Prohibited Transaction Exemption 80-83 -- Securities Purchases for Debt Reduction of Retirement

Federal ;Resister / Vol. 45, No. 21-5 / Tuesday, November 4, 1980 / Notices
Members of the pliblic are encouraged
to file a written statement pertaining to
any topic concerning ERISA, by
submitting 30 copies on or before
November 12, 1980, to the Administrator,
Pension and Welfare Benefit Programs,
U.S. Department of Labor, Room S-4522,
Third and Constitution Avenue, N.W..
Washington, D.C.
Persons desiring to address the
Council should notify Edward F.
Lysczek, Executive Secretary of the
Advisory Council, in care of the above
address or by calling (202) 523-8753.
Signed at Washington. D.C. this 27th day of
October, 1980.

Ian D. Lanoff,
Administrator of Pension and Welfare Benefit
Programs.
1FR Doc. 80-34333 Filed 11-3-80: 8:45 am!
BILLING CODE 4510-2941

[Prohibited Transaction Exemption 10-831

Class Exemption for Certain
Transactions Involving Purchase of
Securities Where Issuer:May Use
Proceeds To Reduce or Retire
Indebtedness To Parties In Interest
AGENCY: Department of Labor.
ACTION: Grant of Class Exemption.
This class exemption permits,
under certain conditions, purchases of
securities by employee benefit plans
when the proceeds from the sale of such
securities may be used by the issuer to
reduce or retire indebtedness to persons
who are parties in interest with respect
to such plans. In the absence of the
retroactive and prospective relief
provided by this exemption, these
transactions might be prohibited by the
Employee Retirement Income Security
Act of 1974 (the Act) and the Internal
Revenue Code of 1954 (the Code).
EFFECTIVE DATE Section 1(B) of this
exemption is effective December 1, 1980.
The remainder of this exemption is
effective January 1, 1975.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

William J. Flanagan, Plan Benefits
Security Division, Office of the Solicitor,
U.S. Department of Labor, (202) 5237925. (This is not a toll free number.)
SUPPLEMENTARY INFORMATION: On July
27, 1979, notice was published lathe
Federal Register (44. F)IR 44286) of the
pendency before the Department of
Labor (the Department) of a proposal for
a class exemption from the restrictions
of section 406(a)(1) (A) through (D) end
section 406(b) (1) and (2).of the. Act, and
from the taxes imposed-by section 4975
(a) and (b).of the reason-Of section
4975(c)(1) (A) . through (E) --of the Code :for

transactions. described in an application

filed by the:American :Bankers
Association (ABA). 1 The-notice set forth
a summary of facts and: representations
contained in the application, and
referred interested persons to the
application for a complete statement of
facts and representations. The
application has been available for
public inspection at the Department in
Washington, D.C.
Public comments and requests for a
hearing with regard to the proposed
class exemption were-received pursuant
to section 406(a) of the Act and section
4975(c)(2) of the Code, and in
accordance with the procedures set
forth in ERISA Procedure 75-1 (40 FR
18471, April 28, 1975). Notice of a public
hearing on the proposed exemption was
published on December 21, 1979 (44 FR
75756), and the public hearing was held
on January 24, 1980. The record of such
hearing remained open until February
15, 1980, and additional comments were
received.
Upon consideration of all of the
^om .....° sukrnitted and testimny
received, the Department has
determined to, grant the proposed class
exemption, subject to certain
modifications. These modifications and
the major comments are discussed
below.
Description of the Proposal
The proposed class exemption
contained in the notice of pendency
provided conditional relief prospectively
and retroactively to January 1, 1975 for
transactions involving purchases of
securities in a public offering by an
employee benefit plan when the
proceeds from such sale of securities
may be used to reduce or retire
indebtedness to a party in interest 2
with respect to such plan. Section 1(A) of
the proposed exemption would provide
relief from sections 406(a)(1) (A) through
(D) of the Act and section 4975(c)(1) (A)
through ID) of the Code retroactively
from January 1, 1975 to the date 30 days
after the publication of the final

exemption. Such retroactive relief would
be available for transactions in which
the proceeds of the -sale of securities to a
plan may be used to reduce or retire
' Exemption Application No. D-690. This
application was filed with both the Department and
the Internal Revenue Service. However, the notice
of pendency was issued and the exemption is being
granted solely by-the Department because, effective
December 31. 1978. section 102 of Reorganization
Plan No. 4 of 1978, (43 FR 47713, October 17, 1978)
transferred the authority of the Secretary of the
Treasury to issue this type of exemption to-the
Secretary of Labor.
2 When the term "party in interest" is used in this
notice, it should be read to include the term
"disqualified-person" as defined in section
4975(e)(2) of the Code.

75189

indebtedness owed to a party in interest
other than the plan fiduciary which
made the decision to purchase such
securities. Such relief would be
available provided that the price paid by
the plan for the securities did not exceed
adequate consideration.
Section 1(B) of the proposed
exemption would provide prospective
relief, effective 30 days after the
publication of the final exemption, from
the prohibitions of section 408(a)(1) (A)
through (D) of the Act and section
4975(c)(1) (A) through (D) of the Code for
transactions in which indebtedness
owed to a party in interest other than
the plan fiduciary which made the
decision to purchase the securities may
be reduced or retired. This prospective
relief would be available provided that
the conditions contained in section 11(A)
of the proposed exemption were met.
Proposed section 11(A) would require
that: (1) the price paid by the plan
fiduciary for the securities does not

exceed the original offering price; and
the fiduciary, on behalf of the plan,
maintains, for a period of six years,
(2)

records which are sufficient to allow a
determination of whether the conditions
of the exemption have been met, and
which are unconditionally available for
examination during normal business
hours by the persons listed in section
II(A)(2)(b) of the proposed exemption.
For transactions in which the
proceeds of the sale of securities in a
public offering may be used to reduce or
retire indebtedness owed to the plan
fiduciary which made the decision to
purchase such securities, section 1(C) of
the proposed exemption would provide
retroactive and prospective conditional
relief only when such fiduciary is a
bank. Such relief from the restrictions of
sections 406(a)(1) (A) through (D) and
406(b) (1) and (2) of the Act and the
taxes imposed by reason of section
4975(c)(1) (A) through (E) of the Code
would be subject to the conditions in
section II(A) discussed above. Such
relief would also be subject to
additional conditions when the fiduciary
bank knows, as defined in section I(C),
that the proceeds will be used to benefit
such fiduciary. 3 These conditions would
3 The applicant represents that a fiduciary bank's
employees who are responsible for investing plan
assets will not ordinarily know that a prior loan by
the fiduciary bank will be reduced or retired with
proceeds from an issuance of securities. The
applicant indicates that the commercial and trust
functions of banks are kept separate to a certain
extent in order to comply with regulations adopted
by the Office of the Comptroller of the Currency, 12
CFR 9.7(d), and the Policy Statement of the Board of
Governors of the Federal Reserve System143 FR
2755. March 27. 1978), which set forth guidelines to
prevent the misuse of material inside information by
bank trust departments in connection with the

Footnotes continued on next page

73190

Federal Register / Vol. 45, No. 215 / Tuesday, November 4, 1980 / Notices

include a three percent limitation on the
amount of securities in an offering
purchased on behalf of a plan; a three
percent limitation on the amount of
assets of a plan used to make such
purchases, except that the limitation is
one percent if the consideration to be
paid exceeds $1 million; and a ten
percent limitation on the amount of
securities purchased in an offering on
behalf of all plans as to which the
fiduciary bank has investment
discretion. These conditions would also
limit the type of securities which may be
purchased and the type of issues which
may be involved in such transactions.
Section 1(C) of the proposed
exemption also contained a three part
definition of knowledge. First, a
fiduciary bank would be deemed to
know that the proceeds will be used for
its benefit if the officers or employees of
such fiduciary who are authorized to be
involved, or who are in fact involved, in
carrying out such fiduciary's investment
obligations receive actual knowledge of
the use of the proceeds. Second, the
fiduciary bank would be deemed to
have such knowledge if such officers or
employees possess information
reasonably sufficient to cause them to
believe that the proceeds will be used to
benefit such fiduciary. Third, the
fiduciary bank would be deemed to
know that the proceeds would be used
for its benefit if such knowledge or
information is received by employees or
agents of the fiduciary and such
knowledge or information should, in the
normal course of business, be
communicated to the fiduciary bank's
officers or employees who are
authorized to be involved, or who are in
fact involved, in carrying out the
fiduciary's investment duties.
Section I(D) of the proposed
exemption provided retroactive and
prospective relief from the prohibitions
of sections 406(a)(1) (A) through (D) and
406(b) (1) and (2) of the Act, and the
taxes imposed by reason of section
4975(c)(1) (A) through (E) of the Code for
the receipt by a party in interest of any
of the proceeds from the sale of
securities when such proceeds may be
used to reduce or retire indebetedness
owed to that party in interest.
Discussion of Comments

A. Sections 1(A) and 1(B)
The Department received one
comment regarding section 1(A) of the
Footnotes continued from last page

purchase or sale of securities. The applicant stated
that the measures taken to prevent the flow of such
material inside information are referred to within
the banking industry as the construction of a
"Chinese Wall" between the commercial and trust
departments.

exemption. The commentator addressed
the requirement that, in order to qualify
for retroactive relief when the proceeds
of a sale of securities to a plan are used
to benefit a party in interest other than
the plan fiduciary, the price paid by the
plan for such securities does not exceed
adequate consideration. The term
"adequate consideration" was not
defined in the exemption as proposed
and the commentator suggests that the
Department adopt the definition of this
term provided in section 3(18)(B) of the
Act. The Department has decided to
adopt this suggestion, and has modified
the exemption accordingly. No
comments were received on section 1(B).
B. Section 1(C)

The largest number of comments
received by the Department dealt with
the provisions of section I(C) of the
proposed exemption. The specific issues
raised by the comments with regards to
the relief proposed in section l(C) are
discussed below.
1. Limitation to Bank Fiduciaries. Two
commentators suggested that the relief
in section 1(C) be expanded to include
transactions in which the proceeds of
the sale of securities are used to reduce
or retire indebtedness owed not only to
the fiduciary bank but also to corporate
affiliates of such bank or of the bank
holding company controlling such
fiduciary bank. As the Department
noted in the preamble to the proposed
exemption (44 FR 44286, 44288), the
relief in section 1(C) was limited to bank
fiduciaries because the record before the
Department at that time was insufficient
to support the proposal of relief for
fiduciaries which are not banks. The
commentators have indicated that bank
affiliates are similar to banks both in
their involvement in the types of
transactions covered by the proposed
exemption, and in the application of
"Chinese Wall" procedures to their
internal operations. Therefore, when a
bank affiliate is a fiduciary with respect
to a plan, the employees of the affiliate
who are responsible for investing plan
assets may not know that a prior
extension of credit from the bank or
from the affiliate will be reduced or
retired with the proceeds from an •
issuance of securities.
In light of this, the Department has
determined that it is appropriate to
expand the relief provided in section
I(C) as the commentators have
requested. Accordingly, section 1(C) is
modified to apply to situations in which
the proceeds from the purchase of
securities on behalf of a plan by a plan
fiduciary which is a bank or a bank
affiliate may be used to reduce or retire

indebtedness owed to such fiduciary
bank or an affiliate thereof.
In addition, the Department is
modifying section II(B) by the addition
of a definition of the term "affiliate."
Under this definition, "affiliate" of a
bank means any entity directly or
indirectly, through one or more
intermediaries, controlling, controlled
by, or under common control with the
bank.
2. Condition 1(C)(3). Condition I(C)(3)
of the exemption as proposed required
that when the fiduciary knows, as
defined in section I(C), that the proceeds
of a sale of securities may be used to
benefit such fiduciary, relief will be
available for such a transaction only if
the issuer of the securities has been in
continuous operation for at least three
years, unless the securities are highly
rated, nonconvertible debt securities.
One commentator has suggested the
deletion of this condition. The
commentator states that this condition
has no substantial relationship to the
exemption's purpose of protecting plans
from abuse due to fiduciary self-dealing.
The commentator argues that the only
effect of this condition would be to
burden capital markets for newly
formed companies.
The Department's intention in
including this condition in the proposed
exemption was to protect plans from
situations in which bank fiduciaries,
having loaned funds used to establish a
company, then used plan monies to
allow the new company to pay off its
initial indebtedness. The commentator
has not indicated why such a situation
would be free from the possibility for
abuse. Therefore, the Department is not
persuaded to delete this requirement
and retains this condition in the final
class exemption.
3. Percentage Limitations. In the
exemption as proposed, the conditions
contained in paragraphs I(C)(4), I(C)(5)
and l(C)(6) limited the extent to which
plans may purchase securities in an
issue when a fiduciary bank knows, as
defined in section I(C), that the proceeds
from such sales may be used for its
benefit. Paragraph I(C)(4) of the
proposal provided that the amount of
such securities purchased by the
fiduciary bank on behalf of any
individual plan may not exceed three
percent of the total issue. Paragraph
I(C)(5) of the proposal provided•that the
consideration paid by any plan to
purchase such securities may not exceed
three percent of the value of the assets
of such plan as Of the last day of the
most recent fiscal quarter of the plan
prior to such transaction, except when
such consideration exceeds $1 million,
in which case such consideration may

Federal Register / Vol. 45, No. 215 / Tuesday, November 4, 1980 / Notices

kb

not exceed one percent of the value of
plan assets. Paragraph /(C)(0) as
proposed provided that the total amount
of securities purchased by a fiduciary
bank on behalf of all plans as to which
such bank acts as a fiduciary may not
exceed ten percent of the issue. .
The Department has received a
number of comments criticizing these
percentage limitations and suggesting
either a general revision or specific
modifications of these conditions. The
commentators suggesting a general
revision of these provisions state their
belief that, by these paragraphs, the
Department is attempting to establish a
de minimis standard. While these
commentators agree on the desirability
of such a standard, they assert that the
limitations proposed by the Department
would unduly restrict fiduciaries in the
exercise of their investment discretion.
As an alternative to the conditions
proposed by the Department, the
commentators suggest that the
Department exempt transactions where
the fiduciary knows, as defined in
paragraph 1(C), that the proceeds of a
sale of securities will be used for its
benefit so long as no more than twenty
percent of the gross proceeds of the
issue are used to reduce or retire
indebtedness to such fiduciary bank.
Upon consideration of these
comments. the Department is not
convinced that the suggested substitutte
provision would be sufficiently
protective to permit the Department to
make the findings required by section
408(a) of the Act and section 4975(c)(2)
of the Code. The conditions proposed by
the Department were intended to limit
the use of plan assets to purchase
securities when the fiduciary bank knew
that the proceeds from such purchases
would accrue to its benefit. The
suggested substitute provision would
supply a supposed de minimis standard
for the extent to which the proceeds of a
securities issue could be used to reduce
or retire indebtedness owed to a
fiduciary bank. The suggested substitue
fails to account for the degree to which
plan assets may be committed to
achieve this supposed de minimis level
of repayment. The applicants' argument
that a fiduciary receiving less than 20
percent of the proceeds of an issue
would have an interest in that issue
insufficient to create the possibility of
abuse is not persuasive, since (1) a
fiduciary bank might use a substantial
amount of plan assets in such a
transaction and (2) a substantial amount
of the bank's indebtedness might be
retired in connection with the purchase
of such securities. Therefore, the
Department does not adopt this
•

suggested substitute and has determined
to retain the structure of these
paragraphs as proposed.
Several commentators made
suggestions regarding specific revisions
of the proposed percentage limitations.
Two commentators argue that all of the
percentages are too low and would
unduly restrict fiduciary investment
discretion. However, these
commentators have not suggested higher
levels they would consider acceptable,
nor have they presented evidence or
arguments in support of such changes or
the need therefor. In the absence of such
a basis, the Department has decided not
to raise the percentage limitations
generally.
With regard to the provisions of
paragraphs l(C)(5), which limit the
percentage of plan assets which may be
used to purchase securities, one
commentator suggests that the
percentage should apply only to the
assets under management of the
fiduciary bank. This same commentator
suggests that plan assets should be
valued as of the most recent valuation
date preceding the transaction. The
Department has decided to adopt these
comments and has modified this
paragraph accordingly.
Also regarding this paragraph, this
commentator suggests the elimination of
the one percent limitation on plan assets
used to purchase securities when the
consideration for such purchase exceeds
$1 million. The commentator notes that
a plan with assets valued between $33
million and $100 million cannot utilize
the three percent limitation contained in
'this paragraph without exceeding the $1
million limit, and at the same time
would be forced to commit less than $1
million when held to the one percent
limitation. Therefore, this commentator
argues that the one percent limitation
discriminates against plans with assets
valued between $33 million and $100
million, and should be eliminated. Upon
consideration of this comment and the
purposes served by the limitation, the
Department has decided to delete the
one percent limitation.
With regard to the provisions of
paragraph 1(C)(6), one commentator
.
states that the limitation of purchases by
any fiduciary bank on behalf of all plans
as to which it is a fiduciary to ten
percent of an offering discriminates
against large fiduciary banks. The
commentator states that the effect of
this condition is to prevent a bank
acting as a fiduciary to more than three
plans from purchasing for each plan to
maximum amount of securities allowed
under former paragraph I(C)(4), which
limits a plan's purchase to three percent
of an issue. The Department notes,

73191

however, that the ten percent limitation
assures that no fiduciary can gain
repayment of its loans or those of an
affiliate by using the assets of the plans
as to which it is a fiduciary to purchase
all, or a substantial portion of, the
securities in an issue. The commentator
also has presented nothing to indicate
how the proposed ten percent limitation
would be disruptive of or require
changes in existing sound bank
investment practices. Accordingly, the
Department does not adopt this
comment.
Finally, several commentators have
requested that, if the Department
decided to retain the percentage limits
as proposed, the Department should
take the position that securities
purchased by commingled or collective
trusts in which a plan participates
should be attributed to that plan
proportionally on the basis of its
participation in the fund. The
Department has decided to adopt this
comment, and has therefore added a
new. subsection II(B)(3), which provides
that each plan participating in a
collective or commingled fund shall, for
the purpose of this exemption, be
considered to own the same
proportionate undivided interest in each
asset of the collective investment fund
as its proportionate interest in the total
assets of the.collective investment fund
as calculated on the most recent
preceding valuation date of the fund.
4. Knowledge. Paragraph l(C)(7) of the
exemption as proposed defined the three
instances in which a fiduciary bank will
be deemed to know that the proceeds of
a sale of securities will be used to
reduce or retire indebtedness owed to
such fiduciary bank or any affiliate
thereof. The commentators generally
agree with the provisions of
subparagraph (a) of this paragraph,
which stated that a fiduciary will be
deemed to possess the requisite
knowledge if such knowledge is actually
communicated to the fiduciary bank's
officers and employees who are
involved in making investment
decisions. With regard to subparagraph
(b), which deemed a fiduciary to possess
the requisite knowledge if the fiduciary
bank's officers and employees involved
in the investment process possess
information reasonably sufficient to
cause belief that the proceeds will be
used to benefit the fiduciary bank, one
commentator stated that this standard is
so vague that banks would be forced to
comply, in all cases, with the restrictive
conditions set forth in section 1(C).
However, this commentator offered no
constructive suggestions for modifying
subparagraph (b). The Department has

73192

Federal Register / Flo)_ 45, No. 215 fi Tuesday, November 4. 1980 / Notices

re-examined this subparagraph in light
of this comment, and has determined
that the provision is not so vague as to
produce the results described by this
commentator. The Department,
therefore, does not accept this comment.
The same commentator criticized
subparagraph (c) of the proposal, which
deemed a fiduciary bank to know that
the proceeds will be used for its benefit
if such knowledge or information is
received by employees or agents of such
fiduciary, and such knowledge or
information should, in the normal course
of business, be communicated to the
bank's officers and employees involved
in the investment process. This
commentator indicated that the
provisions of that paragraph would
require banks to undertake detailed
investigations which might breach the
so-called "Chinese Wall" established
pursuant to federal guidelines designed
to prevent the flow of material
information between the corporate loan
and trust departments of banks.
In addition, this commentator joined
with others in criticizing the provisions
of proposed subparagraphs l(C)(7) (hi
and (c) as establishing a "constructive
knowledge" test which would be
difficult to administer. As a substitute,
these commentators suggest that, in the
absence of actual knowledge, the terms
of the prospectus pursuant to which the
securities are offered should be
determinative. In other words, the
commentators state that if the
prospectus is silent as to the use of
proceeds, or if the prospectus states that
the proceeds will be-used to reduce or
retire indebtedness but does not identify
the persons to whom such indebtedness
is owed, the fiduciary bank, in the
absence of actual knowledge, should be
deemed not to possess the requisite ,
knowledge and should therefore avoid
the application of the restrictive
conditions contained in section 1(C) of
the exemption_
With regard to this proposed
substitute, the Department notes that
testimony given at the public hearing
concerning the proposed exemption
indicates that it is not customary for a
prospectus to identify specific lenders
who would be repaid from the proceeds
of the sate of securities. It would,
therefore, appear that the proposed
substitute would be applicable only in
an extremely limited number of cases. In
light of this, and upon consideration of
the other arguments advanced in
support of this proposed substitute, the
Department has decided not to adopt
these comments and has retained the
proposed structure of this paragraph.
The Department has, however,
decided to delete subparagraph (e). The

Department recognizes, as the
comments have indicated, the difficulty
confronting banks in conducting art
inquiry to determine whether the terms
of that subparagraph have been met_
The Department also notes that this
provision as proposed faits tc take into
account situations in which an
employee, though possessing the
requisite information, does not
communicate such information to
persons involved in the bank's
investment process. Although the
Department has decided to eliminate
this provision, Ii is the Department's
view that the possession of such
knowledge or information by a fiduciary
bank's employee or agent who would, in
the normal course of business,
communicate this knowledge or
information to persons involved in the
bank's investment process is a factor to
be considered when determining
whether a fiduciary bank knows, within
the meaning of this section, that the
proceeds of the sale will be used to
reduce or retire indebtedness owed to
that bank fiduciary.
5. Retroactivity. Section I(C) of the
exemption as proposed would provide
retroactive and prospective conditional
relief. Two commentators, white stating
that retroactive relief is necessary,
object to the fact that the conditions
contained in section 1(C) would also
apply retroactively. These
commentators state that fiduciaries
could not have reasonably anticipated
the expansive definition of "knowledge"
contained in the proposed exemption, or
the conditions that apply when a
fiduciary bank possesses such
knowledge. One commentator suggests
that past abuses in transactions covered
by section I(C) are unlikely due to the
widespread use of "Chinese Wall"
procedures, and that_ therefore, the
Department should provide retroactive
relief under section 1(C) so long as the
plan paid no more than adequate
consideration for the securities.
As indicated above, the Department
has modified the definition. of
"knowledge" in this exemption_ This
modified definition is more limited in
scope than the definition in the
proposal. The only situations in which
the restrictions in section 1(C) would
have retroactive effect are those cases
in which fiduciary bank personnel
involved in the bank's investment
process either received actual _
knowledge that the proceeds from the
sale of securities would he used to
reduce or retire indebtedness owed to
the fiduciary bank. of possessed
information reasonably safficiezd to
cause such a belief..1f. as the

commentators have stated. "Chinese
Wall" procedures are widely followed in
the banking community. it appears
unlikely that banks would often meet
the modified knowledge standard. When
a fiduciary bank possessed such
knowledge and still entered the
transaction, the Department does not
believe that the broad retroactive relief
requested by the commentators would
be warranted for such self-dealing.
However. because the exemption allows
some investment of plan funds even
when a fiduciary bank actually knew. or
possessed knowledge reasonably
sufficient to cause the belief, that the
proceeds from a sale of securities will
be used to reduce or retire indebtedness
owed to such ficuciary bank, the
Department does not believe that
retroactive application of the
conditional relief in section I(C) would
be onerous. In addition, as noted by the
Department in the preamble to the
proposed exemption (44 FR 44286. 44288
n.2), a transaction not qualifying for the
conditional retroactive relief provided
by this class exemption could be
considered for an individual exemption
upon submission of an aplication for
exemption in accordance•with ERISA
Proc. 75-1 (40 FR 18471, April 28, 1975).
Therefore, the Department does not
accept these comments.
C. Section 1(D)
As proposed, section I(D) would
provide retroactive and prospective
relief for the receipt by a party in
interest of proceeds from a sale of
securities when such proceeds are used
by the issuer to reduce or retire
indebtedness owed to the party in
interest. The Department stated in the
preamble to the proposal that this relief
would not be limited to transactions
involving hanks, and would exempt
transactions involving fiduciaries.
The Department recognizes that
confusion may have resulted from the
manner in which this proposed section
and the parts of the preamble relating
thereto are presented. It is possible to
read proposed section I(D) as
undermining or supplanting the
conditional relief provided in sections 1
(A) through (C) of the exemption. In
order to avoid this unintended
possibility, the Department has decided
to make certain changes clarifying the
scope of relief provided by section I(D).
Accordingly, section I(D) as modified
states that,. effective- January 1. 1,975, the
restrictions of section 406(a))1) (A)
through (I) and 406(b) E1)
(2) of the
Act and the taxes imposed by reason of
section 4875(c)(1)(44) threvagiv
the
Code shall not apply to theIeceipt by a
party in interest of any se the proceeds

nal

Federal Register / Vol. 45, No. 215 / Tuesday, November 4, 1980 / Notices
resulting from the issuance, in a public
offering (as defined in section 11(B) of
the exemption), of securities merely
because such proceeds are used by the
issuer to reduce or retire indebtedness
owed to the party in interest, provided
that. when such party in interest is a
fiduciary acquiring such securities on
behalf of a plan. such fiduciary must be
a bank or an affiliate thereof (as defined
in section Il(B) of the exemption) which
meets the provisions of section I(C) of
the exemption.
D. Section II(A)

Section 11(A) contains general
conditions applicable to the transactions
described in section I(B) and 1(C) of the
exemption. The Department has
received one comment regarding section
11(A)(2)(b), which states that records
necessary for a determination of
whether the conditions of the exemption
have been met must be made
"unconditionally available" to certain
designated persons. This commentator
stated that it would be financially
burdensome to make such records
unconditionally available. The
commentator also notes that banks are
required to keep many records of this
type confidential. This commentator
suggests that these problems would be
solved by changing the section to
require that such records be "reasonably
available." The purpose of the
requirement contained in the proposal,
which as been included in other
exemptions containing recordkeeping
requirements, is to prevent the
imposition of conditions on the
availability of the records that would
preclude an interested person from
examining such records. However, the
Department does not interpret this
condition as necessarily requiring the
instantaneous production of all such
records upon demand under all
circumstances. In addition, in light of the
concerns expressed in the comments,
the Department has modified this
condition to provide that the
examination rights do not extend.(other
than in the case of a duly authorized
representative of the Department or the
Internal Revenue Service)' to a bank's
trade secrets, or to commerical or
/ financial information which is privileged
or required to be kept confidential.
E. Directed Trustees and Custodians

In footnote 5 of the preamble to the
proposed exemption (44 FR 44286, 44288
n. 5). the Department invited comments
as to the need for special relief for
banks which serve as custodians or
directed trustees of assets of employee
benefit plans, with responsibility to
carry out proper investment instructions

by a named fiduciary. The
Department noted that it assumed such
custodians and directed trustees
generally would not possess a level of
knowledge sufficient to subject them to
the restrictive provisions of section I(C)
of the proposed exemption.
All of the comments received by the
Department regarding this issue request
that the exemption be modified to make
clear that, for the purpose of this
exemption, directed trustees and
custodians will not be treated as
fiduciaries. These commentators have
described generally the functions and
responsibilities of custodians and
directed trustees in order to illustrate
that these entities should not be
considered fiduciaries. At the same
time, however, testimony at the hearing
indicated that the duties and
responsibilities of a custodian or a
directed trustee are governed primarily
by the terms of its agreement with the
named fiduciary of a plan, and that the
terms of such agreements vary.
In solic"'^g comments in this area, the
Department had hoped that the
commentators would provide sufficient
information upon which to base
generalized treatment of custodians and
directed trustees under this exemption.
However, such information was not
forthcoming. As a result, the Department
has determined not to adopt any special
relief for custodians and directed
trustees in this exemption. Accordingly,
a determination of whether a particular
custodian or directed trustee is a
fiduciary. as defined in section 3(21) of
the Act and regulations adopted pursuant thereto, must be made in each
individual case. However, as noted in
the preamble to the proposed
exemption, custodians and directed
trustees may still possess insufficient
knowledge concerning the transactions
involved to subject them to the
restrictive conditions in section I(C) of
the exemption even where they are
deemed to be fiduciaries.
given

F. Technical Changes

The Department has made certain
technical modifications suggested by the
commentators and certain nonsubstantive changes designed to avoid
confusion. First, in order to clarify the
scope of the "knowledge" standard, and
to reflect more exactly the scope of the
exemption, the Department has deleted
the term "to benefit" and replaced it
with the phrase "by the issuer of the
securities to reduce or retire
indebtedness owed to" in section I(C).
Second, the reference in subparagraph
II(B)(2)(b) to a "common or contract"
carrier and section-20(a) of the Interstate
Commerce Act has been changed to

73193

"motor" carrier and section 214 of the
Interstate Commerce Act. Third,
paragraph I(C)(1) has been changed to
refer to the first business day after
securities are offered rather than the
first business day after the final terms of
securities are fixed and announced.
Fourth, paragraph 1(C)(2) has been
modified. This paragraph as proposed
seemed to indicate that there were three
separate and distinct ways in which
securities could be offered or purchased
under condition 1(C)(2). The
modification is designed to make it clear
that the provisions in subparagraphs (b)
and (c) are exceptions to the general
firm commitment underwriting
procedure which also satisfy the
condition stated in that paragraph.
General Information
The attention of interested persons is
directed to the following:
(1)The fact that a transaction is the
subject of an exemption granted under
section 408(a) of the Act and section
4975(c)(2) of the Code does not relieve a
fiduciary or other party in interest with
respect to a plan to which the exemption
is applicable from certain other
provisions of the Act and the Code,
including any prohibited transaction
provisions to which the exemption does
not•apply and the general fiduciary
responsibility provisions of section 404
of the Act which, among other things,
require a fiduciary to discharge his
duties respecting the plan solely in the
interest of the plan's participants and
beneficiaries and in a prudent fashion in
accordance with section 404(a)(1)(B) of
the Act; nor does it affect the
requirement of section 401(a) of the
Code that a plan must operate for the
exclusive benefit of participants and
beneficiaries.
(2)This exemption is supplemental to,
and not in derogation of, any other
provision of the Act and the Code,
including statutory 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.
(3)The class exemption is applicable
to a particular transaction only if the
transaction satisfies the conditions
specified in the class exemption.
Exemption

In accordance with section 408(a) of
the Act and section 4975(c)(2) of the
Code, and based upon the entire record
including the written comments
submitted in response to the notice of
July 27, 1979, and the testimony given at
the public hearing of January 24, 1980,

-

73194

Federal Register Vol. 454 215 Tuesday, November 4, 1980 / Notices

the Department makes the following
determinations:
(a) The class exemption set forth
herein is administratively feasible;
(hilt is in the interests of plans and of
their participants and beneficiaries; and
(c) It is protective of the rights of
participants and beneficiaries of plans.
Accordingly, the following exemption
is hereby granted under the authority of
section 408(a) of the Act and section
4975(c)(2], of the Code and in accordance
with the procedures set forth in ERISA
Procedure 75-1.

