Securities Exchange Act of 1934 — Section 12(g)
Emeriti Consortium for Retirement Health Solutions
Based on the facts presented, the views of the Division of Corporation Finance and the Division of Investment Management (the "Divisions") are set forth below. Capitalized terms have the same meanings set forth in your letter.
The Division of Corporation Finance will not recommend enforcement action if, in reliance upon your opinions that registration is not required, an Employee-Contribution VEBA offers and sells Participation Interests in the manner described in your letter without compliance with the registration provisions of the 1933 Act and without registration of the Participation Interests under the Exchange Act.
Based on all of the facts and representations in your letter, the Division of Investment Management will not recommend enforcement action to the Commission under Section 7 of the 1940 Act against an Employee-Contribution VEBA if the Employee-Contribution VEBA does not register as an investment company under the 1940 Act.
Your letter represents that Fidelity states that FMTC is a bank within the meaning of the Exchange Act. The Division of Market Regulation has asked us to advise you that the staff has previously declined to answer whether a non-depository trust company is a bank under Section 3(a)(6) of the Exchange Act. See Hawaiian Trust Company, Ltd. (June 7, 1991).
These positions are based on the representations made to the Divisions in your letter. Any different facts or conditions might require the Divisions to reach a different conclusion. Further, this response expresses the Divisions' positions on enforcement action only and does not express any legal conclusions on the questions presented.
For the Division of Corporation Finance,
For the Division of Investment Management,
Anne M. Krauskopf
Susan M. Olson
April 5, 2005
Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Office of the Chief Counsel
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: Emeriti Consortium for Retirement Health Solutions-Request for No-Action Relief in Respect of the Investment Company Act of 1940, as Amended, the Securities Act of 1933, as Amended, and Section 12(g) of the Securities Exchange Act of 1934, as Amended
Ladies and Gentlemen:
On behalf of our client, the Emeriti Consortium for Retirement Health Solutions (the "Consortium"), we seek assurance that the staff (the "Staff") of the Securities and Exchange Commission (the "Commission") will not recommend enforcement action to the Commission if an Employee-Contribution VEBA under a Plan (as further described herein) does not register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act") and participation interests in an Employee-Contribution VEBA under a Plan ("Participation Interests") are offered and sold without registration under the Securities Act of 1933, as amended (the "1933 Act"), or the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The program described below (the "Program") is a tax-advantaged method of providing retiree health benefits to former faculty, staff, administrators and employees ("participants") of colleges, universities, and other higher education-related tax-exempt organizations (collectively hereinafter called "Colleges"), all of which are not-for-profit entities which are tax exempt under Section 501(c)(3) or another section of the Internal Revenue Code of 1986, as amended (the "Code").1
The Program contains three intertwined components: an employee welfare benefit plan providing medical benefits for former employees and their spouses and dependents, trust-based funding mechanisms to receive plan contributions from sponsoring employers and participating employees, and an educational program to assist employees with integrated planning for post-age 65 health needs in retirement. To participate in the Program, each College will adopt its own retiree medical plan ("Plan") which will be funded through two trusts, one of which is the Employee-Contribution VEBA. The Plan and trusts will be based upon model documents. Each of the trusts will qualify under Code Section 501(c)(9) as a voluntary employees' beneficiary association trust ("VEBA").2
The Consortium will oversee the operation of the Program. The Consortium will provide the model documents, provide the educational program, and otherwise design, control, and oversee the operation of the Program.
The Consortium is an Illinois non-member, non-stock, not-for-profit corporation. The Consortium has a small number of full time employees, a board of directors of distinguished individuals associated with higher education, and an advisory council primarily composed of representatives of Colleges which participate or may participate in the Program. Upon termination of the Consortium, any remaining assets of the Consortium are required to be distributed to one or more charitable organizations.3
The Consortium will function principally as a service provider to the Plans. The Consortium will retain outside vendors, including one or more insurers (the "Insurer") and a third-party administrator (the "TPA"), to provide the necessary administrative support to maintain the Program in compliance with the requirements of the Code and ERISA4 for plans of this type, including investment management and satisfaction of the reporting and disclosure requirements of ERISA. As of the date of this letter the Insurer is initially expected to be Aetna Life Insurance Company ("Aetna") and the TPA is initially expected to be Fidelity Investment Institutional Operations Company, Inc. together with one or more of its affiliates (collectively "Fidelity").5 Insurance coverage will be offered only in states in which the Insurer has a certificate of authority or an arrangement with a licensed carrier.6
The Consortium has chosen the investment alternatives from registered mutual funds offered by Fidelity.7 (It is possible that at a later time the investment alternatives offered through the Program will be offered by an entity other than Fidelity. However, all investment alternatives that are offered through the Program will be registered under the 1940 Act and the shares will be registered under the 1933 Act.)
The Consortium will be an ERISA fiduciary of the Plan for purposes of providing a model investment policy and selecting and monitoring the Insurer, the TPA, a COBRA8 administrator (initially expected to be Aetna), a company to provide group-term life insurance (initially expected to be The Hartford), and any other service providers. The Colleges as sponsors, named fiduciaries, and administrators of the Plans will also be ERISA fiduciaries of the Plans. The trustee may be an ERISA fiduciary of the Plans.9
Colleges may become members of the Program by entering into an agreement with the Consortium and adopting the model plan provided by the Consortium. The Consortium's operating expenses, along with other Program expenses, will be paid by enrollment fees and annual Program membership fees based on the number of employees covered by the Plans.10
Each College will establish two VEBAs, one to receive and hold contributions made to the Plan by the College, and the other to receive and hold contributions made by individual participants. Each VEBA will be approved as tax-exempt by the Internal Revenue Service. We understand that (i) neither Colleges nor their employees will receive compensation that is contingent upon or determined as a percentage of contributions made, investments selected or other transactions effected in participants' accounts under a Plan; and (ii) the TPA (not the Colleges or the Consortium) will perform all services relating to the receipt of participant investment instructions and the processing of transactions in participants' accounts under a Plan.
The College will make contributions to an employer-contribution VEBA to fund its portion of the College's Plan. Participating employees and former employees of each College may make voluntary after-tax contributions to an employee-contribution VEBA trust ("Employee-Contribution VEBA").11 Each VEBA will maintain a separate account for the assets of each participant. Employee and employer contributions will not pass through the Consortium. Rather, contributions will be under the control of the trustee, which will be unaffiliated with the Consortium or any of the Consortium's employees.
Earnings and losses will accrue on the account balances within each VEBA. Each Plan and its associated VEBAs will be designed such that: (i) initial eligibility and continued participation is limited to employees and former employees (and their spouses and dependents only as beneficiaries of the employee) of the College; (ii) earnings on contributions to the VEBAs will not inure to the benefit of any individual or private shareholder except through payment of welfare benefits; (iii) all funds in the VEBAs will be used only for medical benefits (paid from the participant's account in each VEBA) during the lives of the participant and all other beneficiaries; and (iv) at the election of the College, forfeitures in the employer-contribution VEBA can be used to pay life-insurance premiums. The life insurance would provide a fixed amount of life-insurance coverage for all participants in the employer-contribution VEBA and the coverage would not be related to a participant's account balance or whether there is a forfeiture of the participant's account.
Following the participant's retirement, the balances in the individual accounts held for each participant in a College's Plan will be available to pay for health-insurance premiums and other qualifying medical expenses. A portion of each benefit payment (i.e., premium payments or reimbursement of qualifying medical expenses) will be drawn from each of the participant's VEBA accounts on a pro-rata basis based on total assets in each of the accounts As explained below, any funds in an individual participant's account in each VEBA not used for medical benefits will be forfeited.
The only compensation the Consortium will receive in exchange for its activities under the Program will be from the Colleges and/or participants (not the TPA). The Colleges will pay a one-time initial enrollment fee after they sign the membership agreements, which fee is in exchange for access to the Program and the model documents, for initial and ongoing participant educational services, and for such other administrative services as the Consortium is obligated to provide. In addition, participants are charged a fixed monthly fee for administrative and ongoing participant educational services. Colleges may elect to pay this fixed monthly fee in whole or in part on participants' behalf. If Colleges elect for participants to pay a portion of this fee, the Colleges will direct the TPA to debit the participant portion from the participant's accounts. If there is no balance in any of the participant's accounts, the fee can be paid by ACH transfer.12 The Colleges will be billed directly for their portions of this fee, if any. Neither of these fees is connected to the amounts contributed to a Plan by Colleges or participants, transactions in participants' accounts, the investment selections made by Colleges or participants or the amount of compensation received by the TPA for services and investments provided under the Plans. Moreover, neither the Consortium nor any of its employees will receive any compensation from or serve as agents of the TPA or any other entity with respect to services performed in connection with the Program.
The TPA charges a quarterly per-participant fee that is paid from participants' accounts in exchange for services provided to the Plans. The TPA will be the entity solely responsible for processing investment transactions for participants, and all appropriate documents will clearly reflect this. All documents relating to the processing of investment transactions for participants will be created by the TPA. Participants who wish to make transactions in their accounts will either access the TPA's webpage or automated phone system or contact a live TPA phone representative.13 The TPA will be solely responsible for effectuating all such transaction requests. The Consortium will not receive transaction requests or instructions from participants or route requests or instructions from participants to the TPA.
The Insurer charges monthly premiums when insurance coverage is in force that are paid from the participant's accounts or by ACH transfer.
The Consortium intends to enter into agreements with the Insurer to insure the medical aspects of the Program and provide for medical claims administration; and with the TPA to provide trust, administrative, investment and other services. Expenses incurred by the individual Plans will be paid directly to these and any other vendors.
The health care benefits will be provided primarily through a post-age 65 group insurance policy integrating with and supplementing Medicare coverage. Coverage may vary from state to state based on state regulatory requirements. Participants will have two choices of how to receive health care. First, upon enrollment in Medicare on or after age 65, a participant may make a one-time election to participate in the Insurer's insurance coverage which is being offered in the Participant's state. If a participant elects to participate in the insurance coverage, the funds in the participant's accounts in the VEBAs are used to pay the premiums for the coverage. It is currently contemplated that this insurance will be provided through a policy issued to a trust maintained by the Insurer. Participants are not required to participate in the Insurer's coverage. Second, after retirement, participants may use the funds in their accounts to get reimbursement for other qualifying medical expenses, and to pay for premiums for health insurance coverage from vendors other than the Insurer.14 The decision to participate in the insurance coverage offered by the Insurer does not preclude the participant's use of funds in his or her accounts for reimbursement of qualifying medical expenses. For example, if the insurance imposes a deductible for a qualifying medical expense, the participant could be reimbursed for the deductible from his or her accounts.
Individual participants will be permitted to direct the investment of the funds held in their accounts among mutual funds available through the Program. Amounts will be invested in, and redeemed from, a registered mutual fund when the amount or the redemption order is received by the TPA, in accordance with the requirements of Rule 22c-1 under the 1940 Act.15 It is currently contemplated that the fund choices initially will be nine life-cycle funds (mutual funds that are specifically designed for different retirement dates), an income fund, and a money-market fund. The number and kind of funds available under the Plans may change before the Program's effective date and may vary over time, but each fund will be a registered mutual fund and all Plans will offer the same funds or a subset of the same funds.
After retirement, a participant will also have the choice of purchasing one or more fixed annuity contracts to be held in the participant's accounts in the VEBA. Such annuity contracts will pay a guaranteed stream of income into the participant's accounts for the purpose of funding the health care benefits available under the College's Plan. It is currently contemplated that the annuities will be offered by an affiliate of the TPA.
Under each Plan, the College will make employer contributions to the employer-contribution VEBA. The amounts received will be allocated to individual accounts for Plan participants. The Plans will require the participant to direct the investment of employer contributions allocated to a participant's account. Colleges can elect to have employer contributions vest according to different vesting schedules.
Based on actuarial projections, the Consortium anticipates that the account balance in the employer-contribution VEBA will be exhausted before the death of the participant and his or her spouse or other covered dependents.16 In some cases, such as premature death, however, a residual account balance may remain at the death of the last covered individual. All residual amounts will be retained in the employer-contribution VEBA in a single forfeiture account. The balance in the forfeiture account can be used to reduce future employer contributions, allocated among the accounts of other participants in the VEBA or used to pay life-insurance premiums if the College has elected to provide an ancillary life-insurance benefit in the employer-contribution VEBA as described above.
Each College may structure its Plan to permit employees to make voluntary contributions on an after-tax basis to a separate Employee-Contribution VEBA. Voluntary employee contributions will be fully vested. Consistent with the tax rules for participation in VEBAs, former employees who have an account balance in the Employee-Contribution VEBA at termination of employment and retirees may make voluntary after-tax contributions into the Employee-Contribution VEBA after termination of employment.
The Employee-Contribution VEBA will have an account for each participant. Participants will direct the investment of the amounts in this account.
The Consortium has the authority under each College's Plan to impose annual and lifetime limits on employee contributions with the goal that no residual is likely to remain at the death of the last individual with rights under an account. Any actual remaining residual will be forfeited and reallocated to the accounts of other participants in the Employee-Contribution VEBA.
