Advisory Opinion 77-46

June 7, 1977

U.S. Department of Labor

Pension and Welfare Benefits Programs

Washington, D.C. 20216

June 7, 1977 AO 77-46

Mr. Frederic S. Kramer

Assistant General Counsel

National Association of Mutual Savings Banks

200 Park Avenue

New York, N. Y. 10017

Dear Mr. Kramer:

Thank you for your letter requesting our advice as to whether the diversification rule of the Employee Retirement Income Security Act of 1974 (ERISA) permits savings bank trustees or custodians to invest contributions under self-employed retirement plans and individual retirement account plans (IRAs) in savings accounts and deposits with the trustee or custodian savings bank where the account balance exceeds the $40,000 amount covered by FDIC insurance. With respect to IRAs, we assume your question refers to an IRA which is established by an employer or union (or other employee association), since an IRA established by an individual for himself is not subject to Title I of ERISA. I regret the delay in responding to your letter.

You explain that the National Association of Mutual Savings Banks represents the 475 mutual savings banks in the United States which are authorized under the Internal Revenue Code of 1954 to act as trustees or custodians of self-employed retirement plan funds and IRAs. You advise that many jurisdictions in which savings banks do not enjoy trust powers have enacted legislation permitting savings banks to act as fiduciaries with respect to such plans and that New York law is typical of such legislation. You state that New York law provides that savings banks shall have the power to act as trustees of such plans provided that the provisions of these plans "require the funds of such trust to be invested exclusively in deposits in savings banks" (section 237.7 and 237.8, New York Banking Law). Accordingly, typical provisions in self-employed retirement plans and IRAs in savings banks jurisdictions authorizing savings banks to act as trustees of these accounts provide that the funds of such trusts will be invested exclusively in savings accounts or deposits in the trustee (or custodian) savings bank.

You advise that mutual savings banks are state chartered institutions that derive their powers, including investment powers, from their respective states; as state chartered institutions, mutual savings bank investments are not regulated by federal law.

You have submitted a chart showing the types of legal investments for mutual savings banks, by state, which was most recently compiled as of September 30, 1975. The chart shows that mutual savings banks in Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, Oregon, Pennsylvania, Rhode Island, and Washington are permitted to invest in the following: U.S. Government bonds; state, county, and municipal bonds; railroad bonds; equipment obligations; telephone bonds; electric utility bonds; Canadian bonds; real estate construction loans; conventional mortgage loans; 20 percent mortgage loans; FHA loans; VA loans; large-scale housing; equity securities; bank stock; collateral loans; unsecured notes; acceptances and bills of exchange. The chart also shows that mutual savings banks in Maine, New Jersey, New York, Ohio, and Vermont are permitted to invest in all but one of these types of investments and that Minnesota, Indiana, Alaska, and Wisconsin are somewhat more restrictive in the types of investments permitted for such banks. In all of the above-named states, except Indiana, Vermont, and Wisconsin, mutual savings banks are permitted to invest in equity securities, as well as in debt instruments.

You have also submitted a booklet containing a list of securities considered legal investments for savings banks under section 235 of the New York Banking Law as of July 1, 1975, and financial statements showing the actual investments of three mutual savings banks (a large bank, a small one, and a medium-sized one).

You explain that the investment authority of mutual savings banks differs from that of commercial banks in that while practically all mutual savings banks can invest in equity securities, commercial banks are prohibited, with limited exceptions, from investing in stocks of corporations. Also, while mutual savings banks' authority to invest in equity securities is generally far broader than that of commercial banks, commercial banks have the power to make short term commercial loans at rates which may be tied to the prime rate and further may make such loans to any one issuer or borrower in an amount up to ten percent of the bank's capital stock, paid-in and unimpaired, plus ten percent of its unimpaired surplus fund.

Section 404(a)(1)(C) of ERISA requires a fiduciary to discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. The Conference Report (H. Rep. No. 93-1280, 93rd Congress, 2nd Session) states, on page 305, that the conferees intend that, in general, whether the plan assets are sufficiently diversified is to be determined by examining the ultimate investment of the plan assets. For example, the conferees understand that for efficiency and economy plans may invest all their assets in a single bank or other pooled investment fund, but that the pooled fund itself could have diversified investments. It is intended that, in this case, the diversification rule is to be applied to the plan by examining the diversification of the investments in the pooled fund. The same is true with respect to investments in a mutual fund. Also, generally a plan may be invested wholly in insurance or annuity contracts without violating the diversification rules, since generally an insurance company's assets are to be invested in a diversified manner. The Conference Report also explains, on page 314, that it is expected that the prudent man, diversification, and other rules of section 404(a) of ERISA generally will not be violated if all plan assets in an individual account plan are invested in a federally-insured account, so long as the investments are fully insured. (If an individual's account balance is greater than the amount covered by federal insurance, this will not violate the prudence and diversification requirements if the individual participant or beneficiary has control over his account and determines, for himself, that the assets should be so invested.)

With respect to control, section 404(c) of ERISA states that in the case of a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over assets in his account, if a participant or beneficiary exercises control over the assets in his account (as determined under regulations of the Secretary) -- (1) such participant or beneficiary shall not be deemed to be a fiduciary by reason of such exercise and (2) no person who is otherwise a fiduciary shall be liable under Part I of ERISA for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control. However, the Conference Report states, on pages 305-306, that the conferees recognize that there may be difficulties in determining whether the participant in fact exercises independent control over his account. Consequently, whether participants and beneficiaries exercise independent control is to be determined pursuant to regulations prescribed by the Secretary of Labor. The conferees expect that the regulations generally will require that for there to be independent control by participants, a broad range of investments must be available to the individual participants and beneficiaries.

You believe that although the term "control" is not defined by ERISA, the requisite control would exist even though substantial penalties for withdrawal from retirement plan accounts are imposed both by the FDIC and the Internal Revenue Code. A participant can withdraw his funds, which are fully vested at all times, at any time subject to these penalties. A participant's control over his IRA is such that he can, once every three years, withdraw the entire amount of the funds in his account and reinvest the proceeds in another IRA funded through insurance contracts or a mutual fund, or through the deposits of another financial institution.

Alternatively, in the event it is determined that the individual participant or beneficiary does not have control over the account as that term might be defined in regulations, you suggest that recognition of the diversification of insurance company investments, discussed on page 305 of the Conference Report, should apply equally to those of a mutual savings bank. You believe that the investment alternatives of a savings bank are, in much the same way as the investment alternatives of an insurance company, strictly regulated to insure the sound and prudent investment of these kinds of funds.

As noted above, no regulations have yet been issued under section 404(c). In the absence of such regulations, we are unable to respond to the question of control.

[FDIC Note: DOL Regulation 2550.404c-1 was not adopted until 10-13-92.]

With respect to your second question as to whether section 404(a)(1)(C) of ERISA permits investment of all the assets of an individual account plan in savings accounts of mutual savings banks where the account balance exceeds the amount covered by Federal insurance, it is the view of the Department of Labor that such an investment would not, in and of itself, contravene the diversification requirements of section 404(a)(1)(C), assuming that the bank invested its assets in a diversified manner. As noted by the Conference Report at p. 314, to the extent that the investment in the account balance is not in excess of the amount covered by Federal insurance, the diversification standard will not be violated, as there cannot be large losses. However, the individual account plan may invest all its assets in a savings bank even if such amount exceeds the amount covered by Federal insurance, without violating the diversification rules, if the bank's assets are invested in a diversified manner. The fiduciary making such investment would, of course, have to determine whether the bank's assets were diversified so as to minimize the risk of large losses.

We are expressing no opinion as to whether in practice the investments of self-employed retirement plans or IRAs in any specific mutual savings bank or any specific group of mutual savings banks are actually sufficiently diversified to meet the requirements of section 404(a)(1)(C).

Sincerely,

Fred W. Stuckwisch

Director

Office of Regulatory Standards and Exceptions

Advisory Opinion to Bank Plan (79-49)

May 14, 1979

U.S. Department of Labor

Labor-Management Services Administration

Washington, D.C. 20216

Washington Service Bureau Reference

May 14, 1979 79-49

Mr. Alfred T. Spada

Hogan and Hartson

815 Connecticut Avenue, N.W.

Washington, D.C. 20006

Re: Riggs National Bank Amended Pension Plan

Dear Mr. Spada:

This is in response to your letter of September 8, 1977, in which you seek our opinion as to whether the appointment and service of the Riggs National Bank (the Bank) as trustee of the Riggs National Bank Amended Pension Plan (the Plan) would constitute a prohibited transaction under section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) or would otherwise be prohibited under ERISA.

In your letter, you represent that the Board of Directors of the Bank adopted the Plan in September 1976 and the related amended trust agreement in May 1977. These documents include an amendment substituting Riggs as trustee of the Plan in place of various individuals currently serving as trustees. You further represent that the Bank will not receive any fee or other compensation from the Plan for its services as trustee.

A number of provisions in Part 4 of Subtitle B of Title I of ERISA seem to imply that an employer of a plan's participants may serve as trustee of the plan.

Section 402(c)(1) states that any employee benefit plan may provide that any person or group of persons may serve in more than one fiduciary capacity with respect to the plan (including service both as trustee and administrator).

Section 408(c)(3) provides that the restrictions of section 406 shall not prohibit a fiduciary from serving as a fiduciary in addition to being an officer, employee, agent, or other representative of a party in interest. Under section 3(14)(C), an employer any of whose employees are covered by a plan is a party in interest with respect to the plan.

Section 408(b)(4)(A) permits the investment of Plan assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of the plan and if the plan covers only employees of the bank or other institution and employees of affiliates of such bank or other institution.

Part 4 of Subtitle B of Title I of ERISA contains no provision that prohibits an organization from being both an employer of a plan's participants and a trustee of the plan. We note, however, that the conduct of any organization in its capacity as trustee would be subject to the fiduciary responsibility requirements of Part 4, including section 404 (relating to fiduciary duties) and section 406 (relating to prohibited transactions).

Section 406(a)(1)(C) of ERISA provides generally that a plan fiduciary shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest.

Section 408(b)(2), however, exempts from the prohibitions of section 406 contracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of a plan, if no more than reasonable compensation is paid therefore.

Regulation 2550.408b-2 explains that the 408(b)(2) exemption applies only to transactions described in section 406(a) of ERISA. If the furnishing of a service involves an act described in section 406(b) (relating to conflicts of interest by fiduciaries), such act constitutes a separate transaction which in not exempt under section 408(b)(2). The prohibitions of section 406(b) are intended to deter fiduciaries from exercising the authority, control, or responsibility which makes them fiduciaries when they have interests which may conflict with the interests of the plans for which they act. Thus, section 406(b) would prohibit a fiduciary from using the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary) to provide a service.

Section 2550.408b-2(c)(3) of the regulation states, however, that if a fiduciary provides services to a plan without the receipt of compensation or other consideration (other than reimbursement of direct expenses properly and actually incurred in the performance of such services), the provision of such services does not, in and of itself, constitute an act described in section 406(b) of ERISA.

We regret the delay in responding to your request, and hope you find this general information helpful.

Sincerely,

Alan D. Lebowitz

Assistant Administrator

Office of Fiduciary Standards

Advisory Opinion to OCC (80-OCC)

July 25, 1980

U.S. Department of Labor

Labor-Management Services Administration

Washington, D.C. 20216

Reply to the Attention of:

Ivan Strasfeld

(202) 523-8971

July 25, 1980

Mr. Dean E. Miller

Deputy Comptroller for Specialized Examinations

Comptroller of the Currency

Administrator of National Banks

Washington, D.C. 20219

Dear Mr. Miller:

By letter dated May 27, 1980, you presented certain issues arising under the prohibited transactions provisions contained in Part 4 of Title I of ERISA that are often discerned by your trust examiners during the course of their inspections.

Accordingly, you have requested guidance with regard to the following questions:

1. Where a bank has sole investment responsibility with respect to the assets of an employee benefit plan, will the purchase for the plan of the bank's stock or its holding company's stock constitute a prohibited transaction under ERISA? If so, which provisions of section 406 would it violate? (You have asked us to assume that the stock will not be purchased from a party in interest).
2. Where the bank as trustee is directed by a named fiduciary authorized to direct the investments of a plan, will the directed purchase for the plan of the bank's stock or its holding company's stock constitute a prohibited transaction under ERISA? (Again, you ask us to assume that the stock will not be purchased from a party in interest).
3. Where an investment manager has been named, will the purchase of the bank trustee's stock or its holding company's stock at the direction of the investment manager constitute a prohibited transaction under ERISA?
4. Does the retention by a plan of the bank trustee's stock or its holding company's stock constitute a prohibited transaction under ERISA?

The prohibited transactions provisions of ERISA restrict the acquisition and holding by an employee benefit plan of securities issued by an employer-sponsoring company. See section 407 of ERISA. No such explicit proscription or limitation applies to stock of a bank trustee or holding company thereof.

However, section 406(a)(1)(D) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. The ERISA Conference Report (H.R. Rep. No. 93-1280; 93d Cong., 2d Session 308 (1974)) clarifies this prohibition by stating, among other things, "... securities purchases or sales by a plan to manipulate the price of the security to the advantage of a party in interest constitutes a use by or for the benefit of a party in interest of any assets of the plan."

Sections 406(b)(1) and (2) further prohibit a fiduciary from dealing with the assets of a plan in his own interest or for his own account or acting in any transaction involving the plan on behalf of a party or representing a party whose interests are adverse to the interests of its participants or beneficiaries. The prohibitions of section 406(b) of ERISA impose upon fiduciaries a duty of undivided loyalty to the plans for which they act. Moreover, the codification of the "prudent man rule" contained in section 404(a)(1) of ERISA provides in relevant part:

Although a determination of whether a violation of sections 406(b)(1) or (2) and 404(a) has occurred will generally depend on the particular facts and circumstances of each case, it burdens our imagination to envision a situation in which a trustee with investment discretion could make an objective decision, solely on the basis of the prudence standard, regarding the purchase or sale of its own stock [emphasis added]. For example, a trustee may exercise his or her discretion based on inside information regarding the bank's financial condition. Although, in a particular case, it may be in the plan's best interest to sell the bank stock, the sale of such stock might cause a further decline in its market value. In such case, the bank trustee would have an interest in the transaction which would conflict with the interest of the plan for which he acts so as to be in violation of section 406(b)(2) of ERISA.

