[Federal Register: December 31, 2003 (Volume 68, Number 250)]
[Notices]
[Page 75632-75640]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31de03-136]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2003-39; Application No. D-11100]
Class Exemption for the Release of Claims and Extensions of
Credit in Connection With Litigation
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Grant of class exemption.
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SUMMARY: This document contains a final 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
exemption permits transactions engaged in by a plan, in connection with
the settlement of litigation. This exemption was proposed in response
to concerns raised by the pension community regarding the impact of
ERISA's prohibited transaction provisions on the settlement of
litigation by employee benefit plans with parties in interest. The
exemption affects 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.
EFFECTIVE DATE: The exemption is effective January 1, 1975.
FOR FURTHER INFORMATION CONTACT: Andrea W. Selvaggio, Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, Room N-5649, 200 Constitution Avenue NW.,
Washington, DC 20210 (202) 693-8540 (not a toll-free number).
SUPPLEMENTARY INFORMATION: On February 11, 2003, the Department
published a notice in the Federal Register (68 FR 6953) of the pendency
of a proposed class exemption from the restrictions of section
406(a)(1)(A), (B) and (D) 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), (B) and (D) of the Code. The Department proposed the
class exemption 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 Subpart B (55 FR 32836, August
10, 1990).\1\
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\1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1 (1996), generally transferred the authority of the Secretary
of the Treasury to issue exemptions under section 4975(c)(2) of the
Code ot the Secretary of Labor. For purposes of this exemption,
references to specific provisions of Title I of the Act, unless
otherwise specified, refer also to the corresponding provisions of
the Code.
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The notice of pendency gave interested persons an opportunity to
comment or request a public hearing on the proposal. The Department
received five (5) public comments. Upon consideration of all the
comments received, the Department has determined to grant the proposed
class exemption, subject to certain modifications. These modifications
and the major comments are discussed below.
Executive Order 12866
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 ``significant'' under Section 3(f)(4) of the
Executive Order. Accordingly, this action has 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 to the
Office of Management and Budget (OMB) for review and clearance at the
time the proposed class exemption was published in the Federal Register
(February 11, 2003, 68 FR 6953). The ICR for the proposed class
exemption was combined with the ICR in PTCE 94-71,\2\ also approved
under OMB control number 1210-0091, because of the similarity of
subject matter between the two exemptions. No comments were received
about the burden estimates and no substantial or material changes have
been made in the grant of the exemption that would affect the burden
estimates in the proposal. The approval for each of the ICRs included
in the two exemptions will expire on April 30, 2006.
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\2\ PTCE 94-71, 59 FR 51216, October 7, 1994, as corrected, 59
FR 60837, November 28, 1994--Settlement Agreements Resulting From An
Investigation, involving remedial settlements resulting from an
investigation of an employee benefit plan conducted by the
Department.
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In order to grant an exemption pursuant to section 408(a) of the
Act, the Department must, among other things, make a finding that the
terms of the exemption are protective of the rights of participants and
beneficiaries of a plan. To support making such a finding, the
Department normally imposes certain conditions on fiduciaries and
parties in interest that may make use of the exemption. The information
collection provisions of the exemption are among these conditions. The
information collection provisions are found in sections III(c), (e),
(g), and
[[Page 75633]]
(h). These requirements are summarized as follows:
Written Agreement. The exemption requires that the terms of the
settlement be specifically described in a written agreement or consent
decree. In the exemption as granted, the Department has added that,
with regard to transactions involving assets other than cash, the
assets and their fair market value, including the date for such
valuation, must be described in writing in the settlement agreement.
Because a description and valuation of the assets involved in a
settlement transaction are usually included in a settlement agreement,
the requirement serves only as a clarification about assets that are
not cash for the parties seeking to use the class exemption. In
addition, because the Department believes that the ability to make
changes with regard to a settlement allows more flexibility to the
parties involved, it has also provided in the final exemption that
certain adjustments, such as the right to amend the plan, are
permissible if written into the agreement. These two new requirements
are only operative for certain provisions and under certain conditions
that may or may not be included in the settlement. Where appropriate,
including the provisions in the agreement enables interested parties
described in the exemption to verify that the conditions of the
exemption have been met. However, neither requirement produces a
measurable burden beyond that which would be considered usual business
practice, and no additional burden has been accounted for in this ICR.
Acknowledgement by a Fiduciary. On a prospective basis, the
exemption also requires that a fiduciary acting on behalf of the plan
acknowledge in writing that it is a fiduciary with respect to the
settlement of the litigation. Under the Act, a person that exercises
``any authority or control respecting disposition of [the plan's]
assets,'' is considered a fiduciary. It is anticipated that the
applicable plan fiduciary will incorporate this acknowledgement in the
written agreement outlining the terms and conditions of its retention
as a plan service provider, and already in existence, as part of usual
and customary business practice. As such, a written acknowledgement is
not expected to impose any measurable additional burden.
