Prohibited Transaction Exemption Procedures; Employee Benefit Plans
Prohibited Transaction Exemption Procedures; Employee Benefit Plans [10/27/2011]
[PDF]
[Federal Register Volume 76, Number 208 (Thursday, October 27, 2011)]
[Rules and Regulations]
[Pages 66637-66654]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-27312]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2570
RIN 1210-AB49
Prohibited Transaction Exemption Procedures; Employee Benefit
Plans
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Final rule.
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SUMMARY: This document contains a final rule that supersedes the
existing procedure governing the filing and processing of applications
for administrative exemptions from the prohibited transaction
provisions of the Employee Retirement Income Security Act of 1974
(ERISA), the Internal Revenue Code of 1986 (the Code), and the Federal
Employees’ Retirement System Act of 1986 (FERSA). The Secretary of
Labor is authorized to grant exemptions from the prohibited transaction
provisions of ERISA, the Code, and FERSA and to establish an exemption
procedure to provide for such relief. This final rule clarifies and
consolidates the Department of Labor’s exemption procedures and
provides the public with a more comprehensive description of the
prohibited transaction exemption process.
DATES: Effective Date: This final rule is effective December 27, 2011,
and applies to all exemption applications filed on or after that date.
FOR FURTHER INFORMATION CONTACT: Eric A. Raps, Office of Exemption
Determinations, Employee Benefits Security Administration, Room N-5700,
U.S. Department of Labor, Washington, DC 20210, telephone (202) 693-
8532. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
On August 30, 2010, the Department published a Notice of Proposed
Rulemaking in the Federal Register (75 FR 53172) that would update the
existing procedure governing the filing and processing of applications
for administrative exemptions from the prohibited transaction
provisions of ERISA, the Code, and FERSA, and invited written comments
from the public concerning its contents. These comments are available
for review at http://www.regulations.gov and also under “Public
Comments” on the “Laws & Regulations” page of the Department’s
Employee Benefits Security Administration (EBSA) Web site at http://www.dol.gov/ebsa.
[[Page 66638]]
The final rule contained in this document revises the prohibited
transaction exemption procedure to reflect changes in the Department’s
exemption practices since the previous exemption procedure was issued
in 1990 (the 1990 Exemption Procedure). Among other things, key
elements of the exemption policies and guidance previously found in
ERISA Technical Release 85-1 and the 1995 Exemption Publication have
been consolidated within the text of a unitary, comprehensive final
regulation. Adoption of this updated procedure should also promote the
prompt and efficient consideration of all exemption applications by
clarifying the types of information and documentation generally
required for a complete filing, by affording expanded opportunities for
the electronic submission of information and comments relating to an
exemption, and by providing plan participants and other interested
persons with a more thorough understanding of the exemption under
consideration.
B. Overview of the Final Rule and Comments
The exemption procedure contained in this document (and codified at
29 CFR part 2570, subpart B) consists of 23 discrete sections (Sec.
2570.30 through Sec. 2570.52), arranged by topic and generally
reflecting the chronological order of steps involved in processing an
exemption application. Set forth below is a summary of those aspects of
the proposed rule on which the Department received comments, and the
Department’s response to those comments. Individuals interested in
obtaining information concerning the content of the proposed rule not
discussed herein should refer to the Notice of Proposed Rulemaking at
75 FR 53172.
Section 2570.30 Scope of the Regulation
Section 2570.30(b) of the proposed rule stated that “the
Department may conditionally or unconditionally exempt any fiduciary or
transaction, or class of fiduciaries or transactions, from all or part
of the restrictions imposed by section 406 of ERISA and the
corresponding restrictions of the Code and FERSA.” One commenter
suggested that this formulation was too restrictive because, under the
foregoing statutes, the Department has the authority to exempt not only
fiduciaries engaged in prohibited transactions, but parties in interest
(or disqualified persons under the Code) as well. Accordingly, the
commenter requested that the Department broaden the scope of section
2570.30(b) to include “parties in interest.”
The Department notes that section 2570.30(b) of the proposed rule
simply restated the statutory language found at section 408(a) of ERISA
concerning the scope of the Department’s authority to grant
administrative exemptions from the prohibited transaction provisions of
ERISA. Because section 408(a) of the Act provides the Department with
the authority to grant exemptions for “any fiduciary or transaction,
or class of fiduciaries or transactions,” the Department also has the
authority to provide exemptive relief to non-fiduciary parties in
interest who engage in plan transactions. Therefore, it is unnecessary
to adopt the commenter’s suggested amendment. In this regard, the
Department notes that, consistent with the legislative history of the
Act,\1\ the Department has routinely granted exemptive relief to non-
fiduciary parties in interest and disqualified persons, and will
continue to exercise its authority, as appropriate.
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\1\ See H.R. Rep. No. 1280, 93d Cong., 2d Sess. 310 (1974), and
also section 102 of Presidential Reorganization Plan No. 4 of 1978
(3 CFR part 332 (1978), reprinted in 5 U.S.C. app. at 672 (2006) and
in 92 Stat. 3790 (1978)), effective December 31, 1978, which
generally transferred the authority of the Secretary of the Treasury
to issue administrative exemptions under section 4975(c)(2) of the
Code to the Department of Labor.
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Section 2570.31 Definitions
Section 2570.31 of the proposed rule defines the following terms
for purposes of the exemption procedure regulation: affiliate, class
exemption, Department, exemption transaction, individual exemption,
party in interest, pooled fund, qualified appraisal report, qualified
independent appraiser, and qualified independent fiduciary.
Definition of “Affiliate”–Section 2570.31(a) of the proposed
rule specifically defined the term “affiliate” to include any
employee or officer of the person who is highly compensated or “[h]as
direct or indirect authority, responsibility, or control regarding the
custody, management, or disposition of plan assets * * * ” One
commenter expressed the view that the language of this definition
should be clarified so that the term “plan assets” would refer only
to those plan assets involved in the exemption transaction. The
commenter stated that, absent such a modification, a person could be
deemed to be an affiliate if he or she had responsibility with respect
to the assets of any plan, without regard to whether the authority or
control relates to the plan at issue or the plan assets at issue.
In response to the commenter’s suggestion, the Department has
modified the definition of “affiliate” at section 2570.31(a) to
clarify that the term applies to any employee or officer of the person
who has direct or indirect authority, responsibility, or control
regarding the custody, management, or disposition of plan assets
involved in the subject exemption transaction. In addition, the
Department, on its own motion, has further modified the term
“affiliate” to clarify the scope and meaning of the term “control”
that is contained within that definition.
Nature and Extent of Independence of Qualified Independent
Appraisers and Fiduciaries–Two commenters objected to the definition
of a “qualified independent fiduciary” (section 2570.31(j) of the
proposed rule), which requires that a person serving in such capacity
be “independent of and unrelated to any party in interest engaging in
the exemption transaction and its affiliates.” One of the commenters
also expressed a similar reservation with respect to the definition of
a “qualified independent appraiser” (section 2570.31(i) of the
proposed rule). One commenter opined that the words “independent of”
and “unrelated to” are not defined in the proposed rule, particularly
with respect to employees of the independent fiduciary who are related
to employees of the party in interest (spouses, children, in-laws,
etc.), and therefore should be deleted in the interests of clarity.
Another commenter took the position that, if the Department’s actual
purpose in utilizing the foregoing language was to bar a qualified
independent fiduciary from being an affiliate of the party in interest
engaging in the transaction, then the Department should revise and
simplify the text of section 2570.31(j) of the final rule accordingly.
As noted previously, the purpose of including these definitions in
the proposed rule was to emphasize that any independent fiduciary or
appraiser retained in connection with an exemption transaction must not
only be “qualified” (i.e., knowledgeable as to its duties and
responsibilities under ERISA and knowledgeable as to the subject
transaction and the markets, if any, where such transactions normally
occur) to serve in that capacity, but also free from any relationships
with the party in interest or its affiliates that could improperly
affect its judgment. Because such relationships may be relevant to the
Department’s determination as to whether an appraiser or fiduciary is
independent, the Department has not adopted the suggestions of the
commenters for modifying these definitions.
[[Page 66639]]
Standards for Measuring Compensation Received By Qualified
Independent Appraisers and Fiduciaries–Several commenters indicated
that the Department’s use of the word “income” in the definitions in
sections 2570.31(i) and (j) (and also in sections 2570.34(c)(7) and
(d)(8)) to describe the overall annual compensation received by
qualified independent appraisers and fiduciaries is problematic. Two of
these commenters expressed the view that substitution of the word
“revenues” for income would be less susceptible to misinterpretation
and more consistent with prior Departmental practice. One of the
commenters also suggested that the text of section 2570.34(d)(8) be
modified to reflect the substitution of the word “revenues” in place
of the word “income.” Another commenter agreed with this view, and
pointed out that the term “income” as a definitional term lends
itself to a variety of interpretations–gross income, taxable income,
etc. Similarly, another commenter suggested the substitution of the
term “gross revenue” in lieu of the term “income” with respect to
the compensation received by qualified independent appraisers. In
general, the Department concurs, and has modified sections 2570.31(i)
and (j) and sections 2570.34(c)(7) and (d)(8) in the final rule by
substituting, where appropriate, the term “revenue” for the term
“income.”
In defining the terms “qualified independent appraiser” (section
2570.31(i)) and “qualified independent fiduciary” (section
2570.31(j)), the proposed rule provided that, in each instance, the
determination as to the independence of the appraiser or fiduciary
would be made “on the basis of all relevant facts and circumstances.”
The definition of a “qualified independent fiduciary” further
provided that, “[a]s a general matter, an independent fiduciary
retained in connection with an exemption transaction must not receive
more than a de minimis amount of compensation (including amounts
received for preparing fiduciary reports and other related duties) from
the parties in interest to the transaction or their affiliates. For
purposes of determining whether the compensation received by the
fiduciary is de minimis, all compensation received by the fiduciary is
taken into account. Such de minimis amount will ordinarily constitute
1% or less of the annual income of the qualified independent fiduciary.
In all events, the burden is on the applicant to demonstrate the
independence of the fiduciary.” The definition of a “qualified
independent appraiser” under the proposed rule described the
compensation to be received by such appraisers in virtually identical
terms.
The Department received a number of comments objecting to the
content of the foregoing definitions under the proposed rule. Two
commenters suggested that a de minimis or percentage test bears, at
best, a narrow relationship to any duty or commitment to impartially
perform independent fiduciary responsibilities under ERISA, and does
not take into account the complexity, risk, expertise, or expenditure
of time that such a commitment may entail. One commenter expressed the
view that inserting the proposed de minimis and 1% standards in the
text of a final regulation would mean that any firm that provides
independent fiduciary services and whose compensation exceeds such
thresholds is presumptively subject to improper influence from a party
in interest to the exemption transaction. Two commenters further
expressed the view that, if the 1% and de minimis aspects of the
proposed rule were ultimately adopted, plan fiduciaries and officials
required to retain independent fiduciaries and appraisers in connection
with complex exemption transactions would inevitably limit their
selections to a handful of large banking, fiduciary, or valuation firms
whose compensation would satisfy the foregoing standards, thus reducing
the overall level of competition for such services. By way of example,
one commenter posited a complex exemption transaction which could
reasonably be expected to command an independent fiduciary fee of
$150,000 in a given year to be paid by a party in interest to the
exemption transaction; the commenter concluded that, under the proposed
rule, only firms with annual revenues of $15,000,000 or more would be
presumptively independent of the party in interest.
One commenter emphasized the negative effect that the de minimis
standard would have upon smaller fiduciary and valuation firms, opining
that smaller firms often possess greater expertise and objectivity with
respect to evaluating exemption transactions than their larger
institutional counterparts, and often provide their services to plans
at less expense as a result of lower overhead costs. Two commenters
expressed the view that the reduced competition resulting from the
adoption of a 1% benchmark would likely have the undesirable effect of
driving up the costs of engaging an independent fiduciary for exemption
transactions; one of these commenters also ventured that such a
provision might cause plans, rather than parties in interest, to pay
the fees of such a fiduciary. Another commenter opined that the
proposed compensation limitations in the proposed rule would make it
especially difficult for newly-established independent fiduciary firms
with few, if any, conflict of interest or affiliation problems to
compete for significant assignments with respect to exemption
transactions. This commenter further stated that this market access
problem for new firms would persist even if the Department had
specified a higher compensation threshold (e.g., 5%) in connection with
the proposed de minimis standard.
Several commenters stated that the 1% compensation threshold for
independent fiduciaries contained in the proposed rule is substantially
lower than the percentage guidelines often utilized by the Department
in past administrative exemptions (and in other ERISA contexts) for
evaluating whether fiduciaries have a relationship with a party in
interest that renders them susceptible to inappropriate influences or
pressures. Two commenters specifically noted that the Department has,
in past individual exemptions, permitted independent fiduciaries to
derive as much as 5% of their compensation from parties in interest
involved in the exemption transaction. Several commenters stated that
there are currently only a small number of firms that perform an
independent fiduciary role in connection with complex exemption
transactions, and that the restrictions on compensation contained in
the proposed rule would tend to deter such firms from accepting these
types of engagements in the future. One commenter also stated that the
proposed de minimis /1% benchmark does not account for the fact that an
independent fiduciary’s fee arrangement often requires that a
significant portion of the fiduciary’s compensation is used to pay
outside lawyers, actuaries, and other consultants for services that
enable the fiduciary to meet its duties to the plan.
Accordingly, several commenters expressed the opinion that the
Department should consider alternatives in the final rule to the 1% and
de minimis compensation standards for defining and evaluating the
independence of fiduciaries and appraisers retained in connection with
exemption transactions. In this connection, one commenter suggested
that the Department should consider its proposed regulation relating to
the definition of “adequate consideration” under section 3(18) of
ERISA (see 53 FR
[[Page 66640]]
16732, proposed May 17, 1988), which enumerated various criteria for
determining whether a plan fiduciary has made a good faith
determination of the fair market value of an asset (other than a
security for which there is a generally recognized market). One of the
proposed criteria would require that the relevant fiduciary be
independent of all parties to the transaction (other than the plan) and
that the assessment of the independence of the fiduciary should be made
in light of all relevant facts and circumstances. In this regard, the
commenter noted that none of the proposed criteria made any references
to amounts or percentages of compensation received by a fiduciary from
a party in interest.
While expressing various concerns about the possible effects of an
express limitation on qualified independent fiduciary compensation,
another commenter nevertheless acknowledged that a fiduciary whose
compensation from parties in interest with respect to a proposed
transaction represents a significant portion of the fiduciary’s
revenues can be, or can be perceived to be, susceptible to improper
influence in carrying out its fiduciary duties. Accordingly, this
commenter suggested the deletion of the Department’s language at
section 2570.31(j) in the proposed rule concerning de minimis amounts
and the 1% compensation standard, and substituting a number of factors
that the Department would utilize in evaluating the independence of a
fiduciary. These factors would include the complexity of the exemption
transaction, the amount of plan assets involved in the exemption
transaction (expressed in both absolute terms and as a percentage of
the plan’s total assets), and the expected duration of the fiduciary’s
engagement.
In response to these comments, the Department wishes to point out
that, in defining the terms “qualified independent appraiser” and
“qualified independent fiduciary”, the proposed rule provided that,
in each instance, the final determination as to the independence of the
appraiser or fiduciary is made “on the basis of all relevant facts and
circumstances.” The Department also notes that the references to the
one percent standard for compensation received by appraisers and
fiduciaries in connection with an exemption transaction was not
intended as an absolute limit with respect to compensation received by
such persons from parties in interest.
Thus, the Department concurs that this provision should be
clarified. In this regard, the Department notes that the percentage of
an appraiser’s or fiduciary’s annual revenue derived from a party in
interest (or its affiliates) to an exemption transaction is an
important factor in determining whether such person is, in fact,
independent of the party in interest engaging in the covered
transaction. The Department also continues to believe that the
percentage of an appraiser’s or fiduciary’s annual revenue that is
attributable to a party in interest should be a de minimis amount.
Accordingly, absent facts and circumstances demonstrating a lack of
independence, the Department will operate according to the presumption
that such appraiser or fiduciary will be independent if the revenues it
receives or is projected to receive, within the current federal income
tax year, from parties in interest (and their affiliates) to the
transaction are not more than 2% of such appraiser’s or fiduciary’s
annual revenues based upon its prior income tax year. Although the
presumption does not apply when the aforementioned percentage exceeds
2%, an appraiser or fiduciary nonetheless may be considered independent
based upon other facts and circumstances provided that the appraiser or
fiduciary receives or is projected to receive revenues that are not
more than 5% within the current federal income tax year, from parties
in interest (and their affiliates) to the transaction based upon its
prior income tax year.
Accordingly, it is the Department’s view that the language
contained in sections 2570.31(i) and (j) in the final rule provides the
Department with sufficient flexibility to take into account any and all
relevant facts and circumstances that may have a bearing on its
assessment of the qualifications and independence of appraisers and
fiduciaries. In this connection, the Department further notes that the
previously referenced factors cited by the commenter may be taken into
account under this “facts and circumstances” standard.
Section 2570.33 Applications the Department Will Not Ordinarily
Consider
Section 2570.33 describes exemption applications that the
Department will not ordinarily consider, such as applications involving
a transaction or transactions that are the subject of an investigation
under the reporting, disclosure and fiduciary responsibility provisions
in parts 1 or 4 of subtitle B of Title I of ERISA. In connection with
the application content provisions of the exemption regulation, one
commenter suggested that the Department modify the language of the
final rule to ensure the confidentiality of information disclosed in an
application (or in any amendments or supplements thereto).\2\ In
support of its view, the commenter stated that investigations by EBSA
are confidential, and that the EBSA Enforcement Manual makes
information about current enforcement proceedings subject to strict
confidentiality (except with respect to other governmental agencies).
The commenter also argued that, absent an amendment excluding this
information from public access, certain applicants affected by the
application content requirements could be stigmatized or might be
deterred from applying for exemptive relief from the Department.
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\2\ Specifically, the commenter suggested modifications to the
language of sections 2570.35(a)(7) and 2570.35(b) to make allowances
for the confidentiality of information submitted to the Department
in connection with an exemption application. Section 2570.35(a)(7)
requires that an application for an individual exemption include a
brief statement to the Department disclosing whether, within the
last five years, any plan affected by the exemption transaction or
any party in interest involved in the exemption transaction has been
under investigation or examination by, or has been engaged in
litigation or a continuing controversy with, the Department, the
Internal Revenue Service, the Justice Department, the Pension
Benefit Guaranty Corporation, or the Federal Retirement Thrift
Investment Board involving compliance with provisions of ERISA,
provisions of the Code relating to employee benefit plans, or
provisions of FERSA relating to the Federal Thrift Savings Fund.
Section 2570.37(b) states that if, at any time during the pendency
of an exemption application, the applicant or any other party in
interest who would participate in the exemption transaction becomes
the subject of an investigative or enforcement action by the
foregoing agencies, the applicant must promptly notify the
Department of such a fact. In considering this comment, the
Department determined that it was appropriate to address the issue
of information designated as confidential by an applicant under
section 2570.33 of the final rule.
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The Department does not concur that the final rule should be
modified to address the commenter’s concerns with respect to preserving
the confidentiality of certain information submitted as part of an
exemption application. Because such information comprises part of the
record in support of an exemption, it enables the public to understand
the basis for the Department’s decision. Section 2570.51(a) of both the
1990 Exemption Procedure and the proposed rule stipulates that “[t]he
administrative record of each exemption application will be open to
public inspection and copying.” Thus, the Department will not process
exemption applications containing such designations unless the claim of
confidentiality and privilege is withdrawn or the Department determines
that the designated information is not material to the exemption
request. Accordingly, in order to provide further clarity, the
Department has redesignated paragraph
[[Page 66641]]
(c) of section 2570.33 as paragraph (d), and a new paragraph (c)
describing the Department’s policy on claims of confidentiality has
been inserted.
Section 2570.34 Information To Be Included in Every Exemption
Application
Disclosure of Compensation Received by Qualified Independent
Appraisers and Fiduciaries–Section 2570.34(d)(8) of the proposed rule
would have required that any statement provided by a qualified
independent fiduciary in support of an exemption application include,
among other things, a representation “disclosing the percentage of
such fiduciary’s current income that was derived from any party in
interest involved in the transaction or its affiliates; in general,
such percentage shall be computed by comparing, in fractional form: (i)
The amount of the fiduciary’s projected personal or business income for
the current federal income tax year that will be derived from the party
in interest or its affiliates (expressed as a numerator); and (ii) The
fiduciary’s gross personal or business income (excluding fixed, non-
discretionary retirement income) for the prior federal income tax year
(expressed as a denominator).” Section 2570.34(c)(7) of the proposed
rule contained similar requirements for the content of statements
submitted by a qualified independent appraiser in support of an
exemption application.
One commenter suggested that this provision be amended in the final
rule to expressly state that, in instances where a qualified
independent fiduciary provides its services to a plan through a
specialized unit which is the subsidiary or affiliate of a larger
business organization, the fiduciary’s revenues (the denominator of the
fraction described in this subsection) should be based solely upon the
revenues of the specialized unit and not the larger organization. The
commenter stated that, because the purpose of examining the proportion
of the independent fiduciary’s compensation derived from parties in
interest is to determine the fiduciary’s lack of susceptibility from
undue influence, the revenues of the specialized unit should be the
proper focus of such an inquiry.
In addition, the commenter offered the view that the time frames
contained in the foregoing denominator should reflect the greater of
(i) The prior federal income tax year’s income or (ii) the qualified
independent fiduciary’s good faith estimate of the current year’s
income. In the commenter’s view, the relationship between the
compensation in connection with the transaction in question and the
current financial state of the business is as least as relevant as data
that may be as much as a year old when the calculation is made.
Because, as previously noted, the focus of this provision is on the
revenues generated by the independent fiduciary, the Department
believes no further changes to the language of this provision are
necessary. Further, the Department declines to adopt the commenter’s
suggested modification of the content of the denominator (as described
at section 2570.34(d)(8)) with respect to the relevant time frame for
computing the revenues received by an independent fiduciary from all
sources. The Department is of the view that the formula described in
the final rule affords greater objectivity and certainty in determining
such amounts.
Specialized Statements–Section 2570.34(c) requires that a
qualified independent appraiser act solely on behalf of the plan in
preparing statements submitted in support of an application for
exemption. In the Department’s view, any appraiser retained to perform
an asset valuation on behalf of a plan must discharge its
responsibilities in an independent and impartial manner. In this
regard, the Department expects the qualified independent appraiser’s
determination to be unbiased, fair, and objective, and to be made in
good faith and based on a detailed analysis of the prevailing
circumstances then known to the appraiser. The same general standards
of professional conduct also apply, as appropriate, to statements
prepared by other third party experts under section 2570.34(e).
Section 2570.35 Information To Be Included in Applications for
Individual Exemptions Only
Disclosure of party in interest investments–Under section
2570.35(a)(16), as it appeared in the 1990 Exemption Procedure, the
extent of applicant disclosure of plan investments with a party in
interest was limited to whether or not the assets of the affected
plans(s) were invested in loans to any party in interest involved in
the exemption transaction, property leased to any such party in
interest, or securities issued by any party in interest involved in the
exemption transaction. Where such investments existed, the applicant
was required to include an additional statement detailing the nature
and extent of these investments, and whether a statutory or
administrative exemption covered such investments.
