PART 2509-INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

Sec. 2509.75-1

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2509.75-2 2509.75-3

2509.75-4

2509.75-5

Interpretive Bulletin Relating to
Section 414 (c) (4) of the Em-
ployee Retirement Security
Act of 1974.

Interpretive Bulletin Relating
to Prohibited Transactions.
Interpretive Bulletin Relating
to Investments by Employee
Benefit Plans in Securities of
Registered Investment Com-
panies.

Interpretive Bulletin Relating to Indemnification of Fiduciaries.

Questions and Answers Relating to Fiduciary Responsibility. 2509.75-6 Interpretive Bulletin Relating to section 408 (c) (2) of the Employee Retirement Income Security Act of 1974. Interpretive Bulletin supple

2509.75-7

2509.76-2

2509.76-3

Interpretive Bulletin Rescinding Guidelines on Seasonal Industries.

Interpretive bulletin withdrawing definition of seasonal industries from ERISA guidelines.

AUTHORITY: Sec. 414 (c) (4), Employee Retirement Income Security Act of 1974.

SOURCE: 41 FR 1906, Jan. 13, 1976, unless otherwise noted.

§ 2509.75-1 Interpretive bulletin relating to section 414 (c) (4) of the Employee Retirement Income Security Act of 1974.

On December 31, 1974, the Department of Labor issued an interpretive bulletin, ERISA IB 75-1, outlining and clarifying the scope of section 414 (c) (4) of the Employee Retirement Income Security Act of 1974. That section provides that section 406 and 407(a) of the Act (relating to prohibited transac

tions) shall not apply to the provision d certain services before June 30, 1977, between a plan and a party in interest if the three requirements contained in section 4:4 (c) (4) are met. The Department of Labor emphasized that section 414 (c) (4) does not delay the applicability of any of the other fiduciary responsibility provisions of Part 4 of Title I of the Act.

The first requirement contained in section 414 (c) (4) is that such services must be provided either (1) under a binding contract in effect on July 1, 1974 (or pursuant to renewals of such contract), or (2) by a party in interest who ordinarily and customarily furnished such services on June 30, 1974.

The second requirement is that at all times the services be provided on terms at least favorable to the plan as would be term newly negotiated in a current arm's-length transaction with an unrelated party.

The third requirement is that the provision of services must not be or have been. at the time of such provision, a prohibited transaction within the meaning of section 503(b) of the Internal Revenue Code of 1954 or the corresponding provisions of prior internal revenue laws.

If the three requirements of section 414 (c) (4) are met, section 406 of the Act will not apply to services provided before June 30, 1977, to customers to whom such services were being provided on June 30, 1974, as well as to new customers.

To the extent section 406 would apply to the receipt of compensation for services rendered, section 406 shall not apply to the receipt of compensation for such services provided before June 30, 1977, if the three requirements of section 414 (c) (4) are met.

To the extent section 406 would apply to the providing of multiple services to a plan. section 406 will not apply to the providing of services to the plan before June 30, 1977, if the three requirements of section 414(c) (4) are met.

Thus, if the three requirements of section 414(c) (4) are met, a person serving as fiduciary to a plan who already receives fulltime pay from an employer or an association of employers whose employees are participants in such plan, or from an employee organization whose members are participants in such plan, may continue to receive reasonable compensation from the plan for services rendered to the plan before June 30,

1977.

Similarly, until June 30, 1977, for example, a plan consultant who may be a fiduciary because of the nature of the consultative and administrative services being provided may, if the three requirements of section 414(c) (4) are met, continue to cause the sale of insurance to the plan and continue to receive commissions for such sales from the insurance company writing the policy.

Similarly, if the three requirements of ection 414 (c) (4) are met, a securities roker-dealer who renders investment adice to a plan for a fee, thereby becoming a duciary, may furnish other services to the lan, such as brokerage services, and receive ompensation therefor. Also, if a registered epresentative of such a broker-dealer were , fiduciary, the registered representative may eceive compensation, including commisions, for brokerage services performed beore June 30, 1977.

40 FR 31598, July 28, 1975. Redesignated at 11 FR 1906, Jan. 13, 1976]

2509.75-2

Interpretive bulletin relating to probihited transactions.

On February 6, 1975, the Department of Labor issued an interpretive bulletin, ERISA IB 75-2, with respect to whether a party in interest has engaged in a prohibited transaction with an employee benefit plan where the party in interest has engaged in a transaction with a corporation or partnership (within the meaning of section 7701 of the Internal Revenue Code of 1954) in which the plan has invested.

Generally, investment by a plan in securities (within the meaning of section 3(20) of the Employee Retirement Income Security Act of 1974) of a corporation or partnership will not, solely by reason of such investment, be considered to be an investment in the underlying assets of such corporation or partnership so as to make such assets of the entity "plan assets" and thereby make a subsequent transaction between the party in interest and the corporation or partnership a prohibited transaction under section 406 of the Act.

For example, if an insurance company issues a contract or policy of insurance to a plan and places the consideration for such contract or policy in its general asset account, the assets in such account shall not be considered to be plan assets. Therefore, a subsequent transaction involving the general asset account between a party in interest and the insurance company will not, solely because the plan has been issued such a contract or policy of insurance, be a prohibited transaction.

Similarly, for example, where a plan acquires a security of a corporation or a limited partnership interest in a partnership, a subsequent lease or sale of property between such corporation or partnership and a party in interest will not be a prohibited transaction solely by reason of the plan's investment in the corporation or partnership.

This general proposition, as applied to corporations and partnerships, is consistent with section 401(b) (1) of the Act, relating to plan investments in investment companies registered under the Investment Company Act of 1940. Under section 401(b) (1), an investment by a plan in securities of such an investment company may be made without

causing, solely by reason of such investment, any of the assets of the investment company to be considered to be assets of the plan.

However, the preceding paragraphs do not mean that an investment of plan assets in a security of a corporation or partnership may not be a prohibited transaction. For example, section 406(a) (1) (D) prohibits the direct or indirect transfer to, or use by or for the benefit of, a party in interest of any assets of the plan and section 406(b) (1) prohibits a fiduciary from dealing with the assets of the plan in his own interest or for his own account.

Thus, for example, if there is an arrangement under which a plan invests in, or retains its investment in, an investment company and as part of the arrangement it is expected that the investment company will purchase securities from a party in interest, such arrangement is a prohibited transaction.

Similarly, the purchase by a plan of an insurance policy pursuant to an arrangement under which it is expected that the insurance company will make a loan to a party in interest is a prohibited transaction.

Moreover, notwithstanding the foregoing, if a transaction between a party in interest and a plan would be a prohibited transaction, then such a transaction between a party in interest and such corporation or partnership will ordinarily be a prohibited transaction if the plan may, by itself, require the corporation or partnership to engage in such transaction.

Similarly, if a transaction between a party in interest and a plan would be a prohibited transaction, then such a transaction between a party in interest and such corporation or partnership will ordinarily be a prohibited transaction if such party in interest, together with one or more persons who are parties in interest by reason of such persons' relationship (within the meaning of section 3(14) (E) through (I)) to such party in interest may, with the aid of the plan but without the aid of any other persons, require the corporation or partnership to engage in such a transaction. However, the preceding sentence does not apply if the parties in interest engaging in the transaction, together with one or more persons who are parties in interest by reason of such persons' relationship (within the meaning of section 3(14) (E) through (I)) to such party in interest, may, by themselves, require the corporation or partnership to engage in the transaction.

Further, the Department of Labor emphasizes that it would consider a fiduciary who makes or retains an investment fh a corporation or partnership for the purpose of avoiding the application of the fiduciary responsibility provisions of the Act to be in contravention of the provisions of section 404 (a) of the Act.

[40 FR 31598, July 28, 1975. Redesignated at 41 FR 1906, Jan. 13, 1976]

§ 2509.75-3 Interpretive bulletin relating to investments by employee benefit plans in securities of registered investment companies.

On March 12, 1975, the Department of Labor issued an interpretive bulletin, ERISA IB 75-3, with regard to its interpretation of section 3(21) (B) of the Employee Retirement Income Security Act of 1974. That section provides that an investment by an employee benefit plan in securities issued by an investment company registered under the Investment Company Act of 1940 shall not by itself cause the investment company, its investment adviser or principal underwriter to be deemed to be a fiduciary or party in interest "except insofar as such investment company or its investment adviser or principal underwriter acts in connection with an employee benefit plan covering employees of the investment company, the investment adviser, or its principal underwriter."

The Department of Labor interprets this section as an elaboration of the principle set forth in section 401(b)(1) of the Act and ERISA IB 75-2 (issued February 6, 1975) that the assets of an investment company shall not be deemed to be assets of a plan solely by reason of an investment by such plan in the shares of such investment company. Consistent with this principle, the Department of Labor interprets this section to mean that a person who is connected with an investment company, such as the investment company itself, its investment adviser or its principal underwriter, is not to be deemed to be a fiduciary of or party in interest with respect to a plan solely because the plan has invested in the investment company's shares.

This principle applies, for example, to a plan covering employees of an investment adviser to an investment company where the plan invests in the securities of the investment company. In such a case the investment company or its principal underwriter is not to be deemed to be a fiduciary of or party in interest with respect to the plan solely because of such investment.

On the other hand, the exception clause in section 3 (21) emphasizes that if an investment company, its investment adviser or its principal underwriter is a fiduciary or party in interest for a reason other than the investment in the securities of the investment company, such a person remains a party in interest or fiduciary. Thus, in the preceding example, since an employer is a party in interest, the investment adviser remains a party in interest with respect to a plan covering its employees.

The Department of Labor emphasized that an investment adviser, principal underwriter or investment company which is a fiduciary by virtue of section 3 (21) (A) of the Act is subject to the fiduciary responsibility provisions of Part 4 of Title I of the Act, including

those relating to fiduciary duties under
tion 404.

[40 FR 31599, July 28, 1975. Redesigna
at 41 FR 1906, Jan. 13, 1976]
§ 2509.75-4

Interpretive bulletin res ing to indemnification of fiduciarie On June 4, 1975, the Department of Lab issued an interpretive bulletin, ERISA D 75-4, announcing the Department's interpe tation of section 410 (a) of the Empire Retirement Income Security Act of 1974 sofar as that section relates to indemasin. tion of fiduciaries. Section 410 (a) states, relevant part, that "any provision in & agreement or instrument which purporta u relieve a fiduciary from responsibility or la bility for any responsibility, obligation, s duty under this part shall be void as aga public policy."

The Department of Labor interprets th section to permit indemnification agreemen? which do not relieve a fiduciary of respons bility or liability under Part 4 of Title LLdemnification provisions which leave th fiduciary fully responsible and liable, bu merely permit another party to satisfy a liability incurred by the fiduciary in the same manner as insurance purchased unde section 410(b) (3), are therefore not void under section 410(a).

Examples of such indemnification prov sions are:

(1) Indemnification of a plan fiduciary bi (a) an employer, any of whose employees & covered by the plan, or an affiliate (as defined in section 407 (d) (7) of the Act) of such employer, or (b) an employee organization any of whose members are covered by the plan; and

(2) Indemnification by a plan fiduciary the fiduciary's employees who actually per form the fiduciary services.

The Department of Labor interprets section 410(a) as rendering void any arrange ment for indemnification of a fiduciary d an employee benefit plan by the plan. Such an arrangement would have the same result as an exculpatory clause, in that it would, effect, relieve the fiduciary of responsibility and liability to the plan by abrogating the plan's right to recovery from the fiduciary fo breaches of fiduciary obligations.

an

While indemnification arrangements do not contravene the provisions of section 410(s) parties entering into indemnification agreement should consider whether the agreement complies with the other provisions of Part 4 of Title I of the Act and with other applicable laws.

[40 FR 31599, July 28, 1975. Redesignated at 41 FR 1906, Jan. 13, 1976]

§ 2509.75-5 Questions and answers relating to fiduciary responsibility.

On June 25, 1975, the Department of Labor issued an interpretive bulletin, ERISA IB 75-5, containing questions and answers