Class Exemption To Permit Certain Authorized Transactions Between Plans and Parties in Interest

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 96-62; Application No. D-10031]

Class Exemption To Permit Certain Authorized Transactions Between

Plans and Parties in Interest

AGENCY: Pension and Welfare Benefits Administration (PWBA), Department

of Labor.

ACTION: Grant of class exemption.

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SUMMARY: This document contains a final exemption from the prohibited

transaction restrictions of the Employee Retirement Income Security Act

of 1974 (ERISA), the Federal Employees' Retirement System Act of 1986

(FERSA) and the Internal Revenue Code of 1986 (the Code). The exemption

applies to certain prospective transactions between employee benefit

plans and parties in interest where such transactions are specifically

authorized by the Department and are subject to terms, conditions and

representations which are substantially similar to exemptions

previously granted by the Department. The exemption affects plans,

participants and beneficiaries of such plans and certain persons

engaging in such transactions.

Discussion of the Exemption

As part of the Department's continuing efforts to reduce regulatory

burdens associated with processing individual exemptions for

transactions prohibited under ERISA, this class exemption permits a

plan to engage in a transaction following a demonstration to the

Department that the transaction: (1) Is substantially similar to those

described in two prior individual exemptions granted by the Department;

and (2) presents little, if any, opportunity for abuse or risk of loss

to a plan's participants and beneficiaries. Under the class exemption,

a party may proceed with a transaction in as little as 78 days from the

acknowledgment of receipt by the Department of a written submission

filed in accordance with the terms of the class exemption. The time-

frames contained in the exemption enable the Department to fully

consider the written submission for compliance with the terms of the

class exemption and provide interested persons with a reasonable

opportunity to comment on the proposed transaction following the

receipt of notification.

EFFECTIVE DATE: July 31, 1996.

FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams, Mr. Ronald

Willett, or Mr. Louis Campagna, Office of Exemption Determinations,

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

telephone (202) 219-8971 (This is not a toll-free number.); or Mr.

William Taylor, Plan Benefits Security Division, Office of Solicitor,

U.S. Department of Labor (202) 219-4592. (This is not a toll-free

number.)

SUPPLEMENTARY INFORMATION: On November 27, 1995, the Department of

Labor (the Department) published a notice in the Federal Register (60

FR 58376) of the pendency of a proposed class exemption from the

restrictions of sections 406 (a), 406(b)(1) and 406(b)(2) of ERISA and

from the taxes imposed by section 4975(a) and (b) of the Internal

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

(E) of the Code.

The Department proposed the class exemption on its own motion

pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code,

and in accordance with the procedures set forth in 29 CFR part 2570,

subpart B, (55 FR 32836, August 10, 1990).1

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

47713, October 17, 1978) generally transferred the authority of the

Secretary of the Treasury to issue administrative exemptions under

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

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The notice of pendency gave interested persons an opportunity to

comment or request a public hearing on the proposal. No requests for a

public hearing with respect to the proposed class exemption were

received by the Department. Six public comments were received by the

Department. Upon consideration of the record as a whole, the Department

has determined to grant the proposed class exemption subject to certain

modifications. These modifications and the comments are discussed

below.

Discussion of Comments Received

One commenter urged the Department to modify the final exemption to

provide relief from section 8477(c)(2) of FERSA which parallels section

406(b) of ERISA.2 The commenter stated that the scope of the class

exemption should be expanded to enable the Thrift Savings Plan for

federal employees to take advantage of the relief provided by the

exemption. The Department sees merit in this comment and believes that

providing such relief is consistent with the policy and safeguards

embodied in this exemption. Accordingly, the Department has modified

section II of the final exemption to provide relief from section

8477(c)(2) of FERSA.

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2 The Department is authorized to grant exemptive relief

from the restrictions of FERSA section 8477(c)(2) pursuant to

section 8477(c)(3) of FERSA. The restrictions of FERSA section

8477(c)(2) parallel section 406(b) of ERISA.

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Another commenter requested that the Department clarify that the

relief provided in the class exemption applies to transactions

involving multiemployer plans. The Department notes that the exemption

applies to transactions which are substantially similar to transactions

described in at least two individual exemptions granted by the

Department within the 60-month period prior to the written submission

filed in accordance with the class exemption. In this regard, the

conditions of the exemption do not include a requirement of substantial

similarity between the type of plan involved in the proposed

transaction under the class exemption and the type of plans involved in

the previously granted individual exemptions (i.e., single employer or

multiemployer plans). Accordingly, it is the view of the Department

that sections I(a) and II(b) will be satisfied in the case of a

multiemployer plan, if such plan relies on two substantially similar

individual exemptions involving single employer plans.

A commenter requested clarification regarding sections I(b) and

II(b) of the exemption which require that there be little, if any, risk

of abuse or loss to the plan participants and beneficiaries as a result

of the transaction. The commenter expressed concern that this condition

may require that the party who is to engage in the transaction

guarantee that a plan never experience a loss as a result of the

subject transaction. As a result, the commenter requested that the

Department clarify this condition to provide that, if a transaction is

prudent when entered into, the relief provided by the class exemption

will not be

[[Page 39989]]

retroactively revoked should there be some future decline in the value

of the asset. It was not the intent of the Department that this

condition act as a guarantee of the future performance of the

transaction. The Department notes that, for purposes of determining

whether a transaction poses little, if any, risk of abuse or loss to

the plan, the party should examine the facts and circumstances

surrounding the transaction as of the date that the transaction is to

be entered into.

Two commenters requested that the Department expand the relief

provided by the exemption to include relief from section 406(b)(3) of

ERISA. One of the commenters noted that section 406(b)(3) relief would

only be available if such relief was provided in the two substantially

similar individual exemptions granted by the Department within the

prior 60-month period. The Department sees merit in these comments and

has modified the final exemption accordingly. In this regard, the

Department notes that any of the relief from specific ERISA

restrictions provided by the class exemption for a particular

transaction is available only to the extent that the same relief is

provided in the two substantially similar individual exemptions

previously granted by the Department.

A commenter requested that the term ``independent fiduciary'' as

used in section II be defined in the final exemption.3 Another

commenter urged that the Department be flexible in determining who may

serve as independent fiduciary and suggested that the sponsoring

employer or other existing plan fiduciary be permitted to act in that

capacity. Because of the variety and constantly evolving nature of the

products and service arrangements presented to the Department for its

consideration under ERISA section 408(a), the Department does not

believe that it would be appropriate to adopt a definition that, in

effect, would require compliance with certain enumerated standards.

Rather, the Department generally has adopted a flexible approach with

respect to the qualification of a party to act as an independent

fiduciary in any particular situation. In this regard, individual

exemptions granted by the Department have required that there be no

affiliation between the independent fiduciary and the party or its

affiliates seeking to engage in the transaction and that the

independent fiduciary receive no more than a de minimis amount of

compensation from the party seeking to engage in the subject

transaction, including amounts received for services as independent

fiduciary. In certain cases, such as a transaction between a plan and a

party unrelated to the plan sponsor, the plan sponsor may qualify to

act as independent fiduciary on behalf of the plan. In addition, as

noted in the preamble to the proposed exemption, ``* * * the

independent fiduciary should be knowledgeable and experienced with

respect to the type of transaction.'' The Department encourages parties

to consider, when retaining an independent fiduciary, any unique

qualifications of the independent fiduciaries utilized in the two or

more individual exemptions being relied upon.

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3 In making a finding that an exemption is

administratively feasible under section 408(a) of ERISA, in that it

requires no continuing administrative burden on behalf of the

Department, the Department generally has required the involvement of

an independent fiduciary to represent the plan for transactions that

require relief from section 406(b) of ERISA.

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One commenter requested that the Department delete the requirement

under the proposed exemption relating to the distribution of notice to

interested persons. According to the commenter, the requirement of

notice and a comment period does not seem to serve a useful purpose and

prolongs the approval process. The Department notes that the proposed

exemption provides broad relief for various party in interest

transactions that do not come within the scope of relief provided by

existing statutory or class exemptions. In this regard, comments

submitted to the Department by interested persons in response to the

publication of a proposed individual exemption in the Federal Register

may raise substantive factual, legal or policy issues which are not

apparent from the information contained in the exemption application.

Under the proposed class exemption, publication of notice in the

Federal Register would not be required. Accordingly, the Department

believes that the distribution of notice affording interested persons

the opportunity to comment on a proposed transaction is an important

safeguard under the class exemption. As a result, the Department has

determined not to modify the exemption in this regard.

The commenter also suggested that the term ``completion of

distribution of the notice'' contained in the definition of ``comment

period'' under section IV(e) of the proposal should be modified to

permit the party who is to engage in the transaction to make a

reasonable estimate of the time necessary for completion of notice such

as three days after sending notice by first-class mail. The Department

notes that, under section IV(e), the comment period expires 25 days

following the completion of the distribution of notice to interested

persons. Accordingly, the expiration date of the comment period is

necessarily dependent upon the date that distribution of the notice is

completed. The Department is of the view that the requirements of the

exemption relating to the comment period as defined under section IV(e)

will be met if the party makes a good faith estimate of the time

necessary to complete distribution of the notice. In this regard, the

Department has modified section IV(e) to specifically provide that a

party may assume that distribution of notice will be complete three

business days following the date of first class mailing of such notice.

The commenter also suggested that the class exemption contain a

requirement that the party wishing to engage in the transaction must

inform interested persons of the date of the expiration of the comment

period. The commenter noted that the preamble to the proposed class

exemption referred to the responsibility of the party to notify

interested persons of the date of the expiration of the comment period,

but that such notification was not specifically included as a condition

of the proposed class exemption. The commenter stated that such a

requirement should appear among the terms and conditions of the class

exemption. The Department sees merit in this comment and has modified

section IV(b) to provide that the notice to interested persons include

the date of the expiration of the comment period.

One of the commenters requested that the Department delete the 60-

month requirement described in sections I(a) and II(a) of the class

exemption. Sections I(a) and II(a) require that a transaction be

substantially similar to transactions described in at least two

individual exemptions that were granted by the Department within the

60-month period ending on the date a written submission is filed. The

Department notes that the 60-month requirement was developed to ensure

that the two substantially similar individual exemptions that the party

compares to its proposed transaction reflect the current exemption

policies of the Department. Therefore, the Department is unable to

conclude that deletion of this requirement is warranted.

A commenter urged the Department to adopt a more liberal definition

of the term ``substantially similar.'' Section IV(a) defines the term

``substantially similar'' as alike in all material respects. The

commenter suggested that the precedential exemptions be considered

[[Page 39990]]

substantially similar where, in the Department's judgement, there

presents little possibility of abuse due to the difference in facts.

The Department is not persuaded by the argument submitted in favor of

an expanded definition of the term ``substantially similar''. The

proposed exemption's premise was that the Department could provide

expedited consideration of a party's written submission within the

timeframes delineated in the proposal only if the transaction was

substantially similar, as defined under the exemption, to two other

transactions previously considered by the Department. The Department

believes that the commenter's suggestion for a more liberal definition

of ``substantially similar'' is inconsistent with the underlying

premise of the class exemption. For this reason, the Department has

determined not to modify this definition.

