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2003-15A
ERISA Sec. 3(14)(G) and 406(a)
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William A. Schmidt
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Second Floor
Washington, DC 20036-1800
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Jacob I. Friedman
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299
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Dear Messrs. Schmidt and Friedman:
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This is in response to your request for an advisory
opinion on behalf of Verizon Investment Management Corp. as to whether
certain transactions between employee benefit plans sponsored by Verizon
Communications, Inc. (Verizon) and a limited partnership in which those
plans invest would constitute prohibited transactions under the Employee
Retirement Income Security Act of 1974 (ERISA).
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You represent that Verizon sponsors welfare benefit plans that qualify as
voluntary employees’ beneficiary associations (VEBAs) and defined benefit
plans (DB Plans), collectively the Verizon Plans.(1)
The Bell Atlantic Master Trust (Master Trust) holds the assets of the
Verizon DB Plans. Mellon Bank, N.A. (Mellon) serves as the directed trustee
of the Master Trust. Each VEBA is held in trust by Mellon.
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Verizon Investment Management Corp. (VIMCO), a wholly-owned subsidiary of
Verizon, serves as investment manager of the Verizon Plans. You represent
that VIMCO is an in-house asset manager (INHAM) within the meaning of Part
IV(a) of Prohibited Transaction Exemption 96-23 with respect to the Verizon
Plans.
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You represent that Verizon intends to create an investment vehicle for the
Verizon Plans, employee benefit plans maintained and sponsored by third
parties unrelated to Verizon or Mellon (Third Party Plans), and other
institutional investors. To accomplish this, VIMCO, in concert with Mellon,
would establish and operate a limited partnership, which is a collective
investment vehicle (CIV) organized under the laws of Delaware.(2)
The CIV will be managed by a joint venture between VIMCO and Mellon (Joint
Venture).
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You represent that Delaware law requires that, among
other things, the CIV have one or more general partners and one or more
limited partners. You represent that, pursuant to Delaware law, the
general partner is not required to make contributions to the CIV nor
acquire a partnership interest in the CIV. You further represent that the
general partner will not make a contribution to, nor acquire a partnership
interest in, the CIV unless required to do so pursuant to the law of
jurisdictions, other than Delaware, in which the CIV may be doing
business.(3) A wholly-owned
subsidiary of VIMCO will be the general partner of the CIV. You represent
that the Verizon Plans will contribute assets to the CIV and become
limited partners of the CIV at the time the CIV is organized. You
represent that Mellon will have no responsibility or authority with
respect to the Verizon Plans’ decisions to invest in the CIV. The Third
Party Plans and other third party institutional investors will become
limited partners at future dates upon contribution to the CIV. Mellon or a
third party will be the trustee for the Third Party Plans. The Third Party
Plans will not have any relationship with VIMCO prior to making a
contribution to the CIV. You represent that, assuming that state law
requirements are fulfilled, the liability of each limited partner for the
CIV’s debts or obligations will be limited to the extent of the capital
that the limited partner has contributed or has agreed to contribute to
the CIV, undistributed profits and, under certain circumstances, the
return of certain distributions from the CIV. You represent that the CIV
will not be designated as a named fiduciary of, nor perform fiduciary
functions for, the Verizon Plans or the Third Party Plans.
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With respect to a Third Party Plan’s participation in the CIV, an
independent fiduciary (i.e., independent of VIMCO and Mellon) will make a
determination whether to make initial or subsequent contributions into the
CIV based upon detailed information provided by VIMCO concerning the
available investment pools and other relevant information. The independent
fiduciary must approve each Third Party Plan’s program of purchases and
redemptions of interests in the CIV.
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Mellon will be the custodian of the assets of the CIV.
You represent that Mellon, as trustee of the Master Trust, will hold at
least fifty percent of the interests of the CIV, on behalf of the Verizon DB
Plans, for the foreseeable future.
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The CIV will be composed of multiple investment pools with varying
investment risks. The Joint Venture will be the investment manager of the
CIV, and as such, will direct the allocation of each limited partner’s
interests in the CIV among the various investment pools. The Joint Venture
will enter into a contract with VIMCO under which VIMCO will discharge
substantially all of the Joint Venture’s investment management
responsibilities with respect to the CIV. You further represent that each
limited partner will have an undivided interest in the assets of each
underlying investment pool in which it invests. The various investment pools
will be either (i) invested in common investment funds or mutual funds, or
(ii) managed by the Joint Venture or other investment advisers designated by
the Joint Venture (Third Party Investment Advisers), which will act as
investment managers and which are registered under the Investment Advisers
Act of 1940 or which are banks or insurance companies.
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You represent that the Joint Venture and the Third Party Investment Advisers
will receive reasonable fees from the Third Party Plans and other
institutional investors for their services. In addition, while the Third
Party Investment Advisers will receive reasonable fees from the Verizon
Plans for their services, the Joint Venture, VIMCO and Mellon will not
receive any fees or other compensation (directly or indirectly) for
investment management services to the Verizon Plans, but will be reimbursed
for expenses directly and properly incurred for performing services for the
Verizon Plans.
