Notice2021-13149
Reopening of Comment Period for Proposed Amendments to Class Prohibited Transaction Exemptions To Remove Credit Ratings Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act
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Published
June 24, 2021
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
The Department of Labor is reopening the comment period on proposed amendments to six class exemptions from prohibited transaction rules set forth in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (the Code). The exemptions are Prohibited Transaction Exemptions (PTEs) 75-1, 80-83, 81-8, 95-60, 97- 41 and 2006-16. The proposed amendments relate to the use of credit ratings in the conditions of these class exemptions. Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Department to remove any references to or requirements of reliance on credit ratings from its class exemptions and to substitute standards of creditworthiness as the Department determines to be appropriate. This reopening of the comment period provides interested persons with the opportunity to submit additional comments on the proposed amendments due to the passage of time since the proposal was originally published in 2013. All comments received to date on the proposed amendments will be included in the public record and need not be resubmitted. The proposed amendments to the class exemptions would affect participants and beneficiaries of employee benefit plans and IRAs, fiduciaries of the plans and IRAs, and financial institutions that engage in transactions with, or provide services to, the plans and IRAs.
Full Text
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<title>Federal Register, Volume 86 Issue 119 (Thursday, June 24, 2021)</title>
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[Federal Register Volume 86, Number 119 (Thursday, June 24, 2021)]
[Notices]
[Pages 33360-33363]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13149]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Number D-11681]
RIN 1210-ZA18
Reopening of Comment Period for Proposed Amendments to Class
Prohibited Transaction Exemptions To Remove Credit Ratings Pursuant to
the Dodd-Frank Wall Street Reform and Consumer Protection Act
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of reopening of comment period.
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SUMMARY: The Department of Labor is reopening the comment period on
proposed amendments to six class exemptions from prohibited transaction
rules set forth in the Employee Retirement Income Security Act of 1974
(ERISA) and the Internal Revenue Code (the Code). The exemptions are
Prohibited Transaction Exemptions (PTEs) 75-1, 80-83, 81-8, 95-60, 97-
41 and 2006-16. The proposed amendments relate to the use of credit
ratings in the conditions of these class exemptions. Section 939A of
the Dodd-Frank Wall Street Reform and Consumer Protection Act requires
the Department to remove any references to or requirements of reliance
on credit ratings from its class exemptions and to substitute standards
of creditworthiness as the Department determines to be appropriate.
This reopening of the comment period provides interested persons with
the opportunity to submit additional comments on the proposed
amendments due to the passage of time since the proposal was originally
published in 2013. All comments received to date on the proposed
amendments will be included in the public record and need not be
resubmitted. The proposed amendments to the class exemptions would
affect participants and beneficiaries of employee benefit plans and
IRAs, fiduciaries of the plans and IRAs, and financial institutions
that engage in transactions with, or provide services to, the plans and
IRAs.
DATES: The Department is reopening the comment period for proposed
amendments to certain class exemptions that were published in the
Federal Register on June 21, 2013 (78 FR 37572). Written comments and
requests for a public hearing must be received by the Department on or
before August 9, 2021. If the Department adopts final amendments, they
would be effective 180 days after the date of their publication in the
Federal Register.
ADDRESSES: All written comments and requests for a public hearing
concerning the proposed amendments should be sent to the Employee
Benefits Security Administration, Office of Exemption Determinations,
U.S. Department of Labor through the Federal eRulemaking Portal and
identified by Application No. D-11681:
Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a> at Docket ID
number: EBSA 2012-0013 (follow the instructions for submitting
comments).
Warning: All comments received will be included in the public
record without change and will be made available online at <a href="http://www.regulations.gov">http://www.regulations.gov</a>, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information, but DO NOT submit information that you consider to
be confidential, or otherwise protected (such as Social Security number
or an
[[Page 33361]]
unlisted phone number), or confidential business information that you
do not want publicly disclosed. However, if EBSA cannot read your
comment due to technical difficulties and cannot contact you for
clarification, EBSA might not be able to consider your comment.
