Notice of proposed amendment to a class exemption
[11/21/2007]
Volume 72, Number 224
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EMPLOYEE BENEFITS SECURITY ADMINISTRATION
[Application No. D-11337]
Proposed Amendment to the Class Exemption for the Release of
Claims and Extensions of Credit in Connection With Litigation
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of proposed amendment to a class exemption.
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SUMMARY: This document contains a notice of a proposed amendment to a
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 amendment to the class exemption, PTE
2003-39 (68 FR 75632, Dec. 31, 2003), would apply to transactions
engaged in by a plan in connection with the settlement of litigation,
including bankruptcy litigation. This amendment is being proposed in
response to requests from practitioners and independent fiduciaries who
sought an expansion of the types of consideration that plans could
accept in connection with the settlement of litigation. 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 January 22, 2008.
DATES: Effective Date: If adopted, the proposed amendments would be
effective as of date of publication of the final amendments in the
Federal Register.
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-5700, 200
Constitution Avenue, NW., Washington, DC 20210, Attention: Proposed
Amendment to Plan Settlement Class Exemption. Commenters are encouraged
to submit responses electronically by e-mail to e-OED@dol.gov, or by
using the Federal eRulemaking portal at http://www.regulations.gov. All
responses will be available for public inspection in the Public
Disclosure Room, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210, and online at www.regulations.gov and http://www.dol.gov/ebsa
.
FOR FURTHER INFORMATION CONTACT: Brian Buyniski, 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 an amendment to a class exemption from the
restrictions of sections 406(a) and 407(a) 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) through (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
[[Page 65598]]
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. at 214 (2000) generally transferred the authority of the
Secretary of 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.
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Executive Order 12866 Statement
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 not ``significant'' under Section 3(f)(4) of the
Executive Order. Accordingly, this action has not been reviewed by OMB.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501-3520) (PRA 95), the Department submitted the information
collection request (ICR) included in the Class Exemption For Release of
Claims and Extensions of Credit in Connection with Litigation (the
``Class Exemption'') to the Office of Management and Budget (OMB) for
review and clearance at the time the class exemption was published in
the Federal Register (68 FR 75632, December 31, 2003) under OMB control
number 1210-0091. The ICR was renewed by OMB on May 11, 2006.
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 the public
understands the Department's collection instructions, respondents can
provide the requested data in the desired format, the reporting burden
(time and financial resources) is minimized, and the Department can
properly assess the impact of collection requirements on respondents.
Currently, the Department is soliciting comments concerning the
information collection request (ICR) included in the Proposed Amendment
to the Class Exemption for the Release of Claims and Extensions of
Credit in Connection with Litigation. A copy of the ICR may be obtained
by contacting the person listed in the PRA Addressee section below.
The Department has submitted a copy of amendment to OMB in
accordance with 44 U.S.C. 3507(d) for review of its information
collections. The Department and OMB are particularly interested in
comments that:
Evaluate whether the 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., by 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 January 22, 2008, OMB requests that comments be
received within 30 days of publication of the Proposed Amendment to the
Class Exemption for the Release of Claims and Extensions of Credit in
Connection with Litigation to ensure their consideration.
PRA Addressee: Address requests for copies of the ICR to Gerald B.
Lindrew, 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. A copy of the ICR also
may be obtained at http://www.RegInfo.gov.
The Class Exemption contains the following information collections:
Written Settlement Agreement. The terms of the settlement must be
specifically described in a written agreement or consent decree.
Acknowledgement by Fiduciary. The fiduciary acting on behalf of the
plan must acknowledge in writing that s/he is a fiduciary with respect
to the settlement of the litigation.
The proposed amendment would expand the scope of non-cash
consideration that may be accepted by an Authorizing Fiduciary on
behalf of the plan in connection with the settlement of litigation
(subject to additional conditions) to include the following: (i)
Employer securities, including bonds, and stock rights or warrants to
acquire employer stock; (ii) a written promise by the employer to
increase future contributions to the plan (as valued by a qualified
appraiser); and/or (iii) a written agreement to adopt future plan
amendments or provide additional employee benefits as approved by the
Authorizing Fiduciary without an independent appraisal (``benefit
enhancements'').
