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Department of Labor Regulation §§2570.30--2570.52 published in the Federal Register August 10,
1990; corrected by the Federal Register April 12, 1991.
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This document contains a final regulation that describes the
procedures for filing and processing applications for exemptions from the
prohibited transaction provisions of the Employee Retirement Income Security Act
of 1974 (ERISA), the Internal Revenue Code of 1986 (the Code), and the Federal
Employees' Retirement System Act of 1986 (FERSA). At this time, the Department
is also removing an interim regulation which describes the exemption procedures
under Federal Employees' Retirement System Act of 1986 because such regulation is superseded by the final regulation
contained herein. The Secretary of Labor is authorized to grant exemptions from
the prohibited transaction provisions of ERISA, the Code and Federal Employees' Retirement System Act of 1986
and to
establish an exemption procedure to provide for such exemptions.
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The final
regulation updates the description of the Department of Labor's procedures to
reflect changes in the Department's exemption authority and to clarify the
procedures by providing a more comprehensive description of the prohibited
transaction exemption process.
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This regulation is effective September 10, 1990, and applies
to all exemption applications filed at any time on or after that date.
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Miriam Freund
U.S. Department of Labor
Pension and Welfare Benefits Administration
Office of Exemption Determinations
Washington, DC 20210
Tel 202.523.8194
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Susan Rees
U.S. Department of Labor
Office of the Solicitor
Plan Benefits
Security Division
Washington, DC 20210
Tel 202.523.9141
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Public reporting burden for this collection of
information is estimated to average 28.5 hours per response, including the time
for reviewing the instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing the collection of
information. Send comments regarding this burden estimate or any other aspect of
this collection of information, including suggestions for reducing the burden,
to Director, Office of Information Management, U.S. Department of Labor, 200
Constitution Avenue NW., Room N-1301, Washington, DC 20210; and to the Office of
Information and Regulatory Affairs, Attn: OMB Desk Officer for PWBA, Office of
Management and Budget, Room 3001, Washington, DC 20503.
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Section 406 of ERISA prohibits certain transactions between employee benefit
plans and "parties in interest" (as defined in section 3(14) of ERISA).
In addition, sections 406 and 407(a) of ERISA impose restrictions on plan
investments in "employer securities" (as defined in section 407(d)(1)
of ERISA) and "employer real property" (as defined in section
407(d)(2) of ERISA). Most of the transactions prohibited by section 406 of ERISA
are likewise prohibited by section 4975 of the Code, which imposes an excise tax
on those transactions to be paid by each " disqualified person"
(defined in section 4975(e)(2) of the Code in virtually the same manner as the
term "party in interest") who participates in the transactions.
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Both ERISA and the Code contain various statutory exemptions from the
prohibited transaction rules. In addition, section 408(a) of ERISA authorizes
the Secretary of Labor to grant administrative exemptions from the restrictions
of ERISA sections 406 and 407(a) while section 4975(c)(2) of the Code authorizes
the Secretary of the Treasury or his delegate to grant exemptions from the
prohibitions of Code section 4975(c)(1). Sections 408(a) of ERISA and 4975(c)(2)
of the Code direct the Secretary of Labor and the Secretary of the Treasury,
respectively, to establish procedures to carry out the purposes of these
sections.
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Under section 3003(b) of ERISA, the Secretary of Labor and the Secretary of
the Treasury are directed to consult and coordinate with each other with respect
to the establishment of rules applicable to the granting of exemptions from the
prohibited transaction restrictions of ERISA and the Code. Under section 3004 of
ERISA, moreover, the Secretaries are authorized to develop jointly rules
appropriate for the efficient administration of ERISA. Pursuant to these
provisions, the Secretaries jointly issued an exemption procedure on April 28,
1975 (ERISA Proc. 75-1, 40 FR 18471, also issued as Rev. Proc. 75-26, 1975-1 C.B.
722). Under these procedures, a person seeking an exemption under both section
408(a) of ERISA and section 4975(c)(2) of the Code was obliged to file an
exemption application with the Internal Revenue Service as well as with the
Department of Labor.
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Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978, effective
on December 31,1978), transferred the authority of the Secretary of the Treasury
to issue exemptions under section 4975 of the Code, with certain enumerated
exceptions, to the Secretary of Labor. As a result, the Secretary of Labor now
possesses authority under section 4975(c)(2) of the Code, as well as under
section 408(a) of ERISA, to issue individual and class exemption from the
prohibited transaction rules of ERISA and the Code. The Secretary has delegated
this authority, along with most of his other responsibilities under ERISA, to
the Assistant Secretary for Pension and Welfare Benefits. See Secretary of
Labor's Order 1-87, 52 FR 13139 (April 21, 1987).
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Federal Employees' Retirement System Act of 1986 also contains prohibited transaction rules that are applicable to
parties in interest with respect to the Federal Thrift Savings Fund established
by Federal Employees' Retirement System Act of 1986, and the Secretary of Labor is directed to prescribe, by regulation, a
procedure for granting administrative exemptions from certain of those
prohibited transactions. See 5 U.S.C. 84477(c)(3).
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On June 28, 1988, the Department published a proposed rule in the Federal
Register (53 FR 24422) updating ERISA Procedure 75-1 to reflect the changes made
by Reorganization Plan No. 4 and extending the procedure to applications for
exemption from the Federal Employees' Retirement System Act of 1986 prohibited transaction rules. In addition, the proposed
regulation codified various procedures developed by PWBA since the adoption of
ERISA Proc. 75-1. Formal adoption of those procedures will facilitate review of
exemption applications. These new procedures also fill in some of the gaps left
in ERISA Proc. 75-1, thereby providing a more detailed description both of the
steps to be taken by applicants in applying for exemptions and the steps
normally taken by the Department in processing such applications. Finally, the
proposed regulation modified some of the procedures described in ERISA Proc.
75-1 to better serve the needs of the administrative exemption program as
demonstrated by the Department's experience with the program over the previous
fourteen years. These amendments were intended to promote the prompt and fair
consideration of all exemption applications.
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The notice of proposed rulemaking gave interested persons an opportunity to
comment on the proposal. In Response, the Department received three letters of
comment regarding several aspects of the proposed regulation. The following
discussion summarizes the proposed regulation and the issues raised by the
commentators and explains the Department's reasons for adopting the provisions
of the final regulation.
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As explained in the notice of proposed rulemaking, the regulation establishes
new procedures to replace ERISA Proc. 75-1. These new procedures reflect changes
in the Department of Labor's exemption authority effected by Reorganization Plan
No. 4 of 1978. Thus, the procedures apply to all applications for exemption
which the Department has authority to issue under section 408(a) of ERISA, or,
as a result of Reorganization Plan No. 4, under section 4975(c)(2) of the Code.
The procedures reflect current practice under which the Department generally
treats any exemption application filed solely under section 408(a) of ERISA or
solely under section 4975(c)(2) of the Code as an application for exemption
filed under both of these sections if the application relates to a transaction
prohibited under corresponding provisions of both ERISA and the Code. The Grant
of an exemption by the Department in such instances protects disqualified
persons covered by the exemption from the excise taxes otherwise assessable
under section 4975(a) and (b) of the Code.
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However, the procedures do not apply to applications for exemption reserved
to the jurisdiction of the Secretary of the Treasury by Reorganization Plan No.
4. To ascertain the correct procedures for filing and processing applications
for these exemptions, applicants should consult the Internal Revenue Service.
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The Department has also concluded that it is appropriate to apply the
procedures provided here to exemption applications filed under Federal Employees' Retirement System Act of 1986, as well as
those filed under ERISA or the Code, as provided by Proposed §2570.30, which
has been adopted without change in the final regulation. Although the prohibited
transaction provisions of Federal Employees' Retirement System Act of 1986 and the scope of the Department's exemption
authority under Federal Employees' Retirement System Act of 1986 differ somewhat from that under ERISA and the Code,
administrative exemption matters under Federal Employees' Retirement System Act of 1986
are likely to involve many of the
same issues as are presented by similar matters involving private plans. Thus,
adopting uniform procedures should help assure uniform administration of the
exemption programs.
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On December 29, 1988, the Department published an interim regulation in the
Federal Register (29 CFR part 2585, 53 FR 52688) describing the procedures for
filing and processing applications for exemptions from the prohibited
transaction provisions of Federal Employees' Retirement System Act of 1986. For such applications, the interim regulation
adopted the procedures then currently followed (pursuant to ERISA Proc. 75-1) by
applicants for exemptions from the prohibited transaction provisions of ERISA
and the Code. The interim final regulation was effective commencing December 29,
1988 until the effective date of the final regulation contained herein for all
prohibited transaction exemption applications (under ERISA, the Code, and Federal Employees' Retirement System Act of 1986).(1)
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Section 2585.12 of the interim regulation provides that this regulation shall
expire on the effective date of the revised prohibited transaction exemption
procedure, published in proposed form on June 28, 1988, 53 FR 24422, and that
the Department will publish a document removing these interim regulations when
it adopts final regulations based on the published proposal. Accordingly, this
notice of final rulemaking removes the interim regulations as of September 10,
1990, the effective date of the final regulation contained herein.
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In regard to Federal Employees' Retirement System Act of 1986
exemption applications, the Department received a comment
relating to the adoption of ERISA class exemptions of Federal Employees' Retirement System Act of 1986
purposes. This
comment suggested that the final regulation clarify that the Department will
follow the procedure authorized under section 8477(c)(3)(E) of Federal Employees' Retirement System Act of 1986, which
permits the Secretary of Labor to determine that an exemption granted for any
class of fiduciaries or transactions under section 408(a) of ERISA shall
constitute an exemption for Federal Employees' Retirement System Act of 1986 purposes upon publication of notice in the
Federal Register without affording interested persons opportunities to present
their views (in writing or at a hearing).
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The procedure described in the preceding paragraph was not used in
conjunction with the Department's adoption for Federal Employees' Retirement System Act of 1986
purposes of a number of
specific class exemptions under ERISA (i.e., Prohibited Transaction Exemptions (PTE)
75-1, 78-19, 80-26, 80-51, 82-63, and 86-128). In that instance, the Department
published in the Federal Register both a notice of proposed adoption of class
exemptions under ERISA (53 FR 38105, September 29, 1988), which invited the
public to submit written comments or requests for a hearing on the proposed
adoption, and also a notice of final adoption of these class exemptions (PTE
T88-1, 53 FR 52838, December 29, 1988). In this regard, the Department notes
that, with respect to ERISA class exemptions which may be proposed in the future
and which may also be relevant under Federal Employees' Retirement System Act of 1986, the Department will solicit the view
of the Executive Director of the Federal Retirement Thrift Investment Board in
advance of the publication of the proposed exemption to determine whether such
exemption should also be proposed for Federal Employees' Retirement System Act of 1986
purposes.
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Also regarding Federal Employees' Retirement System Act of 1986
exemption applications, the Department received another
comment requesting clarification that the mere existence of routine audit
activity conducted by the Department pursuant to the requirements of section
8477(g) of Federal Employees' Retirement System Act of 1986(2) will not provide a basis for denial of, or failure to
consider, an application for exemption under Federal Employees' Retirement System Act of 1986. It is the view of the
Department that those audits conducted by the Department in carrying out its
responsibilities in connection with its regular program of compliance audits
under Federal Employees' Retirement System Act of 1986 section 8477(g) would not constitute an "investigation"
for purposes of §§2570.33(a)(2) and 2570.37(b) of the regulation(3) or an
"examination" for purposes of §2570.35(a)(7).(4)
The Department would
not, however, be precluded from denying, or failing to consider, an application
based on an investigation prompted by information arising as a result of such a
routine audit.
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Section 2570.31 of the proposed regulation defined the following terms for
purposes of the exemption procedures: affiliate, class exemption, Department,
exemption transaction, individual exemption, and party in interest. No comments
were received regarding these definitions which are adopted in the final
regulation as proposed. However, the Department has added to this section a
definition of the term "pooled fund" in response to a comment
requesting that a special rule be added to the final regulation regarding
information to be furnished in exemption applications relating to plans affected
by an exemption transaction undertaken by a pooled investment vehicle. (This
comment is discussed in more detail below.)
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Section 2570.32(a) of the proposed regulation provided that exemption
proceedings may be initiated by the Department either on its own motion or upon
the application of: (1) Any party in interest to a plan which is or may be a
party to the exemption transaction, (2) any plan which is a party to the
exemption transaction, or (3) an association or organization representing
parties in interest who may be parties to an exemption transaction covering a
class of parties in interest or a class of transactions.
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One of the comments received recommended modifying this paragraph of the
regulation to permit an exemption application to be filed by any fiduciary or
prospective fiduciary with respect to plan assets under such fiduciary's
management or control, regardless of whether such fiduciary either represents a
specific plan with respect to the exemption application or would be a party to
the exemption transaction. The commentator clarified his comment by explaining
that he intended this category of applicants to cover prospective fiduciaries,
such as persons creating and/or managing a new investment vehicle in which plans
are expected to participate if the requested exemption is granted, but in which
no plans participate at the time the exemption application is filed. The
commentator noted that in the past the Department has granted individual
exemptions to institutional investment managers in connection with their
investment management of individual plans' investment accounts or pooled
investment funds in which several unidentified plans may participate.
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In the Department's view, the reference in proposed §2570.32(a)(1) to
"any party in interest to a plan who is or may be a party to the exemption
transaction" includes the prospective fiduciaries mentioned by the
commentator. Therefore, §2570.32(a) is adopted in the final regulation without
change.
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Section 2570.32(b) and (c) of the proposed regulation set forth simplified
rules relating to representation of applicants by third parties. No comments
were received regarding these paragraphs, which are adopted in the final
regulation without change.
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Section 2570.33(a) of the proposed regulation described the circumstances
under which the Department will not ordinarily consider the merits of an
exemption application. Thus, this paragraph provided that the Department will
not ordinarily consider an incomplete application. In this regard, the
Department emphasizes that applicants should not file exemption applications
until they have compiled all the information required by §2570.34 and, if
applicable, §2570.35, and can submit this information in an organized and
comprehensive fashion together with all necessary supporting documents and
statements. In addition, the proposal made it clear that the Department
ordinarily will not consider applications that involve a transaction, or a party
in interest with respect to such transaction, that is the subject of an ERISA
enforcement action or investigation. In certain cases, however, the Department
may exercise its discretion to consider exemption applications in these
categories where, for example, deficiencies in the exemption application are
merely technical, or where an enforcement matter is clearly unrelated to the
exemption transaction.
