Proposed Class Exemption for Certain Transactions Involving Insurance Company General Accounts

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-9662]

Proposed Class Exemption for Certain Transactions Involving

Insurance Company General Accounts

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed class exemption from

certain prohibited transaction restrictions of the Employee Retirement

Income Security Act (ERISA or the Act) and from certain taxes imposed

by the Internal Revenue Code of 1986 (the Code). If granted, the

proposed exemption would exempt prospectively and retroactively to

January 1, 1975, certain transactions engaged in by insurance company

general accounts in which an employee benefit plan has an interest, if

certain specified conditions are met. Additional exemptive relief is

proposed for plans to engage in transactions with persons who provide

services to insurance company general accounts. The proposal would also

permit transactions relating to the origination and operation of

certain asset pool investment trusts in which a general account has an

interest as a result of the acquisition of certificates issued by the

trust. The proposed exemption, if granted, would affect participants

and beneficiaries of employee benefit plans, insurance company general

accounts, as well as other persons engaging in the described

transactions.

DATES: Written comments and requests for a hearing shall be submitted

to the Department before October 21, 1994. If granted, the exemption

would be effective January 1, 1975.

ADDRESSES: All written comments (preferably 3 copies) and 9 hearing

requests should be sent to: Pension and Welfare Benefits

Administration, Office of Exemption Determinations, Room N-5649, 200

Constitution Avenue NW., Washington, DC 20210, Attention: ACLI Class

Exemption Proposal. The application for exemption (Application Number

D-9662), as well as all comments received from interested persons, will

be available for public inspection in the Public Documents Room,

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N-5507, 200 Constitution Avenue NW., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT:

Lyssa E. Hall, Office of Exemption Determinations, Pension and Welfare

Benefits Administration, U.S. Department of Labor, Washington, DC

20210, (202) 219-8971 (not a toll-free number) or Timothy Hauser, Plan

Benefits Security Division, Office of the Solicitor, (202) 219-8637

(not a toll-free number).

SUPPLEMENTARY INFORMATION: This document contains a notice of pendency

before the Department of a proposed class exemption from certain of the

restrictions of sections 406 and 407 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 proposed exemption was requested in an

application dated March 25, 1994, submitted by the American Council of

Life Insurance (the ACLI)\1\ pursuant to section 408(a) of ERISA and

section 4975(c)(2) of the Code, and in accordance with procedures set

forth in 29 CFR section 2570 subpart B (55 FR 32836, August 10, 1990).

In addition, the Department is proposing additional relief on its own

motion pursuant to the authority described above.\2\

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\1\The ACLI is the major trade association of the life insurance

business, representing 640 life insurance companies. these companies

hold, in the aggregate, approximately 89% of the assets of all life

insurance companies and 94% of the pension business with insurance

companies.

\2\Section 102 of Reorganization Plan No. 4 of 1978 (43 FR

47713, October 17, 1978), effective December 31, 1978 (44 FR 1065,

January 3, 1979), generally transferred the authority of the

Secretary of the Treasury to issue exemptions under section

4975(c)(2) of the Code to the Secretary of Labor. In the discussion

of the exemption, references to sections 406 and 408 of the Act

should be read to refer as well as to the corresponding provisions

of section 4975 of the Code.

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Background

Life insurance companies issue a variety of group contracts for use

in connection with employee pension benefit plans, some of which

provide benefits the amount of which is guaranteed, some of which

provide benefits that may fluctuate with the investment performance of

the insurance company, and some of which offer elements of both. Under

section 401(b)(2) of ERISA, if an insurance company issues a

``guaranteed benefit policy'' to a plan, the assets of the plan are

deemed to include the policy, but do no, solely by reason of the

issuance of the policy, include any of the assets of the insurance

company. Section 401(b)(2)(B) defines the term ``guaranteed benefit

policy'' to mean an insurance policy or contract to the extent that

such policy or contract provides for benefits the amount of which is

guaranteed by the insurer. In addition, in ERISA Interpretive Bulletin

75-2, 29 CFR 2509.75-2, the Department stated that if an insurance

company issues a contract or policy of insurance to a plan and places

the consideration for such contract or policy in its general asset

account, the assets in such account shall not be considered to be plan

assets.

On December 13, 1993, the Supreme Court rendered its decision in

John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank,

114 S. Ct. 517 (1993) (Harris Trust.) The Supreme Court held that those

funds allocated to an insurer's general account pursuant to a contract

with a plan that vary with the investment experience of the insurance

company are ``plan assets'' under ERISA. As a result, the Court

concluded that Hancock was a fiduciary with respect to the management

and disposition of such funds. Under the reasoning of this decision, a

broad range of activities involving insurance company general accounts

are subject to ERISA's fiduciary standards.

Prior to the Harris Trust decision, the insurance industry,

following adoption of IB 75-2, operated under the assumption that

general account assets were not plan assets, and thus, were not subject

to ERISA's fiduciary responsibility provisions. As a result of the

retroactive effect of the Supreme Court decision, numerous transactions

engaged in by insurance company general accounts may have violated

ERISA's prohibited transaction provisions. The insurance industry

believes that, absent exemptive relief, it will be subject to

significant additional litigation with respect to the operation of its

general accounts.

If the underlying assets of a general account include plan assets,

persons who have engaged in transactions with such general account may

be viewed as parties in interest, including fiduciaries, with respect

to plans which have interests as contractholders in the general

account. Lastly, the underlying assets of an entity in which a general

account acquired an equity interest may include plan assets as a result

of the Harris Trust decision.

Summary of the Application

The application contains facts and representations with regard to

the requested exemption that are summarized below. Interested persons

are referred to the application on file with the Department for the

complete representations of the Applicant.

The ACLI represents that presently, of the $1.5 trillion in general

account assets of domestic life insurance companies, more than $558

billion relate to life insurance, health insurance and a broad variety

of annuity products purchased by employee benefit plans. General

account contracts, unlike all other investment and funding vehicles

offered to plans, provide risk pooling, guarantees of principal and

rates of return, as well as benefit guarantees, all of which are backed

by every dollar in the general account. The Applicant further states

that it is this pooling and assumption of risk that distinguish

insurance companies from typical investment firms and for which the

state insurance regulatory agencies impose stringent reserve and

capital requirements.

Like any other business, insurance companies have developed new

products to compete in an ever changing marketplace. In the pension

area, various forms of participating general account contracts,

especially deposit administration and immediate participation guarantee

contracts, were specifically developed to be responsive to the

expressed needs of plan sponsors. The ACLI states that even before

enactment of ERISA, participating general account contracts provided a

unique balance of investment participation and protection, as well as

many billions of dollars of benefits to plan participants and

beneficiaries. Participating contracts allow contractholders to share

in the general accounts' favorable investment, mortality and morbidity

experience, to obtain protection from unfavorable experience, and to

provide certainty and dependability for the payment of benefits to

participants and beneficiaries. According to the ACLI, these factors

have enabled plan sponsors to fund their benefit promises and to

increase the benefits to plan participants and beneficiaries.

Since the Supreme Court rendered its decision in Harris Trust, the

legal landscape applicable to general account activities has been

significantly altered. The ACLI represents that the Court's decision

has created uncertainty regarding the status of general account

operations and activities under ERISA-governed plans and will have a

long-term adverse effect on plan participants, the U.S. economy and the

insurance industry in the absence of exemptive relief.

The ACLI notes that insurance companies invest approximately $675

billion of general account assets in the economy each year and that

this is one of the largest sources of capital available in the United

States, particularly for smaller and medium-sized businesses which are

the source of most of the new job creation in our country. The

Applicant states that the decision in Harris Trust has begun to slow,

if not totally disrupt, the nation's capital markets. Investment

bankers, brokers and banks, as well as insurance companies, are all now

hesitant to engage in common, commercially reasonable and economically

beneficial business transactions for fear of inadvertently violating

ERISA's prohibited transaction restrictions. The Applicant believes

that without the relief requested in its application, many ordinary

practices of the insurance industry could be called into question.

The ACLI has requested unconditional retroactive relief from

January 1, 1975, for all transactions that may be viewed as having been

prohibited because insurance company general accounts may have held

plan assets, as well as certain other transactions that may be viewed

as having become prohibited merely as the result of an ERISA covered

plan's purchase of a participating general account contract. The ACLI

states that, although it is not possible to identify with specificity

the types of transactions to be covered by the proposed exemption, such

transactions would include (but are not limited to) the following:

(A) all internal operations of the general account (internal

transactions); (B) all investment transactions involving general

account assets, including transactions between the general account and

a party in interest with respect to a plan that has purchased a general

account contract; and (C) the purchase by the general account of

securities issued by and real property leased to employers of employees

covered by plans that have purchased general account contracts.

Internal Transactions

The ACLI represents that general accounts engage in a variety of

internal activities which, given the application of ERISA, could

potentially be viewed as prohibited. For example, income and losses

generated by general account investments are allocated among lines of

business (or, where applicable, among segments) or to surplus.

Decisions must be made regarding the use of surplus, i.e., whether and

to what extent to use surplus to pay dividends to policyholders or

stockholders. In addition, general operational business decisions

relating to salaries and benefits for the employees of the insurer, the

provision of office space and materials, advertising expenses,

charitable contributions, etc., could also be transactions subject to

ERISA due to the pooled nature of general account assets. Thus, the

ACLI represents that conceivably any of the myriad of decisions made by

an insurance company regarding the structuring or internal operation of

its business would need exemptive relief. In addition, the ACLI notes

that many insurance companies use affiliates to provide investment

management or property management services with regard to general

account properties and assets.

Investment Transactions With Third Parties

The Applicant represents that due to the pooled nature of general

account assets, it is conceivable that general account investment

transactions with persons who are parties in interest with respect to

ERISA-governed plans which have purchased participating general account

contracts (external transactions) could be viewed as subject to the

prohibited transaction rules of ERISA. For example insurance companies

are currently the most significant source of loans for smaller and mid-

sized companies in today's market. Many, if not all, of those companies

have party in interest relationships with plans that have purchased

general account contracts. Application of ERISA's prohibited

transaction provisions would have an adverse impact on the primary

source of credit for these companies. The ACLI further represents that

application of the prohibited transaction rules in this case could,

therefore, call into question almost every investment transaction by

insurance company general accounts since the January 1, 1975, effective

date of the ERISA fiduciary provisions.