The proposed amendment to the class exemption would modify the
written settlement agreement information collection by requiring the
agreement to specifically describe (i) the employer securities and
written promises of future employer contributions (and the methodology
for determining the fair market value of such consideration) that has
been tendered as consideration in settlement of litigation and/or (ii)
benefit enhancements as approved by the Authorizing Fiduciary that are
provided to the plan as consideration for settlement. Because it is
usual and customary business practice to express the terms of a
settlement in writing with some degree of detail, no additional hour
burden has been accounted for this provision of the proposed amendment.
The 2007 proposed amendment also would modify the information
collection associated with the Fiduciary Acknowledgment by requiring
the Authorizing Fiduciary to acknowledge its fiduciary responsibility
for the approval of an attorney's fee award in connection with the
settlement in writing. The Department expects the Authorizing Fiduciary
to incorporate
[[Page 65599]]
this acknowledgement into the investment management or trustee
agreement outlining the terms and conditions of the fiduciary's
retention as a plan service provider, and that this agreement will
already be in existence as part of usual and customary business
practice. The additional hour burden attributable to the
acknowledgement provided in the proposed amendment is negligible;
therefore, the Department has not increased the overall hour burden for
this provision of the proposed amendment.
I. Background
Based upon feedback from practitioners and independent fiduciaries
working to settle litigation in accordance with PTE 2003-39, the
Department proposes to expand the type of consideration that can be
accepted by an employee benefit plan in settlement of litigation. While
the Department encourages cash settlements, it recognizes that there
are situations in which it may be in the interest of participants and
beneficiaries to accept consideration other than cash in exchange for
releasing the claims of the plan and/or the plan fiduciary. In
addition, because ERISA does not permit plans to hold employer-issued
stock rights, warrants, or most bonds, without an individual
exemption,\2\ the transactions covered by the class exemption have been
expanded to include acquisition, holding, and disposition of employer
securities received in settlement of litigation, including bankruptcy
litigation. Other amendments seek to clarify the scope of the duties of
the independent fiduciary charged with responsibility for settling
litigation.
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\2\ For example, PTE 2004-03, Lodgian 401(k) Plan and Trust
Agreement, 69 FR 7506, 7509 (Feb. 14, 2004) (warrants); PTE 2003-33,
Liberty Media 401(k) Savings Plan, 68 FR 64657 (Nov. 14, 2003)
(stock rights); PTE 2002-02, The Golden Retirement Savings Program
and The Golden Security Program, 67 FR 1242, 1243 (Jan. 9, 2002)
(warrants).
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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) of the Act states that:
(1) 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;
(C) Furnishing of goods, services, or facilities between the plan
and a party in interest;
(D) Transfer to, or use by or for the benefit of, a party in
interest, of any assets of the plan; or
(E) Acquisition, on behalf of the plan, of any employer security or
employer real property in violation of section 407(a).
(2) No fiduciary who has authority or discretion to control or
manage the assets of a plan shall permit the plan to hold any employer
security or employer real property if he knows or should know that
holding such security or real property violates section 407(a).
II. Description of Existing Relief
The class exemption for the release of claims and extensions of
credit in connection with litigation provides limited relief. Since
conflicted fiduciaries are not permitted to have a role under the
exemption in settling the litigation, no relief is provided from the
self-dealing provisions of ERISA. The current exemption permits the
release of the plan's or the plan fiduciary's claim against a party in
interest in exchange for consideration, and related extensions of
credit. No relief is provided for any prohibited transactions that are
part of the underlying claims in the litigation, or any new prohibited
transactions that may be proposed in settlement of litigation.\3\
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\3\ Where the Department of Labor (DOL) and/or the Internal
Revenue Service (IRS) is a party to the litigation, new prohibited
transactions may be permitted to resolve litigation pursuant to PTE
79-15, Class Exemption for Certain Transactions Authorized or
Required by Judicial Order or Judicially Approved Settlement Decree,
44 FR 26979 (May 8, 1979). DOL may also enter into a voluntary
settlement with parties covered by ERISA, in which case any
prospective prohibited transactions may be covered by the Class
Exemption to Permit Certain Transactions Authorized Pursuant to
Settlement Agreements between the Department of Labor and Plans, PTE
94-71, 59 FR 51216 (Oct. 7, 1994).
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In those situations where the prohibited transaction at issue is
``corrected'' in compliance with section 4975(f)(5) of the Code, this
exemption will not be necessary because correcting a prohibited
transaction under section 4975 of the Code does not give rise to a
prohibited transaction under Title I of the Act.\4\ Additionally, there
is no prohibited transaction if the plan receives consideration,\5\ but
does not have to relinquish its cause of action, or other assets.
Finally, if the dispute involves the provision of services or
incidental goods by a service provider, the settlement may fall within
the statutory exemption under section 408(b)(2) of the Act.\6\
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\4\ It should be noted that the Department of the Treasury has
authority to issue regulations, rulings and opinions regarding the
term ``correction'' as defined in section 4975 of the Code. Reorg.
Plan No. 4 of 1978, 5 U.S.C. App. at 214 (2000). Treas. Reg. section
53.4941(e)-1(c)(1) (1986) (excise taxes on private foundations)
applies to ``correction'' of prohibited transactions under section
4975(f) of the Code (dealing with pension excise taxes) by reason of
Temp. Treas. Reg. section 141.4975-13 (1986).
\5\ Parties entering into such arrangement should review the IRS
rules with respect to restorative payments. Rev. Rul. 2002-45, 2002-
2 C.B. 116.
\6\ See, Advisory Opinion 95-26A (Oct. 17, 1995).
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The exemption is not available where a party in interest is suing
an employee benefit plan, unless the party in interest is suing on
behalf of the plan pursuant to section 502(a)(2) or (3) of ERISA, in
their capacity as a participant, beneficiary, or fiduciary. Further, it
is the view of the Department that, in general, no exemption is needed
to settle benefits disputes,\7\ including subrogation cases.
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\7\ Lockheed v. Spink, 517 U.S. 882, 892-893 (1996)(the payment
of benefits is not a prohibited transaction).
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The operative language of the current class exemption provides as
follows:
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 III below are met:
(a) The release by the plan or a plan fiduciary, 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 or the
fiduciary's claim.
(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, over time, an amount owed to the plan in settlement of a
legal or equitable claim by the plan or a plan fiduciary against the
party in interest.
Section II. Conditions Applicable to All Transactions
(a) There is a genuine controversy involving the plan. A genuine
controversy will be deemed to exist where the court has certified
the case as a class-action.
(b) The fiduciary that authorizes the settlement 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.
(c) The settlement is reasonable in light of the plan's
likelihood of full recovery, the risks and costs of litigation, and
the value of claims foregone.
(d) The terms and conditions of the transaction are no less
favorable to the plan
[[Page 65600]]
than comparable arms-length terms and conditions that would have
been agreed to by unrelated parties under similar circumstances.
(e) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest.
(f) 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 that are reasonable,
taking into consideration the creditworthiness of the party in
interest and the time value of money.
(g) The transaction is not described in Prohibited Transaction
Exemption (PTE) 76-1, A.I. (41 FR 12740, March 26, 1976, as
corrected, 41 FR 16620, April 20, 1976) (relating to delinquent
employer contributions to multiemployer and multiple employer
collectively bargained plans).
Section III. Prospective Conditions
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 January 30, 2004:
(a) Where the litigation has not been certified as a class
action by the court, 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) All terms of the settlement are specifically described in a
written settlement agreement or consent decree.
(c) Assets other than cash may be received by the plan from a
party in interest in connection with a settlement only if:
(1) Necessary to rescind a transaction that is the subject of
the litigation; or
(2) Such assets are securities for which there is a generally
recognized market, as defined in ERISA section 3(18)(A), and which
can be objectively valued. Notwithstanding the foregoing, a
settlement will not fail to meet the requirements of this paragraph
solely because it includes the contribution of additional qualifying
employer securities in settlement of a dispute involving such
qualifying employer securities.
