Rule2024-00586
Procedures Governing the Filing and Processing of Prohibited Transaction Exemption Applications
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 24, 2024
Effective
April 8, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
The Department of Labor (the Department) is adopting amendments to its existing procedure governing the filing and processing of applications for administrative exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code of 1986 (the Code), and the Federal Employees' Retirement System Act of 1986 (FERSA) (the Amendments). The Secretary of Labor (the Secretary) is authorized to grant exemptions from the prohibited transaction provisions of ERISA, the Code, and FERSA and to establish an exemption procedure to provide for such relief. The Amendments update and supersede the Department's existing prohibited transaction exemption procedures.
Full Text
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<title>Federal Register, Volume 89 Issue 16 (Wednesday, January 24, 2024)</title>
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[Federal Register Volume 89, Number 16 (Wednesday, January 24, 2024)]
[Rules and Regulations]
[Pages 4662-4704]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-00586]
[[Page 4661]]
Vol. 89
Wednesday,
No. 16
January 24, 2024
Part II
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2570
Procedures Governing the Filing and Processing of Prohibited
Transaction Exemption Applications; Final Rule
Federal Register / Vol. 89 , No. 16 / Wednesday, January 24, 2024 /
Rules and Regulations
[[Page 4662]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2570
RIN 1210-AC05
Procedures Governing the Filing and Processing of Prohibited
Transaction Exemption Applications
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Final rule.
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SUMMARY: The Department of Labor (the Department) is adopting
amendments to its existing procedure governing the filing and
processing of applications for administrative exemptions from the
prohibited transaction provisions of the Employee Retirement Income
Security Act of 1974 (ERISA), the Internal Revenue Code of 1986 (the
Code), and the Federal Employees' Retirement System Act of 1986 (FERSA)
(the Amendments). The Secretary of Labor (the Secretary) is authorized
to grant exemptions from the prohibited transaction provisions of
ERISA, the Code, and FERSA and to establish an exemption procedure to
provide for such relief. The Amendments update and supersede the
Department's existing prohibited transaction exemption procedures.
DATES: The amendments in this rule are effective April 8, 2024.
FOR FURTHER INFORMATION CONTACT: Brian Shiker, telephone: (202) 693-
8552, email: <a href="/cdn-cgi/l/email-protection#6f1c0706040a1d410d1d060e012f0b000341080019"><span class="__cf_email__" data-cfemail="d5a6bdbcbeb0a7fbb7a7bcb4bb95b1bab9fbb2baa3">[email protected]</span></a>, Office of Exemption Determinations,
Employee Benefits Security Administration, U.S. Department of Labor
(this is not a toll-free number).
Customer Service Information: Individuals interested in obtaining
information from the Department concerning ERISA and employee benefit
plans may call the Employee Benefits Security Administration's Toll-
Free Hotline, at 1-866-444-EBSA (3272) or visit the Department's
website (<a href="http://www.dol.gov/ebsa">www.dol.gov/ebsa</a>).
SUPPLEMENTARY INFORMATION:
Background
Part 4 of Title I of ERISA establishes an extensive framework of
standards and rules that govern the conduct of ERISA plan fiduciaries;
collectively, these rules are designed to safeguard the integrity of
employee benefit plans. As part of this structure, ERISA section 406(a)
generally prohibits a plan fiduciary from causing the plan to engage in
a variety of transactions with certain related parties, unless a
statutory or administrative exemption applies to the transaction. These
related parties (which include plan fiduciaries, sponsoring employers,
unions, service providers, and other persons who may be in a position
to exercise improper influence over a plan) are defined as ``parties in
interest'' in ERISA section 3(14). ERISA section 406(b) generally
prohibits a plan fiduciary from (1) dealing with the assets of a plan
in their own interest or for their account, (2) acting in any
transaction involving the plan on behalf of a party whose interests are
adverse to those of the plan or its participants and beneficiaries, or
(3) receiving any consideration for their own personal account from a
party dealing with the plan in connection with a transaction involving
plan assets, unless an exemption specifically applies to such conduct.
To supplement these provisions, ERISA sections 406(a)(1)(E) and 407(a)
impose restrictions on the nature and extent of plan investments in
assets such as ``employer securities'' (as defined in ERISA section
407(d)(1)) and ``employer real property'' (as defined in ERISA section
407(d)(2)). The transactions prohibited under ERISA sections 406 and
407 are referred to as ``prohibited transactions.''
Most of the transactions prohibited by ERISA section 406 are
likewise prohibited by Code section 4975, which imposes an excise tax
on those transactions to be paid by each ``disqualified person''
(defined in Code section 4975(e)(2) in virtually the same manner as the
term ``party in interest'' is defined in ERISA section 3(14)) who
engages in the prohibited transactions.
Prohibited Transaction Exemptions
Both ERISA and the Code contain various statutory exemptions from
the prohibited transaction rules. These statutory exemptions were
enacted by Congress to prevent the disruption of a number of customary
business practices involving employee benefit plans, parties in
interest, and fiduciaries. The statutory exemptions afford relief for
transactions such as loans to participants and stock ownership plans,
the provision of services necessary for the operation of a plan,
certain investment advice transactions involving individual account
plan participants and beneficiaries, and the investment of plan assets
into deposits in certain financial institutions regulated by state or
Federal agencies.
In addition to the statutory exemptions, ERISA section 408(a)
authorizes the Secretary to grant administrative exemptions from the
restrictions of ERISA sections 406 and 407(a) in instances where the
Secretary makes a finding on the record that relief is (1)
administratively feasible, (2) in the interests of the plan and its
participants and beneficiaries, and (3) protective of the rights of
participants and beneficiaries of such plan. Similarly, Code section
4975(c)(2) authorizes issuance of administrative exemptions from the
prohibitions of Code section 4975(c)(1) subject to the same findings.
Before an exemption is granted, notice of its pendency must be
published in the Federal Register and interested persons must be given
the opportunity to comment on the proposed exemption. If the exemption
transaction involves potential fiduciary self-dealing or conflicts of
interest, an opportunity for a public hearing must be provided.
ERISA section 408(a) authorizes the Secretary to grant
administrative exemptions on either an individual or a class basis.
Class exemptions provide general relief from the restrictions of ERISA,
the Code, and FERSA to those parties in interest who engage in the
categories of transactions described in the exemption and who also
satisfy the conditions stipulated by the exemption. Persons who are in
conformity with all the requirements of a class exemption do not
ordinarily decide to seek an individual exemption for the same
transaction from the Department. Individual exemptions, by contrast,
involve case-by-case determinations as to whether the specific facts
represented by an applicant concerning an exemption transaction as well
as the conditions applicable to such a transaction support a finding by
the Department that the requirements for relief from the prohibited
transaction provisions of ERISA, the Code, and FERSA have been
satisfied in a particular instance. While the vast majority of
administrative exemptions issued by the Department are the product of
requests for relief from individual applicants or the broader employee
benefits community, ERISA section 408(a) also authorizes the Department
to initiate administrative exemptions on its own motion.
In considering individual exemption requests from applicants, the
Department exercises its authority under ERISA section 408(a) by
carefully examining the decision-making process used by a plan's
fiduciaries with respect to an exemption transaction, and the
safeguards that are established against conflicts of interest. In
general, the Department does not make determinations concerning the
appropriateness or prudence of the investment proposals submitted by
[[Page 4663]]
exemption applicants. However, the Department ordinarily will not
favorably consider an exemption request if the Department believes that
the proposed transactions are inconsistent with the fiduciary
responsibility provisions of ERISA sections 403 and 404. To protect
plans and their participants, the Department requires an exemption
transaction to be designed to minimize the potential for conflicts of
interest and self-dealing. Also, exemptions generally preclude
unilateral action by the applicant that could disadvantage the plan.
Prohibited Transaction Exemption Procedure
ERISA section 408(a) and Code section 4975(c)(2) direct the
Secretary and the Secretary of the Treasury (the Secretaries),
respectively, to establish procedures for granting administrative
exemptions. In connection with this directive, ERISA section 3003(b)
directs the Secretaries to consult and coordinate with each other with
respect to the establishment of rules applicable to the granting of
exemptions from the prohibited transaction restrictions of ERISA and
the Code. Further, under ERISA section 3004, the Secretaries are
authorized to develop rules on a joint basis that are appropriate for
the efficient administration of ERISA.
Pursuant to these statutory provisions, the Secretaries jointly
issued an exemption procedure on April 28, 1975 (ERISA Procedure 75-1,
40 FR 18471, also issued as Rev. Proc. 75-26, 1975-1 C.B. 722). Under
this procedure, a person seeking an exemption under both ERISA section
408(a) and Code section 4975 was obliged to file an exemption
application with both the Internal Revenue Service (IRS) and the
Department. However, requiring applicants to seek exemptive relief for
the same transaction from two separate Federal departments soon proved
administratively cumbersome.
To resolve this problem, section 102 of Presidential Reorganization
Plan No. 4 of 1978 (3 CFR, 1978 Comp., p. 332), reprinted in 5 U.S.C.
app. at 672 (2006), and in 92 Stat. 3790 (1978)), effective on December
31, 1978, transferred to the Secretary the authority of the Secretary
of the Treasury to issue exemptions under Code section 4975, with
certain enumerated exceptions. As a result, Congress gave the Secretary
authority under Code section 4975(c)(2) and ERISA section 408(a) to
issue individual and class administrative exemptions from the
prohibited transaction restrictions of ERISA and the Code. The
Secretary has delegated this authority, along with most of the
Secretary's other responsibilities under ERISA, to the Assistant
Secretary of Labor for the Employee Benefits Security
Administration.\1\
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\1\ See Secretary of Labor's Order 6-2009, 74 FR 21524 (May 7,
2009).
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FERSA also contains prohibited transaction rules similar to those
found in ERISA and the Code that are applicable to parties in interest
with respect to the Federal Thrift Savings Fund established by FERSA.
The Secretary is directed under FERSA to prescribe, by regulation, a
procedure for granting administrative exemptions from certain of those
prohibited transactions.\2\ The Secretary also delegated this
rulemaking authority under FERSA to the Assistant Secretary of Labor
for the Employee Benefits Security Administration.\3\
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\2\ 5 U.S.C. 8477(c)(3).
\3\ See Secretary of Labor's Order 6-2009, 74 FR 21524 (May 7,
2009).
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Over time, the Department has issued additional guidance explaining
its policies and practices relating to the consideration of exemption
applications. In 1985, the Department published a statement of policy
concerning the issuance of retroactive exemptions from the prohibited
transaction provisions of ERISA section 406 and Code section 4975
(ERISA Technical Release 85-1, January 22, 1985). This statement noted
that, in evaluating future applications for retroactive exemptions, the
Department would ordinarily take into account a variety of objective
factors in determining whether a plan fiduciary had exhibited good
faith conduct in connection with the past prohibited transaction for
which relief is sought (such as whether the fiduciary had utilized a
contemporaneous independent appraisal or reference to an objective
third-party source, e.g., a stock exchange, in establishing the fair
market value of the plan assets acquired or disposed of by the plan in
connection with the transaction at issue). However, while noting that
the satisfaction of such objective criteria might be indicative of a
fiduciary's good faith conduct, the release cautioned that the
Department would routinely examine the totality of facts and
circumstances surrounding a past prohibited transaction before reaching
a final determination on whether a retroactive exemption is warranted.
In 1990, the Department published a final regulation (29 CFR
2570.30 through 2570.52 (1991), reprinted in 55 FR 32847 (August 10,
1990)), setting forth a revised exemption procedure that superseded
ERISA Procedure 75-1 (the Exemption Procedure Regulation). This
regulation, which became effective on September 10, 1990, reflected the
jurisdictional changes made by Presidential Reorganization Plan No. 4
and extended the scope of the exemption procedure to applications for
relief from the FERSA prohibited transaction rules. In addition, the
Exemption Procedure Regulation codified various informal exemption
guidelines developed by the Department since the adoption of ERISA
Procedure 75-1.
In 1995, the Department issued a publication entitled ``Exemption
Procedures under Federal Pension Law'' (the 1995 Exemption
Publication). In addition to providing a brief overview of the
exemption process, the 1995 Exemption Publication included definitions
of technical terms such as ``qualified independent fiduciary,''
``qualified independent appraiser,'' and ``qualified appraisal
report.'' These definitions, derived from conditions contained in
previously granted exemptions, provide important guidance about the
Department's standards concerning the independence, knowledge, and
competence of third-party experts retained by a plan to review and
oversee an exemption transaction, as well as the contents of the
reports and representations the Department ordinarily requires from
such experts.
The Department published an updated Exemption Procedure Regulation
in 2011 (29 CFR 2570.30 through 2570.52 (2011)).\4\ The updated
Exemption Procedure Regulation revised the prohibited transaction
exemption procedure to reflect changes in the Department's exemption
practices since the previous exemption procedure was issued in 1990.
Among other things, the Department consolidated elements of the
exemption policies and guidance previously found in ERISA Technical
Release 85-1 and the 1995 Exemption Publication within a single,
comprehensive final regulation. The updated Exemption Procedure
Regulation promoted the prompt and efficient consideration of all
exemption applications by (1) clarifying the types of information and
documentation generally required for a complete filing, (2) affording
expanded opportunities for the electronic submission of information and
comments relating to an exemption, and (3) providing plan participants
and other interested persons with a more thorough understanding of the
exemption under consideration.
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\4\ 76 FR 66637 (October 27, 2011).
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[[Page 4664]]
Most recently, on March 15, 2022, the Department published a
proposed amendment to the Exemption Procedure Regulation (the Proposed
Rule) that would update its existing procedures governing the filing
and processing of applications for administrative exemptions from the
prohibited transaction provisions of ERISA, the Code, and FERSA.\5\ The
Department received 29 comment letters on the Proposed Rule before the
public comment period ended on May 29, 2022.
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\5\ 87 FR 14722 (March 15, 2022).
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After consideration of the comments, including a written request
for a public hearing, the Department held a virtual public hearing on
September 15, 2022, which provided an opportunity for all interested
parties to testify on material factual information regarding the
Proposed Rule.\6\ Eight organizations were represented at the hearing.
The Department reopened the Proposed Rule's public comment period on
the hearing date. Following the hearing, the Department posted the
hearing transcript to EBSA's website on October 6, 2022, and announced
that the reopened comment period that began on the hearing date would
close on October 28, 2022.\7\ Eight organizations submitted comments
during the reopened comment period.
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\6\ 87 FR 51299 (August 22, 2022).
\7\ 87 FR 62751 (October 17, 2022).
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After careful consideration of the comments and testimony, the
Department is finalizing the Proposed Rule (the Final Amendment). The
Final Amendment makes a number of changes to the Proposed Rule in
response to comments, which are discussed in detail in the section
below titled ``Changes to the Exemption Procedure Proposed Rule.''
Changes to the Exemption Procedure Proposed Rule
The Department issued the Proposed Rule to promote a prompt,
efficient, open, and transparent exemption application process.
Accordingly, the Proposed Rule would make applicants explicitly aware
of the information the Department requires and the specific steps it
takes during the exemption application process to ensure that a
thorough and complete record is created by which any impacted party,
including plan participants and beneficiaries, can review and
understand the decision-making process the Department engaged in when
considering an exemption application. Specifically, in the Proposed
Rule, the Department, among other things, proposed to (1) clarify the
types of information and documentation required for a complete
application, (2) revise the definitions of a ``qualified independent
fiduciary'' and ``qualified independent appraiser'' to ensure their
independence, (3) clarify the content of specific reports and documents
applicants must submit to ensure that the Department receives
sufficient information to make the requisite findings under ERISA
section 408(a) to issue an exemption, (4) update various timing
requirements to ensure clarity in the application review process, (5)
clarify items that are included in the administrative record for an
application and when the administrative record is available for public
inspection, and (6) expand opportunities for applicants to submit
information to the Department electronically.
General Comments on the Proposed Rule and the Need for Changes
Before discussing specific changes the Department made to the
Proposed Rule in this Final Amendment, the Department notes that many
commenters raised general, broad objections to the Proposed Rule.\8\
Some commenters expressed concern that the Department had become more
restrictive in its approach to exemptions and contended that the
Proposed Rule would result in fewer exemptions. As evidence of this
assertion, the commenters pointed to a decline in the number of
exemptions the Department has issued over the last several years. The
Department does not believe, however, that it has become unduly
restrictive in its approach to exemptions. Instead, the number and
frequency of granted exemptions reflects multiple factors, including
market participants' increased ability to structure transactions in
ways that avoid violating the prohibited transaction rules, the
flexibility provided by many administrative class exemptions previously
issued by the Department, the expansion of statutory exemptions, and
market developments. The Department also notes that in the 2023 fiscal
year, the Department granted 19 individual prohibited transaction
exemptions, an increase in the number of exemptions from previous
years.
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\8\ These commenters consisted of parties from the financial
services industry and their attorney representatives, as well as
independent fiduciaries and appraisers.
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One concern that the Department shares with many of the commenters
is that the process was starting to become more drawn-out and longer
than necessary. One reason the process is sometimes lengthy is that the
Department frequently needs to follow-up with applicants to ensure that
it has all of the information necessary to make the required statutory
findings. This timeline was frustrating to everyone, and commenters
noted it throughout their comments. While the commenters are correct
that the Department intended to formalize many of its current exemption
practices in this rulemaking process, its goal in doing so is to bring
clarity and transparency to the exemption process, especially for plan
participants and beneficiaries impacted by the exemption transaction,
not to decrease the number of applications it receives or grants. The
Department's reasoning is that by providing clearer expectations about
what information should be included in exemption applications, some of
the friction associated with the exemption process can be reduced
because the Department will have less need to request additional
information from applicants. This will make the entire process more
accessible and efficient, especially for applicants that have less
experience with the Department's exemption process. Contrary to the
commenters' concerns, the Final Amendment is designed to help
applicants navigate through the exemption process and not to dissuade
them from applying for exemptions. The Final Amendment makes the
exemption application process more efficient by reducing or eliminating
delays caused when information is missing from exemption applications,
and they are otherwise incomplete. It also tries to ensure that all
entities have the same access to the exemption transaction process by
making all steps of the process transparent.
In addition, commenters stated that the Proposed Rule is overly
prescriptive, burdensome, and costly. The Department reiterates that
one of the main reasons it is amending the Exemption Procedure
Regulation is to clarify the specific items it expects applicants to
include with their exemption applications and provide information
regarding the process by which the Department evaluates exemption
applications. The Department can achieve this goal only if the
requirements of the Final Amendment are sufficiently prescriptive,
because by adding more specificity, the Department will make the
exemption application process less burdensome and costly and more
streamlined and efficient.
The Department emphasizes that ERISA section 408(a) requires it to
build an administrative record for the Department to make its required
findings that an exemption transaction
[[Page 4665]]
is (1) administratively feasible, (2) in the interest of the plan and
its participants and beneficiaries, and (3) protective of its
participants and beneficiaries. Under the current Exemption Procedure
Regulation, the Department often engages in a drawn-out process where
it makes several requests for additional information from the applicant
after the submission of an application in the course of the
Department's review. The information required under ERISA section
408(a) is, however, the same whether it is included with the initial
submission of an application or obtained through this drawn-out
process. Making the Department's expectations clearer through the Final
Amendment should streamline and expedite the application process, which
should redound to the benefit of both applicants and the Department.
These changes will also enhance the administrative feasibility for
exemptions.
Several commenters also urged the Department to withdraw the
Proposed Rule and repropose it at a later date after receiving
additional input from interested stakeholders. The Department disagrees
with these commenters. The Department received comments from many
different types of parties, representing financial institutions,
fiduciaries, appraisers, plans, and participants and beneficiaries,
among others during the initial comment period. The Department also
notes that it provided interested stakeholders with multiple additional
opportunities to provide their input on the Proposed Rule beyond their
initial comments by (1) extending the initial public comment period,
(2) holding a public hearing where the regulatory community expressed
its views directly to the Department through written and oral
testimony, and (3) reopening the comment period on the hearing date.
Moreover, the Final Amendment improves the Department's exemption
process and ultimately reduces applicants' burden; further delay would
unnecessarily deprive the public of these benefits.
One commenter raised a concern that the Department may apply the
Proposed Rule's provisions regarding independent fiduciaries and
appraisers to other areas, such as the employee stock ownership plan
valuation rules under ERISA. In response to this comment, the
Department notes that the Final Amendment applies only to the
Department's rules regarding the filing and processing of exemption
applications. If the Department decides to issue future guidance
regarding other areas of ERISA that contains similar rules for
fiduciaries and appraisers to those contained in the Final Amendment,
notice and an opportunity to comment on such guidance would be provided
to the public, consistent with the Administrative Procedure Act.
Finally, several commenters objected to the Office of Management
and Budget (OMB) and the Department's determination that the rule was
not ``significant'' for purposes of Executive Order 12866. These
commenters asserted that the Department should have included a
regulatory impact analysis (RIA) with the Proposed Rule to assess its
impact on plans, participants, and beneficiaries. In response to such
comments, the Department has included an assessment of the potential
costs and benefits of the Final Amendment, in accordance with section
6(a)(3)(B)(ii) of Executive Order 12866 (as amended by Executive Order
14094).\9\
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\9\ The Department's RIA that is included in this Final
Amendment was informed by comments that the Department received in
response to its notice and comment solicitation in the Paperwork
Reduction Act section of the Proposed Rule.
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Specific Rule Provisions
The current Exemption Procedure Regulation consists of 23
individual sections (Sec. Sec. 2570.30 through 2570.52) that are
arranged by topic, and that generally reflect the chronological order
of steps the Department takes to process an exemption application. This
Final Amendment retains the current section-by-section topical
structure and most of the operative language of the current Exemption
Procedure Regulation. While the Department made some non-substantive
revisions to the current Exemption Procedure Regulation to improve its
readability and provide clarity that are not discussed in this
preamble, the Department addresses all substantive amendments to the
current Exemption Procedure Regulation in the section-by-section
discussion below.
Section 2570.30
Section 2570.30 sets forth the scope of the Exemption Procedure
Regulation. It addresses the filing and processing of applications for
both individual and class exemptions that the Department may propose
and grant pursuant to ERISA section 408(a), Code section 4975(c)(2),
FERSA, and on its own motion. Paragraph (b) broadly addresses the
Department's power to issue exemptions. Similar to the Proposed Rule,
the Department revises the regulatory text that is applicable to
retroactive exemptions in the Final Amendment, to include a statement
that the Department will review any retroactive exemption application
to determine whether any plan participants or beneficiaries were harmed
by the transaction for which retroactive relief is sought. This
language reinforces the Department's existing policy that it,
generally, will not support a request for a retroactive exemption
involving a transaction that negatively impacted participants and
beneficiaries. The Department notes that whether a transaction
negatively impacts participants and beneficiaries will be determined
based on the facts and circumstances, which will include a possible
determination as to whether participants and beneficiaries were made
whole for any harm. Further, the Department emphasizes in the Final
Amendment that it will apply a high level of scrutiny to any
retroactive exemption application using longstanding standards that
have been previously set forth by the Department in the Exemption
Procedure Regulation. As a result, the Department strongly suggests
that a party that anticipates engaging in a transaction that would
require retroactive exemptive relief contact the Department before
engaging in the transaction.
Paragraph (d) of the Proposed Rule provides, generally, that the
issuance of an administrative exemption does not relieve a fiduciary or
other party in interest or disqualified person with respect to a plan
from the obligation to comply with certain other provisions of ERISA,
the Code, or FERSA. For clarity, the Final Amendment adds additional
text to the proposed paragraph (d) to clarify the impact of an
administrative exemption under the Code. Specifically, the Final
Amendment states that the issuance of an exemption does not affect the
requirements of Code section 401(a), including that a plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries, or the rules with respect to other
Code provisions, including that an administrative exemption with
respect to a contribution to a pension plan does not affect the
deductibility of the contribution under Code section 404.
Paragraph (e) of the Final Amendment provides that the Department
will not accept oral exemption applications or grant exemptions orally.
Similar to the Proposed Rule, the Department has revised the regulatory
text in the Final Amendment to clarify that the Department will provide
feedback in response to oral inquiries, but it will not be bound by
that feedback. The Department cannot give parties assurances that an
exemption will be issued or whether a specific exemption condition will
be required before it has
[[Page 4666]]
gone through the public exemption process, fully considered the record,
and made a final determination. The Department also proposed to include
language that any oral statements made by the party making the inquiry
will become part of the administrative record. Commenters objected to
this language on the basis that it would have a chilling effect on the
regulated community's communications with the Department. As discussed
in more detail below in Sec. 2570.32(d), the creation of an accurate
and complete administrative record outweighs commenters' concerns and
necessitates the inclusion of oral communications in the administrative
record. However, in order to be responsive to commenters' concerns
while ensuring an accurate and complete administrative record, the
Department has streamlined the Final Amendment to omit language in the
proposed paragraph (e) regarding oral communications. Instead, all
issues pertaining to the administrative record, many previously
highlighted by the Proposed Rule, including the inclusion of pre-
submission and oral communications, are addressed in Sec. 2570.32(d).
Finally, the Department proposed to add a new paragraph (g), which
would have provided that the Department issues administrative
exemptions at its sole discretion based on the statutory criteria set
forth in ERISA section 408(a) and Code section 4975(c)(2). Several
commenters were concerned that the ``sole discretion'' language used
here and in other sections of the Proposed Rule represented an attempt
by the Department to leave stakeholders without a realistic opportunity
to challenge its actions as arbitrary and capricious under the
Administrative Procedure Act. For example, the commenters maintained
that the Department could create a competitive imbalance by issuing two
exemptions in identical circumstances with different conditions, or by
refusing to give an exemption to one applicant that was given to a
similarly situated applicant.
The Department disagrees. While the proposed text correctly
reflects that the decision to grant or deny an exemption ultimately is
within the Department's sole discretion, the regulation could not
circumvent the Administrative Procedure Act requirements nor does (or
could) it purport to give the Department authority to act arbitrarily.
Therefore, the Department has retained the language as proposed in the
Final Amendment.
In conjunction with this new paragraph (g), the Department proposed
to add language stating that the existence of previously issued
administrative exemptions is not determinative of whether the
Department will propose future exemptions for applications with the
same or similar facts, or whether a proposed exemption will contain the
same conditions as a similar previously issued administrative
exemption. The addition of this language reinforces the Department's
existing policy that it has the sole discretionary authority to issue
exemptions and is not bound by facts or conditions of prior exemptions
in making determinations with respect to an exemption application. This
policy allows the Department to retain sufficient flexibility to grant
exemptions that are appropriate in an ever-changing business,
legislative, and regulatory policy environment.
Commenters objected to proposed paragraph (g) and argued that the
Department should be bound or, at a minimum, influenced by previously
issued administrative exemptions. These commenters believe that prior
exemptions should establish precedent that stakeholders can reasonably
rely on to foster predictability, efficiency, and consistent treatment
of different applicants.
It is reasonable for applicants to identify similar exemptions the
Department previously has granted in certain situations as a starting
point when submitting an exemption application to the Department.
Applicants should be aware, however, that revisions and changes may be
necessary based on the current facts and circumstances, whether they
are driven by business, legislative, regulatory, or policy
considerations. The Department endeavors to use the prohibited
transaction class exemption process when the exemption transaction is
reasonably understood to be a transaction that would benefit, and be
protective of the interests of, participants and beneficiaries of
numerous plans. When the Department is considering a prohibited
transaction individual exemption, however, it is because the Department
understands the transaction to be specific and unique to the party
before it. Accordingly, parties that are facing similar, but not
identical situations, are encouraged to seek their own exemption.
Previously issued exemptions are instructive, and a useful starting
point, but do not prevent the Department from considering each
situation that comes before it in its entirety. As a result, the
Department has modified the proposed paragraph (g) in the Final
Amendment to provide that previously issued administrative exemptions
may inform the Department's determination of whether to propose future
exemptions based on the unique facts and circumstances of each
application.
Lastly, with respect to proposed paragraph (g), commenters raised
concerns regarding the interplay between the Department's stance that
applicants cannot rely on exemptions as precedents and the existing
expedited review process the Department established in Prohibited
Transaction Exemption 96-62 (commonly referred to as EXPRO).\10\ EXPRO
permits the Department to perform an expedited review of an exemption
application that is ``substantially similar'' to two other exemptions
the Department has granted in the prior five years, as determined in
the Department's sole discretion. The Department disagrees with the
commenters' position that the Proposed Rule creates tension with EXPRO.
Pursuant to proposed paragraph (g), the Department may use previously
issued exemptions to inform its decisions regarding whether to grant
individual exemptions. The EXPRO process merely uses prior exemptions
to expeditiously inform the Department of whether an exemption would
meet the requirements of ERISA section 408(a); it does not bind the
Department to prior exemptions as precedent. Instead, before granting
an exemption under EXPRO, the Department must determine, in its sole
discretion, (1) whether a proposed transaction is ``substantially
similar'' and (2) whether there is little, if any, risk of abuse or
loss to plan participants and beneficiaries. Even if a transaction is
substantially similar, the Department may deny an application under
EXPRO if it finds that the particular transaction creates a risk of
abuse or loss, or if it determines that the exemption transaction
differs from the prior exemptions based on the Department's
understanding of changes in present circumstances, whether business,
legislative, regulatory, or policy.
---------------------------------------------------------------------------
\10\ 67 FR 44622 (July 3, 2002).
---------------------------------------------------------------------------
Section 2570.31
Section 2570.31 sets forth definitions that are used throughout the
Exemption Procedure Regulation. While the Department did not propose to
revise most of the definitions (other than to improve readability), the
Department proposed substantive revisions to several existing
definitions and added new definitions. These changes address issues
that the Department has often experienced in its review of exemption
applications.
[[Page 4667]]
First, the Department proposed to revise the definition of
``affiliate'' set forth in paragraph (a) to include:
<bullet> any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person. For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual; any officer,
director, partner, employee, or relative (as defined in ERISA section
3(15)) of any such person; or
<bullet> any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, partner, or
five percent or more owner.
In addition to rewording the text for clarity, the proposed revised
definition would have included all employees and officers, rather than
only those who are highly compensated (as defined in Code section
4975(e)(2)(H)) or have direct or indirect authority, responsibility, or
control regarding the custody, management, or disposition of plan
assets involved in the subject exemption transaction to ensure that all
parties that commonly serve as affiliates are captured, without a
complicating reference to a Code citation.
Although commenters maintained that the revised definition may have
been too broad because it is overly inclusive and might capture parties
that are not related to the exemption transaction, the Department is
finalizing this definition as proposed. The revision reflects the
affiliate definition the Department currently uses in individual and
class exemptions and has proved to be both appropriately protective and
workable.\11\
---------------------------------------------------------------------------
\11\ See, e.g., PTE 2020-02 (85 FR 82798, December 18, 2020);
PTE 2022-02 (87 FR 23245, April 19, 2022); PTE 2022-03 (87 FR 54264,
September 2, 2022); and Proposed Exemption for Morgan Stanley & Co.
LLC, and Current and Future Affiliates and Subsidiaries, Application
No. D-11955 (86 FR 64695, November 18, 2021).
---------------------------------------------------------------------------
The Department proposed to substantially revise the definition of
the term ``qualified independent appraiser'' in paragraph (i) of the
proposal. Commenters generally objected to the proposed changes
because, according to them, such changes could result in a substantial
reduction of the number of experienced appraisers available to
represent the interests of plans in exemption transactions, and it
would especially be harmful for smaller appraisers. They also indicated
that the changes could result in further industry consolidation, which
could lead to concentration of risks. After considering these comments,
the Department has decided not to finalize the revised definition as
proposed, and, except for the modifications discussed below, generally,
has reverted to the qualified independent appraiser definition in the
current Exemption Procedure Regulation.
The Department made a few revisions to the Exemption Procedure
Regulation text in the Final Amendment regarding the qualified
independent appraiser definition to clarify the underlying meaning of
the existing language. The Department requested comments on these
definitions, including whether the ``proposed changes are clear [and
whether they] appropriately reflect the manner in which entities
interact with ERISA-covered plans and plan participants and
beneficiaries.'' \12\ Based on this request for comment, the Department
received input from the public that the proposed definition of
qualified independent appraiser would better reflect the manner in
which the appraiser interacted with plans if the definition were
slightly changed. Specifically, the Final Amendment amends the
qualified independent appraiser definition to provide that the
Department generally will not conclude that an appraiser's independence
is compromised solely based on the revenues it receives from parties in
interest (and their affiliates) participating in the exemption
transaction, as long as the appraiser neither receives nor is projected
to receive more than two percent of its revenues within the current
Federal income tax year from the parties in interest (and their
affiliates). Although larger percentages merit more stringent scrutiny,
an appraiser may be considered independent based upon other facts and
circumstances provided that the appraiser neither receives nor is
projected to receive more than five percent of its revenues within the
current Federal income tax year from parties in interest (and their
affiliates) participating in the exemption transaction.
---------------------------------------------------------------------------
\12\ 87 FR 14725 (Mar. 15, 2022).
---------------------------------------------------------------------------
While the amended definition returns to the two and five percent of
revenue thresholds provided in the Exemption Procedure Regulation, the
Department has modified the language in the Final Amendment to clarify
that an appraiser whose revenue threshold is less than two percent is
not automatically deemed independent. The Department may consider other
facts and circumstances indicating that an appraiser is not independent
regardless of its revenue threshold. For example, if an appraiser is
likely to be retained by the applicant for additional appraisals due to
its provision of an appraisal submitted with the exemption application,
the Department may question whether the appraiser is truly independent.
Further, the modified language emphasizes that appraisers with revenue
thresholds that are between two and five percent could merit heightened
scrutiny from the Department. The revised language in the Final
Amendment strikes the appropriate balance of addressing commenters'
concerns that the proposed changes could have negatively impacted the
appraiser marketplace while giving appropriate weight to the
participant-protective importance of an appraiser's independence based
on all relevant facts and circumstances regardless of the appraiser's
revenue percentage.
The Department also proposed to revise the qualified independent
appraiser definition in the Proposed Rule to provide that an appraiser
must be independent of and unrelated to the qualified independent
fiduciary involved with the exemption transaction. Commenters objected
to the revision by asserting that many independent fiduciaries retain
affiliates to perform appraisals and eliminating this practice would
unnecessarily drive up the cost of an exemption application. After
considering these comments, the Department has not included the
proposed language in the Final Amendment.
The Department also proposed to revise the definition of a
``qualified appraisal report'' in paragraph (h)(2)(i) to require the
appraiser to provide an appraisal report ``on behalf of the plan.''
Commenters representing appraisers stated that longstanding ethical
standards of the valuation profession require appraisers to perform
appraisals independently and without bias in favor of any party. All
appraisal reports are based on objective criteria and may not be ``on
the behalf'' of any party. After considering this information, the
Department did not include the proposed language in the Final
Amendment.
The Department made similar amendments to the definition of
``qualified independent fiduciary'' in paragraph (j) of the proposed
Sec. 2570.31. As with the qualified independent appraiser definition,
commenters expressed concern that the proposed changes to the qualified
independent fiduciary definition would substantially reduce the number
of experienced independent fiduciaries available to represent the
interests of plans and participants and beneficiaries in exemption
transactions, especially
[[Page 4668]]
smaller independent fiduciaries. After considering these concerns, the
Department, generally, is not finalizing these provisions of the
exemption as proposed and has mostly reverted to the language of the
Exemption Procedure Regulation.
The Department proposed to revise the independent fiduciary
definition to:
<bullet> require the fiduciary to be independent from any other
party involved in the development of the exemption request; and
<bullet> state that the Department would consider whether a
fiduciary has an interest in the exemption transaction or in future
transactions of the same nature or type in determining whether a
fiduciary is independent.
Beyond the broad objections described above regarding the changes
to the definition, commenters stated these particular changes would
result in the exclusion of experienced independent fiduciaries, leaving
only inexperienced fiduciaries to represent the interests of plans and
participants and beneficiaries. Commenters maintained that if a
fiduciary develops expertise in a particular area, it would necessarily
have an interest in future transactions, because future business drives
a fiduciary to invest the resources necessary to develop expertise.
While the Department is persuaded not to include the proposed change in
the Final Amendment, it has revised the definition to provide that when
the Department makes an independence determination based on all of the
relevant facts and circumstances, that determination will include an
evaluation of the extent to which the plan's counterparty in the
exemption transaction participated or influenced the selection of the
fiduciary. Using such explanatory language emphasizes the conflict of
interest concerns, previously raised in the Proposed Rule, that the
Department focuses on as part of its evaluation of fiduciary
independence without unduly limiting those parties that may serve as
independent fiduciaries.
Second, as with the definition of a qualified independent
appraiser, the Department proposed to revise the revenue threshold used
to determine independence in the Proposed Rule. Commenters made the
same objections to this proposed change by asserting that it could have
a detrimental impact on the independent fiduciary marketplace. After
considering these comments, the Department, generally, has not included
the proposed changes in the Final Amendment and has largely reverted to
the original revenue thresholds set forth in the existing Exemption
Procedure Regulation. However, as with the definition of a qualified
independent appraiser, the Department has revised the language in the
Exemption Procedure Regulation in the Final Amendment to clarify the
underlying intent of the existing language.
Specifically, the Final Amendment states that the Department
generally will not conclude that a fiduciary's independence is
compromised solely based on the revenues it receives from parties in
interest (and their affiliates) that are participating in the exemption
transaction if the fiduciary neither receives nor is projected to
receive more than two percent of its revenues within the current
Federal income tax year from the parties in interest (and their
affiliates). Although larger percentages merit more stringent scrutiny,
a fiduciary may be considered independent based upon other facts and
circumstances provided that the fiduciary neither receives nor is
projected to receive more than five percent of its revenues within the
current Federal income tax year from parties in interest (and their
affiliates) participating in the exemption transaction.
As with the qualified independent appraiser definition, the amended
independent fiduciary definition in the Final Amendment retains the two
and five percent of revenue standards thresholds set forth in the
existing Exemption Procedure Regulation, but modifies the language to
clarify that a fiduciary with revenues less than the two percent
revenue threshold is not automatically deemed independent: the Final
Amendment provides that the Department may consider other facts and
circumstance indicating whether a fiduciary is independent regardless
of its revenue threshold. Further, the Department has revised the
language in the Final Amendment to emphasize that fiduciaries whose
revenue thresholds are between two and five percent merit heightened
scrutiny from the Department. The revised language addresses the
commenters' concerns that the proposed changes could have negatively
impacted the independent fiduciary marketplace while giving proper
weight to the participant-protective independence of the fiduciary,
initially raised as a concern in the Proposed Rule, based on all
relevant facts and circumstances.
Proposed paragraph (k) would have added a new definition of ``pre-
submission applicant'' that defines a pre-submission applicant as a
party that contacts the Department, either orally or in writing, to
inquire whether a party with a particular fact pattern would need to
submit an exemption application and, if so, what conditions and relief
would be applicable. This definition would not include a party that
contacts the Department to inquire broadly without reference to a
specific fact pattern. The Department has included this definition in
the Final Amendment to clearly distinguish parties that make inquiries
with the Department that could potentially lead to an exemption
application from those that simply seek non-fact specific guidance from
the Department. As discussed below, this distinction impacts how the
Department addresses the inquiries and whether an administrative record
is created when pre-submission applicants contact the Department
regarding an exemption transaction.
The Department also proposed to add a new definition of ``party
involved in the exemption transaction'' that included the following:
(1) a party in interest (as defined in paragraph (f));
(2) any party (or its affiliate) that is engaged in the exemption
transaction; and
(3) any party (or its affiliate) that provides services with
respect to the exemption transaction to either the plan or a party
described in (1) or (2).
The Department proposed to use this term to replace ``party in
interest'' throughout the Exemption Procedure Regulation. After
considering comments and reviewing whether the proposed switch to
``party involved in the exemption transaction'' facilitated the
Department's goals of transparency and efficiency, the Department has
determined not to include this definition in the Final Amendment and is
reverting the reference in the applicable provisions to the term
``party in interest'' that is used in the current Exemption Procedure
Regulation. Reverting to the term ``party in interest'' ensures that
applicants can understand which parties are being addressed and can
efficiently collect the information necessary to complete an
application.
Section 2570.32
Section 2570.32 addresses who may apply for an exemption and when
the administrative record for an exemption application is created. The
Department proposed two revisions to Sec. 2570.32. First, paragraph
(a) would have been revised to describe persons who may apply for
exemptions. The Department proposed to delete the language in paragraph
(a) stating that ``the Department will initiate exemption proceedings
upon the application of'' to
[[Page 4669]]
clarify that this paragraph addresses only those parties who are
permitted to apply for an exemption. The Department has retained this
revision in the Final Amendment as proposed because the revised
language makes clear that paragraph (a) does not address whether the
Department is required to initiate an exemption proceeding. The
decision to initiate an exemption proceeding remains within the
Department's sole discretion.
The Department also proposed to add a new paragraph (d) to address
questions applicants have frequently asked the Department regarding the
creation of the administrative record for an exemption application that
is available for public inspection. To reflect the addition of this
content, the Department proposed adding ``and the administrative
record'' to the heading of Sec. 2570.32. The Department has included
these proposed revisions in the Final Amendment.
The Department proposed in paragraph (d)(1) of the Proposed Rule to
open the administrative record for public inspection beginning on the
date a pre-submission applicant provides information regarding an
exemption transaction to the Department, and it proposed in paragraph
(d)(2) that all pre-submission documents and communications between the
Department and pre-submission applicants would immediately become part
of the administrative record that is open for public inspection.
Commenters objected to this proposed change because, in their view,
it would have a chilling effect on informal and anonymous
communications between the Department and the regulated community.
These commenters asserted that applicants would be less likely to start
the exemption application process or otherwise approach the Department
to discuss potential exemption transactions if every communication with
the Department is included in the administrative record that is
available to the public.
The Department's objective in proposing to add paragraph (d)(1) to
the Exemption Procedure Regulation was to ensure a complete and
accurate administrative record while still encouraging applicants to
communicate freely with the Department. As discussed in more detail
below, the Final Amendment still requires pre-submission information to
be a part of the administrative record. However, the Department
acknowledges commenters' concerns about making information submitted
during the pre-submission process immediately available for public
disclosure. Therefore, the Department has modified the proposed
language in paragraph (d)(1) in the Final Amendment to provide that the
administrative record for an exemption application becomes open for
public inspection, pursuant to Sec. 2570.51(a), on the date an
applicant submits an exemption application to the Office of Exemption
Determinations. This revision makes clear that the administrative
record for an exemption transaction is not available for public
inspection until an applicant formally submits a written exemption
application to the Department. However, the Department also notes that
paragraph (d)(1) is not meant to encourage extended negotiations
between a potential applicant and the Department before it submits an
exemption application, or to permit applicants to circumvent an open
process by ``informally'' seeking an exemption from the Department,
while maintaining that they have not yet formally applied. At its sole
discretion, the Department may decline to engage in extended
conversations without submission of a formal application that ensures
an appropriately open and transparent process.
While the Department acknowledges commenters' concerns regarding
the inclusion of pre-submission information in the administrative
record, including oral communications, the Department's position is
that building an accurate and transparent record takes precedence over
those concerns. In making its required statutory findings under ERISA
section 408(a), the Department is required to build an administrative
record to support its findings under ERISA section 408(a). The
administrative record is incomplete without all of the information that
informed the Department's determinations with respect to the
application, including notes of oral communications with the
Department.
The Department emphasizes that the record is not developed solely
for the benefit of the applicant; it is also available for review and
consideration by all parties that may be affected by the exemption
request, including participants and beneficiaries. The inclusion of
pre-submission information in the public record ensures not only
accuracy but transparency into the Department's exemption determination
process. The record should contain all the information necessary to
fully review the Department's ultimate decision. Not including all
discussions between the applicant and the Department that inform the
Department's decision may hinder, for example, a plan participant's
ability to provide comments or additional facts that might be
beneficial to the Department's review of the application or prevent a
court from fully understanding the basis for the Department's exemption
determination if an applicant or beneficiary legally challenges the
Department's decision. The Department notes, too, that members of the
public can continue to communicate anonymously with the Department
pursuant to the requirements of Sec. 2570.33(d).
Based on the Department's position that all pre-submission
information, whether written or oral, must be included in the
administrative record as of the date an applicant submits an exemption
application, and building on the Proposed Rule's language, the
Department has amended paragraph (d)(2) in the Final Amendment to
provide that the administrative record includes, but is not limited to,
the following: (1) the initial exemption application and any
modifications or supplements thereto; (2) all correspondence with the
applicant after the applicant submits the exemption application; and
(3) any information submitted to the Department by the applicant in
connection with the exemption application, whether such information is
provided orally or in writing (as well as any comments and testimony
received by the Department in connection with an application).
The Department clarified paragraph (d)(2) of the Final Amendment in
turn, by adding a new paragraph (d)(3) which states that, although the
administrative record is open and available to the public only after an
applicant submits an exemption application, the record includes any
material documents or supporting information that an applicant
submitted to the Department in connection with the transaction that is
the subject of the application, whether orally or in writing, before
the applicant formally submits an exemption application to the
Department. The administrative record does not include documents or
records of communications with the Department that are unrelated to the
exemption transaction that is the subject of the application or are
associated with an exemption application an applicant submits
subsequent to the unrelated communications.
Consistent with the goals outlined in the Proposed Rule, paragraphs
(d)(2) and (3) of the Final Amendment clearly establish the documents
and communications that the Department will include in the
administrative record to add clarity and transparency to the
Department's exemption
[[Page 4670]]
determination process. The new language expressly states that all
information material to the Department's decision will be included,
thereby ensuring the creation of an accurate and complete
administrative record. The Department emphasizes, however, that
pursuant to paragraph (d)(3), pre-submission information that is not
material, such as inapplicable background information or information
regarding other transactions that are not relevant to the exemption
transaction, will not be included in the administrative record. Whether
information is material for purposes of paragraph (d)(3) will be
determined solely at the Department's discretion. Limiting pre-
submission information in this manner should address the most
significant concerns of the commenters while fully addressing the
Department's obligation to build a transparent, accurate, and complete
administrative record for its determinations regarding an exemption
application.
In connection with commenters' concerns regarding the proposed
inclusion of pre-submission documents and communications in the
administrative record, several commenters requested the right to review
and comment on or correct the Department's administrative record before
the Department provides public access to it. The Department's position
is that including such a right would be inconsistent with its goal of
creating a record that accurately reflects the information the
Department considered when making its determination. Allowing an
applicant to edit the administrative record for its own exemption
application would defeat the Department's goal of transparency for not
only applicants, but all parties impacted by the transaction, as well
as the general public. To the extent, however, that a party believes it
is appropriate to correct any part of the public record, they are
welcome to submit comments and clarifications which the Department also
will include in the public record. The Department has determined that
the need for an open, transparent, and fully developed process is best
served by including all the information it received or reviewed when
making an exemption determination in the administrative record at the
time an exemption is proposed whether or not the Department relies on
such information.
Finally, the Department proposed to update paragraph (d)(4) of the
Exemption Procedure Regulation to reflect modern methods of
communication. The paragraph provides that if documents are required to
be provided in writing by either the applicant or the Department, the
documents could be provided either by mail or electronically, unless
otherwise required by the Department at its sole discretion. The
Department has adopted this provision in the Final Amendment as
proposed.
Section 2570.33
In Sec. 2570.33, the Department proposed to address applications
the Department will not consider. Specifically, the Department proposed
to revise the text of the Exemption Procedure Regulation to clarify
when it will not consider an exemption application. First, the
Department proposed to revise paragraph (a)(1), under which the
Department may exclude exemption applications that fail to include
current information. The Department intended that the proposed revision
would clarify that the Department would treat an applicant's failure to
include current information the same as an applicant's failure to
include information. The premise of this revision is that absent
current information, the Department cannot develop an accurate
understanding of the facts sufficient to enable a review of the
underlying application. The Department has adopted this provision in
the Final Amendment as proposed.
Second, the Department proposed to revise paragraph (a)(2), which
generally excludes from consideration an application involving: (1) a
transaction or transactions that are the subject of an investigation
for possible violations of part 1 or 4 of subtitle B of Title I of
ERISA or FERSA sections 8477 or 8478; or (2) a party in interest who is
the subject of such an investigation or who is a defendant in an action
by the Department or the IRS to enforce those provisions of ERISA or
FERSA. The proposed revision would have expanded the existing exclusion
to include any ERISA investigations (not only those pursuant to Title I
of ERISA or FERSA sections 8477 and 8478), as well as investigations
under any other Federal or state law. The proposal also would have
expanded the limitation on applications from parties that are the
subject of an investigation or a defendant in an action brought by the
Department or the IRS to include any other regulatory agencies
enforcing ERISA, the Code, FERSA, or any other Federal or state laws.
Commenters argued that the new language was too expansive and would
unnecessarily exclude potential applicants.
The Department has determined that the proposed revision to
paragraph (a)(2) should not be included in the Final Amendment because
parties should not be excluded automatically due to these additional
investigations (except for a failure to include required information),
thereby reverting closer to the current Exemption Procedure Regulation.
The proposed regulation broadly expanded the existing exclusion to
include any ERISA investigation (not only sections 8477 and 8478), as
well as any other Federal or state law. In response to the comments,
the Department decided that a more limited expansion was more
appropriate. The best approach is to require applicants to disclose
investigations or other court or enforcement actions, which is
addressed in Sec. 2570.34. Following this disclosure, the Department
can make a fully informed decision regarding whether an exemption
application should be accepted based on the facts and circumstances,
rather than automatically rejecting an exemption application in this
circumstance.
The Department acknowledges that some commenters were concerned
that these additional disclosures, and their inclusion in the
administrative record, could lead the public to presume malfeasance on
the part of applicants. The Department declines to adopt any changes
based on this comment, because a complete and accurate record is
essential to a transparent exemption process. The Department notes that
applicants who are concerned about potential reputational harm may
include an explanation or description of mitigating facts along with
their disclosure for inclusion in the administrative record. The
Department also notes that some of the required disclosures may already
be reflected in publicly available disciplinary actions by other
regulators or may have been disclosed by the applicant in another
context. For example, an applicant that is a publicly-traded company
may have already disclosed certain investigations or disciplinary
actions as part of its filing of a Form 10-K with the Securities and
Exchange Commission.
The Department proposed to delete the language in the current
paragraph (c) regarding the administrative record, because that topic
is now addressed in revisions to Sec. 2570.32 discussed above. The
Department has made this revision in the Final Amendment as proposed.
The Department proposed to revise the part of paragraph (c)
addressing the submission of confidential information. The current
Exemption Procedure Regulation provides that if an applicant designates
any information required by the rule or requested by the Department as
confidential, the Department will determine whether the information is
[[Page 4671]]
material to the exemption determination. If it determines at its sole
discretion that the information is material, the Department will not
process the application unless the applicant withdraws the claim of
confidentiality. The Department proposed to revise this language to
clarify that it would not review an application that includes
confidential information, with the exception of confidential
designations by a Federal, State, or other governmental entity. This
means that if an applicant submits any confidential information as part
of an exemption application, the Department would not review the
information nor process the exemption application. As a result, the
Department would process the application only after the applicant
withdraws its claim of confidentiality or revokes its submission of the
confidential information. This change would support the Department's
goal of increasing transparency while protecting confidential
information and has adopted this provision in the Final Amendment as
proposed.
One commenter objected to the proposed revisions to paragraph (c)
on the grounds that requiring an applicant to remove a claim of
confidentiality with respect to material information will discourage
applicants from submitting applications. The Department maintains that
the need for transparency in the exemption application process
overrides the commenter's concerns. The Department's record must be
complete and accurate and available for public inspection. If
information that should be included in the administrative record is
excluded based on a claim of confidentiality, a third party could not
review the full administrative record, which would impede the
Department's goal of establishing a full and transparent exemption
determination process. The Department's obligation to make proper
findings is undermined by the submission of confidential documents and
information that are insulated from public comment and evaluation.
The revised language in the Final Amendment also states that by
submitting an exemption application, an applicant consents to public
disclosure of the entire administrative record pursuant to Sec.
2570.51. This revision, consistent with the intent of the Proposed
Rule, places applicants on notice that they are consenting to the
public disclosure of all information in the administrative record when
they submit an exemption application, which will lead to a fully
transparent exemption process.
The Department proposed adding a new paragraph (d) that governs
communications with pre-submission applicants as newly defined in Sec.
2570.31(k). The proposed language provided that the Department would
not communicate with a pre-submission applicant or its representative,
whether through written correspondence or a conference, if the pre-
submission applicant does not: (1) identify and fully describe the
transaction for which exemptive relief is sought; (2) identify the
applicant, the applicable plan(s), and the relevant parties to the
exemption transaction; and (3) set forth the prohibited transaction
provision(s) that the applicant believes are applicable.
Commenters objected to this language, arguing that it would have a
chilling effect on informal and anonymous pre-submission discussions
between the Department and the regulated community. The Department
understands the commenters' concerns, but it also must be able to
associate informal guidance it provides with specific applications that
are submitted. While the Department welcomes pre-submission requests
for guidance, it is imperative that parties approaching the Department
for such guidance regarding a specific exemption transaction provide
the Department with sufficient information to allow it to properly
attribute the guidance to a specific transaction and the relevant
prohibited transaction provisions that are applicable to the
transaction.
Accordingly, the Final Amendment requires those seeking pre-
submission guidance to identify the transaction for which exemptive
relief is sought, as well as the applicable prohibited transaction
provision(s). However, to address commenters' concerns, the Department
has not included the proposed language in the Final Amendment that
would have required pre-submission applicants to identify the
applicant, the applicable plan(s), and the relevant parties to the
exemption transaction before the Department will communicate with a
pre-submission applicant. Eliminating specific identifying information
should address commenters' concerns regarding anonymity while ensuring
that the Department obtains the complete information it needs to
provide relevant advice to an anonymous pre-submission applicant.
Section 2570.34
Section 2570.34 addresses information the Department requires
applicants to include in an exemption application. While the Department
proposed to expand the information the Department requires to be
included in an application in some cases, the Department's intention in
expanding the required information was to streamline the exemption
process by ensuring that most of the information the Department needs
to make an exemption determination is available to it when the
application is submitted, which will expedite the exemption
determination process.\13\ The Department specifically requested
comments on the changes to the information required to be submitted as
part of the application, including comments on whether the Department
should consider other types of information.\14\
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\13\ 87 FR 14727 (Mar. 15, 2022).
\14\ Id.
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Specifically, the Department proposed to revise paragraphs (a)(1)
and (3) to require addresses, phone numbers, and email addresses for
the applicants, representatives, and parties in interest. The
Department proposed to require applicants to include this information
in the initial exemption application to ensure that the Department can
efficiently contact the proper parties.
In addition, the Department proposed to replace the original
paragraph (a)(4) with new paragraphs (a)(4), (5), and (7) to facilitate
the Department's understanding of the decision-making process the
applicant undertook to determine that it was necessary to submit an
exemption application. Accordingly, the Department proposed for
paragraph (a)(4) to require the applicant to include in its application
a description of: (1) the reason(s) for engaging in the exemption
transaction; (2) any material benefit that a party in interest involved
in the exemption transaction may receive as a result of the subject
transaction (including the avoidance of any materially adverse outcome
by the party in interest as a result of engaging in the exemption
transaction); and (3) the costs and benefits of the exemption
transaction to the affected plan(s), participants, and beneficiaries,
including quantification of those costs and benefits to the extent
possible.
Commenters objected to this language on the grounds that requiring
the disclosure is burdensome and unnecessary. However, the Department
views this information as an essential component of an exemption
application, because it will facilitate the Department's understanding
of the underlying rationale for the exemption transaction, including
the costs and benefits for both the party in interest and the plan and
its participants and
[[Page 4672]]
beneficiaries. For example, when an applicant that is a plan sponsor
provides not only a rationale for engaging in the exemption
transaction, but also a statement of the benefits to the sponsor, as
well as the costs and benefits to the plan, the Department can more
accurately determine whether it has sufficient information to make its
findings under ERISA section 408(a). The Department needs to understand
the scope and severity of the conflicts of interest associated with the
transaction, as well as the potential costs and benefits of the
transaction, before it can make a properly informed decision about the
merits of the application and how best to structure a participant-
protective exemption. In addition, the requirement should not be too
burdensome, because a fiduciary that is complying with its fiduciary
obligations under ERISA section 404 should fully evaluate all the
factors set forth in paragraph (a)(4) in the normal course of
fulfilling its fiduciary responsibilities before deciding to seek an
exemption or engage in the transaction at issue. Further, the
Department notes that the required disclosures would likely be
requested as part of the Department's normal review of an exemption
application.
Based on the foregoing, the Department is including the proposed
revisions in the Final Amendment as proposed. The Department notes that
it is not requiring a full actuarial or technical economic accounting
with respect to a proposed exemption transaction but, instead, is
requesting applicants to disclose information they obtain by performing
a full review of the transaction, which includes, at a minimum,
reviewing the material benefits and cost of the transaction for the
plan and its participants and beneficiaries. The Department also notes
that this information is already typically requested when the Office of
Exemption Determinations reviews exemption applications, such that this
information would eventually have to be provided during the
Department's review of the application, and the Department's primary
objective in requiring this information to be submitted with the
initial application is to streamline the exemption determination
process.
The Department also proposed to add a new paragraph (a)(5) that
would build on paragraph (a)(4) by proposing to require applicants to
include with their exemption applications a detailed description of
possible alternatives to the exemption transaction that would not
involve a prohibited transaction and an explanation as to why the
applicant did not pursue those alternatives. Commenters objected to
this language by asserting that it would be burdensome, if not
impossible, for an applicant to investigate and evaluate all potential
approaches to a transaction. Further, commenters argued that ERISA does
not require them to evaluate and exhaust all alternatives to an
exemption transaction before submitting an exemption application.
The Department recognizes that ERISA does not require an applicant
to evaluate every imaginable option with respect to an exemption
transaction and that doing so may prove impractical, and it did not
intend to suggest otherwise. In response to the comments, but still
recognizing the concerns the Department raised in the Proposed Rule,
the Department has modified the language in the Final Amendment to
provide that an applicant must submit a description of the alternatives
to the exemption transaction that it considered or evaluated before
submitting the exemption application and explain why those alternatives
were not pursued with its exemption application. Thus, the Department
simply requires an applicant to explain to the Department the process
by which the applicant arrived at its decision to propose an exemption
application. If as part of that decision-making process the applicant
evaluated alternatives, the applicant must disclose those alternatives
to the Department, along with the rationales for not selecting such
alternatives, to provide the Department with insight into the
applicant's decision-making process. Although the Department is not
retaining the proposed amendment to paragraph (a)(5) that would have
required an exhaustive review of all alternatives to an exemption
transaction, the Department notes that a failure to consider and
address reasonable alternatives to engaging in a prohibited transaction
may provide grounds for the Department to deny an exemption
application. The prohibited transaction rules are the starting point
for the Department's evaluation of an exemption application, and those
rules are designed to prohibit transactions that involve significant
conflicts of interest. Considering the harm conflicts of interest can
inflict on plans and participants and beneficiaries, and the challenges
the Department faces in determining the full scope and severity of
these conflicts and their potential impact on the affected plan and its
participants and beneficiaries, it is reasonable for the Department to
require the applicant to explain why the most protective and
appropriate approach is not avoiding entering into a prohibited
transaction that requires an exemption from the Department to comply
with ERISA. The Department encourages applicants to evaluate whether
the exemption transaction could be structured in a manner that would
not result in a prohibited transaction. In many cases, the best way to
protect participants' interests is not to engage in a transaction
subject to significant conflicts of interest, but rather to avoid the
conflicts of interest in the first place and structure the transaction
to avoid the need for an exemption from otherwise illegal conduct.
The Department proposed to insert a new paragraph (a)(7) that would
replace the prior requirement that an applicant state why the
transaction is customary to the industry with a requirement for the
applicant to set forth a description of each conflict of interest or
potential instance of self-dealing that would be permitted if the
exemption is granted. Commenters expressed concern that complying with
the proposed revision may be difficult and burdensome. The Department,
however, disagrees with these concerns and has included the new
paragraph in the Final Amendment as proposed. The Department is making
this change because the Exemption Procedure Regulation's prior
``customary to the industry'' language did not require applicants to
sufficiently inform the Department of the conflicts of interest and
instances of self-dealing involved in an exemption transaction or the
costs and benefits to a plan and its participants and beneficiaries.
The information required by the new language assists the Department in
identifying the conflicts of interest and instances of self-dealing
involved in an exemption transaction, and thereby facilitates the
Department's analysis regarding whether the exemption transaction is
structured to properly protect the interests of the plan and its
participants and beneficiaries as required by ERISA section 408(a). As
with information about applicants' decision-making processes, the
Department notes it would need to request this information at some
point during the application process to make its required statutory
findings. By requesting this information upfront, as opposed to
requesting it later in the application process, the Department is
streamlining the exemption determination process and thereby reducing
its associated burdens and costs.
Together, the Final Amendment's new paragraphs (a)(4), (5), and (7)
will help the Department better understand applicants' proposed
exemption transactions and their implications for
[[Page 4673]]
plans, participants, and beneficiaries. They also will help ensure that
the Department has sufficient information to make its required findings
under ERISA section 408(a) regarding whether a requested exemption
would be (1) administratively feasible, (2) in the interests of the
plan and of its participants and beneficiaries, and (3) protective of
the rights of participants and beneficiaries when the applicant submits
its application to the Department.
The final revisions to paragraph (a) are intended to provide
consistency among exemption applications. The revised paragraph (a)(8)
simply expands the disclosure requirement to include a statement
regarding whether the transaction is the subject of investigation or
enforcement actions by any regulatory authority. This change is
consistent with the changes to Sec. 2570.33 that are discussed above
and ensures that the Department has the information it needs to make an
informed decision regarding an exemption application.
The Department proposed to add a new paragraph (a)(10) that would
require applicants that use the term ``affiliate'' in their exemption
applications to include a statement that either (1) the definition of
affiliate set forth in Sec. 2570.31(a) is applicable or (2) explains
why a different affiliate definition should be applied. The Department
added this language to encourage the use of a single, consistent
affiliate definition among all applications, which will prevent issues
that could result from different definitions of the term being used in
different exemptions. The Department has adopted this requirement in
the Final Amendment as proposed.
Paragraph (b) addresses some of the Department's specific concerns
with respect to exemption transactions. The most substantial change
adds paragraph (b)(2), which requires applicants to include a statement
in their applications that (A) the exemption transaction will be in the
best interest of the plan and its participants and beneficiaries; (B)
all compensation received, directly or indirectly, by a party involved
in the exemption transaction will not exceed reasonable compensation
within the meaning of ERISA section 408(b)(2) and Code section
4975(d)(2); and (C) all of the statements to the Department, the plan,
or, if applicable, the qualified independent fiduciary or qualified
independent appraiser about the exemption transaction and other
relevant matters will not be materially misleading at the time the
statements are made. If the applicant does not include such a statement
in its exemption application, the applicant must explain why these
exemption standards should not be applicable to the exemption
transaction.
For purposes of paragraph (b), an exemption transaction is in the
best interest of a plan if the plan fiduciary causing the plan to enter
into the transaction determines, 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,
in the conduct of an enterprise of a like character and with like aims,
enter into the exemption transaction based on the circumstances and
needs of the plan. Such fiduciary shall not place the financial or
other interests of itself, a party to the exemption transaction, or any
affiliate ahead of the interests of the plan or subordinate the plan's
interests to those of any party or affiliate.
In proposed paragraph (b)(2), the Department generally incorporated
compliance with ``impartial conduct standards'' as formalized in
Prohibited Transaction Exemption 2020-02 as a baseline condition for
approved exemptions. Commenters, however, stated that the proposed new
paragraph (b)(2) should not be included in the Final Amendment, because
the impartial conduct standards are not applicable to all transactions.
The Final Amendment, however, does not require the impartial conduct
standards to be made applicable to all exemptions as a condition for
the Department to grant them. The impartial conduct standards, however,
are rooted in well-established fiduciary principles designed to address
problems of agency and conflicts of interest, and as such, are often
strong and flexible safeguards against abuse in transactions subject to
the prohibited transaction rules. Accordingly, while the failure to
propose adoption of such standards is not automatically disqualifying,
the adoption of such standards as part of a proposed exemption can lend
important support to a finding by the Department that the exemption
transaction is in the interest of and protective of the plan and its
participants and beneficiaries.
Rather than mandating adoption of such standards, paragraph (b)(2)
of this regulation provides applicants with an opportunity to explain
why the impartial conduct standards should not be applicable to their
exemption transactions. The applicant's inclusion of an explanation as
to why the standards are not applicable provides the Department with
necessary insight into the applicant's process of evaluating the
conflicts of interest that may or may not be inherent in the proposed
exemption transaction. As discussed above with respect to paragraph
(a), understanding and addressing conflicts of interest is a necessary
part of the process the Department must undertake when evaluating
exemption transactions to make its required statutory findings under
ERISA section 408(a).
Commenters also objected to the inclusion of proposed paragraph
(b)(2) on the grounds that the language runs counter to certain court
decisions and Congressional intent. The Department disagrees with these
assertions. As noted, the Final Amendment does not mandate the adoption
of impartial conduct standards in every case, independently impose an
enforceable obligation to comply with those standards, or purport to
pre-decide the circumstances in which such conditions should be
imposed. Instead, the Department is only requiring applicants to
explain whether the standards would be met by the transaction at issue.
This is clearly helpful information for the Department to have in
reviewing exemptions for statutorily prohibited transactions, and for
fiduciaries to consider before moving forward with transactions. The
information allows the Department to address essential questions
regarding whether a proposed exemption transaction is in the interests
of and protective of the rights of the participants and beneficiaries.
For example, knowing whether a transaction is in a plan's best interest
can greatly inform the Department's statutorily mandated findings
regarding whether the exemption transaction is in the interests of and
protective of the rights of the participants and beneficiaries.
Further, if the applicant informs the Department that the impartial
conduct standards are not applicable, that knowledge will inform the
Department's understanding of the transaction and its structure.
Proposed paragraph (b)(4) (previously paragraph (b)(3)) proposed to
provide that if an advisory opinion has been requested by any party to
the exemption transaction from the Department with respect to any issue
relating to the exemption transaction, the exemption application must
include (1) a copy of the letter concluding the Department's action on
the advisory opinion request; or (2) if the Department has not yet
concluded its action on the request, a copy of the request or the date
on which it was submitted together with the Department's correspondence
control number as indicated in the acknowledgment letter. The
Department proposed to revise this provision for readability and to
require an applicant
[[Page 4674]]
to include with its application any opinion or guidance issued by the
Department and any other opinions or guidance issued by Federal, State,
or regulatory bodies regarding the exemption transaction. The
modification expands the prior text to ensure that all relevant
information regarding the exemption transaction, including guidance
issued in connection to the transaction by other Federal, State, or
regulatory bodies is available to the Department when making its
determination whether to grant an exemption. The Department is
including this change in the Final Amendment as proposed.
The Department proposed to include a new paragraph (b)(7) that
would require applicants that communicate with the Department either
orally or in writing before submitting an exemption application to
submit a statement setting forth the date(s) and with whom the
applicant communicated before submitting the application. The
Department added this language to work in tandem with the proposed
revisions made to the Final Amendment in response to the requests made
by multiple commenters that pre-submission applicants not be required
to identify themselves. Since the Final Amendment permits certain
anonymous discussions, paragraph (b)(7) now requires applicants that
engaged in anonymous discussions to identify themselves to the
Department so it can link prior anonymous discussions to the current
applicant. Linking pre-submission communications to a current
application ensures that the Department understands the entire context
of an exemption application. The Department emphasizes, however, that
this provision is only triggered when the applicant submits an
exemption application.
The Final Amendment also includes substantial revisions to the
proposed requirements set forth in proposed paragraphs (c) through (f)
regarding statements and documents about qualified independent
appraisers and qualified independent fiduciaries that are involved in
an exemption transaction. Even though the final version of Sec.
2570.31 generally reverts to the previous definitions of qualified
independent appraiser and qualified independent fiduciary, the
Department has revised, consistent with the intent of the Proposed
Rule, paragraphs (c) through (f) of Sec. 2570.34 to ensure that the
appraiser and fiduciary are independent and that their valuations and
oversight over the exemption transaction are accurate and reliable.
The proposed revision to paragraph (c) addressed statements and
documents included in the application by the qualified independent
appraiser. The Department proposed to extend the provisions of
paragraph (c) to auditors and accountants. As a result, proposed
paragraph (c) applied to all statements submitted by appraisers,
auditors, and accountants to ensure that the Department can rely on any
and all financial documents submitted by third parties.
More specifically, the Department proposed to revise several
provisions that govern the information that must be included in any
statements submitted by an appraiser, auditor, or accountant. First,
the Department proposed to add a paragraph (c)(1) to require that
statements include a signed and dated declaration under penalty of
perjury that, to the best of the qualified independent appraiser's,
auditor's, or accountant's knowledge and belief, all of the
representations made in such statement are true and correct. Commenters
objected to the proposed penalty of perjury requirement because, they
argued, it would increase appraiser liability and discourage
participation in the ERISA market. The Final Amendment does not require
a declaration under penalty of perjury. Instead, it requires a
certification that, to the best of the qualified independent
appraiser's, auditor's, or accountant's knowledge and belief, all of
the representations made in such statement are true and correct. The
revised language in the Final Amendment balances the Department's need
to ensure that an appraiser stands behind the accuracy of an appraisal
report while reducing the potential chilling effect of a declaration
under penalty of perjury.
Next, the Department proposed to expand paragraph (c)(2) to
specifically address the contractual obligations of the appraiser,
auditor, or accountant. The proposed provision required a copy of the
qualified independent appraiser's, auditor's, or accountant's
engagement letter and, if applicable, contract with the plan describing
the specific duties the appraiser, auditor, or accountant shall
undertake to be included with an application. The proposal would have
provided that the appraiser, auditor, or accountant's letter or
contract may not: (1) include any provision that provides for the
direct or indirect indemnification or reimbursement of the independent
appraiser, auditor, or accountant by the plan or another party for any
failure to adhere to its contractual obligations or to Federal and
state laws applicable to the appraiser's, auditor's, or accountant's
work; or (2) waive any rights, claims or remedies of the plan or its
participants and beneficiaries under ERISA, the Code, or other Federal
and state laws against the independent appraiser, auditor, or
accountant with respect to the exemption transaction.
Proposed paragraph (c)(2) would have prevented appraisers,
auditors, and accountants from avoiding accountability to the plan and
its participants by relying on indemnification or reimbursement
provisions, whether direct or indirect, to avoid financial liability
for their failure to comply with their contract or state or Federal
law. When parties agree to relieve appraisers, auditors, and
accountants from accountability through releases, waivers, and
indemnification or reimbursement agreements, they undermine the
protective conditions of the exemption, compromise the independence of
their services, and cast doubt on the reliability of the service
providers' work.
Commenters objected to proposed paragraph (c)(2)'s prohibition of
contractual indemnification provisions. They argued that the proposed
prohibition would dramatically increase the potential liability of
large appraisers that often are engaged to appraise hard-to-value
assets. According to the commenters, this would lead large appraisers
to shift their resources to providing financial advisory services to
non-employee benefit plan clients, leaving small appraisers to service
the employee benefit plan market.
The Department is not persuaded by the commenters' concerns. The
commenters did not provide any evidence that appraisers, accountants,
or auditors would leave the marketplace if indemnification provisions
were prohibited, and there is a large market of such professionals who
will continue to serve plans, even if some of their colleagues choose
not to render their services if they retain the liability assigned
under state and Federal law for substandard work. In practice, the
Department has issued numerous individual exemptions that prohibit such
provisions without negative consequence.\15\
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\15\ See, e.g., PTE 2022-04 granted to the Children's Hospital
of Philadelphia Pension Plan for Union-Represented Employees, 87 FR
71358 (Nov. 11, 2022) and PTE 2021-03 granted to the Electrical
Insurance Trustees Insurance Fund (the EIT Fund) and the Electrical
Joint Apprenticeship and Training Trust, 86 FR 34054 (June 28,
2021).
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Further, the possibility that some market participants might
decline to provide professional appraisal, accounting, or auditing
services is
[[Page 4675]]
outweighed by the Department's need to ensure that they render unbiased
and professional services that meet state and Federal standards. For
example, the function of independent appraisers in prohibited
transactions is to provide an unbiased and objective statement of
value. That function is undermined when the appraisers are relieved
from responsibility and accountability for the proper discharge of
their important work. Similarly, accountants and auditors play a
fundamental role in ensuring that participants' interests are
protected, but that role is compromised when the parties relieve them
of liability and accountability for adherence to applicable legal
standards.
However, the Department understands that there are certain limited
situations where a contractual indemnification provision may be
appropriate such as when there are nuisance claims. As a result, the
Department has revised proposed paragraph (c)(2) in the Final Amendment
to provide that an appraiser, auditor or accountant's letter or
contract may include a provision providing for reimbursement of legal
expenses with respect to claims for any failure to adhere to the
appraiser's, auditor's, or accountant's contractual obligations or to
Federal and state laws applicable to the appraiser's, auditor's, or
accountant's work, provided that: (A) the plan determines that the
reimbursement is prudent following a good faith determination that the
appraiser, auditor, or accountant likely did not fail to adhere to its
contractual obligations or to Federal and state laws applicable to its
work and will be able to repay the plan if it is found liable or enters
into a settlement agreement based on an alleged breach; and (B) the
letter or contract requires the appraiser, auditor, or accountant to
repay all of the reimbursements in a timely fashion if the appraiser,
auditor, or accountant enters into a settlement agreement regarding any
asserted failure to adhere to its contractual obligations, or to state
or Federal laws, or has been found liable for a breach of contract or
violation of any Federal or state laws applicable to the appraiser's,
auditor's, or accountant's work. The new language allows appraisers,
auditors, and accountants and their clients to negotiate agreements
regarding claims that are not likely to result in liability for the
appraiser, auditor, or accountant.
The Department also revised proposed paragraph (c)(4) in the Final
Amendment to state that submitted documents must contain a detailed
description of any relationship that the qualified independent
appraiser, auditor, or accountant has had or may have with the plan or
any party in interest involved in the exemption transaction or its
affiliates that may influence its judgment, including a description of
any past engagements with the appraiser, auditor, or accountant. The
language builds on the Department's insistence, as outlined in the
Proposed Rule, that independent parties involved in the exemption
transaction must truly be independent.
The Department notes that it proposed to include more expansive
disclosure language; the proposal would have extended the disclosure
requirement to apply to any parties involved in the exemption
transaction and any parties involved in developing the proposed
exemption request. Commenters objected to the proposal's language on
the grounds that compliance was overly expansive and burdensome. They
also disputed whether the language addressed any harm. To address these
comments, the Department has revised the language in the Final
Amendment to limit its application to parties in interest involved in
the exemption transaction and their affiliates, and no longer extends
the provision to include parties involved in developing the proposed
exemption transaction. However, the Final Amendment retains the core
requirement that relationships, past or present, with such parties in
interest that may influence the appraiser, auditor, or accountant's
judgment must be disclosed in the exemption application. This outcome
settles at a middle ground between the Exemption Procedure Regulation
and the Proposed Rule and balances the burden of disclosure with the
Department's need to address instances in which a party has potentially
conflicting relationships because it is dependent on or otherwise
regularly involved with parties in interest or their affiliates.
The Department proposed to include language in paragraph (c)(5)
that the appraisal report must be prepared solely in the interest of
the plan. This language reflected proposed language in Sec.
2570.31(h). As discussed above, commenters stated that all appraisal
reports are based on objective criteria and may not be ``on the
behalf'' of any party. The Department did not intend to suggest that
appraisals should be slanted in favor of any particular party, and
accordingly, the Department has revised paragraph (c)(5) of the Final
Amendment to provide that a written appraisal report must be prepared
by a qualified independent appraiser who determines, to the best of
their ability and in accordance with professional appraisal standards,
the fair market value of the subject asset(s) without bias towards the
plan's counterparty in the transaction or other interested parties. The
Department notes that the final provision, which addresses the same
concerns raised by the Proposed Rule, includes anti-bias language to
emphasize that the appraisal report must not favor one party over
another. Specifically, the Department is concerned that appraisals of
employer stock often may be influenced by the employer in employee
stock ownership plan transactions or that an appraiser may rely on
information provided by the applicant without verifying the veracity of
the information.
The Department is deleting the statement in current paragraph
(c)(4)(iii), now paragraph (c)(5)(iii), that requires an applicant to
submit a new appraisal to the Department if an appraisal report is one
year or more old. This deletion makes clear to applicants that they
must submit a current appraisal report with their application when
submitting it to the Department, and that the Department will not move
forward with its analysis of an exemption transaction without receipt
of a current appraisal report.
The Final Amendment also makes changes in paragraph (c)(8). The
revisions are discreet changes that are consistent with the revised
definition of a qualified independent appraiser in Sec. 2570.31(i) and
describe how the revenue limitations thereunder are calculated.
The Department proposed to add a new paragraph (d) that would have
required an applicant to include detailed information regarding the
appraiser selection process. The preamble to proposed paragraph (d)
explained that the Department's goal in proposing the disclosure was
``to promote a prudent and loyal selection process to hire a qualified
independent appraiser.'' \16\ In response to this proposal, commenters
objected on the grounds that the information submitted as part of the
process can be confidential and the fact that a party would be
documented as not being selected in the public record could discourage
parties from participating in the selection process. Commenters also
argued that the Department does not have the statutory authority to
insert itself into the fiduciary selection process.
---------------------------------------------------------------------------
\16\ 87 FR 14729 (Mar. 15, 2022).
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The Department has modified the proposed provision in response to
commenters' concerns. Paragraph (d) of the Final Amendment now states
that an
[[Page 4676]]
applicant must include the following information with its exemption
application: (1) a representation that the independent fiduciary
prudently selected the appraiser after diligent review of the
appraiser's technical training and proficiency with respect to the type
of valuation at issue, the appraiser's independence from the plan's
counterparties in the exemption transaction, and the absence of any
material conflicts of interest with respect to the exemption
transaction; (2) a representation that the appraiser is independent
within the meaning of Sec. 2571.31(i); and (3) a representation that
the independent appraiser has appropriate technical training and
proficiency with respect to the specific details of the exemption
transaction. This new requirement achieves the goal the Department
identified in its proposal to ensure that applicants follow a prudent
and loyal selection process when they hire a qualified independent
appraiser. The Department specifically requested comments on these
proposed revisions, ``including whether the Department should consider
other types of information.'' \17\ Commenters pointed to other types of
information the Department could request that would allow the
Department to fulfill its stated objective and that would allay the
commenters' concerns over the proposed requirements. Accordingly, the
Final Amendment's requirement fulfills the Department's need to require
applicants to follow a prudent and loyal selection process while
addressing commenters' concerns.
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\17\ 87 FR 14727 (Mar. 15, 2022).
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The Department similarly revises the proposed new paragraph (e).
Similar to proposed paragraph (d), proposed paragraph (e) would have
required applicants to provide detailed information regarding the
process by which an independent fiduciary was selected. Commenters
raised similar concerns regarding this language. Therefore, as with
paragraph (d), paragraph (e) of the Final Amendment has been revised to
require applicants to include the following representations with their
exemption applications: (1) a representation that an appropriate
fiduciary without material conflicts of interest prudently selected the
independent fiduciary after diligently reviewing the independent
fiduciary's technical training and proficiency with respect to ERISA,
the Code, and the specific details of the exemption transaction, and
the sufficiency of the independent fiduciary's fiduciary liability
insurance coverage; (2) a representation that the fiduciary retained to
act as the independent fiduciary is independent within the meaning of
Sec. 2570.31(j); and (3) a representation that the independent
fiduciary has appropriate technical training and proficiency with
respect to ERISA and the Code and the specific details of the exemption
transaction. As with paragraph (d), the new paragraph promotes a
prudent and loyal selection process while addressing commenters'
concerns.
In the Final Amendment, the Department revises paragraph (f), which
specifies the information an applicant must include in the qualified
independent fiduciary's statement required to be submitted with its
application. As with the changes to the qualified independent
appraiser's statement, these changes are designed to bolster
independence and reliability.
First, paragraph (f)(1) of the proposal would have required the
statement to include a signed and dated declaration under penalty of
perjury that, to the best of the qualified independent fiduciary's
knowledge and belief, all of the representations made in such statement
are true and correct. As with the proposal's paragraph (c)(1),
commenters objected to the penalty of perjury requirement because it
would increase independent fiduciary liability and discourage them from
participating in the employee benefit plan market. In response to those
commenters, the Final Amendment does not require a declaration under
penalty of perjury, and, instead, requires a certification that, to the
best of the qualified independent fiduciary's knowledge and belief, all
of the representations made in such statement are true and correct. The
revised language appropriately ensures that an independent fiduciary
stands behind its statements and actions while avoiding the potential
chilling impact of a declaration under penalty of perjury. Next,
paragraph (f)(2) aims to prevent fiduciaries from avoiding
accountability to the plan and its participants and beneficiaries by
relying on indemnification or reimbursement provisions, whether direct
or indirect, to avoid financial liability for their failure to comply
with their contract or state or Federal law. When parties agree to
relieve fiduciaries from accountability through releases, waivers, and
indemnification or reimbursement agreements, they undermine the
protective conditions of an applicable exemption, compromise the
independence of their services, and cast doubt on the reliability of
the service providers' work.
As with the proposed paragraph (c)(2), commenters objected to the
prohibition of contractual indemnification provisions in proposed
paragraph (f)(2). They argued similarly that the prohibition on
contractual indemnification provisions would dramatically increase the
potential liability of independent fiduciaries that often are engaged
to perform work with respect to exemption transactions. According to
the commenters, this would lead large independent fiduciaries to shift
their resources to providing fiduciary services to non-employee benefit
plan clients, leaving small, inexperienced fiduciaries to service the
employee benefit plan market.
The Department does not agree with the commenters' concerns. First,
the Department notes that ERISA section 410 already places limitations
on indemnification provisions for fiduciaries. Second, the commenters
did not provide any evidence that fiduciaries would leave the employee
benefit plan marketplace if an indemnification provision were
prohibited, and many independent fiduciaries will continue to serve
plans, even if some of their colleagues choose not to render their
services if they retain the liability assigned under state and Federal
law for substandard work. As with qualified independent appraisers, the
Department has, in recent practice, already required qualified
independent fiduciaries to adhere to stricter requirements in recent
exemptions without a negative effect on the independent fiduciary
market.\18\ Furthermore, the possibility that some independent
fiduciaries might decline to provide fiduciary services to the employee
benefit plan market is outweighed by the Department's need to ensure
that they render unbiased and professional services that meet state and
Federal standards. Independent fiduciaries play a critical role in
ensuring that participants' interests are protected, but that role is
compromised when the parties relieve themselves of liability and
accountability for adherence to applicable legal standards.
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\18\ See, e.g., Section II(f) of PTE 2023-12 (88 FR 11699.
February 23, 2023); Section II(p) of PTE 2022-02 (87 FR 23245, April
19, 2022); Section III(h) of PTE 2022-03 (87 FR 54264, September 2,
2022); Section I(h) of PTE 2021-03 (86 FR 34054, June 28, 2021);
Section III(n) of the Notice of Proposed Exemption Involving J.P.
Morgan Securities LLC, J.P. Morgan Investment Management Inc., J.P.
Morgan Securities, and Chase Wealth Management (86 FR 57446, October
15, 2021).
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However, the Department does recognize that there are certain
limited situations, such as nuisance claims,
[[Page 4677]]
where a contractual reimbursement provision may be appropriate. As a
result, paragraph (f)(2) of the Final Amendment provides that the
independent fiduciary's letter or contract may include a provision
providing for reimbursement of legal expenses with respect to claims
for any failure to adhere to the fiduciary's contractual obligations or
to Federal and state laws applicable to the independent fiduciary's
work, provided that (A) the plan determines that the reimbursement is
prudent following a good faith determination that the independent
fiduciary likely did not fail to adhere to its contractual obligations
or to Federal and state laws applicable to the independent fiduciary's
work and will be able to repay the plan if the fiduciary is found
liable or enters into a settlement for the breach; and (B) the letter
or contract requires the independent fiduciary to repay all of the
reimbursements, in a timely fashion, in the event the independent
fiduciary enters into a settlement agreement regarding any asserted
failure to adhere to its contractual obligations, or to state or
Federal laws, or has been found liable for a breach of contract or
violation of any Federal or state laws applicable to the fiduciary's
work. The new language allows independent fiduciaries and their clients
to negotiate agreements to address claims that are not likely to result
in liability for the fiduciary and is consistent with the underlying
concerns previously laid out by the Proposed Rule. The Department
requires the fiduciary selecting the independent fiduciary to make a
good faith determination to fulfill its fiduciary obligations but does
not require an exhaustive legal review. The Department also notes that
despite the revised language, no language may be included in the letter
or contract that runs afoul of ERISA section 410.
In order to ensure that qualified independent fiduciaries have
sufficient resources to compensate plans for any losses for which they
are liable, the Department originally proposed language that would
require fiduciaries to maintain a sufficient amount of fiduciary
liability insurance to indemnify the plan for damages resulting from a
breach by the independent fiduciary of either: (1) ERISA, the Code, or
any other Federal or state law; or (2) its contract or engagement
letter under proposed paragraph (f)(3). The insurance could not contain
an exclusion for actions brought by the Secretary or any other Federal,
State, or regulatory body, the plan, or plan participants and
beneficiaries. Commenters objected to this language on the grounds that
obtaining insurance that could meet the requirements of the language
would be difficult, if not impossible. They also argued that the cost
of such insurance would drive many independent fiduciaries to exit the
employee benefit plan marketplace.
The Department acknowledges the commenters' concerns but also wants
to ensure that qualified independent fiduciaries have sufficient
resources to compensate plans for any losses for which they are liable.
Therefore, the Department has revised the proposed language in the
Final Amendment to simply require applicants to include in their
exemption applications a description of any fiduciary liability
insurance policy maintained by the independent fiduciary that includes:
(A) the amount of coverage available to indemnify the plan for damages
resulting from a breach by the independent fiduciary of either ERISA,
the Code, or any other Federal or state law or its contract or
engagement letter; and (B) whether the insurance policy contains an
exclusion for actions brought by the Secretary or any other Federal,
State, or regulatory body, the plan, or plan participants or
beneficiaries. Some entities that provide ERISA fiduciary services with
respect to exemption transactions may not be either sufficiently liquid
or sufficiently capitalized to address liability that might arise in
connection with an exemption transaction. A prudent independent
fiduciary must have sufficient insurance to address those issues.
Therefore, the Department's position is that a prudent fiduciary should
make a reasoned determination regarding the appropriate amount of
insurance it should maintain to fulfill its fiduciary obligation to a
plan and protect the plan's participants and beneficiaries. Revising
paragraph (f)(2) in the Final Amendment to require a description of any
fiduciary liability insurance policy maintained by the independent
fiduciary allows the independent fiduciaries to make their own
determinations regarding insurance, while also providing the Department
with the information it needs to determine whether a proposed exemption
is in the interest of and protective of the rights of participants and
beneficiaries. Further, the information would assist the Department in
determining whether it should request additional information regarding
the independent fiduciary's assets, capital, or insurance in order to
determine whether sufficient resources exist to cover a potential loss.
The Department notes that the Final Amendment's independent
fiduciary insurance disclosure requirement is uniquely imposed on
independent fiduciaries because of their important role as a unique
bulwark against conflicts of interest. Under ERISA's statutory
framework, fiduciaries have central responsibility--and
accountability--for the protection of plan participants' interests.
Consequently, the Department is especially concerned that they have the
financial wherewithal to make good on violations that injure plan
participants. Independent fiduciaries may ultimately bear the
responsibility of (1) making final decisions regarding determinations
(e.g., approval of an appraisal) and (2) approving the overall
exemption transaction. Independent fiduciaries also must make a
determination as to whether a third-party service provider, such as an
appraiser, has sufficient insurance, assets, and liquidity to address
any liability that may arise from a failure to meet the service
provider's contractually imposed obligations when determining whether
to retain the service provider. Independent fiduciaries are critically
important to ensuring that the exemptions are in the interest and
protective of the plan and its participants and beneficiaries.
Therefore, when they submit an exemption application, applicants should
be positioned to carefully consider and disclose the independent
fiduciary's ability to remedy any injuries caused by its fiduciary
violations and make the plan whole for any losses caused by the
independent fiduciary's failure to discharge its role properly.\19\
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\19\ The Department notes that the independent fiduciaries
themselves are the parties best informed about their own ability to
remedy any potential ERISA liability, and that the exemption process
is not an adversarial proceeding in which the Department is in a
position to adjudicate all the relevant facts. Accordingly, the
Department's acceptance of these disclosures should not be viewed as
a determination by the Department that an independent fiduciary has
adequately addressed its ability to remedy any potential ERISA
liability.
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Due to the qualified independent fiduciary's essential role in many
exemptions, the Department makes additional changes to paragraph (f) in
the Final Amendment that are consistent with the stated goals of the
Proposed Rule to further bolster the qualified independent fiduciary's
independence. First, paragraph (f)(6) of the Final Amendment expands
the existing acknowledgement provision to require an acknowledgement
that the fiduciary understands its duties and
[[Page 4678]]
responsibilities under ERISA, is acting as a fiduciary of the plan with
respect to the exemption transaction, has no material conflicts of
interest with respect to the exemption transaction, and is not acting
as an agent or representative of the plan sponsor. The Final Amendment
expands the acknowledgment to capture more potential conflicts. Under
the Final Amendment, the fiduciary can no longer simply acknowledge
that it is an ERISA fiduciary, but it also has to acknowledge that it
is acting with respect to the transaction solely in the interest of the
plan, not acting on behalf of the plan sponsor, and not subject to
conflicts of interest.
The Department also revises paragraph (f)(7) in the Final Amendment
to provide that the qualified independent fiduciary must certify in
writing that the exemption transaction complies with the impartial
conduct standards set forth in paragraphs (b)(2)(i)(A) through (C). The
Final Amendment revises paragraph (f)(9) to reflect the changes to the
definition of a qualified independent fiduciary.
The Department added a new paragraph (f)(10) to the Final Amendment
that requires the qualified independent fiduciary to state that it has
no conflicts of interest with respect to the exemption transaction that
could affect the exercise of its best judgment as a fiduciary. The
requirement puts the fiduciary on the record that it has no conflicts
that could impact its judgment and, thereby, promotes compliance with
the exemption's terms.
In the proposal, the Department proposed to revise paragraph
(f)(11) to require an applicant to address in its exemption application
whether the qualified independent fiduciary has been under
investigation or examination, or has been engaged in litigation or a
continuing controversy. Specifically, the fiduciary would have been
required to either (1) include a statement that within the last five
years, the independent fiduciary has not been under investigation or
examination by, and has not engaged in litigation or a continuing
controversy with, the Department, the IRS, the Justice Department, the
Pension Benefit Guaranty Corporation, the Federal Retirement Thrift
Investment Board, or any other Federal or state entity involving
compliance with provisions of ERISA, the Code, FERSA, or other Federal
or state law; or (2) include a statement describing the applicable
investigation, examination, litigation or controversy. Commenters
objected to the breadth of the language, asserting that it would
capture a wide universe of events that were not related to the
interests of employee benefit plans.
In response to the concerns, the Department revised paragraph
(f)(11) in the Final Amendment to limit disclosure to require the
independent fiduciary to include a statement that it has not been under
investigation or examination by, and has not engaged in litigation
investigations or controversies involving: (A) compliance with
provisions of ERISA or FERSA; (B) its representation of or position or
employment with any employee benefit plan, including investigations or
controversies involving ERISA or the Code, or any other Federal or
state law; (C) conduct of the business of a broker, dealer, investment
adviser, bank, insurance company, or fiduciary; (D) income tax evasion;
or (E) or any felony or conspiracy involving the larceny, theft,
robbery, extortion, forgery, counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion, or misappropriation of funds or
securities.
In the final amendment, the Department now is requiring applicants
only to disclose events that are directly applicable to the provision
of fiduciary services to employee benefit plans. Specifically, the
Department has limited the disclosure to cover a fiduciary's work
experience that is relevant to determining whether the fiduciary can
meet the high standard to which it is held under ERISA, whether that
experience is in the employee benefits field or another industry in
which a fiduciary's ability to uphold its heightened obligations is
reflected. These disclosures are essential to informing the
Department's determination of whether the proposed independent
fiduciary will be able to meet the heightened standards to which a
fiduciary is held under ERISA, and the important role they would serve
in overseeing transactions that otherwise would be prohibited under
ERISA. The Department notes, for clarity, that the term employee
benefit plan also refers to governmental and church plans.
Paragraph (f)(12) connects with the Proposed Rule's paragraph
(f)(11), which is slightly revised for clarity in the Final Amendment
by requiring applicants to include in their exemption applications the
qualified independent fiduciary's statement that within the last 13
years, it has not been:
(1) convicted or released from imprisonment, whichever is later, as
a result of any felony involving abuse or misuse of such person's
position or employment with an employee benefit plan or a labor
organization; any felony arising out of the conduct of the business of
a broker, dealer, investment adviser, bank, insurance company or
fiduciary; income tax evasion; any felony involving the larceny, theft,
robbery, extortion, forgery, counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion, or misappropriation of funds or
securities; conspiracy or attempt to commit any such crimes or a crime
of which any of the foregoing crimes is an element; or any crime
identified in ERISA section 411, regardless of whether the conviction
occurred in a U.S. or foreign jurisdiction; or
(2) convicted by a foreign court of competent jurisdiction or
released from imprisonment, whichever is later, as a result of any
crime that is substantially equivalent to an offense described in
paragraph (f)(12)(i)(A)(1); or
A statement describing a conviction or release from imprisonment
described in paragraph (f)(12)(i)(A).
For purposes of paragraph (f), a person is deemed to have been
``convicted'' from the date of the judgment of the trial court (or the
date of the judgment of any court in a foreign jurisdiction that is the
equivalent of a U.S. Federal or state trial court), regardless of
whether that judgment remains under appeal and regardless of whether
the foreign jurisdiction considers a trial court judgment final while
under appeal.
Commenters raised concerns that the required disclosure of foreign
convictions is overly expansive, burdensome, and confusing. The
Department disagrees with these concerns and maintains that the burden
imposed by this disclosure is minimal and moreover that the burden is
outweighed by the Department's need to have information relevant to the
qualifications and independence of the fiduciary and to the prudence
and loyalty of the applicant's selection of the independent fiduciary.
Further, the Department does not believe the requirement is overly
expansive or confusing, because it is limited to convictions that are
specifically related to a fiduciary's duties that are relevant to the
Department's determination.
Lastly, the Final Amendment narrows paragraph (g)(3) regarding
other third-party experts. The paragraph now provides that the detailed
description of any relationship is limited to parties in interest (or
affiliates) involved in the exemption transaction. This revision is
consistent with the changes made in the Final Amendment with respect to
appraisers and fiduciaries.
[[Page 4679]]
Section 2570.35
Section 2570.35 addresses information that must be included in an
individual exemption application. The Department proposed multiple
changes to Sec. 2570.35 for readability and consistency with changes
made in other sections of the Exemption Procedure Regulation and
included these changes in the Final Amendment. In addition, the
Department included some minor changes in the Final Amendment that
require applicants to provide the mail and email addresses of the plan
and parties in interest to which the exemption application applies, as
well as a reminder that applicants should not submit social security
numbers with their applications.
Beyond those changes, the Department proposed to revise paragraph
(a)(6) to address foreign convictions more clearly, which was further
revised in the Final Amendment solely for clarity. While the
Department's position is that the current Exemption Procedure
Regulation language includes foreign convictions, the proposal amended
the provision to clearly require applicants to disclose whether, within
the last 13 years, they or any party involved in the exemption
transaction had been convicted by a foreign court of competent
jurisdiction or released from imprisonment, whichever is later, as a
result of any crime, however denominated by the laws of the relevant
foreign government, that is substantially equivalent to an offense
described in paragraph (a)(6)(i) and a description of the circumstances
of any such conviction. For purposes of this section, a person is
deemed to have been ``convicted'' from the date of the trial court's
judgment (or the date of the judgment of any court in a foreign
jurisdiction that is the equivalent of a U.S. Federal or state trial
court), regardless of whether that judgment remains under appeal and
the foreign jurisdiction considers a trial court judgment final while
under appeal.
Commenters objected to the inclusion of foreign convictions in the
proposal because they asserted that their inclusion is not relevant to
the exemption process and is inconsistent with guidance issued by the
Department with respect to Prohibited Transaction Exemption 84-14.
The Department disagrees with the commenters' position, and it has
adopted the proposed changes in the Final Amendment. The Department's
position is that clarifying the treatment of foreign convictions
removes uncertainty from the exemption application process, which
ensures that the Department receives all relevant information it needs
to make an exemption determination. Applicants' foreign convictions for
crimes involving self-interested and conflicted transactions are
relevant to the Department's statutory findings because such
convictions may indicate risk to the plan and its participants and
beneficiaries. This information also informs the Department about how
to handle potential conflicts of interest and enhances its ability to
design protective conditions by clarifying whether a party is likely to
comply with the terms of the exemption. For example, if a party has a
history of fiduciary violations in foreign jurisdictions, the
Department may look closer or impose different conditions with respect
to an exemption that allows a party to engage in a transaction with
potential fiduciary conflicts of interest. The Department also notes
that the language of the Final Amendment is applicable solely to the
exemption application process and is not an interpretation of
Prohibited Transaction Exemption 84-14.
The Department also proposed to revise paragraph (a)(7) to be
consistent with the Department's approach to fiduciaries that have been
the subject of investigation, examination, or litigation as set forth
in Sec. 2570.34(f)(11). Commenters objected to the breadth of the
language by asserting that it captures a wide universe of events that
are not related to employee benefit plans.
After considering these comments, consistent with Sec.
2570.34(f)(11), the Department has limited the language in the proposed
amendment to only require applicants to include information in their
applications that is essential to the Department's evaluation of an
independent fiduciary's ability to meet ERISA's fiduciary standards,
which are the highest known to law.\20\ As revised, the provision in
the Final Amendment is limited to those investigations, examinations,
or litigation involving: (i) compliance with provisions of ERISA or
FERSA; (ii) representation of or position or employment with any
employee benefit plan, including investigations or controversies
involving ERISA or the Code, or any other Federal or state law; (iii)
conduct of the business of a broker, dealer, investment adviser, bank,
insurance company, or fiduciary; (iv) income tax evasion; or (v) or any
felony or conspiracy involving the larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, or misappropriation of funds or securities. This
change represents a subset of the investigations, examinations, and
litigation matters that the Department proposed to include. This
revision ensures that the Department has full knowledge of any
potential issues or conflicts that may impact an independent
fiduciary's duty to meet its ERISA obligations, while not requiring
disclosures that are overly inclusive or burdensome.
---------------------------------------------------------------------------
\20\ See, Donovan v. Bierwirth, 680 F.2d 263, 272 (2d Cir.
1982).
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The Department also proposed to revise paragraph (a)(12), which
required the applicant to state the percentage of plan assets affected
by the exemption transaction to provide that if the exemption
transaction includes the acquisition of an asset by the plan, the fair
market value of the asset to be acquired must be included in both the
numerator and denominator of the applicable fraction. The new language
simply clarifies the Department's understanding of how to calculate the
fair market value percentage in an acquisition so that the percentage
accurately reflects the impact of the exemption transaction on overall
plan assets. This language has been adopted in the Final Amendment
without change.
Paragraph (a)(18) requires applicants to provide information on
which parties will bear the cost of the exemption application and
notifying interested persons. The Proposed Rule would have explained
that the disclosure is intended to capture all of the costs and fees
associated with the exemption transaction, not just those immediately
derived from the submission of the exemption application. This
facilitates the Department's understanding of the true cost of a
particular exemption transaction. This provision has thus been included
in the Final Amendment without change.
In addition, paragraph (a)(18) of the proposal included language
that stated that a plan may not bear the costs of the exemption
application, commissions, fees, and notification of interested persons
unless the Department determines, in its sole discretion, that a
compelling circumstance exists that necessitates the payment of these
expenses by the plan. Commenters argued that allowing a plan to bear
these costs is acceptable because many applications are solely for the
benefit of a plan, and that prohibiting the plan from incurring such
expenses was arbitrary. After consideration, the Department has
determined not to include this language in the Final Amendment.
Finally, the Department proposed to add a new paragraph (a)(20),
which
[[Page 4680]]
would have required the applicant to state in its exemption application
whether any prior transactions have occurred between (1) the plan or
plan sponsor and (2) a party in interest involved in the exemption
transaction. Requiring this information allows the Department to
determine where the exemption transaction fits in the relationship
between the plan and the parties in interest involved in the exemption
transaction, and to evaluate whether the exemption transaction is part
of a larger set of transactions or a pattern of practice. Therefore,
the Department included that provision in the Final Amendment as
proposed.
The Department proposed a minor change to paragraph (b)(4). The
current Exemption Procedure Regulation requires the application to
contain a net worth statement with respect to any party in interest
providing a personal guarantee with respect to the exemption
transaction. The Department expanded this language to cover not just
parties in interest, but any party providing such a guarantee. This
change allows the Department to more accurately determine the value of
any guarantee associated with the exemption transaction, and,
therefore, has been included in the Final Amendment.
In accordance with its discussion of Sec. 2570.30 regarding
retroactive exemption requests, the Department proposed to make
specific revisions to the requirements for retroactive exemptions in
paragraph (d). For example, the Department proposed to amend current
paragraph (d)(1) to state that the Department will consider exemption
requests for retroactive relief only when (1) the safeguards necessary
for the grant of a prospective exemption were in place at the time the
parties entered into the exemption transaction, and (2) the plan and
its participants and beneficiaries have not been harmed by the
exemption transaction. An applicant for a retroactive exemption must
demonstrate that the responsible plan fiduciaries acted in good faith
by taking all appropriate steps necessary to protect the plan from
abuse, loss, and risk at the time of the exemption transaction. An
applicant should further explain and describe whether the exemption
transaction could have been performed without engaging in a prohibited
exemption transaction, and whether the goals of the exemption
transaction could have been achieved through an alternative transaction
that served the aims of the plan equally well.
The Department's proposed revisions were intended to emphasize that
the applicant must demonstrate that the plan and its participants and
beneficiaries were not harmed by the exemption transaction for which an
applicant requests retroaction relief. The Department cannot readily
make the findings required by ERISA section 408(a) that the transaction
is in the interests of the plan and its participants and beneficiaries
and protective of their rights if, in fact, the transaction were
harmful to plan participants and beneficiaries. The Department's
determination of whether a transaction was harmful will be based on the
facts and circumstances of the transaction, including whether the
participant and beneficiaries were made whole. Further, the applicant
must: (1) demonstrate that the plan fiduciaries took all appropriate
steps necessary to prevent abuse, loss, and risk when the transaction
took place; and (2) fully explain and describe whether the exemption
transaction could have been performed without engaging in a prohibited
exemption transaction, and whether the goals of the transaction could
have been achieved through an alternative transaction that served the
plan's objectives equally well.
Including such information in the exemption application
demonstrates to the Department that the fiduciaries were acting
prudently to protect the plan and its participants and beneficiaries
when the transaction took place. Therefore, the Department has
finalized these revisions as proposed while making minor edits to the
wording.
In order to assist applicants in demonstrating that they acted in
good faith when entering into a previously consummated exemption
transaction, proposed paragraph (d)(2) provided factors the Department
would consider when reviewing a retroactive exemption application. As
proposed, paragraph (d)(2)(i) was revised to state that one of the
factors the Department would consider is the involvement of an
independent fiduciary before an exemption transaction occurs who acts
on behalf of the plan and is qualified to negotiate, approve, and
monitor the exemption transaction; provided, however, the Department
could consider, at its sole discretion, an independent fiduciary's
appointment and retrospective review after completion of the exemption
transaction due to exigent circumstances. The Department proposed
making these revisions to the prior language to clarify that, in
certain exigent circumstances, the Department may consider, at its sole
discretion, the approval of an independent fiduciary after the fact.
The Department recognizes that under certain rare and extreme
circumstances, an independent fiduciary's retroactive approval of the
transaction may assist the Department in determining whether an
applicant acted in good faith.
The Department also proposed to revise paragraph (d)(2)(v) to
assist with the good faith determination. The proposed revision
required an applicant to submit evidence that the plan fiduciary did
not engage in an act or transaction that the fiduciary should have
known was prohibited under ERISA section 406 and/or Code section 4975.
The proposed revision applied the more appropriate ERISA standard that
a fiduciary is responsible not only for what it knows, but what it
should have known. Setting forth this standard ensures that the plan
fiduciary actively engaged and evaluated the exemption transaction. The
Department is adopting this provision in the Final Amendment as
proposed.
Finally, the Department proposed to revise the last paragraph on
retroactive exemptions. Specifically, proposed paragraph (d)(3)
addressed the Department's position that it will not consider
retroactive exemption requests if the exemption transaction resulted in
a loss for the plan. The proposed revision made clear that the
Department's starting presumption is that it will simply not consider
such requests. However, the Department also proposed to clarify that
the determination as to loss is only applied at the time of the
exemption application. Thus, if the facts later show that the exemption
transaction resulted in a loss months or years after the completion of
the exemption application, that information is not relevant to the
exemption determination, which is made based on the facts available at
the time. The Department has adopted this revision in the Final
Amendment as proposed.
Section 2570.36
Section 2570.36 addresses where to file an exemption application.
In the proposal, the Department proposed to modernize the submission
process by no longer requiring a paper submission, and instead
directing applicants to make their submissions to <a href="/cdn-cgi/l/email-protection#4b2e66242e2f0b2f2427652c243d"><span class="__cf_email__" data-cfemail="791c54161c1d391d1615571e160f">[email protected]</span></a>. The
revision retains applicants' right to submit a paper application and
provides current information on the correct delivery addresses while
noting that the address published in the Exemption Procedure Regulation
may change over time. The Department has finalized the revision as
proposed, and notes that it will provide the current submission address
on its website.
[[Page 4681]]
Section 2570.37
Section 2570.37 addresses an applicant's duty to supplement its
exemption application. The Department proposed to revise paragraph (a)
to state that applicants have a duty to promptly notify the Department
of any material changes to facts or representations either during the
Department's consideration of the application or following the
Department's grant of an exemption. This duty only extends to the
information that was provided at the time of the grant of the
exemption. In paragraph (b), the Department includes the duty for
applicants to disclose to the Department whether a party in interest
participating in the exemption transaction is the subject of an
investigation or enforcement action relating to an employee benefit
plan by including investigative and enforcement actions by any Federal
or state governmental entity, not just the Department, the IRS, the
Justice Department, the Pension Benefit Guaranty Corporation, and the
Federal Retirement Thrift Investment Board. The Department has included
this provision in the Final Amendment as proposed, but it notes that
solely for this purpose, SEC examinations are not included.
Section 2570.38
Section 2570.38 addresses the issuance of tentative denial letters
before the Department issues a final denial letter to an applicant.
Tentative denial letters, often referred to as TD letters, inform the
applicant that the Department has tentatively decided not to move
forward with proposing an exemption, and describe the applicant's
rights to request a conference and submit additional information. The
Department proposed to revise the text to clarify that it may extend
the 20-day period during which an applicant normally would be required
to request a hearing or notify the Department of its intent to submit
additional information following the issuance of a tentative denial
letter at its sole discretion. The Department proposed to make this
change to inform applicants that the 20-day period provides a hard
deadline for the applicant to reply unless the Department chooses to
extend the period at its sole discretion based on the facts and
circumstances. The Department has made this change to the Final
Amendment as proposed.
Section 2570.39
Section 2570.39 addresses the applicant's ability to submit
additional information. Consistent with other proposed revisions to the
Exemption Procedure Regulation, the Department proposed a revision to
update the manner by which the applicant may communicate with the
Department. The Department also proposed to revise paragraph (b) to
provide that, while the applicant is required to submit the additional
information within 40 days after the date the Department issued a
tentative denial letter, the Department may extend the time period at
its sole discretion. The Department also proposed to make conforming
changes throughout the section. As with Sec. 2570.38, the Department
proposed this change to inform the applicant that the time period is a
hard deadline, unless the Department chooses to extend the period
pursuant to its own discretion based on the facts and circumstances.
Finally, the Department proposed to delete paragraph (d). The
paragraph provides that if an applicant could not submit all of the
supplementary information within the 40-day time period (unless
extended by the Department), it could withdraw the application and
reinstate it at a later time. The Department proposed to delete this
provision to be consistent with proposed changes to Sec. 2570.44,
which covers withdrawn applications. As described below, the Department
is amending its approach regarding withdrawals and reapplications in
that section.
The Department notes that the requirement in paragraph (b) that the
certification accompanying the submission of additional information be
made pursuant to a penalty of perjury is revised for consistency with
Sec. 2570.34(c) and (f) to require a certification that all
information provided to the Department is true and correct. Otherwise,
the Department is including all of the proposed revisions to Sec.
2570.39 as proposed.
Section 2570.40
Section 2570.40 addresses conferences between the applicant, or its
representative, and the Department. Current paragraph (b) provides
that, generally, an applicant is entitled to only one conference under
the Exemption Procedure Regulation. The Department proposed to retain
this text, but the Department added additional language providing that
the Department may request the applicant to participate in additional
conferences at its sole discretion. The proposal provided that the
Department would make such a request if it determines that additional
conferences are appropriate based on the facts and circumstances of the
exemption application.
The Department also proposed to revise paragraphs (d) through (h),
which govern the timing of conferences and the submission of
information. As with changes to Sec. Sec. 2570.39 and 2570.40(b), the
Department proposed to revise these sections to provide that the
Department may, at its sole discretion, extend time periods. These
changes were proposed to similarly inform the applicant that the time
periods outlined in the section provide a hard deadline for the
applicant, unless the Department, based on the facts and circumstances,
chooses to extend the period pursuant to its own discretion.
The Department also proposed to add a new paragraph (i) providing
that the Department, at its sole discretion, may hold a conference with
any party, including the qualified independent fiduciary or the
qualified independent appraiser, regarding any matter related to an
exemption request without the presence of the applicant or other
parties to the exemption transaction or their representatives. Under
the proposal, any such conferences could occur in addition to the
conference with the applicant described in Sec. 2570.40(b). Commenters
objected to this new paragraph, arguing that it is unnecessary and
presumes malfeasance on the part of the applicant.
The Department disagrees. The Department proposed to add this
language to clarify that it is entitled to hold conferences with
whomever it deems necessary. The new paragraph acknowledges that, under
certain circumstances, the Department may need to meet with a third
party to accurately assess the exemption application. The language does
not presume or connote an applicant's malfeasance; it only recognizes
the fact that certain parties, such as independent fiduciaries or
appraisers, may be less restrained when discussing issues solely with
the Department. For example, the Department may determine that a
discussion with a qualified independent fiduciary without the presence
of the applicant or its representative may provide additional insight
into the qualified independent fiduciary's work if the applicant is not
present to influence the explanation of the fiduciary's work product or
limit the topics which are discussed.
After considering the comments, the Department has included the
revisions to Sec. 2570.40 in the Final Amendment as proposed.
Section 2570.41
Section 2570.41 addresses final denial letters, which are the final
action taken by the Department with respect to an
[[Page 4682]]
application if the Department has determined that an exemption will not
be granted for an exemption transaction. The Department proposed to add
a new paragraph (a), which provides that the Department would issue a
final denial letter without issuing a tentative denial letter under
Sec. 2570.38, or conducting a hearing on the exemption under either
Sec. 2570.46 or Sec. 2570.47, (in other words, a direct denial) if
the Department determines in its sole discretion, that: (1) the
applicant has failed to submit information requested by the Department
in a timely manner; (2) the information provided by the applicant does
not meet the requirements of Sec. Sec. 2570.34 and 2570.35; or (3) a
conference has been held between the Department and the applicant
before the issuance of a tentative denial letter during which the
Department and the applicant addressed the reasons for denial that
otherwise would have been set forth in a tentative denial letter
pursuant to Sec. 2570.38. While the language of Sec. Sec. 2570.38,
2570.46, and 2570.47 does not require a tentative denial letter to be
sent or a hearing to occur under all circumstances, the current
language does not clearly state that the Department may issue a final
denial letter without taking those steps. To eliminate uncertainty, the
Department proposed to add the new text to make clear that, based on
the reasons outlined above, the Department may issue final denial
letters without tentative denial letters or hearings.
Commenters objected to the new proposed paragraph (a) on the
grounds that being issued a direct denial would deprive applicants of
an opportunity to respond to concerns raised by the Department. In
response, the Department clarifies that it would not issue a direct
denial where there is active engagement between the applicant and the
Department. The Department proposed to include this language solely to
clarify that there are certain instances where, for administrative
expediency, the Department can issue a final denial letter without
issuing a tentative denial letter if the facts and circumstances
preclude the Department from processing the application submitted by
the applicant, or if an applicant fails to provide anything more than
cursory information. For example, if an applicant submits an exemption
application that is only one or two pages long and is unresponsive to
the Department's request for additional information, under the proposed
new paragraph, the Department may issue a final denial letter either
immediately or following an initial short conference during which the
applicant fails to provide any additional or requested information.
Further, the Department proposed that it may issue a direct denial
letter if an applicant submits a request for a retroactive exemption
where the participants and beneficiaries were substantially harmed by
the subject transaction.
The Department also notes that it has modified Sec. 2570.45 to
provide that applications denied under Sec. 2570.41(a) can be
resubmitted for reconsideration. Those changes are discussed further
below.
The Department also proposed to add a new paragraph (e), which
would provide that the Department will issue a final denial letter
where the applicant either (1) asks to withdraw the exemption
application, or (2) communicates to the Department that it is not
interested in continuing the application process. This revision is
consistent with the changes the Department is making in Sec. 2570.44.
The Department proposed to add this text to formally memorialize the
ultimate disposition of the application by issuing a final denial
letter if the applicant decides it is no longer interested in an
exemption, whether communicated through either a withdrawal or a
statement of disinterest. The proposed revision would allow the
Department to track and manage exemption applications more clearly.
The Department has included all of the Proposed Rule's revisions to
Sec. 2570.41 in the Final Amendment.
Section 2570.42
When the Department makes an initial determination that the
issuance of an exemption is warranted, Sec. 2570.42 provides that the
Department must give interested parties notice and opportunity to
comment through the publication of a proposed exemption in the Federal
Register. The Department proposed to revise a portion of paragraph (d).
Previously, the paragraph provided that when the proposed exemption
includes relief from ERISA section 406(b), Code section 4975(c)(1)(E),
or FERSA section 8477(c)(2), the proposed exemption must inform
interested persons who would be adversely affected by the transaction
of their right to request a hearing under Sec. 2570.46. The Department
proposed to delete the reference to interested persons who would be
adversely affected by the exemption transaction, thus making the text
applicable to all interested persons who have been materially affected
by the exemption. This revision was made to both reflect the difficulty
in determining which parties are adversely affected and to ensure that
all parties that might have relevant information to the Department's
final determination are provided with an opportunity to communicate
that information.
The Department has retained its proposed revisions to Sec. 2570.42
in the Final Amendment.
Section 2570.43
Upon publication of a proposed exemption in the Federal Register,
Sec. 2570.43 provides that the applicant must provide notice to
interested persons of the pendency of the exemption. The section
outlines the process by which the notice is drafted and provided. The
Department proposed to revise paragraph (a) to delete ``adversely'' and
replace it with ``materially'' when applying the term to the interested
parties' right to a hearing to remain consistent with the proposal's
revision to Sec. 2570.42 discussed above. The Department also proposed
to make minor changes regarding how a commenter may submit their
comment and added language to the existing text advising commenters not
to disclose personal data or submit confidential or otherwise protected
information.
The Department has included these proposed amendments to Sec.
2570.43 in the Final Amendment.
Section 2570.44
Section 2570.44 addresses the withdrawal of an exemption
application. The current Exemption Procedure Regulation is silent as to
whether an applicant can withdraw its exemption application without the
Department's issuance of a formal final denial letter. It has, however,
been the Department's practice that applicants can withdraw their
applications without the issuance of a final denial letter. In a
revision to this practice, the Department proposed to revise paragraph
(b) to provide explicitly that the Department will terminate all
proceedings regarding the application upon receiving an applicant's
withdrawal request and issue a final denial letter. The issuance of the
final denial letter would formally close the application and allow the
Department to better manage its inventory of exemption applications.
The Department proposed to revise paragraph (d) to provide that if
an applicant chooses to reapply after withdrawing their application,
the applicant must update all previously furnished information with
respect to the prior application and the exemption transaction.
Applicants currently can
[[Page 4683]]
reapply without providing additional information after withdrawing
their applications unless the request occurs more than two years after
withdrawal. Applicants should be required to completely update all
information when they reapply for an exemption, regardless of the time
that has elapsed after their withdrawal. Therefore, the Proposed Rule
would treat the withdrawal as a formal denial, which would shift the
burden to the applicant to present an updated application to the
Department for its review.
Commenters raised concerns that the proposed denial and
resubmission revisions would presume malfeasance or bias against
resubmitted applications. The Department disagrees. The denial is an
administrative action only, and it presents no bias against an
application. Clearly shifting the resubmission burden to the applicant,
without relying on an older submission that was withdrawn, is
appropriate because the exemption application process starts from the
premise that applicants must show how they meet the Exemption Procedure
Regulation requirements. Additionally, requiring current information
upon resubmission will benefit both the applicants and the Department
by streamlining the review of resubmitted applications.
Finally, the Department proposed to add a new paragraph (f) which
states that, following the withdrawal of an exemption application, the
administrative record will remain subject to public inspection pursuant
to Sec. 2570.51. The Department proposed this change to clearly set
forth its policy that the administrative record for an exemption will
always be available for public inspection after it is created. The
language was intended to clarify current practice and to make this
section consistent with other revisions regarding the administrative
record described above.
After considering the comments, the Department has retained the
Proposed Rule's revisions to Sec. 2570.44 in the Final Amendment.
Section 2570.45
Section 2570.45 addresses formal requests for reconsideration
following the Department's issuance of a final denial letter. The
Department proposed to add new language to paragraph (a), which
provides that applicants whose applications were denied without a
tentative denial under Sec. 2570.41(a) may request reconsideration,
and a new paragraph (g), which provides that a request for
reinstatement of an exemption application following a withdrawal
pursuant to Sec. 2570.44(d) is not a request for reconsideration
governed by Sec. 2570.45. The Department proposed to add this text to
draw a clear distinction between Sec. Sec. 2570.44 and 2570.45, and it
has retained the proposed revisions in the Final Amendment.
In addition, in response to commenters' concerns about final
denials pursuant to Sec. 2570.41(a), the Department has added a new
paragraph (h). Commenters expressed concern about Sec. 2570.41(a)
foreclosing applicants' opportunities to respond to the Department. New
paragraph (h) provides that the Department will reconsider applications
that were previously denied under Sec. 2570.41(a)(1) or (2) for
failure to timely respond to the Department's request for information
or provide sufficient information, as long as the applications are
cured upon submission for reconsideration. For applications that are
cured upon resubmission, the Department will undertake the steps in the
exemption procedure that remained when the Department issued the final
denial letter. If the Department concludes that an exemption is not
warranted, it will either hold a conference or issue a tentative denial
letter before issuing a final denial. This change clarifies that those
applicants whose applications are denied under Sec. 2570.41(a)(1) or
(2) without a tentative denial letter or an equivalent conference will
be afforded an opportunity to respond to the Department upon
reconsideration.
Section 2570.46
Section 2570.46 covers the right to a hearing with respect to a
proposed exemption that provides relief from ERISA section 406(b), Code
section 4975(c)(1)(E) or (F), or FERSA section 8477(c)(2) for any
interested person who may be adversely affected by the exemption. The
Department proposed to expand the right to a hearing to any person who
may be materially affected by an exemption that provides the relief
described in this section. The determination of whether a person is
materially affected would be at the sole discretion of the Department.
The proposal would delete the reference to interested persons to allow
any party materially affected by the exemption to provide material
information. Similarly, the Department proposed to change the word
``adversely'' to ``materially'' to capture all relevant information
with respect to the exemption transaction. Combined, these revisions
would assist the Department in its review of the exemption transaction
by ensuring that potentially helpful information is not excluded.
The Department also proposed to make a minor revision to paragraph
(b) that would explicitly state that the Department will hold a hearing
when it is necessary to explore material factual information with
respect to the proposed exemption. Factual information is limited to
the proposed exemption to ensure that the hearing is relevant to the
Department's exemption determination; information that is not material
to the exemption transaction would not be sufficient to meet this
requirement.
The Department has adopted the Proposed Rule's revisions to Sec.
2570.46 in the Final Amendment.
Section 2570.47
The Department did not propose any changes to section Sec.
2570.47, and the Final Amendment does not make any material revisions
to Sec. 2570.47.
Section 2570.48
Section 2570.48 restates the Department's ERISA section 408(a)
statutory finding requirements. The Department's only proposed material
change to this section is to clarify that the Department must make a
finding that the exemption is administratively feasible ``for the
Department,'' rather than administratively feasible for the applicant.
The Department has retained the Proposed Rule's revisions to Sec.
2570.48 in the Final Amendment.
Section 2570.49
Section 2570.49 addresses the various effects of and limits on the
grant of an exemption. The Department proposed to revise paragraph (e)
to clarify that the determination regarding whether a particular
statement contained in (or omitted from) an exemption application
constitutes a material fact or representation based on the totality of
the facts and circumstances would be made by the Department in its sole
discretion. The proposed addition of the ``sole discretion'' language
clarifies that the Department retains sole discretion with respect to
the determination.
The Department has retained this revision to Sec. 2570.49 in the
Final Amendment.
Section 2570.50
Section 2570.50 addresses the revocation and modification of
existing exemptions. The Department proposed to substantially revise
paragraph (a) to provide that, if material changes in facts,
circumstances, or representations occur after an exemption takes
effect, including if a qualified independent fiduciary resigns, is
terminated, or is
[[Page 4684]]
convicted of a crime, the Department, at its sole discretion, may take
steps to revoke or modify the exemption. If the qualified independent
fiduciary resigns, is terminated, or is convicted of a crime, the
proposal required the applicant to notify the Department within 30 days
of the resignation, termination, or conviction. The applicant's failure
to provide such notice could result in a determination that the
conditions of the exemption have not been met and lead to the
exemption's revocation. Further, under the proposal, the Department
would reserve the right to request the applicant to provide the
Department with any of the information required pursuant to Sec.
2570.34(e) and (f) at a time determined by the Department at its sole
discretion.
The Department proposed to revise paragraph (a) beyond the material
facts to address the qualified independent fiduciary. In many
exemptions that employ qualified independent fiduciaries, the
fiduciaries represent one of the exemption's core protective
conditions. It is imperative that an applicant inform the Department if
the independent fiduciary ceases to serve in that role because it
resigns, is terminated, or is convicted of a crime. The Proposed Rule
was written to ensure that the Department will be informed of the
changed circumstances and require the applicant to take necessary
actions to ensure the exemption continues to be in the interests of and
protective of the rights of the plan and its participants and
beneficiaries.
In connection with the qualified independent fiduciary issue, the
proposal also would have reserved the Department's right to request
that the applicant provide any of the information required pursuant to
Sec. 2570.34(e) and (f) at a time determined by the Department at its
sole discretion. This change was proposed to assist the Department's
ultimate disposition of the issue and ensure that the exemption remains
protective.
Commenters objected to the cumulative changes in paragraph (a) on
the grounds that disclosing information after the issuance of an
exemption would be burdensome, and that such a requirement would
transform the Office of Exemption Determinations into an enforcement
arm of the Department. While the revised paragraph (a) imposes
additional requirements on an applicant after the issuance of an
exemption, the new language would ensure that granted exemptions remain
protective of plans and their participants and beneficiaries. Ensuring
that an exemption remains protective of plans and their participants
and beneficiaries in the face of changed circumstances relates to the
Department's ability to make its statutorily required findings. Without
the revised language, material changes could undermine the basis or
availability of an issued exemption, whether intentional or not,
without the Department's knowledge. Further, the new provision will
help prevent, or at least provide notice of, the swapping of an
independent fiduciary that was specifically agreed upon with the
Department as an exemption condition for a fiduciary the Department
might not otherwise approve.