The Applicant states that the relief needed for general account

investment transactions would be similar to the broad relief provided

in Prohibited Transaction Exemption 78-19, 43 Fed. Reg. 59915 (December

22, 1978), as amended and redesignated in PTE 90-1, 55 Fed. Reg. 2891,

(January 29, 1990). PTE 90-1 provides conditional relief for certain

transactions between insurance company pooled separate accounts in

which plans have an interest and parties in interest with respect to

those plans.\3\

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\3\Section I(a) of PTE 90-1 exempts from the restrictions of

sections 406(a), 406(b)(2) and 407(a) of ERISA and the taxes imposed

by section 4975(a) and (b) of the Code, by reason of section 4975

(c)(1)(A) through (D) of the Code:

Any transaction between a party in interest with respect to a

plan and an insurance company pooled separate account in which the

plan has an interest, or any acquisition or holding by the pooled

separate account of employer securities or employer real property,

if the party in interest is not the insurance company which holds

the plan assets in its pooled separate account, any other separate

account of the insurance company, or any affiliate of the insurance

company, and if, at the time of the transaction, acquisition or

holding, either;

(1) The assets of the plan (together with the assets of any

other plans maintained by the same employer or employee

organization) in the pooled separate account do not exceed--

* * * * *

(iii) 10 percent of the total of all assets in the pooled

separate account, if the transaction occurs on or after July 1,

1988; or * * *

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Additional Transactions

In addition to broad relief for transactions between parties in

interest and general accounts, the ACLI represents that various other

transactions would need retroactive relief as a result of the potential

plan asset treatment of general account assets.

Over the years, there have been literally thousands of persons and

entities that have provided services to insurance companies. According

to the ACLI, because of the size of insurance company general accounts,

the number of service providers raises the possibility of countless,

technical prohibited transactions which have posed no possibility of

abuse. Thus, the ACLI requests relief for transactions that would be

prohibited merely because a person is deemed to be a party in interest

to a plan solely by reason of providing services to the general account

(or who has a relationship with such service providers described in

sections 3(14) (F), (G), (H), or (I) of ERISA).

The ACLI further represents that, under the Department's plan

assets regulation, 29 CFR Sec. 2510.3-101(f)(2)(iii), an insurance

company investing general account assets could be viewed as a ``benefit

plan investor'' for the purposes of calculating the 25 percent

significant participation test in section 2510.3-101(f)(1) of the

regulation. This could increase the number of entities that would hold

plan assets as the result of a general account equity investment in an

entity, and thereby also increase the number of possible prohibited

transactions.\4\ The ACLI notes that, as a further consequence of the

general account's investment in an entity, the manager of the entity

(and other service providers to the entity) might be deemed to be

fiduciaries or other parties in interest under section 3(14) of ERISA.

Therefore, the ACLI requests broad relief for transactions that would

be prohibited solely because an entity has significant participation by

benefit plan investors as a result of equity investments by general

account(s).

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\4\It is the Department's view that, for purposes of determining

whether equity participation in an entity by benefit plan investors

is ``significant'' within the meaning of the significant

participation test contained in the plan assets regulation, 29 CFR

Sec. 2510.3-101(f), only the proportion of an insurance company

general account's equity investment in the entity that represents

plan assets should be taken into account. Therefore, the proportion

of that investment that represents plan assets would equal the

proportion of the insurance company general account as a whole that

constitutes plan assets.

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Employer Securities and Employer Real Property

The Applicant represents that the breadth of general account

investment activities over the last 20 years makes it likely that

insurance companies have purchased and continued to hold for their

general accounts, securities issued by or properties leased to

employers of employees covered by plans that purchased general account

contracts. Because insurance companies have made such investments with

the understanding that general account assets were not plan assets, it

is possible that general account investments include securities issued

by employers, and real property leased to employers, that do not meet

the standards set forth in section 407(a) of ERISA. The ACLI also

believes that relief is necessary for the acquisition or holding of

qualifying employer securities or qualifying real property by a plan

under circumstances where the acquisition or holding contravenes

sections 406 and 407(a) solely by reason of being aggregated with

employer securities or employer real property held by an insurance

company general account in which the plan holds an interest as a

contractholder. The Applicant notes that the relief requested for such

``excess holdings'' is similar to the relief provided for pooled

separate accounts in section I(c) of PTE 90-1.\5\

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\5\PTE 90-1, Section I(c) provides relief for:

Any acquisition or holding of qualifying employer securities or

qualifying employer real property by a plan (other than through a

pooled separate account) if--

(1) The acquisition or holding contravenes the restrictions of

sections 406(a)(1)(E), 406(a)(2) and 407(a) of the Act solely by

reason of being aggregated with employer securities or employer real

property held by an insurance company pooled separate account in

which the plan has an interest, and

(2) The requirements of either paragraph (a) or paragraph (b) of

this section are met.

