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Trust Examination Manual
June 7, 2002
Wallace M. Starke, Esq.
Troutman, Sanders, Mays & Valentine, L.L.P.
P.O. Box 1122
Richmond, VA 23218-1122
ERISA Sec. 408(e)
Dear Mr. Starke:
This is in response to your request for an advisory opinion regarding the application of section 408(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA) to certain transactions between a plan and various personal trusts and estates sharing a common trustee with the plan.
You represent that National Bankshares, Inc. (NBI) is a bank holding company which owns all the issued and outstanding stock of the National Bank of Blacksburg (the Bank). The Bank is a national banking association subject to the supervision of the Office of the Comptroller of the Currency (OCC).
You further represent that NBI acts as plan sponsor of the National Bankshares, Inc. Employee Stock Ownership Plan (the ESOP) and the Bank is a participating employer with respect to the ESOP. You state that the Bank serves as trustee of the ESOP and also serves as trustee of various inter vivos and executorial trusts and estates (referred to hereafter as personal trusts). You state that to the best of your knowledge, none of the personal trusts are ERISA plans, parties in interest with respect to the ESOP as defined in section 3(14) of ERISA, or disqualified persons within the meaning of section 4975(e) of the Internal Revenue Code (the Code).
You state that the ESOP is an employee stock ownership plan within the meaning of 4975(e)(7) of the Code and section 407(d)(6) of ERISA. It is intended to be qualified under section 401(a) of the Code and last received a favorable determination letter from the Internal Revenue Service to that effect on June 1, 1995. The ESOP, by its terms, is designed to invest primarily in the stock of NBI. NBI's outstanding stock consists of one class of common stock which is readily traded on the NASDAQ small cap market.
You request an advisory opinion regarding several transactions involving the purchase by the ESOP of NBI stock from several personal trusts for which the Bank also serves as trustee. No broker was used for the sales. You represent that the Bank as trustee for the ESOP initiated such purchases of NBI stock for the ESOP. You state that the Bank has an established procedure to obtain, prior to executing any acquisition of NBI stock by the ESOP from a personal trust, written consent from the primary beneficiary or any co-fiduciary of the personal trust to sell NBI stock owned by the personal trust to the ESOP.
You state that no commission was charged to the ESOP or the personal trusts in connection with the NBI stock purchases in question. The consideration paid by the ESOP for the NBI stock was cash equal to the bid price for such shares as quoted by the online service MSN Money Central, a price which was not more than the fair market value of such shares at the time of their purchase. The trustee did not receive any consideration for its personal account in connection with any of the NBI stock purchases in question.
You state that MSN Money Central is an online pricing service that obtains its stock quotes from Standard and Poor's ComStock, Inc., the same service used by a number of other pricing services. You state that there is a 15-minute delay when a stock quote is obtained from MSN Money Central, and that in each of the purchases at issue the transaction was executed within 15 minutes of the time that a price quote was obtained. You state that effecting the trade at the bid price, rather than the asked price, benefitted the plan in that the bid price in most, if not all, cases is lower than the asked price.
A total of ten such transactions occurred between June of 2000 and April of 2001 representing a total of 7,646 shares of NBI stock and a total sale price of $163,301. During an examination by the OCC of the operations of the trust department of the Bank, the OCC examiner questioned whether these transactions were prohibited by ERISA and the Code.
You request the Department's view as to whether the described transactions are exempt from the prohibited transaction restrictions of ERISA and the Code by virtue of sections 408(e) of ERISA and 4975(d)(13) of the Code.
Section 406(a)(1)(A) and (D) of ERISA prohibit a fiduciary with respect to a plan from causing a plan to engage in a transaction if s/he knows or should know that such transaction constitutes a direct or indirect sale or exchange, or leasing of any property between a plan and a party in interest; or a transfer to, or use for the benefit of, a party in interest, of any assets of the plan. Section 3(14)(A) and (C) of ERISA define a party in interest with respect to a plan to include a fiduciary of the plan and an employer any of whose employees are covered by such plan.
Section 406(a)(1)(E) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if s/he knows or should know that such transaction constitutes a direct or indirect acquisition, on behalf of the plan, of any employer security in violation of section 407(a). In addition section 406(a)(2) prohibits certain fiduciaries from permitting a plan to hold any employer security if s/he knows or should know that holding such security violates section 407(a).
Section 407(a) of ERISA provides, in part, that a plan may not acquire or hold any employer security which is not a qualifying employer security.
Section 406(b)(1) and (2) of ERISA prohibit a fiduciary with respect to a plan from dealing with the assets of a plan in his or her own interest or for his own account, or from acting in his or her individual or in any other capacity in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries. Section 406(b)(3) prohibits a fiduciary with respect to a plan from receiving any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of a plan.
