Class Exemption for the Acquisition and Sale of Trust REIT Shares
by Individual Account Plans Sponsored by Trust REITS [04/28/2004]
Volume 69, Number 82, Page 23220-23226
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2004-07; Application Number D-10659]
Class Exemption for the Acquisition and Sale of Trust REIT Shares
by Individual Account Plans Sponsored by Trust REITS
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Grant of class exemption.
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SUMMARY: This document contains a final 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 (the Code). The exemption permits
the acquisition, holding and sale of certain publicly traded shares of
beneficial interest in a real estate investment trust (REIT), that is
structured under state law as a business trust (Trust REIT), by
individual account plans sponsored by the Trust REIT or its affiliates.
The exemption affects participants and beneficiaries of employee
benefit plans involved in such transactions, as well as the REITs and
their affiliates that sponsor such plans.
FOR FURTHER INFORMATION CONTACT: Andrea W. Selvaggio, 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: On June 3, 2003, the Department published a
notice in the Federal Register (68 FR 33185) of the pendency of a
proposed class exemption from the restrictions of sections 406(a),
406(b)(1) and (b)(2), 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 (E) of the Code. Relief for the
transactions was requested in an application (Application No. D-10659)
submitted by the National Association of Real Estate Investment Trusts
(NAREIT or the Applicant) 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, 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. 1 (1996), 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. For purposes of this exemption,
references to specific provisions of Title I of the Act, unless
otherwise specified, refer also to the corresponding provisions of
the Code.
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The notice of pendency gave interested persons an opportunity to
comment or request a public hearing on the proposal. The Department
received two public comments. Upon consideration of the comments
received, the Department has determined to grant the proposed class
exemption, subject to certain modifications. These modifications and
the comments are discussed below.
Executive Order 12866
Under Executive Order 12866, the Department must determine whether
the 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 class exemption has been drafted and reviewed in accordance
with Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this exemption 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
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501) (PRA), the Department submitted the information collection
request (ICR) included in the Notice of a Proposed Class Exemption for
the Acquisition and Sale of Trust REIT Shares by Individual Account
Plans Sponsored by Trust REITs [referred to for the purposes of the ICR
as Disclosures for Transactions with Trust REIT Shares] to the Office
of Management and Budget (OMB) for review and clearance at the time the
Notice of a Proposed Rulemaking (NPRM) was published in the Federal
Register (June 3, 2003, 68 FR 33185). OMB approved the Notice under OMB
control number 1210-0124. The approval will expire on July 31, 2006.
The Department solicited comments concerning the ICR in connection
with the NPRM. The Department received one comment that provided
updated information on the number of REITs and the number of Trust
REITs described in
[[Page 23221]]
the PRA section of the proposed exemption. Specifically, because of
consolidation in the industry, rather than the 228 publicly traded
REITs discussed in the proposal, there are now 173 such REITs.
Likewise, the number of Trust REITs has decreased by one, from 52 to
51. At the suggestion of the commenter, the Department has changed the
data used in the preliminary discussion about REITs under PRA 95. The
Department notes, however, that the respective changes do not
materially affect the hour or cost burdens as originally calculated
under the NPRM. The Department considers its original cost and hour
burden estimates for this ICR to be appropriate at this time. However,
the Department will continue to monitor the number of Trust REITs
subject to the exemption's information collection provisions in future
years.
Discussion of the Comments Received
The comments received by the Department were generally supportive
of the issuance of a class exemption to permit certain transactions
involving Trust REITs shares. However, the commenters requested
specific modifications to the proposal in the following areas:
(1) Permit the purchase of employer securities pursuant to a plan
provision requiring that cash contributions by the employer be used to
purchase Trust REIT shares--The Applicant and the other commenter
requested that the exemption permit the purchase, by the Plan, of Trust
REIT shares in instances where the terms of the Plan require that the
employer's cash contributions be used to acquire Trust REIT shares. The
commenters explained that some employers prefer to contribute cash
because contributing treasury shares would dilute the value of the
shares. NAREIT articulated the concern as follows: ``the trustee is
directed, and arguably is not acting in a fiduciary capacity.
Consequently, the portion of the proposed exemption for fiduciary
investment in Qualifying REIT Shares is probably not applicable.''
Contrary to NAREIT's analysis of the directed trustee's fiduciary
status, the Department notes that a directed trustee is a fiduciary
under the Act.\2\ That fact, however, is not determinative as to
whether the requested relief is warranted.
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\2\ Under ERISA section 403(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. 29
U.S.C. 1103(a)(1).
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After considering the comment, the Department has decided to modify
the final exemption as requested by the commenters. The exemption will
cover the purchase of Trust REIT shares in accordance with the terms of
the Plan that require employer contributions be used to purchase Trust
REIT shares. In such instances, the Trust REIT shares may be purchased
on the Primary Exchange or by netting within the Plan. In following
plan provisions that require the trustee invest employer cash
contributions in Trust REIT shares, the Department notes that the
trustee must discharge his duties consistent with the fiduciary
responsibility provisions of ERISA.
For prospective relief, shares may not be subject to a lockup. The
Applicant has explained that, on a prospective basis, the Independent
Fiduciary will immediately allocate Qualifying REIT Shares contributed
by the employer or purchased with employer cash contributions to the
individual participants' Accounts. Therefore, each participant will
have discretionary authority to direct the trustee to sell such
shares.\3\
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\3\ 29 CFR 2550.404c-1(d)(2)(ii)(E)(4)(i) provides that in order
for the limitation on liability of plan fiduciaries under 404(c) of
the Act to apply, the securities must be qualifying employer
securities (as defined in 407(d)(5) of the Act). The Applicant
sought this exemption to address its concern that Trust REIT shares
might not meet the definition of qualifying employer securities.
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(2) Paired Share Arrangement--The other commenter requested that
the class exemption be modified to cover a ``paired share REIT.''
According to the commenter, in its paired share arrangement, a share of
corporate stock and a share of beneficial interest in the Trust REIT
trade together on an exchange as a single security. The commenter's
paired shares trade on the New York Stock Exchange. The commenter was
concerned that this paired share arrangement might be viewed as a
trading restriction that would cause the Trust REIT shares to fail to
satisfy the definition of Qualifying REIT Shares under section III(j)
of the proposed exemption. After considering the comment, the
Department has determined to amend the definition of Qualifying REIT
Shares to include Trust REIT shares that are part of a paired share
arrangement, provided that the Trust REIT shares would otherwise
satisfy the requirements of the exemption and the corporate stock with
which it is paired is a ``qualifying employer security'' as defined in
section 407(d)(5) of the Act.
(3) Number of Trust REITs--The Applicant also informed the
Department that, as of June 30, 2003, there are a total of 173 publicly
traded REITs in the United States, and 51 publicly traded business
trust REITs.
Description of the Exemption
The exemption consists of three sections. Section I provides
conditional exemptive relief for the acquisition, holding, and sale of
Qualifying Trust REIT Shares by individual account plans sponsored by
the Trust REITs. Section II(a) describes the conditions for retroactive
relief for transactions occurring up to six years prior to the date
that the notice granting the final exemption is published in the
Federal Register and for 60 days thereafter. Section II(b) provides
prospective relief for transactions that meet certain additional
conditions that are described below. Finally, section III contains
definitions for certain terms used in the exemption.
The exemption is generally similar to an individual exemption
previously granted by the Department, Crown American, PTE 97-64 (62 FR
66690 (12/19/97)). Among the conditions of the individual exemption was
a 25 percent cap on the percentage of trust REIT shares held in an
account. Unlike the individual exemption, the Department believed that
for purposes of the proposed class exemption it would not be practical
to develop a single percentage limitation that would apply to
investment in Qualifying REIT Shares by all individual account plans
maintained by the Trust REITs or their Employer Affiliates, in view of
the variety of REITs that would be subject to the proposal and the
different types of real estate activities engaged in by such entities.
In this regard, the Department notes that section 404(a) of the Act
requires, among other things, that a fiduciary discharge his duties
with respect to a plan solely in the interest of the plan's
participants and beneficiaries and in a prudent fashion. Section
404(a)(1)(C) further 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 real property or
qualifying employer securities. To the extent that the Qualifying REIT
Shares do not
[[Page 23222]]
constitute stock for purposes of 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
Qualifying REIT Shares. Accordingly, it is the responsibility of a
fiduciary of each Plan intending to take advantage of the relief
provided by this exemption to determine the appropriate level of
investment in Qualifying REIT Shares, based on the particular facts and
circumstances, consistent with its responsibilities under section 404
of the Act.
The Department continues to believe that the scope of the class
exemption is consistent with the Applicant's request for relief based
on the Applicant's belief that Trust REIT shares were qualifying
employer securities subject to sections 407 and 408(e) of the Act.
Retroactive Relief
The exemption set forth in section I(a) provides retroactive relief
from the restrictions of sections 406(a), 406(b)(1) and (b)(2), and
407(a) of the Act and from the taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1)(A) through (E) of the Code
for: (1) The purchase or sale of Qualifying REIT Shares where the
decision to purchase or sell the securities was made by a participant,
or by a fiduciary that was independent of the Trust REIT and its
affiliates; (2) the contribution of Qualifying REIT Shares to the Plan
by an employer or the purchase of Qualifying REIT Shares pursuant to a
plan provision requiring that employer contributions of cash be used to
purchase Qualifying REIT Shares; and (3) the holding of Qualifying REIT
Shares; provided that the conditions of the exemption were met at the
time of the transaction.
The conditions applicable to the retroactive exemption are set
forth in Section II(a) described below. Section II(a)(1) provides
retroactive relief where participants exercised their discretion to
purchase Trust REIT shares for their own account so long as they were
permitted to give instructions to sell such shares at least quarterly.
Section II(a)(2) provides relief with respect to shares purchased by an
independent fiduciary, including shares purchased pursuant to a plan
provision requiring that cash contributions by the employer be used to
purchase Trust REIT shares. The purchase of Trust REIT shares, by an
independent fiduciary pursuant to plan provisions, or the contribution
of Trust REIT shares by the employer, where such shares are subject to
a lockup, i.e., a restriction on when the shares could be sold, is
covered retroactively, but not prospectively.
The exemption requires that the participant (section II(a)(1)(B)),
or a fiduciary independent of the Trust REITs (Section II(a)(2)(C)) had
the authority to vote, tender and exercise similar ownership rights
with respect to shares controlled by them.
Section II(a)(3) requires that Trust REIT shares be purchased and
sold at the prevailing market price on the Primary Exchange on which
these shares were traded. In this regard, section III(h) provides that
the term ``Primary Exchange'' means the New York Stock Exchange (NYSE),
the American Stock Exchange (AMEX), or the National Association of
Securities Dealers Automated Quotation System National Market (NASDAQ
National Market).
Under the final exemption, the Department has expanded the scope of
section II(a)(4) (netting transactions) to include, not only
transactions between Accounts, but also transactions between an Account
and the independent fiduciary purchasing Qualifying REIT Shares with
employer cash contributions. This change was made to permit the
independent fiduciary to use netting transactions where it is
purchasing employer securities with employer cash contributions
pursuant to a plan provision requiring such purchases. Where investment
decisions are implemented through the netting of purchases and sales
within the Plan, the transactions must be valued at the closing market
price for that day on the Primary Exchange on which the shares are
traded. The Department cautions that, in order for transactions to
satisfy this condition, such trades must be done in an objective and a
mechanical fashion, so that neither the buyer nor the seller is favored
in the transaction.
Section II(a)(5) provides that the covered transactions must meet
an arm's-length test. Under this test, at the time of the transaction,
the terms of the transaction must be at least as favorable to the Plan
or the Account as the terms generally available between unrelated
parties.
Pursuant to section II(a)(6) where Trust REIT shares are
contributed to, or purchased by, the Plan from the Trust REIT, such
shares must be conveyed to the Plan at or below market price and no
commissions or other fees may be charged.
Pursuant to section II(a)(7), a participant's purchase or sale of
Trust REIT shares is not covered by the exemption if the participant
was subject to undue influence with respect to the investment decision
to acquire or sell Trust REIT shares.
Prospective Relief
The exemption set forth in section I(b) provides prospective relief
from the restrictions of sections 406(a), 406(b)(1) and (b)(2), and
407(a) of the Act and from the taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1)(A) through (E) of the Code
for: (1) The purchase or sale of Qualifying REIT Shares by a
participant, or (2) by an Independent Fiduciary; (3) the contribution
of Qualifying REIT Shares to the Plan by an employer or the purchase of
Qualifying REIT Shares pursuant to a plan provision requiring that
employer contributions of cash be used to purchase Qualifying REIT
Shares; and (4) the holding of Qualifying REIT Shares; provided that
the conditions of the exemption were met at the time of the
transaction.
The conditions applicable to the prospective exemption are set
forth in section II(b) described below. Section II(b)(1)(A) provides
that participants must be able to sell Trust REIT shares purchased by
them or contributed to their account at least monthly. As a result, no
shares may be subject to a lockup. Section II(b)(1)(B) provides that
participants must be able to vote, tender and exercise similar rights
with respect to the shares over which the participants have investment
discretion.
Section II(b)(2) provides that an Independent Fiduciary must have
investment discretion to purchase Qualifying REIT Shares, unless such
shares are purchased pursuant to a plan provision requiring that
employer cash contributions be used to purchase Qualifying REIT Shares.