Additionally, the <a href="http://www.regulations.gov">http://www.regulations.gov</a> website is an ``anonymous
access'' system, which means EBSA will not know your identity or
contact information unless you provide it. If you send an email
directly to EBSA without going through <a href="http://www.regulations.gov">http://www.regulations.gov</a>, your
email address will be automatically captured and included as part of
the comment that is placed in the public record and made available on
the internet.
FOR FURTHER INFORMATION CONTACT: Susan Wilker, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, (202) 693-8557 (this is not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
In the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank),\1\ Congress found that credit ratings of certain
financial products proved to be inaccurate and had ``contributed
significantly to the mismanagement of risks by financial institutions
and investors, which in turn adversely impacted the health of the
economy in the United States and around the world.'' \2\ Dodd-Frank
section 939A requires federal agencies, including the Department, to
review any regulation that references or includes requirements
regarding credit ratings, remove the references or requirements, and
substitute standards of creditworthiness as the agency deems
appropriate.
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ Id., section 931(5).
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Pursuant to Dodd-Frank section 939A, the Department conducted a
review of its class prohibited transaction exemptions. In the absence
of an exemption, ERISA and the Code prohibit certain transactions
involving employee benefit plans and IRAs. Class exemptions allow
parties to engage in specified transactions that would otherwise be
prohibited, so long as the parties satisfy the conditions and
definitional provisions of the exemption. Under ERISA section 408(a),
the Department may grant prohibited transaction exemptions provided the
Secretary of Labor finds that the exemption is (i) administratively
feasible, (ii) in the interests of plans and their participants and
beneficiaries, and (iii) protective of the rights of participants and
beneficiaries of the plans.\3\
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\3\ Code section 4975(c)(2) authorizes the Secretary of the
Treasury to grant exemptions from the parallel prohibited
transaction provisions of the Code. Effective December 31, 1978,
section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App.
(2018), transferred this authority from the Secretary of the
Treasury to the Secretary of Labor. Therefore, this notice is issued
solely by the Department.
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The Department's review of its class exemptions identified
Prohibited Transaction Exemptions (PTEs) 75-1, Parts III & IV,\4\ 80-
83,\5\ 81-8,\6\ 95-60,\7\ 97-41,\8\ 2006-16 \9\ (each, a ``Class
Exemption,'' and collectively, the ``Class Exemptions'') as those
including references to, or requiring reliance on, credit ratings. Each
Class Exemption allows certain parties to engage in a financial
transaction involving a plan or IRA, and, in each Class Exemption the
Department conditioned the exemption on the security or other financial
product or its issuer or guarantor receiving a specified minimum credit
rating. The credit rating requirements range from a rating in one of
the four highest generic categories of credit ratings (also known as an
``investment grade'' rating) to a rating in one of the two highest
generic categories, from a nationally recognized statistical rating
organization. The credit rating conditions are one component of the
safeguards established in each Class Exemption to protect the interests
of plans, their participants and beneficiaries, and IRA owners entering
into transactions covered by the Class Exemptions.
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\4\ 40 FR 50845 (October 31, 1975), as amended by 71 FR 5883
(February 3, 2006).
\5\ 45 FR 73189 (November 4, 1980), as amended by 67 FR 9483
(March 1, 2002).
\6\ 46 FR 7511 (January 23, 1981), as corrected at 46 FR 10570
(February 3, 1981) and as amended by 50 FR 14043 (April 9, 1985) and
67 FR 9483 (March 1, 2002).
\7\ 60 FR 35925 (July 12, 1995), as amended by 67 FR 9483 (March
1, 2002).
\8\ 62 FR 42830 (August 8, 1997).
\9\ 71 FR 63786 (October 31, 2006).
