Proposed PTE Amendment
Proposed Amendment to Prohibited Transaction Exemption 86-128
[Federal Register: May 10, 2002 (Volume 67, Number 91)]
[Notices]
[Page 31838-31842]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10my02-107]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Number D-10845]
Proposed Amendment to Prohibited Transaction Exemption 86-128
(PTE 86-128) for Securities Transactions Involving Employee Benefit
Plans and Broker-Dealers
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of Proposed Amendment to PTE 86-128.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to PTE 86-
128. PTE 86-128 is a class exemption that permits certain persons who
serve as fiduciaries for employee benefit plans to effect or execute
securities transactions on behalf of those plans, provided that
specified conditions are met. The exemption also allows sponsors of
pooled separate accounts and other pooled investment funds to use their
affiliates to effect or execute securities transactions for such
accounts when certain conditions are met. Currently, PTE 86-128
generally is not available to any person (or any affiliate thereof) who
is a trustee [other than a nondiscretionary trustee], plan
administrator or an employer, any of whose employees are covered by the
plan. The proposed amendment, if adopted, would allow a fiduciary that
is a plan trustee to engage in a transaction covered by PTE 86-128. The
proposed amendment would affect participants and beneficiaries of
employee benefit plans, fiduciaries with respect to such plans, and
other persons engaging in the described transactions.
DATES: If adopted, the proposed amendment will be effective as of the
date the granted amendment is
[[Page 31839]]
published in the Federal Register. Written comments and requests for a
public hearing should be received by the Department on or before June
24, 2002.
ADDRESSES: All written comments and requests for a public hearing
(preferably three copies) should be addressed to the U.S. Department of
Labor, Office of Exemption Determinations, Pension and Welfare Benefits
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington,
DC 20210, (attention: PTE 86-128 Amendment).
FOR FURTHER INFORMATION CONTACT: Christopher Motta, Office of
Exemptions Determinations, Pension and Welfare Benefits Administration,
U.S. Department of Labor, (202) 693-8544. (This is not a toll-free
number).
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed amendment to PTE 86-128 (51 FR
41686, Nov. 18, 1986). PTE 86-128 provides an exemption from the
restrictions of section 406(b) \1\ of the Employee Retirement Income
Security Act of 1974 (ERISA or the Act) and from the taxes imposed by
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(E)
or (F) of the Code.
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\1\ References to section 406 of ERISA as they appear throughout
this proposed amendment should be read to refer as well to the
corresponding provisions of section 4975 of the Internal Revenue
Code of 1986 (the Code).
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The amendment to PTE 86-128 proposed herein was requested in an
application, dated October 29, 1999, on behalf of the Securities
Industry Association (the SIA), a trade association for securities
broker-dealers. The Department is proposing the amendment to PTE 86-128
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code,
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).\2\
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\2\ Section 102 of the Reorganization Plan No. 4 of 1978 (5
U.S.C. App. 1 [1996] generally transferred the authority of the
Secretary of the Treasury to issue administrative exemptions under
section 4975 of the Internal Revenue Code of 1986 (the Code) to the
Secretary of Labor.
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Paperwork Reduction Act Analysis
The Department of Labor, as part of its continuing effort to reduce
paperwork and respondent burden, conducts a preclearance consultation
program to provide the general public and other federal agencies with
an opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This program helps to ensure that
requested data can be provided in the desired format, reporting burden
(time and financial resources) is minimized, collection instruments are
clearly understood, and the impact of collection requirements on
respondents can be properly assessed. Currently, the Pension and
Welfare Benefits Administration is soliciting comments concerning the
proposed revision of a currently approved collection of information:
Prohibited Transaction Class Exemption 86-128 for Securities
Transactions Involving Employee Benefit Plans and Broker-Dealers. A
copy of the proposed information collection request (ICR) can be
obtained by contacting the Department of Labor Clearance Officer, ATTN:
Marlene Howze, at (202) 693-4158.
DATES: Written comments must be submitted on or before July 9, 2002.
Comments concerning the ICR should be directed to the Office of
Management and Budget, ATTN: Desk Officer for Pension and Welfare
Benefits Administration, 725 17th St., NW., Washington, DC.