(d) To the extent assets, other than cash, are received by the
plan in exchange for the release of the plan's or the plan
fiduciary's claims, such assets must be specifically described in
the written settlement agreement and valued at their fair market
value, as determined in accordance with section 5 of the Voluntary
Fiduciary Correction (VFC) Program, 67 FR 15062 (March 28, 2002).
The methodology for determining fair market value, including the
appropriate date for such determination, must be set forth in the
written settlement agreement.
(e) Nothing in section III (c) shall be construed to preclude
the exemption from applying to a settlement that includes a written
agreement to: (1) make future contributions; (2) adopt amendments to
the plan; or (3) provide additional employee benefits.
(f) The fiduciary acting on behalf of the plan has acknowledged
in writing that it is a fiduciary with respect to the settlement of
the litigation on behalf the plan.
(g) The plan fiduciary maintains or causes to be maintained for
a period of six years the records necessary to enable the persons
described below in paragraph (h) to determine whether the conditions
of this exemption have been met, including documents evidencing the
steps taken to satisfy sections II (b), such as correspondence with
attorneys or experts consulted in order to evaluate the plan's
claims, except that:
(1) If the records necessary to enable the persons described in
paragraph (h) to determine whether the conditions of the exemption
have been met are lost or destroyed, due to circumstances beyond the
control of the plan fiduciary, then no prohibited transaction will
be considered to have occurred solely on the basis of the
unavailability of those records; and
(2) No party in interest, other than the plan fiduciary
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 (h) below;
(h)(1) Except as provided below in paragraph (h)(2) and
notwithstanding any provisions of section 504(a)(2) and (b) of the
Act, the records referred to in paragraph (g) are unconditionally
available at their customary location for examination during normal
business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(B) Any fiduciary of the plan or any duly authorized employee or
representative of such fiduciary;
(C) Any contributing employer and any employee organization
whose members are covered by the plan, or any authorized employee or
representative of these entities; or
(D) 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 (h)(1)(B) through
(D) shall be authorized to examine trade secrets or commercial or
financial information which is privileged or confidential.
Section III. Definition
For purposes of this exemption, the terms ``employee benefit
plan'' and ``plan'' refer to an employee benefit plan described in
section 3(3) of ERISA and/or a plan described in section 4975(e)(1)
of the Code.
III. Description of Proposed Amendments
New Transactions
The proposed amendment expands the transactions covered by the
exemption. In this regard, warrants and stock rights are often offered
to shareholders, including the company's employee benefit plan, in
settlement of litigation, including bankruptcy. In such situations,
bonds or other property that do not constitute qualifying employer
securities under ERISA may also be offered to employee benefit plans.
ERISA does not permit plans to hold these assets absent an individual
exemption. Effective as of the date of publication of the final
exemption in the Federal Register, a plan may acquire, hold, and
dispose of employer securities in settlement of litigation, including
bankruptcy. The transactions covered by the exemption include the
subsequent disposition of stock rights and warrants by sale or by
exercise of the rights or warrants.
Modified Conditions
The exemption currently requires that an attorney retained to
advise \8\ the plan determine that there is a genuine controversy,
unless the case has been certified as a class action. As amended, this
genuine controversy requirement may be met in non-class action cases if
a Federal or State agency is a plaintiff in the litigation.
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\8\ The Department is aware that at least one commentator has
interpreted this condition as requiring a formal opinion of counsel.
This is not the case. Further, it is not necessary for the
litigation to be filed. If suit has not been filed, the independent
attorney can review the disputed issues and conclude that there is a
genuine controversy. As noted in the original exemption, the purpose
of this condition is to avoid covering sham transactions. See, Dairy
Fresh Corp. v. Poole, 108 F.Supp. 2d 1344, 1353 (S.D. Ala. 2000).
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Section II (b) has been redrafted to clarify that the settlement is
being authorized by a fiduciary (hereinafter referred to as the
Authorizing Fiduciary).
Currently, the independent fiduciary must assess the reasonableness
of the settlement in light of the risks and costs of litigation, and
the value of claims foregone. The Department has become concerned that
some independent fiduciaries, and those responsible for their
retention, are viewing this condition too narrowly. As result, the
amendment clarifies that in assessing the reasonableness of any
settlement, the Authorizing Fiduciary must consider the entire
settlement. This includes the scope of the release of claims and the
value of any non-cash assets. In this regard, the Department further
emphasizes that the Authorizing Fiduciary, in assessing the
reasonableness of the settlement, may not exclude consideration of the
attorney's fee award or any other sums to be paid from the recovery
(e.g., consultants) in connection with the settlement of the
litigation.
Since the class exemption was finalized, attorneys for the
Department have reviewed numerous releases in class-action litigation
involving
[[Page 65601]]
employee benefit plans. Some of these releases were unreasonably broad.
The Department continues to believe that the role of the Authorizing
Fiduciary includes a careful review of the scope of any release that
will eliminate the claims of the plan or the plan fiduciaries. In some
instances, it may be necessary for the Authorizing Fiduciary to raise
objections with the court, for example, requesting that the court
narrow the scope of the release.\9\
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\9\ The Department does not suggest that other litigants can
release ERISA-based claims of the Secretary of Labor, plan
fiduciaries, participants or beneficiaries.
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The Department further notes that the amount of the attorney's fees
award to plaintiffs' attorneys may reduce the plan's recovery, directly
or indirectly.\10\ The Department recognizes that the attorneys
bringing these cases are entitled to fair compensation. However, in
some instances there have been abuses in connection with class-action
attorney's fees.\11\ In 2005, Congress passed the Class Action Fairness
Act of 2005 \12\ to address some of these issues. Where the plan's
share of the settlement is significant, the Authorizing Fiduciary is
generally well-positioned to use its bargaining strength to ensure that
these fees are reasonable. It is the view of the Department that the
Authorizing Fiduciary's role may require involvement in the attorney's
fee decisions, including possibly filing a formal objection with the
court regarding these fees.
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\10\ In some instances, the amount of the settlement fund is
finalized before the attorney's fee awards are determined. In other
instances, the attorney's fees are calculated as a percentage of the
settlement fund. Generally, a court will review the reasonableness
of the attorney's fee award.
\11\ This issue was considered by the Federal Trade Commission's
Class Action Fairness Project. The FTC's web site contains links to
many of the materials produced in connection with the Class-Action
Fairness Project. Federal Trade Commission Home Page, http://www.ftc.gov/bcp/workshops/classaction/index.htm
(last visited Apr.
2, 2007).
\12\ Pub. L. 109-2, 119 Stat. 4 (2005). The Act amends both Rule
23 of the Federal Rules of Civil Procedure and 28 U.S.C. 1332. It
expands federal jurisdiction over certain cases and contains new
rules for class action settlements and calculation of attorney's
fees.
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The proposed amendment expands the scope of non-cash consideration
that may be accepted by an Authorizing Fiduciary on behalf of the plan,
subject to additional conditions. Such consideration is divided into
two categories: Non-cash assets and benefits enhancements. Non-cash
assets consist of property that can be appraised pursuant to the
guidelines set forth in the Department's Voluntary Fiduciary Correction
(VFC) Program.\13\ As amended, employer securities, including bonds,
and stock rights or warrants on employer securities, are covered.
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\13\ 71 FR 20262 (Apr. 19, 2006). The VFC Program, as amended,
covers certain prohibited transactions involving illiquid property.
The exemption states that such property includes, but is not limited
to, restricted and thinly traded stock, limited partnership
interests, real estate and collectibles. 71 FR at 20279. Authorizing
Fiduciaries may find the guidelines in the VFC Program helpful in
considering whether accepting Non-Cash property as part of a
settlement is appropriate given the risks and additional costs that
may be incurred where a plan holds such property. Illiquid assets
may complicate the plan's mandatory distributions at age 70 1/2
pursuant to section 401(a)(9) of the Code. The Service takes the
position that compliance with this provision may necessitate
distribution of a participant's fractional interest in the illiquid
asset, which could result in additional costs to the plan. See,
e.g., I.R.S. Priv. Ltr. Rul. 9726032 (June 27, 1997) and I.R.S.
Priv. Ltr. Rul. 9226066 (June 26, 1992).
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The current exemption specifies that a written agreement to make
future contributions could be accepted in exchange for a release. This
continues to be the case. As amended, a written promise by the employer
to increase future contributions falls within the expanded category of
non-cash assets. The fair market value of a stream of future
contributions can be determined by a qualified appraiser. In contrast,
benefits enhancements, i.e., where the employer offers to change the
plan design to increase opportunities to diversify, or to offer other
employee benefits, are plan amendments, not plan assets. Therefore, the
exemption requires only approval by the Authorizing Fiduciary with
respect to such benefits enhancements. Because such enhancements do not
make the plan whole and may not benefit the same participants who were
harmed by the actions that are the subject of litigation,\14\ such
offers should be subject to additional scrutiny by the Authorizing
Fiduciary.
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\14\ See generally, Field Assistance Bulletin No. 2006-01 (Apr.
9, 2006) at http://www.dol.gov/ebsa/regs/fab_2006-1.html for a
discussion of issues to be considered when the need arises to
allocate settlement proceeds among different classes of participants
and beneficiaries.
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As amended, relief is provided for the acquisition, holding, and
disposition of employer securities that are not ``qualifying,'' within
the meaning of section 407(d)(5) of the Act. We understand from our
conversations with independent fiduciaries that when settling cases
involving financially troubled companies, stock rights and warrants may
be all that is available. In other instances, employer-issued bonds or
other debt instruments may offer the best possibility for recovery. The
relief provided by the class exemption for holding such non-cash assets
extends only to relief from the prohibited transaction provisions of
sections 406(a) and 407(a) of the Act, no relief is provided from the
fiduciary provisions of section 404 of the Act. Before authorizing a
settlement involving non-cash assets, the Authorizing Fiduciary must
determine whether accepting such assets is prudent and in the interest
of participants and beneficiaries.
In addition, where such non-cash assets are employer securities,
particular attention must be paid to ERISA's diversification
requirements. Section 404(a)(1)(C) requires that a fiduciary diversify
the investments of the plan so as to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do so.
Section 404(a)(2) provides that, in the case of an eligible individual
account plan, the diversification requirement of section 404(a)(1)(C)
and the prudence requirement (only to the extent that it requires
diversification) of section 404(a)(1)(B) are not violated by the
acquisition or holding of qualifying employer securities. To the extent
that the employer securities do not meet the definition of qualifying
employer securities under section 407(d)(5) of the Act, the exception
contained in section 404(a)(2) from the diversification requirements of
the Act would not apply to a Plan's investment in these assets.
Accordingly, it is the responsibility of the Authorizing Fiduciary to
determine the appropriate level of investment in employer securities,
based on the particular facts and circumstances, consistent with its
responsibilities under section 404 of the Act.
Where non-cash assets or benefits enhancements are being
considered, the Authorizing Fiduciary must first determine that a cash
settlement is either not feasible or is less beneficial than the
alternative. Any non-cash assets must be valued at their fair market
value in accordance with section 5 of the Voluntary Fiduciary
Correction Program, 71 FR 20262, 20270 (Apr. 19, 2006). Both non-cash
assets and benefits enhancements must be described in the written
settlement agreement.
Where employer securities are received by the plan from the
employer as part of the settlement, the Authorizing Fiduciary or
another independent fiduciary must retain sole responsibility for
investment decisions regarding the assets unless such responsibility is
delegated to individual participants in an individual account plan. The
proposed amendment provides that the plan may not pay any commissions
in connection with the acquisition of assets pursuant to this
exemption.
