Proposed Amendment to Prohibited Transaction Exemption (PTE) 84-
14 for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers [09/03/2003]
Volume 68, Number 170, Page 52419-52427
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Number D-11047]
Proposed Amendment to Prohibited Transaction Exemption (PTE) 84-
14 for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers
AGENCY: Employee Benefits Security Administration.
ACTION: Notice of Proposed Amendment to PTE 84-14.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to PTE 84-
14. The exemption permits various parties that are related to employee
benefit plans to engage in transactions involving plan assets if, among
other conditions, the assets are managed by ``qualified professional
asset managers'' (QPAMs), which are independent of the parties in
interest and which meet specified financial standards. Additional
exemptive relief is provided for employers to furnish limited amounts
of goods and services to a managed fund in the ordinary course of
business. Limited relief is also provided for leases of office or
commercial space between managed funds and QPAMs or contributing
employers. Finally, relief is provided for transactions involving
places of public accommodation owned by a managed fund.
The proposed amendment would affect participants and beneficiaries
of employee benefit plans, the sponsoring employers of such plans, and
other persons engaging in the described transactions.
DATES: Written comments must be received by the Department on or before
October 20, 2003.
ADDRESSES: All written comments (preferably three copies) should be
addressed to the U.S. Department of Labor, Office of Exemption
Determinations, Employee Benefits Security Administration, Room N-5649,
200 Constitution Avenue NW., Washington, DC 20210 (attention: PTE 84-14
Amendment). Interested persons are also invited to submit comments to
EBSA via e-mail or fax. Any such comments should be sent either by e-
mail to lloyd.karen@dol.gov or by fax to 202-219-0204 by the end of the
scheduled comment period. All comments received will be available for
public inspection at the Public Documents Room, Employee Benefits
Security Administration, Room N-1513, 200 Constitution Avenue NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Karen E. Lloyd, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-5649, 200 Constitution Avenue NW.,
Washington DC 20210, (202) 693-8540 (not a toll-free number).
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed amendment to PTE 84-14 (49 FR 9494,
March 13, 1984, as corrected at 50 FR 41430, October 10, 1985). PTE 84-
14 provides an exemption from certain of the restrictions of section
406 of ERISA, and from certain taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1) of the Code. The
Department is proposing this amendment to PTE 84-14 on its own motion,
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code,
and in accordance with the procedures set forth in 29 CFR part
[[Page 52420]]
2570, subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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\1\ Section 102 of the Reorganization Plan No. 4 of 1978, 5
U.S.C. App. 1 (1996), generally transferred the authority of the
Secretary of Treasury to issue administrative exemptions under
section 4975(c)(2) of the Code to the Secretary of Labor.
For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) having an annual effect on the economy of $100 million or
more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
This proposed amendment has been drafted and reviewed in accordance
with Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this proposed amendment is not a
``significant regulatory action'' under Executive Order 12866, section
3(f). Accordingly, it does not require an assessment of potential costs
and benefits under section 6(a)(3) of that order.
Paperwork Reduction Act Analysis
This Notice of Proposed Rulemaking is not subject to the
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.) because it does not contain a ``collection of information'' as
defined in 44 U.S.C. 3502(3).
Background
PTE 84-14, which was proposed on the Department's own motion on
December 21, 1982, was granted as part of a continuing effort by the
Department to improve the administration of the prohibited transaction
rules of ERISA. The rules set forth in section 406 of ERISA prohibit
various transactions between a plan and a party in interest (including
a fiduciary) with respect to such plan. Unless a statutory or
administrative exemption applies to the transaction, section 406(a) of
ERISA prohibits, among other things: sales, leases, loans or the
provision of services between a party in interest and a plan, as well
as a use of plan assets by or for the benefit of, or a transfer of plan
assets to, a party in interest. In addition, unless exempted, a
fiduciary of a plan is not permitted to engage in any acts of self-
dealing or make decisions on behalf of a plan if the fiduciary is in a
conflict of interest situation.
The Department has frequently exercised its statutory authority
under section 408(a) of ERISA to grant both individual and class
exemptions from the prohibited transaction provisions where it has been
able to find that the criteria for granting such exemptions have been
satisfied. Based on its experience considering requests for individual
and class exemptions, and in dealing with instances of abusive
violations of the fiduciary responsibility rules of ERISA, the
Department determined that as a general matter, transactions entered
into on behalf of plans with parties in interest are most likely to
conform to ERISA's general fiduciary standards where the decision to
enter into the transaction is made by an independent fiduciary. As
granted, PTE 84-14 provides broad relief for various party in interest
transactions that involve plan assets that are transferred to a
qualified professional asset manager (QPAM) for discretionary
management.
Description of Existing Relief
PTE 84-14 consists of four separate parts. The General Exemption,
set forth in Part I, permits an investment fund managed by a QPAM to
engage in a wide variety of transactions described in ERISA section
406(a)(1)(A) through (D) with virtually all parties in interest except
the QPAM which manages the assets involved in the transaction and those
parties most likely to have the power to influence the QPAM. In this
regard, under section I(a), the exemption would not be available if a
QPAM caused the investment fund to enter into a transaction with a
party in interest dealing with the fund, if the party in interest or
its ``affiliate,'' (1) was authorized to appoint or terminate the QPAM
as a manager of any of the plan's assets, (2) was authorized to
negotiate the terms of the management agreement with the QPAM
(including renewals or modifications thereof) on behalf of the plan, or
(3) had exercised such powers in the immediately preceding one year.
