US DOL proposes amendments to ERISA Prohibited Transaction Class Exemption 75-1, principal transactions, mutual fund share purchases, and extensions of credit

May 01, 2004

Prohibited Transaction Class Exemption ("PTCE") 75-1, Part II, permits the purchase or sale of a security, in a principal transaction, between an employee benefit plan and a broker-dealer, reporting-dealer or a bank. Under certain circumstances PTCE 75-1, Part V, permits an extension of credit to a plan by a broker-dealer in connection with the purchase or sale of securities. The U.S. Department of Labor has proposed an amendment to the conditions of Part II and Part V of this Class Exemption to make them consistent with more recent exemptions granted by the Department.1

Under the current Part II principal transaction exemption, the broker-dealer, reporting dealer or bank is not permitted to be a fiduciary with respect to the plan. Similarly, one of the conditions in PTCE 75-1, Part V, is that the entity providing an extension of credit to the plan not be a fiduciary with respect to any assets of the plan, unless no interest or any other consideration is received by such fiduciary (or an affiliate) in connection with the extension of credit. The two parts of the exemption are proposed to be amended to permit plans to engage in transactions with broker-dealers, reporting dealers and banks and their affiliates except where the broker-dealer, reporting dealer or bank (or affiliate) (a) has or exercised any discretionary authority or control (except as a directed trustee) with respect to the investment of the plan assets involved in the transaction, or (b) renders investment advice with respect to the investment of those assets.

This amendment is beneficial to broker-dealers, reporting dealers and banks, and their affiliates, since it would allow such persons to engage in the exempted transactions with a plan's assets, even if such persons are fiduciaries to the plan, as long as those persons do not have or exercise discretionary authority with respect to the assets of the plan actually involved in the transaction.

The Department has also proposed a change to the language of PTCE 75-1, Part II, to clarify the portion of the exemption that exempts the purchase or sale by the plan of securities issued by open-end registered investment companies. This exemption applies provided that a fiduciary with respect to the plan is not a principal underwriter for, or affiliated with, such investment company. Again, the Department intends to clarify that the fiduciary referenced in this exclusion is the fiduciary who makes the decision on behalf of the plan to enter into the transaction.

Footnotes

1) 69 F.R. 23216 (April 28, 2004).

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