Desired Focus of Comments
The Department of Labor and OMB are particularly interested in
comments that:
- Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
- Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
- Enhance the quality, utility, and clarity of the
information to be collected;
- Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Current Action
Prohibited Transaction Class Exemption 86-128 permits certain
persons who serve as fiduciaries for employee benefit plans to effect
or execute securities transaction on behalf of those plans, provided
that specified conditions are met. The exemption also allows sponsors
of pooled separate accounts and other pooled investment funds to use
their affiliates to effect or execute securities transactions under
certain conditions. The conditions of the existing class exemption
include specific information disclosure provisions currently approved
under OMB control number 1210-0059.
This proposed amendment would allow a fiduciary that is a plan
trustee to engage in a transaction covered by PTE 86-128. The existing
PTE 86-128 is generally not available to any person (or any affiliate
thereof) who is a trustee, plan administrator, or an employer, any of
whose employees are covered by the plan. The proposed amendment would
add such trustees, subject to conditions involving (1) the size of the
plan, and (2) at least annual reporting to the authorizing fiduciary of
each plan of annual brokerage commissions expressed in dollars paid to
(a) brokerage firms affiliated with the trustee, and (b) brokerage
firms unaffiliated with the trustee, and (3) at least annual reporting
of average brokerage commissions expressed as cents per share paid to
(a) brokerage firms affiliated with the trustee, and (b) brokerage
firms unaffiliated with the trustee.
This amendment, if finalized, would result is a larger number of
respondents and disclosure requirements that are specific to those
respondents. The existing burdens and burden estimated to be associated
with the proposed amendment are shown below.
Agency: Department of Labor, Pension and Welfare Benefits
Administration
Title: PTE 86-128 for Certain Transactions Involving Employee
Benefit Plans and Securities Broker-Dealers
Type of Review: Revision of a currently approved collection OMB
Number: 1210-0059
Affected Public: Business or other for-profit; Not-for-profit
institutions
Total Respondents: 22,974 existing; 700 proposal; 23,674 total
Total Responses: 542,813 existing; 700 proposal; 543,513 total
Frequency of Response: Quarterly; Annually
Total Annual Burden: 98,158 hours existing; 875 proposal; 99,033
total
Total Annual Cost (Operating & Maintenance): $188,200 (no addition
for proposal)
Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval of the information
collection request; they will also become a matter of public record.
A. General Background
The prohibited transaction provisions of the Act prohibit certain
transactions between a plan and a party in interest
[[Page 31840]]
(including a fiduciary) with respect to such plan. Specifically, unless
a statutory or administrative exemption is applicable, section 406(a)
of ERISA prohibits, among other things: the provision of services
between a plan and parties in interest [including fiduciaries] with
respect to such plan; and the transfer of assets from a plan to a party
in interest with respect to such plan. In addition, unless exempted,
section 406(b) of ERISA prohibits, among other things, a fiduciary's
dealing with the assets of a plan in his or her own interest. Although
section 408(b)(2) of ERISA provides a conditional statutory exemption
permitting plans to make reasonable contractual arrangements with
parties in interest for the provision of services necessary for plan
operations, that exemption does not extend to acts of self-dealing
described in section 406(b) of ERISA.
A fiduciary performing both investment management and brokerage
services for the same plan is in a position where his or her decision
to engage in a portfolio trade on behalf of the plan, as an exercise of
fiduciary discretion, would result in the plan paying the fiduciary an
additional fee for the provision of the brokerage services. In the
Department's view, such a decision involves an act of self-dealing
prohibited by ERISA section 406(b) with respect to which section
408(b)(2) of ERISA does not provide relief.
B. Description of Existing Relief
PTE 86-128 provides relief from the restrictions of section 406(b)
for a plan fiduciary to use its authority to cause a plan to pay a fee
to such fiduciary for effectuating or executing securities transactions
as agent for the plan. Section I of PTE 86-128 contains definitions and
special rules. Notably, for purposes of this class exemption, a
``person'' is defined to include ``the person and affiliates of the
person'', and an ``affiliate'' of a ``person'' is defined, in part, to
include: (1) Any person directly or indirectly controlling, controlled
by, or under common control with, the person; (2) any officer,
director, partner, employee, relative (as defined in section 3(15) of
ERISA), brother, sister, or spouse of a brother or sister, of the
person; and (3) any corporation or partnership of which the person is
an officer, director or partner.
Section II describes the transactions covered under PTE 86-128, to
include: A plan fiduciary using his or her authority to cause a plan to
pay a fee for effecting or executing securities transactions to that
person as agent for the plan, but only to the extent that such
transactions are not excessive, under the circumstances, in either
amount or frequency; a plan fiduciary acting as the agent in an agency
cross transaction for both the plan and one or more other parties to
the transaction; and the receipt by a plan fiduciary of reasonable
compensation for effecting or executing an agency cross transaction to
which a plan is a party in interest from one or more other parties to
the transaction.
Section III contains conditions designed to protect the interests
of plan participants and beneficiaries. These conditions require prior
authorization to engage in covered transactions and periodic disclosure
of the fiduciary's activities to the authorizing plan fiduciary.
Section III(a) provides that the person engaging in a covered
transaction is not a trustee (other than a nondiscretionary trustee) or
an administrator of the plan, or an employer any of whose employees are
covered by the plan. The term ``person'' is defined to include
``affiliates'' of the person, thus discretionary trustees, plan
administrators, sponsoring employers, and their affiliates are
generally precluded from relying on the relief provided by the
exemption.
Section IV contains exceptions to several of the conditions in
section III. Specifically, section IV provides that the conditions of
section III do not apply to covered transactions to the extent such
transactions are engaged in on behalf of individual retirement accounts
which meet the requirement set forth in 29 CFR 2510.3-2(d) or plans,
other than training programs, that do not cover any employees within
the meaning of 29 CFR 2510.3-3. In addition, section IV provides that
the conditions of section III do not apply in the case of agency cross
transactions to the extent that the person effecting or executing the
transaction: Does not render investment advice to any plan for a fee
with respect to the transaction; is not otherwise a fiduciary who has
investment discretion with respect to any plan assets involved in the
transaction; and does not have the authority to engage, retain or
discharge any person who is, or is proposed to be, a fiduciary
regarding any such plan assets. Section IV also provides that a plan
trustee, plan administrator, or sponsoring employer may engage in a
covered transaction if he or she returns or credits to the plan all
profits earned by that person in connection with the securities
transactions associated with the covered transaction. Finally, Section
IV contains special rules for pooled investment funds.
C. Discussion of the Proposed Exemption
The SIA requests an amendment to PTE 86-128 which would enable a
discretionary trustee of an ERISA covered plan, or an affiliate of such
trustee, to use its fiduciary authority to cause the plan to pay a fee
to such trustee for effectuating or executing securities transactions
as agent for the plan. The applicant represents that the amendment is
necessary since, as a result of the consolidation in the nation's
financial services industry, plans are finding it increasingly
difficult to select service providers that are unaffiliated with plan
trustees. In addition, the applicant notes that banks, as trustees with
investment discretion, are currently precluded under PTE 86-128 from
using their affiliated broker-dealers to execute securities
transactions.
According to the applicant, there has been an increase in the
number of discretionary trustees that have affiliates providing
brokerage services. The applicant states that, as a result, there are
fewer brokers that are not affiliated in some way with a plan trustee.
The applicant represents that further consolidation is likely under the
Gramm-Leach-Bliley Act, signed into law on November 12, 1999 (Pub. L.
106-102, 113 Stat. 1338 (1999).\3\
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\3\ The new law will facilitate cross-ownership and control
among bank holding companies and securities firms through the
creation of ``financial hold companies'' that will be permitted to
engage in broad range of financial and related activities, including
underwriting and dealing activities.
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The SIA represents that, as a result of this consolidation, the
discretionary trustees of larger plans, or affiliated investment
managers thereof, often have little choice but to pay the higher
transaction costs associated with executing securities transactions
only through unaffiliated broker-dealers. In addition, the SIA
represents that the investment strategies of certain plans, such as
small cap, emerging markets or international investing, are
increasingly becoming stunted as the number of available brokers having
the requisite specialized expertise decreases. The proposed amendment,
the applicant represents, will therefore be beneficial to plans because
plan fiduciaries will no longer be forced to: appoint a plan trustee
that does not have affiliated investment managers; appoint investment
managers that are not affiliated with the trustee; or effect or execute
securities transactions only through unaffiliated broker-dealers.
The SIA states that the relief sought in this application was
originally
[[Page 31841]]
requested in 1986, when the Department replaced PTE 79-1 with PTE 86-
128. At that time, the Department granted relief only where the trustee
was strictly custodial and had no discretionary powers noting that ``as
a general matter, the position of a plan trustee may carry with it so
great an influence over the general operation of the plan that an
independent fiduciary may not be effective in examining critically and
objectively multiple service arrangements'', (Preamble to PTE 86-128,
51 FR 41686, 41692 (November 18, 1986). However, the SIA represents
that the comparative benefits gained by continuing to deny relief to
discretionary trustees and their affiliates are at best speculative.
They note that federal securities laws and banking laws, and the duties
imposed upon fiduciaries by ERISA section 404(a), require that
investment managers, regardless of whether they are affiliated with the
trustee, seek ``best execution'' in effecting securities transactions
on behalf of plans. The SIA also states that brokerage commissions have
become very competitive and very transparent.
Moreover, the SIA represents that the compensation arrangements
that investment managers have with plans encourage investment managers
to seek ``best execution'' in effecting securities transactions through
affiliated broker-dealers. In this regard, the SIA represents that an
investment manager is typically compensated based upon the amount of
assets under its management. The SIA represents further that the amount
of ``assets under management'', in turn, is reduced by the brokerage
commissions paid by such investment manager. Thus, according to the
SIA, investment managers have an incentive to seek ``best execution''
in effecting securities transactions through affiliated broker-dealers
since, to the extent a plan pays higher brokerage commissions than is
required under the particular circumstances, the amount of compensation
received by the plan's investment manager will be directly impacted by
the amount of brokerage commissions paid by the plan.
The SIA is of the opinion that plans can be additionally protected
from the risk of discretionary trustees ``steering'' brokerage to a
broker-dealer affiliate by requiring such trustees to disclose annually
to an independent fiduciary all brokerage commissions paid to
affiliated and unaffiliated broker-dealers. They state that a plan
sponsor, advised in writing of the potential conflicts and provided
with significant comparative reporting, should be able to oversee the
investment manager, regardless of whether the manager is affiliated
with the trustee. The SIA notes that the underwriter exemptions \4\
provide similar relief to, among others, fiduciaries, including
trustees, as long as certain reporting requirements are met and to the
extent affected plans meet a minimum size threshold. The SIA represents
that a comparable minimum size threshold and certain reporting
requirements should adequately protect plans and ensure that the
requested relief is in the best interest of affected plans.
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\4\ See e.g., PTE 2000-25 (65 FR 35129, June 1, 2000), an
individual underwriter exemption which permits purchases of
securities by the applicant's asset management affiliate, on behalf
of employee benefit plans for which such asset managment affiliate
is a fiduciary, from underwriting or selling syndicates where the
applicants' broker-dealer affiliate participates as a manager or
syndicate member.
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Finally, the SIA notes that plan sponsors, especially large ones,
have become increasingly sophisticated such that many trustees with
broker-dealer affiliates maintain collective investment funds that
passively manage portfolios to minimize trading and transaction costs.
The SIA represents that, in such instances, the use by discretionary
trustees of their own affiliates to provide brokerage services poses
very little of the risk previously described by the Department. The SIA
represents that, for all of the reasons cited above, it is appropriate
for the Department to reconsider its position.
On the basis of the SIA's representations, and after reevaluating
the Department's previously expressed concerns, the Department has
tentatively concluded that it would be appropriate to extend relief
under PTE 86-128 to discretionary plan trustees, provided that certain
additional conditions are met. In this regard, the Department believes
that a minimum plan size requirement is necessary in order to ensure an
appropriate level of plan investor sophistication to monitor the
covered transactions. Thus, the Department proposes to limit relief to
plans with more than $50 million in assets. While the SIA has agreed to
this dollar limitation, it has also suggested that this dollar
limitation be reviewed periodically and that the $50 million
requirement permit aggregation of all plans of an employer.\5\
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\5\ PTE 2000-25, Section I (o) provides, in part, that for
purposes of meeting the net asset tests, where a group of plans is
maintained by a single employer or controlled group of employers, as
defined in section 407(d)(7) of the Act, the $50 million net asset
requirement * * * may be met by aggregating the assets of such
plans, if the assets are pooled for investment purposes in a single
master trust.
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Accordingly, the Department is proposing to limit the relief
provided to trustees to plans that have net assets valued at least $50
million. In the case of a pooled fund, the $50 million requirement will
be met if 50 percent or more of the units of beneficial interest in
such pooled fund are held by plans having total net assets with a value
of at least $50 million. For purposes of the net asset tests described
above, where a group of plans is maintained by a single employer or
controlled group of employers, as defined in section 407(d)(7) of the
Act, the $50 million net asset requirement may be met by aggregating
the assets of such plans, if the assets are pooled for investment
purposes in a single master trust.
The Department also proposes that the trustee (other than a
nondiscretionary trustee) furnish, at least annually, to the
independent fiduciary of each authorizing plan, the following
information:
(i) The total amount of brokerage commissions, expressed in
dollars, paid by the plan (or fund in situations where a plan invests
in a pooled fund) to brokerage firms affiliated with the trustee;
(ii) The total amount of brokerage commissions, expressed in
dollars, paid by the plan (or fund in situations where a plan invests
in a pooled fund) to brokerage firms unaffiliated with the trustee;
(iii) The average brokerage commissions, expressed as cents per
share, paid by the plan to brokerage firms affiliated with the trustee;
and
(iv) The average brokerage commissions, expressed as cents per
share, paid by the plan to brokerage firms unaffiliated with the
trustee.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of ERISA and section 4975(c)(2) of the Code does
not relieve a fiduciary, or other party in interest or disqualified
person with respect to a plan, from certain other provisions of ERISA
and the Code, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary responsibility
provisions of section 404 of ERISA which require, among other things,
that a fiduciary discharge his or her duties respecting the plan solely
in the interests of the participants and beneficiaries of the plan.
Additionally, the fact that a transaction is the subject of an
exemption does not affect the requirement of section 401(a) of the Code
that the plan must operate for the exclusive benefit of the employees
of
[[Page 31842]]
the employer maintaining the plan and their beneficiaries;
(2) This exemption does not extend to transactions prohibited under
section 406(a) of the Act;
(3) Before an exemption may be granted under section 408(a) of
ERISA and 4975(c)(2) of the Code, the Department must find that the
exemption is administratively feasible, in the interests of the plan
and of its participants and beneficiaries, and protective of the rights
of participants and beneficiaries of the plan;
(4) If granted, the proposed amendment is applicable to a
particular transaction only if the transaction satisfies the conditions
specified in the exemption; and
(5) The proposed amendment, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments and Hearing Request
The Department invites all interested persons to submit written
comments or requests for a public hearing on the proposed amendment to
the address and within the time period set forth above. All comments
received will be made a part of the record. Comments and requests for a
hearing should state the reasons for the writer's interest in the
proposed exemption. Comments received will be available for public
inspection at the above address.
Proposed Amendment
Under section 408(a) of the Act and section 4975(c)(2) of the Code
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990), the Department
proposes to amend PTE 86-128 as set forth below:
(1) Section III(a) is amended to read: ``The person engaging in the
covered transaction is not an administrator of the plan, or an employer
any of whose employees are covered by the plan.
(2) Adding to Section III new paragraph (h) to read: ``(h) A
trustee [other than a nondiscretionary trustee] may only engage in a
covered transaction with a plan that has total net assets with a value
of at least $50 million and in the case of a pooled fund, the $50
million requirement will be met if 50 percent or more of the units of
beneficial interest in such pooled fund are held by plans having total
net assets with a value of at least $50 million.
For purposes of the net asset tests described above, where a group
of plans is maintained by a single employer or controlled group of
employers, as defined in section 407(d)(7) of the Act, the $50 million
net asset requirement may be met by aggregating the assets of such
plans, if the assets are pooled for investment purposes in a single
master trust.
(3) Adding to Section III new paragraph (i) to read:
``(i) The trustee (other than a nondiscretionary trustee) engaging
in a covered transaction furnishes, at least annually, to the
authorizing fiduciary of each plan the following:
(1) The aggregate brokerage commissions, expressed in dollars, paid
by the plan to brokerage firms affiliated with the trustee;
(2) The aggregate brokerage commissions, expressed in dollars, paid
by the plan to brokerage firms unaffiliated with the trustee;
(3) The average brokerage commissions, expressed as cents per
share, paid by the plan to brokerage firms affiliated with the trustee;
and
(4) The average brokerage commissions, expressed as cents per
share, paid by the plan to brokerage firms unaffiliated with the
trustee.''
For purposes of this paragraph (i), the words ``paid by the plan''
shall be construed to mean ``paid by the pooled fund'' when the trustee
engages in covered transactions on behalf of a pooled fund in which the
plan participates.
Signed at Washington, DC, this 6th day of May, 2002.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, Department of Labor.
Source document:
