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March 25, 2005
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2005-04A
ERISA Sec. 406(b)
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Ms. Norma M. Sharara
Buchanan Ingersoll, PC
1776 K Street, NW, Suite 800
Washington, DC 20006-2365
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Dear Ms. Sharara:
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This is in response to your request for guidance under
the Employee Retirement Income Security Act of 1974 (ERISA). In
particular, you request an advisory opinion that the proposed investment
of assets of an employee retirement plan (the Plan) in a mutual fund (the
Fund) will not constitute a per se prohibited transaction under section
406 of ERISA.(1) The Plan is
sponsored by a foundation (the Foundation) and the Fund is a registered
open-ended investment company that is advised and distributed by an
investment advisor (the Advisor).
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You represent that the Foundation is a tax-exempt
organization described in Code section 501(c)(3). The Foundation was
organized under Ohio law as a non-profit corporation, and its principal
place of business is currently located in New York City. The Foundation
has functioned as a private foundation whose principal purpose is to
support other operating charitable organizations. It is exempt from
federal income taxation and has been classified by the Internal Revenue
Service (IRS) as a private foundation under Code section 509. As of
December 31, 2002, the Foundation had approximately $305,000,000 in
assets. The Foundation, in keeping with the wishes of its founder is
time-limited, and expects to disburse substantially all of its assets by
2010.
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Because the Foundation expects to bring its operations to
a close by 2010, the level of grant-making will accelerate significantly in
the coming years. Prior to 2002, the Foundation did not have any paid staff.
The Foundation hired nine individuals in 2002 essentially to prepare for and
carry out the increased grant-making activities that the Foundation expects
to occur between 2002 and 2010 as the Foundation winds down its activities
and operations. The Plan was established in 2002 on behalf of these nine
employees.
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The Foundation is governed by a three-person board of
trustees (the Board), none of whom are currently employees of the
Foundation or participants in the Plan. One trustee also serves as the
chief executive officer of the Foundation, and will soon become an
employee of the Foundation. Another trustee serves as a vice-president of
the Foundation.
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The Plan is a defined contribution plan covering nine
participants and is intended to qualify under Code section 401(a). As of
December 31, 2002, the Plan had net assets of $163,652. Investment
decisions for the plan are made by the Foundation. The Foundation is also
the plan administrator and named fiduciary of the Plan. The Board, as the
decision-maker for the Foundation, carries out the Foundation’s
fiduciary responsibilities on behalf of the Plan. The Board also serves as
the Plan’s trustee, in which capacity it is subject to direction by the
Foundation. The Board has determined to allocate the Plan’s investments
equally between equity and interest-bearing securities.
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The Fund invests primarily in common stocks and is
managed using a “value” strategy. The Fund has consistently
outperformed its benchmark, the S&P 500 Index, over the last 10 years.
A trustee and member of the Board is the President and Chief Executive
Officer of the Advisor. He also holds a 22.9% ownership interest in the
Advisor. Neither the Foundation nor any of the other trustees holds any
ownership interest in, or has any other relationship with, the Advisor.
The Board proposes to invest up to 25% of the Plan’s assets in the Fund.
The remaining allocation to equity securities will be invested in other
mutual funds that are unrelated to the Advisor. The Board has determined
that this allocation would be consistent with the Plan’s investment
policy.
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This trustee is also one of three Advisor portfolio
managers charged with day-to-day management of the Fund’s assets. The Fund
pays the Advisor an annual investment advisory fee of 1% of the Fund’s net
asset value, reduced by certain expenses that the Advisor reimburses to the
Fund. The Fund’s independent Board of Directors is responsible for
approving the investment advisory agreement between the Fund and the
Advisor. The Fund imposes no sales charges, exchange fees, or redemption
fees.
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You represent that the trustee’s compensation for his
services on behalf of the Advisor is not affected by the total amount of
assets under management by the Fund. As of December 31, 2002, the Fund
held net assets of approximately $3.9 billion.
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You request an opinion that the Plan’s investment of
up to 25% of its assets in the Fund will not result in a prohibited
transaction under section 406 of ERISA.
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Section 3(21) of ERISA provides that a person is a
fiduciary with respect to a plan to the extent he exercises any
discretionary authority or control respecting the management of the plan
or the management or disposition of the assets of the plan. A plan’s
administrator and named fiduciary by virtue of having those positions,
must have or exercise discretionary authority or control respecting the
management of the plan or the management or disposition of its assets.(2)
The Foundation is the Plan’s administrator and named fiduciary.
