PWBA
Office of Exemption Determinations PWBA
Office of Exemption Determinations
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Number D-7551]
Amendments to Prohibited Transaction Exemption (PTE) 78-19
Involving Insurance Company Pooled Separate Accounts
Agency: Pension and Welfare Benefits Administration, Department
of Labor.
Action: Adoption of amendments to PTE 78-19, and redesignation of the exemption as PTE 90-1.
Summary: This document amends PTE 78-19, a class exemption that permits insurance company pooled separate accounts, in which employee benefit plans have an interest, to engage in certain transactions, provided specified conditions are met. The amendments affect, among others, participants, beneficiaries and fiduciaries of plans that invest in pooled separate accounts, insurance companies, and other persons engaging in the described insurance companies, and other persons engaging in the described transactions.
Effective Date: The amendments to section 1(a) of PTE 78-19 are effective as of July 1, 1988. The amendment to section II(a)(3) is effective as of January 1, 1975.
For Further Information Contact: Paul Kelty of the Office of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor, (202) 523-8194 (this is not a toll-free number); or Cynthia Hawkins of the Plan Benefits Security Division, Office of the Solicitor, U.S. Department of Labor, (202) 523-9592 (this is not a toll-free number).
Supplementary Information: On July 26, 1989, notice was published in the Federal Register (54 FR 31092) of the pendency before the Department of proposed amendments to PTE 78-19 (43 FR 59915, December 22, 1978).1 PTE 78-19 provides an exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) and from the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1986 (the Code) by reason of certain provisions of section 4975(c)(1) of the Code.
The amendments to PTE 78-19 adopted by this notice were
requested in an exemption application dated March 3, 1988, on
behalf of the Prudential Insurance Company of America, the
Equitable Life Assurance Society of the United States, John
Hancock Mutual Life Insurance Company, Connecticut General Life
Insurance Company, the Mutual Life Insurance Company of New York
and the Principal Financial Group (the Applicants). The exemption
application was submitted pursuant to section 408(a) of ERISA and
section 4975(c)(2) of the Code2 and in accordance with ERISA
Procedure 75-1 (40 FR 18471, April 28, 1975).
Information collection requirements contained in PTE
78-19 have been approved by the Office of Management and Budget
under the provisions of the Paperwork Reduction Act of 1980 (Pub.
L. 96-511) and have been assigned OMB number 1210-0054 approved
for use through February 28, 1990.
The notice of pendency gave interested persons an
opportunity to comment on the proposal. Public comments were
received pursuant to the provisions of section 408(a) of ERISA
and section 4975(c)(2) of the Code and in accordance with the
procedures set forth in ERISA Procedure 75-1.
For the sake of convenience, the entire text of PTE 78-19,
as amended, has been reprinted with this notice. The Department
has redesignated the exemption as PTE 90-1.
1. Description of the Exemption
PTE 78-19 consists of four parts. Section I(a), the
exemption's basic provision, permits an insurance company pooled
separate account to engage in transactions, which otherwise might
be prohibited by sections 406 and 407(a) of ERISA and section
4975(c)(1) of the Code, with persons who are parties in interest
with respect to an employee benefit plan investing in the
account. The plan's participation in the account, under section
I(a), may not exceed 5 percent of the total assets in the pooled
separate account.
Under section II(a) of PTE 78-19, a party in interest with
respect to a plan is permitted in certain cases to furnish goods
to an insurance company pooled separate account in which the plan
has an interest exceeding the section I limitation. Section II(a)
also allows both the leasing of real property and the incidental
furnishing of goods by a pooled separate account to a party in
interest. Section II(a) contains a condition that the amount
involved in the furnishing of goods or leasing of real property
in any calendar year does not exceed the greater of $25,000 or
.025 percent of the fair market value of the assets of the pooled
separate account.
Three amendments to PTE 78-19 are granted pursuant to this
notice: (1) The percentage limitation in section I(a)(1) of PTE
78-19 is increased from 5 to 10 percent; (2) the percentage
limitation in section II(a)(3) is increased from .025 percent to
.5 percent; and (3) relief is included for investments by
insurance company pooled separate accounts in short-term
obligations issued by parties in interest.
