Employer securities in eligible individual account plans

P/OPINION 75-89


                                                       404✓
                                                       406
                                                       407
                                                       408


                         October 14, 1975


Dear              :

This is in reply to your letters of July 23 and August 5,
1975, concerning the application of the provisions of
sections 404, 406, 407 and 408(e) of the Employee
Retirement Income Security Act of 1974 (the Act) to
profit-sharing plans which propose to acquire either
employer securities or preferred stock issued by
corporations that own 100 percent of the outstanding
shares of employers whose employees are covered by
such profit-sharing plans. Your letters request
confirmation of your opinion that, by reason of
section 407(b)(1), such acquisitions are not subject
to the 10 percent limitation set forth in section 407(a)
of the Act, and that such purchases and sales of such
securities by such profit-sharing plans are exempt from
the restrictions of section 406 and 407 of the Act by reason
of section 408(e) of the Act.

You have also requested confirmation of your opinion that
the diversification requirements of section 404(a)(1)
of the Act do not apply to the acquisition and holding
of such securities by profit-sharing plans. Finally,
you have requested our views regarding the impact of the
exercise by a participant of control over the assets in
his individual account, within the meaning of section 404(c),
upon the purchase and sale of qualifying employer securities
and the availability of the exemption provided in section
408(e) of the Act with respect to such transactions.

Section 407(b)(1) of the Act exempts plans from the 10
percent limitations on the acquisition and holding of
qualifying employer securities and real property set forth
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in section 407(a) of the Act, if such plans are eligible
individual accounts plans. Under section 407(d)(3)(A)(i)
of the Act, an individual account plan (as defined in section
3(34) of the Act) is an eligible individual account plan
if it is, among other things, a profit-sharing plan or a
stock bonus plan. Under section 407 (d)(3)(B), such a
plan will be treated as an eligible individual account
plan only if the terms of the plan explicityly provide
for the acquisition and holding of qualifying employer
securities or real property. Therefore, if the profit-sharing
plans to which you refer in your letters are amended in
accordance with section 407 (d)(3)(B) of the Act, they will
be treated as eligible individual account plans and the
exemption under section 407(b)(1) would be available for
such plans. Further, an exemption is provided from the
requirements of section 407(d)(3)(B) until January 1, 1976 for
plans in existence on September 2, 1974.

We also note in this regard that although your letters
refer to the securities that certain profit-sharing
plans might purchase from parent corporations of employers
whose employees are covered by such plans as preferred
stock (which would meet the definition of "qualifying
employer security" set forth in section 407(d)(5) of the
Act since such parent corporations, as you have described
them, would he "affiliates" of employers within the meaning
of section 407(d)(7) of the Act), your letters do not provide
sufficient information for us to determine whether the securities
purchases by such plans which are issued directly by employers
whose employees are covered by the plans would come within
the definition of "qualifying employer securities."

In addition to the restrictions of section 407 of the Act,
sections 406(a)(1)(E) and 406(a)(2) prohibit plan fiduciaries
from knowingly causing plans to acquire or hold employer
securities or real property in violation of section 407(a).
Thus, acquisitions or holdings of employer securities by
an eligible individual account plan would not be prohibited
under either section 406(a)(1)(B) or section 406(a)(2)
of the Act, provided that such employer securities are
qualifying employer securities. However, acquisitions
and sales of qualifying employer securities by eligible
individual account plans as well as other plans might
nevertheless constitute prohibited transactions under
other provisions of the Act. For example, section
406(a)(1)(A) prohibits the sale or exchange of any property
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between a plan and a party in interest, which, as
defined in section 3(14) of the Act, includes an employer
any of whose employees are covered by the plan and any
person which owns a 50 percent or more interest in such
an employer.

However, section 408(e) of the Act provides an exemption
from the restrictions of sections 406 and 407 for the
acquisition or sale by a plan or qualifying employer
securities or real property if, as here relevant, (1)
such acquisition is for adequate consideration, (2) no
commission is charged with respect thereto, and (3) the
plan is an eligible individual account plan. In this
regard, your letters represent that no commission would
be charged with respect to any acquisition of qualifying
employer securities by such plans (nor, presumably, would
any commission be charged with respect to any sales of
such securities), and that the plans under consideration
are eligible individual account plans.

With regard, however, to whether such transactions are for
"adequate consideration," section 3(18) defines that term,
when used in part 4 of subtitle B, to mean, in the case of a
security for which there is a generally recognized market,
either the price of the security prevailing on a national
securities exchange which is registered under section 6 of
the Securities Exchange Act of 1934, or if the security is
not traded on such an exchange, a price not less favorable
to the plan than the offering price for the security
as established by the current bid and asked prices quoted
by persons independent of the issuer and of any party in
interest; and in the case of an asset other than a security
for which there is a generally recognized market, the fair
market value of the asset as determined in good faith by
the trustee or named fiduciary pursuant to the terms of
the plan and in accordance with regulations promulgated
by the Secretary of Labor. In this connection, you have
not provided sufficient information to enable us to determine
whether transactions in qualifying employer securities to
which you refer would be for adequate consideration for
purposes of section 408(e) of the Act.

As noted above, your letter requests our confirmation of
your opinion that the diversification requirement of section
404(a)(1)(C) of the Act and the prudence requirement of
section 404(a)(a)(B), insofar as it requires diversification,
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is not applicable to the acquisition or holding
of qualifying employer securities by an eligible
individual account plan. Pursuant to the provisions
of section 404(a)(2) of the Act, is is our view
that your opinion in this regard is accurate.

Finally, you have inquired whether the exemption provided
in section 408(e) of the Act from sections 406 and 407 (a)
of the Act, as it applies to eligible individual account
plans, would be available if the acquisition or sale of
qualifying employer securities is at the direction of a
participant or beneficiary exercising control over the
assets in his individual account within the meaning of
section 404(c) of the Act. In this regard, the exemption
provided in section 408(e) is available with respect to
an eligible individual account plan only if the conditions
set forth in that section are met; the exemption is not
affected by the exercise of control by a participant
or beneficiary over the assets in his individual account.
We further note that a determination of whether a participant
or beneficiary exercises control over the assets in his
individual account for purposes of section 404(c) can
only be made in accordance with regulations issued by
the Secretary of Labor. At this time, such regulations
have not been adopted or proposed for adoption.

I hope that the above is helpful to you.

Sincerely,