In the proposed rule, the Department proposed an amendment to this
provision that would have required an applicant to disclose whether or
not the assets of the affected plan(s) had been invested directly or
indirectly in any other transactions (e.g., securities lending or
extensions of credit), whether exempt or non-exempt, with the party in
interest involved in the exemption transaction. Accordingly, such
disclosure would not have been limited to plan investments in loans or
leases involving the party in interest, or securities issued by the
party in interest. In cases where any such investments existed, the
applicant would have been required to provide the Department with
additional information describing, among other things: (1) The type of
investment to which the statement pertains; (2) The aggregate fair
market value of all investments of this type as reflected in the plan’s
most recent annual report; (3) The approximate percentage of the fair
market value of the plan’s total assets as shown in such annual report
that is represented by all investments of this type; and (4) The
applicable statutory or administrative exemption covering these
investments (if any).
One commenter expressed the view that this proposed revision, which
requires an exemption applicant to disclose all direct or indirect
investments of a plan with the party in interest (regardless of whether
such investments were exempt or non-exempt under the terms of ERISA)
was “overbroad” and would be “extraordinarily burdensome” for
applicants. The commenter stated that, for a plan with $10 billion in
assets, there could be literally thousands of transactions with or
through a party in interest that would be required to be disclosed
under this revised provision, regardless of how relevant these
transactions might be to the exemption under consideration. The
commenter questioned whether the disclosure of these transactions (and
the costs associated with such disclosure) would result in a more
efficient exemption process, and added that it desired to see a
continuation of the Department’s existing practice of inquiring during
the pendency of the exemption application about other relationships and
transactions concerning a plan’s investments with a party in interest.
After consideration of the comment, the Department generally
concurs with the concerns expressed by the commenter that compliance
with the disclosure requirements described in the proposed revision to
section 2570.35(a)(16) may pose practical difficulties for some
prohibited transaction exemption applicants. The
[[Page 66642]]
purpose of this disclosure provision (as explained in the preamble of
the 1990 Exemption Procedure) is to enable the Department to determine
whether the exemption transaction, in conjunction with other plan
investments involving parties in interest, would unduly concentrate the
plan’s assets in certain investments and parties so as to raise
questions under the fiduciary responsibility provisions of ERISA.
Accordingly, the Department has determined to modify the language in
the final rule by reverting to the existing requirement, contained in
the 1990 Exemption Procedure, which requires an applicant for an
individual exemption to disclose information regarding any plan
investments in loans to, property leased to, or securities issued by,
any party in interest involved in the exemption transaction. In
addition, it is noted that section 2570.35(a)(16) of the final rule
does not preclude the Department from requesting, during the pendency
of the exemption application, additional information from the
applicant.
Retroactive exemptions–In the proposed rule, the Department added
a new section 2570.35(d) to provide guidance to applicants who are
seeking retroactive relief for past prohibited transactions. This new
subsection incorporates the standards for retroactive exemptions that
were described by the Department in ERISA Technical Release 85-1
(January 22, 1985). The Department believes that the inclusion of these
standards as part of an updated and comprehensive exemption procedure
regulation will provide greater clarity to applicants for retroactive
relief, thereby facilitating the prompt evaluation of such
applications. Among other things, the new subsection reaffirms that, as
a general matter, the Department will consider granting retroactive
relief for transactions already consummated only if the safeguards
necessary for the grant of a prospective exemption were in place at the
time of the consummated transaction. In this regard, an applicant
should provide evidence that it acted in good faith at the time of the
subject transaction by taking reasonable and appropriate steps to
protect the plan from abuse and unnecessary risk. The new subsection
also enumerates a variety of objective factors that the Department
ordinarily takes into account when evaluating whether the conduct of
the applicant at the time of a previously consummated transaction
satisfies the good faith standard.
One commenter expressed concern about the practical effect of one
of these factors (section 2570.35(d)(2)(v)), under which the Department
would take into account whether “the applicant has submitted evidence
that the plan fiduciary did not engage in an act or transaction knowing
that such act or transaction was prohibited under section 406 of ERISA
and/or section 4975 of the Code. In this regard, the Department will
accord appropriate weight to the submission of a contemporaneous,
reasoned legal opinion of counsel, upon which the plan fiduciary relied
in good faith before entering the act or transaction * * *.”
The commenter posited a situation in which, during the pendency of
an application for prospective exemptive relief, certain exigencies
(such as a change in the tax laws) create an incentive for a party in
interest to immediately consummate the proposed transaction, despite
the absence of administrative relief from the Department at that point
in time. The commenter expressed the view that in such circumstances,
where an applicant subsequently amends its application to obtain
retroactive relief for a past prohibited transaction, the Department
should adopt an accommodating posture with respect to those exigent
circumstances that might induce a party in interest to a transaction to
engage in that transaction prior to receiving a final grant of
exemption.
The Department notes that the good faith factors enumerated under
section 2570.35(d) do not constitute an exclusive or an exhaustive list
of the criteria that the Department may consider in evaluating an
application for a retroactive exemption. The determination of whether a
fiduciary has acted in good faith will be based upon a review of the
totality of facts and circumstances surrounding a past prohibited
transaction (including the exigencies of the transaction) before
determining whether a retroactive exemption is warranted. In this
connection, the applicant for a retroactive exemption must demonstrate
that the safeguards necessary for the grant of a prospective
transaction were in place at the time that the transaction was
consummated. Accordingly, the Department has determined that no
modifications to section 2570.35(d)(2)(v) are warranted.
Section 2570.37 Duty To Amend and Supplement Exemption Applications
Section 2570.37(a) of the proposed rule required that an exemption
applicant promptly notify the Department if, during the pendency of an
exemption application, any material fact or representation contained in
the application changes or is inaccurate. This section also required
that, during the pendency of the exemption application, the applicant
promptly notify the Department concerning any material fact or
representation that had been omitted from the application. The
determination whether, under the totality of the facts and
circumstances, a particular statement contained in (or omitted from) an
exemption application constitutes a material fact or representation is
made by the Department.
One commenter interpreted the phrase “during the pendency of the
application” contained in paragraph (a) of section 2570.37 to mean the
period “under which the application/exemption is in force.” With this
interpretation in mind, the commenter expressed the view that changes
to the facts underlying the original grant of an exemption (such as the
size of a company, its business affiliations, lines of business, etc.)
occur all of the time. As a consequence, the commenter opined that if a
party in interest to a covered transaction fails to report any changes
at all to the facts and representations underlying a granted exemption,
such exemption may automatically become invalid. Accordingly, the
commenter proposed that the Department should limit the changes that
need to be reported to the Department to those occurring prior to the
granting of an exemption.
The Department does not concur with the commenter’s interpretation
of the words “during the pendency of the application”. The applicable
timeframe covered by section 2570.37(a) is the period between the
submission of an exemption application and the point at which final
administrative action is taken by the Department with respect to the
application. In the case of a granted exemption involving a one-time
transaction that has been consummated in accordance with the terms and
conditions of the exemption, subsequent events do not affect the
validity of the exemptive relief granted by the Department. In
instances where the Department has granted an exemption for a
transaction which is continuing in nature (e.g., a lease), section
2570.49(d) of the procedure would apply. This provision stipulates that
“[f]or transactions that are continuing in nature, an exemption ceases
to be effective if, during the continuation of the transaction, there
are material [emphasis added] changes to the original facts and
representations underlying such exemption or if one or more of the
exemption’s conditions cease to be met.” The materiality of such
changes is determined by the
[[Page 66643]]
Department in light of the totality of the surrounding facts and
circumstances.\3\ Accordingly, after considering this comment, the
Department has determined not to modify the language of section
2570.37(a) in the final rule. However, in the interests of clarity, the
Department has, on its own motion, deleted paragraph (d) of section
2570.37 in the final rule.
—————————————————————————
\3\ Where applicants are in doubt as to the continued validity
of exemptive relief that has been granted, such applicants may seek
guidance from EBSA’s Office of Exemption Determinations.
—————————————————————————
Sections 2570.40 and 2570.41 Conferences and Final Denial Letters
The 1990 Exemption Procedure stipulated that the Department would
attempt to schedule a conference concerning a tentative denial letter
at a mutually convenient date and time during the 45-day period
following the later of (1) The date the Department received the
applicant’s request for a conference, or (2) the date the Department
notified the applicant, after reviewing additional information
submitted pursuant to section 2570.39, that it was not prepared to
propose the requested exemption. The Department’s proposal (at section
2570.40) would have replaced this 1990 rule by substituting a
simplified procedure in order to facilitate the prompt and efficient
scheduling of such conferences. The Department has largely retained the
proposed language of this conference provision in the final rule,
except for certain technical clarifications. In instances where the
applicant has requested a conference and stated an intent to submit
additional information in support of the application, the Department
generally will schedule a conference for a date and time that occurs
within 20 days after the date on which the Department has provided
notification to the applicant that it remains unprepared to propose the
requested exemption based upon the additional information submitted by
the applicant. Alternatively, in instances where the applicant requests
a conference without expressing an intent to submit additional
information pursuant to section 2570.39, the Department generally will
schedule a conference for a date and time that occurs within 40 days
after the date of the issuance of the tentative denial letter.
The Department, on its own motion, has made technical corrections
to section 2570.40 in the final rule to clarify how the rule would
apply where an exemption applicant, within 20 days of receiving a
tentative denial letter, requests a conference and expresses an intent
to submit additional written information, but fails to provide such
information within 40 days from receipt of the tentative denial letter.
To address this situation, the Department has inserted a new
paragraph (f) in section 2570.40. This new paragraph specifies that,
where an applicant has requested a conference and expressed an intent
to submit additional information pursuant to section 2570.39(b), but
has failed to furnish such information within 40 days from the date of
the tentative denial letter, the Department will generally schedule a
conference for a date and time occurring within 60 days after the date
of the issuance of the tentative denial letter. As part of this
technical correction, the Department also has redesignated sections
2570.40(f) and (g) of the proposed rule, respectively, as sections
2570.40(g) and (h) of the final rule.
In addition, the Department has made an additional technical
correction to the text of section 2570.41 of the final rule by deleting
the reference in paragraph (b) to “section 2570.40(e)” and
substituting “section 2570.40.”
Section 2570.49 Limits on the Effect of Exemptions
The Department, on its own motion, has made a technical refinement
to this section of the final rule by adding a new paragraph (e), which
clarifies that the Department possesses the sole discretion to
determine the materiality of any fact or representation which underlies
an administrative exemption.
C. Regulatory Impact Analysis
Executive Order 12866
Under Executive Order 12866 (58 FR 51735), the Department must
determine whether a regulatory action is “significant” and therefore
subject to review by the Office of Management and Budget (OMB). Section
3(f) of the Executive 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. Pursuant to the terms of the
Executive Order, it has been determined that this action is not
“significant” within the meaning of section 3(f) of the Executive
Order and therefore is not subject to review by OMB.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501-3520) (PRA 95), the Department submitted the information
collection request (ICR) included in the Notice of Proposed Rulemaking
to OMB for review and clearance at the time the proposed rule was
published in the Federal Register on August 30, 2010 (75 FR 53172). OMB
approved the final amendment under OMB control number 1210-0160, on
October 17, 2011. The approval will expire on October 31, 2014.
The Department solicited comments concerning the ICR in connection
with the Notice of Proposed Rulemaking. The Department received no
comments addressing its burden estimates; therefore, no substantive
changes have been made in the final rule that would affect the
Department’s earlier burden estimates.
