EBSA Federal Register Notice
Proposed Class Exemption for Acquisition and Sale of REIT Shares by Individual Account Plans Sponsored by Trust REITS [06/03/2003]
[PDF Version]
Volume 68, Number 106, Page 33185-33194
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Number D-10659]
Proposed Class Exemption for Acquisition and Sale of REIT Shares
by Individual Account Plans Sponsored by Trust REITS
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of proposed class exemption.
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SUMMARY: This document contains a notice of a proposed 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).
If granted, the proposed exemption would permit the acquisition,
holding or sale of 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 REIT or its affiliates. The proposed exemption, if granted,
would affect participants and beneficiaries of employee benefit plans
involved in such transactions, as well as the REITs and their
affiliates that sponsor such plans.
DATES: Written comments and requests for a public hearing shall be
submitted to the Department before August 4, 2003.
ADDRESSES: All written comments and requests for a public hearing
(preferably 3 copies) should be sent to: Employee Benefits Security
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington,
DC 20210, Attention: REIT Class Exemption Proposal. Comments may be
sent by fax to (202) 219-0204 or by e-mail to moffittb@ebsa.dol.gov.
The application for exemption (Application Number D-10659), as well as
all comments received, will be available for public inspection in the
Public Documents Room, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
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: This document contains a notice that the
Department is proposing a 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\ Pursuant to its authority, the Department
is proposing additional conditions with respect to the relief requested
by the Applicant.
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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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Executive Order 12866 Statement
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 proposed 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 proposed amendment
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
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data
can be provided in the desired format, reporting burden (time and
financial resources) is minimized, collection instruments are clearly
understood, and the impact of collection requirements on respondents
can be properly assessed.
Currently, EBSA is soliciting comments concerning the information
collection request (ICR) included in this Notice of a Proposed Class
Exemption for Acquisition and Sale of REIT Shares by Individual Account
Plans Sponsored by Trust REITs (referred to for the purpose of the ICR
as Disclosures for Transactions with Trust REIT Shares). A copy of the
ICR may be obtained by contacting Joseph S. Piacentini, Office of
Policy and Research, U.S. Department of Labor, Employee Benefits
Security Administration, 200 Constitution Avenue, NW., Room N-5618,
Washington, DC 20210. Telephone (202) 693-8410; Fax: (202) 219-4745.
These are not toll-free numbers.
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Employee Benefits Security Administration. Although comments may be
submitted through August 4, 2003 OMB requests that comments be received
within 30 days of publication of the Notice of Proposed Exemption to
ensure their consideration.
The Department has submitted a copy of the Notice of Proposed
Exemption to OMB in accordance with 44 U.S.C. 3507(d) for review of its
information
[[Page 33186]]
collections. The Department and OMB are particularly interested in
comments that:
[sbull] Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
[sbull] Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
[sbull] Enhance the quality, utility, and clarity of the
information to be collected; and
[sbull] Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriated
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
NAREIT has requested this class exemption in order to provide Plans
established by Trust REITS with the option of offering a beneficial
interest in the Trust REIT in the form of Qualifying REIT Shares (as
defined in III(j)) to participants in plans sponsored by the REIT or
its Employer Affiliates. Further, NAREIT has requested retroactive
relief from 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 certain
transactions relating to the prior acquisition, holding, or sale of
shares of beneficial interest in Trust REITS. The Department has
proposed prospective relief for transactions occurring on or after the
date of publication of the grant of the final exemption in the Federal
Register and limited retroactive relief for transactions that occurred
within six years of the publication of the final exemption in the
Federal Register. Only Section II(b), Prospective Conditions,
constitutes a collection of information under PRA 95.
Under section 408(a) of ERISA, prior to granting an exemption, the
Secretary must make a finding that the exemption is: (1)
Administratively feasible, (2) in the interests of the plan and its
participants and beneficiaries, and (3) protective of the rights of
participants and beneficiaries of such plan. In order for the
Department and others to determine that the conditions of this
exemption have been met, the Department proposes to require the
disclosure of certain information by administrators of Plans that
acquire, hold, or sell Trust REIT shares to participants.
In its application, NAREIT has indicated that among all REITS, 228
are publicly traded, with 52 of these structured as business trusts
under state law (Trust REITS). NAREIT has also indicated that of the 52
publicly traded Trust REITS, approximately 80%, or 42, offer individual
account pension plans with individual investment direction of
participant contributions, and that nearly all of the 42 Plans provide
for some form of employer match. Finally, NAREIT has indicated that
approximately 14 plans would be considered small, in that they have
fewer than 100 participants (such that there are 28 large plans).
NAREIT believes that nearly all of the 42 plans will make use of the
exemption when it is granted.
The Department has estimated that about 5,300 participants may be
affected by the proposed exemption. While the Department does not know
the number of participants in plans that may include the option to
purchase Trust REIT shares, it bases its estimate on information
provided by NAREIT indicating that, of the 42 Trust REITS that sponsor
401(k) plans, 28 are large and 14 are small. Estimating that the 14
small plans have 80 employees each (1,120 employees), and that the
remaining larger plans have 150 employees (4,200 employees),
approximately 5,300 employees may be offered the option to purchase
Trust REIT Shares or may have Trust REIT shares contributed to their
individual accounts under the proposed exemption. The Department
welcomes comments and relevant data on the estimated number of
employees that might take advantage of the proposed exemption.
The information collection provisions of the proposed exemption are
found in Sections II(b)(4) (pertaining to the prospectus and reports),
II(b)(5) (records and statements regarding confidentiality), II(b)(10)
(specific information about REIT share transactions), II(b)(11)
(recordkeeping), and III(e)(5) (independent fiduciary acknowledgement).
These requirements are summarized below for purposes of the submission
for approval under PRA 95. The actual terms of the proposed exemption
should be consulted for purposes of relief from ERISA prohibitions
otherwise applicable to the purchase of Trust REIT shares.
Prospectus and Periodic Reports. In order to obtain prospective
relief from statutory prohibitions, a Trust REIT traded on a national
securities exchange or market system, or an agent or affiliate thereof,
must furnish the person directing an investment (i.e., the participant
or independent fiduciary) the most recent prospectus and quarterly and
annual reports concerning the Trust REIT both prior to, or immediately
after, the initial investment and regularly thereafter as updated
prospectuses and quarterly and annual reports are published.
NAREIT has indicated that issuers of REIT Trust shares currently
provide prospectuses and annual reports to investors; therefore, this
condition can be satisfied by usual business practices. However, under
the proposed exemption, quarterly reports that are filed with the SEC
under Rule 15d-13 of the Securities Exchange Act of 1934 must also be
distributed to investors in Trust REIT Shares. Because the quarterly
report is required for SEC registrants, no preparation burden arises
from this requirement. The Department believes that quarterly reports
will be distributed to employees in the same manner that prospectuses
and annual reports are distributed, either electronically, provided
that the requirements for electronic distribution under ERISA are
satisfied, or through regular mail. The cost of regular mail at $.40
per mailing would be about $6,400 for the distribution of three
quarterly reports. The fourth quarter report is assumed to be
incorporated in the annual report. Electronic distribution would
represent an annual cost savings of $6,400.
Disclosures. The Trust REIT or Employer Affiliate is required to
disclose specific information about the operation of the Trust REIT.
Under Section II(b)(5), the Plan must provide participants, when they
become eligible to participate in the Plan, with a statement describing
the procedures established for maintaining confidentiality with regard
to the purchase, sale, holding, and share voting rights of Trust REIT
Shares, as well as information identifying the fiduciary responsible
for monitoring compliance with the confidentiality procedures.
In addition, under Section II(b)(10), the Trust REIT or the
Employer Affiliate must furnish to the person that is directing the
investment, prior to an initial investment transaction, information
about fees or transaction costs, the role of the Trust REIT, if any, as
a principal in the transaction, the name of the exchange or market
system on which the Qualifying REIT Shares are traded, and the fact
that copies of the proposed and final exemption are available upon
request. While the Department believes that all of the
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information required to be disclosed is readily available, each of the
Trust REITS making use of the exemption is expected to expend time and
resources to compile the required information and conform it with the
other materials customarily used in communicating information that is
either required to be provided to plan participants (such as Summary
Plan Descriptions, or disclosures required to meet conditions of ERISA
section 404(c) and related regulations at 29 CFR 2550.404c-1), or that
the employer otherwise provides to assist plan participants in
understanding and making use of their benefits. The Department
estimates that compiling these disclosures will require a one-time
preparation investment of about 4 hours per plan, and that they will be
distributed along with other plan materials. It is expected that this
work will be completed by outside professionals at a cost of $75 per
hour. The resulting cost burden is estimated to be about $12,600.
Recordkeeping. Although Section II(b)(11) requires that records be
maintained to demonstrate compliance with the terms of the exemption,
this requirement is consistent with statutory recordkeeping
requirements under ERISA, and with requirements pertaining to
maintenance of tax records. As such, the provision imposes no
additional burden.
Acknowledgement. Finally, based on the terms of the definition
found in Section III(e)(5), where an Independent Fiduciary is involved
in a Trust REIT transaction, the Independent Fiduciary must acknowledge
in writing that he or she is a fiduciary and has the appropriate
training and experience to perform the services contemplated by the
exemption. It is anticipated that the applicable plan fiduciary will
incorporate this acknowledgement in the written investment management
or trustee agreement outlining the terms and conditions of its
retention as a plan service provider that already exists as part of
usual and customary business practice. As such, a written
acknowledgement is not expected to impose any measurable additional
burden.
