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Guest Article

Deloitte logo

(From the November 6, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

EBSA Issues Prohibited Transaction Exemption Relating to Lending Securities to Banks and Broker-Dealers


The Department of Labor's Employee Benefits Security Administration (EBSA) has adopted a final class prohibited transaction exemption to permit employee benefit plan fiduciaries to lend their plans' securities holdings to certain banks and broker-dealers. 71 FR 63786 (October 31, 2006). The new Prohibited Transaction Exemption (PTE) 2006-16, which is effective January 2, 2007, replaces PTE 81-6 and PTE 82-63 and enhances the relief those PTEs provided by adding banks and broker-dealers of the United Kingdom, Canada, and certain other foreign countries as permissible borrowers and expanding the types of collateral plans can accept for these loans. According to an EBSA press release, "The updated requirements will permit pension plans to earn additional income by lending securities from their portfolios to a greater universe of permissible borrowers."

Background on Prohibited Transaction Rules

In general, both ERISA and the Internal Revenue Code (IRC) prohibit plan fiduciaries from causing their plans to engage in certain transactions with "parties in interest" (or, in the case of the IRC, "disqualified persons"). These "prohibited transactions" include the sale or exchange, or any leasing of property, the lending of money or other extension of credit, the furnishing of goods, services, or facilities, and transferring the plan's assets to a party in interest or otherwise permitting a party in interest to use the plan's assets for its benefit. See ERISA § 406(a)(1)(A)-(D). A party in interest to a plan includes the plan's sponsor, fiduciaries, employees, and service providers. ERISA § 3(14). Additionally, plan fiduciaries may not deal with a plan's assets in their own interest or for their own account. See ERISA § 406(b)(1).

There are a variety of statutory exemptions to these prohibited transaction rules, codified at ERISA § 408(b). However, the Secretary of Labor also may grant individual or class exemptions that are .

  • administratively feasible,

  • in the interests of the plan's participants and beneficiaries, and

  • protective of the rights of participants and beneficiaries.

See ERISA § 408(a).

PTE 2006-16

Subject to ERISA's general fiduciary standards, employee benefit plans may lend securities in their portfolios to banks or broker-dealers. However, except for PTE 2006-16 the prohibited transaction rules generally would prevent a plan from making such loans to banks or broker-dealers that are parties in interest with respect to the plan, even if the loan otherwise is in the best interests of the plan and its participants. (As noted, PTE 81-6 and PTE 82-63 currently provide relief from the prohibited transaction rules for these transactions, but that relief is more limited in scope. These PTE's are repealed effective January 2, 2007, when PTE 2006-16 takes effect.)

Basically, PTE 2006-16 will permit plans to lend securities from their portfolios to a "U.S. Broker-Dealer" or "U.S. Bank" if certain conditions are satisfied. For example, neither the borrower nor any of its affiliates can have or exercise discretionary authority or control with respect to investing the plan assets involved in the transaction, or render investment advice with respect to those assets. Additionally, the loan must be made pursuant to a written loan agreement and specific requirements relating to collateral must be met. Also, the plan must have the right to terminate the loan at any time.

The new PTE also permits loans to a "Foreign Broker-Dealer" or "Foreign Bank." But in addition to satisfying the same conditions for loans to a U.S. Broker-Dealer or U.S. Bank, other specific conditions apply. These include the Lending Fiduciary maintaining the written documentation for the loan agreement within the jurisdiction of the U.S. courts and, in certain circumstances, the Foreign Broker-Dealer or Foreign Bank agreeing to be subject to the U.S.'s jurisdiction.

Basically, the PTE defines a "U.S. Bank" as a bank defined in section 202(a) of the Investment Advisers Act, and a "U.S. Broker Dealer" as a broker-dealer registered under the Securities Exchange Act of 1934 or exempted from registration as a dealer in exempted government securities.

A "Foreign Broker-Dealer"is a broker-dealer with equity capital that is equivalent of no less than $200 million and is either registered and regulated under the laws of United Kingdom's Financial Services Authority or is registered and regulated by a securities commission of a Province of Canada that is a member of the Canadian Securities Administration and is subject to the oversight of a Canadian self-regulatory authority. A broker-dealer not subject to regulation in the U.K. or Canada might still be a "Foreign Broker-Dealer" if certain specific requirements are satisfied. The PTE provides a similar definition of "Foreign Bank."


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2006, Deloitte.


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