The Department notes that all the relevant conditions
contained in PTE 78-19, with the exception of those modified by
these amendments, still must be met under the amended class
exemption. These conditions, among others, include a requirement
that the party in interest is not the insurance company (or an
affiliate) which holds the plan assets in its pooled separate
account or any other separate account of the insurance company.
In addition, the terms of the transaction must be at least as
favorable to the pooled separate account as those obtainable in
an arm's-length transaction with an unrelated party, and the
insurance company must maintain certain records for a period of
six years from the date of the transaction.
2. Discussion of Comments Received
The Department received two letters commenting on the
proposed amendments to PTE 78-19. The American Council of Life
Insurance (ACLI), a trade association for the life insurance
industry, expressed strong support for all three of the proposed
amendments. The ACLI represents that, as of the end of 1988,
member companies had over $113 billion of separate account
pension assets under management.
The ACLI represents that each of the proposed
amendments to the class exemption will facilitate the ability of
insurance companies to discharge their pooled separate account
management responsibilities in a manner so as to obtain optimal
performance commensurate with investment risk. The ACLI also
believes the amendments to be consistent with the objectives of
PTE 78-19.
The American Bankers Association (ABA) also submitted a
comment letter concerning the proposed amendments. The ABA is a
national trade association representing banks of all sizes, types
and locations. Nearly 4,000 banks offer fiduciary services to
employee benefit plans and others, according to the ABA, and over
500 banks operate more than 2,000 collective investment funds for
employee benefit plans.
The ABA generally supports the granting of the proposed
amendments so long as the Department provides comparable
exemptive relief for all competing investment vehicles. In
particular, the ABA believes that, if the percentage limitation
for plans participating in pooled separate accounts of insurance
companies is increased from 5 to 10 percent, concurrent relief
should be granted to others similarly situated. For this reason,
the ABA urges that the 5 percent limitation for plan
participation contained in PTE 80-51, the class exemption for
bank collective investment funds (45 49709, July 25, 1980),
should be increased to 10 percent. In this regard, the Department
notes that consideration of an amendment to PTE 80-51 is beyond
the scope of this proceeding. However, the Department wishes to
take the opportunity to state that the commentator may wish to
consider filing an exemption application for comparable class
relief under section 408(a) of ERISA.
General Information
The attention of interested persons is directed to the
following:
(1) The fact that a transaction is the subject of an
exemption under section 408(a) of ERISA does not relieve a
fiduciary or other party in interest or disqualified person from
certain other provisions of ERISA 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 ERISA which require, among other things, that a
fiduciary discharge his or her duties respecting the plan solely
in the interests of the participants and beneficiaries of the
plan; 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 ERISA, the Department makes the following determinations:
(i) The amendments set forth herein are
administratively feasible,
(ii) They are in the interests of plans and of their
participants and beneficiaries, and
(iii) They are protective of the rights of the
participants and beneficiaries of plans;
(3) The class exemption is applicable to a particular
transaction only if the transaction satisfies the conditions
specified in the exemption; and
(4) The amendments are supplemental to, and not in
derogation of, any other provisions of ERISA and the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of
whether the transaction is in fact a prohibited transaction.
Exemption
Accordingly, PTE 78-19 is amended under the authority of
section 408(a) of ERISA and section 4975(c)(2) of the Code and in
accordance with ERISA Procedure 75-1 (40 FR 18471, April 28,
1975).
Section I--Basic Exemption
Effective January 1, 1975, the restrictions of sections
406(a) 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 section
4975(c)(1)(A), (B), (C), or (D) of the Code, shall not apply to
transactions described below if the applicable conditions set
forth in section III are met.