Shares purchased pursuant to such a plan provision must be transferred
to the participants' Accounts. Section III(e) of the exemption defines
the term ``Independent Fiduciary'' as a trustee or investment manager
who had equity capital of at least $1 million and has assets under
management of over $50 million. This fiduciary must be independent of
the Trust REIT, the Employer Affiliate, and any of their affiliates. In
this regard, the Trust REIT, the Employer Affiliate, or any of their
affiliates, may not own any interest in the Independent Fiduciary and
the Independent Fiduciary may not own more than 5 percent of the Trust
REIT, the Employer Affiliate, or any of their affiliates. The
Independent Fiduciary must acknowledge in writing that it is a
fiduciary and that it has the appropriate technical training or
expertise to perform the services
[[Page 23223]]
contemplated by this exemption. The Independent Fiduciary may not
receive more than one percent (1%) of its current gross income for
Federal tax purposes, (as measured by the prior year's taxable income)
from the Trust REIT, the Employer Affiliate and their affiliates.
Lastly, while serving as an Independent Fiduciary and for 6 months
after it ceases to serve in this capacity, the Independent Fiduciary
may not acquire property from, sell property to, or borrow any funds
from the Trust REIT, the Employer Affiliate, or any affiliates thereof.
Section II(b)(3) provides that, where participants have
discretionary authority to purchase or sell Qualifying REIT Shares,
neither the Trust REIT, an Employer Affiliate, the Independent
Fiduciary, nor any affiliates thereof, has any discretion or authority
over such investment decisions, renders any investment advice with
respect to these assets, nor exerts any undue influence over the
decisions of the participants to acquire or sell Qualifying REIT
Shares.
Pursuant to section II(b)(4), prior to or immediately after the
initial investment in Qualifying REIT Shares, copies of the most recent
prospectus, quarterly report and annual report concerning the REITs,
must be provided to the person who is directing the investment. Updates
of these documents must also be provided as published.
To help ensure that participants are not subject to pressure to
invest in, or to continue to hold, employer securities, the
confidentiality of their investment and voting decisions with respect
to all such shares are protected under section II(b)(5) of the
exemption. In this regard, section II(b)(5)(A) requires the appointment
of a fiduciary that is responsible for confidentiality. Pursuant to
section II(b)(5)(B), the Plan must provide participants, in writing,
the procedures established to protect confidentiality of information
relating to the purchase, holding, and sale of Qualifying REIT Shares
and the exercise of voting, tender and other similar rights with
respect to such shares. Further, should any situation arise where the
fiduciary determines that there is a potential for undue influence upon
participants and beneficiaries with respect to the exercise of
shareholder rights, section II(b)(5)(C) requires that the Plan appoint
an independent fiduciary (who may, but need not be, the Independent
Fiduciary (as defined in section III(e)) to carry out activities
related to this particular situation.\4\ For example, tender offers,
mergers and acquisitions are likely to generate the need for an
independent fiduciary to provide additional safeguards for participant
confidentiality.\5\
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\4\ This requirement was modeled after the regulations on
``independent exercise of control'' under section 404(c) of the Act.
29 CFR 2550.404c-1(d)(2)(ii)(E)(4)(viii) and (ix).
\5\ In the preamble to the 404(c) regulations cited above, the
Department stated that it agreed with the commentators that
``situations where the potential for undue employer influence may
exist include tender offers, exchange offers and contested board
elections.'' 57 FR 46906, 46927 (October 13, 1992).
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Where Qualifying REIT Shares are purchased or sold on the Primary
Exchange, Section II(b)(6) provides that such shares must be purchased
for cash at their market price at the time of the transaction. It
further provides that the broker executing the transactions must be
independent of the Trust REIT, an Employer Affiliate, the Independent
Fiduciary and any affiliates thereof. The Applicant requested, and the
Department agreed, to modify the final exemption to provide that the
broker executing the transactions covered by this exemption need not be
independent of the Independent Fiduciary if that broker does not charge
a commission on these purchases and sales.
Section II(b)(7) provides that transactions within the Plan between
Accounts and between an Account and the Independent Fiduciary
purchasing Qualifying REIT Shares with employer cash contributions are
permitted in order to save brokerage costs. Where investment decisions
are implemented through the netting of purchases and sales within the
Plan, the transactions must be valued at the closing market price for
that day on the Primary Exchange on which the shares are traded. Such
transactions must take place on the business day on which the
instruction is received, or on the next business day, using that day's
closing price, if the instruction is received after noon, or such later
deadline as designated by the trustee or the named fiduciary.
Pursuant to section II(b)(8) the covered transactions must meet an
arm's-length test. Under this test, at the time of the transaction, the
terms of the transaction must be at least as favorable to the Plan or
the Account as the terms generally available between unrelated parties.
