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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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REPONSE OF TIE OFFICE OF TI CIl COUNSEL
DIVISION OF INVESTMEN MANAGEMNT

Our Ref. No. 96-402-CC
State Street Bank and
Trust Company
File No. 132-3

By letter dated July 29, 1996, you request our assurace that we would not

recommend enforcement action to the Commission if, as more fully described in your letter,
various plans ("457 Plans") meeting the definition of "eligible deferred compensation plan"
in Section 457 of the Internal Revenue Code of 1986, as amended (the "Code"), paricipate
in cert collective trust funds ("Funds") maitaed by State Street Ban and Trust

Company (" State Street") without registration of the Funds under the Investment Company
Act of 1940 ("Investment Company Act") in reliance on Section 3(c)(1l) of that Act, and
without registration of the units of paricipation therein under the Securities Act of 1933
("Securities Act") or the Securities Exchange Act of 1934 ("Exchange Act"), in reliance on
Section 3(a)(2) of the Securities Act and Section 3(a)(12) of the Exchange Act.
Facts
The State Street Ban and Trust Company Investment Funds for Tax Exempt

Retirement Plans ("Trust") consists of the Funds. Units in the Funds currently are offered

and sold exclusively to cert types of ta-qualed employee benefit plans, as well as to
commingled investment vehicles contag assets of ta-qualed employee benefit plans.

State Street proposes to offer units in the Funds to 457 Plans established by varous
governenta entities described in Section 457(e)(1)(A) of the Code. You represent that the

Plan documents of the 457 Plans investing in the Trust wil provide that Plan assets wil not
be used for any purpose other than for the exclusive benefit of 457 Plan paricipants, except
that Plan assets shal remai subject to the clais of genera creditors of the employer to the

extent necessar to comply with Section 457 of the Code. 1/ You also represent that the
Investment Management Agreement ("Agreement") between State Street and the 457 Plan
wil specifcaly prohibit a paricipating employer from withdrawing Plan assets from the
Trust, except for the following purposes:

(1) To trasfer Plan assets to a trustee in bankptcy in the event of the

employer's insolvency or bankptcy, or to any other agent independent of the
employer authoried to act in such proceedings;

1/ If a 457 Plan's document does not conta such a provision, you represent that State

Street wil obtain a written representation to this effect from an authoried
representative of the 457 Plan (the "Plan Adminstrator"). You further represent that
in no event wil State Street alow a 457 Plan to participate in the Trust if, in State
Street's opinon, the Plan document contains any provision that would not permit it to
be interpreted to require such "exclusive benefit" treatment.

(2) To satisfy the claims of the employer's general creditors in the event of the
employer's insolvency or bankptcy;
(3) To pay benefits to an employee paricipating in a 457 Plan;
(4) To trasfer assets to a 457 Plan's custodian or other person designated by a

sponsorig employer in case the Agreement is terminated or a withdrawal is

made for the purpose of using another investment manager or investment

argement;
(5) To distribute Plan assets to participating employees in the event a 457 Plan is
terminated pursuant to a plan of liquidation; or
(6) To reimburse an employer for any 457 Plan benefits that the employer may

have paid out of its other assets, or to correct an excess deferr or other
mistaen investment in the Trust.

You state that the Agreement wil define "insolvency" as a circumstace in which an
to pay its debts as they become due, or is subject to a pending proceeing

employer is unable

under the United States Banptcy Code. Under the Agreement, a withdrawal based on a

clai of insolvency must be premised on a determination made by the highest governg
body of the employer, as well as its highest executive officer, afer notice of a public hearig
has been given and a public heag has been held on th~. subject of the employer's

insolvency.

You represent that the Agreement wil require that any withdrawal request be

accompaned by a written notication from the Plan Adminstrator explaig the reasons
therefor. If the writing indicates that an

employer wants to redeem units becuse it is

insolvent, then such writing wil describe the procedures that were followed in makg the
insolvency determination. If the writing indicates that an employer is redeeming units
because it wants to terminate its investment management arngement with State Street, or
withdraw funds for the purpose of using another investment manager or investment
arangement, then such writing wil conta a representation from the terminating employer

naming the person to whom State Street would transfer such money and affiring that the
Plan assets are not to be used for employer purposes. The Agreement also wil provide that,
in deciding whether to honor a withdrawal request, State Street may rely on any such writing
it reasonably believes was submitted in good faith by a paricipating employer.

You also represent that State Street wil give directly to al 457 Plan paricipants, or
provide to each sponsorig employer for distribution to all participants, brochures that
prominently disclose (a) that the amounts alocated to tha Funds wil be subject to the claims

of the employer's general creditors as required by the Code, and (b) the potential risks

2

(including access by genera creditors of the employer to Plan assets) 2/ to paricipants
posed by investing in 457 Plans. Finally, you represent that employee contributions to a

particular 457 Plan wil not be invested in securities of the sponsorig employer or its
controlled or commonly controlled entities.
Analysis

