Amendment to Prohibited Transaction Exemption (PTE) 75-1,
Exemptions From Prohibitions Respecting Certain Classes of Transactions
Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting
Dealers and Banks
[02/03/2006]
Volume 71, Number 23, Page 5883-5887
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11184]
Amendment to Prohibited Transaction Exemption (PTE) 75-1,
Exemptions From Prohibitions Respecting Certain Classes of Transactions
Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting
Dealers and Banks
AGENCY: Employee Benefits Security Administration.
ACTION: Final Amendment to PTE 75-1, Part II and Part V.
-----------------------------------------------------------------------
SUMMARY: This document amends PTE 75-1, Part II and Part V (40 FR
50845, October 31, 1975). PTE 75-1, Part II, permits the purchase or
sale of a security in a principal transaction between an employee
benefit plan and a broker-dealer, reporting dealer, or bank. PTE 75-1,
Part V, permits an extension of credit to a plan by a broker-dealer in
connection with the purchase or sale of securities. The amendment
affects participants, beneficiaries and fiduciaries of employee benefit
plans, and broker-dealers, reporting dealers and banks entering into
the described transactions.
DATES: Effective Date: This amendment is effective January 1, 1975.
FOR FURTHER INFORMATION CONTACT: Brian Buyniski or Karen Lloyd, Office
of Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, Room N-5649, 200 Constitution Avenue, NW.,
Washington, DC 20210, 202-693-8540. (This is not a toll free number.)
SUPPLEMENTARY INFORMATION: On April 28, 2004, notice was published in
the Federal Register (69 FR 23216) of the pendency before the
Department of Labor (the Department) of a proposed amendment to PTE 75-
1, Part II and Part V. PTE 75-1 provides exemptive relief from certain
of the restrictions of section 406 of the Employee Retirement Income
Security Act of 1974 (ERISA or the Act), and from certain taxes imposed
by section 4975(a) and (b) of the Internal Revenue Code of 1986 (the
Code), by reason of section 4975(c)(1) of the Code. The amendment was
proposed by the Department on its own motion, 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 part 2570, subpart B (55 FR
32836, August 10, 1990).\1\
---------------------------------------------------------------------------
\1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. at 214 (2000 ed.) 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 specific
provisions of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
---------------------------------------------------------------------------
The notice gave interested persons an opportunity to comment or to
request a hearing on the proposed amendment. The Department received
three comments which are discussed below. One commenter requested a
public hearing if the Department determined to modify a specific
provision of the exemption. As the Department has not modified that
provision in the final exemption, a public hearing will not be held
with regard to this amendment.
Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
the
[[Page 5884]]
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.
This amendment has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this amendment is not a ``significant
regulatory action'' under Executive Order 12866, section 3(f).
Accordingly, it does not require an assessment of potential costs and
benefits under section 6(a)(3) of that order.
Paperwork Reduction Act
The information collection request (ICR) included in the existing
PTE 75-1 is currently approved under Office of Management and Budget
(OMB) control number 1210-0092 (through March 31, 2007). The amendment
does not modify the information collection provisions of the exemption.
Therefore, the Department has not submitted an ICR to OMB in connection
with this Final Amendment to PTE 75-1.
Description of the Exemption
Part I of PTE 75-1 provides relief for agency transactions and
services; \2\ Part II for principal transactions; Part III for
underwritings; Part IV for market-making; and Part V for extension of
credit.
---------------------------------------------------------------------------
\2\ Part I(a) expired on May 1, 1978. It ultimately was replaced
by PTE 86-128 (51 FR 41686, Nov. 18, 1986).
---------------------------------------------------------------------------
PTE 75-1, Part II
Part II of PTE 75-1 provides relief from the restrictions of 406(a)
of ERISA and the taxes imposed by section 4975(a) and (b) of the Code,
by reason of section 4975(c)(1)(A) through (D) of the Code, for the
purchase or sale of a security between an employee benefit plan and:
(1) A broker-dealer registered under the Securities Exchange Act of
1934 (the 1934 Act); (2) a reporting dealer who makes primary markets
in securities of the U.S. Government or of any agency thereof and
reports daily to the Federal Reserve Bank of New York its positions
with respect to Government securities and borrowings thereon; or (3) a
bank supervised by the United States or a State.\3\
---------------------------------------------------------------------------
\3\ The exemption defines the terms ``broker-dealer,''
``reporting dealer'' and ``bank'' to include such entities and any
affiliate thereof. The term ``affiliate'' is defined as in 29 CFR
2510.3-21(e) and 26 CFR 54.4975-9(e).
