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Employee Benefits Security Administration

Advisory Opinion

July 1, 2004

2004-07A
ERISA Sec. 412

William A. Mrozowski
President and Chief Executive Officer
First Commonwealth Trust Company
614 Philadelphia Street
Indiana, PA 15701-0400

Dear Mr. Mrozowski:

This is in response to your request for an advisory opinion regarding the application of section 412 of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether the First Commonwealth Trust Company (FCTC) is exempt from ERISA’s fidelity bonding requirement pursuant to the statutory exemption in section 412(a)(2) of ERISA with respect to plans for which FCTC acts in a fiduciary capacity. You also ask whether FCTC would be covered by the regulatory exemption in 29 C.F.R. §§ 2580.412-27 and 412-28 applicable to certain banking institutions and trust companies subject to federal regulation.

The correspondence and materials you forwarded contain the following facts and representations. FCTC is a corporation that has operated as a trust company in the State of Pennsylvania since 1991, and it is authorized to exercise trust powers under a non-deposit trust bank charter from Pennsylvania. Although FCTC is not itself a member of the Federal Reserve System, it is a wholly owned subsidiary of First Commonwealth Financial Corporation (“First Commonwealth”), a bank holding company. Further, an affiliate of FCTC, another wholly owned subsidiary of First Commonwealth, is a state-chartered member bank of the Federal Reserve System. First Commonwealth is subject to supervision and examination by the Federal Reserve System pursuant to the Bank Holding Company Act. You represent that FCTC is subject to examination and supervision by Pennsylvania banking regulators under state law and by the Federal Reserve System pursuant to section 5 of the Bank Holding Company Act, 12 U.S.C. § 1844, which provides the Federal Reserve System with the authority to supervise and examine subsidiaries of bank holding companies.(1)  You represent that the Federal Reserve Bank of Cleveland in fact periodically examines FCTC. You further represent that FCTC has over $1 million in capital and surplus, and has fidelity bonding coverage that would satisfy the bonding coverage required for First Commonwealth under federal banking law.

Section 412 of ERISA, subject to certain exceptions, requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be covered by a fidelity bond that meets the requirements of section 412 of ERISA and the Department of Labor’s implementing regulations. Section 412(a)(2) provides, in relevant part, that no bond shall be required of a fiduciary (or of any director, officer, or employee of such fiduciary) if such fiduciary – (A) is a corporation organized and doing business under the laws of the United States or of any State; (B) is authorized under such laws to exercise trust powers or to conduct an insurance business; (C) is subject to supervision or examination by Federal or State authority; and (D) has at all times a combined capital and surplus in excess of such a minimum amount as may be established by regulations issued by the Secretary, which amount shall be at least $1,000,000.(2)

Section 412(a)(2) of ERISA further provides that the exemption for such fiduciaries shall apply to a bank or other financial institution which is authorized to exercise trust powers and the deposits of which are not insured by the Federal Deposit Insurance Corporation (FDIC), “only if such bank or institution meets bonding or similar requirements under State law which the Secretary [of Labor] determines are at least equivalent to those imposed on banks by Federal law.” The Secretary has not made any determinations as to whether any state bonding or similar requirements are at least equivalent to those imposed on banks by federal law. The statutory exemption in section 412(a)(2) thus is not available to any bank or other financial institution authorized to exercise trust powers that has deposits that are not insured by the FDIC. It is the view of the Department, however, that banks and other financial institutions that have no deposits, such as FCTC, are not subject to this additional condition. Accordingly, based on your representations that FCTC satisfies all of the other conditions in section 412(a)(2), FCTC would satisfy the conditions for the exemption in section 412(a)(2) of ERISA with respect to the ERISA-covered plans for which FCTC acts in a fiduciary capacity.

The Department has also promulgated regulations under section 412 of ERISA. The regulation at 29 C.F.R. § 2550.412-1 provides, in relevant part, that any plan official, as defined in section 412(a), shall be deemed to be in compliance with the bonding requirements of ERISA if he or she is exempt from such bonding requirements under an exemption in Part 2580 of Title 29 of the Code of Federal Regulations.(3) The regulations at 29 C.F.R. §§ 2580.412-27 and 412-28 provide “banking institutions and trust companies subject to regulation and examination by the Comptroller of the Currency or the Board of Governors of the Federal Reserve System, or the Federal Deposit Insurance Corporation” with an “exemption from the bonding requirements” in sections 412(a) and (b) of ERISA.(4)

In the view of the Department, the authority of the Federal Reserve System over FCTC as a subsidiary of a bank holding company pursuant to the Bank Holding Company Act constitutes regulation and examination by the Board of Governors of the Federal Reserve System within the meaning of 29 C.F.R. §§ 2580.412-27 and 412-28.(5) Accordingly, based on the facts and representations you supplied, it is the opinion of the Department that FCTC would also be exempt under 29 C.F.R. §§ 2580.412-27 and 412-28 from being bonded under Title I in connection with its handling of plan funds or other property of ERISA-covered welfare and pension plans.

This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976), and, accordingly, is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.

Sincerely,
John J. Canary
Chief, Division of Coverage, Reporting and Disclosure
Office of Regulations and Interpretations

Footnotes

  1. 12 U.S.C. § 1844(c) provides in relevant part: “(1) Reports (A) In general – The Board, from time to time, may require a bank holding company and any subsidiary of such company to submit reports under oath to keep the Board informed as to – (i) its financial condition, systems for monitoring and controlling financial and operating risks, and transactions with depository institution subsidiaries of the bank holding company; and (ii) compliance by the company or subsidiary with applicable provisions of this chapter or any other Federal law that the Board has specific jurisdiction to enforce against such company or subsidiary. . . . (2) Examinations (A) Examination authority for bank holding companies and subsidiaries – Subject to subparagraph (B), the Board may make examinations of each bank holding company and each subsidiary of such holding company in order – (i) to inform the Board of the nature of the operations and financial condition of the holding company and such subsidiaries; (ii) to inform the Board of – (I) the financial and operational risks within the holding company system that may pose a threat to the safety and soundness of any depository institution subsidiary of such holding company; and (II) the systems for monitoring and controlling such risks; and (iii) to monitor compliance with the provisions of this chapter or any other Federal law that the Board has specific jurisdiction to enforce against such company or subsidiary and those governing transactions and relationships between any depository institution subsidiary and its affiliates.”

  2. In the absence of regulations setting higher capital and surplus requirements under section 412(a)(2) of ERISA, the requisite amount to be eligible for the exemption is the $1,000,000 minimum provided in the statute.

  3. 29 C.F.R. §2550.412-1, pending issuance of permanent bonding regulations implementing section 412 of ERISA, incorporates by reference most of the bonding regulations issued under the predecessor statute, the Welfare and Pension Plans Disclosure Act (the WPPDA) and makes them applicable to plan officials under ERISA.

  4. Sections 2580.412-27 and 412-28 provide an exemption from the “bonding requirements” in section 412(a) and (b) of ERISA, but not from the section 412(b) prohibition on any plan official, or any other person having the authority to direct the receipt, handling, disbursement, or other exercise of custody or control of any of the funds or other property of any employee benefit plan, from directing that such functions be performed by any plan official with respect to whom the requirements of subsection 412(a) have not been met.

  5. You represent that FCTC is neither a registered investment advisor nor a broker-dealer that would be a “functionally regulated subsidiary” of a bank holding company within the meaning of the Bank Holding Company Act. We express no opinion in this letter regarding the applicability of the bonding exemption in 29 C.F.R. §§ 2580.412-27 and 412-28 to entities that are “functionally regulated subsidiaries” within the meaning of the Bank Holding Company Act.