The Department of Labor (DOL) on June 23 announced that it is reopening the comment period for amendments to class exemptions from prohibited transaction rules set forth in ERISA and the Internal Revenue Code. The proposed amendments, which were originally proposed in 2013, are relevant to certain transactions involving employee benefit plans and IRAs and would remove credit ratings references and create better alignment with the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The DOL’s Employee Benefits Security Administration received three comments on the amendments in 2013, but it did not finalize the amendments. Since then, other regulators have finalized changes to the treatment of credit ratings under their regulatory regimes.
Acting Assistant Secretary of Labor for Employee Benefits Security Ali Khawar said in a press release that the DOL “wants to ensure all interested parties have an opportunity to provide comments or new information to consider as we finalize the proposal.”
What the Amendments Do
The amendments comply with Section 939A of the Dodd-Frank, which requires the DOL to remove any references to—or requirements of reliance on—credit ratings from its class exemptions and substitute standards of creditworthiness it determines to be appropriate.
More specifically, the proposed amendments relate to credit rating references in the conditions of Class Prohibited Transaction Exemptions 75-1, 80-83, 81-8, 95-60, 97-41 and 2006-16. Each class exemption allows certain parties to engage in a financial transaction involving a plan or IRA, and in each class exemption the DOL conditioned the exemption on the security, other financial product, or its issuer or guarantor receiving a specified minimum credit rating. The credit rating requirements range from a rating in one of the four highest generic categories of credit ratings to a rating in one of the two highest generic categories, from a nationally recognized statistical rating organization. The credit rating conditions are one part of the safeguards established in each class exemption to protect the interests of plans, their participants and beneficiaries, and IRA owners entering into transactions covered by the class exemptions.
The Proposed Amendments
In the 2013 Proposal, the DOL set forth the following approaches to the various credit ratings requirements in the class exemptions:
For PTEs 75-1, Parts III and IV, and 80-83, which each conditioned the exemption in part on certain securities involved being “rated in one of the four highest rating categories by at least one nationally recognized statistical rating organization,” the DOL proposed to replace this condition with a requirement that the securities be “(i) subject to no greater than moderate credit risk and (ii) sufficiently liquid that such securities can be sold at or near their fair market value within a reasonably short period of time.”
For PTE 81-8, which permits employee benefit plans and IRAs to invest in commercial paper that possesses a rating in “one of the three highest rating categories by at least one nationally recognized statistical rating service,” the DOL proposed instead to require the commercial paper to be “(i) subject to a minimal or low amount of credit risk based on factors pertaining to credit quality and the issuer’s ability to meet its short-term financial obligations and (ii) sufficiently liquid that such securities can be sold at or near their fair market value within a reasonably short period of time.”
PTE 2006-16 allows securities lending transactions secured by foreign collateral including (1) foreign sovereign debt securities if the issue, issuer or guarantor has a rating in one of the two highest rating categories from a nationally recognized statistical rating organization, and (2) irrevocable letters of credit issued by foreign banks with a counterparty rating of investment grade or better as determined by a nationally recognized statistical rating organization. The DOL proposed replacing the requirement for foreign sovereign debt securities issue, issuer or guarantor to be in the two highest ratings categories with a requirement that they be “(i) subject to a minimal amount of credit risk, and (ii) sufficiently liquid that such securities can be sold at or near their fair market value in the ordinary course of business within seven calendar days.”
Finally, the DOL proposed eliminating certain references to credit ratings in PTEs 95-60 and 97-41 and replacing them with references to credit quality.
Comments Sought
Since eight years have passed since the proposal was originally published in 2013, and to ensure that all interested parties have an opportunity to provide comments or new information, the DOL seeks comments on all aspects of the 2013 proposal.
Specifically, the DOL seeks comment regarding the following questions:
- Are changes to the 2013 proposal’s standards of creditworthiness necessary as a result of the Securities and Exchange Commission’s finalization of amendments to Rules 2a-7 and 5b-3?
- Are changes to the 2013 proposal’s standards of creditworthiness necessary as a result of other regulators’ actions removing references to credit ratings?
- Have other regulators developed standards the DOL should incorporate into the class exemptions?
- Are there particular challenges in the ERISA context to implementing any of those standards?
- Are changes to the 2013 proposal’s standards of creditworthiness necessary in light of business or other economic developments since the DOL proposed changes to the class exemptions in 2013?
- Should references to “fair market value” in the 2013 proposal’s standards of creditworthiness be replaced with references to “carrying value”? If so, why?
- Do commenters recommend that the DOL require financial institutions to adopt policies and procedures for compliance with the standards of creditworthiness? If so, a description of the types of specific policies and procedures would be helpful.
- Do financial institutions already have similar policies and procedures in place?
- Will 180 days provide sufficient time for financial institutions that currently do not currently such policies and procedures in place to adopt them?
Submitting Comments
The DOL will accept comments on the amendments for 45 days after the announcement is published in the Federal Register; that is scheduled for June 24, 2021.
All written comments and requests for a public hearing concerning the proposed amendments should be sent to the Employee Benefits Security Administration, Office of Exemption Determinations, U.S. Department of Labor through the Federal eRulemaking Portal and identified by Application No. D-11681: Federal eRulemaking Portal: http://www.regulations.gov at Docket ID number: EBSA 2012–0013 (follow the instructions for submitting comments).
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