Prohibited Transaction Exemption Procedures; Employee Benefit Plans

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2570

RIN 1210-AB49

Prohibited Transaction Exemption Procedures; Employee Benefit Plans

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Final rule.

SUMMARY: This document contains a final rule that supersedes the existing procedure governing the filing and processing of applications for administrative 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). The Secretary of Labor is authorized to grant exemptions from the prohibited transaction provisions of ERISA, the Code, and FERSA and to establish an exemption procedure to provide for such relief. This final rule clarifies and consolidates the Department of Labor’s exemption procedures and provides the public with a more comprehensive description of the prohibited transaction exemption process.

DATES:Effective Date: This final rule is effective December 27, 2011, and applies to all exemption applications filed on or after that date.

FOR FURTHER INFORMATION CONTACT: Eric A. Raps, Office of Exemption Determinations, Employee Benefits Security Administration, Room N-5700, U.S. Department of Labor, Washington, DC 20210, telephone (202) 693-8532. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

On August 30, 2010, the Department published a Notice of Proposed Rulemaking in the Federal Register (75 FR 53172) that would update the existing procedure governing the filing and processing of applications for administrative exemptions from the prohibited transaction provisions of ERISA, the Code, and FERSA, and invited written comments from the public concerning its contents. These comments are available for review at http://www.regulations.gov and also under “Public Comments” on the “Laws & Regulations” page of the Department’s Employee Benefits Security Administration (EBSA) Web site at http://www.dol.gov/ebsa.

The final rule contained in this document revises the prohibited transaction exemption procedure to reflect changes in the Department’s exemption practices since the previous exemption procedure was issued in 1990 (the 1990 Exemption Procedure). Among other things, key elements of the exemption policies and guidance previously found in ERISA Technical Release 85-1 and the 1995 Exemption Publication have been consolidated within the text of a unitary, comprehensive final regulation. Adoption of this updated procedure should also promote the prompt and efficient consideration of all exemption applications by clarifying the types of information and documentation generally required for a complete filing, by affording expanded opportunities for the electronic submission of information and comments relating to an exemption, and by providing plan participants and other interested persons with a more thorough understanding of the exemption under consideration.

B. Overview of the Final Rule and Comments

The exemption procedure contained in this document (and codified at 29 CFR part 2570, subpart B) consists of 23 discrete sections (§ 2570.30 through § 2570.52), arranged by topic and generally reflecting the chronological order of steps involved in processing an exemption application. Set forth below is a summary of those aspects of the proposed rule on which the Department received comments, and the Department’s response to those comments. Individuals interested in obtaining information concerning the content of the proposed rule not discussed herein should refer to the Notice of Proposed Rulemaking at 75 FR 53172.

Section 2570.30 Scope of the Regulation

Section 2570.30(b) of the proposed rule stated that “the Department may conditionally or unconditionally exempt any fiduciary or transaction, or class of fiduciaries or transactions, from all or part of the restrictions imposed by section 406 of ERISA and the corresponding restrictions of the Code and FERSA.” One commenter suggested that this formulation was too restrictive because, under the foregoing statutes, the Department has the authority to exempt not only fiduciaries engaged in prohibited transactions, but parties in interest (or disqualified persons under the Code) as well. Accordingly, the commenter requested that the Department broaden the scope of section 2570.30(b) to include “parties in interest.”

The Department notes that section 2570.30(b) of the proposed rule simply restated the statutory language found at section 408(a) of ERISA concerning the scope of the Department’s authority to grant administrative exemptions from the prohibited transaction provisions of ERISA. Because section 408(a) of the Act provides the Department with the authority to grant exemptions for “any fiduciary or transaction, or class of fiduciaries or transactions,” the Department also has the authority to provide exemptive relief to non-fiduciary parties in interest who engage in plan transactions. Therefore, it is unnecessary to adopt the commenter’s suggested amendment. In this regard, the Department notes that, consistent with the legislative history of the Act,¹ the Department has routinely granted exemptive relief to non-fiduciary parties in interest and disqualified persons, and will continue to exercise its authority, as appropriate.

¹ See H.R. Rep. No. 1280, 93d Cong., 2d Sess. 310 (1974), and also section 102 of Presidential Reorganization Plan No. 4 of 1978 (3 CFR part 332 (1978), reprinted in 5 U.S.C. app. at 672 (2006) and in 92 Stat. 3790 (1978)), effective December 31, 1978, which generally transferred the authority of the Secretary of the Treasury to issue administrative exemptions under section 4975(c)(2) of the Code to the Department of Labor.

Section 2570.31 Definitions

Section 2570.31 of the proposed rule defines the following terms for purposes of the exemption procedure regulation: affiliate, class exemption, Department, exemption transaction, individual exemption, party in interest, pooled fund, qualified appraisal report, qualified independent appraiser, and qualified independent fiduciary.

Definition of “Affiliate”—Section 2570.31(a) of the proposed rule specifically defined the term “affiliate” to include any employee or officer of the person who is highly compensated or “[h]as direct or indirect authority, responsibility, or control regarding the custody, management, or disposition of plan assets * * * ” One commenter expressed the view that the language of this definition should be clarified so that the term “plan assets” would refer only to those plan assets involved in the exemption transaction. The commenter stated that, absent such a modification, a person could be deemed to be an affiliate if he or she had responsibility with respect to the assets of any plan, without regard to whether the authority or control relates to the plan at issue or the plan assets at issue.

In response to the commenter’s suggestion, the Department has modified the definition of “affiliate” at section 2570.31(a) to clarify that the term applies to any employee or officer of the person who has direct or indirect authority, responsibility, or control regarding the custody, management, or disposition of plan assets involved in the subject exemption transaction. In addition, the Department, on its own motion, has further modified the term “affiliate” to clarify the scope and meaning of the term “control” that is contained within that definition.

Nature and Extent of Independence of Qualified Independent Appraisers and Fiduciaries—Two commenters objected to the definition of a “qualified independent fiduciary” (section 2570.31(j) of the proposed rule), which requires that a person serving in such capacity be “independent of and unrelated to any party in interest engaging in the exemption transaction and its affiliates.” One of the commenters also expressed a similar reservation with respect to the definition of a “qualified independent appraiser” (section 2570.31(i) of the proposed rule). One commenter opined that the words “independent of” and “unrelated to” are not defined in the proposed rule, particularly with respect to employees of the independent fiduciary who are related to employees of the party in interest (spouses, children, in-laws, etc.), and therefore should be deleted in the interests of clarity. Another commenter took the position that, if the Department’s actual purpose in utilizing the foregoing language was to bar a qualified independent fiduciary from being an affiliate of the party in interest engaging in the transaction, then the Department should revise and simplify the text of section 2570.31(j) of the final rule accordingly.

As noted previously, the purpose of including these definitions in the proposed rule was to emphasize that any independent fiduciary or appraiser retained in connection with an exemption transaction must not only be “qualified” (i.e., knowledgeable as to its duties and responsibilities under ERISA and knowledgeable as to the subject transaction and the markets, if any, where such transactions normally occur) to serve in that capacity, but also free from any relationships with the party in interest or its affiliates that could improperly affect its judgment. Because such relationships may be relevant to the Department’s determination as to whether an appraiser or fiduciary is independent, the Department has not adopted the suggestions of the commenters for modifying these definitions.

Standards for Measuring Compensation Received By Qualified Independent Appraisers and Fiduciaries—Several commenters indicated that the Department’s use of the word “income” in the definitions in sections 2570.31(i) and (j) (and also in sections 2570.34(c)(7) and (d)(8)) to describe the overall annual compensation received by qualified independent appraisers and fiduciaries is problematic. Two of these commenters expressed the view that substitution of the word “revenues” for income would be less susceptible to misinterpretation and more consistent with prior Departmental practice. One of the commenters also suggested that the text of section 2570.34(d)(8) be modified to reflect the substitution of the word “revenues” in place of the word “income.” Another commenter agreed with this view, and pointed out that the term “income” as a definitional term lends itself to a variety of interpretations-gross income, taxable income, etc. Similarly, another commenter suggested the substitution of the term “gross revenue” in lieu of the term “income” with respect to the compensation received by qualified independent appraisers. In general, the Department concurs, and has modified sections 2570.31(i) and (j) and sections 2570.34(c)(7) and (d)(8) in the final rule by substituting, where appropriate, the term “revenue” for the term “income.”

In defining the terms “qualified independent appraiser” (section 2570.31(i)) and “qualified independent fiduciary” (section 2570.31(j)), the proposed rule provided that, in each instance, the determination as to the independence of the appraiser or fiduciary would be made ”on the basis of all relevant facts and circumstances.” The definition of a “qualified independent fiduciary” further provided that, “[a]s a general matter, an independent fiduciary retained in connection with an exemption transaction must not receive more than a de minimis amount of compensation (including amounts received for preparing fiduciary reports and other related duties) from the parties in interest to the transaction or their affiliates. For purposes of determining whether the compensation received by the fiduciary is de minimis, all compensation received by the fiduciary is taken into account. Such de minimis amount will ordinarily constitute 1% or less of the annual income of the qualified independent fiduciary. In all events, the burden is on the applicant to demonstrate the independence of the fiduciary.” The definition of a “qualified independent appraiser” under the proposed rule described the compensation to be received by such appraisers in virtually identical terms.

The Department received a number of comments objecting to the content of the foregoing definitions under the proposed rule. Two commenters suggested that a de minimis or percentage test bears, at best, a narrow relationship to any duty or commitment to impartially perform independent fiduciary responsibilities under ERISA, and does not take into account the complexity, risk, expertise, or expenditure of time that such a commitment may entail. One commenter expressed the view that inserting the proposed de minimis and 1% standards in the text of a final regulation would mean that any firm that provides independent fiduciary services and whose compensation exceeds such thresholds is presumptively subject to improper influence from a party in interest to the exemption transaction. Two commenters further expressed the view that, if the 1% and de minimis aspects of the proposed rule were ultimately adopted, plan fiduciaries and officials required to retain independent fiduciaries and appraisers in connection with complex exemption transactions would inevitably limit their selections to a handful of large banking, fiduciary, or valuation firms whose compensation would satisfy the foregoing standards, thus reducing the overall level of competition for such services. By way of example, one commenter posited a complex exemption transaction which could reasonably be expected to command an independent fiduciary fee of $150,000 in a given year to be paid by a party in interest to the exemption transaction; the commenter concluded that, under the proposed rule, only firms with annual revenues of $15,000,000 or more would be presumptively independent of the party in interest.

One commenter emphasized the negative effect that the de minimis standard would have upon smaller fiduciary and valuation firms, opining that smaller firms often possess greater expertise and objectivity with respect to evaluating exemption transactions than their larger institutional counterparts, and often provide their services to plans at less expense as a result of lower overhead costs. Two commenters expressed the view that the reduced competition resulting from the adoption of a 1% benchmark would likely have the undesirable effect of driving up the costs of engaging an independent fiduciary for exemption transactions; one of these commenters also ventured that such a provision might cause plans, rather than parties in interest, to pay the fees of such a fiduciary. Another commenter opined that the proposed compensation limitations in the proposed rule would make it especially difficult for newly-established independent fiduciary firms with few, if any, conflict of interest or affiliation problems to compete for significant assignments with respect to exemption transactions. This commenter further stated that this market access problem for new firms would persist even if the Department had specified a higher compensation threshold (e.g., 5%) in connection with the proposed de minimis standard.

Several commenters stated that the 1% compensation threshold for independent fiduciaries contained in the proposed rule is substantially lower than the percentage guidelines often utilized by the Department in past administrative exemptions (and in other ERISA contexts) for evaluating whether fiduciaries have a relationship with a party in interest that renders them susceptible to inappropriate influences or pressures. Two commenters specifically noted that the Department has, in past individual exemptions, permitted independent fiduciaries to derive as much as 5% of their compensation from parties in interest involved in the exemption transaction. Several commenters stated that there are currently only a small number of firms that perform an independent fiduciary role in connection with complex exemption transactions, and that the restrictions on compensation contained in the proposed rule would tend to deter such firms from accepting these types of engagements in the future. One commenter also stated that the proposed de minimis/1% benchmark does not account for the fact that an independent fiduciary’s fee arrangement often requires that a significant portion of the fiduciary’s compensation is used to pay outside lawyers, actuaries, and other consultants for services that enable the fiduciary to meet its duties to the plan.

Accordingly, several commenters expressed the opinion that the Department should consider alternatives in the final rule to the 1% and de minimis compensation standards for defining and evaluating the independence of fiduciaries and appraisers retained in connection with exemption transactions. In this connection, one commenter suggested that the Department should consider its proposed regulation relating to the definition of “adequate consideration” under section 3(18) of ERISA (see 53 FR 16732, proposed May 17, 1988), which enumerated various criteria for determining whether a plan fiduciary has made a good faith determination of the fair market value of an asset (other than a security for which there is a generally recognized market). One of the proposed criteria would require that the relevant fiduciary be independent of all parties to the transaction (other than the plan) and that the assessment of the independence of the fiduciary should be made in light of all relevant facts and circumstances. In this regard, the commenter noted that none of the proposed criteria made any references to amounts or percentages of compensation received by a fiduciary from a party in interest.

While expressing various concerns about the possible effects of an express limitation on qualified independent fiduciary compensation, another commenter nevertheless acknowledged that a fiduciary whose compensation from parties in interest with respect to a proposed transaction represents a significant portion of the fiduciary’s revenues can be, or can be perceived to be, susceptible to improper influence in carrying out its fiduciary duties. Accordingly, this commenter suggested the deletion of the Department’s language at section 2570.31(j) in the proposed rule concerning de minimis amounts and the 1% compensation standard, and substituting a number of factors that the Department would utilize in evaluating the independence of a fiduciary. These factors would include the complexity of the exemption transaction, the amount of plan assets involved in the exemption transaction (expressed in both absolute terms and as a percentage of the plan’s total assets), and the expected duration of the fiduciary’s engagement.

In response to these comments, the Department wishes to point out that, in defining the terms “qualified independent appraiser” and “qualified independent fiduciary”, the proposed rule provided that, in each instance, the final determination as to the independence of the appraiser or fiduciary is made “on the basis of all relevant facts and circumstances.” The Department also notes that the references to the one percent standard for compensation received by appraisers and fiduciaries in connection with an exemption transaction was not intended as an absolute limit with respect to compensation received by such persons from parties in interest.

Thus, the Department concurs that this provision should be clarified. In this regard, the Department notes that the percentage of an appraiser’s or fiduciary’s annual revenue derived from a party in interest (or its affiliates) to an exemption transaction is an important factor in determining whether such person is, in fact, independent of the party in interest engaging in the covered transaction. The Department also continues to believe that the percentage of an appraiser’s or fiduciary’s annual revenue that is attributable to a party in interest should be a de minimis amount. Accordingly, absent facts and circumstances demonstrating a lack of independence, the Department will operate according to the presumption that such appraiser or fiduciary will be independent if the revenues it receives or is projected to receive, within the current federal income tax year, from parties in interest (and their affiliates) to the transaction are not more than 2% of such appraiser’s or fiduciary’s annual revenues based upon its prior income tax year. Although the presumption does not apply when the aforementioned percentage exceeds 2%, an appraiser or fiduciary nonetheless may be considered independent based upon other facts and circumstances provided that the appraiser or fiduciary receives or is projected to receive revenues that are not more than 5% within the current federal income tax year, from parties in interest (and their affiliates) to the transaction based upon its prior income tax year.

Accordingly, it is the Department’s view that the language contained in sections 2570.31(i) and (j) in the final rule provides the Department with sufficient flexibility to take into account any and all relevant facts and circumstances that may have a bearing on its assessment of the qualifications and independence of appraisers and fiduciaries. In this connection, the Department further notes that the previously referenced factors cited by the commenter may be taken into account under this “facts and circumstances” standard.

Section 2570.33 Applications the Department Will Not Ordinarily Consider

Section 2570.33 describes exemption applications that the Department will not ordinarily consider, such as applications involving a transaction or transactions that are the subject of an investigation under the reporting, disclosure and fiduciary responsibility provisions in parts 1 or 4 of subtitle B of Title I of ERISA. In connection with the application content provisions of the exemption regulation, one commenter suggested that the Department modify the language of the final rule to ensure the confidentiality of information disclosed in an application (or in any amendments or supplements thereto).² In support of its view, the commenter stated that investigations by EBSA are confidential, and that the EBSA Enforcement Manual makes information about current enforcement proceedings subject to strict confidentiality (except with respect to other governmental agencies). The commenter also argued that, absent an amendment excluding this information from public access, certain applicants affected by the application content requirements could be stigmatized or might be deterred from applying for exemptive relief from the Department.

² Specifically, the commenter suggested modifications to the language of sections 2570.35(a)(7) and 2570.35(b) to make allowances for the confidentiality of information submitted to the Department in connection with an exemption application. Section 2570.35(a)(7) requires that an application for an individual exemption include a brief statement to the Department disclosing whether, within the last five years, any plan affected by the exemption transaction or any party in interest involved in the exemption transaction has been under investigation or examination by, or has been engaged in litigation or a continuing controversy with, the Department, the Internal Revenue Service, the Justice Department, the Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift Investment Board involving compliance with provisions of ERISA, provisions of the Code relating to employee benefit plans, or provisions of FERSA relating to the Federal Thrift Savings Fund. Section 2570.37(b) states that if, at any time during the pendency of an exemption application, the applicant or any other party in interest who would participate in the exemption transaction becomes the subject of an investigative or enforcement action by the foregoing agencies, the applicant must promptly notify the Department of such a fact. In considering this comment, the Department determined that it was appropriate to address the issue of information designated as confidential by an applicant under section 2570.33 of the final rule.

The Department does not concur that the final rule should be modified to address the commenter’s concerns with respect to preserving the confidentiality of certain information submitted as part of an exemption application. Because such information comprises part of the record in support of an exemption, it enables the public to understand the basis for the Department’s decision. Section 2570.51(a) of both the 1990 Exemption Procedure and the proposed rule stipulates that “[t]he administrative record of each exemption application will be open to public inspection and copying.” Thus, the Department will not process exemption applications containing such designations unless the claim of confidentiality and privilege is withdrawn or the Department determines that the designated information is not material to the exemption request. Accordingly, in order to provide further clarity, the Department has redesignated paragraph (c) of section 2570.33 as paragraph (d), and a new paragraph (c) describing the Department’s policy on claims of confidentiality has been inserted.

Section 2570.34 Information To Be Included in Every Exemption Application

Disclosure of Compensation Received by Qualified Independent Appraisers and Fiduciaries—Section 2570.34(d)(8) of the proposed rule would have required that any statement provided by a qualified independent fiduciary in support of an exemption application include, among other things, a representation “disclosing the percentage of such fiduciary’s current income that was derived from any party in interest involved in the transaction or its affiliates; in general, such percentage shall be computed by comparing, in fractional form: (i) The amount of the fiduciary’s projected personal or business income for the current federal income tax year that will be derived from the party in interest or its affiliates (expressed as a numerator); and (ii) The fiduciary’s gross personal or business income (excluding fixed, non-discretionary retirement income) for the prior federal income tax year (expressed as a denominator).” Section 2570.34(c)(7) of the proposed rule contained similar requirements for the content of statements submitted by a qualified independent appraiser in support of an exemption application.

One commenter suggested that this provision be amended in the final rule to expressly state that, in instances where a qualified independent fiduciary provides its services to a plan through a specialized unit which is the subsidiary or affiliate of a larger business organization, the fiduciary’s revenues (the denominator of the fraction described in this subsection) should be based solely upon the revenues of the specialized unit and not the larger organization. The commenter stated that, because the purpose of examining the proportion of the independent fiduciary’s compensation derived from parties in interest is to determine the fiduciary’s lack of susceptibility from undue influence, the revenues of the specialized unit should be the proper focus of such an inquiry.

In addition, the commenter offered the view that the time frames contained in the foregoing denominator should reflect the greater of (i) The prior federal income tax year’s income or (ii) the qualified independent fiduciary’s good faith estimate of the current year’s income. In the commenter’s view, the relationship between the compensation in connection with the transaction in question and the current financial state of the business is as least as relevant as data that may be as much as a year old when the calculation is made.

Because, as previously noted, the focus of this provision is on the revenues generated by the independent fiduciary, the Department believes no further changes to the language of this provision are necessary. Further, the Department declines to adopt the commenter’s suggested modification of the content of the denominator (as described at section 2570.34(d)(8)) with respect to the relevant time frame for computing the revenues received by an independent fiduciary from all sources. The Department is of the view that the formula described in the final rule affords greater objectivity and certainty in determining such amounts.

Specialized Statements—Section 2570.34(c) requires that a qualified independent appraiser act solely on behalf of the plan in preparing statements submitted in support of an application for exemption. In the Department’s view, any appraiser retained to perform an asset valuation on behalf of a plan must discharge its responsibilities in an independent and impartial manner. In this regard, the Department expects the qualified independent appraiser’s determination to be unbiased, fair, and objective, and to be made in good faith and based on a detailed analysis of the prevailing circumstances then known to the appraiser. The same general standards of professional conduct also apply, as appropriate, to statements prepared by other third party experts under section 2570.34(e).

Section 2570.35 Information To Be Included in Applications for Individual Exemptions Only

Disclosure of party in interest investments—Under section 2570.35(a)(16), as it appeared in the 1990 Exemption Procedure, the extent of applicant disclosure of plan investments with a party in interest was limited to whether or not the assets of the affected plans(s) were invested in loans to any party in interest involved in the exemption transaction, property leased to any such party in interest, or securities issued by any party in interest involved in the exemption transaction. Where such investments existed, the applicant was required to include an additional statement detailing the nature and extent of these investments, and whether a statutory or administrative exemption covered such investments.

In the proposed rule, the Department proposed an amendment to this provision that would have required an applicant to disclose whether or not the assets of the affected plan(s) had been invested directly or indirectly in any other transactions (e.g., securities lending or extensions of credit), whether exempt or non-exempt, with the party in interest involved in the exemption transaction. Accordingly, such disclosure would not have been limited to plan investments in loans or leases involving the party in interest, or securities issued by the party in interest. In cases where any such investments existed, the applicant would have been required to provide the Department with additional information describing, among other things: (1) The type of investment to which the statement pertains; (2) The aggregate fair market value of all investments of this type as reflected in the plan’s most recent annual report; (3) The approximate percentage of the fair market value of the plan’s total assets as shown in such annual report that is represented by all investments of this type; and (4) The applicable statutory or administrative exemption covering these investments (if any).

One commenter expressed the view that this proposed revision, which requires an exemption applicant to disclose all direct or indirect investments of a plan with the party in interest (regardless of whether such investments were exempt or non-exempt under the terms of ERISA) was “overbroad” and would be “extraordinarily burdensome” for applicants. The commenter stated that, for a plan with $10 billion in assets, there could be literally thousands of transactions with or through a party in interest that would be required to be disclosed under this revised provision, regardless of how relevant these transactions might be to the exemption under consideration. The commenter questioned whether the disclosure of these transactions (and the costs associated with such disclosure) would result in a more efficient exemption process, and added that it desired to see a continuation of the Department’s existing practice of inquiring during the pendency of the exemption application about other relationships and transactions concerning a plan’s investments with a party in interest.

After consideration of the comment, the Department generally concurs with the concerns expressed by the commenter that compliance with the disclosure requirements described in the proposed revision to section 2570.35(a)(16) may pose practical difficulties for some prohibited transaction exemption applicants. The purpose of this disclosure provision (as explained in the preamble of the 1990 Exemption Procedure) is to 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 certain investments and parties so as to raise questions under the fiduciary responsibility provisions of ERISA. Accordingly, the Department has determined to modify the language in the final rule by reverting to the existing requirement, contained in the 1990 Exemption Procedure, which requires an applicant for an 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. In addition, it is noted that section 2570.35(a)(16) of the final rule does not preclude the Department from requesting, during the pendency of the exemption application, additional information from the applicant.

Retroactive exemptions—In the proposed rule, the Department added a new section 2570.35(d) to provide guidance to applicants who are seeking retroactive relief for past prohibited transactions. This new subsection incorporates the standards for retroactive exemptions that were described by the Department in ERISA Technical Release 85-1 (January 22, 1985). The Department believes that the inclusion of these standards as part of an updated and comprehensive exemption procedure regulation will provide greater clarity to applicants for retroactive relief, thereby facilitating the prompt evaluation of such applications. Among other things, the new subsection reaffirms that, as a general matter, the Department will consider granting retroactive relief for transactions already consummated only if the safeguards necessary for the grant of a prospective exemption were in place at the time of the consummated transaction. In this regard, an applicant should provide evidence that it acted in good faith at the time of the subject transaction by taking reasonable and appropriate steps to protect the plan from abuse and unnecessary risk. The new subsection also enumerates a variety of objective factors that the Department ordinarily takes into account when evaluating whether the conduct of the applicant at the time of a previously consummated transaction satisfies the good faith standard.

One commenter expressed concern about the practical effect of one of these factors (section 2570.35(d)(2)(v)), under which the Department would take into account whether “the applicant has submitted evidence that the plan fiduciary did not engage in an act or transaction knowing that such act or transaction was prohibited under section 406 of ERISA and/or section 4975 of the Code. In this regard, the Department will accord appropriate weight to the submission of a contemporaneous, reasoned legal opinion of counsel, upon which the plan fiduciary relied in good faith before entering the act or transaction * * *.”

The commenter posited a situation in which, during the pendency of an application for prospective exemptive relief, certain exigencies (such as a change in the tax laws) create an incentive for a party in interest to immediately consummate the proposed transaction, despite the absence of administrative relief from the Department at that point in time. The commenter expressed the view that in such circumstances, where an applicant subsequently amends its application to obtain retroactive relief for a past prohibited transaction, the Department should adopt an accommodating posture with respect to those exigent circumstances that might induce a party in interest to a transaction to engage in that transaction prior to receiving a final grant of exemption.

The Department notes that the good faith factors enumerated under section 2570.35(d) do not constitute an exclusive or an exhaustive list of the criteria that the Department may consider in evaluating an application for a retroactive exemption. The determination of whether a fiduciary has acted in good faith will be based upon a review of the totality of facts and circumstances surrounding a past prohibited transaction (including the exigencies of the transaction) before determining whether a retroactive exemption is warranted. In this connection, the applicant for a retroactive exemption must demonstrate that the safeguards necessary for the grant of a prospective transaction were in place at the time that the transaction was consummated. Accordingly, the Department has determined that no modifications to section 2570.35(d)(2)(v) are warranted.

Section 2570.37 Duty To Amend and Supplement Exemption Applications

Section 2570.37(a) of the proposed rule required that an exemption applicant promptly notify the Department if, during the pendency of an exemption application, any material fact or representation contained in the application changes or is inaccurate. This section also required that, during the pendency of the exemption application, the applicant promptly notify the Department concerning any material fact or representation that had been omitted from the application. The determination whether, under the totality of the facts and circumstances, a particular statement contained in (or omitted from) an exemption application constitutes a material fact or representation is made by the Department.

One commenter interpreted the phrase “during the pendency of the application” contained in paragraph (a) of section 2570.37 to mean the period “under which the application/ exemption is in force.” With this interpretation in mind, the commenter expressed the view that changes to the facts underlying the original grant of an exemption (such as the size of a company, its business affiliations, lines of business, etc.) occur all of the time. As a consequence, the commenter opined that if a party in interest to a covered transaction fails to report any changes at all to the facts and representations underlying a granted exemption, such exemption may automatically become invalid. Accordingly, the commenter proposed that the Department should limit the changes that need to be reported to the Department to those occurring prior to the granting of an exemption.

The Department does not concur with the commenter’s interpretation of the words “during the pendency of the application”. The applicable timeframe covered by section 2570.37(a) is the period between the submission of an exemption application and the point at which final administrative action is taken by the Department with respect to the application. In the case of a granted exemption involving a one-time transaction that has been consummated in accordance with the terms and conditions of the exemption, subsequent events do not affect the validity of the exemptive relief granted by the Department. In instances where the Department has granted an exemption for a transaction which is continuing in nature (e.g., a lease), section 2570.49(d) of the procedure would apply. This provision stipulates that “[f]or transactions that are continuing in nature, an exemption ceases to be effective if, during the continuation of the transaction, there are material [emphasis added] changes to the original facts and representations underlying such exemption or if one or more of the exemption’s conditions cease to be met.” The materiality of such changes is determined by the Department in light of the totality of the surrounding facts and circumstances.³ Accordingly, after considering this comment, the Department has determined not to modify the language of section 2570.37(a) in the final rule. However, in the interests of clarity, the Department has, on its own motion, deleted paragraph (d) of section 2570.37 in the final rule.

³ Where applicants are in doubt as to the continued validity of exemptive relief that has been granted, such applicants may seek guidance from EBSA’s Office of Exemption Determinations.

Sections 2570.40 and 2570.41 Conferences and Final Denial Letters

The 1990 Exemption Procedure stipulated that the Department would attempt to schedule a conference concerning a tentative denial letter at a mutually convenient date and time during the 45-day period following the later of (1) The date the Department received the applicant’s request for a conference, or (2) the date the Department notified the applicant, after reviewing additional information submitted pursuant to section 2570.39, that it was not prepared to propose the requested exemption. The Department’s proposal (at section 2570.40) would have replaced this 1990 rule by substituting a simplified procedure in order to facilitate the prompt and efficient scheduling of such conferences. The Department has largely retained the proposed language of this conference provision in the final rule, except for certain technical clarifications. In instances where the applicant has requested a conference and stated an intent to submit additional information in support of the application, the Department generally will schedule a conference for a date and time that occurs within 20 days after the date on which the Department has provided notification to the applicant that it remains unprepared to propose the requested exemption based upon the additional information submitted by the applicant. Alternatively, in instances where the applicant requests a conference without expressing an intent to submit additional information pursuant to section 2570.39, the Department generally will schedule a conference for a date and time that occurs within 40 days after the date of the issuance of the tentative denial letter.

The Department, on its own motion, has made technical corrections to section 2570.40 in the final rule to clarify how the rule would apply where an exemption applicant, within 20 days of receiving a tentative denial letter, requests a conference and expresses an intent to submit additional written information, but fails to provide such information within 40 days from receipt of the tentative denial letter.

To address this situation, the Department has inserted a new paragraph (f) in section 2570.40. This new paragraph specifies that, where an applicant has requested a conference and expressed an intent to submit additional information pursuant to section 2570.39(b), but has failed to furnish such information within 40 days from the date of the tentative denial letter, the Department will generally schedule a conference for a date and time occurring within 60 days after the date of the issuance of the tentative denial letter. As part of this technical correction, the Department also has redesignated sections 2570.40(f) and (g) of the proposed rule, respectively, as sections 2570.40(g) and (h) of the final rule.

In addition, the Department has made an additional technical correction to the text of section 2570.41 of the final rule by deleting the reference in paragraph (b) to “section 2570.40(e)” and substituting “section 2570.40.”

Section 2570.49 Limits on the Effect of Exemptions

The Department, on its own motion, has made a technical refinement to this section of the final rule by adding a new paragraph (e), which clarifies that the Department possesses the sole discretion to determine the materiality of any fact or representation which underlies an administrative exemption.

C. Regulatory Impact Analysis

Executive Order 12866

Under Executive Order 12866 (58 FR 51735), the Department must determine whether a regulatory action is “significant” and therefore subject to review by the Office of Management and Budget (OMB). Section 3(f) of the Executive Order defines a “significant regulatory action” as an action that is likely to result in a rule (1) Having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as “economically significant”); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. Pursuant to the terms of the Executive Order, it has been determined that this action is not “significant” within the meaning of section 3(f) of the Executive Order and therefore is not subject to review by OMB.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501- 3520) (PRA 95), the Department submitted the information collection request (ICR) included in the Notice of Proposed Rulemaking to OMB for review and clearance at the time the proposed rule was published in the Federal Register on August 30, 2010 (75 FR 53172). OMB approved the final amendment under OMB control number 1210-0160, on October 17, 2011. The approval will expire on October 31, 2014.

The Department solicited comments concerning the ICR in connection with the Notice of Proposed Rulemaking. The Department received no comments addressing its burden estimates; therefore, no substantive changes have been made in the final rule that would affect the Department’s earlier burden estimates.

The paperwork burden estimates are summarized as follows:

Type of Review: New collection.

Agency: Employee Benefits Security Administration, Department of Labor.

Title: Final Rule for Prohibited Transaction Exemption Procedures.

OMB Number: 1210-0060.

Affected Public: Business or other for-profit; not-for-profit institutions.

Respondents: 56.

Responses: 22,995.

Frequency of Response: Occasionally.

Estimated Total Annual Burden Hours: 2,564.

Estimated Total Annual Burden Cost: $1,547,013.

Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are likely to have a significant economic impact on a substantial number of small entities. Unless the head of an agency certifies that a final rule is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires that the agency present an initial regulatory flexibility analysis at the time of the publication of the notice of proposed rulemaking describing the impact of the rule on small entities and seeking public comment on such impact.

For purposes of the RFA, the Department continues to consider a small entity to be an employee benefit plan with fewer than 100 participants.⁴ Further, while some large employers may have small plans, in general small employers maintain most small plans. Thus, the Department believes that assessing the impact of this final rule on small plans is an appropriate substitute for evaluating the effect on small entities. The definition of small entity considered appropriate for this purpose differs, however, from a definition of small business that is based on size standards promulgated by the Small Business Administration (SBA) (13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et seq.). The Department requested comments on the appropriateness of the size standard used in evaluating the impact of the rule on small entities but did not receive any comments.

⁴ The basis for this definition is found in section 104(a)(2) of the Act, which permits the Secretary of Labor to prescribe simplified annual reports for pension plans that cover fewer than 100 participants. Pursuant to the authority of section 104(a)(3), the Department has previously issued at 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10 certain simplified reporting provisions and limited exemptions from reporting and disclosure requirements for small plans, including unfunded or insured welfare plans covering fewer than 100 participants and satisfying certain other requirements.

By this standard, the Department estimates that nearly half the requests for exemptions are from small plans. Thus, of the approximately 613,000 ERISA-covered small plans, the Department estimates that 28 small plans (.000046% of small plans) file prohibited transaction exemption applications each year. The Department does not consider this to be a substantial number of small entities. Therefore, based on the foregoing, pursuant to section 605(b) of RFA, the Assistant Secretary of the Employee Benefits Security Administration hereby certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The Department invited public comments on its certification and the potential impact of the rule on small entities at the proposed rule stage and did not receive any comments.

Congressional Review Act

The final rule being issued here is subject to the provisions of the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the Comptroller General for review.

Unfunded Mandates Reform Act

For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), the final rule does not include any federal mandate that may result in expenditures by State, local, or tribal governments, or impose an annual burden exceeding $100 million or more, adjusted for inflation, on the private sector.

Federalism Statement

Executive Order 13132 (August 4, 1999) outlines fundamental principles of federalism and requires federal agencies to adhere to specific criteria in the process of their formulation and implementation of policies that have substantial direct effects on the States, or the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. This final rule does not have federalism implications, because it has no substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Section 514 of ERISA provides, with certain exceptions specifically enumerated, that the provisions of Titles I and IV of ERISA supersede any and all laws of the States as they relate to any employee benefit plan covered under ERISA. The requirements implemented in the rule do not alter the fundamental provisions of the statute with respect to employee benefit plans, and as such would have no implications for the States or the relationship or distribution of power between the national government and the States.

List of Subjects in 29 CFR Part 2570

Administrative practice and procedure, Employee benefit plans, Employee Retirement Income Security Act, Federal Employees’ Retirement System Act, Exemptions, Fiduciaries, Party in interest, Pensions, Prohibited transactions, Trusts and trustees.

* * * * *

Signed at Washington, DC, this 18th day of October, 2011.

Phyllis C. Borzi,

Assistant Secretary, Employee Benefits Security Administration, Department of Labor.

[FR Doc. 2011-27312 Filed 10-26-11; 8:45 am]

BILLING CODE 4510-29-P