Each College will have the choice under the Program to establish a separate retiree health plan (the "Optional Plan"). The Optional Plan would be used only to provide fully insured medical benefits and not for the reimbursement of medical expenses. It is currently contemplated that the insurance coverage available under the Optional Plan would be offered by the Insurer under the same policies as used for the Plans and would provide essentially the same coverage options and terms. It is possible that other terms or insurance provided by a different insurer might be available at a later time.
The College would specify which employees or categories of employees would be eligible to participate in the Optional Plan. All employees are potentially eligible, but it is expected that a College would use the Optional Plan to provide insured benefits to key employees, tenured faculty, and selected faculty and administrators.17 All employees eligible to participate in the Optional Plan would also be eligible to participate in the employer-contribution VEBA and the Employee-Contribution VEBA under the Plan, except that a College may specify that key employees eligible to participate in the Optional Plan are not eligible to participate in the employer-contribution VEBA under the Plan.
Each participant in the Optional Plan would have a notional account in his or her name in the Optional Plan with respect to amounts credited by the College for his or her benefit. Each participant would direct the "deemed" investment of his or her credited balance in the Optional Plan among the same investment alternatives and in the same manner as under the Plans. The College would be directly responsible for the payment of insurance premiums up to the full balance of each participant's notional account. If an employee is eligible under the Optional Plan and has no balance in the VEBAs, the employee would be able to pay insurance premiums through ACH transfers.18
The College could establish one or more grantor trusts (the "Optional Trust"), which would not be VEBAs, to offset the College's liabilities incurred under the Optional Plan. It is contemplated that FMTC would initially serve as the trustee of the Optional Trust and that FIIOC would handle the recordkeeping for the notional accounts in the Optional Plan in the same manner as the VEBA trusts under the Plan. However, the Optional Trust trustee may be unassociated with the TPA. The Optional Trust would be funded solely by College contributions. Employees would not be permitted to make contributions into the Optional Trust. The College, and not the participants, would have the power to direct the trustee with respect to investment of assets held in the Optional Trust, although the College could elect to use participant "deemed" investment elections in the notional accounts as the basis for determining what investment directions it gives to the trustee. As a grantor trust, the Optional Trust would be dedicated to offsetting the College's Optional Plan liabilities, but the assets of the Optional Trust would remain subject to the claims of creditors of the College. The College would be free to satisfy its obligations under the Optional Plan from sources other than the Optional Trust and, if the College decides to terminate the Optional Plan for any reason other than the College's insolvency, the assets of the Optional Trust would revert to the College.
Activity notices ("Notices") reflecting certain participant-initiated activity will be distributed directly to participants. Notices would be generated after certain events, including, but not limited to, a participant's reallocation of his or her Plan assets between available investment alternatives. A Notice generated as a result of such a reallocation would be dated as of the date of the transaction and would show the identity and price of the mutual fund shares involved in the transaction. Certain events, including the contribution of funds into or the disbursement of funds out of an account, would not generate a Notice. Participants transacting through the internet will have the ability to affirmatively select whether to receive Notices either electronically or through the mail. Participants who transact through a phone representative or the automated phone system will receive a paper Notice through the mail.
Account statements will be distributed to participants once a year through the mail. The annual account statement will show all activity in the participant's account(s) during that period. The statement will include summary information about such things as fees charged against the account as well as contributions into and disbursements from the account. The statement will also include details about each transaction in the account, including a descriptor that identifies the type of transaction, the date of the event, the amount involved, the fund(s) involved, and the net asset value of the fund(s) on the date of the event. At the present time, a copy of the statement will not be available online. However, a participant can obtain the information provided on the statement, albeit in a different format, via the TPA's website or by speaking to a TPA phone representative. lt is contemplated that at a later time it may be feasible for participants to affirmatively elect to receive electronic statements in place of paper by consenting to electronic delivery of these documents.
As part of the enrollment kit, a participant will be provided with the prospectus for each of the mutual funds offered under a Plan. A participant will also receive a mutual- fund prospectus upon first allocating a portion of his or her account balance to a particular mutual fund, provided that, during the preceding 30 days, a copy of the prospectus has not already been sent to the participant (for example, in response to a request for information about a particular fund) and the participant does not represent to the TPA that he or she has previously received a copy of the prospectus. A participant can also request a prospectus at any time by calling a phone representative. Participants will receive prospectus supplements, updated prospectuses, mutual-fund semi-annual and annual reports as well as any proxy statements for so long as they maintain their allocation in that fund.19 Participants will also have access to a website where current versions of some of these documents are available at any time. Participants can also request current copies of these documents by calling a phone representative.20 In accordance with the Plan, the TPA will pass through to participants all proxy voting for the mutual-funds shares held in the employer-contribution VEBA and the Employee-Contribution VEBA, but not in the Optional Plan.
