Federal Register: February 3, 2006 (Volume 71, Number 23)
DOCID: FR Doc E6-1504
DEPARTMENT OF LABOR
Employee Benefits Security Administration
DOCUMENT ID: [Exemption Application D-11069]
NOTICE: NOTICES
ACTION: Employee benefit plans; class exemptions:
DOCUMENT ACTION: Adoption of Amendment to PTE 84-24.
SUBJECT CATEGORY:
Amendment to Prohibited Transaction Exemption 84-24 (PTE 84-24) For Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, Investment Companies and Investment Company Principal Underwriters
DATES: The amendment is effective February 3, 2006.
DOCUMENT SUMMARY:
This document amends PTE 84-24, a class exemption that provides relief for certain transactions relating to the purchase, with plan assets, of investment company securities or insurance or annuity contracts, and the payment of associated sales commissions to insurance agents or brokers, pension consultants, or investment company principal underwriters that are parties in interest with respect to such plan. The amendment extends relief to purchase transactions involving insurance agents and brokers, pension consultants, and investment company principal underwriters whose affiliates exercise investment discretion over plan assets that are not involved in the transaction.
SUMMARY:
Insurance agents, brokers, consultants, insurance and investment companies, and investment company principal underwriters,
SUPPLEMENTAL INFORMATION
On September 14, 2004, notice was published
in the Federal Register (69 FR 55463) of the pendency before the
Department of a proposed amendment to PTE 8424 (49 FR 13208 (April 3,
1984) as corrected at 49 FR 24819 (June 15, 1984)). PTE 8424 provides
an exemption from the restrictions of section 406(a)(1)(A) through (D)
and section 406(b) of the Employee Retirement Income Security Act of
1974 (ERISA or the Act) and from the taxes imposed by section 4975(a)
and (b) of the Code, by reason of section 4975(c)(1)(A) through (F) of the Code.\1\
\1\ References to section 406 of ERISA as they appear throughout
this amendment should be read to refer as well to the corresponding
provisions of section 4975 of the Internal Revenue Code of 1986, as amended (the Code).
The amendment to PTE 8424 was proposed by the Department on its
own motion, pursuant to section 408(a) of ERISA and section 4975(c)(2)
of the Code and in accordance with the procedures set forth in 29 CFR
part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).\2\ The
notice of pendency gave interested persons an opportunity to comment or
to request a hearing on the proposed amendment. The Department received
one comment on the proposed amendment. That comment, from the
Investment Company Institute, supported the amendment as proposed. The Department did not receive a request for a public hearing.
\2\ Section 102 of the Reorganization Plan No. 4 of 1978 (5
U.S.C. App. at 214, 2000 ed.) generally transferred the authority of
the Secretary of the Treasury to issue administrative exemptions under section 4975 of the Code to the Secretary of Labor.
For the sake of convenience, the entire text of PTE 8424, as amended, has been reprinted in this notice.
Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether a regulatory action is ``significant'' and therefore subject to the requirements of the Executive Order and subject to review by the Office of Management and Budget (OMB). Under section 3(f), the order defines a ``significant regulatory action'' as an action that is likely to result in a rule (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as ``economically significant''); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.
This amendment has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this amendment is not a ``significant
regulatory action'' under Executive Order 12866, section 3(f).
Accordingly, it does not require an assessment of potential costs and benefits under section 6(a)(3) of that order.
[[Page 5888]]
Paperwork Reduction Act
This amendment does not contain any ``collection of information'' as defined in the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (PRA) and therefore is not subject to the requirements of the PRA. The recordkeeping requirement that is one of the conditions imposed under PTE 8424 (section V(e)(1)), both prior to this amendment and hereinafter, has been approved by OMB as part of the information collection request assigned OMB control number 12100059. The approval is currently scheduled to expire on August 31, 2008.