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One comment was received specifically regarding investigations, and it is
discussed above under the heading "Applications for Exemption under Federal Employees' Retirement System Act of 1986."
In addition, the Department has amended §2570.33(a)(2) (relating to certain
investigations and enforcement actions) to conform to a similar revision to §2570.35(a)(7)
(discussed below) made in response to two other comments received regarding the
proposed requirement to include information in an application concerning certain
investigations, examinations, litigation, or continuing controversy involving
specified Federal agencies with respect to any plan or party in interest
involved in the exemption transaction. The effect of these amendments is to
expand the proposed regulation in order to broaden the scope of exemption
applications which the Department will ordinarily consider.
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No comments were received on paragraphs (b) and (c) of proposed §2570.33,
which are adopted without change in the final regulation. These paragraphs
relate to the Department's written explanation of an applicant whose exemption
application the Department has decided not to consider, and to applications for
individual exemption relating to transaction(s) covered by a class exemption
under consideration by the Department.
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As previously noted in the proposed regulation, the Department's experience
to date with the administrative exemption program suggests that the program's
efficiency could be increased and applicants can receive more timely treatment
of their applications for exemption if the quality of exemption applications
filed were improved. In the past, applications have been incomplete, have
omitted or misstated facts or legal analyses needed to justify requests for
exemptive relief, and in some cases have been so poorly drafted that the details
of the transactions for which exemptive relief is sought ("exemption
transactions") are unclear. The time and effort required to deal with such
deficient applications and to obtain accurate and complete information about
exemption transactions have contributed to processing delays.
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Moreover, in many
exemption applications, the discussion of the substantive basis for the
exemption does not take adequate account of positions adopted by the Department
with respect to other similar applications.
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The proposed regulation attempted to address these problems in a number of
ways. First, the proposal required that applicants provided more complete
information in their applications about exemption transactions and about the
plans and the parties in interest involved in those transactions. The
Department's experience suggests that this additional information is very
helpful, and often essential, for a complete understanding of the exemption
transaction and of the context surrounding it, and that the omission of such
additional information in exemption applications will delay review of these
applications on their merits.
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For the same reason, the proposed regulation required filing with the
exemption application copies of the relevant portions of documents bearing on
transactions for which individual exemptions are sought. Such filing will avoid
delays in the evaluation of exemption applications pending receipt of relevant
documents. By filing comprehensive applications with necessary supporting
documentation, applicants can do much to facilitate the Department's review of
requested exemptions and to expedite the exemption process as a whole.
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To further expedite the exemption process the proposed regulation required
that an applicant include with his application a statement explaining why the
requested exemption satisfies requirements set forth in sections 408(a) of ERISA
and 4975(c)(2) of the Code and 5 U.S.C. 8477(c)(3)(C) that an exemption be:
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Administratively feasible;
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In the interests of the plan and of its participants and beneficiaries;
and
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Protective of the rights of the plan's participants and beneficiaries.
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This requirement is not new. Under ERISA Proc. 75-1, applicants have been
required to include with their applications statements explaining why a
requested exemption satisfies the statutory prerequisites for an exemption. Too
often, however, applicants have attempted to satisfy this requirement with
generalizations and perfunctory assurances about the benefits to be reaped by
plans and their participants and beneficiaries from the proposed exemption.
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The Department will not seek out reasons to grant an exemption that has not
been adequately justified by an applicant. Indeed, the Department considers that
it is the responsibility of applicants to demonstrate clearly that exemptions
they are requesting meet statutory criteria. Accordingly, under both the
proposed and the final regulation, applicants are expected to review the
statutory criteria for granting administrative exemptions and explain with as
much specificity as possible why a requested exemption would pose no
administrative problems, what benefits affected plans and their participants and
beneficiaries can expect to receive from it, and what conditions would be
attached to protect the rights of participants and beneficiaries of affected
plans.(5)
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Under ERISA Proc. 75-1, applicants have been given the option, but have not
been required, to submit a draft of the proposed exemption. Both the proposed
and the final regulation preserve this option. However, while not requiring the
submission of a draft of the proposed exemption, the Department recommends that
applicants include in their exemption applications draft language which defines
the scope of the requested exemption, including the specific conditions under
which the requested exemption would apply. A draft which explains the exemption
requested in a clear and concise manner and focuses on what the applicant
considers to be the essential features of the exemption transaction and the
critical safeguards supporting the requested relief is likely to facilitate the
process of review. Obviously, the degree of detail necessary to describe the
proposed exemption adequately will vary depending on the complexity of the
transaction and the kind of relief requested.
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Section 2570.34 of the proposed regulation listed the information that is
required in every exemption application, whether it be an application for
individual or class exemption. In addition, the information specified in §2570.35
of the regulation must be included in applications for individual exemptions.
Some specific items of information are discussed below.
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Section 2570-34(a)(3) of the proposed regulation required each exemption
application to disclose whether the same person will represent both the plan and
the parties in interest involved in an exemption transaction in matters relating
to the application. The proposal noted that such shared representation may raise
questions under the exclusive purpose and prudence requirements of sections
403(c) and 404(a) of ERISA and under the prohibited transaction provisions of
section 406 of ERISA and section 4975(c)(1) of the Code. No comments have been
received regarding this subparagraph, which is adopted as proposed.
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Section 2570.34(b)(5)(iii) of the proposed regulation required as declaration
under penalty of perjury to accompany specialized statements from third-party
experts submitted to support an exemption application, such as appraisals,
analyses of market conditions or opinions of independent fiduciaries.
Specifically, the proposal required a declaration under penalty of perjury, that
to the best of the expert's knowledge and belief, the representations made in
the specialized statement are true and correct. This declaration was to be dated
and signed by the expert who prepared the statement.
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One of the comments received urged deletion of this requirement and expressed
concern that it would cause additional expense to applicants because new
third-party statements would be required once the appraiser, engineer, financial
specialist, or other expert became aware of their intended use as part of an
exemption application. The commentator advised subsequently that such experts
either may be reluctant to provide any sort of attestation because of unknown
liabilities which may arise by using the expert's report as part of an exemption
application, or may seek an additional, and perhaps substantial, fee for
furnishing an attestation due to the unknown liabilities.
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In this regard, the Department notes that, with respect to any matter within
the jurisdiction of any department or agency of the United States, it is a
crime, punishable by a fine of up to $10,000 and/or imprisonment of up to five
years, for anyone knowingly and willfully to falsify, conceal, or cover up by
any trick, scheme or devise a material fact; to make any false, fictitious, of
fraudulent statements or representations; or to make or use any false writing or
document knowing the same contains any false, fictitious, or fraudulent
statement or entry (18 U.S.C. §1001). It is the view of the Department that
this provision applies to applicants for exemptions under ERISA, the Code, or Federal Employees' Retirement System Act of 1986, to fiduciaries (independent or otherwise) representing the plan in an
exemption transaction, and to third-party experts who prepare statements or
reports that such experts know will be included in exemption applications.