(a) General exemption. Any transaction between a party
in interest with respect to a plan and an insurance company
pooled separate account in which the plan has an interest, or any
acquisition or holding by the pooled separate account of employer
securities or employer real property, if the party in interest is
not the insurance company which holds the plan assets in its
pooled separate account, any other separate account of the
insurance company, or any affiliate of the insurance company, and
if, at the time of the transaction, acquisition or holding,
either:
(1) The assets of the plan (together with the assets of
any other plans maintained by the same employer or employee
organization) in the pooled separate account do not exceed--
(i) 10 percent of the total of all assets in the pooled
separate account, if the transaction occurs prior to Febuary 20,
1979;
(ii) 5 percent of the total of all assets in the pooled
separate account, if the transaction occurs on or after February
20, 1979, and on or before June 30, 1988; or
(iii) 10 percent of the total of all assets in the
pooled separate account, if the transaction occurs on or after
July 1, 1988, or
(2) On or after July 1, 1988, the pooled separate
account is a specialized account that has a policy of investing,
and invests, substantially all of its assets in short-term
obligations (having a stated maturity date of one year or less or
having a maturity date of one year or less from the date of
acquisition by such specialized account), including but not
necessarily limited to--
(i) Corporate or governmental obligations or related
repurchase agreements;
(ii) Certificates of deposit;
(iii) Bankers acceptances; or
(iv) Variable amount notes of borrowers of prime credit.
(b) Multiple employer plans exemption. Any transaction
between an employer (or an affiliate of an employer) of employees
covered by a multiple employer plan and an insurance company
pooled separate account in which the plan has an interest, or any
acquisition or holding by the pooled separate account of employer
securities or employer real property, if at the time of the
transaction, acquisition or holding--
(1) In the case of a transaction occurring prior to
February 20, 1979, the employer is not a substantial employer
with respect to the plan (within the meaning of section
4001(a)(2) of the Act); or
(2) In the case of a transaction occurring on or after
February 20, 1979,
(i) The assets of the multiple employer plan in the
pooled separate account do not exceed 10 percent of the total
assets in the pooled separate account, and the employer is not a
substantial employer with respect to the plan (within the meaning
of section 4001(a)(2) of the Act), or
(ii) The assets of the multiple employer plan in the
pooled separate account exceed 10 percent of the total assets in
the pooled separate account, but the employer is not a
substantial employer and would not be a substantial employer with
respect to the plan within the meaning of section 4001(a)(2) of
the Act if "5 percent" were substituted for "10 percent" in that
definition.
(c) Excess holdings exemption for employee benefit
plans. Any acquisition or holding of qualifying employer
securities or qualifying employer real property by a plan (other
than through a pooled separate account) if--
(1) The acquisition or holding contravenes the
restrictions of sections 406(a)(1)(E), 406(a)(2) and 407(a) of
the Act solely by reason of being aggregated with employer
securities or employer real property held by an insurance company
pooled separate account in which the plan has an interest, and
(2) The requirements of either paragraph (a) or
paragraph (b) of this section are met.
(d) Employer securities and employer real property.
(1) Except as provided in subsection 2 of this
paragraph, any acquisition, sale or holding of employer
securities and any acquisition, sale, holding or lease of
employer real property by the insurance company pooled separate
account in which a plan has an interest and which does not meet
the requirements of paragraphs (a) or (b) of this section, if no
commission is paid to the insurance company or to the employer or
any affiliate of the employer in connection with the acquisition
or sale of employer securities or the acquisition, sale or lease
of employer real property, and--
(i) In the case of employer real property--
(a) Each parcel of employer real property and the
improvements thereon held by the pooled separate account are
suitable (or adaptable without excessive cost) for use by
different tenants, and
(b) The property of the pooled separate account, which
is leased or held for lease to others, in the aggregate, is
dispersed geographically.
(ii) In the case of employer securities--
(a) The employer security is (1) stock, or (2) a bond,
debenture, note, certificate, or other evidence of indebtedness
(the security described in (2) is hereinafter referred to as an
"obligation"), and
(b) The insurance company in whose pooled separate
account the security is held is not an affiliate of the issuer of
the security and, if the security is an obligation of the issuer,
either
(c) The pooled separate account already owns the
obligation at the time the plan acquires an interest in the
separate account and interests in the pooled separate account are
offered and redeemed in accordance with valuation procedures of
the pooled separate account applied on a uniform or consistent
basis, or
(d) Immediately after acquisition of the obligation:
(1) not more than 25 percent of the aggregate amount of
obligations issued in the issue and outstanding at the time of
acquisition is held by such plan, and (2) in the case of an
obligation which is a restricted security within the meaning of
Rule 144 under the Securities Act of 1933, at least 50 percent of
the aggregate amount referred to in (1) is held by persons
independent of the issuer. The insurance company, its affiliates
and any separate account of the insurance company shall be
considered persons independent of the issuer if the insurance
company is not an affiliate of the issuer.
(2) Provided that, in the case of a plan which is not
an eligible individual account plan (as defined in section
407(d)(3) of the Act), immediately after such acquisition the
aggregate fair market value of employer securities and employer
real property owned by the plan does not exceed 10 percent of the
fair market value of the assets of the plan.
(3) For the purposes of the exemption contained in
subsection (1) of this paragraph (d), the term "employer
securities" shall include securities issued by, and the term
"employer real property" shall include real property leased to, a
person who is a party in interest with respect to a plan (which
has an interest in the separate account) by reason of a
relationship to the employer described in section 3(14)(E), (G),
(H), or (I) of the Act.
Section II--Specific Exemptions
Effective January 1, 1975, the restrictions of sections
406(a)(1)(A), (B), (C), and (D), and 406(b)(1) and (2) of the Act
and the taxes imposed by sections 4975(a) and (b) of the Code by
reason of section 4975(c)(1)(A), (B), (C), (D), or (E) of the
Code shall not apply to the transactions described below provided
that the conditions of section III are met.
(a) Certain leases and goods. The furnishing of goods
to an insurance company pooled separate account by a party in
interest with respect to the plan, which plan has an interest in
the pooled separate account, or the leasing of real property of
the pooled separate account to a party in interest and the
incidental furnishing of goods to the party in interest by the
insurance company separate account, if--
(1) In the case of goods, they are furnished to or by
the pooled separate account in connection with the real property
investments of the pooled separate account;
(2) The party in interest is not the insurance company,
any other pooled separate account of the insurance company, or an
affiliate of the insurance company; and
(3) The amount involved in the furnishing of goods or
leasing of real property in any calendar year (including the
amount under any other lease or arrangement for the furnishing of
goods in connection with the real property investments of the
pooled separate account with the same party in interest, or any
affiliate thereof) does not exceed the greater of $25,000 or .5
percent of the fair market value of the assets of the pooled
separate account on the most recent valuation date of the account
prior to the transaction.
(b) Transactions with persons who are parties in
interest to the plan solely by virtue of being certain service
providers or certain affiliates of service providers. Any
transaction between an insurance company pooled separate account
and a person who is a party in interest with respect to a plan,
which plan has an interest in the pooled separate account, if--
(1) The person is a party in interest including a
fiduciary by reason of providing services to the plan, or by
reason of a relationship to a service provider described in
section 3(14)(F), (G), (H), or (I) of the Act, and the person
exercises no discretionary authority, control, responsibility, or
influence with respect to the investment of plan assets in the
pooled separate account and has no discretionary authority,
control, responsibility, or influence with respect to the
management or disposition of the plan assets held in the pooled
separate account; and
(2) The person is not an affiliate of the insurance
company.
(c) Management of real property. Any services provided
to an insurance company pooled separate account (in which a plan
has an interest) by the insurance company or its affiliate in
connection with the management of the real property investments
of the pooled separate account, if the compensation paid to the
insurance company or its affiliate for the services does not
exceed the cost of the services to the insurance company or its
affiliate.
(d) Transactions involving places of public
accommodation. The furnishing of services, facilities and any
goods incidental to such services and facilities by a place of
public accommodation owned by an insurance company pooled
separate account, to a party in interest with respect to a plan,
which plan has an interest in the pooled separate account, if the
services, facilities and incidental goods are furnished on a
comparable basis to the general public.
Section III--General Conditions
(a) At the time the transaction is entered into, and at
the time of any subsequent renewal thereof that requires the
consent of the insurance company, the terms of the transaction
are not less favorable to the pooled separate account than the
terms generally available in arm's-length transactions between
unrelated parties.
(b) The insurance company maintains for a period of six
years from the date of the transaction the records necessary to
enable the persons described in paragraph (c) of this section to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be deemed to
have occurred if, due to circumstances beyond the control of the
insurance company, the records are lost or destroyed prior to the
end of the six-year period, and (2) no party in interest shall be
subject to the civil penalty which 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 (c) below.