The paperwork burden estimates are summarized as follows:
Type of Review: New collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Final Rule for Prohibited Transaction Exemption Procedures.
OMB Number: 1210-0060.
Affected Public: Business or other for-profit; not-for-profit
institutions.
Respondents: 56.
Responses: 22,995.
Frequency of Response: Occasionally.
Estimated Total Annual Burden Hours: 2,564.
Estimated Total Annual Burden Cost: $1,547,013.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless the head of an agency certifies that a final
rule is not likely to have a significant economic impact on a
substantial number of small entities, section 603 of
[[Page 66644]]
the RFA requires that the agency present an initial regulatory
flexibility analysis at the time of the publication of the notice of
proposed rulemaking describing the impact of the rule on small entities
and seeking public comment on such impact.
For purposes of the RFA, the Department continues to consider a
small entity to be an employee benefit plan with fewer than 100
participants.\4\ Further, while some large employers may have small
plans, in general small employers maintain most small plans. Thus, the
Department believes that assessing the impact of this final rule on
small plans is an appropriate substitute for evaluating the effect on
small entities. The definition of small entity considered appropriate
for this purpose differs, however, from a definition of small business
that is based on size standards promulgated by the Small Business
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business
Act (15 U.S.C. 631 et seq.). The Department requested comments on the
appropriateness of the size standard used in evaluating the impact of
the rule on small entities but did not receive any comments.
—————————————————————————
\4\ The basis for this definition is found in section 104(a)(2)
of the Act, which permits the Secretary of Labor to prescribe
simplified annual reports for pension plans that cover fewer than
100 participants. Pursuant to the authority of section 104(a)(3),
the Department has previously issued at 29 CFR 2520.104-20,
2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10 certain
simplified reporting provisions and limited exemptions from
reporting and disclosure requirements for small plans, including
unfunded or insured welfare plans covering fewer than 100
participants and satisfying certain other requirements.
—————————————————————————
By this standard, the Department estimates that nearly half the
requests for exemptions are from small plans. Thus, of the
approximately 613,000 ERISA-covered small plans, the Department
estimates that 28 small plans (.000046% of small plans) file prohibited
transaction exemption applications each year. The Department does not
consider this to be a substantial number of small entities. Therefore,
based on the foregoing, pursuant to section 605(b) of RFA, the
Assistant Secretary of the Employee Benefits Security Administration
hereby certifies that the final rule will not have a significant
economic impact on a substantial number of small entities. The
Department invited public comments on its certification and the
potential impact of the rule on small entities at the proposed rule
stage and did not receive any comments.
Congressional Review Act
The final rule being issued here is subject to the provisions of
the Congressional Review Act provisions of the Small Business
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and
will be transmitted to Congress and the Comptroller General for review.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), the final rule does not include any federal mandate that may
result in expenditures by State, local, or tribal governments, or
impose an annual burden exceeding $100 million or more, adjusted for
inflation, on the private sector.
Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism and requires federal agencies to adhere to
specific criteria in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, or the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. This final rule does not have federalism
implications, because it has no substantial direct effect on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Section 514 of ERISA provides, with
certain exceptions specifically enumerated, that the provisions of
Titles I and IV of ERISA supersede any and all laws of the States as
they relate to any employee benefit plan covered under ERISA. The
requirements implemented in the rule do not alter the fundamental
provisions of the statute with respect to employee benefit plans, and
as such would have no implications for the States or the relationship
or distribution of power between the national government and the
States.
List of Subjects in 29 CFR Part 2570
Administrative practice and procedure, Employee benefit plans,
Employee Retirement Income Security Act, Federal Employees’ Retirement
System Act, Exemptions, Fiduciaries, Party in interest, Pensions,
Prohibited transactions, Trusts and trustees.
For the reasons set forth in the preamble, the Department amends
subchapter G, part 2570 of chapter XXV of title 29 of the Code of
Federal Regulations as follows:
PART 2570–PROCEDURAL REGULATIONS UNDER THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT
0
1. Revise the authority citation for part 2570 to read as follows:
Authority: 5 U.S.C. 8477; 29 U.S.C. 1002(40), 1021, 1108, 1132,
and 1135; sec. 102, Reorganization Plan No. 4 of 1978, 5 U.S.C. App
at 672 (2006); Secretary of Labor’s Order 3-2010, 75 FR 55354
(September 10, 2010).
0
2. Revise subpart B to part 2570 to read as follows:
Subpart B–Procedures Governing the Filing and Processing of Prohibited
Transaction Exemption Applications
Sec.
2570.30 Scope of rules.
2570.31 Definitions.
2570.32 Persons who may apply for exemptions.
2570.33 Applications the Department will not ordinarily consider.
2570.34 Information to be included in every exemption application.
2570.35 Information to be included in applications for individual
exemptions only.
2570.36 Where to file an application.
2570.37 Duty to amend and supplement exemption applications.
2570.38 Tentative denial letters.
2570.39 Opportunities to submit additional information.
2570.40 Conferences.
2570.41 Final denial letters.
2570.42 Notice of proposed exemption.
2570.43 Notification of interested persons by applicant.
2570.44 Withdrawal of exemption applications.
2570.45 Requests for reconsideration.
2570.46 Hearings in opposition to exemptions from restrictions on
fiduciary self-dealing.
2570.47 Other hearings.
2570.48 Decision to grant exemptions.
2570.49 Limits on the effect of exemptions.
2570.50 Revocation or modification of exemptions.
2570.51 Public inspection and copies.
2570.52 Effective date.
Subpart B–Procedures Governing the Filing and Processing of
Prohibited Transaction Exemption Applications
Sec. 2570.30 Scope of rules.
(a) The rules of procedure set forth in this subpart apply to
prohibited transaction exemptions issued by the Department under the
authority of:
(1) Section 408(a) of the Employee Retirement Income Security Act
of 1974 (ERISA);
[[Page 66645]]
(2) Section 4975(c)(2) of the Internal Revenue Code of 1986 (the
Code); \1\ or
—————————————————————————
\1\ Section 102 of Presidential Reorganization Plan No. 4 of
1978 (3 CFR part 332 (1978), reprinted in 5 U.S.C. app. at 672
(2006), and in 92 Stat. 3790 (1978)), effective December 31, 1978,
generally transferred the authority of the Secretary of the Treasury
to issue administrative exemptions under section 4975(c)(2) of the
Code to the Department of Labor.
—————————————————————————
(3) The Federal Employees’ Retirement System Act of 1986 (FERSA) (5
U.S.C. 8477(c)(3)).
(b) Under these rules of procedure, the Department may
conditionally or unconditionally exempt any fiduciary or transaction,
or class of fiduciaries or transactions, from all or part of the
restrictions imposed by section 406 of ERISA and the corresponding
restrictions of the Code and FERSA. While administrative exemptions
granted under these rules are ordinarily prospective in nature, an
applicant may also obtain retroactive relief for past prohibited
transactions if certain safeguards described in this subpart were in
place at the time the transaction was consummated.
(c) These rules govern the filing and processing of applications
for both individual and class exemptions that the Department may
propose and grant pursuant to the authorities cited in paragraph (a) of
this section. The Department may also propose and grant exemptions on
its own motion, in which case the procedures relating to publication of
notices, hearings, evaluation and public inspection of the
administrative record, and modification or revocation of previously
granted exemptions will apply.
(d) The issuance of an administrative exemption by the Department
under these procedural rules does not relieve a fiduciary or other
party in interest or disqualified person with respect to a plan from
the obligation to comply with certain other provisions of ERISA, the
Code, or FERSA, including any prohibited transaction provisions to
which the exemption does not apply, and the general fiduciary
responsibility provisions of ERISA which require, among other things,
that a fiduciary discharge his or her duties respecting the plan solely
in the interests of the participants and beneficiaries of the plan and
in a prudent fashion; 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.
(e) The Department will not propose or issue exemptions upon oral
request alone, nor will the Department grant exemptions orally. An
applicant for an administrative exemption may request and receive oral
advice from Department employees in preparing an exemption application.
However, such advice does not constitute part of the administrative
record and is not binding on the Department in its processing of an
exemption application or in its examination or audit of a plan.
(f) The Department will generally treat any exemption application
that is filed solely under section 408(a) of ERISA or solely under
section 4975(c)(2) of the Code as an exemption request filed under both
section 408(a) and section 4975(c)(2) if it relates to a transaction
that would be prohibited both by ERISA and the corresponding provisions
of the Code.
Sec. 2570.31 Definitions.
For purposes of these procedures, the following definitions apply:
(a) An affiliate of a person means–
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person. For purposes of this paragraph, the term “control”
means the power to exercise a controlling influence over the management
or policies of a person other than an individual;
(2) Any director of, relative of, or partner in, any such person;
(3) Any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
or more partner or owner; or
(4) Any employee or officer of the person who–
(i) Is highly compensated (as defined in section 4975(e)(2)(H) of
the Code), or
(ii) Has direct or indirect authority, responsibility, or control
regarding the custody, management, or disposition of plan assets
involved in the subject exemption transaction.
(b) A class exemption is an administrative exemption, granted under
section 408(a) of ERISA, section 4975(c)(2) of the Code, and/or 5
U.S.C. 8477(c)(3), which applies to any transaction and party in
interest within the class of transactions and parties in interest
specified in the exemption when the conditions of the exemption are
satisfied.
(c) Department means the U.S. Department of Labor and includes the
Secretary of Labor or his or her delegate exercising authority with
respect to prohibited transaction exemptions to which this subpart
applies.
(d) Exemption transaction means the transaction or transactions for
which an exemption is requested.
(e) An individual exemption is an administrative exemption, granted
under section 408(a) of ERISA, section 4975(c)(2) of the Code, and/or 5
U.S.C. 8477(c)(3), which applies only to the specific parties in
interest and transactions named or otherwise defined in the exemption.
(f) A party in interest means a person described in section 3(14)
of ERISA or 5 U.S.C. 8477(a)(4) and includes a disqualified person, as
defined in section 4975(e)(2) of the Code.
(g) Pooled fund means an account or fund for the collective
investment of the assets of two or more unrelated plans, including (but
not limited to) a pooled separate account maintained by an insurance
company and a common or collective trust fund maintained by a bank or
similar financial institution.
(h) A qualified appraisal report is any appraisal report that
satisfies all of the requirements set forth in this subpart at Sec.
2570.34(c)(4).
(i) A qualified independent appraiser is any individual or entity
with appropriate training, experience, and facilities to provide a
qualified appraisal report on behalf of the plan regarding the
particular asset or property appraised in the report, that is
independent of and unrelated to any party in interest engaging in the
exemption transaction and its affiliates; in general, the determination
as to the independence of the appraiser is made by the Department on
the basis of all relevant facts and circumstances. In making this
determination, the Department generally will take into account the
amount of both the appraiser’s revenues and projected revenues for the
current federal income tax year (including amounts received for
preparing the appraisal report) that will be derived from the party in
interest or its affiliates relative to the appraiser’s revenues from
all sources for the prior federal income tax year. Absent facts and
circumstances demonstrating a lack of independence, the Department will
operate according to the presumption that such appraiser will be
independent if the revenues it receives or is projected to receive,
within the current federal income tax year, from parties in interest
(and their affiliates) to the transaction are not more than 2% of such
appraiser’s annual revenues based upon its prior income tax year.
Although the presumption does not apply when the aforementioned
percentage exceeds 2%, an appraiser nonetheless may be considered
independent based upon other facts and circumstances provided that it
receives or is projected to receive revenues that are not more than 5%
within the current federal income tax year from parties in interest
(and their
[[Page 66646]]
affiliates) to the transaction based upon its prior income tax year.
