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August 12, 2003
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2003-10A
ERISA Sec. 407(a)(2)
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Charles R. Smith
Kirkpatrick & Lockhart LLP
535 Smithfield Street
Pittsburgh, PA 15222-2312
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Dear Mr. Smith:
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This is in response to your request for an advisory opinion under Title I of
the Employee Retirement Income Security Act of 1974 (ERISA). Specifically,
you ask whether the reallocation of employer securities from the account of
one plan participating in a master trust to the accounts of other plans
participating in the master trust in exchange for interests of those plans
in other assets of the same value held in the master trust would constitute
an acquisition of employer securities for purposes of section 407(a) of
ERISA.
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You represent that Crucible Materials Corporation (CMC)
created a master trust (the Trust) pursuant to the Crucible Materials
Corporation Master Trust Agreement dated October 24, 1986, between CMC and
Mellon Bank, NA (the Trustee), as amended (the Trust Agreement). The
assets of the following five defined benefit pension plans sponsored by
CMC for the benefit of certain of its collectively bargained employees
(the Plans) are held by the Trust:
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Trent Tube Division of Carrollton,
Georgia Pension Plan (Plan No. 048)
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Trent Tube Pension Plan, East Troy,
Wisconsin (Plan No. 047)
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Crucible Compaction Metals Division
of Crucible Materials Corporation (Compaction Plan)
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Crucible Materials Corporation
Specialty Metals Division – Syracuse Plan (Plan No. 044)
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Service Centers Division Retirement
Plan for Cleveland Warehouse Employees (Plan No. 046)
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The Trust is a master trust that holds the assets of all
five Plans. The assets in the Trust currently are commingled for investment
purposes. Included in the assets of the Trust are shares of CMC capital
stock. You represent that at present the fair market value of the CMC stock
allocated within the Trust does not exceed 10 percent of the fair market
value of the assets of any of the Plans (or, to the extent they do, any such
excess is not the result of an “acquisition” within the meaning of
section 407(a)(2) of ERISA, but rather the growth in the fair market value
of such securities since the date of acquisition). All of the assets of the
Trust, including the employer securities, are allocated among the Plans for
funding and record keeping purposes and for purposes of satisfying the
liabilities of each Plan.
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You further represent that in connection with the collective bargaining
process at CMC’s Compaction Metals Division, the union representing the
hourly workers has requested that the Compaction Plan be merged into a
pension plan maintained by the union for its members. You represent that the
union has advised CMC that its pension plan cannot accept the CMC employer
securities held by the Compaction Plan in the Trust. In order to accommodate
the merger of the two plans, CMC proposed to direct the Trustee to
reallocate the assets of the Trust among the Plans, such that the qualifying
employer securities are reallocated from the Compaction Plan to the
remaining Plans and assets of equal value, other than the qualifying
employer securities, are reallocated from the remaining Plans to the
Compaction Plan. The fair market value of the assets allocated within the
Trust to each Plan will be the same immediately before and after the
allocation. However, the reallocation may cause the value of the employer
securities held by the plans other than the Compaction Plan to exceed 10
percent of the fair market value of the total assets of the Trust allocated
to each of the Plans other than the Compaction Plan. You also note that the
reallocation of assets will not result in a change of legal or beneficial
ownership of the securities by the Trust, nor will any of the certificates
representing the CMC employer securities be canceled or reissued.
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You ask whether a reallocation of assets, including employer securities,
held in the accounts of various plans participating in a master trust,
constitutes an acquisition for purposes of section 407(a) of ERISA.
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Section 407(a)(1) of ERISA provides that a plan may not
acquire or hold any employer security that is not a qualifying employer
security. In relevant part, section 407(d)(5)(A) of ERISA defines the term
qualifying employer security as an employer security that is stock.(1)
Section 407(a)(2) provides further that a plan that is not an eligible
individual account plan as defined in section 407(d)(3) of ERISA, such as
a defined benefit plan, may not acquire any qualifying employer security
or qualifying employer real property, if immediately after such
acquisition the aggregate fair market value of employer securities and
employer real property held by the plan exceeds 10 percent of the fair
market value of the assets of the plan. Section 406(a)(1)(E) provides that
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 acquisition, on behalf of the plan, of any employer
security or employer real property in violation of section 407(a).
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For purposes of section 407(a) of ERISA, an acquisition by a plan of
qualifying employer securities or qualifying employer real property shall
include, but not be limited to, an acquisition by purchase, by the exchange
of plan assets, by the exercise of warrants or rights, by the conversion of
a security (except any acquisition pursuant to a conversion exempt under
section 408(b)(7) of ERISA), by default of a loan where the qualifying
employer security or qualifying employer real property was security for the
loan, or by the contribution of such securities or real property to the
plan. 29 CFR 2550.407a-2(b).
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In our view, a reallocation of one plan’s fractional interest in
qualifying employer securities held in a master trust to the remaining plans
participating in the master trust with a corresponding reallocation to the
first plan from the remaining plans of an interest in the other master trust
assets of the same value as the first plan’s fractional interest in the
qualifying employer securities is an acquisition of qualifying employer
securities by the remaining plans by an exchange of plan assets within the
meaning of section 407(a)(2) of ERISA. To the extent that, immediately after
the reallocation, more than 10 percent of the value of the master trust
assets in which any of the remaining plans held an interest were in
qualifying employer securities, the transaction would violate sections
407(a)(1) and 406(a)(1)(E) of ERISA.
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In addition, to the extent that a common fiduciary
represents all plans involved in the transaction, the exchange of plan
assets among the plans participating in the master trust would violate
section 406(b)(2) of ERISA, which provides that a fiduciary shall not in
his or her individual or in any other capacity act in any transaction
involving the plan on behalf of a party (or represent a party) whose
interests are adverse to the interests of the plan or the interests of its
participants or beneficiaries. We note further that the statutory
exemption provided by section 408(e) of ERISA from the restrictions of
section 406 and 407 of ERISA for the acquisition of qualifying employer
securities is conditioned upon compliance with the requirements of section
407(a) in the case of plans that are not eligible individual account
plans, and so would not provide relief here.
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Finally, we note that section 404 of ERISA requires fiduciaries to act
prudently and for the exclusive purpose of providing benefits and defraying
reasonable expenses of the plan.
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This letter constitutes an advisory opinion under ERISA Procedure
761, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued
subject to the provisions of that procedure, including section 10 thereof,
relating to the effect of advisory opinions.
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Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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For purposes of this letter only, we
assume that the CMC capitol stock constitutes qualifying employer
securities within the meaning of section 407(d)(5).
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