[[Page 65602]]
As is the case in the current exemption, the Authorizing Fiduciary
must acknowledge in writing that it is a fiduciary for purposes of the
settlement. As noted above, since the original exemption was granted at
the end of 2003, the Department has learned that practitioners are
divided on whether or not the Authorizing Fiduciary's role in the
settlement included review of attorney's fees. It is the view of the
Department that in any instance where an attorney's fee award or any
other sums to be paid from the recovery has the potential to reduce the
plan's overall recovery, the Authorizing Fiduciary should take
appropriate steps to review the proposed fees. The exact nature of the
Authorizing Fiduciary's role in connection with attorney's fees and
other expenses paid from the recovery will vary depending on the size
and nature of the litigation.
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 or her duties with respect to 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 exemption will be applicable to a particular
transaction only if the conditions specified in the class exemption are
met; and
(4) The exemption, if granted, will be supplemental to, and not in
derogation of, any other provisions of the Code and the Act, 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.
Written Comments and Hearing Requests
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 requests for a hearing should state
the reasons for the writer's interest in the proposed exemption.
Comments received will be available for public inspection with the
referenced application at the above-referenced address.
Proposed Exemption
Section I. Prospective Exemption--Covered Transactions
Effective [DATE OF PUBLICATION OF FINAL EXEMPTION IN THE Federal
Register], the restrictions of sections 406(a) and 407(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, shall not apply to the
following transactions, if the relevant conditions set forth in
sections II through III below are met:
(a) The release by the plan or a plan fiduciary 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 or the fiduciary's
claim.
(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, over time, an amount owed to the plan in settlement of a legal
or equitable claim by the plan or a plan fiduciary against the party in
interest.
(c) The plan's acquisition, holding, and disposition of employer
securities received in settlement of litigation, including bankruptcy.
Disposition of employer securities that are stock rights or warrants
includes sale of these securities, as well as the exercise of the
rights or warrants.
Section II Prospective Exemption--Conditions
(a) Where the litigation has not been certified as a class action
by the court, and no federal or state agency is a plaintiff in the
litigation, an attorney or attorneys retained to advise the plan on the
claim, and having no relationship to any of the parties involved in the
claims, other than the plan, determines that there is a genuine
controversy involving the plan.
(b) The settlement is authorized by a fiduciary (The Authorizing
Fiduciary) that has no relationship to, or interest in, any of the
parties involved in the claims, other than the plan, that might affect
the exercise of such person's best judgment as a fiduciary.
(c) The settlement terms, including the scope of the release of
claims; the amount of cash and the value of any non-cash assets
received by the plan; and the amount of any attorney's fee award or any
other sums to be paid from the recovery, are reasonable in light of the
plan's likelihood of full recovery, the risks and costs of litigation,
and the value of claims foregone.
(d) The terms and conditions of the transaction are no less
favorable to the plan than comparable arms-length terms and conditions
that would have been agreed to by unrelated parties under similar
circumstances.
(e) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest.
(f) 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 that are reasonable, taking into
consideration the creditworthiness of the party in interest and the
time value of money.
(g) The transaction is not described in section A.I. of Prohibited
Transaction Exemption (PTE) 76-1 (41 FR 12740, 12742 (Mar. 26, 1976),
as corrected, 41 FR 16620 Apr. 20, 1976)(relating to delinquent
employer contributions to multiemployer and multiple employer
collectively bargained plans).
(h) All terms of the settlement are specifically described in a
written settlement agreement or consent decree.
