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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The Department of Labor’s Employee Benefits Security Administration (EBSA) has adopted prohibited transaction exemption (PTE) 2006-16, which essentially amends two class exemptions from ERISA’s prohibited transaction restrictions regarding the lending of securities by employee benefit plans. Notice of the adoption of the amendment was published in the October 31 Federal Register.
PTE 81-6 provides relief from ERISA’s prohibited transaction restrictions for the lending of securities by employee benefit plans to banks and broker-dealers registered under the Securities Exchange Act of 1934, who are parties-in-interest with respect to such plans. The exemption was amended in 1987 to include broker-dealers exempted from registration as dealers in exempted government securities, provided that all other conditions of the exemption are met.
PTE 82-63 exempts certain compensation arrangements for the provision of securities lending services by a plan fiduciary to an employee benefit plan, provided that (1) the loan of securities is not prohibited by ERISA Sec. 406(a); (2) the lending fiduciary is authorized to engage in lending transactions on behalf of the plan; (3) the compensation is reasonable and is paid in accordance with terms of a written instrument; (4) the compensation arrangement is approved by an independent fiduciary; and (5) the authorization is provided only after the independent fiduciary has received all information necessary to approve the arrangement with the lending fiduciary. Currently, relief under PTE 81-6 is limited to securities lending transactions in which a plan loans securities to a U.S. broker-dealer or U.S. bank that is a party-in-interest with respect to the plan. Furthermore, only collateral consisting of cash, securities issued or guaranteed by the United States government, or irrevocable bank letters of credit may be accepted by the plan.
In 2003, the EBSA proposed an amendment that would combine PTEs 81-6 and 82-63 into a new class exemption and expand those class exemptions to additional parties, subject to modified conditions. The EBSA now has adopted that amendment as PTE 2006-16, with certain modifications.
Among other changes, PTE 2006-16 permits the lending of securities that are assets of an employee benefit plan to a foreign broker-dealer or a foreign bank. The proposed amendment would have limited this relief to United Kingdom broker-dealers and banks. However, the final amendment expands the definition of a “foreign broker-dealer” to include those broker-dealers registered and regulated under the relevant securities laws of a governmental entity of a country other than the United States where such securities laws were applicable to a broker-dealer that received: (1) an individual exemption, granted by the EBSA under ERISA Sec. 408(a) involving the loan of securities by a plan to a broker-dealer; or (2) a final authorization by the EBSA to engage in an otherwise prohibited transaction pursuant to PTE 96-62, involving the loan of securities by a plan to a broker-dealer. To further protect plans from any unnecessary costs and risks associated with the lending of securities in the different foreign jurisdictions, the final amendment imposes a new condition that requires the lending fiduciary to be a U.S. bank or U.S. broker-dealer that indemnifies the plan with respect to the difference, if any, between the replacement cost of the borrowed securities and the market value of the collateral on the date of a borrower default. The final amendment also expands the definition of “borrower” to include Canadian broker-dealers and Canadian banks that are members of the Canadian Securities Administration.
PTE 2006-16 also permits the payment to a lending fiduciary of compensation for services rendered in connection with loans of plan assets that are securities. In addition, under the amendment, U.S. banks and U.S. broker-dealers are permitted to give plans foreign collateral for securities loans. The final amendment expands the types of collateral allowed under the class exemption.
Under the terms of PTE 2006-16, the securities lending agreement must describe any fees to be received by a plan in connection with the lending of securities and specify whether the payment will be made in the same currency as the collateral, in the currency of the securities lent, or in U.S. dollars. The securities lending agreement also must give the plan a continuing security interest in, title to, or the rights of a secured creditor with respect to the collateral received by the plan. In the case of a foreign broker-dealer or foreign bank, the borrower must furnish the lending fiduciary its most recent available audited statement of its financial condition.
Furthermore, PTE 2006-16 requires the lending fiduciary to maintain the situs of the loan agreement in accordance with the indicia of ownership requirements under ERISA Sec. 404(b). In addition, a foreign borrower must agree to submit to the jurisdiction of the district courts of the United States, and agree that the plan can in its sole discretion enforce the agreement in a U.S. court. Alternatively, the lending fiduciary can indemnify and hold harmless each plan against any shortfall in the collateral or losses incurred by the plan arising from a borrower’s default.
PTE 2006-16 is effective Jan. 2, 2007, and PTEs 81-6 and 82-63 are revoked effective as of that date. For further information, contact Allison Padams Lavigne at (202) 693-8540.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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