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Wallace M. Starke, Esq.
Troutman, Sanders, Mays & Valentine, L.L.P.
P.O. Box 1122
Richmond, VA 23218-1122
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2002-04A
ERISA Sec. 408(e)
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Dear Mr. Starke:
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This is in response to your request for an advisory opinion regarding the
application of section 408(e) of the Employee Retirement Income Security Act
of 1974, as amended (ERISA) to certain transactions between a plan and
various personal trusts and estates sharing a common trustee with the plan.
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You represent that National Bankshares, Inc. (NBI) is a bank holding company
which owns all the issued and outstanding stock of the National Bank of
Blacksburg (the Bank). The Bank is a national banking association subject to
the supervision of the Office of the Comptroller of the Currency (OCC).
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You further represent that NBI acts as plan sponsor of the National
Bankshares, Inc. Employee Stock Ownership Plan (the ESOP) and the Bank is a
participating employer with respect to the ESOP. You state that the Bank
serves as trustee of the ESOP and also serves as trustee of various inter
vivos and executorial trusts and estates (referred to hereafter as personal
trusts). You state that to the best of your knowledge, none of the personal
trusts are ERISA plans, parties in interest with respect to the ESOP as
defined in section 3(14) of ERISA, or disqualified persons within the
meaning of section 4975(e) of the Internal Revenue Code (the Code).
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You state that the ESOP is an employee stock ownership plan within the
meaning of 4975(e)(7) of the Code and section 407(d)(6) of ERISA. It is
intended to be qualified under section 401(a) of the Code and last received
a favorable determination letter from the Internal Revenue Service to that
effect on June 1, 1995. The ESOP, by its terms, is designed to invest
primarily in the stock of NBI. NBI's outstanding stock consists of one class
of common stock which is readily traded on the NASDAQ small cap market.
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You request an advisory opinion regarding several transactions involving the
purchase by the ESOP of NBI stock from several personal trusts for which the
Bank also serves as trustee. No broker was used for the sales. You represent
that the Bank as trustee for the ESOP initiated such purchases of NBI stock
for the ESOP. You state that the Bank has an established procedure to
obtain, prior to executing any acquisition of NBI stock by the ESOP from a
personal trust, written consent from the primary beneficiary or any
co-fiduciary of the personal trust to sell NBI stock owned by the personal
trust to the ESOP.
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You state that no commission was charged to the ESOP or the personal trusts
in connection with the NBI stock purchases in question. The consideration
paid by the ESOP for the NBI stock was cash equal to the bid price for such
shares as quoted by the online service MSN Money Central, a price which was
not more than the fair market value of such shares at the time of their
purchase. The trustee did not receive any consideration for its personal
account in connection with any of the NBI stock purchases in question.
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You state that MSN Money Central is an online pricing service that obtains
its stock quotes from Standard and Poor's ComStock, Inc., the same service
used by a number of other pricing services. You state that there is a
15-minute delay when a stock quote is obtained from MSN Money Central, and
that in each of the purchases at issue the transaction was executed within
15 minutes of the time that a price quote was obtained. You state that
effecting the trade at the bid price, rather than the asked price,
benefitted the plan in that the bid price in most, if not all, cases is
lower than the asked price.
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A total of ten such transactions occurred between June of 2000 and April of
2001 representing a total of 7,646 shares of NBI stock and a total sale
price of $163,301. During an examination by the OCC of the operations of the
trust department of the Bank, the OCC examiner questioned whether these
transactions were prohibited by ERISA and the Code.
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You request the Department's view as to whether the described transactions
are exempt from the prohibited transaction restrictions of ERISA and the
Code by virtue of sections 408(e) of ERISA and 4975(d)(13) of the Code.
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Section 406(a)(1)(A) and (D) of ERISA prohibit a fiduciary with respect to a
plan from causing a plan to engage in a transaction if s/he knows or should
know that such transaction constitutes a direct or indirect sale or
exchange, or leasing of any property between a plan and a party in interest;
or a transfer to, or use for the benefit of, a party in interest, of any
assets of the plan. Section 3(14)(A) and (C) of ERISA define a party in
interest with respect to a plan to include a fiduciary of the plan and an
employer any of whose employees are covered by such plan.
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Section 406(a)(1)(E) of ERISA prohibits a fiduciary
with respect to a plan from causing the plan to engage in a transaction if
s/he knows or should know that such transaction constitutes a direct or
indirect acquisition, on behalf of the plan, of any employer security in
violation of section 407(a). In addition section 406(a)(2) prohibits
certain fiduciaries from permitting a plan to hold any employer security
if s/he knows or should know that holding such security violates section
407(a).
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Section 407(a) of ERISA provides, in part, that a plan
may not acquire or hold any employer security which is not a qualifying
employer security.
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Section 406(b)(1) and (2) of ERISA prohibit a fiduciary
with respect to a plan from dealing with the assets of a plan in his or
her own interest or for his own account, or from acting in his or her
individual or in any other capacity in any transaction involving the plan
on behalf of a party (or representing a party) whose interests are adverse
to the interests of the plan or the interests of its participants or
beneficiaries. Section 406(b)(3) prohibits a fiduciary with respect to a
plan from receiving any consideration for his own personal account from
any party dealing with such plan in connection with a transaction
involving the assets of a plan.
