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EBSA Notices

Class Exemption for the Release of Claims and Extensions of Credit in Connection With Litigation   [12/31/2003]
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FR Doc 03-32191

[Federal Register: December 31, 2003 (Volume 68, Number 250)]
[Notices]               
[Page 75632-75640]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31de03-136]                         

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Prohibited Transaction Exemption 2003-39; Application No. D-11100]

 
Class Exemption for the Release of Claims and Extensions of 
Credit in Connection With Litigation

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Grant of class exemption.

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SUMMARY: This document contains a final class exemption from certain 
prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974 (ERISA or the Act) and from certain taxes imposed 
by the Internal Revenue Code of 1986, as amended (the Code). The 
exemption permits transactions engaged in by a plan, in connection with 
the settlement of litigation. This exemption was proposed in response 
to concerns raised by the pension community regarding the impact of 
ERISA's prohibited transaction provisions on the settlement of 
litigation by employee benefit plans with parties in interest. The 
exemption affects all employee benefit plans, the participants and 
beneficiaries of such plans, and parties in interest with respect to 
those plans engaging in the described transactions.

EFFECTIVE DATE: The exemption is effective January 1, 1975.

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

SUPPLEMENTARY INFORMATION: On February 11, 2003, the Department 
published a notice in the Federal Register (68 FR 6953) of the pendency 
of a proposed class exemption from the restrictions of section 
406(a)(1)(A), (B) and (D) of the Act and from the sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A), (B) and (D) of the Code. The Department proposed the 
class exemption on its own motion, pursuant to section 408(a) of the 
Act and section 4975(c)(2) of the Code, and in accordance with the 
procedures set forth in 29 CFR Part 2570 Subpart B (55 FR 32836, August 
10, 1990).\1\
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App. 1 (1996), generally transferred the authority of the Secretary 
of the Treasury to issue exemptions under section 4975(c)(2) of the 
Code ot the Secretary of Labor. For purposes of this exemption, 
references to specific provisions of Title I of the Act, unless 
otherwise specified, refer also to the corresponding provisions of 
the Code.
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    The notice of pendency gave interested persons an opportunity to 
comment or request a public hearing on the proposal. The Department 
received five (5) public comments. Upon consideration of all the 
comments received, the Department has determined to grant the proposed 
class exemption, subject to certain modifications. These modifications 
and the major comments are discussed below.

Executive Order 12866

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

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520) (PRA 95), the Department submitted the information 
collection request (ICR) included in the Class Exemption For Release of 
Claims and Extensions of Credit in Connection With Litigation to the 
Office of Management and Budget (OMB) for review and clearance at the 
time the proposed class exemption was published in the Federal Register 
(February 11, 2003, 68 FR 6953). The ICR for the proposed class 
exemption was combined with the ICR in PTCE 94-71,\2\ also approved 
under OMB control number 1210-0091, because of the similarity of 
subject matter between the two exemptions. No comments were received 
about the burden estimates and no substantial or material changes have 
been made in the grant of the exemption that would affect the burden 
estimates in the proposal. The approval for each of the ICRs included 
in the two exemptions will expire on April 30, 2006.
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    \2\ PTCE 94-71, 59 FR 51216, October 7, 1994, as corrected, 59 
FR 60837, November 28, 1994--Settlement Agreements Resulting From An 
Investigation, involving remedial settlements resulting from an 
investigation of an employee benefit plan conducted by the 
Department.
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    In order to grant an exemption pursuant to section 408(a) of the 
Act, the Department must, among other things, make a finding that the 
terms of the exemption are protective of the rights of participants and 
beneficiaries of a plan. To support making such a finding, the 
Department normally imposes certain conditions on fiduciaries and 
parties in interest that may make use of the exemption. The information 
collection provisions of the exemption are among these conditions. The 
information collection provisions are found in sections III(c), (e), 
(g), and

[[Page 75633]]

(h). These requirements are summarized as follows:
    Written Agreement. The exemption requires that the terms of the 
settlement be specifically described in a written agreement or consent 
decree. In the exemption as granted, the Department has added that, 
with regard to transactions involving assets other than cash, the 
assets and their fair market value, including the date for such 
valuation, must be described in writing in the settlement agreement. 
Because a description and valuation of the assets involved in a 
settlement transaction are usually included in a settlement agreement, 
the requirement serves only as a clarification about assets that are 
not cash for the parties seeking to use the class exemption. In 
addition, because the Department believes that the ability to make 
changes with regard to a settlement allows more flexibility to the 
parties involved, it has also provided in the final exemption that 
certain adjustments, such as the right to amend the plan, are 
permissible if written into the agreement. These two new requirements 
are only operative for certain provisions and under certain conditions 
that may or may not be included in the settlement. Where appropriate, 
including the provisions in the agreement enables interested parties 
described in the exemption to verify that the conditions of the 
exemption have been met. However, neither requirement produces a 
measurable burden beyond that which would be considered usual business 
practice, and no additional burden has been accounted for in this ICR.
    Acknowledgement by a Fiduciary. On a prospective basis, the 
exemption also requires that a fiduciary acting on behalf of the plan 
acknowledge in writing that it is a fiduciary with respect to the 
settlement of the litigation. Under the Act, a person that exercises 
``any authority or control respecting disposition of [the plan's] 
assets,'' is considered a fiduciary. It is anticipated that the 
applicable plan fiduciary will incorporate this acknowledgement in the 
written agreement outlining the terms and conditions of its retention 
as a plan service provider, and already in existence, as part of usual 
and customary business practice. As such, a written acknowledgement is 
not expected to impose any measurable additional burden.
    Recordkeeping. Prospectively, the exemption requires a plan to 
maintain for a period of six years the records necessary to enable 
certain persons to determine whether the conditions of the exemption 
had been met. The six-year recordkeeping requirement is consistent with 
the requirements in section 107 of the Act as well as general record-
keeping requirements for tax information under the Code. As such, the 
Department has not accounted for a burden related to recordkeeping for 
this exemption.
    The exemption may affect employee benefit plans, the participants 
and beneficiaries of those plans, and parties in interest to plans 
engaging in the specified transactions. It is not possible to estimate 
the number of respondents or frequency of response to the information 
collection requirements of the exemption due to the wide variety of 
litigation involving plans, parties to that litigation, and 
jurisdictions in which litigation occurs. However, the lack of an 
ascertainable number of settlements does not impact the hour or cost 
burden because no additional burden is associated with the information 
collection requirements of the exemption.

I. Discussion of Comments Received

    The comments received by the Department were generally supportive 
of the issuance of a class exemption for the release of claims and 
extensions of credit in connection with litigation. However, commenters 
requested specific modifications to the proposal in the following 
areas:
    A. Whether the settlement of litigation with a party in interest is 
a prohibited transaction. Several commenters argued that settling 
litigation is not a transaction, and, therefore, not prohibited under 
section 406 of the Act. Other commenters requested that the Department 
clarify that only a fiduciary, a participant or beneficiary, or the 
Secretary of Labor, may bring suit to enforce ERISA's fiduciary duties. 
These commenters asserted that, because the statute does not identify a 
plan as a party with standing to pursue ERISA litigation, an ERISA 
claim is not a plan asset and the release of such an asset, in exchange 
for consideration from a party in interest, would not be a prohibited 
sale or exchange of any property under section 406 of ERISA. Other 
commenters asserted that the settlement of litigation with a party in 
interest is a prohibited transaction and urged stricter conditions for 
the provision of retroactive relief because the Department's position 
on this issue was clearly articulated in its 1995 Opinion Letter, AO 
95-26A (October 17, 1995).
    As the Department noted in proposing this exemption, the fact that 
a transaction is subject to an administrative exemption is not 
dispositive of whether the transaction is, in fact, a prohibited 
transaction. Rather, the exemption is being granted in response to 
uncertainty expressed on the part of plan fiduciaries charged with the 
responsibility under ERISA for determining whether it is in the 
interests of a plan's participants and beneficiaries to enter into a 
settlement agreement with a party in interest. The comments have 
confirmed the Department's earlier conclusion that there was 
considerable uncertainty surrounding this issue. After considering all 
of the comments, the Department has determined that the exemption, as 
revised, appropriately balances the concerns of these commenters while 
allowing plan fiduciaries to properly carry out their responsibilities 
under ERISA.
    In response to the comments that ERISA civil actions for breach of 
fiduciary duty may only be brought by participants, beneficiaries, 
fiduciaries, and the Secretary of Labor, the Department has modified 
the final class exemption to include the release of claims by both the 
plan and a plan fiduciary. As the Department noted in the preamble to 
the proposed exemption, many situations in which a plan settles 
litigation may not give rise to a prohibited transaction or may be 
covered by an existing statutory or administrative exemption. For 
example, correction of a prohibited transaction that complies with 
section 4975(f)(5) of the Code \3\; reimbursement of a plan without a 
release of the plan's claim; settlement with a service provider of a 
dispute related to the provision of services or incidental goods to the 
plan that is otherwise exempt under ERISA 408(b)(2) (See, Opinion 
Letter, AO 95-26A); settlements authorized by the Department pursuant 
to PTE 94-71 (59 FR 51216, October 7, 1994, as corrected, 59 FR 60837, 
November 28, 1994); and judicially approved settlements where the Labor 
Department or the Internal Revenue Service is a party pursuant to PTE 
79-15 (44 FR 26979, May 8, 1979).
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    \3\ IRC Reg. sec. 141.4975-13 provides that for purposes of the 
excise taxes on prohibited transactions, the definition of the term 
``correction'' under IRC Reg. sec. 53.4941(e)-1 (concerning excise 
taxes on self-dealing with foundations) is controlling.
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    In addition, the Department notes that this class exemption would 
be available for settlement agreements relating to an employer's 
failure to timely remit participant contributions to a plan, including 
a collectively bargained multiemployer or multiple employer plan, to 
the extent the conditions contained in this final exemption are

[[Page 75634]]

met.\4\ In this regard, the Department notes that the relief provided 
by this exemption is limited to the prohibited transactions that arise 
where a plan trustee and an employer enter into a settlement involving 
the employer's failure to timely forward participant contributions to 
the plan as required under ERISA. Thus, nothing in this class exemption 
should be construed as exempting any of the prohibited transactions 
described in section 406(a) or 406(b) of ERISA that arise solely in 
connection with an employer's failure to timely forward participant 
contributions to a plan.\5\
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    \4\ The Department notes that the relief provided by this 
exemption would be available for settlements involving participant 
or employer contributions to a single employer plan or to a non-
collectively bargained multiple employer plan.
    \5\ In this regard, the failure of an employer to timely remit 
contributions made to a plan by an employee of such employer 
violates ERISA sections 403(a), 403(c)(1), 404(a)(1)(A), 
406(a)(1)(D), and 406(b)(1).
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    This exemption does not, however, apply to transactions described 
in PTE 76-1, A.I. (41 FR 12740, March 26, 1976, as corrected, 41 FR 
16620, April 20, 1976) relating to delinquent employer contributions to 
a collectively bargained multiemployer or multiple employer plan. 
Finally, PTE 76-1, A.I. does not extend relief to those settlement 
arrangements that arise from the failure of an employer to timely 
forward participant contributions to a multiemployer or multiple 
employer plan.
    Section 502(d)(1) of the Act provides that ``an employee benefit 
plan may sue or be sued under this title as an entity.'' This exemption 
covers settlement of any type of suit the plan has brought. However 
this exemption is not available for settlement of claims brought by a 
party in interest against a plan. This exemption does not cover a 
plan's payment of money or other things of value to a party in interest 
in exchange for the dropping of claims against the plan. As with 
exchanges made for the release of claims in favor of the plan, the 
Department's determination in this regard is not dispositive of whether 
such an exchange constitutes a prohibited transaction.
    Finally, the Department notes that a settlement between a plan and 
a participant or beneficiary made solely to resolve claims against a 
plan for the recovery of benefits, by a participant or beneficiary, may 
not involve a prohibited transaction. If the plan makes payment to a 
participant who is a party in interest to settle a benefits dispute, 
such payment generally would be viewed by the Department as the payment 
of a plan benefit that would not trigger the need for an exemption. As 
the Supreme Court noted in Lockheed Corp. v. Spink, 517 U.S. 882, 892-
893 (1996), the payment of benefits is not a prohibited transaction.
    B. The plan must obtain advice from an attorney representing the 
plan that a genuine controversy exists. Several commenters were 
concerned that imposing this requirement on past settlements would 
effectively limit the availability of the exemption. These commenters 
asserted that, prior to publication of the Department's proposed 
exemption, many fiduciaries were unaware that the settlement of 
litigation might be considered a prohibited transaction by the 
Department. Even if an attorney was retained in connection with the 
litigation, it is unlikely that the attorney would have opined as to 
whether or not there was a genuine controversy. Other commenters argued 
that: the filing of a lawsuit should be sufficient to find the 
existence of a genuine controversy; and class action settlements should 
not have to meet this requirement. Another commenter suggested 
retaining the requirement for a genuine controversy, but without 
requiring an attorney's determination. This commenter also suggested 
that the attorney review be permitted, but not required, as a safe 
harbor in certain situations. He explained that fiduciaries might find 
it prudent and in the interests of participants and beneficiaries to 
settle a frivolous case for a de minimus amount, rather than incur the 
cost of litigation. In this situation, such fiduciaries should be able 
to meet the condition of the class exemption by demonstrating that they 
sought and obtained advice of counsel before settling the case.
    Several commenters asserted that the genuine controversy condition 
was unnecessary as the concern raised by the Department, the 
possibility of a collusive settlement, was addressed by the condition 
that the settlement is not an arrangement to benefit a party in 
interest. Another commenter suggested that independent legal advice and 
a written agreement or consent decree should be mandatory for all 
retroactive relief because, even if the fiduciary was unaware of the 
prohibited transaction issue, a prudent fiduciary would have obtained 
such written documentation before entering into a settlement.
    On the basis of these comments, the Department has decided to amend 
the genuine controversy condition. No finding of genuine controversy 
will be required where the case has been certified as a class action by 
the court. In addition, for transactions entered into prior to the 
publication of the final exemption, and the first 30 days thereafter, 
no attorney review will be required to determine whether the genuine 
controversy exists. On a prospective basis, attorney review will be 
required. In response to a question from one of the commenters, the 
Department confirms that the independent fiduciary's in-house 
attorneys, as well as its outside counsel, could provide the 
appropriate advice concerning the existence of a genuine controversy.
    C. The decision-making fiduciary has no interest in any of the 
parties involved in the litigation that might affect the exercise of 
its best judgment as a fiduciary (independent fiduciary). Several 
commenters suggested that the Department eliminate the requirement for 
an independent fiduciary or, in the alternative, limit its application 
to prospective relief. Among the suggestions were: limit the 
requirement for an independent fiduciary to material claims where there 
are no alternative safeguards; and eliminate the independent fiduciary 
requirement where a judge reviews the fairness of a class action 
settlement. Other commenters expressed concern that the plan's directed 
trustee, even if not a defendant, should not be considered sufficiently 
independent to make decisions settling a case. They suggested that an 
entirely independent fiduciary be retained. Another commenter argued 
that relief in large cases should be conditioned upon the retention of 
an independent fiduciary with no prior relationship to the plan, or the 
defendants, and no future relationship with the plan for three years 
after the engagement.
    Except as noted above in connection with the finding of genuine 
controversy, the Department does not believe that it would be 
appropriate to make a distinction between the requirements applicable 
to class action settlements and other settlements. However, in response 
to comments, the Department has decided to eliminate the requirement 
that the independent fiduciary ``negotiate'' the settlement. The 
Department realizes that many of the settlements to which this class 
exemption would apply are class action settlements. Where the plan is 
not a lead plaintiff, the plan fiduciary's role in negotiating the 
terms of the settlement may be limited. The Department recognizes, 
however, that even where negotiation does not take place between the 
plan and the defendant, a fiduciary will be compelled, consistent with 
ERISA's fiduciary responsibility provisions, to make a decision 
regarding

[[Page 75635]]

the settlement on behalf of the plan, even if that decision is merely 
to accept or reject a proposed settlement negotiated by other class 
members.
    As modified, the final class exemption covers settlements 
authorized by a fiduciary that are reasonable, in light of the plan's 
likelihood of full recovery, the risks and costs of litigation, and the 
value of claims foregone. Such settlements must be no less favorable to 
the plan than comparable arm's-length terms and conditions that would 
have been agreed to by unrelated parties in similar circumstances. In 
addition, the transaction must not be part of an agreement, arrangement 
or understanding designed to benefit a party in interest. Thus, an 
independent fiduciary could satisfy the authorization requirements 
under the final exemption by deciding not to opt out of class action 
litigation if, after a review of the settlement, such fiduciary 
concludes that the chances of obtaining any further relief for the plan 
are not justified by the expense involved in pursuing such relief. 
Although the Department has determined to delete the requirement for 
negotiation as a specific condition of the class exemption, the 
Department notes that this modification does not diminish the 
fiduciary's responsibilities with respect to the settlement terms.
    As noted above, several of the commenters expressed concern about 
the degree of independence of institutional fiduciaries, such as 
directed trustees, that may serve as the fiduciary contemplated by the 
class exemption. Without agreeing or disagreeing with this comment, the 
Department emphasizes that this class exemption does not provide relief 
from section 406(b) of the Act. In addition, the fiduciary's decisions 
in authorizing a settlement are subject to the fiduciary responsibility 
provisions of the Act.
    D. Plans must select an independent fiduciary. Several commenters 
expressed concern about the additional cost of hiring independent 
fiduciaries in connection with settlements. The Department believes 
that plans often will not need to retain fiduciaries specifically to 
comply with this exemption. In most cases, the plan will be able to use 
a current fiduciary who is not a party to the action and who is not so 
closely allied with a party (other than the plan) as to create a 
conflict of interest. As with any other expense, the Department expects 
that fiduciaries will engage in prudent cost/benefit analysis to select 
the appropriate independent fiduciary in each case. In some cases, the 
cost of the independent fiduciary may be included in the damages 
claimed by the plan and may be reimbursed by the defendant in settling 
the litigation.
    One of the commenters suggested that to avoid duplication, the 
independent fiduciary should be permitted to rely on the opinion of 
plaintiffs' class counsel or experts hired to assist class counsel. The 
Department agrees that the fiduciary should not spend plan resources 
unnecessarily. Whether and to what extent a fiduciary should rely on a 
particular attorney or expert hired by one of the other parties are 
decisions that the fiduciary must make in accordance with its fiduciary 
responsibilities under ERISA.
    In this regard, the Department notes that on occasion the 
independent fiduciary may wish to retain outside experts to assist the 
fiduciary in determining whether or not to settle litigation. The 
following are some of the factors that may assist the fiduciary in its 
determination: the size of the claim, the expertise of the fiduciary, 
and the subject matter of the litigation.
    Several of the commenters asked the Department to clarify that the 
mere fact that a party in interest pays for an attorney, an independent 
fiduciary, or other expert hired by the plan, does not mean that these 
professionals are not independent for purposes of the exemption. The 
Department agrees with this assertion, assuming that the professional 
being paid by the party in interest understands that the plan is their 
client, not the party paying their bill. In addition, the amount of 
compensation paid to the professional by the party in interest 
constitutes no more than a small percentage of such professional's 
annual gross income.
    E. What is the role of the independent fiduciary where there is 
judicial approval of a settlement? Several commenters recommended that 
judicial approval of a settlement should eliminate the need for an 
independent fiduciary. One of the commenters suggested that where the 
settlement is judicially approved, relief from section 406(b) of the 
Act should be available under the exemption for those fiduciaries that 
were defendants in the litigation. The Department has determined not to 
adopt these suggestions. The court, in reaching its conclusion that the 
settlement is fair, must balance the interests of all the litigants. 
ERISA, on the other hand, requires that a fiduciary make its decisions 
with an ``eye single to the interests of the participants and 
beneficiaries.'' Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 
1982), cert. denied, 459 U.S. 1069 (1982). In response to the request 
for relief from section 406(b), the Department does not believe that a 
sufficient showing has been made that such relief would be appropriate 
under the circumstances.
    F. Should there be special rules for settling class action 
litigation? Several of the commenters explained that, with respect to 
certain types of class actions, class members do not have the option of 
opting out of the class--all are bound by the decision. The commenters 
explained that ERISA class actions are often non-opt out cases. 
According to the commenters, this means that where class action 
litigation is brought by the participants, the plan fiduciary may, 
without taking any action, be bound by the class action settlement. In 
light of this, the commenters asked how such a fiduciary could cause a 
prohibited transaction where it took no action and yet was bound by the 
settlement. The Department does not regard this exemption proceeding to 
be the appropriate setting for resolving questions concerning what 
types of settlement are more or less likely to be prohibited 
transactions.
    The Department notes, however, that the fiduciary is unlikely to 
remain uninvolved in the settlement of an ERISA lawsuit initiated by 
participants for two reasons. First, the fiduciary will, in all 
likelihood, be named as a party to the lawsuit and the court will 
almost certainly require the plan fiduciary's input on the settlement. 
Alternatively, the party in interest likely will seek the involvement 
of the fiduciary because the party in interest (disqualified person) 
may need to take advantage of the relief provided by the class 
exemption in order to avoid the possible imposition of excise taxes 
under section 4975 of the Code. Under the Code, such excise taxes are 
paid by the disqualified person who participates in the prohibited 
transaction, not the fiduciary who caused the plan to engage in the 
transaction.
    In order to meet the conditions of the class exemption, the 
fiduciary faced with a non-opt out class action must take such actions 
as are appropriate under the particular circumstances. For example, 
before such a settlement is imposed on a non-opt out class, generally 
there is an opportunity to object to its terms. If the fiduciary does 
not believe that the proposed terms and conditions of the settlement 
are as favorable to the plan as comparable arm's-length terms and 
conditions that would have been agreed to by unrelated parties under 
similar circumstances, it should object to the settlement.
    In securities fraud class action cases, there is often an option to 
opt out of the class. Where the plan or the plan

[[Page 75636]]

trustee, as the holder of record of the securities, is a class member, 
whatever action or inaction that fiduciary determines to undertake has 
consequences for the plan. If the fiduciary takes no action, and the 
case is settled for far less than the full value of the plan's losses, 
the burden will be on the fiduciary to justify its inaction. The 
fiduciary responsible for authorizing settlement of class action claims 
must decide, not only whether or not to opt out of the class action, 
but also whether to protest the proposed settlement during the fairness 
hearing.\6\
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    \6\ For example, in Great Neck Capital Appreciation Investment 
Partnership v. PriceWaterhouseCoopers, In re Harnischfeger 
Industries, Inc. Securities Litigation, 212 F.R.D. 400 (E.D. Wisc. 
2002), the original securities law class action settlement proposal 
included release of ERISA claims against the fiduciaries of the 
Harnischfeger employee benefit plans, even though the lawsuit had 
not alleged ERISA claims. At the fairness hearing, a participant 
protested that the participants' ERISA claims might be extinguished 
if this release was approved as part of the settlement. After 
considering the parties positions, the judge, during a conference 
call, ``advised the parties that [he] was inclined to view the 
proposed settlement as unfair if its effect would be to extinguish 
the Plan participants' ERISA claims without compensation and that it 
also appeared to be unfair to require Plan participants to give up 
their right to participate in the settlement as a condition of 
asserting ERISA claims.'' 212 F.R.D. at 406. The securities law 
parties took the judge's hint and voluntarily agreed to exclude the 
ERISA claims from the release. In re IKON Office Solutions, Inc. 
Securities Litigation, 194 F.R.D. 166 (E.D.Pa. 2000), on the other 
hand, involved a securities law release that arguably released at 
least some of the ERISA claims and participants protested this at 
the fairness hearing. The court held that it would be premature, in 
the context of a settlement, for the court to address such issues--
participants could either opt out and not be bound by the 
settlement, or take their chances pursuing what was left of their 
ERISA claims after receiving their portion of the securities class 
action settlement.
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    G. Only cash may be received in exchange for the release, unless 
the transaction at issue is being rescinded. The commenters were 
universal in their objection to this condition. They pointed out that 
frequently, in cases involving investment in employer securities, the 
settlement consists of additional employer securities. In addition, 
settlements with plan sponsors often include nonmonetary relief, such 
as a promise of future contributions and plan amendments improving 
participants' rights, for example, the right to diversify their 
investments.
    In response to these comments, the Department notes that the 
conditions for retroactive relief do not specify the type of the 
consideration that may be provided in exchange for the release. On a 
prospective basis, the Department has decided to modify the final 
exemption to permit assets other than cash to be provided in exchange 
for the plan's or the plan fiduciary's release of a claim. As modified, 
the final exemption permits contributions of qualifying employer 
securities, or other marketable securities, in certain instances. Any 
assets contributed to the plan, in connection with a settlement, must 
consist of securities that can be objectively valued to determine fair 
market value, in accordance with Section 5 of the Voluntary Fiduciary 
Correction (VFC) Program (67 FR 15062, March 28, 2002). The final 
exemption has also been modified to provide that plan amendments, 
additional employee benefits, and the promise of future contributions 
may be included as part of a settlement agreement covered by this 
exemption.
    H. When is a settlement reasonable? One commenter urged the 
Department to apply this condition to all transactions and to include 
the costs of litigation among the factors to be considered in 
determining whether a settlement is reasonable. Another commenter asked 
to include the value of claims foregone. The Department has adopted 
these suggestions. The final exemption requires that the settlement 
must be reasonable in light of the plan's likelihood of full recovery, 
the risks and costs of litigation, and the value of claims foregone. 
How these factors are weighed by fiduciaries will differ, depending on 
the type of case, but will always involve a prudent decision-making 
process, given the facts and circumstances of the particular situation.
    I. Should an interest rate be specified? Most of the commenters 
urged the Department to eliminate the requirement that a reasonable 
interest rate be charged for an extension of credit in connection with 
a settlement covered by the exemption. The commenters explained that 
often a settlement requires a payment of the promised sum over several 
years, without specifying an interest rate. In response to these 
comments, the Department has modified this condition to delete the 
reference to interest in connection with the loan or extension of 
credit. As modified, any extensions of credit must be made on terms 
that are reasonable. Although the final exemption provides more 
flexibility, fiduciaries that agree to an extension of credit with a 
party in interest nonetheless must consider that party's 
creditworthiness and the time value of money in evaluating the 
settlement.
    As noted above, the settlement of litigation with a plan sponsor 
often involves the promise of future contributions. Another commenter 
requested that the Department clarify that the promise of future 
contributions is not loan or other extension of credit. The Department 
agrees with the commenter.
    The Department encountered a case where the trustees had agreed to 
accept payments over time in order to collect amounts misappropriated 
by a party in interest. In this case, the trustees extended credit to 
the party in interest, but did not release their cause of action 
against him. In such a case, the class exemption will apply if the 
extension of credit is being made in connection with a settlement and 
both the settlement and the extension of credit meet all of the 
conditions of this exemption.
    Several commenters urged the Department to require that extensions 
of credit be secured by property or a letter of credit. Although the 
Department has decided not to adopt this suggestion as a condition of 
the final exemption, the Department encourages fiduciaries to seek 
security for an extension of credit, wherever feasible, to protect the 
plan against the risk of default.
    J. Certain applicants request that the scope of AO 95-26A (October 
17, 1995) be extended. In AO 95-26A, the Department opined that 
settlement of litigation with a service provider may be covered by the 
statutory exemption for service providers provided under section 
408(b)(2) of the Act. Several commenters asked whether the same 
rationale extended to the settlement of cases where the transaction at 
issue in the litigation is of the type addressed by a statutory or 
administrative exemption. The Department notes that the issues raised 
by the commenters, with respect to the scope of AO 95-26A, are beyond 
the scope of this exemption proceeding.
    K. Who bears the burden of proof? Several commenters expressed 
concern that, if the retroactive conditions of the exemption are too 
subjective or difficult to meet, fiduciaries who acted in good faith in 
settling cases, particularly complex securities fraud cases, may be 
subject to litigation. According to the commenters, most practitioners 
were unaware of the Department's position that settling litigation with 
a party in interest might result in a prohibited transaction until the 
Department published the proposal for this class exemption. These 
commenters argued that, without a broad retroactive exemption, 
frivolous litigation may ensue.
    Other commenters asserted that whether or not the fiduciaries were 
aware of potential prohibited transactions, these fiduciaries knew they 
were making decisions involving plan assets. If they acted prudently 
and in the interests of participants and

[[Page 75637]]

beneficiaries in settling the litigation with the party in interest, 
these fiduciaries should have no trouble meeting the retroactive 
requirements of the exemption. These commenters argued that, given the 
Department's guidance on this issue in 1995, it is appropriate to shift 
the burden of proving substantive and procedural prudence from the 
person challenging the settlement to the fiduciary seeking the 
protection of the exemption.
    In light of these comments, the Department confirms that the party 
seeking to take advantage of any administrative exemption granted by 
the Department has the burden of proving that it met each condition of 
the exemption. Nonetheless, the Department has been persuaded that many 
practitioners were unaware of the prohibited transaction issues 
involved in settlements. The Department is also aware that some 
attorneys may have advised their clients that the settlement of 
litigation with a party in interest is not the type of transaction 
intended to be covered by section 406 of the Act. After considering 
these comments, the Department believes that it is appropriate to 
modify the retroactive relief under the final exemption. Accordingly, 
for settlements entered into on or before 30 days after the date of 
publication of the final exemption, the determination that there was a 
genuine controversy need not have been made by an attorney.
    L. Should notice be required? Several commenters urged the 
Department to require notice to all participants and beneficiaries in 
connection with the settlement of litigation. One commenter pointed out 
that the Department requires notice in connection with PTE 94-71 (59 FR 
51216, October 7, 1994, as corrected, 59 FR 60837, November 28, 1994) 
(settlement agreements between the U.S. Department of Labor and plans) 
where the Department is a party to the settlement. This commenter 
argued that without the involvement of the Department, notice is even 
more important to the participants and beneficiaries because their 
rights to pursue their own ERISA litigation could be compromised or 
waived entirely by the plan fiduciary. The commenter recommended that 
notice to participants of the nature of the allegations leading to the 
settlement and the terms of the proposed settlement should be required. 
This commenter also urged that all settlements should take the form of 
a proposed consent decree filed after, or contemporaneous with, the 
Complaint. In addition, the analytical basis for the settlement should 
be open to inspection by participants for a stated period of time. 
Another commenter explained that, in his experience, participants are 
not aware of litigation, or at least the plan's involvement, until 
after the settlement is final. Other commenters strongly oppose notice. 
These commenters asserted that such an undertaking could be very costly 
and disruptive, especially for minor litigation.
    The Department has determined not to add a notice requirement as a 
condition of this class exemption. Requiring notice at the point where 
litigation is about to be settled could result in unnecessary delays 
and additional costs. The Department believes that the interests of the 
participants and beneficiaries will be sufficiently protected by the 
conditions of this class exemption, especially the requirement that the 
settlement is authorized by a fiduciary who is independent of the 
parties involved in the litigation.
    M. Discussion of other comments. One of the commenters requested 
the Department's concurrence that, if ERISA claims are not covered by 
the release given by the plan or the plan fiduciary in settlement of 
litigation, the fiduciary need not obtain additional consideration to 
account for such claims. The Department agrees with this statement.
    One commenter urged the Department to opine that, where a plan 
fiduciary causes a plan to release all the plan's non-ERISA claims 
arising out of a transaction, the fiduciary does not automatically 
release the fiduciary's own claims for breach of fiduciary duty arising 
out of the same transaction. The commenter explained that the proposed 
exemption did not distinguish between claims brought by the plan, i.e., 
with the plan itself as a named party, and claims brought on behalf of 
the plan by a fiduciary. ERISA Sec.  502(d)(1), 29 U.S.C. 1132(d)(1), 
provides that an employee benefit plan may sue and be sued as an 
entity. Claims for violations of title I of ERISA, however, may be 
brought by a fiduciary, participant or beneficiary of the plan or by 
the Secretary of Labor. ERISA Sec. Sec.  502(a)(2), 502(a)(3), 
502(a)(4), 502(a)(5), and 502(e)(1), 29 U.S.C. 1132(a)(2), 1132(a)(3), 
1132(a)(4), 1132(a)(5) and 1132(e)(1). Some courts have concluded that 
plans may bring actions under other laws, but may not bring an action 
for a fiduciary breach under title I of ERISA. E.g., Pressroom Unions-
Printers League Income Security Fund v. Continental Assurance Co., 700 
F.2d 889, 893 (2nd Cir. 1983). Other courts have not adopted this 
distinction. E.g., Saramar Aluminum Co. v. Pension Plan for Employees 
of the Aluminum Indus. and Allied Indus., 782 F.2d 577, 581 (6th Cir. 
1986). The commenter believes that a failure to distinguish between 
claims that a plan can make in its own name and those that must be made 
by a plan fiduciary, for example, could cause courts to conclude that 
releasing a plan's non-ERISA claims automatically releases a plan 
fiduciary's, or participant's or beneficiary's ERISA claims on behalf 
of the plan.
    The Department amended the proposed exemption to clarify that it 
applies to releases by the plan or by a plan fiduciary. The issue of 
how a release of claims by a plan or plan fiduciary may affect ERISA 
claims that could otherwise be brought by a fiduciary, participant or 
beneficiary is beyond the scope of this exemption proceeding. In the 
Department's view, a fiduciary should understand, in advance of 
signing, the legal effect that a settlement agreement may have on all 
claims that might be brought by or on behalf of the plan or its 
participants and beneficiaries. Plan fiduciaries may need to obtain 
legal advice on the scope of claims affected by a proposed settlement 
agreement. The Department notes that it has long held the view that a 
fiduciary's release of ERISA claims does not bind the Secretary.
    It is not uncommon for the same transactions to give rise to both 
ERISA and securities fraud claims. The plan, and by extension, the 
participants and beneficiaries of the plan, are entitled to the same 
recovery as other shareholders in the securities fraud settlement. 
However, the participants and beneficiaries may have another avenue of 
recovery not available to other shareholders. They are authorized, 
under ERISA, along with the plan fiduciary and the Secretary of Labor, 
to bring suit to make the plan whole for all losses caused by a breach 
of fiduciary duty. As noted above, the Department recognizes that, in a 
number of securities fraud class action settlements, the participants 
and/or plan fiduciaries have successfully objected to the original 
release and were able to modify the terms of the release to permit the 
plan to receive its share of the securities fraud settlement without 
releasing its ERISA claims against the parties in interest. In other 
instances, fiduciaries have successfully negotiated additional relief 
for the plan beyond that provided to shareholders who did not have 
ERISA claims against the defendants. The Department notes that plan 
fiduciaries should consider whether additional relief may be available 
for the ERISA claims before agreeing to a broad release.

[[Page 75638]]

    In conclusion, the Department encourages participants, 
beneficiaries, fiduciaries, parties in interest and other interested 
persons to take advantage of the wide range of compliance assistance 
offered by the Department. Those with questions about their rights and 
responsibilities in particular situations should look first to our web 
site: http://www.dol.gov/EBSA/. You may also call, toll-free, the 

Employee & Employer Hotline 1-866-444-EBSA (3272). To discuss 
substantive ERISA issues in connection with particular cases, please 
contact your local EBSA field office. The EBSA web site mentioned above 
includes a state-by-state list of phone numbers and addresses for these 
offices. Click on ``About EBSA/EBSA Offices.''

II. Description of the Exemption

    The exemption provides retroactive and prospective relief from the 
restrictions of section 406(a)(1)(A), (B) and (D) of the Act and from 
the taxes imposed by section 4975(a) and (b) of the Code by reason of 
section 4975(c)(1)(A), (B) and (D) of the Code, for the following 
transactions, effective January 1, 1975:
    (1) The release by the plan or by a plan fiduciary of a legal or 
equitable claim against a party in interest in exchange for 
consideration, given by, or on behalf of, a party in interest to the 
plan in partial or complete settlement of the plan's or the fiduciary's 
claim; and
    (2) An extension of credit by a plan to a party in interest in 
connection with a settlement whereby the party in interest agrees to 
repay, over time, an amount owed to the plan in settlement of a legal 
or equitable claim by the plan or a plan fiduciary against the party in 
interest.

A. Conditions Applicable to All Transactions

    The exemption is conditioned upon the existence of a genuine 
controversy involving the plan unless the case has been certified as a 
class action by the court. The Department believes that this condition 
is necessary to prevent the plan and parties in interest from engaging 
in a sham transaction purporting to fall within this class exemption, 
thus shielding a transaction, such as an extension of credit or other 
transaction with a party in interest, that would otherwise be 
prohibited.
    The fiduciary that authorizes the settlement must have no 
relationship to, or interest in, any of the other parties involved in 
the litigation, other than the plan, that might affect its best 
judgment as a fiduciary. The Department intends a flexible standard for 
fiduciary independence, recognizing that the exemption will encompass a 
wide range of situations, both in terms of the type of litigation and 
the cost of pursuing such litigation. For example, in some instances 
where there are complex issues and significant amounts of money 
involved, it may be appropriate to hire an independent fiduciary having 
no prior relationship to the plan, its trustee, any parties in 
interest, or any other parties to the litigation. In other instances, 
the plan's current trustee or investment manager, assuming that 
fiduciary's conduct is not at issue, may be an appropriate party to 
make the decision on behalf of the plan as to whether to settle the 
litigation.
    In response to comments received by the Department regarding the 
settlement of class action litigation in which the ability to negotiate 
may be limited, the Department eliminated the requirement that the 
settlement be ``negotiated'' by the fiduciary. In lieu of this 
requirement, the exemption provides that the fiduciary may authorize a 
settlement if its terms and conditions are no less favorable to the 
plan than comparable arm's-length terms and conditions that would have 
been agreed to by unrelated parties under similar circumstances.
    The exemption is conditioned upon the settlement being reasonable 
given the likelihood of full recovery, the costs and risks of 
litigation, and the value of claims foregone. The claims foregone may 
include additional causes of action not available to the other 
plaintiffs in the same case. For example, where shareholders have 
brought a class action securities fraud case against the Company and 
its officers, the Company's employee benefit plan or the trustee, as 
the holder of record, may be named as a member of the class because it 
holds employer securities. The plan or trustee may also have ERISA 
claims against the Company and some or all of its officers, as well as 
against other parties. Before entering into a settlement with any 
defendant, the plan fiduciary should consider the value of these 
additional claims against that defendant. The plan fiduciaries may also 
be able to pursue claims against defendants not named in the securities 
fraud case, including knowing participants in the breach. Under certain 
circumstances, the plan will have additional sources of recovery, 
including fiduciary liability insurance, the plan's fidelity bond, and 
the personal assets of the defendants, including their own employee 
benefit plan accounts.\7\
---------------------------------------------------------------------------

    \7\ Section 206(d)(4) of the Act permits a plan to offset the 
benefits of a participant under an employee pension plan against an 
amount that the participant is ordered or required to pay, if the 
order or requirement to pay arises under a judgment of conviction of 
a crime involving the plan, a civil judgment, including a consent 
order or decree, entered into by a court, or where there is a 
settlement agreement between the participant and the Secretary of 
Labor or the PBGC in connection with a violation of Part IV of 
ERISA.
---------------------------------------------------------------------------

    The exemption also provides that the settlement must not be part of 
an agreement, arrangement, or understanding designed to benefit a party 
in interest. The intent of this condition is not to deny direct 
benefits to other parties to a transaction but, rather, to exclude 
transactions that are part of a broader overall agreement, arrangement 
or understanding designed to benefit parties in interest.
    Where a settlement includes an extension of credit by a plan to a 
party in interest for purposes of repaying an amount owed in settlement 
of litigation, the exemption requires that the credit terms be 
reasonable. Fiduciaries must consider the creditworthiness of the party 
in interest and the time value of money in evaluating extensions of 
credit to settle litigation. The settling fiduciary should also 
consider security for such loans, such as a third party guarantee or 
letter of credit, to protect against default.
    The Department has added a new condition which clarifies that this 
class exemption does not cover those transactions that are described in 
PTE 76-1, A.I. (41 FR 12740, March 26, 1976, as corrected, 41 FR 16620, 
April 20, 1976) (relating to delinquent employer contributions to 
multiemployer and multiple employer collectively bargained plans).
    Finally, in response to a question received during the comment 
period, the Department has defined the terms ``employee benefit plan'' 
and ``plan'' to include an employee benefit plan described in section 
3(3) of ERISA and/or plans as defined in section 4975(e)(1) of the 
Code.

B. Conditions Applicable to Prospective Transactions

    On a prospective basis, the existence of a genuine controversy must 
be determined by an attorney retained to advise the plan unless the 
case has been certified as a class action by the court. That attorney 
must be independent of the other parties to the litigation. All terms 
of the settlement must be specifically described in a written agreement 
or consent decree and the fiduciary authorizing the settlement must 
acknowledge its fiduciary status in writing.
    The exemption provides that in certain instances assets, other than 
cash,

[[Page 75639]]

may be received by the plan from a party in interest. Assets may be 
received by the plan if necessary to rescind transactions. The 
conditions for retroactive relief do not specify the nature of the 
consideration exchanged for the release. On a prospective basis, 
securities with a generally recognized market may be exchanged for the 
release, provided that such securities can be objectively valued. In 
addition, the contribution of additional qualifying employer securities 
is permitted in settlement of the dispute involving such qualifying 
employer securities. Where assets, other than cash, are provided to the 
plan in exchange for a release, such assets must be specifically 
described in the written settlement agreement and valued at their fair 
market value as determined in accordance with section 5 of the 
Voluntary Fiduciary Correction (VFC) Program (67 FR 15062 March 28, 
2002). The final exemption also provides that the settlement may also 
include a written agreement to: make future contributions, adopt 
amendments to the plan, or provide additional employee benefits.
General Information
    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act which require, among other things, that a fiduciary 
discharge his duties with respect to the plan solely in the interests 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code, and based upon the entire record, the 
Department finds that the exemption is administratively feasible, in 
the interests of the plans and their participants and beneficiaries, 
and protective of the rights of participants and beneficiaries of such 
plans;
    (3) The exemption is applicable to a particular transaction only if 
the conditions specified in the class exemption are met; and
    (4) The exemption is supplemental to, and not in derogation of, any 
other provisions of the Code and the Act, including statutory or 
administrative exemptions and transitional rules. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction.

Exemption

    Accordingly, the following exemption is granted under the authority 
of section 408(a) of the Act and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR part 2570, subpart B 
(55 FR 32836, 32847, August 10, 1990.)

Section I. Covered Transactions

    Effective January 1, 1975, the restrictions of section 
406(a)(1)(A), (B) and (D) of the Act, and the taxes imposed by section 
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A), (B) 
and (D) of the Code, shall not apply to the following transactions, if 
the relevant conditions set forth in sections II through III below are 
met:
    (a) The release by the plan or a plan fiduciary, of a legal or 
equitable claim against a party in interest in exchange for 
consideration, given by, or on behalf of, a party in interest to the 
plan in partial or complete settlement of the plan's or the fiduciary's 
claim.
    (b) An extension of credit by a plan to a party in interest in 
connection with a settlement whereby the party in interest agrees to 
repay, over time, an amount owed to the plan in settlement of a legal 
or equitable claim by the plan or a plan fiduciary against the party in 
interest.

Section II. Conditions Applicable to All Transactions

    (a) There is a genuine controversy involving the plan. A genuine 
controversy will be deemed to exist where the court has certified the 
case as a class-action.
    (b) The fiduciary that authorizes the settlement has no 
relationship to, or interest in, any of the parties involved in the 
litigation, other than the plan, that might affect the exercise of such 
person's best judgment as a fiduciary.
    (c) The settlement is reasonable in light of the plan's likelihood 
of full recovery, the risks and costs of litigation, and the value of 
claims foregone.
    (d) The terms and conditions of the transaction are no less 
favorable to the plan than comparable arms-length terms and conditions 
that would have been agreed to by unrelated parties under similar 
circumstances.
    (e) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest.
    (f) Any extension of credit by the plan to a party in interest in 
connection with the settlement of a legal or equitable claim against 
the party in interest is on terms that are reasonable, taking into 
consideration the creditworthiness of the party in interest and the 
time value of money.
    (g) The transaction is not described in Prohibited Transaction 
Exemption (PTE) 76-1, A.I. (41 FR 12740, March 26, 1976, as corrected, 
41 FR 16620, April 20, 1976) (relating to delinquent employer 
contributions to multiemployer and multiple employer collectively 
bargained plans).

Section III. Prospective Conditions

    In addition to the conditions described in section II, the 
following conditions apply to the transactions described in section I 
(a) and (b) entered into after January 30, 2004:
    (a) Where the litigation has not been certified as a class action 
by the court, an attorney or attorneys retained to advise the plan on 
the claim, and having no relationship to any of the parties, other than 
the plan, determines that there is a genuine controversy involving the 
plan.
    (b) All terms of the settlement are specifically described in a 
written settlement agreement or consent decree.
    (c) Assets other than cash may be received by the plan from a party 
in interest in connection with a settlement only if:
    (1) necessary to rescind a transaction that is the subject of the 
litigation; or
    (2) such assets are securities for which there is a generally 
recognized market, as defined in ERISA section 3(18)(A), and which can 
be objectively valued. Notwithstanding the foregoing, a settlement will 
not fail to meet the requirements of this paragraph solely because it 
includes the contribution of additional qualifying employer securities 
in settlement of a dispute involving such qualifying employer 
securities.
    (d) To the extent assets, other than cash, are received by the plan 
in exchange for the release of the plan's or the plan fiduciary's 
claims, such assets must be specifically described in the written 
settlement agreement and valued at their fair market value, as 
determined in accordance with section 5 of the Voluntary Fiduciary 
Correction (VFC) Program, 67 FR 15062 (March 28, 2002). The methodology 
for determining

[[Page 75640]]

fair market value, including the appropriate date for such 
determination, must be set forth in the written settlement agreement.
    (e) Nothing in section III (c) shall be construed to preclude the 
exemption from applying to a settlement that includes a written 
agreement to: (1) Make future contributions; (2) adopt amendments to 
the plan; or (3) provide additional employee benefits.
    (f) The fiduciary acting on behalf of the plan has acknowledged in 
writing that it is a fiduciary with respect to the settlement of the 
litigation on behalf the plan.
    (g) The plan fiduciary maintains or causes to be maintained for a 
period of six years the records necessary to enable the persons 
described below in paragraph (h) to determine whether the conditions of 
this exemption have been met, including documents evidencing the steps 
taken to satisfy sections II (b), such as correspondence with attorneys 
or experts consulted in order to evaluate the plan's claims, except 
that:
    (1) if the records necessary to enable the persons described in 
paragraph (h) to determine whether the conditions of the exemption have 
been met are lost or destroyed, due to circumstances beyond the control 
of the plan fiduciary, then no prohibited transaction will be 
considered to have occurred solely on the basis of the unavailability 
of those records; and
    (2) No party in interest, other than the plan fiduciary responsible 
for record-keeping, shall be subject to the civil penalty that may be 
assessed under section 502(i) of the Act or to the taxes imposed by 
section 4975(a) and (b) of the Code if the records are not maintained 
or are not available for examination as required by paragraph (h) 
below;
    (h)(1) Except as provided below in paragraph (h)(2) and 
notwithstanding any provisions of section 504(a)(2) and (b) of the Act, 
the records referred to in paragraph (g) are unconditionally available 
at their customary location for examination during normal business 
hours by--
    (A) any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) any fiduciary of the plan or any duly authorized employee or 
representative of such fiduciary;
    (C) any contributing employer and any employee organization whose 
members are covered by the plan, or any authorized employee or 
representative of these entities; or
    (D) any participant or beneficiary of the plan or the duly 
authorized employee or representative of such participant or 
beneficiary.
    (2) None of the persons described in paragraph (h)(1)(B)-(D) shall 
be authorized to examine trade secrets or commercial or financial 
information which is privileged or confidential.

Section III. Definition

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

    Signed at Washington, DC this 24th of December, 2003.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 03-32191 Filed 12-30-03; 8:45 am]

BILLING CODE 4520-29-P