---------------------------------------------------------------------------
The exemption further provides relief from the restrictions of
section 406(b) of ERISA and the taxes imposed by section 4975(a) and
(b) of the Code, by reason of section 4975(c)(1)(E) and (F) of the
Code, for the purchase or sale by a plan of securities issued by an
open-end investment company registered under the Investment Company Act
of 1940, provided that a fiduciary with respect to the plan is not a
principal underwriter for, or affiliated with, such investment company
within the meaning of sections 2(a)(29) and 2(a)(3) of the Investment
Company Act of 1940 (the Mutual Fund Exemption).
The conditions of PTE 75-1, Part II, require that a broker-dealer
must customarily purchase and sell securities for its own account in
the ordinary course of its business as a broker-dealer. The conditions
further require that reporting dealers and banks must customarily
purchase and sell Government securities for their own accounts in the
ordinary course of their businesses, and that any purchase or sale
between the plan and such reporting dealer or bank be limited to a
purchase or sale of Government securities.
All transactions entered into pursuant to Part II must be at least
as favorable to the plan as an arm's length transaction with an
unrelated party would be, and must not be, at the time of the
transaction, a prohibited transaction within the meaning of section
503(b) of the Code.
Except with respect to the Mutual Fund Exemption, Part II as
originally granted provided that the broker-dealer, reporting dealer or
bank may not be a fiduciary with respect to the plan, and such broker-
dealer, reporting dealer or bank may be a party in interest or
disqualified person with respect to the plan solely by reason of
section 3(14)(B) of the Act or section 4975(e)(2)(B) of the Code or a
relationship to a person described in those sections. For purposes of
this condition, a broker-dealer, reporting dealer or bank is not deemed
to be a fiduciary with respect to a plan solely by reason of providing
securities custodial services for a plan. Lastly, the exemption for
principal transactions also contains certain recordkeeping
requirements.
PTE 75-1, Part V
Part V of PTE 75-1 provides relief from the restrictions of section
406 of ERISA and the related excise taxes imposed by section 4975(a)
and (b) of the Code, by reason of section 4975(c)(1) of the Code, for
any extension of credit to a plan by a broker or dealer registered
under the 1934 Act.\4\ As originally granted, Part V provided that the
broker-dealer extending credit may not be a fiduciary with respect to
any assets of the plan, unless no interest or other consideration is
received by such fiduciary or any affiliate in connection with the
extension of credit.
---------------------------------------------------------------------------
\4\ The exemption defines the terms ``broker'' and ``dealer'' to
include such entities and any affiliate thereof. The term
``affiliate'' is defined as in 29 CFR 2510.3-21(e) and 26 CFR
54.4975-9(e).
---------------------------------------------------------------------------
Under Part V, the extension of credit must be made in connection
with the purchase or sale of securities, must be lawful under the 1934
Act, and may not be a prohibited transaction within the meaning of
section 503(b) of the Code. Lastly, the exemption for extensions of
credit also contains certain recordkeeping requirements.
Amendment
As part of the proposed amendment, the Department repositioned the
following language found in section (d) of Part II of the exemption:
Neither the restrictions of this paragraph nor (if the other
conditions of this exemption are met) the restrictions of section
406(b) of the Act and the taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1)(E) and (F) of the Code,
shall apply to the purchase or sale by the plan of securities issued
by an open-end investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1 et seq.), provided that a
fiduciary with respect to the plan is not a principal underwriter
for, or affiliated with, such investment company within the meaning
of sections 2(a)(29) and 2(a)(3) of the Investment Company Act of
1940 (15 U.S.C. 80a-2(a)(29) and 80a-2(a)(3)).
The Department included the relief provided by this provision in a
new paragraph (2) of Part II of the exemption for principal
transactions. The Department also proposed to amend the language of
this section to clarify that the fiduciary referenced therein is the
[[Page 5885]]
fiduciary who makes the decision on behalf of the plan to enter into
the transaction. The Department also requested public comment on the
current utility of this exemption.
