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In the January/February 1998 issue of ABA Trust & Investments, Richard K. Matta and Marc H. Cahn reviewed current industry views as to interpreting the Department of Labor's class Prohibited Transaction Exemption (PTE) 77-3 and PTE 77-4, including an overview of a "next generation" of key issues to be resolved. In this follow-up, Matta looks back at how these issues have played out.
Just more than a year ago, in an article titled "ERISA PTE 77-3 and PTE 77-4: The Next Generation of Issues," we looked back over several years of significant developments in Department of Labor interpretations and mutual fund and banking industry responses regarding the two related prohibited transaction exemptions. For about 10 years the industry struggled to apply these aging PTEs to a new range of mutual fund offerings and fee arrangements, and the DOL issued various advisory opinions interpreting their terms and a long list of individual exemptions permitting certain common practices not contemplated by the PTEs. We noted the rise of a second "generation" of issues, and speculated as to how they may be resolved under a new wave of interpretations.
Looking back over the past year or so, arguably the most noticeable development with respect to these PTEs is the fact that there has been only one significant development: DOL advisory opinion 98-06A, issued to Federated Investors. It concluded that unlike PTE 77-4, PTE 77-3 does, indeed, authorize a mutual fund adviser to direct an inkind "conversion" of its in-house plan assets without the need for an individual exemption or an independent fiduciary review.
This distinction turns primarily on a (probably inadvertent) difference in a single word between the two exemptions. Specifically, PTE 77-4 authorizes the "purchase" of mutual fund shares (i.e., for cash); PTE 77-3 authorizes the "acquisition" of mutual fund shares. Fiduciaries are reminded, however, that the ability to convert in-house plan assets without independent fiduciary or DOL review does not relieve them of their obligation to determine that the transaction satisfies the general fiduciary requirements of the Employee Retirement Income Security Act of 1974.
Aside from...