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The Proposed Exemption

The scope of the exemption being proposed by the Department differs

from that requested by the Applicant. As previously noted, the

Department has granted a class exemption for insurance company pooled

separate accounts that provides relief from ERISA's prohibited

transaction provisions for a variety of transactions between separate

accounts and parties in interest with respect to plans participating in

such accounts. The Department has decided to propose similar relief, as

described below, with respect to insurance company general account

transactions to the extent that it believes that the requirements of

section 408(a) of ERISA would be met. On its own motion, the Department

is also proposing relief for certain transactions involving the

operation of certain asset pool investment trusts. However, as more

fully discussed below, the Department is not prepared at this time to

propose several additional exemptions requested by the Applicant.

Internal Transactions

After considering the ACLI's requested exemption for activities in

connection with the internal operation of general accounts, the

Department has determined that it does not have sufficient information

regarding the operation of such accounts to make the findings required

by section 408(a)\6\ of ERISA. In a letter dated May 20, 1994, the

Department has requested from the ACLI the necessary information by

posing a number of questions concerning the internal operations of

general accounts. In that letter, the Department indicated that it

would proceed with its review of their application as it pertains to

the external transactions while awaiting their response to the

questions.

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\6\Section 408(a) of ERISA provides, among other things, that

the Department may grant an exemption from the prohibited

transaction rules only if finds 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 such plan.

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Therefore, the Department is not proposing relief for transactions

involving the internal operation of general accounts at this time.

Additional Transactions

In addition to requesting broad retroactive relief for general

account transactions, the ACLI application also requests relief for

certain other transactions that may be viewed as being prohibited under

the Supreme Court's analysis in Harris Trust merely as a result of a

plan's purchase of a participating general account contract. As

previously noted, the significant participation test contained in the

plan asset regulation (section 2510.3-101) is a ``safe harbor''

provision which provides that the assets of an entity will be

considered to include plan assets only if equity participation by

``benefit plan investors'' is ``significant''. The ACLI represents

that, under regulation section 2510.3-101(f)(2), an insurance company

investing general account assets in an entity could be viewed as a

benefit plan investor for the purposes of calculating the 25 percent

significant participation test. As a result, transactions between the

entity and a party in interest to a plan with an interest in the

general account could be prohibited under section 406 of ERISA.\7\

Accordingly, the ACLI seeks broad exemptive relief for transactions

that would be prohibited solely because an entity is deemed to hold

plan assets under the significant participation test as the result of

an insurance company general account investment in such entity.

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\7\In addition, the general partner of a partnership (or any

other person with discretion over the assets of the entity) may be

viewed as a fiduciary under ERISA which could raise issues under

section 406(b) of ERISA.

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Based upon its consideration of the ACLI application and supporting

documentation, the Department does not believe that it has sufficient

information regarding the impact of the Harris Trust decision on

entities that conducted their business operations in accordance with

the significant participation exception contained in the plan asset

regulation. Specifically, while the ACLI application generally

identifies the potential impact of the Harris Trust decision on such

entities, the application provides no specific information, either from

the affected entities themselves or other independent sources

concerning the makeup of such entities, a description of the

transactions for which exemptive relief is necessary, or the standards

and safeguards upon which exemptive relief for such transactions should

be conditioned.

The Department believes that it is important that the standards and

safeguards incorporated in any class exemption be feasible, effective,

and protective of plans, participants and beneficiaries. Accordingly,

this notice is intended to provide interested persons with an

opportunity to submit written comments which will be considered by the

Department in deciding whether to propose additional exemptive relief.

The following is a list of some of the issues that have been

identified by the Department. The list does not purport to identify all

issues relevant to the development of exemptive relief, and comments on

other matters raised by this portion of the ACLI request are also

invited.

A. Need for Exemptive Relief

1. A description of the entities that may be affected by the Harris

Trust decision in operating under the significant participation test by

reason of an insurance company's investment of general account assets

in such entity.

2. What types of transactions would require exemptive relief if the

underlying assets of the entity include plan assets as a result of the

Harris Trust decision? In this regard, please distinguish between

transactions involving the internal operation of the entity and

external transactions involving the entity and parties in interest with

respect to plan contractholders of the general account investor.

3. What costs or hardships, if any, would result for plans if the

Department does not provide relief for these transactions?

B. Standards and Safeguards

1. Describe whether any of such entities are subject to federal or

state regulatory oversight. The response should include a brief

description of the specific regulatory environment applicable to the

entity and how the particular regulatory scheme serves as a constraint

on the exercise of discretion by the persons responsible for the

management of the entity.

2. What limitations or safeguards should a class exemption contain

in order to reduce the potential for abuse of discretionary authority?

For example, what limitations, if any, should be included with respect

to:

(i) The types of transactions for which relief is provided?

(ii) Transactions which inure to the direct or indirect benefit of

the entity manager or an affiliated person?