Additionally, under section I(d), the QPAM may not cause the investment
fund which it manages to engage in a transaction with itself or a
``related'' party. Section V(h) provides generally that a party in
interest and a QPAM are ``related'' if either entity (or parties
controlling or controlled by either entity) owns a five percent or more
interest in the other entity. Section I(e) makes explicit the
Department's view that a plan (and its sponsor) which provides a
significant portion of the QPAM's business as a manager of plan funds
would, in many cases, be in a position to improperly influence
investment decisions of the QPAM. Accordingly, the exemption would not
be available for transactions with parties in interest of a plan if the
amount of the plan's assets that are managed by a QPAM, together with
the assets managed by the same QPAM that are attributable to other
plans maintained by the same employer (or its affiliate), represent
more than 20 percent of all client assets under the management of the
QPAM at the time of the transaction.
Part II of the exemption provides limited relief under both section
406(a) and (b) of ERISA for certain transactions involving those
employers and certain of their affiliates which could not qualify for
the General Exemption provided by Part I. Section II(a) of the
exemption provides conditional relief for employers and their
affiliates to furnish limited amounts of goods and services to an
investment fund managed by a QPAM. Section II(b) of the exemption
permits such employers and their affiliates to lease office or
commercial space from an investment fund managed by a QPAM.
Part III of the exemption provides limited relief under section
406(a) and (b) of ERISA for the leasing of office or commercial space
by an investment fund to the QPAM, an affiliate of the QPAM, or a
person who could not qualify for the General Exemption provided by Part
I because it held the power of appointment described in section I(a).
Part IV of the exemption provides limited relief under section
406(a) and 406(b)(1) and (2) of ERISA for the furnishing of services
and facilities by a place of public accommodation owned by an
investment fund managed by a QPAM, to all parties in interest, if the
services and facilities are furnished on a comparable basis to the
general public.
[[Page 52421]]
Description of the Proposed Amendments
Although the Department is proposing this amendment on its own
motion, its proposal is based, in part, on information received from a
number of interested persons concerning the difficulties encountered in
complying with several conditions contained in PTE 84-14. The
Department has been informed that, due to the consolidation in the
financial services industry and the large size of the resulting
institutions, many financial institutions have found it more difficult
to ensure that section I(a) (power of appointment) and section I(d)
(parties ``related'' to the QPAM), are satisfied.
As understood by the Department, the difficulties encountered by
large financial institutions under the current exemption may be
illustrated by the following examples:
EXAMPLE 1: A registered investment adviser, QPAM I, manages
Commingled Investment Fund F. Fund F has 75 plan investors, all of
which utilize various service providers in the administration of
their respective plans. Broker-Dealer B is a party in interest to
several plan investors. Corporation C was the named fiduciary of
Plan P until December 31, 2002, and invested part of the assets of
Plan P in Fund F on December 15, 2002. Corporation C is also an
affiliate of Broker-Dealer B. On March 1, 2003, QPAM I used Fund F
assets to purchase securities from Broker-Dealer B. The exemption
would not be available for this transaction because an affiliate of
a party in interest involved in the transaction exercised, within
the immediately preceding year, its authority to acquire an interest
in Fund F.
EXAMPLE 2: Bank B, a QPAM, is a wholly-owned subsidiary of a
large financial services institution, Corporation C, and has been
retained to manage a fund established by Plan P. Corporation C has
numerous subsidiaries, joint ventures and other business structures,
including a 10 percent interest in Joint Venture J. Joint Venture J
provides actuarial services to Plan P. Bank B uses Plan P assets to
purchase, on several occasions, debt instruments issued by Joint
Venture J. The general exemption set forth in Part I would not be
available for this transaction because Corporation C controls the
QPAM and has an interest in the party in interest which exceeds five
percent.
EXAMPLE 3: Bank C is a QPAM that manages several investment
funds. Bank C also serves as a custodian for employee benefit plan
assets and, as a result, holds legal title to securities owned on
behalf of the plans. Bank C owns a three percent interest in
Corporation Y. Ten employee benefit plans (the Client Plans), for
which Bank C acts as custodian and also exercises voting rights for
securities holdings, own stock in Corporation Y in varying amounts
up to one percent each. Bank C uses assets of one of its investment
funds to purchase a parcel of unimproved real property from
Corporation Y, a party in interest with respect to a plan investor
in the investment fund. The general exemption set forth in Part I
may not be available for this transaction because Bank C owns three
percent of Corporation Y and also is considered to own, for purposes
of the exemption, the interests of the Client Plans in Corporation Y
for which it holds legal title and exercises voting rights.
Depending on the holdings of the Client Plans, from time to time,
Bank C's aggregate ownership interest could exceed five percent of
Corporation Y.
To address these concerns, the interested persons made a number of
suggestions to modify several of the conditions of PTE 84-14 without
sacrificing the protections embodied in the class exemption. First,
with respect to section I(a) (power of appointment), several persons
suggested that the Department delete the ``one year look-back rule''
under which the exemption would be unavailable to a party in interest
if it had exercised the power of appointment within the one-year period
preceding the transaction. Second, the interested persons suggested
that the Department clarify that section I(a)'s power of appointment
refers only to the power to appoint the QPAM as manager of the assets
involved in the transaction, as opposed to any of the plan's assets.
The Department has determined to adopt these suggested
modifications. The Department recognizes that the burdens of compliance
in the current financial marketplace outweigh the benefits of the one
year look-back rule. The Department believes that deletion of the rule
would not significantly diminish the safeguards contained in the
exemption. In addition, the Department believes that the focus of the
``power of appointment'' rule should be on the assets involved in the
transaction, as opposed to all of the plan's assets. This proposed
modification is consistent with the approach taken by the Department in
more recent class exemptions.\2\
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\2\ See e.g., PTE 94-20 (59 FR 8022, February 17, 1994) and PTE
98-54 (63 FR 63503, November 13, 1998).
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As amended, section I(a) would provide that at the time of the
transaction, the party in interest or its affiliate does not have the
authority to: (i) Appoint or terminate the QPAM as a manager of the
plan assets involved in the transaction, or (ii) negotiate on behalf of
the plan the terms of the management agreement with the QPAM (including
renewals or modifications thereof) with respect to the plan assets
involved in the transaction.
In addition, one of the interested persons suggested a modification
to section I(a) in connection with commingled investment funds. In the
preamble to PTE 84-14, the Department explained that a party in
interest who has the authority to redeem or acquire units of such a
fund is considered, for purposes of the exemption, to have the
authority to appoint or terminate the QPAM as a manager of plan assets.
To further reduce administrative burdens, it was suggested that section
I(a) be amended to make the class exemption available to a party in
interest with respect to a plan investing in a commingled investment
fund, notwithstanding that the party in interest has the authority to
redeem or acquire units of such a fund on behalf of the plan, if the
plan's interest in the fund represents less than 25 percent of the
investment fund's total assets. According to the interested person, a
party in interest to a plan with a relatively small interest in a
commingled investment fund is less likely to be in a position to
exercise undue influence over the QPAM's investment decisions. On the
basis of this suggestion, the Department has proposed an amendment to
section I(a) of the class exemption. However, contrary to the opinion
of the interested person, the Department views 10 percent, and not 25
percent, as the meaningful measure for determining whether a QPAM may
be susceptible to undue influence.
Therefore, the Department proposes to further amend the class
exemption by adding the following paragraph at the end of section I(a):
Notwithstanding the foregoing, in the case of an investment fund
in which two or more unrelated plans have an interest, a transaction
with a party in interest with respect to an employee benefit plan
will be deemed to satisfy the requirements of section I(a) if the
assets of the plan managed by the QPAM in the investment fund, when
combined with the assets of other plans established or maintained by
the same employer (or affiliate thereof described in section V(c)(1)
of the exemption) or by the same employee organization, and managed
in the same investment fund, represent less than 10 percent of the
assets of the investment fund.
Finally, the Department proposes to amend section V(c), the
definition of affiliate as it applies to section I(a) and Part II. The
definition currently provides that ``an affiliate of a person means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, 5 percent
or more partner, or employee (but only if the
[[Page 52422]]
employer or such employee is the plan sponsor), and
(3) Any director of the person or any employee of the person who
is a highly compensated employee, as defined in section
4975(e)(2)(H) of the Code, or who has direct or indirect authority,
responsibility or control regarding the custody, management or
disposition of the plan assets. A named fiduciary (within the
meaning of section 402(a)(2) of ERISA) of a plan and an employer any
of whose employees are covered by the plan will also be considered
affiliates with respect to each other for purposes of section I(a)
if such an employer or an affiliate of such employer has the
authority, alone or shared with others, to appoint or terminate the
named fiduciary or otherwise negotiate the terms of the named
fiduciary's employment agreement.''
Interested persons requested that the Department narrow those
persons and entities listed as affiliates under section V(c) of the
exemption. According to the interested persons, the definition is
difficult to monitor, particularly the portion of the definition that
includes 5 percent or more partners and employees. Accordingly, after
considering the suggestion, the Department has determined to delete
those partnerships in which the person has less than a 10 percent
interest. In addition, the Department proposes to amend section V(c)(2)
to only include highly compensated employees as defined in section
4975(e)(2)(H) of the Code.
Over the years, a number of interested persons have sought
clarification regarding the application of section I(b) of PTE 84-14.
Section I(b) excludes from exemptive relief those transactions
described in PTEs 81-6 (relating to securities lending arrangements),
83-1 (relating to acquisitions by plans of interests in mortgage pools)
and 82-87 (relating to certain mortgage financing arrangements).
According to the interested persons, there is uncertainty regarding the
application of PTE 84-14 to certain types of transactions that,
although similar to the transactions that are the subject of the three
specialized exemptions, are beyond the scope of relief provided by
those exemptions. Thus, for example, PTE 81-6 would not provide relief
for the lending of securities that are assets of a plan to a foreign
broker-dealer.\3\ It is the view of the Department that PTE 84-14 would
provide relief for such transactions if the conditions of that
exemption were otherwise met. The Department cautions, however, that
PTE 84-14 would not be available for any transaction specifically
described in PTEs 81-6, 83-1 or 82-87, if a person determines not to
satisfy one or more of the conditions of the specialized exemptions
solely in order to take advantage of the relief provided by PTE 84-14.
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\3\ PTE 81-6 does provide relief for broker-dealers registered
under the Securities Exchange Act of 1934 (the 1934 Act) or exempted
from registration under section 15(a)(1) of the 1934 Act as a dealer
in exempted Government securities (as defined in section 3(a)(12) of
the 1934 Act).
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With respect to section I(d) and the definition of ``related''
under section V(h), interested persons suggested that the threshold for
determining whether a party in interest is related to the QPAM should
be increased from a 5 percent ownership interest to a 20 percent
ownership interest, and that the definition of ``interest'' under
section V(h)(1) should be narrowed to exclude ownership interests held
for the benefit of clients. Additionally, one interested person
suggested that section I(d) be revised to make it easier to monitor for
compliance. In this regard, the interested person suggested that the
exemption permit a determination as to whether a party in interest is
related to the QPAM to be made as of the last day of the preceding
calendar quarter.
After considering the suggestions, the Department recognizes that
compliance with section I(d) may create administrative burdens for a
number of financial institutions. However, the Department does not
believe that raising the percentage limitation to 20 percent would be
appropriate in all cases. For example, while it may be more difficult
to monitor the ownership interests of entities that ``control'' or are
``controlled by'' the QPAM and the party in interest, the Department
believes that the QPAM and the party in interest should be able to
determine any ownership interests in each other without excessive
administrative burden. Accordingly, the Department is proposing to
amend section V(h) to provide that a QPAM is ``related'' to a party in
interest for purposes of section I(d) if:
[sbull] The QPAM or the party in interest owns a ten percent or
more interest in the other entity;
[sbull] A person controlling or controlled by the QPAM or the party
in interest owns a twenty percent or more interest in the other entity;
or
[sbull] A person controlling, or controlled, by the QPAM or the
party in interest owns less than a twenty percent interest in the other
entity, but nevertheless exercises control over the management or
policies of the other party by reason of its ownership interest.
In addition, the Department proposes to modify section V(h) to
provide that generally determinations of whether the QPAM is
``related'' to a party in interest for purposes of section I(d) may be
made as of the last day of the most recent calendar quarter. Finally,
the Department is proposing to amend section V(h)(1) to provide that
shares held in a fiduciary capacity need not be considered in applying
the percentage limitation. The Department believes that these
modifications should further lessen the compliance burdens under the
class exemption.
Accordingly, the Department is proposing to amend the definition of
``related'' to in section V(h) as follows:
A QPAM is ``related'' to a party in interest for purposes of
section I(d) of this exemption if, as of the last day of its most
recent calendar quarter: (i) The QPAM owns a ten percent or more
interest in the party in interest; (ii) a person controlling, or
controlled by, the QPAM owns a twenty percent or more interest in
the party in interest; (iii) the party in interest owns a ten
percent or more interest in the QPAM; or (iv) a person controlling,
or controlled by, the party in interest owns a twenty percent or
more interest in the QPAM. Notwithstanding the foregoing, a party in
interest is ``related'' to a QPAM if: (i) A person controlling, or
controlled by, the party in interest owns less than a twenty percent
interest in the QPAM and such person exercises control over the
management or policies of the QPAM by reason of its ownership
interest; or (ii) a person controlling, or controlled by, the QPAM
owns less than a twenty percent interest in the party in interest
and such person exercises control over the management or policies of
the party in interest by reason of its ownership interest.
(1) The term ``interest'' means with respect to ownership of an
entity--(A) The combined voting power of all classes of stock
entitled to vote or the total value of the shares of all classes of
stock of the entity if the entity is a corporation, (B) The capital
interest or the profits interest of an entity if the entity is a
partnership, or (C) The beneficial interest of the entity if the
entity is a trust or unincorporated enterprise; and
(2) A person is considered to own an interest if, other than in
a fiduciary capacity, the person has or shares the authority--(A) To
exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or (B) To
dispose or to direct the disposition of such interest.
An interested person also requested that the Department clarify the
language in section V(a)(4) which defines a QPAM to include ``[a]n
investment adviser registered under the Investment Advisers Act of 1940
that has, as of the last day of its most recent fiscal year, total
client assets under its management and control in excess of
$50,000,000, and either (A) shareholders' or partners' equity (as
defined in section V(m)) in excess of $750,000* * *'' The interested
person noted that section V(m) provides that:
[[Page 52423]]
For purposes of section V(a)(4), the term ``shareholders'' or
partners' equity'' means the equity shown in the most recent balance
sheet prepared within the two years immediately preceding a
transaction undertaken pursuant to this exemption, in accordance
with generally accepted accounting principles.
According to the interested person, the two-year time period referenced
in section V(m), which defines the term ``shareholders'' or partners'
equity,'' appears to conflict with the phrase ``as of the last day of
its most recent fiscal year'' contained in section V(a)(4). The
Department proposes to amend section V(a)(4) to clarify that the phrase
``as of the last day of its most recent fiscal year'' only modifies the
term ``total client assets under management and control in excess of
$50,000,000,'' and does not refer to the shareholders' or partners'
equity requirement.
The Department also notes that the $50 million of client assets
under management standard utilized in section V(a)(4) for investment
advisers has not been revised since 1984 and may no longer provide
significant protections for plans in the current financial marketplace.
The Department has determined to adjust the $50 million figure to $85
million, to reflect the change in the Consumer Price Index.
Additionally, the Department proposes to increase the shareholders' and
partners' equity requirement from $750,000 to $1,000,000, to correspond
to the preceding subsections of section V(a).
