Class Exemption for Plan Asset Transactions Determined by In- House Asset Managers

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 96-23; Application Number D-09602]

Class Exemption for Plan Asset Transactions Determined by In-

House Asset Managers

Agency: Pension and Welfare Benefits Administration, Labor.

Action: Grant of class exemption.

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SUMMARY: This document contains a final exemption from certain

prohibited transaction restrictions of the Employee Retirement Income

Security Act of 1974 (ERISA or the Act) and from certain taxes imposed

by the Internal Revenue Code of 1986 (the Code). The exemption permits

various transactions involving employee benefit plans whose assets are

managed by in-house managers (INHAMS), provided that the conditions of

the exemption are met. The

[[Page 15976]]

exemption affects participants and beneficiaries of employee benefit

plans, the sponsoring employers of such plans, INHAMS, and other

persons engaging in the described transactions.

EFFECTIVE DATE: The effective date of the exemption is April 10, 1996.

FOR FURTHER INFORMATION CONTACT: Lyssa Hall or Virginia J. Miller,

Pension and Welfare Benefits Administration, Office of Exemption

Determinations, U.S. Department of Labor, Washington, DC 20210, (202)

219-8971 (not a toll-free number) or Paul D. Mannina, Plan Benefits

Security Division, Office of the Solicitor, (202) 219-9141 (not a toll-

free number).

SUPPLEMENTARY INFORMATION: Exemptive relief for the transactions

described herein was requested in an application dated December 16,

1993 submitted by the Committee on Investment of Employee Benefit

Assets (CIEBA), 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 section 2570 subpart B (55 FR 32836 August 10, 1990).

On March 24, 1995, the Department published a notice in the Federal

Register (60 FR 15597) of the pendency of a proposed class exemption

from certain of the restrictions of sections 406 and 407(a) 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.1

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

47713, October 17, 1978), effective December 31, 1978 (44 F.R. 1063,

January 3, 1978), 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 to the corresponding provisions of

section 4975 of the Code.

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The notice gave interested persons an opportunity to submit written

comments or requests for a hearing on the proposed class exemption to

the Department. The Department received fourteen written comments and

no requests for a public hearing. Upon consideration of all of the

comments received, the Department has determined to grant the proposed

class exemption, subject to certain modifications. These modifications

and the major comments are discussed below.

Discussion of the Comments

A. Basic Exemption

1. INHAM as Decision Maker (Section I(a)). The proposed general

exemption, set forth in Part I, permitted that portion of a plan that

is managed by an INHAM to engage in all transactions described in

section 406(a)(1)(A) through (D) with virtually all party in interest

service providers except the INHAM or a person related to the INHAM.

Under section I(a) of the proposed exemption, the INHAM must function

as the decision maker for the plan in all covered transactions.

Specifically, section I(a) requires that the terms of the transaction

be negotiated by, or under the authority and general direction of, the

INHAM and that the INHAM make the decision to enter into the

transaction.

Under section I(a) of the proposal, the exemption would be

available for a transaction involving an amount in excess of $5,000,000

notwithstanding the fact that the transaction that had been negotiated

by the INHAM was subject to a veto or approval by the plan sponsor. A

commenter suggested that section I(a) should be modified to permit the

plan sponsor or its designee to retain the right to veto or approve any

transaction, regardless of the size of the transaction. Although the

exemption permits the retention of a veto power for large transactions,

the exemption was developed based on the premise that independent

decisionmaking was more likely to be assured if day to day transactions

are negotiated and approved by an INHAM. Therefore, the Department has

determined not to adopt the commenter's suggestion.

A commenter is concerned that the requirement under section I(a) of

the proposal that the INHAM negotiate and make the decision on behalf

of the plan to enter into the transaction may foreclose a transaction

where an INHAM retains a QPAM to locate and negotiate the terms of a

possible plan investment. According to the commenter, it is frequently

advantageous for a plan to retain a QPAM to identify investment

opportunities and to negotiate the terms of these types of investments,

while permitting the INHAM to perform its own ``due diligence'' review

of each investment opportunity presented and evaluate the

appropriateness of the investment for the plan's particular investment

needs. The Department does not believe that it would be appropriate in

the context of this exemption proceeding to modify the INHAM exemption

to, in effect, permit a transaction that was previously rejected by the

Department during its consideration of the final QPAM class

exemption.2

2 In this regard, see PTE 84-14, 49 FR 9497 (March 13, 1984).

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A commenter questioned whether Part I of the exemption would apply

to ``drag along'' and similar transactions that are not actually

negotiated by the INHAM. According to the commenter, when a plan makes

an investment in a non-publicly traded entity, both the plan and other

investors want to be able to dispose of their investment at a favorable

price. In order to accomplish this objective, plans and other investors

may negotiate certain rights at the time they make their initial

investments. One such right would be the ability of the plan to ``tag

along'' and sell out its interest at the same price as the majority

investors if the majority investors sell their interests to a third

party. The converse of this right would be the ability of the majority

investors to ``drag along'' the plan if they sell their interest to a

third party. When these rights are exercised, it may turn out that the

party to whom the interests are sold is a party in interest. The

commenter argues that the ``drag along'' or similar transactions should

be treated as subordinate to the initial investment transaction and,

therefore, subject to the authority or general direction of the INHAM

for purposes of section I(a) of the exemption. The commenter represents

that, while the INHAM is not involved in selecting the party to whom

the plan's interest is sold, the transaction is determined by an

independent party pursuant to rights negotiated by the INHAM at arm's-

length at the outset of the investment transaction. The commenter

further represents that these rights would be taken into account by the

INHAM in determining whether the initial investment would be prudent.

It is the view of the Department that section I(a) of the exemption

will be deemed satisfied in the case of ``drag along'' or similar

transactions that are entered into pursuant to rights that were

negotiated by the INHAM as part of the primary investment transaction.

The Department notes, however, that it does not interpret section I(a)

as exempting a ``drag along'' or similar transaction unless such

transaction is itself subject to relief under the exemption and the

applicable conditions are otherwise met. In this regard, the Department

expects that any determination regarding the appropriate price to be

paid for the investment would reflect the effect on the value of such

investment of rights which may be exercised in the future at the

discretion of unrelated third persons.

One commenter requested that the Department clarify that the

requirements of section I(a) would be met if an officer of the INHAM

also serves as a member of the employer's investment committee or other

named fiduciary under the plan. Nothing contained in section I(a) would

preclude

[[Page 15977]]

an officer of the INHAM from also serving as a member of the employer's

investment committee or other named fiduciary under the plan, provided

that the INHAM otherwise meets the definition set forth in section

IV(a), including the requirement that the INHAM must be a separate

entity that is registered as an investment adviser.

A commenter requested that the Department clarify that the

requirements of section I(a) will be satisfied notwithstanding the fact

that the INHAM also manages assets of outside clients.

In the Department's view, nothing contained in the exemption would

preclude the INHAM from providing services to outside clients who have

no affiliation with the INHAM.

In response to a comment regarding typical investment increments

used in financial transactions, the Department has revised section I(a)

by replacing ``an amount in excess of $5,000,000'' to ``$5,000,000 or

more'' in connection with the plan sponsor's right to veto or approve

such transactions.

2. Transactions Involving Arrangements Designed to Benefit Parties

in Interest (Section I(c)). Section I(c) of the proposal requires that

the transaction not be part of an agreement, arrangement or

understanding designed to benefit a party in interest. A commenter

suggested that the Department clarify that to the extent that the

INHAM's purpose in entering into a transaction is not to benefit a

party in interest, so that any benefit to the party in interest is

incidental to the purpose of the transaction, the transaction should

not give rise to an agreement, arrangement or understanding designed to

benefit a party in interest which is described in section I(c). The

Department concurs with the commenter and notes that the intent of the

condition in section I(c) was not to deny direct benefits to other

parties to a transaction but, rather, to exclude relief for

transactions that are part of a broader overall agreement, arrangement

or understanding designed to benefit parties in interest.

3. Transactions with Service Providers (Section I(e)). Under

section I(e) of the proposed exemption, relief was limited to

transactions with party in interest service providers who do not have

discretionary authority or control with respect to the assets involved

in the transaction or otherwise render investment advice with respect

to such assets. A commenter urged the Department to expand the scope of

the final exemption to include relief for all parties in interest. The

Department does not believe that a sufficient showing has been made

that the safeguards contained in the proposed exemption would

adequately discourage the exercise of undue influence upon the INHAM if

the final exemption were expanded as requested by the commenter.

Accordingly, the Department cannot conclude that further relief is

warranted.

Several commenters suggested that the Department clarify that

section I(e) of the proposal would not preclude a directed trustee of a

plan or a trustee with discretionary authority over plan assets not

involved in the transaction from engaging in transactions with the

plan. In the Department's view, a nondiscretionary trustee subject to

the direction of an INHAM, and that does not otherwise render

investment advice with respect to the plan assets involved in the

transaction may carry out proper directions that are not contrary to

ERISA with respect to the transactions covered by the class exemption.

Similarly, the exemption would be available for transactions with a

trustee that exercises investment discretion with respect to a portion

of plan assets not involved in the transaction.

Another commenter objected to the requirement in section I(e)(2)

that the party in interest dealing with the plan not have discretionary

authority or control with respect to the investment of the plan assets

involved in the transaction and not render investment advice (within

the meaning of 29 CFR 2510.3-21(c)) with respect to those assets.

According to the commenter, the first part of this condition regarding

discretionary authority or control is unnecessary in view of the

requirement under section I(a) that the terms of the transaction must

be negotiated by the INHAM, and that the INHAM make the decision on

behalf of the plan to enter into the transaction. The commenter further

believed that the requirement contained in section I(e)(2) that the

party in interest dealing with the plan not render ``investment

advice'' would create uncertainty and is unnecessary in view of the

limited scope of relief provided. Accordingly, the commenter requests

that the Department eliminate this requirement from the final

exemption.

This class exemption was developed, and is being granted by the

Department, based on the essential premise that broad exemptive relief

from the prohibitions of section 406(a) of ERISA can be afforded for

all types of service provider transactions in which a plan engages only

if the INHAM independently negotiates the transaction and makes the

decision on behalf of the plan to enter into the transaction. The

limitations contained in section I(e)(2) were included in the proposal

in order to further emphasize that the INHAM must be the decision-maker

in order for transactions to be covered by the class exemption. In

addition, the Department believes that, if exemptive relief were to be

provided where the party in interest renders investment advice to the

plan, with respect to the transaction at issue, the potential for

decision making with regard to the plan assets that would inure to the

benefit of a party in interest would be increased. For these reasons,

the Department believes that a separate condition is warranted and has

determined not to revise the exemption as requested by the commenter.

4. Fiduciary Audit (Section I(g)). Section I(g) of the proposed

exemption required that an independent auditor conduct an annual

fiduciary audit to determine whether the written procedures adopted by

the INHAM are designed to assure compliance with the conditions of the

exemption. Section IV(f) defined fiduciary audit as including: (1) a

determination by the auditor as to whether or not the plan has

developed adequate internal policies and procedures designed to assure

compliance with the terms of the exemption; (2) a test of a

representative sample of the plan's transactions to determine

operational compliance with such policies and procedures; (3) a

determination as to whether the INHAM meets the definition of INHAM set

forth in the exemption; and (4) a written report describing the steps

performed by the auditor during the course of its review and the

auditor's findings and recommendations.

Several commenters requested that the Department clarify the types

of ``policies and procedures'' that the INHAM is required to adopt for

purposes of sections I(g) and IV(f) of the proposal, and the criteria

the independent auditor should apply in conducting the audit. Another

commenter recommended that the audit be conducted in accordance with

standards established by the American Institute of Certified Public

Accountants (AICPA), and that the Department establish criteria against

which the independent auditor can make a determination that the

procedures are designed to operate in the manner contemplated by the

exemption. In this regard, a commenter raised a related question

concerning whether the proposed audit condition would require that the

policies and procedures include substantive criteria regarding expected

risk, gross return and expenses of a proposed transaction that the

INHAM should consider. One commenter

[[Page 15978]]

suggested that the scope of the audit should be expanded to include a

determination by the auditor regarding compliance with section 404(a)

of ERISA. Lastly, a commenter urged the Department to delete this

requirement entirely.

As noted in the preamble to the proposed exemption, the Department

proposed the audit requirement in order to address the lack of

independence of the INHAM. The Department continues to believe that an

annual fiduciary audit is necessary to address this lack of

independence and, accordingly, has determined not to delete this

requirement. In this regard, it was the Department's intent that the

role of the auditor would be limited to determining whether the written

procedures adopted by the INHAM are designed to assure compliance with

the conditions of the exemption. Since the sole purpose of the audit

requirement is to assure compliance with the exemption, the Department

does not believe that it would be appropriate to expand the scope of

this requirement to include either determinations under section 404 of

the Act or determinations regarding the appropriateness of investments

entered into under the exemption. In response to the comment concerning

the adoption of AICPA standards as part of the audit requirement, the

Department does not believe that it would be appropriate to adopt a

definition that would require compliance with standards developed by

certain professional organizations. However, in consideration of the

concerns expressed by the commenters, the Department has adopted a new

section I(g) which specifically requires that the INHAM adopt written

policies and procedures designed to assure compliance with the

conditions of the exemption. (The fiduciary audit requirement, set

forth in section I(g) of the proposal, has been renumbered as section

I(h) under the final exemption.) The Department has also adopted a new

definition, under section IV(g), that contains a list of the objective

requirements of the exemption that must be described in the written

policies and procedures and that must be reviewed by the auditor.3

In addition, the Department notes that, although the exemption provides

flexibility with respect to the specific procedures adopted by the

INHAM, it expects such procedures to be designed in a manner that

assures that the INHAM's operations are consistent with the

requirements of the exemption.

3 Although the Department has limited the auditor's

responsibilities under the final exemption to making findings on the

INHAM's compliance with the objective requirements of the exemption,

the INHAM remains responsible for assuring compliance with all of

the conditions of the exemption. Accordingly, the failure of the

INHAM to comply with a condition of the exemption not described in

section IV(g) would render the exemption unavailable.

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On a related issue, another commenter noted that the role of the

auditor under the exemption should be limited to determining compliance

with policies and procedures designed by the INHAM and should not

include a determination by the auditor as to whether the plan has

developed adequate policies and procedures as required under section

IV(f) of the proposal. According to the commenter, having the auditor

review the adequacy of the procedures would expand the auditor's role

beyond the typical role of an independent auditor. In response to the

commenter, the Department has determined to modify section IV(f) to

delete the requirement that the auditor make a determination regarding

the adequacy of the policies and procedures adopted by the INHAM. Under

the revised section IV(f)(1), the auditor would be required to review

the policies and procedures for consistency with the objective

requirements of the exemption. In light of the decision to revise

section (IV)(f)(1), the Department has also determined to expand

section IV(f)(2) to require the auditor to test for compliance with

both the written policies and procedures adopted by the INHAM and the

objective requirements of the exemption. In the Department's view, this

revised condition will help to assure that the INHAM properly carries

out its responsibilities under the exemption.

A commenter noted that the proposal did not make clear the

consequences on existing transactions of an unsatisfactory audit. In

response to the comment, the Department notes that an adverse finding

in the auditor's report would not, in itself, render the exemption

unavailable for any transaction engaged in by the INHAM on behalf of

the plan.4 However, if a transaction did not meet a condition of

the exemption (e.g., because relief was not available for transactions

with the party with whom the INHAM dealt), the exemption would not be

available for that transaction, but the exemption would continue to be

available for those transactions that did satisfy its conditions.

Conversely, a failure to comply with the general terms of the exemption

applicable to all transactions would render the exemption unavailable,

regardless of whether the failure is identified in the audit. Thus, if

the INHAM failed to adopt policies and procedures that complied with

the requirements of section I(g) or if no audit were conducted, the

exemption would not cover transactions engaged in on behalf of the plan

by the INHAM.

4 The Department cautions that the failure of the INHAM to

take appropriate steps to address any adverse findings in an

unsatisfactory audit would raise issues under ERISA's fiduciary

responsibility provisions.

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Several commenters were concerned that the exemption could be

interpreted to mean that only financial accounting firms or auditing

firms could conduct the fiduciary audit required under section I(g) of

the proposal. According to the commenters, other types of financial

service organizations may well be capable of conducting a fiduciary

audit. The Department did not intend to limit eligibility to serve as

independent auditors under the exemption solely to accounting or

auditing firms. Accordingly, any person who otherwise possesses the

requisite technical training and proficiency with ERISA's fiduciary

responsibility provisions may conduct a fiduciary audit.

A number of commenters also requested that we clarify the

requirement that the person performing the fiduciary audit must be

``independent''. In the Department's view, whether an auditor is

independent for purposes of the exemption would depend on the

particular facts and circumstances of each case. However, the

Department would not view an auditor as independent under circumstances

where the auditor has a financial interest, including an ownership

interest, in the INHAM , the employer, any parties dealing with the

plan under the exemption, or any affiliates thereof, or otherwise

receives more than a de minimis amount of its compensation from the

INHAM, the employer, its affiliates, or the plan.

One commenter questioned whether the auditor performing the

fiduciary audit can be an entity or individual who provides other

services to the plan, e.g., the firm that audits the plan in connection

with preparation of the plan's annual report (Form 5500). In the

Department's view, the provision of other services would not, in

itself, preclude a firm from meeting the requirement under the

exemption that the person performing the fiduciary audit must be

independent. However, the Department notes that the provision of other

services could raise questions regarding the independence of the

auditor if the aggregate services result in the auditor deriving more

than a de minimis amount of its compensation from the INHAM, the

employer, its affiliates, or the plan.

[[Page 15979]]

One of the commenters expressed concern about how the audit

requirement would apply to the condition, contained in section I(b),

that the transaction not be described in certain specified class

exemptions. The commenter suggested that the auditor's role regarding

this condition should be limited to a finding as to whether the

transaction is of the type described in the specified class exemptions,

rather than a finding regarding compliance with the terms and

conditions of such class exemptions. The Department concurs with this

comment. The Department believes, however, that it is the ongoing

responsibility of the INHAM to determine whether a transaction is

covered by one of the specified class exemptions or the INHAM

exemption.

A commenter suggested that the Department revise the requirement

under section I(g) of the proposal that the independent auditor must

have appropriate technical training and proficiency with ERISA's

fiduciary responsibility provisions. According to the commenter, the

most likely candidates to conduct an audit are people who have

experience with ERISA's fiduciary responsibility provisions rather than

technical training. On the basis of this comment, the Department has

determined to modify section I(g) to provide that the independent

auditor must have appropriate technical training or experience, and

proficiency with ERISA's fiduciary responsibility provisions. Another

commenter urged the Department to delete this requirement entirely. In

response to this comment, the Department believes that the requirement

that the auditor be familiar with ERISA's fiduciary responsibility

provisions provides an additional protection under the class exemption.

Therefore, the Department has determined not to further revise this

condition.

According to a commenter, the language in section IV(f)(4) of the

proposal, which provides that the auditor must make recommendations in

its written report, would require the auditor to go beyond its auditing

role of providing findings regarding compliance. The Department concurs

with this comment and, accordingly, has deleted the words ``and

recommendations'' from section IV(f). In response to a related comment,

the Department has deleted the words ``among other things'' from the

definition of fiduciary audit in order to clarify that the definition

sets out the specific steps for a fiduciary audit. The Department

cautions that the auditor would be responsible for taking any actions

necessary to adequately perform the steps described in the definition

of fiduciary audit.

A commenter suggested that the Department modify sections I(g) and

IV(f) by deleting the word ``fiduciary'' from ``fiduciary audit''

wherever it appears in those sections and substituting the word

``exemption'' to reflect the fact that the auditor's role is to assure

compliance with the policies and procedures established for purposes of

the exemption and does not otherwise involve examining for compliance

with ERISA's fiduciary responsibility provisions. The Department

concurs with the commenter's suggestion and has modified the exemption

accordingly.

The following examples illustrate the types of transactions which

would be covered by Part I of the exemption:

(1) Corporation C designates INHAM X to manage a portion of Plan

P's assets. Assume that X meets the criteria for an INHAM under the

exemption. X uses Plan P assets to purchase a building from Y, a

wholly-owned subsidiary of a broker-dealer that provides services to

the Plan. Absent this exemption, the purchase of the building from Y, a

party in interest described in ERISA section 3(14)(G), would violate

the restrictions contained in section 406(a)(1)(A), and the transaction

could not proceed until exempted by the Department. The general

exemption set forth in Part I would allow such transaction if the

conditions contained therein are met.

(2) INHAM X invests part of a pension fund's assets to acquire a

parcel of unimproved real property from the president of the employer

sponsoring the Plan. Part I does not provide an exemption for the

purchase of the property since relief is limited under that Part to

transactions with service providers and their affiliates. In addition,

no relief would be provided under the exemption for the act of self-

dealing described in section 406(b)(1) arising in connection with X's

use of the fund's assets in a transaction that benefits a person in

whom X has an interest that may affect the exercise of its best

judgement as a fiduciary.

(3) Corporation C is the named fiduciary of Plan P. C chooses INHAM

X to manage the portion of P's assets allocated for real estate

investments. X, using its discretionary authority, locates and

negotiates the purchase for $6 million of a commercial building in New

York that is being offered for sale by Corporation Z. Z provides

accounting services to Plan P. Pursuant to its arrangement with C, X is

required to seek the approval of C for all real estate transactions

involving amounts of $5 million or more. On the basis of X's

recommendation, C approves the transaction. Despite the retention of

approval power by C, Part I of the exemption would be available for the

purchase of the building provided there is no arrangement with C that

requires X to buy the building from Z and the conditions of Part I are

otherwise met.

(4) Corporation C allocates part of the assets of its Plan P to a

master trust managed by INHAM X. X uses master trust assets to purchase

an office building that is subsequently leased to M. M provides

administrative services to Plan P. During the term of the lease, M

becomes a wholly-owned subsidiary of Corporation C. Although M is no

longer a party in interest with respect to Plan P solely by reason of

providing services to such Plan, Part I will continue to be available

for the entire lease term since, at the time the transaction was

entered into (as defined in section IV(e)), M was not affiliated with

the plan sponsor and its relationship to Plan P was solely that of a

service provider.

(5) INHAM X retains Broker-Dealer B to provide brokerage services

to Plan P. In a separate transaction, X uses Plan P assets to purchase

corporate bonds directly from B. The bonds were originally issued by

Corporation Z, an investment manager for a portion of the Plan's assets

that are not controlled by INHAM X. Since the Department expects that,

as part of its fiduciary responsibilities, the INHAM would have

analyzed the terms of the bonds prior to purchase, the relief provided

by Part I could extend to both the acquisition of the bonds and the

underlying extension of credit. Thus, Part I could cover a subsidiary

transaction with a party in interest if such transaction is itself

subject to relief under the exemption and the applicable conditions are

otherwise met.

(6) Corporation C designates INHAM X to manage a portion of Plan

P's assets. X uses plan assets to purchase an office building that is

subsequently leased to Broker-Dealer BD, a non-party in interest with

respect to Plan P. During the term of the lease, BD becomes a service

provider to Plan P. Although BD was not a party in interest service

provider at the time the lease was executed, section IV(e) provides

that Part I of the exemption would be available for the entire lease

term provided that the remaining conditions of the exemption were met

at the time the transaction was entered into. Alternatively, section

IV(e) provides that Part I of the exemption would be available to

exempt the transaction if

[[Page 15980]]

the conditions of the exemption were met as of the time the transaction

would have become prohibited.

B. Specific Exemptions for Employers

A commenter urged the Department to expand the relief provided

under Part II of the proposal to permit an INHAM to select an affiliate

to provide telecommunications related goods and services to any real

property that may be considered an asset of the plan or to an entity in

which the plan owns a controlling interest and that is managed by an

INHAM. While the commenter has identified the need for exemptive

relief, the Department does not believe that it has sufficient

information on the record at this time to provide additional relief for

a class of transactions that would otherwise violate section 406(b) of

ERISA. Finally, the Department believes that adoption of the

commenter's suggestion would arbitrarily favor one specific industry

over another under similar circumstances.

C. Definitions

1. INHAM (Section IV(a)). A commenter requested that the definition

of an INHAM be revised to include a division or group within the

employer's management structure. The Department believes that an INHAM

that is organized as a separate legal entity, is separately managed,

and is subject to oversight by the Securities and Exchange Commission

as a result of registration as an investment adviser under the

Investment Advisers Act of 1940 provides an important safeguard under

the exemption. Therefore, the Department cannot conclude that further

relief is warranted.

Another commenter suggested that the Department modify the

definition of INHAM to permit a majority-owned subsidiary of an

employer, or a direct or indirect majority-owned subsidiary of a parent

organization of such an employer to serve as an INHAM. The Department

does not believe that a sufficient showing has been made that the

requirement that the INHAM be wholly-owned under the proposal would

raise compliance problems for those persons intending to use the

exemption. Accordingly, the Department has determined not to revise the

final exemption as requested.

Several commenters urged the Department to expand the definition of

an INHAM to include an entity established by a multiemployer plan or

its plan sponsor. A commenter further noted that the definition of an

affiliate of the INHAM contained in sections IV(a) and IV(b) of the

proposal should be broadened to include families of multiemployer

plans. The Department notes that the exemption application requested

relief for transactions involving the assets of single employer plans

managed by in-house managers. Accordingly, the Department does not

believe that it has sufficient information regarding the operation and

management of multiemployer plans to make the findings necessary to

grant exemptive relief. Moreover, the Department does not believe that

a sufficient showing has been made by the commenters that the

conditions contained in the exemption would adequately protect the

interests of participants and beneficiaries of internally managed

multiemployer plans. Of course, the Department would be prepared to

consider additional relief upon proper demonstration that the findings

can be made under section 408(a) of ERISA with respect to such plans.

A commenter requested that the Department clarify that the relief

provided for employee benefit plans whose assets are managed by INHAMs

extends, not only to plans sponsored by affiliates of the INHAM, but

also includes plans sponsored by the INHAM itself. According to the

commenter, the INHAM may establish a stand-alone plan to cover its

employees, or its employees may participate in a plan established and

maintained by an affiliate of the INHAM. Therefore, the commenter urged

that the Department adopt a definition of ``plan'', which would include

plans maintained by the INHAM or an affiliate of the INHAM. In

consideration of the concerns raised by the commenter, the Department

has determined to adopt a definition of plan under section IV(h) that

includes plans maintained by the INHAM and affiliates of the INHAM. The

commenter further requested that the requirements under section IV(a)

that the INHAM have $50 million of plan assets under management and

control, and that plans maintained by affiliates of the INHAM have $250

million of aggregate plan assets also should be modified to clarify

that these requirements are not intended to exclude any plan maintained

by the INHAM. The requirement that the INHAM be affiliated with a plan

sponsor (or group of related plan sponsors) whose plan(s) hold in the

aggregate assets of at least $250 million, $50 million of which is

under the direct management and control of the INHAM was imposed

because the Department believes that INHAMs of large plans are more

likely to have an appropriate level of expertise in financial and

business matters. In this regard, the Department believes that the

requirement that the INHAM have a significant dollar amount of assets

under its management and control attributable to plans maintained by

affiliates which are separately accountable for the operation of their

respective plans provides an additional safeguard under the exemption.

Accordingly, the Department has determined not to revise the $50

million requirement. However, the Department has determined that it

would be appropriate to include the assets of plans maintained by the

INHAM in determining compliance with the $250 million standard.

Finally, a commenter requested that the $50 million requirement be

revised to permit the $50 million threshold to be met during the

INHAM's first fiscal year as a separate legal entity. According to the

commenter, the requirement that the INHAM have in excess of $50 million

of plan assets under its management and control as of the last day of

its most recent fiscal year could unintentionally prevent the exemption

from being immediately available for an employer's in-house management

group in its first year as a separate wholly-owned subsidiary of the

employer. In response to this comment, the Department has revised

section IV(a)(2) to specify that an existing asset management group

that is newly-incorporated as a separate subsidiary of the employer may

satisfy the $50 million requirement in its initial fiscal year if the

requirement is met as of the date during its initial fiscal year as a

separate legal entity that responsibility for the management of such

assets in excess of $50 million was transferred to it from the

employer.

2. Continuing Transactions (Section IV(e)). A commenter asserted

that the last sentence of section IV(e), which deals with transactions

which are continuing in nature, is unclear. This sentence addresses the

issue of whether a continuing transaction that is not prohibited and,

therefore, not subject to the exemption at the outset, may become

covered by the exemption during the course of the transaction if it

later becomes prohibited. According to the commenter, certain of the

conditions of the exemption can be met only at the time the transaction

is entered into, such as the condition in section I(d) dealing with

arms-length terms. Conversely, the requirements of section I(e)(1)

dealing with the party in interest relationships permitted under the

exemption can only be determined at the time the transaction would have

become prohibited. It is the view of the

[[Page 15981]]

Department that section I(d) will be deemed satisfied in the case of a

continuing transaction that later becomes prohibited if the transaction

negotiated by the INHAM satisfied such section at the time the

transaction was entered into. The Department notes that it does not

interpret section IV(e) as exempting a continuing transaction that

becomes prohibited subsequent to a renewal or modification that

required the consent of the INHAM, unless the renewal or modification

otherwise met the arm's-length requirement of section I(d). Lastly, the

Department has modified section IV(e) to clarify that in determining

compliance with the conditions of the exemption at the time that the

transaction was entered into, section I(e) will be deemed satisfied if

the transaction was entered into between a plan and a person who was

not then a party in interest.

D. Miscellaneous

1. In response to a comment, the Department has added section

IV(d)(3) to the exemption in order to define ``control'' for purposes

of determining whether or not an INHAM is ``related'' to a party in

interest under section IV(d).

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) 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 participants and beneficiaries;

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

other provisions of the Act 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; and

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

the transaction satisfies the conditions specified in the class

exemption.

Exemption

Accordingly, the following exemption is granted 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).

Part I--Basic Exemption

Effective April 10, 1996, the restrictions of section 406(a)(1) (A)

through (D) of the Act and the taxes imposed by Code section 4975 (a)

and (b) of the Code, by reason of 4975(c)(1) (A) through (D), shall not

apply to a transaction between a party in interest with respect to a

plan (as defined in section IV(h)) and such plan, provided that an in-

house asset manager (INHAM) (as defined in section IV(a)) has

discretionary authority or control with respect to the plan assets

involved in the transaction and the following conditions are satisfied:

(a) The terms of the transaction are negotiated on behalf of the

plan by, or under the authority and general direction of, the INHAM,

and either the INHAM, or (so long as the INHAM retains full fiduciary

responsibility with respect to the transaction) a property manager

acting in accordance with written guidelines established and

administered by the INHAM, makes the decision on behalf of the plan to

enter into the transaction. Notwithstanding the foregoing, a

transaction involving an amount of $5,000,000 or more, which has been

negotiated on behalf of the plan by the INHAM will not fail to meet the

requirements of this section I(a) solely because the plan sponsor or

its designee retains the right to veto or approve such transaction;