(iii) The scope of discretion exercised by the entity manager?

C. Miscellaneous

1. Describe any agreements that limit the discretionary authority

of the entity manager with respect to the management or operation of

the entity. For example, to what extent do investors independent of the

manager retain any decision-making responsibility or authority?

2. Describe the methods used to determine the compensation of the

entity manager and related persons for services provided to the entity.

For example, does the manager have the ability to affect the timing

and/or amount of its compensation?

3. To what extent would transactions prohibited as a result of the

Harris Trust decision be covered by any existing statutory or

administrative exemptions?

4. Describe whether the entity managers are affiliated with general

account investors or other fiduciaries of plans that are accountholders

of such general account investors.

5. What information does the entity provide to investors? For

example, does the entity provide information regarding the internal

operation of the entity prior to investment, and periodic disclosures

during the period of investment?

6. What other standards should be included in a class exemption in

addition to an arm's-length requirement? For example, should an

exemption condition relief upon some degree of sophistication and

financial accountability on the part of the entity manager?

General Exemption

The proposed exemption consists of six separate parts. Section I

sets forth the basic exemption and enumerates certain conditions

applicable to transactions described therein. Sections II and III of

the proposal set forth three specific exemptions. Section IV contains

the general conditions applicable to transactions described in sections

I and II. Section V contains definitions for certain terms used in the

proposed exemption. Section VI sets forth the effective date of the

exemption.

Section I

The general exemption set forth in section I would provide an

exemption from the restrictions of sections 406(a) and 407(a) for: (1)

any transaction between a party in interest with respect to a plan and

an insurance company general account, in which the plan has an interest

as a contractholder; (2) any acquisition or holding by the general

account of employer securities or employer real property; and (3) any

acquisition or holding of qualifying employer securities or qualifying

employer real property by a plan (other than through an insurance

company general account) if the acquisition or holding contravenes the

restrictions of sections 406(A)(1)(E), 406(a)(2) and 407(a) of ERISA

solely by reason of being aggregated with employer securities or

employer real property held by an insurance company general account.

The above exemptions are subject to the requirement that the plan's

participation in the general account as measured by the amount of the

reserves arising from the contract held by the plan, (determined under

section 807(d) of the Code) does not exceed 10% of all liabilities of

the general account.

The ACLI stated that it would be unfair to retroactively impose a

percentage limitation in the requested exemption. In this regard, the

Applicant represents that the level of insurance company general

account investments activities and the breadth of general account

holdings are so great that it would effectively preclude any single

plan contractholder from exerting any undue influence over the

decisions of an insurance company. Nevertheless, the Department has

decided to reject the ACLI's recommendation that a percentage

limitation not be imposed as a condition to broad exemptive relief. In

the past, the Department has conditioned the availability of a number

of class exemptions providing similar broad relief on a plan's interest

in a collective fund or account not exceeding a specified percentage

amount. The Department continues to believe that a plan that provides a

significant percentage of an entity's business would, in many cases, be

in a position to improperly influence the investment decisions of the

entity. In any event, it does not appear that compliance with such a

condition would be difficult in light of the apparent size of most

general accounts.

Section II

Section II is divided into two subparts. Section II(a) of the

proposed exemption would permit transactions involving persons who are

parties in interest to a plan solely by reason of providing services to

an insurance company general account in which the plan has an interest

as a contractholder.

Based on precedents established in several class and individual

exemptions the Department is proposing an exemption, in section II(b),

that permits the furnishing of services, facilities and any goods

incidental to such services and facilities by a place of public

accommodation owned by an insurance company general account to parties

in interest if the services, facilities and incidental goods are

furnished on a comparable basis to the general public.

In the regular operations of places of public accommodation, such

as hotels and motels, that may be purchased by an insurance company

general account, many people, including parties in interest with

respect to plans which have participating contracts with the general

account, may receive use of such rooms, service, food, etc. Such hotels

and motels will typically be managed by hotel management companies who

probably would not be aware of the relationship of the hotel and motel

guests to the insurance company and the plans who purchased general

account contracts.

Section III

Subsequent to the filing of the ACLI exemption application, the

Department has received several suggestions with respect to any

exemption that may result from the Department's consideration of the

ACLI request. While expressing general endorsement for the exemption

requested by the ACLI with respect to the operation of entities that

are deemed to hold plan assets under section 2510.3-101(f) as a result

of an insurance company general account investment, one commenter

specifically focused on the impact of the Harris Trust decision on a

number of exemptions previously granted by the Department for the

operation of asset pool investment trusts that issue asset-backed,

pass-through certificates to plans.

PTE 83-1 (48 FR 895, January 7, 1983) provides conditional relief

for the operation of certain mortgage pool investment trusts and the

acquisition and holding by plans of certain mortgage-backed pass-

through certificates evidencing interests therein. The Department also

granted a large number of individual exemptions (e.g., PTE 89-88 [54 FR

42581, October 17, 1989]), each of which provides substantially

identical relief for the operation of certain asset pool investment

trusts and the acquisition and holding by plans of certain asset-based

pass-through certificates representing interests in those trusts

(collectively, the Underwriter Exemptions).

