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April 15, 2003
Memorandum for: Virginia C. Smith
Director of Enforcement, Regional Directors
From: Robert J. Doyle
Director of Regulations and Interpretations
Subject: Participant Loans to Corporate Directors and
Officers
May a plan administrator deny participant loans to directors and executive
officers of the sponsoring employer of the plan on the basis that such loans may
violate Section 13(k) of the Securities Exchange Act of 1934 without
contravening the requirement of section 408(b)(1) of ERISA that loans be made
available to all participants on a reasonably equivalent basis?
Section 402 of the Sarbanes-Oxley Act of 2002 added a new
subsection (k) to Section 13 of the Securities Exchange Act of 1934 (the “1934
Act”). Section 13(k) makes it unlawful for any issuer (as defined in
Section 2(a)(7) of the Sarbanes-Oxley Act of 2002)(1),
directly or indirectly, including through any subsidiary, to extend or
maintain credit, to arrange for the extension of credit, or to modify or
renew an extension of credit maintained by the issuer on the date of
enactment,(2) in the form of a personal
loan to or for any director or executive officer (or equivalent thereof).
The Department of Labor does not have interpretative authority with respect
to the 1934 Act.
Section 404 of ERISA requires, among other things, that
fiduciaries of employee benefit plans discharge their duties prudently and
solely in the interest of the plan’s participants and beneficiaries.
Section 404(a)(1)(D) requires that fiduciaries discharge their duties in
accordance with the documents and instruments governing the plan insofar as
such documents and instruments are consistent with the provisions of title I
of ERISA. Section 406(a)(1)(B) prohibits a fiduciary from causing an
employee benefit plan to engage in a loan between the plan and a party in
interest. Parties in interest include employees, officers and directors of
an employer sponsoring the plan.
Section 408(b)(1) exempts from the prohibited
transactions provisions of section 406 the making of a loan by an employee
benefit plan to a party in interest who is a participant or beneficiary of
the plan, provided that certain conditions are satisfied. Among other
things, section 408(b)(1)(A) and the Department’s regulations issued
thereunder, at 29 CFR § 2550.408b-1, provide that such loans must be made
available to all participants and beneficiaries of the plan on a reasonably
equivalent basis.
Section 514(d) of ERISA provides that nothing in Title I
of ERISA shall be construed to alter, amend, modify, invalidate, impair, or
supersede any other Federal law.
We understand that ERISA practitioners have raised the
question of whether section 13(k) of the 1934 Act prohibits directors and
executive officers of an employer from taking loans from employee pension
benefit plans. It has long been the view of the Department that fiduciaries
are responsible for administering their plans to assure compliance with both
ERISA and other applicable Federal laws, in recognition of the fact that
such other Federal laws are not preempted by ERISA.
In our view, a decision to disallow a participant loan
based on a reasonable question concerning the legality of the loan would not
be a failure to provide loans to all participants on a reasonably equivalent
basis and would not affect the plan's compliance with section 408(b)(1) or
29 C.F.R. § 2550.408b-1.
It is the view of this Office that, in view of the
uncertainty concerning the scope of section 13(k) of the 1934 Act, plan
fiduciaries of public companies may deny participant loans to officers and
directors (or the equivalent thereof) without violating the requirements of
section 404(a)(1) or the requirement of section 408(b)(1)(A) and the
regulation issued thereunder that loans be available to all participants and
beneficiaries on a reasonably equivalent basis. In stating this view, the
Department takes no position on the application of section 13(k) of the 1934
Act to participant loans.
Any questions concerning this matter may be directed to
Louis Campagna or David Lurie, Division of Fiduciary Interpretations,
202.693.8510.
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Section 2(a)(7) of the Sarbanes-Oxley
Act of 2002 defines “issuer” as “an issuer (as defined in section
3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the
securities of which are registered under section 12 of the Act (15 U.S.C.
78l), or that is required to file reports under section 15(d) (15 U.S.C.
78o(d)), or that files or has filed a registration statement that has
not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a
et seq.), and that it has not withdrawn.”
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July 30, 2002.
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