(b) The transaction is not described in--

(1) Prohibited Transaction Exemption 81-6 (46 FR 7527; January 23,

1981) (relating to securities lending arrangements),

(2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7,

1983) (relating to acquisitions by plans of interests in mortgage

pools), or

(3) Prohibited Transaction Exemption 88-59 (53 FR 24811; June 30,

1988) (relating to certain mortgage financing arrangements);

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

understanding designed to benefit a party in interest;

(d) At the time the transaction is entered into, and at the time of

any subsequent renewal or modification thereof that requires the

consent of the INHAM, the terms of the transaction are at least as

favorable to the plan as the terms generally available in arm's length

transactions between unrelated parties;

(e) The party in interest dealing with the plan: (1) is a party in

interest with respect to the plan (including a fiduciary) solely by

reason of providing services to the plan, or solely by reason of a

relationship to a service provider described in section 3(14) (F), (G),

(H), or (I) of ERISA; and (2) does not have discretionary authority or

control with respect to the investment of the plan assets involved in

the transaction and does not render investment advice (within the

meaning of 29 CFR 2510.3-21(c)) with respect to those assets;

(f) The party in interest dealing with the plan is neither the

INHAM nor a person related to the INHAM (within the meaning of section

IV(d));

(g) The INHAM adopts written policies and procedures that are

designed to assure compliance with the conditions of the exemption; and

(h) An independent auditor, who has appropriate technical training

or experience and proficiency with ERISA's fiduciary responsibility

provisions and so represents in writing, conducts an exemption audit

(as defined in section IV(f)) on an annual basis. Following completion

of the exemption audit, the auditor shall issue a written report to the

plan presenting its specific findings regarding the level of compliance

with the policies and procedure adopted by the INHAM in accordance with

section I(g).

Part II--Specific Exemptions

Effective April 10, 1996, the restrictions of sections 406(a),

406(b)(1), 406(b)(2) and 407(a) of the Act and the taxes imposed by

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

4975(c)(1) (A) through (E), shall not apply to:

(a) The leasing of office or commercial space owned by a plan

managed by an INHAM to an employer any of whose employees are covered

by the plan or an affiliate of such an employer (as defined in section

407(d)(7) of the Act), if--

[[Page 15982]]

(1) The plan acquires the office or commercial space subject to an

existing lease with an employer, or its affiliate as a result of

foreclosure on a mortgage or deed of trust;

(2) The INHAM makes the decision on behalf of the plan to foreclose

on the mortgage or deed of trust as part of the exercise of its

discretionary authority;

(3) The exemption provided for transactions engaged in with a plan

pursuant to section II(a) is effective until the later of the

expiration of the lease term or any renewal thereof which does not

require the consent of the plan lessor;

(4) The amount of space covered by the lease does not exceed

fifteen (15) percent of the rentable space of the office building or

the commercial center; and

(5) The requirements of sections I(c), I(g) and I(h) are satisfied

with respect to the transaction.

(b) The leasing of residential space by a plan to a party in

interest if--

(1) The party in interest leasing space from the plan is an

employee of an employer any of whose employees are covered by the plan

or an employee of an affiliate of such employer (as defined in section

407(d)(7) of the Act);

(2) The employee who is leasing space does not have any

discretionary authority or control with respect to the investment of

the assets involved in the lease transaction and does not render

investment advice (within the meaning of 29 CFR 2510.3-21(c)) with

respect to those assets;

(3) The employee who is leasing space is not an officer, director,

or a 10% or more shareholder of the employer or an affiliate of such

employer;

(4) At the time the transaction is entered into, and at the time of

any subsequent renewal or modification thereof that requires the

consent of the INHAM, the terms of the transaction are not less

favorable to the plan than the terms afforded by the plan to other,

unrelated lessees in comparable arm's length transactions;

(5) The amount of space covered by the lease does not exceed five

percent (5%) of the rentable space of the apartment building or multi-

unit residential subdivision [townhouses or garden apartments], and the

aggregate amount of space leased to all employees of the employer or an

affiliate of such employer does not exceed ten percent (10%) of such

rentable space; and

(6) The requirements of sections I(a), I(c), I(d), I(g) and I(h)

are satisfied with respect to the transaction.

Part III--Places of Public Accommodation

Effective April 10, 1996, the restrictions of sections 406(a)(1)

(A) through (D) and 406(b) (1) and (2) of ERISA and the taxes imposed

by Code section 4975 (a) and (b), by reason of Code section 4975(c)(1)

(A) through (E), shall not apply to the furnishing of services and

facilities (and goods incidental thereto) by a place of public

accommodation owned by a plan and managed by an INHAM to a party in

interest with respect to the plan, if the services and facilities (and

incidental goods) are furnished on a comparable basis to the general

public.

Part IV--Definitions

For the purposes of this exemption:

(a) The term ``in-house asset manager'' or ``INHAM'' means an

organization which is--

(1) either (A) a direct or indirect wholly-owned subsidiary of an

employer, or a direct or indirect wholly-owned subsidiary of a parent

organization of such an employer, or (B) a membership nonprofit

corporation a majority of whose members are officers or directors of

such an employer or parent organization; and

(2) an investment adviser registered under the Investment Advisers

Act of 1940 that, as of the last day of its most recent fiscal year,

has under its management and control total assets attributable to plans

maintained by affiliates of the INHAM (as defined in section IV(b)) in

excess of $50 million; provided that if it has no prior fiscal year as

a separate legal entity as a result of it constituting a division or

group within the employer's organizational structure, then this

requirement will be deemed met as of the date during its initial fiscal

year as a separate legal entity that responsibility for the management

of such assets in excess of $50 million was transferred to it from the

employer.

In addition, plans maintained by affiliates of the INHAM and/or the

INHAM, must have, as of the last day of each plan's reporting year,

aggregate assets of at least $250 million.

(b) For purposes of sections IV(a) and IV(h), an ``affiliate'' of

an INHAM means a member of either (1) a controlled group of

corporations (as defined in section 414(b) of the Code) of which the

INHAM is a member, or (2) a group of trades or businesses under common

control (as defined in section 414(c) of the Code) of which the INHAM

is a member; provided that ``50 percent'' shall be substituted for ``80

percent'' wherever ``80 percent'' appears in section 414(b) or 414(c)

or the rules thereunder.

(c) 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).

(d) An INHAM is ``related'' to a party in interest for purposes of

section I(f) of this exemption if the party in interest (or a person

controlling, or controlled by, the party in interest) owns a five

percent or more interest in the INHAM or if the INHAM (or a person

controlling, or controlled by, the INHAM) owns a five percent or more

interest in the party in interest. For purposes of this definition:

(1) The term ``interest'' means with respect to ownership of an

entity--

(A) The combined voting power of all classes of stock entitled to

vote or the total value of the shares of all classes of stock of the

entity if the entity is a corporation.

(B) The capital interest or the profits interest of the entity if

the entity is a partnership, or

(C) The beneficial interest of the entity if the entity is a trust

or unincorporated enterprise;

(2) A person is considered to own an interest held in any capacity

if the person has or shares the authority--

(A) To exercise any voting rights or to direct some other person to

exercise the voting rights relating to such interest, or

(B) To dispose or to direct the disposition of such interest; and

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

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

individual.

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

transaction occurs is the date upon which the transaction is entered

into. In addition, in the case of a transaction that is continuing, the

transaction shall be deemed to occur until it is terminated. If any

transaction is entered into on or after April 10, 1996, or any renewal

that requires the consent of the INHAM occurs on or after April 10,

1996, and the requirements of this exemption are satisfied at the time

the transaction is entered into or renewed, respectively, the

requirements will continue to be satisfied thereafter with respect to

the transaction. Nothing in this paragraph shall be construed as

exempting a transaction entered into by a plan 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

[[Page 15983]]

become prohibited but for this exemption. In determining compliance

with the conditions of the exemption at the time that the transaction

was entered into for purposes of the preceding sentence, section I(e)

will be deemed satisfied if the transaction was entered into between a

plan and a person who was not then a party in interest.

(f) Exemption Audit. An ``exemption audit'' of a plan must consist

of the following:

(1) A review of the written policies and procedures adopted by the

INHAM pursuant to section I(g) for consistency with each of the

objective requirements of this exemption (as described in section

IV(g)).

(2) A test of a representative sample of the plan's transactions in

order to make findings regarding whether the INHAM is in compliance

with (i) the written policies and procedures adopted by the INHAM

pursuant to section I(g) of the exemption and (ii) the objective

requirements of the exemption.

(3) A determination as to whether the INHAM has satisfied the

definition of an INHAM under the exemption; and

(4) Issuance of a written report describing the steps performed by

the auditor during the course of its review and the auditor's findings.

(g) For purposes of section IV(f), the written policies and

procedures must describe the following objective requirements of the

exemption and the steps adopted by the INHAM to assure compliance with

each of these requirements:

(1) The definition of an INHAM in section IV(a).

(2) The requirements of Part I and section I(a) regarding the

discretionary authority or control of the INHAM with respect to the

plan assets involved in the transaction, in negotiating the terms of

the transaction, and with regard to the decision on behalf of the plan

to enter into the transaction.

(3) That any procedure for approval or veto of the transaction

meets the requirements of section I(a).

(4) For a transaction described in Part I:

(A) that the transaction is not entered into with any person who is

excluded from relief under section I(e)(1), section I(e)(2), to the

extent such person has discretionary authority or control over the plan

assets involved in the transaction, or section I(f), and

(B) that the transaction is not described in any of the class

exemptions listed in section I(b).

(5) For a transaction described in Part II:

(A) If the transaction is described in section II(a),

(i) that the transaction is with a party described in section

II(a);

(ii) that the transaction occurs under the circumstances described

in section II(a) (1) and (2);

(iii) that the transaction does not extend beyond the period of

time described in section II(a)(3); and

(iv) that the percentage test in section II(a)(4) has been

satisfied or

(B) If the transaction is described in section II(b),

(i) that the transaction is with a party described in sections

II(b)(1);

(ii) that the transaction is not entered into with any person

excluded from relief under section II(b)(2) to the extent such person

has discretionary authority or control over the plan assets involved in

the lease transaction or section II(b)(3); and

(iii) that the percentage test in section II(b)(5) has been

satisfied.

(h) The term ``plan'' means a plan maintained by the INHAM or an

affiliate of the INHAM.

Signed at Washington, DC, 4th day of April 1996.

Alan D. Lebowitz,

Deputy Assistant Secretary for Program Operations, Pension and Welfare

Benefits Administration, U.S. Department of Labor.

[FR Doc. 96-8841 Filed 4-9-96; 8:45 am]

BILLING CODE 4510-29-P