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Melanie Franco Nussdorf, Esq.
Steptoe & Johnson LLP
1330 Connecticut Avenue, NW
Washington, D.C. 20036
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2003-07A
Sec. V(h)
PTE 84-14
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Dear Ms. Nussdorf:
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This is in response to your request for guidance
concerning section V(h) of Prohibited Transaction Exemption (PTE) 84-14
(49 FR 9494, March 13, 1984, as corrected at 50 FR 41430, October 10,
1985). As you noted, PTE 84-14 permits certain transactions between a
party in interest with respect to an employee benefit plan and an
investment fund (as defined in section V(b) of PTE 84-14) in which the
plan has an interest and which is managed by a qualified professional
asset manager (QPAM), provided that the other conditions of the exemption
are satisfied.
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One of the conditions of the exemption, set forth in
section I(d), requires that the party in interest dealing with the
investment fund is neither the QPAM nor a person “related” to the QPAM.
As defined in section V(h) of PTE 84-14, a QPAM is “related” to a
party in interest if:
the party in interest (or a person controlling, or
controlled by, the party in interest) owns a five percent or more
interest in the QPAM or if the QPAM (or a person controlling, or
controlled by, the QPAM) owns a five percent or more interest in the
party in interest.(1)
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Section V(h) further provides that the term “interest” means with
respect to ownership of an entity: the combined voting power of all classes
of stock entitled to vote or the total value of the shares of all classes of
stock of the entity if the entity is a corporation; the capital interest or
the profits interest of the entity if the entity is a partnership; or the
beneficial interest of the entity if the entity is a trust or unincorporated
enterprise. Under section V(h), a person is considered to own an interest
held in any capacity if the person has or shares the authority to exercise
any voting rights or to direct some other person to exercise the voting
rights relating to such interest, or to dispose or to direct the disposition
of such interest.
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You have requested guidance from the Department as to
whether the language in section V(h) referencing the ownership interests
of “the QPAM (or a person controlling, or controlled by, the QPAM),”
means that only interests owned by the QPAM and entities in its vertical
chain of ownership are counted for purposes of the five percent ownership
test.(2) In this regard, you
state that while section V(h) requires the counting of ownership interests
of entities that “control” or are “controlled by” the QPAM,
section V(h) does not appear to require the counting of ownership
interests of entities “under common control” with the QPAM.
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The Department concurs with your interpretation of section V(h) of PTE
84-14. As the Department previously stated in the preamble to PTE 84-14, “[i]t
is the intention of the Department that, for purposes of section V(h), the
phrase ‘a person controlling or controlled by’ the party in interest or
the QPAM should include any entity within the vertical chain of ownership
containing the QPAM or party in interest.” Accordingly, in response to
your inquiry, it is the view of the Department that it would not be
necessary to count the ownership interests of parties “under common
control” with the QPAM for purposes of the five percent ownership test in
section V(h) of the class exemption.
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The Department notes that, while your inquiry focused on the language of
section V(h) regarding the QPAM’s ownership of a party in interest, the
Department’s conclusion applies equally to the remaining portion of
section V(h) which states that a QPAM is related to a party in interest if
“the party in interest (or a person controlling, or controlled by, the
party in interest) owns a five percent or more interest in the QPAM.”(3)
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You have also requested guidance as to whether, for purposes of the five
percent ownership test, section V(h) requires the counting of ownership
interests in only the party in interest itself or the QPAM itself, and not
in either of their affiliates. In the Department’s view, section V(h)
clearly limits application of the five percent ownership test to ownership
interests in the party in interest or the QPAM, and does not extend to their
affiliates. Therefore, as you have suggested, where a party in interest is
wholly owned by another entity, a QPAM will not be deemed “related” to
the party in interest if the QPAM merely holds an ownership interest of five
percent or more in the parent company of the party in interest.(4)
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1 and is issued subject to the provisions of that procedure,
including section 10, relating to the effect of advisory opinions. This
opinion relates only to the specific issue addressed herein.
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Sincerely,
Ivan L. Strasfeld
Director
Office of Exemption Determinations
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The term “control” is defined in
section V(e) of PTE 84-14 to mean “the power to exercise a
controlling influence over the management or policies of a person
other than an individual.”
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You acknowledge that to the extent
an entity in the vertical chain of ownership has or shares the
authority to vote or dispose of interests that are owned by entities
outside the vertical chain of ownership, those interests also would be
counted.
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In this regard, the Department notes
that, although the ownership interests of parties under common control
with the QPAM or the party in interest are not taken into account for
purposes of the related party determination under section I(d) of the
class exemption, no relief would be available under Part I of the
class exemption for any violations of section 406(b)(1) of the Act
that may arise in connection with transactions involving affiliated
parties.
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The Department notes however, that
prohibited transaction issues may arise where the parties create a
nonsubstantive parent entity to the party in interest and the QPAM (or
a person controlling, or controlled by, the QPAM) has a five percent
or greater interest in the parent company. If such structure is
designed solely to take advantage of the relief provided by the
exemption, it is the Department’s view that an issue would be raised
regarding compliance with that part of section I(c) of the exemption
which requires that the transaction not be part of an agreement,
arrangement or understanding designed to benefit a party in interest.
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