The Department additionally proposed to amend another provision of
section (d) of Part II, which stated, in relevant part, that:
Such broker-dealer, reporting dealer or bank is not a fiduciary
with respect to the plan, and such broker-dealer, reporting dealer
or bank is a party in interest or disqualified person with respect
to the plan solely by reason of section 3(14)(B) of the Act or
section 4975(e)(2)(B) of the Code or a relationship to a person
described in such sections. For purposes of this paragraph, a
broker-dealer, reporting dealer, or bank shall not be deemed to be a
fiduciary with respect to a plan solely by reason of providing
securities custodial services for a plan.
Under the proposed amendment, the exemption permits plans to engage
in transactions with broker-dealers, reporting dealers, banks and their
affiliates except where the broker-dealer, reporting dealer, bank or an
affiliate has or exercises any discretionary authority or control
(except as a directed trustee) with respect to the investment of plan
assets involved in the transaction, or renders investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to the
investment of those assets.\5\
---------------------------------------------------------------------------
\5\ Nothing herein should be construed to imply that a directed
trustee is not a fiduciary under the Act. See 29 U.S.C. 103(a)(1). A
plan may expressly provide that a trustee is subject to the
direction of a named fiduciary who is not a trustee, in which case
the trustee shall be subject to proper directions of such fiduciary
which are made in accordance with the terms of the plan and which
are not contrary to the Act.
---------------------------------------------------------------------------
The Department likewise proposed to amend condition (a)(2) of PTE
75-1, Part V, which required that the party in interest or disqualified
person providing the extension of credit to the plan:
[i]s not a fiduciary with respect to any assets of such plan,
unless no interest or other consideration is received by such
fiduciary or any affiliate thereof in connection with such extension
of credit.
Under the proposed amendment, section (a)(2) states that the party
in interest or disqualified person extending credit to the plan:
does not have or exercise any discretionary authority or control
(except as a directed trustee) with respect to the investment of the
plan assets involved in the transaction, nor does it render
investment advice (within the meaning of 29 CFR section 2510.3-
21(c)) with respect to those assets, unless no interest or other
consideration is received by the party in interest or disqualified
person or any affiliate thereof in connection with such extension of
credit.
Discussion of Comments
The Department received one comment concerning the effective date
of the proposed amendments. The commenter requested that, with respect
to the proposed amendments to condition (d) of Part II and condition
(a)(2) of Part V, the Department state that it was the intention of the
Department at the time of the granting of the final exemption in 1975
to focus only on fiduciaries with respect to the plan assets involved
in the transaction, as opposed to any fiduciary of the plan. The
commenter referenced the following language in the preamble of the
proposed exemption in August 1975 regarding proposed regulations under
the definition of fiduciary at section 3(21) of the Act:
It should be noted, moreover, that under the regulations
proposed in conjunction with these proposed exemptions relating to
the definition of the term ``fiduciary,'' a person who is a plan
fiduciary would be deemed to be a fiduciary only with respect to
those plan assets with respect to which he exercises those functions
which make him a fiduciary.
40 FR 33566. The Department received a follow up submission from this
commenter requesting that, in order to avoid confusion and uncertainty,
this amendment to PTE 75-1 be made retroactive to October 31, 1975. The
Department also has been urged informally to adopt a retroactive
effective date.
While the Department acknowledges that some confusion may have
arisen from the fact that two conditions of PTE 75-1, Part II and Part
V, regarding fiduciaries, were broader than the Department's
regulations regarding the definition of a fiduciary under section 3(21)
of the Act, the Department is unable to concur with the commenter that
its original intent with respect to such conditions was in fact to
limit them to fiduciaries with respect to the plan assets involved in
the transaction.\6\ The conditions contained in the Department's
administrative exemptions are designed to ensure that the Department
can make findings required pursuant to section 408(a) of ERISA and
4975(c)(2) of the Code that the exemption is administratively feasible,
and in the interests of, and protective of the rights of, plan
participants and beneficiaries. The Department's regulations do not
govern the scope of the conditions of its administrative exemptions.
Therefore, the fact that a regulation defining the term ``fiduciary''
may have focused on the plan assets with respect to which a person
exercises fiduciary functions does not necessarily govern the meaning
of a condition of an administrative exemption. Prior to this amendment,
the conditions in PTE 75-1, Part II and V, clearly referred to a
fiduciary with respect to a plan.
---------------------------------------------------------------------------
\6\ The Department notes that the language quoted by the
commenter appeared in the preamble to Part III of PTE 75-1, which is
not the subject of this amendment.
---------------------------------------------------------------------------
Nevertheless, in the Department's view, an interpretation of the
conditions of PTE 75-1, Part II and Part V, which focused on
fiduciaries with respect to the plan assets involved in the transaction
would not have created an undue risk of loss of plan assets. As the
Department has concluded that the amendments are sufficiently
protective of plan assets on a prospective basis, the Department
believes a similar conclusion would dictate in favor of granting the
amendments on a retroactive basis. Accordingly, the Department has
determined to make these amendments to PTE 75-1 retroactive to January
1, 1975, which is the effective date of PTE 75-1.
The Department received three comments on the current utility of
the Mutual Fund Exemption. Based on the information received, the
Department believes that additional time is needed to more fully
consider the issues raised by the commenters. However, the Department
does not wish to unduly delay finalization of the other amendments to
PTE 75-1. Accordingly, this document contains final amendments to Parts
II and V of PTE 75-1 and adopts the repositioning of the Mutual Fund
Exemption to paragraph (2) of PTE 75-1, Part II, and adopts the
clarifying language. As a result, the Mutual Fund Exemption remains in
effect pending further action by the Department.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
granted 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 with respect to a plan to which the exemption is
applicable 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, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the plan's participants and beneficiaries and in a prudent fashion in
accordance with subsection (a)(1)(B) of section 404 of the Act; nor
does it affect
[[Page 5886]]
the requirement of section 401(a) of the Code that a plan must operate
for the exclusive benefit of employees of the employer maintaining the
plan and their beneficiaries;
(2) The Department finds that the amended exemption is
administratively feasible, in the interests of the plan and of its
participants and beneficiaries, and protective of the rights of
participants and beneficiaries of the plan;
(3) The amended exemption is applicable to a particular transaction
only if the transaction satisfies the conditions specified in the
exemption; and
(4) The amended exemption is supplemental to, and not in derogation
of, any other provisions of the Act and the Code, including statutory
and other exemptions and transitional rules. Furthermore, the fact that
a transaction is the subject of an exemption is not dispositive of
whether the transaction would have been a prohibited transaction in the
absence of such exemption.
Amendment
Accordingly, PTE 75-1 is amended as follows 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, 32847, August 10, 1990).
I. PTE 75-1, Part II, is amended in its entirety to read as
follows:
(1) The restrictions of section 406(a) of the Employee Retirement
Income Security Act of 1974 (the Act) and the taxes imposed by section
4975(a) and (b) of the Internal Revenue Code of 1986 (the Code), by
reason of section 4975(c)(1)(A) through (D) of the Code, shall not
apply to any purchase or sale of a security between an employee benefit
plan and a broker-dealer registered under the Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.), a reporting dealer who makes primary
markets in securities of the United States Government or of any agency
of the United States Government (``Government securities'') and reports
daily to the Federal Reserve Bank of New York its positions with
respect to Government securities and borrowings thereon, or a bank
supervised by the United States or a State, and
(2) The restrictions of section 406(a) and 406(b) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(A) through (F) of the Code, shall not apply to the
purchase or sale by a plan of securities issued by an open-end
investment company registered under the Investment Company Act of 1940
(15 U.S.C. 80a-1 et seq.), provided that no fiduciary with respect to
the plan who makes the decision on behalf of the plan to enter into the
transaction is a principal underwriter for, or affiliated with, such
investment company within the meaning of sections 2(a)(29) and 2(a)(3)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(29) and 80a-
2(a)(3)).
The exemptions set forth in (1) and (2) above are subject to the
following conditions:
(a) In the case of such broker-dealer, it customarily purchases and
sells securities for its own account in the ordinary course of its
business as a broker-dealer.
(b) In the case of such reporting dealer or bank, it customarily
purchases and sells Government securities for its own account in the
ordinary course of its business and such purchase or sale between the
plan and such reporting dealer or bank is a purchase or sale of
Government securities.
(c) Such transaction is at least as favorable to the plan as an
arm's length transaction with an unrelated party would be, and it was
not, at the time of such transaction, a prohibited transaction within
the meaning of section 503(b) of the Code.
