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Employee Benefits Security Administration

Advisory Opinion

June 19, 2003

Melanie Franco Nussdorf, Esq.
Steptoe & Johnson LLP
1330 Connecticut Avenue, NW
Washington, D.C. 20036

2003-07A
Sec. V(h)
PTE 84-14

Dear Ms. Nussdorf:

This is in response to your request for guidance concerning section V(h) of Prohibited Transaction Exemption (PTE) 84-14 (49 FR 9494, March 13, 1984, as corrected at 50 FR 41430, October 10, 1985). As you noted, PTE 84-14 permits certain transactions between a party in interest with respect to an employee benefit plan and an investment fund (as defined in section V(b) of PTE 84-14) in which the plan has an interest and which is managed by a qualified professional asset manager (QPAM), provided that the other conditions of the exemption are satisfied.

One of the conditions of the exemption, set forth in section I(d), requires that the party in interest dealing with the investment fund is neither the QPAM nor a person “related” to the QPAM. As defined in section V(h) of PTE 84-14, a QPAM is “related” to a party in interest if:

the party in interest (or a person controlling, or controlled by, the party in interest) owns a five percent or more interest in the QPAM or if the QPAM (or a person controlling, or controlled by, the QPAM) owns a five percent or more interest in the party in interest.(1)

Section V(h) further provides that the term “interest” means with respect to ownership of an entity: the combined voting power of all classes of stock entitled to vote or the total value of the shares of all classes of stock of the entity if the entity is a corporation; the capital interest or the profits interest of the entity if the entity is a partnership; or the beneficial interest of the entity if the entity is a trust or unincorporated enterprise. Under section V(h), a person is considered to own an interest held in any capacity if the person has or shares the authority to exercise any voting rights or to direct some other person to exercise the voting rights relating to such interest, or to dispose or to direct the disposition of such interest.

You have requested guidance from the Department as to whether the language in section V(h) referencing the ownership interests of “the QPAM (or a person controlling, or controlled by, the QPAM),” means that only interests owned by the QPAM and entities in its vertical chain of ownership are counted for purposes of the five percent ownership test.(2)  In this regard, you state that while section V(h) requires the counting of ownership interests of entities that “control” or are “controlled by” the QPAM, section V(h) does not appear to require the counting of ownership interests of entities “under common control” with the QPAM.

The Department concurs with your interpretation of section V(h) of PTE 84-14. As the Department previously stated in the preamble to PTE 84-14, “[i]t is the intention of the Department that, for purposes of section V(h), the phrase ‘a person controlling or controlled by’ the party in interest or the QPAM should include any entity within the vertical chain of ownership containing the QPAM or party in interest.” Accordingly, in response to your inquiry, it is the view of the Department that it would not be necessary to count the ownership interests of parties “under common control” with the QPAM for purposes of the five percent ownership test in section V(h) of the class exemption.

The Department notes that, while your inquiry focused on the language of section V(h) regarding the QPAM’s ownership of a party in interest, the Department’s conclusion applies equally to the remaining portion of section V(h) which states that a QPAM is related to a party in interest if “the party in interest (or a person controlling, or controlled by, the party in interest) owns a five percent or more interest in the QPAM.”(3)

You have also requested guidance as to whether, for purposes of the five percent ownership test, section V(h) requires the counting of ownership interests in only the party in interest itself or the QPAM itself, and not in either of their affiliates. In the Department’s view, section V(h) clearly limits application of the five percent ownership test to ownership interests in the party in interest or the QPAM, and does not extend to their affiliates. Therefore, as you have suggested, where a party in interest is wholly owned by another entity, a QPAM will not be deemed “related” to the party in interest if the QPAM merely holds an ownership interest of five percent or more in the parent company of the party in interest.(4)

This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. This opinion relates only to the specific issue addressed herein.

Sincerely,
Ivan L. Strasfeld
Director
Office of Exemption Determinations

Footnotes

  1. The term “control” is defined in section V(e) of PTE 84-14 to mean “the power to exercise a controlling influence over the management or policies of a person other than an individual.”

  2. You acknowledge that to the extent an entity in the vertical chain of ownership has or shares the authority to vote or dispose of interests that are owned by entities outside the vertical chain of ownership, those interests also would be counted.

  3. In this regard, the Department notes that, although the ownership interests of parties under common control with the QPAM or the party in interest are not taken into account for purposes of the related party determination under section I(d) of the class exemption, no relief would be available under Part I of the class exemption for any violations of section 406(b)(1) of the Act that may arise in connection with transactions involving affiliated parties.

  4. The Department notes however, that prohibited transaction issues may arise where the parties create a nonsubstantive parent entity to the party in interest and the QPAM (or a person controlling, or controlled by, the QPAM) has a five percent or greater interest in the parent company. If such structure is designed solely to take advantage of the relief provided by the exemption, it is the Department’s view that an issue would be raised regarding compliance with that part of section I(c) of the exemption which requires that the transaction not be part of an agreement, arrangement or understanding designed to benefit a party in interest.