Description of the Exemption, as Amended
PTE 8424 provides relief for certain classes of transactions involving purchases with plan assets of insurance or annuity contracts and of securities issued by registered investment companies, and the receipt of sales commissions in connection therewith. Section I and section II of PTE 8424 provide retroactive and prospective relief for covered transactions. Section III describes the transactions covered by the class exemption as follows: (a) The direct or indirect receipt by an insurance agent or broker or a pension consultant of a sales commission from an insurance company in connection with the purchase, with plan assets of an insurance or annuity contract; (b) the receipt of a sales commission by a principal underwriter for an investment company registered under the Investment Company Act of 1940 (hereinafter, an investment company) in connection with the purchase, with plan assets, of securities issued by an investment company; (c) the effecting by an insurance agent or broker, pension consultant or investment company principal underwriter of a transaction for the purchase, with plan assets, of an insurance or annuity contract or securities issued by an investment company; (d) the purchase, with plan assets, of an insurance or annuity contract from an insurance company; (e) the purchase, with plan assets, of an insurance or annuity contract from an insurance company which is a fiduciary or a service provider (or both) with respect to the plan solely by reason of the sponsorship of a master or prototype plan; and (f) the purchase, with plan assets, of securities issued by an investment company from, or the sale of such securities to, an investment company or an investment company principal underwriter, when such investment company, principal underwriter, or the investment company investment adviser is a fiduciary or a service provider (or both) with respect to the plan solely by reason of: (1) The sponsorship of a master or prototype plan; or (2) the provision of nondiscretionary trust services to the plan; or (3) both (1) and (2).
Section IV contains general conditions applicable to all transactions described in section III. Section V of the class exemption contains conditions specific to transactions described in section III(a) through (d). Section VI defines certain terms that are used in the class exemption. Section VI(b) defines the terms ``insurance agent or broker,'' ``pension consultant,'' ``insurance company,'' ``investment company,'' and ``principal underwriter'' to mean such persons and any affiliates thereof.
Section V excludes certain persons from engaging in transactions
covered by the class exemption. In this regard, sections V(a)(1) and
V(a)(3) provided that the insurance agent or broker, pension
consultant, insurance company, or investment company principal
underwriter may not engage in a covered transaction if such person is a
trustee of the plan (other than a nondiscretionary trustee who does not
render investment advice with respect to any assets of the plan) or a
fiduciary who is expressly authorized in writing to manage, acquire or
dispose of the assets of the plan on a discretionary basis. The
amendment adopted by this notice provides a limited exception to such
restrictions (which otherwise remain in effect). In this regard,
section V(a), as amended, now provides that, notwithstanding the
restriction contained therein, an insurance agent or broker, pension
consultant, insurance company, or investment company principal
underwriter that is affiliated with a trustee or investment manager
with respect to a plan may engage in a transaction described in section
III(a) through (d) of this exemption on behalf of a plan if such
trustee or investment manager has no discretionary authority or control
over the plan assets involved in the transaction other than as a nondiscretionary trustee.\3\
\3\ As described in the notice of proposed amendment to PTE 84
24, the Department and the Service previously took the view that the
class exemption extends relief to a plan's purchase of an insurance
or annuity contract through an agent or broker affiliated with an
entity that manages certain of the plan's assets to the extent that
the investment manager is not, with respect to the transaction, a
fiduciary expressly authorized in writing to manage, acquire, or
dispose of, on a discretionary basis, the assets of the plan
involved in the purchase transaction. See letter from the Department
of the Service to John A. Cardon, Esq., et al., part 6 (October 31, 1977).
The amendment adopted in this notice also modifies the definition of the term ``nondiscretionary trust services'' in section VI(g) of PTE 8424 to permit a party to use the exemption, notwithstanding its affiliation with a nondiscretionary trustee, including a directed trustee that performs such services pursuant to directions in accordance with ERISA section 403(a)(1), with respect to the plan assets involved in the transaction.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of ERISA and section 4975(c)(2) of the Code does
not relieve a fiduciary, or other party in interest or disqualified
person with respect to a plan, from certain other provisions of ERISA
and the Code, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary responsibility
provisions of section 404 of 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; nor
does it affect the requirement of section 401(a) of the Code that the
plan must operate for the exclusive benefit of the employees of the employer maintaining the plan and their beneficiaries;
(2) In accordance with section 408(a) of ERISA and 4975(c)(2) of
the Code, the Department makes the following determinations:
(i) The amendment set forth herein is administratively feasible;
(ii) the amendment set forth herein is in the interests of plans and of their participants and beneficiaries; and
(iii) the amendment set forth herein is protective of the rights of participants and beneficiaries of plans;
(3) The amendment is applicable to a particular transaction only if
the transaction satisfies the conditions specified in the exemption; and
(4) The amendment is supplemental to, and not in derogation of, any
other provisions of ERISA and the Code, including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a prohibited transaction.
Exemption
Accordingly, PTE 8424 is amended under the authority of section 408(a) of the Employee Retirement Income
[[Page 5889]]
Security Act of 1974 (the Act) and section 4975(c)(2) of the Internal
Revenue Code of 1986, as amended (the Code), and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990), as set forth below:
Section IRetroactive Application
The restrictions of sections 406(a)(1)(A) through (D) and 406(b) of the Act and the taxes imposed by section 4975 of the Code do not apply to any of the transactions described in section III of this exemption in connection with purchases made before November 1, 1977, if the conditions set forth in section IV are met.
Section IIProspective Application
The restrictions of section 406(a)(1)(A) through (D) and 406(b) of
the Act and the taxes imposed by section 4975 of the Code do not apply
to any of the transactions described in section III of this exemption
in connection with purchases made after October 31, 1977, if the conditions set forth in sections IV and V are met.
Section IIITransactions
(a) The receipt, directly or indirectly, by an insurance agent or
broker or a pension consultant of a sales commission from an insurance
company in connection with the purchase, with plan assets, of an insurance or annuity contract.
(b) The receipt of a sales commission by a principal underwriter
for an investment company registered under the Investment Company Act
of 1940 (hereinafter referred to as an investment company) in
connection with the purchase, with plan assets, of securities issued by an investment company.
(c) The effecting by an insurance agent or broker, pension
consultant or investment company principal underwriter of a transaction
for the purchase, with plan assets, of an insurance or annuity contract or securities issued by an investment company.
(d) The purchase, with plan assets, of an insurance or annuity contract from an insurance company.
(e) The purchase, with plan assets, of an insurance or annuity
contract from an insurance company which is a fiduciary or a service
provider (or both) with respect to the plan solely by reason of the sponsorship of a master or prototype plan.
(f) The purchase, with plan assets, of securities issued by an
investment company from, or the sale of such securities to, an
investment company or an investment company principal underwriter, when
such investment company, principal underwriter, or the investment
company investment adviser is a fiduciary or a service provider (or
both) with respect to the plan solely by reason of: (1) The sponsorship
of a master or prototype plan; or (2) the provision of nondiscretionary trust services to the plan; or (3) both (1) and (2).
Section IVConditions With Respect to Transactions Described in Section III
(a) The transaction is effected by the insurance agent or broker,
pension consultant, insurance company or investment company principal
underwriter in the ordinary course of its business as such a person.
(b) The transaction is on terms at least as favorable to the plan
as an arm'slength transaction with an unrelated party would be.
(c) The combined total of all fees, commissions and other
consideration received by the insurance agent or broker, pension
consultant, insurance company, or investment company principal underwriter:
(1) For the provision of services to the plan; and
(2) In connection with the purchase of insurance or annuity
contracts or securities issued by an investment company is not in
excess of ``reasonable compensation'' within the contemplation of
section 408(b)(2) and 408(c)(2) of the Act and sections 4975(d)(2)and
4975(d)(10) of the Code. If such total is in excess of ``reasonable
compensation,'' the ``amount involved'' for purposes of the civil
penalties of section 502(i) of the Act and the excise taxes imposed by
section 4975 (a) and (b) of the Code is the amount of compensation in excess of ``reasonable compensation.''
