Wallace M. Starke, Esq.
Troutman, Sanders, Mays & Valentine, L.L.P.
P.O. Box 1122
Richmond, VA 23218-1122
ERISA Sec. 408(e)
Dear Mr. Starke:
This is in response to your request for an advisory opinion regarding the application
of section 408(e) of the Employee Retirement Income Security Act of 1974, as
amended (ERISA) to certain transactions between a plan and various personal trusts
and estates sharing a common trustee with the plan.
You represent that National Bankshares, Inc. (NBI) is a bank holding company
which owns all the issued and outstanding stock of the National Bank of Blacksburg
(the Bank). The Bank is a national banking association subject to the supervision
of the Office of the Comptroller of the Currency (OCC).
You further represent that NBI acts as plan sponsor of the National Bankshares,
Inc. Employee Stock Ownership Plan (the ESOP) and the Bank is a participating
employer with respect to the ESOP. You state that the Bank serves as trustee
of the ESOP and also serves as trustee of various inter vivos and executorial
trusts and estates (referred to hereafter as personal trusts). You state that
to the best of your knowledge, none of the personal trusts are ERISA plans, parties
in interest with respect to the ESOP as defined in section 3(14) of ERISA, or
disqualified persons within the meaning of section 4975(e) of the Internal Revenue
Code (the Code).
You state that the ESOP is an employee stock ownership plan within the meaning
of 4975(e)(7) of the Code and section 407(d)(6) of ERISA. It is intended to be
qualified under section 401(a) of the Code and last received a favorable determination
letter from the Internal Revenue Service to that effect on June 1, 1995. The
ESOP, by its terms, is designed to invest primarily in the stock of NBI. NBI's
outstanding stock consists of one class of common stock which is readily traded
on the NASDAQ small cap market.
You request an advisory opinion regarding several transactions involving the
purchase by the ESOP of NBI stock from several personal trusts for which the
Bank also serves as trustee. No broker was used for the sales. You represent
that the Bank as trustee for the ESOP initiated such purchases of NBI stock for
the ESOP. You state that the Bank has an established procedure to obtain, prior
to executing any acquisition of NBI stock by the ESOP from a personal trust,
written consent from the primary beneficiary or any co-fiduciary of the personal
trust to sell NBI stock owned by the personal trust to the ESOP.
You state that no commission was charged to the ESOP or the personal trusts in
connection with the NBI stock purchases in question. The consideration paid by
the ESOP for the NBI stock was cash equal to the bid price for such shares as
quoted by the online service MSN Money Central, a price which was not more than
the fair market value of such shares at the time of their purchase. The trustee
did not receive any consideration for its personal account in connection with
any of the NBI stock purchases in question.
You state that MSN Money Central is an online pricing service that obtains its
stock quotes from Standard and Poor's ComStock, Inc., the same service used by
a number of other pricing services. You state that there is a 15-minute delay
when a stock quote is obtained from MSN Money Central, and that in each of the
purchases at issue the transaction was executed within 15 minutes of the time
that a price quote was obtained. You state that effecting the trade at the bid
price, rather than the asked price, benefitted the plan in that the bid price
in most, if not all, cases is lower than the asked price.
A total of ten such transactions occurred between June of 2000 and April of 2001
representing a total of 7,646 shares of NBI stock and a total sale price of $163,301.
During an examination by the OCC of the operations of the trust department of
the Bank, the OCC examiner questioned whether these transactions were prohibited
by ERISA and the Code.
You request the Department's view as to whether the described transactions are
exempt from the prohibited transaction restrictions of ERISA and the Code by
virtue of sections 408(e) of ERISA and 4975(d)(13) of the Code.
Section 406(a)(1)(A) and (D) of ERISA prohibit a fiduciary with respect to a
plan from causing a plan to engage in a transaction if s/he knows or should know
that such transaction constitutes a direct or indirect sale or exchange, or leasing
of any property between a plan and a party in interest; or a transfer to, or
use for the benefit of, a party in interest, of any assets of the plan. Section
3(14)(A) and (C) of ERISA define a party in interest with respect to a plan to
include a fiduciary of the plan and an employer any of whose employees are covered
by such plan.
Section 406(a)(1)(E) of ERISA prohibits a fiduciary with respect to a plan from
causing the plan to engage in a transaction if s/he knows or should know that
such transaction constitutes a direct or indirect acquisition, on behalf of the
plan, of any employer security in violation of section 407(a). In addition section
406(a)(2) prohibits certain fiduciaries from permitting a plan to hold any employer
security if s/he knows or should know that holding such security violates section
Section 407(a) of ERISA provides, in part, that a plan may not acquire or hold
any employer security which is not a qualifying employer security.
Section 406(b)(1) and (2) of ERISA 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
own account, or from acting in his or her individual or in any other capacity
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. Section 406(b)(3) prohibits a fiduciary
with respect to a plan from receiving any consideration for his own personal
account from any party dealing with such plan in connection with a transaction
involving the assets of a plan.
However, section 408(e) of ERISA provides, in part, that sections 406(a) and
406(b)(1) and (2) shall not apply to the acquisition or sale by a plan of qualifying
employer securities (as defined in section 407(d)(5)) if the following conditions
are met: (1) the acquisition or sale is for adequate consideration; (2) no commission
is charged with respect to the acquisition or sale; and (3) the plan is an eligible
individual account plan (as defined in section 407(d)(3))… 2.