However, section 408(e) of ERISA provides, in part, that sections 406(a) and 406(b)(1) and (2) shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5)) if the following conditions are met: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in section 407(d)(3))… 2.
Section 407(d)(1) of ERISA defines the term employer security in part to mean a security issued by an employer of employees covered by the plan or by an affiliate of such employer. With respect to eligible individual account plans, section 407(d)(5) of ERISA defines the term qualifying employer security to include an employer security which is a stock.
Section 3(18) of ERISA defines the term adequate consideration to include, in the case of a security for which there is a generally recognized market and if the security is not traded on a national securities exchange which is registered under section 6 of the Securities Exchange Act of 1934, 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.
The term eligible individual account plan is defined under section 407(d)(3) as including employee stock ownership plans which explicitly provide for the acquisition and holding of qualifying employer securities.
Based on the representations described in your request, it is the opinion of the Department that the ESOP constitutes an eligible individual account plan inasmuch as the plan is an employee stock ownership plan within the meaning of 4975(e)(7) of the Code and 407(d)(6) of ERISA and is designed, by its terms, to invest primarily in the common stock of NBI.
You have represented that the transactions involve the purchase of NBI common stock by the ESOP. You state that the ESOP is maintained for the benefit of the employees of NBI, the Bank, and any other NBI affiliate which adopts the ESOP as a participating employer. The Bank, as a wholly owned subsidiary of NBI, constitutes an affiliate of NBI on the basis of the facts you describe. Based on your representations, it is the Department's view that common stock of NBI will constitute qualifying employer securities with respect to the ESOP.
You represent that none of these trusts are parties in interest as defined under section 3(14). As a result, a violation of section 406(a) would not have occurred with respect to the transactions. You have also represented that the transactions involve the purchase of NBI common stock by the ESOP from several personal trusts for which the Bank also serves as the trustee. Such transactions would involve violations of section 406(b)(2).
Further, the Department has stated that to the extent that an investment manager exercises discretion over both sides of a transaction in a cross-trade transaction, there is potential for the investment manager to use its discretion to favor one account over another, for example, in the pricing or timing of the trade or in the decision to buy or sell securities for an ERISA account. Such acts could result in one or more violations of the fiduciary provisions of Title I of ERISA in addition to those described in section 406(b)(2).
Regulations issued by the Department clarify that section 408(e), by its terms, exempts certain transactions from the prohibitions of section 406(a) and 406(b)(1) and (2). Accordingly, it is the view of the Department that the acquisitions of NBI stock by the ESOP under the circumstances described would be exempt from the prohibitions of 406(a), and 406(b)(1) and (2) by virtue of section 408(e) provided that the transactions are for adequate consideration and that no commission is charged with respect to the transactions.
Whether the terms of section 408(e) have been met with respect to a transaction is an inherently factual question which may only be answered by the appropriate plan fiduciaries based on all of the relevant facts and circumstances. The Department generally will not opine as to whether a particular transaction is for adequate consideration. Rather, the Department believes that such determinations should be made by appropriate plan fiduciaries on the basis of all relevant facts and circumstances.
We would note, however, that the fact that a transaction is exempt under section 408(e) is not determinative of whether a fiduciary has met its fiduciary obligations under ERISA. Section 404(a)(1)(A) of ERISA requires plan fiduciaries to discharge their duties with respect to a plan solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan. Section 404(a)(1)(B) requires plan fiduciaries to act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. Section 403(c)(1) provides that the assets of a plan shall never inure to the benefit of an employer and shall be held for the exclusive purposes of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.
The general standards of fiduciary conduct contained in sections 404(a)(1) and 403(c) apply to the described purchases of NBI stock by the ESOP. Accordingly, fiduciaries of the ESOP must act prudently, solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable plan administrative costs when deciding whether to acquire NBI stock for the ESOP. Therefore, if plan fiduciaries failed to act in compliance with these general fiduciary standards in the acquisition of the NBI stock for the ESOP, they would be liable for losses resulting from such breaches of fiduciary responsibility regardless of whether the acquisition may be exempt from certain prohibited transaction restrictions by virtue of section 408(e).
If, under the facts and circumstances of any transaction, the Bank uses the authority which makes it a fiduciary with respect to the transaction to benefit personal trust clients at the expense of the ESOP, or otherwise fails to act solely in the interest of plan participants and beneficiaries in deciding to purchase NBI stock for the ESOP, violations of sections 404(a)(1) and 403(c) could occur.
This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions.
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations