Prohibited Transaction Class Exemption 75-1 Security Transactions with Broker-Dealers, Reporting Dealers and Banks

NOTICES
DEPARTMENT OF LABOR
Labor•Management Services
Administration

DEPARTMENT OF THE TREASURY
Internal Revenue Service
I Prohibited Transaction Exemption 75-11

EMPLOYEE BENEFIT PLANS
Exemptions From Prohibitions Respecting
Certain Classes of Transactions Involving Employee Benefit Plans and Certain
Broker-Dealers, Reporting Dealers and
Banks
On August 8, 1975, notice was published in the FEDERAL REGISTER (40 FR
33564) that the Department of Labor
(the Department) and the Internal
Revenue Service (the Service) had under
consideration a proposal to exempt certain classes of transactions involving employee benefit plans and certain brokerdealers, reporting dealers and banks
from the restrictions of section 406 of
the Employee Retirement Income Security Act of 1974 (the Act) and the
taxes imposed by section 4975 (a) and
(b) of the Internal Revenue Code of
/954 (the Code), by reason of section
4975(c) (1) of the Code, pursuant to section 408(a) of the Act and section 4975
(c) (2) of the Code. The exemptions were
proposed in accordance with the procedures set forth in ERISA Procedure
75-1 (40 FR 18471, April 28, 1975) and
Rev. Proc. 75-26, 1975-20 I.R.B. 14.
All interested persons were invited to
submit written comments with respect to
th- proposed exemptions. In ,addition,
pursuant to notice published in the FEDERAL REGISTER on August 8, 1975 (40
FR 33563), a public hearing was held on
August 26, 1975 with regard to the proposed exemptions and with regard to
proposed regulations (26 CFR 54.4975-9
and 29 CFR 2510.3-21) designed to clarify the applicability of the definition of
the term "fiduciary" set forth in section
4975(e) (3) of the Code and section 3(21)
(A) of the Act to persons who render
investment advice to employee benefit
plans and tc persons who execute securities transactions on behalf of plans
(40 FR 33560 and 33561).
The Department and the Service have
considered all of the written comments
received and the testimony given at the
public hearing and have determined to
grant the proposed exemptions, as modified, in the form set forth below. Further, by notices published in this issue
of the FEDERAL REGISTER, the Department
and the Service have also adopted the
regulations referred to above clarifying
the definition of the term "fiduciary."
The exemptions granted herein are
preme;ed on the adoption of these regulations and should, therefore, be considered In conjunction therewith.
On February 4, 1975, notice was published In the FEDERAL REGISTER (40 FR
5201 of the granting of an interim exemption from the prohibited transaction
provisions of section 406 of the Act and
from the taxes imposed by section 4975
of the Code with respect to certain secu-

titles transactions between employee
benefit plans and certain broker-dealers,
reporting dealers and banks for the period from January 1, 1975, to April 30,
1975.
By notices published in the FEDERAL
REGISTER on April 23, 1975 (40 FR 17861) ,
June 9, 1975 (40 FR 24578), and September 23, 1975 (40 FR 43785), the interim exemption was extended until October 31, 1975.
As indicated in those notices, the interim exemption was granted in order
(1) to prevent the harm to employee
benefit plans and to the interests in
plans of participants and beneficiaries
which, in all likelihood, would have resulted from the immediate and full application of all of the prohibited transaction provisions set forth in Title I and
Title II of the Act, and (2) to afford all
interested persons an opportunity to submit proposals for permanent exemptions
relating to transactions between plans
and certain broker-dealers, reporting
dealers and banks, and to provide an opportunity for the Department and the
Service to consider such proposals. The
granting of the interim exemption was
based upon a record which includes written comments submitted in response to
notices of the proposal of the granting
of the interim exemption and of the extension of the interim exemption published in the FEDERAL REGISTER on January 13, 1975 (40 FR 2483 and 2455), and
April 23, 1975 (40 FR 17861), respectively, and the testimony at a public
hearing held on January 21, 1975.
Proposals for the granting of permanent exemptions from the prohibited
transaction provisions of section 406 of
the Act and from the taxes imposed by
section 4975 of the Code were submitted
by the Securities Industry Association
and others and were made available for
public inspection by the Service. Proposals for the adoption of regulations concerning the relationship of plans and
broker-dealers, reporting dealers and
banks were also submitted and made
available for public inspection.
The written proposals which were submitted stated that the services provided by broker-dealers, reporting dealers and banks for which exemptions were
requested have been of great benefit to
plans and their participants and beneficiaries, and that it is in their best interests to have such services available in
the future. The proposals represented
that the exemptions and regulations suggested are in the interests of plans and
their participants and beneficiaries with
respect to the dealings of such plans with
broker-dealers, reporting dealers and
banks in the management of securities
portfolios of plans.
Based upon these written submissions
and upon the extensive regulation of the
securities industry by the Securities and
Exchange Commission, the national securities exchanges and other industry
self-regulatory bodies, the Department
and the Service proposed the granting of
the class exemptions, which, as modified,
are described below, for certain services
furnished to employee benefit plans and

508.15
for certain securities transactions engaged in by plans.
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, 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 subsection (a) (1)
(B) of section 404 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 the employees
of the employer maintaining the plan
and their beneficiaries.
(2) The exemptions granted herein
are supplemental to, and not in derogation of, any other provisions of the Act
and the Code, including statutory and
other exemptions and transitional rules.
Furthermore, the fact that a transaction
is the subject of an exemption is not dispositive of whether the transaction
would have been a prohibited transaction in the absence of such exemption,
or, though it would have been a prohibited transaction, is exempt by operation of a statutory exemption er a transitional rule.
(3) Each class exemption set forth
herein is applicable to a particular transaction only if the transaction satisfies
the conditions specified for the class in
which it falls.
(4) Under the regulations adopted in
conjunction with these exemptions relating to the definition of the term "fiduciary" (26 CFR 54.4975-9 (c) through
(e) and 29 CFR, 2510.3-21 (c) through
(e)) , a person who is a plan fiduciary
is deemed to be a fiduciary only with
respect to those plan assets with respect
to which he exercises or has responsibility to exercise those functions which
make him a fiduciary. Thus, a fiduciary
will be treated as a party in interest or
disqualified person other than a fiduciary (e.g., a person providing services
to the plan) when he engages in a
transaction with the plan which does not
involve any plan assets with respect to
which he is a fiduciary.
(5 ) For purposes of section 406 of the
Act and section 4975(c) (1 I of the Code,
if a fiduciary with respect to one plan engages In n transaction with a second
plan pursuant - to an agreement, arrangement or understanding whereby
it is expected that a fiduciary with respect to toe second plan will engage in
a similar transaction with the first plan.
each transaction will be treated as an
Indirect transaction between the plan

FEDERAL REGISTER, VOL. 40, NO. 211—FRIDAY, OCTOBER 31, 1975

50846

NOTICES

and the fiduciary with respect to such
plan.
In accordance with section 408(a) of
the Act and section 4975(c) (2) of the
Code, and based Upon the entire record,
including not only the written comments
submitted in response to the notice of
August 8, 1975, the testimony at the public hearing held on August 26, 1975, and
the proposals submitted for the granting
of permanent exemptions, but also the
written comments submitted in response
to the notices of January 13, 1975, and
April 23, 1975, relating to the interim
exemption and the testimony at the public hearing held on January 21, 1975,
the Department and the Service make.
the following findings and determinations:
(i) The class exemptions set forth
herein are administratively feasible;
(11) They are in the interests of plans
and of their participants and beneficiaries; and
(iii) They are protective of the rights
of participants and beneficiaries of
plans.
L Agency transactions and services.
Section 414(c) (4) and section 2003
(c) (2) (D) of the Act presently provide
an exemption until June 30, 1977, from
the prohibited transaction provisions of
the Act and the Code, respectively, for
the provision of services between a plan
and a party in interest or disqualified
person if such services are either provided under a binding contract in effect
on July 1, 1974 (or pursuant to renewals
of such contract), or if the party in interest or disqualified person ordinarily
and customarily furnished such services
on June 30, 1974, if such provision of
services remains at least as favorable
to the plan as an arm's-length transaction with an unrelated party would
be and if the provision of services was
not, at the time of such provision, a
prohibited transaction within the meaning of section 503(b) of the Code or the
corresponding provisions of prior law. In
ERISA 1B 75-1 and TIR-1329, issued on
December 31, 1974, the Department and
the Service indicated that the exemption
provided by section 414(c) (4) and section 2003(c) (2) (D) of the Act applies to
the execution of brokerage transactions
on behalf of a plan if the conditions of
those sections are met.
Based on the proposals which were
submitted relating to this class exemption, the letters of comment, and the
testimony given at the public hearings,
the Department and the Service have
made the following determinations.
Broker-dealers regularly provide research, information and advice concerning securities and execute transactions
for the purchase or sale of securities in
the ordinary course of their business as
broker-dealers and the provision of such
services might constitute prohibited
transactions. Although exemptions are
provided In sections 414(cr (4) and 2003
(e) (2i (D) of the Act, these exemptions
terminate on June 30, 1077, and, moreover, are not available at the present
time for persons who first provided such
services after June 30, 1974. Therefore,

the granting of exemptions is necessary
with respect to such services to permit
the unimpeded flow of information, research and brokerage services, either
alone or in combination, to employee
benefit plans.
Accordingly, the Department and the
Service have granted the exemption set
forth below to permit persons who are
parties in interest or disqualified persons with respect to employee benefit
plans to effect securities transactions
on behalf of such plans, to perform certain functions incidental to effecting
such transactions, and to provide certain limited advisory and research services to plans.
The exemption is of limited duration,
however, when the person effecting such
securities transactions on behalf of an
employee benefit plan is a fiduciary with
respect to such plan, as that terni is defined in section 3(21) (A) of the Act and
section 4975(e) (3) of the Code and in
the regulations interpreting that term
adopted in conjunction with the granting
of these exemptions. Such transactions,
when effected by a plan fiduciary, present opportunities for abuse in the management of plan assets. Moreover, section
11(a) of the Securities Exchange Act of
1934 (15 U.S.C. 78k(a)), as amended by
the Securities Acts Amendments of 1975
(Pub. L. 94-29, 88 Stat. 110), prohibits
any member of a national securities exchange from effecting any transaction on
such exchange for an account with respect to which it or an associated person
thereof exercises investment discretion.
However, section 11(a) of that Act also
provides an exception from the prohibition set forth therein until May 1. 1978,
for members of a national securities exchange who were members on May 1,
1975. The Conference Report relating to
the Securities Acts Amendments of 1975
(H.R. Rep. No. 94-229, 94th Cong. 1st
Sess. (1975) ) also indicates, at page 107,
that it was the view of the conferees that
the Department and the Service should
grant an exemption from the prohibited
transaction provisions of the Act and the
Code to permit broker-dealers to continue to provide brokerage services to
plans with respect to which they exercise investment discretion until May 1,
1978, in order to conform the pertinent
provisions of the Act and the Code to
section 11(a) of the Securities Exchange
Act of 1934 and thereby permit brokerdealers to phase out in an orderly fashion the businesses of both serving as investment advisers to plans and providing
brokerage services to such plans.
Therefore, with respect to a person
who is a plan fiduciary, the exemption
for effecting securities transactions on
behalf of employee benefit plans, and
for functions performed incidental to the
effecting of such transactions, whether
or not such transaction is effected on a
national securities exchange, is available
only if such person was ordinarily and
customarily effecting securities transactions on May 1, 1975, and such exemption
will terminate on May 1, 1978.
Regardless of whether the transaction
is effected by a person who is n fiduci-