Section 3(a)(2) of the Securities Act and Section 3(a)(12) of the Exchange Act exempt
from registration any interest or paricipation in a coiieètive trust fund maitaed by a bank,
which interest or paricipation is issued in connection with a governenta plan as defined in
Section 414( d) of the Code that has been "established by an employer for the exclusive

benefit of its employees . . . if under such plan it is impossible . . . for any par of the

corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of
such employees." 3./ Section 3(c)(1l) of the Investment Company Act excludes from the
defintion of "investment company" any collective trust fund maitaed by a ban consisting
solely of assets of such plans.
Whie Section 3(a)(2) does not explicitly refer to 457 Plans, such plans are deferred
compensation plans established and maitaed by state and local governents, and thus, you

represent, are as a techncal matter, "governenta plans" withi Section 4l4(d) of the Code.
Section 457(b)(6) of the Code, however, requires that al assets accumulated under a 457
Plan must remai solely the property of the sponsorig employer, "subject only to the clais
of the employer's genera creditors." Therefore, 457 Plans techncaly may not meet the
requirement that it be impossible to use plan assets for "purposes other than the exclusive
benefit" of employees.

You state that 457 Plan assets effectively wil be adminstered for the "exclusive
benefit" of participating employees because a sponsorig employer would not be permitted to
withdraw plan assets for its own use except, in the event of the employer's insolvency or

banptcy, to satisfy its genera creditors. Although it is possible for the assets held in a
457 Plan to be used by the employer for its own purposes, . yo:n believe that the provisions
contaed in the Agreement and the Plan documents, along with
the, aupplementa written
representations made upon any withdrawal of Plan assets,snould ensure that employer use

remais only a remote possibilty, and that the assets wil be adminstered in a manner that
substantially comports with the requirements applicable to qualed employee benefit plans.

2/ Telephone conversation on August 1, 1996 between Wendell Fara, counsel to State

Street, and Kare McMilan of the staf.
3./ Section 414(d) of the Code provides, in relevant par, that a "governenta plan

means a plan established and maitaed for its employees by the Governent of the
United States, by the government of any State or political subdivision thereof, or by
any agency or instrumentaity of any of the foregoing."
3

You further state that, at all times, the Plan Administrator wil exercise fiduciary
responsibilities in seeking to ensure that the interests of 457 Plan paricipants are adequately
protected.
In light of the foregoing, we would not recommend enforcement action to the
Commission if State Street offers and sells units in the Funds to 457 Plans without registerig
the Funds as investment companes in reliance on Section 3(c)(1l) of the Investment
Company Act. The Division of Corporation Finance has asked us to inorm you that it
would not recommend enforcement action to the Commission if State Street, in reliance upon
your opinon as counsel that the exemptions under Section 3

(2) of the Securities Act and
Section 3(a)(12) of the Exchange Act are avaiable, offers units in the Funds to 457 Plans
without registration under these Acts. The Division of Market Regulation has asked us to
inorm you that it concurs in this position with respect to the Exchange Act. The Divisions'
positions are based on the facts and representations in your letter. You should note that any
(a)

different facts or circumstaces might require a different conclusion. Furthermore, this

response represents only the Divisions' positions on enforcement action and does not purport
to express any legal conclusions as to the questions presented.

Status of Prior Letters

The staf previously has issued a number of no-action letters relating to 457
plans. M The positions taen in these letters were based largely on the genera
representation that plan assets would not be used for any purpose other than the exclusive
benefit of paricipants except to the extent that plan assets must remai subject to the clais
of general creditors of the employer to preserve the plan.'s qualcation under Section 457 of
the Code. The sta, however, now believes that this genera representation no longer

provides an adequate basis for no-action relief without specifc additional restrctions on the

1/ See, e.g., The Lincoln National Life Insurance Company (pub. avai. Oct. 26, 1992);

Harford Life Insurance Company (pub. avai. June 24, 1992); Pan American Life
Insurace Company (pub. avai. Nov. 19, 1991); Standard Insurance Company (pub.
avail. Sept. 11, 1991); Aetna Life Insurance and Anuity Company (pub. avai. Sept.
11, 1991); Pricipal Mutual Life Insurace Company (pub. avai. June 27, 1991);
Metropolitan Life Insurance Company (pub. avai. June 6, 1991); Monarch Life

Insurance Company (pub. avai. Apr. 3, 1991); The Travelers Insurace Company
(pub. avail. Aug. 6, 1990); Great-West Life and Anuity Insurace Co. (pub. avai.
Feb. 1, 1990); Fidelity Management Trust Company (pub. avail. Nov. 2, 1989);

Aetna Life Insurance Company (pub. avail. Oct. 18, 1989); Nationwide Life
Savings and Loan
N.A. (pub. avail. Sept. 7,

Insurace Company (pub. avai. May 12, 1989Y; North Shore
Association (pub. avail. Dec. 8, 1988); Wells Fargo

Bank,

1988).

4

ability of an employer to withdraw assets similar to those described in this letter. The prior
no-action letters, therefore, no longer represent the staf's position on enforcement action in
this area. ~/

K.~ Me \ALLo.
Kare McMilan
Special Counsel

5.1 The staff realies that a number of bans and insurace companes may be permitting

457 Plans to invest in their collective trust funds or separte accounts in reliance on
these prior letters. To faciltate an orderly trasition to its current position, the staf

wil not recommend enforcement action to the Commission for a period of twelve
months from the date of this letter if these persons continue to rely on the prior
letters. At the end of that period, however, banks and insurace companes wishig

to continue including 457 Plans in their collective trust funds or separte accounts
should, for new contracts, enter into an agreement similar to that described above
with the sponsor of each such 457 Plan, and for existing contracts, use reasonable
efforts to amend plan documents andlor supporting contracts to conform to the
agreement (or one similar to the one) described above.
5

LAW OFFICES OF

PAUL. HASTINGS. JANOfSKY & WALKER
COUNSEL

LEE G. PAUL
ROBERT p, HASTINGS
LEONARD S. JANOFSKY
CHARLES M. WALKER

LOS ANGELES OFFICE

A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS

ATLANTA OFFICE

TENTH FLOOR
1299 PENNSYLVANIA AVENUE, N.W.

