Proposed Class Exemption For Release of Claims and Extensions of
Credit in Connection With Litigation [02/11/2003]
Volume 68, Number 28, Page 6953-6958
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11100]
Proposed Class Exemption For Release of Claims and Extensions of
Credit in Connection With Litigation
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of proposed class exemption.
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SUMMARY: This document contains a notice of a proposed class 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, as amended
(the Code). The proposed class exemption would apply to transactions
engaged in by a plan in connection with the settlement of litigation.
This exemption is being proposed in response to concerns raised by the
pension community regarding the impact of ERISA's prohibited
transaction provisions on the settlement of litigation by employee
benefit plans with parties in interest. The proposed exemption, if
granted, would affect all employee benefit plans, the participants and
beneficiaries of such plans, and parties in interest with respect to
those plans engaging in the described transactions.
DATES: Written comments and requests for a public hearing shall be
submitted to the Department before March 28, 2003.
ADDRESSES: All written comments and requests for a public hearing
(preferably 3 copies) should be sent to: U. S. Department of Labor,
Employee Benefits Security Administration, Room N-5649, 200
Constitution Avenue, NW., Washington, DC 20210, Attention: Plan
Settlement Class Exemption Proposal. Comments may be sent by fax to
(202) 219-0204 or by e-mail to moffittb@pwba.dol.gov. The application
for exemption (Application Number D-11100), as well as all comments
received, will be available for public inspection in the Public
Documents Room, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Andrea W. Selvaggio, Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, Washington DC 20210 (202) 693-8540 (not a
toll-free number).
SUPPLEMENTARY INFORMATION: This document contains a notice that the
Department is proposing a class exemption from the restrictions of
section 406(a)(1)(A), (B) and (D) of the Act and from the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A), (B) and (D) of the Code. The exemption
described herein is being proposed by the Department on its own motion
pursuant to 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).\1\
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\1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1 (1996) 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. For purposes of this exemption,
references to specific provisions of Title I of the Act, unless
otherwise specified, refer also to the corresponding provisions of
the Code.
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I. General Background
Questions have been raised regarding whether a fiduciary that
agrees to settle litigation or threatened litigation by releasing the
plan's claims against a party in interest in exchange for consideration
has engaged in a prohibited transaction. In this regard, the prohibited
transaction provisions of the Act generally prohibit transactions
between a plan and a party in interest (including a fiduciary) with
respect to such plan. Specifically, section 406(a)(1)(A), (B) and (D)
of the Act states that a fiduciary with respect to a plan shall not
cause the plan to engage in a transaction, if he knows or should know
that such transaction constitutes a direct or indirect--
(A) Sale or exchange, or leasing, of any property between the plan
and a party in interest;
(B) Lending of money or other extension of credit between the plan
and a party in interest; or
[[Page 6954]]
(D) Transfer to, or use by or for the benefit of, a party in
interest, of any assets of the plan.
As noted in the General Information section of the Preamble of this
proposed class exemption, the fact that a transaction is subject to an
administrative exemption is not dispositive of whether the transaction
is in fact a prohibited transaction. Rather, the proposed exemption is
being published in response to uncertainty expressed on the part of
plan fiduciaries charged with the responsibility under ERISA for
determining whether it is in the interests of a plan's participants and
beneficiaries to enter into a settlement agreement with a party in
interest. The Department believes that this exemption will remove the
uncertainty surrounding this issue and allow plan fiduciaries to
properly carry out their responsibilities under ERISA.
II. Discussion of the Proposed Exemption
The Department is proposing this class exemption on its own motion
in order to facilitate settlement of litigation by plans. Currently,
two class exemptions provide limited relief for prohibited transactions
that may arise as a result of the remedy proposed by the parties and/or
the court in settlement of litigation or potential litigation where the
Department or the Internal Revenue Service (the Service) is involved
(the remedial transactions ). PTE 79-15 \2\ exempts certain remedial
transactions or activities specifically authorized or required by a
judicial order or a judicially approved settlement decree where the
Department or the Service is a party to the litigation. PTE 79-15
requires, among other things, that the transaction or activity be
approved by the court prior to its occurrence. Similarly, PTE 94-71 \3\
exempts certain remedial transactions authorized, prior to the
occurrence of such transactions, by the Department. PTE 94-71 is
available only to settle issues arising out of a Department of Labor
investigation of a plan. No relief is provided for the transactions
originally cited as violations by the Department. Under PTE 94-71,
relief is conditioned, among other things, on approval by the
Department, a written settlement agreement and notice to affected
participants and beneficiaries.