PTE 83-1 and the Underwriter Exemptions are conditioned, among

other things, upon the certificates purchased by plans not being

subordinated to other classes of certificates issued by the same trust.

The commenter further noted that, in a typical asset pool investment

trust, one or more classes of subordinated certificates are often

issued. Underwriters and issuers will sell senior certificates to plans

in reliance on PTE 83-1 and the Underwriter Exemptions, but will not

knowingly sell any of the subordinated certificates to plans. Thus, the

Above-described exemptions provide relief for the operation of a pool

that sells senior certificates to plans, but provide no relief for the

same acts of the pool trustee and servicer if plans purchase

subordinated certificates issued by the same trust.

The commenter stated that life insurance companies have been

significant purchasers of subordinated certificates. The Harris Trust

decision raises the potential for servicers and trustees of pools to be

subject to excise taxes and civil penalty liability for the same acts

involving the operation of trusts which would be exempt if the

certificates were not subordinated. Accordingly, the commenter believes

that exemptive relief is especially appropriate in situations where

insurance company general account investments in subordinated classes

of certificates causes plan ownership of such classes to equal or

exceed 25 percent.\8\ In support of this request for specific relief,

the commenter provided the following reasons: (1) asset pool investment

trusts are fixed pools, the assets of which are generally not subject

to change once the certificates are sold; (2) the pool sponsor's

discretion and the servicer's discretion with respect to assets

included in a trust are severely limited and are governed by a written

pooling and servicing agreement that is available to investors prior to

purchasing a certificate; (3) the assets in the trusts represent

secured obligations; and (4) trustees of asset pool investment trusts

must be independent of the pool sponsors. Moreover, the commenter

argued that the fact that the certificates acquired by a general

account are subordinated should not preclude the Department from

providing exemptive relief since the certificates will have been

analyzed by insurance company purchasers, who are presumptively

sophisticated investors.

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\8\In this regard, see 29 CFR 2510.3-101(f) for a description of

the ``significant participation test'' contained in the plan assets

regulation.

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The Department believes that the commenter's recommendation has

merit and has determined to propose exemptive relief on its own motion.

Section III of the proposal would provide relief from sections 406(a),

406(b), and 407(a) of ERISA for the operation of asset pool investment

trusts in which the insurance general account has an interest as a

result of the acquisition of subordinated certificates.\9\ The proposal

requires that the conditions of either PTE 83-1 or an applicable

Underwriter Exemption be met other than the requirements that the

certificates acquired by the general account not be subordinated and

receive a rating that is in one of the three highest generic rating

categories from an independent rating agency. In addition, the

Department has proposed additional relief for the operation of such

trusts where a plan acquired subordinated certificates in a transaction

that was not prohibited or otherwise satisfied the conditions of PTE

75-1. The department has proposed this exemption in recognition that no

relief would be available for the operation of a trust if a plan

purchased subordinated certificates in a transaction that was not

prohibited (or was otherwise covered by PTE 75-1) and the underlying

assets of the trust includes plan assets under the analysis adopted in

the Harris Trust decision as a result of the application of the

significant participation test under the plan asset regulation (section

2510.3-101(f)) to the general account's investment in such subordinated

certificates.

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\9\The Department notes that Section I of the proposed exemption

provides relief for the acquisition, sale and holding of asset-

backed pass-through certificates representing a beneficial ownership

interest in a pool of obligations.

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Section IV contains general conditions which are applicable to all

transactions described in sections I and II of the proposed exemption.

Transactions must be at least as favorable to the insurance company

general account as arm's-length transactions between unrelated parties.

The proposal would also require that the transaction not be part of any

agreement, arrangement, or understanding designed to benefit a party in

interest. Lastly, the party in interest entering into the transaction

cannot be the insurance company, any pooled separate account of the

insurance company, or any affiliate of the insurance company.

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 the Act and section 4975(c)(2) of the Code does

not relieve a fiduciary or other party in interest or disqualified

person from certain other provisions of the Act 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 the Act which require, among other things, that a fiduciary

discharge his duties respecting the plan solely in the interests of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(B) of the Act; nor does it affect the

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 the

Act and section 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 the participant and beneficiaries;

(3) If granted, the proposed class exemption will be applicable to

a particular transaction only if the transaction satisfies the

conditions specified in the class exemption; and

(4) The proposed exemption, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Code and Act,

including statutory or administrative exemptions and transitional

rules. Furthermore, the face 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 and Hearing Requests

All interested persons are invited to submit comments or requests

for a hearing on the proposed exemption to the address and within the

time period set forth above. All comments will be made a part of the

record. Comments and requests for a hearing should state the reasons

for the writer's interest in the proposed exemption. Comments received

will be available for public inspection with the application for

exemption at the address set forth above.

Proposed Exemption

The Department has under consideration the grant of the following

class exemption under the authority of 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, August 10,

1990).

Section I--Basic Exemption. The restrictions of sections 406(a) and

407(a) of the Act and the taxes imposed by section 4975(a) and (b) of

the Code by reason of section 4975(c)(1)(A) through (D) of the Code,

shall not apply to the transactions described below if the applicable

conditions set forth in section IV are met.

(a) General Exemption. Any transaction between a party in interest

with respect to a plan and an insurance company general account, in

which the plan has an interest as a contractholder, or any acquisition

or holding by the general account of employer securities or employer

real property, if at the time of the transaction, acquisition or

holding, the amount of the reserves for the contract(s) held by or on

behalf of the plan, (determined under section 807(d) of the Code)

together with the amount of the reserves for the contracts held by or

on behalf of any other plans (determined under section 807(d) of the

Code) maintained by the same employer or (affiliate thereof as defined

in section V(a)(1)) or by the same employee organization in the general

account do not exceed 10% of the total of all liabilities of the

general account.

(b) Excess Holdings Exemption for Employee Benefit Plans. Any

acquisition or holding of qualifying employer securities or qualifying

employer real property by a plan (other than through an insurance

company general account, if:

(1) The acquisition or holding contravenes the restrictions of

section 406(a)(1)(E), 406(a)(2) and 407(a) of the Act solely by reason

of being aggregated with employer securities or employer real property

held by an insurance company general account in which the plan has an

interest; and

(2) The percentage limitation of paragraph (a) of this section is

met.

Section II--Specific Exemptions (a) Transactions with persons who

are parties in interest to the plan solely by reason of being certain

service providers or certain affiliates of service providers. The

restrictions of section 406(a)(1) (A) through (D) of the Act and the

taxes imposed by section 4975 (a) and (b) of the Code by reason of

section 4975(c)(1) (A) through (D) of the Code, shall not apply to any

transaction to which the above restrictions or taxes would otherwise

apply solely because a person is deemed to be a party in interest

(including a fiduciary) with respect to a plan as a result of providing

services to an insurance company general account in which the plan has

an interest as a contractholder (or as a result of a relationship to

such service provider described in section 3(14) (F), (G), (H) or (I)

of the Act or section 4975(e)(2) (F), (G), (H) or (I) of the Act or

section 4975(e)(2) (F), (G), (H), or (I) of the Code), if the

applicable conditions set forth in section IV are met.

(b) Transactions involving place of public accommodation. The

restrictions of sections 406(a)(1) (A) through (D) and 406 (b)(1) and

(b)(2) of the Act and the taxes imposed by section 4975(a) and (b) of

the Code by reason of section 4975(c)(1) (A) through (E) of the Code

shall not apply to the furnishing of services, facilities and any goods

incidental to such services and facilities by a place of public

accommodation owned by an insurance company general account, to a party

in interest with respect to a plan, that has an interest as a

contractholder in the insurance company general account, if the

services, facilities and incidental goods are furnished on a comparable

basis to the general public.

Section III--Specific Exemption for Operation of Asset Pool

Investment Trusts. The restrictions of sections 406(a), 406(b) and

407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of

the Code by reason of section 4975(c) of the Code, shall not apply to

transactions in connection with the servicing, management and operation

of a trust in which an insurance company general account has an

interest as a result of its acquisition of certificates issued by the

trust, provided:

(1) The trust is described in Prohibited Transaction Exemption 83-1

(48 FR 895, January 7, 1983) or in one of the Underwriter Exemptions

(as defined in section V(g) below);

(2) The conditions of either PTE 83-1 or the relevant Underwriter

Exemption are met, except for the requirements that:

(A) the rights and interests evidenced by the certificates acquired

by the general account are not subordinated to the rights and interests

evidenced by other certificates of the same trust; and

(B) the certificates acquired by the general account have received

a rating at the time of such acquisition that is in one of the three

highest generic rating categories from either Standard & Poor's

Corporation (S&P), Moody's Investor's Service, Inc. (Moody's), Duff &

Phelp's Inc. (D&P), or Fitch Investors Service, Inc. (Fitch).

Notwithstanding the foregoing, the exemption shall apply to a

transaction described in this section III if: (i) a plan acquired

certificates in a transaction that was not prohibited, or otherwise

satisfied the conditions of Part II or Part III of PTE 75-1 (40 FR

50845, October 31, 1975), (ii) the underlying assets of a trust include

plan assets under section 2510.3-101(f) of the plan assets regulation

with respect to the class of certificates acquired by the plan as a

result of an insurance company general account investment in such class

of certificates, and (iii) the requirements of this section III (1) and

(2) are met, except that the words ``acquired by the general account''

in section III(2) (A) and (B) should be construed to mean ``acquired by

the plan''.

Section IV--General Conditions. (a) At the time the transaction is

entered into, and at the time of any subsequent renewal thereof that

requires the consent of the insurance company, the terms of the

transaction are at least as favorable to the insurance company general

account as the terms generally available in arm's length transactions

between unrelated parties.

(b) The transaction is not part of an agreement, arrangement or

understanding designed to benefit a party in interest.

(c) The party in interest is not the insurance company, any pooled

separate account of the insurance company, or an affiliate of the

insurance company.