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2013 Proposal
On June 21, 2013, following its review of the Class Exemptions, the
Department issued proposed amendments to the Class Exemptions to remove
references to, and requirements of reliance on, credit ratings (2013
Proposal).\10\ In drafting the proposed amendments, the Department
focused on alternatives to credit ratings requirements set forth in
three releases by the Securities and Exchange Commission (SEC). The SEC
releases included proposed amendments to rules 2a-7 and 5b-3 (Rule 2a-7
and Rule 5b-3); \11\ a final amendment to rule 10f-3 (Rule 10f-3),\12\
and a new rule 6a-5 (Rule 6a-5),\13\ all under the Investment Company
Act of 1940.
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\10\ 78 FR 37572 (June 21, 2013). The Department proposed the
amendments on its own motion, pursuant to ERISA section 408(a) and
Code section 4975(c)(2), and in accordance with the procedures set
forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27,
2011)).
\11\ References to Credit Ratings in Certain Investment Company
Act Rules and Forms, Release Nos. 33-9193, IC-29592; 76 FR 12896
(March 9, 2011).
\12\ References to Ratings of Nationally Recognized Statistical
Rating Organizations, Release Nos. 34-60789, IC-28939; 74 FR 52358
(October 9, 2009).
\13\ Purchase of Certain Debt Securities by Business and
Industrial Development Companies Relying on an Investment Company
Act Exemption, Release No. IC-30268; 77 FR 70117 (November 23,
2012).
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In the 2013 Proposal, the Department set forth the following
approaches to the various credit ratings requirements in the Class
Exemptions. For PTEs 75-1, Parts III and IV, and 80-83, which each
conditioned the exemption in part on certain securities involved being
``rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization,'' the Department
proposed to replace this condition with a requirement that the
securities be ``(i) subject to no greater than moderate credit risk and
(ii) sufficiently liquid that such securities can be sold at or near
their fair market value within a reasonably short period of time.'' In
doing so, the Department relied on Rules 6a-5 and 10f-3.
For PTE 81-8, which permits employee benefit plans and IRAs to
invest in commercial paper that, among other things, possesses a rating
in ``one of the three highest rating categories by at least one
nationally recognized statistical rating service,'' the Department
proposed instead to require the commercial paper to be ``(i) subject to
a minimal or low amount of credit risk based on factors pertaining to
credit quality and the issuer's ability to meet its short-term
financial obligations and (ii) sufficiently liquid that such securities
can be sold at or near their fair market value within a reasonably
short period of time.'' In doing so, the Department relied on Rule 10f-
3 and the proposed amendment to Rule 2a-7.
PTE 2006-16 allows securities lending transactions secured by
foreign collateral including (i) foreign sovereign debt securities if
the issue, issuer or guarantor has a rating in one of the two highest
rating categories from a nationally recognized statistical rating
organization, and (ii) irrevocable letters of credit issued by foreign
banks with a counterparty rating of investment grade or better as
determined by a nationally recognized statistical rating
[[Page 33362]]
organization. The Department proposed to replace the requirement for
foreign sovereign debt securities issue, issuer or guarantor to be in
the two highest ratings categories with a requirement that they be
``(i) subject to a minimal amount of credit risk, and (ii) sufficiently
liquid that such securities can be sold at or near their fair market
value in the ordinary course of business within seven calendar days.''
In doing so, the Department relied on the proposed amendments to Rules
2a-7 and 5b-3. The Department proposed to replace the requirement that
foreign banks issuing letters of credit receive an ``investment grade''
counterparty rating with a requirement that the bank's ability to honor
its commitments thereunder be subject to ``no greater than moderate
credit risk,'' relying on Rule 6a-5.
Finally, the Department proposed to eliminate certain references to
credit ratings in PTEs 95-60 and 97-41 and replace them with references
to credit quality.\14\
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\14\ See PTE 95-60 Section III(a)(2)(B) and PTE 97-41 Section
II(c)(2), discussed in the 2013 Proposal, 78 FR at 37579-80.