Section 407(d)(1) of ERISA defines the term employer security in part to mean
a security issued by an employer of employees covered by the plan or by an affiliate
of such employer. With respect to eligible individual account plans, section
407(d)(5) of ERISA defines the term qualifying employer security to include an
employer security which is a stock.
Section 3(18) of ERISA defines the term adequate consideration to include, in
the case of a security for which there is a generally recognized market and if
the security is not traded on a national securities exchange which is registered
under section 6 of the Securities Exchange Act of 1934, a price not less favorable
to the plan than the offering price for the security as established by the current
bid and asked prices quoted by persons independent of the issuer and of any party
The term eligible individual account plan is defined under section 407(d)(3)
as including employee stock ownership plans which explicitly provide for the
acquisition and holding of qualifying employer securities.
Based on the representations described in your request, it is the opinion of
the Department that the ESOP constitutes an eligible individual account plan
inasmuch as the plan is an employee stock ownership plan within the meaning of
4975(e)(7) of the Code and 407(d)(6) of ERISA and is designed, by its terms,
to invest primarily in the common stock of NBI.
You have represented that the transactions involve the purchase of NBI common
stock by the ESOP. You state that the ESOP is maintained for the benefit of the
employees of NBI, the Bank, and any other NBI affiliate which adopts the ESOP
as a participating employer. The Bank, as a wholly owned subsidiary of NBI, constitutes
an affiliate of NBI on the basis of the facts you describe. Based on your representations,
it is the Department's view that common stock of NBI will constitute qualifying
employer securities with respect to the ESOP.
You represent that none of these trusts are parties in interest as defined under
section 3(14). As a result, a violation of section 406(a) would not have occurred
with respect to the transactions. You have also represented that the transactions
involve the purchase of NBI common stock by the ESOP from several personal trusts
for which the Bank also serves as the trustee. Such transactions would involve
violations of section 406(b)(2).
Further, the Department has stated that to the extent that an investment manager
exercises discretion over both sides of a transaction in a cross-trade transaction,
there is potential for the investment manager to use its discretion to favor
one account over another, for example, in the pricing or timing of the trade
or in the decision to buy or sell securities for an ERISA account. Such acts
could result in one or more violations of the fiduciary provisions of Title I
of ERISA in addition to those described in section 406(b)(2).
Regulations issued by the Department clarify that section 408(e), by its terms,
exempts certain transactions from the prohibitions of section 406(a) and 406(b)(1)
and (2). Accordingly, it is the view of the Department that the acquisitions
of NBI stock by the ESOP under the circumstances described would be exempt from
the prohibitions of 406(a), and 406(b)(1) and (2) by virtue of section 408(e)
provided that the transactions are for adequate consideration and that no commission
is charged with respect to the transactions.
Whether the terms of section 408(e) have been met with respect to a transaction
is an inherently factual question which may only be answered by the appropriate
plan fiduciaries based on all of the relevant facts and circumstances. The Department
generally will not opine as to whether a particular transaction is for adequate
consideration. Rather, the Department believes that such determinations should
be made by appropriate plan fiduciaries on the basis of all relevant facts and
We would note, however, that the fact that a transaction is exempt under section
408(e) is not determinative of whether a fiduciary has met its fiduciary obligations
under ERISA. Section 404(a)(1)(A) of ERISA requires plan fiduciaries to discharge
their duties with respect to a plan solely in the interest of plan participants
and beneficiaries and for the exclusive purpose of providing benefits to participants
and beneficiaries and defraying the reasonable expenses of administering the
plan. Section 404(a)(1)(B) requires plan fiduciaries to act with the care, skill,
prudence and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character with like aims. Section 403(c)(1)
provides that the assets of a plan shall never inure to the benefit of an employer
and shall be held for the exclusive purposes of providing benefits to participants
and beneficiaries and defraying reasonable expenses
of administering the plan.
The general standards of fiduciary conduct contained in sections 404(a)(1) and
403(c) apply to the described purchases of NBI stock by the ESOP. Accordingly,
fiduciaries of the ESOP must act prudently, solely in the interest of the plan's
participants and beneficiaries, and for the exclusive purpose of providing benefits
and defraying reasonable plan administrative costs when deciding whether to acquire
NBI stock for the ESOP. Therefore, if plan fiduciaries failed to act in compliance
with these general fiduciary standards in the acquisition of the NBI stock for
the ESOP, they would be liable for losses resulting from such breaches of fiduciary
responsibility regardless of whether the acquisition may be exempt from certain
prohibited transaction restrictions by virtue of section 408(e).
If, under the facts and circumstances of any transaction, the Bank uses the authority
which makes it a fiduciary with respect to the transaction to benefit personal
trust clients at the expense of the ESOP, or otherwise fails to act solely in
the interest of plan participants and beneficiaries in deciding to purchase NBI
stock for the ESOP, violations of sections 404(a)(1) and 403(c) could occur.
This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed.
Reg. 36281 (Aug. 27, 1976). Accordingly, it is issued subject to the provisions
of that procedure, including section 10 thereof relating to the effect of advisory
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations