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DOL Finalizes Amendment to INHAM Prohibited Transaction Exemption

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Home Perspectives DOL Finalizes Amendment to INHAM Prohibited Transaction Exemption

The Department of Labor ("DOL") has finalized an amendment to Class Prohibited Transaction Exemption ("PTE") 96-23, which expands the scope of permissible transactions permitted by employee benefit plans whose assets are managed by in-house asset managers ("INHAMs"). PTE 96-23 generally allows the portion of a plan managed by an INHAM to engage in all transactions prohibited in Section 406(a)(1)(A)-(D) of ERISA (i.e., sales, loans, furnishing of services and transfers) with most party in interest service providers, excluding the INHAM or a party related to the INHAM, so long as the requirements of PTE 96-23 are met.

The amendment makes the following changes to PTE 96-23:

  • expanding the definition of INHAM to include a subsidiary that is 80% or more owned by the employer or parent company;
  • increasing the amount of assets an INHAM must manage from $50 million to $85 million;
  • increasing the ownership threshold for determining whether an INHAM is "related" to a party in interest from 5% to 10%;
  • broadening the scope of the general exemption to permit transactions with a co-joint venturer if the joint venture relationship is the entity's sole relationship to the employer (or if the co-joint venturer is both a joint venturer and a service provider); and
  • extending relief to certain existing leases with an employer or an affiliate resulting from the plan's acquisition of the underlying office or commercial space.

The DOL also made the following clarifications with respect to the exemption audits required under PTE 96-23:

  • an exemption audit must test a sufficient sample of the INHAM's transactions during the audit period to give the auditor a reasonable basis to (i) conclude whether the INHAM is in compliance with its policies and procedures required under PTE 96-23, and (ii) render an overall opinion as to the INHAM's level of compliance with its policies and procedures and the objective requirements of PTE 96-23; and
  • an exemption audit and written report must be completed within six months following the end of the year to which the audit relates.

Additionally, the DOL noted that the amended exemption does not provide relief with respect to the following transactions:

  • the receipt of compensation by an INHAM or any minority owner of the INHAM regarding the provision of investment management services to a plan maintained by the INHAM or an affiliate of the INHAM;
  • the receipt of compensation by an INHAM from the plan for providing services in excess of direct expenses; and
  • transactions engaged in by the INHAM on behalf of other plans that are not maintained by the INHAM or an affiliate of the INHAM.

The amendment to PTE 96-23 is effective April 1, 2011, except for (i) the joint venturer relief, which is retroactive to the original effective date of PTE 96-23 (i.e., April 10, 1996), and (ii) the exemption audit and report requirements, which are effective December 31, 2011.

 

Client Alert 2011-121