Skip to page content
Employee Benefits Security Administration

EBSA Federal Register Notice

Notice of proposed amendment to a class exemption [11/21/2007]

[PDF Version]

Volume 72, Number 224

-----------------------------------------------------------------------
=======================================================================
-----------------------------------------------------------------------

EMPLOYEE BENEFITS SECURITY ADMINISTRATION

[Application No. D-11337]

 
Proposed Amendment to the Class Exemption for the Release of 
Claims and Extensions of Credit in Connection With Litigation

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Notice of proposed amendment to a class exemption.

-----------------------------------------------------------------------

SUMMARY: This document contains a notice of a proposed amendment to a 
class exemption from certain prohibited transaction restrictions of the 
Employee Retirement Income Security Act of 1974 (ERISA or the Act) and 
from certain taxes imposed by the Internal Revenue Code of 1986, as 
amended (the Code). The proposed amendment to the class exemption, PTE 
2003-39 (68 FR 75632, Dec. 31, 2003), would apply to transactions 
engaged in by a plan in connection with the settlement of litigation, 
including bankruptcy litigation. This amendment is being proposed in 
response to requests from practitioners and independent fiduciaries who 
sought an expansion of the types of consideration that plans could 
accept in connection with the settlement of litigation. The proposed 
exemption, if granted, would affect all employee benefit plans, the 
participants and beneficiaries of such plans, and parties in interest 
with respect to those plans engaging in the described transactions.

DATES: Written comments and requests for a public hearing shall be 
submitted to the Department before January 22, 2008.

DATES: Effective Date: If adopted, the proposed amendments would be 
effective as of date of publication of the final amendments in the 
Federal Register.

ADDRESSES: All written comments and requests for a public hearing 
(preferably 3 copies) should be sent to: U.S. Department of Labor, 
Employee Benefits Security Administration, Room N-5700, 200 
Constitution Avenue, NW., Washington, DC 20210, Attention: Proposed 
Amendment to Plan Settlement Class Exemption. Commenters are encouraged 
to submit responses electronically by e-mail to e-OED@dol.gov, or by 
using the Federal eRulemaking portal at http://www.regulations.gov. All 

responses will be available for public inspection in the Public 
Disclosure Room, Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210, and online at www.regulations.gov and http://www.dol.gov/ebsa
.


FOR FURTHER INFORMATION CONTACT: Brian Buyniski, Office of Exemption 
Determinations, Employee Benefits Security Administration, U.S. 
Department of Labor, Washington DC 20210 (202) 693-8540 (not a toll-
free number).

SUPPLEMENTARY INFORMATION: This document contains a notice that the 
Department is proposing an amendment to a class exemption from the 
restrictions of sections 406(a) and 407(a) of the Act and from the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code. The 
exemption described herein is being proposed by the Department on its 
own motion pursuant to section 408(a) of the Act and section 4975(c)(2) 
of the Code, and in accordance with the procedures set forth in 29 CFR 
part 2570

[[Page 65598]]

subpart B (55 FR 32836, August 10, 1990).\1\
---------------------------------------------------------------------------

    \1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
app. at 214 (2000) generally transferred the authority of the 
Secretary of Treasury to issue exemptions under section 4975(c)(2) 
of the Code to the Secretary of Labor. In the discussion of the 
exemption, references to specific provisions of the Act should be 
read to refer as well to the corresponding provisions of section 
4975 of the Code.
---------------------------------------------------------------------------

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, it was determined 
that this action is not ``significant'' under Section 3(f)(4) of the 
Executive Order. Accordingly, this action has not been reviewed by OMB.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520) (PRA 95), the Department submitted the information 
collection request (ICR) included in the Class Exemption For Release of 
Claims and Extensions of Credit in Connection with Litigation (the 
``Class Exemption'') to the Office of Management and Budget (OMB) for 
review and clearance at the time the class exemption was published in 
the Federal Register (68 FR 75632, December 31, 2003) under OMB control 
number 1210-0091. The ICR was renewed by OMB on May 11, 2006.
    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, the reporting burden 
(time and financial resources) is minimized, and the Department can 
properly assess the impact of collection requirements on respondents.
    Currently, the Department is soliciting comments concerning the 
information collection request (ICR) included in the Proposed Amendment 
to the Class Exemption for the Release of Claims and Extensions of 
Credit in Connection with Litigation. A copy of the ICR may be obtained 
by contacting the person listed in the PRA Addressee section below.
    The Department has submitted a copy of amendment to OMB in 
accordance with 44 U.S.C. 3507(d) for review of its information 
collections. The Department and OMB are particularly interested in 
comments that:
    Evaluate whether the collection of information is necessary for the 
proper performance of the functions of the agency, including whether 
the information will have practical utility;
    Evaluate the accuracy of the agency's estimate of the burden of the 
collection of information, including the validity of the methodology 
and assumptions used;
    Enhance the quality, utility, and clarity of the information to be 
collected; and
    Minimize the burden of the collection of information on those who 
are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., by permitting electronic 
submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. Although comments may be 
submitted through January 22, 2008, OMB requests that comments be 
received within 30 days of publication of the Proposed Amendment to the 
Class Exemption for the Release of Claims and Extensions of Credit in 
Connection with Litigation to ensure their consideration.
    PRA Addressee: Address requests for copies of the ICR to Gerald B. 
Lindrew, Office of Policy and Research, U.S. Department of Labor, 
Employee Benefits Security Administration, 200 Constitution Avenue, 
NW., Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax: 
(202) 219-5333. These are not toll-free numbers. A copy of the ICR also 
may be obtained at http://www.RegInfo.gov.

    The Class Exemption contains the following information collections:
    Written Settlement Agreement. The terms of the settlement must be 
specifically described in a written agreement or consent decree.
    Acknowledgement by Fiduciary. The fiduciary acting on behalf of the 
plan must acknowledge in writing that s/he is a fiduciary with respect 
to the settlement of the litigation.
    The proposed amendment would expand the scope of non-cash 
consideration that may be accepted by an Authorizing Fiduciary on 
behalf of the plan in connection with the settlement of litigation 
(subject to additional conditions) to include the following: (i) 
Employer securities, including bonds, and stock rights or warrants to 
acquire employer stock; (ii) a written promise by the employer to 
increase future contributions to the plan (as valued by a qualified 
appraiser); and/or (iii) a written agreement to adopt future plan 
amendments or provide additional employee benefits as approved by the 
Authorizing Fiduciary without an independent appraisal (``benefit 
enhancements'').
    The proposed amendment to the class exemption would modify the 
written settlement agreement information collection by requiring the 
agreement to specifically describe (i) the employer securities and 
written promises of future employer contributions (and the methodology 
for determining the fair market value of such consideration) that has 
been tendered as consideration in settlement of litigation and/or (ii) 
benefit enhancements as approved by the Authorizing Fiduciary that are 
provided to the plan as consideration for settlement. Because it is 
usual and customary business practice to express the terms of a 
settlement in writing with some degree of detail, no additional hour 
burden has been accounted for this provision of the proposed amendment.
    The 2007 proposed amendment also would modify the information 
collection associated with the Fiduciary Acknowledgment by requiring 
the Authorizing Fiduciary to acknowledge its fiduciary responsibility 
for the approval of an attorney's fee award in connection with the 
settlement in writing. The Department expects the Authorizing Fiduciary 
to incorporate

[[Page 65599]]

this acknowledgement into the investment management or trustee 
agreement outlining the terms and conditions of the fiduciary's 
retention as a plan service provider, and that this agreement will 
already be in existence as part of usual and customary business 
practice. The additional hour burden attributable to the 
acknowledgement provided in the proposed amendment is negligible; 
therefore, the Department has not increased the overall hour burden for 
this provision of the proposed amendment.

I. Background

    Based upon feedback from practitioners and independent fiduciaries 
working to settle litigation in accordance with PTE 2003-39, the 
Department proposes to expand the type of consideration that can be 
accepted by an employee benefit plan in settlement of litigation. While 
the Department encourages cash settlements, it recognizes that there 
are situations in which it may be in the interest of participants and 
beneficiaries to accept consideration other than cash in exchange for 
releasing the claims of the plan and/or the plan fiduciary. In 
addition, because ERISA does not permit plans to hold employer-issued 
stock rights, warrants, or most bonds, without an individual 
exemption,\2\ the transactions covered by the class exemption have been 
expanded to include acquisition, holding, and disposition of employer 
securities received in settlement of litigation, including bankruptcy 
litigation. Other amendments seek to clarify the scope of the duties of 
the independent fiduciary charged with responsibility for settling 
litigation.
---------------------------------------------------------------------------

    \2\ For example, PTE 2004-03, Lodgian 401(k) Plan and Trust 
Agreement, 69 FR 7506, 7509 (Feb. 14, 2004) (warrants); PTE 2003-33, 
Liberty Media 401(k) Savings Plan, 68 FR 64657 (Nov. 14, 2003) 
(stock rights); PTE 2002-02, The Golden Retirement Savings Program 
and The Golden Security Program, 67 FR 1242, 1243 (Jan. 9, 2002) 
(warrants).
---------------------------------------------------------------------------

    In this regard, the prohibited transaction provisions of the Act 
generally prohibit transactions between a plan and a party in interest 
(including a fiduciary) with respect to such plan. Specifically, 
section 406(a) of the Act states that:
    (1) A fiduciary with respect to a plan shall not cause the plan to 
engage in a transaction, if he knows or should know that such 
transaction constitutes a direct or indirect--
    (A) Sale or exchange, or leasing, of any property between the plan 
and a party in interest;
    (B) Lending of money or other extension of credit between the plan 
and a party in interest;
    (C) Furnishing of goods, services, or facilities between the plan 
and a party in interest;
    (D) Transfer to, or use by or for the benefit of, a party in 
interest, of any assets of the plan; or
    (E) Acquisition, on behalf of the plan, of any employer security or 
employer real property in violation of section 407(a).
    (2) No fiduciary who has authority or discretion to control or 
manage the assets of a plan shall permit the plan to hold any employer 
security or employer real property if he knows or should know that 
holding such security or real property violates section 407(a).

II. Description of Existing Relief

    The class exemption for the release of claims and extensions of 
credit in connection with litigation provides limited relief. Since 
conflicted fiduciaries are not permitted to have a role under the 
exemption in settling the litigation, no relief is provided from the 
self-dealing provisions of ERISA. The current exemption permits the 
release of the plan's or the plan fiduciary's claim against a party in 
interest in exchange for consideration, and related extensions of 
credit. No relief is provided for any prohibited transactions that are 
part of the underlying claims in the litigation, or any new prohibited 
transactions that may be proposed in settlement of litigation.\3\
---------------------------------------------------------------------------

    \3\ Where the Department of Labor (DOL) and/or the Internal 
Revenue Service (IRS) is a party to the litigation, new prohibited 
transactions may be permitted to resolve litigation pursuant to PTE 
79-15, Class Exemption for Certain Transactions Authorized or 
Required by Judicial Order or Judicially Approved Settlement Decree, 
44 FR 26979 (May 8, 1979). DOL may also enter into a voluntary 
settlement with parties covered by ERISA, in which case any 
prospective prohibited transactions may be covered by the Class 
Exemption to Permit Certain Transactions Authorized Pursuant to 
Settlement Agreements between the Department of Labor and Plans, PTE 
94-71, 59 FR 51216 (Oct. 7, 1994).
---------------------------------------------------------------------------

    In those situations where the prohibited transaction at issue is 
``corrected'' in compliance with section 4975(f)(5) of the Code, this 
exemption will not be necessary because correcting a prohibited 
transaction under section 4975 of the Code does not give rise to a 
prohibited transaction under Title I of the Act.\4\ Additionally, there 
is no prohibited transaction if the plan receives consideration,\5\ but 
does not have to relinquish its cause of action, or other assets. 
Finally, if the dispute involves the provision of services or 
incidental goods by a service provider, the settlement may fall within 
the statutory exemption under section 408(b)(2) of the Act.\6\
---------------------------------------------------------------------------

    \4\ It should be noted that the Department of the Treasury has 
authority to issue regulations, rulings and opinions regarding the 
term ``correction'' as defined in section 4975 of the Code. Reorg. 
Plan No. 4 of 1978, 5 U.S.C. App. at 214 (2000). Treas. Reg. section 
53.4941(e)-1(c)(1) (1986) (excise taxes on private foundations) 
applies to ``correction'' of prohibited transactions under section 
4975(f) of the Code (dealing with pension excise taxes) by reason of 
Temp. Treas. Reg. section 141.4975-13 (1986).
    \5\ Parties entering into such arrangement should review the IRS 
rules with respect to restorative payments. Rev. Rul. 2002-45, 2002-
2 C.B. 116.
    \6\ See, Advisory Opinion 95-26A (Oct. 17, 1995).
---------------------------------------------------------------------------

    The exemption is not available where a party in interest is suing 
an employee benefit plan, unless the party in interest is suing on 
behalf of the plan pursuant to section 502(a)(2) or (3) of ERISA, in 
their capacity as a participant, beneficiary, or fiduciary. Further, it 
is the view of the Department that, in general, no exemption is needed 
to settle benefits disputes,\7\ including subrogation cases.
---------------------------------------------------------------------------

    \7\ Lockheed v. Spink, 517 U.S. 882, 892-893 (1996)(the payment 
of benefits is not a prohibited transaction).
---------------------------------------------------------------------------

    The operative language of the current class exemption provides as 
follows:

Section I. Covered Transactions

    Effective January 1, 1975, the restrictions of section 
406(a)(1)(A), (B) and (D) of the Act, and the taxes imposed by 
section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1)(A), (B) and (D) of the Code, shall not apply to the 
following transactions, if the relevant conditions set forth in 
sections II through III below are met:
    (a) The release by the plan or a plan fiduciary, of a legal or 
equitable claim against a party in interest in exchange for 
consideration, given by, or on behalf of, a party in interest to the 
plan in partial or complete settlement of the plan's or the 
fiduciary's claim.
    (b) An extension of credit by a plan to a party in interest in 
connection with a settlement whereby the party in interest agrees to 
repay, over time, an amount owed to the plan in settlement of a 
legal or equitable claim by the plan or a plan fiduciary against the 
party in interest.

Section II. Conditions Applicable to All Transactions

    (a) There is a genuine controversy involving the plan. A genuine 
controversy will be deemed to exist where the court has certified 
the case as a class-action.
    (b) The fiduciary that authorizes the settlement has no 
relationship to, or interest in, any of the parties involved in the 
litigation, other than the plan, that might affect the exercise of 
such person's best judgment as a fiduciary.
    (c) The settlement is reasonable in light of the plan's 
likelihood of full recovery, the risks and costs of litigation, and 
the value of claims foregone.
    (d) The terms and conditions of the transaction are no less 
favorable to the plan

[[Page 65600]]

than comparable arms-length terms and conditions that would have 
been agreed to by unrelated parties under similar circumstances.
    (e) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest.
    (f) Any extension of credit by the plan to a party in interest 
in connection with the settlement of a legal or equitable claim 
against the party in interest is on terms that are reasonable, 
taking into consideration the creditworthiness of the party in 
interest and the time value of money.
    (g) The transaction is not described in Prohibited Transaction 
Exemption (PTE) 76-1, A.I. (41 FR 12740, March 26, 1976, as 
corrected, 41 FR 16620, April 20, 1976) (relating to delinquent 
employer contributions to multiemployer and multiple employer 
collectively bargained plans).

Section III. Prospective Conditions

    In addition to the conditions described in section II, the 
following conditions apply to the transactions described in section 
I(a) and (b) entered into after January 30, 2004:
    (a) Where the litigation has not been certified as a class 
action by the court, an attorney or attorneys retained to advise the 
plan on the claim, and having no relationship to any of the parties, 
other than the plan, determines that there is a genuine controversy 
involving the plan.
    (b) All terms of the settlement are specifically described in a 
written settlement agreement or consent decree.
    (c) Assets other than cash may be received by the plan from a 
party in interest in connection with a settlement only if:
    (1) Necessary to rescind a transaction that is the subject of 
the litigation; or
    (2) Such assets are securities for which there is a generally 
recognized market, as defined in ERISA section 3(18)(A), and which 
can be objectively valued. Notwithstanding the foregoing, a 
settlement will not fail to meet the requirements of this paragraph 
solely because it includes the contribution of additional qualifying 
employer securities in settlement of a dispute involving such 
qualifying employer securities.
    (d) To the extent assets, other than cash, are received by the 
plan in exchange for the release of the plan's or the plan 
fiduciary's claims, such assets must be specifically described in 
the written settlement agreement and valued at their fair market 
value, as determined in accordance with section 5 of the Voluntary 
Fiduciary Correction (VFC) Program, 67 FR 15062 (March 28, 2002). 
The methodology for determining fair market value, including the 
appropriate date for such determination, must be set forth in the 
written settlement agreement.
    (e) Nothing in section III (c) shall be construed to preclude 
the exemption from applying to a settlement that includes a written 
agreement to: (1) make future contributions; (2) adopt amendments to 
the plan; or (3) provide additional employee benefits.
    (f) The fiduciary acting on behalf of the plan has acknowledged 
in writing that it is a fiduciary with respect to the settlement of 
the litigation on behalf the plan.
    (g) The plan fiduciary maintains or causes to be maintained for 
a period of six years the records necessary to enable the persons 
described below in paragraph (h) to determine whether the conditions 
of this exemption have been met, including documents evidencing the 
steps taken to satisfy sections II (b), such as correspondence with 
attorneys or experts consulted in order to evaluate the plan's 
claims, except that:
    (1) If the records necessary to enable the persons described in 
paragraph (h) to determine whether the conditions of the exemption 
have been met are lost or destroyed, due to circumstances beyond the 
control of the plan fiduciary, then no prohibited transaction will 
be considered to have occurred solely on the basis of the 
unavailability of those records; and
    (2) No party in interest, other than the plan fiduciary 
responsible for recordkeeping, shall be subject to the civil penalty 
that may be assessed under section 502(i) of the Act or to the taxes 
imposed by section 4975(a) and (b) of the Code if the records are 
not maintained or are not available for examination as required by 
paragraph (h) below;
    (h)(1) Except as provided below in paragraph (h)(2) and 
notwithstanding any provisions of section 504(a)(2) and (b) of the 
Act, the records referred to in paragraph (g) are unconditionally 
available at their customary location for examination during normal 
business hours by--
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) Any fiduciary of the plan or any duly authorized employee or 
representative of such fiduciary;
    (C) Any contributing employer and any employee organization 
whose members are covered by the plan, or any authorized employee or 
representative of these entities; or
    (D) Any participant or beneficiary of the plan or the duly 
authorized employee or representative of such participant or 
beneficiary.
    (2) None of the persons described in paragraph (h)(1)(B) through 
(D) shall be authorized to examine trade secrets or commercial or 
financial information which is privileged or confidential.

Section III. Definition

    For purposes of this exemption, the terms ``employee benefit 
plan'' and ``plan'' refer to an employee benefit plan described in 
section 3(3) of ERISA and/or a plan described in section 4975(e)(1) 
of the Code.

III. Description of Proposed Amendments

New Transactions

    The proposed amendment expands the transactions covered by the 
exemption. In this regard, warrants and stock rights are often offered 
to shareholders, including the company's employee benefit plan, in 
settlement of litigation, including bankruptcy. In such situations, 
bonds or other property that do not constitute qualifying employer 
securities under ERISA may also be offered to employee benefit plans. 
ERISA does not permit plans to hold these assets absent an individual 
exemption. Effective as of the date of publication of the final 
exemption in the Federal Register, a plan may acquire, hold, and 
dispose of employer securities in settlement of litigation, including 
bankruptcy. The transactions covered by the exemption include the 
subsequent disposition of stock rights and warrants by sale or by 
exercise of the rights or warrants.

Modified Conditions

    The exemption currently requires that an attorney retained to 
advise \8\ the plan determine that there is a genuine controversy, 
unless the case has been certified as a class action. As amended, this 
genuine controversy requirement may be met in non-class action cases if 
a Federal or State agency is a plaintiff in the litigation.
---------------------------------------------------------------------------

    \8\ The Department is aware that at least one commentator has 
interpreted this condition as requiring a formal opinion of counsel. 
This is not the case. Further, it is not necessary for the 
litigation to be filed. If suit has not been filed, the independent 
attorney can review the disputed issues and conclude that there is a 
genuine controversy. As noted in the original exemption, the purpose 
of this condition is to avoid covering sham transactions. See, Dairy 
Fresh Corp. v. Poole, 108 F.Supp. 2d 1344, 1353 (S.D. Ala. 2000).
---------------------------------------------------------------------------

    Section II (b) has been redrafted to clarify that the settlement is 
being authorized by a fiduciary (hereinafter referred to as the 
Authorizing Fiduciary).
    Currently, the independent fiduciary must assess the reasonableness 
of the settlement in light of the risks and costs of litigation, and 
the value of claims foregone. The Department has become concerned that 
some independent fiduciaries, and those responsible for their 
retention, are viewing this condition too narrowly. As result, the 
amendment clarifies that in assessing the reasonableness of any 
settlement, the Authorizing Fiduciary must consider the entire 
settlement. This includes the scope of the release of claims and the 
value of any non-cash assets. In this regard, the Department further 
emphasizes that the Authorizing Fiduciary, in assessing the 
reasonableness of the settlement, may not exclude consideration of the 
attorney's fee award or any other sums to be paid from the recovery 
(e.g., consultants) in connection with the settlement of the 
litigation.
    Since the class exemption was finalized, attorneys for the 
Department have reviewed numerous releases in class-action litigation 
involving

[[Page 65601]]

employee benefit plans. Some of these releases were unreasonably broad. 
The Department continues to believe that the role of the Authorizing 
Fiduciary includes a careful review of the scope of any release that 
will eliminate the claims of the plan or the plan fiduciaries. In some 
instances, it may be necessary for the Authorizing Fiduciary to raise 
objections with the court, for example, requesting that the court 
narrow the scope of the release.\9\
---------------------------------------------------------------------------

    \9\ The Department does not suggest that other litigants can 
release ERISA-based claims of the Secretary of Labor, plan 
fiduciaries, participants or beneficiaries.
---------------------------------------------------------------------------

    The Department further notes that the amount of the attorney's fees 
award to plaintiffs' attorneys may reduce the plan's recovery, directly 
or indirectly.\10\ The Department recognizes that the attorneys 
bringing these cases are entitled to fair compensation. However, in 
some instances there have been abuses in connection with class-action 
attorney's fees.\11\ In 2005, Congress passed the Class Action Fairness 
Act of 2005 \12\ to address some of these issues. Where the plan's 
share of the settlement is significant, the Authorizing Fiduciary is 
generally well-positioned to use its bargaining strength to ensure that 
these fees are reasonable. It is the view of the Department that the 
Authorizing Fiduciary's role may require involvement in the attorney's 
fee decisions, including possibly filing a formal objection with the 
court regarding these fees.
---------------------------------------------------------------------------

    \10\ In some instances, the amount of the settlement fund is 
finalized before the attorney's fee awards are determined. In other 
instances, the attorney's fees are calculated as a percentage of the 
settlement fund. Generally, a court will review the reasonableness 
of the attorney's fee award.
    \11\ This issue was considered by the Federal Trade Commission's 
Class Action Fairness Project. The FTC's web site contains links to 
many of the materials produced in connection with the Class-Action 
Fairness Project. Federal Trade Commission Home Page, http://www.ftc.gov/bcp/workshops/classaction/index.htm
 (last visited Apr. 

2, 2007).
    \12\ Pub. L. 109-2, 119 Stat. 4 (2005). The Act amends both Rule 
23 of the Federal Rules of Civil Procedure and 28 U.S.C. 1332. It 
expands federal jurisdiction over certain cases and contains new 
rules for class action settlements and calculation of attorney's 
fees.
---------------------------------------------------------------------------

    The proposed amendment expands the scope of non-cash consideration 
that may be accepted by an Authorizing Fiduciary on behalf of the plan, 
subject to additional conditions. Such consideration is divided into 
two categories: Non-cash assets and benefits enhancements. Non-cash 
assets consist of property that can be appraised pursuant to the 
guidelines set forth in the Department's Voluntary Fiduciary Correction 
(VFC) Program.\13\ As amended, employer securities, including bonds, 
and stock rights or warrants on employer securities, are covered.
---------------------------------------------------------------------------

    \13\ 71 FR 20262 (Apr. 19, 2006). The VFC Program, as amended, 
covers certain prohibited transactions involving illiquid property. 
The exemption states that such property includes, but is not limited 
to, restricted and thinly traded stock, limited partnership 
interests, real estate and collectibles. 71 FR at 20279. Authorizing 
Fiduciaries may find the guidelines in the VFC Program helpful in 
considering whether accepting Non-Cash property as part of a 
settlement is appropriate given the risks and additional costs that 
may be incurred where a plan holds such property. Illiquid assets 
may complicate the plan's mandatory distributions at age 70 1/2 
pursuant to section 401(a)(9) of the Code. The Service takes the 
position that compliance with this provision may necessitate 
distribution of a participant's fractional interest in the illiquid 
asset, which could result in additional costs to the plan. See, 
e.g., I.R.S. Priv. Ltr. Rul. 9726032 (June 27, 1997) and I.R.S. 
Priv. Ltr. Rul. 9226066 (June 26, 1992).
---------------------------------------------------------------------------

    The current exemption specifies that a written agreement to make 
future contributions could be accepted in exchange for a release. This 
continues to be the case. As amended, a written promise by the employer 
to increase future contributions falls within the expanded category of 
non-cash assets. The fair market value of a stream of future 
contributions can be determined by a qualified appraiser. In contrast, 
benefits enhancements, i.e., where the employer offers to change the 
plan design to increase opportunities to diversify, or to offer other 
employee benefits, are plan amendments, not plan assets. Therefore, the 
exemption requires only approval by the Authorizing Fiduciary with 
respect to such benefits enhancements. Because such enhancements do not 
make the plan whole and may not benefit the same participants who were 
harmed by the actions that are the subject of litigation,\14\ such 
offers should be subject to additional scrutiny by the Authorizing 
Fiduciary.
---------------------------------------------------------------------------

    \14\ See generally, Field Assistance Bulletin No. 2006-01 (Apr. 
9, 2006) at http://www.dol.gov/ebsa/regs/fab_2006-1.html for a 

discussion of issues to be considered when the need arises to 
allocate settlement proceeds among different classes of participants 
and beneficiaries.
---------------------------------------------------------------------------

    As amended, relief is provided for the acquisition, holding, and 
disposition of employer securities that are not ``qualifying,'' within 
the meaning of section 407(d)(5) of the Act. We understand from our 
conversations with independent fiduciaries that when settling cases 
involving financially troubled companies, stock rights and warrants may 
be all that is available. In other instances, employer-issued bonds or 
other debt instruments may offer the best possibility for recovery. The 
relief provided by the class exemption for holding such non-cash assets 
extends only to relief from the prohibited transaction provisions of 
sections 406(a) and 407(a) of the Act, no relief is provided from the 
fiduciary provisions of section 404 of the Act. Before authorizing a 
settlement involving non-cash assets, the Authorizing Fiduciary must 
determine whether accepting such assets is prudent and in the interest 
of participants and beneficiaries.
    In addition, where such non-cash assets are employer securities, 
particular attention must be paid to ERISA's diversification 
requirements. Section 404(a)(1)(C) requires that a fiduciary diversify 
the investments of the plan so as to minimize the risk of large losses, 
unless under the circumstances it is clearly prudent not to do so. 
Section 404(a)(2) provides that, in the case of an eligible individual 
account plan, the diversification requirement of section 404(a)(1)(C) 
and the prudence requirement (only to the extent that it requires 
diversification) of section 404(a)(1)(B) are not violated by the 
acquisition or holding of qualifying employer securities. To the extent 
that the employer securities do not meet the definition of qualifying 
employer securities under section 407(d)(5) of the Act, the exception 
contained in section 404(a)(2) from the diversification requirements of 
the Act would not apply to a Plan's investment in these assets. 
Accordingly, it is the responsibility of the Authorizing Fiduciary to 
determine the appropriate level of investment in employer securities, 
based on the particular facts and circumstances, consistent with its 
responsibilities under section 404 of the Act.
    Where non-cash assets or benefits enhancements are being 
considered, the Authorizing Fiduciary must first determine that a cash 
settlement is either not feasible or is less beneficial than the 
alternative. Any non-cash assets must be valued at their fair market 
value in accordance with section 5 of the Voluntary Fiduciary 
Correction Program, 71 FR 20262, 20270 (Apr. 19, 2006). Both non-cash 
assets and benefits enhancements must be described in the written 
settlement agreement.
    Where employer securities are received by the plan from the 
employer as part of the settlement, the Authorizing Fiduciary or 
another independent fiduciary must retain sole responsibility for 
investment decisions regarding the assets unless such responsibility is 
delegated to individual participants in an individual account plan. The 
proposed amendment provides that the plan may not pay any commissions 
in connection with the acquisition of assets pursuant to this 
exemption.

[[Page 65602]]

    As is the case in the current exemption, the Authorizing Fiduciary 
must acknowledge in writing that it is a fiduciary for purposes of the 
settlement. As noted above, since the original exemption was granted at 
the end of 2003, the Department has learned that practitioners are 
divided on whether or not the Authorizing Fiduciary's role in the 
settlement included review of attorney's fees. It is the view of the 
Department that in any instance where an attorney's fee award or any 
other sums to be paid from the recovery has the potential to reduce the 
plan's overall recovery, the Authorizing Fiduciary should take 
appropriate steps to review the proposed fees. The exact nature of the 
Authorizing Fiduciary's role in connection with attorney's fees and 
other expenses paid from the recovery will vary depending on the size 
and nature of the litigation.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act which require, among other things, that a fiduciary 
discharge his or her duties with respect to the plan solely in the 
interests of the participants and beneficiaries of the plan and in a 
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor 
does it affect the requirement of section 401(a) of the Code that the 
plan must operate for the exclusive benefit of the employees of the 
employer maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interests of plans 
and their participants and beneficiaries and protective of the rights 
of the participants and beneficiaries of plans;
    (3) If granted, the exemption will be applicable to a particular 
transaction only if the conditions specified in the class exemption are 
met; and
    (4) The exemption, if granted, will be supplemental to, and not in 
derogation of, any other provisions of the Code and the Act, including 
statutory or administrative exemptions and transitional rules. 
Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a public hearing on the proposed exemption to the address 
and within the time period set forth above. All comments will be made a 
part of the record. Comments and requests for a hearing should state 
the reasons for the writer's interest in the proposed exemption. 
Comments received will be available for public inspection with the 
referenced application at the above-referenced address.

Proposed Exemption

Section I. Prospective Exemption--Covered Transactions
    Effective [DATE OF PUBLICATION OF FINAL EXEMPTION IN THE Federal 
Register], the restrictions of sections 406(a) and 407(a) of ERISA and 
the taxes imposed by section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1)(A) through (D) of the Code, shall not apply to the 
following transactions, if the relevant conditions set forth in 
sections II through III below are met:
    (a) The release by the plan or a plan fiduciary of a legal or 
equitable claim against a party in interest in exchange for 
consideration, given by, or on behalf of, a party in interest to the 
plan in partial or complete settlement of the plan's or the fiduciary's 
claim.
    (b) An extension of credit by a plan to a party in interest in 
connection with a settlement whereby the party in interest agrees to 
repay, over time, an amount owed to the plan in settlement of a legal 
or equitable claim by the plan or a plan fiduciary against the party in 
interest.
    (c) The plan's acquisition, holding, and disposition of employer 
securities received in settlement of litigation, including bankruptcy. 
Disposition of employer securities that are stock rights or warrants 
includes sale of these securities, as well as the exercise of the 
rights or warrants.
Section II Prospective Exemption--Conditions
    (a) Where the litigation has not been certified as a class action 
by the court, and no federal or state agency is a plaintiff in the 
litigation, an attorney or attorneys retained to advise the plan on the 
claim, and having no relationship to any of the parties involved in the 
claims, other than the plan, determines that there is a genuine 
controversy involving the plan.
    (b) The settlement is authorized by a fiduciary (The Authorizing 
Fiduciary) that has no relationship to, or interest in, any of the 
parties involved in the claims, other than the plan, that might affect 
the exercise of such person's best judgment as a fiduciary.
    (c) The settlement terms, including the scope of the release of 
claims; the amount of cash and the value of any non-cash assets 
received by the plan; and the amount of any attorney's fee award or any 
other sums to be paid from the recovery, are reasonable in light of the 
plan's likelihood of full recovery, the risks and costs of litigation, 
and the value of claims foregone.
    (d) The terms and conditions of the transaction are no less 
favorable to the plan than comparable arms-length terms and conditions 
that would have been agreed to by unrelated parties under similar 
circumstances.
    (e) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest.
    (f) Any extension of credit by the plan to a party in interest in 
connection with the settlement of a legal or equitable claim against 
the party in interest is on terms that are reasonable, taking into 
consideration the creditworthiness of the party in interest and the 
time value of money.
    (g) The transaction is not described in section A.I. of Prohibited 
Transaction Exemption (PTE) 76-1 (41 FR 12740, 12742 (Mar. 26, 1976), 
as corrected, 41 FR 16620 Apr. 20, 1976)(relating to delinquent 
employer contributions to multiemployer and multiple employer 
collectively bargained plans).
    (h) All terms of the settlement are specifically described in a 
written settlement agreement or consent decree.
    (i) Non-cash assets, which may include employer securities, and 
written promises of future employer contributions (hereinafter, ``non-
cash assets''), and/or a written agreement to adopt future plan 
amendments or provide additional employee benefits (hereinafter 
``benefits enhancements'') may be provided to the plan by a party in 
interest in exchange for a release by the plan or a plan fiduciary only 
if:
    (1) the Authorizing Fiduciary determines that an all cash 
settlement is either not feasible, or is less beneficial to the 
participants and beneficiaries than accepting all or part of the 
settlement in non-cash assets and/or benefits enhancements;

[[Page 65603]]

    (2) the non-cash assets are specifically described in writing as 
part of the settlement and valued at their fair market value, as 
determined in accordance with section 5 of the Voluntary Fiduciary 
Correction (VFC) Program, 71 FR 20262, 20270 (Apr. 19, 2006). The 
methodology for determining fair market value, including the 
appropriate date for such determination, must be set forth in the 
written agreement;
    (3) Benefits enhancements are specifically described in writing as 
part of the settlement. Benefits enhancements may be included as part 
of the settlement without an independent appraisal. In deciding whether 
to approve the release of a claim in exchange for benefits 
enhancements, the Authorizing Fiduciary shall take into account all 
aspects of the settlement, including the cash or other assets to be 
received by the plan, the solvency of the party in interest, and the 
best interests of the class of participants harmed by the acts that are 
the subject of the plan's claims;
    (4) The Authorizing Fiduciary, or another independent fiduciary, 
acts on behalf of the plan and its participants and beneficiaries for 
all purposes related to any property, including employer securities as 
defined by 407(d)(1) of the Act, received by the plan from the employer 
as part of the settlement. The Authorizing Fiduciary or another 
independent fiduciary continues to act on behalf of the plan and its 
participants and beneficiaries for the period that the plan holds the 
property, including employer securities, received from the employer as 
part of the settlement. The Authorizing Fiduciary or another 
independent fiduciary shall have sole responsibility relating to the 
acquisition, holding, disposition, ongoing management, and where 
appropriate, exercise of all ownership rights, including the right to 
vote securities, except that, in the case of an individual account plan 
which permits participant direction, the Authorizing Fiduciary or other 
independent fiduciary may delegate to the individual participants to 
whose accounts the assets have been allocated, the decision to hold, 
exercise ownership rights, or dispose of the assets;
    (j) The plan does not pay any commissions in connection with the 
acquisition of the assets;
    (k) The Authorizing Fiduciary acting on behalf of the plan has 
acknowledged in writing that it is a fiduciary with respect to the 
settlement of the litigation on behalf of the plan;
    (l) The plan fiduciary maintains or causes to be maintained for a 
period of six years the records necessary to enable the persons 
described below in paragraph (m) to determine whether the conditions of 
this exemption have been met, including documents evidencing the steps 
taken to satisfy section II (c), such as correspondence with attorneys 
or experts consulted in order to evaluate the plan's claims, except 
that:
    (1) if the records necessary to enable the persons described in 
paragraph (m) to determine whether the conditions of the exemption have 
been met are lost or destroyed, due to circumstances beyond the control 
of the plan fiduciary, then no prohibited transaction will be 
considered to have occurred solely on the basis of the unavailability 
of those records; and
    (2) No party in interest, other than the plan fiduciary responsible 
for record-keeping, shall be subject to the civil penalty that may be 
assessed under section 502(i) of the Act or to the taxes imposed by 
section 4975(a) and (b) of the Code if the records are not maintained 
or are not available for examination as required by paragraph (m) 
below;
    (m)(1) Except as provided below in paragraph (m)(2) and 
notwithstanding any provisions of section 504(a)(2) and (b) of the Act, 
the records referred to in paragraph (l) are unconditionally available 
at their customary location for examination during normal business 
hours by--
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) Any fiduciary of the plan or any duly authorized employee or 
representative of such fiduciary;
    (C) Any contributing employer and any employee organization whose 
members are covered by the plan, or any authorized employee or 
representative of these entities; or
    (D) Any participant or beneficiary of the plan or the duly 
authorized employee or representative of such participant or 
beneficiary.
    (2) Nothing in this exemption supersedes any restriction on the 
disclosure of trade secrets or other commercial or financial 
information which is privileged or confidential and this exemption does 
not authorize any of the persons described in paragraph (m)(1)(B)-(D) 
to examine trade secrets or such commercial or financial information.
Section III. Definition
    For purposes of this exemption, the terms ``employee benefit plan'' 
and ``plan'' refer to an employee benefit plan described in section 
3(3) of ERISA and/or a plan described in section 4975(e)(1) of the 
Code.
    For purposes of this exemption, the term ``employer security'' 
refers to employer securities described in section 407(d)(1) of ERISA.

IV. Effective Dates

    This amendment to the class exemption is effective for settlements 
occurring on or after the date of publication of the final exemption in 
the Federal Register. For settlements occurring before the date of 
publication of the final exemption in the Federal Register, see the 
original grant of the Class Exemption for Release of Claims and 
Extensions of Credit in Connection with Litigation, 68 FR 75632 (Dec. 
31, 2003).

    Signed at Washington, DC, this 14th day of November, 2007.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
 [FR Doc. E7-22718 Filed 11-20-07; 8:45 am]

BILLING CODE 4510-29-P