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Nevertheless, the Department recognizes that third-party experts such as
appraisers, bankers, financial analysts, and other specialized consultants
usually do not function as fiduciaries with respect to a plan if such experts'
authority, responsibility, or contact with respect to the plan is limited to
providing an opinion which may be included in an exemption application and which
will be considered by plan fiduciaries who will decide what, if any, action they
will take on behalf of the plan based upon such opinion. The Department believes
that such experts need not be held to the same degree of accountability
regarding exemption application covering transactions where a plan fiduciary has
the authority and responsibility to make decisions on behalf of a plan. Thus,
the Department has decided to modify proposed §2570.34(b)(5)(iii) to provide
that a statement of consent, rather than a declaration under penalty of perjury,
is required from each such expert which acknowledges that his or her statement
is being submitted to the Department as part of an exemption application. The
Department believes that such a consent statement from a third-party expert will
not require an applicant to obtain a new report from the expert because the
expert's consent statement may refer to his or her previously issued report.
(However, the Department may require an updated report if any case if the
substantive information contained in a report submitted with an exemption
application is out of date.)
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Conversely, where an independent fiduciary represents the plan in an
exemption transaction, that fiduciary is subject to all of the responsibilities
imposed by part 4 of subtitle B of title I of ERISA. None of the comments
received questioned the need for such a fiduciary to provide the declaration
under penalty of perjury required under the proposed regulation, and the
Department has decided to retain this proposed requirement for such plan
fiduciaries in the final regulation. As a result, the Department has modified §2570.34(b)(5)(ii)
and has added §2570.34(b)(5)(iv) to clarify that a declaration is required for
such plan fiduciaries.
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One comment suggested that §2570.35 of the proposed regulation be modified
to provide a special rule regarding information to be included in an application
for an individual exemption involving a pooled investment fund, such as a pooled
separate account maintained by an insurance company or a collective investment
fund maintained by another financial institution. The commentator pointed out
that, as proposed, §2570.35 would require information to be submitted regarding
each plan participating in a pooled investment fund, resulting in the submission
of an overwhelming volume of information unrelated to the exemption transaction.
However, the commentator recognized that information regarding certain plans may
be relevant to the exemption application in view of the potential for conflicts
of interest involving such plans. Such plans would include any plan maintained
for employees of the sponsor or other fiduciary of the pooled investment fund,
and a plan whose participation in the pooled fund exceeded a specified
percentage of the total fund assets.
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The Department agrees with this comment and, accordingly, has added a new
paragraph (c) to §2570.35, which contains a special rule for applications for
individual exemptions involving pooled funds [as defined in §2570.31(g)].
Subparagraph (1) of §2570.35(c) excepts such applications from including
certain information otherwise required relating to among other things:
reportable events under section 4043 of ERISA, notice of intent to terminate a
plan (section 4041 of ERISA), the number of participants and beneficiaries of
each plan participating in the pooled fund, and the percentage of each such
plan's assets involved in the exemption transaction.
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Subparagraph (2) of the special rule provides that certain information
otherwise required by §2570.35(a) and (b) of the regulation must be furnished
by reference to the pooled fund rather than the plans participating in such
fund. This information pertains to: Identifying information; any prior
violations of the Code's exclusive benefit rule or of the prohibited transaction
provisions of the Code, ERISA or Federal Employees' Retirement System Act of 1986; any prior applications for exemption
from such prohibited transaction provisions; any lawsuits or criminal actions
regarding conduct with respect to any employee plan; any criminal convictions
described in section 411 of ERISA; any investigation or continuing controversy
with specified Federal agencies regarding compliance with ERISA, Code provisions
relating to employee plans, or Federal Employees' Retirement System Act of 1986 provisions relating to the Federal Thrift
Savings Fund; whether the exemption transaction has been consummated and, if so,
certain related information regarding correction of the prohibited transaction
and payment of excise taxes; the identification of persons with investment
discretion over any assets involved in the exemption transaction and each such
person's relationship to the parties in interest involved in the exemption
transaction; investments involving certain parties in interest; the fair market
value of the pooled fund; the identity of the person who will pay the costs of
the exemption application, notifying interested persons, and the fee of any
independent fiduciary involved in the exemption transaction; and an analysis of
the facts relevant to the exemption transaction as reflected in documents
submitted with the application. The pooled fund, rather than participating
plans, must also furnish copies of all relevant documents, including, for
example, the most recent financial statements of the pooled fund.
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Subparagraph (3) of the special rule requires information to be furnished
with pooled fund exemption applications with respect to: the aggregate number of
plans expected to participate in the pooled fund, and the limits (if any)
imposed by the pooled fund on the amount or percentage of each participating
plan's assets that may be invested in the pooled fund.
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Subparagraph (4) of §2570.35(c) contains additional requirements for
applications for individual exemptions involving pooled funds. These
requirements apply to plans whose investments in the pooled fund represent more
than 20% of the pooled fund's total assets(6) and those plans covering employees
of the pooled fund's sponsor, and other fiduciaries with discretion over pooled
fund assets. The Department believes that additional information is warranted in
those situations where the potential for decision making that may inure to the
benefit of a fiduciary or other party in interest is increased. For each of
these plans, the additional requirements provide for the furnishing of certain
individual plan information described in §2570.35(a), in addition to the
information required under §2570.35(c)(2) and (c)(3). The Department believes
this information is necessary for its determination as to whether sufficient
protections are incorporated into the exemption transaction.
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The Department further notes that the decision by the fiduciaries of certain
plans to invest in a pooled fund may involve a separate prohibited transaction,
apart from any prohibited transaction which may be entered into by the pooled
fund itself. In this regard, the Department notes that the information required
to be submitted on behalf of such plans is to be provided in accordance with the
general rule contained in §2570.35, rather than the special rule for pooled
funds.
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Finally, the Department believes that the special rule for pooled funds is
less burdensome to applicants than the rules set forth in the proposed
regulation. As noted by a commentator, the proposed regulation would have
required the submission of voluminous amounts of material, as information would
have to be submitted on behalf of each plan investing in a pooled fund. The
final regulation limits the amount of material to be submitted since it requires
only information relating to the pooled fund and, where applicable, certain
plans investing in the pooled fund. In addition, the Department believes that
its ability to analyze and process applications for exemption involving pooled
funds will be enhanced by this special rule. In this regard, the Department
believes that the final regulation eliminates a significant amount of material
that otherwise would have been required.
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Sections 2570.35(a)(5), (6), and (7) of the proposed regulation required
exemption applications to disclose information regarding whether the applicant
or any of the parties to the exemption transaction is or has been, within a
specified number of years past, a defendant in any lawsuit or criminal action
concerning conduct as a fiduciary or other party in interest with respect to any
employee benefit plan (§2570.35(a)(5)), convicted of a crime described in
section 411 of ERISA (§2570.35(a)(6)), or under investigation or examination or
engaged in litigation or a continuing controversy with certain Federal agencies
(§2570.35(a)(7)). Proposed §2570.35(a)(7) also required disclosure of whether
any plan affected by the exemption transaction has been under such
investigation, examination, litigation, or continuing controversy, and further
required the applicant to submit copies of all correspondence with the specified
Federal agencies regarding substantive issues involved in such investigations,
etc.
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Two of the comments urged deletion of the disclosure requirements of proposed
§2570.35(a)(5) and (7) on the basis that such disclosure is difficult, costly,
and almost always irrelevant to the exemption transaction.