(j) A qualified independent fiduciary is any individual or entity
with appropriate training, experience, and facilities to act on behalf
of the plan regarding the exemption transaction in accordance with the
fiduciary duties and responsibilities prescribed by ERISA, that is
independent of and unrelated to any party in interest engaging in the
exemption transaction and its affiliates; in general, the determination
as to the independence of a fiduciary is made by the Department on the
basis of all relevant facts and circumstances. In making this
determination, the Department generally will take into account the
amount of both the fiduciary’s revenues and projected revenues for the
current federal income tax year (including amounts received for
preparing fiduciary reports) that will be derived from the party in
interest or its affiliates relative to the fiduciary’s revenues from
all sources for the prior federal income tax year. Absent facts and
circumstances demonstrating a lack of independence, the Department will
operate according to the presumption that such fiduciary will be
independent if the revenues it receives or is projected to receive,
within the current federal income tax year, from parties in interest
(and their affiliates) to the transaction are not more than 2% of such
fiduciary’s annual revenues based upon its prior income tax year.
Although the presumption does not apply when the aforementioned
percentage exceeds 2%, a fiduciary nonetheless may be considered
independent based upon other facts and circumstances provided that it
receives or is projected to receive revenues that are not more than 5%
within the current federal income tax year from parties in interest
(and their affiliates) to the transaction based upon its prior income
tax year.
Sec. 2570.32 Persons who may apply for exemptions.
(a) The Department will initiate exemption proceedings upon the
application of:
(1) Any party in interest to a plan who is or may be a party to the
exemption transaction;
(2) Any plan which is a party to the exemption transaction; or
(3) In the case of an application for an exemption covering a class
of parties in interest or a class of transactions, in addition to any
person described in paragraphs (a)(1) and (2) of this section, an
association or organization representing parties in interest who may be
parties to the exemption transaction.
(b) An application by or for a person described in paragraph (a) of
this section, may be submitted by the applicant or by an authorized
representative. An application submitted by a representative of the
applicant must include proof of authority in the form of:
(1) A power of attorney; or
(2) A written certification from the applicant that the
representative is authorized to file the application.
(c) If the authorized representative of an applicant submits an
application for an exemption to the Department together with proof of
authority to file the application as required by paragraph (b) of this
section, the Department will direct all correspondence and inquiries
concerning the application to the representative unless requested to do
otherwise by the applicant.
Sec. 2570.33 Applications the Department will not ordinarily
consider.
(a) The Department ordinarily will not consider:
(1) An application that fails to include all the information
required by Sec. Sec. 2570.34 and 2570.35 of this subpart or otherwise
fails to conform to the requirements of these procedures; or
(2) An application involving a transaction or transactions which
are the subject of an investigation for possible violations of part 1
or 4 of subtitle B of Title I of ERISA or section 8477 or 8478 of FERSA
or an application involving a party in interest who is the subject of
such an investigation or who is a defendant in an action by the
Department or the Internal Revenue Service to enforce the above-
mentioned provisions of ERISA or FERSA.
(b) An application for an individual exemption relating to a
specific transaction or transactions ordinarily will not be considered
if the Department has under consideration a class exemption relating to
the same type of transaction or transactions. Notwithstanding the
foregoing, the Department may consider such an application if the
issuance of the final class exemption may not be imminent, and the
Department determines that time constraints necessitate consideration
of the transaction on an individual basis.
(c) The administrative record of an exemption application includes
the initial exemption application and any supporting information
provided by the applicant (as well as any comments and testimony
received by the Department in connection with an application). If an
applicant designates as confidential any information required by these
regulations or requested by the Department, the Department will
determine whether the information is material to the exemption
determination. If it determines the information to be material, the
Department will not process the application unless the applicant
withdraws the claim of confidentiality.
(d) If for any reason the Department decides not to consider an
exemption application, it will inform the applicant in writing of that
decision and of the reasons therefore.
Sec. 2570.34 Information to be included in every exemption
application.
(a) All applications for exemptions must contain the following
information:
(1) The name(s) of the applicant(s);
(2) A detailed description of the exemption transaction including
identification of all the parties in interest involved, a description
of any larger integrated transaction of which the exemption transaction
is a part, and a chronology of the events leading up to the
transaction;
(3) The identity of any representatives for the affected plan(s)
and parties in interest and what individuals or entities they
represent;
(4) The reasons a plan would have for entering into the exemption
transaction;
(5) The prohibited transaction provisions from which exemptive
relief is requested and the reason why the transaction would violate
each such provision;
(6) Whether the exemption transaction is customary for the industry
or class involved;
(7) Whether the exemption transaction is or has been the subject of
an investigation or enforcement action by the Department or by the
Internal Revenue Service; and
(8) The hardship or economic loss, if any, which would result to
the person or persons on behalf of whom the exemption is sought, to
affected plans, and to their participants and beneficiaries from denial
of the exemption.
(b) All applications for exemption must also contain the following:
(1) A statement explaining why the requested exemption would be–
(i) Administratively feasible;
(ii) In the interests of affected plans and their participants and
beneficiaries; and
(iii) Protective of the rights of participants and beneficiaries of
affected plans.
(2) With respect to the notification of interested persons required
by Sec. 2570.43:
[[Page 66647]]
(i) A description of the interested persons to whom the applicant
intends to provide notice;
(ii) The manner in which the applicant will provide such notice;
and
(iii) An estimate of the time the applicant will need to furnish
notice to all interested persons following publication of a notice of
the proposed exemption in the Federal Register.
(3) If an advisory opinion has been requested by any party to the
exemption transaction from the Department with respect to any issue
relating to the exemption transaction–
(i) A copy of the letter concluding the Department’s action on the
advisory opinion request; or
(ii) If the Department has not yet concluded its action on the
request:
(A) A copy of the request or the date on which it was submitted
together with the Department’s correspondence control number as
indicated in the acknowledgment letter; and
(B) An explanation of the effect of the issuance of an advisory
opinion upon the exemption transaction.
(4) If the application is to be signed by anyone other than an
individual party in interest seeking exemptive relief on his or her own
behalf, a statement which–
(i) Identifies the individual signing the application and his or
her position or title; and
(ii) Explains briefly the basis of his or her familiarity with the
matters discussed in the application.
(5)(i) A declaration in the following form:
Under penalty of perjury, I declare that I am familiar with the
matters discussed in this application and, to the best of my
knowledge and belief, the representations made in this application
are true and correct.
(ii) This declaration must be dated and signed by:
(A) The applicant, in its individual capacity, in the case of an
individual party in interest seeking exemptive relief on his or her own
behalf;
(B) A corporate officer or partner where the applicant is a
corporation or partnership;
(C) A designated officer or official where the applicant is an
association, organization or other unincorporated enterprise; or
(D) The plan fiduciary that has the authority, responsibility, and
control with respect to the exemption transaction where the applicant
is a plan.
(c) Specialized statements, as applicable, from a qualified
independent appraiser acting solely on behalf of the plan, such as
appraisal reports or analyses of market conditions, submitted to
support an application for exemption must be accompanied by a statement
of consent from such appraiser acknowledging that the statement is
being submitted to the Department as part of an application for
exemption. Such statements must also contain the following written
information:
(1) A copy of the qualified independent appraiser’s engagement
letter with the plan describing the specific duties the appraiser shall
undertake;
(2) A summary of the qualified independent appraiser’s
qualifications to serve in such capacity;
(3) A detailed description of any relationship that the qualified
independent appraiser has had or may have with any party in interest
engaging in the transaction with the plan, or its affiliates, that may
influence the appraiser;
(4) A written appraisal report prepared by the qualified
independent appraiser, acting solely on behalf of the plan, rather
than, for example, on behalf of the plan sponsor, which satisfies the
following requirements:
(i) The report must describe the method(s) used in determining the
fair market value of the subject asset(s) and an explanation of why
such method best reflects the fair market value of the asset(s);
(ii) The report must take into account any special benefit that the
party in interest or its affiliate(s) may derive from control of the
asset(s), such as from owning an adjacent parcel of real property or
gaining voting control over a company; and
(iii) The report must be current and not more than one year old
from the date of the transaction, and there must be a written update by
the qualified independent appraiser affirming the accuracy of the
appraisal as of the date of the transaction. If the appraisal report is
a year old or more, a new appraisal shall be submitted to the
Department by the applicant.
(5) If the subject of the appraisal report is real property, the
qualified independent appraiser shall submit a written representation
that he or she is a member of a professional organization of appraisers
that can sanction its members for misconduct;
(6) If the subject of the appraisal report is an asset other than
real property, the qualified independent appraiser shall submit a
written representation describing the appraiser’s prior experience in
valuing assets of the same type; and
(7) The qualified independent appraiser shall submit a written
representation disclosing the percentage of its current revenue that is
derived from any party in interest involved in the transaction or its
affiliates; in general, such percentage shall be computed by comparing,
in fractional form:
(i) The amount of the appraiser’s projected revenues from the
current federal income tax year (including amounts received from
preparing the appraisal report) that will be derived from the party in
interest or its affiliates (expressed as a numerator); and
(ii) The appraiser’s revenues from all sources for the prior
federal income tax year (expressed as a denominator).
(d) For those exemption transactions requiring the retention of a
qualified independent fiduciary to represent the interests of the plan,
a statement must be submitted by such fiduciary that contains the
following written information:
(1) A signed and dated declaration under penalty of perjury that,
to the best of the qualified independent fiduciary’s knowledge and
belief, all of the representations made in such statement are true and
correct;
(2) A copy of the qualified independent fiduciary’s engagement
letter with the plan describing the fiduciary’s specific duties;
(3) An explanation for the conclusion that the fiduciary is a
qualified independent fiduciary, which also must include a summary of
that person’s qualifications to serve in such capacity, as well as a
description of any prior experience by that person or other
demonstrated characteristics of the fiduciary (such as special areas of
expertise) that render that person or entity suitable to perform its
duties on behalf of the plan with respect to the exemption transaction;
(4) A detailed description of any relationship that the qualified
independent fiduciary has had or may have with the party in interest
engaging in the transaction with the plan or its affiliates;
(5) An acknowledgement by the qualified independent fiduciary that
it understands its duties and responsibilities under ERISA in acting as
a fiduciary on behalf of the plan rather than, for example, acting on
behalf of the plan sponsor;
(6) The qualified independent fiduciary’s opinion on whether the
proposed transaction would be in the interests of the plan and of its
participants and beneficiaries, and protective of the rights of
participants and beneficiaries of such plan, along
[[Page 66648]]
with a statement of the reasons on which the opinion is based;
(7) Where the proposed transaction is continuing in nature, a
declaration by the qualified independent fiduciary that it is
authorized to take all appropriate actions to safeguard the interests
of the plan, and shall, during the pendency of the transaction:
(i) Monitor the transaction on behalf of the plan on a continuing
basis;
(ii) Ensure that the transaction remains in the interests of the
plan and, if not, take any appropriate actions available under the
particular circumstances; and
(iii) Enforce compliance with all conditions and obligations
imposed on any party dealing with the plan with respect to the
transaction; and
(8) The qualified independent fiduciary shall submit a written
representation disclosing the percentage of such fiduciary’s current
revenue that is derived from any party in interest involved in the
transaction or its affiliates; in general, such percentage shall be
computed by comparing, in fractional form:
(i) The amount of the fiduciary’s projected revenues from the
current federal income tax year that will be derived from the party in
interest or its affiliates (expressed as a numerator); and
(ii) The fiduciary’s revenues from all sources (excluding fixed,
non-discretionary retirement income) for the prior federal income tax
year (expressed as a denominator).
(e) Specialized statements, as applicable, from other third-party
experts, including but not limited to economists or market specialists,
submitted on behalf of the plan to support an application for exemption
must be accompanied by a statement of consent from such expert
acknowledging that the statement prepared on behalf of the plan is
being submitted to the Department as part of an application for
exemption. Such statements must also contain the following written
information:
(1) A copy of the expert’s engagement letter with the plan
describing the specific duties the expert will undertake;
(2) A summary of the expert’s qualifications to serve in such
capacity; and
(3) A detailed description of any relationship that the expert has
had or may have with any party in interest engaging in the transaction
with the plan, or its affiliates, that may influence the actions of the
expert.
(f) An application for exemption may also include a draft of the
requested exemption which describes the transaction and parties in
interest for which exemptive relief is sought and the specific
conditions under which the exemption would apply.
Sec. 2570.35 Information to be included in applications for
individual exemptions only.
(a) Except as provided in paragraph (c) of this section, every
application for an individual exemption must include, in addition to
the information specified in Sec. 2570.34 of this subpart, the
following information:
(1) The name, address, telephone number, and type of plan or plans
to which the requested exemption applies;
(2) The Employer Identification Number (EIN) and the plan number
(PN) used by such plan or plans in all reporting and disclosure
required by the Department;
(3) Whether any plan or trust affected by the requested exemption
has ever been found by the Department, the Internal Revenue Service, or
by a court to have violated the exclusive benefit rule of section
401(a) of the Code, section 4975(c)(1) of the Code, section 406 or
407(a) of ERISA, or 5 U.S.C. 8477(c)(3), including a description of the
circumstances surrounding such violation;
(4) Whether any relief under section 408(a) of ERISA, section
4975(c)(2) of the Code, or 5 U.S.C. 8477(c)(3) has been requested by,
or provided to, the applicant or any of the parties on behalf of whom
the exemption is sought and, if so, the exemption application number or
the prohibited transaction exemption number;
(5) Whether the applicant or any of the parties in interest
involved in the exemption transaction is currently, or has been within
the last five years, a defendant in any lawsuit or criminal action
concerning such person’s conduct as a fiduciary or party in interest
with respect to any plan (other than a lawsuit with respect to a
routine claim for benefits), and a description of the circumstances of
such lawsuit or criminal action;
(6) Whether the applicant (including any person described in Sec.
2570.34(b)(5)(ii)) or any of the parties in interest involved in the
exemption transaction has, within the last 13 years, been either
convicted or released from imprisonment, whichever is later, as a
result of: any felony involving abuse or misuse of such person’s
position or employment with an employee benefit plan or a labor
organization; any felony arising out of the conduct of the business of
a broker, dealer, investment adviser, bank, insurance company or
fiduciary; income tax evasion; any felony involving the larceny, theft,
robbery, extortion, forgery, counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion, or misappropriation of funds or
securities; conspiracy or attempt to commit any such crimes or a crime
of which any of the foregoing crimes is an element; or any other crime
described in section 411 of ERISA, and a description of the
circumstances of any such conviction. For purposes of this section, a
person shall be deemed to have been “convicted” from the date of the
judgment of the trial court, regardless of whether that judgment
remains under appeal;
(7) Whether, within the last five years, any plan affected by the
exemption transaction, or any party in interest involved in the
exemption transaction, has been under investigation or examination by,
or has been engaged in litigation or a continuing controversy with, the
Department, the Internal Revenue Service, the Justice Department, the
Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift
Investment Board involving compliance with provisions of ERISA,
provisions of the Code relating to employee benefit plans, or
provisions of FERSA relating to the Federal Thrift Savings Fund. If so,
the applicant must provide a brief statement describing the
investigation, examination, litigation or controversy. The Department
reserves the right to require the production of additional information
or documentation concerning any of the above matters. In this regard, a
denial of the exemption application will result from a failure to
provide additional information requested by the Department.
(8) Whether any plan affected by the requested exemption has
experienced a reportable event under section 4043 of ERISA, and, if so,
a description of the circumstances of any such reportable event;
(9) Whether a notice of intent to terminate has been filed under
section 4041 of ERISA respecting any plan affected by the requested
exemption, and, if so, a description of the circumstances for the
issuance of such notice;
(10) Names, addresses, and taxpayer identifying numbers of all
parties in interest involved in the subject transaction;
(11) The estimated number of participants and beneficiaries in each
plan affected by the requested exemption as of the date of the
application;
(12) The percentage of the fair market value of the total assets of
each affected
[[Page 66649]]
plan that is involved in the exemption transaction;
(13) Whether the exemption transaction has been consummated or will
be consummated only if the exemption is granted;
(14) If the exemption transaction has already been consummated:
(i) The circumstances which resulted in plan fiduciaries causing
the plan(s) to engage in the transaction before obtaining an exemption
from the Department;
(ii) Whether the transaction has been terminated;
(iii) Whether the transaction has been corrected as defined in Code
section 4975(f)(5);
(iv) Whether Form 5330, Return of Excise Taxes Related to Employee
Benefit Plans, has been filed with the Internal Revenue Service with
respect to the transaction; and
(v) Whether any excise taxes due under section 4975(a) and (b) of
the Code, or any civil penalties due under section 502(i) or (l) of
ERISA by reason of the transaction have been paid. If so, the applicant
should submit documentation (e.g., a canceled check) demonstrating that
the excise taxes or civil penalties were paid.
(15) The name of every person who has investment discretion over
any plan assets involved in the exemption transaction and the
relationship of each such person to the parties in interest involved in
the exemption transaction and the affiliates of such parties in
interest;
(16) Whether or not the assets of the affected plan(s) are invested
in loans to any party in interest involved in the exemption
transaction, in property leased to any such party in interest, or in
securities issued by any such party in interest, and, if such
investments exist, a statement for each of these three types of
investments which indicates:
(i) The type of investment to which the statement pertains;
(ii) The aggregate fair market value of all investments of this
type as reflected in the plan’s most recent annual report;
(iii) The approximate percentage of the fair market value of the
plan’s total assets as shown in such annual report that is represented
by all investments of this type; and
(iv) The statutory or administrative exemption covering these
investments, if any.
(17) The approximate aggregate fair market value of the total
assets of each affected plan;
(18) The person(s) who will bear the costs of the exemption
application and of notifying interested persons; and
(19) Whether an independent fiduciary is or will be involved in the
exemption transaction and, if so, the names of the persons who will
bear the cost of the fee payable to such fiduciary.
(b) Each application for an individual exemption must also include:
(1) True copies of all contracts, deeds, agreements, and
instruments, as well as relevant portions of plan documents, trust
agreements, and any other documents bearing on the exemption
transaction;
(2) A discussion of the facts relevant to the exemption transaction
that are reflected in these documents and an analysis of their bearing
on the requested exemption;
(3) A copy of the most recent financial statements of each plan
affected by the requested exemption; and
(4) A net worth statement with respect to any party in interest
that is providing a personal guarantee with respect to the exemption
transaction.
(c) Special rule for applications for individual exemption
involving pooled funds:
(1) The information required by paragraphs (a)(8) through (12) of
this section is not required to be furnished in an application for
individual exemption involving one or more pooled funds;
(2) The information required by paragraphs (a)(1) through (7) and
(a)(13) through (19) of this section and by paragraphs (b)(1) through
(3) of this section must be furnished in reference to the pooled fund,
rather than to the plans participating therein. (For purposes of this
paragraph, the information required by paragraph (a)(16) of this
section relates solely to other pooled fund transactions with, and
investments in, parties in interest involved in the exemption
transaction which are also sponsors of plans which invest in the pooled
fund.);
(3) The following information must also be furnished–
(i) The estimated number of plans that are participating (or will
participate) in the pooled fund; and
(ii) The minimum and maximum limits imposed by the pooled fund (if
any) on the portion of the total assets of each plan that may be
invested in the pooled fund.
(4) Additional requirements for applications for individual
exemption involving pooled funds in which certain plans participate.
(i) This paragraph applies to any application for an individual
exemption involving one or more pooled funds in which any plan
participating therein–
(A) Invests an amount which exceeds 20% of the total assets of the
pooled fund, or
(B) Covers employees of:
(1) The party sponsoring or maintaining the pooled fund, or any
affiliate of such party, or
(2) Any fiduciary with investment discretion over the pooled fund’s
assets, or any affiliate of such fiduciary.
(ii) The exemption application must include, with respect to each
plan described in paragraph (c)(4)(i) of this section, the information
required by paragraphs (a)(1) through (3), (a)(5) through (7), (a)(10),
(a)(12) through (16), and (a)(18) and (19), of this section. The
information required by this paragraph must be furnished in reference
to the plan’s investment in the pooled fund (e.g., the names, addresses
and taxpayer identifying numbers of all fiduciaries responsible for the
plan’s investment in the pooled fund (Sec. 2570.35(a) (10)), the
percentage of the assets of the plan invested in the pooled fund (Sec.
2570.35(a)(12)), whether the plan’s investment in the pooled fund has
been consummated or will be consummated only if the exemption is
granted (Sec. 2570.35(a)(13)), etc.).
(iii) The information required by paragraph (c)(4) of this section
is in addition to the information required by paragraphs (c)(2) and (3)
of this section relating to information furnished by reference to the
pooled fund.
(5) The special rule and the additional requirements described in
paragraphs (c)(1) through (4) of this section do not apply to an
individual exemption request solely for the investment by a plan in a
pooled fund. Such an application must provide the information required
by paragraphs (a) and (b) of this section.
(d) Retroactive exemptions:
(1) Generally, the Department will favorably consider requests for
retroactive relief, in all exemption applications, only where the
safeguards necessary for the grant of a prospective exemption were in
place at the time at which the parties entered into the transaction. An
applicant for a retroactive exemption must have acted in good faith by
taking reasonable and appropriate steps to protect the plan from abuse
and unnecessary risk at the time of the transaction.
(2) Among the factors that the Department would take into account
in making a finding that an applicant acted in good faith include the
following:
(i) The participation of an independent fiduciary acting on behalf
of the plan who is qualified to negotiate, approve and monitor the
transaction;
(ii) The existence of a contemporaneous appraisal by a qualified
independent appraiser or reference to an objective third party source,
such as a stock or bond index;
[[Page 66650]]
(iii) The existence of a bidding process or evidence of comparable
fair market transactions with unrelated third parties;
(iv) That the applicant has submitted an accurate and complete
application for exemption containing documentation of all necessary and
relevant facts and representations upon which the applicant relied. In
this regard, additional weight will be given to facts and
representations which are prepared and certified by a source
independent of the applicant;
(v) That the applicant has submitted evidence that the plan
fiduciary did not engage in an act or transaction knowing that such act
or transaction was prohibited under section 406 of ERISA and/or section
4975 of the Code. In this regard, the Department will accord
appropriate weight to the submission of a contemporaneous, reasoned
legal opinion of counsel, upon which the plan fiduciary relied in good
faith before entering the act or transaction;
(vi) That the applicant has submitted a statement of the
circumstances which prompted the submission of the application for
exemption and the steps taken by the applicant with regard to the
transaction upon discovery of the violation;
(vii) That the applicant has submitted a statement, prepared and
certified by an independent person familiar with the types of
transactions for which relief is requested, demonstrating that the
terms and conditions of the transaction (including, in the case of an
investment, the return in fact realized by the plan) were at least as
favorable to the plan as that obtainable in a similar transaction with
an unrelated party; and
(viii) Such other undertakings and assurances with respect to the
plan and its participants that may be offered by the applicant which
are relevant to the criteria under section 408(a) of ERISA and section
4975(c)(2) of the Code.
(3) The Department, as a general matter, will not favorably
consider requests for retroactive exemptions where transactions or
conduct with respect to which an exemption is requested resulted in a
loss to the plan. In addition, the Department will not favorably
consider requests for exemptions where the transactions are
inconsistent with the general fiduciary responsibility provisions of
sections 403 or 404 of ERISA or the exclusive benefit requirements of
section 401(a) of the Code.
Sec. 2570.36 Where to file an application.
The Department’s prohibited transaction exemption program is
administered by the Employee Benefits Security Administration (EBSA).
Any exemption application governed by these procedures may be mailed
via first-class mail to: Employee Benefits Security Administration,
Office of Exemption Determinations, U.S. Department of Labor, Room N-
5700, 200 Constitution Avenue NW., Washington, DC 20210. Alternatively,
applications may be emailed to the Department at [email protected] or
transmitted via facsimile at (202) 219-0204. Notwithstanding the
foregoing methods of transmission, applicants are also required to
submit one paper copy of the exemption application for the Department’s
file.
Sec. 2570.37 Duty to amend and supplement exemption applications.
(a) While an exemption application is pending final action with the
Department, an applicant must promptly notify the Department in writing
if he or she discovers that any material fact or representation
contained in the application or in any documents or testimony provided
in support of the application is inaccurate, if any such fact or
representation changes during this period, or if, during the pendency
of the application, anything occurs that may affect the continuing
accuracy of any such fact or representation. In addition, an applicant
must promptly notify the Department in writing if it learns that a
material fact or representation has been omitted from the exemption
application.
(b) If, at any time during the pendency of an exemption
application, the applicant or any other party in interest who would
participate in the exemption transaction becomes the subject of an
investigation or enforcement action by the Department, the Internal
Revenue Service, the Justice Department, the Pension Benefit Guaranty
Corporation, or the Federal Retirement Thrift Investment Board
involving compliance with provisions of ERISA, provisions of the Code
relating to employee benefit plans, or provisions of FERSA relating to
the Federal Thrift Savings Fund, the applicant must promptly notify the
Department.
(c) The Department may require an applicant to provide
documentation it considers necessary to verify any statements contained
in the application or in supporting materials or documents.
Sec. 2570.38 Tentative denial letters.
(a) If, after reviewing an exemption file, the Department
tentatively concludes that it will not propose or grant the exemption,
it will notify the applicant in writing. At the same time, the
Department will provide a brief statement of the reasons for its
tentative denial.
(b) An applicant will have 20 days from the date of a tentative
denial letter to request a conference under Sec. 2570.40 of this
subpart and/or to notify the Department of its intent to submit
additional information under Sec. 2570.39 of this subpart. If the
Department does not receive a request for a conference or a
notification of intent to submit additional information within that
time, it will issue a final denial letter pursuant to Sec. 2570.41.
(c) The Department need not issue a tentative denial letter to an
applicant before issuing a final denial letter where the Department has
conducted a hearing on the exemption pursuant to either Sec. 2570.46
or Sec. 2570.47.
Sec. 2570.39 Opportunities to submit additional information.
(a) An applicant may notify the Department of its intent to submit
additional information supporting an exemption application either by
telephone or by letter sent to the address furnished in the applicant’s
tentative denial letter, or electronically to the email address
provided in the tentative denial letter. At the same time, the
applicant should indicate generally the type of information that will
be submitted.
(b) The additional information an applicant intends to provide in
support of the application must be in writing and be received by the
Department within 40 days from the date of the tentative denial letter.
All such information must be accompanied by a declaration under penalty
of perjury attesting to the truth and correctness of the information
provided, which is dated and signed by a person qualified under Sec.
2570.34(b)(5) of this subpart to sign such a declaration.
(c) If, for reasons beyond its control, an applicant is unable to
submit all the additional information he or she intends to provide in
support of his application within the 40-day period described in
paragraph (b) of this section, he or she may request an extension of
time to furnish the information. Such requests must be made before the
expiration of the 40-day period and will be granted only in unusual
circumstances and for a limited period as determined, respectively, by
the Department in its sole discretion.
(d) If an applicant is unable to submit all of the additional
information he or she intends to provide within the 40-day period
specified in paragraph (b) of this section, or within any additional
period granted pursuant to paragraph (c)
[[Page 66651]]
of this section, the applicant may withdraw the exemption application
before expiration of the applicable time period and reinstate it later
pursuant to Sec. 2570.44.
(e) The Department will issue, without further notice, a final
denial letter denying the requested exemption pursuant to Sec. 2570.41
where–
(1) The Department has not received the additional information that
the applicant stated his or her intention to submit within the 40-day
period described in paragraph (b) of this section, or within any
additional period granted pursuant to paragraph (c) of this section;
(2) The applicant did not request a conference pursuant to Sec.
2570.38(b) of this subpart; and
(3) The applicant has not withdrawn the application as permitted by
paragraph (d) of this section.
Sec. 2570.40 Conferences.
(a) Any conference between the Department and an applicant
pertaining to a requested exemption will be held in Washington, DC,
except that a telephone conference will be held at the applicant’s
request.
(b) An applicant is entitled to only one conference with respect to
any exemption application. An applicant will not be entitled to a
conference, however, where the Department has held a hearing on the
exemption under either Sec. 2570.46 or Sec. 2570.47 of this subpart.
(c) Insofar as possible, conferences will be scheduled as joint
conferences with all applicants present where:
(1) More than one applicant has requested an exemption with respect
to the same or similar types of transactions;
(2) The Department is considering the applications together as a
request for a class exemption;
(3) The Department contemplates not granting the exemption; and
(4) More than one applicant has requested a conference.
(d) In instances where the applicant has requested a conference
pursuant to Sec. 2570.38(b) and also has submitted additional
information pursuant to Sec. 2570.39, the Department will schedule a
conference under this section for a date and time that occurs within 20
days after the date on which the Department has provided either oral or
written notification to the applicant that, after reviewing the
additional information, it is still not prepared to propose the
requested exemption. If, for reasons beyond its control, the applicant
cannot attend a conference within the 20-day limit described in this
paragraph, the applicant may request an extension of time for the
scheduling of a conference, provided that such request is made before
the expiration of the 20-day limit. The Department will only grant such
an extension in unusual circumstances and for a brief period as
determined, respectively, by the Department in its sole discretion.
(e) In instances where the applicant has requested a conference
pursuant to Sec. 2570.38(b) but has not expressed an intent to submit
additional information in support of the exemption application as
provided in Sec. 2570.39, the Department will schedule a conference
under this section for a date and time that occurs within 40 days after
the date of the issuance of the tentative denial letter described in
Sec. 2570.38(a). If, for reasons beyond its control, the applicant
cannot attend a conference within the 40-day limit described in this
paragraph, the applicant may request an extension of time for the
scheduling of a conference, provided that such request is made before
the expiration of the 40-day limit. The Department will only grant such
an extension in unusual circumstances and for a brief period as
determined, respectively, by the Department in its sole discretion.
(f) In instances where the applicant has requested a conference
pursuant to Sec. 2570.38(b) of this subpart, has notified the
Department of its intent to submit additional information pursuant to
Sec. 2570.39, and has failed to furnish such information within 40
days from the date of the tentative denial letter, the Department will
schedule a conference under this section for a date and time that
occurs within 60 days after the date of the issuance of the tentative
denial letter described in Sec. 2570.38(a). If, for reasons beyond its
control, the applicant cannot attend a conference within the 60-day
limit described in this paragraph, the applicant may request an
extension of time for the scheduling of a conference, provided that
such request is made before the expiration of the 60-day limit. The
Department will only grant such an extension in unusual circumstances
and for a brief period as determined, respectively, by the Department
in its sole discretion.
(g) If the applicant fails to either timely schedule or appear for
a conference agreed to by the Department pursuant to this section, the
applicant will be deemed to have waived its right to a conference.
(h) Within 20 days after the date of any conference held under this
section, the applicant may submit to the Department (electronically or
in paper form) any additional written data, arguments, or precedents
discussed at the conference but not previously or adequately presented
in writing. If, for reasons beyond its control, the applicant is unable
to submit the additional information within this 20-day limit, the
applicant may request an extension of time to furnish the information,
provided that such request is made before the expiration of the 20-day
limit described in this paragraph. The Department will only grant such
an extension in unusual circumstances and for a brief period as
determined, respectively, by the Department in its sole discretion.
Sec. 2570.41 Final denial letters.
The Department will issue a final denial letter denying a requested
exemption where:
(a) The conditions for issuing a final denial letter specified in
Sec. 2570.38(b) or Sec. 2570.39(e) of this subpart are satisfied;
(b) After issuing a tentative denial letter under Sec. 2570.38 of
this subpart and considering the entire record in the case, including
all written information submitted pursuant to Sec. Sec. 2570.39 and
2570.40 of this subpart, the Department decides not to propose an
exemption or to withdraw an exemption already proposed; or
(c) After proposing an exemption and conducting a hearing on the
exemption under either Sec. 2570.46 or Sec. 2570.47 of this subpart
and after considering the entire record in the case, including the
record of the hearing, the Department decides to withdraw the proposed
exemption.
Sec. 2570.42 Notice of proposed exemption.
If the Department tentatively decides that an administrative
exemption is warranted, it will publish a notice of a proposed
exemption in the Federal Register. In addition to providing notice of
the pendency of the exemption before the Department, the notice will:
(a) Explain the exemption transaction and summarize the information
and reasons in support of proposing the exemption;
(b) Describe the scope of relief and any conditions of the proposed
exemption;
(c) Inform interested persons of their right to submit comments to
the Department (either electronically or in writing) relating to the
proposed exemption and establish a deadline for receipt of such
comments; and
(d) Where the proposed exemption includes relief from the
prohibitions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F)
of the Code, or section 8477(c)(2) of FERSA, inform interested persons
of their right to request a hearing under Sec. 2570.46 of this
[[Page 66652]]
subpart and establish a deadline for receipt of requests for such
hearings.
Sec. 2570.43 Notification of interested persons by applicant.
(a) If a notice of proposed exemption is published in the Federal
Register in accordance with Sec. 2570.42 of this subpart, the
applicant must notify interested persons of the pendency of the
exemption in the manner and within the time period specified in the
application. If the Department determines that this notification would
be inadequate, the applicant must obtain the Department’s consent as to
the manner and time period of providing the notice to interested
persons. Any such notification must include:
(1) A copy of the notice of proposed exemption as published in the
Federal Register; and
(2) A supplemental statement in the following form:
You are hereby notified that the United States Department of
Labor is considering granting an exemption from the prohibited
transaction restrictions of the Employee Retirement Income Security
Act of 1974, the Internal Revenue Code of 1986, or the Federal
Employees’ Retirement System Act of 1986. The exemption under
consideration is summarized in the enclosed [Summary of Proposed
Exemption, and described in greater detail in the accompanying] \2\
Notice of Proposed Exemption. As a person who may be affected by
this exemption, you have the right to comment on the proposed
exemption by [date].\3\ [If you may be adversely affected by the
grant of the exemption, you also have the right to request a hearing
on the exemption by [date].] \4\
—————————————————————————
\2\ To be added in instances where the Department requires the
applicant to furnish a Summary of Proposed Exemption to interested
persons as described in Sec. 2570.43(d).
\3\ The applicant will write in this space the date of the last
day of the time period specified in the notice of proposed
exemption.
\4\ To be added in the case of an exemption that provides relief
from section 406(b) of ERISA or corresponding sections of the Code
or FERSA.
—————————————————————————
All comments and/or requests for a hearing should be addressed
to the Office of Exemption Determinations, Employee Benefits
Security Administration, Room ——,\5\ U.S. Department of Labor,
200 Constitution Avenue NW., Washington, DC 20210, ATTENTION:
Application No.——.\6\ Comments and hearing requests may also be
transmitted to the Department electronically at [email protected] or at
http://www.regulations.gov (follow instructions for submission), and
should prominently reference the application number listed above. In
addition, comments and hearing requests may be transmitted to the
Department via facsimile at (202) 219-0204. Individuals submitting
comments or requests for a hearing on this matter are advised not to
disclose sensitive personal data, such as social security numbers.
—————————————————————————
\5\ The applicant will fill in the room number of the Office of
Exemptions Determinations. As of the date of this final regulation,
the room number of the Office of Exemption Determinations is N-5700.
\6\ The applicant will fill in the exemption application number,
which is stated in the notice of proposed exemption, as well as in
all correspondence from the Department to the applicant regarding
the application.
—————————————————————————
The Department will make no final decision on the proposed
exemption until it reviews the comments received in response to the
enclosed notice. If the Department decides to hold a hearing on the
exemption request before making its final decision, you will be
notified of the time and place of the hearing.
(b) The method used by an applicant to furnish notice to interested
persons must be reasonably calculated to ensure that interested persons
actually receive the notice. In all cases, personal delivery and
delivery by first-class mail will be considered reasonable methods of
furnishing notice. If the applicant elects to furnish notice
electronically, he or she must provide satisfactory proof of electronic
delivery to the entire class of interested persons.
(c) After furnishing the notification described in paragraph (a) of
this section, an applicant must provide the Department with a written
statement confirming that notice was furnished in accordance with the
foregoing requirements of this section. This statement must be
accompanied by a declaration under penalty of perjury attesting to the
truth of the information provided in the statement and signed by a
person qualified under Sec. 2570.34(b)(5) of this subpart to sign such
a declaration. No exemption will be granted until such a statement and
its accompanying declaration have been furnished to the Department.
(d) In addition to the provision of notification required by
paragraph (a) of this section, the Department, in its discretion, may
also require an applicant to furnish interested persons with a brief
summary of the proposed exemption (Summary of Proposed Exemption),
written in a manner calculated to be understood by the average
recipient, which objectively describes:
(1) The exemption transaction and the parties in interest thereto;
(2) Why such transaction would violate the prohibited transaction
provisions of ERISA, the Code, and/or FERSA from which relief is
sought;
(3) The reasons why the plan seeks to engage in the transaction;
and
(4) The conditions and safeguards proposed to protect the plan and
its participants and beneficiaries from potential abuse or unnecessary
risk of loss in the event the Department grants the exemption.
(e) Applicants who are required to provide interested persons with
the Summary of Proposed Exemption described in paragraph (d) of this
section shall furnish the Department with a copy of such summary for
review and approval prior to its distribution to interested persons.
Such applicants shall also provide confirmation to the Department that
the Summary of Proposed Exemption was furnished to interested persons
as part of the written statement and declaration required of exemption
applicants by paragraph (c) of this section.
Sec. 2570.44 Withdrawal of exemption applications.
(a) An applicant may withdraw an application for an exemption at
any time by oral or written (including electronic) notice to the
Department. A withdrawn application generally shall not prejudice any
subsequent applications for an exemption submitted by an applicant.
(b) Upon receiving an applicant’s notice of withdrawal regarding an
application for an individual exemption, the Department will confirm by
letter the applicant’s withdrawal of the application and will terminate
all proceedings relating to the application. If a notice of proposed
exemption has been published in the Federal Register, the Department
will publish a notice withdrawing the proposed exemption.
(c) Upon receiving an applicant’s notice of withdrawal regarding an
application for a class exemption or for an individual exemption that
is being considered with other applications as a request for a class
exemption, the Department will inform any other applicants for the
exemption of the withdrawal. The Department will continue to process
other applications for the same exemption. If all applicants for a
particular class exemption withdraw their applications, the Department
may either terminate all proceedings relating to the exemption or
propose the exemption on its own motion.
(d) If, following the withdrawal of an exemption application, an
applicant decides to reapply for the same exemption, he or she may
contact the Department in writing (including electronically) to request
that the application be reinstated. The applicant should refer to the
application number assigned to the original application. If, at the
time the original application was withdrawn, any additional information
to be submitted to the Department under Sec. 2570.39 was outstanding,
that information must accompany the request for reinstatement of the
[[Page 66653]]
application. However, the applicant need not resubmit information
previously furnished to the Department in connection with a withdrawn
application unless reinstatement of the application is requested more
than two years after the date of its withdrawal.
(e) Any request for reinstatement of a withdrawn application
submitted, in accordance with paragraph (d) of this section, will be
granted by the Department, and the Department will take whatever steps
remained at the time the application was withdrawn to process the
application.
Sec. 2570.45 Requests for reconsideration.
(a) The Department will entertain one request for reconsideration
of an exemption application that has been finally denied pursuant to
Sec. 2570.41 if the applicant presents in support of the application
significant new facts or arguments, which, for good reason, could not
have been submitted for the Department’s consideration during its
initial review of the exemption application.
(b) A request for reconsideration of a previously denied
application must be made within 180 days after the issuance of the
final denial letter and must be accompanied by a copy of the
Department’s final letter denying the exemption and a statement setting
forth the new information and/or arguments that provide the basis for
reconsideration.
(c) A request for reconsideration must also be accompanied by a
declaration under penalty of perjury attesting to the truth of the new
information provided, which is signed by a person qualified under Sec.
2570.34(b)(5) to sign such a declaration.
(d) If, after reviewing a request for reconsideration, the
Department decides that the facts and arguments presented do not
warrant reversal of its original decision to deny the exemption, it
will send a letter to the applicant reaffirming that decision.
(e) If, after reviewing a request for reconsideration, the
Department decides, based on the new facts and arguments submitted, to
reconsider its final denial letter, it will notify the applicant of its
intent to reconsider the application in light of the new information
presented. The Department will then take whatever steps remained at the
time it issued its final denial letter to process the exemption
application.
(f) If, at any point during its subsequent processing of the
application, the Department decides again that the exemption is
unwarranted, it will issue a letter affirming its final denial.
Sec. 2570.46 Hearings in opposition to exemptions from restrictions
on fiduciary self-dealing.
(a) Any interested person who may be adversely affected by an
exemption which the Department proposes to grant from the restrictions
of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code,
or section 8477(c)(2) of FERSA may request a hearing before the
Department within the period of time specified in the Federal Register
notice of the proposed exemption. Any such request must state:
(1) The name, address, telephone number, and email address of the
person making the request;
(2) The nature of the person’s interest in the exemption and the
manner in which the person would be adversely affected by the
exemption; and
(3) A statement of the issues to be addressed and a general
description of the evidence to be presented at the hearing.
(b) The Department will grant a request for a hearing made in
accordance with paragraph (a) of this section where a hearing is
necessary to fully explore material factual issues identified by the
person requesting the hearing. A notice of such hearing shall be
published by the Department in the Federal Register. The Department may
decline to hold a hearing where:
(1) The request for the hearing does not meet the requirements of
paragraph (a) of this section;
(2) The only issues identified for exploration at the hearing are
matters of law; or
(3) The factual issues identified can be fully explored through the
submission of evidence in written (including electronic) form.
(c) An applicant for an exemption must notify interested persons in
the event that the Department schedules a hearing on the exemption.
Such notification must be given in the form, time, and manner
prescribed by the Department. Ordinarily, however, adequate
notification can be given by providing to interested persons a copy of
the notice of hearing published by the Department in the Federal
Register within 10 days of its publication, using any of the methods
approved in Sec. 2570.43(b).
(d) After furnishing the notice required by paragraph (c) of this
section, an applicant must submit a statement confirming that notice
was given in the form, manner, and time prescribed. This statement must
be accompanied by a declaration under penalty of perjury attesting to
the truth of the information provided in the statement, which is signed
by a person qualified under Sec. 2570.34(b)(5) to sign such a
declaration.
Sec. 2570.47 Other hearings.
(a) In its discretion, the Department may schedule a hearing on its
own motion where it determines that issues relevant to the exemption
can be most fully or expeditiously explored at a hearing. A notice of
such hearing shall be published by the Department in the Federal
Register.
(b) An applicant for an exemption must notify interested persons of
any hearing on an exemption scheduled by the Department in the manner
described in Sec. 2570.46(c). In addition, the applicant must submit a
statement subscribed as true under penalty of perjury like that
required in Sec. 2570.46(d).
Sec. 2570.48 Decision to grant exemptions.
(a) The Department may not grant an exemption under section 408(a)
of ERISA, section 4975(c)(2) of the Code, or 5 U.S.C. 8477(c)(3)
unless, following evaluation of the facts and representations
comprising the administrative record of the proposed exemption
(including any comments received in response to a notice of proposed
exemption and the record of any hearing held in connection with the
proposed exemption), it finds that the exemption is:
(1) Administratively feasible;
(2) In the interests of the plan (or the Thrift Savings Fund in the
case of FERSA) and of its participants and beneficiaries; and
(3) Protective of the rights of participants and beneficiaries of
such plan (or the Thrift Savings Fund in the case of FERSA).
(b) In each instance where the Department determines to grant an
exemption, it shall publish a notice in the Federal Register which
summarizes the transaction or transactions for which exemptive relief
has been granted and specifies the conditions under which such
exemptive relief is available.
Sec. 2570.49 Limits on the effect of exemptions.
(a) An exemption does not take effect with respect to the exemption
transaction unless the material facts and representations contained in
the application and in any materials and documents submitted in support
of the application were true and complete.
(b) An exemption is effective only for the period of time specified
and only under the conditions set forth in the exemption.
(c) Only the specific parties to whom an exemption grants relief
may rely on
[[Page 66654]]
the exemption. If the notice granting an exemption does not limit
exemptive relief to specific parties, all parties to the exemption
transaction may rely on the exemption.
(d) For transactions that are continuing in nature, an exemption
ceases to be effective if, during the continuation of the transaction,
there are material changes to the original facts and representations
underlying such exemption or if one or more of the exemption’s
conditions cease to be met.
(e) The determination as to whether, under the totality of the
facts and circumstances, a particular statement contained in (or
omitted from) an exemption application constitutes a material fact or
representation is made by the Department.
Sec. 2570.50 Revocation or modification of exemptions.
(a) If, after an exemption takes effect, changes in circumstances,
including changes in law or policy, occur which call into question the
continuing validity of the Department’s original findings concerning
the exemption, the Department may take steps to revoke or modify the
exemption.
(b) Before revoking or modifying an exemption, the Department will
publish a notice of its proposed action in the Federal Register and
provide interested persons with an opportunity to comment on the
proposed revocation or modification. Prior to the publication of such
notice, the applicant will be notified of the Department’s proposed
action and the reasons therefore. Subsequent to the publication of the
notice, the applicant will have the opportunity to comment on the
proposed revocation or modification.
(c) Ordinarily the revocation or modification of an exemption will
have prospective effect only.
Sec. 2570.51 Public inspection and copies.
(a) The administrative record of each exemption will be open to
public inspection and copying at the EBSA Public Disclosure Room, U.S.
Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210.
(b) Upon request, the staff of the Public Disclosure Room will
furnish photocopies of an administrative record, or any specified
portion of that record, for a specified charge per page.
Sec. 2570.52 Effective date.
This subpart B is effective with respect to all exemptions filed
with or initiated by the Department under section 408(a) of ERISA,
section 4975(c)(2) of the Code, and/or 5 U.S.C. 8477(c)(3) at any time
on or after December 27, 2011. Applications for exemptions under
section 408(a) of ERISA, section 4975(c)(2) of the Code, and/or 5
U.S.C. 8477(c)(3) filed on or after September 10, 1990, but before
December 27, 2011 are governed by part 2570 of chapter XXV of title 29
of the Code of Federal Regulations (title 29 CFR part 2570 as revised
July 1, 1991).
* * * * *
Signed at Washington, DC, this 18th day of October, 2011.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2011-27312 Filed 10-26-11; 8:45 am]
BILLING CODE 4510-29-P