600 PEACHTREE STREET, N.E.
ATLANTA. GEORGIA 30308-2222

WASHINGTON, D,C. 20004-2400

CONNECTICUT OFFICE
1055 WASHINGTON BOULEVARD
STAMFORD, CONNECTICUT 06901-2217

SSS SOUTH FLOWER STREET

LOS ANGELES, CALIFORNIA 90071-2371
TELEPHONE (213. 683-6000

-Te:i.e:PHÓN-e:''- (202) 50a~"500

ORANGE COUNTY OFFICE
695 TOWN CENTER DRIVE
COSTA MESA, CALIFORNIA 92626-1924
TELEPHONE (714) .668-6200

FACSIMILe:: (202) 506-9700

SUITE 2400
TELEPHONE (404) 81S-2400

TELEPHONE (203) 961-7400
NEW YORK OFFICE

399 PARK AVENUE
NEW YORK, NEW YORK 10022-4697
TELEPHONE (212) 318-6000

WEST LOS ANGELES OFFICE
1299 OCEAN AVENUE
SANTA MONICA. CALIFORNIA 90401-1078
TELEPHONE (310) 319-3300

July 29, 1996

TOKYO OFFICE
ARK MORI BUILDING, 30TH FLOOR

P.O. BOX 577
12-32, AKASAKA l-CHOME
MINATO-KU, TOKYO 107

TELEPHONE (03) 3S86-4711

WRITER'S DIRECT DIAL NUMBER

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VIA MESSENGER
Jack W. Murphy, Esq.
Associate Director and Chief Counsel
Division of Investment Management
Securi ties and Exchange Commission
450 Fifth street, N.W.
Washington, D. C. 20549
Martin P. Dunn, Esq.
Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: State Street Bank and Trust Company:
Section 457 Plan No-Action Letter Request
Ladies and Gentlemen:

We are writing on behalf of our client, State
street Bank and Trust Company (" State Street"), to

respectfully request that the Staff (the "Staff") of the

PAUL. HASTINGS. JANOfSKY & WALKER

Securities and Exchange Commission (the "Commission") agree
not to recommend enforcement action to the Commission if

various plans meeting the definition of "eligible deferred
compensation plan" in Section 457 of the Internal Revenue
Code of 1986, as amended, ("Code") were to participate in
certain collective trust funds maintained by State Street

without registering the funds or the offering of units of
participation therein under the federal securities laws.

More particularly, we respectfully request that
the Staff concur in our opinion that units in the collective

trust funds may be offered to Section 457 governmental plans

(i. e., governmental plans established pursuant to section
457 of the Code) in reliance on the exemptions from

registration afforded under Section 3 (a) (2) of the
Securities Act of 1933 ("Securities Act") and Section

3 (a) (12) of the Securities and Exchange Act of 1934
("Exchange Act"), and the exception from regulation as an

investment company affo~ded under Section 3 (c) (11) of the
Investment Company Act of 1940 (" Investment Company Act") . 1/

1/ For convenience, we occasionally refer in this letter
to the exception from regulation as an investment company
afforded in Section 3 (c) (11) of the Investment Company Act
as an "exemption."
2

PAUL. HASTINGS. JANOFSKY & WALKER

I.
STATEMENT OF FACTS

A. Backqround
state street is a trust company establ ished in

1891 under the laws of The Commonwealth of Massachusetts and
is a wholly-owned subsidiary of state street Boston

Corporation, a federal bank holding company. state street
is subject to the supervision and examination of the

Massachusetts Commissioner of Banks and the Federal Deposit
Insurance Corporation, which insures state street's

deposi ts. state street is also a member of the Federal

Reserve System and subject to supervision and examination by

the Board of Governors of the Federal Reserve System. As of
December 31, 1995, State Street and its affiliates world­

wide had over $2.3 trillion of assets in trust or under
custody and over $226 billion of assets under management.

State Street has established various collective

trust funds under the State Street Bank and Trust Company
Investment Funds for Tax Exempt Retirement Plans (all such
collective trust funds referred to hereafter as "Trust").

The Trust is offered and sold to employee benefit plans
qualified for favorable tax treatment under Section 401 (a)

of the Code, and to governmental plans defined in Code
Section 414 (d) which also qualify for favorable federal tax

treatment. Employee benefit plans for self-employed
3

PAUL. HASTINGS. JANOfSKY & WALKER

individuals within the meaning of Code Section 401(c) (1)

("Keogh Plans") also may participate in the Trust, but only
to the extent the interests in such -plans, and the interests

of any such plans in pooled investment vehicles in which

they invest, are exempt from registration in reliance on

Rule 180 under the Securities Act. Commingled investment
some or all of the

vehicles containing only assets -of

employee benefit plans eligible for participating directly

in the Trust, also may invest in the Trust. Individual
retirement account plans established pursuant to Code

i tered arrangements

Section 408 (a), however, and tax-she

established pursuant to Code Section 403 (b), may not

participate in the Trust.

The Trust is operated in reliance on various

exemptions under the federal securities laws. Trust units
are offered and sold to qualified participants in reliance
afforded by Section

on the exemption from registration

3 (a) (2) of the Securities Act and the corresponding
exemption from registration afforded by Section 3 (a) (12) of
the Exchange Act. In addition, the Trust operates in

reI iance on the exception from regulation as an investment

company afforded under Section 3 (c) (11) of the Investment
Company Act.

4

PAUL, HASTINGS. JANOfSKY & WAlKER

B. Proposal

state Street- proposes to offer unitg in the Trust
to Section 457 plans established by various governmental

units described in Code Section 457 (e) (1) (A) ("Section 457
Plan" or "Plan,,)gf, in reliance on- the exemptions from

registration afforded under the Securities Act, the Exchange

Act, and the Investment Company Act. W As here relevant and
fully in accordance with the requirements of Section

457 (b) (6) of the Code, a Section 457 Plan participating in
the Trust will provide, among other requirements, that all

assets accumulated under the Plan shall remain "solely the
property and rights of the (sponsoring) employer . . .

subject only to the claims of the employer's general

creditors. " In addition, and also fully in accordance with

the provisions of Treasury Regulations § 1.457-1(b) and §
1.457-2 (j), a participating Section 457 Plan may permit an

employee participating Ëhereunder to direct the investment
of contributions and amounts accumulated on such person's

y Section 457 (e) (1) (A) defines the term "eligible
employer", for purposes of the definition of "eligible
deferred compensation plan" in Section 457 (b), to mean any
"State, political subdivision of a State, and any agency or
instrumentality of a State or political subdivision of a

State. "

1/ State Street is requesting that the Staff grant noaction assurance only with respect to future investment

arrangements involving Section 457 plans.
5

PAUL. HASTINGS. JANOfSKY & WALKER

behalf, even though such amounts are considered the
"property and rights" of the sponsoring employer.
Participation in

the' Trust-by a Section 457 Plan

will be evidenced by an Investment Management Agreement
("Agreement") executed between State Street and an

authorized representative of such Plan (referred to herein
as the "Plan Administrator")+ .This Agreement will contain a
number of provisions intended to ensure that the assets of a
participating Plan will be administered for the exclusive
benefi t of Plan participants, subj ect to the requirements of

Section 457 (b) (6) of the Code and interpretations thereof .~I
As an initial matter, the Agreement will prohibit
a Section 457 Plan from participating in the Trust unless

the Plan document contains a provision (or is interpreted in
a manner) that requires Plan assets to be administered for
the exclusive benefit of Plan participants, except to the
extent necessary to satisfy the provisions of Section
457(b) (6) of the Code. .In the event the Plan document, in

State Street's opinion, does not provide for administering

AI The Internal Revenue Service has issued Revenue
Procedure 92-64, 26 CFR 601.201, 1992 IRB LEXIS 380, 1992-33

LR.B. 11 (Aug. 17, 1992), which affords a "safe harbor" for

unfunded deferred compensation plans that use a "Rabbi
Trust" in the manner described in that ruling. Although
State Street's proposed investment arrangement does not
involve use of a Rabbi Trust, State street believes
that the
terms of its proposed arrangement generally are consistent
with the terms and conditions of Revenue Procedure 92-64.
6

PAUL, HASTINGS. JANOfSKY & WALKER

Plan assets for the exclusive benefit of participants
(consistent with federal tax law), the Agreement will

authorize state street to obtain from a Plan Administrator a

wri ting explaining that the Plan document is to be

interpreted in this manner. state street represents that in
no event will it allow a Section 457 Plan to participate in
the Trust if, in state street's opinion, the Plan document
contains any provision that would not permit it to be
interpreted to require such "exclusive benefit" treatment.

Consistent with this "exclusive benefit" condition
and the requirements of federal tax law, the Agreement will
contain provisions that prohibit an employer from
wi thdrawing Plan assets from the Trust except for one or

more of the following reasons:

( i) to transfer Plan assets to a trustee in bankruptcy
in the event of the employer's insolvency or
bankruptcy, or to any other agent independent of
the employer authorized to act in such

proceedings;

(2) to satisfy the claims of general creditors of the
employer in the event of the employer's insolvency
or bankruptcy;

(3) to pay benefits to an employee participating under
a Plan;

(4) to transfer assets to a Plan custodian or other
person designated by a sponsoring employer in case
the Agreement is terminated or a ,withdrawal is
made for the purpose of using another investment
manager or investment arrangement;

7

PAUL. HASTINGS. JANOfSKY & WALKER

(5) to distribute Plan assets to participating
employees in the event a Plan is terminated
pursuant to a plan of liquidation; or

(6) - to meet the following miscellaneous expenses

related to Plan administration: (a) to reimburse
an employer for any Plan benefits that may have
been paid by the employer out of its other assets,
or (b) to correct an excess deferral or other
mistaken investment in the Trust.
The Agreement will define "insolvency", for

purposes of clauses (1) and (2) above, as a circumstance in
which an employer is unable to pay its debts as they become
due or is subj ect to a pending proceeding as a debtor under

the United states Bankruptcy Code.~ In this regard, the
Agreement will require a Plan Administrator to represent
that a withdrawal based on a claim of insolvency will be

premised on a determination made by the highest governing
body of the employer, as well as its highest executive
officer, after notice of public hearing has been given and a
public hearing has been held.
wi th respect to the conditions conta ",ned in

clauses (4) and (5) above, the Agreement will contain a

representation from the Plan Administrator that in no event

will an employer be permitted to use Plan assets for its

purposes when assets are withdrawn for the reasons stated in

those clauses.

2J This definition is consistent with the definition of
" insol veney" contained in Revenue Procedure 92 -64. See

Section 3 (a) of Rev. Proc. 92-64.
8

PAUL. HASTINGS. JAt\fOfSKY & WALKER

In addition, the Agreement will require a

withdrawal request made for any of the reasons stated above
in clauses (1) - (6) to

be accompanied-by written

notification from the Plan Administrator explaining the

reasons therefor. If the writing indicates that an employer
wants to redeem units because it is insolvent, then such
writing, in accordance wi ththe provisions stated above for
determining insolvency, will describe the procedures that

were followed in making this determination. If the writing
indicates that an employer

is redeeming units because it

wants to terminate its investment management arrangement
with state street, in whole or in part, then such writing

will contain a representation from the terminating employer
naming the person to whom such money should be transferred

by state street and affirming that the assets are not to be

used for employer purposes. Under the Agreement, state
street will not be obligated to and will not release the

proceeds of a withdrawal unless an employer includes this

representation in its writing. The Agreement will also
provide that, in deciding whether to honor a withdrawal
request, state street may rely on any such writing it
reasonably believes was submitted in good faith by a
participating employer.

state street does not intend, by the foregoing

provisions to be included in the Agreement, that any
9

PAUL. HASTINGS. JANOfSKY & WALKER

participant or beneficiary will have a vested or secured
interest in the assets of the Trust, or any claim under a

Plan, other than as a general creditor of an employer
participating in the Trust.

_II.
DISCUSSION

A. Relevant StatutorY Authoritv Under the Federal
Securi ties Laws

The federal securities laws do not expressly
provide an exemption for interests in a Section 457

governmental plan or to the plan itself, or for commingled
investment funds that permit participation by such plans.

The exemption from registration contained in Section 3 (a) (2)
of the Securities Act, on its face, limits the availability
of the exemption to

a governmental plan as defined in Section 414 (d) of
(the) Code which has been established by an employer
for the exclusive benefit of its employees or their
beneficiaries for ~he purpose of distributing to such
employees or their beneficiaries the corpus and income
of the funds accumulated under such plan, if under such
plan it is impossible prior to the satisfaction of all
liabilities with respect to such employees and their
beneficiaries, for any part of the corpus or income to
be used for, or diverted to, purposes other than the
exclusive benefit of such employees or their
beneficiaries . . . .

Substantially similar provisions relating to

governmental plans are contained in Section 3 (a) (12) of the

Exchange Act and, by reference to Section 3 (a) (2) (C) of the
10

PAUL. HASTINGS. JA~OfSKY & WALKER

Securities Act, in Section 3 (c) (11) of the Investment

Company Act.
The governmental

plan exemptions contained in

section 3(a) (2) of the Securities Act, Section 3(a) (12) of

the Exchange Act, and Section 3 (c) (11) of the Investment
Company Act were added by the Small Business Investment
Incentive Act of 198.0 (the "1980 Amendments") .fif A

Commission Memorandum submitted to the United States Senate
in support of the 1980 Amendments, and which was later made

part of the legislative record, explained the reasons for

enacting these provisions. In pertinent part, the
Memorandum explained:
Section 414 (d) of the Internal Revenue Code provides
special tax treatment for state and local employee
benefit plans, and was added to the Code in 1978 in
recognition
of the fact that it is often difficult if
not impossible for such plans to meet all the
qualification requirements of Section 401, particularly

the anti-discrimination requirements of Section 401 (a) ,
because the statutes establishing such plans prescribe
a shorter vesting period for elected and appointed
officials than for other covered employees in
recognition of the .
reality of political life. (T)he
Bill would make exemption from registration for bank
and insurance company funding of public pension plans
turn upon the plans' compliance with the substance of
Section 401 as it is material to the operation of the
securities laws, rather than on their compliance with
all the technical requirements of that Section. Thus,
it would provide an exemption from registration for

bank and insurance company funding of Section 414 (d)

plans which have been established for the exclusive
purpose of providing retirement benefits to employees

§/ See Pub. L. No. 96-477, §§ 701-03, 94 Stat. 2275, 2294­

96 (1980).

11

PAuL. HASTINGS. JANOFSKY & WALKER

or their beneficiaries and whose funds are segregated
and cannot be diverted to other purposes. The two
requirements contained in the amendment are based upon
Section 401(a) (1) and Section 401(a) (2) respectively,
which are two of the three central provisions of

Section 401.If

As is evident from the foregoing, the

Congressional policy underlying the employee benefit plan

exemptions of the federal securities laws, as they relate to
governmentai plans, is that government employees generally
receive adequate protection from their employers in

connection with retirement plans established for their
exclusive benefit, and that the protections afforded by
registration under the federal securities laws are,

therefore, unnecessary. Congress assured such protection
for participants in a governmental plan relying on these

exemptions by incorporating into Section 3 (a) (2) of the
Securities Act and Section 3 (a) (12) of the Exchange Act

(and, by implication, Section 3 (c) (11) of the Investment
Company Act) the provisions of Sections 401 (a) (1) and

401(a) (2) of the Code. These provisions effectively require
a governmental plan to be administered for the exclusive

benefit of participants, typically under trusteed or insured

1/ See 126 Cong. Rec. S 27272-74 (cum. ed. Sept. 25,
1980). The legislative history of the changes to the
employee benefit plan exemptions to add governmental plans
is recounted in Securities Act Release No. 33-6281 (Jan. 23,

1981) .
12

PAUL. HASTINGS. JANOfSKY & WALKER

arrangements, in order to receive tax-favored treatment.

"Exclusive benefit" treatment is assured by requiring the
trustee or insurer, as the -case may be, to administer plan

assets in a way that makes it impossible to use such assets
unless the benefits owed to participants are first

satisfied.
There is no indication in the legislative history
that Congress, in describing the types of "governmental

plans" that could rely on the employee benefit plan

exemptions under the federal securities laws, attached any
particular significance to the inclusion of the clause "as
defined in section 414 (d) of (the) Code" in the text of

these exemptions. Nor is there anything, in the definition
of "governmental plan" under Section 414 (d) of the Code,

that would be relevant in distinguishing such plan from
other "governmental plans" defined elsewhere in the Code in

determining the scope of these exemptions. In fact, as a
technical matter, a "governmental plan" established by a
state (or agency or instrumentality thereof) pursuant to

Section 457 of the Code is a "governmental plan" (or, more
accurately, an "eligible deferred compensation plan")

established by such State (or agency or instrumentality

13

PAUL, HASTINGS. JAKOfSKY & WALKER

thereof) pursuant to Section 414 (d) of the Code.~

Operationally, however, the two types of plans could be very
different depending on the extent to which the Section
414 (d) plan provides for "exclusive benefit" treatment for

participants under such plan and the extent to which the
Section 457 Plan, consistent with federal tax law, could
provide essentially for such treatment.
In light of the foregoing , it appears reasonable,

in determining whether the employee benefit plan exemptions

should be made available to Section 457 Plans and the pooled

vehicles in which they invest, to focus appropriately on the
extent to which "exclusive benefit" treatment would be
afforded to participants in such plans under the State
Street investment arrangement.

B. Applvinq the "Exclusive Benefit" Clause of the
Emplovee Benefit Plan Exemptions to Section 457

Plans

A Section 457 governmental plan may not be

administered ior the "exclusive benefit" of participants, in
the way that is expressly set forth in the employee benefit

Y "Governmental plan" is defined in Section 414 (d) of the

Code simply as a "plan established and maintained for its
employees by the Government of the United States, by the
government of any State or political subdivision thereof, or
by any agency or instrumentality of any of the foregoing."
The definition also includes "any plan to which the Railroad
Retirement Act of 1935 or 1937 applies . . . and any plan of
an international organization which is exempt from taxation
by reason of the International Organizations Immunities Act.
"

14

PAUL. HASTINGS. JANOfSKY & WALKER

plan exemptions (i. e ~, by making it impossible to use plan

assets unless the benefits owed to participants are first
satisfied), without resulting in significant adverse tax

consequences to participants in such plan. As noted, in
order to qualify for favorable tax treatment, a Section 457

plan must be operated in accordance with the requirements of
In this regard, the assets

Section 457 (b) (6) of the Code.

held under such plan must remain at all times the "property
and rights" of the sponsoring employer and must be reachable
by general creditors of such employer.

The Congressional policy underlying the enactment

of Section 457 (b) (6) appears to be based mainly on the
doctrine of "constructive receipt" of income. Under this
doctrine, an employee is prohibited from acquiring a present
interest in the contributions made to, or the assets held

in, a Section 457 plan. Before the enactment of Section
457, sponsors of such plans had sought and obtained

favorable rulings from ~he Internal Revenue Service allowing
employees, under certain conditions predicated on the
"constructive receipt" doctrine, to postpone their tax

liability on deferred compensation until actual receipt

under the plan. This doctrine was later incorporated into
the Code in Section 457.
Al though it is possible for the assets held in a

Section 457 Plan to be used for employer purposes, we

15

PAUL, HASTINGS, JANOfSKY & WALKER

believe that the provisions state street proposes to include
in its Investment Management Agreement will ensure that this

remains only a remote possibility, and that, as a practical

matter, such assets will be administered substantially in
accordance with the "exclusive benefit" provision of the

employee benefit plan exemptions. In this regard, the
"exemptions will not be

Congressional policy::underlying these

frustrated and will be substantially met under a state
street investment arrangement.

(1) The Aqreement Provisions will Ensure That the
Plan Will be Operated Fundamentallv for the
Benefit of Emplovees
As noted, the Agreement will contain provisions
which are intended to ensure that a Section 457 Plan
participating in the Trust will be administered for the
"exclusive benefit" of Plan participants (subject only to

the requirements of federal tax law). Under the Agreement,
the Plan document itself must provide for administering the

Plan in this manner. If the Plan document does not contain
such a provision, state street will obtain a writing to this
effect from a Plan Administrator, provided that the Plan
document does not contain any provision which, in the

opinion of state street, would be deemed inconsistent with

such treatment. These provisions, in our opinion, will
ensure that, as a matter of fundamental Plan administration,

16

PAUL. HASTINGS. JANOfSKY & WALKER

an employer will not be permitted to use Plan assets for its
own purposes.

Further- towards this end, as noted previously, the

Agreement will specify the limited cases in which the
sponsor of a Section 457 Plan participating in the Trust

will be permitted to make withdrawals from the Trust. As is
evident from examining these cases, a withdrawal will be

permitted only if it benefits a participating employee or if
it is warranted because a sponsoring employer has been

declared insolvent, after following certain procedures

described in the Agreement, or has filed a petition for

bankruptcy. In no other event will an employer be allowed

to use Plan assets. A withdrawal based upon a partial or
complete termination of the Agreement will be permitted only
if the Plan Administrator affirms in writing that the

employer does not intend to use Plan assets for its own

purposes. In the opinion of State street, these provisions
will ensure that so long as a Section 457 Plan remains
invested in the Trust, and even upon a termination of the

Agreement, an employer could not use Plan assets to meet
operating expenses.

(2) The Conqressional Policy Underlyinq the
Employee Benefit Plan Exemptions will Not Be

Frustrated

The proposed provisions to be included in the

Agreement also will ensure that the fundamental

17

PAUL. HASTINGS. JANOfSKY & WALKER

Congressional policy underlying the employee benefit plan
exemptions of the federal securities laws would not be

frustrated-: if' a Section' 457 Plan_were to invest in the
Trust. A participating Section 457 Plan will operate
substantially along the lines of a Section 414 (d)

governmental plan that is administered in accordance with
the "exclusive benefit" clause of the employee benefit plan
exemptions (except, of course, to the extent necessary to

retain tax qualification under Section 457 of the Code). In
this regard, there will always be someone (such as the Plan

Administrator, a designated trustee, or an insurer) charged
with exercising fiduciary responsibilities in seeking to
protect the interests of participants in the Plan.

Except in the unlikely event of insolvency or

bankruptcy, and so long as a Section 457 Plan sponsor
remains a "going concern", employee participation in the

Plan will be very much like participating in a Section
414 (d) governmental plan that is administered in accordance

with the "exclusive benefit" clause of the employee benefit

plan exemptions. As noted, depending on the provisions of a
particular Plan, an employee, consistent with the provisions
for qualifying as a Section 457 plan, may instruct its

employer how to allocate contributions, including the

earnings thereon, among available investment options. In
addition, an employee eligible to receive benefits under the
18

PAUL. HASTINGS. JANOfSKY & WAlKER

Plan will receive benefits in a manner that would be

indistinguishable from the manner of paying benefits under a
Section 414 (d) governmental plan properly relying on the

employee benefit plan exemptions. The Plan Administrator,
acting on behalf of employees in such cases, would perform

his or her duties, for federal securities law purposes, in a
manner that would be indistinguishable from the performance
of such person's duties under a Section 414 (d) governmental

plan (administered in a manner that provides for "exclusive

benefit" treatment for participants) .
C. Previous No-Action Positions' Taken bv the SEe
Staff Support this Request for Relief
Our request for no-action assurance is supported

by positions taken by the Staff in several letters over the

last ten years. W In those letters, the Staff agreed not to
2/ See,~, Wells Fargo Bank, N.A. (avail. Sept. 7,
1988); North Shore Savings & Loan Association (avail. Dec.
8, 1988) Nationwide Life Insurance Company (avail. May 12,
1989); Aetna Life Insurance Company (avail. Oct. 18, 1989);
Fidelity Management Trust Company (avail. Nov. 2, 1989);
Great West Life Annuity Insurance Co. (avail. Feb. 1, 1990);
The Travelers Insurance Company (avail. Aug. 6, 1990);
Hartford Life Insurance Company (avail. Jun. 24, 1992); The
Lincoln National Life Insurance Company (avail. Oct. 26,

1992) .
In addition to the foregoing, the Staff on
previous occasions has granted no-action relief to Section
457 plans and their funding media in analogous
circumstances. See, ~, ICMA Retirement Trust (avail. Feb.
7, 1983) (offering of interests in a trust for commingled

investment of Section 457 plans exempt under Section 3 (a) (2)

of the Securities Act and Section 2 (b) of the Investment

(continued. . . )
19

PAUL. HASTINGS. JANOfSKY & WALKER

recommend enforcement action to the Commission if various

Section 457 plans sponsored by state or local governments

were to participate in collective investment funds or in
insurance company separate accounts relying on the employee

benefit plan exemptions. The Staff's position in many of
these letters, particularly the more recent, was premised on
compliance with the following general conditions:

(1) the funding vehicle will be used for no purpose
other than to fund one or more plans qualifying

under Section 401(a) or Section 404(a) (2) of the
Code;