The Board exercises the Foundation’s fiduciary responsibilities on
behalf of the plan. Accordingly, all trustees and members of the Board are
fiduciaries with respect to the Plan.
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Section 406(b)(1) of ERISA prohibits a fiduciary from
dealing with the assets of the plan in his own interest or for his own
account. Section 406(b)(2) of ERISA prohibits a fiduciary with respect to a
plan from acting in any transaction involving the plan on behalf of a party,
or represent a party, whose interests are adverse to the interests of the
plan or of its participants and beneficiaries.
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The Department has explained in regulation 29 CFR
§2550.408b-2(e) that the prohibitions of section 406(b) are imposed upon
fiduciaries to deter them from exercising the authority, control, or
responsibility that makes them fiduciaries when they have interests that
may conflict with the interests of the plans for which they act. Thus, a
fiduciary may not use the authority, control, or responsibility that makes
him a fiduciary to cause a plan to pay an additional fee to such
fiduciary, or to a person in which he has an interest that may affect the
exercise of his best judgment as a fiduciary, to provide a service.
However, regulation 29 CFR §2550.408b-2(e)(2) provides that a fiduciary
does not engage in an act described in section 406(b)(1) of ERISA if the
fiduciary does not use any of the authority, control, or responsibility
that makes him a fiduciary to cause a plan to pay additional fees for a
service furnished by such fiduciary or to pay a fee for a service
furnished by a person in which the fiduciary has an interest that may
affect the exercise of his judgment as a fiduciary.
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One member of the Board and trustee of the Plan is a
significant owner and the President and Chief Executive Officer of the
Advisor, the investment advisor for the Fund. In addition, he is one of
the portfolio managers of the Fund, involved in the day-to-day operation
of the Fund. It is the opinion of the Department that based on these
factors, taken together, this trustee has an interest in the Fund that may
affect his best judgment as a fiduciary of the Plan regarding the decision
whether to invest Plan assets in the Fund. Accordingly, if that trustee
uses any of the authority, control, or responsibility that makes him a
fiduciary to cause the Plan to invest in the Fund, the trustee will engage
in a violation of section 406(b)(1) and 406(b)(2).
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The Department has stated in other situations involving
a fiduciary who has this type of conflict of interest that the fiduciary
can avoid engaging in a transaction described in section 406(b)(1) and
406(b)(2) of ERISA by removing himself from all consideration of the
transaction in question, and not exercising any of the authority, control,
or discretion that makes him a fiduciary to cause the plan to enter into
the transaction, as long as there is no arrangement, agreement, or
understanding regarding the proposed transaction.(3)
We note, however, that if a fiduciary has or obtains material
information, including information regarding plan investments, that would
be necessary in order for other plan fiduciaries to make an appropriate
and prudent decision with respect to the purchase, holding, or disposition
of a particular investment, we believe the fiduciary’s duties under
section 404 of ERISA would require informing the deciding fiduciaries of
that information.(4)
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ERISA's general standards of fiduciary conduct also
would apply to the proposed investment. Under section 404(a)(1), the
responsible Plan fiduciaries must act prudently and solely in the interest
of the Plan participants and beneficiaries in deciding whether to make an
investment of Plan assets in the Fund.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this
letter is issued subject to the provisions of the procedure, including
section 10 relating to the effect of advisory opinions.
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Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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Under Reorganization Plan No. 4 of
1978 (43 FR 47713, October 17, 1978), the authority of the Secretary
of the Treasury to issue rulings under section 4975 of the Internal
Revenue Code (the Code) has been transferred, with certain exceptions
not here relevant, to the Secretary of Labor. Therefore, the
references in this letter to specific sections of ERISA should be
taken as referring also to the corresponding sections of the Code.
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See, Interpretive Bulletin 75-8, D-3
(29 CFR 2509.75-8, D-3)
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See, Advisory Opinion 99-09A (May
21, 1999) and Advisory Opinion 79-72A (October 10, 1979)
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We offer no opinion on the impact
that insider-trading rules under the Federal securities laws may have
on the dissemination of such information to other fiduciaries. Such
rules are under the jurisdiction of the Securities and Exchange
Commission.
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