The Department proposed to amend paragraph (a) to provide a tool
for the Department to evaluate exemptions on an ongoing basis, which
would allow the Department to determine whether it can continue to make
its statutory findings under ERISA section 408(a) with respect to an
exemption it previously granted. While in some cases such submissions
could result in the referral of potentially non-exempt prohibited
transactions to EBSA's enforcement program, that is not the chief
purpose of the submissions. Nevertheless, non-enforcement EBSA offices
remain aware of potential ERISA violations and can, and do,
appropriately refer parties to the Office of Enforcement or applicable
regional offices when appropriate.
Lastly, the Proposed Rule would have revised paragraph (c), which
currently permits the Department's to revoke or modify an exemption
under certain circumstances, which possibly could give the
modifications retroactive effect. The proposal deleted the reservation
of the Department's right to make retroactive changes, and instead
provided that changes may only be made prospectively. The revision
reflects the Department's concern that the ability to make retroactive
changes undermines the legitimate interests of applicants, plans,
participants, and beneficiaries to rely on exemptions that have been
granted pursuant to specific conditions. Commenters indicated that the
proposed language may create uncertainty about whether the Department
might choose to revoke an exemption. The Department disagrees. The
current Exemption Procedure Regulation already permits revocation, and
the new provision, in fact, provides more certainty by eliminating the
retroactive revocation language. In addition, the Department emphasizes
that, per new paragraph (b), a revocation cannot occur without notice
and comment.
Accordingly, the Department has retained the Proposed Rule's
revisions to Sec. 2570.50 in the Final Amendment.
Section 2750.51
Section 2570.51 addresses public inspection and the provision of
copies of the administrative record. The Department proposed to revise
the current language in coordination with Sec. 2570.32(d), which
addresses the administrative record and the information included in the
administrative record. In the proposal, the Department clarified that
the administrative record is open for public inspection and available
to copy from the date the administrative record is established, as
determined by Sec. 2570.32(d). In addition, the Department proposed to
update paragraph (b) to allow copies of the administrative record to be
furnished electronically.
The Department has retained the Proposed Rule's revisions to Sec.
2570.51 in the Final Amendment.
Effective Date
This regulation is effective April 18, 2024.
Regulatory Impact Analysis
1.1. Background and Need for Regulation
As discussed above, the Department's Exemption Procedure Regulation
sets forth the process by which the Department makes exemption
determinations with respect to applications for administrative relief
from the prohibited transaction provisions of ERISA and the Code. The
Final Amendment revises the current Exemption Procedure Regulation to
promote the Department's goal of promptly and efficiently making
exemption determinations pursuant to a transparent process that is
available for public inspection and subject to public scrutiny.
In order to accomplish this objective, the Final Amendment makes
applicants aware of information the Department requires during the
exemption application process based on recent practices the Department
has used to process administrative exemption requests. The Final
Amendment also revises the baseline Exemption Procedure Regulation to
ensure creation of a thorough and complete administrative record. The
revision will increase transparency and help any impacted party,
including plan participants and beneficiaries, understand the
information the Department considers when reviewing
[[Page 4685]]
exemption applications and the decisions the Department makes in making
exemption determinations.
As discussed below, the Department has examined the effects of this
Final Amendment as required by Executive Order 12866,\21\ Executive
Order 13563,\22\ the Paperwork Reduction Act of 1995,\23\ the
Regulatory Flexibility Act,\24\ section 202 of the Unfunded Mandates
Reform Act of 1995,\25\ Executive Order 13132,\26\ and the
Congressional Review Act.\27\
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\21\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\22\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 18, 2011).
\23\ 44 U.S.C. 3506(c)(2)(A) (1995).
\24\ 5 U.S.C. 601 et seq. (1980).
\25\ 2 U.S.C. 1501 et seq. (1995).
\26\ Federalism, 64 FR 153 (Aug. 4, 1999).
\27\ 5 U.S.C. 804(2) (1996).
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1.2. Executive Orders 12866 and 13563
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, select regulatory approaches that maximize net
benefits (including potential economic, environmental, public health,
and safety effects; distributive impacts; and equity). Executive Order
13563 emphasizes the importance of quantifying costs and benefits,
reducing costs, harmonizing rules, and promoting flexibility.
Under Executive Order 12866 (the Executive order), ``significant''
regulatory actions are subject to review by the Office of Management
and Budget (OMB).\28\ As amended by Executive Order 14094,\29\ entitled
``Modernizing Regulatory Review,'' Executive order section 3(f) defines
a ``significant regulatory action'' as an action that is likely to
result in a rule that may (1) have an annual effect on the economy of
$200 million or more (adjusted every three years by the Administrator
of Office of Information and Regulatory Affairs (OIRA) for changes in
gross domestic product); or adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, territorial, or
tribal governments or communities; (2) create a serious inconsistency
or otherwise interfere with an action taken or planned by another
agency; (3) materially alter the budgetary impacts of entitlement
grants, user fees, or loan programs or the rights and obligations of
recipients thereof; or (4) raise legal or policy issues for which
centralized review would meaningfully further the President's
priorities or the principles set forth in the Executive order, as
specifically authorized in a timely manner by the Administrator of OIRA
in each case.
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\28\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\29\ Modernizing Regulatory Review, 88 FR 21879 (April 6, 2023).
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Pursuant to the terms of Executive Order 12866, OMB has determined
that this action is ``significant'' within the meaning of section 3(f)
of the Executive order. Therefore, the Department has provided an
assessment of the potential costs, benefits, and transfers associated
with the Final Amendment, which is presented below and has been
reviewed by OMB in accordance with the requirements of the Executive
order.
1.3. Affected Entities
The Final Amendment affects individual retirement accounts,
employee benefit plans, plan sponsors and fiduciaries, and participants
and beneficiaries that are subject to the prohibited transaction rules
set forth in ERISA, the Code, or FERSA. Based on recent exemption
application activity, the Department estimates that it receives
approximately 21 exemption applications annually.\30\
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\30\ This estimate is the rounded five-year average of
applications received.
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1.4. Benefits of Final Amendment
The Department expects that the Final Amendment will achieve the
Department's goal of bringing enhanced efficiency, clarity, and
transparency to the exemption determination process. The Department
will achieve this objective by including provisions in the Final
Amendment that, among other things, (1) clarify the types of
information and documentation required for a complete application, (2)
revise the definitions of a qualified independent fiduciary and
qualified independent appraiser to ensure their independence, (3)
clarify the content of specific reports and documents applicants must
submit to ensure that the Department receives sufficient information to
make the requisite findings under ERISA section 408(a) to issue an
exemption, (4) update various timing requirements to ensure clarity in
the application review process, (5) clarify items that are included in
the administrative record for an application and when the
administrative record is available for public inspection, and (6)
expand opportunities for applicants to submit information to the
Department electronically.
Also, the Department is requiring applicants to include more
information upfront as part of their exemption applications, which will
lead to an efficient determination process. Specifically, the
Department is requiring applicants to include information relevant to
the cost and benefits of the transaction, alternative transactions to
the exemption transaction that were considered, the benefits derived by
the parties involved, and explicit descriptions of all known conflicts
involved with the transaction.
The baseline Exemption Procedure Regulation already requires
applicants to submit most of this information to the Department. The
Department, however, is amending the Exemption Procedure Regulation to
align more closely with the information the Department frequently
requests from applicants to make its statutorily mandated findings, and
to require such information to be submitted sooner in the process
rather than after the Department requests it. Having the information
provided with the application clarifies expectations about required
information. Also, time is saved as back-and-forth discussions about
required information are reduced. In doing this, the Department will
make the exemption determination process more efficient. Increased
efficiency also will result from the amendment to Sec. 2570.36 of the
Exemption Procedure Regulation, which allows applicants to submit
applications and supporting materials to the Department electronically.
The Final Amendment also enhances the transparency of the exemption
determination process by clarifying that the administrative record for
an exemption application becomes open for public inspection and
available for copying when an applicant submits its exemption
application to the Department. At that time, in addition to the
application itself, any information the applicant provided to the
Department before it submitted its application, as well as any pre-
submission communications regarding the exemption transaction, will
become part of the administrative record.
1.5. Costs Associated With the Final Amendment
As discussed above, the Final Amendment requires applicants to
include information in their exemption applications that frequently was
requested during review. For example, under the Final Amendment,
applicants must include in their applications a description of: (1) the
reason(s) for engaging in the exemption transaction; (2) any material
benefit that a party in interest involved in the exemption transaction
may receive as a result of the
[[Page 4686]]
subject transaction (including the avoidance of any materially adverse
outcome by the party in interest as a result of engaging in the
exemption transaction); (3) the costs and benefits of the exemption
transaction to the affected plan(s), participants, and beneficiaries,
including quantification of those costs and benefits to the extent
possible; (4) a description of the alternatives to the exemption
transaction that it considered or evaluated before submitting the
exemption application and an explanation of why those alternatives were
not pursued; and (5) a description of each conflict of interest or
potential instance of self-dealing that would be permitted if the
exemption is granted.
The Final Amendment also revises the baseline Exemption Procedure
Regulation to expand the number of specialized parties from whom
statements and documents must be included in exemption applications,
such as auditors and accountants acting on the behalf of the plan (as
well as independent fiduciaries and independent appraisers who already
were covered). The required disclosures are expanded to cover any
documents submitted by these parties in support of the application.
These parties also are required to disclose, among other things,
information regarding their contracts with the applicant, including,
but not limited to, information on indemnification provisions, waivers,
and relationships with other parties involved in the exemption
transaction. In addition, the qualified independent fiduciaries and
qualified independent appraisers are required to include specific
information regarding conflicts of interest, fiduciary liability
insurance, and whether the fiduciary has been under investigation or
convicted of certain crimes.
While including this information in the application could impose
additional costs on some applicants compared to the baseline
requirements of the current Exemption Procedure Regulation, as
discussed below, these increased costs are modest and justified by the
Department's need for this critical information to make its findings
under ERISA section 408(a) and to promote increased efficiency as
explained previously. Such information also will facilitate the
Department's understanding of the underlying rationale for the
exemption transaction, including the costs and benefits for both the
party in interest and the plan and its participants and beneficiaries.
The Final Amendment also requires information to be submitted by
applicants with whom the Department engages on a pre-submission basis.
Specifically, if an applicant communicated with the Department either
orally or in writing before submitting an exemption application for the
exemption transaction, the applicant or its representative must (1)
identify and fully describe the exemption transaction; and (2) set
forth the prohibited transactions that the applicant believes are
applicable.
Applicants who communicated with the Department prior to submitting
an application also must submit a statement setting forth the date(s)
and with whom the applicant communicated before submission. Linking
pre-submission communications to a current application ensures that the
Department understands the entire context of an exemption application.
The Department emphasizes, however, that this provision is only
triggered when the applicant submits a formal exemption application.
Although the final amendment requires exemption applicants to
submit information earlier than the baseline exemption procedure, as
mentioned above, the Department expects that the final amendment will
generate efficiency gains. Such gains will result because the open,
transparent, and clear process implemented by final amendment will
eliminate friction that is caused when the Department has back and
forth discussion with applicants regarding information that is not
included in an exemption application after the applicants submit their
exemption application under the baseline Exemption Procedure
Regulation. On balance, this final amendment will be cost neutral as a
result of the efficiency gains that will be generated; however, the
Department does not have sufficient data to quantify them. Based on the
foregoing, the Department expects that this Final Amendment will result
in modest increased labor costs to applicants compared to the baseline
Exemption Procedure Regulation, which represent an upper bound because
the efficiency gains that would offset such costs are not taken into
account.
Specifically, the Department estimates a total estimated cost
increase to prepare the application of approximately $29,000. This
estimate does not include cost savings generated by efficiency gains.
Each of the 21 affected applicants could experience an increase of six
hours per application divided among various professionals. It does
include the cost savings associated with increased electronic
submission of applications and supporting materials that the Department
had sufficient data to quantify. The cost of individual components of
the Final Amendment are presented in Table 1 and explained below.
Table 1--Labor Hours and Equivalent Cost Changes
----------------------------------------------------------------------------------------------------------------
Additional hours Additional hours Additional costs Additional costs
(per plan) (total) (per plan) (total)
----------------------------------------------------------------------------------------------------------------
Prepare Application: In House Legal 1 21 $159.34 $3,346
Professional.......................
Prepare Application: Clerical....... 1 21 63.45 1,332
Prepare Application: Outside Legal 1 21 535.85 11,253
Professional.......................
Prepare Application: Outside 2 42 610.04 12,811
Fiduciary/Experts..................
Pre-Submission Conference, Do Not 1 5 159.34 797
Apply..............................
Change to Submission Method (from 0 0 -16.45 -345
mail to electronic)................
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Total........................... 6 110 1,511.57 29,194
----------------------------------------------------------------------------------------------------------------
On average, an in-house attorney with a labor and overhead cost
estimated at a rate of $159.34 per hour is expected to spend
approximately one additional hour in preparing the application for a
total cost of $159.34 per plan, or $3,346 total for the 21 plans
estimated to apply each year.\31\
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\31\ Unless otherwise noted, all wage rates are based on
internal Department calculations based on 2020 labor cost data. For
a description of the Department's methodology for calculating wage
rates, see <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf</a>.
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[[Page 4687]]
An additional hour of an attorney's time required to organize and
prepare information is estimated for plans that choose to have a pre-
submission consultation and do not later apply. The Department assumes
that five plans per year will conduct pre-submission consultations but
not formally apply, at a per plan cost of $159.34 and $797 per year
increase for this group of plans.
Outside professionals are hired by the plan to handle certain
fiduciary and service provider duties associated with the transaction,
the valuation(s), and the preparation of the application materials. The
amendments are estimated to increase the net time an outside legal
professional takes to prepare the application by one hour per plan at a
billing rate of $535.85 per hour.\32\ This results in a per plan cost
of $535.85 and a total annual cost increase of $11,253 for the 21 plans
assumed to apply. Both the outside fiduciary and appraiser or other
service provider are assumed to require an additional hour to comply
with the amended rules. The hourly rate for both is assumed to be
$305.02, which results in an increase of $610.04 for each plan and a
total of $12,811 for the 21 plans that are expected to apply annually.
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\32\ Outside legal billing rates are a blended rate based on the
Laffey Matrix, which is available at <a href="http://www.laffeymatrix.com/see.html">http://www.laffeymatrix.com/see.html</a>.
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The final labor component that is expected to change relates to
clerical staff for whom the Department estimates labor and overhead
cost of $63.45 per hour. The Department also estimates that an
additional hour of clerical work will be associated with assisting
outside professionals with preparation of the application, resulting in
a cost increase of $63.45 per application, and a total of $1,332 for
the 21 applications expected annually.
The changes to Sec. 2570.36 of the baseline Exemption Procedure
Regulation that allow for the application to be submitted
electronically are expected to generate a cost savings of $16.45 per
plan, for a total of $345 annually.
1.6. Uncertainty
The number of exemption applications the Department receives may
vary over time due to the macroeconomic health of the economy, and they
may vary over the business cycle. For example, prohibited transaction
exemption applications may deal with the sale of illiquid assets for
which there is a limited market. Because of this, these assets are more
likely to be liquidated while the market is distressed. Therefore,
exemption applications for this type of transaction may increase if the
macroeconomic economy is unhealthy. This variation in the number of
applications is supported by the Department's application data.
The Final Amendment itself may impact the number of applications
the Department receives. For example, application volume could increase
if potential applicants observe enhanced transparency in the exemption
determination process and increased clarity about the information that
is required to be included in an exemption application. As a result,
the Department may receive more exemption applications because
applicants may have increased confidence that their applications will
be approved by the Department, since they are fully aware of the
information the Department requires to be included in their
applications and the Department's process for considering their
applications.
Finally, as discussed above, the Department maintains that this
Final Amendment will be cost neutral due to the efficiency gains it
will generate relative to the baseline Exemption Procedure Regulation,
but it is uncertain regarding the amount of cost savings that will
result from the efficiency gains, as the Department does not have
sufficient information to quantify them.
1.7. Alternatives
Although Executive order section 6(a)(3)(C) only requires the
Department to assess the cost and benefits of feasible alternatives for
rules that are significant under section 3(f)(1), the Department
considered several alternatives to the provisions in the Final
Amendment that are discussed in this section.
First, the Department considered retaining the status quo. However,
the status quo was not a feasible alternative because the Department
has found that the baseline Exemption Procedure Regulation has not been
working with maximum efficiency since the Exemption Procedure
Regulation was last amended in 2011. Under the current Exemption
Procedure Regulation, the Department has had to adopt the practice of
requiring applicants to submit additional information that was not
specifically provided for in the baseline Exemption Procedure
Regulation to ensure that it has sufficient information to make the
statutorily mandated findings under ERISA section 408(a) that an
exemption request is (1) administratively feasible, (2) in the interest
of the plan that is requesting the exemption and its participants and
beneficiaries, and (3) protective of the rights of the plan's
participants and beneficiaries. The Department found that many
exemption applications did not contain sufficient information for the
Department to make these findings, and a lot of back-and-forth
communication was taking place between applicants and the Department to
make sure that adequate information was provided to the Department for
it to make its findings. This led the Department to make a policy
decision that the baseline Exemption Procedure Regulation needs to be
amended to require the specific information the Department needs to
process exemption applications. The Department expects the selected
alternative of requiring more information submitted with the
application will in many instances, but not all, either maintain or
reduce the costs for applications that are granted relative to the
status quo.
The Department also made a policy decision that an amendment to the
Exemption Procedure Regulation is necessary to clarify when the
administrative record opens for an exemption application and the items
that are included in the administrative record. The creation of the
administrative record for an exemption application is critically
important because it commences the exemption determination proces
[…truncated; see source link]Indexed from Federal Register on January 24, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.