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\2\ 44 FR 26979 (5/8/79).
\3\ 59 FR 51216 (10/7/94), as corrected 59 FR 60837 (11/28/94).
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PTEs 79-15 and 94-71 recognize that, in some situations, the most
appropriate resolution for certain ERISA violations may be a remedy
that would otherwise be prohibited. For example, a plan may have
purchased property from a party in interest in violation of section
406(a)(1)(A) of the Act. In attempting to resolve this prohibited
transaction, the parties may find that another party in interest is the
only person willing and able to purchase the property from the plan.
However, without an exemption, this remedial transaction would also
violate section 406(a)(1)(A) of the Act. It is this second transaction,
the remedial transaction, that is the subject of relief under PTEs 79-
15 and 94-71, not the original transaction that led to the controversy.
The current proposed class exemption is more limited than PTEs 79-
15 and 94-71. It covers the transaction that occurs when the plan
exchanges or releases its cause of action in exchange for consideration
from parties in interest \4\ in settlement of litigation or threatened
litigation. It also covers certain limited extensions of credit
incident to the settlement. Unlike PTEs 79-15 and 94-71, this proposed
exemption does not provide relief for any remedial prohibited
transactions that the parties or the court may consider in an effort to
achieve a settlement. In the Department s view, it would not be
sufficiently protective of the interests of participants and
beneficiaries to permit such remedial prohibited transactions without
any involvement by either the Department or the Service. Therefore,
absent an applicable statutory, class, or individual exemption,
remedial prohibited transactions may not be entered into as part of a
settlement pursuant to this proposed exemption. However, the proposed
exemption does cover the receipt of cash by a plan in exchange for the
release by the plan of a claim against a party in interest in partial
or complete settlement of such claim.
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\4\ Throughout this discussion we refer to consideration paid by
or on behalf of a party in interest settling the case. This would
include consideration paid by a third party, such as an insurance
company, on behalf of the party in interest. It would also include
consideration paid by another party in interest, including a
fiduciary.
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The Department notes that many situations in which a plan settles
litigation involve no question of a prohibited transaction triggering
the need for an exemption. For example, if the parties in interest
alleged to have committed prohibited transactions agreed to correct
these transactions and this correction complies with section 4975 of
the Code, the Department has taken the position that the correction
itself will not result in a separate prohibited transaction under Title
I of the Act.\5\
Similarly, if a party in interest is willing to reimburse the plan
for its losses without requiring a release of the plan's claims, no
question of a prohibited transaction would arise because the plan,
having not given up its claim, has not engaged in a transaction with a
party in interest prohibited under section 406 of the Act. This may
occur, for example, where the plan sponsor, concerned that it might be
sued for breach of fiduciary duty, decides to make the plan whole for
losses.\6\
The Service recently confirmed its position that such a payment may
be ``a restoration payment'' not a contribution.\7\
Finally, the Department noted in AO 95-26A (October 17, 1995) that,
where a service provider and the plan are settling a dispute related to
the provision of services or incidental goods to the plan, the
statutory exemption found in section 408(b)(2) of the Act may apply.
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\5\ It should be noted that the Department has no jurisdiction
with respect to the meaning of the term correction under section
53.4941(e)-1(c)(1) of the Foundation Excise Tax Regulations, which
applies to correction of prohibited transactions under section 4975
of the Code, by reason of Temporary Pension Excise Tax Regulation
section 141.4975-13.
\6\ For example, see PTE 97-32, 62 FR 31631 (6/10/97).
\7\ Rev. Rul. 2002-45, 2002-29 IRB 116 (06/26/02). For the
payments to be considered restoration payments, not contributions,
there must be a reasonable risk of liability for breach of fiduciary
duty.
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The Department has recently received a number of informal inquires
regarding the settlement of class-action securities fraud cases where
the plan and/or its participants are shareholders. In many securities
fraud cases, the plan may also have a cause of action against some of
the same parties, based on ERISA violations. The defendants in the
ERISA case are likely to overlap with the defendants in the securities
fraud litigation. Given the rise in the number of cases in which plans
are involved, either as individual litigants or members of the class
action, the Department has determined that it would be appropriate to
provide an exemption for parties in interest in order to facilitate the
settlement of litigation with plans.