One commenter requested a number of modifications to the proposal

based upon its belief that the class exemption should be applicable to

generic transactions that would otherwise be the subject of a class

exemption. The Department notes that the preamble to the proposal

indicates that the party wishing to take advantage of the exemption

must demonstrate that the transaction is substantially similar to at

least two individual exemptions previously granted by the Department.

The Department notes that it determined to propose relief based, in

part, on its observation that many of the individual applications

contain nearly identical transactions, terms and conditions as those

previously granted. Accordingly, because the proposal limits relief to

identifiable individual transactions and the parties thereto, not

generic transactions, the modifications requested by the commenter are

beyond the scope of this proceeding. Lastly, the Department notes that

the great majority of class exemption requests considered by the

Department over the previous 20 years presented unique facts and

circumstances that were not substantially similar to prior exemptions

granted by the Department.

The same commenter also urged the Department to extend the relief

provided by the class exemption to include transactions that have taken

place prior to the submission required under part III of the exemption.

Another commenter urged the Department to consider retroactive relief

to the date of the written submission under the class exemption. The

Department noted in the preamble to the proposal that `` * * * in light

of the broad scope of relief provided under the proposal, the class

exemption is only available with respect to prospective transactions.''

It appears to the Department that providing retroactive relief under

the class exemption could result in the completed transaction not being

in compliance with one or more of the requirements of the class

exemption, including the requirement that the transaction be

substantially similar to two previously granted exemptions. In

addition, the Department continues to believe that providing interested

persons with the opportunity to comment on a contemplated transaction

is an important safeguard under the class exemption. Accordingly, the

Department has decided not to adopt this comment.

Conditions

The exemption contains conditions, as described below, which are

necessary to support a finding that the exemption meets the statutory

standards of section 408(a) of ERISA.4

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4 References to sections 408(a) and 406(a) and (b) of ERISA

incorporate the corresponding provisions of section 4975 of the

Code.

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Under section I of the exemption, relief is provided for

transactions, as discussed below, from certain of the restrictions

described in section 406(a) of ERISA. In this regard, section I(a)

requires that the transaction be substantially similar to transactions

described in at least two individual exemptions that were granted by

the Department, and which provided relief from the same restrictions as

requested by the party, within the 60-month period ending on the date a

written submission is filed. ``Substantially similar'' is defined in

section IV(a) as alike in all material respects.

Section I(b) of the exemption requires that there be little, if

any, risk of abuse or loss to the plan participants and beneficiaries

as a result of the transaction. Section I(c) further provides that

prior to the execution of a transaction, the authorizing requirements

of section III must be satisfied (as discussed below).

Under section II of the exemption, additional relief is provided

from certain of the restrictions described in sections 406(b) of ERISA

and the parallel restrictions described in section 8477(c)(2) of FERSA

provided that: (a) the transaction is substantially similar (as defined

in section IV(a)) to transactions described in at least two individual

exemptions that were granted by the Department, and which provided

relief from the same restrictions or, if FERSA relief is requested, the

ERISA relief provided parallels the restriction of section 8477(c)(2)

of FERSA, within the 60-month period ending on the date of filing of

the written submission; (b) there is little, if any, risk of abuse or

loss to the plan participants and beneficiaries as a result of the

transaction; and (c) prior to its execution, the transaction has met

the requirements described in section III (as discussed below.)

In considering the availability of this class exemption, the party

who is to engage in the transaction should carefully determine whether

the contemplated transaction contains terms and conditions which

closely parallel the transaction delineated in the prior exemptions

granted by the Department and the material facts and representations

supporting such exemptions. In particular, the Department wishes to

note that the relief provided by the class exemption is available for a

specific transaction only to the extent that the relief from the same

restrictions has been provided in the two substantially similar

individual exemptions that were submitted to the Department by the

party that wishes to engage in the transaction.

As a precondition for a grant of relief from the fiduciary self-

dealing and conflict of interest restrictions of section 406(b) of

ERISA, section II(d) and (e) require that prior to execution of such

transaction, an independent fiduciary has reviewed the proposed

transaction and determined that the transaction would be in the

interests and protective of the plan and its participants and

beneficiaries, and later represents the interests of the plan in the

execution of the transaction. Under section II(f), for those

transactions that are continuing in nature, such as leases and loans,

the independent fiduciary must: (1) represent the interests of the plan

for the duration of the transaction; (2) monitor the transaction on

behalf of the plan; (3) enforce compliance with all conditions and

obligations imposed on any party dealing with the plan with respect to

the transaction; and (4) ensure that the transaction remains in the

interests of the plan.5

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5 The written submission referred to section III should include

specific information regarding the methods proposed by the

independent fiduciary for: monitoring the transaction; enforcing

compliance with all the conditions and obligations imposed on the

parties dealing with the plan; and ensuring that the transaction

remains in the interests and protective of the participants and

beneficiaries of the plan.

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The Department notes that any relief from section 406(b) provided

under section II of the proposal required the involvement of an

independent

[[Page 39991]]

fiduciary. Section II required that the independent fiduciary review

and approve the transaction and, where the transaction was continuing

in nature, monitor the transaction and represent the interests of the

plan throughout the duration of the transaction. However, it was

brought to the attention of the Department that certain types of

exemptions which provided section 406(b) relief for transactions such

as sales of property by the plan to certain parties in interest or

loans from the individually directed accounts of participants in plans

to those participants, may not have required the involvement of an

independent fiduciary. Accordingly, the Department has modified the

final exemption to clarify that the involvement of an independent

fiduciary as described in section II is required only if the exempted

transactions described in either of the two previously granted

exemptions cited by the party required the involvement of an

independent fiduciary. If an independent fiduciary is required for the

contemplated transaction, then the fiduciary's involvement must comply

with the requirements of section II.