ary, the availability of the exemption set
forth below is also subject to the condition that the transaction be effected on
behalf of the plan, or the advisory services be furnished to the plan, on terms
at least as favorable to the plan as an
arm's-length transaction with an unrelated party would be. In response to questions raised in the written comments, it
is the view of the Department and the
Service that this condition requires that
the transaction be effected on behalf of
the plan, or the advisory services be furnished to the plan, on terms at least as
favorable to the plan as those which
would have existed between the plan and
such party in interest or disqualified person if they were not related.
Minor changes designed to clarify the
exemption have been made in the provisions of the exemption in response to
suggestions made in the letters of comment.
Exemption. Accordingly, the following
exemption is 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 (40 FR 18471,
April 28, 1975) and Rev. Proc. 75-26,
1875-20 I.R.B. 14:
The restrictions of section 406 of the
Employee Retirement Income Security
Act of 1974 (the Act) and the taxes imposed by section 4975 (a) and (b) of the
Internal Revenue Code of 1954 (the
Code), by reason of section 4975(c (1)
of the Code, shall not apply(a) Until May 1, 1978, to the effecting
of any securities transaction on behalf
of an employee benefit plan by a person
who is a fiduciary with respect to the
plan, acting in such transaction as agent
for the plan, and to the performance by
such person of clearance, settlement, or
custodial functions incidental to effecting such transaction, if such person ordinarily and customarily effected such securities transactions and performed such
functions on May 1, 1975;
(b) To the effecting of any securities
transaction on behalf of an employee
benefit plan by a person who is a party in
interest or a disqualified person with
respect to such plan (other than a person
who is a fiduciary with respect to the
plan), acting in such transaction as
agent for the plan, and to the performance by such person of clearance, settlement, or custodial functions incidental
to effecting such transaction; or
(c) To the furnishing to an employee
benefit plan by a person who is a party
in interest or disqualified person with
respect to such plan of eny advice, either
directly or through publications or writings, as to the value of securities or other
property, the advisability of investing in.
purchasing, or selling securities or other
property, or the availability of securities
or other property or of purchasers or
sellers of securities or other property, or
of any analyses or reports concerning issuers, industries, securities or other property, economic factors or trends, portfolio strategy, or the performance of accounts, under circumstances which do
not make such party in interest or titsqunlifled person a fiduciary with respect

FEDERAL REGISTER, VOL. 40, NO. 211-FRIDAY. OCTOBER 31, 1975

50817

NOTICES
to such plan: Provided that, in each instance, such transactions are effected on
behalf of the plan, or such advice,
analyses or reports are furnished to the
plan, on terms at least as favorable to
the plan as an arm's-length transaction
with an unrelated party would be and
were not, at the time such transactions
were effected or at the time such advice,
analyses or reports were furnished, prohibited transactions within the meaning
of section 503(bl of the Code. For purposes of this exemption, the term "person" shall include such person and any
affiliates of such person. and the term
"affiliate" shall be defined in the same
manner as that term is defined in 29 CFR
2510.3-21(e) and 26 CFR 54.4975-9(e).
II. Principal transactions. The interim
exemption in effect until November 1,
1975, for certain securities transactions
provided an exemption from the prohibited transaction provisions for the purchase or sale of securities between a plan
and a broker-dealer, reporting dealer or
bank if certain conditions designed to
safeguard the interests of plans and their
participants and beneficiaries were met.
As indicated in the notice of initial
granting of the interim exemption (40
FR 5201, February 4, 1974). the record
developed with respect to the granting
of that exemption from the testimony received at the public hearing held on
January 21, 1975. and from the written
comments submitted In response to the
notice of proposed granting of the
interim exemption (40 FR 2455 and 2483,
January 13. 1975), established that an
exemption for such transactions is administratively feasible, in the interest of
plans and of their participants and
beneficiaries, and protective of the rights
of plan participants and beneficiaries.
The Department and the Service have,
therefore, granted an exemption for this
class of principal transactions, modified
to take into account the long-term nature
of the exemption and the regulations
under section 3(21) (A) of the Act and
section 4975(e) (3) of the Code (relating to the definition of the term "fiduciary") adopted in conjunction with the
exemptions set forth herein.
Modifications in the exemption for
principal transactions as proposed on
August 8, 1975 have been made in response to suggestions made in the written comments. In this regard, it has been
urged that certain modifications be made
to permit plans to purchase or sell securities issued by mutual funds from or
to a broker-dealer who is a plan fiduciary under procedures which were in effect prior to the passage of the Act,
which are protective of the rights and
interests of plans and their participants
and beneficiaries, and which are subject
to regulation by the National Association
of Securities Dealers, Inc., and the Securities and Exchange Commission.
Paragraph (d) of the exemption has,
therefore, been modified to provide an
exception for the purchase or sale of
mutual fund shares by plans from or to
a plan fiduciary, provided that such fiduciary is not a principal underwriter for,
or affiliated with, such mutual fund.

It was also asserted in the letters of
comment that the records required by
paragraph (e) of the exemption may be
lost or destroyed during the six-year record maintenance period set forth in that
paragraph, and that such loss or destruction under such circumstances should
not result in loss of the exemption or in
liability for plan fiduciaries if such loss
or destruction occurred under circumstances beyond the control of such plan
fiduciaries. In response to this comment,
modifications have been made in paragra ph (e) and in the comparable record-keeping provisions of the exemptions
set forth below for underwriting and
market-making transactions and extensions of credit.
In addition, other minor clarifying
changes have been made in the exemption.
Exemption. Accordingly, the following
exemption is 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 (40 FR 18471,
April 28, 1975) and Rev. Proc. 75-26,
1975-20 I.R.B. 14:
The restrictions of section 406(a) of
the Employee Retirement Income Security Act of 1974 (the Act) and the taxes
imposed by section 4975 (a) and (b) of
Internal Revenue Code of 1954 (the
Code), by reason of section 4975(c) (1)
(A) through (D) of the Code, shall not
apply to any purchase or sale of a security between an employee benefit plan
and a broker-dealer registered under the
Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.), a reporting dealer
who makes primary markets in securities
of the United States Government or of
any agency of the United States Government or of any agency of the United
States Government ("Government securities") and reports daily to the Federal
Reserve Bank of New York its positions
with respect to Government securities
and borrowings thereon, or a bank supervised by the United States or a State, if
the following conditions are met:
(a) In the case of such broker-dealer,
it customarily purchases and sells securities for its own account in the ordinary
course of its business as a broker-dealer.
(b) In the case of such reporting dealer
or bank, it customarily purchases and
sells Government securities for its own
account in the ordinary course of its
business and such purchase or sale between the plan and such reporting dealer
or bank is a purchase or sale of Government securities.
(c) Such transaction is at least as favorable to the plan as an arm's length
transaction with an unrelated party
would be, and it was not, at the time of
such transaction, a prohibited transaction within the meaning of section 503
(b) of the Code.
(d ) Such broker-dealer, reporting
dealer or bank Is not a fiduciary with respect to the plan, and such broker-dealer, reporting dealer or bank is n party
in Interest or disqualified person with
respect to the plan solely by reason of
section 3(14)(B) of the Act or section

4975( e ) (2) (El) of the Code or a rela-

tionship to a person described in such
sec tions. For purposes of this paragraph.
a broker-dealer, reporting dealer, or bank
sh 11 not be deemed to be a fiduciary with
respect to a plan solely by reason of providing securities custodial services for a
plan. Neither the restrictions of this paragraph nor (if the other conditions of
this exemption are met) the restrictions
of section 406(b) of the Act and the
taxes imposed by section 4975 (a) and
( b) of the Code, by reason of section 4975
(c) (I) (E) and (F) of the Code, shall apply to the purchase or sale by the plan of
securities issued by an open-end investmerit company registered under the Investment Company Act of 1940 (15 U.S.C.
80a-1 et seq.), provided that a fiduciary
with respect to the plan is not a principal underwriter for, or affiliated with,
such investment company within the
meaning of sections 2(a) (29: and 2(a)
(3) of the Investment Company Act of
1940 (15 U.S.C. 80a-2(a) (29) and 80a2(a) (3)).
(e) The plan maintains or causes to
be maintained for a period of six years
from the date of such transaction such
records as are necessary to enable the
persons described in paragraph (f) of
this exemption to determine whether the
conditions of this exemption have been
met, except that
(1 ) Such broker-dealer, reporting
dealer, or bank shall not be subject to the
civil penalty which may be assessed
under section 502(1) of the Act, or to
the taxes imposed by section 4975 (a)
and (b) of the Code, if such records are
not maintained, or are not available for
examination as required by paragraph
(f) below; and
(2) A prohibited transaction will not
be deemed to have occurred if, due to circumstances beyond the control of the
plan fiduciaries, such records are lost or
destroyed prior to the end of such sixyear period.
(f) Notwithstanding anything to the
contrary in subsections (a) (2) and (b)
of section 504 of the Act, the records referred to in paragraph (e) are unconditionally available for examination during
normal business hours by duly authorized
employees of (1) the Departmei t of
Labor, (2) the Internal Revenue Service.
(3) plan participants and beneficiaries,
(4) any employer of plan participants
and beneficiaries, and (5) any employee
organization any of whose members are
covered by such plan. For purposes of
this exemption, the terms "brokerdealer," "reporting dealer" and "bank"
shall include such persons and any affiliates thereof, and the term "affiliate"
shall be defined in the same manner as
that term is defined in 29 CFR 2510.3-21
(e) and 26 CFR 54.4975-94e).
NI. Underwritings. Based on the
proposals submitted relating to this class
exemption, the letters of comment, and
the testimony given at the public hearings, the Department and the Service
have made the following determinations.
It is often in the interests of plans to
purchase underwritten securities in n
public offering because, more often than

FEDERAL REGISTER, VOL. 40, NO. 211—FRIDAY, OCTOBER 31, 1975

50848

NOTICES

not, the public offering price for such
securities will be more favorable to the
plan than the net cost to the plan of
the same securities in the secondary
market immediately following the initial
public offering. However, when a fiduciary of a plan, as defined in section
3(21) (A) of the Act and section 4975(e)
(3) of the Code and the regulations
adopted thereunder in conjunction with
these proposed exemptions, or an affiliate
of such fiduciary, is a member of the
underwriting or selling syndicate for the
public offering of a security, the purchase
of such security by the plan during the
existence of the syndicate from such
fiduciary, or from an affiliate of such
fiduciary, would constitute a prohibited
transaction under section 406 of the Act
and section 4975(c) (1) of the Code. Further, since it is generally in the interests
of the members of an underwriting syndicate that all shares being offered by the
syndicate are sold, the purchase of any
such shares by the plan when a fiduciary
with respect to the plan, or an affiliate of
such a fiduciary, is a member of the syndicate might also be a prohibited use of
plan assets for the benefit of such
fiduciary under section 406 of the Act and
section 4975(c) (1) of the Code, even if
the seller is not a fiduciary with respect
to the plan, or an affiliate of such fiduciary. However, the purchase of securities
during the existence of an underwriting
or selling syndicate with respect to such
securities, of which a fiduciary or an
affiliate thereof is a member, from a person who is not such fiduciary or an affiliate thereof will not be deemed such a
prohibited use where such fiduciary is
not involved in any way in causing the
plan to make the purchase, e.g., neither
recommends the purchase to the plan nor
participates in any other manner in the
plans decision to make the purchase.
It should be noted, moreover, that under the regulations adopted in conjunction with these exemptions relating to
the definition of the term "fiduciary", a
person who is a plan fiduciary is deemed
to be a fiduciary only with respect to
those plan assets with respect to which
he exercises or has responsibility to exercise those functions which make him
a fiduciary.
Further, it should be noted that the
purchase by a plan of securities during
the existence of an underwriting syndicate of which a plan fiduciary, or an
affiliate thereof, is a member, from a
broker-dealer, reporting dealer or bank
which is neither a plan fiduciary nor an
affiliate of such a fiduciary, but which is
a party in interest or disqualified person
with respect to the plan would not subject such broker-dealer, reporting-dealer
or bank to civil penalties under section
502(i) of the Act or excise tax under
section 4975 (a) and (b) of the Code
notwithstanding that the conditions of
the class exemption for such underwriting transactions set forth below are
cat met. However, such broker-dealer,
reporting dealer or bank would be liable
for such penalties or taxes if the conditions of the class exemption for principal transactions previously set forth
are not met.

Based on the testimony given at the
hearing and the written comments which
have been submitted, certain modifications have been made in the exemption
as set forth below. Although many of
these modifications are intended merely
to clarify the provisions of the exemption, certain major revisions have also
been made. In this regard, the exemption
has been modified so that it is available
only with respect to purchases of underwritten securities by a plan from persons
other than fiduciaries (or any affiliate
thereof). Further, the effective date of
the condition limiting the availability of
the exemption where the fiduciary is a
manager of the underwriting or selling
syndicate has been extended from January 1, 1977, to July 1, 1977.
In addition, the condition in the proposed exemption relating to the amount
of gross commissions, spread or profit
which may be received by the seller in
such transactions has been removed in
order to provide necessary and appropriate flexibility in this area. Further, the
exemption has been modified to make it
feasible for plans to purchase securities
during unregistered secondary offerings
of such securities when a fiduciary is
a member of the offering syndicate. This
modification has been made based on a
determination that certain reporting requirements in the Securities Exchange
Act of 1934 ensure that. sufficient information regarding these issues is publicly
available so that the interests of plans
and their participants and beneficiaries
in the purchase of such securities may be
protected,
In addition, the requirement of the
proposed exemption that the underwritten securities be purchased on the first
day of the offering has been revised to
take into account the possibility that such
securities may be purchased in a secondary offering, and to permit the purchase
of debt securities after the first day in
those circumstances when interest rates
for comparable debt securities have fallen
below the interest rate set for the debt
securities being purchased.
A revision has also been made in the
requirement that the issuer of the securities be in existence for at least three
years in order to permit plans to purchase underwritten securities of new issuers which are guaranteed by persons
whose securities could have been purchased by the plan in an underwriting
consistent with the conditions of this
exemption.
Exemption. Accordingly, the following
exemption is 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 (40 FR 18471,
April 28, 1975) and Rev. Proc. 75-28,
1975-20 I.R.B. 14:
The restrictions of section 406 of the
Employee Retirement Income Security
Act of 1974 (the Act) and the taxes imposed F-Jysectlon 4075 (a) and (b) of the
Internal Revenue Code of 1954 (the
Code) , by reason of section 4075(c) (1)
of the Code, shall not apply to the purchase or other acquisition of nny sm g -

