Adoption of Amendment to the Class Exemption for the Release of Claims and Extensions of Credit in Connection With Litigation (PTE 2003-39), 33830-33837 [2010-14381]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 75, Number 114 (Tuesday, June 15, 2010)]
[Notices]
[Pages 33830-33837]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-14381]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11337]


Adoption of Amendment to the Class Exemption for the Release of 
Claims and Extensions of Credit in Connection With Litigation (PTE 
2003-39)

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Adoption of Amendment to a Class Exemption.

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SUMMARY: This document amends PTE 2003-39 (68 FR 75632, Dec. 31, 2003), 
a class exemption from certain prohibited transaction restrictions of 
the Employee Retirement Income Security Act of 1974 (ERISA or the Act) 
and from certain taxes imposed by the Internal Revenue Code of 1986, as 
amended (the Code). PTE 2003-39 generally exempts a plan's receipt of 
consideration from a related party in partial or complete settlement of 
actual or threatened litigation, as well as extensions of credit from a 
plan in connection with settlement payments made over time by the 
related party. The amendment expands the categories of assets that may 
be accepted by plans in the settlement of litigation, subject to 
certain conditions. Among other things, the amendment permits the 
receipt of non-cash assets in settlement of a claim (including the 
promise of future employer contributions) but only in instances where 
the consideration can be objectively valued. The amendment also 
modifies PTE 2003-39 to permit plans to acquire, hold, or sell employer 
securities such as warrants and stock rights which are received in 
settlement of litigation, including bankruptcy proceedings.
    This amendment is being granted in response to requests from 
practitioners and independent fiduciaries who sought an expansion of 
the types of consideration that plans could accept in connection with 
the settlement of litigation. The amendment affects all employee 
benefit plans, the participants and beneficiaries of such plans, and 
parties in interest with respect to those plans engaging in the 
described transactions.

DATES: Effective Date: The amendment is effective June 15, 2010.

FOR FURTHER INFORMATION CONTACT: Christopher Motta or Allison Padams-
Lavigne, Office of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor, Washington, DC 20210 (202) 
693-8540 (not a toll-free number).

SUPPLEMENTARY INFORMATION: On November 21, 2007, a notice was published 
in the Federal Register (72 FR 65597) of the pendency before the 
Department of a proposed amendment to PTE 2003-39, which exempts 
certain transactions from the restrictions of sections 406(a) and 
407(a) of the Act and from the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code.
    The amendment described herein is being granted by the Department 
on its own motion pursuant to section 408(a) of the Act and section 
4975(c)(2) of the Code, and in accordance with the procedures set forth 
in 29 CFR Part 2570 Subpart B (55 FR 32836, August 10, 1990).\1\ The 
notice gave interested persons an opportunity to submit written 
comments or request a public hearing on the proposed amendment to the 
Department. The Department received two comments and no requests for a 
public hearing. Upon consideration of the record taken as a whole, the 
Department has determined to grant the proposed amendment with minor 
modifications.
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App. at 214 (2000) generally transferred the authority of the 
Secretary of Treasury to issue exemptions under section 4975(c)(2) 
of the Code to the Secretary of Labor. In the discussion of the 
exemption, references to specific provisions of the Act should be 
read to refer as well to the corresponding provisions of section 
4975 of the Code.
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Executive Order 12866 Statement

    Significant regulatory actions are subject to the requirements of 
Executive Order 12866 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

[[Page 33831]]

rule: (1) Having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, this action is 
significant under section 3(f)(4) of the Executive Order.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520) (PRA 95), the Department submitted the information 
collection request (ICR) included in the Class Exemption for Release of 
Claims and Extensions of Credit in Connection With Litigation (the 
``Class Exemption'') to the Office of Management and Budget (OMB) for 
review and clearance at the time the class exemption was published in 
the Federal Register (68 FR75632, December 31, 2003) under OMB control 
number 1210-0091. The ICR was renewed by OMB through June 30, 2012, on 
June 15, 2009.
    The Amendment to the Class Exemption contains the following 
information collections:
    Written Settlement Agreement. The terms of the settlement must be 
specifically described in a written agreement or consent decree.
    Acknowledgement by Fiduciary. The fiduciary acting on behalf of the 
plan must acknowledge in writing that s/he is a fiduciary with respect 
to the settlement of the litigation.
    The amendment would expand the scope of non-cash consideration that 
may be accepted by an authorizing fiduciary on behalf of the plan in 
connection with the settlement of litigation (subject to additional 
conditions) to include employer securities, including bonds, and stock 
rights or warrants to acquire employer stock. The amendment also would 
make the valuation methods used to value non-cash consideration more 
flexible.
    The amendment to the class exemption would modify the written 
settlement agreement information collection by requiring the agreement 
to specifically describe (i) the employer securities and written 
promises of future employer contributions (and the methodology for 
determining the fair market value of such consideration) that has been 
tendered as consideration in settlement of litigation and/or (ii) 
benefit enhancements as approved by the authorizing fiduciary that are 
provided to the plan as consideration for settlement. Because it is 
usual and customary business practice to express the terms of a 
settlement in writing with some degree of detail, no additional hour 
burden has been accounted for this provision of the amendment.
    The 2007 amendment modifies the information collection associated 
with the Fiduciary Acknowledgment by requiring the authorizing 
fiduciary to acknowledge its fiduciary responsibility for the approval 
of an attorney's fee award in connection with the settlement in 
writing. The Department expects the authorizing fiduciary to 
incorporate this acknowledgement into the investment management or 
trustee agreement outlining the terms and conditions of the fiduciary's 
retention as a plan service provider, and that this agreement will 
already be in existence as part of usual and customary business 
practice. The additional hour burden attributable to the 
acknowledgement provided in the amendment is negligible; therefore, the 
Department has not increased the overall hour burden for this provision 
of the amendment.

I. Background

    Based upon feedback from practitioners and independent fiduciaries 
working to settle litigation with parties in interest, the Department 
is amending PTE 2003-39 to expand the type of consideration that can be 
accepted by an employee benefit plan in settlement of litigation. While 
the Department encourages cash settlements, it recognizes that there 
are situations in which it may be in the interest of participants and 
beneficiaries to accept consideration other than cash in exchange for 
releasing the claims of the plan and/or the plan fiduciary. Because 
ERISA does not permit plans to hold employer-issued stock rights, 
warrants, or most bonds, without an individual exemption,\2\ the 
transactions covered by PTE 2003-39 have been expanded to include the 
acquisition, holding, and disposition of employer securities received 
in settlement of litigation, including bankruptcy litigation. Other 
amendments to the class exemption seek to clarify the scope of the 
duties of the independent fiduciary charged with responsibility for 
settling litigation.
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    \2\ For example, PTE 2004-03, Lodgian 401(k) Plan and Trust 
Agreement, 69 FR 7506, 7509 (Feb. 14, 2004) (warrants); PTE 2003-33, 
Liberty Media 401(k) Savings Plan, 68 FR 64657 (Nov. 14, 2003) 
(stock rights); PTE 2002-02, The Golden Retirement Savings Program 
and The Golden Security Program, 67 FR 1242, 1243 (Jan. 9, 2002) 
(warrants).
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    The Department understands that segments of the pension community 
question whether the receipt of property by a plan in consideration for 
the release of a claim arising out of litigation with a party in 
interest would constitute a prohibited transaction under section 406 of 
the Act. It is the Department's position that the release by the plan 
of a legal or equitable claim against a party in interest in exchange 
for consideration is an exchange of property (a chose in action) 
between the plan and the party in interest which is prohibited under 
section 406(a)(1)(A) of the Act in the absence of an exemption. This 
administrative class exemption provides conditional relief from this 
prohibition.
    In many cases where a plan has brought, or is considering, a 
lawsuit against a party in interest, the plan will have terminated its 
relationship with the party, and the party will no longer be party in 
interest at the time of the settlement. A settlement of the claims 
against such a party would not constitute a prohibited transaction. In 
addition, the Department has concluded that the statutory exemption in 
ERISA section 408(b)(2) may be available under limited circumstances 
for an exchange of property made solely to resolve claims arising out 
of the performance of an underlying service arrangement.\3\
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    \3\ See Advisory Opinion 95-26A (October 17, 1995).
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II. Description of Existing Relief

    The class exemption for the release of claims and extensions of 
credit in connection with litigation provides limited relief. Since 
conflicted fiduciaries are not permitted to have a role under the 
exemption in settling the litigation, no relief is provided from the 
self-dealing provisions of ERISA. The current exemption permits the 
release of the plan's or the plan fiduciary's claim against a party in 
interest in exchange for consideration, and related extensions of 
credit. No relief is provided for any prohibited transactions that are 
the subject of the underlying litigation, or any new prohibited 
transactions (other than consideration for the release of claims) that 
may be proposed in settlement of litigation.\4\
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    \4\ Where the Department of Labor (DOL) and/or the Internal 
Revenue Service (IRS) is a party to the litigation, new prohibited 
transactions may be permitted to resolve litigation pursuant to PTE 
79-15, Class Exemption for Certain Transactions Authorized or 
Required by Judicial Order or Judicially Approved Settlement Decree, 
44 FR 26979 (May 8, 1979). DOL may also enter into a voluntary 
settlement with parties covered by ERISA, in which case any 
prospective prohibited transactions may be covered by the Class 
Exemption to Permit Certain Transactions Authorized Pursuant to 
Settlement Agreements between the Department of Labor and Plans, PTE 
94-71, 59 FR 51216 (Oct. 7, 1994).

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[[Page 33832]]

    Where a prohibited transaction giving rise to the actual or 
potential litigation is ``corrected'' in compliance with section 
4975(f)(5) of the Code, this exemption will not be necessary because 
correcting a prohibited transaction under section 4975 of the Code does 
not give rise to a prohibited transaction under Title I of the Act.\5\ 
Additionally, there is no prohibited transaction if the plan receives 
consideration,\6\ but does not have to relinquish its cause of action, 
or other assets. Finally, if the dispute involves the provision of 
services or incidental goods by a service provider, the settlement may 
fall within the statutory exemption under section 408(b)(2) of the 
Act.\7\
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    \5\ It should be noted that the Department of the Treasury has 
authority to issue regulations, rulings and opinions regarding the 
term ``correction'' as defined in Sec.  4975 of the Code. Reorg. 
Plan No. 4 of 1978, 5 U.S.C. App. at 214 (2000). Treas. Reg. Sec.  
53.4941(e)-1(c)(1) (1986) (excise taxes on private foundations) 
applies to ``correction'' of prohibited transactions under section 
4975(f) of the Code (dealing with pension excise taxes) by reason of 
Temp. Treas. Reg. Sec.  141.4975-13 (1986).
    \6\ Parties entering into such arrangement should review the IRS 
rules with respect to restorative payments. Rev. Rul. 2002-45, 2002-
2 C.B. 116.
    \7\ See, Advisory Opinion 95-26A (Oct. 17, 1995).
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    The exemption is not available where a party in interest is suing 
an employee benefit plan, unless the party in interest is suing on 
behalf of the plan pursuant to section 502(a)(2) or (3) of ERISA, in 
their capacity as a participant, beneficiary, or fiduciary. Further, it 
is the view of the Department that, in general, no exemption is needed 
to settle benefits disputes,\8\ including subrogation cases.
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    \8\ See Lockheed v. Spink, 517 U.S. 882, 892-893 (1996) (the 
payment of benefits is not a prohibited transaction).
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III. Description of Amendments

New Transactions

    The proposed amendment expanded the transactions covered by the 
exemption. In this regard, warrants and stock rights are often offered 
to shareholders, including the company's employee benefit plan, in 
settlement of litigation, including bankruptcy. In such situations, 
bonds or other property that do not constitute qualifying employer 
securities under ERISA may also be offered to employee benefit plans. 
ERISA does not permit plans to hold these assets absent an individual 
exemption. Effective as of the date of publication of the final 
exemption in the Federal Register, a plan may acquire, hold, and 
dispose of employer securities in settlement of litigation, including 
bankruptcy. The transactions covered by the exemption include the 
subsequent disposition of stock rights and warrants by sale or by 
exercise of the rights or warrants.

Modified Conditions

    The exemption currently requires that an attorney retained to 
advise \9\ the plan determine that there is a genuine controversy, 
unless the case has been certified as a class action. As amended, this 
genuine controversy requirement may be met in non-class action cases if 
a Federal or State agency is a plaintiff in the litigation.
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    \9\ The Department is aware that at least one commentator has 
interpreted this condition as requiring a formal opinion of counsel. 
This is not the case. Further, it is not necessary for the 
litigation to be filed. If suit has not been filed, the independent 
attorney can review the disputed issues and conclude that there is a 
genuine controversy. As noted in the original exemption, the purpose 
of this condition is to avoid covering sham settlements. See, Dairy 
Fresh Corp. v. Poole, 108 F. Supp. 2d 1344, 1353 (S.D. Ala. 2000).
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    Section II (b) has been redrafted to clarify that the settlement is 
being authorized by a fiduciary (hereinafter referred to as the 
authorizing fiduciary).
    Currently, the independent fiduciary must assess the reasonableness 
of the settlement in light of the risks and costs of litigation, and 
the value of claims foregone. The Department had become concerned that 
some independent fiduciaries, and those responsible for their 
retention, were viewing this condition too narrowly. As a result, the 
amendment clarified that in assessing the reasonableness of any 
settlement, the authorizing fiduciary must consider the entire 
settlement. This includes the scope of the release of claims and the 
value of any non-cash assets. In this regard, the Department further 
emphasized that the authorizing fiduciary, in assessing the 
reasonableness of the settlement, may not exclude consideration of the 
attorney's fee award or any other sums to be paid from the recovery 
(e.g., for consultants) in connection with the settlement of the 
litigation.
    Since the class exemption was finalized, attorneys for the 
Department have reviewed numerous releases in class-action litigation 
involving employee benefit plans. Some of these releases were 
unreasonably broad. The Department continues to believe that the role 
of the authorizing fiduciary includes a careful review of the scope of 
any release that will eliminate the claims of the plan or the plan 
fiduciaries. In some instances, it may be necessary for the authorizing 
fiduciary to raise objections with the court, for example, requesting 
that the court narrow the scope of the release.\10\
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    \10\ The Department does not suggest that other litigants can 
release ERISA-based claims of the Secretary of Labor, plan 
fiduciaries, participants or beneficiaries.
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    When a plan participates in a settlement, it does so as an 
independent legal entity with legal rights and obligations distinct 
from those of both the plan sponsor and from any given plan participant 
or beneficiary. In a class action, the authorizing fiduciary should 
consider whether the plan is being treated less equitably than are 
other class members, either by the terms of the settlement or through 
the failure of the settlement to adequately recognize the plan's 
particular interests. For example, a settlement could be viewed as less 
advantageous to the plan than to other class members if it requires the 
plan to surrender ERISA-related claims without payment of additional 
consideration, or if it imposes restrictions on the plan that are not 
placed on other class members (e.g., by not considering some or all of 
the plan's securities in allocating settlement proceeds).
    Attorney's fees awarded to plaintiffs' attorneys may reduce the 
plan's recovery, directly or indirectly.\11\ Although the attorneys 
bringing these class actions are entitled to fair compensation, in some 
instances abuses have occurred.\12\ In 2005, Congress passed the Class 
Action Fairness Act of 2005 \13\ to address some of these abuses. Where 
the plan's share of the settlement is significant, the authorizing 
fiduciary is generally well-positioned to use its bargaining strength 
to ensure that these fees are reasonable. It is the view of the 
Department that the authorizing fiduciary's role may require 
involvement in the attorney's fee

[[Page 33833]]

decisions, including possibly filing a formal objection with the court 
regarding these fees.
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    \11\ In some instances, the amount of the settlement fund is 
finalized before the attorney's fee awards are determined. In other 
instances, the attorney's fees are calculated as a percentage of the 
settlement fund. Generally, a court will review the reasonableness 
of the attorney's fee award.
    \12\ This issue was considered by the Federal Trade Commission's 
Class Action Fairness Project. The FTC's Web site contains links to 
many of the materials produced in connection with the Class-Action 
Fairness Project. Federal Trade Commission Home Page: https://www.ftc.gov/bcp/workshops/classaction/index.htm.
    \13\ Public Law 109-2, 119 Stat. 4 (2005). The Act amends both 
Rule 23 of the Federal Rules of Civil Procedure and 28 U.S.C. 1332. 
It expands federal jurisdiction over certain cases and contains new 
rules for class action settlements and calculation of attorney's 
fees.
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    The proposed amendment expanded the scope of non-cash consideration 
that may be accepted by an authorizing fiduciary on behalf of the plan, 
subject to additional conditions. Such consideration is divided into 
two categories: non-cash assets and benefits enhancements. Non-cash 
assets consist of property that can be appraised pursuant to the 
guidelines set forth in the Department's Voluntary Fiduciary Correction 
(VFC) Program.\14\ As amended, employer securities, including bonds, 
and stock rights or warrants on employer securities, are covered.
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    \14\ 71 FR 20262 (Apr. 19, 2006). The VFC Program, as amended, 
covers certain prohibited transactions involving illiquid property. 
The exemption states that such property includes, but is not limited 
to, restricted and thinly traded stock, limited partnership 
interests, real estate and collectibles. 71 FR at 20279. Authorizing 
Fiduciaries may find the guidelines in the VFC Program helpful in 
considering whether accepting Non-Cash property as part of a 
settlement is appropriate given the risks and additional costs that 
may be incurred where a plan holds such property. Illiquid assets 
may complicate the plan's mandatory distributions at age 70\1/2\ 
pursuant to section 401(a)(9) of the Code. The Service takes the 
position that compliance with this provision may necessitate 
distribution of a participant's fractional interest in the illiquid 
asset, which could result in additional costs to the plan. See, 
e.g., I.R.S. Priv. Ltr. Rul. 9726032 (June 27, 1997) and I.R.S. 
Priv. Ltr. Rul. 9226066 (June 26, 1992).
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    The current exemption specifies that a written agreement to make 
future contributions could be accepted in exchange for a release. This 
continues to be the case. As amended, a written promise by the employer 
to increase future contributions falls within the expanded category of 
non-cash assets. The fair market value of a stream of future 
contributions can be determined by a qualified appraiser. In contrast, 
benefits enhancements, i.e., where the employer offers to change the 
plan design to increase opportunities to diversify, or to offer other 
employee benefits, are plan amendments, not plan assets. Therefore, the 
exemption requires only approval by the authorizing fiduciary with 
respect to such benefits enhancements. Because such enhancements do not 
make the plan whole and may not benefit the same participants who were 
harmed by the actions that are the subject of litigation,\15\ an 
authorizing fiduciary should give such offers special scrutiny.
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    \15\ See generally, Field Assistance Bulletin No. 2006-01 (Apr. 
9, 2006) at https://www.dol.gov/ebsa/regs/fab_2006-1.html for a 
discussion of issues to be considered when the need arises to 
allocate settlement proceeds among different classes of participants 
and beneficiaries.
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    As amended, relief is provided for the acquisition, holding, and 
disposition of employer securities that are not ``qualifying,'' within 
the meaning of section 407(d)(5) of the Act. We understand from our 
conversations with independent fiduciaries that, in cases involving 
financially troubled companies, stock rights and warrants may be the 
only assets available. In other instances, employer-issued bonds or 
other debt instruments may offer the best value for the plan. The 
relief provided by the class exemption for accepting and holding such 
non-cash assets extends only to relief from the prohibited transaction 
provisions of sections 406(a) and 407(a) of the Act; no relief is 
provided from the fiduciary provisions of section 404 of the Act. 
Before authorizing a settlement involving non-cash assets, the 
authorizing fiduciary must determine whether accepting such assets is 
prudent and in the interest of participants and beneficiaries.
    In addition, where such non-cash assets are employer securities, 
particular attention must be paid to ERISA's diversification 
requirements. Section 404(a)(1)(C) requires that a fiduciary diversify 
the investments of the plan so as to minimize the risk of large losses, 
unless under the circumstances it is clearly prudent not to do so. 
Section 404(a)(2) provides that, in the case of an eligible individual 
account plan, the diversification requirement of section 404(a)(1)(C) 
and the prudence requirement (only to the extent that it requires 
diversification) of section 404(a)(1)(B) is not violated by the 
acquisition or holding of qualifying employer securities. If the 
employer securities do not meet the definition of qualifying employer 
securities under section 407(d)(5) of the Act, the exception contained 
in section 404(a)(2) from the diversification requirements of the Act 
will not apply to a Plan's investment in these assets. Accordingly, the 
authorizing fiduciary must determine the appropriate level of 
investment in employer securities, based on the particular facts and 
circumstances, consistent with its responsibilities under section 404 
of the Act.
    Where non-cash assets or benefits enhancements are being 
considered, the authorizing fiduciary must first determine that a cash 
settlement is either not feasible or is less beneficial than the 
alternative. Any non-cash assets must be valued at their fair market 
value in accordance with section 5 of the Voluntary Fiduciary 
Correction Program, 71 FR 20262, 20270 (Apr. 19, 2006). Both non-cash 
assets and benefits enhancements must be described in the written 
settlement agreement.
    Where the plan receives employer securities as part of the 
settlement, the authorizing fiduciary or another independent fiduciary 
must retain sole responsibility for investment decisions regarding the 
assets unless the plan is a participant-directed individual account 
plan and the authorizing fiduciary allows the participants and 
beneficiaries to exercise control over the securities allocated to 
their accounts.\16\ The proposed amendment provided that the plan could 
not pay any commissions in connection with the acquisition of assets 
pursuant to this exemption.
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    \16\ The Department encourages the independent fiduciary to the 
extent possible, consistent with its fiduciary obligations, to 
dispose of property received as part of a settlement within a 
reasonably short timeframe in order to limit costs to the plan of 
the independent fiduciary's services.
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    As is the case in the current exemption, the authorizing fiduciary 
must acknowledge in writing that it is a fiduciary for purposes of the 
settlement. As noted above, since the original exemption was granted at 
the end of 2003, the Department has learned that practitioners are 
divided on whether or not the authorizing fiduciary's role in the 
settlement included review of attorney's fees. It is the view of the 
Department that in any instance where an attorney's fee award or any 
other sums to be paid from the recovery has the potential to reduce the 
plan's overall recovery, the authorizing fiduciary should take 
appropriate steps to review the proposed fees. The exact nature of the 
authorizing fiduciary's role in connection with attorney's fees and 
other expenses paid from the recovery will vary depending on the size 
and nature of the litigation.

Discussion of the Comments Received

    The Department received two comments with respect to the proposed 
amendment, each of which suggested modifications to the text of the 
proposal as described below.
    One commenter suggested that the language of section II (m)(2) of 
the proposed exemption be modified to ensure that certain information 
offered confidentially by parties to a settlement (i.e., data that is 
not readily classified as either company trade secrets or other 
commercial or financial information) be kept confidential by the 
Department and the Internal Revenue Service, and not be disclosable to 
plan participants or beneficiaries, fiduciaries, contributing employers 
or employee organizations.
    To support its position, the commenter explained that settlements 
resulting from a mediation process

[[Page 33834]]

frequently involve the preparation of statements by the parties; these 
statements may contain certain information relevant to the dispute, 
such as a company's loss analysis, that is deemed sensitive by one of 
the parties. Because such information may not always be readily 
classified as a trade secret or as confidential, commercial or 
financial information under either the current or amended version of 
the exemption, the commenter believes that an independent fiduciary may 
not be able to guarantee the confidentiality of such internally-
generated information. As a result, the commenter stated that parties 
to a mediation are often unwilling to share sensitive information and 
analysis; thus depriving the independent fiduciary of information that 
may be relevant in evaluating the appropriateness of a proposed 
settlement. In the commenter's opinion, the independent fiduciary's 
access to sensitive information relevant to the settlement is 
paramount, even if such access results in a less transparent decisional 
record for plan participants and other interested parties.
    After considering this comment, the Department has determined to 
modify the language of the final exemption to clarify that, where 
information is offered to an authorizing fiduciary by a party to the 
settlement negotiations on the condition that the fiduciary agree that 
the information be kept confidential, the fiduciary may accept the 
information and use it to assist in its decision making without making 
it available to plan participants and beneficiaries or the Secretary, 
provided that: (i) the fiduciary makes a written finding that the 
proferred information would likely assist the fiduciary in carrying out 
its responsibilities; and (ii) a decision of a court or an opinion of 
counsel confirms that the proferred information likely cannot be 
obtained unconditionally by seeking discovery through the court, or 
cannot be obtained in a timely fashion.
    Another commenter proposed that Section I of the exemption be 
amended to modify the relief provided for the ``acquisition, holding 
and disposition of employer securities received in settlement of 
litigation, including bankruptcy.'' This commenter stated that section 
II(i)(2) of the proposed amendment, which requires that the fair market 
value of non-cash assets tendered to a plan in exchange for a release 
of claims must be determined in accordance with section 5 of the 
Voluntary Fiduciary Correction (VFC) Program, would prove unduly 
restrictive and burdensome with respect to achievement of settlements 
involving the pricing and transfer of employer securities. The 
commenter stated that the valuation of non-cash assets in a settlement 
transaction is generally the product of litigation and settlement 
negotiations between adverse parties to a genuine controversy which may 
not have involved employee benefits, and as to which ERISA-regulated 
plans may have only a minor stake. The commenter also opined that a 
plan's decision whether to receive the non-cash assets will be made by 
an authorizing fiduciary who is, by definition, independent, a feature 
not present in the typical VFC context. The commenter further argues 
that certain conditions of the exemption (sections II (c) and (d)) of 
the exemption already require that the authorizing fiduciary find the 
settlement terms, including the value of any non-cash assets, are 
``reasonable'' and ``no less favorable to the plan than comparable 
arms-length terms and conditions.'' Accordingly, the commenter believes 
that the existing conditions in the exemption are sufficiently 
protective and rigorous without incorporating additional requirements 
from the VFC program.
    Section 5(a)(1) of the VFC states that, for securities for which 
``there is a generally recognized market,'' the fair market is the 
``average'' value of the asset ``on the applicable date'' unless the 
plan document provides another objectively determined value. According 
to the commenter, legal counsel for the plaintiff class may have good 
reason for agreeing to a method for valuing publicly traded employer 
securities on a basis other than the average price on a given date. 
Moreover, the commenter represents that, for some plans, the acceptance 
of settlement proceeds at the average daily price may require amending 
the terms of the plan. The commenter further states that, even in rare 
instances where an independent fiduciary possesses the authority to 
make such an amendment, the process of adopting such a change would 
consume time and resources without providing meaningful protection to 
plan participants.
    The commenter notes that, in certain situations, the parties to a 
lawsuit may agree to settle their claims by utilizing the average price 
of publicly traded employer securities over a range of days rather than 
on a single day. The commenter then expresses the view that, because 
section 5(a)(1) of the VFC Program utilizes the words ``the applicable 
date'' in connection with determining the value of an asset for which 
there is a generally recognized market, any plan receiving proceeds 
under a settlement agreement that utilizes the average price of an 
employer security spread over a range of days would not be eligible for 
the relief afforded under the amended class exemption. The commenter 
further states that an authorizing fiduciary would thus be required to 
petition the Department for an individual exemption to obtain relief 
for transactions involving these types of settlements. Such an outcome 
would be unsatisfactory, the commenter states, because the authorizing 
fiduciary cannot know, at the time a settlement is reached, whether the 
Department ultimately, will approve such an individual exemption 
application.
    Additionally, the commenter states that the other VFC related 
requirement of the proposed amendment imposes burdens on authorizing 
fiduciaries, particularly with respect to the valuation of securities 
such as warrants, and even stock, issued through bankruptcy 
reorganization. Specifically, the commenter points to section 5(a)(2) 
of the VFC program, which requires that, if there is no generally 
recognized market for the assets, the fair market value of such assets 
must be determined in accordance with ``generally accepted appraisal 
standards by a qualified, independent appraiser.'' The commenter 
maintains that a company emerging from bankruptcy typically is not 
required to obtain appraisals of its securities from licensed 
appraisers. In this connection, the commenter states that it is 
unrealistic to expect that bankruptcy reorganizations will be 
negotiated to meet the requirements of the VFC Program because one of 
the shareholders or creditors that will be receiving a distribution 
also happens to be a benefit plan sponsored by the reorganizing debtor. 
The commenter states that the VFC-related requirements of the proposed 
amendment are administratively burdensome to authorizing fiduciaries, 
and that the remaining conditions of the proposed class exemption, 
along with the general fiduciary standards of ERISA, provide safeguards 
that are sufficient to protect plans receiving settlement proceeds.
    After considering these comments, the Department has decided to 
modify the language of section II(i)(2) of the exemption to read as 
follows:

    The non-cash assets are specifically described in writing as 
part of the settlement, and valued at their fair market value as of 
the date or dates specified in the settlement agreement utilizing 
objective third party sources such as price quotations from persons 
independent of the issuer or independent third party pricing 
services for the non-cash assets (in instances where there is a 
generally recognized market for the

[[Page 33835]]

assets) or utilizing an objective and generally recognized 
methodology for valuing the non-cash assets that is approved as 
reasonable by the authorizing fiduciary and fully described in the 
written settlement agreement.

The Department expects the authorizing fiduciary to be experienced and 
knowledgeable regarding the valuation of any non-cash asset that is 
part of a settlement. If the authorizing fiduciary is not experienced 
with the type of asset offered as part of the settlement, such 
fiduciary must seek advice from an experienced independent party with 
respect to the valuation at issue.
    The commenter also suggested that, in the case of a securities 
class action in section (i)(1), the authorizing fiduciary cannot know 
in advance of a settlement what percentage of the recovery will be in 
the form of cash and what percentage will be in the form of employer 
securities, thus complicating the fiduciary's evaluation of the plan's 
diversification of assets. The preamble to the proposed exemption notes 
that a fiduciary must be mindful of ERISA's general diversification 
requirements under ERISA section 404(a) in instances where the plan is 
to receive employer securities as part of a settlement. The commenter 
also noted that, if the authorizing fiduciary must decline to accept a 
settlement which may result in a distribution raising a diversification 
issue, the plan may receive nothing if there is no cost-efficient means 
for the plan to pursue a recovery in a form that avoids a 
diversification problem.
    The commenter suggested to the Department that the value of a 
particular settlement payable in employer securities, and the absence 
of cost-effective alternatives to accepting the settlement, may 
constitute circumstances which make it ``clearly prudent'' to accept 
the settlement although doing so would result in a lack of 
diversification. The authorizing fiduciary would still be required to 
consider whether the receipt of the employer securities would impair 
the plan's overall operations or ability to make benefit payments. In 
addition, the commenter opined that the amendment to the class 
exemption should permit a grace period (perhaps one year in duration) 
for the plan to divest those employer securities which exceed the 
limitations described in section 407(a) of the Act. In response, the 
Department continues to believe that the authorizing fiduciary has a 
responsibility to consider ERISA's diversification requirements when 
evaluating a settlement offer. Nevertheless, the Department concurs 
with the commenter's argument that the fiduciary must consider the 
totality of circumstances when evaluating a settlement consisting in 
whole or part of employer securities under section 404(a) of ERISA. 
Clearly, the impact of the receipt of employer securities on the plan's 
overall operations or the ability to make benefit payments is relevant 
to the authorizing fiduciary's determination as to whether or not the 
settlement is reasonable and consistent with the requirements of 
section 404 of ERISA. In addition, the Department has determined not to 
adopt the commenter's suggestion for a grace period. In the 
Department's view, it is the responsibility of the authorizing 
fiduciary to determine when to sell or otherwise dispose of the 
employer securities and the best method for such disposition.
    Another commenter states that section II(c) of the proposed 
amendment, which requires that the authorizing fiduciary consider the 
scope of the release of claims and the attorney's fee award and other 
payments from the recovery in evaluating a particular settlement, is 
potentially problematic because: (1) Prospective members of a class 
must decide whether to opt out of the class, thereby foregoing the 
benefits of a settlement, before or simultaneously with the deadline 
for objecting; (2) class members who decline to opt out become bound to 
the terms of the settlement, including its release provisions; and (3) 
persons who opt out of the class have no standing to object to the 
settlement. Thus, according to the commenter, an authorizing fiduciary 
cannot object to the attorney's fees, or any other aspect of the 
settlement, without waiving the plan's right to opt out, and binding 
the plan to the release, even if the court overrules the objection and 
approves a fee award or other provision which the authorizing fiduciary 
found unreasonable. The commenter also believes that at the time of the 
opt-out decision, counsel for the plaintiff class will not yet have 
filed its motion for attorney's fees, and the notice to class members 
typically states only the upper limit of attorney's fees which counsel 
may receive.
    The commenter notes that some of these issues would be mitigated if 
the authorizing fiduciary is retained well in advance of a settlement 
in order to raise plan-related concerns before the settlement is 
finalized. However, the commenter continues to believe that, even in 
situations of early retention, independent fiduciaries may find 
themselves with little leverage to negotiate modifications of a fee 
arrangement or other aspects of the settlement due to the plan's 
relatively small stake in the litigation. The commenter suggests that 
the language in the preamble be modified to acknowledge these 
constraints imposed on authorizing fiduciaries. The commenter also 
suggests that the text of the exemption be modified to provide that the 
authorizing fiduciary's judgments on the matters set forth in sections 
II(c), (d) and (i)(l), in situations where the plan is a member of a 
class asserting claims, are to be made on the basis of the information 
available to the authorizing fiduciary as of the deadline by which 
class members must decide whether to grant a release.
    The Department continues to believe that the authorizing fiduciary 
must consider the entire settlement, including the scope of the release 
of claims and the amount of any attorney's fee award. In this regard, 
the Department recognized, in the preamble to the proposed amendment, 
that where the plan's share of the settlement is significant, the 
authorizing fiduciary is generally well-positioned to use its 
bargaining strength to ensure that the legal fees are reasonable. 
Conversely, where the plan has a small stake in the litigation as a 
member of a class asserting claims, the authorizing fiduciary, after 
the end of the opt-out period, may raise objections with the court 
which the court subsequently finds unpersuasive. The Department 
recognizes that there may be constraints on an authorizing fiduciary's 
ability to influence the terms of a settlement. Similarly, the 
Department also recognizes that judgments must be made on the basis of 
all of the information available to the fiduciary as of the deadline 
for the decision by class members to opt out of the class. The 
Department believes that section II(b) as proposed provides sufficient 
flexibility to enable an authorizing fiduciary to carry out its 
responsibilities under the class exemption, notwithstanding the variety 
of facts and circumstances that may arise in connection with each 
settlement.
    Finally, the commenter notes that the proposed amendment in section 
II(i) limits the scope of acceptable consideration (other than cash) to 
non-cash assets and benefit enhancements. The commenter states that 
other types of non-cash elements that fall outside the categories 
enumerated in section II(i) of the proposed exemption often constitute 
a meaningful part of securities litigation settlements. These may 
include corporate governance reforms, resignations of corporate 
officials, and other promised actions which will enhance the value of 
the corporation whose securities are subject to the litigation.

[[Page 33836]]

    The Department recognizes that the aforementioned types of 
corporate reforms could constitute a meaningful part of securities 
litigation settlements.\17\ Thus, the Department has amended section 
II(i) of the operative language of the amendment in order to expand the 
scope of other enhancements that may be accepted by an authorizing 
fiduciary on behalf of the plan in determining whether to grant a 
release.
---------------------------------------------------------------------------

    \17\ The Department notes that the authorizing fiduciary, in 
assessing the reasonableness of a settlement, must evaluate the 
totality of circumstances, which may include corporate reforms. See 
section II(i) of final 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 the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act which require, among other things, that a fiduciary 
discharge his or her duties with respect to the plan solely in the 
interests of the participants and beneficiaries of the plan and in a 
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor 
does it affect the requirement of section 401(a) of the Code that the 
plan must operate for the exclusive benefit of the employees of the 
employer maintaining the plan and their beneficiaries.
    (2) The amendment will not extend to transactions prohibited under 
sections 406(b) of the Act and 4975(c)(1)(E) and (F) of the Code.
    (3) In accordance with sections 408(a) of the Act and section 
4975(c)(2) of the Code, the Department finds that the exemption is 
administratively feasible, in the interests of plans and their 
participants and beneficiaries and protective of the rights of the 
participants and beneficiaries of plans.
    (4) The amendment is supplemental to, and not in derogation of, any 
other provisions of the Code and the Act, including statutory or 
administrative exemptions and transitional rules. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction.
    (5) The amendment is applicable to a transaction only if the 
conditions specified in the class exemption are satisfied.

Amendment

Section I. Prospective Exemption--Covered Transactions

    Effective [INSERT DATE OF PUBLICATION OF FINAL EXEMPTION IN THE 
FEDERAL REGISTER], the restrictions of sections 406(a) and 407(a) of 
ERISA and the taxes imposed by section 4975(a) and (b) of the Code, by 
reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply to the following transactions, if the relevant conditions set 
forth in sections II through III below are met:
    (a) The release by the plan or a plan fiduciary of a legal or 
equitable claim against a party in interest in exchange for 
consideration, given by, or on behalf of, a party in interest to the 
plan in partial or complete settlement of the plan's or the fiduciary's 
claim.
    (b) An extension of credit by a plan to a party in interest in 
connection with a settlement whereby the party in interest agrees to 
repay, over time, an amount owed to the plan in settlement of a legal 
or equitable claim by the plan or a plan fiduciary against the party in 
interest.
    (c) The plan's acquisition, holding, and disposition of employer 
securities received in settlement of litigation, including bankruptcy. 
Disposition of employer securities that are stock rights or warrants 
includes sale of these securities, as well as the exercise of the 
rights or warrants.

Section II Prospective Exemption--Conditions

    (a) Where the litigation has not been certified as a class action 
by the court, and no federal or state agency is a plaintiff in the 
litigation, an attorney or attorneys retained to advise the plan on the 
claim, and having no relationship to any of the parties involved in the 
claims, other than the plan, determines that there is a genuine 
controversy involving the plan.
    (b) The settlement is authorized by a fiduciary (The authorizing 
fiduciary) that has no relationship to, or interest in, any of the 
parties involved in the claims, other than the plan, that might affect 
the exercise of such person's best judgment as a fiduciary.
    (c) The settlement terms, including the scope of the release of 
claims; the amount of cash and the value of any non-cash assets 
received by the plan; and the amount of any attorney's fee award or any 
other sums to be paid from the recovery, are reasonable in light of the 
plan's likelihood of full recovery, the risks and costs of litigation, 
and the value of claims foregone.
    (d) The terms and conditions of the transaction are no less 
favorable to the plan than comparable arms-length terms and conditions 
that would have been agreed to by unrelated parties under similar 
circumstances.
    (e) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest.
    (f) Any extension of credit by the plan to a party in interest in 
connection with the settlement of a legal or equitable claim against 
the party in interest is on terms that are reasonable, taking into 
consideration the creditworthiness of the party in interest and the 
time value of money.
    (g) The transaction is not described in section A.I. of Prohibited 
Transaction Exemption (PTE) 76-1 (41 FR 12740, 12742 (Mar. 26, 1976), 
as corrected, 41 FR 16620 Apr. 20, 1976) (relating to delinquent 
employer contributions to multiemployer and multiple employer 
collectively bargained plans).
    (h) All terms of the settlement are specifically described in a 
written settlement agreement or consent decree.
    (i) Non-cash assets, which may include employer securities, and 
written promises of future employer contributions (hereinafter, ``non-
cash assets''), and/or a written agreement to adopt future plan 
amendments or provide additional employee benefits or corporate reforms 
(hereinafter ``enhancements'') may be provided to the plan by a party 
in interest in exchange for a release by the plan or a plan fiduciary 
only if:
    (1) The Authorizing Fiduciary determines that an all cash 
settlement is either not feasible, or is less beneficial to the 
participants and beneficiaries than accepting all or part of the 
settlement in non-cash assets and/or enhancements;
    (2) The non-cash assets are specifically described in writing as 
part of the settlement, and valued at their fair market value as of the 
date or dates specified in the settlement agreement utilizing objective 
third party sources such as price quotations from persons independent 
of the issuer or independent third party pricing services for the non-
cash assets (in instances where there is a generally recognized market 
for the assets) or utilizing an objective and generally recognized 
methodology for valuing the non-cash assets that is approved as 
reasonable by the authorizing fiduciary and fully described in the 
settlement agreement;
    (3) The enhancements are specifically described in writing as part 
of the

[[Page 33837]]

settlement. Enhancements may be included as part of the settlement 
without an independent appraisal. In deciding whether to approve the 
release of a claim in exchange for enhancements, the authorizing 
fiduciary shall take into account all aspects of the settlement, 
including the cash or other assets to be received by the plan, the 
solvency of the party in interest, and the best interests of the class 
of participants harmed by the acts that are the subject of the plan's 
claims;
    (4) The authorizing fiduciary, or another independent fiduciary, 
acts on behalf of the plan and its participants and beneficiaries for 
all purposes related to any property, including employer securities as 
defined by section 407(d)(1) of the Act, received by the plan from the 
employer as part of the settlement. The authorizing fiduciary or 
another independent fiduciary continues to act on behalf of the plan 
and its participants and beneficiaries for the period that the plan 
holds the property, including employer securities, received from the 
employer as part of the settlement. The authorizing fiduciary or 
another independent fiduciary shall have sole responsibility relating 
to the acquisition, holding, disposition, ongoing management, and where 
appropriate, exercise of all ownership rights, including the right to 
vote securities, unless the plan is a participant-directed individual 
account plan and the authorizing fiduciary allows the participants and 
beneficiaries to exercise control over the securities allocated to 
their accounts;
    (j) The plan does not pay any commissions in connection with the 
acquisition of the assets;
    (k) The authorizing fiduciary acting on behalf of the plan has 
acknowledged in writing that it is a fiduciary with respect to the 
settlement of the litigation on behalf of the plan;
    (l) The plan fiduciary maintains or causes to be maintained for a 
period of six years the records necessary to enable the persons 
described below in paragraph (m) to determine whether the conditions of 
this exemption have been met, including documents evidencing the steps 
taken to satisfy section II (c), such as correspondence with attorneys 
or experts consulted in order to evaluate the plan's claims, except 
that:
    (1) if the records necessary to enable the persons described in 
paragraph (m) to determine whether the conditions of the exemption have 
been met are lost or destroyed, due to circumstances beyond the control 
of the plan fiduciary, then no prohibited transaction will be 
considered to have occurred solely on the basis of the unavailability 
of those records; and
    (2) No party in interest, other than the plan fiduciary responsible 
for record-keeping, shall be subject to the civil penalty that may be 
assessed under section 502(i) of the Act or to the taxes imposed by 
section 4975(a) and (b) of the Code if the records are not maintained 
or are not available for examination as required by paragraph (m) 
below;
    (m)(1) Except as provided below in paragraph (m)(2) and 
notwithstanding any provisions of section 504(a)(2) and (b) of the Act, 
the records referred to in paragraph (l) are unconditionally available 
at their customary location for examination during normal business 
hours by--
    (A) any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) any fiduciary of the plan or any duly authorized employee or 
representative of such fiduciary;
    (C) any contributing employer and any employee organization whose 
members are covered by the plan, or any authorized employee or 
representative of these entities; or
    (D) any participant or beneficiary of the plan or the duly 
authorized employee or representative of such participant or 
beneficiary.
    (2) Nothing in this exemption supersedes any restriction on the 
disclosure of trade secrets or other commercial or financial 
information which is privileged or confidential and this exemption does 
not authorize any of the persons described in paragraph (m)(1)(B)-(D) 
to examine trade secrets or such commercial or financial information. 
Similarly, nothing in this exemption requires the disclosure of 
information to the persons described in paragraph (m)(1)(A-(D) which is 
offered to the authorizing fiduciary by a party to the settlement 
negotiations conditioned on the maintenance of its confidentiality, 
provided that: (1) the Fiduciary makes a written determination that the 
information would likely assist the Fiduciary in carrying out its 
responsibilities on behalf of the plan; and (2) a decision of a court 
or an opinion of an attorney, having no relationship to any of the 
parties involved in the claims other than the plan, confirms that the 
proffered information likely cannot be obtained unconditionally by 
seeking discovery through the court, or cannot be obtained in a timely 
fashion.

Section III. Definitions

    For purposes of this exemption, the terms ``employee benefit plan'' 
and ``plan'' refer to an employee benefit plan described in section 
3(3) of ERISA and/or a plan described in section 4975(e)(1) of the 
Code.
    For purposes of this exemption, the term ``employer security'' 
refers to employer securities described in section 407(d)(1) of ERISA.

IV. Effective Dates

    This amendment to the class exemption is effective for settlements 
occurring on or after the date of publication of the final exemption in 
the Federal Register. For settlements occurring before the date of 
publication of the final exemption in the Federal Register, see the 
original grant of the Class Exemption for Release of Claims and 
Extensions of Credit in Connection with Litigation, 68 FR 75632 (Dec. 
31, 2003).

    Signed at Washington, DC this 10th day of June, 2010.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 2010-14381 Filed 6-14-10; 8:45 am]
BILLING CODE 4510-29-P