Recordkeeping. Prospectively, the exemption requires a plan to
maintain for a period of six years the records necessary to enable
certain persons to determine whether the conditions of the exemption
had been met. The six-year recordkeeping requirement is consistent with
the requirements in section 107 of the Act as well as general record-
keeping requirements for tax information under the Code. As such, the
Department has not accounted for a burden related to recordkeeping for
this exemption.
The exemption may affect employee benefit plans, the participants
and beneficiaries of those plans, and parties in interest to plans
engaging in the specified transactions. It is not possible to estimate
the number of respondents or frequency of response to the information
collection requirements of the exemption due to the wide variety of
litigation involving plans, parties to that litigation, and
jurisdictions in which litigation occurs. However, the lack of an
ascertainable number of settlements does not impact the hour or cost
burden because no additional burden is associated with the information
collection requirements of the exemption.
I. Discussion of Comments Received
The comments received by the Department were generally supportive
of the issuance of a class exemption for the release of claims and
extensions of credit in connection with litigation. However, commenters
requested specific modifications to the proposal in the following
areas:
A. Whether the settlement of litigation with a party in interest is
a prohibited transaction. Several commenters argued that settling
litigation is not a transaction, and, therefore, not prohibited under
section 406 of the Act. Other commenters requested that the Department
clarify that only a fiduciary, a participant or beneficiary, or the
Secretary of Labor, may bring suit to enforce ERISA's fiduciary duties.
These commenters asserted that, because the statute does not identify a
plan as a party with standing to pursue ERISA litigation, an ERISA
claim is not a plan asset and the release of such an asset, in exchange
for consideration from a party in interest, would not be a prohibited
sale or exchange of any property under section 406 of ERISA. Other
commenters asserted that the settlement of litigation with a party in
interest is a prohibited transaction and urged stricter conditions for
the provision of retroactive relief because the Department's position
on this issue was clearly articulated in its 1995 Opinion Letter, AO
95-26A (October 17, 1995).
As the Department noted in proposing this exemption, the fact that
a transaction is subject to an administrative exemption is not
dispositive of whether the transaction is, in fact, a prohibited
transaction. Rather, the exemption is being granted in response to
uncertainty expressed on the part of plan fiduciaries charged with the
responsibility under ERISA for determining whether it is in the
interests of a plan's participants and beneficiaries to enter into a
settlement agreement with a party in interest. The comments have
confirmed the Department's earlier conclusion that there was
considerable uncertainty surrounding this issue. After considering all
of the comments, the Department has determined that the exemption, as
revised, appropriately balances the concerns of these commenters while
allowing plan fiduciaries to properly carry out their responsibilities
under ERISA.
In response to the comments that ERISA civil actions for breach of
fiduciary duty may only be brought by participants, beneficiaries,
fiduciaries, and the Secretary of Labor, the Department has modified
the final class exemption to include the release of claims by both the
plan and a plan fiduciary. As the Department noted in the preamble to
the proposed exemption, many situations in which a plan settles
litigation may not give rise to a prohibited transaction or may be
covered by an existing statutory or administrative exemption. For
example, correction of a prohibited transaction that complies with
section 4975(f)(5) of the Code \3\; reimbursement of a plan without a
release of the plan's claim; settlement with a service provider of a
dispute related to the provision of services or incidental goods to the
plan that is otherwise exempt under ERISA 408(b)(2) (See, Opinion
Letter, AO 95-26A); settlements authorized by the Department pursuant
to PTE 94-71 (59 FR 51216, October 7, 1994, as corrected, 59 FR 60837,
November 28, 1994); and judicially approved settlements where the Labor
Department or the Internal Revenue Service is a party pursuant to PTE
79-15 (44 FR 26979, May 8, 1979).
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\3\ IRC Reg. sec. 141.4975-13 provides that for purposes of the
excise taxes on prohibited transactions, the definition of the term
``correction'' under IRC Reg. sec. 53.4941(e)-1 (concerning excise
taxes on self-dealing with foundations) is controlling.
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In addition, the Department notes that this class exemption would
be available for settlement agreements relating to an employer's
failure to timely remit participant contributions to a plan, including
a collectively bargained multiemployer or multiple employer plan, to
the extent the conditions contained in this final exemption are
[[Page 75634]]
met.\4\ In this regard, the Department notes that the relief provided
by this exemption is limited to the prohibited transactions that arise
where a plan trustee and an employer enter into a settlement involving
the employer's failure to timely forward participant contributions to
the plan as required under ERISA. Thus, nothing in this class exemption
should be construed as exempting any of the prohibited transactions
described in section 406(a) or 406(b) of ERISA that arise solely in
connection with an employer's failure to timely forward participant
contributions to a plan.\5\
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\4\ The Department notes that the relief provided by this
exemption would be available for settlements involving participant
or employer contributions to a single employer plan or to a non-
collectively bargained multiple employer plan.
\5\ In this regard, the failure of an employer to timely remit
contributions made to a plan by an employee of such employer
violates ERISA sections 403(a), 403(c)(1), 404(a)(1)(A),
406(a)(1)(D), and 406(b)(1).
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This exemption does not, however, apply to transactions described
in 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
a collectively bargained multiemployer or multiple employer plan.
Finally, PTE 76-1, A.I. does not extend relief to those settlement
arrangements that arise from the failure of an employer to timely
forward participant contributions to a multiemployer or multiple
employer plan.
Section 502(d)(1) of the Act provides that ``an employee benefit
plan may sue or be sued under this title as an entity.'' This exemption
covers settlement of any type of suit the plan has brought. However
this exemption is not available for settlement of claims brought by a
party in interest against a plan. This exemption does not cover a
plan's payment of money or other things of value to a party in interest
in exchange for the dropping of claims against the plan. As with
exchanges made for the release of claims in favor of the plan, the
Department's determination in this regard is not dispositive of whether
such an exchange constitutes a prohibited transaction.
Finally, the Department notes that a settlement between a plan and
a participant or beneficiary made solely to resolve claims against a
plan for the recovery of benefits, by a participant or beneficiary, may
not involve a prohibited transaction. If the plan makes payment to a
participant who is a party in interest to settle a benefits dispute,
such payment generally would be viewed by the Department as the payment
of a plan benefit that would not trigger the need for an exemption. As
the Supreme Court noted in Lockheed Corp. v. Spink, 517 U.S. 882, 892-
893 (1996), the payment of benefits is not a prohibited transaction.
B. The plan must obtain advice from an attorney representing the
plan that a genuine controversy exists. Several commenters were
concerned that imposing this requirement on past settlements would
effectively limit the availability of the exemption. These commenters
asserted that, prior to publication of the Department's proposed
exemption, many fiduciaries were unaware that the settlement of
litigation might be considered a prohibited transaction by the
Department. Even if an attorney was retained in connection with the
litigation, it is unlikely that the attorney would have opined as to
whether or not there was a genuine controversy. Other commenters argued
that: the filing of a lawsuit should be sufficient to find the
existence of a genuine controversy; and class action settlements should
not have to meet this requirement. Another commenter suggested
retaining the requirement for a genuine controversy, but without
requiring an attorney's determination. This commenter also suggested
that the attorney review be permitted, but not required, as a safe
harbor in certain situations. He explained that fiduciaries might find
it prudent and in the interests of participants and beneficiaries to
settle a frivolous case for a de minimus amount, rather than incur the
cost of litigation. In this situation, such fiduciaries should be able
to meet the condition of the class exemption by demonstrating that they
sought and obtained advice of counsel before settling the case.
Several commenters asserted that the genuine controversy condition
was unnecessary as the concern raised by the Department, the
possibility of a collusive settlement, was addressed by the condition
that the settlement is not an arrangement to benefit a party in
interest. Another commenter suggested that independent legal advice and
a written agreement or consent decree should be mandatory for all
retroactive relief because, even if the fiduciary was unaware of the
prohibited transaction issue, a prudent fiduciary would have obtained
such written documentation before entering into a settlement.
On the basis of these comments, the Department has decided to amend
the genuine controversy condition. No finding of genuine controversy
will be required where the case has been certified as a class action by
the court. In addition, for transactions entered into prior to the
publication of the final exemption, and the first 30 days thereafter,
no attorney review will be required to determine whether the genuine
controversy exists. On a prospective basis, attorney review will be
required. In response to a question from one of the commenters, the
Department confirms that the independent fiduciary's in-house
attorneys, as well as its outside counsel, could provide the
appropriate advice concerning the existence of a genuine controversy.
C. The decision-making fiduciary has no interest in any of the
parties involved in the litigation that might affect the exercise of
its best judgment as a fiduciary (independent fiduciary). Several
commenters suggested that the Department eliminate the requirement for
an independent fiduciary or, in the alternative, limit its application
to prospective relief. Among the suggestions were: limit the
requirement for an independent fiduciary to material claims where there
are no alternative safeguards; and eliminate the independent fiduciary
requirement where a judge reviews the fairness of a class action
settlement. Other commenters expressed concern that the plan's directed
trustee, even if not a defendant, should not be considered sufficiently
independent to make decisions settling a case. They suggested that an
entirely independent fiduciary be retained. Another commenter argued
that relief in large cases should be conditioned upon the retention of
an independent fiduciary with no prior relationship to the plan, or the
defendants, and no future relationship with the plan for three years
after the engagement.
Except as noted above in connection with the finding of genuine
controversy, the Department does not believe that it would be
appropriate to make a distinction between the requirements applicable
to class action settlements and other settlements. However, in response
to comments, the Department has decided to eliminate the requirement
that the independent fiduciary ``negotiate'' the settlement. The
Department realizes that many of the settlements to which this class
exemption would apply are class action settlements. Where the plan is
not a lead plaintiff, the plan fiduciary's role in negotiating the
terms of the settlement may be limited. The Department recognizes,
however, that even where negotiation does not take place between the
plan and the defendant, a fiduciary will be compelled, consistent with
ERISA's fiduciary responsibility provisions, to make a decision
regarding
[[Page 75635]]
the settlement on behalf of the plan, even if that decision is merely
to accept or reject a proposed settlement negotiated by other class
members.
As modified, the final class exemption covers settlements
authorized by a fiduciary that are reasonable, in light of the plan's
likelihood of full recovery, the risks and costs of litigation, and the
value of claims foregone. Such settlements must be no less favorable to
the plan than comparable arm's-length terms and conditions that would
have been agreed to by unrelated parties in similar circumstances. In
addition, the transaction must not be part of an agreement, arrangement
or understanding designed to benefit a party in interest. Thus, an
independent fiduciary could satisfy the authorization requirements
under the final exemption by deciding not to opt out of class action
litigation if, after a review of the settlement, such fiduciary
concludes that the chances of obtaining any further relief for the plan
are not justified by the expense involved in pursuing such relief.
Although the Department has determined to delete the requirement for
negotiation as a specific condition of the class exemption, the
Department notes that this modification does not diminish the
fiduciary's responsibilities with respect to the settlement terms.
As noted above, several of the commenters expressed concern about
the degree of independence of institutional fiduciaries, such as
directed trustees, that may serve as the fiduciary contemplated by the
class exemption. Without agreeing or disagreeing with this comment, the
Department emphasizes that this class exemption does not provide relief
from section 406(b) of the Act. In addition, the fiduciary's decisions
in authorizing a settlement are subject to the fiduciary responsibility
provisions of the Act.
D. Plans must select an independent fiduciary. Several commenters
expressed concern about the additional cost of hiring independent
fiduciaries in connection with settlements. The Department believes
that plans often will not need to retain fiduciaries specifically to
comply with this exemption. In most cases, the plan will be able to use
a current fiduciary who is not a party to the action and who is not so
closely allied with a party (other than the plan) as to create a
conflict of interest. As with any other expense, the Department expects
that fiduciaries will engage in prudent cost/benefit analysis to select
the appropriate independent fiduciary in each case. In some cases, the
cost of the independent fiduciary may be included in the damages
claimed by the plan and may be reimbursed by the defendant in settling
the litigation.
One of the commenters suggested that to avoid duplication, the
independent fiduciary should be permitted to rely on the opinion of
plaintiffs' class counsel or experts hired to assist class counsel. The
Department agrees that the fiduciary should not spend plan resources
unnecessarily. Whether and to what extent a fiduciary should rely on a
particular attorney or expert hired by one of the other parties are
decisions that the fiduciary must make in accordance with its fiduciary
responsibilities under ERISA.
In this regard, the Department notes that on occasion the
independent fiduciary may wish to retain outside experts to assist the
fiduciary in determining whether or not to settle litigation. The
following are some of the factors that may assist the fiduciary in its
determination: the size of the claim, the expertise of the fiduciary,
and the subject matter of the litigation.
Several of the commenters asked the Department to clarify that the
mere fact that a party in interest pays for an attorney, an independent
fiduciary, or other expert hired by the plan, does not mean that these
professionals are not independent for purposes of the exemption. The
Department agrees with this assertion, assuming that the professional
being paid by the party in interest understands that the plan is their
client, not the party paying their bill. In addition, the amount of
compensation paid to the professional by the party in interest
constitutes no more than a small percentage of such professional's
annual gross income.
E. What is the role of the independent fiduciary where there is
judicial approval of a settlement? Several commenters recommended that
judicial approval of a settlement should eliminate the need for an
independent fiduciary. One of the commenters suggested that where the
settlement is judicially approved, relief from section 406(b) of the
Act should be available under the exemption for those fiduciaries that
were defendants in the litigation. The Department has determined not to
adopt these suggestions. The court, in reaching its conclusion that the
settlement is fair, must balance the interests of all the litigants.
ERISA, on the other hand, requires that a fiduciary make its decisions
with an ``eye single to the interests of the participants and
beneficiaries.'' Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir.
1982), cert. denied, 459 U.S. 1069 (1982). In response to the request
for relief from section 406(b), the Department does not believe that a
sufficient showing has been made that such relief would be appropriate
under the circumstances.
F. Should there be special rules for settling class action
litigation? Several of the commenters explained that, with respect to
certain types of class actions, class members do not have the option of
opting out of the class--all are bound by the decision. The commenters
explained that ERISA class actions are often non-opt out cases.
According to the commenters, this means that where class action
litigation is brought by the participants, the plan fiduciary may,
without taking any action, be bound by the class action settlement. In
light of this, the commenters asked how such a fiduciary could cause a
prohibited transaction where it took no action and yet was bound by the
settlement. The Department does not regard this exemption proceeding to
be the appropriate setting for resolving questions concerning what
types of settlement are more or less likely to be prohibited
transactions.
The Department notes, however, that the fiduciary is unlikely to
remain uninvolved in the settlement of an ERISA lawsuit initiated by
participants for two reasons. First, the fiduciary will, in all
likelihood, be named as a party to the lawsuit and the court will
almost certainly require the plan fiduciary's input on the settlement.
