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  1. Trust Examination Manual

    Advisory Opinion 2003-15A

    November 17, 2003
    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.

    Louis J. Campagna
    Chief, Division of Fiduciary Interpretations
    Office of Regulations and Interpretations


    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.
  2. You represent that the CIV will be treated as a partnership for tax purposes pursuant to Treasury Regulation 26 CFR 301.7701-3(b).
  3. 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.
  4. 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.
  5. See Advisory Opinion 80-67A (Nov. 30, 1980).

Last Updated 04/02/2008

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