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Amendment to Prohibited Transaction Exemption 86-128 (PTE 86-128)


DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Number D-10845]

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, U.S. Department of
Labor.

ACTION: Adoption of Amendment to PTE 86-128.

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SUMMARY: This document amends PTE 86-128, 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. The
amendment affects participants and beneficiaries of employee benefit
plans, fiduciaries with respect to such plans, and other persons
engaging in the described transactions.

DATES: The amendment is effective October 17, 2002.

FOR FURTHER INFORMATION CONTACT: Christopher Motta, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, (202) 693-8544, (this is not a toll-free number);
or Charles Jackson, Plan Benefits Security Division, Office of the
Solicitor, U.S. Department of Labor, (202) 693-5600, (this is not a
toll-free number).

SUPPLEMENTARY INFORMATION: On May 10, 2002, notice was published in the
Federal Register (67 FR 31838) 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.
---------------------------------------------------------------------------

    \1\ References to section 406 of ERISA as they appear throughout
this amendment should be read to refer as well to the corresponding
provisions of section 4975 of the Internal Revenue Code of 1986 (the
Code).
---------------------------------------------------------------------------

    The amendment to PTE 86-128 adopted by this notice 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 proposed 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\
---------------------------------------------------------------------------

    \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 Code to the Secretary of Labor.
---------------------------------------------------------------------------

    The notice of pendency gave interested persons an opportunity to
comment on the proposed amendment or request a hearing. The Department
received one comment on the proposed amendment which subsequently was
withdrawn. The amendment adopted in this document is identical to the
proposed amendment.

Paperwork Reduction Act

    In accordance with the provisions of the Paperwork Reduction Act of
1995, the Department submitted the proposed revision of the information
collection provisions of Prohibited Transaction Exemption 86-128 to the
Office of Management and Budget (OMB) at the time of publication of the
proposed amendment. OMB approved the revised information collection
request on June 20, 2002 under OMB control number 1210-0059. An
application for continuing approval will be made before the currently
scheduled expiration date of June 30, 2005.

Description of the Exemption

    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 the 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

[[Page 64138]]

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 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), prior to this amendment, provided that the person
engaging in a covered transaction may not be 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 requirements 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.

Description of the Exemption as Amended

    The amendment to PTE 86-128 granted pursuant to this notice enables
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. In so doing, the trustee (other
than a nondiscretionary trustee) must furnish to the authorizing
fiduciary of each plan, at least annually, the information specified in
section III(i) of the exemption, as amended. In general terms, this
section requires the trustee to provide to such fiduciary the aggregate
and the average brokerage commissions paid by the plan to brokerage
firms affiliated and unaffiliated with the trustee.

    In addition, as described in section III(h) of the exemption, a
trustee (other than a nondiscretionary trustee) may only engage in a
covered transaction on behalf of a plan to the extent such plan has at
least $50 million in total net assets. This section provides further
that, 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.

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 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) In accordance with section 408(a) of ERISA and 4975(c)(2) of
the Code, the Department makes the following determinations:
    (i) the amendment set forth herein is administratively feasible;
    (ii) the amendment set forth herein is in the interests of plans
and of their participants and beneficiaries; and
    (iii) the amendment set forth herein is protective of the rights of
participants and beneficiaries of plans;
    (4) The amendment is applicable to a particular transaction only if
the transaction satisfies the conditions specified in the exemption;
and
    (5) The amendment is 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.

Exemption

    Accordingly, PTE 86-128 is amended as follows under the authority
of section 408(a) of the Act and section 4975(c)(2) of the Code and in
accordance with the procedures set forth in 29 CFR 2570, Subpart B (55
FR 32836, 32847, August 10, 1990):

    (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) A new paragraph (h) is added to section III which reads:

    "(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) A new paragraph (i) is added to section III which reads:

[[Page 64139]]

    "(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 11th day of October, 2002.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.

Source document:
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