29 CFR 2570 Prohibited Transaction Exemption Procedures Employee Benefit Plans

Department of Labor Regulation §§2570.30--2570.52 published in the Federal Register August 10, 1990; corrected by the Federal Register April 12, 1991.

Summary

This document contains a final regulation that describes the procedures for filing and processing applications for exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code of 1986 (the Code), and the Federal Employees' Retirement System Act of 1986 (FERSA). At this time, the Department is also removing an interim regulation which describes the exemption procedures under Federal Employees' Retirement System Act of 1986 because such regulation is superseded by the final regulation contained herein. The Secretary of Labor is authorized to grant exemptions from the prohibited transaction provisions of ERISA, the Code and Federal Employees' Retirement System Act of 1986 and to establish an exemption procedure to provide for such exemptions.

The final regulation updates the description of the Department of Labor's procedures to reflect changes in the Department's exemption authority and to clarify the procedures by providing a more comprehensive description of the prohibited transaction exemption process.

Effective Date

This regulation is effective September 10, 1990, and applies to all exemption applications filed at any time on or after that date.

For Further Information Contact

Miriam Freund
U.S. Department of Labor
Pension and Welfare Benefits Administration
Office of Exemption Determinations
Washington, DC 20210
Tel 202.523.8194

Susan Rees
U.S. Department of Labor
Office of the Solicitor
Plan Benefits Security Division
Washington, DC 20210
Tel 202.523.9141

Supplementary Information

Public reporting burden for this collection of information is estimated to average 28.5 hours per response, including the time for reviewing the instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing the burden, to Director, Office of Information Management, U.S. Department of Labor, 200 Constitution Avenue NW., Room N-1301, Washington, DC 20210; and to the Office of Information and Regulatory Affairs, Attn: OMB Desk Officer for PWBA, Office of Management and Budget, Room 3001, Washington, DC 20503.

Section 406 of ERISA prohibits certain transactions between employee benefit plans and "parties in interest" (as defined in section 3(14) of ERISA). In addition, sections 406 and 407(a) of ERISA impose restrictions on plan investments in "employer securities" (as defined in section 407(d)(1) of ERISA) and "employer real property" (as defined in section 407(d)(2) of ERISA). Most of the transactions prohibited by section 406 of ERISA are likewise prohibited by section 4975 of the Code, which imposes an excise tax on those transactions to be paid by each " disqualified person" (defined in section 4975(e)(2) of the Code in virtually the same manner as the term "party in interest") who participates in the transactions.

Both ERISA and the Code contain various statutory exemptions from the prohibited transaction rules. In addition, section 408(a) of ERISA authorizes the Secretary of Labor to grant administrative exemptions from the restrictions of ERISA sections 406 and 407(a) while section 4975(c)(2) of the Code authorizes the Secretary of the Treasury or his delegate to grant exemptions from the prohibitions of Code section 4975(c)(1). Sections 408(a) of ERISA and 4975(c)(2) of the Code direct the Secretary of Labor and the Secretary of the Treasury, respectively, to establish procedures to carry out the purposes of these sections.

Under section 3003(b) of ERISA, the Secretary of Labor and the Secretary of the Treasury are directed to consult and coordinate with each other with respect to the establishment of rules applicable to the granting of exemptions from the prohibited transaction restrictions of ERISA and the Code. Under section 3004 of ERISA, moreover, the Secretaries are authorized to develop jointly rules appropriate for the efficient administration of ERISA. Pursuant to these provisions, the Secretaries jointly issued an exemption procedure on April 28, 1975 (ERISA Proc. 75-1, 40 FR 18471, also issued as Rev. Proc. 75-26, 1975-1 C.B. 722). Under these procedures, a person seeking an exemption under both section 408(a) of ERISA and section 4975(c)(2) of the Code was obliged to file an exemption application with the Internal Revenue Service as well as with the Department of Labor.

Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978, effective on December 31,1978), transferred the authority of the Secretary of the Treasury to issue exemptions under section 4975 of the Code, with certain enumerated exceptions, to the Secretary of Labor. As a result, the Secretary of Labor now possesses authority under section 4975(c)(2) of the Code, as well as under section 408(a) of ERISA, to issue individual and class exemption from the prohibited transaction rules of ERISA and the Code. The Secretary has delegated this authority, along with most of his other responsibilities under ERISA, to the Assistant Secretary for Pension and Welfare Benefits. See Secretary of Labor's Order 1-87, 52 FR 13139 (April 21, 1987).

Federal Employees' Retirement System Act of 1986 also contains prohibited transaction rules that are applicable to parties in interest with respect to the Federal Thrift Savings Fund established by Federal Employees' Retirement System Act of 1986, and the Secretary of Labor is directed to prescribe, by regulation, a procedure for granting administrative exemptions from certain of those prohibited transactions. See 5 U.S.C. 84477(c)(3).

On June 28, 1988, the Department published a proposed rule in the Federal Register (53 FR 24422) updating ERISA Procedure 75-1 to reflect the changes made by Reorganization Plan No. 4 and extending the procedure to applications for exemption from the Federal Employees' Retirement System Act of 1986 prohibited transaction rules. In addition, the proposed regulation codified various procedures developed by PWBA since the adoption of ERISA Proc. 75-1. Formal adoption of those procedures will facilitate review of exemption applications. These new procedures also fill in some of the gaps left in ERISA Proc. 75-1, thereby providing a more detailed description both of the steps to be taken by applicants in applying for exemptions and the steps normally taken by the Department in processing such applications. Finally, the proposed regulation modified some of the procedures described in ERISA Proc. 75-1 to better serve the needs of the administrative exemption program as demonstrated by the Department's experience with the program over the previous fourteen years. These amendments were intended to promote the prompt and fair consideration of all exemption applications.

The notice of proposed rulemaking gave interested persons an opportunity to comment on the proposal. In Response, the Department received three letters of comment regarding several aspects of the proposed regulation. The following discussion summarizes the proposed regulation and the issues raised by the commentators and explains the Department's reasons for adopting the provisions of the final regulation.

Scope of the Regulation

As explained in the notice of proposed rulemaking, the regulation establishes new procedures to replace ERISA Proc. 75-1. These new procedures reflect changes in the Department of Labor's exemption authority effected by Reorganization Plan No. 4 of 1978. Thus, the procedures apply to all applications for exemption which the Department has authority to issue under section 408(a) of ERISA, or, as a result of Reorganization Plan No. 4, under section 4975(c)(2) of the Code. The procedures reflect current practice under which the Department generally treats any exemption application filed solely under section 408(a) of ERISA or solely under section 4975(c)(2) of the Code as an application for exemption filed under both of these sections if the application relates to a transaction prohibited under corresponding provisions of both ERISA and the Code. The Grant of an exemption by the Department in such instances protects disqualified persons covered by the exemption from the excise taxes otherwise assessable under section 4975(a) and (b) of the Code.

However, the procedures do not apply to applications for exemption reserved to the jurisdiction of the Secretary of the Treasury by Reorganization Plan No. 4. To ascertain the correct procedures for filing and processing applications for these exemptions, applicants should consult the Internal Revenue Service.

The Department has also concluded that it is appropriate to apply the procedures provided here to exemption applications filed under Federal Employees' Retirement System Act of 1986, as well as those filed under ERISA or the Code, as provided by Proposed §2570.30, which has been adopted without change in the final regulation. Although the prohibited transaction provisions of Federal Employees' Retirement System Act of 1986 and the scope of the Department's exemption authority under Federal Employees' Retirement System Act of 1986 differ somewhat from that under ERISA and the Code, administrative exemption matters under Federal Employees' Retirement System Act of 1986 are likely to involve many of the same issues as are presented by similar matters involving private plans. Thus, adopting uniform procedures should help assure uniform administration of the exemption programs.

Applications for Exemption under Federal Employees' Retirement System Act of 1986

On December 29, 1988, the Department published an interim regulation in the Federal Register (29 CFR part 2585, 53 FR 52688) describing the procedures for filing and processing applications for exemptions from the prohibited transaction provisions of Federal Employees' Retirement System Act of 1986. For such applications, the interim regulation adopted the procedures then currently followed (pursuant to ERISA Proc. 75-1) by applicants for exemptions from the prohibited transaction provisions of ERISA and the Code. The interim final regulation was effective commencing December 29, 1988 until the effective date of the final regulation contained herein for all prohibited transaction exemption applications (under ERISA, the Code, and Federal Employees' Retirement System Act of 1986).(1)

Section 2585.12 of the interim regulation provides that this regulation shall expire on the effective date of the revised prohibited transaction exemption procedure, published in proposed form on June 28, 1988, 53 FR 24422, and that the Department will publish a document removing these interim regulations when it adopts final regulations based on the published proposal. Accordingly, this notice of final rulemaking removes the interim regulations as of September 10, 1990, the effective date of the final regulation contained herein.

In regard to Federal Employees' Retirement System Act of 1986 exemption applications, the Department received a comment relating to the adoption of ERISA class exemptions of Federal Employees' Retirement System Act of 1986 purposes. This comment suggested that the final regulation clarify that the Department will follow the procedure authorized under section 8477(c)(3)(E) of Federal Employees' Retirement System Act of 1986, which permits the Secretary of Labor to determine that an exemption granted for any class of fiduciaries or transactions under section 408(a) of ERISA shall constitute an exemption for Federal Employees' Retirement System Act of 1986 purposes upon publication of notice in the Federal Register without affording interested persons opportunities to present their views (in writing or at a hearing).

The procedure described in the preceding paragraph was not used in conjunction with the Department's adoption for Federal Employees' Retirement System Act of 1986 purposes of a number of specific class exemptions under ERISA (i.e., Prohibited Transaction Exemptions (PTE) 75-1, 78-19, 80-26, 80-51, 82-63, and 86-128). In that instance, the Department published in the Federal Register both a notice of proposed adoption of class exemptions under ERISA (53 FR 38105, September 29, 1988), which invited the public to submit written comments or requests for a hearing on the proposed adoption, and also a notice of final adoption of these class exemptions (PTE T88-1, 53 FR 52838, December 29, 1988). In this regard, the Department notes that, with respect to ERISA class exemptions which may be proposed in the future and which may also be relevant under Federal Employees' Retirement System Act of 1986, the Department will solicit the view of the Executive Director of the Federal Retirement Thrift Investment Board in advance of the publication of the proposed exemption to determine whether such exemption should also be proposed for Federal Employees' Retirement System Act of 1986 purposes.

Also regarding Federal Employees' Retirement System Act of 1986 exemption applications, the Department received another comment requesting clarification that the mere existence of routine audit activity conducted by the Department pursuant to the requirements of section 8477(g) of Federal Employees' Retirement System Act of 1986(2) will not provide a basis for denial of, or failure to consider, an application for exemption under Federal Employees' Retirement System Act of 1986. It is the view of the Department that those audits conducted by the Department in carrying out its responsibilities in connection with its regular program of compliance audits under Federal Employees' Retirement System Act of 1986 section 8477(g) would not constitute an "investigation" for purposes of §§2570.33(a)(2) and 2570.37(b) of the regulation(3) or an "examination" for purposes of §2570.35(a)(7).(4)  The Department would not, however, be precluded from denying, or failing to consider, an application based on an investigation prompted by information arising as a result of such a routine audit.

Definitions

Section 2570.31 of the proposed regulation defined the following terms for purposes of the exemption procedures: affiliate, class exemption, Department, exemption transaction, individual exemption, and party in interest. No comments were received regarding these definitions which are adopted in the final regulation as proposed. However, the Department has added to this section a definition of the term "pooled fund" in response to a comment requesting that a special rule be added to the final regulation regarding information to be furnished in exemption applications relating to plans affected by an exemption transaction undertaken by a pooled investment vehicle. (This comment is discussed in more detail below.)

Who May Apply for Exemptions

Section 2570.32(a) of the proposed regulation provided that exemption proceedings may be initiated by the Department either on its own motion or upon the application of: (1) Any party in interest to a plan which is or may be a party to the exemption transaction, (2) any plan which is a party to the exemption transaction, or (3) an association or organization representing parties in interest who may be parties to an exemption transaction covering a class of parties in interest or a class of transactions.

One of the comments received recommended modifying this paragraph of the regulation to permit an exemption application to be filed by any fiduciary or prospective fiduciary with respect to plan assets under such fiduciary's management or control, regardless of whether such fiduciary either represents a specific plan with respect to the exemption application or would be a party to the exemption transaction. The commentator clarified his comment by explaining that he intended this category of applicants to cover prospective fiduciaries, such as persons creating and/or managing a new investment vehicle in which plans are expected to participate if the requested exemption is granted, but in which no plans participate at the time the exemption application is filed. The commentator noted that in the past the Department has granted individual exemptions to institutional investment managers in connection with their investment management of individual plans' investment accounts or pooled investment funds in which several unidentified plans may participate.

In the Department's view, the reference in proposed §2570.32(a)(1) to "any party in interest to a plan who is or may be a party to the exemption transaction" includes the prospective fiduciaries mentioned by the commentator. Therefore, §2570.32(a) is adopted in the final regulation without change.

Section 2570.32(b) and (c) of the proposed regulation set forth simplified rules relating to representation of applicants by third parties. No comments were received regarding these paragraphs, which are adopted in the final regulation without change.

Applications the Department Will Not Ordinarily Consider

Section 2570.33(a) of the proposed regulation described the circumstances under which the Department will not ordinarily consider the merits of an exemption application. Thus, this paragraph provided that the Department will not ordinarily consider an incomplete application. In this regard, the Department emphasizes that applicants should not file exemption applications until they have compiled all the information required by §2570.34 and, if applicable, §2570.35, and can submit this information in an organized and comprehensive fashion together with all necessary supporting documents and statements. In addition, the proposal made it clear that the Department ordinarily will not consider applications that involve a transaction, or a party in interest with respect to such transaction, that is the subject of an ERISA enforcement action or investigation. In certain cases, however, the Department may exercise its discretion to consider exemption applications in these categories where, for example, deficiencies in the exemption application are merely technical, or where an enforcement matter is clearly unrelated to the exemption transaction.

One comment was received specifically regarding investigations, and it is discussed above under the heading "Applications for Exemption under Federal Employees' Retirement System Act of 1986." In addition, the Department has amended §2570.33(a)(2) (relating to certain investigations and enforcement actions) to conform to a similar revision to §2570.35(a)(7) (discussed below) made in response to two other comments received regarding the proposed requirement to include information in an application concerning certain investigations, examinations, litigation, or continuing controversy involving specified Federal agencies with respect to any plan or party in interest involved in the exemption transaction. The effect of these amendments is to expand the proposed regulation in order to broaden the scope of exemption applications which the Department will ordinarily consider.

No comments were received on paragraphs (b) and (c) of proposed §2570.33, which are adopted without change in the final regulation. These paragraphs relate to the Department's written explanation of an applicant whose exemption application the Department has decided not to consider, and to applications for individual exemption relating to transaction(s) covered by a class exemption under consideration by the Department.

Exemption Application Contents - General Information

As previously noted in the proposed regulation, the Department's experience to date with the administrative exemption program suggests that the program's efficiency could be increased and applicants can receive more timely treatment of their applications for exemption if the quality of exemption applications filed were improved. In the past, applications have been incomplete, have omitted or misstated facts or legal analyses needed to justify requests for exemptive relief, and in some cases have been so poorly drafted that the details of the transactions for which exemptive relief is sought ("exemption transactions") are unclear. The time and effort required to deal with such deficient applications and to obtain accurate and complete information about exemption transactions have contributed to processing delays.

Moreover, in many exemption applications, the discussion of the substantive basis for the exemption does not take adequate account of positions adopted by the Department with respect to other similar applications.

The proposed regulation attempted to address these problems in a number of ways. First, the proposal required that applicants provided more complete information in their applications about exemption transactions and about the plans and the parties in interest involved in those transactions. The Department's experience suggests that this additional information is very helpful, and often essential, for a complete understanding of the exemption transaction and of the context surrounding it, and that the omission of such additional information in exemption applications will delay review of these applications on their merits.

For the same reason, the proposed regulation required filing with the exemption application copies of the relevant portions of documents bearing on transactions for which individual exemptions are sought. Such filing will avoid delays in the evaluation of exemption applications pending receipt of relevant documents. By filing comprehensive applications with necessary supporting documentation, applicants can do much to facilitate the Department's review of requested exemptions and to expedite the exemption process as a whole.

To further expedite the exemption process the proposed regulation required that an applicant include with his application a statement explaining why the requested exemption satisfies requirements set forth in sections 408(a) of ERISA and 4975(c)(2) of the Code and 5 U.S.C. 8477(c)(3)(C) that an exemption be:

  1. Administratively feasible;
  2. In the interests of the plan and of its participants and beneficiaries; and
  3. Protective of the rights of the plan's participants and beneficiaries.

This requirement is not new. Under ERISA Proc. 75-1, applicants have been required to include with their applications statements explaining why a requested exemption satisfies the statutory prerequisites for an exemption. Too often, however, applicants have attempted to satisfy this requirement with generalizations and perfunctory assurances about the benefits to be reaped by plans and their participants and beneficiaries from the proposed exemption.

The Department will not seek out reasons to grant an exemption that has not been adequately justified by an applicant. Indeed, the Department considers that it is the responsibility of applicants to demonstrate clearly that exemptions they are requesting meet statutory criteria. Accordingly, under both the proposed and the final regulation, applicants are expected to review the statutory criteria for granting administrative exemptions and explain with as much specificity as possible why a requested exemption would pose no administrative problems, what benefits affected plans and their participants and beneficiaries can expect to receive from it, and what conditions would be attached to protect the rights of participants and beneficiaries of affected plans.(5)

Under ERISA Proc. 75-1, applicants have been given the option, but have not been required, to submit a draft of the proposed exemption. Both the proposed and the final regulation preserve this option. However, while not requiring the submission of a draft of the proposed exemption, the Department recommends that applicants include in their exemption applications draft language which defines the scope of the requested exemption, including the specific conditions under which the requested exemption would apply. A draft which explains the exemption requested in a clear and concise manner and focuses on what the applicant considers to be the essential features of the exemption transaction and the critical safeguards supporting the requested relief is likely to facilitate the process of review. Obviously, the degree of detail necessary to describe the proposed exemption adequately will vary depending on the complexity of the transaction and the kind of relief requested.

Section 2570.34 of the proposed regulation listed the information that is required in every exemption application, whether it be an application for individual or class exemption. In addition, the information specified in §2570.35 of the regulation must be included in applications for individual exemptions. Some specific items of information are discussed below.

Shared Representation

Section 2570-34(a)(3) of the proposed regulation required each exemption application to disclose whether the same person will represent both the plan and the parties in interest involved in an exemption transaction in matters relating to the application. The proposal noted that such shared representation may raise questions under the exclusive purpose and prudence requirements of sections 403(c) and 404(a) of ERISA and under the prohibited transaction provisions of section 406 of ERISA and section 4975(c)(1) of the Code. No comments have been received regarding this subparagraph, which is adopted as proposed.

Third-Party Declarations

Section 2570.34(b)(5)(iii) of the proposed regulation required as declaration under penalty of perjury to accompany specialized statements from third-party experts submitted to support an exemption application, such as appraisals, analyses of market conditions or opinions of independent fiduciaries. Specifically, the proposal required a declaration under penalty of perjury, that to the best of the expert's knowledge and belief, the representations made in the specialized statement are true and correct. This declaration was to be dated and signed by the expert who prepared the statement.

One of the comments received urged deletion of this requirement and expressed concern that it would cause additional expense to applicants because new third-party statements would be required once the appraiser, engineer, financial specialist, or other expert became aware of their intended use as part of an exemption application. The commentator advised subsequently that such experts either may be reluctant to provide any sort of attestation because of unknown liabilities which may arise by using the expert's report as part of an exemption application, or may seek an additional, and perhaps substantial, fee for furnishing an attestation due to the unknown liabilities.

In this regard, the Department notes that, with respect to any matter within the jurisdiction of any department or agency of the United States, it is a crime, punishable by a fine of up to $10,000 and/or imprisonment of up to five years, for anyone knowingly and willfully to falsify, conceal, or cover up by any trick, scheme or devise a material fact; to make any false, fictitious, of fraudulent statements or representations; or to make or use any false writing or document knowing the same contains any false, fictitious, or fraudulent statement or entry (18 U.S.C. §1001). It is the view of the Department that this provision applies to applicants for exemptions under ERISA, the Code, or Federal Employees' Retirement System Act of 1986, to fiduciaries (independent or otherwise) representing the plan in an exemption transaction, and to third-party experts who prepare statements or reports that such experts know will be included in exemption applications.

Nevertheless, the Department recognizes that third-party experts such as appraisers, bankers, financial analysts, and other specialized consultants usually do not function as fiduciaries with respect to a plan if such experts' authority, responsibility, or contact with respect to the plan is limited to providing an opinion which may be included in an exemption application and which will be considered by plan fiduciaries who will decide what, if any, action they will take on behalf of the plan based upon such opinion. The Department believes that such experts need not be held to the same degree of accountability regarding exemption application covering transactions where a plan fiduciary has the authority and responsibility to make decisions on behalf of a plan. Thus, the Department has decided to modify proposed §2570.34(b)(5)(iii) to provide that a statement of consent, rather than a declaration under penalty of perjury, is required from each such expert which acknowledges that his or her statement is being submitted to the Department as part of an exemption application. The Department believes that such a consent statement from a third-party expert will not require an applicant to obtain a new report from the expert because the expert's consent statement may refer to his or her previously issued report. (However, the Department may require an updated report if any case if the substantive information contained in a report submitted with an exemption application is out of date.)

Conversely, where an independent fiduciary represents the plan in an exemption transaction, that fiduciary is subject to all of the responsibilities imposed by part 4 of subtitle B of title I of ERISA. None of the comments received questioned the need for such a fiduciary to provide the declaration under penalty of perjury required under the proposed regulation, and the Department has decided to retain this proposed requirement for such plan fiduciaries in the final regulation. As a result, the Department has modified §2570.34(b)(5)(ii) and has added §2570.34(b)(5)(iv) to clarify that a declaration is required for such plan fiduciaries.

Pooled Funds

One comment suggested that §2570.35 of the proposed regulation be modified to provide a special rule regarding information to be included in an application for an individual exemption involving a pooled investment fund, such as a pooled separate account maintained by an insurance company or a collective investment fund maintained by another financial institution. The commentator pointed out that, as proposed, §2570.35 would require information to be submitted regarding each plan participating in a pooled investment fund, resulting in the submission of an overwhelming volume of information unrelated to the exemption transaction. However, the commentator recognized that information regarding certain plans may be relevant to the exemption application in view of the potential for conflicts of interest involving such plans. Such plans would include any plan maintained for employees of the sponsor or other fiduciary of the pooled investment fund, and a plan whose participation in the pooled fund exceeded a specified percentage of the total fund assets.

The Department agrees with this comment and, accordingly, has added a new paragraph (c) to §2570.35, which contains a special rule for applications for individual exemptions involving pooled funds [as defined in §2570.31(g)]. Subparagraph (1) of §2570.35(c) excepts such applications from including certain information otherwise required relating to among other things: reportable events under section 4043 of ERISA, notice of intent to terminate a plan (section 4041 of ERISA), the number of participants and beneficiaries of each plan participating in the pooled fund, and the percentage of each such plan's assets involved in the exemption transaction.

Subparagraph (2) of the special rule provides that certain information otherwise required by §2570.35(a) and (b) of the regulation must be furnished by reference to the pooled fund rather than the plans participating in such fund. This information pertains to: Identifying information; any prior violations of the Code's exclusive benefit rule or of the prohibited transaction provisions of the Code, ERISA or Federal Employees' Retirement System Act of 1986; any prior applications for exemption from such prohibited transaction provisions; any lawsuits or criminal actions regarding conduct with respect to any employee plan; any criminal convictions described in section 411 of ERISA; any investigation or continuing controversy with specified Federal agencies regarding compliance with ERISA, Code provisions relating to employee plans, or Federal Employees' Retirement System Act of 1986 provisions relating to the Federal Thrift Savings Fund; whether the exemption transaction has been consummated and, if so, certain related information regarding correction of the prohibited transaction and payment of excise taxes; the identification of persons with investment discretion over any assets involved in the exemption transaction and each such person's relationship to the parties in interest involved in the exemption transaction; investments involving certain parties in interest; the fair market value of the pooled fund; the identity of the person who will pay the costs of the exemption application, notifying interested persons, and the fee of any independent fiduciary involved in the exemption transaction; and an analysis of the facts relevant to the exemption transaction as reflected in documents submitted with the application. The pooled fund, rather than participating plans, must also furnish copies of all relevant documents, including, for example, the most recent financial statements of the pooled fund.

Subparagraph (3) of the special rule requires information to be furnished with pooled fund exemption applications with respect to: the aggregate number of plans expected to participate in the pooled fund, and the limits (if any) imposed by the pooled fund on the amount or percentage of each participating plan's assets that may be invested in the pooled fund.

Subparagraph (4) of §2570.35(c) contains additional requirements for applications for individual exemptions involving pooled funds. These requirements apply to plans whose investments in the pooled fund represent more than 20% of the pooled fund's total assets(6) and those plans covering employees of the pooled fund's sponsor, and other fiduciaries with discretion over pooled fund assets. The Department believes that additional information is warranted in those situations where the potential for decision making that may inure to the benefit of a fiduciary or other party in interest is increased. For each of these plans, the additional requirements provide for the furnishing of certain individual plan information described in §2570.35(a), in addition to the information required under §2570.35(c)(2) and (c)(3). The Department believes this information is necessary for its determination as to whether sufficient protections are incorporated into the exemption transaction.

The Department further notes that the decision by the fiduciaries of certain plans to invest in a pooled fund may involve a separate prohibited transaction, apart from any prohibited transaction which may be entered into by the pooled fund itself. In this regard, the Department notes that the information required to be submitted on behalf of such plans is to be provided in accordance with the general rule contained in §2570.35, rather than the special rule for pooled funds.

Finally, the Department believes that the special rule for pooled funds is less burdensome to applicants than the rules set forth in the proposed regulation. As noted by a commentator, the proposed regulation would have required the submission of voluminous amounts of material, as information would have to be submitted on behalf of each plan investing in a pooled fund. The final regulation limits the amount of material to be submitted since it requires only information relating to the pooled fund and, where applicable, certain plans investing in the pooled fund. In addition, the Department believes that its ability to analyze and process applications for exemption involving pooled funds will be enhanced by this special rule. In this regard, the Department believes that the final regulation eliminates a significant amount of material that otherwise would have been required.

Lawsuits, Certain Criminal Convictions, Investigations, Examinations, Continuing Controversies, etc.

Sections 2570.35(a)(5), (6), and (7) of the proposed regulation required exemption applications to disclose information regarding whether the applicant or any of the parties to the exemption transaction is or has been, within a specified number of years past, a defendant in any lawsuit or criminal action concerning conduct as a fiduciary or other party in interest with respect to any employee benefit plan (§2570.35(a)(5)), convicted of a crime described in section 411 of ERISA (§2570.35(a)(6)), or under investigation or examination or engaged in litigation or a continuing controversy with certain Federal agencies (§2570.35(a)(7)). Proposed §2570.35(a)(7) also required disclosure of whether any plan affected by the exemption transaction has been under such investigation, examination, litigation, or continuing controversy, and further required the applicant to submit copies of all correspondence with the specified Federal agencies regarding substantive issues involved in such investigations, etc.

Two of the comments urged deletion of the disclosure requirements of proposed §2570.35(a)(5) and (7) on the basis that such disclosure is difficult, costly, and almost always irrelevant to the exemption transaction.

The Department continues to believe that the proposed disclosure is relevant to the exemption transaction. With regard to §2570.35(a)(5) (relating to lawsuits or certain criminal actions), the Department views the disclosure required as directly concerning the conduct of the applicant and other parties in interest participating in the exemption transaction. The Department believes that such information is necessary in evaluating the credibility and integrity of such parties, some of whom may possess substantial discretion regarding the exemption transaction or may make representation upon which the Department must rely in determining whether the statutory criteria for an exemption have been satisfied. In addition, the proposed disclosure assists the Department in ensuring that the exemption transaction contains appropriate safeguards.

Further, the Department does not agree that the disclosure required by §2570.35(a)(5) imposes any significant burdens on applicants. The Department believes that prudent fiduciaries would, in the normal course of carrying out their responsibilities, ascertain such information about the parties they intend to deal with in investment and other plan transactions. However, the Department has determined that it would be appropriate to modify proposed §2570.35(a)(5) in the final regulations to limit disclosure to the applicant or any of the parties in interest involved in the exemption transaction.

Regarding the disclosure required by proposed §2570.35(a)(7) (relating to investigations, examinations, litigation, and continuing controversy by or with the specified Federal agencies), the Department believes that such information is necessary to ensure that the Debarment's exemption activities do not compromise its enforcement efforts. Although the Department is most interested in information involving investigations, etc. that are directly related to the subject exemption transactions and the participating parties, the Department believes, nevertheless, that its exemption staff, and not the applicants, should determine which investigations, examinations, etc. are relevant.

One of the comments further suggested that it is inappropriate to require applicants to disclose matters which have resulted in no formal allegations of violations of law. The Department notes, however, that the affected parties may include, as part of their disclosure, any qualifications or explanations they deem appropriate for consideration by the Department, including information on the final disposition of any matter.

Another commentator suggested that disclosure under §2570.35(a)(7) be limited to a reference to the investigation or litigation without requiring submission of copies of "all correspondence" involved in the investigation. In this regard, the Department notes that the proposed regulation did not require submission of copies of all correspondence, but only of correspondence relating to the substantive issues involved in the investigation, examination, litigation, or controversy. Specifically, the Department intended to require submission of copies of correspondence containing only that information directly relevant to determining whether or not the requested exemption should be granted. After considering the comment, the Department has modified §2570.35(a)(7) to clarify that the phrase "substantive issues" refers to issues related to compliance with the provisions of parts 1 and 4 of subtitle B of title I of ERISA (reporting and disclosure (part 1) and fiduciary responsibility (part 4)), section 4975 of the Code, or sections 8477 or 8478 of Federal Employees' Retirement System Act of 1986 (fiduciary responsibilities, liability and penalties (section 8477) and bonding (section 8478)). Copies of correspondence relating to any of these substantive issues is necessary in order for the Department to determine the effect the requested exemption may have on the Department's enforcement activities in each case under investigation, examination, etc.

One of the comments noted that proposed §2570.35(a)(5), (6), and (7) required the disclosure of information regarding any parties to the exemption transaction and suggested limiting the required disclosure to fiduciaries authorizing the transaction and any parties in interest involved in the exemption transaction. This comment pointed out that investment transactions may involve multiple parties, many of whom are neither plan fiduciaries nor parties in interest. After due consideration, the Department agrees with this suggestion and, accordingly, has modified §2570.35(a)(5), (6), and (7) to limit the required disclosure to any parties in interest involved in the exemption transaction. The Department notes that this group includes, among others, the fiduciary authorizing the exemption transaction.

See the heading "Applications for Exemption under Federal Employees' Retirement System Act of 1986," above, regarding modification to proposed §2570.35(a)(7) as applicable to the Federal Thrift Savings Plan established by Federal Employees' Retirement System Act of 1986.

Party-in-Interest Investments

Proposed §2570.35(a)(16) required an application for individual exemption to disclose information regarding any plan investments in loans to, property leased to, or securities issued by, any party in interest involved in the exemption transaction. One of the comments suggested deletion of this requirement due to the difficulty of identifying such investments in view of the "look-through" rule contained in the Department's plan asset regulation (29 CFR 2510.3-101). This comment suggested that the proposed disclosure may involve many transactions, by an entity whose underlying assets include "plan assets," which are totally unrelated to the exemption transaction. The comment further indicated that this disclosure would be burdensome for exemption transactions involving numerous parties in interest, such as those involving pooled funds.

The Department agrees that, for exemption applications involving pooled funds, furnishing the proposed disclosure could be burdensome inasmuch as such applications generally do not relate to specific plans. Accordingly, the Department has adopted a special rule for applications for individual exemption involving pooled funds, discussed above (under the heading "Pooled Funds"), which limits this type of disclosure to the pooled fund and to certain plans participating therein.

Regarding exemption applications involving specific individual plans, it appears to the Department that the information to be disclosed under proposed §2570.35(a)(16) must be maintained, in any event, to satisfy the annual reporting requirements of section 103 of ERISA, as well as the recordkeeping requirements of section 107. Therefore, the Department believes that this disclosure requirement should not impose any additional burdens on the applicant. The information to be disclosed will enable the Department to determine whether the exemption transaction, in conjunction with other plan investments involving parties in interest, would unduly concentrate the plan's assets in such investments so as to raise questions under the fiduciary responsibility provisions of section 404 of ERISA. For these reasons, the Department has decided to adopt §2570.35(a)(16) as proposed, subject to the special rule for applications for individual exemption involving pooled funds in §2570.35(c).

Costs Related to the Exemption Application

Proposed §2570.35(a)(18) and (19) required the exemption application to identify the person who will bear the costs of the exemption application, of notifying interested persons, and of the fee charged by any independent fiduciary involved in the exemption transaction. The preamble to the proposed regulation noted that a plan's payment of the expenses associated with the filing or processing of an exemption application raises questions under the fiduciary responsibility and the prohibited transaction restrictions to the extent that any party in interest benefits from the transaction for which an exemption is sought (see section 406(a)(1)(D) of ERISA).

One of the commentators requested that the Department provide a more specific discussion of when it believes such questions will be raised. The comment states that, in many cases, it is appropriate for the plan to pay the expenses attributable to obtaining an exemption, and that an independent fiduciary's fees are generally paid by the plan receiving such fiduciary's services in order to ensure that such fiduciary conducts its activities in a totally independent manner and without any potential influence from persons other than the plan paying such fees.

The proposed disclosure of who pays the fees for an exemption application is intended to enable the Department to review the appropriateness of such payment by a plan in the context of a specific exemption request. Such disclosure is also intended to aid the exemption staff in evaluating whether the economic merits of the transaction, taking into account the costs attributable to the exemption application, support a finding that the proposed transaction is in the interests of the plan and its participants and beneficiaries. While the Department agrees that there may be certain instances in which it would be appropriate for a plan to pay all or part of the costs attendant with obtaining an exemption, such as where it is necessary to ensure the independence of an independent fiduciary or third-party expert, the Department believes that the propriety of such payments by a plan is an inherently factual determination which can be made only on a case-by-case basis.

In this regard, the Department notes that, when evaluating the propriety of the payment by a plan of certain expenses, plan fiduciaries must first consider the general fiduciary responsibility provisions of sections 403 and 404 of ERISA. Section 403(c)(1) provides, in part, that the assets of an employee benefit plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. Similarly, section 404(a)(1)(A) requires, in part, that a fiduciary of a plan discharge his duties for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan. Thus, a payment that is not a distribution of benefits to participants or beneficiaries of a plan would not be consistent with the requirements of sections 403(c)(1) and 404(a)(1)(A) unless it was used to defray a reasonable expense of administering the plan.

In addition, section 406(a)(1)(D) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest of any assets of the plan. It is the responsibility of appropriate plan fiduciaries to determine whether a particular expense is a reasonable administrative expense under sections 403(c)(1) and 404(a)(1)(A) of ERISA or whether plan payment of an expense would constitute a prohibited use of plan assets for the benefit of a party in interest under section 406(a)(1)(D) of ERISA.

Copies of Documents

Section 2570.35(b)(1) of the proposed regulation required each application for individual exemption to include true copies of all documents bearing on the exemption transaction, such as contracts, deeds, agreements, instruments, and relevant portions of plan documents, including trust agreements.

One comment objected to this requirement on the grounds that having to assemble the required documents is time consuming, costly, and unnecessary if the exemption application properly describes all pertinent plan provisions and other documents in sufficient detail to allow the Department to evaluate the merits of the exemption transaction. In this regard, the Department notes that the documents with respect to which copies are requested are all documents which would be readily available to the parties to the exemption transaction. Accordingly, the Department does not believe that there would be a significant burden in either compiling the documents or in transmitting copies to the Department. Further, the Department notes that it is not uncommon for representations contained in an exemption application to be inconsistent with the provisions of the governing documents or for the latter to contain provisions with respect to which clarifications or other representations are needed in order for the requested exemption to be proposed. On the basis of the Department's experience with exemptions, scrutiny of the relevant documents is, in the large majority of cases, a necessary prerequisite to a complete understanding of the exemption transaction and the implications for affected plans and parties in interest. Moreover, in the Department's experience, the inclusion of copies of the requested documents, as part of the exemption application, has expedited the processing of the requested exemption.

For these reasons, the final regulation adopts proposed §2570.35(b)(1) without change. However, the Department wishes to clarify three points regarding this requirement. First, for exemption transactions in which identical documents will be executed by more than one party, the submission of only one specimen document will satisfy the requirements of this paragraph.

Second, in the case of exemption transactions which are proposed, copies of the documents relating to the proposed transaction need not be executed or dated when they are submitted with the exemption application if the documents are complete in every other respect. In this regard, the Department strongly encourages requesting an administrative exemption before entering into a prohibited transaction because of the ability to incorporate all of the necessary safeguards into the transaction. By contrast, such safeguards cannot be put into place after a prohibited transaction has occurred.

Third, only copies of documents need be submitted. The Department may not be able to return original documents and therefore, urges that only true copies of documents be submitted.

Where To File an Application

Although no comments were received regarding this section, which is adopted as proposed, the Department wishes to advise applicants that including the room number of the Division of Exemptions in the address will generally expedite its delivery. The current room number of the Division of Exemptions, Room N-5671, is not included in the regulation to avoid the need to amend the regulation every time the room number of the Division changes.

Duty To Amend and Supplement Information

The proposed regulation continued the requirement established in ERISA Proc. 75-1 that an applicant promptly notify the Division of Exemptions if he discovers that any material fact or representation contained in his application, or in any supporting documents or testimony, was inaccurate or if any such fact or representation changes. However, the proposed regulation added the requirement that an applicant notify the Division of Exemptions when anything occurs that may affect the continuing accuracy of such facts or representations.

Two comments received indicated confusion as to the expiration date of the duty to update information submitted as part of an exemption application.  Accordingly, the final regulation clarifies §2570.37(a) and (b) to indicate that such duty applies only during the pendency of the exemption application and expires after the exemption is granted.

The Department also wishes to clarify that, in §2570.37(a), the phrase "continuing accuracy of any such fact or representation" refers to future events or changes known before the exemption is granted that will render inaccurate facts stated or representations made before such grant.  The Department also wishes to note that exemptions are granted only to transactions as described. Therefore, if an exemption is granted and the transaction is not as described in some material aspect, the exemption does not take effect or protect parties in interest from liability for the transaction. See §2570.49 of the regulation.

Tentative Denial Letters

Although ERISA Proc. 75-1 established no procedures to be followed by the Department in denying exemption applications or by applicants in responding to such denials, the Department has developed procedures over the years to notify applicants first to the tentative and later, of the final denial of their applications. In large part, the proposed regulation codified these procedures.

Under the proposed regulation, the Department may decide to deny an exemption request at any one of a number of stages in the review process. For example, it may decide after its initial review of an application that the requested exemption does not satisfy the statutory criteria set forth in sections 408(a) of ERISA and 4975(c)(2) of the Code. In that event, the Department will send a tentative denial letter to the applicant pursuant to §2570.38 of the regulation. That letter will inform the applicant of the Department's tentative decision to deny the application and of the reasons therefor. Under §2570.38, an applicant has 20 days from the date of this letter to request a conference with the Department and/or to notify the Department of his intent to submit additional information in writing to support the application. If the Department receives no request for a conference and no notice of intent to submit additional information within that time, it will send the applicant a final denial letter pursuant to §2570.41 of the regulation.

One of the comments received suggested that: (1) The final regulation should clarify that the Department's exemption staff may request applicants to provide additional information before a tentative denial letter is issued, and (2) rather than a "short statement" of the reasons for a tentative denial, the tentative denial letter should provide a detailed explanation of the basis for the Department's decision. Regarding the first suggestion, the comment indicates that it is unreasonable to expect an applicant to anticipate, when the exemption application is filed, all of the material which the Department may find pertinent to its consideration of an exemption application.

As stated above (under the heading "Exemption Application Contents--General Information"), the Department's view is that the applicant bears the responsibility to demonstrate clearly that the requested exemptions meet the statutory criteria. While nothing in the proposed regulation would preclude the Department's exemption staff from exercising its discretion and contacting an applicant for a clarification or additional information, the Department anticipates that such contact will be limited to exemption applications which, upon initial review, meet the essential requirements of the regulation. It is not administratively feasible to expect the Department's exemption staff to solicit information in every case. Moreover, such a procedure would, in effect, shift the burden of developing the exemption application from the applicant to the exemption staff.

Similarly, the imposition of a requirement that tentative denial letters detail all the reasons for the denial would, in effect, shift the analytical burden from the applicant to the Department. As with the circumstances under which additional information is solicited from applicants, the Department believes that the degree of detail required for a tentative denial letter should be left to the discretion of the exemption staff. The Department believes that a general statement of the reasons for a tentative denial is sufficient inasmuch as the issuance of a tentative denial letter does not terminate the exemption proceedings. Rather, the tentative denial letter offers the applicant the opportunity to have a conference and/or to submit additional information for consideration. In addition, a requirement to issue a comprehensive and detailed tentative denial letter in most cases would significantly increase the time required to conclude a final action.

For these reasons, the Department has decided to adopt proposed §2570.38 without change.

Opportunities To Submit Additional Information

Section 2570.39 of the proposed regulation provided that if an applicant wishes to submit additional information in support of a tentative denied exemption application, he may notify the Department of his intention to do so within the prescribed 20-day period either by telephone or by letter. After issuing such a notice, an applicant has 30 days from the date of the notice to furnish additional information to the Department. If an applicant notifies the Department of his intent to submit additional information but requests no conference, and subsequently fails to submit the promised information within the prescribed 30-day period, the Department will issue the applicant a final denial letter pursuant to §2570.41 of the regulation. However, an applicant who realizes that he will be unable to submit his additional information within the allotted time may avoid receiving a final denial letter by withdrawing his application before the end of the 30-day period pursuant to §2570.44.

As an alternative to withdrawing his application, an applicant who, for reasons beyond his control, is unable to meet the 30-day deadline may request an extension of time for filing additional information, pursuant to §2570.39 of the regulation. However, the Department will grant such extensions of time only in unusual circumstances.

No comments were received on this section of the proposed regulation which is adopted without change in the final regulation.

Conferences

Section 2570.40 of the proposed regulation described the procedures regarding conferences on exemption applications which the Department has tentatively decided to deny. Under this proposed section, an applicant is entitled to only one conference with respect to any exemption application, and is also given 20 days after the date of any conference to submit to the Department in writing any additional data or arguments discussed at the conference but not previously or adequately presented in writing. Under the proposal, an applicant is deemed to have waived his right to a conference if he fails, without good cause, to appear for a scheduled conference or to schedule a conference for any of the times proposed by the Department within the 45-day period following the receipt of his request for a conference.

Proposed §2570.40 is adopted without change in the final regulation. The only comment received regarding this proposed section suggested that the Department continue its practice of informally consulting with applicants on exemption applications in addition to holding conferences. In this regard, the Department will continue to informally contact applicants as it deems appropriate.

Final Denial Letters

Proposed §2570.41 is adopted without change in the final regulation. No comments were received on this section which specifies the circumstances in which the Department may issue a final denial letter denying a requested exemption. In most cases, the same procedure will also be followed in denying exemptions that the Department has already proposed through publication of a notice of proposed exemption in the Federal Register. However, in cases where the Department holds a hearing on an exemption, §2570.41(a)(3) of the proposed regulation allowed the Department to issue a final denial letter without first issuing a tentative denial letter and without providing the applicant with the opportunity for a conference. In the Department's view, where a hearing on a proposed exemption is conducted, the applicant and other proponents of the exemption have adequate opportunity to present their views and other evidence in support of the exemption.

Notice of Proposed Exemption

The proposed regulation did not significantly alter the procedures established by ERISA Proc. 75-1 for granting an exemption. Under §2570.42 of the regulation, the Department will publish a notice of proposed exemption in the Federal Register if, after reviewing an exemption application and any additional information submitted by an applicant, the Department tentatively concludes that the requested exemption satisfies the statutory criteria for the granting of an exemption and that the requested exemption is otherwise appropriate. This proposed section also described the contents of the notice of proposed exemption.

No comments were received on proposed §2570.42, which is adopted without change in the final regulation.

Notifying Interested Persons

Like ERISA Proc. 75-1, the proposed regulation required applicants to provide notice to interested persons in the event that the Department decides to propose the exemption. Section 2570.34 of the proposal required an applicant to submit with his application a description of the interested persons to whom notice will be provided and a description of the manner in which the applicant proposed to provide notice. That section also required an applicant to provide an estimate of the time he will need to furnish notice to interested persons following publication of a notice of proposed exemption.

Section 2570.43 of the proposed regulation provided guidance on methods an applicant may use to notify interested persons of a proposed exemption and indicated what must be included in the notice. In addition to the Notice of Proposed Exemption published in the Federal Register, the applicant must include in the notification to interested persons a supplemental statement. Section 2570.43 also stated that, once the Department has published a notice of proposed exemption, the applicant must notify the interested persons described in his application in the manner indicated in the application unless the Department has informed the applicant beforehand that it considers the method of notification described in the application to be inadequate. Where the Department has so informed an applicant, it will also secure from the applicant an agreement to provide notice in the time and manner and to the persons designated by the Department. After furnishing notification, an applicant must provide the Department with a declaration under penalty of perjury certifying that notice was given to the persons and in the manner and time specified in his application or the superseding agreement with the Department.

One of the comments received concerning notification requested clarification that, in the case of a pooled fund, the notification requirement would be satisfied if the notice to interested persons is furnished to the appropriate fiduciary of each of the plans participating in the pooled fund, but not to all participants and beneficiaries of such plans.

In the Department's view, the individuals or organizations that will constitute "interested persons" depends on the nature of the exemption being requested. For this reason, the proposed regulation did not attempt to delineate the term "interested persons" for purposes of the notification requirements of §2570.43. As previously noted, the applicant is required to include, as part of the exemption application, a description of the interested persons to whom the applicant intends to provide notice (§2570.34(b)(2)(i)). If the Department finds that either the method of providing the notice or the persons to whom the applicant proposes to provide notice is inadequate, the Department will, pursuant to §2570.43, secure an agreement from the applicant on the appropriate method of providing the notice and/or the scope of the notice to be provided. The Department believes that this approach provides the flexibility necessary to accommodate the varied types of exemption applications, as well as circumstances unique to a particular applicant.(7)

Accordingly, the Department has decided to adopt §2570.43 as proposed. However, subparagraph (b)(2) of this section has been modified to insert references to the Code and Federal Employees' Retirement System Act of 1986, and to reflect the current room number of the Division of Exemptions in a footnote to that section. Paragraph (d) of this section has also been modified to clarify that the declaration accompanying the statement to be furnished to the Department regarding the notice to interested persons must be made under penalty of perjury, as stated in the preamble to the proposed regulation (53 FR 24422, at 24425, June 28, 1988).

Withdrawal and Reinstatement of Exemption Applications

Section 2570.44 of the proposed regulation permitted an applicant to withdraw his application at any time and to reinstate the application later. Reinstatement may be requested without resubmitting any information or materials previously furnished if no more than two years has elapsed from the withdrawal date. The request for reinstatement must be accompanied by any additional information that was outstanding at the time of withdrawal.

No comments were received on this proposed section, which is adopted in the final regulation without change.

Requests for Reconsideration of Final Denials

Under §2570.45 of the proposed regulation, after the Department has issued a final denial letter on an exemption, it will not reconsider an application covering the same transaction unless the applicant presents significant new facts or arguments in support of the exemption which, for good reason, the applicant could not have submitted for consideration during the Department's initial review of the exemption application. An applicant must present the significant new facts or arguments in a request for reconsideration within 180 days after the issuance of the final denial letter.

Proposed §2570.45 also stated that only on request for reconsideration of any finally denied application will be considered by the Department. Although no comments were received on this section of the proposed regulation, the Department has modified this section in the final regulation to clarify that the Department will not limit the number of requests for reconsideration of final denials based solely on the applicant's failure to respond timely to a tentative denial letter or to furnish additional information timely (i.e., within the time frames provided under §§2570.38(b) or 2570.39(e), respectively).

The Department has also clarified in the final regulation that the declaration required under §2570.45(c) must be made under penalty of perjury. This clarification is consistent with the requirement of §2570.34(b)(5) that every original exemption application must be accompanied by a similar declaration under penalty of perjury. The Department intends that the same type of declaration should accompany both an original exemption application and a request for reconsideration of a final denial based on the merits of such an application.

Hearings

Section 408(a) of ERISA precludes the Department from granting an exemption from the fiduciary self-dealing prohibitions of section 406(b) unless the Department affords an opportunity for a hearing and makes a determination on the record with respect to the three statutory criteria established for granting an exemption.(8)  Because these provisions specify that an opportunity for a hearing must be given before an exemption from these prohibitions is granted, but not before such an exemption is denied, the Department interprets these provisions to mean that only opponents of such an exemption must be given an opportunity for a hearing. Moreover, the Department has concluded that it must provide a hearing on the record to opponents of such a proposed exemption only where it appears that there are material factual issues relating to the proposed exemption that cannot be fully explored without such a hearing. Indeed, in the Department's experience, such hearings are not useful where the only issues to be decided are matters of law or where material factual issues can be adequately explored by less costly and more expeditious means, such as written submissions. Accordingly, under §2570.46 of the proposed regulation, the Department requires that persons who may be adversely affected by the grant of an exemption from the fiduciary self-dealing prohibitions offer some evidence of the existence of issues that can be fully examined only at a hearing before it will grant a request for a hearing. Where persuasive evidence of the existence of such issues is offered, however, the Department will grant the requested hearing.

Under §2570.47 of the proposed regulation, the Department may schedule a hearing on its own motion if it determines that a hearing would be useful in exploring issues relevant to the requested exemption. Under the proposed procedures, if the Department decides to conduct a hearing on an exemption under either §2570,46 or §2570.47, the applicant must notify interested persons of the hearing in the manner prescribed by the Department. Ordinarily, such notice may be provided by furnishing interested persons with a copy of the notice of hearing published by the Department in the Federal Register within 10 days of its publication. After furnishing notice, the applicant must submit to the Department a declaration under penalty of perjury certifying that notice has been provided in the manner prescribed.

Any testimony or other evidence offered at a hearing held under either §2570.46 or §2570.47 becomes part of the administrative record to be used by the Department in making its final decision on an exemption application.

No comments were received on proposed §§2570.46 and 2570.47, which are adopted without change in the final regulation.

Grant of Exemption

Section 2570.48 of the proposed regulation provided that if, after considering all of an applicant's submissions, together with any comments received from interested persons and the record of any hearing held in connection with a requested exemption should be granted, it will publish a notice in the Federal Register granting the exemption. This proposed section also described the contents of the grant notice.

No comments were received on proposed §2570.48, which is adopted without change in the final regulation.

Limits on the Effect of Exemptions

Notwithstanding the duty to amend and supplement exemption applications provided under §2570.37, the Department expressly conditions every exemption on the accuracy and completeness of the facts and representations provided by an applicant in support of the exemption.

Therefore, as indicated under §2570.49 of the proposed regulation, exemption does not take effect or protect parties in interest from liability unless the material facts and representations contained in the application or in any other materials, documents, or testimony submitted by the applicant in support of the application were true and complete.

Thus, for example, in the case of a continuing exemption transaction such as a loan or a lease, if any of the material facts described in the application were to change after the exemption is granted, the exemption would cease to apply as of the date of such change even though, pursuant to §2570.37, the applicant would not be obligated to notify the Department of such change. In the event of any such change the parties in interest involved in the exemption transaction may apply for a new exemption to protest themselves from liability on or after the date of such change. Such an application should be submitted before such change occurs (see the discussion of prospective, versus retroactive, exemption under the heading "Copies of Documents," above).

No comments were received on proposed §2570.49, which is adopted without change in the final regulation.

Revocation or Modification of Exemptions

Section 2570.50 of the proposed regulation described the circumstances under which the Department may revoke or modify a previously granted exemption and the rights afforded to the applicant and to other interested persons in the event such revocation or modification is proposed. This section also provided that ordinarily such revocation or modification will be prospective only. Under this proposed section one of the circumstances permitting the Department to modify or revoke an exemption was a change in policy which calls into question to continuing validity of the Department's original conclusions regarding the granted exemption.

Two of the comments objected to permitting a change in policy as grounds for revoking or modifying a granted exemption. The commentators argued that disturbing transactions already reviewed and approved by the Department would inject an unneeded element of uncertainty into the exemption process. Moreover, concern was expressed that the revocation of an exemption could severely disrupt an applicant's business and impose great financial hardship. A commentator suggested that the final regulation include a prohibition against revocation of an exemption until the affected party in interest is given both written notice of the facts or conduct which may warrant the revocation and an opportunity to demonstrate compliance with the requirements of the exemption.(9)

Proposed §2570.50 is intended to provide the Department with the flexibility to undertake appropriate action in those cases where, subsequent to the grant of an exemption, potentially abusive practices or changes in the regulatory environment of an industry are identified which would cause the Department to reconsider its policy with respect to whether the exemption transactions continue to satisfy the statutory criteria under section 408(a) of ERISA.

With regard to the procedural issues raised by one of the comments, the Department notes that paragraph (b) of proposed §2570.50 provides for notice to interested persons by publication in the Federal Register, notice to the applicant of the proposed revocation or modification, and an opportunity for the interested persons and the applicant to submit comments on the proposed revocation or modification.

After careful consideration of the comments, the Department has decided to adopt §2570.50 as proposed. However, the Department has clarified paragraph (b) to provide that the notice of proposed revocation or modification given to the applicant must be in writing.

Public Inspection and Copies

Section 2570.51 of the proposed regulation provided that the public may examine and copy any exemption application and all correspondence and documents submitted in regard thereto and may receive photocopies of all or any portion of such administrative record for a specified charge per page. For this reason, the Department cannot honor requests to keep confidential any information submitted regarding an exemption application. Therefore, none of the information submitted in regard to a requested exemption should be material that the applicant or other sender does not wish to disclose to the public.

No comments were received on proposed §2570.51, which is adopted without change in the final regulation.

Executive Order 12291 Statement

The Department has determined that this regulatory action would not constitute a "major rule" as that term is used in Executive Order 12291 because the action would not result in: an annual effect on the economy of $100 million; a major increase in costs or prices for consumers, individual industries, government agencies, or geographical regions; or significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in the domestic or export markets.

Regulatory Flexibility Act Statement

The Department has determined that this regulation would not have a significant economic impact on small plans or other small entities. As stated previously, this regulation would do little more than describe procedures that reflect practices already in place for filing and processing applications for exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974, the Internal Revenue Code of 1986, and the Federal Employee Retirement System Act of 1986.

Paperwork Reduction Act

This regulation modifies current collection of information requirements. It does so largely by codifying requests for facts and opinions that are routinely addressed to applicants for exemptions under current procedures. Accordingly, the regulation will not increase the paperwork burden for applicants. The regulation has been approved by the Office of Management and Budget under the provisions of the Paperwork Reduction Act of 1990 (Pub. L. 96-511). The final regulation is assigned control number 1210-0060.

Authority

The final regulation set forth herein is issued pursuant to the authority granted in sections 408(a) (Pub. L. 93-406, 88 Stat. 883, 29 U.S.C. 1108(a)) and 505 (Pub. L. 93-406, 88 Stat. 894, 29 U.S.C. 1135) of ERISA, under Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), under 5 U.S.C. 8477(c)(3), and under Secretary of Labor's Order No. 1-87 (52 FR 13139, April 21, 1987).

List of Subjects in 29 CFR Part 2570

Administrative practice and procedure, Employee benefit plans, Employee Retirement Income Security Act, Federal Employees' Retirement System Act, Party in interest, Pensions, Prohibited transactions.

Final Regulation

For the reasons set out in the preamble, parts 2570 and 2585 of chapter XXV of title 29 of the code of Federal Regulations are amended as follows:

Part 2570 - [Amended]

  1. The authority for part 2570 is revised to read as follows:

    Authority: 29 U.S.C. 1108(a), 1135; Reorganization Plan No.4 of 1978; 5 U.S.C. 8477(c)(3); Secretary of Labor's Order No. 1-87.

    Subpart A is also issued under 29 U.S.C. 1132(i).

  2. By adding in the appropriate place the following new subpart B to part 2570.

    Subpart B-Procedures for filling and Processing Prohibited Transaction Exemption Applications
    2570.30 Scope of rules
    2570.31 Definitions
    2570.32 Persons who may apply for exemptions
    2570.33 Applications the Department will not ordinarily consider
    2570.34 Information to be included in every exemption application
    2570.35 Information to be included in applications for individual exemptions only
    2570.36 Where to file an application
    2570.37 Duty to amend and supplement exemption applications
    2570.38 Tentative denial letters
    2570.39 Opportunities to submit additional information
    2570.40 Conferences
    2570.41 Final denial letters
    2570.42 Notice of proposed exemption
    2570.43 Notification of interested persons by applicant
    2570.44 Withdrawal of exemption applications
    2570.45 Requests for reconsideration
    2570.46 Hearings in opposition to exemptions from restrictions on fiduciary self-dealing
    2570.47 Other hearings
    2570.48 Decision to grant exemptions
    2570.49 Limits on the effect of exemptions
    2570.50 Revocation or modification of exemptions
    2570.51 Public inspection and copies
    2570.52 Effective date
    Subpart B--Procedures for Filing and Processing Prohibited Transaction Exemption Applications

§2570.30 Scope of Rules

  1. The rules of procedure set forth in this subpart apply to all applications for exemption which the Department has authority to issue under:
    1. Section 408(a) of the Employee Retirement Income Security Act of 1974 (ERISA);
    2. Section 4975(c)(2) of the Internal Revenue Code of 1986 (the Code) (see Reorganization Plan No. 4 of 1978); or
    3. The Federal Employees' Retirement System Act of 1986 (FERSA) (5 U.S.C. 8477(c)(3)).
  2. The Department will generally treat any exemption application which is filed solely under section 408(a) of ERISA or solely under section 4975(c)(2) of the Code as an exemption filed under both section 408(a) and section 4975(c)(2) if it relates to a transaction that would be prohibited both by ERISA and by the corresponding provisions of the Code.
  3. The procedures set forth in this subpart represent the exclusive means by which the Department will issue administrative exemptions. The Department will not issue exemptions upon oral request alone. Likewise, the Department will not grant exemptions orally. An applicant for an administrative exemption may request and receive oral advice from Department employees in preparing an exemption application. However, such advice does not constitute part of the administrative record and is not binding on the Department in its processing of an exemption application or in its examination or audit of a plan.

§2570.31 Definitions

For purposes of these procedures, the following definitions apply:

  1. An affiliate of a person means ––
    1. Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the person;
    2. Any director of, relative of, or partner in, any such person;
    3. Any corporation, partnership, trust, or unincorporated enterprise of which such person is an officer, director, or a 5 percent or more partner or owner; and
    4. Any employee or officer of the person who ––
      1. Is highly compensated (as defined in section 4975(e)(2)(H) of the Code), or
      2. Has direct or indirect authority, responsibility, or control regarding the custody, management, or disposition of plan assets.
  2. A class exemption is an administrative exemption, granted under section 408(a) of ERISA, section 4975(c)(2) of the Code, and/or 5 U.S.C. 8477(c)(3), which applies to any parties in interest within the class of parties in interest specified in the exemption who meet the conditions of the exemption.
  3. Department means the U.S. Department of Labor and includes the Secretary of Labor or his delegate exercising authority with respect to prohibited transaction exemptions to which this subpart applies.
  4. Exemption transaction means the transaction or transactions for which an exemption is requested.
  5. An individual exemption is an administrative exemption, granted under section 408(a) of ERISA, section 4975(c)(2) of the Code, and/or 5 U.S.C. 8477(c)(3), which applies only to the specific parties in interest named or otherwise defined in the exemption.
  6. A party in interest means a person described in section 3(14) of ERISA or 5 U.S.C. 8477(a)(4) and includes a disqualified person, as defined in section 4975(e)(2) of the Code.
  7. Pooled fund means an account or fund for the collective investment of the assets of two or more unrelated plans, including (but not limited to) a pooled separate account maintained by an insurance company and a common or collective trust fund maintained by a bank or similar financial institution.

§2570.32 Persons Who May Apply for Exemptions

  1. The Department may initiate exemption proceedings on its own motion. In addition, the Department will initiate exemption proceedings upon the application of:
    1. Any party in interest to a plan who is or may be a party to the exemption transaction;
    2. Any plan which is a party to the exemption transaction; or
    3. In the case of an application for an exemption covering a class of parties in interest or a class of transactions, in addition to any person described in paragraphs (a)(1) and (a)(2) of this section, an association or organization representing parties in interest who may be parties to the exemption transaction.
  2. An application by or for a person described in paragraph (a) of this section, may be submitted by the applicant or by his authorized representatives. If the application is submitted by a representative of the applicant, the representative must submit proof of his authority in the form of:
    1. A power of attorney; or
    2. A written certification from the applicant that the representation is authorized.
  3. If the authorized representative of an applicant submits an application for an exemption to the Department together with proof of his authority to file the application as required by paragraph (b) of this section, the Department will direct all correspondence and inquiries concerning the application to the representative unless requested to do otherwise by the applicant.

§2570.33 Applications the Department Will Not Ordinarily Consider

  1. The Department will not ordinarily consider:
    1. An application that fails to include all the information required by §§2570.34 and 2570.35 or otherwise fails to conform to the requirements of these procedures; or
    2. An application for exemption involving a transaction or transactions which are the subject of an investigation for possible violations of part 1 or 4 of subtitle B of title I of ERISA or section 8477 or 8478 of Federal Employees' Retirement System Act of 1986 or an application for an exemption involving a party in interest who is the subject of such an investigation or who is a defendant in an action by the Department or the Internal Revenue Service to enforce the above-mentioned provisions of ERISA or Federal Employees' Retirement System Act of 1986.
  2. If for any reason the Department decides not to consider an exemption application, it will inform the applicant of that decision in writing and of the reasons therefore.
  3. An application for an individual exemption relating to a specific transaction or transactions will ordinarily not be considered separately if the Department is considering a class exemption relating to the same type of transaction or transactions.

§2570.34 Information To Be Included in Every Exemption Application

  1. All applications for exemptions must contain the following information:
    1. The name(s) of the applicant(s);
    2. A detailed description of the exemption transaction and the parties in interest for whom an exemption is requested, including a description of any larger integrated transaction of which the exemption transaction is a part;
    3. Whether the affected plan(s) and any parties in interest will be represented by the same person with regard to the exemption application;
    4. Reasons a plan would have for entering into the exemption transaction;
    5. The prohibited transaction provisions from which exemptive relief is requested and the reason why the transaction would violate each such provision;
    6. Whether the exemption transaction is customary for the industry or class involved;
    7. Whether the exemption transaction is or has been the subject of an investigation or enforcement action by the Department or by the Internal Revenue Service; and
    8. The hardship or economic loss, if any, which would result to the person or persons on behalf of whom the exemption is sought, to affected plans, and to their participants and beneficiaries from denial of the exemption.
  2. All applications for exemption must also contain the following:
    1. A statement explaining why the requested exemption would be ––
      1. Administratively feasible;
      2. In the interests of affected plans and their participants and beneficiaries; and
      3. Protective of the rights of participants and beneficiaries of affected plans.
    2. With respect to the notification of interested persons required by §2570.43:
      1. A description of the interested persons to whom the applicant intends to provide notice;
      2. The manner in which the applicant will provide such notice; and
      3. An estimate of the time the applicant will need to furnish notice to all interested persons following publication of a notice of the proposed exemption in the Federal Register.
    3. If an advisory opinion has been requested with respect to any issue relating to the exemption transaction ––
      1. A copy of the letter concluding the Department's action on the advisory opinion request; or
      2. If the Department has not yet concluded its action on the request:
        1. A copy of the request or the date on which it was submitted together with the Department's correspondence control number as indicated in the acknowledgment letter; and
        2. An explanation of the effect of a favorable advisory opinion upon the exemption transaction.
    4. If the application is to be signed by anyone other than an individual party in interest seeking exemptive relief on his own behalf, a statement which ––
      1. Identifies the individual who will be signing the application and his position with the applicant; and
      2. Explains briefly the basis of his familiarity with the matters discussed in the application.
    5. A declaration in the following form: Under penalty of perjury, I declare that I am familiar with the matters discussed in this application and, to the best of my knowledge and belief, the representations made in this application are true and correct.
      1. This declaration must be dated and signed by:
        1. The applicant himself in the case of an individual party in interest seeking exemptive relief on his own behalf;
        2. A corporate officer or partner where the applicant is a corporation or partnership;
        3. A designated officer or official where the applicant is an association, organization or other unincorporated enterprise;
        4. The plan fiduciary who has the authority, responsibility, and control with respect to the exemption transaction where the applicant is a plan.
      2. Specialized statements from third-party experts, such as appraisals or analyses of market conditions, submitted to support an application for exemption must also be accompanied by a statement of consent from such expert acknowledging that he or she knows that his or her statement is being submitted to the Department as part of an application for exemption.
      3. For those applications requiring an independent fiduciary to represent the plan in the exemption transaction, each statement submitted by said independent fiduciary must contain a signed and dated declaration under penalty of perjury that, to the best of said fiduciary's knowledge and belief, the representations made in such statement are true and correct.
  3. An application for exemption may also include a draft of the requested exemption which defines the transaction and parties in interest for which exemptive relief is sought and the specific conditions under which the exemption would apply.

§2570.35 Information To Be Included in Applications for Individual Exemptions Only

  1. Except as provided in paragraph (c) of this section, every application for an individual exemption must include, in addition to the information specified in §2570.34, the following information:
    1. The name, address, telephone number, and type of plan or plans to which the requested exemption applies;
    2. The Employer Identification Number (EIN) and the plan number (PN) used by such plan or plans in all reporting and disclosure required by the Department;
    3. Whether any plan or trust affected by the requested exemption has ever been found by the Department, the Internal Revenue Service, or by a court to have violated the exclusive benefit rule of section 401(a) of the Code, or to have engaged in a prohibited transaction under section 503(b) of the Code or corresponding provisions of prior law, section 4975(c)(1) of the Code, section 406 or 407(a) of ERISA, or 5 U.S.C. 8477(c)(3);
    4. Whether any relief under section 408(a) of ERISA, section 4975(c)(2) of the Code, or 5 U.S.C. 8477(c)(3) has been requested by, or provided to, the applicant or any of the parties on behalf of whom the exemption is sought and, if so, the exemption application number or the prohibited transaction exemption number;
    5. Whether the applicant or any of the parties in interest involved in the exemption transaction is currently, or has been within the last five years, a defendant in any lawsuit or criminal action concerning such person's conduct as a fiduciary or party in interest with respect to any plan;
    6. Whether the applicant or any of the parties in interest involved in the exemption transaction has, within the last 13 years, been convicted of any crime described in section 411 of ERISA;
    7. Whether, within the last five years, any plan affected by the exemption transaction or any party in interest involved in the exemption transaction has been under investigation or examination by, or has been engaged in litigation or a continuing controversy with, the Department, the Internal Revenue Service, the Justice Department, the Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift Investment Board involving compliance with provisions of ERISA, provisions of the Code relating to employee benefit plans, or provisions of Federal Employees' Retirement System Act of 1986 relating to the Federal Thrift Savings Fund. If so, the applicant must submit copies of all correspondence with the Department, the Internal Revenue Service, the Justice Department, the Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift Investment Board regarding the substantive issues involved in the investigation, examination, litigation, or controversy which relate to compliance with the provisions of part 1 or 4 of subtitle B of title I of ERISA, section 4975 of the Code, or section 8477 or 8478 of Federal Employees' Retirement System Act of 1986. For this purpose, the term "examination" does not include routine audits conducted by the Department pursuant to section 8477(g) of Federal Employees' Retirement System Act of 1986;
    8. Whether any plan affected by the requested exemption has experienced a reportable event under section 4043 of ERISA;
    9. Whether a notice of intent to terminate has been filed under section 4041 of ERISA respecting any plan affected by the requested exemption;
    10. Names, addresses, and taxpayer identifying numbers of all parties in interest involved in the subject transaction;
    11. The estimated number of participants and beneficiaries in each plan affected by the requested exemption as of the date of the application;
    12. The percentage of the fair market value of the total assets of each affected plan that is involved in the exemption transaction;
    13. Whether the exemption transaction has been consummated or will be consummated only if the exemption is granted;
    14. If the exemption transaction has already been consummated:
      1. The circumstances which resulted in plan fiduciaries causing the plan(s) to engage in the subject transaction before obtaining an exemption from the Department;
      2. Whether the transaction has been terminated;
      3. Whether the transaction has been corrected as defined in Code section 4975(f)(5);
      4. Whether Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, has been filed with the Internal Revenue Service with respect to the transaction; and
      5. Whether any excise taxes due under section 4975(a) and (b) of the Code by reason of the transaction have been paid.
    15. The name of every person who has investment discretion over any assets involved in the exemption transaction and the relationship of each such person to the parties in interest involved in the exemption transaction and the affiliates of such parties in interest;
    16. Whether or not the assets of the affected plan(s) are invested in loans to any party in interest involved in the exemption transaction, in property leased to any such party in interest, or in securities issued by any such party in interest, and, if such investments exist, a statement for each of these three types of investments which indicates:
      1. The type of investment to which the statement pertains;
      2. The aggregate fair market value of all investments of this type as reflected in the plan's most recent annual report;
      3. The approximate percentage of the fair market value of the plan's total assets as shown in such annual report that is represented by all investments of this type; and
      4. The statutory or administrative exemption covering these investments, if any.
    17. The approximate aggregate fair market value of the total assets of each affected plan;
    18. The person(s) who will bear the costs of the exemption application and of notifying interested persons; and
    19. Whether an independent fiduciary is or will be involved in the exemption transaction and, if so, the names of the persons who will bear the cost of the fee payable to such fiduciary.
  2. Each application for an individual exemption must also include:
    1. True copies of all contracts, deeds, agreements, and instruments, as well as relevant portions of plan documents, trust agreements, and any other documents bearing on the exemption transaction;
    2. A discussion of the facts relevant to the exemption transaction that are reflected in these documents and an analysis of their bearing on the requested exemption; and
    3. A copy of the most recent financial statements of each plan affected by the requested exemption.
  3. Special rule for applications for individual exemption involving pooled funds:
    1. The information required by paragraphs (a)(8) through (12) of this section is not required to be furnished in an application for individual exemption involving one or more pooled funds;
    2. The information required by paragraphs (a)(1) through (7) and (a) (13) through (19) of this section and by paragraphs (b)(1) through (3) of this section must be furnished by reference to the pooled fund, rather than to the plans participating therein. (For purposes of this paragraph, the information required by paragraph (a)(16) of this section relates solely to other pooled fund transactions with, and investments in, parties in interest involved in the exemption transaction which are also sponsors of plans which invest in the pooled fund.);
    3. The following information must also be furnished ––
      1. The estimated number of plans that are participating (or will participate) in the pooled fund; and
      2. The minimum and maximum limits imposed by the pooled fund (if any) on the portion of the total assets of each plan that may be invested in the pooled fund.
    4. Additional requirements for applications for individual exemption involving pooled funds in which certain plans participate.
      1. This paragraph applies to any application for individual exemption involving one or more pooled funds in which any plan participating therein ––
        1. Invests an amount which exceeds 20% of the total assets of the pooled fund, or
        2. Covers employees of:
          1. The party sponsoring or maintaining the pooled fund, or any affiliate of such party, or
          2. Any fiduciary with investment discretion over the pooled fund's assets, or any affiliate of such fiduciary.
      2. The exemption application must include, with respect to each plan described in paragraph (c)(4)(i) of this section, the information required by paragraphs (a)(1) through (3), (a)(5) through (7), (a)(10), (a)(12) through (16) and, (a)(18) and (19), of this section. The information required by this paragraph must be furnished by reference to the plan's investment in the pooled fund (e.g., the names, addresses and taxpayer identifying numbers of all fiduciaries responsible for the plan's investment in the pooled fund [§2570.35(a)(10)], the percentage of the assets of the plan invested in the pooled fund [§2570.35(a)(12)], whether the plan's investment in the pooled fund has been consummated or will be consummated only if the exemption is granted [§2570.35(a)(13)], etc.).
      3. The information required by paragraph (c)(4) of this section is in addition to the information required by paragraphs (c)(2) and (3) of this section relating to information furnished by reference to the pooled fund.
    5. The special rule and the additional requirements described in paragraphs (c)(1) through (4) of this section do not apply to an individual exemption request solely for the investment by a plan in a pooled fund. Such an application must provide the information required by paragraphs (a) and (b) of this section.

§2570.36 Where to File an Application

The Department's prohibited transaction exemption program is administered by the Pension and Welfare Benefits Administration (PWBA). Any exemption application governed by these procedures should be mailed or otherwise delivered to: Exemption Application, PWBA, Office of Exemption Determinations, Division of Exemptions, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210.

§2570.37 Duty to Amend and Supplement Exemption Applications

During the pendency of his exemption application, an applicant must promptly notify the Division of Exemptions in writing if he discovers that any material fact or representation contained in his application or in any documents or testimony provided in support of the application is inaccurate, if any such fact or representation changes during this period, or if, during the pendency of the application, anything occurs that may affect the continuing accuracy of any such fact or representation.

If, at any time during the pendency of his exemption application, an applicant or any other party in interest who would participate in the exemption transaction becomes the subject of an investigation or enforcement action by the Department, the Internal Revenue Service, the Justice Department, the Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift Investment Board involving compliance with provisions of ERISA, provisions of the Code relating to employee benefit plans, or provisions of Federal Employees' Retirement System Act of 1986 relating to the Federal Thrift Savings Fund, the applicant must promptly notify the Division of Exemptions.

The Department may require an applicant to provide documentation it considers necessary to verify any statements contained in the application or in supporting materials or documents.

§2570.38 Tentative Denial Letters

If, after reviewing an exemption file, the Department concludes that it will not grant the exemption, it will notify the applicant in writing of its tentative denial of the exemption application. At the same time, the Department will provide a short statement of the reasons for its tentative denial.

An applicant will have 20 days from the date of a tentative denial letter to request a conference under §2570.40 of these procedures and/or to notify the Department of its intent to submit additional information in writing under §2570.39 of these procedures. If the Department does not receive a request for a conference or a notification of intent to submit additional information within that time, it will issue a final denial letter pursuant to §2570.41.

The Department need not issue a tentative denial letter to an applicant before issuing a final denial letter where the Department has conducted a hearing on the exemption pursuant to either §2570.46 or §2570.47 of these procedures.

§2570.39 Opportunities to Submit Additional Information

An applicant may notify the Department of its intent to submit additional information supporting an exemption application either by telephone or by letter sent to the address furnished in the applicant's tentative denial letter. At the same time, the applicant should indicate generally the type of information that he will submit.

An applicant will have 30 days from the date of the notification discussed in paragraph (a) of this section to submit in writing all of the additional information he intends to provide in support of his application. All such information must be accompanied by a declaration under penalty of perjury attesting to the truth and correctness of the information provided, which is dated and signed by a person qualified under §2570.34(b)(5) of these procedures to sign such a declaration.

If, for reasons beyond his control, an applicant is unable to submit in writing all the additional information he intends to provide in support of his application within the 30-day period described in paragraph (b) of this section, he may request an extension of time to furnish the information. Such requests must be made before the expiration of the 30-day period and will be granted only in unusual circumstances and for limited periods of time.

If an applicant is unable to submit all of the additional information he intends to provide in support of his exemption application within the 30-day period specified in paragraph (b) of this section, or within any additional period of time granted to him pursuant to paragraph (c) of this section, the applicant may withdraw the exemption application before expiration of the applicable time period and reinstate it later pursuant to §2570.44 of these procedures.

The Department will issue, without further notice, a final denial letter denying the requested exemption pursuant to §2570.41 of these procedures where ––

  1. The Department has not received the additional information that the applicant indicated he would submit within the 30-day period described in paragraph (b) of this section, or within any additional period of time granted pursuant to paragraph (c) of this section;
  2. The applicant did not request a conference pursuant to §2570.38(b) of these procedures; and
  3. The applicant has not withdrawn his application as permitted by paragraph (d) of this section.

§2570.40 Conferences

Any conference between the Department and an applicant pertaining to a requested exemption will be held in Washington, DC, except that a telephone conference will be held at the applicant's request.

An applicant is entitled to only one conference with respect to any exemption application. An applicant will not be entitled to a conference, however, where the Department has held a hearing on the exemption under either §2570.46 or §2570.47 of these procedures.

Insofar as possible, conferences will be scheduled as joint conferences with all applicants present where:

  1. More than one applicant has requested an exemption with respect to the same or similar types of transactions;
  2. The Department is considering the applications together as a request for a class exemption;
  3. The Department contemplates not granting the exemption; and
  4. More than one applicant has requested a conference.

The Department will attempt to schedule a conference under this section for a mutually convenient time during the 45-day period following the later of ––

  1. The date the Department receives the applicant's request for a conference, or
  2. The date the Department notifies the applicant, after reviewing additional information submitted pursuant to §2570.39, that it is still not prepared to propose the requested exemption. If the applicant is unable to attend a conference at any of the times proposed by the Department during this 45-day period or if the applicant fails to appear for a scheduled conference, he will be deemed to have waived his right to a conference unless circumstances beyond his control prevent him from scheduling a conference or attending a scheduled conference within this period.

Within 20 days after the date of any conference held under this section, the applicant may submit to the Department a written record of any additional data, arguments, or precedents discussed at the conference but not previously or adequately presented in writing.

§2570.41 Final Denial Letters

The Department will issue a final denial letter denying a requested exemption where:

  1. The conditions for issuing a final denial letter specified in §2570.38(b) or §2570.39(e) of these procedures are satisfied;
  2. After issuing a tentative denial letter under §2570.38 of this part and considering the entire record in the case, including all written information submitted pursuant to §2570.39 and §2570.40(e) of these procedures, the Department decides not to propose an exemption or to withdraw an exemption already proposed; or
  3. After proposing an exemption and conducting a hearing on the exemption under either §2570.46 or §2570.47 of this part and after considering the entire record in the case, including the record of the hearing, the Department decides to withdraw the proposed exemption.

§2570.42 Notice of Proposed Exemption

If the Department tentatively decides, based on all the information submitted by an applicant, that the exemption should be granted, it will publish a notice of proposed exemption in the Federal Register. The notice will:

  1. Explain the exemption transaction and summarize the information received by the Department in support of the exemption;
  2. Specify any conditions under which the exemption is proposed;
  3. Inform interested persons of their right to submit comments in writing to the Department relating to the proposed exemption and establish a deadline for receipt of such comments;
  4. If the proposed exemption includes relief from the prohibitions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of Federal Employees' Retirement System Act of 1986, inform interested persons of their right to request a hearing under §2570.46 of this part and establish a deadline for receipt of requests for such hearings.

§2570.43 Notification of Interested Persons by Applicant

If, as set forth in the exemption application, the notification that an applicant intends to provide to interested persons upon publication of a notice of proposed exemption in the Federal Register is inadequate, the Department will so inform the applicant and will secure the applicant's written agreement to provide what it considers to be adequate notice under the circumstances.

If a notice of proposed exemption is published in the Federal Register in accordance with §2570.42 of this part, the applicant must notify interested persons of the pendency of the exemption in the manner and time period specified in the application or in any superseding agreement with the Department. Any such notification must include:

  1. A copy of the notice of proposed exemption; and
  2. A supplemental statement in the following form:

You are hereby notified that the United States Department of Labor is considering granting an exemption from the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974, the Internal Revenue Code of 1986, or the Federal Employees' Retirement System Act of 1986. The exemption under consideration is explained in the enclosed Notice of Proposed Exemption. As a person who may be affected by this exemption, you have the right to comment on the proposed exemption by [date].(10)  If you may be adversely affected by the grant of the exemption, you also have the right to request a hearing on the exemption by [date].](11)

Comments or requests for a hearing should be addressed to: Office of Exemption Determinations, Pension and Welfare Benefits Administration, room ________(12)  U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention: Application No. ________.(13)

The Department will make no final decision on the proposed exemption until it reviews all comments received in response to the enclosed notice. If the Department decides to hold a hearing on the exemption before making its final decision, you will be notified of the time and place of the hearing.

The method used to furnish notice to interested persons must be reasonably calculated to ensure that interested persons actually receive the notice. In all cases, personal delivery and delivery by first-class mail will be considered reasonable methods of furnishing notice.

After furnishing the notice required by this section, an applicant must provide the Department with a statement confirming that notice was furnished to the persons and in the manner and time designated in its exemption application or in any superseding agreement with the Department. This statement must be accompanied by a declaration under penalty of perjury attesting to the truth of the information provided in the statement and signed by a person qualified under §2570.34(b)(5) of these procedures to sign such a declaration. No exemption will be granted until such a statement and its accompanying declaration have been furnished to the Department.

§2570.44 Withdrawal of Exemption Applications

An applicant may withdraw his application for an exemption at any time by informing the Department, either orally or in writing, of his intent to withdraw.

Upon receiving an applicant's notice of intent to withdraw an application for an individual exemption, the Department will confirm by letter the applicant's withdrawal of the application and will terminate all proceedings relating to the application. If a notice of proposed exemption has been published in the Federal Register, the Department will publish a notice withdrawing the proposed exemption.

Upon receiving an applicant's notice of intent to withdraw an application for a class exemption or for an individual exemption that is being considered with other applications as a request for a class exemption, the Department will inform any other applicants for the exemption of the withdrawal. The Department will continue to process other applications for the same exemption. If all applicants for a particular class exemption withdraw their applications, the Department may either terminate all proceedings relating to the exemption or propose the exemption on its own motion.

If, following the withdrawal of an exemption application, an applicant decides to reapply for the same exemption, he may submit a letter to the Department requesting that the application be reinstated and referring to the application number assigned to the original application. If, at the time the original application was withdrawn, any additional information to be submitted to the Department under §2570.39 of these procedures was outstanding, that information must accompany the letter requesting reinstatement of the application. However, the applicant need not resubmit information previously furnished to the Department in connection with a withdrawn application unless reinstatement of the application is requested more than two years after the date of its withdrawal.

Any request for reinstatement of a withdrawn application submitted in accordance with paragraph (d) of this section, will be granted by the Department, and the Department will take whatever steps remained at the time the application was withdrawn to process the application.

§2570.45 Requests for Reconsideration

The Department will entertain one request for reconsideration of an exemption application that has been finally denied pursuant to §2570.41(a)(2) or (a)(3) of this part if the applicant presents in support of the application significant new facts or arguments, which, for good reason, could not have been submitted for the Department's consideration during its initial review of the exemption application.

A request for reconsideration of a previously denied application must be made within 180 days after the issuance of the final denial letter and must be accompanied by a copy of the Department's final letter denying the exemption and a statement setting forth the new information and/or arguments that provide the basis for reconsideration.

A request for reconsideration must also be accompanied by a declaration under penalty of perjury attesting to the truth of the new information provided, which is signed by a person qualified under §2570.34(b)(5) of these procedures to sign such a declaration.

If, after reviewing a request for reconsideration, the Department decides that the facts and arguments presented do not warrant reversal of its original decision to deny the exemption, it will send a letter to the applicant reaffirming that decision.

If, after reviewing a request for reconsideration, the Department decides, based on the new facts and arguments submitted, to reconsider its denial letter, it will notify the applicant of its intent to reconsider the application in light of the new information presented. The Department will then take whatever steps remained at the time it issued its final denial letter to process the exemption application.

If, at any point during its subsequent processing of the application, the Department decides again that the exemption is unwarranted, it will issue a letter affirming its final denial.

§2570.46 Hearings in Opposition to Exemptions from Restrictions on Fiduciary Self-Dealing

Any interested person who may be adversely affected by an exemption which the Department proposes to grant from the restrictions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of Federal Employees' Retirement System Act of 1986 may request a hearing before the Department within the period of time specified in the Federal Register notice of the proposed exemption. Any such request must state:

  1. The name, address, and telephone number of the person making the request;
  2. The nature of the person's interest in the exemption and the manner in which the person would be adversely affected by the exemption; and
  3. A statement of the issues to be addressed and a general description of the evidence to be presented at the hearing.

The Department will grant a request for a hearing made in accordance with paragraph (a) of this section where a hearing is necessary to fully explore material factual issues identified by the person requesting the hearing. However, the Department may decline to hold a hearing where:

  1. The request for the hearing does not meet the requirements of paragraph (a);
  2. The only issues identified for exploration at the hearing are matters of law; or
  3. The factual issues identified can be fully explored through the submission of evidence in written form.

An applicant for an exemption must notify interested persons in the event that the Department schedules a hearing on the exemption. Such notification must be given in the form, time, and manner prescribed by the Department. Ordinarily, however, adequate notification can be given by providing to interested persons a copy of the notice of hearing published by the Department in the Federal Register within 10 days of its publication, using any of the methods approved in §2570.43(c) of this part.

After furnishing the notice required by paragraph (c) of this section, an applicant must submit a statement confirming that notice was given in the form, manner, and time prescribed. This statement must be accompanied by a declaration under penalty of perjury attesting to the truth of the information provided in the statement, which is signed by a person qualified under §2570.34(b)(5) of these procedures to sign such a declaration.

§2570.47 Other Hearings

In its discretion, the Department may schedule a hearing on its own motion where it determines that issues relevant to the exemption can be most fully or expeditiously explored at a hearing.

An applicant for an exemption must notify interested persons of any hearing on an exemption scheduled by the Department in the manner described in §2570.46(c). In addition, the applicant must submit a statement subscribed as true under penalty of perjury like that required in §2570.46(d).

§2570.48 Decision to Grant Exemptions

If, after considering all the facts and representations submitted by an applicant in support of an exemption application, all the comments received in response to a notice of proposed exemption, and the record of any hearing held in connection with the proposed exemption, the Department determines that the exemption should be granted, it will publish a notice in the Federal Register granting the exemption.

A Federal Register notice granting an exemption will summarize the transaction or transactions for which exemptive relief has been granted and will specify the conditions under which such exemptive relief is available.

§2570.49 Limits on the Effect of Exemptions

An exemption does not take effect or protect parties in interest from liability with respect to the exemption transaction unless the material facts and representations contained in the application and in any materials and documents submitted in support of the application were true and complete.

An exemption is effective only for the period of time specified and only under the conditions set forth in the exemption.

Only the specific parties to whom an exemption grants relief may rely on the exemption. If the notice granting an exemption does not limit exemptive relief to specific parties, all parties to the exemption transaction may rely on the exemption.

§2570.50 Revocation or Modification of Exemptions

If, after an exemption takes effect, changes in circumstances, including changes in law or policy, occur which call into question the continuing validity of the Department's original conclusions concerning the exemption, the Department may take steps to revoke or modify the exemption.

Before revoking or modifying an exemption, the Department will publish a notice of its proposed action in the Federal Register and provide interested persons with an opportunity to comment on the proposed revocation or modification. In addition, the Department will give the applicant at least 30 days notice in writing of the proposed revocation or modification and the reasons therefor and will provide the applicant with the opportunity to comment on the revocation or modification.

Ordinarily the revocation or modification of an exemption will have prospective effect only.

§2570.51 Public Inspection and Copies

The administrative record of each exemption application will be open to public inspection and copying at the Public Disclosure Branch, PWBA, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.

Upon request, the staff of the Public Disclosure Branch will furnish photocopies of an administrative record, or any specified portion of that record, for a specified charge per page.

§2570.52 Effective Date

This regulation is effective with respect to all applications for exemptions filed with the Department under section 408(a) of ERISA, section 4975(c)(2) of the Code, or 5 U.S.C. 8477(c)(3) at any time on or after September 10, 1990. Applications for exemptions under section 408(a) of ERISA and/or section 4975 of the Code filed before September 10, 1990, are governed by ERISA Procedure 75-1. Applications for exemption under 5 U.S.C. 8477(c)(3) filed before September 10, 1990, but after December 29, 1988 are governed by part 2585 of chapter XXV of title 29 of the Code of Federal Regulations, (section 29 CFR part 2585 as revised July 1, 1990). Applications under 5 U.S.C. 8477(c)(3) filed before December 29, 1988 are governed by ERISA Procedure 75-1.

Part 2585 - [Removed]

The regulations in part 2585 of chapter XXV of title 29 of the Code of Federal Regulations are removed.

Signed at Washington, DC, this 27th day of July 1990
David G. Ball
Assistant Secretary for Pensions and Welfare Benefits
U.S. Department of Labor

Footnotes

  1. Under section 111 of the Federal Employees' Retirement System Act of 1986 Technical Corrections Act of 1986 (Pub. L. 99-556, October 27, 1986), the Department's existing exemptions procedures were made applicable to exemption applications under Federal Employees' Retirement System Act of 1986 until the earlier of the date of publication of final regulations adopting an exemption procedure or December 31, 1988.
  2. Section 8477(g) of Federal Employees' Retirement System Act of 1986 requires the Secretary of Labor to establish a program to carry out audits to determine the level of compliance with the requirements of this section relating to fiduciary responsibilities and prohibited activities of fiduciaries with respect to the Thrift Savings Fund of the Federal Employees' Retirement System. The Department has interpreted section 8477(g) to mean that the Department has a continuing responsibility to audit the Thrift Savings Fund established by Federal Employees' Retirement System Act of 1986.
  3. These sections relate, in pertinent part, to: the Department's nonconsideration of exemption applications which are the subject of an investigation for possible violations of Federal Employees' Retirement System Act of 1986 or which involve a party in interest who is the subject of such an investigation (§ 2570.33(a)(2)); and to the notification of the Division of Exemptions of certain investigations initiated after the filing of an exemption application (§ 2570.37(b)).
  4. This section of the regulation requires certain exemption applications to include copies of correspondence relating to investigations, examinations, litigation, or continuing controversies with specified Federal agencies.
  5. The Department must find that the statutory criteria are satisfied before granting a prohibited transaction exemption. The legislative history of ERISA makes it clear, however, that the Department has broad discretion in determining whether or not to grant an exemption. H.R. Rep. 1280, 93 Cong., 2d Sess. 311 (1974).
  6. See section I(e) of PTE 84-14 (49 FR 9494, March 13, 1984) the class exemption involving qualified professional asset managers.
  7. The Department notes that the form of the notice is prescribed under § 2570.43(b) of the regulation.
  8. Section 4975(c)(2) of the Code and 5 U.S.C. 8477(c)(3)(D) (added by Federal Employees' Retirement System Act of 1986) contain similar hearing requirements. The following discussion of the hearing requirements of section 408(a) of ERISA is equally applicable to those statutory provisions.
  9. This comment compares the revocation of an exemption to the revocation of a license granted by an agency of the United States Government pursuant to 5 U.S.C. 558(c). The Department is expressing no opinion herein as to the applicability of 5 U.S.C. 558(c) to the revocation of prohibited transaction exemptions under ERISA, the Code, or Federal Employees' Retirement System Act of 1986.
  10. The applicant will write in this space the date of the last day of the time period specified in the notice of proposed exemption.
  11. To be added in the case of an exemption that provides relief from section 406(b) of ERISA or corresponding sections of the Code or Federal Employees' Retirement System Act of 1986.
  12. The applicant will fill in the room number of the Division of Exemptions. As of the date of this final regulation, the room number of the Division of Exemptions was N-5671.
  13. The applicant will fill in the exemption application number, which is stated in the notice of proposed exemption, as well as in all correspondence from the Department to the applicant regarding the application.