Section V--Defintions. For the purpose of this exemption:

(a) 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 officer, director, employee (including, in the case of an

insurance company, an insurance agent thereof, whether or not the agent

is a common law employee of the insurance company), or relative of, or

partner in, any such person; and

(3) Any corporation or partnership of which such person is an

officer, director, partner or employee.

(b) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

(c) The term ``employer securities'' means ``employer securities''

as that term is defined in Act section 407(d)(1), and the term

``employer real property'' means ``employer real property'' as defined

in Act section 407(d)(2).

(d) The term ``insurance company'' means an insurance company

authorized to do business under the laws of more than one state.

(e) The term ``insurance company general account'' means all of the

assets of an insurance company that are not legally segregated and

allocated to separate accounts under applicable state law.

(f) The term ``party in interest'' means a person described in Act

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 section 3(15) of the Act (or a ``member of the family'' as

that term is defined in section 4975(e)(6) of the Code), or a brother,

sister, or a spouse of a brother or sister.

(h) The term ``Underwriter Exemption'' refers to the following

individual Prohibited Transaction Exemptions (PTEs)--

PTE 89-88, 54 FR 42582 (October 17, 1989); PTE 89-89, 54 FR 42569

(October 17, 1989); PTE 89-90, 54 FR 42597 (October 17, 1989); PTE 90-

22, 55 FR 20542 (May 17, 1990); PTE 90-23, 55 FR 20545 (May 17, 1990);

PTE 90-24, 55 FR 20548 (May 17, 1990); PTE 90-28, 55 FR 21456 (May 24,

1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 90-30, 55 FR 21461

(May 24, 1990); PTE 90-31, 55 FR 23144 (June 6, 1990); PTE 90-32, 55 FR

23147 (June 6, 1990); PTE 90-33, 55 FR 23151 (June 6, 1990); PTE 90-36,

55 FR 25903 (June 25, 1990); PTE 90-39, 55 FR 27713 (July 5, 1990); PTE

90-59, 55 FR 36724 (September 6, 1990); PTE 90-83, 55 FR 50250

(December 5, 1990); PTE 90-84, 55 FR 50252 (December 5, 1990); PTE 90-

88, 55 FR 52899 (December 24, 1990); PTE 91-14, 55 FR 48178 (February

22, 1991); PTE 91-22, 56 FR 03277 (April 18, 1991); PTE 91-23, 56 FR

15936 (April 18, 1991); PTE 91-30, 56 FR 22452 (May 15, 1991); PTE 91-

39, 56 FR 33473 (July 22, 1991); PTE 91-62, 56 FR 51406 (October 11,

1991); PTE 93-6, 58 FR 07255 (February 5, 1993); PTE 93-31, 58 FR 28620

(May 5, 1993); PTE 93-32, 58 FR 28623 (May 14, 1993); PTE 94-29, 59 FR

14675 (March 29, 1994) and any other exemption providing similar relief

to the extent that the Department expressly determines, as part of the

proceeding to grant such exemption, to include the exemption within

this definition.

(i) For purposes of this exemption, the time as of which any

transaction, acquisition, or holding occurs is the date upon which the

transaction is entered into, the acquisition is made or the holding

commences. 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, or acquisition made, on

or after January 1, 1975, or any renewal that requires the consent of

the insurance company occurs on or after January 1, 1975, and the

requirements of this exemption are satisfied at the time the

transaction is entered into or renewed, respectively, or at the time

the acquisition is made, the requirements will continue to be satisfied

thereafter with respect to the transaction or acquisition and the

exemption shall apply thereafter to the continued holding of the

securities or property so acquired. This exemption also applies to any

transaction or acquisition entered into or renewed, or holding

commencing prior to January 1, 1975, if either the requirements of this

exemption would have been satisfied on the date the transaction was

entered into or acquisition was made (or on which the holding

commenced), or the requirements would have been satisfied on January 1,

1954 if the transaction had been entered into, the acquisition was

made, or the holding had commenced, on January 1, 1975. Notwithstanding

the foregoing, this exemption shall cease to apply to a transction or

holding exempt by virtue of section I(a) or section I(b) at such time

as the interest of the plan in the insurance company general account

exceeds the percentage interest limitation contained in section I(a),

unless no portion of such excess results from an increase in the assets

allocated to the insurance company general account by the plan. For

this purpose, assets allocated do not include the reinvestment of

general account earnings. Nothing in this paragraph shall be construed

as exempting a transaction entered into by an insurance company general

account which becomes a transaction described in section 406 of the Act

or section 4975 of the Code while the transaction is continuing, unless

the conditions of the 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 ``reserves'' has the same meaning as the term ``life

insurance reserves'' as described in section 816(b) of the Code.

Section VI--Effective date. If granted, the exemption would be

effective January 1, 1975.

Signed at Washington, DC, this 17th day of August, 1994.

Ivan L. Strasfeld,

Director, Office of Exemption Determinations, Pension and Welfare

Benefits Administration, U.S. Department of Labor.

[FR Doc. 94-20511 Filed 8-19-94; 8:45 am]

BILLING CODE 4510-29-M