The Department notes that the independent fiduciary should be

knowledgeable and experienced with respect to the type of transaction.

In this regard, any unique qualifications of the independent

fiduciaries utilized in the substantially similar individual exemptions

should be considered when retaining an independent fiduciary. Further,

in determining a potential fiduciary's independence from the parties to

the transaction, consideration should be given to such person's

relationship to the other parties involved in the contemplated

transaction in terms of any affiliation between such person and the

other parties to the transaction, as well as whether such person

derives more than a de minimis amount of compensation from the other

parties to the transaction.

Section III of the exemption contains the authorization

requirements for a transaction. Section III(a)(1) requires that the

party who will be engaging in such transaction file a written

submission with the Department containing a specific statement to

demonstrate compliance with the conditions of the class exemption. The

purpose of the authorization requirements of section III is to enable

the Department to examine the written submission to determine whether

the transaction, in fact, complies with the requirements of the class

exemption. The written submission must clearly state that it is made

pursuant to the class exemption rather than under the Department's

procedures for considering individual exemptions.6

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\6\ See 29 CFR part 2570, subpart B.

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Section III(a)(2) requires that the submission include the same

information that is required to be submitted with an individual

exemption application. The Department believes this condition will

assure a full and comprehensive file upon which the Department can base

its conclusions concerning the availability of this class exemption.

The Department's experience in considering individual exemption

requests has demonstrated that it is difficult to approve an exemption

for a particular transaction without the ability to examine the

surrounding facts and circumstances. In a number of instances,

examination of the facts and circumstances has revealed past or

potential violations of the provisions of Title I of the Act or other

significant issues which must be resolved prior to granting an

exemption. Similarly, the Department believes that it is important to

examine the supporting documentation for a transaction, such as

appraisals and independent third party representations regarding the

transaction. This information frequently discloses additional issues

which must be addressed by the applicants and is required under the

individual exemption procedures to be submitted to the Department in an

individual exemption application. Rather than developing a separate set

of requirements under this class exemption for the submission of

relevant information, the Department believes that reference to the

individual exemption procedure, already an established and familiar

procedure, was a more appropriate approach. The information required by

the procedure, which is published at 29 CFR 2570.34 and .35 is designed

to minimize the need to subject applicants to repeated requests for

additional information after the application is filed. As an additional

consideration, this condition will permit the written submission to be

considered under the Department's individual exemption procedures in

the event that the Department is unable to conclude from the written

submissions that the conditions of the class exemption would be met.

Under section III(a)(3), the party who will be engaging in the

transaction must demonstrate that the proposed transaction presents

little, if any, risk of abuse or loss to the plan participants and

beneficiaries given the terms and conditions of the transaction. The

Department interprets section III(a)(3) as requiring that the party

demonstrate that the facts and circumstances surrounding the

transaction at the time the transaction is entered into present little,

if any, risk of abuse or loss to the plan participants and

beneficiaries. It was not the intention of the Department to make the

party who engaged in the transaction responsible for all unforeseen

events that occur at some later date. Section III(a)(4) requires that

the party compare the proposed transaction to those previously exempted

transactions identified by the party as substantially similar. In this

regard, any comparison must include a description of any material

differences between the proposed transaction and the identified

exemptions.

Section III(a)(5) requires that a complete and accurate draft of

the notice which will be distributed to interested persons be submitted

to the Department. The Department believes that it is necessary to

review the notice prior to its distribution to interested persons in

order to assure that a completely objective summary of the proposed

transaction has been prepared by the party. The purpose of the notice

requirement is to afford interested persons with the opportunity to

provide the Department with relevant information based upon an

objective description of the transaction to assist the Department in

its consideration of the proposed transaction. The term ``notice'' is

defined in section IV(b) as a written notification to interested

persons which includes an objective description of the transaction, the

approximate date on which the transaction will occur, a statement that

the proposed transaction has met the requirements for tentative

authorization under this class exemption, a statement apprising

interested persons of their right to comment, the Federal Register

citations for the prior exemptions identified by the party as

substantially similar to the contemplated transaction and the

expiration date of the comment period. The expiration date of the

comment period obviously cannot be determined as of the date of the

written submission, but must be included when notice is distributed to

interested persons. The notice must also contain a statement directing

interested persons to submit comments to the Department for

consideration. In order to simplify the submission of comments, the

Department has modified the final exemption to require that the notice

contain the address of the Department. The address is as follows:

Office of Exemption Determinations, U.S.

[[Page 39992]]

Department of Labor, 200 Constitution Avenue, N.W., Room N-5649,

Washington, D.C. 20210.

With respect to a transaction described in section II of this

exemption, section III(b) provides that the written submission must

also contain the following additional information: (1) the identity of

the independent fiduciary; (2) a description of such fiduciary's

independence from the parties in interest involved in the subject

transaction; (3) a statement by the independent fiduciary containing an

explanation as to why the subject transaction is in the interests and

protective of the participants and beneficiaries of the plan; (4) an

agreement by the independent fiduciary to represent the interests of

the plan; and (5) a description of the procedures for replacement of

the independent fiduciary, if necessary, during the term of the

transaction. As previously explained in response to a comment, the

description of the independence of the fiduciary may be accomplished by

a brief discussion in the written submission describing any

relationship between the fiduciary and the other parties to the

contemplated transaction in terms of any affiliation and the amount of

any income derived by the fiduciary from the other parties.