A bank trustee may avoid engaging in an act described in section 406(b)(1) or (2) of ERISA by not using the authority, control or responsibility which makes it a fiduciary to cause a plan to purchase or sell bank stock. Thus, the purchase or sale of bank stock by a trustee pursuant to the instructions of a named fiduciary or investment manager not affiliated with such trustee will not result in violations of such 406(b) of ERISA.

It should be noted that the inquiry concerning whether a fiduciary has violated section 406(b)(1) and (2) of ERISA is not limited to a decision whether to buy or sell bank stock. At all times that a trustee acts in a fiduciary capacity, he may make no decision on behalf of a plan which would have the effect of benefiting a person in which such fiduciary has an interest. A decision to retain bank stock in the plan portfolio, as well as decisions to buy or sell such stock, may involve acts described in section 406(b) of ERISA. However, to the extent a trustee has no discretion regarding retention of bank stock, (e.g., the decision to retain bank stock is, in fact, made by an independent investment manager), no violation of section 406(b)(1) or (2) will occur.

We hope this information provides adequate guidance to you in the implementation of examination policy. Of course, we would welcome any further inquiries raised under the fiduciary responsibility provisions of ERISA.

Sincerely,

Alan D. Lebowitz

Assistant Administrator for Fiduciary Standards

Pension and Welfare Benefit Programs

Advisory Opinion/Individual Exemption 85-36A

Loans Intended to Benefit Union Members/Employers

October 23, 1985

U.S. Department of Labor

Office of Pension and Welfare Benefit Programs

Washington, D.C. 20210

Ralph P. Katz

Delson & Gordon

230 Park Avenue

New York, NY 10169

Identification Number: F-2521

Dear Mr. Katz:

This is in response to your letter of September 23, 1982, in which you requested clarification regarding the application of the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) to a proposed investment by the Annuity Fund of the Electrical Industry of Long Island (the Fund). Specifically, you inquired whether a prohibited transaction would occur if the trustees of the Fund made an investment which was part of an overall agreement obligating an insurance company to invest a specified amount of insurance company assets in construction mortgages within the geographic jurisdiction of the union whose members are participants in the Fund. The agreement would further require the insurance company to make such investments in construction projects employing only labor represented by unions affiliated with the AFL-CIO. You state that the trustees will make the investment after determining that the investment rate of return is equal to or greater than similar investments bearing similar risks.

Section 406(a)(1)(D) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction which the fiduciary knows or should know constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) and (2) of ERISA further prohibit a fiduciary with respect to a plan from dealing with the assets of a plan in his or her own interest or for his or her own account, or acting in any transaction on behalf of a party or representing a party whose interests are adverse to the interest of the plan or its participants.

Section 3(14) of ERISA defines the term party in interest to include a fiduciary, an employer any of whose employees are covered by the plan, and any employees of such employer.

We wish to point out, as we have done in prior correspondence regarding this matter, that ERISA's general standards of fiduciary conduct apply to your proposed investment course of action. Sections 403(c) and 404(a)(1) of ERISA require, among other things, that a fiduciary of a plan act prudently, solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of providing benefits to participants and beneficiaries. As you know the Department, on a number of occasions, has expressed its views as to the meaning of these requirements in the context of investment decision-making.

We have stated that, to act prudently, a plan fiduciary must consider, among other factors, the availability, riskiness, and potential return of alternative investments for his plan. Because the investment you propose causes the plan to forego other alternative investment opportunities, such an investment would not be prudent if it provided a plan with less return, in comparison to risk, than comparable investments available to the plan, or if it involved a greater risk to the security of plan assets than other investments offering a similar return.

We have construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to, participants and beneficiaries as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their requirement income to unrelated objectives. Thus, in deciding whether and to what extent to invest in a particular investment, a fiduciary must ordinarily consider only factors relating to the interests of plan participants and beneficiaries in their retirement income. A decision to make an investment may not be influenced by desire to stimulate the construction industry and generate employment, unless the investment, judged solely on the basis of its economic value to the plan, would be equal or superior to alternative investments available to the plan.

Thus, it would not be inconsistent with the requirements of sections 403(c) or 404 of ERISA for plan fiduciaries to select an investment course of action that reflects non-economic factors, so long as application of such factors follows primary consideration of a broad range of investment opportunities that are, economically advantageous.

Based on the representations made in your letter, it does not appear that the arrangement you describe would involve a prohibited transaction of the kind described in sections 406(a)(1)(A), (B) or (C) of ERISA (relating to sales, leases or other exchanges of property, loans or other extensions of credit and the furnishing of goods, services or facilities). In addition, it does not appear that the arrangement involves a direct transfer of plan assets to, or use of plan assets by or for the benefit of, a party of interest of the kind described in section 406(a)(1)(D) of the Act.

Nonetheless, it is reasonable to infer that the arrangement will result in some benefit to parties in interest with respect to the plan, i.e. contributing employers and their employees. Thus, it is necessary to determine whether the arrangement would involve an indirect use of plan assets for the benefit of a party in interest.

In the circumstances you describe, where the arrangement would be prohibited, if at all, solely as an indirect use of plan assets for the benefit of a party in interest,^* the Department believes that it is appropriate to examine the facts and circumstances surrounding the plan's investment to determine whether it is made for the purposes of providing a prohibited benefit. Since this is an inherently factual determination, the Department is not prepared to issue an advisory opinion regarding the specific arrangement described in your letter.

In our view, however, a plan investment which is made subject to a condition which can reasonably be expected to result in a benefit to one or more parties in interest would violate section 406(a)(1)(D) (as well as sections 403 and 404 of the Act) if it involves greater a greater risk or a lesser return to the plan than a comparable transaction that is not subject to such a condition.

This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.

Sincerely,

Elliot I. Daniel

Assistant Administrator for Regulations and Interpretations

Section 406(a) of ERISA provides, in pertinent part, that a fiduciary of an ERISA plan shall not cause the plan to engage in a transaction which the fiduciary knows or should know constitutes a direct or indirect: (1) sale or exchange, or leasing of any property between the plan and a party in interest; (2) furnishing of goods, services, or facilities between the plan and a party in interest; or (3) transfer to, or use by or for the benefit of a party in interest, of any asset of the plan. Section 3(14) defines the term "party in interest" to include a fiduciary and a person providing services to the plan. In addition, section 406(b) provides that a fiduciary with respect to a plan shall not: (1) deal with the assets of the plan in its own interest or for its own account; (2) act on behalf of or represent a part whose interests are adverse to those of the plan; or (3) receive consideration from a third party in connection with a transaction involving plan assets.

ERISA section 408(b)(2) exempts from the prohibitions of section 406(a) the payment by a plan to a party in interest, including a fiduciary, for a service (or a combination of services if: (1) the service is necessary for the establishment or operation of the plan; (2) the service is furnished under a contract or arrangement which is reasonable; and (3) no more than reasonable compensation is paid for the service. Accordingly, the mere provision of cash sweep services by a bank or similar institution would be exempt from the prohibitions of ERISA section 406(a) if the conditions of the exemption described in section 408(b)(2) were met.²

With respect to the prohibitions in section 406(b), regulation 29 C.F.R. 2550.408b-2(a) indicates that ERISA section 408(b)(2) does not contain an exemption for an act described in ERISA section 406(b) (relating to conflicts of interest on the part of fiduciaries) even if such act occurs in connection with a provision of services which is exempt under section 408(b)(2). As explained in regulation 29 C.F.R. 2550.408b-2(e)(1), if a fiduciary uses the authority, control, or responsibility which makes it a fiduciary to cause the plan to enter into a transaction involving the provision of services when such fiduciary has an interest in the transaction which may affect the exercise of its best judgment as a fiduciary, a transaction described in section 406(b) would occur, and that transaction would be deemed to be a separate transaction from the transaction involving the provision of services and would not be exempted by section 408(b)(2).

As a general matter, a bank engages in violations of section 406(b)(1) whenever it uses its fiduciary authority or control with respect to plan funds to increase the amount of its compensation by determining the timing and/or the amount of plan funds to be transferred into the sweep fund.³ Conversely, section 29 C.F.R. 2550.408b-2(e)(3) indicates that if a bank provides sweep services without the receipt of additional compensation or other consideration (other than reimbursement of direct expenses Properly and actually incurred in the performance of such services within the meaning of 29 C.F.R. 2550.408c-2(b)(3)), then the provision of sweep services by the bank would not, in itself, constitute a violation of section 406(b) of ERISA. Moreover, the provision by a bank of investment management services, including sweep services, under a single arrangement which is calculated as a investment management services, including sweep services, of the market value of the total assets under management would not, in itself, constitute an act described in section 406(b)(1) of ERISA because the bank would not be exercising its fiduciary authority or control to cause a plan to pay an additional fee.

The following examples illustrate the application of the of section 408(b)(2) of ERISA to sweep service arrangement. The examples assume that the underlying investment transactions otherwise comply with applicable statutory exemptions.

You further indicate that some banks have been relying on the exemption provided by section 408(b)(6) of ERISA. Section 408(b)(6) exempts from the prohibitions of section 406 the provision of certain ancillary services by a bank or similar financial institution supervised by the United States or a State to a plan for which it acts as a fiduciary if the conditions of 29 C.F.R. 2550.408b-6(b) are met. Such ancillary services include services which do not meet the requirements of ERISA section 408(b)(2) because the provision of such services involves an act described in section 406(b)(1) or (b)(2) of ERISA, section 2550.408b-6(b) requires that such services must be provided at not more than reasonable compensation; under adequate internal safeguards which assure that the provision of such service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority; and only to the extent such service is subject to specific guidelines issued by the bank or similar financial institution which meet the requirements of section 2550.408b-6(c). To date, no regulations have been issued clarifying that section. However, the Department has stated that the condition contained in section 408(b)(6)(B) requiring "specific guidelines" is satisfied (in the absence of such regulations) if the ancillary services are provided in accordance with specific guidelines issued by the bank or similar financial institution, and if adherence to the guidelines would reasonably preclude such bank or institution from providing the services in an excessive or unreasonable manner and in a manner that would be inconsistent with the best interests of the participants and beneficiaries. (See 47 FR 14806, April 6, 1982.)

A bank which is a fiduciary to a plan may receive additional fees for additional services rendered only if such services are "ancillary services." In the Department's view, the question of whether short-term cash management services constitute "ancillary services" within the meaning of section 408(b)(6) depends on the expectations of the parties as evidenced by the terms of the governing instrument and applicable Federal banking law. Thus, for example, the Department believes that where a plan appoints a bank trustee or investment manager with complete discretion to manage the assets placed in its control, and no provision for short-term cash management is made under the terms of the governing instrument, the plan does so with the expectation that such person will minimize uninvested cash balances and maximize the plan's rate of return in accordance with evolving technology for short-term cash management. However, where, for example, a plan appoints an independent investment manager to manage plan assets, the provision by a custodial trustee bank of sweep services for any idle cash balances may constitute an "ancillary service" within the meaning of section 408(b)(6). At the present time, the Department is not prepared to conclude that section 408(b)(6) is available in all cases For the arrangements described in your letter.

You further indicate that some banks appear to be relying on the exemption provided by ERISA section 408(b)(8) to invest plan funds in collective trust funds maintained by such banks.

Section 408(b)(8) of ERISA provides an exemption for any transaction between a plan and a common or collective trust fund maintained by a bank or trust company supervised by a State or Federal agency, if (a) the transaction is a sale or purchase of an interest in the fund, (b) the bank or trust company receives not more than reasonable compensation, and (c) the transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank or trust company, or an affiliate thereof) who has authority to manage and control the assets of the plan. The Department has been unwilling to indicate the extent to which section 408(b)(8) provides relief from the prohibitions of section 406(b) of ERISA (See 44 FR 44291 n. 3, July 27, 1979). However, if the bank does not exercise its fiduciary authority to cause a plan to pay an additional fee or other compensation in connection with the acquisition by a plan of an interest in a collective trust fund or for the provisions of services under such fund, the investment would not, in itself, involve acts described in section 406(b)(1) of ERISA.

We hope these comments have been helpful. However, if you should have any further questions or if we can provide any further assistance, please feel free to contact Ivan Strasfeld at (202) 523-8671.

Alan D. Lebowitz

Deputy Administrator for Program Operations

cc: Dean Miller

- Footnotes -

1. Your request appears to be limited to the situation where the bank fiduciary sweeps idle cash balances into its in-house short-term investment vehicles. Accordingly, our response focuses on that situation and does not address the sweep of cash balances into short-term vehicles maintained by parties unrelated to the bank.
2. The Department notes that, although section 408(b)(2) of ERISA provides relief for the furnishing of goods in the course of, and incidental to, the furnishing of services to a plan, the statutory exemption for services does not extend to underlying investment transactions, such as sales or extensions of credit otherwise described in section 406 of ERISA. Rather, section 408(b)(2) provides relief from the restrictions of section 406(a) only for those service transactions which satisfy the conditions of section 408(b)(2) and the regulations thereunder. For example, if a bank fiduciary sells repurchase agreements to a plan under a sweep service arrangement, section 408(b)(2) may provide relief for the provision of such sweep service, but does not provide relief for the acquisition of the repurchase agreements from the bank.
3. In this regard, the Department expresses no opinion as to whether the underlying investment transaction itself is the subject of statutory or administrative relief. See, for example, sections 408(b)(4) and 408(b)(8) of ERISA

Advisory Opinion/Individual Exemption 88-02A

February 2, 1988

U.S. Department of Labor Pension and Welfare Benefits Administration

Washington, D.C. 20210

February 2, 1988 88-02A

Sec. 406(b)(1) & (3), 408(b)(2)

Ms. Charlotte 0. Roederer

Vice President and

Associate General Counsel

Manufacturers and Traders Trust Company

One M&T Plaza

Buffalo, NY 14240

Re: Identification Number: F-3634A

Dear Ms. Roederer;

This is in response to your request for an advisory opinion regarding the application of the Employee Retirement Income Security Act of 1974 (ERISA) to certain "sweep services" provided by Manufacturers and Traders Trust Company (the Bank) to employee benefit plans for which the Bank acts as custodian or directed trustee. You specifically ask whether the transactions would qualify for the statutory exemptions provided by sections 408(b)(2) and/or 408(b)(6) of ERISA.

You represent that the bank offers a daily cash "sweep service" to employee benefit plans for which the Bank acts as custodian or directed trustee. For those plans which elect to utilize the sweep service, some or all of the plans' uninvested cash is swept into one of several money market funds, all of which are sponsored by independent third parties. For each plan to which the Bank offers this service, an independent third party (or the employer, other than the Bank) functions as the sole investment advisor. The investment advisor determines whether and how much uninvested cash will be swept, and chooses which of several money market funds will be utilized. The specified amount of uninvested cash is swept into the selected investment vehicle at the close of each business day.

Each month the plans participating in the sweep service receive a dividend from the money market funds based on the prior month's daily invested cash balance in the funds. The bank periodically calculates a "cash sweep" fee which is a percentage of the dividends received by each plan from the funds. The bank receives no fees or other compensation from the money market funds. Thus, you represent that no part of the dividends received are allocated to the Bank for its own account as compensation for sweep services. The cash sweep fee is recorded separately in the periodic accounting and billing which the Bank sends to the employer. For most plans, the fee is calculated and billed on a quarterly basis, but small plan accounts are billed annually. The cash sweep arrangement is subject to immediate termination without penalty and requires that the Bank notify the plan no less than 30 days prior to any change in the fees to be charged for the service.

The provisions of section 406(a)(1)(C) and (D) of ERISA prohibit a fiduciary with respect to a plan from causing the plan to engage in a transaction if he or she knows or should know that the transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest, or transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) of ERISA further prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in his or her own interest or for his or her own account. Section 406(b)(2) of ERISA provides that a fiduciary shall not in his or her individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries. Section 406(b)(3) of ERISA prohibits a fiduciary from receiving a fee or other consideration for his or her own personal account from a party dealing with a plan in connection with a transaction involving the assets of the plan.

Subject to the limitations of section 408(d), section 408(b)(2) of ERISA exempts from the prohibitions of section 406(a) contracting (or making reasonable arrangements) for services (or a combination of services) with a party in interest if: the service is necessary for the establishment or operation of the plan; (2) the service is furnished under a contract which is reasonable; and no more than reasonable compensation is paid for the service. Regulations issued by the Department clarify the terms "necessary service" (29 C.F.R. 2550.408b-2(b)), "reasonable contract or arrangement" (29 C.F.R. 2550.408b-2(c)), and "reasonable compensation" (29 C.F.R. 2550.408c-2).

Accordingly, the provision of sweep services would be exempt from the prohibitions of section 406(a) of ERISA if the conditions of section 408(b)(2) are met.¹ We note, however, that the questions of what constitutes a necessary service, a reasonable contract or arrangement, and reasonable compensation are inherently factual in nature. Section 5.01 of Advisory Opinion Procedure 76-1 (ERISA Proc. 76-1, 41 FR 36281, August 27, 1976) states that the Department generally will not issue opinions on such questions.

With respect to the prohibitions in section 406(b), regulation 29 C.F.R. 2550.408b-2(a) states that section 408(b)(2) of ERISA does not contain an exemption for an act described in section 406(b). As explained in 29 C.F.R. 2550.408b-2(e)(1), if a fiduciary uses the authority, control or responsibility that makes him or her a fiduciary to cause the plan to enter into a transaction involving the provision of services when such a fiduciary has an interest in the transaction that may affect the exercise of his or her best judgment as a fiduciary, a transaction described in section 406(b) of ERISA would occur, and the transaction would be deemed to be a separate transaction from the one involving the provision of services and would not be exempted by ERISA section 408(b)(2).

Your letter of March 31, 1987 states that the bank does not have investment discretion with respect to the plans to which the Bank offers the sweep service, and that the decision to utilize the sweep services and compensate the Bank therefore is made by independent investment advisors. Your submission also explains that the Bank will not receive a fee or other benefit from any of the unrelated money market funds into which uninvested cash is swept and that the Bank will notify a plan no less than 30 days prior to any change in the fees to be charged for the service. Your letter also states that each month, the plan receives from the fund into which the plan's assets are swept a dividend based on the prior month's activity and that the bank's "cash sweep" fee is a percentage of these dividends either paid by the plan sponsor or deducted by the Bank (at the instruction of the sponsor) from the assets of the plan.²

In the circumstances you describe, it appears that the Bank would not be exercising any of the authority, control, or responsibility that makes it a fiduciary to cause a plan to pay an additional fee in connection with the "sweep services". Thus, the provision of sweep services would not, in and of itself, involve acts described in section 406(b)(1) of ERISA. The Bank also would not appear to violate section 406(b)(2) because it would not, solely by reason of the circumstances you describe, be acting on behalf of a party whose interests are adverse to those of the plan.³

With respect to section 406(b)(3), the Department notes that, under the described circumstances, the receipt of fees by the Bank from the assets of a plan for the provision of sweep services would not, in itself, constitute a violation of section 406(b)(3) of ERISA.

You also ask whether the provision of sweep services by the Bank would qualify for the statutory exemption provided by section 408(b)(6) of ERISA. However, to the extent that the arrangement you describe is covered by section 408(b)(2), the Department does not find it necessary to address whether an additional statutory exemption is available.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. We note that pursuant to section 5 of ERISA Procedure 76-1, this advisory opinion relates solely to the arrangement described involving the Bank.

Sincerely,

Robert J. Doyle

Acting Associate Director for Regulations and Interpretations

- Footnotes -

1. The Department expresses no opinion herein regarding the underlying investment of plan assets in the money market funds. In this regard, the Department notes that the statutory exemption for services does not extend to underlying investment transactions such as sales between a plan and a party in interest described in section 406 of ERISA.
2. We assume that, where the bank's fee is deducted from the assets of a plan, the obligation to pay such fee is, under the governing plan documents, an obligation of the plan and not of the plan sponsor.
3. In expressing this opinion, the Department assumes that no arrangement exists between either the Bank and any of the above described mutual funds or the directing plan fiduciary and any of the funds such as described in 29 C.F.R. § 2509.75-2(c).

Advisory Opinion/Individual Exemption 88-09A

April 15, 1988

U.S. Department of Labor

Pension and Welfare Benefits Administration

Washington, D.C. 20210

April 15, 1988 A/Opinion 88-09A

Lloyd V. Crawford

Rushton, Stakely, Johnston & Garrette

184 Commerce Street

Montgomery, AL 36104

Re: Bank of Prattville

Identification Number: F-3677A

Dear Mr. Crawford:

This is in response to your letters of May 29 and June 18, 1987 requesting an advisory opinion regarding the application of the prohibited transaction provisions of section 4975 of the Internal Revenue Code of 1986 (the Code). In particular, your letter concerns purchases of stock of the parent (the Parent) of the Bank of Prattville (the Bank) by various self-directed individual retirement accounts (IRAs) sponsored by the Bank.

You represent that the Bank is a banking corporation organized under the laws of the state of Alabama and is wholly owned by the Parent. The Bank qualifies under section 408(a)(2) and 408(n) of the Code as a trustee of IRAs.