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The Department continues to believe that the proposed disclosure is relevant
to the exemption transaction. With regard to §2570.35(a)(5) (relating to
lawsuits or certain criminal actions), the Department views the disclosure
required as directly concerning the conduct of the applicant and other parties
in interest participating in the exemption transaction. The Department believes
that such information is necessary in evaluating the credibility and integrity
of such parties, some of whom may possess substantial discretion regarding the
exemption transaction or may make representation upon which the Department must
rely in determining whether the statutory criteria for an exemption have been
satisfied. In addition, the proposed disclosure assists the Department in
ensuring that the exemption transaction contains appropriate safeguards.
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Further, the Department does not agree that the disclosure required by §2570.35(a)(5)
imposes any significant burdens on applicants. The Department believes that
prudent fiduciaries would, in the normal course of carrying out their
responsibilities, ascertain such information about the parties they intend to
deal with in investment and other plan transactions. However, the Department has
determined that it would be appropriate to modify proposed §2570.35(a)(5) in
the final regulations to limit disclosure to the applicant or any of the parties
in interest involved in the exemption transaction.
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Regarding the disclosure required by proposed §2570.35(a)(7) (relating to
investigations, examinations, litigation, and continuing controversy by or with
the specified Federal agencies), the Department believes that such information
is necessary to ensure that the Debarment's exemption activities do not
compromise its enforcement efforts. Although the Department is most interested
in information involving investigations, etc. that are directly related to the
subject exemption transactions and the participating parties, the Department
believes, nevertheless, that its exemption staff, and not the applicants, should
determine which investigations, examinations, etc. are relevant.
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One of the comments further suggested that it is inappropriate to require
applicants to disclose matters which have resulted in no formal allegations of
violations of law. The Department notes, however, that the affected parties may
include, as part of their disclosure, any qualifications or explanations they
deem appropriate for consideration by the Department, including information on
the final disposition of any matter.
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Another commentator suggested that disclosure under §2570.35(a)(7) be
limited to a reference to the investigation or litigation without requiring
submission of copies of "all correspondence" involved in the
investigation. In this regard, the Department notes that the proposed regulation
did not require submission of copies of all correspondence, but only of
correspondence relating to the substantive issues involved in the investigation,
examination, litigation, or controversy. Specifically, the Department intended
to require submission of copies of correspondence containing only that
information directly relevant to determining whether or not the requested
exemption should be granted. After considering the comment, the Department has
modified §2570.35(a)(7) to clarify that the phrase "substantive
issues" refers to issues related to compliance with the provisions of parts
1 and 4 of subtitle B of title I of ERISA (reporting and disclosure (part 1) and
fiduciary responsibility (part 4)), section 4975 of the Code, or sections 8477
or 8478 of Federal Employees' Retirement System Act of 1986 (fiduciary responsibilities, liability and penalties (section
8477) and bonding (section 8478)). Copies of correspondence relating to any of
these substantive issues is necessary in order for the Department to determine
the effect the requested exemption may have on the Department's enforcement
activities in each case under investigation, examination, etc.
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One of the comments noted that proposed §2570.35(a)(5), (6), and (7)
required the disclosure of information regarding any parties to the exemption
transaction and suggested limiting the required disclosure to fiduciaries
authorizing the transaction and any parties in interest involved in the
exemption transaction. This comment pointed out that investment transactions may
involve multiple parties, many of whom are neither plan fiduciaries nor parties
in interest. After due consideration, the Department agrees with this suggestion
and, accordingly, has modified §2570.35(a)(5), (6), and (7) to limit the
required disclosure to any parties in interest involved in the exemption
transaction. The Department notes that this group includes, among others, the
fiduciary authorizing the exemption transaction.
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See the heading "Applications for Exemption under Federal Employees' Retirement System Act of 1986," above,
regarding modification to proposed §2570.35(a)(7) as applicable to the Federal
Thrift Savings Plan established by Federal Employees' Retirement System Act of 1986.
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Proposed §2570.35(a)(16) required an application for individual exemption to
disclose information regarding any plan investments in loans to, property leased
to, or securities issued by, any party in interest involved in the exemption
transaction. One of the comments suggested deletion of this requirement due to
the difficulty of identifying such investments in view of the
"look-through" rule contained in the Department's plan asset
regulation (29 CFR 2510.3-101). This comment suggested that the proposed
disclosure may involve many transactions, by an entity whose underlying assets
include "plan assets," which are totally unrelated to the exemption
transaction. The comment further indicated that this disclosure would be
burdensome for exemption transactions involving numerous parties in interest,
such as those involving pooled funds.
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The Department agrees that, for exemption applications involving pooled
funds, furnishing the proposed disclosure could be burdensome inasmuch as such
applications generally do not relate to specific plans. Accordingly, the
Department has adopted a special rule for applications for individual exemption
involving pooled funds, discussed above (under the heading "Pooled
Funds"), which limits this type of disclosure to the pooled fund and to
certain plans participating therein.
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Regarding exemption applications involving specific individual plans, it
appears to the Department that the information to be disclosed under proposed §2570.35(a)(16)
must be maintained, in any event, to satisfy the annual reporting requirements
of section 103 of ERISA, as well as the recordkeeping requirements of section
107. Therefore, the Department believes that this disclosure requirement should
not impose any additional burdens on the applicant. The information to be
disclosed will enable the Department to determine whether the exemption
transaction, in conjunction with other plan investments involving parties in
interest, would unduly concentrate the plan's assets in such investments so as
to raise questions under the fiduciary responsibility provisions of section 404
of ERISA. For these reasons, the Department has decided to adopt §2570.35(a)(16)
as proposed, subject to the special rule for applications for individual
exemption involving pooled funds in §2570.35(c).
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Proposed §2570.35(a)(18) and (19) required the exemption application to
identify the person who will bear the costs of the exemption application, of
notifying interested persons, and of the fee charged by any independent
fiduciary involved in the exemption transaction. The preamble to the proposed
regulation noted that a plan's payment of the expenses associated with the
filing or processing of an exemption application raises questions under the
fiduciary responsibility and the prohibited transaction restrictions to the
extent that any party in interest benefits from the transaction for which an
exemption is sought (see section 406(a)(1)(D) of ERISA).
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One of the commentators requested that the Department provide a more specific
discussion of when it believes such questions will be raised. The comment states
that, in many cases, it is appropriate for the plan to pay the expenses
attributable to obtaining an exemption, and that an independent fiduciary's fees
are generally paid by the plan receiving such fiduciary's services in order to
ensure that such fiduciary conducts its activities in a totally independent
manner and without any potential influence from persons other than the plan
paying such fees.
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The proposed disclosure of who pays the fees for an exemption application is
intended to enable the Department to review the appropriateness of such payment
by a plan in the context of a specific exemption request. Such disclosure is
also intended to aid the exemption staff in evaluating whether the economic
merits of the transaction, taking into account the costs attributable to the
exemption application, support a finding that the proposed transaction is in the
interests of the plan and its participants and beneficiaries. While the
Department agrees that there may be certain instances in which it would be
appropriate for a plan to pay all or part of the costs attendant with obtaining
an exemption, such as where it is necessary to ensure the independence of an
independent fiduciary or third-party expert, the Department believes that the
propriety of such payments by a plan is an inherently factual determination
which can be made only on a case-by-case basis.
