Prohibited Transaction or Arms Length Transaction

[Guest ellah]

The CEO (the CEO is not an owner) of a manufacturing firm (Company A) decides to move the plan to a new broker and TPA (Company B). The equity owner of Company A is not involved with the day to day management of the Company A, nor is he a plan trustee or administrator nor is involved in the decision to move the plan. After doing some research it is found that the owner of Company A has an investment in a venture fund (Company C)that has invested in the TPA firm (Company B). This investment is with Company C and the investor has no control over what the venture capital (Company C) can invest in or any managment control over any of the companies that Company C invests the venture capital in. Would this be consider a Prohibited Transaction or Arms Length Transaction? Is Company B considered a party in interest?

I am eager to hear your thoughts around this question.

[jpod]

There are at least 3 Qs which need to be answered before your Q can be addressed:

1. What percentage of the Venture Capital fund do the owner and his family members and his affiliated entities own in the aggregate?

2. Is this just an "amazing coincidence," or is there some other explanation as to why the CEO decided to send the business to Company B?

3. Who will pay Company B's fees: the Plan or Company A?

[Guest ellah]

There are at least 3 Qs which need to be answered before your Q can be addressed:

1. What percentage of the Venture Capital fund do the owner and his family members and his affiliated entities own in the aggregate?

2. Is this just an "amazing coincidence," or is there some other explanation as to why the CEO decided to send the business to Company B?

3. Who will pay Company B's fees: the Plan or Company A?

1. The ownership is less than 10%. And again...it is purely investment money...much like investing in a mutual fund in that the investor has no control over how the fund invests and what it invests in.

2. it is truly a conicidence. The owner is extremely wealthy and has investments spread all over the city in which he resides

3. Company A is going to pay Company Bs fees

[jpod]

Sounds to me like (a) no 406(a) pt, and (b) probably no 406(b) pt. Two more questions:

1. What percentage of Company B does the venture capital fund own?

2. Do the owner and/or his family and affiliated entities own any additional interests (directly or indirectly) in Company B outside of of the venture capital fund?

The point of these Qs is that for purposes of the 406(b) analysis, one needs to assess the owner's level of interest in in seeing that Company B gets the plan's business. I understand that the CEO is supposedly making the decision, but the DOL would ignore that supposed fact, at least initially, if other facts suggest self-dealing on the owner's part.

[Guest ellah]

Sounds to me like (a) no 406(a) pt, and (b) probably no 406(b) pt. Two more questions:

1. What percentage of Company B does the venture capital fund own?

2. Do the owner and/or his family and affiliated entities own any additional interests (directly or indirectly) in Company B outside of of the venture capital fund?

The point of these Qs is that for purposes of the 406(b) analysis, one needs to assess the owner's level of interest in in seeing that Company B gets the plan's business. I understand that the CEO is supposedly making the decision, but the DOL would ignore that supposed fact, at least initially, if other facts suggest self-dealing on the owner's part.

Answer to question 1; 30% they are simple a silent investor they do not have any management control or responsibility.

2. No the owner has no contact with Company B nor has any other ownership interest in Company B. Again simply has money invested in a venture fund that has made an investment in company B.

Understand where you are coming from regarding the DOL. The truth is that the owner of this company doesn't even know that they are looking to move the plan and may not even know a plan exists (probably does if he bought the company) and does not know Company B at all....does not do any other business with Company B.

thanks for your help.

[jpod]

It doesn't matter that the owner doesn't know. What would matter is that the CEO knows that his boss - the owner - is an indirect investor in Company B. That is how the self-dealing issue (or at least the DOL's typical reaction) could occur. However, if what we have here is a situation where the owner is not involved in the decision-making, and the owner's indirect ownership interest in Company B is only 3% (10% x 30%), then I think any allegation of self-dealing would be quite a stretch. Keep in mind, however, that this is an informal message-board reaction, and Company A should consult with its own ERISA counsel.