The Bank is considering amending the existing master and prototype IRA for which it serves as custodian to include a self-directed feature which permits the participants to direct the investments of their accounts in securities selected by the participants, including stock of the Parent. Pursuant to these amendments, the participants will have complete and sole discretion over the investments, with the Bank acting only as a nondiscretionary trustee or custodian. The Bank will not make any investments or dispose of any investments for the IRAs except upon the written direction of the participants. Neither the Bank nor the Parent will provide any form of investment advice or make investment recommendations. Purchases and sales of securities will be conducted through brokerage accounts which the IRA participants will establish with the Bank.

Parent stock is not traded on any exchange or on the national over-the-counter market system. In cases where an IRA participant directs that funds in his or her account be invested in Parent stock, the stock would be purchased either from the Parent's treasury or from unrelated third parties.

You ask for an opinion with respect to the following questions:

Pursuant to section 2510.3-2(d) of the Department's regulations, the Department does not have jurisdiction under Title I of the Employee Retirement Income Security Act (ERISA) over those individual retirement accounts described in section 408(2) of the Code which comply with the provisions of that section of the regulation.¹ Such IRAs are within the purview of Title II of ERISA, section 4975 of the Code. Under Presidential Reorganization No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor and the Secretary of the Treasury is bound by the interpretations of the Secretary of Labor pursuant to such authority. To the extent there is Title I jurisdiction regarding any IRA for which the Bank serves as custodian or trustee, references to specific sections of the Code in this letter shall also refer to the corresponding sections of ERISA.

Section 4975(c)(1) of the Code prohibits, in relevant part, the sale or exchange of property between a plan and a disqualified person (4975(c)(1)(A)), the furnishing of goods or services between a plan and a disqualified person (4975(c)(1)(C)), the use by or for the benefit of a disqualified person of the income or assets of a plan (4975(c)(1)(D)), and an act by a disqualified person who is a fiduciary whereby he or she deals with the income or assets of a plan in his or her own interest or for his or her own account (4975(c)(1)(E)).

Section 4975(e)(2) of the Code defines the term "disqualified person" to include a plan fiduciary and a person providing services to a plan.

Thus, the Bank is a disqualified person with respect to the IRAs. The Parent, however, is not a disqualified person with respect to the IRAs solely by reason of its ownership of the Bank.² The question of whether the Parent is a disqualified person with respect to the IRAs under any other provision of section 4975(e)(2) of the Code is inherently factual in nature. Section 5.01 of Advisory Opinion Procedure 76-1 (ERISA Proc. 76-1, 41 FR 36281, August 27, 1976) states that the Department generally will not issue opinions on such questions.

Therefore, with respect to questions 1 and 2, to the extent that the Parent is not a disqualified person with respect to the IRAs, purchases of stock from the Parent by the Bank on behalf of and at the direction of the IRA participants would not involve transactions described in section 4975(c)(1)(A) of the Code.

With respect to questions 3 and 4, it is the Department's opinion that if the seller of the Parent stock is not otherwise a disqualified person with respect to an IRA, the purchase by the Bank of Parent stock from unrelated third parties on behalf of the IRA does not constitute a transaction described in section 4975(c)(1)(A) of the Code.

With respect to question 5, regarding purchases of Parent stock by IRA custodians other than the Bank on behalf of and at the sole direction of participants who are officers or directors of the Bank from the Parent or an unrelated third party, it is our view that the purchases of Parent stock do not constitute transactions described in section 4975(c)(i)(A) of the Code to the extent that the seller of Parent stock is not a disqualified person with respect to the IRA.³

However, while the Parent may not be a disqualified person with respect to the IRAs sponsored by the Bank, purchases and holding of Parent stock by the self-directed IRAs of officers and directors of the Bank raise questions under section 4975(c)(1)(D) and (E) of the Code, depending on the degree (if any) of the participant's interest in the transaction. The IRA participants, as officers and directors of the Bank, may have interests in the proposed transactions which may affect their best judgment as fiduciaries of their IRAs. In such circumstances, the transactions may violate section 4975(c)(1)(D) and (E) of the Code.

In addition, although the Bank may have no discretion in selecting the investments to be made by the IRAs, it appears that the Bank may have discretion in determining the seller from which the IRAs will purchase Parent stock. To the extent that it does have such discretion, the Bank would be a plan fiduciary with respect to its exercise of such discretion.

Thus, if the IRA participants do not instruct the Bank with respect to such matters but, rather, rely on it as a fiduciary to select appropriate sellers for the transactions, a selection by the Bank of the Parent as seller would raise questions under section 4975(c)(1)(D) and (E) of the Code. This is because the Bank, as a wholly-owned subsidiary of the Parent, has an interest in the fortunes of the Parent. Therefore, the Bank may be in a position to indirectly use the assets of a plan for its own benefit or to deal with the assets of a plan in its own interest.⁴

We note that you have not requested and consequently the Department is not offering an opinion regarding the provision of brokerage services by the Bank to the IRAs.

This letter constitutes an advisory opinion under ERISA Procedure 76-1. Section 10 of the procedure describes the effect of advisory opinions.

Sincerely,

Robert J. Doyle

Acting Associate Director for

Regulations and Interpretations

1. Under the regulation, Title I is inapplicable only if:  (1) no contributions to the plan are made by the employer or employee association; (2) participation is completely voluntary for employees or members; (3) the sole involvement of the employer or employee organization is to permit the sponsor to publicize the program and to collect contributions on behalf of the sponsor through payroll deductions or dues checkoffs; and (4) the employer or employee organization receives no consideration in the form of cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll deductions or dues checkoffs.
2. However, the Department notes that the Parent may be a party in interest with respect to any IRAs sponsored by the Bank which are within the jurisdiction of Title I of ERISA. In this regard, contrast section 3(14)(H) of ERISA with section 4975(e)(2)(H) of the Code.
3. We are assuming for the purposes of this letter that the Bank is not acting as an employer, as defined in section 4975(e)(2)(D) of the Code and section 3(14)(C) of ERISA, with respect to the IRAs of officers and directors of the Bank. See Advisory Opinion 85-26, April 10, 1985.
4. We assume, for purposes of this ruling, that the Bank does not have any authority or responsibility to vote or otherwise deal with Parent stock held by its self-directed IRAs.

Advisory Opinion/Individual Exemption 88-18A

December 23, 1988

U.S. Department of Labor Pension and Welfare Benefits Administration

Washington, D.C. 20210

December 23, 1988

Mr. Joseph E. Hurst, Jr.

Friday, Eldredge & Clark

2000 First Commercial Building

Little Rock, AR 72201

Re: Thomas E. Darragh

Identification Number: F-3819A

Dear Mr. Hurst:

Your letter dated January 22, 1988, to the Internal Revenue Service (the Service) has been forwarded to this office for our consideration and response. Your letter concerns whether a loan from an Individual Retirement Account (IRA) to a corporation would violate section 4975(c)(1)(B) of the Internal Revenue Code of 1986 (the Code).

You represent that Thomas F. Darragh established an IRA described in section 408 of the Code. Mr. Darragh is the only participant in the IRA and has reserved the right to direct the IRA's investments. You further represent that Mr. Darragh is currently an employee, shareholder and member of the Board of Directors of Darragh Company (the Corporation). Your subsequent letter of April 28, 1988, indicates that the Corporation has no involvement whatsoever with the establishment or maintenance of the IRA. The Corporation has two classes of stock, Class A voting and Class B nonvoting. Mr. Darragh owns directly and indirectly (pursuant to section 4975(e)(4) and (6) of the Code) 46.04 percent of the total voting power of the Corporation and 48.14 percent of the total issued and outstanding shares of stock.

Mr. Darragh proposes to direct the IRA Custodian, One National Bank, to lend the Corporation approximately $500,000 pursuant to a promissory note entered into by the Corporation. The Corporation will pay the IRA interest on the note based on the then current prevailing market rate of interest which lenders are currently charging to the Corporation.

You have requested an advisory opinion that the proposed loan will not constitute a prohibited transaction under section 4975(c)(1)(B) of the Code.

Pursuant to section 2510.3-2(d) of the Department of Labor's (the Department) regulations, the Department does not have jurisdiction under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) over those IRAs described in section 408(a) of the Code which comply with the provisions of that section of regulation.^* Under Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor and the Secretary of the Treasury is bound by such interpretations of the Secretary of Labor pursuant to such authority.

Section 4975(c)(1)(B) of the Code prohibits any direct or indirect sale, lending of money or other extension of credit between a plan and a disqualified person. Section 4975(e)(1) of the Code, in relevant part, defines the term plan to include an IRA described in section 408(a) of the Code. Section 4975(e)(2) of the Code defines "disqualified person" to include a fiduciary, an employer any of whose employees are covered by the plan, and a corporation, partnership, or trust or estate of which (or in which) 50 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 the 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 a fiduciary. Section 4975(e)(3) of the Code defines the term fiduciary, in part, to include any person who exercises any discretionary authority or discretionary control respecting management of the plan, or exercised any authority or control respecting the management or the disposition of its assets.

Mr. Darragh is a fiduciary and, thus, a disqualified person with respect to the IRA because of the authority under the IRA to direct investments. You have stated that Mr. Darragh is employed by the Corporation. Although section 4975 does not define the term "employer", section 3(5) of ERISA provides, in part, that an "employer" is any person acting as an employer in relation to an employee benefit plan. You have stated that the Corporation has no involvement with the establishment or maintenance of the IRA. Therefore, it is the opinion of the Department that the Corporation is not a disqualified person with respect to the IRA under section 4975(e)(2)(C) of the Code. In addition, the Corporation is not a disqualified person with respect to the IRA under section 4975(e)(2)(G) of the Code by reason of Mr. Darragh's stock ownership in the Corporation.

Therefore, to the extent that the Corporation is not a disqualified person with respect to the IRA under any other provision of section 4975(e)(2) of the Code, the loan by the IRA to the Corporation would not violate section 4975(c)(1)(B) of the Code.

We note, however, that this conclusion does not preclude the existence of other prohibited transactions under section 4975 of the Code. Section 4975(c)(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Section 4975(c)(1)(E) of the Code prohibits a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account. Section 54.4975-6(a)(5) of the Pension Excise Tax Regulations characterizes transactions described in section 4975(c)(1)(E) as involving the use of authority by fiduciaries to cause plans to enter into transactions when those fiduciaries have interests which may affect the exercise of their best judgment as fiduciaries. Mr. Darragh is a fiduciary with respect to the IRA. In addition, he has a substantial interest in the Corporation. Therefore, the Corporation is a party in whom Mr. Darragh has an interest which might affect his best judgment as a fiduciary. Accordingly, a prohibited use of plan assets for the benefit of a disqualified person under section 4975(c)(1)(D) or an act of self-dealing under section 4975(c)(1)(E) is likely to result if Mr. Darragh directs the IRA to loan funds to the Corporation. [Emphasis added]

This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of the procedures, including section 10 thereof, relating to the effect of advisory opinions.

Sincerely,

Robert J. Doyle

Acting Associate Director for Regulations and Interpretations

- Footnote -

Advisory Opinion/Individual Exemption 88-28

January 26, 1988 (Exemption Application D-7187)

U.S. Department of Labor

Office of Pension and Welfare Benefit Programs

Washington, D.C. 20210

People's Bank (People's) Located In

Bridgeport, Connecticut

(Application No. D-7187)

Proposed Exemption

The Department is considering granting an exemption 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 ERISA Procedure 75-1 (40 FR 18471, April 21 1975). If the exemption is granted the restrictions of section 406(a) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) thru (D) of the Code shall not apply to the sale by People's of its subsidiary's stock to the Keogh Plans (the Keoghs) for which People's services [sic] as custodian, as part of an initial issue of such stock, and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code shall not apply to the sale by People's of its subsidiary's stock to the individual retirement accounts (the IRAs) for which People's serves as custodian, as part of an initial issue of such stock, provided the Keoghs and IRAs pay no more than the fair market value of the stock on the date of the sale.¹

Summary of Facts and Representations

1. People's is a mutual savings bank organized under the laws of the State of Connecticut. People's is in the process of reorganizing (the Reorganization) pursuant to Connecticut Public Act 85-330 (the Reorganization Act) from its current form as a mutual savings bank to a mutual holding company with a capital stock subsidiary bank (the Bank) which will assume substantially all of the operations of People's. The majority of the bank's stock will be held by People's in its reorganized form as a mutual holding company.
2. ln connection with, and as part of the Reorganization, the Bank proposes to offer between 20% and 30% of its stock to the public. The Reorganization Act permits the Bank from selling or offering to sell its common stock or securities convertible into common stock unless it first gives to each "eligible account holder" subscription rights to acquire Bank stock pursuant to a subscription offering. Regulations issued by the Department of Banking of the State of Connecticut clearly establish that the IRAs and the Keoghs, held in time deposits by People's as custodian, are eligible accounts requiring that the holders of those accounts receive subscription rights to purchase Bank stock. Accordingly, People's intends to offer its IRA and Keogh depositors subscription rights to Bank stock in connection with the Reorganization. After the Reorganization, the Bank stock will be traded publicly on the Over-the-Counter market.
3. People's currently acts as custodian for approximately 64,000 IRA customers and 2,000 participants in custodial Keoghs with assets, in the aggregate, of approximately $500 million. These assets represents approximately 12% of total deposits held by People's. People's as custodian has no discretionary authority with respect to the investment of IRA or Keogh assets. All investments are made at the direction of the account holder within the range of investment choices permitted by the plan documents. The applicants represent that no single IRA or Keogh account will be permitted to invest more than 25% of the assets of such account in stock of the Bank in connection with this initial offering.
4. In accordance with the provisions of the Reorganization Act, People's must submit to the Connecticut Banking Commissioner (the Commissioner) a plan outlining the terms of the subscription offering. Within 15 days from the date of that submission, People's will be required to mail to each holder, including holders of IRAs and Keoghs, a notice that the Board of Trustees has approved the sale of a certain number of shares of common stock or securities convertible into common stock, a description of the rights of such depositors to subscribe to such stock and various other information concerning rights of stockholders. Subscription rights must be exercised within a period ending no sooner than 60 days from the date the subscription plan is submitted to the Commissioner, or they will expire. Pursuant to the terms of the proposed transaction, the IRA and Keogh customers would notify People's within that subscription period of their intention to invest the assets of their IRA and Keogh accounts in Bank stock. Since the purchase of stock will be made in connection with an initial issue, no broker will be involved and purchases will be made by the IRA or Keogh directly from the Bank. Since no broker is involved in the transaction, no commissions will be paid with respect to the purchase.
5. As part of the subscription plan submitted to the Commissioner, People's will include an appraisal prepared by an independent firm of the estimated market value of the Bank and the Bank stock to be issued. The valuation will be based on financial information relating People's and the economic environment in which it operates, a comparison of People's with selected publicly held thrift institutions and with other thrift institutions located in Connecticut, and any other factor as the independent appraiser may deem to be appropriate. The valuation will be stated in terms of a subscription price range, the maximum of which will be no more than 25% above the average of the minimum and maximum of such price range, and the minimum of which will be no more than 25% below such average. After the subscription plan is approved by the Commissioner, the independent appraiser will review, prior to the subscription offering, all developments consequent to its initial valuation in order to confirm or amend its determination of the initial subscription price range. The subscription price will be no less than the minimum of the price range, nor any greater than the maximum of the price range.
6. Concurrently with the subscription offering, People's may offer the opportunity to purchase all shares not subscribed for in the subscription offering to (a) Certain other customers of People's who may not have qualified as eligible account holders; (b) trustees, officers, or employees of People's or its affiliates, and (c) residents of Fairfield, New Haven, Tolland, Hartford and Litchfield Counties, Connecticut (the Community Offering). If all shares of Bank stock are sold through the exercise of subscription rights and through the Community Offering, the independent appraiser will re-examine its estimate of the market value of the Bank and of the shares of Bank stock as of the last day of the subscription offering and the Community Offering. If at that time the independent appraiser's estimate of the value of Bank stock is less than the subscription price (but not less than the minimum of the originally estimated price range), then that estimated value will become the final purchase price for Bank stock and the Bank will refund to all purchasers the difference between the subscription price and the independent appraiser's final estimate of the value of Bank stock. If, however, the independent appraiser's final estimate of the value of Bank stock exceeds the subscription price (or is less than the minimum of the originally estimated price range), then with the approval of the Commissioner, People's will either terminate the subscription plan, establish a new subscription price range, or adjust the total number of shares of the Bank so that the market value per share will be within the subscription price range.
7. If all the shares of Bank stock to be sold are not sold through the exercise of subscription rights or through the Community Offering, the remaining shares will be sold to the public after approval of a public offering circular by the Commissioner. The independent appraiser will again update its prior appraisal of the estimated market value of Bank stock. If there is any change in that appraisal, the number of shares of the Bank may be adjusted to reflect the increase or decrease of the appraised value of the Bank stock. That number of shares will then be sold to or through the underwriters of the public offering pursuant to terms of an underwriting agreement. In the event the sale price of Bank stock pursuant to the public offering is less than the price paid for exercise of subscription rights or pursuant to the Community Offering the difference will be refunded to those who paid the higher price.
8. The applicants represent that the entire process is designed to ensure that the price paid for Bank stock is fair market value. In any event, the determination as to the price to be paid for Bank stock will be subject to approval by the Commissioner.
9. In summary, the applicants represent that the proposed transaction meets the criteria of section 408(a) of the Act and section 4975(c)(2) of the Code because: (1) The decision to purchase the Bank stock will be made by IRA and Keogh customers out of a range of investment choices, and People's has no discretion over such decision; (2) no fees or commissions will be paid with respect to the transaction; (3) no more than 25% of the assets of any IRA or Keogh account will be invested in Bank stock in connection with the initial offering; and (4) the purchase price or the stock will be determined by independent appraisal and must be approved by the Commissioner.

For further information contact: Gary H. Lefkowitz of the Department, telephone (202) 523-8881. (This is not a toll-free number.)

People's Bank (People's) Located

Bridgeport, Connecticut

[Prohibited Transaction Exemption 88-28.

Exemption Application No. D-7187]

Exemption

The restrictions of section 406(a) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(2)(A) through (D) of the Code, shall not apply to the sale by People's of its subsidiary's stock to the Keogh plans (the Keoghs) for which People's serves as custodian, as part of an initial issue of such stock, and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code shall not apply to the sale by People's of its subsidiary's stock to the individual retirement accounts (the IRAs) for which People's serves as custodian, as part of an initial issue of such stock, provided the Keoghs and the IRAs pay no more than the fair market value of the stock on the date of the sale.¹

For a more complete statement of the facts and representations supporting the Department's decision to grant this exemption refer to the notice of proposed exemption published on January 26, 1988 at 53 FR 2106.

For Further Information Contact: Gary Lefkowitz of the Department, telephone (202) 523-8881. (This is not a toll-free number.)

1. Because the IRAs do not meet the conditions described in 29 C.F.R. 2510.3-2(d), there is no jurisdiction with respect to the IRAs under Title I of the Act. However, there is jurisdiction under Title II of the Act pursuant to section 4975 of the Code.

Advisory Opinion/Individual Exemption 89-03

March 23, 1989

U.S. Department of Labor Pension and Welfare Benefits Administration

Washington, D.C. 20210

March 23, 1989

Ms. Maria Stefanis

Arthur Young

3000 K Street, N.W.

Washington, D.C. 20007

Re: Individual Retirement Accounts of Edward E. and Frances E. Bowns

Identification Number F-3879A

Dear Ms. Stefanis:

Your letter dated May 19, 1988, to the Internal Revenue Service has been forwarded to this office for our consideration and response. Your letter concerns whether a purchase of stock by an Individual Retirement Account (IRA) from a corporation would violate section 4975(c)(1)(A) of the Internal Revenue Code of 1986 (the Code).

You represent that Edward E. Bowns and his wife, Frances, established IRAs described in section 408 of the Code. Mr. and Mr. Bowns are the only participants in their respective IRAs and have reserved the right to direct their IRA's investments. Mr. Bowns is Executive Vice President and General Manager of the Partition Division of the Rock-Tenn Company. Mr. Bowns owns directly 1,122 shares. Mr. Bowns holds incentive stock options, expiring 1993 through 1998, to acquire an additional 27,020 shares. Assuming all options are exercised and including the 400 shares proposed to be purchased by the IRAs, the Bowns family would own a total of 29,327 shares. There are now approximately 2,500,000 shares of Rock-Tenn common stock outstanding. You further attest that Rock-Tenn has not sponsored, maintained or made any contribution to the IRAs.

Mr. and Mrs. Bowns propose to direct their IRA trustee to purchase Rock-Tenn common stock from Rock-Tenn on behalf of each of their IRAs. The trustee will pay no more than adequate compensation for the Rock-Tenn stock.

You have requested an advisory opinion that the proposed purchase will not constitute a prohibited transaction under section 4975(c)(1)(A) of the Code.

Pursuant to section 2510.3-2(d) of the Department of Labor's (the Department) regulations, the Department does not have jurisdiction under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) over those IRAs described in section 408 of the Code which comply with the provisions of that section of regulation.¹ Such IRAs are, however, subject to section 4975 of the Code. Pursuant to Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code, subject to certain exceptions not here rele