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Department of Labor - Employee Benefits Security Administration

Field Assistance Bulletin 2003-1

April 15, 2003

Memorandum for: Virginia C. Smith
Director of Enforcement, Regional Directors

From: Robert J. Doyle
Director of Regulations and Interpretations

Subject: Participant Loans to Corporate Directors and Officers

Issue

May a plan administrator deny participant loans to directors and executive officers of the sponsoring employer of the plan on the basis that such loans may violate Section 13(k) of the Securities Exchange Act of 1934 without contravening the requirement of section 408(b)(1) of ERISA that loans be made available to all participants on a reasonably equivalent basis?

Law And Analysis

Section 402 of the Sarbanes-Oxley Act of 2002 added a new subsection (k) to Section 13 of the Securities Exchange Act of 1934 (the “1934 Act”). Section 13(k) makes it unlawful for any issuer (as defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002)(1), directly or indirectly, including through any subsidiary, to extend or maintain credit, to arrange for the extension of credit, or to modify or renew an extension of credit maintained by the issuer on the date of enactment,(2) in the form of a personal loan to or for any director or executive officer (or equivalent thereof). The Department of Labor does not have interpretative authority with respect to the 1934 Act.

Section 404 of ERISA requires, among other things, that fiduciaries of employee benefit plans discharge their duties prudently and solely in the interest of the plan’s participants and beneficiaries. Section 404(a)(1)(D) requires that fiduciaries discharge their duties in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of title I of ERISA. Section 406(a)(1)(B) prohibits a fiduciary from causing an employee benefit plan to engage in a loan between the plan and a party in interest. Parties in interest include employees, officers and directors of an employer sponsoring the plan.

Section 408(b)(1) exempts from the prohibited transactions provisions of section 406 the making of a loan by an employee benefit plan to a party in interest who is a participant or beneficiary of the plan, provided that certain conditions are satisfied. Among other things, section 408(b)(1)(A) and the Department’s regulations issued thereunder, at 29 CFR § 2550.408b-1, provide that such loans must be made available to all participants and beneficiaries of the plan on a reasonably equivalent basis.

Section 514(d) of ERISA provides that nothing in Title I of ERISA shall be construed to alter, amend, modify, invalidate, impair, or supersede any other Federal law.

We understand that ERISA practitioners have raised the question of whether section 13(k) of the 1934 Act prohibits directors and executive officers of an employer from taking loans from employee pension benefit plans. It has long been the view of the Department that fiduciaries are responsible for administering their plans to assure compliance with both ERISA and other applicable Federal laws, in recognition of the fact that such other Federal laws are not preempted by ERISA.

In our view, a decision to disallow a participant loan based on a reasonable question concerning the legality of the loan would not be a failure to provide loans to all participants on a reasonably equivalent basis and would not affect the plan's compliance with section 408(b)(1) or 29 C.F.R. § 2550.408b-1.

Conclusion

It is the view of this Office that, in view of the uncertainty concerning the scope of section 13(k) of the 1934 Act, plan fiduciaries of public companies may deny participant loans to officers and directors (or the equivalent thereof) without violating the requirements of section 404(a)(1) or the requirement of section 408(b)(1)(A) and the regulation issued thereunder that loans be available to all participants and beneficiaries on a reasonably equivalent basis. In stating this view, the Department takes no position on the application of section 13(k) of the 1934 Act to participant loans.

Any questions concerning this matter may be directed to Louis Campagna or David Lurie, Division of Fiduciary Interpretations, 202.693.8510.

Footnotes

  1. Section 2(a)(7) of the Sarbanes-Oxley Act of 2002 defines “issuer” as “an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the securities of which are registered under section 12 of the Act (15 U.S.C. 78l), or that is required to file reports under section 15(d) (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn.”

July 30, 2002.

Last Updated 04/02/2008

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