Amendment to Prohibited Transaction Exemption (PTE) 84-14 for Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers, 49305-49312 [05-16702]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 70, Number 162 (Tuesday, August 23, 2005)]
[Notices]
[Pages 49305-49312]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-16702]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Number D-11047]


Amendment to Prohibited Transaction Exemption (PTE) 84-14 for 
Plan Asset Transactions Determined by Independent Qualified 
Professional Asset Managers

AGENCY: Employee Benefits Security Administration.

ACTION: Adoption of amendment to PTE 84-14.

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SUMMARY: This document amends PTE 84-14, a class exemption that permits 
various parties that are related to employee benefit plans to engage in 
transactions involving plan assets if, among other conditions, the 
assets are managed by ``qualified professional asset managers'' 
(QPAMs), which are independent of the parties in interest and which 
meet specified financial standards. Additional exemptive relief is 
provided for employers to furnish limited amounts of goods and services 
to a managed fund in the ordinary course of business. Limited relief is 
also provided for leases of office or commercial space between managed 
funds and QPAMs or contributing employers. Finally, relief is provided 
for transactions involving places of public accommodation owned by a 
managed fund. The amendment affects participants and beneficiaries of 
employee benefit plans, the sponsoring employers of such plans, and 
other persons engaging in the described transactions.

DATES: Except where otherwise indicated herein, the amendment is 
effective August 23, 2005.

FOR FURTHER INFORMATION CONTACT: Christopher J. Motta or Karen E. 
Lloyd, Office of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor, Room N-5649, 200 Constitution 
Avenue, NW., Washington, DC 20210, (202) 693-8540 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION: On September 3, 2003, a notice was published 
in the Federal Register (68 FR 52419) of the pendency before the 
Department of Labor (the Department) of a proposed amendment to PTE 84-
14 (49 FR 9494, March 13, 1984, as corrected at 50 FR 41430, October 
10, 1985). PTE 84-14 provides an exemption from certain of the 
restrictions of section 406 of ERISA, and from certain taxes imposed by 
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1) of 
the Code. The Department proposed to amend to PTE 84-14 on its own 
motion, pursuant to section 408(a) of ERISA and section 4975(c)(2) of 
the Code, and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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    \1\ Section 102 of the Reorganization Plan No. 4 of 1978, 5 
U.S.C. App. 1 (1996), generally transferred the authority of the 
Secretary of Treasury to issue administrative exemptions under 
section 4975(c)(2) of the Code to the Secretary of Labor.
    For purposes of this exemption, references to specific 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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    The notice of pendency gave interested persons an opportunity to 
comment on the proposed exemption. The Department received six comment 
letters. In general, the commenters expressed support for the proposed 
amendments. Upon consideration of all the comments received, the 
Department has determined to grant the proposed amendment, subject to 
certain modifications. These modifications and the major comments are 
discussed below.

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of

[[Page 49306]]

the Executive Order and subject to review by the Office of Management 
and Budget (OMB). Under section 3(f), the order defines a ``significant 
regulatory action'' as an action that is likely to result in a rule: 
(1) Having an annual effect on the economy of $100 million or more, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    This amendment has been drafted and reviewed in accordance with 
Executive Order 12866, section 1(b), Principles of Regulation. Pursuant 
to the terms of the Executive Order, it has been determined that this 
action is a ``significant regulatory action.'' Accordingly, this action 
has been reviewed by OMB.

Paperwork Reduction Act

    The information collections in the exemption, as re-stated and 
amended in the adoption of Amendment to PTE 84-14, and in the Proposed 
Amendment to Prohibited Transaction Exemption 84-14 for Plan Asset 
Transactions Determined by Independent Qualified Professional Asset 
Managers have been combined in one ICR that is described in the 
Paperwork Reduction Act section of the Notice of the Proposed Amendment 
also published in this issue of the Federal Register.

Description of the Exemption

    PTE 84-14 consists of four separate parts. The General Exemption, 
set forth in Part I, permits an investment fund managed by a QPAM to 
engage in a wide variety of transactions described in ERISA section 
406(a)(1)(A) through (D) with virtually all parties in interest except 
the QPAM which manages the assets involved in the transaction and those 
parties most likely to have the power to influence the QPAM. In this 
regard, under section I(a), the exemption would not be available if a 
QPAM caused the investment fund to enter into a transaction with a 
party in interest dealing with the fund, if the party in interest or 
its ``affiliate,'' (1) was authorized to appoint or terminate the QPAM 
as a manager of any of the plan's assets, (2) was authorized to 
negotiate the terms of the management agreement with the QPAM 
(including renewals or modifications thereof) on behalf of the plan, or 
(3) had exercised such powers in the immediately preceding one year. 
Additionally, under section I(d), the QPAM may not cause the investment 
fund which it manages to engage in a transaction with itself or a 
``related'' party. Section V(h) provides generally that a party in 
interest and a QPAM are ``related'' if either entity (or parties 
controlling or controlled by either entity) owns a five percent or more 
interest in the other entity.
    Part II of the exemption provides limited relief under both section 
406(a) and (b) of ERISA for certain transactions involving those 
employers and certain of their affiliates which could not qualify for 
the General Exemption provided by Part I. Part III of the exemption 
provides limited relief under section 406(a) and (b) of ERISA for the 
leasing of office or commercial space by an investment fund to the 
QPAM, an affiliate of the QPAM, or a person who could not qualify for 
the General Exemption provided by Part I because it held the power of 
appointment described in section I(a). Part IV of the exemption 
provides limited relief under section 406(a) and 406(b)(1) and (2) of 
ERISA for the furnishing of services and facilities by a place of 
public accommodation owned by an investment fund managed by a QPAM, to 
all parties in interest, if the services and facilities are furnished 
on a comparable basis to the general public.
    In the notice published September 3, 2003, the Department proposed 
to amend the General Exemption of PTE 84-14 in several respects. With 
respect to section I(a) (power of appointment), the Department proposed 
to delete the ``one year look-back rule'' under which the exemption 
would have been unavailable to a party in interest if it had exercised 
the power of appointment within the one-year period preceding the 
transaction. The Department also proposed to clarify that section 
I(a)'s power of appointment refers only to the power to appoint the 
QPAM as manager of the assets involved in the transaction, as opposed 
to any of the plan's assets. In addition, the Department proposed to 
modify section I(a) to make the class exemption available to a party in 
interest with respect to a plan investing in a commingled investment 
fund, notwithstanding that the party in interest has the authority to 
redeem or acquire units of such a fund on behalf of the plan, if the 
plan's interest in the fund represents less than 10% of the investment 
fund's total assets. Finally, the Department proposed to amend section 
V(c), the definition of affiliate as it applies to section I(a) and 
Part II, to delete those partnerships in which the person has less than 
a 10 percent interest and to only include highly compensated employees 
as defined in section 4975(e)(2)(H) of the Code.
    With respect to section I(d) and the definition of ``related'' 
under section V(h), the Department proposed to amend section V(h) to 
provide that a QPAM is ``related'' to a party in interest for purposes 
of section I(d) if:
     The QPAM or the party in interest owns a 10 percent or 
more interest in the other entity;
     A person controlling or controlled by the QPAM or the 
party in interest owns a 20 percent or more interest in the other 
entity; or
     A person controlling, or controlled, by the QPAM or the 
party in interest owns less than a 20 percent interest in the other 
entity, but nevertheless exercises control over the management or 
policies of the other party by reason of its ownership interest.
    In addition, the Department proposed to modify section V(h) to 
provide that generally determinations of whether the QPAM is 
``related'' to a party in interest for purposes of section I(d) may be 
made as of the last day of the most recent calendar quarter. Finally, 
the Department proposed to amend section V(h)(2) to provide that shares 
held in a fiduciary capacity need not be considered in applying the 
percentage limitations.
    With respect to the definition of QPAM, the Department proposed to 
clarify that the phrase in section V(a)(4) ``as of the last day of its 
most recent fiscal year'' only modifies the term ``total client assets 
under its management and control in excess of $50,000,000,'' and does 
not refer to the shareholders' or partners' equity requirement.
    The Department also proposed to adjust the $50 million of client 
assets under management standard utilized in section V(a)(4) to $85 
million, to reflect the change in the Consumer Price Index. 
Additionally, the Department proposed to increase the shareholders' and 
partners' equity requirement from $750,000 to $1,000,000, to correspond 
to the preceding subsections of section V(a).
    Finally, the Department proposed to clarify the exemption to 
specifically provide that a QPAM must be independent of an employer 
with respect to a plan whose assets are managed by the QPAM.

[[Page 49307]]

Written Comments

Comments on Proposed Amendments

QPAM Independence

    A number of commenters addressed the Department's proposed 
clarification of the QPAM requirement that it must be independent of an 
employer with respect to a plan whose assets are managed by the QPAM. 
According to the commenters, many employers in the financial services 
industry believed, based on the advice of counsel, that they were 
eligible to serve as QPAMs for their own plans. One commenter stated 
that as in-house counsel it obtained written legal advice from outside 
ERISA counsel and, in good faith reliance on such advice, determined 
that the class exemption allowed an employer to act as QPAM for its own 
plan. According to the advice memorandum submitted to the Department 
for the record, the ERISA counsel noted that there are several 
exceptions to the availability of relief under Part I of the class 
exemption. The general exemption will not apply to transactions with 
parties in interest who have the power to appoint the QPAM. In 
addition, no relief is available for transactions with the QPAM or a 
person ``related to'' the QPAM. The memorandum concluded that there is 
no exception from the availability of Part I relief for situations in 
which the QPAM is both employer and asset manager.
    Another comment submitted on behalf of an asset manager stated that 
its in-house counsel initially determined that the class exemption did 
not preclude the manager from acting as QPAM for its own plan based on 
legal advice from outside counsel; and, subsequently, this 
determination was confirmed by discussions in-house counsel had with 
outside counsel and with potential plan counterparties. Another 
commenter stated that, as in-house counsel to a large financial 
services organization, it concluded based upon its analysis that the 
class exemption permitted an investment manager to act as a QPAM for 
its own plan. In considering the issue, the commenter noted that the 
class exemption focuses on the relationship between the investment 
manager and the party in interest. According to the commenter, neither 
Part I, nor the related definitions and the general rules under Part V, 
make mention of the relationship between the plan sponsor and the 
investment manager.
    The commenters stated further that they are unaware of any examples 
of abuse associated with an advisor acting as a QPAM for its own plan. 
In addition, these commenters argued that the other conditions of the 
exemption are sufficient to protect plans from abuse. These commenters 
urged the Department to reverse its position that a QPAM must be 
independent of an employer with respect to a plan whose assets are 
managed by the QPAM.
    As to the assertion that many practioners were ``unaware'' of the 
scope of the independence requirement discussed in the paragraph above, 
the Department notes that the preamble to PTE 84-14 (49 FR 9497) 
states:

    This class exemption was developed, and is being granted, by the 
Department based on the essential premise that broad exemptive 
relief from the prohibitions of section 406(a) of ERISA can be 
afforded for all types of transactions in which a plan engages only 
if the commitments and the investments of plan assets and the 
negotiations leading thereto, are the sole responsibility of an 
independent investment manager. [Emphasis added.]