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The Department received three comments in response to the 2013
Proposal. The comments were generally supportive of the Department's
approach in light of the statutory requirement to remove credit ratings
references and requirements, and commenters did not suggest specific
changes to the language of the amendments. Commenters did suggest that
the Department provide additional guidance on satisfaction of the new
standards, and requested that the Department delay finalizing the 2013
Proposal until the SEC had finalized all of its proposals. Following
the receipt of these comments, the Department did not finalize the
amendments as it focused on other priorities. Due to the passage of
time, the Department is now seeking comments that take into account
developments that have occurred since the Department issued and
received comments on the 2013 Proposal.
Other Regulators
The SEC has finalized the amendments to Rules 2a-7 and 5b-3 since
the Department's 2013 Proposal. The SEC re-proposed an amendment to
Rule 2a-7 in 2014, and finalized the amendment in 2015.\15\ The SEC
also finalized its amendment to Rule 5b-3 in 2014.\16\ While the SEC
made changes to the language in response to comments, the final
amendments generally took the same approach to replacing references to
credit ratings with alternative methods for determining credit quality.
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\15\ Removal of Certain References to Credit Ratings and
Amendment to the Issuer Diversification Requirement in the Money
Market Fund Rule (Re-proposed Rule and Proposed Rule), 79 FR 47986
(August 14, 2014); Removal of Certain References to Credit Ratings
and Amendment to the Issuer Diversification Requirement in the Money
Market Fund Rule (Final Rule), 80 FR 58124 (September 25, 2015).
\16\ Removal of Certain References to Credit Ratings under the
Investment Company Act (Final Rule), 79 FR 1316 (January 8, 2014).
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Other regulators have also replaced credit rating standards in
their regulations using different standards than the Department used in
its 2013 Proposal. For example, in October 2013, the Office of the
Comptroller of the Currency (OCC), the Board of Governors of the
Federal Reserve System (Federal Reserve Board), and the Federal Deposit
Insurance Corporation (FDIC), issued a joint agreement to revise an
existing agreement and replace references to credit ratings with
alternative standards of creditworthiness consistent with Dodd-
Frank.\17\ The revised agreement provides that a security is investment
grade if the issuer of the security has an adequate capacity to meet
financial commitments for the life of the asset. An issuer has adequate
capacity to meet its financial commitments if the risk of default is
low, and the full and timely repayment of principal and interest is
expected. The National Credit Union Administration (NCUA) used similar
language to define ``investment grade'' in the 2012 rule amendment.\18\
The rule provides that investment grade means the issuer of a security
has an adequate capacity to meet the financial commitments under the
security for the projected life of the asset or exposure, even under
adverse economic conditions (12 CFR 704.2). An issuer has an adequate
capacity to meet financial commitments if the risk of default by the
obligor is low and the full and timely repayment of principal and
interest on the security is expected. (Id.). NCUA also defined a higher
standard, ``minimal amount of credit risk,'' as the amount of credit
risk when the issuer of a security has a very strong capacity to meet
all financial commitments under the security for the projected life of
the asset or exposure, even under adverse economic conditions (Id.). An
issuer has a very strong capacity to meet all financial commitments if
the risk of default by the obligor is very low, and the full and timely
repayment of principal and interest on the security is expected. (Id.)
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\17\ Uniform Agreement on the Classification and Appraisal of
Securities Held by Depository Institutions (Agreement), October 29,
2013, available at <a href="https://www.federalreserve.gov/supervisionreg/srletters/sr1318a1.pdf">https://www.federalreserve.gov/supervisionreg/srletters/sr1318a1.pdf</a>
\18\ Alternatives to the Use of Credit Ratings (Final Rule) 77
FR 74103 (December 13, 2012).
