Ex Parte Cease and Desist and Summary Seizure Orders-Multiple Employer Welfare Arrangements, 13797-13811 [2013-04862]

Download as PDF Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Parts 2560 and 2571 RIN 1210–AB48 Ex Parte Cease and Desist and Summary Seizure Orders—Multiple Employer Welfare Arrangements Employee Benefits Security Administration, Department of Labor. ACTION: Final rules. AGENCY: This document contains two final rules under the Employee Retirement Income Security Act of 1974 (ERISA) to facilitate implementation of new enforcement authority provided to the Secretary of Labor by the Patient Protection and Affordable Care Act (Affordable Care Act). The Affordable Care Act authorizes the Secretary to issue a cease and desist order, ex parte (i.e. without prior notice or hearing), when it appears that the alleged conduct of a multiple employer welfare arrangement (MEWA) is fraudulent, creates an immediate danger to the public safety or welfare, or is causing or can be reasonably expected to cause significant, imminent, and irreparable public injury. The Secretary may also issue a summary seizure order when it appears that a MEWA is in a financially hazardous condition. The first regulation establishes the procedures for the Secretary to issue ex parte cease and desist orders and summary seizure orders with respect to fraudulent or insolvent MEWAs. The second regulation establishes the procedures for use by administrative law judges and the Secretary when a MEWA or other person challenges a temporary cease and desist order. DATES: Effective date. These final regulations are effective April 1, 2013. FOR FURTHER INFORMATION CONTACT: Stephanie Lewis, Plan Benefits Security Division, Office of the Solicitor, Department of Labor, at (202) 693–5588 or Suzanne Bach, Employee Benefits Security Administration, Department of Labor, at (202) 693–8335. These are not toll-free numbers. SUPPLEMENTARY INFORMATION: emcdonald on DSK67QTVN1PROD with RULES SUMMARY: I. Executive Summary A. Purpose of the Regulatory Action 1. Need for Regulatory Action The Patient Protection and Affordable Care Act (Affordable Care Act) gives the Secretary authority to issue a cease and desist order when a multiple employer VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 welfare arrangement (MEWA) engages in conduct that is fraudulent, creates an immediate danger to the public safety or welfare, or causes or can be reasonably expected to cause significant, immediate, and irreparable injury. The act also gives the Secretary authority to issue a summary seizure order when a MEWA is in a financially hazardous condition. These new powers strengthen the Secretary’s ability to protect plan participants, beneficiaries, employers, employee organizations, and other members of the public from fraudulent, abusive, and financially unstable MEWAs. These two regulations are necessary to set forth the criteria for determining whether the statutory grounds for issuing an order have been met, and, in the case of a cease and desist order, to establish reasonable administrative review procedures. The Secretary will generally obtain judicial authorization before issuing a summary seizure order. The substantive criteria for issuing an order are based on several decades of enforcement experience by the Department and the States regarding fraudulent or financially hazardous conduct of MEWAs (and persons acting as their agents and employees). The administrative procedures will allow affected persons to challenge a cease and desist order and obtain expeditious review, including the right to a hearing. 2. Legal Authority Section 521 of ERISA, 29 U.S.C. 1151, sets out the Secretary’s authority to issue cease and desist orders and summary seizure orders. Section 521(f) provides that ‘‘the Secretary may promulgate such regulations or other guidance as may be necessary or appropriate to carry out’’ this new enforcement authority. Section 505 of ERISA, 29 U.S.C. 1135, also provides the Secretary with authority to prescribe such regulations as necessary or appropriate to carry out the provisions of Title I of ERISA, which includes the new section 521. B. Summary of the Major Provisions of This Regulatory Action These rules generally set forth the statutory criteria under which the Secretary may issue cease and desist orders and summary seizure orders. They also specify that orders may apply to MEWAs and to persons having custody or control of assets of a MEWA, any authority over management of a MEWA, or any role in the transaction of a MEWA’s business. Paragraph (b) of this section contains key definitions. Most notably, this paragraph sets forth the criteria for determining if it appears PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 13797 that the MEWA or any person acting as an agent or employee of the MEWA has engaged in conduct that would support issuance of an order under the statute. The regulations address the scope of the cease and desist order and the process for a person who is the subject of a temporary cease and desist order to request an administrative hearing to show cause why the order should be modified or set aside. The regulations also establish the procedures for such hearings. Although the Secretary may issue a cease and desist order without first seeking court approval, the procedure for a summary seizure order is somewhat different. The regulations generally require that the Secretary obtain judicial authorization before issuing a summary seizure order. They also require that the Secretary seek court appointment of a receiver or independent fiduciary and obtain court authorization for other actions to assert control over the MEWA’s and plan assets. Orders issued under these final rules are effective upon service and remain in effect until modified or set aside by the Secretary, an administrative law judge, or a reviewing court. Issued final orders will be made available to the public as will modifications and terminations of such final orders. Further, to facilitate coordination with the States, Federal agencies, and foreign authorities, the Secretary may disclose the issuance of any order (whether temporary or final) and any information and evidence of any proceedings and hearings related to the order to other Federal, State, or foreign authorities. (The sharing of such information, however, does not constitute a waiver of any applicable privilege or claim of confidentiality.) The Secretary remains committed to helping MEWAs and plan officials comply with legal requirements and serve plan participants and beneficiaries properly. These new enforcement tools will enhance the Department’s ability to protect plan participants and beneficiaries when MEWAs and plan actors fail to comply with their obligations. The Secretary will also continue to use any other investigatory and enforcement tools available under title I of ERISA. C. Costs and Benefits These final regulations will improve MEWA compliance and deter abusive practices. They will also enable the Secretary to take enforcement action against fraudulent, abusive, and financially unstable MEWAs more effectively. The Department’s primary judicial remedy for violations of ERISA E:\FR\FM\01MRR1.SGM 01MRR1 13798 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations by MEWAs is court-ordered relief based on a breach of fiduciary duty. Gathering sufficient evidence to prove a fiduciary breach may be very time-consuming and labor intensive, even where it is clear that the MEWA is insolvent or unable to meet its financial commitments. In many MEWA cases, important financial records are poor or non-existent. The new authority implemented by these regulations provides an additional, more flexible tool for the Secretary to use, when appropriate, to combat fraudulent and abusive conduct by MEWAs and financially hazardous arrangements. Moreover, these regulations will enable the enforcement process to be more efficient because the subject of a cease and desist order can seek review of the order in an administrative hearing rather than a court. Since the rules do not require any action or impose any requirements on MEWAs, these regulations do not impose any major costs. emcdonald on DSK67QTVN1PROD with RULES II. Background Multiple employer welfare arrangements (MEWAs) 1 that are properly operated provide an additional option for small employers seeking affordable health coverage for their employees. Nevertheless, fraudulent and abusive practices and financial instability are recurrent themes in ERISA enforcement.2 Congress enacted section 6605 of the Patient Protection and Affordable Care Act (Affordable Care Act), Public Law 111–148, 124 Stat. 119, 780 (2010), which adds section 521 to ERISA, to give the Secretary of Labor additional enforcement authority to protect plan participants, beneficiaries, employees or employee organizations, or other members of the public against fraudulent, abusive, or financially hazardous MEWAs. This section authorizes the Secretary to issue ex parte cease and desist orders when it appears to the Secretary that the alleged conduct of a MEWA is ‘‘fraudulent, or creates an immediate danger to the public safety or welfare, or is causing or can be reasonably expected to cause significant, imminent, and irreparable public injury.’’ 29 U.S.C. 1151(a). A person that is adversely affected by the issuance of a cease and desist order may request an administrative hearing regarding the 1 The term ‘‘multiple employer welfare arrangement’’ is defined at ERISA § 3(40), 29 U.S.C. 1002(40). 2 See, e.g., Chao v. Graf, 2002 WL 1611122 (D. Nev. 2002), In re Raymond Palombo, et al., 2011 WL 1871438 (Bankr. C.D. CA 2011) and Solis v. Palombo, No. 1:08–CV–2017 (N.D. Ga 2009); Chao v. Crouse, 346 F.Supp.2d 975 (S.D. Ind. 2004). VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 order. 29 U.S.C. 1151(b). This section also allows the Secretary to issue an order to seize the assets of a MEWA that the Secretary determines to be in a financially hazardous condition. 29 U.S.C. 1151(e). On December 6, 2011, the Department published in the Federal Register proposed regulations (76 FR 76235) implementing new ERISA section 521 and setting forth the procedures for administrative hearings on the issuance of an ex parte cease and desist order. The Department received three (3) comment letters on these proposed rules. After consideration of the comments received, the Department is publishing these final regulations with little modification of the proposed rules. III. Overview of the Final Regulations A. Ex Parte Cease and Desist and Summary Seizure Order Regulations (29 CFR 2560.521) Purpose and Definitions Pursuant to section 6605 of the Affordable Care Act, these rules set forth criteria and procedures for the Secretary to issue cease and desist orders and summary seizure orders and procedures for administrative review of the cease and desist orders. The rules apply to any cease and desist order and any summary seizure order issued under section 521 of ERISA. Paragraph (a) of section 2560.521–1 of the rules generally sets forth the statutory criteria under which the Secretary may issue orders. It also specifies that orders may apply to MEWAs and to persons having custody or control of assets of a MEWA, any authority over management of a MEWA, or any role in the transaction of a MEWA’s business. One commenter expressed concern that applying cease and desist and summary seizure orders to third party administrators (TPAs) would threaten their ability to perform their services, which may include helping MEWAs recover when they are in financial peril. TPAs perform critical services for the plan community. As the commenter notes, an important service TPAs do or can provide is to educate MEWAs about their duty to pay claims and provide promised benefits. TPAs also play an important role in informing the Department about MEWAs that ask them to deceive or defraud plan participants. The Department recognizes the role that conscientious and knowledgeable TPAs and other service providers may play in protecting plans and their participants and beneficiaries. Where the functions of a service provider are essential to the operation of a MEWA, cease and desist orders will PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 need to cover these functions, whether or not the service provider engaged in conduct giving rise to the order. Moreover, in some cases a service provider may be integrally involved in conduct evidencing an intent to deceive or defraud plans and their participants and beneficiaries or other actions that endanger the public welfare. As an example, in U.S. v. William Madison Worthy, No. 7:11–cr–00487–HMH (D. S.C. 2011), Mr. Worthy, who owned the TPA providing services to the MEWA, pleaded guilty for diverting almost $1 million in premium contributions for coverage provided in connection with the MEWA. Ultimately, about $1.7 million in claims either went unpaid or had to be paid by plan members. Moreover, it should be emphasized that orders may often be issued to persons, who were not involved in improper conduct, but whose cooperation is necessary to carry out the purpose of the order. For instance, a bank holding assets of a MEWA may receive a court-approved summary seizure order that directs the bank to freeze those assets. See, e.g., 29 CFR 2560.521–1(f)(4). Paragraph (b) contains key definitions. ERISA section 521 applies the Secretary’s cease and desist and seizure order authority to MEWAs, as defined under section 3(40) of ERISA, 29 U.S.C. 1002(40). As stated in the proposed regulations, Congress did not limit the Secretary’s authority to issue orders to MEWAs that are ERISAcovered employee welfare benefits plans (ERISA-covered plans). Section 521 of ERISA also applies if the MEWA provides health coverage to one or more ERISA-covered plans, even if it also provides coverage to other persons unconnected to an ERISA-covered plan. These rules do not, however, apply to MEWAs that provide coverage only in connection with governmental plans, church plans, and plans maintained solely for the purpose of complying with workers’ compensation laws, which are not covered by ERISA. They also do not apply to arrangements that only provide coverage to individuals other than in connection with an employee welfare benefit plan (e.g., individual market coverage). The proposed rules also noted that they did not apply to arrangements licensed or authorized to operate as a health insurance issuer. Though the Department has not changed the substance of the regulations in this regard, it has revised paragraph (b)(1) for the sake of clarity. The definition of a MEWA in ERISA section 3(40) is very broadly worded. Read literally, it could be interpreted to include traditional E:\FR\FM\01MRR1.SGM 01MRR1 emcdonald on DSK67QTVN1PROD with RULES Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations health insurance issuers (including health maintenance organizations) that are fully licensed (i.e., subject to stringent and comprehensive insurance regulation) to offer health insurance coverage to the public and employers at large in every State in which they offer health insurance coverage. The Department has never, however, applied ERISA’s provisions on MEWAs to such organizations. These organizations do not pose the same level of risk for fraud, abuse, and financial instability that ERISA’s provisions on MEWAs, including the new ERISA section 521 and these final rules, are designed to address. Consequently, these final rules do not apply to these entities. This exclusion applies to any arrangement that could fall within the definition of MEWA but is covered by the same level and scope of stringent and comprehensive insurance laws of a State (such as laws on licensure, solvency, reporting, anti-fraud, appeals, premium assessment, and guaranty funds) as traditional health insurance issuers (including health maintenance organizations) and that offers health insurance coverage to the public and employers at large. ERISA section 514(b)(6) makes clear that the States can regulate any MEWA, even a MEWA that is an ERISA-covered plan. The Department retains shared jurisdiction with the States. In some States, some MEWAs are permitted to operate if they have obtained a limited license from the State (e.g. a license that, for instance, allows them to operate subject to lower requirements or less extensive examination and oversight and/or to offer and provide coverage to a limited population.). These arrangements remain subject to ERISA section 521 and these final rules. One commenter encouraged the Department to focus its enforcement actions on abusive and fraudulent MEWAs that are self-funded or not fully insured (within the meaning of ERISA section 514(b)(6)(D)). The Department recognizes that fully insured MEWAs have raised fewer concerns than other MEWAs. Nevertheless, a fully insured MEWA that engages in the conduct meeting the statutory criteria could be subject to an order. ERISA section 521 provides three statutory grounds upon which the Secretary may issue a cease and desist order. Paragraphs (b)(2)–(4) of the final regulations clarify the scope and meaning of the statutory language. The first statutory ground, fraudulent conduct, is described in paragraph (b)(2) of the final rules as an act or omission intended to deceive or defraud plan participants, plan beneficiaries, VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 employers or employee organizations, or other members of the public, the Secretary or a State about the MEWA’s financial condition or regulatory status, benefits, management, control, or administration, and other aspects of its operation (e.g. claims review, marketing, etc.) that the Secretary determines are material.3 One commenter expressed concern about the definition of fraudulent conduct. In particular, the commenter was concerned that a focus on omissions regarding the financial condition of the MEWA, including the management of plan assets, could inadvertently target service providers that adjudicate or pay claims. The commenter also expressed concern that service providers would be adversely implicated simply because they interacted with the MEWA and others with respect to claims or marketing. The new enforcement tools under ERISA section 521 are designed to prevent or address serious harm to plan participants, plan beneficiaries, employers, employee organizations, and other members of the public. Fraudulent conduct, as defined in the proposed rules and under these final regulations, requires knowledge and intentionality or a reckless disregard on the part of the MEWA or agent or employee of the MEWA. As stated previously, however, even though an order is based on the conduct of a person other than the service provider, the service provider’s activities may be affected simply because the order prohibits all or certain activities with respect to the MEWA, such as marketing, to continue. The second ground for issuing a cease and desist order, conduct that creates an immediate danger to the public safety or welfare, is described in paragraph (b)(3) of the final rules. Conduct meets this standard if it impairs, or threatens to impair, the MEWA’s ability to pay claims or otherwise unreasonably increases the risk of nonpayment of benefits. The third ground, conduct that 3 Similarly, section 519 of ERISA, 29 U.S.C. 1149, (also enacted as part of the Affordable Care Act) prohibits false statements and representations by any person, in connection with a MEWA’s marketing or sales, concerning the financial condition or solvency of the MEWA, the benefits provided by the MEWA, and the regulatory status of the MEWA. Under ERISA section 501(b), 29 U.S.C. 1131(b), (as amended by the Affordable Care Act) criminal penalties may apply to a violation of ERISA section 519. Other criminal penalties may apply under other federal provisions as well. See e.g., 29 U.S.C. 1131(a) (willful violations of ERISA reporting and disclosure requirements), 18 U.S.C. 1001 (knowingly and willfully false statements to the U.S. government), and 18 U.S.C. 1027 (knowingly false statement or knowing concealment of facts in relation to documents required by ERISA). PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 13799 causes or can be reasonably expected to cause significant, imminent, and irreparable injury, is described in paragraph (b)(4). Conduct meets this statutory standard if it has, or can be reasonably be expected to have, a significant and imminent negative effect that the Secretary reasonably believes will not be fully rectified on one or more of the following: (a) An employee welfare benefit plan that is, or offers benefits in connection with, a MEWA, (b) plan participants and plan beneficiaries, or (c) employers or employee organizations. Paragraphs (b)(2)–(4) also provide examples of conduct that falls within those standards. A single act or omission within the categories of conduct set forth in the regulation may provide the basis for a cease and desist order. However, because the categories set forth in the statute are broad and overlapping, the examples may provide more than one basis for a cease and desist order. The new ERISA section 521 also further expands the Secretary’s enforcement options with respect to MEWAs by authorizing the Secretary to issue a summary seizure order to remove plan assets and other property from the management, control, or administration of a MEWA when it appears that the MEWA is in a financially hazardous condition. Under paragraph (b)(5) a MEWA is in a financially hazardous condition when the Secretary has probable cause to believe that a MEWA is, or is in imminent danger of becoming, unable to pay benefit claims as they become due, or that a MEWA has sustained, or is in imminent danger of sustaining, a significant loss of assets. Under the definition, a MEWA may also be in a financially hazardous condition if the Secretary has issued a cease and desist order to a person responsible for the management, control, or administration of the MEWA or plan assets associated with the MEWA. Paragraph (b)(6) defines a person, for purposes of these regulations, to be an individual, partnership, corporation, employee welfare benefit plan, association, or other entity or organization. One commenter posited that the definition of person in the proposed rules was too broad because it reached service providers to MEWAs. The Department does not agree that the definition of person is overbroad. As discussed above, persons that provide services to MEWAs may engage in conduct that is grounds for the issuance of an order. Moreover, as previously noted, if a MEWA is being operated in a fraudulent or financially hazardous E:\FR\FM\01MRR1.SGM 01MRR1 13800 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations emcdonald on DSK67QTVN1PROD with RULES manner, an order may need to apply to persons providing services to a MEWA in order to achieve its purpose. For example, it may be necessary for a cease and desist order to apply to an individual performing marketing services for a fraudulent MEWA even if the individual was not engaged in fraudulent conduct. In addition, the Department observes that the definition of person in ERISA section 3(9), while different from that in the proposed and these final rules, already encompasses service providers. Cease and Desist Order Paragraph (c) of § 2560.521–1 addresses the scope of the cease and desist order. This paragraph is structured the same as in the proposed rules. Paragraph (c)(2)(i) notes that the Secretary may enjoin a MEWA or person from the conduct that served as the basis for the order and from activities in furtherance of that conduct though a cease and desist order. In addition, the cease and desist order may provide broader relief as the Secretary determines is necessary and appropriate to protect the interests of plan participants, plan beneficiaries, employers or employee organizations, or other members of the public. Paragraph (c)(2)(ii) provides that an order may prohibit a person from taking any specified actions with respect to, or exercising authority over, specified funds of any MEWA or of any welfare or pension plan. Paragraph (c)(2)(iii) provides that an order may also bar a person from acting as a service provider to MEWAs or plans. This provision allows the Secretary to issue an order preventing a person from, for example, performing any administrative, management, financial, or marketing services for any MEWA or any welfare or pension plan. A cease and desist order containing such a prohibition against transacting business with any MEWA or plan would prevent the MEWA or a person from avoiding the cease and desist order by shutting the MEWA down and re-establishing it in a new location or under a new identity. Such a prohibition may be necessary in cases of serious harmful conduct where it would be contrary to the interests of plan participants, plan beneficiaries, employers or employee organizations, or other members of the public for a person whose conduct gave rise to the order to gain a position with other MEWAs or welfare or pension plans where they could repeat that conduct. The Department has added paragraph (c)(3) to clarify that it may require documentation from the subject of the order confirming compliance with the VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 cease and desist order. Paragraph (d) of this section preserves the Secretary’s existing ability to seek additional remedies under ERISA. Under the new section 521(b) of ERISA, a person who is the subject of a temporary cease and desist order may request an administrative hearing to show cause why the order should be modified or set aside. Under the statute, the burden of proof rests with the person requesting the hearing. The process for the administrative hearing, set forth in paragraph (e) of § 2560.521– 1 in these final regulations, is basically the same process set forth in the proposed rules. If parties subject to a cease and desist order fail to request a hearing before an administrative law judge within 30 days after receiving notice of the order, the order becomes final. If a party makes a timely request for an administrative hearing, the order is not final until the conclusion of the process set forth in 29 CFR part 2571. It remains, however, in effect and enforceable throughout the administrative review process unless stayed by the Secretary, an administrative law judge, or a court. The section was slightly revised to clarify the nature of evidence the Secretary and the person requesting the hearing must provide to the administrative law judge. The proposed rules simply stated that the Secretary must offer evidence supporting the findings made in issuing the order. The final rules were revised to clarify the findings that must be supported by evidence, i.e., the Secretary’s findings that she had reasonable cause to believe that the MEWA (or a person acting as an employee or agent of the MEWA) engaged in the conduct specified in the new ERISA section 521(a) and § 2560.521–1(c)(1) of the proposed and these final rules. The proposed rules further stated that the person requesting the hearing has the burden of proof to show that the order was not necessary to protect the interests of the plan, plan participants, plan beneficiaries, and others. The final rules were revised to state that the person requesting the hearing has the burden of proof to show that the MEWA (or a person acting as an employee or agent of the MEWA) did not engage in the conduct specified in the new ERISA section 521(a) and § 2560.521–1(c)(1) of the proposed and these final rules or that the requirements imposed by the order are arbitrary and capricious. This revision clarifies how the person requesting the hearing shows that the order was not necessary. PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 Summary Seizure Order The new section 521(e) of ERISA and paragraph (f)(1) of § 2560.521–1 of these rules authorize the Secretary to issue a summary seizure order when it appears that a MEWA is in a financially hazardous condition. Pursuant to the Fourth Amendment of the U.S. Constitution, the Secretary will generally obtain judicial authorization before issuing a summary seizure order. (See Colonnade Catering Corp. v. U.S., 397 U.S. 72 (1970): ‘‘Where Congress has authorized inspection but made no rules governing the procedures that inspectors must follow, the Fourth Amendment and its various restrictive rules apply.’’) As in the proposed rules, paragraph (f)(2) provides for such judicial authorization. A court’s authorization may be sought ex parte when the Secretary determines that prior notice could result in removal, dissipation, or concealment of plan assets. On its own initiative, the Department has slightly revised paragraph (f)(2) to clarify that it may seek appointment of a receiver or independent fiduciary by the court and other relief at the time it obtains judicial authorization. Paragraph (f)(3) clarifies that the Secretary may act on a summary seizure order prior to judicial authorization, however, if the Secretary reasonably believes that delay in issuing the order will result in the removal, dissipation, or concealment of assets. Under these circumstances, the Secretary will promptly seek judicial authorization after service of the order. Paragraph (f)(4) of § 2560.521–1 describes the general scope of a seizure order.4 Under paragraph (f)(4), the Secretary may seize books, documents, and other records of the MEWA. She may also seize the premises, other property, and financial accounts for the purpose of transferring such property to a court-appointed receiver or independent fiduciary. In addition, the order may prohibit the MEWA and its operators from transacting any business or disposing of any property of the MEWA. This paragraph also clarifies that the order may be directed to any person holding assets that are the subject of the order, including banks or other financial institutions. The principal purpose of a seizure order is to preserve the assets of an employee welfare benefit plan that is a MEWA, and assets of any employee welfare benefit plans under the control 4 The scope of the summary seizure order in this rule is similar to that provided for in section 201(B) in the National Association of Insurance Commissioners (NAIC) Insurer Receivership Model Act (October 2007). E:\FR\FM\01MRR1.SGM 01MRR1 emcdonald on DSK67QTVN1PROD with RULES Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations of a MEWA, that is in a hazardous financial condition so that such assets are available to pay claims and other legitimate expenses of the MEWA and its participating plans. The Secretary will also issue summary seizure orders to prevent abusive operators from illegally using or acquiring plan assets. Seized assets are not deposited with the U.S. Treasury. Instead they are managed by a court-appointed receiver or independent fiduciary. Paragraph (f)(5) states that the Secretary may also, in connection with or following the execution of a summary seizure order, among other things, obtain court appointment of an independent fiduciary or receiver to perform any necessary functions of the MEWA, and court authorization for further actions in the best interest of plan participants, plan beneficiaries, employers or employee organizations, or other members of the public, including the liquidation and winding down of the MEWA, if appropriate. There were no comments on the procedures for issuing summary seizure orders or implementing other actions. With the minor exception noted above, and certain clarifying changes in paragraph (f)(5), the provisions in the proposed rules have been adopted without further modification. The provisions related to effective date of orders (paragraph g), disclosure (§ 2560.521–2), and effect of ERISA section 521 on other enforcement authority (§ 2560.521–3) have not changed from the proposed rules. Paragraph (h) of § 2560.521–1 of the proposed rules regarding the service of orders on persons who are corporations, associations, or other entities or organizations, was slightly revised for these final rules to state that service could also be made to any person designated for service of process under State law or the applicable plan document. Orders issued under these final rules are effective upon service and remain in effect until modified or set aside by the Secretary, an administrative law judge, or a reviewing court. Issued final orders will be made available to the public, as will modifications and terminations of such final orders. Further, coordination and collaboration with other Federal agencies and the States are integral and instrumental to successful MEWA enforcement efforts. The Secretary remains committed to working closely with them to help detect, prevent, and address MEWA fraud, abuse, and financial insolvency. To facilitate this collaborative approach to MEWA enforcement, the Secretary may disclose the issuance of any order (whether VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 temporary or final) and any information and evidence of any proceedings and hearings related to the order to other Federal, State, or foreign authorities. The sharing of such information, however, does not constitute a waiver of any applicable privilege or claim of confidentiality as to the information so shared. The Secretary also remains committed to helping MEWAs and plan officials comply with legal requirements and serve plan participants and beneficiaries properly. Section 521 is not, however, the only enforcement tool available to the Secretary with regard to MEWAs. She will continue to use the other investigatory and enforcement tools which were available to the Secretary under title I of ERISA prior to the enactment of ERISA section 521. Cross-Reference These rules finalize the standards for the issuance of ex parte cease and desist and summary seizure orders. The Department has also finalized in this Notice rules for administrative hearings on ex parte cease and desist orders. In addition, elsewhere in this issue of the Federal Register is a separate regulation amending 29 CFR 2520–101.2, 2520.103–1, 2520.104–20, and 2520.104–41 to implement section 101(g), as amended by the Affordable Care Act, and to enhance the Department’s ability to enforce requirements under 29 CFR 2520–101.2. B. Procedures for Administrative Hearings on the Issuance of Cease and Desist Orders Regulation (29 CFR Part 2571) Purpose and Definitions These final procedural rules apply only to adjudicatory proceedings before administrative law judges of the U.S. Department of Labor. Under these procedural rules, an adjudicatory proceeding before an administrative law judge is commenced only after a person who is the subject of a temporary cease and desist order timely requests a hearing and files an answer showing cause why the temporary order should be modified or set aside. These procedural regulations are largely consistent with rules of practice and procedure under 29 CFR part 18 that generally apply to matters before the Department’s Office of Administrative Law Judges (OALJ). At the same time, they reflect the unique nature of orders issued under ERISA section 521. The definitional section of this rule, for instance, incorporates the basic adjudicatory principles set forth at 29 CFR part 18, but includes terms and PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 13801 concepts of specific relevance to proceedings under ERISA section 521. These rules are controlling to the extent they are inconsistent with 29 CFR part 18. The authority of the Secretary with respect to the orders and proceedings covered by this rule has been delegated to the Assistant Secretary for the Employee Benefits Security Administration pursuant to Secretary’s Order 1–2011, 77 FR 1088 (Jan. 9, 2012). With respect to appeals of administrative law judge decisions to the Secretary, the Assistant Secretary has redelegated this authority to the Director of the Office of Policy and Research of the Employee Benefits Security Administration. As required by the Administrative Procedure Act (5 U.S.C. 552(a)(2)(A)) all final decisions of the Department under section 521 of ERISA shall be maintained, and available for public inspection, in the Public Disclosure Room of the Employee Benefits Security Administration, Room N–1513, U.S. Department of Labor, 200 Constitution Ave. NW., Washington, DC 20210. There were no comments on the proposed administrative procedures. The proposed rules are being published as final rules with only minor clarifying changes. Of note, under § 2571.4(d) of the proposed rules, if the administrative law judge denies a petition to participate in the hearing by persons not named in a temporary order, the administrative law judge shall treat the petition as a request for participation as an amicus curiae. The final rules give the administrative law judge discretion on the treatment of denied petitions and state that the administrative law judge may consider whether to treat the petition as a request for participation as amicus curiae. In addition, as stated in the preamble and § 2571.7 of the proposed rules, the fiduciary exception to the attorney-client and work product privileges applies. Consequently, the administrative law judge may not protect from discovery nor from use in the proceedings communications between an attorney and a plan administrator or other plan fiduciary, or work product, that fall under the fiduciary exception. The final rules clarify that the fiduciary exception applies to communications and work product between an attorney and plan fiduciary concerning plan administration and other fiduciary activities, and not to communications made or documents prepared to aid the fiduciary personally or for settlor acts. See Solis v. The Food Employers Labor Relations Ass’n, 644 F.3d 221 (4th Cir. 2011). This provision should not be E:\FR\FM\01MRR1.SGM 01MRR1 13802 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations interpreted as excluding consideration by the administrative law judge of other relevant exceptions to the privileges. IV. Economic Impact and Paperwork Burdens A. Summary These final regulations implement amendments made by section 6605 of the Affordable Care Act, which added ERISA section 521. As discussed earlier in this preamble, ERISA section 521 provides the Secretary of Labor with new enforcement authority over MEWAs. Specifically, ERISA section 521(a) authorizes the Secretary to issue cease and desist orders, without prior notice or a hearing, when it appears to the Secretary that a MEWA’s alleged conduct is fraudulent, creates an immediate danger to the public safety or welfare, or causes or can be reasonably expected to cause significant, imminent, and irreparable public injury. This section also authorizes the Secretary to issue a summary order to seize the assets of a MEWA the Secretary determines to be in a financially hazardous condition. These final regulations implement ERISA section 521(a) by setting forth procedures the Secretary will follow to issue ex parte cease and desist and summary seizure orders. ERISA section 521(b), as added by Affordable Care Act section 6605, provides that a person that is adversely affected by the issuance of a cease and desist order may request an administrative hearing regarding the order. These final regulations also implement the requirements of ERISA section 521(b) by describing the procedures before the Office of Administrative Law Judges (OALJ) that will apply when a person seeks an administrative hearing for review of a cease and desist order. These regulations maintain the maximum degree of uniformity with rules of practice and procedure under 29 CFR part 18 that generally apply to matters before the OALJ. At the same time, these regulations reflect the unique nature of orders issued under ERISA section 521, and are controlling to the extent they are inconsistent with 29 CFR part 18. emcdonald on DSK67QTVN1PROD with RULES B. Executive Order 12866 and 13563 Statement Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing and streamlining rules, and of promoting flexibility. It also requires federal agencies to develop a plan under which the agencies will periodically review their existing significant regulations to make the agencies’ regulatory programs more effective or less burdensome in achieving their regulatory objectives. Under Executive Order 12866, a regulatory action deemed ‘‘significant’’ is subject to the requirements of the Executive Order and review by the Office of Management and Budget (OMB). Section 3(f) of the Executive 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. These regulatory actions are not economically significant within the meaning of section 3(f)(1) of the Executive Order. However, OMB has determined that the actions are significant within the meaning of section 3(f)(4) of the Executive Order, and the Department accordingly provides the following assessment of their potential benefits and costs. 1. Need for Regulatory Action Properly structured and managed MEWAs that are licensed to operate in a State provide a viable option for some employers to purchase affordable health insurance coverage. However, some MEWAs are marketed by unlicensed entities attempting to avoid State insurance reserve, contribution, and consumer protection requirements. By avoiding these requirements, such entities often are able to market insurance coverage at lower rates than licensed insurers, making them particularly attractive to some small employers that find it difficult to obtain affordable health insurance coverage for PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 their employees. Due to insufficient funding and inadequate reserves, and in some situations, fraud, some MEWAs have become insolvent and unable to pay benefit claims. In addition, certain promoters set up arrangements that they claim are not MEWAs subject to state insurance regulation, because they are established pursuant to collective bargaining agreements. Often, however, these collective bargaining agreements are nothing more than shams designed to avoid state insurance regulation. Employees and their dependents have become financially responsible for paying medical claims they presumed were covered by insurance after paying health insurance premiums to fraudulent MEWAs.5 The impact, financial and otherwise, on individuals and families can be devastating when MEWAs become insolvent. Moreover, employees and their dependents may be deprived of medical services if they cannot afford to pay medical claims outof-pocket that are not paid by the MEWA. Before the enactment of ERISA section 521, the Department’s primary enforcement tool against fraudulent and abusive MEWAs was court-ordered injunctive relief. In order to obtain this relief, the Department must present evidence to a federal court that an ERISA fiduciary breach occurred and that the Department is likely to prevail based on the merits of the case. Gathering sufficient evidence to prove a fiduciary breach is time-consuming and labor-intensive, in most cases, because the Department’s investigators must work with poor or nonexistent financial records and uncooperative parties. As a result, the Department at times has been unable to shut down fraudulent and abusive MEWAs quickly enough to preserve their assets and ensure that outstanding benefit claims are timely paid. States also encountered problems in their enforcement efforts against MEWAs in the absence of federal authority to shut down fraudulent and abusive MEWAs nationally. When one State succeeded in shutting down an abusive MEWA, in some cases, its operators continued operating in another State.6 ERISA section 521 provides the Department with stronger legal remedies to combat fraudulent and abusive MEWAs. ERISA section 521(f) provides the Secretary of Labor with the authority to promulgate regulations that may be necessary and appropriate to carry out the Department’s authority under ERISA 5 GAO Report, supra note 2. 6 Id. E:\FR\FM\01MRR1.SGM 01MRR1 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations section 521. These regulations are necessary, because they set forth standards and procedures the Department would use to implement this new enforcement authority. They also are necessary to provide procedures that a person who is adversely affected by the issuance of a cease and desist order may follow to request an administrative hearing regarding the order pursuant to ERISA section 521(b). emcdonald on DSK67QTVN1PROD with RULES 2. ERISA Section 521(a) and (e), Ex Parte Cease and Desist and Summary Seizure Orders—Multiple Employer Welfare Arrangements (29 CFR 2560.521–1) a. Benefits of Final Rules As discussed earlier in this preamble, ERISA section 521(a) authorizes the Secretary to issue an ex parte cease and desist order if it appears to the Secretary that the alleged conduct of a MEWA is fraudulent, or creates an immediate danger to the public safety or welfare, or is causing or can reasonably be expected to cause, significant, imminent, and irreparable public injury. ERISA section 521(e) allows the Secretary to issue a summary seizure order if it appears that a MEWA is in a financially hazardous condition. These final regulations implement the Department’s enhanced enforcement authority by setting forth the standards and procedures the Department will follow in issuing cease and desist and summary seizure orders. They also define important statutory terms and clarify the scope of the Department’s authority under ERISA sections 521(a) and (e). ERISA section 521 and these final regulations will potentially benefit approximately two million MEWA participants 7 by ensuring that MEWA assets are preserved and benefits timely paid. In some cases, individuals have incurred significant medical claims before they learn that their claims are not being paid by improperly operated MEWAs and that they are responsible for paying these claims out-of-pocket. These regulations will help such individuals avoid the financial hardship and adverse health effects that result from unpaid health claims. They also will benefit health care providers that are detrimentally impacted when they are not paid for services they have performed. ERISA section 521 and these final regulations also will improve MEWA compliance and deter abusive practices of fraudulent MEWAs, 7 The Department’s estimate is based on the number of MEWA participants reported on the 2010 Form M–1. Please note that this is an undercount, because the Form M–1 definition of participants specifically excludes dependents. VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 potentially lessening the need for future use of these provisions. As a result of these statutory and regulatory provisions, the Department will be able to take enforcement action against fraudulent and abusive MEWAs much more quickly and efficiently than under prior law. Common examples of such fraudulent and abusive conduct include a systematic failure to pay benefits claims or a diversion of premiums for personal use. For example, Employers Mutual, a MEWA covering 22,000 individuals which turned out to be a nationwide health insurance fraud, advertised deceptively low premium rates that were far less than necessary to pay promised benefits and misrepresented that the benefits were fully insured. Operators of this MEWA misused and misappropriated premiums so extensively that by the time the Department was able to shut down the MEWA and appoint an independent fiduciary to take over, the fraud left $27 million in unpaid benefits. With this new authority, the Department can take steps to protect plan participants and small employers much earlier in the process and before a MEWA’s assets have been exhausted. In addition, the Department will be able to take action against fraudulent and abusive MEWAs nationally, which will prevent unscrupulous MEWA operators from moving their operations to another State when they are shut down in a State. b. Costs of the Final Rules As discussed earlier in this preamble, the final rules provide standards and procedures the Department would follow to issue ex parte cease and desist and summary seizure orders with respect to MEWAs. The Department does not expect the rules to impose any significant costs, because it does not require any action or impose any requirements on MEWAs as defined in ERISA section 3(40). Therefore, the Department concludes that the final rules would enhance the Department’s ability to take immediate action against fraudulent and abusive MEWAs without imposing major costs. 3. ERISA Section 521(b), Procedures for Administrative Hearings on the Issues of Cease and Desist Orders—Multiple Employer Welfare Arrangements (29 CFR 2571.1 Through 2571.12) a. Benefits of Final Rule The Department expects that administrative hearings held pursuant to ERISA section 521(b) and the procedures set forth in the final regulations would benefit the Department and parties requesting a PO 00000 Frm 00033 Fmt 4700 Sfmt 4700 13803 hearing. The Department foresees improved efficiencies through use of administrative hearings, because such hearings should allow the parties involved to obtain a decision in a more timely and efficient manner than is customary in federal court proceedings, which would be the alternative adjudicative forum. The Department expects that these final rules setting forth the standards and procedures the Department would use to implement its cease and desist authority under ERISA section 521 will allow it to take action against fraudulent and abusive MEWAs much more quickly and efficiently than under prior law. These benefits have not been quantified. To access the benefit of improved efficiencies that would result from an administrative proceeding, the Department compared the cost of contesting a cease and desist order under the final regulations to the cost of contesting an action taken against a MEWA by the Department before the enactment of the Affordable Care Act. The Department’s primary enforcement tool against fraudulent and abusive MEWAs before Congress enacted ERISA section 521 was court-ordered injunctive relief. In order to obtain this relief, the Department must present evidence to a court that an ERISA fiduciary breach occurred and that the Department likely would prevail based on the merits of the case. Gathering sufficient evidence to prove a fiduciary breach is very time-consuming and labor-intensive, in most cases, because the Department’s investigators must work with poor or nonexistent financial records and uncooperative parties. The Department believes that an administrative hearing should result in cost savings compared with the baseline cost of litigating in federal court. Because the procedures and evidentiary rules of an administrative hearing generally track the Federal Rules of Civil Procedure and Evidence, document production will be similar for both an administrative hearing and a federal court proceeding. It is unlikely that any additional cost will be incurred for an administrative hearing than would be required to prepare for federal court litigation. Moreover, certain administrative hearing practices and other new procedures initiated by these regulations are expected to result in cost savings over court litigation. For example, parties may be more likely to appear pro se; the prehearing exchange is expected to be short and general; a motion for discovery only will be granted upon a showing of good cause; the general formality of the hearing may vary, particularly depending on whether E:\FR\FM\01MRR1.SGM 01MRR1 13804 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations the petitioner is appearing pro se; and the administrative law judge would be required to make its decision expeditiously after the conclusion of the ERISA section 521 proceeding. The Department cannot with certainty predict that any or all of these conditions will exist nor that any of these factors represent a cost savings, but it is likely that the administrative hearing process will create a consistent legal standard for section 521 proceedings. The Department invited public comments on the comparative cost of a federal court proceeding versus an administrative hearing. The Department did not receive any comments that addressed this issue. emcdonald on DSK67QTVN1PROD with RULES b. Costs of Final Rule The Department estimates that the cost of the final regulation would total approximately $548,900 annually. The total hour burden is estimated to be approximately 20 hours, and the dollar equivalent of the hour burden is estimated to be approximately $564. The data and methodology used in developing these estimates are described more fully in the Paperwork Reduction Act section, below. C. Paperwork Reduction Act This issuance of the cease and desist order final regulation is not subject to the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), because it does not contain a ‘‘collection of information’’ as defined in 44 U.S.C. 3502(3). The Final Rule on Procedures for Administrative Hearings Regarding the Issuance of Cease and Desist Orders under ERISA section 521—Multiple Employer Welfare Arrangements contains a collection of information and the associated hour and cost burden are discussed below. In accordance with the requirements of the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Department submitted an information collection request (ICR) to OMB in accordance with 44 U.S.C. 3507(d), contemporaneously with the publication of the proposed regulation, for OMB’s review and solicited public comment. No public comments were received related to the administrative hearing procedures for cease and desist orders. OMB assigned OMB control number 1210–0148 to the ICR but did not approve the ICR at the proposed rule stage. In connection with publication of these final rules, the Department submitted a revision to the ICR under OMB Control Number 1210–0116. OMB approved the revised ICR, which is VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 scheduled to expire on February 29, 2016. A copy of the revised ICR may be obtained by contacting the PRA addressee shown below or at http:// www.RegInfo.gov. PRA ADDRESSEE: G. Christopher Cosby, Office of Policy and Research, U.S. Department of Labor, Employee Benefits Security Administration, 200 Constitution Avenue NW., Room N 5647, Washington, DC 20210. Telephone (202) 693–8410; Fax: (202) 219–4745. These are not toll free numbers. This final regulation establishes procedures for hearings and appeals before an administrative law judge and the Secretary when a MEWA or other person challenges a temporary cease and desist order. As stated in the Regulatory Flexibility Act analysis below, the Department estimates that, on average, a maximum of 10 MEWAs would initiate an adjudicatory proceeding before an administrative law judge to revoke or modify a cease and desist order.8 Most of the factual information necessary to prepare the petition should be readily available to the MEWA and is expected to take approximately two hours of clerical time to assemble and forward to legal professionals resulting in an estimated total hour burden of approximately 20 hours. The Department believes that MEWAs will hire outside attorneys to prepare and file the appeal, which is estimated to require 120 hours at $457 per hour.9 The majority of the attorneys’ time is expected to be spent drafting motions, petitions, pleadings, briefs, and other 8 As stated in the Department’s December l, 2011 Fact Sheet on MEWA Enforcement, the Department has filed 99 civil complaints against MEWAs since 1990, which averages approximately five complaints per year. With the expanded enforcement authority provided to the Department under the Affordable Care Act, the number of civil complaints brought against MEWAs by the Department could increase. Therefore, for purposes of this Paperwork Reduction Act analysis, the Department assumes that twenty complaints will be filed as an upper bound. The Department is unable to estimate the number of cease and desist orders that will be contested; therefore, for purposes of this analysis it assumes that half of the MEWAs will contest cease and desist orders. The Department’s fact sheet on MEWA enforcement can be found on the EBSA Web site at http://www.dol.gov/ebsa/ newsroom/fsMEWAenforcement. 9 The Department’s estimate for the attorney’s hourly rate is taken from the Laffey Matrix which provides an estimate of legal service for court cases in the DC area. It can be found at http:// www.laffeymatrix.com/see.html. The estimate is an average of the 4–7 and 8–10 years of experience rates. The proposed rule included an estimate of 40 hours of outside attorney time for an administrative appeal. Though no comments were submitted on that estimate and we cannot state an estimate with certainty, after further consideration of the potential tasks involved we determined that a higher number would be more appropriate. PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 documents relating to the case. Based on the foregoing, the total estimated legal cost associated with the information collection would be approximately $54,840 per petition filed. Additional costs material and mailing costs are estimated at approximately $50.00 per petition. Type of Review: New. Agency: Employee Benefits Security Administration. Title: Final Rule on Procedures for Administrative Hearings Regarding the Issuance of Cease and Desist Orders under ERISA section 521—Multiple Employer Welfare Arrangements. OMB Number: 1210–0148. Affected Public: Business or other for profit; not for profit institutions; State government. Respondents: 10. Responses: 10. Estimated Total Burden Hours: 20 hours. Estimated Total Burden Cost (Operating and Maintenance): $548,900. D. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) applies to most Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.). Unless an agency certifies that such a rule will not have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis at the time of the publication of the notice of proposed rulemaking describing the impact of the rule on small entities. Small entities include small businesses, organizations and governmental jurisdictions. In accordance with the RFA, the Department prepared an initial regulatory flexibility analysis at the proposed rule stage and requested comments on the analysis. No comments were received. Below is the Department’s final regulatory flexibility analysis and its certification that these final regulations do not have a significant economic impact on a substantial number of small entities. The Department does not have data regarding the total number of MEWAs that currently exist. The best information the Department has to estimate the number of MEWAs is based on filing of the Form M–1, which is an annual report that MEWAs and certain collectively bargained arrangements file with the Department. Form M–1 was filed with the Department by 436 MEWAs in 2010, the latest year for which data is available. E:\FR\FM\01MRR1.SGM 01MRR1 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations emcdonald on DSK67QTVN1PROD with RULES The Small Business Administration uses a size standard of less than $7 million in average annual receipts to determine whether businesses in the finance and insurance sector are small entities.10 While the Department does not collect revenue information on the Form M–1, it does collect data regarding the number of participants covered by MEWAs that file Form M–1 and can use average premium data to determine the number of MEWAs that are small entities because they do not exceed the $7 million dollar threshold. For 2009, the average annual premium for single coverage was $4,717 and the average annual premium for family coverage was $12,696.11 Combining these premium estimates with estimates from the Current Population Survey regarding the fraction of policies that are for single or family coverage at employers with less than 500 workers, the Department estimates approximately 60 percent of MEWAs (258 MEWAs) are small entities. In order to develop an estimate of the number of MEWAs that could become subject to a cease and desist order, the Department examined the number of civil claims the Department filed against MEWAs since FY 1990. During this time, the Department filed 99 civil complaints against MEWAs, an average of approximately five complaints per year. For purposes of this analysis, the Department believes that an average of twenty complaints a year is a reasonable upper bound estimate of the number of MEWAs that could be subject to a cease and desist order 12 and that half this number, or an average of ten complaints a year, is a reasonable upper bound estimate of the number of MEWAs that could be expected to request an administrative hearing in a year. Based on the foregoing, the Department estimates that the greatest number of small MEWAs likely to be subject to a cease and desist order (20/ 258 or 7.8 percent) and the greatest 10 U.S. Small Business Administration, ‘‘Table of Small Business Size Standards Matched to North American Industry Classification System Codes.’’ http://www.sba.gov/sites/default/files/ Size_Standards_Table.pdf. 11 Kaiser Family Foundation and Health Research Educational Trust ‘‘Employer Health Benefits, 2009 Annual Survey.’’ The reported numbers are from Exhibit 1.2 and are for the category Annual, all Small Firms (3–199 workers). 12 With the expanded enforcement authority provided to the Department under the Affordable Care Act, the number of civil complaints brought against MEWAs by the Department could increase. Therefore, for purposes of this analysis, the Department assumes that twenty complaints will be filed as an upper bound. The Department is unable to estimate the number of cease and desist orders that will be contested; therefore, it assumes that half the MEWAs will contest cease and desist orders. VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 number of MEWAs likely to petition for an administrative hearing (10/258 or 3.9 percent) represents a small fraction of the total number of small MEWAs. Accordingly, the Department hereby certifies that these final regulations will not have a significant economic impact on a substantial number of small entities. E. Unfunded Mandates Reform Act For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1501 et seq.), as well as Executive Order 12875, these final rules do not include any federal mandate that may result in expenditures by State, local, or tribal governments, or the private sector, which may impose an annual burden of $100 million adjusted for inflation since 1995. F. Executive Order 13132 When an agency promulgates a regulation that has federalism implications, Executive Order 13132 (64 FR 43255, August 10, 1999), requires the Agency to provide a federalism summary impact statement. Pursuant to section 6(c) of the Order, such a statement must include a description of the extent of the agency’s consultation with State and local officials, a summary of the nature of their concerns and the agency’s position supporting the need to issue the regulation, and a statement of the extent to which the concerns of the State have been met. This regulation has federalism implications, because the States and the Federal Government share dual jurisdiction over MEWAs that are employee benefit plans or hold plan assets. Generally, States are primarily responsible for overseeing the financial soundness and licensing of MEWAs under State insurance laws. The Department enforces ERISA’s provisions, including its fiduciary responsibility provisions against MEWAs that are ERISA plans or that hold or control plan assets. Over the years, the Department and State insurance departments have worked closely and coordinated their investigations and other actions against fraudulent and abusive MEWAs. For example, EBSA regional offices have met with State officials in their regions and provided information necessary for States to obtain cease and desist orders to stop abusive and insolvent MEWAs. The Department also has relied on States to obtain cease and desist orders against MEWAs in individual States while it pursued investigations to gather sufficient evidence to obtain injunctive relief in the federal courts to shut down MEWAs nationally. States have often PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 13805 lobbied for stronger federal enforcement tools to help combat fraudulent and insolvent MEWAs. By providing procedures and standards the Department would follow to issue ex parte cease and desist and summary seizure orders and providing procedures for use by administrative law judges and the Secretary of Labor when a MEWA or other person challenges a temporary cease and desist order, these final rules address the States’ concerns and enhance the State and Federal Government’s joint mission to take immediate action against fraudulent and abusive MEWAs and limit the losses suffered by American workers and their families when abusive MEWAs become insolvent and fail to reimburse medical claims. List of Subjects 29 CFR Part 2560 Administrative practice and procedure, Employee welfare benefit plans, Employee Retirement Income Security Act, Law enforcement, Pensions, Multiple employer welfare arrangements, Cease and desist, Seizure. 29 CFR Part 2571 Administrative practice and procedure, Employee benefit plans, Employee Retirement Income Security Act, Multiple employer welfare arrangements, Law enforcement, Cease and desist. For the reasons set out in the preamble, 29 CFR chapter XXV is amended as follows: PART 2560—RULES AND REGULATIONS FOR ADMINISTRATION AND ENFORCEMENT 1. The authority citation for part 2560 is revised to read as follows: ■ Authority: 29 U.S.C. 1002(40), 1132, 1133, 1134, 1135, and 1151; and Secretary of Labor’s Order 1–2011, 77 FR 1088 (Jan. 9, 2012). 2. Sections 2560.521–1 through 2560.521–4 are added to read as follows: ■ § 2560.521–1 Cease and desist and seizure orders under section 521. (a) Purpose. Section 521(a) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1151(a), authorizes the Secretary of Labor to issue an ex parte cease and desist order if it appears to the Secretary that the alleged conduct of a multiple employer welfare arrangement (MEWA) under section 3(40) of ERISA is fraudulent, or creates an immediate danger to the public safety or welfare, or is causing or can be reasonably expected to cause E:\FR\FM\01MRR1.SGM 01MRR1 emcdonald on DSK67QTVN1PROD with RULES 13806 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations significant, imminent, and irreparable public injury. Section 521(e) of ERISA authorizes the Secretary to issue a summary seizure order if it appears that a MEWA is in a financially hazardous condition. An order may apply to a MEWA or to persons having custody or control of assets of the subject MEWA, any authority over management of the subject MEWA, or any role in the transaction of the subject MEWA’s business. This section sets forth standards and procedures for the Secretary to issue ex parte cease and desist and summary seizure orders and for administrative review of the issuance of such cease and desist orders. (b) Definitions. When used in this section, the following terms shall have the meanings ascribed in this paragraph (b). (1) Multiple employer welfare arrangement (MEWA) is an arrangement as defined in section 3(40) of ERISA that either is an employee welfare benefit plan subject to Title I of ERISA or offers benefits in connection with one or more employee welfare benefit plans subject to Title I of ERISA. For purposes of section 521 of ERISA, a MEWA does not include a health insurance issuer (including a health maintenance organization) that is licensed to offer or provide health insurance coverage to the public and employers at large in each State in which it offers or provides health insurance coverage, and that, in each such State, is subject to comprehensive licensure, solvency, and examination requirements that the State customarily requires for issuing health insurance policies to the public and employers at large. The term health insurance issuer does not include group health plans. For purposes of this section, the term ‘‘health insurance coverage’’ has the same meaning as in ERISA section 733(b)(1). (2) The conduct of a MEWA is fraudulent: (i) When the MEWA or any person acting as an agent or employee of the MEWA commits an act or omission knowingly and with an intent to deceive or defraud plan participants, plan beneficiaries, employers or employee organizations, or other members of the public, the Secretary, or a State regarding: (A) The financial condition of the MEWA (including the MEWA’s solvency and the management of plan assets); (B) The benefits provided by or in connection with the MEWA; (C) The management, control, or administration of the MEWA; VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 (D) The existing or lawful regulatory status of the MEWA under Federal or State law; or, (E) Any other material fact, as determined by the Secretary, relating to the MEWA or its operation. (ii) Fraudulent conduct includes any false statement regarding any of paragraphs (b)(2)(i)(A) through (b)(2)(i)(E) of this section that is made with knowledge of its falsity or that is made with reckless indifference to the statement’s truth or falsity, and the knowing concealment of material information regarding any of paragraphs (b)(2)(i)(A) through (b)(2)(i)(E) of this section. Examples of fraudulent conduct include, but are not limited to, misrepresenting the terms of the benefits offered by or in connection with the MEWA or the financial condition of the MEWA or engaging in deceptive acts or omissions in connection with marketing or sales or fees charged to employers or employee organizations. (3) The conduct of a MEWA creates an immediate danger to the public safety or welfare if the conduct of a MEWA or any person acting as an agent or employee of the MEWA impairs, or threatens to impair, a MEWA’s ability to pay claims or otherwise unreasonably increases the risk of nonpayment of benefits. Intent to create an immediate danger is not required for this criterion. Examples of such conduct include, but are not limited to, a systematic failure to properly process or pay benefit claims, including failure to establish and maintain a claims procedure that complies with the Secretary’s claims procedure regulations (29 CFR 2560.503–1 and 29 CFR 2590.715– 2719), failure to establish or maintain a recordkeeping system that tracks the claims made, paid, or processed or the MEWA’s financial condition, a substantial failure to meet applicable disclosure, reporting, and other filing requirements, including the annual reporting and registration requirements under sections 101(g) and 104 of ERISA, failure to establish and implement a policy or method to determine that the MEWA is actuarially sound with appropriate reserves and adequate underwriting, failure to comply with a cease and desist order issued by a government agency or court, and failure to hold plan assets in trust. (4) The conduct of a MEWA is causing or can be reasonably expected to cause significant, imminent, and irreparable public injury: (i) If the conduct of a MEWA, or of a person acting as an agent or employee of the MEWA, is having, or is reasonably expected to have, a PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 significant and imminent negative effect on one or more of the following: (A) An employee welfare benefit plan that is, or offers benefits in connection with, a MEWA; (B) The sponsor of such plan or the employer or employee organization that makes payments for benefits provided by or in connection with a MEWA; or (C) Plan participants and plan beneficiaries; and (ii) If it is not reasonable to expect that such effect will be fully repaired or rectified. Intent to cause injury is not required for this criterion. Examples of such conduct include, but are not limited to, conversion or concealment of property of the MEWA; improper disposal, transfer, or removal of funds or other property of the MEWA, including unreasonable compensation or payments to MEWA operators and service providers (e.g. brokers, marketers, and third party administrators); employment by the MEWA of a person prohibited from such employment pursuant to section 411 of ERISA, and embezzlement from the MEWA. For purposes of section 521 of ERISA, compensation that would be excessive under 26 CFR 1.162–7 will be considered unreasonable compensation or payments for purposes of this regulation. Depending upon the facts and circumstances, compensation may be unreasonable under this regulation even it is not excessive under 26 CFR 1.162–7. (5) A MEWA is in a financially hazardous condition if: (i) The Secretary has probable cause to believe that a MEWA: (A) Is, or is in imminent danger of becoming, unable to pay benefit claims as they come due, or (B) Has sustained, or is in imminent danger of sustaining, a significant loss of assets; or (ii) A person responsible for management, control, or administration of the MEWA’s assets is the subject of a cease and desist order issued by the Secretary. (6) A person, for purposes of this section, is an individual, partnership, corporation, employee welfare benefit plan, association, or other entity or organization. (c) Temporary cease and desist order. (1)(i) The Secretary may issue a temporary cease and desist order when the Secretary finds there is reasonable cause to believe that the conduct of a MEWA, or any person acting as an agent or employee of the MEWA, is – (A) Fraudulent; (B) Creates an immediate danger to the public safety or welfare; or E:\FR\FM\01MRR1.SGM 01MRR1 emcdonald on DSK67QTVN1PROD with RULES Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations (C) Is causing or can be reasonably expected to cause significant, imminent, and irreparable public injury. (ii) A single act or omission may be the basis for a temporary cease and desist order. (2) A temporary cease and desist order, as the Secretary determines is necessary and appropriate to stop the conduct on which the order is based, and to protect the interests of plan participants, plan beneficiaries, employers or employee organizations, or other members of the public, may— (i) Prohibit specific conduct or prohibit the transaction of any business of the MEWA; (ii) Prohibit any person from taking specified actions, or exercising authority or control, concerning funds or property of a MEWA or of any employee benefit plan, regardless of whether such funds or property have been commingled with other funds or property; and, (iii) Bar any person either directly or indirectly, from providing management, administrative, or other services to any MEWA or to an employee benefit plan or trust. (3) The Secretary may require documentation from the subject of the order verifying compliance. (d) Effect of order on other remedies. The issuance of a temporary or final cease and desist order shall not foreclose the Secretary from seeking additional remedies under ERISA. (e) Administrative hearing. (1) A temporary cease and desist order shall become a final order as to any MEWA or other person named in the order 30 days after such person receives notice of the order unless, within this period, such person requests a hearing in accordance with the requirements of this paragraph (e). (2) A person requesting a hearing must file a written request and an answer to the order showing cause why the order should be modified or set aside. The request and the answer must be filed in accordance with 29 CFR part 2571 and § 18.4 of this title. (3) A hearing shall be held expeditiously following the receipt of the request for a hearing by the Office of the Administrative Law Judges, unless the parties mutually consent, in writing, to a later date. (4) The decision of the administrative law judge shall be issued expeditiously after the conclusion of the hearing. (5) The Secretary must offer evidence supporting the findings made in issuing the order that there is reasonable cause to believe that the MEWA (or a person acting as an employee or agent of the MEWA) engaged in conduct specified in paragraph (c)(1) of this section. VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 (6) The person requesting the hearing has the burden to show that the order should be modified or set aside. To meet this burden such person must show by a preponderance of the evidence that the MEWA (or a person acting as an employee or agent of the MEWA) did not engage in conduct specified in paragraph (c)(1) of this section or must show that the requirements imposed by the order, are, in whole or part, arbitrary and capricious. (7) Any temporary cease and desist order for which a hearing has been requested shall remain in effect and enforceable, pending completion of the administrative proceedings, unless stayed by the Secretary, an administrative law judge, or by a court. (8) The Secretary may require that the hearing and all evidence be treated as confidential. (f) Summary seizure order. (1) Subject to paragraphs (f)(2) and (3) of this section, the Secretary may issue a summary seizure order when the Secretary finds there is probable cause to believe that a MEWA is in a financially hazardous condition. (2) Except as provided in paragraph (f)(3) of this section, the Secretary, before issuing a summary seizure order to remove assets and records from the control and management of the MEWA or any persons having custody or control of such assets or records, shall obtain judicial authorization from a federal court in the form of a warrant or other appropriate form of authorization and may at that time pursue other actions such as those set forth in paragraph (f)(5) of this section. (3) If the Secretary reasonably believes that any delay in issuing the order is likely to result in the removal, dissipation, or concealment of plan assets or records, the Secretary may issue and serve a summary seizure order before seeking court authorization. Promptly following service of the order, the Secretary shall seek authorization from a federal court and may at that time pursue other actions such as those set forth in paragraph (f)(5) of this section. (4) A summary seizure order may authorize the Secretary to take possession or control of all or part of the books, records, accounts, and property of the MEWA (including the premises in which the MEWA transacts its business) to protect the benefits of plan participants, plan beneficiaries, employers or employee organizations, or other members of the public, and to safeguard the assets of employee welfare benefit plans. The order may also direct any person having control and custody of the assets that are the subject of the PO 00000 Frm 00037 Fmt 4700 Sfmt 4700 13807 order not to allow any transfer or disposition of such assets except upon the written direction of the Secretary, or of a receiver or independent fiduciary appointed by a court. (5) In connection with or following the execution of a summary seizure order, the Secretary may— (i) Secure court appointment of a receiver or independent fiduciary to perform any necessary functions of the MEWA; (ii) Obtain court authorization for the Secretary, the receiver or independent fiduciary to take any other action to seize, secure, maintain, or preserve the availability of the MEWA’s assets; and (iii) Obtain such other appropriate relief available under ERISA to protect the interest of employee welfare benefit plan participants, plan beneficiaries, employers or employee organizations or other members of the public. Other appropriate equitable relief may include the liquidation and winding up of the MEWA’s affairs and, where applicable, the affairs of any person sponsoring the MEWA. (g) Effective date of orders. Cease and desist and summary seizure orders are effective immediately upon issuance by the Secretary and shall remain effective, except to the extent and until any provision is modified or the order is set aside by the Secretary, an administrative law judge, or a court. (h) Service of orders. (1) As soon as practicable after the issuance of a temporary or final cease and desist order and no later than five business days after issuance of a summary seizure order, the Secretary shall serve the order either: (i) By delivering a copy to the person who is the subject of the order. If the person is a partnership, service may be made to any partner. If the person is a corporation, association, or other entity or organization, service may be made to any officer of such entity or any person designated for service of process under State law or the applicable plan document. If the person is an employee welfare benefit plan, service may be made to a trustee or administrator. A person’s attorney may accept service on behalf of such person; (ii) By leaving a copy at the principal office, place of business, or residence of such person or attorney; or (iii) By mailing a copy to the last known address of such person or attorney. (2) If service is accomplished by certified mail, service is complete upon mailing. If service is done by regular mail, service is complete upon receipt by the addressee. E:\FR\FM\01MRR1.SGM 01MRR1 13808 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations (3) Service of a temporary or final cease and desist order and of a summary seizure order shall include a statement of the Secretary’s findings giving rise to the order, and, where applicable, a copy of any warrant or other authorization by a court. § 2560.521–2 Disclosure of order and proceedings. Subpart B—[Reserved] (a) Notwithstanding § 2560.521– 1(e)(8), the Secretary shall make available to the public final cease and desist and summary seizure orders or modifications and terminations of such final orders. (b) Except as prohibited by applicable law, and at his or her discretion, the Secretary may disclose the issuance of a temporary cease and desist order or summary seizure order and information and evidence of any proceedings and hearings related to an order, to any Federal, State, or foreign authorities responsible for enforcing laws that apply to MEWAs and parties associated with, or providing services to, MEWAs. (c) The sharing of such documents, material, or other information and evidence under this section does not constitute a waiver of any applicable privilege or claim of confidentiality. § 2560.521–3 authority. Effect on other enforcement The Secretary’s authority under section 521 shall not be construed to limit the Secretary’s ability to exercise his or her enforcement or investigatory authority under any other provision of title I of ERISA. 29 U.S.C. 1001 et seq. The Secretary may, in his or her sole discretion, initiate court proceedings without using the procedures in this section. § 2560.521–4 Cross-reference. See 29 CFR 2571.1 through 2571.13 for procedural rules relating to administrative hearings under section 521 of ERISA. ■ 3. Add part 2571 to read as follows: emcdonald on DSK67QTVN1PROD with RULES PART 2571—PROCEDURAL REGULATIONS FOR ADMINISTRATION AND ENFORCEMENT UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT Subpart A—Procedures for Administrative Hearings on the Issuance of Cease and Desist Orders Under ERISA Section 521— Multiple Employer Welfare Arrangements Sec. 2571.1 Scope of rules. 2571.2 Definitions. 2571.3 Service: copies of documents and pleadings. 2571.4 Parties. 2571.5 Consequences of default. 2571.6 Consent order or settlement. VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 2571.7 Scope of discovery. 2571.8 Summary decision. 2571.9 Decision of the administrative law judge. 2571.10 Review by the Secretary. 2571.11 Scope of review by the Secretary. 2571.12 Procedures for review by the Secretary. 2571.13 Effective date. Authority: 29 U.S.C. 1002(40), 1132, 1135; and 1151, Secretary of Labor’s Order 1–2011, 77 FR 1088 (January 9, 2012). Subpart A—Procedures for Administrative Hearings on the Issuance of Cease and Desist Orders Under ERISA Section 521—Multiple Employer Welfare Arrangements § 2571.1 Scope of rules. The rules of practice set forth in this part apply to ex parte cease and desist order proceedings under section 521 of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The rules of procedure for administrative hearings published by the Department’s Office of Administrative Law Judges at Part 18 of this Title will apply to matters arising under ERISA section 521 except as modified by this section. These proceedings shall be conducted as expeditiously as possible, and the parties and the Office of the Administrative Law Judges shall make every effort to avoid delay at each stage of the proceedings. § 2571.2 Definitions. For section 521 proceedings, this section shall apply in lieu of the definitions in § 18.2 of this title: (a) Adjudicatory proceeding means a judicial-type proceeding before an administrative law judge leading to an order; (b) Administrative law judge means an administrative law judge appointed pursuant to the provisions of 5 U.S.C. 3105; (c) Answer means a written statement that is supported by reference to specific circumstances or facts surrounding the temporary order issued pursuant to 29 CFR 2560.521–1(c); (d) Commencement of proceeding is the filing of an answer by the respondent; (e) Consent agreement means a proposed written agreement and order containing a specified proposed remedy or other relief acceptable to the Secretary and consenting parties; (f) Final order means a cease and desist order that is a final order of the Secretary of Labor under ERISA section 521. Such final order may result from a PO 00000 Frm 00038 Fmt 4700 Sfmt 4700 decision of an administrative law judge or of the Secretary on review of a decision of an administrative law judge, or from the failure of a party to invoke the procedures for a hearing under 29 CFR 2560.521–1 within the prescribed time limit. A final order shall constitute a final agency action within the meaning of 5 U.S.C. 704; (g) Hearing means that part of a section 521 proceeding which involves the submission of evidence, either by oral presentation or written submission, to the administrative law judge; (h) Order means the whole or any part of a final procedural or substantive disposition of a section 521 proceeding; (i) Party includes a person or agency named or admitted as a party to a section 521 proceeding; (j) Person includes an individual, partnership, corporation, employee welfare benefit plan, association, or other entity or organization; (k) Petition means a written request, made by a person or party, for some affirmative action; (l) Respondent means the party against whom the Secretary is seeking to impose a cease and desist order under ERISA section 521; (m) Secretary means the Secretary of Labor or his or her delegate; (n) Section 521 proceeding means an adjudicatory proceeding relating to the issuance of a temporary order under 29 CFR 2560.521–1 and section 521 of ERISA; (o) Solicitor means the Solicitor of Labor or his or her delegate; and (p) Temporary order means the temporary cease and desist order issued by the Secretary under 29 CFR 2560.521–1(c) and section 521 of ERISA. § 2571.3 Service: copies of documents and pleadings. For section 521 proceedings, this section shall apply in lieu of § 18.3 of this title: (a) In general. Copies of all documents shall be served on all parties of record. All documents should clearly designate the docket number, if any, and short title of all matters. All documents to be filed shall be delivered or mailed to the Chief Docket Clerk, Office of Administrative Law Judges, 800 K Street NW., Suite 400, Washington, DC 20001– 8002, or to the OALJ Regional Office to which the section 521 proceeding may have been transferred for hearing. Each document filed shall be clear and legible. (b) By parties. All motions, petitions, pleadings, briefs, or other documents shall be filed with the Office of Administrative Law Judges with a copy, including any attachments, to all other E:\FR\FM\01MRR1.SGM 01MRR1 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations parties of record. When a party is represented by an attorney, service shall be made upon the attorney. Service of any document upon any party may be made by personal delivery or by mailing a copy to the last known address. The Secretary shall be served by delivery to the Associate Solicitor, Plan Benefits Security Division, ERISA Section 521 Proceeding, P.O. Box 1914, Washington, DC 20013 and any attorney named for service of process as set forth in the temporary order. The person serving the document shall certify to the manner of date and service. (c) By the Office of Administrative Law Judges. Service of orders, decisions, and all other documents shall be made in such manner as the Office of Administrative Law Judges determines to the last known address. (d) Form of pleadings. (1) Every pleading or other paper filed in a section 521 proceeding shall designate the Employee Benefits Security Administration (EBSA) as the agency under which the proceeding is instituted, the title of the proceeding, the docket number (if any) assigned by the Office of Administrative Law Judges and a designation of the type of pleading or paper (e.g., notice, motion to dismiss, etc.). The pleading or paper shall be signed and shall contain the address and telephone number of the party or person representing the party. Although there are no formal specifications for documents, they should be printed when possible on standard size 81⁄2 × 11 inch paper. (2) Illegible documents, whether handwritten, printed, photocopies, or otherwise, will not be accepted. Papers may be reproduced by any duplicating process provided all copies are clear and legible. emcdonald on DSK67QTVN1PROD with RULES § 2571.4 Parties. For section 521 proceedings, this section shall apply in lieu of § 18.10 of this title: (a) The term ‘‘party’’ wherever used in these rules shall include any person that is a subject of the temporary order and is challenging the temporary order under these section 521 proceedings, and the Secretary. A party challenging a temporary order shall be designated as the ‘‘respondent.’’ The Secretary shall be designated as the ‘‘complainant.’’ (b) Other persons shall be permitted to participate as parties only if the administrative law judge finds that the final decision could directly and adversely affect them or the class they represent, that they may contribute materially to the disposition of the section 521 proceeding and their interest is not adequately represented by VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 the existing parties, and that in the discretion of the administrative law judge the participation of such persons would be appropriate. (c) A person not named in a temporary order, but wishing to participate as a respondent under this section shall submit a petition to the administrative law judge within fifteen (15) days after the person has knowledge of, or should have known about, the section 521 proceeding. The petition shall be filed with the administrative law judge and served on each person who has been made a party at the time of filing. Such petition shall concisely state: (1) Petitioner’s interest in the section 521 proceeding (including how the section 521 proceedings will directly and adversely affect them or the class they represent and why their interest is not adequately represented by the existing parties); (2) How his or her participation as a party will contribute materially to the disposition of the section 521 proceeding; (3) Who will appear for the petitioner; (4) The issues on which petitioner wishes to participate; and (5) Whether petitioner intends to present witnesses. (d) Objections to the petition may be filed by a party within fifteen (15) days of the filing of the petition. If objections to the petition are filed, the administrative law judge shall then determine whether petitioners have the requisite interest to be a party in the section 521 proceeding, as defined in paragraph (b) of this section, and shall permit or deny participation accordingly. Where persons with common interest file petitions to participate as parties in a section 521 proceeding, the administrative law judge may request all such petitioners to designate a single representative, or the administrative law judge may designate one or more of the petitioners to represent the others. The administrative law judge shall give each such petitioner, as well as the parties, written notice of the decision on his or her petition. For each petition granted, the administrative law judge shall provide a brief statement of the basis of the decision. If the petition is denied, he or she shall briefly state the grounds for denial and may consider whether to treat the petition as a request for participation as amicus curiae. § 2571.5 Consequences of default. For section 521 proceedings, this section shall apply in lieu of § 18.5(b) of this title. Failure of the respondent to file an answer to the temporary order PO 00000 Frm 00039 Fmt 4700 Sfmt 4700 13809 within the 30-day period provided by 29 CFR 2560.521–1(e) shall constitute a waiver of the respondent’s right to appear and contest the temporary order. Such failure shall also be deemed to be an admission of the facts as alleged in the temporary order for purposes of any proceeding involving the order issued under section 521 of ERISA. The temporary order shall then become the final order of the Secretary, within the meaning of 29 CFR 2571.2(f), 30 days from the date of the service of the temporary order. § 2571.6 Consent order or settlement. For section 521 proceedings, this section shall apply in lieu of § 18.9 of this title: (a) In general. At any time after the commencement of a section 521 proceeding, the parties jointly may move to defer the hearing for a reasonable time in order to negotiate a settlement or an agreement containing findings and a consent order disposing of the whole or any part of the section 521 proceeding. The administrative law judge shall have discretion to allow or deny such a postponement and to determine its duration. In exercising this discretion, the administrative law judge shall consider the nature of the section 521 proceeding, the requirements of the public interest, the representations of the parties and the probability of reaching an agreement that will result in a just disposition of the issues involved. (b) Content. Any agreement containing consent findings and an order disposing of the section 521 proceeding or any part thereof shall also provide: (1) That the consent order shall have the same force and effect as an order made after full hearing; (2) That the entire record on which the consent order is based shall consist solely of the notice and the agreement; (3) A waiver of any further procedural steps before the administrative law judge; (4) A waiver of any right to challenge or contest the validity of the consent order and decision entered into in accordance with the agreement; and (5) That the consent order and decision of the administrative law judge shall be final agency action within the meaning of 5 U.S.C. 704. (c) Submission. On or before the expiration of the time granted for negotiations, the parties or their authorized representatives or their counsel may: (1) Submit the proposed agreement containing consent findings and an order to the administrative law judge; E:\FR\FM\01MRR1.SGM 01MRR1 emcdonald on DSK67QTVN1PROD with RULES 13810 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations (2) Notify the administrative law judge that the parties have reached a full settlement and have agreed to dismissal of the action subject to compliance with the terms of the settlement; or (3) Inform the administrative law judge that agreement cannot be reached. (d) Disposition. If a settlement agreement containing consent findings and an order, agreed to by all the parties to a section 521 proceeding, is submitted within the time allowed therefor, the administrative law judge shall incorporate all of the findings, terms, and conditions of the settlement agreement and consent order of the parties. Such decision shall become a final agency action within the meaning of 5 U.S.C. 704. (e) Settlement without consent of all respondents. In cases in which some, but not all, of the respondents to a section 521 proceeding submit an agreement and consent order to the administrative law judge, the following procedure shall apply: (1) If all of the respondents have not consented to the proposed settlement submitted to the administrative law judge, then such non-consenting parties must receive notice and a copy of the proposed settlement at the time it is submitted to the administrative law judge; (2) Any non-consenting respondent shall have fifteen (15) days to file any objections to the proposed settlement with the administrative law judge and all other parties; (3) If any respondent submits an objection to the proposed settlement, the administrative law judge shall decide within thirty (30) days after receipt of such objections whether to sign or reject the proposed settlement. Where the record lacks substantial evidence upon which to base a decision or there is a genuine issue of material fact, then the administrative law judge may establish procedures for the purpose of receiving additional evidence upon which a decision on the contested issue may be reasonably based; (4) If there are no objections to the proposed settlement, or if the administrative law judge decides to sign the proposed settlement after reviewing any such objections, the administrative law judge shall incorporate the consent agreement into a decision meeting the requirements of paragraph (d) of this section; and (5) If the consent agreement is incorporated into a decision meeting the requirements of paragraph (d) of this section, the administrative law judge shall continue the section 521 VerDate Mar<15>2010 14:12 Feb 28, 2013 Jkt 229001 proceeding with respect to any nonconsenting respondents. exceptions to the attorney-client or work product privileges shall also apply. § 2571.7 § 2571.8 Scope of discovery. For section 521 proceedings, this section shall apply in lieu of § 18.14 of this title: (a) A party may file a motion to conduct discovery with the administrative law judge. The administrative law judge may grant a motion for discovery only upon a showing of good cause. In order to establish ‘‘good cause’’ for the purposes of this section, the moving party must show that the requested discovery relates to a genuine issue as to a fact that is material to the section 521 proceeding. The order of the administrative law judge shall expressly limit the scope and terms of the discovery to that for which ‘‘good cause’’ has been shown, as provided in this paragraph. (b) Any evidentiary privileges apply as they would apply in a civil proceeding in federal district court. For example, legal advice provided by an attorney to a client is generally protected from disclosure. Mental impressions, conclusions, opinions, or legal theories of a party’s attorney or other representative developed in anticipation of litigation are also generally protected from disclosure. The administrative law judge may not, however, protect from discovery or use, relevant communications between an attorney and a plan administrator or other plan fiduciary, or work product, that fall under the fiduciary exception to the attorney-client or work product privileges. The fiduciary exception to these privileges exists when an attorney advises the plan administrator or other plan fiduciary on matters concerning plan administration or other fiduciary activities. Consequently, the administrative law judge may not protect such communications from discovery or from use by the Secretary in the proceedings. The administrative law judge also may also not protect attorney work product prepared to assist the fiduciary in its fiduciary capacity from discovery or from use by the Secretary in the proceedings. The fiduciary exception does not apply, however, to the extent that communications were made or documents were prepared exclusively to aid the fiduciary personally or for nonfiduciary matters (e.g. settlor acts), provided that the plan did not pay for the legal services. The Secretary need not make a special showing, such as good cause, merely to obtain information or documents covered by the fiduciary exception. Other relevant PO 00000 Frm 00040 Fmt 4700 Sfmt 4700 Summary decision. For section 521 proceedings, this section shall apply in lieu of § 18.41 of this title: (a) No genuine issue of material fact. Where the administrative law judge finds that no issue of a material fact has been raised, he or she may issue a decision which, in the absence of an appeal, pursuant to §§ 2571.10 through 2571.12, shall become a final agency action within the meaning of 5 U.S.C. 704. (b) A decision made under this section, shall include a statement of: (1) Findings of fact and conclusions of law, and the reasons thereof, on all issues presented; and (2) Any terms and conditions of the ruling. (c) A copy of any decision under this section shall be served on each party. § 2571.9 judge. Decision of the administrative law For section 521 proceedings, this section shall apply in lieu of § 18.57 of this title: (a) Proposed findings of fact, conclusions, and order. Within twenty (20) days of the filing of the transcript of the testimony, or such additional time as the administrative law judge may allow, each party may file with the administrative law judge, subject to the judge’s discretion, proposed findings of fact, conclusions of law, and order together with a supporting brief expressing the reasons for such proposals. Such proposals and briefs shall be served on all parties, and shall refer to all portions of the record and to all authorities relied upon in support of each proposal. (b) Decision of the administrative law judge. The administrative law judge shall make his or her decision expeditiously after the conclusion of the section 521 proceeding. The decision of the administrative law judge shall include findings of fact and conclusions of law with reasons therefore upon each material issue of fact or law presented on the record. The decision of the administrative law judge shall be based upon the whole record and shall be supported by reliable and probative evidence. The decision of the administrative law judge shall become final agency action within the meaning of 5 U.S.C. 704 unless an appeal is made pursuant to the procedures set forth in §§ 2571.10 through 2571.12. § 2571.10 Review by the Secretary. (a) The Secretary may review the decision of an administrative law judge. E:\FR\FM\01MRR1.SGM 01MRR1 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Rules and Regulations Such review may occur only when a party files a notice of appeal from a decision of an administrative law judge within twenty (20) days of the issuance of such a decision. In all other cases, the decision of the administrative law judge shall become the final agency action within the meaning of 5 U.S.C. 704. (b) A notice of appeal to the Secretary shall state with specificity the issue(s) in the decision of the administrative law judge on which the party is seeking review. Such notice of appeal must be served on all parties of record. (c) Upon receipt of an appeal, the Secretary shall request the Chief Administrative Law Judge to submit to the Secretary a copy of the entire record before the administrative law judge. § 2571.11 Scope of review by the Secretary. The review of the Secretary shall be based on the record established before the administrative law judge. There shall be no opportunity for oral argument. § 2571.12 Procedures for review by the Secretary. (a) Upon receipt of a notice of appeal, the Secretary shall establish a briefing schedule which shall be served on all parties of record. Upon motion of one or more of the parties, the Secretary may, in her discretion, permit the submission of reply briefs. (b) The Secretary shall issue a decision as promptly as possible after receipt of the briefs of the parties. The Secretary may affirm, modify, or set aside, in whole or in part, the decision on appeal and shall issue a statement of reasons and bases for the action(s) taken. Such decision by the Secretary shall be the final agency action with the meaning of 5 U.S.C. 704. § 2571.13 Effective date. emcdonald on DSK67QTVN1PROD with RULES Subpart B—[Reserved] Signed at Washington, DC, this 26th day of February, 2013. Phyllis C. Borzi, Assistant Secretary, Employee Benefits Security Administration, Department of Labor. [FR Doc. 2013–04862 Filed 2–28–13; 8:45 am] BILLING CODE 4510–29–P 14:12 Feb 28, 2013 Coast Guard 33 CFR Part 100 [Docket No. USCG–2012–1094] Special Local Regulation; Annual Marine Events on the Colorado River, Between Davis Dam (Bullhead City, AZ) and Headgate Dam (Parker, AZ) Within the San Diego Captain of the Port Zone Jkt 229001 This notice is issued under authority of 33 CFR 100.1102 and 5 U.S.C. 552 (a). In addition to this notice in the Federal Register, the Coast Guard will provide the maritime community with extensive advance notification of this enforcement period via the Local Notice to Mariners. If the COTP or his designated representative determines that the regulated area need not be enforced for the full duration stated in this notice, he or she may use a Broadcast Notice to Mariners to grant general permission to enter the regulated area. AGENCY: Coast Guard, DHS. ACTION: Notice of enforcement of regulation. Dated: February 12, 2013. S.M. Mahoney, Captain, U.S. Coast Guard, Captain of the Port San Diego. The Coast Guard will enforce the Parker International Water Ski Race Special Local Regulation located upon the Colorado River from 8 a.m. through 5 p.m. on March 9 and March 10, 2013. The event will cover an area beginning at the Blue Water Marina in Parker, AZ, and extending approximately 10 miles to La Paz County Park. This action is necessary provide for the safety of the participants, crew, spectators, sponsor vessels of the race, and general users of the waterway. During the enforcement period, no spectators shall anchor, block, loiter in, or impede the through transit of participants or official patrol vessels in the regulated area during the effective dates and times, unless cleared for such entry by or through an official patrol vessel. DATES: The regulations in 33 CFR 100.1102 will be enforced from 8 a.m. through 5 p.m. on March 9 and March 10, 2013. FOR FURTHER INFORMATION CONTACT: If you have questions on this notice, call or email Bryan Gollogly, Waterways Management, U.S. Coast Guard Sector San Diego Coast Guard; telephone (619)–278–7656, email D11–PFMarineEventsSanDiego@uscg.mil. [FR Doc. 2013–04730 Filed 2–28–13; 8:45 am] The Coast Guard will enforce the Special Local Regulation for the Parker International Water Ski Race in 33 CFR 100.1102 from 8 a.m. through 5 p.m. on March 9 through March 10, 2013. Under the provisions of 33 CFR 100.1102, a vessel may not enter the regulated area, unless it receives permission from the COTP. Spectator vessels may safely transit outside the regulated area but may not anchor, block, loiter in, or impede the transit of ship parade participants or official patrol vessels. The Coast Guard may be assisted by other Federal, State, or local law enforcement agencies in enforcing this regulation. DATES: SUMMARY: SUPPLEMENTARY INFORMATION: This regulation is effective with respect to all cease and desist orders issued by the Secretary under section 521 of ERISA at any time after April 1, 2013. VerDate Mar<15>2010 DEPARTMENT OF HOMELAND SECURITY 13811 PO 00000 Frm 00041 Fmt 4700 Sfmt 4700 BILLING CODE 9110–04–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket No. USCG–2013–0048] Safety Zone; Underwater Escape Event, Seaport, East River, NY Coast Guard, DHS. Notice of enforcement of regulation. AGENCY: ACTION: The Coast Guard will enforce a safety zone in the Captain of the Port New York Zone on the specified date and time. This action is necessary to ensure the safety of participants, vessels and spectators from hazards associated with the escape artist event and associated pyrotechnics display. During the enforcement period, no person or vessel may enter the safety zone without permission of the Captain of the Port (COTP). SUMMARY: The regulation for the safety zone described in 33 CFR 165.160 will be enforced March 24, 2013, from 6:30 p.m. to 8:30 p.m. FOR FURTHER INFORMATION CONTACT: If you have questions on this notice, call or email Lieutenant Junior Grade Kristopher Kesting, Coast Guard; telephone 718–354–4154, email Kristopher.R.Kesting@uscg.mil. The Coast Guard will enforce the safety zone listed in 33 CFR 165.160 on the specified date and time as indicated in Table 1 below. This regulation was published in the Federal Register on November 9, 2011 (76 FR 69614). SUPPLEMENTARY INFORMATION: E:\FR\FM\01MRR1.SGM 01MRR1

Agencies

[Federal Register Volume 78, Number 41 (Friday, March 1, 2013)]
[Rules and Regulations]
[Pages 13797-13811]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04862]



[[Page 13797]]

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2560 and 2571

RIN 1210-AB48


Ex Parte Cease and Desist and Summary Seizure Orders--Multiple 
Employer Welfare Arrangements

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Final rules.

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SUMMARY: This document contains two final rules under the Employee 
Retirement Income Security Act of 1974 (ERISA) to facilitate 
implementation of new enforcement authority provided to the Secretary 
of Labor by the Patient Protection and Affordable Care Act (Affordable 
Care Act). The Affordable Care Act authorizes the Secretary to issue a 
cease and desist order, ex parte (i.e. without prior notice or 
hearing), when it appears that the alleged conduct of a multiple 
employer welfare arrangement (MEWA) is fraudulent, creates an immediate 
danger to the public safety or welfare, or is causing or can be 
reasonably expected to cause significant, imminent, and irreparable 
public injury. The Secretary may also issue a summary seizure order 
when it appears that a MEWA is in a financially hazardous condition. 
The first regulation establishes the procedures for the Secretary to 
issue ex parte cease and desist orders and summary seizure orders with 
respect to fraudulent or insolvent MEWAs. The second regulation 
establishes the procedures for use by administrative law judges and the 
Secretary when a MEWA or other person challenges a temporary cease and 
desist order.

DATES: Effective date. These final regulations are effective April 1, 
2013.

FOR FURTHER INFORMATION CONTACT: Stephanie Lewis, Plan Benefits 
Security Division, Office of the Solicitor, Department of Labor, at 
(202) 693-5588 or Suzanne Bach, Employee Benefits Security 
Administration, Department of Labor, at (202) 693-8335. These are not 
toll-free numbers.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

A. Purpose of the Regulatory Action

1. Need for Regulatory Action
    The Patient Protection and Affordable Care Act (Affordable Care 
Act) gives the Secretary authority to issue a cease and desist order 
when a multiple employer welfare arrangement (MEWA) engages in conduct 
that is fraudulent, creates an immediate danger to the public safety or 
welfare, or causes or can be reasonably expected to cause significant, 
immediate, and irreparable injury. The act also gives the Secretary 
authority to issue a summary seizure order when a MEWA is in a 
financially hazardous condition. These new powers strengthen the 
Secretary's ability to protect plan participants, beneficiaries, 
employers, employee organizations, and other members of the public from 
fraudulent, abusive, and financially unstable MEWAs.
    These two regulations are necessary to set forth the criteria for 
determining whether the statutory grounds for issuing an order have 
been met, and, in the case of a cease and desist order, to establish 
reasonable administrative review procedures. The Secretary will 
generally obtain judicial authorization before issuing a summary 
seizure order. The substantive criteria for issuing an order are based 
on several decades of enforcement experience by the Department and the 
States regarding fraudulent or financially hazardous conduct of MEWAs 
(and persons acting as their agents and employees). The administrative 
procedures will allow affected persons to challenge a cease and desist 
order and obtain expeditious review, including the right to a hearing.
2. Legal Authority
    Section 521 of ERISA, 29 U.S.C. 1151, sets out the Secretary's 
authority to issue cease and desist orders and summary seizure orders. 
Section 521(f) provides that ``the Secretary may promulgate such 
regulations or other guidance as may be necessary or appropriate to 
carry out'' this new enforcement authority. Section 505 of ERISA, 29 
U.S.C. 1135, also provides the Secretary with authority to prescribe 
such regulations as necessary or appropriate to carry out the 
provisions of Title I of ERISA, which includes the new section 521.

B. Summary of the Major Provisions of This Regulatory Action

    These rules generally set forth the statutory criteria under which 
the Secretary may issue cease and desist orders and summary seizure 
orders. They also specify that orders may apply to MEWAs and to persons 
having custody or control of assets of a MEWA, any authority over 
management of a MEWA, or any role in the transaction of a MEWA's 
business. Paragraph (b) of this section contains key definitions. Most 
notably, this paragraph sets forth the criteria for determining if it 
appears that the MEWA or any person acting as an agent or employee of 
the MEWA has engaged in conduct that would support issuance of an order 
under the statute. The regulations address the scope of the cease and 
desist order and the process for a person who is the subject of a 
temporary cease and desist order to request an administrative hearing 
to show cause why the order should be modified or set aside. The 
regulations also establish the procedures for such hearings.
    Although the Secretary may issue a cease and desist order without 
first seeking court approval, the procedure for a summary seizure order 
is somewhat different. The regulations generally require that the 
Secretary obtain judicial authorization before issuing a summary 
seizure order. They also require that the Secretary seek court 
appointment of a receiver or independent fiduciary and obtain court 
authorization for other actions to assert control over the MEWA's and 
plan assets.
    Orders issued under these final rules are effective upon service 
and remain in effect until modified or set aside by the Secretary, an 
administrative law judge, or a reviewing court. Issued final orders 
will be made available to the public as will modifications and 
terminations of such final orders. Further, to facilitate coordination 
with the States, Federal agencies, and foreign authorities, the 
Secretary may disclose the issuance of any order (whether temporary or 
final) and any information and evidence of any proceedings and hearings 
related to the order to other Federal, State, or foreign authorities. 
(The sharing of such information, however, does not constitute a waiver 
of any applicable privilege or claim of confidentiality.)
    The Secretary remains committed to helping MEWAs and plan officials 
comply with legal requirements and serve plan participants and 
beneficiaries properly. These new enforcement tools will enhance the 
Department's ability to protect plan participants and beneficiaries 
when MEWAs and plan actors fail to comply with their obligations. The 
Secretary will also continue to use any other investigatory and 
enforcement tools available under title I of ERISA.

C. Costs and Benefits

    These final regulations will improve MEWA compliance and deter 
abusive practices. They will also enable the Secretary to take 
enforcement action against fraudulent, abusive, and financially 
unstable MEWAs more effectively. The Department's primary judicial 
remedy for violations of ERISA

[[Page 13798]]

by MEWAs is court-ordered relief based on a breach of fiduciary duty. 
Gathering sufficient evidence to prove a fiduciary breach may be very 
time-consuming and labor intensive, even where it is clear that the 
MEWA is insolvent or unable to meet its financial commitments. In many 
MEWA cases, important financial records are poor or non-existent. The 
new authority implemented by these regulations provides an additional, 
more flexible tool for the Secretary to use, when appropriate, to 
combat fraudulent and abusive conduct by MEWAs and financially 
hazardous arrangements. Moreover, these regulations will enable the 
enforcement process to be more efficient because the subject of a cease 
and desist order can seek review of the order in an administrative 
hearing rather than a court. Since the rules do not require any action 
or impose any requirements on MEWAs, these regulations do not impose 
any major costs.

II. Background

    Multiple employer welfare arrangements (MEWAs) \1\ that are 
properly operated provide an additional option for small employers 
seeking affordable health coverage for their employees. Nevertheless, 
fraudulent and abusive practices and financial instability are 
recurrent themes in ERISA enforcement.\2\ Congress enacted section 6605 
of the Patient Protection and Affordable Care Act (Affordable Care 
Act), Public Law 111-148, 124 Stat. 119, 780 (2010), which adds section 
521 to ERISA, to give the Secretary of Labor additional enforcement 
authority to protect plan participants, beneficiaries, employees or 
employee organizations, or other members of the public against 
fraudulent, abusive, or financially hazardous MEWAs.
---------------------------------------------------------------------------

    \1\ The term ``multiple employer welfare arrangement'' is 
defined at ERISA Sec.  3(40), 29 U.S.C. 1002(40).
    \2\ See, e.g., Chao v. Graf, 2002 WL 1611122 (D. Nev. 2002), In 
re Raymond Palombo, et al., 2011 WL 1871438 (Bankr. C.D. CA 2011) 
and Solis v. Palombo, No. 1:08-CV-2017 (N.D. Ga 2009); Chao v. 
Crouse, 346 F.Supp.2d 975 (S.D. Ind. 2004).
---------------------------------------------------------------------------

    This section authorizes the Secretary to issue ex parte cease and 
desist orders when it appears to the Secretary that the alleged conduct 
of a MEWA is ``fraudulent, or creates an immediate danger to the public 
safety or welfare, or is causing or can be reasonably expected to cause 
significant, imminent, and irreparable public injury.'' 29 U.S.C. 
1151(a). A person that is adversely affected by the issuance of a cease 
and desist order may request an administrative hearing regarding the 
order. 29 U.S.C. 1151(b). This section also allows the Secretary to 
issue an order to seize the assets of a MEWA that the Secretary 
determines to be in a financially hazardous condition. 29 U.S.C. 
1151(e).
    On December 6, 2011, the Department published in the Federal 
Register proposed regulations (76 FR 76235) implementing new ERISA 
section 521 and setting forth the procedures for administrative 
hearings on the issuance of an ex parte cease and desist order. The 
Department received three (3) comment letters on these proposed rules. 
After consideration of the comments received, the Department is 
publishing these final regulations with little modification of the 
proposed rules.

III. Overview of the Final Regulations

A. Ex Parte Cease and Desist and Summary Seizure Order Regulations (29 
CFR 2560.521)

Purpose and Definitions
    Pursuant to section 6605 of the Affordable Care Act, these rules 
set forth criteria and procedures for the Secretary to issue cease and 
desist orders and summary seizure orders and procedures for 
administrative review of the cease and desist orders. The rules apply 
to any cease and desist order and any summary seizure order issued 
under section 521 of ERISA. Paragraph (a) of section 2560.521-1 of the 
rules generally sets forth the statutory criteria under which the 
Secretary may issue orders. It also specifies that orders may apply to 
MEWAs and to persons having custody or control of assets of a MEWA, any 
authority over management of a MEWA, or any role in the transaction of 
a MEWA's business.
    One commenter expressed concern that applying cease and desist and 
summary seizure orders to third party administrators (TPAs) would 
threaten their ability to perform their services, which may include 
helping MEWAs recover when they are in financial peril. TPAs perform 
critical services for the plan community. As the commenter notes, an 
important service TPAs do or can provide is to educate MEWAs about 
their duty to pay claims and provide promised benefits. TPAs also play 
an important role in informing the Department about MEWAs that ask them 
to deceive or defraud plan participants. The Department recognizes the 
role that conscientious and knowledgeable TPAs and other service 
providers may play in protecting plans and their participants and 
beneficiaries. Where the functions of a service provider are essential 
to the operation of a MEWA, cease and desist orders will need to cover 
these functions, whether or not the service provider engaged in conduct 
giving rise to the order. Moreover, in some cases a service provider 
may be integrally involved in conduct evidencing an intent to deceive 
or defraud plans and their participants and beneficiaries or other 
actions that endanger the public welfare. As an example, in U.S. v. 
William Madison Worthy, No. 7:11-cr-00487-HMH (D. S.C. 2011), Mr. 
Worthy, who owned the TPA providing services to the MEWA, pleaded 
guilty for diverting almost $1 million in premium contributions for 
coverage provided in connection with the MEWA. Ultimately, about $1.7 
million in claims either went unpaid or had to be paid by plan members.
    Moreover, it should be emphasized that orders may often be issued 
to persons, who were not involved in improper conduct, but whose 
cooperation is necessary to carry out the purpose of the order. For 
instance, a bank holding assets of a MEWA may receive a court-approved 
summary seizure order that directs the bank to freeze those assets. 
See, e.g., 29 CFR 2560.521-1(f)(4).
    Paragraph (b) contains key definitions. ERISA section 521 applies 
the Secretary's cease and desist and seizure order authority to MEWAs, 
as defined under section 3(40) of ERISA, 29 U.S.C. 1002(40). As stated 
in the proposed regulations, Congress did not limit the Secretary's 
authority to issue orders to MEWAs that are ERISA-covered employee 
welfare benefits plans (ERISA-covered plans). Section 521 of ERISA also 
applies if the MEWA provides health coverage to one or more ERISA-
covered plans, even if it also provides coverage to other persons 
unconnected to an ERISA-covered plan. These rules do not, however, 
apply to MEWAs that provide coverage only in connection with 
governmental plans, church plans, and plans maintained solely for the 
purpose of complying with workers' compensation laws, which are not 
covered by ERISA. They also do not apply to arrangements that only 
provide coverage to individuals other than in connection with an 
employee welfare benefit plan (e.g., individual market coverage). The 
proposed rules also noted that they did not apply to arrangements 
licensed or authorized to operate as a health insurance issuer. Though 
the Department has not changed the substance of the regulations in this 
regard, it has revised paragraph (b)(1) for the sake of clarity. The 
definition of a MEWA in ERISA section 3(40) is very broadly worded. 
Read literally, it could be interpreted to include traditional

[[Page 13799]]

health insurance issuers (including health maintenance organizations) 
that are fully licensed (i.e., subject to stringent and comprehensive 
insurance regulation) to offer health insurance coverage to the public 
and employers at large in every State in which they offer health 
insurance coverage. The Department has never, however, applied ERISA's 
provisions on MEWAs to such organizations. These organizations do not 
pose the same level of risk for fraud, abuse, and financial instability 
that ERISA's provisions on MEWAs, including the new ERISA section 521 
and these final rules, are designed to address. Consequently, these 
final rules do not apply to these entities. This exclusion applies to 
any arrangement that could fall within the definition of MEWA but is 
covered by the same level and scope of stringent and comprehensive 
insurance laws of a State (such as laws on licensure, solvency, 
reporting, anti-fraud, appeals, premium assessment, and guaranty funds) 
as traditional health insurance issuers (including health maintenance 
organizations) and that offers health insurance coverage to the public 
and employers at large.
    ERISA section 514(b)(6) makes clear that the States can regulate 
any MEWA, even a MEWA that is an ERISA-covered plan. The Department 
retains shared jurisdiction with the States. In some States, some MEWAs 
are permitted to operate if they have obtained a limited license from 
the State (e.g. a license that, for instance, allows them to operate 
subject to lower requirements or less extensive examination and 
oversight and/or to offer and provide coverage to a limited 
population.). These arrangements remain subject to ERISA section 521 
and these final rules.
    One commenter encouraged the Department to focus its enforcement 
actions on abusive and fraudulent MEWAs that are self-funded or not 
fully insured (within the meaning of ERISA section 514(b)(6)(D)). The 
Department recognizes that fully insured MEWAs have raised fewer 
concerns than other MEWAs. Nevertheless, a fully insured MEWA that 
engages in the conduct meeting the statutory criteria could be subject 
to an order.
    ERISA section 521 provides three statutory grounds upon which the 
Secretary may issue a cease and desist order. Paragraphs (b)(2)-(4) of 
the final regulations clarify the scope and meaning of the statutory 
language. The first statutory ground, fraudulent conduct, is described 
in paragraph (b)(2) of the final rules as an act or omission intended 
to deceive or defraud plan participants, plan beneficiaries, employers 
or employee organizations, or other members of the public, the 
Secretary or a State about the MEWA's financial condition or regulatory 
status, benefits, management, control, or administration, and other 
aspects of its operation (e.g. claims review, marketing, etc.) that the 
Secretary determines are material.\3\
---------------------------------------------------------------------------

    \3\ Similarly, section 519 of ERISA, 29 U.S.C. 1149, (also 
enacted as part of the Affordable Care Act) prohibits false 
statements and representations by any person, in connection with a 
MEWA's marketing or sales, concerning the financial condition or 
solvency of the MEWA, the benefits provided by the MEWA, and the 
regulatory status of the MEWA. Under ERISA section 501(b), 29 U.S.C. 
1131(b), (as amended by the Affordable Care Act) criminal penalties 
may apply to a violation of ERISA section 519. Other criminal 
penalties may apply under other federal provisions as well. See 
e.g., 29 U.S.C. 1131(a) (willful violations of ERISA reporting and 
disclosure requirements), 18 U.S.C. 1001 (knowingly and willfully 
false statements to the U.S. government), and 18 U.S.C. 1027 
(knowingly false statement or knowing concealment of facts in 
relation to documents required by ERISA).
---------------------------------------------------------------------------

    One commenter expressed concern about the definition of fraudulent 
conduct. In particular, the commenter was concerned that a focus on 
omissions regarding the financial condition of the MEWA, including the 
management of plan assets, could inadvertently target service providers 
that adjudicate or pay claims. The commenter also expressed concern 
that service providers would be adversely implicated simply because 
they interacted with the MEWA and others with respect to claims or 
marketing. The new enforcement tools under ERISA section 521 are 
designed to prevent or address serious harm to plan participants, plan 
beneficiaries, employers, employee organizations, and other members of 
the public. Fraudulent conduct, as defined in the proposed rules and 
under these final regulations, requires knowledge and intentionality or 
a reckless disregard on the part of the MEWA or agent or employee of 
the MEWA. As stated previously, however, even though an order is based 
on the conduct of a person other than the service provider, the service 
provider's activities may be affected simply because the order 
prohibits all or certain activities with respect to the MEWA, such as 
marketing, to continue.
    The second ground for issuing a cease and desist order, conduct 
that creates an immediate danger to the public safety or welfare, is 
described in paragraph (b)(3) of the final rules. Conduct meets this 
standard if it impairs, or threatens to impair, the MEWA's ability to 
pay claims or otherwise unreasonably increases the risk of nonpayment 
of benefits. The third ground, conduct that causes or can be reasonably 
expected to cause significant, imminent, and irreparable injury, is 
described in paragraph (b)(4). Conduct meets this statutory standard if 
it has, or can be reasonably be expected to have, a significant and 
imminent negative effect that the Secretary reasonably believes will 
not be fully rectified on one or more of the following: (a) An employee 
welfare benefit plan that is, or offers benefits in connection with, a 
MEWA, (b) plan participants and plan beneficiaries, or (c) employers or 
employee organizations.
    Paragraphs (b)(2)-(4) also provide examples of conduct that falls 
within those standards. A single act or omission within the categories 
of conduct set forth in the regulation may provide the basis for a 
cease and desist order. However, because the categories set forth in 
the statute are broad and overlapping, the examples may provide more 
than one basis for a cease and desist order.
    The new ERISA section 521 also further expands the Secretary's 
enforcement options with respect to MEWAs by authorizing the Secretary 
to issue a summary seizure order to remove plan assets and other 
property from the management, control, or administration of a MEWA when 
it appears that the MEWA is in a financially hazardous condition. Under 
paragraph (b)(5) a MEWA is in a financially hazardous condition when 
the Secretary has probable cause to believe that a MEWA is, or is in 
imminent danger of becoming, unable to pay benefit claims as they 
become due, or that a MEWA has sustained, or is in imminent danger of 
sustaining, a significant loss of assets. Under the definition, a MEWA 
may also be in a financially hazardous condition if the Secretary has 
issued a cease and desist order to a person responsible for the 
management, control, or administration of the MEWA or plan assets 
associated with the MEWA.
    Paragraph (b)(6) defines a person, for purposes of these 
regulations, to be an individual, partnership, corporation, employee 
welfare benefit plan, association, or other entity or organization. One 
commenter posited that the definition of person in the proposed rules 
was too broad because it reached service providers to MEWAs. The 
Department does not agree that the definition of person is overbroad. 
As discussed above, persons that provide services to MEWAs may engage 
in conduct that is grounds for the issuance of an order. Moreover, as 
previously noted, if a MEWA is being operated in a fraudulent or 
financially hazardous

[[Page 13800]]

manner, an order may need to apply to persons providing services to a 
MEWA in order to achieve its purpose. For example, it may be necessary 
for a cease and desist order to apply to an individual performing 
marketing services for a fraudulent MEWA even if the individual was not 
engaged in fraudulent conduct. In addition, the Department observes 
that the definition of person in ERISA section 3(9), while different 
from that in the proposed and these final rules, already encompasses 
service providers.
Cease and Desist Order
    Paragraph (c) of Sec.  2560.521-1 addresses the scope of the cease 
and desist order. This paragraph is structured the same as in the 
proposed rules. Paragraph (c)(2)(i) notes that the Secretary may enjoin 
a MEWA or person from the conduct that served as the basis for the 
order and from activities in furtherance of that conduct though a cease 
and desist order. In addition, the cease and desist order may provide 
broader relief as the Secretary determines is necessary and appropriate 
to protect the interests of plan participants, plan beneficiaries, 
employers or employee organizations, or other members of the public. 
Paragraph (c)(2)(ii) provides that an order may prohibit a person from 
taking any specified actions with respect to, or exercising authority 
over, specified funds of any MEWA or of any welfare or pension plan. 
Paragraph (c)(2)(iii) provides that an order may also bar a person from 
acting as a service provider to MEWAs or plans. This provision allows 
the Secretary to issue an order preventing a person from, for example, 
performing any administrative, management, financial, or marketing 
services for any MEWA or any welfare or pension plan. A cease and 
desist order containing such a prohibition against transacting business 
with any MEWA or plan would prevent the MEWA or a person from avoiding 
the cease and desist order by shutting the MEWA down and re-
establishing it in a new location or under a new identity. Such a 
prohibition may be necessary in cases of serious harmful conduct where 
it would be contrary to the interests of plan participants, plan 
beneficiaries, employers or employee organizations, or other members of 
the public for a person whose conduct gave rise to the order to gain a 
position with other MEWAs or welfare or pension plans where they could 
repeat that conduct. The Department has added paragraph (c)(3) to 
clarify that it may require documentation from the subject of the order 
confirming compliance with the cease and desist order. Paragraph (d) of 
this section preserves the Secretary's existing ability to seek 
additional remedies under ERISA.
    Under the new section 521(b) of ERISA, a person who is the subject 
of a temporary cease and desist order may request an administrative 
hearing to show cause why the order should be modified or set aside. 
Under the statute, the burden of proof rests with the person requesting 
the hearing. The process for the administrative hearing, set forth in 
paragraph (e) of Sec.  2560.521-1 in these final regulations, is 
basically the same process set forth in the proposed rules. If parties 
subject to a cease and desist order fail to request a hearing before an 
administrative law judge within 30 days after receiving notice of the 
order, the order becomes final. If a party makes a timely request for 
an administrative hearing, the order is not final until the conclusion 
of the process set forth in 29 CFR part 2571. It remains, however, in 
effect and enforceable throughout the administrative review process 
unless stayed by the Secretary, an administrative law judge, or a 
court. The section was slightly revised to clarify the nature of 
evidence the Secretary and the person requesting the hearing must 
provide to the administrative law judge. The proposed rules simply 
stated that the Secretary must offer evidence supporting the findings 
made in issuing the order. The final rules were revised to clarify the 
findings that must be supported by evidence, i.e., the Secretary's 
findings that she had reasonable cause to believe that the MEWA (or a 
person acting as an employee or agent of the MEWA) engaged in the 
conduct specified in the new ERISA section 521(a) and Sec.  2560.521-
1(c)(1) of the proposed and these final rules. The proposed rules 
further stated that the person requesting the hearing has the burden of 
proof to show that the order was not necessary to protect the interests 
of the plan, plan participants, plan beneficiaries, and others. The 
final rules were revised to state that the person requesting the 
hearing has the burden of proof to show that the MEWA (or a person 
acting as an employee or agent of the MEWA) did not engage in the 
conduct specified in the new ERISA section 521(a) and Sec.  2560.521-
1(c)(1) of the proposed and these final rules or that the requirements 
imposed by the order are arbitrary and capricious. This revision 
clarifies how the person requesting the hearing shows that the order 
was not necessary.
Summary Seizure Order
    The new section 521(e) of ERISA and paragraph (f)(1) of Sec.  
2560.521-1 of these rules authorize the Secretary to issue a summary 
seizure order when it appears that a MEWA is in a financially hazardous 
condition. Pursuant to the Fourth Amendment of the U.S. Constitution, 
the Secretary will generally obtain judicial authorization before 
issuing a summary seizure order. (See Colonnade Catering Corp. v. U.S., 
397 U.S. 72 (1970): ``Where Congress has authorized inspection but made 
no rules governing the procedures that inspectors must follow, the 
Fourth Amendment and its various restrictive rules apply.'') As in the 
proposed rules, paragraph (f)(2) provides for such judicial 
authorization. A court's authorization may be sought ex parte when the 
Secretary determines that prior notice could result in removal, 
dissipation, or concealment of plan assets. On its own initiative, the 
Department has slightly revised paragraph (f)(2) to clarify that it may 
seek appointment of a receiver or independent fiduciary by the court 
and other relief at the time it obtains judicial authorization. 
Paragraph (f)(3) clarifies that the Secretary may act on a summary 
seizure order prior to judicial authorization, however, if the 
Secretary reasonably believes that delay in issuing the order will 
result in the removal, dissipation, or concealment of assets. Under 
these circumstances, the Secretary will promptly seek judicial 
authorization after service of the order.
    Paragraph (f)(4) of Sec.  2560.521-1 describes the general scope of 
a seizure order.\4\ Under paragraph (f)(4), the Secretary may seize 
books, documents, and other records of the MEWA. She may also seize the 
premises, other property, and financial accounts for the purpose of 
transferring such property to a court-appointed receiver or independent 
fiduciary. In addition, the order may prohibit the MEWA and its 
operators from transacting any business or disposing of any property of 
the MEWA. This paragraph also clarifies that the order may be directed 
to any person holding assets that are the subject of the order, 
including banks or other financial institutions.
---------------------------------------------------------------------------

    \4\ The scope of the summary seizure order in this rule is 
similar to that provided for in section 201(B) in the National 
Association of Insurance Commissioners (NAIC) Insurer Receivership 
Model Act (October 2007).
---------------------------------------------------------------------------

    The principal purpose of a seizure order is to preserve the assets 
of an employee welfare benefit plan that is a MEWA, and assets of any 
employee welfare benefit plans under the control

[[Page 13801]]

of a MEWA, that is in a hazardous financial condition so that such 
assets are available to pay claims and other legitimate expenses of the 
MEWA and its participating plans. The Secretary will also issue summary 
seizure orders to prevent abusive operators from illegally using or 
acquiring plan assets. Seized assets are not deposited with the U.S. 
Treasury. Instead they are managed by a court-appointed receiver or 
independent fiduciary. Paragraph (f)(5) states that the Secretary may 
also, in connection with or following the execution of a summary 
seizure order, among other things, obtain court appointment of an 
independent fiduciary or receiver to perform any necessary functions of 
the MEWA, and court authorization for further actions in the best 
interest of plan participants, plan beneficiaries, employers or 
employee organizations, or other members of the public, including the 
liquidation and winding down of the MEWA, if appropriate. There were no 
comments on the procedures for issuing summary seizure orders or 
implementing other actions. With the minor exception noted above, and 
certain clarifying changes in paragraph (f)(5), the provisions in the 
proposed rules have been adopted without further modification.
    The provisions related to effective date of orders (paragraph g), 
disclosure (Sec.  2560.521-2), and effect of ERISA section 521 on other 
enforcement authority (Sec.  2560.521-3) have not changed from the 
proposed rules. Paragraph (h) of Sec.  2560.521-1 of the proposed rules 
regarding the service of orders on persons who are corporations, 
associations, or other entities or organizations, was slightly revised 
for these final rules to state that service could also be made to any 
person designated for service of process under State law or the 
applicable plan document. Orders issued under these final rules are 
effective upon service and remain in effect until modified or set aside 
by the Secretary, an administrative law judge, or a reviewing court. 
Issued final orders will be made available to the public, as will 
modifications and terminations of such final orders.
    Further, coordination and collaboration with other Federal agencies 
and the States are integral and instrumental to successful MEWA 
enforcement efforts. The Secretary remains committed to working closely 
with them to help detect, prevent, and address MEWA fraud, abuse, and 
financial insolvency. To facilitate this collaborative approach to MEWA 
enforcement, the Secretary may disclose the issuance of any order 
(whether temporary or final) and any information and evidence of any 
proceedings and hearings related to the order to other Federal, State, 
or foreign authorities. The sharing of such information, however, does 
not constitute a waiver of any applicable privilege or claim of 
confidentiality as to the information so shared.
    The Secretary also remains committed to helping MEWAs and plan 
officials comply with legal requirements and serve plan participants 
and beneficiaries properly. Section 521 is not, however, the only 
enforcement tool available to the Secretary with regard to MEWAs. She 
will continue to use the other investigatory and enforcement tools 
which were available to the Secretary under title I of ERISA prior to 
the enactment of ERISA section 521.
Cross-Reference
    These rules finalize the standards for the issuance of ex parte 
cease and desist and summary seizure orders. The Department has also 
finalized in this Notice rules for administrative hearings on ex parte 
cease and desist orders. In addition, elsewhere in this issue of the 
Federal Register is a separate regulation amending 29 CFR 2520-101.2, 
2520.103-1, 2520.104-20, and 2520.104-41 to implement section 101(g), 
as amended by the Affordable Care Act, and to enhance the Department's 
ability to enforce requirements under 29 CFR 2520-101.2.

B. Procedures for Administrative Hearings on the Issuance of Cease and 
Desist Orders Regulation (29 CFR Part 2571)

Purpose and Definitions
    These final procedural rules apply only to adjudicatory proceedings 
before administrative law judges of the U.S. Department of Labor. Under 
these procedural rules, an adjudicatory proceeding before an 
administrative law judge is commenced only after a person who is the 
subject of a temporary cease and desist order timely requests a hearing 
and files an answer showing cause why the temporary order should be 
modified or set aside. These procedural regulations are largely 
consistent with rules of practice and procedure under 29 CFR part 18 
that generally apply to matters before the Department's Office of 
Administrative Law Judges (OALJ). At the same time, they reflect the 
unique nature of orders issued under ERISA section 521. The 
definitional section of this rule, for instance, incorporates the basic 
adjudicatory principles set forth at 29 CFR part 18, but includes terms 
and concepts of specific relevance to proceedings under ERISA section 
521. These rules are controlling to the extent they are inconsistent 
with 29 CFR part 18.
    The authority of the Secretary with respect to the orders and 
proceedings covered by this rule has been delegated to the Assistant 
Secretary for the Employee Benefits Security Administration pursuant to 
Secretary's Order 1-2011, 77 FR 1088 (Jan. 9, 2012). With respect to 
appeals of administrative law judge decisions to the Secretary, the 
Assistant Secretary has redelegated this authority to the Director of 
the Office of Policy and Research of the Employee Benefits Security 
Administration. As required by the Administrative Procedure Act (5 
U.S.C. 552(a)(2)(A)) all final decisions of the Department under 
section 521 of ERISA shall be maintained, and available for public 
inspection, in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1513, U.S. Department of Labor, 200 
Constitution Ave. NW., Washington, DC 20210.
    There were no comments on the proposed administrative procedures. 
The proposed rules are being published as final rules with only minor 
clarifying changes. Of note, under Sec.  2571.4(d) of the proposed 
rules, if the administrative law judge denies a petition to participate 
in the hearing by persons not named in a temporary order, the 
administrative law judge shall treat the petition as a request for 
participation as an amicus curiae. The final rules give the 
administrative law judge discretion on the treatment of denied 
petitions and state that the administrative law judge may consider 
whether to treat the petition as a request for participation as amicus 
curiae. In addition, as stated in the preamble and Sec.  2571.7 of the 
proposed rules, the fiduciary exception to the attorney-client and work 
product privileges applies. Consequently, the administrative law judge 
may not protect from discovery nor from use in the proceedings 
communications between an attorney and a plan administrator or other 
plan fiduciary, or work product, that fall under the fiduciary 
exception. The final rules clarify that the fiduciary exception applies 
to communications and work product between an attorney and plan 
fiduciary concerning plan administration and other fiduciary 
activities, and not to communications made or documents prepared to aid 
the fiduciary personally or for settlor acts. See Solis v. The Food 
Employers Labor Relations Ass'n, 644 F.3d 221 (4th Cir. 2011). This 
provision should not be

[[Page 13802]]

interpreted as excluding consideration by the administrative law judge 
of other relevant exceptions to the privileges.

IV. Economic Impact and Paperwork Burdens

A. Summary

    These final regulations implement amendments made by section 6605 
of the Affordable Care Act, which added ERISA section 521. As discussed 
earlier in this preamble, ERISA section 521 provides the Secretary of 
Labor with new enforcement authority over MEWAs. Specifically, ERISA 
section 521(a) authorizes the Secretary to issue cease and desist 
orders, without prior notice or a hearing, when it appears to the 
Secretary that a MEWA's alleged conduct is fraudulent, creates an 
immediate danger to the public safety or welfare, or causes or can be 
reasonably expected to cause significant, imminent, and irreparable 
public injury. This section also authorizes the Secretary to issue a 
summary order to seize the assets of a MEWA the Secretary determines to 
be in a financially hazardous condition. These final regulations 
implement ERISA section 521(a) by setting forth procedures the 
Secretary will follow to issue ex parte cease and desist and summary 
seizure orders.
    ERISA section 521(b), as added by Affordable Care Act section 6605, 
provides that a person that is adversely affected by the issuance of a 
cease and desist order may request an administrative hearing regarding 
the order. These final regulations also implement the requirements of 
ERISA section 521(b) by describing the procedures before the Office of 
Administrative Law Judges (OALJ) that will apply when a person seeks an 
administrative hearing for review of a cease and desist order. These 
regulations maintain the maximum degree of uniformity with rules of 
practice and procedure under 29 CFR part 18 that generally apply to 
matters before the OALJ. At the same time, these regulations reflect 
the unique nature of orders issued under ERISA section 521, and are 
controlling to the extent they are inconsistent with 29 CFR part 18.

B. Executive Order 12866 and 13563 Statement

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing and streamlining rules, and 
of promoting flexibility. It also requires federal agencies to develop 
a plan under which the agencies will periodically review their existing 
significant regulations to make the agencies' regulatory programs more 
effective or less burdensome in achieving their regulatory objectives.
    Under Executive Order 12866, a regulatory action deemed 
``significant'' is subject to the requirements of the Executive Order 
and review by the Office of Management and Budget (OMB). Section 3(f) 
of the Executive 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.
    These regulatory actions are not economically significant within 
the meaning of section 3(f)(1) of the Executive Order. However, OMB has 
determined that the actions are significant within the meaning of 
section 3(f)(4) of the Executive Order, and the Department accordingly 
provides the following assessment of their potential benefits and 
costs.
1. Need for Regulatory Action
    Properly structured and managed MEWAs that are licensed to operate 
in a State provide a viable option for some employers to purchase 
affordable health insurance coverage. However, some MEWAs are marketed 
by unlicensed entities attempting to avoid State insurance reserve, 
contribution, and consumer protection requirements. By avoiding these 
requirements, such entities often are able to market insurance coverage 
at lower rates than licensed insurers, making them particularly 
attractive to some small employers that find it difficult to obtain 
affordable health insurance coverage for their employees. Due to 
insufficient funding and inadequate reserves, and in some situations, 
fraud, some MEWAs have become insolvent and unable to pay benefit 
claims. In addition, certain promoters set up arrangements that they 
claim are not MEWAs subject to state insurance regulation, because they 
are established pursuant to collective bargaining agreements. Often, 
however, these collective bargaining agreements are nothing more than 
shams designed to avoid state insurance regulation.
    Employees and their dependents have become financially responsible 
for paying medical claims they presumed were covered by insurance after 
paying health insurance premiums to fraudulent MEWAs.\5\ The impact, 
financial and otherwise, on individuals and families can be devastating 
when MEWAs become insolvent. Moreover, employees and their dependents 
may be deprived of medical services if they cannot afford to pay 
medical claims out-of-pocket that are not paid by the MEWA.
---------------------------------------------------------------------------

    \5\ GAO Report, supra note 2.
---------------------------------------------------------------------------

    Before the enactment of ERISA section 521, the Department's primary 
enforcement tool against fraudulent and abusive MEWAs was court-ordered 
injunctive relief. In order to obtain this relief, the Department must 
present evidence to a federal court that an ERISA fiduciary breach 
occurred and that the Department is likely to prevail based on the 
merits of the case. Gathering sufficient evidence to prove a fiduciary 
breach is time-consuming and labor-intensive, in most cases, because 
the Department's investigators must work with poor or nonexistent 
financial records and uncooperative parties. As a result, the 
Department at times has been unable to shut down fraudulent and abusive 
MEWAs quickly enough to preserve their assets and ensure that 
outstanding benefit claims are timely paid.
    States also encountered problems in their enforcement efforts 
against MEWAs in the absence of federal authority to shut down 
fraudulent and abusive MEWAs nationally. When one State succeeded in 
shutting down an abusive MEWA, in some cases, its operators continued 
operating in another State.\6\ ERISA section 521 provides the 
Department with stronger legal remedies to combat fraudulent and 
abusive MEWAs.
---------------------------------------------------------------------------

    \6\ Id.
---------------------------------------------------------------------------

    ERISA section 521(f) provides the Secretary of Labor with the 
authority to promulgate regulations that may be necessary and 
appropriate to carry out the Department's authority under ERISA

[[Page 13803]]

section 521. These regulations are necessary, because they set forth 
standards and procedures the Department would use to implement this new 
enforcement authority. They also are necessary to provide procedures 
that a person who is adversely affected by the issuance of a cease and 
desist order may follow to request an administrative hearing regarding 
the order pursuant to ERISA section 521(b).
2. ERISA Section 521(a) and (e), Ex Parte Cease and Desist and Summary 
Seizure Orders--Multiple Employer Welfare Arrangements (29 CFR 
2560.521-1)
a. Benefits of Final Rules
    As discussed earlier in this preamble, ERISA section 521(a) 
authorizes the Secretary to issue an ex parte cease and desist order if 
it appears to the Secretary that the alleged conduct of a MEWA is 
fraudulent, or creates an immediate danger to the public safety or 
welfare, or is causing or can reasonably be expected to cause, 
significant, imminent, and irreparable public injury. ERISA section 
521(e) allows the Secretary to issue a summary seizure order if it 
appears that a MEWA is in a financially hazardous condition. These 
final regulations implement the Department's enhanced enforcement 
authority by setting forth the standards and procedures the Department 
will follow in issuing cease and desist and summary seizure orders. 
They also define important statutory terms and clarify the scope of the 
Department's authority under ERISA sections 521(a) and (e).
    ERISA section 521 and these final regulations will potentially 
benefit approximately two million MEWA participants \7\ by ensuring 
that MEWA assets are preserved and benefits timely paid. In some cases, 
individuals have incurred significant medical claims before they learn 
that their claims are not being paid by improperly operated MEWAs and 
that they are responsible for paying these claims out-of-pocket. These 
regulations will help such individuals avoid the financial hardship and 
adverse health effects that result from unpaid health claims. They also 
will benefit health care providers that are detrimentally impacted when 
they are not paid for services they have performed. ERISA section 521 
and these final regulations also will improve MEWA compliance and deter 
abusive practices of fraudulent MEWAs, potentially lessening the need 
for future use of these provisions. As a result of these statutory and 
regulatory provisions, the Department will be able to take enforcement 
action against fraudulent and abusive MEWAs much more quickly and 
efficiently than under prior law. Common examples of such fraudulent 
and abusive conduct include a systematic failure to pay benefits claims 
or a diversion of premiums for personal use. For example, Employers 
Mutual, a MEWA covering 22,000 individuals which turned out to be a 
nationwide health insurance fraud, advertised deceptively low premium 
rates that were far less than necessary to pay promised benefits and 
misrepresented that the benefits were fully insured. Operators of this 
MEWA misused and misappropriated premiums so extensively that by the 
time the Department was able to shut down the MEWA and appoint an 
independent fiduciary to take over, the fraud left $27 million in 
unpaid benefits. With this new authority, the Department can take steps 
to protect plan participants and small employers much earlier in the 
process and before a MEWA's assets have been exhausted. In addition, 
the Department will be able to take action against fraudulent and 
abusive MEWAs nationally, which will prevent unscrupulous MEWA 
operators from moving their operations to another State when they are 
shut down in a State.
---------------------------------------------------------------------------

    \7\ The Department's estimate is based on the number of MEWA 
participants reported on the 2010 Form M-1. Please note that this is 
an undercount, because the Form M-1 definition of participants 
specifically excludes dependents.
---------------------------------------------------------------------------

b. Costs of the Final Rules
    As discussed earlier in this preamble, the final rules provide 
standards and procedures the Department would follow to issue ex parte 
cease and desist and summary seizure orders with respect to MEWAs. The 
Department does not expect the rules to impose any significant costs, 
because it does not require any action or impose any requirements on 
MEWAs as defined in ERISA section 3(40). Therefore, the Department 
concludes that the final rules would enhance the Department's ability 
to take immediate action against fraudulent and abusive MEWAs without 
imposing major costs.
3. ERISA Section 521(b), Procedures for Administrative Hearings on the 
Issues of Cease and Desist Orders--Multiple Employer Welfare 
Arrangements (29 CFR 2571.1 Through 2571.12)
a. Benefits of Final Rule
    The Department expects that administrative hearings held pursuant 
to ERISA section 521(b) and the procedures set forth in the final 
regulations would benefit the Department and parties requesting a 
hearing. The Department foresees improved efficiencies through use of 
administrative hearings, because such hearings should allow the parties 
involved to obtain a decision in a more timely and efficient manner 
than is customary in federal court proceedings, which would be the 
alternative adjudicative forum. The Department expects that these final 
rules setting forth the standards and procedures the Department would 
use to implement its cease and desist authority under ERISA section 521 
will allow it to take action against fraudulent and abusive MEWAs much 
more quickly and efficiently than under prior law. These benefits have 
not been quantified.
    To access the benefit of improved efficiencies that would result 
from an administrative proceeding, the Department compared the cost of 
contesting a cease and desist order under the final regulations to the 
cost of contesting an action taken against a MEWA by the Department 
before the enactment of the Affordable Care Act. The Department's 
primary enforcement tool against fraudulent and abusive MEWAs before 
Congress enacted ERISA section 521 was court-ordered injunctive relief. 
In order to obtain this relief, the Department must present evidence to 
a court that an ERISA fiduciary breach occurred and that the Department 
likely would prevail based on the merits of the case. Gathering 
sufficient evidence to prove a fiduciary breach is very time-consuming 
and labor-intensive, in most cases, because the Department's 
investigators must work with poor or nonexistent financial records and 
uncooperative parties.
    The Department believes that an administrative hearing should 
result in cost savings compared with the baseline cost of litigating in 
federal court. Because the procedures and evidentiary rules of an 
administrative hearing generally track the Federal Rules of Civil 
Procedure and Evidence, document production will be similar for both an 
administrative hearing and a federal court proceeding. It is unlikely 
that any additional cost will be incurred for an administrative hearing 
than would be required to prepare for federal court litigation. 
Moreover, certain administrative hearing practices and other new 
procedures initiated by these regulations are expected to result in 
cost savings over court litigation. For example, parties may be more 
likely to appear pro se; the prehearing exchange is expected to be 
short and general; a motion for discovery only will be granted upon a 
showing of good cause; the general formality of the hearing may vary, 
particularly depending on whether

[[Page 13804]]

the petitioner is appearing pro se; and the administrative law judge 
would be required to make its decision expeditiously after the 
conclusion of the ERISA section 521 proceeding. The Department cannot 
with certainty predict that any or all of these conditions will exist 
nor that any of these factors represent a cost savings, but it is 
likely that the administrative hearing process will create a consistent 
legal standard for section 521 proceedings.
    The Department invited public comments on the comparative cost of a 
federal court proceeding versus an administrative hearing. The 
Department did not receive any comments that addressed this issue.
b. Costs of Final Rule
    The Department estimates that the cost of the final regulation 
would total approximately $548,900 annually. The total hour burden is 
estimated to be approximately 20 hours, and the dollar equivalent of 
the hour burden is estimated to be approximately $564. The data and 
methodology used in developing these estimates are described more fully 
in the Paperwork Reduction Act section, below.

C. Paperwork Reduction Act

    This issuance of the cease and desist order final regulation is not 
subject to the requirements of the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501 et seq.), because it does not contain a ``collection of 
information'' as defined in 44 U.S.C. 3502(3). The Final Rule on 
Procedures for Administrative Hearings Regarding the Issuance of Cease 
and Desist Orders under ERISA section 521--Multiple Employer Welfare 
Arrangements contains a collection of information and the associated 
hour and cost burden are discussed below.
    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Department submitted an 
information collection request (ICR) to OMB in accordance with 44 
U.S.C. 3507(d), contemporaneously with the publication of the proposed 
regulation, for OMB's review and solicited public comment. No public 
comments were received related to the administrative hearing procedures 
for cease and desist orders. OMB assigned OMB control number 1210-0148 
to the ICR but did not approve the ICR at the proposed rule stage.
    In connection with publication of these final rules, the Department 
submitted a revision to the ICR under OMB Control Number 1210-0116. OMB 
approved the revised ICR, which is scheduled to expire on February 29, 
2016. A copy of the revised ICR may be obtained by contacting the PRA 
addressee shown below or at http://www.RegInfo.gov.
    PRA ADDRESSEE: G. Christopher Cosby, Office of Policy and Research, 
U.S. Department of Labor, Employee Benefits Security Administration, 
200 Constitution Avenue NW., Room N 5647, Washington, DC 20210. 
Telephone (202) 693-8410; Fax: (202) 219-4745. These are not toll free 
numbers.
    This final regulation establishes procedures for hearings and 
appeals before an administrative law judge and the Secretary when a 
MEWA or other person challenges a temporary cease and desist order. As 
stated in the Regulatory Flexibility Act analysis below, the Department 
estimates that, on average, a maximum of 10 MEWAs would initiate an 
adjudicatory proceeding before an administrative law judge to revoke or 
modify a cease and desist order.\8\ Most of the factual information 
necessary to prepare the petition should be readily available to the 
MEWA and is expected to take approximately two hours of clerical time 
to assemble and forward to legal professionals resulting in an 
estimated total hour burden of approximately 20 hours.
---------------------------------------------------------------------------

    \8\ As stated in the Department's December l, 2011 Fact Sheet on 
MEWA Enforcement, the Department has filed 99 civil complaints 
against MEWAs since 1990, which averages approximately five 
complaints per year. With the expanded enforcement authority 
provided to the Department under the Affordable Care Act, the number 
of civil complaints brought against MEWAs by the Department could 
increase. Therefore, for purposes of this Paperwork Reduction Act 
analysis, the Department assumes that twenty complaints will be 
filed as an upper bound. The Department is unable to estimate the 
number of cease and desist orders that will be contested; therefore, 
for purposes of this analysis it assumes that half of the MEWAs will 
contest cease and desist orders. The Department's fact sheet on MEWA 
enforcement can be found on the EBSA Web site at http://www.dol.gov/ebsa/newsroom/fsMEWAenforcement.
---------------------------------------------------------------------------

    The Department believes that MEWAs will hire outside attorneys to 
prepare and file the appeal, which is estimated to require 120 hours at 
$457 per hour.\9\ The majority of the attorneys' time is expected to be 
spent drafting motions, petitions, pleadings, briefs, and other 
documents relating to the case. Based on the foregoing, the total 
estimated legal cost associated with the information collection would 
be approximately $54,840 per petition filed. Additional costs material 
and mailing costs are estimated at approximately $50.00 per petition.
---------------------------------------------------------------------------

    \9\ The Department's estimate for the attorney's hourly rate is 
taken from the Laffey Matrix which provides an estimate of legal 
service for court cases in the DC area. It can be found at http://www.laffeymatrix.com/see.html. The estimate is an average of the 4-7 
and 8-10 years of experience rates. The proposed rule included an 
estimate of 40 hours of outside attorney time for an administrative 
appeal. Though no comments were submitted on that estimate and we 
cannot state an estimate with certainty, after further consideration 
of the potential tasks involved we determined that a higher number 
would be more appropriate.
---------------------------------------------------------------------------

    Type of Review: New.
    Agency: Employee Benefits Security Administration.
    Title: Final Rule on Procedures for Administrative Hearings 
Regarding the Issuance of Cease and Desist Orders under ERISA section 
521--Multiple Employer Welfare Arrangements.
    OMB Number: 1210-0148.
    Affected Public: Business or other for profit; not for profit 
institutions; State government.
    Respondents: 10.
    Responses: 10.
    Estimated Total Burden Hours: 20 hours.
    Estimated Total Burden Cost (Operating and Maintenance): $548,900.

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) applies 
to most Federal rules that are subject to the notice and comment 
requirements of section 553(b) of the Administrative Procedure Act (5 
U.S.C. 551 et seq.). Unless an agency certifies that such a rule will 
not have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present an 
initial regulatory flexibility analysis at the time of the publication 
of the notice of proposed rulemaking describing the impact of the rule 
on small entities. Small entities include small businesses, 
organizations and governmental jurisdictions. In accordance with the 
RFA, the Department prepared an initial regulatory flexibility analysis 
at the proposed rule stage and requested comments on the analysis. No 
comments were received. Below is the Department's final regulatory 
flexibility analysis and its certification that these final regulations 
do not have a significant economic impact on a substantial number of 
small entities.
    The Department does not have data regarding the total number of 
MEWAs that currently exist. The best information the Department has to 
estimate the number of MEWAs is based on filing of the Form M-1, which 
is an annual report that MEWAs and certain collectively bargained 
arrangements file with the Department. Form M-1 was filed with the 
Department by 436 MEWAs in 2010, the latest year for which data is 
available.

[[Page 13805]]

    The Small Business Administration uses a size standard of less than 
$7 million in average annual receipts to determine whether businesses 
in the finance and insurance sector are small entities.\10\ While the 
Department does not collect revenue information on the Form M-1, it 
does collect data regarding the number of participants covered by MEWAs 
that file Form M-1 and can use average premium data to determine the 
number of MEWAs that are small entities because they do not exceed the 
$7 million dollar threshold. For 2009, the average annual premium for 
single coverage was $4,717 and the average annual premium for family 
coverage was $12,696.\11\ Combining these premium estimates with 
estimates from the Current Population Survey regarding the fraction of 
policies that are for single or family coverage at employers with less 
than 500 workers, the Department estimates approximately 60 percent of 
MEWAs (258 MEWAs) are small entities.
---------------------------------------------------------------------------

    \10\ U.S. Small Business Administration, ``Table of Small 
Business Size Standards Matched to North American Industry 
Classification System Codes.'' http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf.
    \11\ Kaiser Family Foundation and Health Research Educational 
Trust ``Employer Health Benefits, 2009 Annual Survey.'' The reported 
numbers are from Exhibit 1.2 and are for the category Annual, all 
Small Firms (3-199 workers).
---------------------------------------------------------------------------

    In order to develop an estimate of the number of MEWAs that could 
become subject to a cease and desist order, the Department examined the 
number of civil claims the Department filed against MEWAs since FY 
1990. During this time, the Department filed 99 civil complaints 
against MEWAs, an average of approximately five complaints per year. 
For purposes of this analysis, the Department believes that an average 
of twenty complaints a year is a reasonable upper bound estimate of the 
number of MEWAs that could be subject to a cease and desist order \12\ 
and that half this number, or an average of ten complaints a year, is a 
reasonable upper bound estimate of the number of MEWAs that could be 
expected to request an administrative hearing in a year.
---------------------------------------------------------------------------

    \12\ With the expanded enforcement authority provided to the 
Department under the Affordable Care Act, the number of civil 
complaints brought against MEWAs by the Department could increase. 
Therefore, for purposes of this analysis, the Department assumes 
that twenty complaints will be filed as an upper bound. The 
Department is unable to estimate the number of cease and desist 
orders that will be contested; therefore, it assumes that half the 
MEWAs will contest cease and desist orders.
---------------------------------------------------------------------------

    Based on the foregoing, the Department estimates that the greatest 
number of small MEWAs likely to be subject to a cease and desist order 
(20/258 or 7.8 percent) and the greatest number of MEWAs likely to 
petition for an administrative hearing (10/258 or 3.9 percent) 
represents a small fraction of the total number of small MEWAs.
    Accordingly, the Department hereby certifies that these final 
regulations will not have a significant economic impact on a 
substantial number of small entities.

E. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1501 et seq.), as well as Executive Order 12875, these final rules do 
not include any federal mandate that may result in expenditures by 
State, local, or tribal governments, or the private sector, which may 
impose an annual burden of $100 million adjusted for inflation since 
1995.

F. Executive Order 13132

    When an agency promulgates a regulation that has federalism 
implications, Executive Order 13132 (64 FR 43255, August 10, 1999), 
requires the Agency to provide a federalism summary impact statement. 
Pursuant to section 6(c) of the Order, such a statement must include a 
description of the extent of the agency's consultation with State and 
local officials, a summary of the nature of their concerns and the 
agency's position supporting the need to issue the regulation, and a 
statement of the extent to which the concerns of the State have been 
met.
    This regulation has federalism implications, because the States and 
the Federal Government share dual jurisdiction over MEWAs that are 
employee benefit plans or hold plan assets. Generally, States are 
primarily responsible for overseeing the financial soundness and 
licensing of MEWAs under State insurance laws. The Department enforces 
ERISA's provisions, including its fiduciary responsibility provisions 
against MEWAs that are ERISA plans or that hold or control plan assets.
    Over the years, the Department and State insurance departments have 
worked closely and coordinated their investigations and other actions 
against fraudulent and abusive MEWAs. For example, EBSA regional 
offices have met with State officials in their regions and provided 
information necessary for States to obtain cease and desist orders to 
stop abusive and insolvent MEWAs. The Department also has relied on 
States to obtain cease and desist orders against MEWAs in individual 
States while it pursued investigations to gather sufficient evidence to 
obtain injunctive relief in the federal courts to shut down MEWAs 
nationally. States have often lobbied for stronger federal enforcement 
tools to help combat fraudulent and insolvent MEWAs. By providing 
procedures and standards the Department would follow to issue ex parte 
cease and desist and summary seizure orders and providing procedures 
for use by administrative law judges and the Secretary of Labor when a 
MEWA or other person challenges a temporary cease and desist order, 
these final rules address the States' concerns and enhance the State 
and Federal Government's joint mission to take immediate action against 
fraudulent and abusive MEWAs and limit the losses suffered by American 
workers and their families when abusive MEWAs become insolvent and fail 
to reimburse medical claims.

List of Subjects

29 CFR Part 2560

    Administrative practice and procedure, Employee welfare benefit 
plans, Employee Retirement Income Security Act, Law enforcement, 
Pensions, Multiple employer welfare arrangements, Cease and desist, 
Seizure.

29 CFR Part 2571

    Administrative practice and procedure, Employee benefit plans, 
Employee Retirement Income Security Act, Multiple employer welfare 
arrangements, Law enforcement, Cease and desist.

    For the reasons set out in the preamble, 29 CFR chapter XXV is 
amended as follows:

PART 2560--RULES AND REGULATIONS FOR ADMINISTRATION AND ENFORCEMENT

0
1. The authority citation for part 2560 is revised to read as follows:

    Authority:  29 U.S.C. 1002(40), 1132, 1133, 1134, 1135, and 
1151; and Secretary of Labor's Order 1-2011, 77 FR 1088 (Jan. 9, 
2012).


0
2. Sections 2560.521-1 through 2560.521-4 are added to read as follows:


Sec.  2560.521-1  Cease and desist and seizure orders under section 
521.

    (a) Purpose. Section 521(a) of the Employee Retirement Income 
Security Act of 1974 (ERISA), 29 U.S.C. 1151(a), authorizes the 
Secretary of Labor to issue an ex parte cease and desist order if it 
appears to the Secretary that the alleged conduct of a multiple 
employer welfare arrangement (MEWA) under section 3(40) of ERISA is 
fraudulent, or creates an immediate danger to the public safety or 
welfare, or is causing or can be reasonably expected to cause

[[Page 13806]]

significant, imminent, and irreparable public injury. Section 521(e) of 
ERISA authorizes the Secretary to issue a summary seizure order if it 
appears that a MEWA is in a financially hazardous condition. An order 
may apply to a MEWA or to persons having custody or control of assets 
of the subject MEWA, any authority over management of the subject MEWA, 
or any role in the transaction of the subject MEWA's business. This 
section sets forth standards and procedures for the Secretary to issue 
ex parte cease and desist and summary seizure orders and for 
administrative review of the issuance of such cease and desist orders.
    (b) Definitions. When used in this section, the following terms 
shall have the meanings ascribed in this paragraph (b).
    (1) Multiple employer welfare arrangement (MEWA) is an arrangement 
as defined in section 3(40) of ERISA that either is an employee welfare 
benefit plan subject to Title I of ERISA or offers benefits in 
connection with one or more employee welfare benefit plans subject to 
Title I of ERISA. For purposes of section 521 of ERISA, a MEWA does not 
include a health insurance issuer (including a health maintenance 
organization) that is licensed to offer or provide health insurance 
coverage to the public and employers at large in each State in which it 
offers or provides health insurance coverage, and that, in each such 
State, is subject to comprehensive licensure, solvency, and examination 
requirements that the State customarily requires for issuing health 
insurance policies to the public and employers at large. The term 
health insurance issuer does not include group health plans. For 
purposes of this section, the term ``health insurance coverage'' has 
the same meaning as in ERISA section 733(b)(1).
    (2) The conduct of a MEWA is fraudulent:
    (i) When the MEWA or any person acting as an agent or employee of 
the MEWA commits an act or omission knowingly and with an intent to 
deceive or defraud plan participants, plan beneficiaries, employers or 
employee organizations, or other members of the public, the Secretary, 
or a State regarding:
    (A) The financial condition of the MEWA (including the MEWA's 
solvency and the management of plan assets);
    (B) The benefits provided by or in connection with the MEWA;
    (C) The management, control, or administration of the MEWA;
    (D) The existing or lawful regulatory status of the MEWA under 
Federal or State law; or,
    (E) Any other material fact, as determined by the Secretary, 
relating to the MEWA or its operation.
    (ii) Fraudulent conduct includes any false statement regarding any 
of paragraphs (b)(2)(i)(A) through (b)(2)(i)(E) of this section that is 
made with knowledge of its falsity or that is made with reckless 
indifference to the statement's truth or falsity, and the knowing 
concealment of material information regarding any of paragraphs 
(b)(2)(i)(A) through (b)(2)(i)(E) of this section. Examples of 
fraudulent conduct include, but are not limited to, misrepresenting the 
terms of the benefits offered by or in connection with the MEWA or the 
financial condition of the MEWA or engaging in deceptive acts or 
omissions in connection with marketing or sales or fees charged to 
employers or employee organizations.
    (3) The conduct of a MEWA creates an immediate danger to the public 
safety or welfare if the conduct of a MEWA or any person acting as an 
agent or employee of the MEWA impairs, or threatens to impair, a MEWA's 
ability to pay claims or otherwise unreasonably increases the risk of 
nonpayment of benefits. Intent to create an immediate danger is not 
required for this criterion. Examples of such conduct include, but are 
not limited to, a systematic failure to properly process or pay benefit 
claims, including failure to establish and maintain a claims procedure 
that complies with the Secretary's claims procedure regulations (29 CFR 
2560.503-1 and 29 CFR 2590.715-2719), failure to establish or maintain 
a recordkeeping system that tracks the claims made, paid, or processed 
or the MEWA's financial condition, a substantial failure to meet 
applicable disclosure, reporting, and other filing requirements, 
including the annual reporting and registration requirements under 
sections 101(g) and 104 of ERISA, failure to establish and implement a 
policy or method to determine that the MEWA is actuarially sound with 
appropriate reserves and adequate underwriting, failure to comply with 
a cease and desist order issued by a government agency or court, and 
failure to hold plan assets in trust.
    (4) The conduct of a MEWA is causing or can be reasonably expected 
to cause significant, imminent, and irreparable public injury:
    (i) If the conduct of a MEWA, or of a person acting as an agent or 
employee of the MEWA, is having, or is reasonably expected to have, a 
significant and imminent negative effect on one or more of the 
following:
    (A) An employee welfare benefit plan that is, or offers benefits in 
connection with, a MEWA;
    (B) The sponsor of such plan or the employer or employee 
organization that makes payments for benefits provided by or in 
connection with a MEWA; or
    (C) Plan participants and plan beneficiaries; and
    (ii) If it is not reasonable to expect that such effect will be 
fully repaired or rectified.
    Intent to cause injury is not required for this criterion. Examples 
of such conduct include, but are not limited to, conversion or 
concealment of property of the MEWA; improper disposal, transfer, or 
removal of funds or other property of the MEWA, including unreasonable 
compensation or payments to MEWA operators and service providers (e.g. 
brokers, marketers, and third party administrators); employment by the 
MEWA of a person prohibited from such employment pursuant to section 
411 of ERISA, and embezzlement from the MEWA. For purposes of section 
521 of ERISA, compensation that would be excessive under 26 CFR 1.162-7 
will be considered unreasonable compensation or payments for purposes 
of this regulation. Depending upon the facts and circumstances, 
compensation may be unreasonable under this regulation even it is not 
excessive under 26 CFR 1.162-7.
    (5) A MEWA is in a financially hazardous condition if:
    (i) The Secretary has probable cause to believe that a MEWA:
    (A) Is, or is in imminent danger of becoming, unable to pay benefit 
claims as they come due, or
    (B) Has sustained, or is in imminent danger of sustaining, a 
significant loss of assets; or
    (ii) A person responsible for management, control, or 
administration of the MEWA's assets is the subject of a cease and 
desist order issued by the Secretary.
    (6) A person, for purposes of this section, is an individual, 
partnership, corporation, employee welfare benefit plan, association, 
or other entity or organization.
    (c) Temporary cease and desist order. (1)(i) The Secretary may 
issue a temporary cease and desist order when the Secretary finds there 
is reasonable cause to believe that the conduct of a MEWA, or any 
person acting as an agent or employee of the MEWA, is -
    (A) Fraudulent;
    (B) Creates an immediate danger to the public safety or welfare; or

[[Page 13807]]

    (C) Is causing or can be reasonably expected to cause significant, 
imminent, and irreparable public injury.
    (ii) A single act or omission may be the basis for a temporary 
cease and desist order.
    (2) A temporary cease and desist order, as the Secretary determines 
is necessary and appropriate to stop the conduct on which the order is 
based, and to protect the interests of plan participants, plan 
beneficiaries, employers or employee organizations, or other members of 
the public, may--
    (i) Prohibit specific conduct or prohibit the transaction of any 
business of the MEWA;
    (ii) Prohibit any person from taking specified actions, or 
exercising authority or control, concerning funds or property of a MEWA 
or of any employee benefit plan, regardless of whether such funds or 
property have been commingled with other funds or property; and,
    (iii) Bar any person either directly or indirectly, from providing 
management, administrative, or other services to any MEWA or to an 
employee benefit plan or trust.
    (3) The Secretary may require documentation from the subject of the 
order verifying compliance.
    (d) Effect of order on other remedies. The issuance of a temporary 
or final cease and desist order shall not foreclose the Secretary from 
seeking additional remedies under ERISA.
    (e) Administrative hearing. (1) A temporary cease and desist order 
shall become a final order as to any MEWA or other person named in the 
order 30 days after such person receives notice of the order unless, 
within this period, such person requests a hearing in accordance with 
the requirements of this paragraph (e).
    (2) A person requesting a hearing must file a written request and 
an answer to the order showing cause why the order should be modified 
or set aside. The request and the answer must be filed in accordance 
with 29 CFR part 2571 and Sec.  18.4 of this title.
    (3) A hearing shall be held expeditiously following the receipt of 
the request for a hearing by the Office of the Administrative Law 
Judges, unless the parties mutually consent, in writing, to a later 
date.
    (4) The decision of the administrative law judge shall be issued 
expeditiously after the conclusion of the hearing.
    (5) The Secretary must offer evidence supporting the findings made 
in issuing the order that there is reasonable cause to believe that the 
MEWA (or a person acting as an employee or agent of the MEWA) engaged 
in conduct specified in paragraph (c)(1) of this section.
    (6) The person requesting the hearing has the burden to show that 
the order should be modified or set aside. To meet this burden such 
person must show by a preponderance of the evidence that the MEWA (or a 
person acting as an employee or agent of the MEWA) did not engage in 
conduct specified in paragraph (c)(1) of this section or must show that 
the requirements imposed by the order, are, in whole or part, arbitrary 
and capricious.
    (7) Any temporary cease and desist order for which a hearing has 
been requested shall remain in effect and enforceable, pending 
completion of the administrative proceedings, unless stayed by the 
Secretary, an administrative law judge, or by a court.
    (8) The Secretary may require that the hearing and all evidence be 
treated as confidential.
    (f) Summary seizure order. (1) Subject to paragraphs (f)(2) and (3) 
of this section, the Secretary may issue a summary seizure order when 
the Secretary finds there is probable cause to believe that a MEWA is 
in a financially hazardous condition.
    (2) Except as provided in paragraph (f)(3) of this section, the 
Secretary, before issuing a summary seizure order to remove assets and 
records from the control and management of the MEWA or any persons 
having custody or control of such assets or records, shall obtain 
judicial authorization from a federal court in the form of a warrant or 
other appropriate form of authorization and may at that time pursue 
other actions such as those set forth in paragraph (f)(5) of this 
section.
    (3) If the Secretary reasonably believes that any delay in issuing 
the order is likely to result in the removal, dissipation, or 
concealment of plan assets or records, the Secretary may issue and 
serve a summary seizure order before seeking court authorization. 
Promptly following service of the order, the Secretary shall seek 
authorization from a federal court and may at that time pursue other 
actions such as those set forth in paragraph (f)(5) of this section.
    (4) A summary seizure order may authorize the Secretary to take 
possession or control of all or part of the books, records, accounts, 
and property of the MEWA (including the premises in which the MEWA 
transacts its business) to protect the benefits of plan participants, 
plan beneficiaries, employers or employee organizations, or other 
members of the public, and to safeguard the assets of employee welfare 
benefit plans. The order may also direct any person having control and 
custody of the assets that are the subject of the order not to allow 
any transfer or disposition of such assets except upon the written 
direction of the Secretary, or of a receiver or independent fiduciary 
appointed by a court.
    (5) In connection with or following the execution of a summary 
seizure order, the Secretary may--
    (i) Secure court appointment of a receiver or independent fiduciary 
to perform any necessary functions of the MEWA;
    (ii) Obtain court authorization for the Secretary, the receiver or 
independent fiduciary to take any other action to seize, secure, 
maintain, or preserve the availability of the MEWA's assets; and
    (iii) Obtain such other appropriate relief available under ERISA to 
protect the interest of employee welfare benefit plan participants, 
plan beneficiaries, employers or employee organizations or other 
members of the public. Other appropriate equitable relief may include 
the liquidation and winding up of the MEWA's affairs and, where 
applicable, the affairs of any person sponsoring the MEWA.
    (g) Effective date of orders. Cease and desist and summary seizure 
orders are effective immediately upon issuance by the Secretary and 
shall remain effective, except to the extent and until any provision is 
modified or the order is set aside by the Secretary, an administrative 
law judge, or a court.
    (h) Service of orders. (1) As soon as practicable after the 
issuance of a temporary or final cease and desist order and no later 
than five business days after issuance of a summary seizure order, the 
Secretary shall serve the order either:
    (i) By delivering a copy to the person who is the subject of the 
order. If the person is a partnership, service may be made to any 
partner. If the person is a corporation, association, or other entity 
or organization, service may be made to any officer of such entity or 
any person designated for service of process under State law or the 
applicable plan document. If the person is an employee welfare benefit 
plan, service may be made to a trustee or administrator. A person's 
attorney may accept service on behalf of such person;
    (ii) By leaving a copy at the principal office, place of business, 
or residence of such person or attorney; or
    (iii) By mailing a copy to the last known address of such person or 
attorney.
    (2) If service is accomplished by certified mail, service is 
complete upon mailing. If service is done by regular mail, service is 
complete upon receipt by the addressee.

[[Page 13808]]

    (3) Service of a temporary or final cease and desist order and of a 
summary seizure order shall include a statement of the Secretary's 
findings giving rise to the order, and, where applicable, a copy of any 
warrant or other authorization by a court.


Sec.  2560.521-2  Disclosure of order and proceedings.

    (a) Notwithstanding Sec.  2560.521-1(e)(8), the Secretary shall 
make available to the public final cease and desist and summary seizure 
orders or modifications and terminations of such final orders.
    (b) Except as prohibited by applicable law, and at his or her 
discretion, the Secretary may disclose the issuance of a temporary 
cease and desist order or summary seizure order and information and 
evidence of any proceedings and hearings related to an order, to any 
Federal, State, or foreign authorities responsible for enforcing laws 
that apply to MEWAs and parties associated with, or providing services 
to, MEWAs.
    (c) The sharing of such documents, material, or other information 
and evidence under this section does not constitute a waiver of any 
applicable privilege or claim of confidentiality.


Sec.  2560.521-3  Effect on other enforcement authority.

    The Secretary's authority under section 521 shall not be construed 
to limit the Secretary's ability to exercise his or her enforcement or 
investigatory authority under any other provision of title I of ERISA. 
29 U.S.C. 1001 et seq. The Secretary may, in his or her sole 
discretion, initiate court proceedings without using the procedures in 
this section.


Sec.  2560.521-4  Cross-reference.

    See 29 CFR 2571.1 through 2571.13 for procedural rules relating to 
administrative hearings under section 521 of ERISA.

0
3. Add part 2571 to read as follows:

PART 2571--PROCEDURAL REGULATIONS FOR ADMINISTRATION AND 
ENFORCEMENT UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT

Subpart A--Procedures for Administrative Hearings on the Issuance of 
Cease and Desist Orders Under ERISA Section 521--Multiple Employer 
Welfare Arrangements
Sec.
2571.1 Scope of rules.
2571.2 Definitions.
2571.3 Service: copies of documents and pleadings.
2571.4 Parties.
2571.5 Consequences of default.
2571.6 Consent order or settlement.
2571.7 Scope of discovery.
2571.8 Summary decision.
2571.9 Decision of the administrative law judge.
2571.10 Review by the Secretary.
2571.11 Scope of review by the Secretary.
2571.12 Procedures for review by the Secretary.
2571.13 Effective date.
Subpart B--[Reserved]

    Authority:  29 U.S.C. 1002(40), 1132, 1135; and 1151, Secretary 
of Labor's Order 1-2011, 77 FR 1088 (January 9, 2012).

Subpart A--Procedures for Administrative Hearings on the Issuance 
of Cease and Desist Orders Under ERISA Section 521--Multiple 
Employer Welfare Arrangements


Sec.  2571.1  Scope of rules.

    The rules of practice set forth in this part apply to ex parte 
cease and desist order proceedings under section 521 of the Employee 
Retirement Income Security Act of 1974, as amended (ERISA). The rules 
of procedure for administrative hearings published by the Department's 
Office of Administrative Law Judges at Part 18 of this Title will apply 
to matters arising under ERISA section 521 except as modified by this 
section. These proceedings shall be conducted as expeditiously as 
possible, and the parties and the Office of the Administrative Law 
Judges shall make every effort to avoid delay at each stage of the 
proceedings.


Sec.  2571.2  Definitions.

    For section 521 proceedings, this section shall apply in lieu of 
the definitions in Sec.  18.2 of this title:
    (a) Adjudicatory proceeding means a judicial-type proceeding before 
an administrative law judge leading to an order;
    (b) Administrative law judge means an administrative law judge 
appointed pursuant to the provisions of 5 U.S.C. 3105;
    (c) Answer means a written statement that is supported by reference 
to specific circumstances or facts surrounding the temporary order 
issued pursuant to 29 CFR 2560.521-1(c);
    (d) Commencement of proceeding is the filing of an answer by the 
respondent;
    (e) Consent agreement means a proposed written agreement and order 
containing a specified proposed remedy or other relief acceptable to 
the Secretary and consenting parties;
    (f) Final order means a cease and desist order that is a final 
order of the Secretary of Labor under ERISA section 521. Such final 
order may result from a decision of an administrative law judge or of 
the Secretary on review of a decision of an administrative law judge, 
or from the failure of a party to invoke the procedures for a hearing 
under 29 CFR 2560.521-1 within the prescribed time limit. A final order 
shall constitute a final agency action within the meaning of 5 U.S.C. 
704;
    (g) Hearing means that part of a section 521 proceeding which 
involves the submission of evidence, either by oral presentation or 
written submission, to the administrative law judge;
    (h) Order means the whole or any part of a final procedural or 
substantive disposition of a section 521 proceeding;
    (i) Party includes a person or agency named or admitted as a party 
to a section 521 proceeding;
    (j) Person includes an individual, partnership, corporation, 
employee welfare benefit plan, association, or other entity or 
organization;
    (k) Petition means a written request, made by a person or party, 
for some affirmative action;
    (l) Respondent means the party against whom the Secretary is 
seeking to impose a cease and desist order under ERISA section 521;
    (m) Secretary means the Secretary of Labor or his or her delegate;
    (n) Section 521 proceeding means an adjudicatory proceeding 
relating to the issuance of a temporary order under 29 CFR 2560.521-1 
and section 521 of ERISA;
    (o) Solicitor means the Solicitor of Labor or his or her delegate; 
and
    (p) Temporary order means the temporary cease and desist order 
issued by the Secretary under 29 CFR 2560.521-1(c) and section 521 of 
ERISA.


Sec.  2571.3  Service: copies of documents and pleadings.

    For section 521 proceedings, this section shall apply in lieu of 
Sec.  18.3 of this title:
    (a) In general. Copies of all documents shall be served on all 
parties of record. All documents should clearly designate the docket 
number, if any, and short title of all matters. All documents to be 
filed shall be delivered or mailed to the Chief Docket Clerk, Office of 
Administrative Law Judges, 800 K Street NW., Suite 400, Washington, DC 
20001-8002, or to the OALJ Regional Office to which the section 521 
proceeding may have been transferred for hearing. Each document filed 
shall be clear and legible.
    (b) By parties. All motions, petitions, pleadings, briefs, or other 
documents shall be filed with the Office of Administrative Law Judges 
with a copy, including any attachments, to all other

[[Page 13809]]

parties of record. When a party is represented by an attorney, service 
shall be made upon the attorney. Service of any document upon any party 
may be made by personal delivery or by mailing a copy to the last known 
address. The Secretary shall be served by delivery to the Associate 
Solicitor, Plan Benefits Security Division, ERISA Section 521 
Proceeding, P.O. Box 1914, Washington, DC 20013 and any attorney named 
for service of process as set forth in the temporary order. The person 
serving the document shall certify to the manner of date and service.
    (c) By the Office of Administrative Law Judges. Service of orders, 
decisions, and all other documents shall be made in such manner as the 
Office of Administrative Law Judges determines to the last known 
address.
    (d) Form of pleadings.
    (1) Every pleading or other paper filed in a section 521 proceeding 
shall designate the Employee Benefits Security Administration (EBSA) as 
the agency under which the proceeding is instituted, the title of the 
proceeding, the docket number (if any) assigned by the Office of 
Administrative Law Judges and a designation of the type of pleading or 
paper (e.g., notice, motion to dismiss, etc.). The pleading or paper 
shall be signed and shall contain the address and telephone number of 
the party or person representing the party. Although there are no 
formal specifications for documents, they should be printed when 
possible on standard size 8\1/2\ x 11 inch paper.
    (2) Illegible documents, whether handwritten, printed, photocopies, 
or otherwise, will not be accepted. Papers may be reproduced by any 
duplicating process provided all copies are clear and legible.


Sec.  2571.4  Parties.

    For section 521 proceedings, this section shall apply in lieu of 
Sec.  18.10 of this title:
    (a) The term ``party'' wherever used in these rules shall include 
any person that is a subject of the temporary order and is challenging 
the temporary order under these section 521 proceedings, and the 
Secretary. A party challenging a temporary order shall be designated as 
the ``respondent.'' The Secretary shall be designated as the 
``complainant.''
    (b) Other persons shall be permitted to participate as parties only 
if the administrative law judge finds that the final decision could 
directly and adversely affect them or the class they represent, that 
they may contribute materially to the disposition of the section 521 
proceeding and their interest is not adequately represented by the 
existing parties, and that in the discretion of the administrative law 
judge the participation of such persons would be appropriate.
    (c) A person not named in a temporary order, but wishing to 
participate as a respondent under this section shall submit a petition 
to the administrative law judge within fifteen (15) days after the 
person has knowledge of, or should have known about, the section 521 
proceeding. The petition shall be filed with the administrative law 
judge and served on each person who has been made a party at the time 
of filing. Such petition shall concisely state:
    (1) Petitioner's interest in the section 521 proceeding (including 
how the section 521 proceedings will directly and adversely affect them 
or the class they represent and why their interest is not adequately 
represented by the existing parties);
    (2) How his or her participation as a party will contribute 
materially to the disposition of the section 521 proceeding;
    (3) Who will appear for the petitioner;
    (4) The issues on which petitioner wishes to participate; and
    (5) Whether petitioner intends to present witnesses.
    (d) Objections to the petition may be filed by a party within 
fifteen (15) days of the filing of the petition. If objections to the 
petition are filed, the administrative law judge shall then determine 
whether petitioners have the requisite interest to be a party in the 
section 521 proceeding, as defined in paragraph (b) of this section, 
and shall permit or deny participation accordingly. Where persons with 
common interest file petitions to participate as parties in a section 
521 proceeding, the administrative law judge may request all such 
petitioners to designate a single representative, or the administrative 
law judge may designate one or more of the petitioners to represent the 
others. The administrative law judge shall give each such petitioner, 
as well as the parties, written notice of the decision on his or her 
petition. For each petition granted, the administrative law judge shall 
provide a brief statement of the basis of the decision. If the petition 
is denied, he or she shall briefly state the grounds for denial and may 
consider whether to treat the petition as a request for participation 
as amicus curiae.


Sec.  2571.5  Consequences of default.

    For section 521 proceedings, this section shall apply in lieu of 
Sec.  18.5(b) of this title. Failure of the respondent to file an 
answer to the temporary order within the 30-day period provided by 29 
CFR 2560.521-1(e) shall constitute a waiver of the respondent's right 
to appear and contest the temporary order. Such failure shall also be 
deemed to be an admission of the facts as alleged in the temporary 
order for purposes of any proceeding involving the order issued under 
section 521 of ERISA. The temporary order shall then become the final 
order of the Secretary, within the meaning of 29 CFR 2571.2(f), 30 days 
from the date of the service of the temporary order.


Sec.  2571.6  Consent order or settlement.

    For section 521 proceedings, this section shall apply in lieu of 
Sec.  18.9 of this title:
    (a) In general. At any time after the commencement of a section 521 
proceeding, the parties jointly may move to defer the hearing for a 
reasonable time in order to negotiate a settlement or an agreement 
containing findings and a consent order disposing of the whole or any 
part of the section 521 proceeding. The administrative law judge shall 
have discretion to allow or deny such a postponement and to determine 
its duration. In exercising this discretion, the administrative law 
judge shall consider the nature of the section 521 proceeding, the 
requirements of the public interest, the representations of the parties 
and the probability of reaching an agreement that will result in a just 
disposition of the issues involved.
    (b) Content. Any agreement containing consent findings and an order 
disposing of the section 521 proceeding or any part thereof shall also 
provide:
    (1) That the consent order shall have the same force and effect as 
an order made after full hearing;
    (2) That the entire record on which the consent order is based 
shall consist solely of the notice and the agreement;
    (3) A waiver of any further procedural steps before the 
administrative law judge;
    (4) A waiver of any right to challenge or contest the validity of 
the consent order and decision entered into in accordance with the 
agreement; and
    (5) That the consent order and decision of the administrative law 
judge shall be final agency action within the meaning of 5 U.S.C. 704.
    (c) Submission. On or before the expiration of the time granted for 
negotiations, the parties or their authorized representatives or their 
counsel may:
    (1) Submit the proposed agreement containing consent findings and 
an order to the administrative law judge;

[[Page 13810]]

    (2) Notify the administrative law judge that the parties have 
reached a full settlement and have agreed to dismissal of the action 
subject to compliance with the terms of the settlement; or
    (3) Inform the administrative law judge that agreement cannot be 
reached.
    (d) Disposition. If a settlement agreement containing consent 
findings and an order, agreed to by all the parties to a section 521 
proceeding, is submitted within the time allowed therefor, the 
administrative law judge shall incorporate all of the findings, terms, 
and conditions of the settlement agreement and consent order of the 
parties. Such decision shall become a final agency action within the 
meaning of 5 U.S.C. 704.
    (e) Settlement without consent of all respondents. In cases in 
which some, but not all, of the respondents to a section 521 proceeding 
submit an agreement and consent order to the administrative law judge, 
the following procedure shall apply:
    (1) If all of the respondents have not consented to the proposed 
settlement submitted to the administrative law judge, then such non-
consenting parties must receive notice and a copy of the proposed 
settlement at the time it is submitted to the administrative law judge;
    (2) Any non-consenting respondent shall have fifteen (15) days to 
file any objections to the proposed settlement with the administrative 
law judge and all other parties;
    (3) If any respondent submits an objection to the proposed 
settlement, the administrative law judge shall decide within thirty 
(30) days after receipt of such objections whether to sign or reject 
the proposed settlement. Where the record lacks substantial evidence 
upon which to base a decision or there is a genuine issue of material 
fact, then the administrative law judge may establish procedures for 
the purpose of receiving additional evidence upon which a decision on 
the contested issue may be reasonably based;
    (4) If there are no objections to the proposed settlement, or if 
the administrative law judge decides to sign the proposed settlement 
after reviewing any such objections, the administrative law judge shall 
incorporate the consent agreement into a decision meeting the 
requirements of paragraph (d) of this section; and
    (5) If the consent agreement is incorporated into a decision 
meeting the requirements of paragraph (d) of this section, the 
administrative law judge shall continue the section 521 proceeding with 
respect to any non-consenting respondents.


Sec.  2571.7  Scope of discovery.

    For section 521 proceedings, this section shall apply in lieu of 
Sec.  18.14 of this title:
    (a) A party may file a motion to conduct discovery with the 
administrative law judge. The administrative law judge may grant a 
motion for discovery only upon a showing of good cause. In order to 
establish ``good cause'' for the purposes of this section, the moving 
party must show that the requested discovery relates to a genuine issue 
as to a fact that is material to the section 521 proceeding. The order 
of the administrative law judge shall expressly limit the scope and 
terms of the discovery to that for which ``good cause'' has been shown, 
as provided in this paragraph.
    (b) Any evidentiary privileges apply as they would apply in a civil 
proceeding in federal district court. For example, legal advice 
provided by an attorney to a client is generally protected from 
disclosure. Mental impressions, conclusions, opinions, or legal 
theories of a party's attorney or other representative developed in 
anticipation of litigation are also generally protected from 
disclosure. The administrative law judge may not, however, protect from 
discovery or use, relevant communications between an attorney and a 
plan administrator or other plan fiduciary, or work product, that fall 
under the fiduciary exception to the attorney-client or work product 
privileges. The fiduciary exception to these privileges exists when an 
attorney advises the plan administrator or other plan fiduciary on 
matters concerning plan administration or other fiduciary activities. 
Consequently, the administrative law judge may not protect such 
communications from discovery or from use by the Secretary in the 
proceedings. The administrative law judge also may also not protect 
attorney work product prepared to assist the fiduciary in its fiduciary 
capacity from discovery or from use by the Secretary in the 
proceedings. The fiduciary exception does not apply, however, to the 
extent that communications were made or documents were prepared 
exclusively to aid the fiduciary personally or for non-fiduciary 
matters (e.g. settlor acts), provided that the plan did not pay for the 
legal services. The Secretary need not make a special showing, such as 
good cause, merely to obtain information or documents covered by the 
fiduciary exception. Other relevant exceptions to the attorney-client 
or work product privileges shall also apply.


Sec.  2571.8  Summary decision.

    For section 521 proceedings, this section shall apply in lieu of 
Sec.  18.41 of this title:
    (a) No genuine issue of material fact. Where the administrative law 
judge finds that no issue of a material fact has been raised, he or she 
may issue a decision which, in the absence of an appeal, pursuant to 
Sec. Sec.  2571.10 through 2571.12, shall become a final agency action 
within the meaning of 5 U.S.C. 704.
    (b) A decision made under this section, shall include a statement 
of:
    (1) Findings of fact and conclusions of law, and the reasons 
thereof, on all issues presented; and
    (2) Any terms and conditions of the ruling.
    (c) A copy of any decision under this section shall be served on 
each party.


Sec.  2571.9  Decision of the administrative law judge.

    For section 521 proceedings, this section shall apply in lieu of 
Sec.  18.57 of this title:
    (a) Proposed findings of fact, conclusions, and order. Within 
twenty (20) days of the filing of the transcript of the testimony, or 
such additional time as the administrative law judge may allow, each 
party may file with the administrative law judge, subject to the 
judge's discretion, proposed findings of fact, conclusions of law, and 
order together with a supporting brief expressing the reasons for such 
proposals. Such proposals and briefs shall be served on all parties, 
and shall refer to all portions of the record and to all authorities 
relied upon in support of each proposal.
    (b) Decision of the administrative law judge. The administrative 
law judge shall make his or her decision expeditiously after the 
conclusion of the section 521 proceeding. The decision of the 
administrative law judge shall include findings of fact and conclusions 
of law with reasons therefore upon each material issue of fact or law 
presented on the record. The decision of the administrative law judge 
shall be based upon the whole record and shall be supported by reliable 
and probative evidence. The decision of the administrative law judge 
shall become final agency action within the meaning of 5 U.S.C. 704 
unless an appeal is made pursuant to the procedures set forth in 
Sec. Sec.  2571.10 through 2571.12.


Sec.  2571.10  Review by the Secretary.

    (a) The Secretary may review the decision of an administrative law 
judge.

[[Page 13811]]

Such review may occur only when a party files a notice of appeal from a 
decision of an administrative law judge within twenty (20) days of the 
issuance of such a decision. In all other cases, the decision of the 
administrative law judge shall become the final agency action within 
the meaning of 5 U.S.C. 704.
    (b) A notice of appeal to the Secretary shall state with 
specificity the issue(s) in the decision of the administrative law 
judge on which the party is seeking review. Such notice of appeal must 
be served on all parties of record.
    (c) Upon receipt of an appeal, the Secretary shall request the 
Chief Administrative Law Judge to submit to the Secretary a copy of the 
entire record before the administrative law judge.


Sec.  2571.11  Scope of review by the Secretary.

    The review of the Secretary shall be based on the record 
established before the administrative law judge. There shall be no 
opportunity for oral argument.


Sec.  2571.12  Procedures for review by the Secretary.

    (a) Upon receipt of a notice of appeal, the Secretary shall 
establish a briefing schedule which shall be served on all parties of 
record. Upon motion of one or more of the parties, the Secretary may, 
in her discretion, permit the submission of reply briefs.
    (b) The Secretary shall issue a decision as promptly as possible 
after receipt of the briefs of the parties. The Secretary may affirm, 
modify, or set aside, in whole or in part, the decision on appeal and 
shall issue a statement of reasons and bases for the action(s) taken. 
Such decision by the Secretary shall be the final agency action with 
the meaning of 5 U.S.C. 704.


Sec.  2571.13  Effective date.

    This regulation is effective with respect to all cease and desist 
orders issued by the Secretary under section 521 of ERISA at any time 
after April 1, 2013.

Subpart B--[Reserved]

    Signed at Washington, DC, this 26th day of February, 2013.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2013-04862 Filed 2-28-13; 8:45 am]
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