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In this regard, the Department notes that, when evaluating the propriety of
the payment by a plan of certain expenses, plan fiduciaries must first consider
the general fiduciary responsibility provisions of sections 403 and 404 of ERISA.
Section 403(c)(1) provides, in part, that the assets of an employee benefit plan
shall never inure to the benefit of any employer and shall be held for the
exclusive purpose of providing benefits to participants and beneficiaries and
defraying reasonable expenses of administering the plan. Similarly, section
404(a)(1)(A) requires, in part, that a fiduciary of a plan discharge his duties
for the exclusive purpose of providing benefits to participants and their
beneficiaries and defraying reasonable expenses of administering the plan. Thus,
a payment that is not a distribution of benefits to participants or
beneficiaries of a plan would not be consistent with the requirements of
sections 403(c)(1) and 404(a)(1)(A) unless it was used to defray a reasonable
expense of administering the plan.
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In addition, section 406(a)(1)(D) of ERISA prohibits a fiduciary with respect
to a plan from causing the plan to engage in a transaction if he knows or should
know that such transaction constitutes a direct or indirect transfer to, or use
by or for the benefit of, a party in interest of any assets of the plan. It is
the responsibility of appropriate plan fiduciaries to determine whether a
particular expense is a reasonable administrative expense under sections
403(c)(1) and 404(a)(1)(A) of ERISA or whether plan payment of an expense would
constitute a prohibited use of plan assets for the benefit of a party in
interest under section 406(a)(1)(D) of ERISA.
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Section 2570.35(b)(1) of the proposed regulation required each application
for individual exemption to include true copies of all documents bearing on the
exemption transaction, such as contracts, deeds, agreements, instruments, and
relevant portions of plan documents, including trust agreements.
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One comment objected to this requirement on the grounds that having to
assemble the required documents is time consuming, costly, and unnecessary if
the exemption application properly describes all pertinent plan provisions and
other documents in sufficient detail to allow the Department to evaluate the
merits of the exemption transaction. In this regard, the Department notes that
the documents with respect to which copies are requested are all documents which
would be readily available to the parties to the exemption transaction.
Accordingly, the Department does not believe that there would be a significant
burden in either compiling the documents or in transmitting copies to the
Department. Further, the Department notes that it is not uncommon for
representations contained in an exemption application to be inconsistent with
the provisions of the governing documents or for the latter to contain
provisions with respect to which clarifications or other representations are
needed in order for the requested exemption to be proposed. On the basis of the
Department's experience with exemptions, scrutiny of the relevant documents is,
in the large majority of cases, a necessary prerequisite to a complete
understanding of the exemption transaction and the implications for affected
plans and parties in interest. Moreover, in the Department's experience, the
inclusion of copies of the requested documents, as part of the exemption
application, has expedited the processing of the requested exemption.
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For these reasons, the final regulation adopts proposed §2570.35(b)(1)
without change. However, the Department wishes to clarify three points regarding
this requirement. First, for exemption transactions in which identical documents
will be executed by more than one party, the submission of only one specimen
document will satisfy the requirements of this paragraph.
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Second, in the case of exemption transactions which are proposed, copies of
the documents relating to the proposed transaction need not be executed or dated
when they are submitted with the exemption application if the documents are
complete in every other respect. In this regard, the Department strongly
encourages requesting an administrative exemption before entering into a
prohibited transaction because of the ability to incorporate all of the
necessary safeguards into the transaction. By contrast, such safeguards cannot
be put into place after a prohibited transaction has occurred.
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Third, only copies of documents need be submitted. The Department may not be
able to return original documents and therefore, urges that only true copies of
documents be submitted.
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Although no comments were received regarding this section, which is adopted
as proposed, the Department wishes to advise applicants that including the room
number of the Division of Exemptions in the address will generally expedite its
delivery. The current room number of the Division of Exemptions, Room N-5671, is
not included in the regulation to avoid the need to amend the regulation every
time the room number of the Division changes.
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The proposed regulation continued the requirement established in ERISA Proc.
75-1 that an applicant promptly notify the Division of Exemptions if he
discovers that any material fact or representation contained in his application,
or in any supporting documents or testimony, was inaccurate or if any such fact
or representation changes. However, the proposed regulation added the
requirement that an applicant notify the Division of Exemptions when anything
occurs that may affect the continuing accuracy of such facts or representations.
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Two comments received indicated confusion as to the expiration date of the
duty to update information submitted as part of an exemption application.
Accordingly, the final regulation clarifies §2570.37(a) and (b) to indicate
that such duty applies only during the pendency of the exemption application and
expires after the exemption is granted.
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The Department also wishes to clarify
that, in §2570.37(a), the phrase "continuing accuracy of any such fact or
representation" refers to future events or changes known before the
exemption is granted that will render inaccurate facts stated or representations
made before such grant. The Department also wishes to note that exemptions are
granted only to transactions as described. Therefore, if an exemption is granted
and the transaction is not as described in some material aspect, the exemption
does not take effect or protect parties in interest from liability for the
transaction. See §2570.49 of the regulation.
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Although ERISA Proc. 75-1 established no procedures to be followed by the
Department in denying exemption applications or by applicants in responding to
such denials, the Department has developed procedures over the years to notify
applicants first to the tentative and later, of the final denial of their
applications. In large part, the proposed regulation codified these procedures.
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Under the proposed regulation, the Department may decide to deny an exemption
request at any one of a number of stages in the review process. For example, it
may decide after its initial review of an application that the requested
exemption does not satisfy the statutory criteria set forth in sections 408(a)
of ERISA and 4975(c)(2) of the Code. In that event, the Department will send a
tentative denial letter to the applicant pursuant to §2570.38 of the
regulation. That letter will inform the applicant of the Department's tentative
decision to deny the application and of the reasons therefor. Under §2570.38,
an applicant has 20 days from the date of this letter to request a conference
with the Department and/or to notify the Department of his intent to submit
additional information in writing to support the application. If the Department
receives no request for a conference and no notice of intent to submit
additional information within that time, it will send the applicant a final
denial letter pursuant to §2570.41 of the regulation.
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One of the comments received suggested that: (1) The final regulation should
clarify that the Department's exemption staff may request applicants to provide
additional information before a tentative denial letter is issued, and (2)
rather than a "short statement" of the reasons for a tentative denial,
the tentative denial letter should provide a detailed explanation of the basis
for the Department's decision. Regarding the first suggestion, the comment
indicates that it is unreasonable to expect an applicant to anticipate, when the
exemption application is filed, all of the material which the Department may
find pertinent to its consideration of an exemption application.
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As stated above (under the heading "Exemption Application
Contents--General Information"), the Department's view is that the
applicant bears the responsibility to demonstrate clearly that the requested
exemptions meet the statutory criteria. While nothing in the proposed regulation
would preclude the Department's exemption staff from exercising its discretion
and contacting an applicant for a clarification or additional information, the
Department anticipates that such contact will be limited to exemption
applications which, upon initial review, meet the essential requirements of the
regulation. It is not administratively feasible to expect the Department's
exemption staff to solicit information in every case. Moreover, such a procedure
would, in effect, shift the burden of developing the exemption application from
the applicant to the exemption staff.
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Similarly, the imposition of a requirement that tentative denial letters
detail all the reasons for the denial would, in effect, shift the analytical
burden from the applicant to the Department. As with the circumstances under
which additional information is solicited from applicants, the Department
believes that the degree of detail required for a tentative denial letter should
be left to the discretion of the exemption staff. The Department believes that a
general statement of the reasons for a tentative denial is sufficient inasmuch
as the issuance of a tentative denial letter does not terminate the exemption
proceedings. Rather, the tentative denial letter offers the applicant the
opportunity to have a conference and/or to submit additional information for
consideration. In addition, a requirement to issue a comprehensive and detailed
tentative denial letter in most cases would significantly increase the time
required to conclude a final action.
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For these reasons, the Department has decided to adopt proposed §2570.38
without change.
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Section 2570.39 of the proposed regulation provided that if an applicant
wishes to submit additional information in support of a tentative denied
exemption application, he may notify the Department of his intention to do so
within the prescribed 20-day period either by telephone or by letter. After
issuing such a notice, an applicant has 30 days from the date of the notice to
furnish additional information to the Department. If an applicant notifies the
Department of his intent to submit additional information but requests no
conference, and subsequently fails to submit the promised information within the
prescribed 30-day period, the Department will issue the applicant a final denial
letter pursuant to §2570.41 of the regulation. However, an applicant who
realizes that he will be unable to submit his additional information within the
allotted time may avoid receiving a final denial letter by withdrawing his
application before the end of the 30-day period pursuant to §2570.44.
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As an alternative to withdrawing his application, an applicant who, for
reasons beyond his control, is unable to meet the 30-day deadline may request an
extension of time for filing additional information, pursuant to §2570.39 of
the regulation. However, the Department will grant such extensions of time only
in unusual circumstances.
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No comments were received on this section of the proposed regulation which is
adopted without change in the final regulation.
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Section 2570.40 of the proposed regulation described the procedures regarding
conferences on exemption applications which the Department has tentatively
decided to deny. Under this proposed section, an applicant is entitled to only
one conference with respect to any exemption application, and is also given 20
days after the date of any conference to submit to the Department in writing any
additional data or arguments discussed at the conference but not previously or
adequately presented in writing. Under the proposal, an applicant is deemed to
have waived his right to a conference if he fails, without good cause, to appear
for a scheduled conference or to schedule a conference for any of the times
proposed by the Department within the 45-day period following the receipt of his
request for a conference.
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Proposed §2570.40 is adopted without change in the final regulation. The
only comment received regarding this proposed section suggested that the
Department continue its practice of informally consulting with applicants on
exemption applications in addition to holding conferences. In this regard, the
Department will continue to informally contact applicants as it deems
appropriate.
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Proposed §2570.41 is adopted without change in the final regulation. No
comments were received on this section which specifies the circumstances in
which the Department may issue a final denial letter denying a requested
exemption. In most cases, the same procedure will also be followed in denying
exemptions that the Department has already proposed through publication of a
notice of proposed exemption in the Federal Register. However, in cases where
the Department holds a hearing on an exemption, §2570.41(a)(3) of the proposed
regulation allowed the Department to issue a final denial letter without first
issuing a tentative denial letter and without providing the applicant with the
opportunity for a conference. In the Department's view, where a hearing on a
proposed exemption is conducted, the applicant and other proponents of the
exemption have adequate opportunity to present their views and other evidence in
support of the exemption.
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The proposed regulation did not significantly alter the procedures
established by ERISA Proc. 75-1 for granting an exemption. Under §2570.42 of
the regulation, the Department will publish a notice of proposed exemption in
the Federal Register if, after reviewing an exemption application and any
additional information submitted by an applicant, the Department tentatively
concludes that the requested exemption satisfies the statutory criteria for the
granting of an exemption and that the requested exemption is otherwise
appropriate. This proposed section also described the contents of the notice of
proposed exemption.
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No comments were received on proposed §2570.42, which is adopted without
change in the final regulation.
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Like ERISA Proc. 75-1, the proposed regulation required applicants to provide
notice to interested persons in the event that the Department decides to propose
the exemption. Section 2570.34 of the proposal required an applicant to submit
with his application a description of the interested persons to whom notice will
be provided and a description of the manner in which the applicant proposed to
provide notice. That section also required an applicant to provide an estimate
of the time he will need to furnish notice to interested persons following
publication of a notice of proposed exemption.
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Section 2570.43 of the proposed regulation provided guidance on methods an
applicant may use to notify interested persons of a proposed exemption and
indicated what must be included in the notice. In addition to the Notice of
Proposed Exemption published in the Federal Register, the applicant must include
in the notification to interested persons a supplemental statement. Section
2570.43 also stated that, once the Department has published a notice of proposed
exemption, the applicant must notify the interested persons described in his
application in the manner indicated in the application unless the Department has
informed the applicant beforehand that it considers the method of notification
described in the application to be inadequate. Where the Department has so
informed an applicant, it will also secure from the applicant an agreement to
provide notice in the time and manner and to the persons designated by the
Department. After furnishing notification, an applicant must provide the
Department with a declaration under penalty of perjury certifying that notice
was given to the persons and in the manner and time specified in his application
or the superseding agreement with the Department.
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One of the comments received concerning notification requested clarification
that, in the case of a pooled fund, the notification requirement would be
satisfied if the notice to interested persons is furnished to the appropriate
fiduciary of each of the plans participating in the pooled fund, but not to all
participants and beneficiaries of such plans.
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In the Department's view, the individuals or organizations that will
constitute "interested persons" depends on the nature of the exemption
being requested. For this reason, the proposed regulation did not attempt to
delineate the term "interested persons" for purposes of the
notification requirements of §2570.43. As previously noted, the applicant is
required to include, as part of the exemption application, a description of the
interested persons to whom the applicant intends to provide notice
(§2570.34(b)(2)(i)).
If the Department finds that either the method of providing the notice or the
persons to whom the applicant proposes to provide notice is inadequate, the
Department will, pursuant to §2570.43, secure an agreement from the applicant
on the appropriate method of providing the notice and/or the scope of the notice
to be provided. The Department believes that this approach provides the
flexibility necessary to accommodate the varied types of exemption applications,
as well as circumstances unique to a particular applicant.(7)
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Accordingly, the Department has decided to adopt §2570.43 as proposed.
However, subparagraph (b)(2) of this section has been modified to insert
references to the Code and Federal Employees' Retirement System Act of 1986, and to reflect the current room number of the
Division of Exemptions in a footnote to that section. Paragraph (d) of this
section has also been modified to clarify that the declaration accompanying the
statement to be furnished to the Department regarding the notice to interested
persons must be made under penalty of perjury, as stated in the preamble to the
proposed regulation (53 FR 24422, at 24425, June 28, 1988).
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Section 2570.44 of the proposed regulation permitted an applicant to withdraw
his application at any time and to reinstate the application later.
Reinstatement may be requested without resubmitting any information or materials
previously furnished if no more than two years has elapsed from the withdrawal
date. The request for reinstatement must be accompanied by any additional
information that was outstanding at the time of withdrawal.
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No comments were received on this proposed section, which is adopted in the
final regulation without change.
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Under §2570.45 of the proposed regulation, after the Department has issued a
final denial letter on an exemption, it will not reconsider an application
covering the same transaction unless the applicant presents significant new
facts or arguments in support of the exemption which, for good reason, the
applicant could not have submitted for consideration during the Department's
initial review of the exemption application. An applicant must present the
significant new facts or arguments in a request for reconsideration within 180
days after the issuance of the final denial letter.
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Proposed §2570.45 also stated that only on request for reconsideration of
any finally denied application will be considered by the Department. Although no
comments were received on this section of the proposed regulation, the
Department has modified this section in the final regulation to clarify that the
Department will not limit the number of requests for reconsideration of final
denials based solely on the applicant's failure to respond timely to a tentative
denial letter or to furnish additional information timely (i.e., within the time
frames provided under §§2570.38(b) or 2570.39(e), respectively).
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The Department has also clarified in the final regulation that the
declaration required under §2570.45(c) must be made under penalty of perjury.
This clarification is consistent with the requirement of §2570.34(b)(5) that
every original exemption application must be accompanied by a similar
declaration under penalty of perjury. The Department intends that the same type
of declaration should accompany both an original exemption application and a
request for reconsideration of a final denial based on the merits of such an
application.
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Section 408(a) of ERISA precludes the Department from granting an exemption
from the fiduciary self-dealing prohibitions of section 406(b) unless the
Department affords an opportunity for a hearing and makes a determination on the
record with respect to the three statutory criteria established for granting an
exemption.(8) Because these provisions specify that an opportunity for a hearing
must be given before an exemption from these prohibitions is granted, but not
before such an exemption is denied, the Department interprets these provisions
to mean that only opponents of such an exemption must be given an opportunity
for a hearing. Moreover, the Department has concluded that it must provide a
hearing on the record to opponents of such a proposed exemption only where it
appears that there are material factual issues relating to the proposed
exemption that cannot be fully explored without such a hearing. Indeed, in the
Department's experience, such hearings are not useful where the only issues to
be decided are matters of law or where material factual issues can be adequately
explored by less costly and more expeditious means, such as written submissions.
Accordingly, under §2570.46 of the proposed regulation, the Department requires
that persons who may be adversely affected by the grant of an exemption from the
fiduciary self-dealing prohibitions offer some evidence of the existence of
issues that can be fully examined only at a hearing before it will grant a
request for a hearing. Where persuasive evidence of the existence of such issues
is offered, however, the Department will grant the requested hearing.
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Under §2570.47 of the proposed regulation, the Department may schedule a
hearing on its own motion if it determines that a hearing would be useful in
exploring issues relevant to the requested exemption. Under the proposed
procedures, if the Department decides to conduct a hearing on an exemption under
either §2570,46 or §2570.47, the applicant must notify interested persons of
the hearing in the manner prescribed by the Department. Ordinarily, such notice
may be provided by furnishing interested persons with a copy of the notice of
hearing published by the Department in the Federal Register within 10 days of
its publication. After furnishing notice, the applicant must submit to the
Department a declaration under penalty of perjury certifying that notice has
been provided in the manner prescribed.
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Any testimony or other evidence offered at a hearing held under either §2570.46
or §2570.47 becomes part of the administrative record to be used by the
Department in making its final decision on an exemption application.
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No comments were received on proposed §§2570.46 and 2570.47, which are
adopted without change in the final regulation.
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Section 2570.48 of the proposed regulation provided that if, after
considering all of an applicant's submissions, together with any comments
received from interested persons and the record of any hearing held in
connection with a requested exemption should be granted, it will publish a
notice in the Federal Register granting the exemption. This proposed section
also described the contents of the grant notice.
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No comments were received on proposed §2570.48, which is adopted without
change in the final regulation.
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Notwithstanding the duty to amend and supplement exemption applications
provided under §2570.37, the Department expressly conditions every exemption on
the accuracy and completeness of the facts and representations provided by an
applicant in support of the exemption.
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Therefore, as indicated under §2570.49
of the proposed regulation, exemption does not take effect or protect parties in
interest from liability unless the material facts and representations contained
in the application or in any other materials, documents, or testimony submitted
by the applicant in support of the application were true and complete.
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Thus, for example, in the case of a continuing exemption transaction such as
a loan or a lease, if any of the material facts described in the application
were to change after the exemption is granted, the exemption would cease to
apply as of the date of such change even though, pursuant to §2570.37, the
applicant would not be obligated to notify the Department of such change. In the
event of any such change the parties in interest involved in the exemption
transaction may apply for a new exemption to protest themselves from liability
on or after the date of such change. Such an application should be submitted
before such change occurs (see the discussion of prospective, versus
retroactive, exemption under the heading "Copies of Documents,"
above).
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No comments were received on proposed §2570.49, which is adopted without
change in the final regulation.
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Section 2570.50 of the proposed regulation described the circumstances under
which the Department may revoke or modify a previously granted exemption and the
rights afforded to the applicant and to other interested persons in the event
such revocation or modification is proposed. This section also provided that
ordinarily such revocation or modification will be prospective only. Under this
proposed section one of the circumstances permitting the Department to modify or
revoke an exemption was a change in policy which calls into question to
continuing validity of the Department's original conclusions regarding the
granted exemption.
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Two of the comments objected to permitting a change in policy as grounds for
revoking or modifying a granted exemption. The commentators argued that
disturbing transactions already reviewed and approved by the Department would
inject an unneeded element of uncertainty into the exemption process. Moreover,
concern was expressed that the revocation of an exemption could severely disrupt
an applicant's business and impose great financial hardship. A commentator
suggested that the final regulation include a prohibition against revocation of
an exemption until the affected party in interest is given both written notice
of the facts or conduct which may warrant the revocation and an opportunity to
demonstrate compliance with the requirements of the exemption.(9)
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Proposed §2570.50 is intended to provide the Department with the flexibility
to undertake appropriate action in those cases where, subsequent to the grant of
an exemption, potentially abusive practices or changes in the regulatory
environment of an industry are identified which would cause the Department to
reconsider its policy with respect to whether the exemption transactions
continue to satisfy the statutory criteria under section 408(a) of ERISA.
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With regard to the procedural issues raised by one of the comments, the
Department notes that paragraph (b) of proposed §2570.50 provides for notice to
interested persons by publication in the Federal Register, notice to the
applicant of the proposed revocation or modification, and an opportunity for the
interested persons and the applicant to submit comments on the proposed
revocation or modification.
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After careful consideration of the comments, the Department has decided to
adopt §2570.50 as proposed. However, the Department has clarified paragraph (b)
to provide that the notice of proposed revocation or modification given to the
applicant must be in writing.
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Section 2570.51 of the proposed regulation provided that the public may
examine and copy any exemption application and all correspondence and documents
submitted in regard thereto and may receive photocopies of all or any portion of
such administrative record for a specified charge per page. For this reason, the
Department cannot honor requests to keep confidential any information submitted
regarding an exemption application. Therefore, none of the information submitted
in regard to a requested exemption should be material that the applicant or
other sender does not wish to disclose to the public.
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No comments were received on proposed §2570.51, which is adopted without
change in the final regulation.
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The Department has determined that this regulatory action would not
constitute a "major rule" as that term is used in Executive Order
12291 because the action would not result in: an annual effect on the economy of
$100 million; a major increase in costs or prices for consumers, individual
industries, government agencies, or geographical regions; or significant adverse
effects on competition, employment, investment, productivity, innovation, or on
the ability of United States-based enterprises to compete with foreign-based
enterprises in the domestic or export markets.
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