Alternatively, the party in interest likely will seek the involvement
of the fiduciary because the party in interest (disqualified person)
may need to take advantage of the relief provided by the class
exemption in order to avoid the possible imposition of excise taxes
under section 4975 of the Code. Under the Code, such excise taxes are
paid by the disqualified person who participates in the prohibited
transaction, not the fiduciary who caused the plan to engage in the
transaction.
In order to meet the conditions of the class exemption, the
fiduciary faced with a non-opt out class action must take such actions
as are appropriate under the particular circumstances. For example,
before such a settlement is imposed on a non-opt out class, generally
there is an opportunity to object to its terms. If the fiduciary does
not believe that the proposed terms and conditions of the settlement
are as favorable to the plan as comparable arm's-length terms and
conditions that would have been agreed to by unrelated parties under
similar circumstances, it should object to the settlement.
In securities fraud class action cases, there is often an option to
opt out of the class. Where the plan or the plan
[[Page 75636]]
trustee, as the holder of record of the securities, is a class member,
whatever action or inaction that fiduciary determines to undertake has
consequences for the plan. If the fiduciary takes no action, and the
case is settled for far less than the full value of the plan's losses,
the burden will be on the fiduciary to justify its inaction. The
fiduciary responsible for authorizing settlement of class action claims
must decide, not only whether or not to opt out of the class action,
but also whether to protest the proposed settlement during the fairness
hearing.\6\
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\6\ For example, in Great Neck Capital Appreciation Investment
Partnership v. PriceWaterhouseCoopers, In re Harnischfeger
Industries, Inc. Securities Litigation, 212 F.R.D. 400 (E.D. Wisc.
2002), the original securities law class action settlement proposal
included release of ERISA claims against the fiduciaries of the
Harnischfeger employee benefit plans, even though the lawsuit had
not alleged ERISA claims. At the fairness hearing, a participant
protested that the participants' ERISA claims might be extinguished
if this release was approved as part of the settlement. After
considering the parties positions, the judge, during a conference
call, ``advised the parties that [he] was inclined to view the
proposed settlement as unfair if its effect would be to extinguish
the Plan participants' ERISA claims without compensation and that it
also appeared to be unfair to require Plan participants to give up
their right to participate in the settlement as a condition of
asserting ERISA claims.'' 212 F.R.D. at 406. The securities law
parties took the judge's hint and voluntarily agreed to exclude the
ERISA claims from the release. In re IKON Office Solutions, Inc.
Securities Litigation, 194 F.R.D. 166 (E.D.Pa. 2000), on the other
hand, involved a securities law release that arguably released at
least some of the ERISA claims and participants protested this at
the fairness hearing. The court held that it would be premature, in
the context of a settlement, for the court to address such issues--
participants could either opt out and not be bound by the
settlement, or take their chances pursuing what was left of their
ERISA claims after receiving their portion of the securities class
action settlement.
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G. Only cash may be received in exchange for the release, unless
the transaction at issue is being rescinded. The commenters were
universal in their objection to this condition. They pointed out that
frequently, in cases involving investment in employer securities, the
settlement consists of additional employer securities. In addition,
settlements with plan sponsors often include nonmonetary relief, such
as a promise of future contributions and plan amendments improving
participants' rights, for example, the right to diversify their
investments.
In response to these comments, the Department notes that the
conditions for retroactive relief do not specify the type of the
consideration that may be provided in exchange for the release. On a
prospective basis, the Department has decided to modify the final
exemption to permit assets other than cash to be provided in exchange
for the plan's or the plan fiduciary's release of a claim. As modified,
the final exemption permits contributions of qualifying employer
securities, or other marketable securities, in certain instances. Any
assets contributed to the plan, in connection with a settlement, must
consist of securities that can be objectively valued to determine fair
market value, in accordance with Section 5 of the Voluntary Fiduciary
Correction (VFC) Program (67 FR 15062, March 28, 2002). The final
exemption has also been modified to provide that plan amendments,
additional employee benefits, and the promise of future contributions
may be included as part of a settlement agreement covered by this
exemption.
H. When is a settlement reasonable? One commenter urged the
Department to apply this condition to all transactions and to include
the costs of litigation among the factors to be considered in
determining whether a settlement is reasonable. Another commenter asked
to include the value of claims foregone. The Department has adopted
these suggestions. The final exemption requires that the settlement
must be reasonable in light of the plan's likelihood of full recovery,
the risks and costs of litigation, and the value of claims foregone.
How these factors are weighed by fiduciaries will differ, depending on
the type of case, but will always involve a prudent decision-making
process, given the facts and circumstances of the particular situation.
I. Should an interest rate be specified? Most of the commenters
urged the Department to eliminate the requirement that a reasonable
interest rate be charged for an extension of credit in connection with
a settlement covered by the exemption. The commenters explained that
often a settlement requires a payment of the promised sum over several
years, without specifying an interest rate. In response to these
comments, the Department has modified this condition to delete the
reference to interest in connection with the loan or extension of
credit. As modified, any extensions of credit must be made on terms
that are reasonable. Although the final exemption provides more
flexibility, fiduciaries that agree to an extension of credit with a
party in interest nonetheless must consider that party's
creditworthiness and the time value of money in evaluating the
settlement.
As noted above, the settlement of litigation with a plan sponsor
often involves the promise of future contributions. Another commenter
requested that the Department clarify that the promise of future
contributions is not loan or other extension of credit. The Department
agrees with the commenter.
The Department encountered a case where the trustees had agreed to
accept payments over time in order to collect amounts misappropriated
by a party in interest. In this case, the trustees extended credit to
the party in interest, but did not release their cause of action
against him. In such a case, the class exemption will apply if the
extension of credit is being made in connection with a settlement and
both the settlement and the extension of credit meet all of the
conditions of this exemption.
Several commenters urged the Department to require that extensions
of credit be secured by property or a letter of credit. Although the
Department has decided not to adopt this suggestion as a condition of
the final exemption, the Department encourages fiduciaries to seek
security for an extension of credit, wherever feasible, to protect the
plan against the risk of default.
J. Certain applicants request that the scope of AO 95-26A (October
17, 1995) be extended. In AO 95-26A, the Department opined that
settlement of litigation with a service provider may be covered by the
statutory exemption for service providers provided under section
408(b)(2) of the Act. Several commenters asked whether the same
rationale extended to the settlement of cases where the transaction at
issue in the litigation is of the type addressed by a statutory or
administrative exemption. The Department notes that the issues raised
by the commenters, with respect to the scope of AO 95-26A, are beyond
the scope of this exemption proceeding.
K. Who bears the burden of proof? Several commenters expressed
concern that, if the retroactive conditions of the exemption are too
subjective or difficult to meet, fiduciaries who acted in good faith in
settling cases, particularly complex securities fraud cases, may be
subject to litigation. According to the commenters, most practitioners
were unaware of the Department's position that settling litigation with
a party in interest might result in a prohibited transaction until the
Department published the proposal for this class exemption. These
commenters argued that, without a broad retroactive exemption,
frivolous litigation may ensue.
Other commenters asserted that whether or not the fiduciaries were
aware of potential prohibited transactions, these fiduciaries knew they
were making decisions involving plan assets. If they acted prudently
and in the interests of participants and
[[Page 75637]]
beneficiaries in settling the litigation with the party in interest,
these fiduciaries should have no trouble meeting the retroactive
requirements of the exemption. These commenters argued that, given the
Department's guidance on this issue in 1995, it is appropriate to shift
the burden of proving substantive and procedural prudence from the
person challenging the settlement to the fiduciary seeking the
protection of the exemption.
In light of these comments, the Department confirms that the party
seeking to take advantage of any administrative exemption granted by
the Department has the burden of proving that it met each condition of
the exemption. Nonetheless, the Department has been persuaded that many
practitioners were unaware of the prohibited transaction issues
involved in settlements. The Department is also aware that some
attorneys may have advised their clients that the settlement of
litigation with a party in interest is not the type of transaction
intended to be covered by section 406 of the Act. After considering
these comments, the Department believes that it is appropriate to
modify the retroactive relief under the final exemption. Accordingly,
for settlements entered into on or before 30 days after the date of
publication of the final exemption, the determination that there was a
genuine controversy need not have been made by an attorney.
L. Should notice be required? Several commenters urged the
Department to require notice to all participants and beneficiaries in
connection with the settlement of litigation. One commenter pointed out
that the Department requires notice in connection with PTE 94-71 (59 FR
51216, October 7, 1994, as corrected, 59 FR 60837, November 28, 1994)
(settlement agreements between the U.S. Department of Labor and plans)
where the Department is a party to the settlement. This commenter
argued that without the involvement of the Department, notice is even
more important to the participants and beneficiaries because their
rights to pursue their own ERISA litigation could be compromised or
waived entirely by the plan fiduciary. The commenter recommended that
notice to participants of the nature of the allegations leading to the
settlement and the terms of the proposed settlement should be required.
This commenter also urged that all settlements should take the form of
a proposed consent decree filed after, or contemporaneous with, the
Complaint. In addition, the analytical basis for the settlement should
be open to inspection by participants for a stated period of time.
Another commenter explained that, in his experience, participants are
not aware of litigation, or at least the plan's involvement, until
after the settlement is final. Other commenters strongly oppose notice.
These commenters asserted that such an undertaking could be very costly
and disruptive, especially for minor litigation.
The Department has determined not to add a notice requirement as a
condition of this class exemption. Requiring notice at the point where
litigation is about to be settled could result in unnecessary delays
and additional costs. The Department believes that the interests of the
participants and beneficiaries will be sufficiently protected by the
conditions of this class exemption, especially the requirement that the
settlement is authorized by a fiduciary who is independent of the
parties involved in the litigation.
M. Discussion of other comments. One of the commenters requested
the Department's concurrence that, if ERISA claims are not covered by
the release given by the plan or the plan fiduciary in settlement of
litigation, the fiduciary need not obtain additional consideration to
account for such claims. The Department agrees with this statement.
One commenter urged the Department to opine that, where a plan
fiduciary causes a plan to release all the plan's non-ERISA claims
arising out of a transaction, the fiduciary does not automatically
release the fiduciary's own claims for breach of fiduciary duty arising
out of the same transaction. The commenter explained that the proposed
exemption did not distinguish between claims brought by the plan, i.e.,
with the plan itself as a named party, and claims brought on behalf of
the plan by a fiduciary. ERISA Sec. 502(d)(1), 29 U.S.C. 1132(d)(1),
provides that an employee benefit plan may sue and be sued as an
entity. Claims for violations of title I of ERISA, however, may be
brought by a fiduciary, participant or beneficiary of the plan or by
the Secretary of Labor. ERISA Sec. Sec. 502(a)(2), 502(a)(3),
502(a)(4), 502(a)(5), and 502(e)(1), 29 U.S.C. 1132(a)(2), 1132(a)(3),
1132(a)(4), 1132(a)(5) and 1132(e)(1). Some courts have concluded that
plans may bring actions under other laws, but may not bring an action
for a fiduciary breach under title I of ERISA. E.g., Pressroom Unions-
Printers League Income Security Fund v. Continental Assurance Co., 700
F.2d 889, 893 (2nd Cir. 1983). Other courts have not adopted this
distinction. E.g., Saramar Aluminum Co. v. Pension Plan for Employees
of the Aluminum Indus. and Allied Indus., 782 F.2d 577, 581 (6th Cir.
1986). The commenter believes that a failure to distinguish between
claims that a plan can make in its own name and those that must be made
by a plan fiduciary, for example, could cause courts to conclude that
releasing a plan's non-ERISA claims automatically releases a plan
fiduciary's, or participant's or beneficiary's ERISA claims on behalf
of the plan.
The Department amended the proposed exemption to clarify that it
applies to releases by the plan or by a plan fiduciary. The issue of
how a release of claims by a plan or plan fiduciary may affect ERISA
claims that could otherwise be brought by a fiduciary, participant or
beneficiary is beyond the scope of this exemption proceeding. In the
Department's view, a fiduciary should understand, in advance of
signing, the legal effect that a settlement agreement may have on all
claims that might be brought by or on behalf of the plan or its
participants and beneficiaries. Plan fiduciaries may need to obtain
legal advice on the scope of claims affected by a proposed settlement
agreement. The Department notes that it has long held the view that a
fiduciary's release of ERISA claims does not bind the Secretary.
It is not uncommon for the same transactions to give rise to both
ERISA and securities fraud claims. The plan, and by extension, the
participants and beneficiaries of the plan, are entitled to the same
recovery as other shareholders in the securities fraud settlement.
However, the participants and beneficiaries may have another avenue of
recovery not available to other shareholders. They are authorized,
under ERISA, along with the plan fiduciary and the Secretary of Labor,
to bring suit to make the plan whole for all losses caused by a breach
of fiduciary duty. As noted above, the Department recognizes that, in a
number of securities fraud class action settlements, the participants
and/or plan fiduciaries have successfully objected to the original
release and were able to modify the terms of the release to permit the
plan to receive its share of the securities fraud settlement without
releasing its ERISA claims against the parties in interest. In other
instances, fiduciaries have successfully negotiated additional relief
for the plan beyond that provided to shareholders who did not have
ERISA claims against the defendants. The Department notes that plan
fiduciaries should consider whether additional relief may be available
for the ERISA claims before agreeing to a broad release.
[[Page 75638]]
In conclusion, the Department encourages participants,
beneficiaries, fiduciaries, parties in interest and other interested
persons to take advantage of the wide range of compliance assistance
offered by the Department. Those with questions about their rights and
responsibilities in particular situations should look first to our web
site: http://www.dol.gov/EBSA/. You may also call, toll-free, the
Employee & Employer Hotline 1-866-444-EBSA (3272). To discuss
substantive ERISA issues in connection with particular cases, please
contact your local EBSA field office. The EBSA web site mentioned above
includes a state-by-state list of phone numbers and addresses for these
offices. Click on ``About EBSA/EBSA Offices.''
II. Description of the Exemption
The exemption provides retroactive and prospective relief from the
restrictions of section 406(a)(1)(A), (B) and (D) of the Act and from
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, for the following
transactions, effective January 1, 1975:
(1) The release by the plan or by 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; and
(2) 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.
A. Conditions Applicable to All Transactions
The exemption is conditioned upon the existence of a genuine
controversy involving the plan unless the case has been certified as a
class action by the court. The Department believes that this condition
is necessary to prevent the plan and parties in interest from engaging
in a sham transaction purporting to fall within this class exemption,
thus shielding a transaction, such as an extension of credit or other
transaction with a party in interest, that would otherwise be
prohibited.