Section VConditions for Transactions Described in Section III (a) Through (d)
The following conditions apply solely to a transaction described in paragraphs (a), (b), (c) or (d) of section III:
(a) The insurance agent or broker, pension consultant, insurance
company, or investment company principal underwriter is not (1) a
trustee of the plan (other than a nondiscretionary trustee who does not
render investment advice with respect to any assets of the plan), (2) a
plan administrator (within the meaning of section 3(16)(A) of the Act
and section 414(g) of the Code), (3) a fiduciary who is expressly
authorized in writing to manage, acquire or dispose of the assets of
the plan on a discretionary basis, or (4) for transactions described in
sections III (a) through (d) entered into after December 31, 1978, an employer any of whose employees are covered by the plan.
Notwithstanding the above, an insurance agent or broker, pension
consultant, insurance company, or investment company principal
underwriter that is affiliated with a trustee or an investment manager
(within the meaning of section VI(b)) with respect to a plan may engage
in a transaction described in section III(a) through (d) of this
exemption on behalf of the plan if such trustee or investment manager
has no discretionary authority or control over the plan assets involved
in the transaction other than as a nondiscretionary trustee.
(b)(1) With respect to a transaction involving the purchase with
plan assets of an insurance or annuity contract or the receipt of a
sales commission thereon, the insurance agent or broker or pension
consultant provides to an independent fiduciary with respect to the
plan prior to the execution of the transaction the following
information in writing and in a form calculated to be understood by a
plan fiduciary who has no special expertise in insurance or investment matters:
(A) If the agent, broker, or consultant is an affiliate of the
insurance company whose contract is being recommended, or if the
ability of such agent, broker or consultant to recommend insurance or
annuity contracts is limited by any agreement with such insurance
company, the nature of such affiliation, limitation, or relationship;
(B) The sales commission, expressed as a percentage of gross annual
premium payments for the first year and for each of the succeeding
renewal years, that will be paid by the insurance company to the agent,
broker or consultant in connection with the purchase of the recommended contract; and
(C) For purchases made after June 30, 1979, a description of any
charges, fees, discounts, penalties or adjustments which may be imposed
under the recommended contract in connection with the purchase, holding, exchange, termination or sale of such contract.
(2) Following the receipt of the information required to be
disclosed in paragraph (b)(1), and prior to the execution of the
transaction, the independent fiduciary acknowledges in writing receipt
of such information and approves the transaction on behalf of the plan.
Such fiduciary may be an employer of employees covered by the plan, but
may not be an insurance agent or broker, pension consultant or
insurance company involved in the transaction. Such fiduciary may not
receive, directly or indirectly (e.g. through an affiliate), any compensation
[[Page 5890]]
or other consideration for his or her own personal account from any
party dealing with the plan in connection with the transaction.
(c)(1) With respect to a transaction involving the purchase with
plan assets of securities issued by an investment company or the
receipt of a sales commission thereon by an investment company
principal underwriter, the investment company principal underwriter
provides to an independent fiduciary with respect to the plan, prior to
the execution of the transaction, the following information in writing
and in a form calculated to be understood by a plan fiduciary who has no special expertise in insurance or investment matters:
(A) If the person recommending securities issued by an investment
company is the principal underwriter of the investment company whose
securities are being recommended, the nature of such relationship and
of any limitation it places upon the principal underwriter's ability to recommend investment company securities;
(B) The sales commission, expressed as a percentage of the dollar
amount of the plan's gross payment and of the amount actually invested,
that will be received by the principal underwriter in connection with
the purchase of the recommended securities issued by the investment company; and
(C) For purchases made after December 31, 1978, a description of
any charges, fees, discounts, penalties, or adjustments which may be
imposed under the recommended securities in connection with the
purchase, holding, exchange, termination or sale of such securities.
(2) Following the receipt of the information required to be
disclosed in paragraph (c)(1), and prior to the execution of the
transaction, the independent fiduciary approves the transaction on
behalf of the plan. Unless facts or circumstances would indicate the
contrary, such approval may be presumed if the fiduciary permits the
transaction to proceed after receipt of the written disclosure. Such
fiduciary may be an employer of employees covered by the plan, but may
not be a principal underwriter involved in the transaction. Such
fiduciary may not receive, directly or indirectly (e.g. through an
affiliate), any compensation or other consideration for his or her own
personal account from any party dealing with the plan in connection with the transaction.
(d) With respect to additional purchases of insurance or annuity
contracts or securities issued by an investment company, the written
disclosure required under paragraphs (b) and (c) of this section V need not be repeated, unless
(1) More than three years have passed since such disclosure was
made with respect to the same kind of contract or security, or
(2) The contract or security being recommended for purchase or the
commission with respect thereto is materially different from that for
which the approval described in paragraphs (b) and (c) of this section was obtained.
(e)(1)) In the case of any transaction described in paragraphs (a),
(b), or (c) of section III, the insurance agent or broker (or the
insurance company whose contract is being described if designated by
the agent or broker), pension consultant or investment company
principal underwriter shall retain or cause to be retained for a period
of six years from the date of such transaction, the following:
(A) The information disclosed pursuant to paragraphs (b), (c), and (d) of this section V;
(B) Any additional information or documents provided to the
fiduciary described in paragraphs (b) and (c) of this section V with respect to such transaction; and
(C) The written acknowledgement described in paragraph (b) of this section.
(2) A prohibited transaction will not be deemed to have occurred
if, due to circumstances beyond the control of the insurance agent or
broker, pension consultant, or principal underwriter, such records are lost or destroyed prior to the end of such sixyear period.
(3) Notwithstanding anything to the contrary in section 504(a)(2)
and (b) of the Act, such records are unconditionally available for
examination during normal business hours by duly authorized employees
or representatives of the Department of Labor, the Internal Revenue
Service, plan participants and beneficiaries, any employer of plan
participants and beneficiaries, and any employee organization any of whose members are covered by the plan.
Section VIDefinitions
For purposes of this exemption:
(a) The term ``principal underwriter'' is defined in the same
manner as that term is defined in section 2(a)(29) of the Investment Company Act of 1940 (15 U.S.C. 80a2(a)(29)).
(b) The terms ``insurance agent or broker,'' ``pension
consultant,'' ``insurance company,'' ``investment company,'' and
``principal underwriter'' mean such persons and any affiliates thereof. (c) The term ``affiliate'' of a person means:
(1) Any person directly or indirectly controlling, controlled by, or under common control with such person;
(2) Any officer, director, employee (including, in the case of
principal underwriter, any registered representative thereof, whether
or not such person is a common law employee of such principal
underwriter), or relative of any such person, or any partner in such person; or
(3) Any corporation or partnership of which such person is an
officer, director, or employee, or in which such person is a partner.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an individual.
(e) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother, a sister, or a spouse of a brother or a sister.
(f) The term ``master or prototype plan'' means a plan which is
approved by the Service under Rev. Proc. 727, 19721 C.B. 715, or Rev. Proc. 728, 19721 C.B. 716, or their successors.
(g) ``The term ``nondiscretionary trust services'' means custodial
services, services ancillary to custodial services, none of which
services are discretionary, duties imposed by any provisions of the
Code, and services performed pursuant to directions in accordance with
ERISA section 403(a)(1). The term ``nondiscretionary trustee'' of a
plan means a trustee whose powers and duties with respect to the plan
are limited to the provision of nondiscretionary trust services. For purposes of this exemption, a person who is otherwise a
nondiscretionary trustee will not fail to be a nondiscretionary trustee
solely by reason of his having been delegated, by the sponsor of a master or prototype plan, the power to amend such plan.
Signed at Washington, DC this 30th day of January, 2006. Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor.
[FR Doc. E61504 Filed 2206; 8:45 am]
BILLING CODE 452029P
FOR FURTHER INFORMATION CONTACT
Christopher Motta, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor, (202) 6938540 (this is not a tollfree number).