Type of Collection: New.
Agency: Department of Labor, Employee Benefits Security
Administration.
Title: Disclosures for Transactions with Trust REIT Shares
(Prohibited Transaction Exemption xx-xx (number to be assigned when
granted).
OMB Control Number: 1210-New.
Affected Public: Business or other for profit; Individuals or
households; Not-for-profit institutions.
Respondents: 42.
Responses: 42.
Frequency of Response: On occasion; quarterly; annually.
Estimated Burden Hours: 0.
Estimated Capital/Startup Costs: $12,600.
Estimated Annual Costs (Operating & Maintenance): $6,400.
Estimated Total Annual Cost: $19,000.
I. Discussion of the Application
The application contains facts and representations with regard to
the requested exemption that are summarized below. Interested persons
are referred to the application on file with the Department for the
complete representations of the Applicant.
The Applicant, NAREIT, is a Washington, DC-based trade association
that supports the legislative, capital formation, and educational needs
of the real estate investment trust (REIT) industry. REITs are entities
that combine the capital of investors to acquire, or provide financing
for, real estate investment. According to the Applicant, NAREIT
represents nearly all of the 228 REITs in the United States whose
shares are publicly traded.\2\ NAREIT requests this exemption on behalf
of publicly traded REITs that are structured under state law as
business trusts and which issue equity interests in the form of shares
of beneficial interest (Trust REITs).
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\2\ The Applicant has limited its request to REITs whose shares
of beneficial interest are publicly traded on the following national
exchanges or market systems: the New York Stock Exchange, the
American Stock Exchange, and the National Association of Securities
Dealers Automated Quotation National Market System (NASDAQ National
Market). Accordingly, the term ``publicly traded'' as used below
refers only to shares traded on these exchanges or market systems.
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The Applicant represents that REITs are customarily structured for
state law purposes either as corporations or trusts. Corporate REITs
issue equity interests in the form of stock. Trust REITs, under state
law, issue equity interests in the form of shares of beneficial
interest (shares). According to the Applicant, the use of a trust as a
REIT business form is becoming more common and, of the 228 publicly
traded REITs operating in the United States that are closely followed
by NAREIT, 52 are structured as business trusts.
The Applicant explains that, in connection with the management of a
Trust REIT's business, either the Trust REIT, or a corporation or a
partnership owned by the Trust REIT, employs the individuals who engage
in real estate and trust management services (an employer). The Trust
REIT owns the real estate either directly or through another entity.
The term ``Employer Affiliate'' as used herein, refers to an entity
that sponsors an individual account plan and which is owned 50 percent
or more by a Trust REIT. The Applicant explains that because the REIT's
ownership interest in the Employer Affiliate is 50 percent or more,
that entity may be deemed to be an affiliate of the REIT under section
407(d)(7) of the Act \3\ and, accordingly, the REIT's shares may be
considered ``employer securities'' for purposes of section 407(d)(1) of
the Act, in connection with any plan sponsored by such Employer
Affiliate.\4\
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\3\ Section 407(d)(7) of the Act provides that ``a corporation
is an affiliate of an employer if it is a member of any controlled
group of corporations (as defined in section 1563(a) of Title 26,
except that ``applicable percentage'' shall be substituted for ``80
percent'' wherever the latter percentage appears in each section) of
which the employer who maintains the plan is a member. For purposes
of the preceding sentence, the term ``applicable percentage'' means
50 percent, or such lower percentage as the Secretary may prescribe
by regulation. A person other than a corporation shall be treated as
an affiliate of an employer to the extent provided by regulations of
the Secretary. An employer which is a person other than a
corporation shall be treated as affiliated with another person to
the extent provided by regulations of the Secretary * * *.''
\4\ No regulations have been issued under 407(d)(7) of the Act.
In the absence of regulations, the Department is providing no
opinion herein as to whether non-corporate entities may be deemed an
affiliate of a REIT.
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The Applicant states that many Trust REITs, or their Employer
Affiliates, sponsor or have adopted tax-qualified ``individual account
plans,'' as that term is defined in section 3(34) of the Act, in which
employees of the Trust REIT and/or its Employer Affiliates participate.
Typically, these Plans (as defined in section III (f)) contain
qualified cash or deferred arrangements within the meaning of Code
section 401(k), and may provide for employer matching contributions,
profit-sharing contributions, or both. The Applicant represents that in
some Plans the participant's account is separated into two parts. The
plan administrator may account for a participant's elective deferrals,
and earnings thereon, separately from the company's contributions--
i.e., the company's matching or profit-sharing contributions. This
separate accounting usually occurs in situations in which the
participant has the right to direct investment of his or her elective
salary deferral amounts and their earnings, but does not direct the
investment of contributions made on his or her behalf.
The Applicant asserts that it is common for employers, including
employers that are publicly traded REITs formed as corporations, to
offer
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employer securities as an investment or investment option under the
individual account plans that they sponsor. The stock of a corporate
REIT may constitute ``qualifying employer securities'' for purposes of
section 407(d)(5) of the Act,\5\ and, if so, the individual account
plans sponsored by corporate REITs may invest in and hold such stock
without engaging in a prohibited transaction.\6\ The Applicant notes
that statutory provisions under the Act specifically allow plan
investments in qualifying employer securities, and Department
regulations specifically reference the acquisition of qualifying
employer securities with respect to participant-directed individual
account plans.\7\
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\5\ Section 407(d)(5) provides, in part: ``The term qualifying
`employer security' means an employer security which is:
(A) Stock,
(B) a marketable obligation (as defined in subsection (e) of
this section), or
(C) an interest in a publicly traded partnership (as defined in
section 7704(b) of title 26), but only if such partnership is an
existing partnership as defined in section 10211(c)(2)(A) of the
Revenue Act of 1987 (Pub. L. 100-203).''
\6\ Section 407(b)(1) provides that the percentage limitations
of ``subsection (a) of this section shall not apply to any
acquisition or holding of qualifying employer securities or
qualifying employer real property by an eligible individual account
plan.'' The Department notes that, for plan years beginning on or
after 1/1/99, plans may not require that more than 10 percent of an
elective deferral account be invested in qualifying employer
securities, subject to certain exceptions. Section 407(b)(2), as
amended by Pub. L. 105-34 section 1524(a) (August 8, 1997).
\7\ 29 CFR 2550.404c-1(d)(2)(ii)(E)(4).
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The Applicant believes that shares issued by a publicly traded
Trust REIT constitute ``securities'' within the meaning of section 2(1)
of the Securities Act of 1933. The Applicant argues that because shares
of beneficial interest issued by a Trust REIT are securities, they also
constitute ``employer securities'' in connection with Plans covering
employees of such Trust REIT and its Employer Affiliates.\8\ The
Applicant asserts that, while it is clear that shares issued by Trust
REITs do not constitute ``marketable obligations'' (as defined under
section 407(e) of the Act) or interests in a ``publicly traded
partnership,'' as defined under the Code, it is unclear whether such
shares would constitute ``stock'' and, thus, satisfy the definition of
``qualifying employer security'' in section 407(d)(5) of the Act. In
this regard, section 407(a)(1) of the Act provides that a plan may not
acquire or hold any employer security, which is not a qualifying
employer security. If the shares are not qualifying employer
securities, the Plans sponsored by the Trust REITs and their Employer
Affiliates cannot rely on sections 407 \9\ and 408(e) \10\ of the Act
to obtain relief from the prohibitions of sections 406 and 407 of the
Act for the acquisition, holding or sale of Trust REIT shares.\11\
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\8\ Under ERISA section 3(20), the term ``security'' has the
same meaning as such term has under section 2(1) of the Securities
Act of 1933. ERISA section 407(d)(1) defines an employer security as
``a security issued by an employer of employees covered by the plan,
or by an affiliate of such employer.''
\9\ See note 5, Supra.
\10\ Section 408(e) provides that: ``sections 406 and 407 [29
U.S.C. 1106 and 1107] shall not apply to the acquisition or sale by
a plan of qualifying employer securities (as defined in section
407(d)(5) [29 U.S.C. 1107(d)(5)]) or acquisition, sale or lease by a
plan of qualifying employer real property (as defined in section
407(d)(4) [29 U.S.C. 1107(d)(4)])--
(1) if such acquisition, sale, or lease is for adequate
consideration (or in the case of a marketable obligation, at a price
not less favorable to the plan than the price determined under
section 407(e)(1) [29 U.S.C. 1107(e)(1)]),
(2) if no commission is charged with respect thereto, and (3) if
(A) the plan is an eligible individual account plan (as defined in
section 407(d)(3) [29 U.S.C. 1107(d)(3)]), or (B) in the case of an
acquisition or lease of qualifying employer real property by a plan
which is not an eligible individual account plan, or of an
acquisition of qualifying employer securities by such a plan, the
lease or acquisition is not prohibited by section 407(a) [29 U.S.C.
1107(a)].''
\11\ In proposing this exemption, the Department is providing no
opinion herein as to whether shares of a Trust REIT constitute
``stock'' for purposes of section 407(d)(5).