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You have asked for an advisory opinion to the effect
that, where fifty percent or more of the interests in the CIV are legally
held by Mellon, as fiduciary for the benefit of the Verizon Plans, the CIV
is not itself a party in interest with respect to the Verizon Plans
invested in the CIV, and therefore, contributions to and distributions
from the CIV would not constitute prohibited transactions under ERISA. You
are specifically concerned that the CIV may be deemed a party in interest
with respect to the Verizon Plans under section 3(14)(G) of ERISA because
Mellon would hold more than fifty percent of the interests in the CIV on
behalf of the Verizon Plans as trustee of those Plans.
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Section 406(a)(1)(A) and (D) prohibits, in relevant part, the exchange of
any property between a plan and party in interest and the transfer to, or
use by or for the benefit of, a party in interest, of any assets of the
plan. Section 3(14)(G) of ERISA defines a party in interest to include a
corporation, partnership or trust or estate of which (or in which) fifty
percent or more of (i) the combined voting power of all classes of stock
entitled to vote or the total value of shares of all classes of stock of
such corporation, (ii) the capital interest or profits interest of such
partnership, or (iii) the beneficial interest of such trust or estate, is
owned directly or indirectly, or held by, among others, a fiduciary of a
plan. (Emphasis added.)
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Mellon, as trustee of the Verizon Plans, is a fiduciary
with respect to the Verizon Plans under section 3(21) of ERISA. The
Verizon Plans’ contributions to the CIV would be directed by VIMCO. The
ownership interests in the CIV would be held by Mellon on behalf of the
Verizon Plans. Similarly, distributions from the CIV to the Verizon Plans
would be made to Mellon and held on behalf of the Verizon Plans.
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Consistent with section 3(14) of ERISA, a plan’s
ownership of fifty percent or more of a partnership entity will not cause
that partnership to become a party in interest with respect to that
investing plan.(4) In our view,
the application of section 3(14)(G) should not change that result merely
because a plan’s interests in a partnership are held by a fiduciary on
behalf of the plan. Although Mellon would hold more than fifty percent of
the value of the CIV interests, it would hold such interests on behalf of
the Verizon Plans, not on behalf of itself or a third party. As a result,
it is the view of the Department that the CIV will not be a party in
interest with respect to the Verizon Plans.(5)
Therefore, transactions between the Verizon Plans and the CIV,
including initial and subsequent contributions to the CIV by the Verizon
Plans and distributions from the CIV to the Verizon Plans, would not be
prohibited under section 406(a) of ERISA.
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Section 406(b)(1) of ERISA prohibits a fiduciary from
dealing with plan assets in his or her own interests or for his or her own
account. ERISA section 406(b)(2) specifically prohibits fiduciaries in
their individual or in any other capacity from acting 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. Accordingly, VIMCO and Mellon must ensure
that they can act on behalf of the CIV without compromising their
positions as fiduciaries of the Verizon Plans. Further, while the
Department recognizes that determining whether violations of the
prohibited transaction provisions of section 406(b) of ERISA would occur
are inherently factual questions, it is the view of the Department that
if, in operation, VIMCO’s provision of investment management services to
the Verizon Plans or Mellon’s provision of trustee services to the
Verizon Plans results in a divergence of interests between VIMCO and the
Verizon Plans or Mellon and the Verizon Plans, violations of sections
406(b) of ERISA could occur.
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The Department cautions that ERISA’s general
standards of fiduciary conduct would apply to the Verizon Plans’
investment in the CIV. Section 404(a)(1) of ERISA requires, among other
things, that a fiduciary discharge his or her duties with respect to a
plan solely in the interest of the participants and beneficiaries, and
with the care, skill, prudence and diligence under the circumstances then
prevailing that a prudent person acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of like
character and with like aims. Accordingly, the appropriate plan
fiduciaries must act “prudently” and “solely in the interests” of
the plan participants and beneficiaries with respect to the decision to
acquire or dispose of the Verizon Plans’ interests in the CIV.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, this letter is issued subject to the
provisions of the procedure, including section 10 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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Under Reorganization Plan No. 4 of
1978, 43 Fed. Reg. 47713 (Oct. 17, 1978), the authority of the
Secretary of the Treasury to issue rulings under section 4975 of the
Internal Revenue Code (the Code) has been transferred to the Secretary
of Labor, with certain exceptions not here relevant. The Secretary of
the Treasury is bound by interpretations of the Secretary of Labor
pursuant to such authority. Therefore, references in this letter to
specific sections of ERISA should be read to refer also to the
corresponding sections of the Code.
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You represent that the CIV will be
treated as a partnership for tax purposes pursuant to Treasury
Regulation 26 CFR 301.7701-3(b).
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You represent that if the general
partner must make a contribution to, or acquire a partnership interest
in, the CIV pursuant to state law requirements, the general partner’s
interest in the CIV will be limited to the extent necessary to comply
with such requirements.
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Under the plan assets regulation, 29
CFR 2510.3-101, the extent of a plan’s equity ownership interest in
an entity may cause that entity to be deemed to hold plan assets.
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See Advisory Opinion 80-67A (Nov.
30, 1980).
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