ties by an employee benefit plan during
the existence of an underwriting or selling syndicate with respect to such securities, from any person other than a
fiduciary with respect to the plan, when
such a fiduciary is a member of such
syndicate, provided that the following
conditions are met:
(a) No fiduciary who is Involved in
any way in causing the plan to make
the purchase is a manager of such underwriting or selling syndicate, except
that this paragraph shall not apply until
July 1, 1977. For purposes of this exemption, the term "manager" means any
member of an underwriting or selling
syndicate who, either alone or together
with other members of the syndicate, is
authorized to act on behalf of the members of the syndicate in connection with
the sale and distribution of the securities
being offered or who receives compensation from the members of the syndicate for its services as a manager of the
syndicate.
(b) The securities to be purchased or
otherwise acquired are
(1) Part of an issue registered under
the Securities Act of 1933 or, if exempt
from such registration requirement, are
(i) issued or guaranteed by the United
States or by any person controlled or
supervised by and acting as an instrumentality of the United States pursuant
to authority granted by the Congress of
of the United States, (ii) issued by a
bank, (iii) issued by a common or contract carrier, if such issuance is subject
to the provisions of section 20a of the
Interstate Commerce Act, as amended,
(iv) exempt from such registration requirement pursuant to a Federal statute
other than the Securities Act of 1933, or
(v) are the subject of a distribution and
are 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
preceding the sale of securities and has
filed all reports required to be filed thereunder with the Securities and Exchange
Commission during the preceding 12
months.
(2) Purchased at not more than the
public offering price prior to the end of
the first full business day after the final
terms of the securities have been fixed
and announced to the public, except
that
(I) If such securities are offered for
subscription upon exercise of rights, they
are purchased on or before the fourth
day preceding the day on which the,
rights offering terminates; or
(ii) If such securities are debt securities, they may be purchased at a public
offering price on a day subsequent to the
end of such first full business day, provided that the interest rates on comparable debt securities offered to the publice subsequent to such first full business
day and prior to the purchase are less
than the interest rate of the debt securities being purchased.
(3) Offered pursuant to an underwriting agreement. under which the members

FEDERAL REGISTER, VOL. 40, NO. 211—FRIDAY, OCTOBER 31, 1475

NOTICES
of the syndicate are committed to purchase all of the securities being offered,
except LIM Such securities are purchased by
others pursuant to a rights offering; or
U1) Such securities are offered pursuant to an over-allotment option.
(a) The issuer of such securities has
• been in continuous operation for not less
than three years, including the operations of any predecessors, unless
(1) 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;
(2) Such securities are issued or fully
guaranteed by a person described in
paragraph (b) D U) of this exemption:
or
(3) Such securities are fully guaranteed by a person who has issued securities described in paragraph (b) (1) (ii),
(iii) , (iv) or (v) and this paragraph (c).
(d) The amount of such securities to
be purchased or otherwise acquired by
the plan does not exceed three percent
of the total amount of such securities
being offered.
(e) The consideration to be paid by
the plan in purchasing or otherwise acquiring such securities does not exceed
three percent of the fair market value
of the total assets of the plan as of the
List day of the most recent fiscal quarter
of the plan prior to such transaction,
provided that if such consideration exceeds $1 million, it does not exceed one
percent of such fair market value of the
total assets of the plan.
(f) The plan maintains or causes to
be maintained for a period of six years
from the date of such transaction such
records as are necessary to enable the
persons described in paragraph (g) of
this exemption 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 plan fiduciaries, such records
are lost or destroyed prior to the end
of such six-year period.
(g) Notwithstanding anything to the
contrary in subsections (a) (2) and (b)
of section 504 of the Act, the records referred to in paragraph (f) are unconditionally available for examination during normal business hours by duly authorized employees of (1) the Department of Labor. (2) the Internal Revenue Service, (3 r plan participants and
beneficiaries, (4; any employer of plan
participants and beneficiaries, and (5)
any employee organization any of whose
members are covered by such plan.
If such securities are purchased by the
plan from a party in interest or disqualified person with respect to the plan, such
party in interest or disqualified person
shall not be subject to the civil penalty
which may be assessed under section 502
(I) of the Act, or to the taxes imposed
by section 4975 (a) and (b) of the Code,
if the conditions of this exemption are
not met. However, if such securities are
purchased from a party in interest or
disqualified person with respect to the