(i) Non-cash assets, which may include employer securities, and
written promises of future employer contributions (hereinafter, ``non-
cash assets''), and/or a written agreement to adopt future plan
amendments or provide additional employee benefits (hereinafter
``benefits enhancements'') may be provided to the plan by a party in
interest in exchange for a release by the plan or a plan fiduciary only
if:
(1) the Authorizing Fiduciary determines that an all cash
settlement is either not feasible, or is less beneficial to the
participants and beneficiaries than accepting all or part of the
settlement in non-cash assets and/or benefits enhancements;
[[Page 65603]]
(2) the non-cash assets are specifically described in writing as
part of the settlement and valued at their fair market value, as
determined in accordance with section 5 of the Voluntary Fiduciary
Correction (VFC) Program, 71 FR 20262, 20270 (Apr. 19, 2006). The
methodology for determining fair market value, including the
appropriate date for such determination, must be set forth in the
written agreement;
(3) Benefits enhancements are specifically described in writing as
part of the settlement. Benefits enhancements may be included as part
of the settlement without an independent appraisal. In deciding whether
to approve the release of a claim in exchange for benefits
enhancements, the Authorizing Fiduciary shall take into account all
aspects of the settlement, including the cash or other assets to be
received by the plan, the solvency of the party in interest, and the
best interests of the class of participants harmed by the acts that are
the subject of the plan's claims;
(4) The Authorizing Fiduciary, or another independent fiduciary,
acts on behalf of the plan and its participants and beneficiaries for
all purposes related to any property, including employer securities as
defined by 407(d)(1) of the Act, received by the plan from the employer
as part of the settlement. The Authorizing Fiduciary or another
independent fiduciary continues to act on behalf of the plan and its
participants and beneficiaries for the period that the plan holds the
property, including employer securities, received from the employer as
part of the settlement. The Authorizing Fiduciary or another
independent fiduciary shall have sole responsibility relating to the
acquisition, holding, disposition, ongoing management, and where
appropriate, exercise of all ownership rights, including the right to
vote securities, except that, in the case of an individual account plan
which permits participant direction, the Authorizing Fiduciary or other
independent fiduciary may delegate to the individual participants to
whose accounts the assets have been allocated, the decision to hold,
exercise ownership rights, or dispose of the assets;
(j) The plan does not pay any commissions in connection with the
acquisition of the assets;
(k) The Authorizing Fiduciary acting on behalf of the plan has
acknowledged in writing that it is a fiduciary with respect to the
settlement of the litigation on behalf of the plan;
(l) The plan fiduciary maintains or causes to be maintained for a
period of six years the records necessary to enable the persons
described below in paragraph (m) to determine whether the conditions of
this exemption have been met, including documents evidencing the steps
taken to satisfy section II (c), such as correspondence with attorneys
or experts consulted in order to evaluate the plan's claims, except
that:
(1) if the records necessary to enable the persons described in
paragraph (m) to determine whether the conditions of the exemption have
been met are lost or destroyed, due to circumstances beyond the control
of the plan fiduciary, then no prohibited transaction will be
considered to have occurred solely on the basis of the unavailability
of those records; and
(2) No party in interest, other than the plan fiduciary responsible
for record-keeping, 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 (m)
below;
(m)(1) Except as provided below in paragraph (m)(2) and
notwithstanding any provisions of section 504(a)(2) and (b) of the Act,
the records referred to in paragraph (l) are unconditionally available
at their customary location for examination during normal business
hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(B) Any fiduciary of the plan or any duly authorized employee or
representative of such fiduciary;
(C) Any contributing employer and any employee organization whose
members are covered by the plan, or any authorized employee or
representative of these entities; or
(D) Any participant or beneficiary of the plan or the duly
authorized employee or representative of such participant or
beneficiary.
(2) Nothing in this exemption supersedes any restriction on the
disclosure of trade secrets or other commercial or financial
information which is privileged or confidential and this exemption does
not authorize any of the persons described in paragraph (m)(1)(B)-(D)
to examine trade secrets or such commercial or financial information.
Section III. Definition
For purposes of this exemption, the terms ``employee benefit plan''
and ``plan'' refer to an employee benefit plan described in section
3(3) of ERISA and/or a plan described in section 4975(e)(1) of the
Code.
For purposes of this exemption, the term ``employer security''
refers to employer securities described in section 407(d)(1) of ERISA.
IV. Effective Dates
This amendment to the class exemption is effective for settlements
occurring on or after the date of publication of the final exemption in
the Federal Register. For settlements occurring before the date of
publication of the final exemption in the Federal Register, see the
original grant of the Class Exemption for Release of Claims and
Extensions of Credit in Connection with Litigation, 68 FR 75632 (Dec.
31, 2003).
Signed at Washington, DC, this 14th day of November, 2007.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. E7-22718 Filed 11-20-07; 8:45 am]
BILLING CODE 4510-29-P
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