The written submissions will be reviewed by the Department to

ensure that the conditions of this class exemption are met. If the

Department determines that a submission does not meet the requirements

for the class exemption, the Department will notify the party and, if

the party so desires, the Department will consider the submission under

the Department's exemption procedure for individual exemptions.

The exemption requires, under section III(c), that the transaction

meet the requirements for tentative authorization. ``Tentative

authorization'' is defined under section IV(c) as occurring upon the

earlier of: (1) the expiration of the 45-day period following

acknowledgement by the Department of the receipt of the written

submission with respect to the proposed transaction, unless the

Department has notified the party who is to engage in the transaction

during this period that the transaction is not eligible for

authorization under the terms of this class exemption, or (2) the

issuance of a written determination by the Department during the 45-day

period that the proposed transaction meets the requirements for

tentative authorization.7 In view of the broad scope of relief

provided under the exemption, and the need to protect the interests of

the plan's participants and beneficiaries, the Department believes it

necessary to retain the authority to determine, prior to the execution

of the transaction, whether the transaction is substantially similar to

previously exempted transactions and presents little, if any, risk of

abuse or loss to the plan participants and beneficiaries. This

determination will be made within 45 days from the Department's

acknowledgement of the receipt of the written submission. In order to

protect the interests of participants and beneficiaries, the Department

believes that the 45-day period is the minimum amount of time necessary

for a thorough review of the written submission, and a comparison of

the facts and circumstances surrounding the transaction under

consideration to the transactions contained in the two prior exemptions

cited by the party as substantially similar. Although in some cases,

the Department expects that it will be able to complete its review and

issue a determination letter in less than 45 days, the Department

believes that a shorter time limit for this process would not be

workable. Starting the review period from the date of the Department's

acknowledgement of receipt of the written submission assures that the

Department will have the full 45-day period in which to complete its

review. Under the class exemption, the party seeking to engage in the

transaction will also receive quick assurance that the Department has

received its submission and that the 45-day period is running.

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7 The Department does not intend to issue written

determinations of tentative authorization except in unusual

situations where the Department deems it appropriate to do so.

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The Department will send a letter to each party acknowledging

receipt of the written submission. Generally, the acknowledgement

letter will be sent within three to five days of actual receipt of the

written submission by the Department. The 45-day period for tentative

authorization will commence as of the date of the acknowledgement

letter. In this regard, the Department notes that the party may not

assume receipt of the written submission by the Department until the

party receives an acknowledgement letter. Since the acknowledgement

letter may be the only formal written communication between the party

and the Department, the acknowledgement letter will also contain a

brief summary of the requirements for tentative authorization and final

authorization of the transaction, to assist the party in understanding

the requirements of the class exemption.

Section III(d) provides that, following tentative authorization,

the party who is to engage in the transaction provides written notice

(as defined in section IV(b)) to interested persons. Tentative

authorization, in effect, permits the party to begin the distribution

of written notice to interested persons. The exemption does not specify

the manner in which written notice must be provided to interested

persons. However, section III(d) requires that notice be given in a

manner that is reasonably calculated to result in the receipt of such

notice by interested persons. It is the responsibility of the party who

is to engage in the transaction to promptly distribute notice after

tentative authorization is obtained, because the 25-day comment period,

as defined under section IV(e), will not commence until the

notification to all interested persons is complete. The notice must

also inform interested persons of the date of expiration of the comment

period in accordance with section IV(b)(5). Since the date of

completion of the notification is within the control of the party who

is to engage in the transaction, the Department expects the party who

provides written notice to take this into account in determining the

expiration date of the comment period. It is also the responsibility of

the party to inform the Department of the date upon which notification

was completed and the date the comment period expires. In order to

avoid unnecessary delay, the Department strongly encourages parties to

notify it regarding the expiration of the comment period as soon as

possible following tentative authorization, but in no event later than

the expiration of the 25-day comment period.

The Department recognizes that there may be difficulties in

determining the completion date for notification and, thus, the

expiration of the comment period. To ease compliance with the

requirements of the class exemption, the Department is of the view that

distribution of notice will be deemed complete under section IV(e) on a

date the party determines through a good faith estimate of the time

necessary to complete distribution of notice. In the case of

notification by first-class mail, the Department specifically has

modified section IV(e) to provide that completion of the distribution

of the notice will be deemed satisfied three business days following

the date of the first class mailing to interested persons.

In addition, section III(d) requires that the party who is to

engage in the

[[Page 39993]]

transaction resolve all substantive adverse comments submitted to the

Department to the satisfaction of the Department. The term

``substantive adverse comments,'' as defined in section IV(f), means

those comments submitted by interested persons to the Department within

the prescribed comment period which raise significant factual, legal or

policy issues regarding the transaction as determined by the

Department.

``Final authorization'' is defined in section IV(d) as the end of

the five-day period immediately following the expiration of the comment

period unless the Department notifies the party within that period that

the transaction is not eligible for authorization, or the expiration of

a period of time extending beyond the five-day period as mutually

agreed to by the Department and the party in order to resolve any

substantive adverse comments submitted to the Department. The five-day

period between the expiration of the comment period and final

authorization is intended to allow consideration by the Department of

comments received within the 25-day comment period. If mutual agreement

between the Department and the party who is to engage in the

transaction is not reached regarding the period of time in which such

comments must be resolved, the party will be notified that the

transaction fails to comply with the conditions of the class exemption,

and the written submission will be considered by the Department in

accordance the Department's exemption procedures at 29 CFR 2570,

subpart B.

The Department will not consider a proposed transaction to satisfy

the conditions of this proposed class exemption unless the material

facts and representations contained in the written submission and in

any materials and documents submitted in support of the written

submission are true and complete. In this regard, with respect to

transactions that are continuing in nature, such as a loan or a lease,

any change in the material facts described in the written submission

with respect to the transaction may result in the prospective

unavailability of the class exemption for the transaction. In the event

of any such change, the parties involved in the transaction have the

option of applying for a new exemption, either pursuant to this class

exemption or under the Department's exemption procedures at 29 CFR

2570, subpart B.

The Department has determined to include in the exemption, as a new

section V, an optional checklist of the information required to be

submitted to the Department under section III of the exemption. The

Department recognizes that, because of oversight, items required for

the written submission described in section III may be accidentally

omitted causing potential delay to the party who wishes to engage in

the transaction. The Department believes that utilization of the

checklist by the party during its preparation of the written submission

will help avoid such omissions and assure that the submission is

complete. However, the Department notes that use of the checklist

described in section V is completely optional and need not be prepared

as part of the written submission.

Examples

The application of the exemption may be illustrated by the

following examples:

Example (1): ABC Company files a written submission under the class

exemption for a loan of money from a plan for which it currently

provides accounting services. Because the loan would be prohibited

under section 406(a), ABC needs an exemption for the loan. ABC cites in

its written submission two prior exemptions for loans whose terms are

substantially similar to those proposed in the ABC Company submission.

However, one loan is from a plan to the plan's non-discretionary broker

and the other loan is to the plan's actuary. Both loans are for twice

the amount proposed in the ABC Company submission, but are for less

than 25 percent of the assets of the plans involved. Provided the

amount of the ABC Company loan is less than 25 percent of the assets of

the plan, these distinctions would not cause the proposed transaction

to fail the substantially similar test of section I(a). In addition,

the substantially similar test is applied with respect to the

transactions described in the two prior exemptions and not the parties

involved in the transactions.

Example (2): An exemption application is submitted to the

Department by applicant X, the sponsor of plan Y, for a lease of office

space by plan Y to X. The transaction proposed is similar in all

material respects to four other exemptions granted by the Department

within the last five years. Applicant X, however, does not make a

specific declaration that the application is submitted with the

intention of demonstrating compliance with the class exemption, and

there is no information which otherwise complies with sections I, II

and III of the class exemption. The application may be considered by

the Department pursuant to individual exemption procedures unless the

applicant amends its original written submission and provides the

required information. At that point, the Department will acknowledge

receipt of the written submission requesting expedited authorization

under the class exemption.

Example (3): In 1994, two exemptions were granted for loans by

pension plans to Corporation A and Corporation B, respectively, the

sponsoring employers. The loan to Corporation A was for $50,000. The

loan to Corporation B was for $75,000. Among the conditions and

material representations contained in both exemptions were the

following: the loans would be approved and monitored by an independent

fiduciary; the term of the loans could extend no more than five years;

regular installment payments of principal and interest had to be made

during the term; the collateral consisting of real property had to be

maintained at all times at a value of at least 150 percent of the

outstanding balance of the loan; and no more than 25 percent of the

assets of the plan would be involved in loans to the sponsoring

employer. In 1996, X Corporation makes a written submission pursuant to

the class exemption with respect to a proposed loan from its plan. The

proposed transaction, including the terms and conditions of the loan

and the creditworthiness of the borrower, is substantially similar to

the exemptions granted to Corporation A and Corporation B, except that

the loan is for $400,000 and the term is seven years. X Corporation

cites the previously granted exemptions in its submission and

demonstrates that the 25 percent limitation on the amount of assets

involved in loans to the employer would be met. These differences in

dollar amounts and loan term would not cause the transaction to fail

the ``substantially similar'' test under sections I(a) and II(a).

If, however, in addition to these differences (i.e., dollar amounts

and loan term), the loan transaction proposed by X Corporation also

included different repayment provisions requiring monthly payments of

interest only during the loan term and a balloon payment of principal

at the end of the term, the relief afforded by the class exemption

would not be available because the terms of the proposed loan are not

alike in all material respects within the meaning of sections I(a) and

II(a) to the previous loan exemptions granted by the Department and

cited by the applicant.

Example (4): In 1994, Investment Adviser X is granted a conditional

exemption which permits plans for which it provides investment

[[Page 39994]]

management services to purchase units of a limited partnership for

which X is the general partner. In 1996, the assets of X are sold to Y.

Y subsequently makes a written submission pursuant to the class

exemption for the same transactions which were the subject of the

exemption granted to X. In addition to the exemption granted to X, Y

cites in its submission one other substantially similar exemption

granted by the Department within the last five years. The relief

afforded by the exemption would be available because the terms and

conditions of the transaction are substantially similar to previous

exemptions granted by the Department.

Example (5): Firm C makes a written submission pursuant to the

class exemption for the sale of property by its plan to C. The written

submission is received by the Department on April 1. On April 3, the

Department sends an acknowledgement letter to C. Forty-five days elapse

from April 3, the date of the acknowledgement letter, without

notification from the Department that the transaction is not eligible

for authorization under the terms of the class exemption. Pursuant to

the exemption, C proceeds to distribute notice to interested persons by

first class mail. Completion of notice is deemed to occur three days

following the date of a first class mailing. On the 24th day following

completion of notice, the Department receives a comment from an

interested person raising significant factual concerns regarding the

sale. At this point, if the comment cannot be resolved within the five-

day period following the expiration of the comment period, the

Department and C can mutually agree, pursuant to section IV(d) of the

exemption, to a date beyond this period, at which time the comment must

be resolved to the Department's satisfaction in order for the

transaction to be authorized under the terms of the exemption. If the

Department and C cannot agree to an extended date, the transaction will

not receive final authorization and the exemption will not be available

for such transaction.

Paperwork Reduction Act Analysis

The collection of information contained in this final class

exemption has been approved by the Office of Management and Budget

after review under section 3507(d) of the Paperwork Reduction Act of

1995, and has been given OMB control number 1210-0098.

Comments were solicited on the Department's need for this

information; an explanation of how the collection of information

contained in the final class exemption was amended in response to any

comments received from OMB or the public is contained in the preamble,

above. This discussion includes the identification and explanation of

those modifications made in the class exemption, and an explanation of

why certain comments were rejected.

Persons who are to respond to this collection of information are

not required to respond to the collection of information unless it

displays a currently valid OMB control number. The OMB control number

displayed above is valid through September 1998.

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of ERISA and section 4975(c)(2) of the Code does

not relieve a fiduciary or other party in interest or disqualified

person with respect to a plan from certain other provisions of ERISA

and the Code to which the exemption does not expressly apply and the

general fiduciary responsibility provisions of section 404 of ERISA.

Section 404 requires, in part, that a fiduciary discharge his or her

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 ERISA. This exemption does not affect the

requirement of section 401(a) of the Code that a plan must operate for

the exclusive benefit of the employees of the employer maintaining the

plan and their beneficiaries.

(2) In accordance with section 408(a) of the Act and section

4975(c)(2) of the Code, and based upon the entire record, the

Department finds that the exemption is administratively feasible, in

the interests of plans and of their participants and beneficiaries and

protective of the rights of the participants and beneficiaries.

(3) The exemption is supplemental to, and not in derogation of

other provisions of ERISA and the Code, including statutory or

administrative exemptions and transitional rules. Furthermore, the fact

that a transaction is subject to an administrative or statutory

exemption is not dispositive of whether the transaction is in fact a

prohibited transaction.

(4) The exemption is applicable to a transaction only if the

conditions specified in the class exemption are satisfied.

Exemption

Accordingly, the following exemption is granted under the authority

of section 408(a) of ERISA, section 4975(c)(2) of the Code, and section

8477(c)(3) of FERSA and in accordance with the procedures set forth in

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

Section I--General Exemption. Effective July 31, 1996, a

restriction described in section 406(a) of ERISA, and the taxes imposed

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

provision described in section 4975(c)(1)(A) through (D) of the Code,

shall not apply to a transaction between a plan and a party in interest

with respect to such plan, provided the following conditions are met:

(a) The transaction is substantially similar (as defined in section

IV(a)) to transactions described in at least two individual exemptions

that were granted by the Department, and provided relief from the same

restriction, within the 60-month period ending on the date of filing of

the written submission referred to in section III(a);

(b) There is little, if any, risk of abuse or loss to the plan

participants and beneficiaries as result of the transaction; and

(c) Prior to its execution, the transaction has met the

requirements described in section III.

Section II--Specific Exemption. Effective July 31, 1996, a

restriction described in sections 406(b) of ERISA or a parallel

restriction described in section 8477(c)(2) of FERSA, and the taxes

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

parallel provision described in section 4975(c)(1)(E) and (F) of the

Code, shall not apply to a transaction between a plan and a party in

interest with respect to such plan, provided the following conditions

are met:

(a) The transaction is substantially similar (as defined in section

IV(a)) to transactions described in at least two individual exemptions

that were granted by the Department, and provided relief from the same

restriction or, if FERSA relief is requested, the ERISA relief provided

parallels the restrictions of section 8477(c)(2) of FERSA, within the

60-month period ending on the date of filing of the written submission

referred to in section III(a);

(b) There is little, if any, risk of abuse or loss to the plan

participants and beneficiaries as a result of the transaction;

(c) Prior to its execution, the transaction has met the

requirements described in section III;

(d) Where either of the previously granted exemptions identified in

the written submission described in section III, required the

involvement of an

[[Page 39995]]

independent fiduciary, an independent fiduciary has reviewed the

proposed transaction and determined that the transaction would be in

the interests and protective of the plan and its participants and

beneficiaries;

(e) The independent fiduciary described in section II(d) represents

the interests of the plan in the execution of the transaction; and

(f) If the transaction is continuing in nature, the independent

fiduciary described in section II(d)--

(i) Represents the interests of the plan for the duration of the

transaction and monitors the transaction on behalf of the plan;

(ii) enforces compliance with all conditions and obligations

imposed on any party dealing with the plan with respect to the

transaction; and

(iii) ensures that the transaction remains in the interests of the

plan.

Section III: Authorization Requirements. The requirements for this

section are met if:

(a) A written submission is filed with the Department with respect

to the transaction which contains the following information:

(1) A separate written declaration by the party who is to engage in

the transaction that the written submission is made with the intention

of demonstrating compliance with the conditions of this class

exemption;

(2) All information required to be submitted with an individual

exemption application in accordance with the procedures set forth in 29

CFR 2570 subpart B;

(3) A specific statement demonstrating that the proposed

transaction poses little, if any, risk of abuse or loss to the plan

participants and beneficiaries;

(4) A comparison of the proposed transaction to at least two

substantially similar transactions which were the subject of individual

exemptions granted by the Department within a sixty month period ending

on the date of the filing of the written submission and an explanation

as to why any differences should not be considered material for

purposes of this exemption; and

(5) A complete and accurate draft of the notice (as defined in

section IV(b)) prepared for distribution to interested persons and a

description of the proposed method of distribution for such notice.

(b) With respect to transactions described in section II of this

exemption, the written submission referred to in section (a) above

contains the following additional information:

(1) the identity of the independent fiduciary;

(2) A description of such fiduciary's independence from the parties

in interest involved in the subject transaction;

(3) A statement by the independent fiduciary containing an

explanation as to why the subject transaction is in the interests and

protective of the participants and beneficiaries of the plan(s)

involved;

(4) An agreement by the independent fiduciary to represent the

interests of the plan(s) involved in the transaction; and

(5) A description of the procedures for replacement of the

independent fiduciary, if necessary, during the term of the

transaction.

(c) The transaction meets the requirements for tentative

authorization (as defined in section IV(c)) from the Department.

(d) Following tentative authorization, the party who is to engage

in the transaction provides written notice (as defined in section

IV(b)) to interested persons in a manner that is reasonably calculated

to result in the receipt of such notice by interested persons, informs

interested persons of the date of the expiration of the comment period,

and resolves all substantive adverse comments (as defined in section

IV(f)) to the satisfaction of the Department.

(e) The transaction meets the requirements for final authorization

(as defined in section IV(d)).

Section IV: Definitions

(a) The term substantially similar means alike in all material

respects as determined by the Department, in its sole discretion.

(b) The term notice means written notification to interested

persons which includes--

(1) an objective description of the transaction, including all

material terms and conditions,

(2) the approximate date on which the transaction will occur,

(3) A statement that the proposed transaction has met the

requirements for tentative authorization under this exemption,

(4) A statement apprising interested persons of their right to

comment to the Department on the proposed transaction at the following

address: Office of Exemption Determinations, U.S. Department of Labor,

200 Constitution Avenue, N.W., Room N-5649, Washington, D.C. 20210,

(5) the expiration date of the comment period, and

(6) the Federal Register citations for the prior exemptions

identified by the party as substantially similar to the contemplated

transaction.

(c) For purposes of this exemption, ``tentative authorization''

occurs upon the earlier of:

(1) the expiration of the 45-day period following an

acknowledgement by the Department of receipt of the written submission

with respect to the transaction under this exemption unless the

Department has notified the party who is to engage in the transaction

during that period that the transaction is not eligible for

authorization under the terms of this exemption; or

(2) the issuance of a written determination by the Department

during the 45-day period that the proposed transaction meets the

requirements for tentative authorization.

(d) For purposes of this exemption ``final authorization'' occurs

upon the expiration of:

(1) The five (5) day period immediately following the comment

period (as defined in section IV(e)), unless the Department notifies

the party that the transaction is not eligible for authorization under

the terms of this exemption, and

(2) If necessary in order to resolve any substantive adverse

comments received by the Department from interested persons within the

comment period, a period of time extending beyond the five-day period

immediately following the comment period as mutually agreed between the

Department and the party.

(e) The term comment period means the 25-day period following the

completion of distribution of the notice to interested persons by the

party who is to engage in the transaction. For this purpose,

distribution of notice by first class mail will be deemed complete

three business days following the date of mailing to interested

persons.

(f) The term substantive adverse comments means those comments

submitted by interested persons to the Department within the prescribed

comment period which raise significant factual, legal or policy issues

regarding the transaction as determined by the Department.

Section V--Optional Checklist. Completion and submission of the

following optional checklist to accompany the written submission

described in section III(a) will assist the Department in the

consideration of the transaction under the class exemption.

The written submission filed with the Department contains the

following information:

[ ] A separate written declaration of intent to comply with the

conditions of the class exemption.

[ ] All information required to be submitted with an individual

[[Page 39996]]

exemption application under 29 CFR 2570 subpart B.

[ ] A statement demonstrating that the transaction poses little, if

any, risk of abuse or loss to the plan participants and beneficiaries.

[ ] A comparison of the proposed transaction to at least two

substantially similar transactions which were the subject of individual

exemptions granted within the 60 month period ending on the date of the

filing and an explanation why any differences should not be considered

material.

[ ] A complete and accurate draft of the notice to interested persons

(as defined in section IV(b)).

[ ] A description of the proposed method of distribution of for such

notice.

If either of the previously granted exemptions identified in the

written submission required the involvement of an independent

fiduciary, the written submission must contain the following additional

information:

[ ] The identity of the independent fiduciary responsible for

reviewing the proposed transaction, and representing the interests of

the plan in the execution of the transaction. (If the transaction is

continuing in nature, the independent fiduciary represents the

interests of the plans for the duration of the transaction and takes

all necessary action on behalf of the plan.)

[ ] A description of such fiduciary's independence from the parties

involved in the transaction.

[ ] A statement from the independent fiduciary explaining why the

transaction is in the interests and protective of the plan participants

and beneficiaries.

[ ] An agreement by the independent fiduciary to represent the

interests of the plan.

[ ] A description of the procedures for the replacement of the

independent fiduciary, if necessary, during the term of the

transaction.

The notice to interested persons filed with the Department includes

the following information:

[ ] An objective description of the transaction, including all

material terms and conditions.

[ ] The approximate date on which the transaction will occur.

[ ] A statement that the transaction has met the requirements for

tentative authorization under the exemption.

[ ] A statement apprising interested persons of their right to comment

on the proposed transaction at the address contained in the exemption.

[ ] The expiration date of the comment period.

[ ] The Federal Register citations for the two prior exemptions

identified as substantially similar to the contemplated transaction.

Signed at Washington, D.C., this 26th day of July 1996.

Olena Berg,

Assistant Secretary for Pension and Welfare Benefits, U.S. Department

of Labor.

[FR Doc. 96-19483 Filed 7-30-96; 8:45 am]

BILLING CODE 4510-29-P