(2) no assets held by the investment vehicles will be
attributable to individual retirement accounts
qualifying under Section 408 of the Code or to
retirement plans qualifying under Section 403 (b)
of the Code;

(3) in the opinion of counsel, the plan will be a
"governmental plan" within the meaning of the
employee benefit plan exemptions under the federal
securi ties laws;

(4) plan assets will not be used for any purpose other
than for the exclusive benefit of plan
participants, except that plan assets shall remain
subj ect to the claims of general creditors of the
employer to the extent necessary to preserve
qualification of the plan under Section 457 of the
Code; and
(5) the sponsor of the investment vehicle will give
directly to all plan participants, or provide to
each plan sponsor for actual distribution to all

~ (. . . continued)

Company Act as an "instrumentality" of the government) ;
Equitable Life Assurance Society (avail. Dec. 12, 1980)
(offering of interests in a group annuity contract held in
trust to Section 457 plans not subject to registration under
the Securities and Investment Company Acts) .

20

PAlTL. HASTINGS, JANOfSKY & WALKER

participants, brochures that prominently disclose
(a) that the amounts allocated to the investment
vehicle will be subj ect to the claims of general
credi tors of the employer under current tax law,
and (b) the consequences to -participants of this

arrangement. 10/
state street will comply with each of the
foregoing conditions as well as the additional conditions

listed previously in this letter. In addition, state street
represents that employee contributions to a particular

Section 457 Plan will not be invested in securities of the
sponsoring employer or its controlled or commonly controlled
enti ties. Taken together, these conditions would serve to
bring a participating Plan as close as possible to the
operation of a Section 414 (d) governmental plan, which is

being administered exclusively for the benefit of
participants in such plan, without resulting in immediate
taxation of employees participating thereunder.

D. No Apparent Policv Reason Supports A Need for

Reqistration

Our request fer no-action assurance also is

supported by the absence of any cogent policy reason to
require registration of the Trust or the offering of units

therein in the circumstances. No legitimate investor
protection concern apparently will be advanced in such case.

10/ This last condition has appeared in the most recent

Section 457 no-action letters. See, ~, The Lincoln

National Life Insurance Company (avail. Oct. 26, 1992);
Hartford Life Insurance Company (avail. Jun. 24, 1992).

21

PAGL. HASTINGS. JANOfSKY & WALKER

First, it is questionable whether participants

will receive any more disclosure than they currently receive
if registration under the federal securities laws were

required. Under current law, an issuer of units sold in a
plans is required only to

registered offering to Section 457

deliver prospectuses to the sponsor of such plan.ll/ A

plan participant, therefore, in the case of a registered
offering, is not certain to receive a statutory prospectus.

Under the terms of this no-action request, by contrast, such
persons will be assured of receiving some disclosure since
State street has undertaken in the Agreement to deliver

brochures directly to plan participants, or to have such
brochures delivered to such persons.

Second, it is questionable whether Plan

participants would be any more protected by regulation under
the Investment Company Act than if they were invested in a
governmental plan that contained the "exclusive benefit"

clause referred to previously. As noted, the provisions
State Street proposes to include in the Agreement would

11/ We recognize, of course, that the Staff of the Division
of Investment Managément has recommended that the Commission
seek legislation to require the delivery of prospectuses to
employees in participant-directed, defined contribution
plans. See Division of Investment Management, SEC, "Pooled
Investment Vehicles for Employee Benef it Plan Assets,"
Protecting Investors: A Half Century Of Investment Company
Regulation (1992) ("Protecting Investors Report"). It is
not certain, however, whether the Division's recommendation
covers the offering of units to Section 457 plans.

22

PAUL. HASTINGS. JANOfSKY & WALKER

require the Plan to be administered exclusively for the

benefit of participants in the Plan (subject, of course, to

the requirementsoffeder- tax law) and would require
someone, such as the Plan Administrator, to exercise

fiduciary responsibilities with respect to the assets of

such Plan. Participants in such Plan, therefore, would have
many of the substantive prntections that ordinarily would be
provided by registration under the Investment Company Act
or, at least, many of the protections afforded under a

governmental plan operated exclusively for the benefit of

participants. Regulation under the Investment Company Act
would, at best, provide marginal incremental protection to
Plan participants.

III.
REQUESTED STAFF POSITION

On the basis of the foregoing, it is our opinion
that the interests in the Trust to be issued to Section 457
Plans, in the manner described above, are exempt securities

both under Section 3 (a) (2) of the Securities Act and Section
3 (a) (12) of the Exchange Act, and that the Trust would not
be required to register under the Investment Company Act by

virtue of the exemption afforded by Section 3 (c) (11)
thereof.

23

PAUL. HASTINGS. JANOfSKY & WALKER

We would appreciate your advice that the staff

will not recommend to the Commission that any action be

taken if state -street ~roceedswith its proposed offering
without compliance with the various registration

requirements of the federal securities laws. If, however,
the Staff considers denying our no-action request, we would

like to arrange a conference to discuss these issues. If
you require additional information, please contact the
undersigned at (202) 508-9574, or Robert E. Carlson at (213)

683-6299.

Sincerely,

~.

L0L~u ~~ --0 .. ./
wendeii' M. .~,
for Paul, Hastings, Janofsky & Walker

24

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A76f917b3523b245a. Public record. Not legal advice.