(c)(1) Except as provided in subsection 2 of this
paragraph and notwithstanding any provisions of subsections
(a)(2) and (b) of section 504 of the Act, the records referred to
in paragraph (b) of this section are unconditionally available at
their customary location for examination during normal business
hours by:
(i) Any duly authorized employee or representative of
the Department of Labor or the Internal Revenue Service,
(ii) Any fiduciary of a plan who has authority to
acquire or dispose of the interests of the plan in the separate
account, or any duly authorized employee or representative of
such fiduciary,
(iii) Any contributing employer to any plan which has
an interest in the pooled separate account or any duly authorized
employee or representative of that employer,
(iv) Any participant or beneficiary of any plan which
has an interest in the pooled separate account or any duly
authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described in subparagraphs (ii)
through (iv) of this paragraph shall be authorized to examine an
insurance company's trade secrets or commercial or financial
information which is privileged or confidential.
Section IV--Definitions and General Rules
For purposes of sections I through III above,
(a) The term "multiple employer plan" means an employee
plan which satisfies at least the requirements of section
3(37)(A)(i), (ii) and (v) of the Act and section 414(f) (1)(A),
(B), and (E) of the Code.
(b) An "affiliate" of a person includes--
(1) Any person directly or indirectly, through one or
more intermediaries, controlling, controlled by, or under common
control with the person;
(2) Any officer, director, employee (including, in the
case of an insurance company, an insurance agent thereof, whether
or not the agent is a common law employee of the insurance
company), or relative of, or partner in, any such person; and
(3) Any corporation or partnership of which such person
is an officer, director, partner, or employee.
(c) The term "control" means the power to exercise a
controlling influence over the management or policies of a person
other than an individual.
(d) The term "relative" means a "relative" as that term
is defined in section 3(15) of the Act (or a "member of the
family" as that term is defined in section 4975(e)(6) of the
Code), or a brother, a sister, or a spouse of a brother or
sister.
(e) General. (i) The time as of which any transaction,
acquisition, or holding occurs for purposes of this exemption is
the date upon which the transaction is entered into (or the
acquisition is made) and the holding commences. Thus, for
purposes of this exemption, if any transaction is entered into,
or an acquisition is made, on or after January 1, 1975, or a
renewal which requires the consent of the insurance company
occurs on or after January 1, 1975, and the requirements of this
exemption are satisfied at the time the transaction is entered
into or renewed, respectively, or at the time the acquisition is
made, the requirements will continue to be satisfied thereafter
with respect to the transaction or acquistion and the exemption
shall apply thereafter to the continued holding of the securities
or property so acquired. This exemption also applies to any
transaction or acquisition entered into, or holding commencing,
prior to January 1, 1975, if either the requirements of this
exemption would have been satisfed on the date the transaction
was entered into or acquisition was made (or on which the holding
commenced), or the requirements would have been satisfied on
January 1, 1975, if the transaction had been entered into,
acquisition was made, or if the holding had commenced, on January
1, 1975. Notwithstanding the foregoing, this exemption shall
cease to apply to a holding exempt by virtue of section I(a)
above at such time as the interest of the plan in the pooled
separate account exceeds the percentage interest limitation of
section I(a), if the excess results solely from an increase in
the amount of consideration allocated to the pooled separate
account by the plan.
(ii) Each plan shall be considered to own the same
fractional share of each asset (or portion thereof) in the pooled
separate account as its fractional share of total assets in the
pooled separate account on the most recent preceding valuation
date of the account.
Signed at Washington, D.C., this 23rd day of January 1990.
Alan D. Lebowitz
Deputy Assistant Secretary for
Program Operations
Pension and Welfare Benefits
Administration
U.S. Department of Labor
1On August 3, 1989, due to typesetting errors, certain corrections of the July 26 publication were published in the Federal Register (54 FR 32024).
2 Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), effective December 31, 1978 (44 FR 1065, January 3, 1979), transferred the authority of the Secretary of the Treasury to issue exemptions of this type to the Secretary of Labor.
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