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Trust Examination Manual
Advisory
Opinion 2003-15A
November 17, 2003
2003-15A
ERISA Sec. 3(14)(G) and 406(a)
William A. Schmidt
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Second Floor
Washington, DC 20036-1800
Jacob I. Friedman
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299
Dear Messrs. Schmidt and Friedman:
This is in response to your request for an advisory opinion on behalf of Verizon
Investment Management Corp. as to whether certain transactions between employee
benefit plans sponsored by Verizon Communications, Inc. (Verizon) and a limited
partnership in which those plans invest would constitute prohibited transactions
under the Employee Retirement Income Security Act of 1974 (ERISA).
You represent that Verizon sponsors welfare benefit plans that qualify as voluntary
employees’ beneficiary associations (VEBAs) and defined benefit plans (DB Plans),
collectively the Verizon Plans.(1) The Bell Atlantic Master Trust (Master Trust)
holds the assets of the Verizon DB Plans. Mellon Bank, N.A. (Mellon) serves as
the directed trustee of the Master Trust. Each VEBA is held in trust by Mellon.
Verizon Investment Management Corp. (VIMCO), a wholly-owned subsidiary of Verizon,
serves as investment manager of the Verizon Plans. You represent that VIMCO is
an in-house asset manager (INHAM) within the meaning of Part IV(a) of Prohibited
Transaction Exemption 96-23 with respect to the Verizon Plans.
You represent that Verizon intends to create an investment vehicle for the Verizon
Plans, employee benefit plans maintained and sponsored by third parties unrelated
to Verizon or Mellon (Third Party Plans), and other institutional investors.
To accomplish this, VIMCO, in concert with Mellon, would establish and operate
a limited partnership, which is a collective investment vehicle (CIV) organized
under the laws of Delaware.(2) The CIV will be managed by a joint venture between
VIMCO and Mellon (Joint Venture).
You represent that Delaware law requires that, among other things, the CIV
have one or more general partners and one or more limited partners. You represent
that, pursuant to Delaware law, the general partner is not required to make
contributions
to the CIV nor acquire a partnership interest in the CIV. You further represent
that the general partner will not make a contribution to, nor acquire a partnership
interest in, the CIV unless required to do so pursuant to the law of jurisdictions,
other than Delaware, in which the CIV may be doing business.(3) A wholly-owned
subsidiary of VIMCO will be the general partner of the CIV. You represent
that the Verizon Plans will contribute assets to the CIV and become limited
partners
of the CIV at the time the CIV is organized. You represent that Mellon will
have no responsibility or authority with respect to the Verizon Plans’ decisions
to
invest in the CIV. The Third Party Plans and other third party institutional
investors will become limited partners at future dates
upon contribution to the CIV. Mellon or a third party will be the trustee
for the Third Party Plans. The Third Party Plans will not have any relationship
with
VIMCO prior to making a contribution to the CIV. You represent that, assuming
that state law requirements are fulfilled, the liability of each limited
partner for the CIV’s debts or obligations will be limited to the extent
of the capital
that the limited partner has contributed or has agreed to contribute to the
CIV, undistributed profits and, under certain circumstances, the return of
certain
distributions from the CIV. You represent that the CIV will not be designated
as a named fiduciary of, nor perform fiduciary functions for, the Verizon
Plans or the Third Party Plans.
With respect to a Third Party Plan’s participation in the CIV, an independent
fiduciary (i.e., independent of VIMCO and Mellon) will make a determination whether
to make initial or subsequent contributions into the CIV based upon detailed
information provided by VIMCO concerning the available investment pools and other
relevant information. The independent fiduciary must approve each Third Party
Plan’s program of purchases and redemptions of interests in the CIV.
Mellon will be the custodian of the assets of the CIV. You represent that Mellon,
as trustee of the Master Trust, will hold at least fifty percent of the interests
of the CIV, on behalf of the Verizon DB Plans, for the foreseeable future.
The CIV will be composed of multiple investment pools with varying investment
risks. The Joint Venture will be the investment manager of the CIV, and as such,
will direct the allocation of each limited partner’s interests in the CIV among
the various investment pools. The Joint Venture will enter into a contract with
VIMCO under which VIMCO will discharge substantially all of the Joint Venture’s
investment management responsibilities with respect to the CIV. You further represent
that each limited partner will have an undivided interest in the assets of each
underlying investment pool in which it invests. The various investment pools
will be either (i) invested in common investment funds or mutual funds, or (ii)
managed by the Joint Venture or other investment advisers designated by the Joint
Venture (Third Party Investment Advisers), which will act as investment managers
and which are registered under the Investment Advisers Act of 1940 or which are
banks or insurance companies.
You represent that the Joint Venture and the Third Party Investment Advisers
will receive reasonable fees from the Third Party Plans and other institutional
investors for their services. In addition, while the Third Party Investment Advisers
will receive reasonable fees from the Verizon Plans for their services, the Joint
Venture, VIMCO and Mellon will not receive any fees or other compensation (directly
or indirectly) for investment management services to the Verizon Plans, but will
be reimbursed for expenses directly and properly incurred for performing services
for the Verizon Plans.
You have asked for an advisory opinion to the effect that, where fifty percent
or more of the interests in the CIV are legally held by Mellon, as fiduciary
for the benefit of the Verizon Plans, the CIV is not itself a party in interest
with respect to the Verizon Plans invested in the CIV, and therefore, contributions
to and distributions from the CIV would not constitute prohibited transactions
under ERISA. You are specifically concerned that the CIV may be deemed a party
in interest with respect to the Verizon Plans under section 3(14)(G) of ERISA
because Mellon would hold more than fifty percent of the interests in the CIV
on behalf of the Verizon Plans as trustee of those Plans.
Section 406(a)(1)(A) and (D) prohibits, in relevant part, the exchange of any
property between a plan and party in interest and the transfer to, or use by
or for the benefit of, a party in interest, of any assets of the plan. Section
3(14)(G) of ERISA defines a party in interest to include a corporation, partnership
or trust or estate of which (or in which) fifty percent or more of (i) the combined
voting power of all classes of stock entitled to vote or the total value of shares
of all classes of stock of such corporation, (ii) the capital interest or profits
interest of such partnership, or (iii) the beneficial interest of such trust
or estate, is owned directly or indirectly, or held by, among others, a fiduciary
of a plan. (Emphasis added.)
Mellon, as trustee of the Verizon Plans, is a fiduciary with respect to the Verizon
Plans under section 3(21) of ERISA. The Verizon Plans’ contributions to the CIV
would be directed by VIMCO. The ownership interests in the CIV would be held
by Mellon on behalf of the Verizon Plans. Similarly, distributions from the CIV
to the Verizon Plans would be made to Mellon and held on behalf of the Verizon
Plans.
Consistent with section 3(14) of ERISA, a plan’s ownership of fifty percent or
more of a partnership entity will not cause that partnership to become a party
in interest with respect to that investing plan.(4) In our view, the application
of section 3(14)(G) should not change that result merely because a plan’s interests
in a partnership are held by a fiduciary on behalf of the plan. Although Mellon
would hold more than fifty percent of the value of the CIV interests, it would
hold such interests on behalf of the Verizon Plans, not on behalf of itself or
a third party. As a result, it is the view of the Department that the CIV will
not be a party in interest with respect to the Verizon Plans.(5) Therefore, transactions
between the Verizon Plans and the CIV, including initial and subsequent contributions
to the CIV by the Verizon Plans and distributions from the CIV to the Verizon
Plans, would not be prohibited under section 406(a) of ERISA.
Section 406(b)(1) of ERISA prohibits a fiduciary from dealing with plan assets
in his or her own interests or for his or her own account. ERISA section
406(b)(2) specifically prohibits fiduciaries in their individual or in any
other capacity
from acting in any transaction involving the plan on behalf of a party (or
representing a party) whose interests are adverse to the interests of the
plan or the interests
of its participants or beneficiaries. Accordingly, VIMCO and Mellon must
ensure that they can act on behalf of the CIV without compromising their
positions as
fiduciaries of the Verizon Plans. Further, while the Department recognizes
that determining whether violations of the prohibited transaction provisions
of section
406(b) of ERISA would occur are inherently factual questions, it is the view
of the Department that if, in operation, VIMCO’s provision of investment
management services to the Verizon Plans or Mellon’s provision of trustee
services to the
Verizon Plans results in a divergence of interests
between VIMCO and the Verizon Plans or Mellon and the Verizon Plans, violations
of sections 406(b) of ERISA could occur.
The Department cautions that ERISA’s general standards of fiduciary conduct would
apply to the Verizon Plans’ investment in the CIV. Section 404(a)(1) of ERISA
requires, among other things, that a fiduciary discharge his or her duties with
respect to a plan solely in the interest of the participants and beneficiaries,
and with the care, skill, prudence and diligence under the circumstances then
prevailing that a prudent person acting in a like capacity and familiar with
such matters would use in the conduct of an enterprise of like character and
with like aims. Accordingly, the appropriate plan fiduciaries must act “prudently”
and “solely in the interests” of the plan participants and beneficiaries with
respect to the decision to acquire or dispose of the Verizon Plans’ interests
in the CIV.
This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly,
this letter is issued subject to the provisions of the procedure, including section
10 relating to the effect of advisory opinions.
Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
Footnotes
Under Reorganization Plan No. 4 of 1978, 43 Fed. Reg. 47713 (Oct. 17, 1978),
the authority of the Secretary of the Treasury to issue rulings under section
4975 of the Internal Revenue Code (the Code) has been transferred to the Secretary
of Labor, with certain exceptions not here relevant. The Secretary of the Treasury
is bound by interpretations of the Secretary of Labor pursuant to such authority.
Therefore, references in this letter to specific sections of ERISA should be
read to refer also to the corresponding sections of the Code.
- You represent that the CIV will be treated as a partnership
for tax purposes pursuant to Treasury Regulation
26 CFR 301.7701-3(b).
- You represent that if the general partner must make a
contribution to, or acquire a partnership interest in, the CIV pursuant
to state
law requirements, the general partner’s interest
in the CIV will be limited to the extent necessary to comply with such
requirements.
- Under the plan assets regulation, 29 CFR 2510.3-101, the
extent of a plan’s equity ownership interest in an
entity may cause that entity to be deemed to hold plan assets.
- See Advisory Opinion 80-67A (Nov. 30, 1980).
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