The fiduciary that authorizes the settlement must have no
relationship to, or interest in, any of the other parties involved in
the litigation, other than the plan, that might affect its best
judgment as a fiduciary. The Department intends a flexible standard for
fiduciary independence, recognizing that the exemption will encompass a
wide range of situations, both in terms of the type of litigation and
the cost of pursuing such litigation. For example, in some instances
where there are complex issues and significant amounts of money
involved, it may be appropriate to hire an independent fiduciary having
no prior relationship to the plan, its trustee, any parties in
interest, or any other parties to the litigation. In other instances,
the plan's current trustee or investment manager, assuming that
fiduciary's conduct is not at issue, may be an appropriate party to
make the decision on behalf of the plan as to whether to settle the
litigation.
In response to comments received by the Department regarding the
settlement of class action litigation in which the ability to negotiate
may be limited, the Department eliminated the requirement that the
settlement be ``negotiated'' by the fiduciary. In lieu of this
requirement, the exemption provides that the fiduciary may authorize a
settlement if its terms and conditions are no less favorable to the
plan than comparable arm's-length terms and conditions that would have
been agreed to by unrelated parties under similar circumstances.
The exemption is conditioned upon the settlement being reasonable
given the likelihood of full recovery, the costs and risks of
litigation, and the value of claims foregone. The claims foregone may
include additional causes of action not available to the other
plaintiffs in the same case. For example, where shareholders have
brought a class action securities fraud case against the Company and
its officers, the Company's employee benefit plan or the trustee, as
the holder of record, may be named as a member of the class because it
holds employer securities. The plan or trustee may also have ERISA
claims against the Company and some or all of its officers, as well as
against other parties. Before entering into a settlement with any
defendant, the plan fiduciary should consider the value of these
additional claims against that defendant. The plan fiduciaries may also
be able to pursue claims against defendants not named in the securities
fraud case, including knowing participants in the breach. Under certain
circumstances, the plan will have additional sources of recovery,
including fiduciary liability insurance, the plan's fidelity bond, and
the personal assets of the defendants, including their own employee
benefit plan accounts.\7\
---------------------------------------------------------------------------
\7\ Section 206(d)(4) of the Act permits a plan to offset the
benefits of a participant under an employee pension plan against an
amount that the participant is ordered or required to pay, if the
order or requirement to pay arises under a judgment of conviction of
a crime involving the plan, a civil judgment, including a consent
order or decree, entered into by a court, or where there is a
settlement agreement between the participant and the Secretary of
Labor or the PBGC in connection with a violation of Part IV of
ERISA.
---------------------------------------------------------------------------
The exemption also provides that the settlement must not be part of
an agreement, arrangement, or understanding designed to benefit a party
in interest. The intent of this condition is not to deny direct
benefits to other parties to a transaction but, rather, to exclude
transactions that are part of a broader overall agreement, arrangement
or understanding designed to benefit parties in interest.
Where a settlement includes an extension of credit by a plan to a
party in interest for purposes of repaying an amount owed in settlement
of litigation, the exemption requires that the credit terms be
reasonable. Fiduciaries must consider the creditworthiness of the party
in interest and the time value of money in evaluating extensions of
credit to settle litigation. The settling fiduciary should also
consider security for such loans, such as a third party guarantee or
letter of credit, to protect against default.
The Department has added a new condition which clarifies that this
class exemption does not cover those transactions that are described in
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).
Finally, in response to a question received during the comment
period, the Department has defined the terms ``employee benefit plan''
and ``plan'' to include an employee benefit plan described in section
3(3) of ERISA and/or plans as defined in section 4975(e)(1) of the
Code.
B. Conditions Applicable to Prospective Transactions
On a prospective basis, the existence of a genuine controversy must
be determined by an attorney retained to advise the plan unless the
case has been certified as a class action by the court. That attorney
must be independent of the other parties to the litigation. All terms
of the settlement must be specifically described in a written agreement
or consent decree and the fiduciary authorizing the settlement must
acknowledge its fiduciary status in writing.
The exemption provides that in certain instances assets, other than
cash,
[[Page 75639]]
may be received by the plan from a party in interest. Assets may be
received by the plan if necessary to rescind transactions. The
conditions for retroactive relief do not specify the nature of the
consideration exchanged for the release. On a prospective basis,
securities with a generally recognized market may be exchanged for the
release, provided that such securities can be objectively valued. In
addition, the contribution of additional qualifying employer securities
is permitted in settlement of the dispute involving such qualifying
employer securities. Where assets, other than cash, are provided to the
plan in exchange for a release, 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 final exemption also provides that the settlement may also
include a written agreement to: make future contributions, adopt
amendments to the plan, or provide additional employee benefits.
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 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) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, and based upon the entire record, the
Department finds that the exemption is administratively feasible, in
the interests of the plans and their participants and beneficiaries,
and protective of the rights of participants and beneficiaries of such
plans;
(3) The exemption is applicable to a particular transaction only if
the conditions specified in the class exemption are met; and
(4) The exemption is 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.
Exemption
Accordingly, the following exemption is granted under the authority
of 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, subpart B
(55 FR 32836, 32847, August 10, 1990.)
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 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
[[Page 75640]]
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 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 (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)-(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.
Signed at Washington, DC this 24th of December, 2003.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 03-32191 Filed 12-30-03; 8:45 am]
BILLING CODE 4520-29-P