Section II(b)(9) provides that where Qualifying REIT Shares are
purchased from the Trust REIT, contributed by the Plan Sponsor, or
purchased by the Plan with employer contributions, such shares must be
conveyed to the Plan at or below market price and no commissions or
other fees may be charged.
Under section II(b)(10) certain information must be disclosed to
the participant or the Independent Fiduciary prior to the initial
covered transaction that occurs 60 days after publication of the final
exemption in the Federal Register. The disclosures must describe, among
other things, any fees or transaction costs, the role, if any, of the
Trust REIT as a principal in the transaction, and the exchange or
market system where Qualifying REIT Shares are traded. Finally, the
participant or Independent Fiduciary must be informed that copies of
the proposed and final exemption are available upon request.
Section II(b)(11) of the exemption contains a condition requiring
the Trust REIT or its Employer Affiliates on a prospective basis to
maintain, for a period of six years from the date of each covered
transaction, subject to limited exceptions, the records necessary to
enable certain persons to determine whether the applicable conditions
of the exemption have been met. Such persons include any duly
authorized employee or representative of the Department or the Internal
Revenue Service, any plan fiduciary, any participant or beneficiary of
the Plan whose Account is invested in Qualifying REIT Shares, any
employer of employees covered by the Plan, and any employee
organizations whose members are covered by the Plan. All records must
be unconditionally available at their customary location for
examination during normal business hours by the above-described
persons. However, the Trust REIT or its Employer Affiliates may refuse
to disclose to a person, other than a duly authorized employee or
representative of the Department or the Internal Revenue Service,
commercial or financial information that is privileged or confidential.
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 duties respecting the plan solely in the interests of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with
[[Page 23224]]
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) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, and based on the entire record, the Department
finds 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 the plans;
(3) The class exemption is applicable to a particular transaction
only if the transaction satisfies the conditions specified in the class
exemption; and
(4) The exemption is supplemental to, and not in derogation of, any
other provisions of ERISA and the Code, including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction.
Exemption
Accordingly, the following exemption is granted 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).
Section I. Covered Transactions
(a) For the period from six years prior to April 28, 2004, to June
28, 2004, the restrictions of sections 406(a), 406(b)(1), 406(b)(2),
and 407(a) of the Act, and the taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the following transactions, if the relevant
conditions set forth in section II(a) below are met at the time of the
transaction:
(1) The purchase or sale of Qualifying REIT Shares (as defined in
section III(j)) on behalf of an Account (as defined in section III(a))
at the direction of the participant;
(2) The purchase or sale of Qualifying REIT Shares on behalf of the
Plan (as defined in section III(f)) at the direction of an independent
fiduciary (as defined in section II(a)(2));
(3) The contribution in-kind of Qualifying REIT Shares to a Plan by
an employer, or the purchase of Qualifying REIT Shares pursuant to a
plan provision requiring that employer contributions of cash be used to
purchase Qualifying REIT Shares; and
(4) The holding of the Qualifying REIT Shares by the Plan.
(b) Effective after June 28, 2004, the restrictions of sections
406(a), 406(b)(1), 406(b)(2), and 407(a) of the Act, and the taxes
imposed by section 4975(a) and (b) of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the following
transactions, if the relevant conditions set forth in section II(b)
below are met at the time of the transaction:
(1) The purchase or sale of Qualifying REIT Shares on behalf of an
Account in a Plan at the direction of the participant;
(2) The purchase or sale of Qualifying REIT Shares on behalf of the
Plan at the direction of the Independent Fiduciary (as defined in
section III(e));
(3) The contribution in-kind of Qualifying REIT Shares to a Plan by
an employer, or the purchase of Qualifying REIT Shares pursuant to a
plan provision requiring that employer contributions of cash be used to
purchase Qualifying REIT Shares; and
(4) The holding of the Qualifying REIT Shares by the Plan.
Section II. Conditions
(a) Retroactive Conditions
(1) The participant has discretionary authority to direct the
trustee to:
(A) Sell the Qualifying REIT Shares purchased by the participant
for his own Account no less frequently than quarterly; and
(B) Vote, tender and exercise similar rights with respect to those
Qualifying REIT Shares in the Account over which the participant has
discretion; or
(2) An independent fiduciary has discretionary authority to
purchase, hold or sell the Qualifying REIT Shares, or such fiduciary is
acting in accordance with a plan provision that requires employer cash
contributions be used to purchase Qualifying REIT Shares, and such
independent fiduciary:
(A) Is a trustee, named fiduciary or investment manager with
respect to the Qualifying REIT Shares;
(B) is neither the Trust REIT (as defined in section III(i)) an
Employer Affiliate (as defined in section III(d)) nor an affiliate
thereof; and
(C) has the discretionary authority to exercise the voting, tender
and similar rights with respect to those Qualifying REIT Shares for
which it has investment discretion. Notwithstanding the foregoing, this
paragraph (2)(C) shall be deemed met if another fiduciary that is
independent of the Trust REIT had the right to exercise the voting,
tender and similar rights with respect to the Trust REIT shares.