III. Description of the Proposed Exemption
The Department is proposing a retroactive and prospective exemption
from the restrictions of section 406(a)(1)(A), (B) and (D) of the Act
and from the taxes imposed by section
[[Page 6955]]
4975(a) and (b) of the Code by reason of section 4975(c)(1)(A), (B) and
(D) of the Code, for the following transactions effective January 1,
1975: (1) The release by the plan of a legal or equitable claim against
a party in interest in exchange for consideration in settlement of
litigation; and (2) an extension of credit by a plan to a party in
interest in connection with a settlement whereby the party in interest
agrees to repay, in installments, an amount owed to the plan.
a. Conditions Applicable to All Transactions
Both the retroactive and prospective parts of the proposed
exemption are conditioned upon the existence of a genuine controversy
involving the plan. The Department believes that this condition is
necessary to prevent the plan and parties in interest from engaging in
a sham transaction purporting to fall within this class exemption, thus
shielding a transaction, such as an extension of credit, that would
otherwise be prohibited. The existence of a genuine controversy must be
determined by an attorney retained to advise the plan. That attorney
must be independent of the other parties to the litigation.
The terms and conditions of the settlement must be negotiated by a
fiduciary that has no relationship to, or interest in, the other
parties involved in the litigation, other than the plan, that might
affect its best judgment as a fiduciary. The Department intends a
flexible standard for fiduciary independence, recognizing that the
exemption will encompass a wide range of situations, both in terms of
the type of litigation and the cost of pursuing such litigation. For
example, in some instances where there are complex issues and
significant amounts of money involved, it may be appropriate to hire an
independent fiduciary having no prior relationship to the plan, its
trustee, any parties in interest, or any other parties to the
litigation. In other instances, the plan's current trustee, assuming
that the trustee's conduct is not at issue, may be an appropriate
fiduciary to make the decision on behalf of the plan as to whether to
settle the litigation.
The proposed exemption also provides that the settlement must not
be part of an agreement, arrangement, or understanding designed to
benefit a party in interest. The intent of this condition is not to
deny direct benefits to other parties to a transaction but, rather, to
exclude transactions that are part of a broader overall agreement,
arrangement or understanding designed to benefit parties in interest.
b. Conditions Applicable to Retroactive Transactions
In addition to the conditions applicable to all transactions, if
the transactions addressed in this class exemption occurred between
January 1, 1975 and the date of publication of the final exemption, the
retroactive exemption with respect to any extensions of credit is
conditioned upon those extensions of credit bearing a reasonable
interest rate taking into account all the facts and circumstances of
the settlement.
c. Conditions Applicable to Prospective Transactions
In addition to the conditions applicable to all transactions, the
prospective exemption is conditioned upon all terms of the settlement
being specifically described in a written agreement or consent decree.
Further, the plan must participate in the settlement on a basis no less
favorable to the plan than the participation of similarly situated
persons that are not plans. As discussed below, in some instances the
plan may be able to negotiate a more favorable resolution of the issues
than the other parties, given the additional causes of action available
under ERISA.
The exemption is conditioned upon the settlement being reasonable,
given the likelihood of full recovery and the risk of litigation.
Settlement must be in the best interests of the participants and
beneficiaries of the plan. The Department notes that, under ERISA, the
plan may have additional causes of action not available to the other
plaintiffs in the same case. For example, where shareholders have
brought a class action securities fraud case against the Company and
its officers, the Company's employee benefit plan may be named as a
member of the class because it holds employer securities. Such a plan
may also have ERISA claims against the Company and some or all of its
officers, as well as against other parties. Before entering into a
settlement, the plan fiduciary should consider the value of these
additional claims. The plan fiduciaries may also be able to pursue
claims against defendants not named in the securities fraud case,
including knowing participants in the breach. Under certain
circumstances, the plan will have additional sources of recovery,
including fiduciary liability insurance, the plan's fidelity bond, and
the personal assets of the defendants, including their own employee
benefit plan accounts.\8\
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\8\ Section 206(d)(4) of the Act permits a plan to offset the
benefits of a participant under an employee pension plan against an
amount that the participant is ordered or required to pay, if the
order or requirement to pay arises under a judgment or conviction of
a crime involving the plan, a civil judgment, including a consent
order or decree, entered into by a court, or where there is a
settlement agreement between the participant and the Secretary of
Labor or the PBGC in connection with a violation of Part IV of
ERISA.
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Where a settlement includes an extension of credit to a party in
interest for purposes of repaying an amount owed in settlement of
litigation, the prospective exemption requires that the credit terms,
including the interest rate, be reasonable, but in no case may the rate
be less than the underpayment rate defined in section 6621(a)(2) of the
Code.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act which require, among other things, that a fiduciary
discharge his duties respecting the plan solely in the interests of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of plans
and their participants and beneficiaries and protective of the rights
of the participants and beneficiaries of plans;
(3) If granted, the proposed class exemption will be applicable to
a particular transaction only if the transaction satisfies the
conditions specified in the class exemption; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and the Code,
including statutory or administrative exemptions and transitional
rules.
[[Page 6956]]
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.
Executive Order 12866
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) having an annual effect on the economy of $100 million or
more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
Pursuant to the terms of the Executive Order, it was determined
that this action is ``significant'' under Section 3(f)(4) of the
Executive Order. Accordingly, this action has been reviewed by OMB.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data
can be provided in the desired format, reporting burden (time and
financial resources) is minimized, collection instruments are clearly
understood, and the impact of collection requirements on respondents
can be properly assessed.
Currently, EBSA is soliciting comments concerning the information
collection request (ICR) included in this Notice of Proposed Class
Exemption For Release of Claims and Extensions of Credit in Connection
with Litigation. Address requests for copies of the ICR to Joseph S.
Piacentini, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue, NW,
Room N-5718, Washington, DC 20210. Telephone (202) 693-8410; Fax: (202)
219-5333. These are not toll-free numbers.
The Department has submitted a copy of the proposed revision of a
currently approved information collection to OMB in accordance with 44
U.S.C. 3507(d) for review. The Department and OMB are particularly
interested in comments that:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the burden of the
collection of information, including the validity of the methodology
and assumptions used;
Enhance the quality, utility, and clarity of the information to be
collected; and
Minimize the burden of the collection of information on those who
are to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission of responses. Comments should be sent to the Office of
Information and Regulatory Affairs, Office of Management and Budget,
Room 10235, New Executive Office Building, Washington, DC 20503;
Attention: Desk Officer for the Employee Benefits Security
Administration.
Although comments may be submitted through April 14, 2003 OMB
requests that comments be received within 30 days of publication of the
Notice of Class Exemption For Release of Claims and Extensions of
Credit in Connection with Litigation to ensure their consideration.
The proposed class exemption would cover certain transactions
engaged in by a plan in connection with litigation. If adopted, the
class exemption would make clear that, under specified conditions,
plans may settle litigation by: (1) Releasing their claims against
parties in interest in exchange for payment by or on behalf of a party
in interest; and (2) entering into agreements with parties in interest
for payments of agreed-upon amounts in settlement of claims in
installments. Without this exemption, for reasons described in detail
in the General Background section of this notice, questions may be
raised regarding whether a fiduciary or party in interest that agrees
to a settlement on behalf of the plan has engaged in a prohibited
transaction under sections 406(a)(1)(A), (B), or (D) of the Act, which
state, in pertinent part, that a fiduciary shall not cause a plan to
engage in a transaction that constitutes a direct or indirect:
Sale or exchange, or leasing, of any property between the plan and
a party in interest;
Lending of money or other extension of credit between the plan and
a party in interest; or
Transfer to, or use by or for the benefit of, a party in interest,
or any assets of the plan.
The Department recognizes that in certain instances it may be
advantageous to the plan that is or potentially may be a party to
litigation for the plan fiduciary to settle the litigation and release
its claims. Settling a cause of action may be of greater benefit to a
plan than engaging in lengthy and possibly costly litigation, or
pursuing claims that defendants are unlikely to be capable of
satisfying, even where a settlement does not fully satisfy amounts at
issue. However, questions have been raised with the Department as to
whether such a settlement and release of claims, as well as certain
arrangements that may be made for payment in satisfaction of a
settlement, would result in a prohibited transaction between the plan
and the party in interest. Accordingly, the Department is proposing
this class exemption in order to facilitate the settlement of
litigation with plans.
In order to grant an exemption pursuant to section 408(a) of the
Act, the Department must, among other things, make a finding that the
terms of the exemption are protective of the rights of participants and
beneficiaries of a plan. To support making such a finding, the
Department normally imposes certain conditions on fiduciaries and
parties in interest that may make use of the exemption. The information
collection provisions of the proposed exemption are among these
conditions. The information collection provisions are found in sections
IV (a), IV (e), and V (a). These requirements are summarized as
follows:
Written Agreement. The proposed prospective exemption requires that
the terms of the settlement be specifically described in a written
agreement or consent decree. The Department believes that execution of
a written agreement between parties to litigation is usual and
customary business practice. Therefore, no additional burden for a
written settlement agreement is expected to be associated with the
exemption.
[[Page 6957]]
Acknowledgement by a Fiduciary. The proposed prospective exemption
also requires that a fiduciary acting on behalf of the plan acknowledge
in writing that it is a fiduciary with respect to the settlement of the
litigation. Under the Act, a person that exercises any authority or
control respecting disposition of [the plan's] assets,\9\ is considered
a fiduciary. It is anticipated that the applicable plan fiduciary will
incorporate this acknowledgement in the written agreement outlining the
terms and conditions of its retention as a plan service provider, and
already in existence, as part of usual and customary business practice.
As such, a written acknowledgement is not expected to impose any
measurable additional burden.
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\9\ [10]: Section 3(21)(A)(i) of ERISA.
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Recordkeeping. The proposed prospective exemption would require a
plan to maintain for a period of six years the records necessary to
enable certain persons to determine whether the conditions of the
proposed exemption had been met. The six-year recordkeeping requirement
is consistent with the requirements in section 107 of the Act as well
as general recordkeeping requirements for tax information under the
Code. The requirement is also consistent with other statutory
requirements. As such, the Department has not accounted for a burden
related to the recordkeeping requirement of this proposed exemption.
The proposed prospective exemption may affect all employee benefit
plans, the participants and beneficiaries of those plans, and parties
in interest to plans engaging in the specified transactions. It is not
possible to estimate the number of respondents or frequency of response
to the information collection requirements of the proposed exemption
due to the wide variety of litigation involving plans, parties to that
litigation, and jurisdictions in which litigation occurs. However, the
lack of an ascertainable number of settlements would not impact the
hour or cost burden because, as noted, no additional burden is expected
to be associated with the information collection requirements of the
proposed exemption.
The Department has on other occasions exempted classes of
transactions involving settlement agreements under specific
circumstances. Pursuant to PTE 94-71 (59 FR 51216), the Department
determined that the restrictions of sections 406(a)(1)(A) through (E)
and the taxes imposed by sections 4975(a) and 4975(b) of the Code, by
reason of section 4975(c)(1)(A) through (E) of the Code, shall not
apply to a transaction or activity that is authorized by a remedial
settlement agreement resulting from an investigation of an employee
benefit plan conducted by the Department. Because this proposed
exemption applies to settlement agreements involving plans and parties
in interest, and the release of claims by the plan, the subject matter
is considered to be sufficiently similar to suggest that both the
public and the government would be served by combining the clearance of
the information collection requests of both exemptions under one OMB
control number.
Type of Review: Revision of a currently approved collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Settlement Agreements Between a Plan and Party In Interest
(Prohibited Transaction Class Exemption 94-71; and Application No. D-
11100).
OMB Number: 1210-0091.
Affected Public: Individuals or households; Business or other for-
profit institutions; Not-for-profit institutions.
Frequency of Response: On occasion.
Total Respondents: 4 for existing ICR; no additional for proposed
revision.
Total Responses: 1,080 for existing ICR; no additional for proposed
revision.
Estimated Burden Hours: 40 for existing ICR; no additional for
proposed revision.
Estimated Annual Costs (Operating and Maintenance): $0.
Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval of the information
collection request; they will also become a matter of public record.
Written Comments
All interested persons are invited to submit written comments or
requests for a public hearing on the proposed exemption to the address
and within the time period set forth above. All comments will be made a
part of the record. Comments and hearing requests should state the
reasons for the writer's interest in the proposed exemption. Comments
received will be available for public inspection at the address set
forth above.
Section I. Covered Transactions
Effective January 1, 1975, the restrictions of section
406(a)(1)(A), (B) and (D) of the Act, and the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A), (B)
and (D) of the Code, shall not apply to the following transactions, if
the relevant conditions set forth in sections II through IV below are
met:
(a) The release by the plan of a legal or equitable claim against a
party in interest in exchange for consideration, given by, or on behalf
of, a party in interest to the plan in partial or complete settlement
of the plan's claim; and
(b) An extension of credit by a plan to a party in interest in
connection with a settlement whereby the party in interest agrees to
repay, in installments, an amount owed to the plan in settlement of a
legal or equitable claim by the plan against the party in interest.
Section II. Conditions Applicable to Transactions Described in Section
I
(a) An attorney or attorneys retained to advise the plan on the
claim, and having no relationship to any of the parties, other than the
plan, determines that there is a genuine controversy involving the
plan;
(b) The terms and conditions of the transaction are negotiated at
arms' length by a fiduciary who has no relationship to, or interest in,
any of the parties involved in the litigation, other than the plan,
that might affect the exercise of such person s best judgment as a
fiduciary; and
(c) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest.
Section III. Retroactive Conditions for Transactions Described in
Section I (b)
In addition to the conditions described in section II, the
following condition applies to the transactions described in section I
(b) entered into on or before the date of publication of the final
exemption in the Federal Register
(a) Any extension of credit by the plan to a party in interest in
connection with the settlement of a legal or equitable claim against
the party in interest is on terms, including the interest rate, that
are reasonable.
Section IV. Prospective Conditions for Transactions Described in
Section I (a) and (b)
In addition to the conditions described in section II, the
following conditions apply to the transactions described in section I
(a) and (b) entered into after the date of publication of the final
exemption in the Federal Register:
(a) All terms of the settlement are specifically described in a
written agreement or consent decree;
(b) The plan participates in the settlement on a basis no less
favorable to the plan then the participation of
[[Page 6958]]
similarly situated persons that are not plans;
(c) Assets other than cash may be received by the plan from a party
in interest in connection with a settlement only to the extent
necessary to rescind a transaction that is the subject of the
litigation. Such assets must be valued at their fair market value, as
of the date of the settlement;
(d) The settlement is reasonable in light of the plan's likelihood
of full recovery and the risks of litigation, and is in the best
interest of the participants and beneficiaries of the plan;
(e) The fiduciary acting on behalf of the plan has acknowledged in
writing that it is fiduciary with respect to the settlement of the
litigation on behalf of the plan; and
(f) Any loan or extension of credit to a party in interest by the
plan in connection with the settlement of a legal or equitable claim
against the party in interest is on terms, including the interest rate,
that are reasonable, but in no event is the interest rate less than the
underpayment rate defined in section 6621(a)(2) of the Code.
Section V. General Conditions
In addition to the conditions described in section II and IV, the
following conditions apply to all transactions described in section I
entered into after the date of publication of the final exemption in
the Federal Register:
(a) The plan maintains or causes to be maintained for a period of
six years the records necessary to enable the persons described below
in paragraph (b) to determine whether the conditions of this exemption
have been met, including documents evidencing the steps taken to
satisfy section IV (d), such as correspondence with attorneys or
experts consulted in order to evaluate the plan's claims, except that:
(1) This recordkeeping condition shall not be violated if, due to
circumstances beyond the control of the party responsible for
recordkeeping, the records are lost or destroyed prior to the end of
the six-year period,
(2) No party in interest other than the party responsible for
recordkeeping shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act or to the taxes imposed by
section 4975(a) and (b) of the Code if the records are not maintained
or are not available for examination as required by paragraph (b)
below; and
(b) (1) Except as provided below in paragraph (b)(2) and
notwithstanding any provisions of section 504(a)(2) and (b) of the Act,
the records referred to in paragraph (a) are unconditionally available
at their customary location for examination during normal business
hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the plan or any duly authorized employee or
representative of such fiduciary,
(iii) Any employer of participants and beneficiaries and any
employee organization whose members are covered by the plan, or any
authorized employee or representative of these entities; or
(iv) Any participant or beneficiary of the plan or the duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1)(ii)-(iv)
shall be authorized to examine trade secrets or commercial or financial
information which is privileged or confidential.
Signed at Washington, DC this 6th day of February, 2003.
Ivan L. Strasfeld,
Director, Office of Exemption , Determinations, Employee Benefits
Security Administration, Department of Labor.
[FR Doc. 03-3393 Filed 2-10-03; 8:45 am]
BILLING CODE 4510-29-P
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