Advisory Opinion 1975-89

Dear :

This is in reply to your letters of July 23 and August 5, 1975, concerning the application of the provisions of sections 404, 406, 407 and 408(e) of the Employee Retirement Income Security Act of 1974 (the Act) to profit-sharing plans which propose to acquire either employer securities or preferred stock issued by corporations that own 100 percent of the outstanding shares of employers whose employees are covered by such profit-sharing plans. Your letters request confirmation of your opinion that, by reason of section 407(b)(1), such acquisitions are not subject to the 10 percent limitation set forth in section 407(a) of the Act, and that such purchases and sales of such securities by such profit-sharing plans are exempt from the restrictions of section 406 and 407 of the Act by reason of section 408(e) of the Act.

You have also requested confirmation of your opinion that the diversification requirements of section 404(a)(1) of the Act do not apply to the acquisition and holding of such securities by profit-sharing plans. Finally, you have requested our views regarding the impact of the exercise by a participant of control over the assets in his individual account, within the meaning of section 404(c), upon the purchase and sale of qualifying employer securities and the availability of the exemption provided in section 408(e) of the Act with respect to such transactions.

Section 407(b)(1) of the Act exempts plans from the 10 percent limitations on the acquisition and holding of qualifying employer securities and real property set forth in section 407(a) of the Act, if such plans are eligible individual accounts plans. Under section 407(d)(3)(A)(i) of the Act, an individual account plan (as defined in section 3(34) of the Act) is an eligible individual account plan if it is, among other things, a profit-sharing plan or a stock bonus plan. Under section 407 (d)(3)(B), such a plan will be treated as an eligible individual account plan only if the terms of the plan explicityly provide for the acquisition and holding of qualifying employer securities or real property. Therefore, if the profit-sharing plans to which you refer in your letters are amended in accordance with section 407 (d)(3)(B) of the Act, they will be treated as eligible individual account plans and the exemption under section 407(b)(1) would be available for such plans. Further, an exemption is provided from the requirements of section 407(d)(3)(B) until January 1, 1976 for plans in existence on September 2, 1974.

We also note in this regard that although your letters refer to the securities that certain profit-sharing plans might purchase from parent corporations of employers whose employees are covered by such plans as preferred stock (which would meet the definition of "qualifying employer security" set forth in section 407(d)(5) of the Act since such parent corporations, as you have described them, would he "affiliates" of employers within the meaning of section 407(d)(7) of the Act), your letters do not provide sufficient information for us to determine whether the securities purchases by such plans which are issued directly by employers whose employees are covered by the plans would come within the definition of "qualifying employer securities."

In addition to the restrictions of section 407 of the Act, sections 406(a)(1)(E) and 406(a)(2) prohibit plan fiduciaries from knowingly causing plans to acquire or hold employer securities or real property in violation of section 407(a). Thus, acquisitions or holdings of employer securities by an eligible individual account plan would not be prohibited under either section 406(a)(1)(B) or section 406(a)(2) of the Act, provided that such employer securities are qualifying employer securities. However, acquisitions and sales of qualifying employer securities by eligible individual account plans as well as other plans might nevertheless constitute prohibited transactions under other provisions of the Act. For example, section 406(a)(1)(A) prohibits the sale or exchange of any property between a plan and a party in interest, which, as defined in section 3(14) of the Act, includes an employer any of whose employees are covered by the plan and any person which owns a 50 percent or more interest in such an employer.

However, section 408(e) of the Act provides an exemption from the restrictions of sections 406 and 407 for the acquisition or sale by a plan or qualifying employer securities or real property if, as here relevant, (1) such acquisition is for adequate consideration, (2) no commission is charged with respect thereto, and (3) the plan is an eligible individual account plan. In this regard, your letters represent that no commission would be charged with respect to any acquisition of qualifying employer securities by such plans (nor, presumably, would any commission be charged with respect to any sales of such securities), and that the plans under consideration are eligible individual account plans.

With regard, however, to whether such transactions are for "adequate consideration," section 3(18) defines that term, when used in part 4 of subtitle B, to mean, in the case of a security for which there is a generally recognized market, either the price of the security prevailing on a national securities exchange which is registered under section 6 of the Securities Exchange Act of 1934, or if the security is not traded on such an exchange, a price not less favorable to the plan than the offering price for the security as established by the current bid and asked prices quoted by persons independent of the issuer and of any party in interest; and in the case of an asset other than a security for which there is a generally recognized market, the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary of Labor. In this connection, you have not provided sufficient information to enable us to determine whether transactions in qualifying employer securities to which you refer would be for adequate consideration for purposes of section 408(e) of the Act.

As noted above, your letter requests our confirmation of your opinion that the diversification requirement of section 404(a)(1)(C) of the Act and the prudence requirement of section 404(a)(a)(B), insofar as it requires diversification, is not applicable to the acquisition or holding of qualifying employer securities by an eligible individual account plan. Pursuant to the provisions of section 404(a)(2) of the Act, is is our view that your opinion in this regard is accurate.

Finally, you have inquired whether the exemption provided in section 408(e) of the Act from sections 406 and 407 (a) of the Act, as it applies to eligible individual account plans, would be available if the acquisition or sale of qualifying employer securities is at the direction of a participant or beneficiary exercising control over the assets in his individual account within the meaning of section 404(c) of the Act. In this regard, the exemption provided in section 408(e) is available with respect to an eligible individual account plan only if the conditions set forth in that section are met; the exemption is not affected by the exercise of control by a participant or beneficiary over the assets in his individual account. We further note that a determination of whether a participant or beneficiary exercises control over the assets in his individual account for purposes of section 404(c) can only be made in accordance with regulations issued by the Secretary of Labor. At this time, such regulations have not been adopted or proposed for adoption.

I hope that the above is helpful to you.