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However, section 408(e) of ERISA provides, in part,
that sections 406(a) and 406(b)(1) and (2) shall not apply to the
acquisition or sale by a plan of qualifying employer securities (as
defined in section 407(d)(5)) if the following conditions are met: (1) the acquisition or sale is for
adequate consideration; (2) no commission is charged with
respect to the acquisition or sale; and (3) the plan is an eligible individual
account plan (as defined in section 407(d)(3))… 2.
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Section 407(d)(1) of ERISA defines the term employer
security in part to mean a security issued by an employer of employees
covered by the plan or by an affiliate of such employer. With respect to
eligible individual account plans, section 407(d)(5) of ERISA defines the
term qualifying employer security to include an employer security which is
a stock.
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Section 3(18) of ERISA defines the term adequate
consideration to include, in the case of a security for which there is a
generally recognized market and if the security is not traded on a
national securities exchange which is registered under section 6 of the
Securities Exchange Act of 1934, a price not less favorable to the plan
than the offering price for the security as established by the current bid
and asked prices quoted by persons independent of the issuer and of any
party in interest.
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The term eligible individual account plan is defined
under section 407(d)(3) as including employee stock ownership plans which
explicitly provide for the acquisition and holding of qualifying employer
securities.
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Based on the representations described in your request,
it is the opinion of the Department that the ESOP constitutes an eligible
individual account plan inasmuch as the plan is an employee stock
ownership plan within the meaning of 4975(e)(7) of the Code and 407(d)(6)
of ERISA and is designed, by its terms, to invest primarily in the common
stock of NBI.
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You have represented that the transactions involve the
purchase of NBI common stock by the ESOP. You state that the ESOP is
maintained for the benefit of the employees of NBI, the Bank, and any
other NBI affiliate which adopts the ESOP as a participating employer. The
Bank, as a wholly owned subsidiary of NBI, constitutes an affiliate of NBI
on the basis of the facts you describe. Based on your representations, it
is the Department's view that common stock of NBI will constitute
qualifying employer securities with respect to the ESOP.
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You represent that none of these trusts are parties in
interest as defined under section 3(14). As a result, a violation of
section 406(a) would not have occurred with respect to the transactions.
You have also represented that the transactions involve the purchase of
NBI common stock by the ESOP from several personal trusts for which the
Bank also serves as the trustee. Such transactions would involve
violations of section 406(b)(2).
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Further, the Department has stated that to the extent that an investment
manager exercises discretion over both sides of a transaction in a
cross-trade transaction, there is potential for the investment manager to
use its discretion to favor one account over another, for example, in the
pricing or timing of the trade or in the decision to buy or sell securities
for an ERISA account. Such acts could result in one or more violations of
the fiduciary provisions of Title I of ERISA in addition to those described
in section 406(b)(2).
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Regulations issued by the Department clarify that section 408(e), by its
terms, exempts certain transactions from the prohibitions of section 406(a)
and 406(b)(1) and (2). Accordingly, it is the view of the Department that
the acquisitions of NBI stock by the ESOP under the circumstances described
would be exempt from the prohibitions of 406(a), and 406(b)(1) and (2) by
virtue of section 408(e) provided that the transactions are for adequate
consideration and that no commission is charged with respect to the
transactions.
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Whether the terms of section 408(e) have been met with respect to a
transaction is an inherently factual question which may only be answered by
the appropriate plan fiduciaries based on all of the relevant facts and
circumstances. The Department generally will not opine as to whether a
particular transaction is for adequate consideration. Rather, the Department
believes that such determinations should be made by appropriate plan
fiduciaries on the basis of all relevant facts and circumstances.
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We would note, however, that the fact that a
transaction is exempt under section 408(e) is not determinative of whether
a fiduciary has met its fiduciary obligations under ERISA. Section
404(a)(1)(A) of ERISA requires plan fiduciaries to discharge their duties
with respect to a plan solely in the interest of plan participants and
beneficiaries and for the exclusive purpose of providing benefits to
participants and beneficiaries and defraying the reasonable expenses of
administering the plan. Section 404(a)(1)(B) requires plan fiduciaries to
act with the care, skill, prudence and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of a like
character with like aims. Section 403(c)(1) provides that the assets of a
plan shall never inure to the benefit of an employer and shall be held for
the exclusive purposes of providing benefits to participants and
beneficiaries and defraying reasonable expenses of administering the plan.
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The general standards of fiduciary conduct contained in
sections 404(a)(1) and 403(c) apply to the described purchases of NBI
stock by the ESOP. Accordingly, fiduciaries of the ESOP must act
prudently, solely in the interest of the plan's participants and
beneficiaries, and for the exclusive purpose of providing benefits and
defraying reasonable plan administrative costs when deciding whether to
acquire NBI stock for the ESOP. Therefore, if plan fiduciaries failed to
act in compliance with these general fiduciary standards in the
acquisition of the NBI stock for the ESOP, they would be liable for losses
resulting from such breaches of fiduciary responsibility regardless of
whether the acquisition may be exempt from certain prohibited transaction
restrictions by virtue of section 408(e).
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If, under the facts and circumstances of any
transaction, the Bank uses the authority which makes it a fiduciary with
respect to the transaction to benefit personal trust clients at the
expense of the ESOP, or otherwise fails to act solely in the interest of
plan participants and beneficiaries in deciding to purchase NBI stock for
the ESOP, violations of sections 404(a)(1) and 403(c) could occur.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). Accordingly, it 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 J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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