(d) Except with respect to transactions described in section (2)
above, neither the broker-dealer, reporting dealer, bank, nor any
affiliate thereof has or exercises any discretionary authority or
control (except as a directed trustee) with respect to the investment
of the plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets.
(e) The plan maintains or causes to be maintained for a period of
six years from the date of such transaction such records as are
necessary to enable the persons described in paragraph (f) of this
exemption to determine whether the conditions of this exemption have
been met, except that:
(1) Such broker-dealer, reporting dealer, or bank shall not 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 such records are not maintained, or are not available for
examination as required by paragraph (f) below; and
(2) A prohibited transaction will not be deemed to have occurred
if, due to circumstances beyond the control of the plan fiduciaries,
such records are lost or destroyed prior to the end of such six-year
period.
(f) Notwithstanding anything to the contrary in subsections (a)(2)
and (b) of section 504 of the Act, the records referred to in paragraph
(e) are unconditionally available for examination during normal
business hours by duly authorized employees of (1) the Department of
Labor, (2) the Internal Revenue Service, (3) plan participants and
beneficiaries, (4) any employer of plan participants and beneficiaries,
and (5) any employee organization any of whose members are covered by
such plan. For purposes of this exemption, the terms ``broker-dealer,''
``reporting dealer'' and ``bank'' shall include such persons and any
affiliates thereof, and the term ``affiliate'' shall be defined in the
same manner as that term is defined in 29 CFR 2510.3-21(e) and 26 CFR
54.4975-9(e).
II. PTE 75-1, Part V, is amended in its entirety to read as
follows:
The restrictions of section 406 of the Employee Retirement Income
Security Act of 1974 (the Act) and the taxes imposed by section 4975(a)
and (b) of the Internal Revenue Code of 1986 (the Code), by reason of
section 4975(c)(1) of the Code, shall not apply to any extension of
credit to an employee benefit plan by a party in interest or a
disqualified person with respect to the plan, provided that the
following conditions are met:
(a) The party in interest or disqualified person:
(1) Is a broker or dealer registered under the Securities Exchange
Act of 1934; and
(2) Does not have or exercise any discretionary authority or
control (except as a directed trustee) with respect to the investment
of the plan assets involved in the transaction, nor does it render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets, unless no interest or other consideration is
received by the party in interest or disqualified person or any
affiliate thereof in connection with such extension of credit.
(b) Such extension of credit:
(1) Is in connection with the purchase or sale of securities;
(2) Is lawful under the Securities Exchange Act of 1934 and any
rules and regulations promulgated thereunder; and
(3) Is not a prohibited transaction within the meaning of section
503(b) of the Code.
(c) The plan maintains or causes to be maintained for a period of
six years from the date of such transaction such records as are
necessary to enable the persons described in paragraph (d) of this
exemption to determine whether
[[Page 5887]]
the conditions of this exemption have been met, except that:
(1) If such party in interest or disqualified person is not a
fiduciary with respect to any assets of the plan, such party in
interest or disqualified person shall not 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 such
records are not maintained, or are not available for examination as
required by paragraph (d) below; and
(2) A prohibited transaction will not be deemed to have occurred
if, due to circumstances beyond the control of the plan fiduciaries,
such records are lost or destroyed prior to the end of such six-year
period.
(d) Notwithstanding anything to the contrary in subsections (a)(2)
and (b) of section 504 of the Act, the records referred to in paragraph
(c) are unconditionally available for examination during normal
business hours by duly authorized employees of (1) the Department of
Labor, (2) the Internal Revenue Service, (3) plan participants and
beneficiaries, (4) any employer of plan participants and beneficiaries,
and (5) any employee organization any of whose members are covered by
such plan. For purposes of this exemption, the terms ``party in
interest'' and ``disqualified person'' shall include such party in
interest or disqualified person and any affiliates thereof, and the
term ``affiliate'' shall be defined in the same manner as that term is
defined in 29 CFR 2510.3-21(e) and 26 CFR 54.4975-9(e).
Signed at Washington DC, this 30th day of January, 2006.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, Department of Labor.
[FR Doc. E6-1484 Filed 2-2-06; 8:45 am]
BILLING CODE 4520-29-P
|