Because the Plans will be subject to ERISA, each participant will receive a summary plan description ("SPD"). A copy of the current version of the SPD is attached to this request. There will be a separate SPD for the Optional Plan. Under ERISA, the SPD is required to be updated annually for any significant change by means of a summary of material modifications. A new SPD is required every 5 years if there have been changes or every 10 years if there have not been changes.
The SPD for the Plan will contain information about eligibility and participation in the Plan, employer contributions and employee after-tax contributions, as well as the investment of accounts and the fees associated with an account and various other matters. The SPD for the Optional Plan will be similar in terms of scope of coverage in so far as the Optional Plan provides similar benefits. However, the SPD for the Optional Plan will make it clear that employee contributions and reimbursement benefits are not permitted under the Optional Plan.
The SPD for the Plan, the Consortium website and other applicable documents will contain a legend to the effect that interests in the Employee-Contribution VEBA have not been registered under the 1933 Act and that the Employee-Contribution VEBA has not been registered under the 1940 Act.
A Plan participant will have the right to receive a copy of the Plan on request. An Optional Plan participant will have the right to receive a copy of the Optional Plan on request.
Each Plan and Optional Plan will file a Form 5500 annually with the Internal Revenue Service ("IRS") and Department of Labor ("DOL"). Each participant will receive a summary annual report that summarizes the financial information from the Form 5500. A Plan or Optional Plan participant will have the right to receive a copy of the Form 5500 on request.
Each VEBA will file a Form 990 annually with the IRS. Each participant will have the right to receive a copy of the Form 990 on request.
After the death of a participant, the same information will be available in the same manner to any beneficiary who is entitled to benefits under the Plan or the Optional Plan.
Each College's Plan and Optional Plan will be an "employee welfare benefit plan" under ERISA, because it will be established and maintained by an employer (the College) for the purpose of providing medical benefits to former employees and their spouses and dependents.21 The Program and the Colleges' Plans and Optional Plans must comply with the provisions of ERISA, including those ERISA requirements pertaining to fiduciary obligations, reporting, and disclosure. Certain ERISA obligations will be carried out by the Consortium through outside vendors, including ERISA's reporting, disclosure, and investment policy requirements. However, ultimate responsibility for compliance with ERISA will remain with the Colleges.
Plans established by certain Colleges that are established or maintained by religious organizations may be exempt from ERISA and some provisions of the Code.22 The Program will provide each Plan and Optional Plan with the same reports and disclosure that would be provided if ERISA applied. To participate in the Program, a College would be required to make an election that its Plan and Optional Plan are subject to ERISA. Although the legal effect of such an election is unsettled, the Program intends to treat each Plan and Optional Plan as if they are subject to ERISA, including the remedy provisions of ERISA as discussed below.
The Plans are employee welfare benefit plans subject to ERISA. ERISA provides a comprehensive regulatory scheme for the regulation of employee welfare benefit plans. The scope of ERISA extends broadly to cover fiduciaries and other parties in interest (such as service providers) with respect to ERISA plans.23 In addition, various important remedies under the federal securities laws may also be applicable to the Plans, including the antifraud provisions of the 1933 Act and the Exchange Act.
ERISA Section 502(a)(2) allows a participant, fiduciary or beneficiary to bring suit against a fiduciary for breach of fiduciary duty under ERISA Section 409. ERISA Section 502(a)(3) allows a participant, fiduciary or beneficiary to bring suit to enjoin any act that violates ERISA or obtain equitable relief to redress a violation of ERISA. The fiduciaries of the Plans include the College as the sponsor, named fiduciary, and administrator of the Plan; and the Consortium to the extent that it is delegated duties of the administrator of the Plan.24 The Plan's trustee may also be an ERISA fiduciary of the Plan.25 Certain remedies may also be available against parties in interest, such as the TPA and the Consortium. Any recovery would go to the Plan and participants' accounts, not to individual participants directly.
The offering of shares of the investment alternatives will be registered under the 1933 Act. Potential remedies under the 1933 Act include (1) Section 11, which provides a rescission remedy for securities sold under a registration statement where there is a material misstatement or omission; and (2) Section 12(a)(2), which provides a rescission-type remedy for securities sold under a prospectus which contains a material misstatement or as to which there is an omission of a material fact. The shares in the investment alternatives are subject to Rule 10b-5 under the Exchange Act, which makes it unlawful to employ any device to defraud, to make any untrue statement of a material fact or to engage in any transaction that operates as a fraud in the offer or sale of any security and which provides for recovery of damages.Other securities-law remedies may be available under the Exchange Act, such as Rule 14a-9, or under the 1940 Act, such as Section 36(b). In most jurisdictions and most circumstances, under ERISA, remedies with respect to the investment alternatives could only be pursued by the Plan on behalf of all affected participants.26
Subject to the grant of the relief requested herein, Participation Interests are securities that will not be registered under the 1933 Act and thus would not be subject to the Section 11 remedy. The Participation Interests will be subject to the antifraud provisions of the federal securities laws.27
The principal aspect of the Program that has resulted in this submission is the application of the 1933 Act to the Participation Interests and the application of the 1940 Act to the Employee-Contribution VEBAs.
The Plans will be employee welfare benefit plans. The Staff has previously taken the position that participation interests in some employee welfare benefit or similar plans do not create a security that needs to be registered.28 The Staff has also issued several letters with respect to registration of welfare benefit plans (and plan participation interests) funded by VEBAs.29 Where relief comparable to the relief requested herein was granted, these letters did not involve defined contribution-type plans.
The Plans are different from most welfare benefit plans and the arrangements discussed in these no action letters. These differences are primarily a result of the defined contribution nature of the Plans and the self-directed investment of contributions in registered mutual funds. Therefore, it is unclear whether the Staff's prior positions would apply to the Participation Interests and the Employee-Contribution VEBA under a Plan.
However, each of these characteristics which might differentiate the Plan from most other welfare benefit plans is identical to a characteristic commonly found in a Code Section 403(b) plan. Accordingly, we are of the opinion that the Employee-Contribution VEBAs and Participation Interests are sufficiently like Code Section 403(b) plans and participation interests in 403(b) plans that the Staff's prior position about 403(b) plans should apply to the Employee-Contribution VEBAs and the Participation Interests.
In our opinion, the SEC's approach to Code Section 403(b) plans provides compelling support for the requested relief. Code Section 403(b) permits public school systems and charitable organizations to enter into deferred compensation arrangements with their employees that are funded through the purchase of annuity contracts or mutual-fund shares for the covered employees which are held in trusts or custodial accounts. Variable annuity contracts are securities, as are mutual-fund shares, and both are therefore subject to the registration and antifraud provisions of the 1933 Act. Participation interests in Code Section 403(b) plans that are both voluntary and contributory on the part of participating employees would involve securities for the reasons outlined in SEC Release 33-6188. As a matter of administrative practice, however, the Staff does not require such interests to be registered. The antifraud provisions, however, continue to apply to the offer and sale of interests in these types of plans. Release 33-6188, at Section II.A.5(c).
The Staff's position with respect to Code Section 403(b) plans appears to be related in large part to the fact that registered mutual funds are the investment alternatives used. ERISA first authorized the use of mutual funds in a custodial account for a 403(b) plan. Previously, a 403(b) plan had to be under an annuity contract. Shortly after the enactment of ERISA, the Staff took a no-action position regarding 403(b) plans invested in mutual funds:
". . . this Division would not recommend any action to the Commission if Section 403(b) accounts funded solely by specific mutual fund shares or Section 408 plans funded solely with specific mutual fund shares are offered and sold to the public without registration under the Securities Act. In addition, this Division has been advised by the Division of Investment Management Regulation that, in the circumstances described in your letter and summarized above, that Division would not recommend any action to the Commission if such 403(b) plans and Section 408 plans funded solely with specific mutual funds shares are created without registration under the Investment Company Act of 1940, provided that no custodian or trustee has investment discretion with respect to the plan." Investment Company Institute (Oct. 21, 1974).30
This position was confirmed following a 1979 amendment to Code Section 403(b). Investment Company Institute (May 23, 1979).
We have located only one no-action letter issued to an individual 403(b) plan sponsor. This letter was issued in 1979 to the Cleveland Clinic Foundation (Aug. 12, 1979). In that letter, the Staff noted as significant:
The Staff's position on 403(b) plans should be followed in the case of the Participation Interests and the Employee-Contribution VEBAs. The following essential features of a Plan are identical to or substantially similar to a typical 403(b) plan:
The Employee-Contribution VEBAs and the Participation Interests share a number of other common features with 403(b) plans. These commonalities provide support for parallel treatment of the Participant Interests and Employee-Contribution VEBAs with 403(b) plans. The common features include the following:
The Participation Interests and Employee-Contribution VEBAs involve the same essential characteristic that led to the Staff's position on 403(b) plans: underlying investment alternatives in the Employee-Contribution VEBAs are registered mutual funds.33 In addition, the criteria which were noted by the Staff as important in the Cleveland Clinic Foundation letter are satisfied here: the VEBAs exist to satisfy tax requirements, the accounts provide only custodial service, participants are not granted access to investments to which they would not otherwise have access, and the TPA does not exercise investment discretion on behalf of participants.
The differences between the Participation Interests and Employee-Contribution VEBAs, on the one hand, and 403(b) plans on the other do not justify a different result from the Staff position for 403(b) plans. Primarily, the nature of the Plans as welfare benefit plans makes them even less susceptible to abuse than 403(b) plans. In 403(b) plans, the participants have general use of the funds upon retirement. In the Plans, participants can only use the funds in their accounts for welfare benefits.34 A 403(b) plan typically uses a custodial account while the Plans use a trust to hold plan assets, similar to a 401(k) plan. Additionally, the Plans will be subject to the reporting and disclosure requirements of ERISA35 while a 403(b) plan may or may not be subject to these requirements. For example, a 403(b) annuity plan is not subject to ERISA reporting and disclosure rules if it is funded solely by voluntary employee contributions and the employer has a limited administrative role.36 The participants in the Plans would be benefited by these additional requirements. Accordingly, this situation presents a compelling case for the Staff to extend to Participation Interests and the Employee-Contribution VEBAs the administrative relief accorded to 403(b) plans and not to require registration of the Participation Interests and Employee-Contribution VEBAs under the 1933 Act or 1940 Act respectively.
The Staff's position on employer-sponsored individual retirement accounts ("IRAs") provides further support for the requested no action relief. Under that position, so long as mutual funds are offered pursuant to current prospectuses with appropriate disclosures about the IRAs, no separate registration of the IRA plan is necessary.37 The Staff position covers employer-sponsored master-trust or prototype plan arrangements for IRAs.38 As with the Plan, an employer can establish an IRA plan with a single trust with a separate IRA account in the trust for each individual participant. Investment discretion is normally vested in each account holder. Participants usually are afforded several investment alternatives. The Participation Interests and the Employee-Contribution VEBAs are similar to employer-sponsored IRA plans and participation interests in such plans in the following significant ways:
For these purposes, the Participation Interests and the Employee-Contribution VEBAs are so similar to employer-sponsored master trust IRAs that the same no-action position should apply to both.
Public policy interests would not be served by requiring registration of the Participation Interests or the Employee-Contribution VEBAs for the following reasons.
Prior to a participant's retirement, all investment alternatives under the Employee-Contribution VEBAs will be mutual funds. Each of these funds will be registered under the 1933 Act and the 1940 Act. As a result, extensive disclosure will be made available to the participants about each of the mutual funds which will be offered as part of the Plan and each of these funds will be subject to the substantive regulatory provisions of the 1933 Act and the 1940 Act. An explanation of the information to be provided to participants is contained above. All participants will be sent the prospectus documents and other information by the TPA in connection with their investment choices. In addition, each of these funds will be managed by an investment adviser or investment advisers which are registered under and subject to the Investment Advisers Act of 1940, as amended. At retirement, a participant may continue investing in the mutual funds or may purchase annuities as described above.
In addition, the Plans are welfare benefit plans subject to all applicable ERISA provisions.39 The participants will receive extensive information about the Plan in which they participate. As an ERISA welfare benefit plan, a Plan will provide each participant with an SPD that explains all of the important provisions of the Plan. Each year, a participant also will receive a summary annual report on the Plan's financial status. Under ERISA, a participant may request and receive a copy of the Plan, including the trusts, and the Plan's annual report on Form 5500. A participant will receive annual statements of the value of the participant's accounts in the Plan, including the Employee-Contribution VEBA.
In addition, a College that is established or maintained by a religious organization and which is exempt from ERISA and some provisions of the Code would be required (i) to provide the same disclosure and reports that would be provided if ERISA applied and (ii) to make an election that its Plan is subject to ERISA.40
For these reasons, requiring registration of the Participation Interests under the 1933 Act or requiring registration of the Employee-Contribution VEBAs under the 1940 Act would not provide any significantly greater level of protection to the participants. Requiring registration of the Participation Interests and Employee-Contribution VEBAs would only increase the cost of the Program to participants, without any meaningful additional protection to those participants. Therefore, public policy considerations should not require registration.
The Consortium does not know how many assets each Employee-Contribution VEBA will hold and how many participants will hold Participation Interests under each Employee-Contribution VEBA. But even if the value of an Employee-Contribution VEBA's assets and the number of participants holding Participation Interests were to meet the threshold requirements of Section 12(g) of the Exchange Act, we are of the opinion that registration of any such Participation Interests under the Exchange Act should not be required.
Participants can use the funds in their Plan accounts solely for welfare benefits. The Participation Interests will not be transferable (except in the event of a participant's death, in which case the participant's account can be accessed by his or her spouse (or qualifying domestic partner) and/or certain dependent relatives, or in the case of a qualified domestic relations order under Code Section 414(p)). Any remaining residual will be forfeited and reallocated to the accounts of other participants in the Employee-Contribution VEBA. The Participation Interests will not be listed on any exchange or publicly or privately traded. Since the Participation Interests are personal rights of the participants and their beneficiaries, and since the right to make voluntary contributions arises only in connection with an employment relationship with one of the Colleges, there will be no public investors or public trading interest or market in any of the Participation Interests. Furthermore, participants who are eligible to make voluntary contributions will already receive extensive disclosures about the Program and their investments (including SPDs, Notices, account statements, mutual fund prospectuses, mutual fund prospectus supplements, updated mutual fund prospectuses, semi-annual and annual mutual fund reports, and mutual fund proxy statements) as discussed in Section I above.
For these reasons, in our opinion nonregistration of the Participation Interests under the Exchange Act would comport with the policy and intent of the Exchange Act.
In accordance with Release No. 33-6269 (available December 5, 1980), seven additional copies of this letter are enclosed. Please feel free to contact David H. Pankey at 202-857-1716 or Steven D. Kittrell at 202-857-1701 if you have any questions or comments concerning this request. We would be pleased to meet with the Staff to explain the Program and our analysis in more detail and to answer any questions which the Staff might have about these matters. We request a conference with the Staff to discuss this request if the Staff does not agree with the analysis contained in this request letter and in advance of any adverse determination.
/s/ David H. Pankey
/s/ Steven D. Kittrell
Prospective Member Institutions
Agnes Scott College
Berklee College of Music
Bryn Mawr College
Case Western Reserve University
Claremont McKenna College
Claremont Graduate University
Claremont University Consortium
College of St. Benedict
College of the Holy Cross
College of Wooster
*Emeriti Consortium for Retirement Health Solutions
Emory and Henry College
*Five Colleges, Inc.
Franklin and Marshall College
Fresno Pacific University
George Washington University
*Georgia Foundation for Independent Colleges, Inc., The
Gustavus Adolphus College
Harvey Mudd College
Hewlett Foundation, The William and Flora
Hobart and William Smith Colleges
Illinois Wesleyan University
Keck Graduate Institute
Lake Forest College
Lebanon Valley College
Le Moyne College
Lewis and Clark College
Lincoln Memorial University
Lindsey Wilson College
Marymount Manhattan College
Mars Hill College
Mellon Foundation, The Andrew W.
Mount Holyoke College
New England College of Optometry
New England Conservatory
Olin College of Engineering
Olivet Nazarene University
Pittsburgh Theological Seminary
Rensselaer Polytechnic Institute
Rochester Institute of Technology
Rose-Hulman Institute of Technology
Saint Anselm College
Saint John's University (MN)
Saint Louis University
*Saint Mary's College (IN)
Saint Mary's College (CA)
Saint Michael's College
*Sarah Lawrence College
Seattle Pacific University
Southern Methodist University
Springfield College (MA)
St. John's College (MD)
St. Lawrence University
*St. Olaf College
Texas Christian University
Thomas M. Cooley Law School
Trinity College (CT)
Trinity University (TX)
Union College (NY)
*Union Theological Seminary
University of Chicago
University of Hartford
University of Notre Dame
University of the Pacific
University of Pennsylvania
University of Portland
University of Puget Sound
University of the Redlands
University of San Francisco
University of the Sciences (PA)
*University of the South
Vermont Law School
Washington College (MD)
Washington and Jefferson College
Washington and Lee University
Wentworth Institute of Technology
West Virginia Wesleyan College
Westminster College (MO)
Westminster College (PA)
Wheaton College (MA)
As of the date of the no-action letter request, the preceding prospective member institutions have signed non-binding statements of interest in the Program. Asterisked institutions have also signed non-binding declarations of membership in the Program. None of these institutions has yet signed or will be allowed to sign a binding Program membership contract before the requested relief is granted, but it is anticipated that many will choose to do so if and when the relief requested is granted. Other eligible institutions not on this list may choose to sign binding Program membership contracts in the future.
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