Transactions
A. Effective January 1. 1975 the
restrictions of section 406(a)(11 (A)
through (D) of the Act and the taxes
imposed by reason of section 4975(c)(1)
(A) through (D) of the Code shall not
apply to the purchase or other
acquisition prior to December 1. 1980 in
a public offering (defined in Section
11(B)) of securities by a fiduciary on
behalf of an employee benefit plan
solely because the proceeds from the
sale were or were to be used by the
issuer of the securities to retire or
reduce indebtedness owed to a party in
interest with respect to the plan. other
than the fiduciary, provided that the
price paid by the plan for the securities
does not exceed adequate consideration
as defined in section 3(18) of the Act.
B. Subject to the conditions described
in section II(A), effective December 1,
1980. the restrictions of sections
406(a)(1) (A) through (IA of the Act and
the taxes imposed by reason of section
4975(c)(11 (A) through (I)) of the Code
shall not apply to the purchase or other
acquisition in a public offering (defined
in section 110311 of securities by a
fiduciary on behalf of an employee
benefit plan solely because the proceeds
from the sale may be used by the issuer
of the securities to retire or reduce
indebtedness owed to a party in interest
of the plan other than the fiduciary.
C. Subject to the conditions described
in section II(A). effective January 1.
1975. the restrictions of sections
406(a)(1) (A) through (D) and 406(b) (1]
and (2) of the Act and the taxes imposed
by reason of section 4975(c)(1] (A)
through (E) of the Code shall not apply
to the purchase or other acquisition in a
public offering (defined in section II(B))
of securities by a fiduciary, which is a
bank or an affiliate thereof, on behalf of
an employee benefit plan solely because
the proceeds, from the sale may be used
by the issuer of the securities to retire or
reduce indebtedness owed to such
fiduciary or any affiliate thereof,
provided that. if such fiduciary of the
plan knows (as defined in paragraph 7)
that the proceeds of this issue will be

used in whole or in part by the issuer of
the securities to reduce or retire
indebtedness owed to such fiducairy or
affiliate thereof, the transaction shall
have complied with the conditions set
forth in paragraph 1 through 6 below:
1. Such securities are purchased prior
to the end of the first full business day
after the securities have been offered to
the public, except that
a. If such securities are offered for
subscription upon exercise of rights,
they may be purchased on or before the
fourth day preceding the day on which
the rights offering terminates; or
b. If such securities are debt
securities, they may be purchased on a
day subsequent to the end of such first
full business day, if the effective interest
rates on comparable debt securities
offered to the public subsequent to such
first full business day and prior to the
purchase arc less than effective interest
rate of the debt securities being
purchased;
2. Such securities are offered by the
issuer pursuant to an underwriting
agreement under which the members of
the underwriting syndicate are
committed to purchase all of the
securities being offered, except if the
securities
a. Are purchased by others pursuant
to a rights offering, or
b. Are offered pursuant to an
overallotment option;
3.. The issuer of such securities has
been in continuous operation for not less
than three years, including the
operations of any predecessors, unless
such securities are non-convertible debt
securities rated in one of the four
highest rating categories by at least one
nationally recognized statistical rating
organization;
4. The amount of securities purchased
or otherwise acquired on behalf of the
plan by the fiduciary does not exceed
three percent of the total amount of the
securities being offered;
5. The consideration to be paid by any
plan in purchasing or otherwise
acquiring such securities does not
exceed three percent of the fair market
value, as of the most recent valuation
date of the- plan prior to such transactors,
of the plan assets which are subject to
the management and control of such
fiduciary;
6. The total amount of securities in
any single offering purchased by the
fiduciary on behalf of the plan together
with the total amount of such securities
purchased by such fiduciary acting as a
fiduciary on behalf of any other
employee benefit plan subject to Title I
of the Act does not exceed 10 percent of
the amount of the offering

7. As used in this section I(C), a
fiduciary will be deemed to know that
the proceeds of an issuance of securities
will be used in whole or in part by the
issuer of the securities to reduce or
retire indebtedness owned to such
fiduciary or an affiliate thereof. if
a. Such knowledge is actually
communicated to, or
b. Information reasonably sufficient to
cause belief that the proceeds wilt be
used in whole or in part by the issuer of
the securities to reduce or retire
indebtedness owned to the fiduciary, or
an affiliate thereof, is possessed by,
the officers or employees of the
fiduciary, who are authorized to be
involved in carrying out the investment
responsibilities, obligations, or duties of
the fiduciary, or who in fact are
involved in carrying out such
responsibilities, obligations, or duties,
regarding the purchase or other
acquisition.
D. Effective January 1, 1975. the
restrictions of sections 406(a)(11 (A)
thrnnott (TT} and 40fi(til
anrt (21 a' the
Act and the taxes imposed by reason of
section 4975(c)(1) (Al through (E) of the
Code shall not apply to the receipt by a
party in interest of any of the proceeds
resulting from the issuance, Ina public
offering (as defined in section II(B)), of
securities merely because such proceeds
are used by the issuer of the securities
to retire or reduce indebtedness owed to
the party in interest provided that, when
such. party in interest is a fiduciary
acquiring such securities on: behalf of a
plan, such fiduciary is a bank or an
affiliate thereof (as defind in section
II(B)) which meets the provisions of
section 1(C) of this exemption.

II. General Conditions
A. The following conditions apply to
the transactions described in section
1(B) and (C) above:.
1. The price paid by the plan fiduciary
for the securities shall not be in excess
of the offering price described in an
effective registration statement under
the Securities Act of 1933 covering such
securities, or in the case of securities
described in section. 1103)(1)(13), in. the
offering circular required under
applicable federal law;
Z. (a) The fiduciary. on behalf of the
plan, maintains for a period of six years
from the date of the transaction the
records necessary to enable the persons
described in section Il(A)E2kh) below to
determine whether the conditions of this
exemption have been met, except that a
prohibited transaction will not be
deemed to have occurred if, due to
circumstances beyond the control of the
fiduciary, the records are lost or

Federal Register / Vol. 45, No. 215 / Tuesday, November 4, 1980 / Notices
destroyed prior to the end of the sixyear period;
(b) Nothwithstanding any provisions
of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in
section II(A)(2)(a) above are
unconditionally available at their
customary location for examination
during normal business hours by:
(i) Any duly authorized employee or
representative of the Department of
Labor or the Internal Revenue Service,
(ii) Any fiduciary of a plan who has
authority to manage and control the
assests of the plan, or to allocate to
another fiduciary the authority to
manage and control the assets of the
plan, or any duly authorized employee
or representative of such fiduciary,
(iii) Any contributing employer to the
plan or representative of such employer,
(iv) Any participant or beneficiary of
the plan or any duly authorized
employee or representative of such
participant or beneficiary.
(v) None of the persons described in
e.ihpnrarrnrth (ii) thrn,,nh (iv) of

paragraph shall be authorized to
examine any fiduciary's trade secrets or
required to be kept commercial or
financial information which is privileged
or required to be kept confidential.
B. For the purposes of the exemptions
contained in Part I,
1. The term "public offering" means
a. The offering of securities registered
under the Securities Act of 1933
(Securities Act), or
b. The offering of securities exempt
from registration under the Securities
Act which are
(i) Issued by a bank,
(ii) Issued by a motor carrier if such
issuance is subject to the provisions of
section 214 of the Interstate Commerce
Act, as amended,
(iii) Exempt from the registration
requirements of the Securities Act
pursuant to a federal statute other than
the Securities Act, or
(iv) The subject of a distribution and
of a class which is required to be
registered under section 12 of the
Securities Exchange Act of 1934 (15
U.S.C. 781), and the issuer of which has
been subject to the reporting
requirements of section 13 of that Act
(15 U.S.C. 78m) for a period of at least 90
days immediately preceeding the sale of
securities and has filed all reports
required to be filed thereunder with the
Securities and Exchange Commission
during the preceeding 12 months.
2. An "affiliate" of a bank means any
entity directly or indirectly, through one
or more intermediaries, controlling,
controlled by, or under common control

with such bank.
For the 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.
3. Each plan participating in a
collective or commingled fund shall be
considered to own the same
proportionate undivided interest in each
asset of the collective investment fund
as its proportionate interest in the total
assets of the collective investment fund
as calculated on the most recent
preceding valuation date of the fund.
Signed at Washington, D.C., this 30th day
of October, 1980.

Ian D. Lanett
Administrator, Pension and Welfare Benefit
Programs, Labor-Management Services
Administration, Department of Labor.
[FR Doc. 80-34384 Filed 11-3-801 8:45 am]
BILLING CODE 4510-29-M

[Prohibited Transaction Exemption 80-81;
Exemption Application No. D-20361

Exemption From the Prohibitions for
Certain Transactions Involving the
Arizona Machinery Co., Inc.,
Employees Profit-Sharing Retirement
Plan Located in Avondale, Arizona
AGENCY: Department of Labor.
ACTION: Grant of individual exemption.
This exemption would
exempt ivau -uy the Arizona
Machinery Company, Inc. Employees'
Profit-Sharing Retirement Plan (the Plan)
to Arizona Machinery Company, Inc.
(the Employer), a party in interest with
respect to the Plan, for the lesser of
$516,000 or 40 percent of the Plan's
assets.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Alan H. Levitas of the Office of
Fiduciary Standards, Pension and
Welfare Benefit Programs, Room C4526, U.S. Department of Labor, 200
Constitution Avenue, N.W., Washington,
D.C. 20216. (202) 523-8884. • 1/is is not a
toll-free number.)
SUPPLEMENTARY INFORMATION: On
September 9, 1980 notice was published
in the Federal Register (45 FR 59440) of
the pendency before the Department of
Labor (the Department) of a proposal to
grant an exemption from the restrictions
of section 406(a) and 406 (b)(1) and
(b)(2) of the Employee Retirement
Income Security Act of 1974 (the Act)
and from the sanctions resulting from
the application of section 4975 of the
Internal Revenue Code of 1954 (the
Code) by reason of section 4975(c)(1) (A)
through (E) of the Code, for a

73195

transaction described in an application
filed by the trustees of the Plan. The
notice set forth a summary of facts and
representations contained in the
application for exemption and referred
interested persons to the application for
a complete statement of the facts and
representations. The application has
been available for public inspection at
the Department in Washington, D.C. The
notice also invited interested persons to
submit comments on the requested
exemption to the Department. In
addition the notice stated that any
interested person might submit a written
request that a public hearing be held
relating to this exemption. The applicant
has represented that it has complied
with the requirements of the notification
to interested persons as set forth in the
notice of pendency. No public comments
and no requests for a hearing were
received by the Department.
.The notice of pendency was issued
and the exemption is being granted
solely by the Department because,
effective December 31. 1978. section 102
of Reorganization Plan No. 4 of 1978 (43
FR 47713, October 17, 1978) transferred
the authority of the Secretary of the
Treasury to issue exemptions of the type
proposed to the Secretary of Labor.
Tax Consequences of Transaction
The Department of the Treasury has
determined that if a transaction between
a qualified employee benefit plan and
its sponsoring employer (or affiliate
thereof) results in the plan either paying
less than or receiving more than fair
market value such excess may be
considered to be a contribution by the
sponsoring employer to the plan and
therefore must be examined under
applicable provisions of the Internal
Revenue Code, including sections
401(a)(4), 404 and 415.
General Information

The attention of interested persons is
directed to the following:
(1) The fact that a transaction is the
subject of an exemption granted under
section 408(a) of the Act and section
4975(c)(2) of the Code does not relieve a
fiduciary or other party in interest or
disqualified person with respect to a
plan to which the exemption is
applicable from certain other provisions
of the Act and the Code. These
provisions include any prohibited
transaction provisions to which the
exemption does not apply and the
general fiduciary responsibility
provisions of section 404 of the Act,
which among other things require a
fiduciary to discharge his or her duties
respecting the plan solely in the interest