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The Applicant believes that REITs structured as business trusts are
virtually indistinguishable from REITs structured as corporations. The
Applicant notes that under the Code, all tax-qualified REITs are
treated as corporations for federal income tax purposes,
notwithstanding their business structure.\12\ According to the
Applicant, Treasury Reg. section 1.856-1(d)(1) requires that a Trust
REIT's trustees have the rights and powers ``to meet the requirement of
centralization of management,'' meaning that REIT trustees must have
the ``continued exclusive authority'' to manage the affairs of the
Trust REIT. The Applicant further notes that: the shareholders of Trust
REITs possess the same limited liability protection as do stockholders
of corporate REITs; Trust REITs are managed by trustees in much the
same way as corporations are managed by directors; and shareholders of
Trust REITs elect trustees just as stockholders of corporate REITs
elect directors. According to the Applicant, in many states, Trust
REITs may issue more than one class of shares, or may issue preferred
or convertible classes of shares.\13\ Further, in many states, the
rules that govern procedures for amending a Trust REIT's declaration of
trust conform to the rules that govern amending a corporate charter,
and the rules governing the amendment of a Trust REIT's bylaws conform
to the rules governing the amendment of a corporation's bylaws.\14\ The
Applicant argues that the marketplace makes no distinction between
publicly traded Trust REITs and publicly traded corporate REITs. In
addition, Trust REIT shareholders and corporate REIT stockholders
receive the same type of disclosure documents required by the
Securities and Exchange Commission, and the trading rules of the stock
exchanges apply in the same manner. The Applicant concludes that the
ownership and legal operation of Trust REITs and corporate REITs are
virtually the same and that the hallmark of corporate status, limited
liability to equity investors, is provided under state law to
shareholders of Trust REITs just as it is to stockholders of
corporations.\15\
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\12\ See Code section 856(a)(3).
\13\ The Applicant provides the following citation in support of
its assertion: Tex. Civ. Stat 3.1.
\14\ The Applicant provides the following citations in support
of its assertion: Md. Corps. & Assns. Ann. 8-501; Tex. Corps. &
Assns. Ann 9.1, 23.1.
\15\ The Applicant provides the following citations in support
of its assertion: Md. Corps. & Assns. Ann 8-601; 3 Cal. Corp. Code
23001; Del. Code Ann. Tit. 12, 3803; Ill. Rev. Stat. Ch. 745, para.
60.2.; Tex. Corps. & Assns. Ann. 6138A-9.1, 6.138A-9.1.
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The Applicant represents that, despite these similarities and
uniform treatment for federal income tax purposes, the distinction in
REIT business form for state law purposes creates an anomaly for those
Trust REITs that sponsor individual account plans. Thus, in the absence
of an administrative exemption, the Applicant asserts that a Trust REIT
which has roughly the same capitalization as a corporate REIT, whose
shares bear the same indicia of ownership and offer the same investor
protection against liability as shares issued by a corporate REIT,
whose business is managed by shareholder-appointed trustees just as a
corporate REIT's business is managed by shareholder-appointed
directors, whose shares are traded on the same national exchange as a
corporate REIT, and whose shares are traded at nearly the same daily
volume as a corporate REIT, may be prohibited from allowing its
employees to share in the growth of the business through the company's
individual account plan, even though it may be permissible for the
corporate REIT to do so.
The Applicant requests a class exemption to permit Trust REITs
whose shares are publicly traded the same opportunity as corporate
REITs by allowing their employees to share in the growth of the
business through their
[[Page 33189]]
individual account plans. The Applicant believes that employees of
Trust REITs are disadvantaged compared with employees of REITs
structured as corporations under state law, even though all REITs are
treated as corporations for federal income tax purposes.
The requested exemption is limited to Plans sponsored by a Trust
REIT or its affiliates in which the Plan's investment was in Qualifying
REIT Shares (as defined in section III(j)) which are not subject to any
restrictions on transfer other than restrictions required under
applicable securities and exchange rules or to maintain REIT status
under the Code. The Applicant represents that, in order to maintain
REIT status, it is routine for the REIT's trust instruments to restrict
shareholders from transferring shares of beneficial interest if such
transfer would result in shareholders violating the Code's closely-held
ownership test, or if such transfer otherwise would cause the REIT to
fail to qualify as a REIT under the Code.\16\ The Applicant believes
that, particularly in the context of publicly traded REITs, these
customary restrictions would not impair in any way the ability of Plans
to quickly sell or dispose of Trust REIT shares previously acquired.
According to the Applicant, no Trust REIT would contribute to, or allow
the acquisition by, an individual account plan of REIT shares not
subject to these customary restrictions.
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\16\ According to the Applicant, in order for an entity to
qualify as a REIT under the Code, no more than 50 percent in value
of outstanding shares of beneficial ownership may be owned, actually
or constructively, by five or fewer individuals during the last half
of a taxable year or during a proportionate part of a shorter
taxable year. See Code section 856(h). In addition, if a REIT or an
owner of 10% or more of a REIT actually or constructively own 10% or
more of a tenant of that REIT (or a tenant of a partnership in which
the REIT is a partner), the rent received by the REIT (either
directly or indirectly) from such tenant will not be qualifying
income for purposes of the REIT gross income tests of the Code
unless such tenant is a taxable REIT subsidiary of the REIT and
certain other requirements are met. See Code section 856(d)(2)(B). A
REIT's shares also must be beneficially owned by 100 or more
persons. See Code section 856(a)(5).
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The Applicant asserts that this exemption is in the interest of
participants and beneficiaries because it will afford employees of
publicly traded Trust REITs, or their Employer Affiliates, the
opportunity to invest in shares of beneficial interest issued by their
employers through individual account plans, thus enabling such persons
to share in the growth of each respective employer's business. Further,
the Applicant believes this investment option will generally afford
participants and beneficiaries an efficient and inexpensive means to
participate in the growth and profitability of the real estate sector
of the economy.
The Applicant asserts that the requested exemption is protective of
the rights of participants and beneficiaries because the participant
determines whether or not his or her elective deferrals will be
invested in shares of beneficial interest. In addition, only those
Trust REITs with publicly traded shares are included in the exemption,
thus providing sufficient liquidity and pricing protections. Finally,
the Applicant proposes that, with respect to the participant directed
portion of an Account (as defined in section III(a)), no more than 25
percent of the account balance may be invested in Trust REIT shares.
The Applicant requests prospective and retroactive relief for the
contribution, purchase, holding or sale of Trust REIT shares by plans
sponsored by the Trust REIT and/or its affiliates. The Applicant
submits that the requested exemption meets the standards of section
408(a) for granting exemptive relief from the prohibited transaction
provisions.
II. Description of the Proposed Retroactive Exemption
On the basis of the representations made by the Applicant, the
Department is proposing limited 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
the following transactions for the period beginning six years prior to
the date of publication of the final exemption in the Federal Register
and ending on the date of publication of the final exemption: (1) The
purchase or sale of Qualifying REIT Shares where the decision to
purchase or sell these 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; and (3) the holding of Qualifying REIT Shares; provided that
the conditions of the exemption were met at the time of the
transaction.
The Applicant has requested that the period of retroactive relief
be sufficient to encompass transactions for which the applicable
statute of limitations under the Act has not yet run.\17\ Specifically,
the Applicant has requested that the relief look back six years, nine
months from the date of publication of the exemption, based on its
belief that a court might find that the beginning of the statutory
period was the date that the transaction was reported on the Form
5500,\18\ rather than the date on which the transaction occurred.
Because the six-year statute of limitations, unlike the three-year
statute of limitations, does not require actual knowledge of the
transaction, the statute of limitations runs from the date of the
transaction, absent fraudulent concealment.\19\ The Department has
determined that it is appropriate to provide retroactive relief for a
period of six years prior to the date the final exemption is published
in the Federal Register.
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\17\ Section 413 of the Act provides, ``No action may be
commenced under this subchapter with respect to a fiduciary's breach
of any responsibility, duty, or obligation under this part, or with
respect to a violation of this part, after the earlier of--
(1) six years after (A) the date of the last action which
constituted a part of the breach or violation, or (B) in the case of
an omission, the latest date on which the fiduciary could have cured
the breach or violation, or
(2) three years after the earliest date on which the plaintiff
had actual knowledge of the breach or violation; except that in the
case of fraud or concealment, such action may be commenced not later
than six years after the date of discovery of such breach or
violation.''
\18\ Section 104(a)(1) provides ``The administrator of any
employee benefit plan subject to this part shall file with the
Secretary the annual report for a plan year within 210 days after
the close of such year * * *.''
\19\ Id.
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The Applicant initially requested retroactive relief for all Trust
REIT Share contributions, purchases, holdings, and sales. The Applicant
explained that because Trust REIT plans believed that the employers'
shares were covered by the statutory exemption under ERISA section
408(e) for ``qualifying employer securities,'' some of the shares
contributed by the employer were subject to a lockup, i.e. participants
could not sell the shares contributed to their account for some period
of time. The Applicant is unaware whether any shares purchased by
participants or independent fiduciaries were also subject to a lockup.
Therefore, the Department has determined to limit proposed retroactive
relief to employer contributed shares, including those subject to a
lockup. The Department is also providing relief where either the
participant or an independent fiduciary had investment discretion to
sell such shares. Where participants exercised their discretion to
invest in Trust REIT shares for their own account they must have been
permitted to give instructions to sell such shares at least quarterly.
In the case of Trust REIT shares purchased by the independent
fiduciary, that independent fiduciary must have had the authority to
divest the Account of
[[Page 33190]]
the Qualifying REIT Shares without restriction. The Department,
however, specifically solicits comments from interested persons on
whether the scope of the exemption should be modified to include
additional retroactive relief for other transactions involving Trust
REIT Shares that were subject to a lockup.