508-19

plan, the restrictions of section 406(a) total assets of the plan, since such fiduciof the Act shall apply to any fiduciary ary may not be a fiduciary with respect
with respect to the plan and the taxes to all of the assets of the plan. An eximposed by section 4976 (a) and (b) of ception from these limitations has also
the Code, by reason of section 4975 (c) been provided for the purchase or sale of
(1) (A) through (D) of the Code, shall government securities.
apply to such party in interest or dis- The condition with regard to the numqualified person, unless the conditions ber of market-makers other than plan
for exemption of Part 11 of this notice fiduciaries with respect to the securities
(relating to certain principal transac- being purchased or sold by the plan has
been revised in response to suggestions
tions) are met.
For purposes of this exemption, the made in the letters of comment in order
term "fiduciary" shall include such to require that there be only one other
fiduciary and any affiliates of such market-maker. This revision is based on
fiduciary, and the term "affiliate" shall a determination that many securities
be defined in the same manner as that which might be appropriate for plans to
term is defined in 29 CFR 2510.3-21(e) purchase; and particularly debt securities, frequently have only two marketand 26 CFR 54.4975-9(e).
IV. Market-making. Based on the pro- makers. Further, the exemption now prop osals submitted relating to this class vides that the plan can only purchase or
exemption, the letters of comment and sell such securities from or to a fiduciary
the testimony given at the public hear- who is a market-maker on terms more
ings, the Department and the Service favorable to the plan than those which
have made the following determinations. the fiduciary, acting in good faith, reaCertain firms which provide investment sonably believes to be available from all
advice to plans either directly or through other market-makers. Other modificatheir affiliates regularly maintain mar- tions have also been made to clarify
kets in securities, and as a result of this other provisions of the exemption in remarket-making activity, these firms in sponse to the written comments.
some instances can provide plans with The Department and the Service note
the best available purchase or sales that certain broker-dealers who are fiduprice with respect to particular ciaries -with respect to plans may purchase securities from or sell securities to
*securities.
The purchase or sale of securities by such plans as so-called "block posia plan from or to a fiduciary with respect tioners" with respect to such securities.
to such plan, or an affiliate of such Such transactions would constitute profiduciary, would be a prohibited trans- hibited transactions under section 406 of
action under section 406 of the Act and the Act and section 4975(c) (1) of the
section 4975(c) (1) of the Code. Gen- Code. Although it has been suggested
erally, the purchase or sale by a plan of that an exemption be granted for such
securities for which a plan fiduciary or transactions, the Department and the
affiliate of such fiduciary is a market- Service lack sufficient supportive data on
maker, from or to a broker-dealer, re- which to consider the proposal of such
porting dealer or bank which is unrelated an exemption.
Exemption. Ac,ordingly, the following
to such fiduciary (and is not otherwise a
exemption is granted under the authority
party in interest or disqualified person)
will not be deemed a prohibited trans - of section 408(a) of the Act and section
action under section 406 of the Act and 4975(c) (2) of the Code and in accordsection 4975(c) (1) of the Code; unless ance with the procedures set forth in
such transaction was engaged in for the ERISA Procedure 75-1 (40 FR 18471,
purpose of benefiting such fiduciary or an April 28, 1975) and Rev. Proc. 75-26,
1975-20 I.R.B. 14:
affiliate of such fiduciary.
The restrictions of section 406 of the
It should also be noted that under the
regulations adopted in conjunction here- Employee Retirement Income Security
with relating to the definition of the Act of 1974 (the Act) and the taxes linterm "fiduciary", a person is a fiduciary posed by section 4975 (a) and (b) of the
only with respect to those plan assets Internal Revenue Code of 1954 (the
with respect to which he exercises those Code), by reason of section 4975(c) (1)
functions which make him a fiduciary. of the Code, shall not apply to any purCertain revisions have been made in. chase or sale of any securities by an
the exemption based on certain of the employee benefit plan from or to a
comments which were sub
sub- market-maker with respect to such semarket-maker"
has been of
revised
that curities who is also a fiduciary with rewritten
The definition
term
mitted.
the so
" spect to such plan, provided that the following conditions are met
met:
it more closely conforms to the defini(a) The issuer of such securities has
tion of that term set forth in section
lass
3 ( a) (38) of the Securities Exchange Act been in continuous operation for not
operaU.S.C. 78n ( a ) (38) ) , as than three years, including the —
(
of 1934 (15
tions of any
, unless
amended by the Securities Acts Amend- (1) Such securities are non-convertiments of 1975 (Pub. L. 94-29, 89 Stat. ble debt securities rated in one of the
103). In addition, the limitations on the four highest rating categories by at least
size of plan holdings of securities re- one nationally recognized statistical ratferred to in the exemption have been ing organization;
modified so that they are based on the (2) Such securities are issued or guaramount of assets under the management anteed by the United States or by any
and control of the plan fiduciary who Is person controlled or supervised by awe
n market-maker, rather than on the acting as an instrumentality of the

FEDERAL REGISTER, VOL 40, NO 211—FRIDAY, OCTOBER 31, 1975

50850

NOTICES

United States pursuant to authority
granted by the Congress of the United
States, or
(3) Such securities are fully guaranteed by a person described in this paragraph (a).
(b) As a result of purchasing such securities
(1) The fair market value of the aggregate amount of such securities owned,
directly or indirectly, by the plan and
With respect to which such fiduciary Ls
a fiduciary, does not exceed three percent of the fair market value of the assets of the plan with respect to which
such fiduciary is a fiduciary, as of the
last day of the most recent fiscal quarter of the plan prior to such transaction,
provided that if the fair market value
of such securities exceeds $1 million, it
does not exceed one percent of such fair
market value of such assets of the plan,
except that this paragraph shall not apply to securities described in paragraph
(a) (2) of this exemption; and
(2) The fair market value of the aggregate amount of all securities for
which such fiduciary is a market-maker,
which are owned, directly or indirectly,
by the plan and with respect to which
such fiduciary is a fiduciary, does not exceed 10 percent of the fair market value
of the assets of the plan with respect to
Which such fiduciary is a fiduciary, as
of the last day of the most recent fiscal
quarter of the plan prior to such transaction, except that this paragraph shall
not apply to securities described in paragraph (a) (2) of this exemption.
(c) At least one person other than
such fiduciary is a market-maker with
respect to such securities.
(d) The transaction is executed at a
net price to the plan for the number
of snares or other units to be purchased
or sold in the transaction which is more
favorable to the plan than that which
such fiduciary, acting in good faith, reasonably believes to be available at the
time of such transaction from all other
market-makers with respect to such
securi ties.
(e) The plan maintains or causes to
be maintained for a period of six years
from the date of such transaction such
records as are necessary to enable the
persons described in paragraph (1) of
this exemption 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 plan fiduciaries, such records
are lost or destroyed prior to the end of
such six year period.
(f) Notwithstanding anything to the
contrary in subsections (a) (2) and (b) of
section 504 of the Act, tile records referred to in paragraph ,e) are unconditionally available for examination during normal business hours by duly authorized employees of (1) the Department of Labor, (2) the Internal Revenue
Service, (3) plan participants and beneficiarien, (4) any employer of plan participants and beneficiaries, and (5) any

employee organization any of whose
members are covered by such plan.
For purposes of this exemption
(1) The term "market-maker" shall
mean any specialist permitted to act as
a dealer, and any dealer who, with respect to a security, holds himself out
(by entering quotations in an interdealer communications system or otherwise) as being willing to buy and sell
such secui ity for his own account on a
regular or continuous basis. (2) The term "fiduciary" shall include
such fiduciary and any affiliates of such
fiduciary, and the term "affiliate" shall
be defined in the same manner as that
term is defined in 29 CFR 2510.3-21(e)
and 26 CFR 54.4975-9(e) .
V. Extension of credit. Based on the
proposals submitted relating to this class
exemption, the letters of comment, and
the testimony given at the public hearings, the Department and the Service
have made the following determinations.
A normal part of the execution of securities transactions by broker-dealers on
behalf of customers, including plans, is
the extension of credit to customers so as
to permit the settlement of transactions
in the customary five-day settlement
period. In- addition, such extensions of
credit are also customary in connection
with certain kinds of securities transactions, such as short sales and the writing
of option contracts.
Since such extensions of credit are
normally made by broker-dealers in connection with the execution of transactions for customers, if the customer is a
plan, the broker-dealer would be a party
in interest or disqualified person with
respect to the plan by reason of providing
the service of executing a transaction for
the plan. Section 406(a) (i) (B) of the
Act and section 4975(c) (1) (B) of the
Code prohibit extensions of credit between plans and parties in interest or
disqualified persons.
However, the Department and the
Service have determined to grant the exemption set forth below to permit extensions of credit by broker-dealers to plans
under conditions designed to safeguard
the interests of plans and their participants and beneficiaries.
Exemption. Accordingly, the following
exemption is 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 (40 FR 18471,
April 28, 1975) and Rev. Proc. 75-26,
1975-20 I.R.B. 14:
The restrictions of section 406 of the
Employee Retirement Income Security
Act of 1974 (the Act) and the taxes imposee by section 4975 (a) and (b) of
the Internal Revenue Code of 1954 (the
Code) , by reason of section 4975(c) (1)
of the Code, shall not apply to any extension of credit to an employee benefit
plan by a party In interest or a disqualified person with respect to the plan,
provided that the following conditions
are met:
(a) The party in interest or disqualified person

(1) Is a broker or dealer registered
under the Securities Exchange Act of
1934; and
(2) Is not a fiduciary with respect to
any assets of such plan, unless no interest or other consideration is received
by such fiduciary or any affiliate thereof
in connection with such extension of
credit.
(b) Such extension of credit
(1) Is in connection with the purchase
or sale of securities;
(2) Is lawful under the Securities Exchange Act of 1934 and any rules and
regulations promulgated thereunder;
and
(3) Is not a prohibited transaction
within the meaning of section 503(b)
of the Code.
(c) The plan maintains or causes to be
maintained for a period of six years
from the date of such transaction such
records as are necessary to enable the
persons described it paragraph (d) of
this exemption to determine whether the
conditions of this exemption have been
met, except that
(1) if such party in interest or disqualified person is not a fiduciary withrespect to any assets of the plan, such
party in interest or disqualified person
shall not be subject to the civil penalty
which may he assessed under section
502(1) of the Act, or to the taxer. imposed
by section 4975 (a) and (b) of the Code.
If such records are not maintained, or
are not available for examination as required by paragraph (d) below; and
(2) a prohibited transaction will not be
deemed to have occurred if, due to circumstances beyond the control of the
plan fiduciaries, such records are lost
or destroyed prior to the end of such
six-year period.
(d) Notwithstanding anything to the
contrary in subsections (a) (2) and (b)
of section 504 of the Act, the records referred to in paragraph (c) are unconditionally available for examination during
normal business hours by duly authorized
employees of (1) the Department of
Labor, (2) the Internal Revenue Service,
(3) plan participants and beneficiaries.
(4) any employer of plan participants
and beneficiarie, and (5) any employee
organization anv of whose members are
covered by such plan. For purposes of
this exemption, the terms "party in interest" and "disqualified person" shall
include such party in interest or disqualified person and any affiliates thereof, and the term "affilit'e" shall be defined in the same manner as that term
is defined in 29 CFR 2510.3-21(e) and 26
CFR 54.4975-9(e).
The effective date for exemptions I
through V above Is Jar unry 1, 1975.
Signed at Washington, D.C. this 24th
day of October, 1975.
JAM-Es D. HUTCHINSON.
Administrator of Pension and
Welfare Benefit Programs,
U.S. Department of Labor.
DON Ain C. ALM:ANDER.
Commissioner of Internal Revenue.
poo.75-29230 Fled 10 -38-75:8:45 Rini

FEDERAL REGISTER, VOL. 40, NO. 211—FRIDAY, OCTOBER 31, 1973