(3) Purchases and sales of Qualifying REIT Shares by the Plan are
executed:
(A) For cash;
(B) on the Primary Exchange (as defined in section III(h)) or
directly with the Trust REIT; and
(C) at the market price for the Trust REIT shares on the Primary
Exchange at the time of the transaction.
(4) Notwithstanding paragraph (3) above, the exemption shall apply
to purchases and sales of Qualifying REIT Shares within the Plan
between Accounts and between an Account and the independent fiduciary
purchasing Qualifying REIT Shares with employer cash contributions, in
order to avoid brokerage commissions and other transaction costs,
provided that each transaction is executed at the closing price for the
Trust REIT shares on the Primary Exchange on the date of the
transaction.
(5) At the time the transaction is entered into, the terms of the
transaction are at least as favorable to the Plan or the Account as the
terms generally available in comparable arm's-length transactions
between unrelated parties.
(6) Qualifying REIT Shares contributed to, or purchased by, the
Plan from the Trust REIT:
(A) Are conveyed to the Plan at or below the market price for the
Trust REIT shares on the Primary Exchange at the time of the
transaction; and
(B) are conveyed to the Plan without the payment of any commission
or other fee in connection with the transaction.
(7) Where a participant has discretionary authority to purchase or
sell Qualifying REIT Shares, neither the Trust REIT, an Employer
Affiliate, the independent fiduciary, nor any affiliate thereof exerts
any undue influence over the decisions of the participant to acquire or
sell Qualifying REIT Shares.
(b) Prospective Conditions
(1) The participant has discretionary authority to direct the
trustee:
(A) To sell Qualifying REIT Shares purchased by, or contributed to,
his Account no less frequently than monthly; and
(B) to vote, tender and exercise similar rights with respect to
those Qualifying REIT Shares in the Account over which the participant
has discretion; or
(2) An Independent Fiduciary, as defined in section III(e), has
discretionary authority to purchase, hold or sell the Qualifying REIT
Shares, or such fiduciary is acting in accordance with a plan provision
that requires employer cash contributions be used to purchase
Qualifying REIT Shares for transfer to the participants' Accounts. The
Independent Fiduciary has the discretionary authority to exercise the
[[Page 23225]]
voting, tender and similar rights with respect to the Qualifying REIT
Shares, unless the participant has discretionary authority to direct
the trustee with respect to such matters. Notwithstanding the
foregoing, this paragraph (2) shall be deemed met if another fiduciary
that is independent of the Trust REIT, the Employer Affiliate and any
affiliates thereof; has the right to exercise the voting, tender and
similar rights with respect to the Qualifying Trust REIT Shares.
(3) Where a participant has discretionary authority to purchase,
hold or sell Qualifying REIT Shares, neither the Trust REIT, an
Employer Affiliate, the Independent Fiduciary, nor any affiliate
thereof:
(A) Has discretionary authority or control with respect to the
investment of the Plan assets involved in the transaction;
(B) renders any investment advice [within the meaning of 29 CFR
2510.3-21(c)] with respect to those assets; or
(C) exerts any undue influence over the decisions of the
participants to acquire, hold or sell Qualifying REIT Shares.
(4) Prior to or immediately after an initial investment in
Qualifying REIT Shares, either the Trust REIT, or an agent or affiliate
thereof provides the person who is directing the investment (i.e. the
participant or the Independent Fiduciary) with the most recent
prospectus, quarterly report, and annual report concerning the Trust
REIT, and thereafter, either the Trust REIT, or an agent or affiliate
thereof, provides such participants and/or Independent Fiduciary with
updated prospectuses, quarterly statements and annual reports as
published.
(5) Information relating to the purchase, holding, and sale of
Qualifying REIT Shares, and the exercise of voting, tender and similar
rights with respect to such Qualifying REIT Shares by participants is
maintained in accordance with procedures designed to safeguard the
confidentiality of such information except to the extent necessary to
comply with Federal or state laws not preempted by ERISA. To safeguard
confidentiality, the Plan shall:
(A) Designate a fiduciary responsible for safeguarding
confidentiality;
(B) provide participants, when they become eligible to participate
in the Plan, with a statement describing the procedures established to
provide for the confidentiality of information relating to the
purchase, holding and sale of Trust REIT shares, and the exercise of
voting, tender and similar rights, by participants and beneficiaries
and the name, address and telephone number of the fiduciary responsible
for monitoring compliance with the procedures; and
(C) appoint, if the fiduciary responsible for safeguarding
participant confidentiality determines that a situation involves a
potential for undue employer influence upon participants and
beneficiaries with regard to the direct or indirect exercise of
shareholder rights, an independent fiduciary (who may, but need not be,
the Independent Fiduciary), to take appropriate action to protect the
confidentiality of the participants' and beneficiaries' votes. For
purposes of this subparagraph (C), a fiduciary is not independent if
the fiduciary is affiliated with the Trust REIT, an Employer Affiliate,
or any affiliate thereof.
(6) All purchases and sales of Qualifying REIT Shares by the Plan
are executed:
(A) For cash;
(B) On the Primary Exchange (as defined in section III(h)) by a
broker that is independent of the Trust REIT, the Employer Affiliate,
the Independent Fiduciary and any affiliate thereof, or directly with
the Trust REIT. Notwithstanding the above, the Independent Fiduciary or
its affiliate may execute these transactions if no commission is
charged; and
(C) at the market price for the Trust REIT shares on the Primary
Exchange at the time of the transaction.
(7) Notwithstanding paragraph (6) above, the exemption shall apply
to purchases and sales of Qualifying REIT Shares within the Plan
between Accounts and between an Account and the Independent Fiduciary
purchasing Qualifying REIT Shares with employer cash contributions, in
order to avoid brokerage commissions and other transaction costs,
provided that the transaction is executed at the closing price for the
Trust REIT shares on the Primary Exchange on the date of the
transaction. All such transactions will take place at the closing price
on the business day on which the instruction is received, or at the
closing price on the next business day if the instruction is received
after noon or such later deadline as designated by the trustee or named
fiduciary.
(8) At the time the transaction is entered into, the terms of the
transaction are at least as favorable to the Plan or the Account as the
terms generally available in comparable arm's-length transactions
between unrelated parties.
(9) Qualifying REIT Shares that are contributed to, or purchased
by, the Plan from the Trust REIT and Qualifying REIT Shares purchased
by the Plan with employer cash contributions:
(A) Are conveyed to the Plan at or below the market price for the
Trust REIT shares on the Primary Exchange at the time of the
transaction;
(B) Can be immediately sold on the Primary Exchange; and
(C) Are conveyed to the Plan without the payment of any commission
or other fee in connection with the transaction.
(10) Prior to a participant, Plan Sponsor (as defined in section
III(g)) or an Independent Fiduciary engaging in an initial transaction
under this exemption, after June 28, 2004, the Trust REIT or its
Employer Affiliate provides the following disclosures to the person who
exercises discretionary authority with respect to the Qualifying REIT
Shares (i.e., the participant or the Independent Fiduciary). The
disclosure must contain the following information regarding the
transactions and a supplemental disclosure must be made to the person
directing the covered investments if material changes occur subsequent
to the initial disclosure. This disclosure must include:
(A) Disclosure of any fees for brokerage services or transaction
costs that will be incurred as a result of the transactions;
(B) Disclosure of the role of the Trust REIT, if any, as a
principal in the transactions;
(C) The exchange or market system where the Qualifying REIT Shares
are traded; and
(D) A statement that a copy of the proposed and final exemption
shall be provided to participants and the Independent Fiduciary upon
request.
(11) The Trust REIT or its Employer Affiliates for a period of six
years maintains the records necessary to enable the persons described
below in paragraph (12) to determine whether the conditions of this
exemption have been met, except that:
(A) If the records necessary to enable the persons described in
paragraph (12) to determine whether the conditions of the exemption
have been met are lost or destroyed, due to circumstances beyond the
control of the Trust REIT or its Employer Affiliates, then no
prohibited transaction will be considered to have occurred solely on
the basis of the unavailability of those records; and
(B) No party in interest other than the Trust REIT or its Employer
Affiliates shall be subject 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 (12) below.
(12) (A) Except as provided below in paragraph (12)(B) and
notwithstanding
[[Page 23226]]
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (11) are unconditionally available at their
customary location for examination during normal business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Plan or any duly authorized employee or
representative of such fiduciary,
(iii) Any employer of participants and beneficiaries and any
employee organization whose members are covered by the Plan, or any
authorized employee or representative of these entities; or
(iv) Any participant or beneficiary of the Plan whose Account is
invested in Qualifying REIT Shares or the duly authorized employee or
representative of such participant or beneficiary;
(B) None of the persons described in paragraph (12)(A)(ii)-(iv)
shall be authorized to examine trade secrets of the Trust REIT, or an
Employer Affiliate or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this exemption,
(a) Account--The term ``Account'' means the individual account of a
participant in a defined contribution pension plan in which benefits
are based solely upon the amount contributed to the participant's
account, and any income, expenses, gains or losses, and any forfeitures
of accounts of other participants which may be allocated to such
participant's account.
(b) Affiliate--The term ``affiliate'' of a person means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) Any officer, director, employee, or relative (as defined in
section 3(15) of the Act) of such person or partner in such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) Control--The term ``control'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(d) Employer Affiliate--The term ``Employer Affiliate'' means any
corporation, limited liability company (LLC), or partnership 50 percent
or more owned by a Trust REIT.
(e) Independent Fiduciary--The term ``Independent Fiduciary'' means
a person who:
(1) Is a trustee or an investment manager (as defined in 3(38) of
the Act) who had equity capital of at least $1 million as of the last
day of its most recent fiscal year and has client assets under
management or control of over $50 million;
(2) Is not an affiliate of the Trust REIT, the Employer Affiliate
or an affiliate thereof;
(3) Is not a corporation, partnership or trust in which the Trust
REIT, its Employer Affiliate or an affiliate thereof has a one percent
or more ownership interest or is a partner;
(4) Does not have more than a five percent ownership interest in
the Trust REIT, its Employer Affiliate or an affiliate thereof;
(5) Has acknowledged in writing that:
(i) It is a fiduciary; and
(ii) It has appropriate technical training or experience to perform
the services contemplated by the exemption;
(6) For purposes of this definition, no organization or individual
may serve as Independent Fiduciary for any fiscal year in which the
gross income received by such organization or individual (or
partnership or corporation of which such organization or individual is
an officer, director, or 10 percent or more partner or shareholder)
from the Trust REIT, its Employer Affiliate and affiliates thereof,
(including amounts received for services as an independent fiduciary
under any prohibited transaction exemption granted by the Department)
exceeds one percent of such fiduciary's gross income for federal tax
purposes in its prior tax year; and
(7) In addition, no organization or individual which is an
Independent Fiduciary and no partnership or corporation of which such
organization or individual is an officer, director or 10 percent or
more partner or shareholder may acquire any property from, sell any
property to or borrow any funds from the Trust REIT, its Employer
Affiliate or their affiliates, during the period that such organization
or individual serves as an Independent Fiduciary and continuing for a
period of six months after such organization or individual ceases to be
an Independent Fiduciary or negotiates any such transaction during the
period that such organization or individual serves as an Independent
Fiduciary.
(f) Plan--The term ``Plan'' means an individual account plan
sponsored by the issuer of Qualifying REIT Shares or an Employer
Affiliate thereof.
(g) Plan Sponsor--The term ``Plan Sponsor'' means the Trust REIT or
the Employer Affiliate that is the employer of the employees covered by
the Plan.
(h) Primary Exchange--The term ``Primary Exchange'' means the
national securities exchange or market system on which the Trust REIT
shares are primarily traded, and which is either the New York Stock
Exchange, the American Stock Exchange, or the National Association of
Securities Dealers Automated Quotation System National Market.
(i) Trust REIT--The term ``Trust REIT'' means a ``real estate
investment trust'' within the meaning of section 856 of the Code that
is organized as a trust under applicable law.
(j) Qualifying REIT Shares--The term ``Qualifying REIT Shares''
means shares of beneficial interest in a Trust REIT that:
(1) Are publicly traded (as defined in section III(k); and
(2) Have no trading restrictions other than those necessary to
qualify for REIT status or otherwise to satisfy securities law or
applicable exchange or market system trading rules. Notwithstanding the
above, the term ``Qualifying REIT Shares'' includes a Trust REIT share
that otherwise meets the conditions of this exemption but trades only
as a unit consisting of a Trust REIT share and a share of corporate
stock (a paired share arrangement), provided that the corporate stock
with which it trades is a qualifying employer security as defined in
ERISA section 407(d)(5).
(k) Publicly Traded--The term ``publicly traded,'' for purposes of
this exemption, means Trust REIT shares of beneficial interest which
are traded on the New York Stock Exchange, the American Stock Exchange,
or the National Association of Securities Dealers Automated Quotation
System National Market System.
(1) Participant--The term ``participant'' includes beneficiaries.
Signed at Washington, DC, this 22nd day of April, 2004.
Ivan L. Strasfeld,
Director, Office of Exemption, Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 04-9631 Filed 4-27-04; 8:45 am]
BILLING CODE 4520-29-P
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