Where the participant or the independent fiduciary had discretion
to purchase or sell Qualifying REIT Shares, the proposed exemption
requires that the participant or a fiduciary independent of the Trust
REIT had the authority to vote, tender and exercise similar ownership
rights with respect to those such shares.
The Applicant suggested that any person or entity independent of
the Plan Sponsor (as defined in section III(g)) or its affiliates
should qualify as an independent fiduciary for purposes of the
exemption. The Department has clarified the Applicant's suggestion to
make it clear that the independent fiduciary must also be independent
of any affiliates of the Trust REIT or its Employer Affiliates.
The Department has adopted the Applicant's suggestion that the
price at which shares must have been contributed, purchased and sold
must be the prevailing market price on the Primary Exchange on which
these shares were traded. In addition, no commissions or other fees
could be charged if share transactions were directly with the Trust
REIT or the shares were contributed by the Plan Sponsor.
The Department believes that it is appropriate to narrow the Trust
REIT class of shares covered by this exemption by limiting the
definition of the term ``Primary Exchange.'' Accordingly, for purposes
of this proposed exemption, relief is limited to Trust REIT shares
traded on: 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). In
this regard, the Applicant has represented that the opening and closing
prices for REIT shares listed on the exchanges or the NASDAQ National
Market are published daily in numerous newspapers throughout the
country, and trading prices for such listed securities are readily
available on the Internet. Therefore, by limiting the proposed
exemption to Trust REIT shares traded on the NYSE, AMEX or the NASDAQ
National Market, the Department believes that participants and
beneficiaries will have easy access to the current trading prices of
the Trust REIT shares held in their Accounts.
In response to the Department's concern as to whether there would
be sufficient trading liquidity to ensure that Plans could readily
dispose of REIT shares, the Applicant provided the following
information: The NYSE, AMEX, and the NASDAQ National Market each impose
requirements relating to minimum capitalization, minimum number of
publicly-held shares eligible for trading, and minimum number of
shareholders in order for a public company to be listed, or in the case
of the NASDAQ National Market, designated, on such exchange or
system.\20\
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\20\ According to the Applicant, the NYSE listing rules include,
inter alia, a requirement of 2,200 public shareholders together with
average monthly trading volume of 100,000 shares, or 500 public
shareholders together with average monthly trading volume of
1,000,000 shares, or 2,000 shareholders holding at least 100 shares.
See NYSE Rule 102.01A (NYSE Listed Company Manual, 2002). Rule
102.01B generally requires companies to demonstrate an aggregate
market value of publicly-held shares (i.e., shares held by persons
other than directors, officers, their immediate families or 10%
stockholders) of not less than $60 million, in the case of companies
applying for listing in connection with their initial public
offerings or a spin-off, or $100 million for other companies. See
NYSE Rule 102.01B (NYSE Listed Company Manual, 2002).
The rules of the AMEX require that a listed company have (1) at
least 500,000 shares publicly held and eligible for trading and a
minimum of 800 public shareholders or (2) 1,000,000 shares publicly
held and eligible for trading together with a minimum of 400 public
shareholders. AMEX may also consider listing the equity securities
of companies with at least 500,000 shares publicly held and eligible
for trading, a minimum of 400 public shareholders, and an average
daily trading volume of 2,000 shares for the six months prior to the
date application is made for the listing. For purposes of satisfying
the requirement of 400 or 800 minimum public shareholders, shares
held by officers, directors and persons with a 10% interest or more
are not taken into account. The AMEX also generally requires a
minimum market price of $3 per share, and at least $3 million
aggregate market value for publicly held shares ``for a reasonable
period of time prior to the filing of the listing application.'' See
American Stock Exchange Rule 102 (The American Stock Exchange
Company Guide, CCH, 2000).
The NASDAQ National Market imposes alternative criteria in order
to be designated on the system, but in general an equity issuer may
not be designated unless (1) at least 1,100,000 shares are held by
the public and eligible for trading (shares held by officers,
directors, or beneficial owners of more than 10 percent of the
outstanding shares are not counted toward the 1,100,000 share
requirement); (2) the market value of the publicly held shares
eligible for trading are at least $8 million, $18 million, or $20
million (depending on length of operating history and number of
market makers); (3) the minimum bid price is $5 or more; and (4) the
issuer has a minimum of 400 shareholders who own 100 shares or more.
See NASD Manual, Rule 4420 (CCH, 1998).
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The Department adopted the Applicant's suggestion that transactions
between Accounts, initiated at the direction of the participants or an
independent fiduciary, be permitted in order to save brokerage costs.
Under the proposed exemption, where investment decisions are
implemented through the netting of purchases and sales between
Accounts, the transactions would 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 buying nor the selling participant is
favored in the transaction.
Under the Department's proposed exemption, 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.
The Applicant had originally requested retroactive relief for all
Accounts, including those whose assets were invested up to 100 percent
in REIT Shares. After careful consideration of the issue, the
Department has determined that 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
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 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
acquisition or holding of qualifying employer real property or
qualifying employer securities. To the extent that the Qualifying REIT
Shares do not 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 proposed exemption to determine the
appropriate
[[Page 33191]]
level of investment in Qualifying REIT Shares, based on the particular
facts and circumstances, consistent with its responsibilities under
section 404 of the Act.
III. Description of the Proposed Prospective Exemption
On the basis of the representations made by the Applicant, the
Department is proposing prospective relief from the restrictions of
sections 406(a), 406(b)(1) and (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 for the following
transactions occurring after the date of publication of the final
exemption in the Federal Register: (1) The purchase or sale of
Qualifying REIT Shares where the decision to purchase or sell these
securities is made by a participant, or by an Independent Fiduciary;
(2) the contribution of Qualifying REIT Shares to the Plan by an
employer; and (3) the holding of Qualifying REIT Shares; provided that
the conditions of the exemption are met at the time of the transaction.
Prospectively, contributed shares may not be subject to a lockup.
In addition, 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 the exemption. In this regard,
the proposed exemption requires the appointment of a fiduciary that is
responsible for confidentiality. It also requires that the Plan 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, the Plan shall 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.\21\
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\21\ 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) & (ix).
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If the Employer Affiliate, or the Trust REIT exerts undue influence
over the shareholder decisions of the participants and beneficiaries in
Plans covered by this proposed exemption, this proposed exemption shall
not apply to any transactions involving shares subject to such
influence. For example, tender offers, mergers and acquisitions are
likely to generate the need for an independent fiduciary to provide
additional safeguards for participant confidentiality.\22\
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\22\ 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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Section III(e) of the proposal 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 contemplated by this proposed 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.
Where Qualifying REIT Shares are purchased or sold on the Primary
Exchange, the broker executing the transactions must be independent of
the Trust REIT, any Employer Affiliate, the Independent Fiduciary and
any affiliates thereof.
Certain information must be disclosed to the participant or the
Independent Fiduciary prior to the initial covered transaction that
occurs 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.
Consistent with the practice followed in other prohibited
transaction class exemptions granted by the Department, the proposal
contains a condition requiring the Trust REIT or its Employer
Affiliates utilizing the exemption 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 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) Before an exemption may be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible,
[[Page 33192]]
in the interests of plans and their participants and beneficiaries and
protective of the rights of the participants and beneficiaries of
plans;
(3) If granted, the proposed class exemption will be applicable to
a particular transaction only if the transaction satisfies the
conditions specified in the class exemption; and
(4) The proposed exemption, if granted, will be 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.
Written Comments
All interested persons are invited to submit written comments or
requests for a public hearing on the proposed exemption to the address
and within the time period set forth above. All comments will be made a
part of the record. Comments and requests should state the reasons for
the writer's interest in the proposed exemption. Comments received will
be available for public inspection with the application for exemption
at the address set forth above.
IV. Proposed Exemption
The Department has under consideration the grant of the following
class exemption 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 the date of publication
of the final class exemption in the Federal Register to the date of
publication of the final class exemption in the Federal Register 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; and
(4) The holding of the Qualifying REIT Shares by the Plan. (b)
Effective after the date of publication of the final class exemption in
the Federal Register, 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; 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 sell
the Qualifying REIT Shares purchased at the direction of the
independent fiduciary 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 the Qualifying REIT Shares purchased
on behalf of a Plan. 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 between Accounts
within a Plan in order to avoid brokerage commissions and other
transaction costs, provided that the price received by each Account is
equal to 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 affiliates thereof exerts
any undue influence over the decisions of the participants 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,
an 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 and has the discretionary authority to exercise the voting,
tender and similar rights with respect to the Qualifying REIT Shares.
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
[[Page 33193]]
voting, tender and similar rights with respect to the Trust REIT
shares.
(3) 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 affiliates 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 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 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' 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 affiliates thereof, 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.
(7) Notwithstanding paragraph (6) above, the exemption shall apply
to purchases and sales of Qualifying REIT Shares between Accounts
within a Plan 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 participant 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:
(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 the date of publication of the final class
exemption in the Federal Register, 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 plan fiduciary 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 plan fiduciary, 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 plan fiduciary shall be
subject to the civil penalty that may be assessed under section 502(i)
of the Act or 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 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
[[Page 33194]]
(iv) Any participant or beneficiary of the Plan who's 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 1 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.
(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.
(l) Participant--the term ``participant'' includes beneficiaries.
Signed at Washington, DC this 28th day of May, 2003.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Employee Benefits
Security Administration, Department of Labor.
[FR Doc. 03-13899 Filed 6-2-03; 8:45 am]
BILLING CODE 4510-29-P