As amended, section V(a)(4) would read as follows:
An investment adviser registered under the Investment Advisers
Act of 1940 that has total client assets under its management and
control in excess of $85,000,000 as of the last day of its most
recent fiscal year, and either (A) shareholders' or partners' equity
(as defined in section V(m)) in excess of $1,000,000, or (B) payment
of all its liabilities including any liabilities that may arise by
reason of a breach or violation of a duty described in sections 404
and 406 of ERISA is unconditionally guaranteed by--(i) A person with
a relationship to such investment adviser described in section
V(c)(1) if the investment adviser and such affiliate have, as of the
last day of their most recent fiscal year, shareholders' or
partners' equity, in the aggregate, in excess of $1,000,000, or (ii)
A person described in (a)(1), (a)(2) or (a)(3) of section V above,
or (iii) A broker-dealer registered under the Securities Exchange
Act of 1934 that has, as of the last day of its most recent fiscal
year, net worth in excess of $1,000,000; provided that such bank,
savings and loan association, insurance company or investment
adviser has acknowledged in a written management agreement that it
is a fiduciary with respect to each plan that has retained the QPAM.
In response to inquiries regarding the definition of QPAM contained
in section V(a), the Department proposes to modify the exemption to
specifically provide that a QPAM must be independent of an employer
with respect to a plan whose assets are managed by the QPAM. As the
Department noted in the preamble to PTE 84-14 (49 FR 9497):
This class exemption was developed, and is being granted, by the
Department based on the essential premise that broad exemptive
relief from the prohibitions of section 406(a) of ERISA can be
afforded for all types of transactions in which a plan engages only
if the commitments and the investments of plan assets and the
negotiations leading thereto, are the sole responsibility of an
independent investment manager.
To avoid further uncertainty on this issue, the Department has amended
the definition of QPAM accordingly.
The Department also has received inquiries about section V(i) of
PTE 84-14, which defines ``the time as of which any transaction
occurs.'' The Department understands there is uncertainty regarding the
role of a QPAM in a continuing transaction. Section V(i) states the
following with respect to a continuing transaction:
[I]n the case of a transaction that is continuing, the
transaction shall be deemed to occur until it is terminated. If any
transaction is entered into on or after December 21, 1982, or a
renewal that requires the consent of a QPAM occurs on or after
December 21, 1982 and the requirements of this exemption are
satisfied at the time the transaction is entered into or renewed,
respectively, the requirements will continue to be satisfied
thereafter with respect to the transaction. Notwithstanding the
foregoing, this exemption shall cease to apply to a transaction
exempt by virtue of Part I or Part II at such times as the
percentage requirement contained in section I(e) is exceeded, unless
no portion of such excess results from an increase in the assets
transferred for discretionary management to a QPAM. For this
purpose, assets transferred do not include the reinvestment of
earnings attributable to those plan assets already under the
discretionary management of the QPAM. Nothing in this paragraph
shall be construed as exempting a transaction entered into by an
investment fund which becomes a transaction described in section 406
of ERISA or section 4975 of the Code while the transaction is
continuing, unless the conditions of this exemption were met either
at the time the transaction was entered into or at the time the
transaction would have become prohibited but for this exemption.
In the Department's view, the exemption would be available for a
continuing transaction (e.g., a loan or lease), provided that all the
conditions of the exemption are satisfied on the date on which the
transaction is entered into (or on the date of a renewal that requires
the consent of the QPAM), notwithstanding the subsequent failure to
satisfy one or more of the conditions of the exemption. The only
exception to the availability of the exemption for a continuing
transaction is the requirement that section I(e) must be satisfied
throughout the duration of the transaction. Nonetheless, the Department
cautions that, although Part I may continue to be available for the
entire term of a continuing transaction which subsequently fails to
satisfy one or more of the conditions of that Part, no relief would be
provided for an act of self-dealing described in section 406(b)(1) of
ERISA if the QPAM has an interest in the person which may affect the
exercise of its best judgment as a fiduciary. Although Part I provides
an exemption from section 406(a)(1)(A) through (D) of ERISA, it does
not provide relief from acts described in section 406(b) of ERISA. The
Department urges fiduciaries to take appropriate steps to avoid
engaging in 406(b) violations should circumstances change during the
course of a continuing transaction.
An interested person also was concerned about the availability of
Part I in the context of a continuing transaction where the QPAM
becomes unable to continue to serve as a QPAM, or is terminated, prior
to the appointment of a replacement QPAM. In the Department's view, the
exemption would continue to be available provided no decisions were
required to be made by the QPAM on behalf of the investment fund with
respect to the transaction (e.g., how to respond to a default in
payments on a lease) during the interim period before the appointment
of the replacement QPAM.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of ERISA and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person with respect to a plan from certain other provisions of ERISA
and the Code, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary responsibility
provisions of section 404 of ERISA which require, among other things,
that a fiduciary discharge his or her duties respecting plan solely in
the interests of the participants and beneficiaries of the plan.
Additionally, the fact that a transaction is the subject of an
exemption does not affect the
[[Page 52424]]
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of
ERISA and 4975(c)(2) of the Code, the Department must find that the
exemption is administratively feasible, in the interests of the plan
and of its participants and beneficiaries, and protective of the rights
of participants and beneficiaries of the plan;
(3) If granted, the proposed amendment is applicable to a
particular transaction only if the transaction satisfies the conditions
specified in the exemption; and
(4) The proposed amendment, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments
The Department invites all interested persons to submit written
comments on the proposed amendment to the address and within the time
period set forth above. All comments received will be made a part of
the record. Comments should state the reasons for the writer's interest
in the proposed exemption. Comments received will be available for
public inspection at the above address.
Proposed Amendment
Under section 408(a) of the Act and section 4975(c)(2) of the Code
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990), the Department
proposes to amend PTE 84-14 as set forth below:
Part I--General Exemption
Effective as of the date of publication of the final class
exemption in the Federal Register, the restrictions of ERISA section
406(a)(1)(A) through (D) and the taxes imposed by Code section 4975(a)
and (b), by reason of Code section 4975(c)(1)(A) through (D), shall not
apply to a transaction between a party in interest with respect to an
employee benefit plan and an investment fund (as defined in section
V(b)) in which the plan has an interest, and which is managed by a
qualified professional asset manager (QPAM) (as defined in section
V(a)), if the following conditions are satisfied:
(a) At the time of the transaction (as defined in section V(i)) the
party in interest, or its affiliate (as defined in section V(c)), does
not have the authority to--
(1) Appoint or terminate the QPAM as a manager of the plan assets
involved in the transaction, or
(2) Negotiate on behalf of the plan the terms of the management
agreement with the QPAM (including renewals or modifications thereof)
with respect to the plan assets involved in the transaction;
Notwithstanding the foregoing, in the case of an investment fund in
which two or more unrelated plans have an interest, a transaction with
a party in interest with respect to an employee benefit plan will be
deemed to satisfy the requirements of section I(a) if the assets of the
plan managed by the QPAM in the investment fund, when combined with the
assets of other plans established or maintained by the same employer
(or affiliate thereof described in section V(c)(1) of the exemption) or
by the same employee organization, and managed in the same investment
fund, represent less than 10 percent of the assets of the investment
fund;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 81-6 (46 FR 7527; January 23,
1981) (relating to securities lending arrangements),
(2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7,
1983) (relating to acquisitions by plans of interests in mortgage
pools), or
(3) Prohibited Transaction Exemption 82-87 (47 FR 21331; May 18,
1982) (relating to certain mortgage financing arrangements);
(c) The terms of the transaction are negotiated on behalf of the
investment fund by, or under the authority and general direction of,
the QPAM, and either the QPAM, or (so long as the QPAM retains full
fiduciary responsibility with respect to the transaction) a property
manager acting in accordance with written guidelines established and
administered by the QPAM, makes the decision on behalf of the
investment fund to enter into the transaction, provided that the
transaction is not part of an agreement, arrangement or understanding
designed to benefit a party in interest;
(d) The party in interest dealing with the investment fund is
neither the QPAM nor a person related to the QPAM (within the meaning
of section V(h));
(e) The transaction is not entered into with a party in interest
with respect to any plan whose assets managed by the QPAM, when
combined with the assets of other plans established or maintained by
the same employer (or affiliate thereof described in section V(c)(1) of
this exemption) or by the same employee organization, and managed by
the QPAM, represent more than 20 percent of the total client assets
managed by the QPAM at the time of the transaction;
(f) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the QPAM, the terms of the transaction are at least as
favorable to the investment fund as the terms generally available in
arm's length transactions between unrelated parties;
(g) Neither the QPAM nor any affiliate thereof (as defined in
section V(d)), nor any owner, direct or indirect, of a 5 percent or
more interest in the QPAM is a person who within the 10 years
immediately preceding the transaction has been either convicted or
released from imprisonment, whichever is later, as a result of: Any
felony involving abuse or misuse of such person's employee benefit plan
position or employment, or position or employment with a labor
organization; any felony arising out of the conduct of the business of
a broker, dealer, investment adviser, bank, insurance company or
fiduciary; income tax evasion; any felony involving the larceny, theft,
robbery, extortion, forgery, counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion, or misappropriation of funds or
securities; conspiracy or attempt to commit any such crimes or a crime
in which any of the foregoing crimes is an element; or any other crime
described in section 411 of ERISA. For purposes of this section (g), a
person shall be deemed to have been ``convicted'' from the date of the
judgment of the trial court, regardless of whether that judgment
remains under appeal.
Part II--Specific Exemption for Employers
Effective December 21, 1982, the restrictions of sections 406(a),
406(b)(1) and 407(a) of ERISA and the taxes imposed by section 4975(a)
and (b) of the Code, by reason of Code section 4975(c)(1)(A) through
(E), shall not apply to:
(a) The sale, leasing, or servicing of goods (as defined in section
V(j)), or to the furnishing of services, to an investment fund managed
by a QPAM by a party in interest with respect to a plan having an
interest in the fund, if--
(1) The party in interest is an employer any of whose employees are
[[Page 52425]]
covered by the plan or is a person who is a party in interest by virtue
of a relationship to such an employer described in section V(c),
(2) The transaction is necessary for the administration or
management of the investment fund,
(3) The transaction takes place in the ordinary course of a
business engaged in by the party in interest with the general public,
(4) Effective for taxable years of the party in interest furnishing
goods and services after the date this exemption is granted, the amount
attributable in any taxable year of the party in interest to
transactions engaged in with an investment fund pursuant to section
II(a) of this exemption does not exceed one (1) percent of the gross
receipts derived from all sources for the prior taxable year of the
party in interest, and
(5) The requirements of sections I(c) through (g) are satisfied
with respect to the transaction;
(b) The leasing of office or commercial space by an investment fund
maintained by a QPAM to a party in interest with respect to a plan
having an interest in the investment fund, if--
(1) The party in interest is an employer any of whose employees are
covered by the plan or is a person who is a party in interest by virtue
of a relationship to such an employer described in section V(c),
(2) No commission or other fee is paid by the investment fund to
the QPAM or to the employer, or to an affiliate of the QPAM or employer
(as defined in section V(c)), in connection with the transaction,
(3) Any unit of space leased to the party in interest by the
investment fund is suitable (or adaptable without excessive cost) for
use by different tenants,
(4) The amount of space covered by the lease does not exceed
fifteen (15) percent of the rentable space of the office building,
integrated office park, or of the commercial center (if the lease does
not pertain to office space),
(5) In the case of a plan that is not an eligible individual
account plan (as defined in section 407(d)(3) of ERISA), immediately
after the transaction is entered into, the aggregate fair market value
of employer real property and employer securities held by investment
funds of the QPAM in which the plan has an interest does not exceed 10
percent of the fair market value of the assets of the plan held in
those investment funds. In determining the aggregate fair market value
of employer real property and employer securities as described herein,
a plan shall be considered to own the same proportionate undivided
interest in each asset of the investment fund or funds as its
proportionate interest in the total assets of the investment fund(s).
For purposes of this requirement, the term ``employer real property''
means real property leased to, and the term ``employer securities''
means securities issued by, an employer any of whose employees are
covered by the plan or a party in interest of the plan by reason of a
relationship to the employer described in subparagraphs (E) or (G) of
ERISA section 3(14), and
(6) The requirements of sections I(c) through (g) are satisfied
with respect to the transaction.
Part III--Specific Lease Exemption for QPAMs
Effective December 21, 1982, the restrictions of section
406(a)(1)(A) through (D) and 406(b)(1) and (2) of ERISA and the taxes
imposed by Code section 4975(a) and (b), by reason of Code section
4975(c)(1)(A) through (E), shall not apply to the leasing of office or
commercial space by an investment fund managed by a QPAM to the QPAM, a
person who is a party in interest of a plan by virtue of a relationship
to such QPAM described in subparagraphs (G), (H), or (I) of ERISA
section 3(14) or a person not eligible for the General Exemption of
Part I by reason of section I(a), if--
(a) The amount of space covered by the lease does not exceed the
greater of 7500 square feet or one (1) percent of the rentable space of
the office building, integrated office park or of the commercial center
in which the investment fund has the investment,
(b) The unit of space subject to the lease is suitable (or
adaptable without excessive cost) for use by different tenants,
(c) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the QPAM, the terms of the transaction are not more
favorable to the lessee than the terms generally available in arm's
length transactions between unrelated parties, and
(d) No commission or other fee is paid by the investment fund to
the QPAM, any person possessing the disqualifying powers described in
section I(a), or any affiliate of such persons (as defined in section
V(c)), in connection with the transaction.
Part IV--Transactions Involving Places of Public Accommodation
Effective December 21, 1982, the restrictions of section
406(a)(1)(A) through (D) and 406(b)(1) and (2) of ERISA and the taxes
imposed by Code section 4975(a) and (b), by reason of Code section
4975(c)(1)(A) through (E), shall not apply to the furnishing of
services and facilities (and goods incidental thereto) by a place of
public accommodation owned by an investment fund managed by a QPAM to a
party in interest with respect to a plan having an interest in the
investment fund, if the services and facilities (and incidental goods)
are furnished on a comparable basis to the general public.
Part V--Definitions and General Rules
For purposes of this exemption:
(a) The term ``qualified professional asset manager'' or ``QPAM''
means an independent fiduciary (as defined in section V(n)) which is--
(1) A bank, as defined in section 202(a)(2) of the Investment
Advisers Act of 1940 that has the power to manage, acquire or dispose
of assets of a plan, which bank has, as of the last day of its most
recent fiscal year, equity capital (as defined in section V(k)) in
excess of $1,000,000 or
(2) A savings and loan association, the accounts of which are
insured by the Federal Savings and Loan Insurance Corporation, that has
made application for and been granted trust powers to manage, acquire
or dispose of assets of a plan by a State or Federal authority having
supervision over savings and loan associations, which savings and loan
association has, as of the last day of its most recent fiscal year,
equity capital (as defined in section V(k)) or net worth (as defined in
section V(l)) in excess of $1,000,000 or
(3) An insurance company which is qualified under the laws of more
than one State to manage, acquire, or dispose of any assets of a plan,
which company has, as of the last day of its most recent fiscal year,
net worth (as defined in section V(l)) in excess of $1,000,000 and
which is subject to supervision and examination by a State authority
having supervision over insurance companies, or
(4) An investment adviser registered under the Investment Advisers
Act of 1940 that has total client assets under its management and
control in excess of $85,000,000 as of the last day of its most recent
fiscal year, and either (A) shareholders' or partners' equity (as
defined in section V(m)) in excess of $1,000,000, or (B) payment of all
of its liabilities including any liabilities that may arise by reason
of a breach or violation of a duty described in sections 404 and 406 of
ERISA is unconditionally guaranteed by--(i) A person with a
relationship to such investment adviser described in section
[[Page 52426]]
V(c)(1) if the investment adviser and such affiliate have, as of the
last day of their most recent fiscal year, shareholders' or partners'
equity, in the aggregate, in excess of $1,000,000, or (ii) A person
described in (a)(1), (a)(2) or (a)(3) of section V above, or (iii) A
broker-dealer registered under the Securities Exchange Act of 1934 that
has, as of the last day of its most recent fiscal year, net worth in
excess of $1,000,000; Provided that such bank, savings and loan
association, insurance company or investment adviser has acknowledged
in a written management agreement that it is a fiduciary with respect
to each plan that has retained the QPAM.
(b) An ``investment fund'' includes single customer and pooled
separate accounts maintained by an insurance company, individual trusts
and common, collective or group trusts maintained by a bank, and any
other account or fund to the extent that the disposition of its assets
(whether or not in the custody of the QPAM) is subject to the
discretionary authority of the QPAM.
(c) For purposes of section I(a) and Part II, an ``affiliate'' of a
person means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, 10 percent or
more partner (except with respect to part II this figure shall be 5
percent), or highly compensated employee as defined in section
4975(e)(2)(H) of the Code (but only if the employer of such employee is
the plan sponsor), and
(3) Any director of the person or any employee of the person who is
a highly compensated employee, as defined in section 4975(e)(2)(H) of
the Code, or who has direct or indirect authority, responsibility or
control regarding the custody, management or disposition of plan
assets. A named fiduciary (within the meaning of section 402(a)(2) of
ERISA) of a plan and an employer any of whose employees are covered by
the plan will also be considered affiliates with respect to each other
for purposes of section I(a) if such employer or an affiliate of such
employer has the authority, alone or shared with others, to appoint or
terminate the named fiduciary or otherwise negotiate the terms of the
named fiduciary's employment agreement.
(d) For purposes of section I(g) an ``affiliate'' of a person
means--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any director of, relative of, or partner in, any such person,
(3) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
or more partner or owner, and
(4) Any employee or officer of the person who--
(A) Is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or
(B) Has direct or indirect authority, responsibility or control
regarding the custody, management or disposition of plan assets.
(e) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(f) The term ``party in interest'' means a person described in
ERISA section 3(14) and includes a ``disqualified person,'' as defined
in Code section 4975(e)(2).
(g) The term ``relative'' means a relative as that term is defined
in ERISA section 3(15), or a brother, a sister, or a spouse of a
brother or sister.
(h) A QPAM is ``related'' to a party in interest for purposes of
section I(d) of this exemption if, as of the last day of its most
recent calendar quarter: (i) The QPAM owns a ten percent or more
interest in the party in interest; (ii) a person controlling, or
controlled by, the QPAM owns a twenty percent or more interest in the
party in interest; (iii) the party in interest owns a ten percent or
more interest in the QPAM; or (iv) a person controlling, or controlled
by, the party in interest owns a twenty percent or more interest in the
QPAM. Notwithstanding the foregoing, a party in interest is ``related''
to a QPAM if: (i) a person controlling, or controlled by, the party in
interest owns less than a twenty percent interest in the QPAM and such
person exercises control over the management or policies of the QPAM by
reason of its ownership interest; (ii) a person controlling, or
controlled by, the QPAM owns less than a twenty percent interest in the
party in interest and such person exercises control over the management
or policies of the party in interest by reason of its ownership
interest. For purposes of this definition:
(1) The term ``interest'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership, or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest if, other than in a
fiduciary capacity, the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
(i) The time as of which any transaction occurs is the date upon
which the transaction is entered into. In addition, in the case of a
transaction that is continuing, the transaction shall be deemed to
occur until it is terminated. If any transaction is entered into on or
after December 21, 1982, or a renewal that requires the consent of the
QPAM occurs on or after December 21, 1982 and the requirements of this
exemption are satisfied at the time the transaction is entered into or
renewed, respectively, the requirements will continue to be satisfied
thereafter with respect to the transaction. Notwithstanding the
foregoing, this exemption shall cease to apply to a transaction exempt
by virtue of Part I or Part II at such time as the percentage
requirement contained in section I(e) is exceeded, unless no portion of
such excess results from an increase in the assets transferred for
discretionary management to a QPAM. For this purpose, assets
transferred do not include the reinvestment of earnings attributable to
those plan assets already under the discretionary management of the
QPAM. Nothing in this paragraph shall be construed as exempting a
transaction entered into by an investment fund which becomes a
transaction described in section 406 of ERISA or section 4975 of the
Code while the transaction is continuing, unless the conditions of this
exemption were met either at the time the transaction was entered into
or at the time the transaction would have become prohibited but for
this exemption.
(j) The term ``goods'' includes all things which are movable or
which are fixtures used by an investment fund but does not include
securities, commodities, commodities futures, money, documents,
instruments, accounts, chattel paper, contract rights and any other
property, tangible or intangible, which, under the relevant
[[Page 52427]]
facts and circumstances, is held primarily for investment.
(k) For purposes of section V(a)(1) and (2), the term ``equity
capital'' means stock (common and preferred), surplus, undivided
profits, contingency reserves and other capital reserves.
(l) For purposes of section V(a)(3), the term ``net worth'' means
capital, paid-in and contributed surplus, unassigned surplus,
contingency reserves, group contingency reserves, and special reserves.
(m) For purposes of section V(a)(4), the term ``shareholders'' or
partners' equity'' means the equity shown in the most recent balance
sheet prepared within the two years immediately preceding a transaction
undertaken pursuant to this exemption, in accordance with generally
accepted accounting principles.
(n) For purposes of section V(a), the term ``independent
fiduciary'' means a fiduciary managing the assets of a plan in an
investment fund that is independent of and unrelated to the employer
sponsoring such plan. For purposes of this exemption, the independent
fiduciary will not be deemed to be independent of and unrelated to the
employer sponsoring the plan if such fiduciary directly or indirectly
controls, is controlled by, or is under common control with the
employer sponsoring the plan.
Signed at Washington, DC, this 28th day of August, 2003.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, Department of Labor.
[FR Doc. 03-22383 Filed 9-2-03; 8:45 am]
BILLING CODE 4510-29-P
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