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2015-2016 Rulemaking
In 2015 and 2016, the Department also engaged in a rulemaking
regarding the definition of an investment advice fiduciary under ERISA
and the Internal Revenue Code, which included publication of the
Proposed Class Exemption for Principal Transactions in Certain Debt
Securities between Investment Advice Fiduciaries and Employee Benefit
Plans and IRAs (the Proposed Principal Transactions Exemption).\19\ The
Proposed Principal Transactions Exemption included conditions imposing
standards of creditworthiness that were similar to those provided in
the 2013 Proposal. Specifically, under the proposal, a debt security
purchased by or sold to a plan or IRA in a principal transaction with
an investment advice fiduciary would have to ``[p]ossess[ ] no greater
than a moderate credit risk; and . . . [be] sufficiently liquid that
the Debt Security could be sold at or near its fair market value within
a reasonably short period of time.''
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\19\ 80 FR 21989 (April 20, 2015).
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In comparison to comments on the 2013 Proposal, the Department
received significant comments on the standards of creditworthiness in
the Proposed Principal Transactions Exemption. Commenters generally
stated that the standard lacked objectivity, and some commenters
expressed the view that the Department's reliance on Rule 6a-5 was
misplaced because the SEC used the standard in a different context.
Further, commenters requested that the standard use the term ``carrying
value'' rather than ``fair market value.'' Finally, one commenter
suggested that the Department require financial institutions to
establish policies and procedures to determine how credit risk and
liquidity will be assessed, as a means of operationalizing the
requirements. Based on these comments, the Department finalized the
Principal Transactions Exemption with revised standards of
creditworthiness that require the debt security to (i) possess ``no
greater than a moderate credit risk;'' and (ii) be ``sufficiently
liquid'' that it ``could be sold at or near its carrying value within a
reasonably short period of time.'' \20\
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\20\ See Class Exemption for Principal Transactions in Certain
Assets Between Investment Advice Fiduciaries and Employee Benefit
Plans and IRAs, 81 FR 21089, 21119-20 (April 8, 2016). The U.S.
Court of Appeals for the Fifth Circuit later vacated the exemption
on unrelated grounds. Chamber of Commerce of the United States v.
U.S. Department of Labor, 885 F.3d 360 (5th Cir. 2018).
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Request for Comment
Due to the passage of time since the 2013 Proposal was originally
published, and to ensure that all interested parties have an
opportunity to provide comments or new information, the Department is
reopening the comment period and soliciting comments on all aspects of
the 2013 Proposal. The Department specifically seeks comment regarding
the following questions:
<bullet> Are changes to the 2013 Proposal's standards of
creditworthiness necessary as a result of the SEC's finalization of
amendments to Rules 2a-7 and 5b-3?
<bullet> Are changes to the 2013 Proposal's standards of
creditworthiness necessary as a result of other regulators' actions
removing references to credit ratings? For example, should the
Department incorporate OCC, Federal Reserve Board, FDIC and/or NCUA
standards developed for depository institutions? Have other regulators
developed standards the Department should incorporate into the Class
Exemptions? Are there particular challenges in the ERISA context to
implementing any of those standards?
<bullet> Are changes to the 2013 Proposal's standards of
creditworthiness necessary in light of business or other economic
developments since the Department proposed changes to the Class
Exemptions in 2013?
<bullet> Should references to ``fair market value'' in the 2013
Proposal's standards of creditworthiness be replaced with references to
``carrying value''? If so, please explain why.
<bullet> Do commenters recommend that the Department require
financial institutions to adopt policies and procedures for compliance
with the standards of creditworthiness? If so, please describe the
types of specific policies and procedures that would be helpful. Do
financial institutions already have similar policies and procedures in
place? Will 180 days provide sufficient time for financial institutions
that currently do not currently such policies and procedures in place
to adopt them?
Signed at Washington, DC, this 16th day of June 2021.
Ali Khawar,
Acting Assistant Secretary, Employee Benefits Security Administration,
U.S. Department of Labor.
[FR Doc. 2021-13149 Filed 6-23-21; 8:45 am]
BILLING CODE 4510-29-P
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