    In addition, the Department has received informal comments from 
other practitioners who were aware of the requirement that a QPAM must 
be independent of an employer with respect to a plan whose assets are 
managed by the QPAM and so advised their clients.
    After carefully considering the entire record, the Department 
acknowledges that good faith efforts appear to have been made by the 
regulated community to comply with the QPAM independence requirement, 
based on advice of counsel. Although the Department is not revising the 
final amendment to permit financial services entities to act as QPAMs 
for their own plans, we are providing limited retroactive and 
transitional relief herein.\2\ Accordingly, the independent fiduciary 
requirement of the QPAM definition will not apply for the period from 
December 21, 1982, through the date on which the Department grants a 
final amendment to the QPAM class exemption which specifically 
addresses relief for a financial institution to act as investment 
manager for its own in-house plan. In addition, by notice appearing 
elsewhere in this issue of the Federal Register, the Department is 
publishing a notice of proposed amendment to PTE 84-14 that would 
permit a financial institution to act as a QPAM for its own plan.
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    \2\ The Department notes that the definition of independent 
fiduciary in the final amendment has been re-designated section 
V(o). The Department has inserted as section V(n) the amendment to 
the QPAM class exemption pursuant to PTE 2002-13 (67 FR 9483, March 
1, 2002) which defines the term ``employee benefit plan'' or 
``plan.''
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Definition of QPAM

    As part of the proposed amendment, the Department clarified that 
the language in section V(a)(4) ``as of the last day of its most recent 
fiscal year'' only modified the term ``total client assets under its 
management * * *'' and not the term ``shareholders' or partners' 
equity.'' A commenter noted that the language ``as of the last day of 
its most recent fiscal year'' also appears in connection with the 
shareholders'/partners' equity requirement in another portion of 
section V(a)(4), and requested that the Department delete that 
language. The Department concurs with the commenter and has deleted the 
language.

Assets Involved in the Transaction

    The Department proposed to amend section I(a), the power of 
appointment rule, to focus only on the power of appointment over the 
plan assets involved in the transaction. One commenter requested that 
the definition of affiliate in section V(c) be similarly amended. In 
this regard, an affiliate of a person is defined in section V(c) to 
include:

    (3) Any director of the person or any employee of the person who 
is a highly compensated employee, as defined in section 
4975(e)(2)(H) of the Code, or who has direct or indirect authority, 
responsibility or control regarding the custody, management or 
disposition of plan assets. A named fiduciary (within the meaning of 
section 402(a)(2) of ERISA) of a plan and an employer any of whose 
employees are covered by the plan will also be considered affiliates 
with respect to each other for purposes of section I(a) if such 
employer or an affiliate of such employer has the authority, alone 
or shared with others, to appoint or terminate the named fiduciary 
or otherwise negotiate the terms of the named fiduciary's employment 
agreement.

    The commenter requested that the portion of the definition that 
refers to ``any employee * * * who has direct or indirect authority, 
responsibility or control regarding the custody, management or 
disposition of plan assets'' be amended to refer only to the plan 
assets involved in the transaction. Likewise, the commenter requested a 
similar amendment with respect to the language that refers to ``a named 
fiduciary of a plan * * *'' The Department concurs with this comment 
and has revised the final exemption accordingly.

``Related'' Definition

    The Department has proposed to amend the definition in section V(h) 
for purposes of determining whether a QPAM is ``related'' to a party in 
interest, as follows:


[[Page 49308]]


    A QPAM is ``related'' to a party in interest * * * if, as of the 
last day of its most recent calendar quarter, (i) the QPAM owns a 
ten percent or more interest in the party in interest; (ii) a person 
controlling, or controlled by, the QPAM owns a twenty percent or 
more interest in the party in interest; (iii) the party in interest 
owns a ten percent or more interest in the QPAM; or (iv) a person 
controlling, or controlled by, the party in interest owns a twenty 
percent or more interest in the QPAM. Notwithstanding the foregoing, 
a party in interest is ``related'' to a QPAM if: (i) a person 
controlling, or controlled by, the party in interest owns less than 
a twenty percent interest in the QPAM and such person exercises 
control over the management or policies of the QPAM by reason of its 
ownership interest, or (ii) a person controlling, or controlled by, 
the QPAM owns less than a twenty percent interest in the party in 
interest and such person exercises control over the management or 
policies of the party in interest by reason of its ownership 
interest.

    One commenter suggested that the threshold for determining whether 
a QPAM and a party in interest are related be increased from a 10 
percent or more interest to a 20 percent or more interest. Another 
commenter suggested that the last sentence of the definition under 
which the QPAM and a party in interest are considered related parties 
with an ownership interest of less than 20 percent due to the exercise 
of actual control, be amended so that only ownership interests of less 
than 20 percent but greater than 10 percent would be excluded under 
this part of the definition.
    The Department has determined not to adopt the commenter's 
suggestion to raise the ownership interest from 10 percent to 20 
percent. The Department believes that it is not overly burdensome for 
the QPAM and the party in interest to keep track of ownership interests 
in each other. In addition, the Department views a 10 percent interest 
in either the QPAM or the party in interest by the other entity as a 
meaningful measure for determining whether a QPAM is related to a party 
in interest. Lastly, the Department has determined to adopt the second 
comment for ease of administration of this provision. However, the 
Department cautions that a QPAM that engages in a transaction with a 
party that has actual control over it (regardless of the percentage of 
ownership involved) might be engaging in a violation of 406(b) of ERISA 
for which the General Exemption does not provide relief.

Transitional Relief

    Several commenters urged the Department to delay the effective date 
for certain of the proposed amendments in order to give parties more 
time to comply with the changes. In particular, transitional relief was 
requested for the client assets under management requirement and the 
shareholders/partners' equity requirement for QPAMs that are investment 
advisers registered under the Investment Advisers Act of 1940 (section 
V(a)(4)). One commenter requested that the client assets under 
management and shareholders' or partners' equity standards be effective 
as of the first fiscal year following the publication of the final 
amendment in the Federal Register. Another commenter requested two 
fiscal years for a QPAM to comply with the increased assets under 
management standard and one fiscal year for the increased 
shareholders'/partners' equity standard.
    The Department concurs that transitional relief is appropriate in 
these cases to permit QPAMs to conform to the amended exemption. 
Accordingly, the effective date of the new client assets under 
management and the shareholders'/partners' equity standards of section 
V(a)(4) will be as of the last day of the first fiscal year beginning 
on or after the date of publication of this amendment in the Federal 
Register. The coordination of this transitional relief with section 
V(m) of the exemption, which defines ``shareholders'' or partners' 
equity,'' may be illustrated by the following example:

    As of December 31, 2004, QPAM A had $55,000,000 in total client 
assets under its management and control, and $800,000 in 
shareholders' equity as demonstrated by the most recent balance 
sheet prepared within the immediately preceding two years. Based on 
these amounts, QPAM A, which operates on a calendar year basis and 
prepares audited balance sheets as of the last day of each calendar 
year, may continue to act as a QPAM until December 30, 2006 
[assuming that this final amendment is published during 2005]. If 
QPAM A wishes to continue operating as a QPAM after that date, QPAM 
A: (i) must have total client assets under management in excess of 
$85,000,000 as of the last day of the most recent fiscal year 
preceding the transaction, and (ii) must have, as of the date of the 
transaction, shareholders' equity in excess of $1,000,000 as shown 
in the most recent balance sheet prepared within the immediately 
preceding two years.

Securities Lending Class Exemption Amendment

    In October 2003, the Department proposed to amend and restate 
Prohibited Transaction Exemptions 81-6 and 82-63, relating to 
securities lending arrangements (68 FR 60715, October 23, 2003). The 
class exemption, if granted, would incorporate both PTEs 81-6 and 82-63 
and would expand those class exemptions to additional parties, subject 
to modified conditions. It was brought to the attention of the 
Department that PTE 81-6 is referenced in section I(b)(1) of the QPAM 
class exemption. The Department intends that, following the 
finalization of the proposed amendment and restatement of PTEs 81-6 and 
82-63, section I(b)(1) will continue to exclude transactions described 
therein from relief under the QPAM class exemption. Accordingly, the 
reference to PTE 81-6 in section I(b), as well as the references to 
other class exemptions therein, have been amended to include the phrase 
``as amended or superseded.''

Comments Requesting Additional Amendments

Newly Formed Entities Serving as QPAMs

    Under PTE 84-14, a QPAM that is an investment adviser registered 
under the Investment Advisers Act of 1940 must satisfy the assets under 
management test of section V(a)(4) as of the last day of the QPAM's 
most recent fiscal year. A commenter noted that it is difficult for 
newly-formed entities to satisfy this test and requested instead that 
the QPAM be permitted to satisfy the test based on its last fiscal 
quarter as demonstrated on a quarterly balance sheet.
    The Department notes that the original QPAM class exemption 
required the QPAM to satisfy the client assets under management 
standard as of the last day of its most recent fiscal year to ensure 
that entities serving as QPAMs are established financial institutions 
which are large enough to discourage the exercise of undue influence 
upon their decisionmaking processes. Therefore, the Department has 
determined not to revise this condition.

Veto or Approval Power

    Commenters on the original QPAM class exemption requested that plan 
officials be permitted to retain ultimate investment decision-making 
authority with respect to transactions negotiated by a QPAM. The 
Department did not adopt the suggestions of the commenters because of 
its view that retention of a veto or approval power would be 
inconsistent with the underlying concept of the QPAM exemption. The 
Department noted in the preamble to the QPAM class exemption that if 
exemptive relief were to be provided where the QPAM has less than 
ultimate discretion over acquisitions for an investment fund that it 
manages, the potential for decision making with regard to plan assets 
that would inure to the benefit of a party in interest would

[[Page 49309]]

be increased. A commenter with respect to the proposed amendments noted 
that in the INHAM class exemption, which was granted subsequent to the 
QPAM class exemption, approval power is reserved to the plan sponsor 
for transactions involving $5 million or more. The commenter requested 
that the Department likewise amend the QPAM class exemption to permit 
approval or veto by plan officials.
    The Department is not persuaded by the argument in favor of 
retention of a veto or approval power by the plan sponsor or its 
designee. The relief contained in the QPAM class exemption was 
predicated upon the existence of an independent, professional asset 
manager who is solely responsible for the discretionary management of 
plan assets that are transferred to its control. The QPAM class 
exemption did not provide relief for transactions involving the assets 
of plans managed by in-house asset managers. Conversely, the INHAM 
class exemption provided more limited relief for plan assets managed by 
an in-house manager, subject to a number of conditions, which reflected 
the differences between the QPAM and the INHAM class exemptions. Thus, 
for example, relief under the INHAM class exemption is predicated upon 
an annual exemption audit conducted by an independent auditor to assure 
compliance with the conditions of the exemption. Although the INHAM 
class exemption permits the plan sponsor to retain a veto or approval 
power, the Department notes that the plan's assets under the INHAM 
class exemption, unlike the QPAM class exemption, remain under the 
management of an affiliate of the plan sponsor. Accordingly, the 
Department has determined not to revise this condition.

Section I(e)--20% Limitation

    Section I(e) provides that a QPAM may not enter into a transaction 
with a party in interest with respect to any plan whose assets managed 
by the QPAM, when combined with the assets of other plans maintained by 
the same employer or affiliates of the employer, represent more than 20 
percent of the total client assets managed by the QPAM at the time of 
the transaction. One commenter suggested that the Department's grant of 
the INHAM class exemption indicated that it was no longer concerned 
about the potential for undue influence by plan sponsors on managers 
with large amounts of plan assets under management. As a result, the 
commenter proposed that the 20 percent limitation contained in section 
I(e) of the QPAM class exemption be eliminated or increased.
    The Department notes that the relief provided under both the QPAM 
exemption and the INHAM exemption, as well as the conditions and 
restrictions contained in each exemption, were designed to address the 
issues unique to in-house management and the retention of an 
independent manager. Since in-house managers primarily manage the 
assets of in-house plans, it would not have been practical for the 
Department to impose a 20 percent limitation similar to that found in 
the QPAM exemption. However, the Department developed other conditions 
and safeguards that enabled it to provide relief to in-house managers, 
consistent with the findings under section 408(a) of the Act. In this 
regard, the Department continues to believe that the 20 percent 
limitation plays a role in ensuring that the investment decisions of a 
QPAM are not improperly influenced by any one large plan client. 
Therefore, the Department has determined not to modify the 20 percent 
limitation in the QPAM class exemption.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of ERISA and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person with respect to a plan from certain other provisions of ERISA 
and the Code, including any prohibited transaction provisions to which 
the exemption does not apply and the general fiduciary responsibility 
provisions of section 404 of ERISA which require, among other things, 
that a fiduciary discharge his or her duties respecting plan solely in 
the interests of the participants and beneficiaries of the plan. 
Additionally, the fact that a transaction is the subject of an 
exemption does not affect the requirement of section 401(a) of the Code 
that the plan must operate for the exclusive benefit of the employees 
of the employer maintaining the plan and their beneficiaries;
    (2) The Department finds that the amended exemption is 
administratively feasible, in the interests of plans and of their 
participants and beneficiaries, and protective of the rights of 
participants and beneficiaries of plans;
    (3) The amended exemption is applicable to a particular transaction 
only if the transaction satisfies the conditions specified in the 
exemption; and
    (4) The amended exemption is supplemental to, and not in derogation 
of, any other provisions of ERISA and the Code, including statutory or 
administrative exemptions and transitional rules. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction.

Exemption

    Under section 408(a) of the Act and section 4975(c)(2) of the Code 
and in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B (55 FR 32836, 32847, August 10, 1990), effective August 23, 
2005, the Department amends PTE 84-14 as set forth below:

Part I--General Exemption

    Effective as of August 23, 2005, the restrictions of ERISA section 
406(a)(1)(A) through (D) and the taxes imposed by Code section 4975(a) 
and (b), by reason of Code section 4975(c)(1)(A) through (D), shall not 
apply to a transaction between a party in interest with respect to an 
employee benefit plan and an investment fund (as defined in section 
V(b)) in which the plan has an interest, and which is managed by a 
qualified professional asset manager (QPAM) (as defined in section 
V(a)), if the following conditions are satisfied:
    (a) At the time of the transaction (as defined in section V(i)) the 
party in interest, or its affiliate (as defined in section V(c)), does 
not have the authority to--
    (1) Appoint or terminate the QPAM as a manager of the plan assets 
involved in the transaction, or
    (2) Negotiate on behalf of the plan the terms of the management 
agreement with the QPAM (including renewals or modifications thereof) 
with respect to the plan assets involved in the transaction;
    Notwithstanding the foregoing, in the case of an investment fund in 
which two or more unrelated plans have an interest, a transaction with 
a party in interest with respect to an employee benefit plan will be 
deemed to satisfy the requirements of section I(a) if the assets of the 
plan managed by the QPAM in the investment fund, when combined with the 
assets of other plans established or maintained by the same employer 
(or affiliate thereof described in section V(c)(1) of the exemption) or 
by the same employee organization, and managed in the same investment 
fund, represent less than 10 percent of the assets of the investment 
fund;
    (b) The transaction is not described in--

[[Page 49310]]

    (1) Prohibited Transaction Exemption 81-6 (46 FR 7527; January 23, 
1981) (relating to securities lending arrangements) (as amended or 
superseded),
    (2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7, 
1983) (relating to acquisitions by plans of interests in mortgage 
pools) (as amended or superseded), or
    (3) Prohibited Transaction Exemption 82-87 (47 FR 21331; May 18, 
1982) (relating to certain mortgage financing arrangements) (as amended 
or superseded);
    (c) The terms of the transaction are negotiated on behalf of the 
investment fund by, or under the authority and general direction of, 
the QPAM, and either the QPAM, or (so long as the QPAM retains full 
fiduciary responsibility with respect to the transaction) a property 
manager acting in accordance with written guidelines established and 
administered by the QPAM, makes the decision on behalf of the 
investment fund to enter into the transaction, provided that the 
transaction is not part of an agreement, arrangement or understanding 
designed to benefit a party in interest;
    (d) The party in interest dealing with the investment fund is 
neither the QPAM nor a person related to the QPAM (within the meaning 
of section V(h));
    (e) The transaction is not entered into with a party in interest 
with respect to any plan whose assets managed by the QPAM, when 
combined with the assets of other plans established or maintained by 
the same employer (or affiliate thereof described in section V(c)(1) of 
this exemption) or by the same employee organization, and managed by 
the QPAM, represent more than 20 percent of the total client assets 
managed by the QPAM at the time of the transaction;
    (f) At the time the transaction is entered into, and at the time of 
any subsequent renewal or modification thereof that requires the 
consent of the QPAM, the terms of the transaction are at least as 
favorable to the investment fund as the terms generally available in 
arm's length transactions between unrelated parties;
    (g) Neither the QPAM nor any affiliate thereof (as defined in 
section V(d)), nor any owner, direct or indirect, of a 5 percent or 
more interest in the QPAM is a person who within the 10 years 
immediately preceding the transaction has been either convicted or 
released from imprisonment, whichever is later, as a result of: any 
felony involving abuse or misuse of such person's employee benefit plan 
position or employment, or position or employment with a labor 
organization; any felony arising out of the conduct of the business of 
a broker, dealer, investment adviser, bank, insurance company or 
fiduciary; income tax evasion; any felony involving the larceny, theft, 
robbery, extortion, forgery, counterfeiting, fraudulent concealment, 
embezzlement, fraudulent conversion, or misappropriation of funds or 
securities; conspiracy or attempt to commit any such crimes or a crime 
in which any of the foregoing crimes is an element; or any other crime 
described in section 411 of ERISA. For purposes of this section (g), a 
person shall be deemed to have been ``convicted'' from the date of the 
judgment of the trial court, regardless of whether that judgment 
remains under appeal.

Part II--Specific Exemption for Employers

    Effective as of August 23, 2005, the restrictions of sections 
406(a), 406(b)(1) and 407(a) of ERISA and the taxes imposed by section 
4975(a) and (b) of the Code, by reason of Code section 4975(c)(1)(A) 
through (E), shall not apply to:
    (a) The sale, leasing, or servicing of goods (as defined in section 
V(j)), or to the furnishing of services, to an investment fund managed 
by a QPAM by a party in interest with respect to a plan having an 
interest in the fund, if--
    (1) The party in interest is an employer any of whose employees are 
covered by the plan or is a person who is a party in interest by virtue 
of a relationship to such an employer described in section V(c),
    (2) The transaction is necessary for the administration or 
management of the investment fund,
    (3) The transaction takes place in the ordinary course of a 
business engaged in by the party in interest with the general public,
    (4) Effective for taxable years of the party in interest furnishing 
goods and services after August 23, 2005, the amount attributable in 
any taxable year of the party in interest to transactions engaged in 
with an investment fund pursuant to section II(a) of this exemption 
does not exceed one (1) percent of the gross receipts derived from all 
sources for the prior taxable year of the party in interest, and
    (5) The requirements of sections I(c) through (g) are satisfied 
with respect to the transaction;
    (b) The leasing of office or commercial space by an investment fund 
maintained by a QPAM to a party in interest with respect to a plan 
having an interest in the investment fund, if--
    (1) The party in interest is an employer any of whose employees are 
covered by the plan or is a person who is a party in interest by virtue 
of a relationship to such an employer described in section V(c),
    (2) No commission or other fee is paid by the investment fund to 
the QPAM or to the employer, or to an affiliate of the QPAM or employer 
(as defined in section V(c)), in connection with the transaction,
    (3) Any unit of space leased to the party in interest by the 
investment fund is suitable (or adaptable without excessive cost) for 
use by different tenants,
    (4) The amount of space covered by the lease does not exceed 
fifteen (15) percent of the rentable space of the office building, 
integrated office park, or of the commercial center (if the lease does 
not pertain to office space),
    (5) In the case of a plan that is not an eligible individual 
account plan (as defined in section 407(d)(3) of ERISA), immediately 
after the transaction is entered into, the aggregate fair market value 
of employer real property and employer securities held by investment 
funds of the QPAM in which the plan has an interest does not exceed 10 
percent of the fair market value of the assets of the plan held in 
those investment funds. In determining the aggregate fair market value 
of employer real property and employer securities as described herein, 
a plan shall be considered to own the same proportionate undivided 
interest in each asset of the investment fund or funds as its 
proportionate interest in the total assets of the investment fund(s). 
For purposes of this requirement, the term ``employer real property'' 
means real property leased to, and the term ``employer securities'' 
means securities issued by, an employer any of whose employees are 
covered by the plan or a party in interest of the plan by reason of a 
relationship to the employer described in subparagraphs (E) or (G) of 
ERISA section 3(14), and
    (6) The requirements of sections I(c) through (g) are satisfied 
with respect to the transaction.

Part III--Specific Lease Exemption for QPAMs

    Effective as of August 23, 2005, the restrictions of section 
406(a)(1)(A) through (D) and 406(b)(1) and (2) of ERISA and the taxes 
imposed by Code section 4975(a) and (b), by reason of Code section 
4975(c)(1)(A) through (E), shall not apply to the leasing of office or 
commercial space by an investment fund managed by a QPAM to the QPAM, a 
person who is a party in interest of a

[[Page 49311]]

plan by virtue of a relationship to such QPAM described in 
subparagraphs (G), (H), or (I) of ERISA section 3(14) or a person not 
eligible for the General Exemption of Part I by reason of section I(a), 
if--
    (a) The amount of space covered by the lease does not exceed the 
greater of 7500 square feet or one (1) percent of the rentable space of 
the office building, integrated office park or of the commercial center 
in which the investment fund has the investment,
    (b) The unit of space subject to the lease is suitable (or 
adaptable without excessive cost) for use by different tenants,
    (c) At the time the transaction is entered into, and at the time of 
any subsequent renewal or modification thereof that requires the 
consent of the QPAM, the terms of the transaction are not more 
favorable to the lessee than the terms generally available in arm's 
length transactions between unrelated parties, and
    (d) No commission or other fee is paid by the investment fund to 
the QPAM, any person possessing the disqualifying powers described in 
section I(a), or any affiliate of such persons (as defined in section 
V(c)), in connection with the transaction.

Part IV--Transactions Involving Places of Public Accommodation

    Effective as of August 23, 2005, the restrictions of section 
406(a)(1)(A) through (D) and 406(b)(1) and (2) of ERISA and the taxes 
imposed by Code section 4975(a) and (b), by reason of Code section 
4975(c)(1)(A) through (E), shall not apply to the furnishing of 
services and facilities (and goods incidental thereto) by a place of 
public accommodation owned by an investment fund managed by a QPAM to a 
party in interest with respect to a plan having an interest in the 
investment fund, if the services and facilities (and incidental goods) 
are furnished on a comparable basis to the general public.

Part V--Definitions and General Rules

    For purposes of this exemption:
    (a) The term ``qualified professional asset manager'' or ``QPAM'' 
means an independent fiduciary (as defined in section V(o)) which is--
    (1) A bank, as defined in section 202(a)(2) of the Investment 
Advisers Act of 1940 that has the power to manage, acquire or dispose 
of assets of a plan, which bank has, as of the last day of its most 
recent fiscal year, equity capital (as defined in section V(k)) in 
excess of $1,000,000 or
    (2) A savings and loan association, the accounts of which are 
insured by the Federal Savings and Loan Insurance Corporation, that has 
made application for and been granted trust powers to manage, acquire 
or dispose of assets of a plan by a State or Federal authority having 
supervision over savings and loan associations, which savings and loan 
association has, as of the last day of its most recent fiscal year, 
equity capital (as defined in section V(k)) or net worth (as defined in 
section V(l)) in excess of $1,000,000 or
    (3) An insurance company which is qualified under the laws of more 
than one State to manage, acquire, or dispose of any assets of a plan, 
which company has, as of the last day of its most recent fiscal year, 
net worth (as defined in section V(l)) in excess of $1,000,000 and 
which is subject to supervision and examination by a State authority 
having supervision over insurance companies, or
    (4) An investment adviser registered under the Investment Advisers 
Act of 1940 that has total client assets under its management and 
control in excess of $50,000,000 as of the last day of its most recent 
fiscal year, and either (A) shareholders' or partners' equity (as 
defined in section V(m)) in excess of $750,000, or (B) payment of all 
of its liabilities including any liabilities that may arise by reason 
of a breach or violation of a duty described in sections 404 and 406 of 
ERISA is unconditionally guaranteed by--(i) A person with a 
relationship to such investment adviser described in section V(c)(1) if 
the investment adviser and such affiliate have shareholders' or 
partners' equity, in the aggregate, in excess of $750,000, or (ii) A 
person described in (a)(1), (a)(2) or (a)(3) of section V above, or 
(iii) A broker-dealer registered under the Securities Exchange Act of 
1934 that has, as of the last day of its most recent fiscal year, net 
worth in excess of $750,000; and (C) effective as of the last day of 
the first fiscal year of the investment adviser beginning on or after 
August 23, 2005, substitute ``$85,000,000'' for ``$50,000,000'' and 
``$1,000,000'' for ``$750,000'' in (a)(4)(A) or (B) of section V above;
    Provided that such bank, savings and loan association, insurance 
company or investment adviser has acknowledged in a written management 
agreement that it is a fiduciary with respect to each plan that has 
retained the QPAM.
    (b) An ``investment fund'' includes single customer and pooled 
separate accounts maintained by an insurance company, individual trusts 
and common, collective or group trusts maintained by a bank, and any 
other account or fund to the extent that the disposition of its assets 
(whether or not in the custody of the QPAM) is subject to the 
discretionary authority of the QPAM.
    (c) For purposes of section I(a) and Part II, 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 corporation, partnership, trust or unincorporated 
enterprise of which such person is an officer, director, 10 percent or 
more partner (except with respect to Part II this figure shall be 5 
percent), or highly compensated employee as defined in section 
4975(e)(2)(H) of the Code (but only if the employer of such employee is 
the plan sponsor), and
    (3) Any director of the person or any employee of the person who is 
a highly compensated employee, as defined in section 4975(e)(2)(H) of 
the Code, or who has direct or indirect authority, responsibility or 
control regarding the custody, management or disposition of plan assets 
involved in the transaction. A named fiduciary (within the meaning of 
section 402(a)(2) of ERISA) of a plan with respect to the plan assets 
involved in the transaction and an employer any of whose employees are 
covered by the plan will also be considered affiliates with respect to 
each other for purposes of section I(a) if such employer or an 
affiliate of such employer has the authority, alone or shared with 
others, to appoint or terminate the named fiduciary or otherwise 
negotiate the terms of the named fiduciary's employment agreement.
    (d) For purposes of section I(g) 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--
    (A) Is a highly compensated employee (as defined in section 
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of 
the yearly wages of such person), or
    (B) Has direct or indirect authority, responsibility or control 
regarding the custody, management or disposition of plan assets.
    (e) The term ``control'' means the power to exercise a controlling 
influence over the management or

[[Page 49312]]

policies of a person other than an individual.
    (f) The term ``party in interest'' means a person described in 
ERISA section 3(14) and includes a ``disqualified person,'' as defined 
in Code section 4975(e)(2).
    (g) The term ``relative'' means a relative as that term is defined 
in ERISA section 3(15), or a brother, a sister, or a spouse of a 
brother or sister.
    (h) A QPAM is ``related'' to a party in interest for purposes of 
section I(d) of this exemption if, as of the last day of its most 
recent calendar quarter: (i) the QPAM owns a ten percent or more 
interest in the party in interest; (ii) a person controlling, or 
controlled by, the QPAM owns a twenty percent or more interest in the 
party in interest; (iii) the party in interest owns a ten percent or 
more interest in the QPAM; or (iv) a person controlling, or controlled 
by, the party in interest owns a twenty percent or more interest in the 
QPAM. Notwithstanding the foregoing, a party in interest is ``related'' 
to a QPAM if: (i) a person controlling, or controlled by, the party in 
interest has an ownership interest that is less than twenty percent but 
greater than ten percent in the QPAM and such person exercises control 
over the management or policies of the QPAM by reason of its ownership 
interest; (ii) a person controlling, or controlled by, the QPAM has an 
ownership interest that is less than twenty percent but greater than 
ten percent in the party in interest and such person exercises control 
over the management or policies of the party in interest by reason of 
its ownership interest. For purposes of this definition:
    (1) The term ``interest'' means with respect to ownership of an 
entity--
    (A) The combined voting power of all classes of stock entitled to 
vote or the total value of the shares of all classes of stock of the 
entity if the entity is a corporation,
    (B) The capital interest or the profits interest of the entity if 
the entity is a partnership, or
    (C) The beneficial interest of the entity if the entity is a trust 
or unincorporated enterprise; and
    (2) A person is considered to own an interest if, other than in a 
fiduciary capacity, the person has or shares the authority--
    (A) To exercise any voting rights or to direct some other person to 
exercise the voting rights relating to such interest, or
    (B) To dispose or to direct the disposition of such interest.
    (i) The time as of which any transaction occurs is the date upon 
which the transaction is entered into. In addition, in the case of a 
transaction that is continuing, the transaction shall be deemed to 
occur until it is terminated. If any transaction is entered into on or 
after December 21, 1982, or a renewal that requires the consent of the 
QPAM occurs on or after December 21, 1982 and the requirements of this 
exemption are satisfied at the time the transaction is entered into or 
renewed, respectively, the requirements will continue to be satisfied 
thereafter with respect to the transaction. Notwithstanding the 
foregoing, this exemption shall cease to apply to a transaction exempt 
by virtue of Part I or Part II at such time as the percentage 
requirement contained in section I(e) is exceeded, unless no portion of 
such excess results from an increase in the assets transferred for 
discretionary management to a QPAM. For this purpose, assets 
transferred do not include the reinvestment of earnings attributable to 
those plan assets already under the discretionary management of the 
QPAM. Nothing in this paragraph shall be construed as exempting a 
transaction entered into by an investment fund which becomes a 
transaction described in section 406 of ERISA or section 4975 of the 
Code while the transaction is continuing, unless the conditions of this 
exemption were met either at the time the transaction was entered into 
or at the time the transaction would have become prohibited but for 
this exemption.
    (j) The term ``goods'' includes all things which are movable or 
which are fixtures used by an investment fund but does not include 
securities, commodities, commodities futures, money, documents, 
instruments, accounts, chattel paper, contract rights and any other 
property, tangible or intangible, which, under the relevant facts and 
circumstances, is held primarily for investment.
    (k) For purposes of section V(a)(1) and (2), the term ``equity 
capital'' means stock (common and preferred), surplus, undivided 
profits, contingency reserves and other capital reserves.
    (l) For purposes of section V(a)(3), the term ``net worth'' means 
capital, paid-in and contributed surplus, unassigned surplus, 
contingency reserves, group contingency reserves, and special reserves.
    (m) For purposes of section V(a)(4), the term ``shareholders' or 
partners' equity'' means the equity shown in the most recent balance 
sheet prepared within the two years immediately preceding a transaction 
undertaken pursuant to this exemption, in accordance with generally 
accepted accounting principles.
    (n) The terms ``employee benefit plan'' and ``plan'' refer to an 
employee benefit plan described in section 3(3) of ERISA and/or a plan 
described in section 4975(e)(1) of the Code.
    (o) For purposes of section V(a), the term ``independent 
fiduciary'' means a fiduciary managing the assets of a plan in an 
investment fund that is independent of and unrelated to the employer 
sponsoring such plan. For purposes of this exemption, the independent 
fiduciary will not be deemed to be independent of and unrelated to the 
employer sponsoring the plan if such fiduciary directly or indirectly 
controls, is controlled by, or is under common control with the 
employer sponsoring the plan. Notwithstanding the foregoing, for the 
period from December 21, 1982, through the date on which the Department 
grants a final amendment which addresses relief for financial 
institutions that serve as investment managers for their own plans, a 
QPAM managing the assets of a plan in an investment fund will not fail 
to satisfy the requirements of section V(a) solely because such 
fiduciary is the employer sponsoring the plan or directly or indirectly 
controls, is controlled by, or is under common control with the 
employer sponsoring the plan.

    Signed at Washington, DC, this 11th day of August, 2005.
Ivan L. Strasfeld,
Director, Office of Exemption, Determinations, Employee Benefits 
Security Administration, Department of Labor.
[FR Doc. 05-16702 Filed 8-22-05; 8:45 am]
BILLING CODE 4510-29-P