WASHINGTON - The Labor Department has proposed a new regulation that might give plan sponsors a quicker way to get approval on certain prohibited transactions.
For the most part, prohibited transaction exemptions usually take about a year to be granted by the Labor Department. The new proposal would take a minimum of 75 days - but of course, there are a couple of catches.
Plan sponsors would have to show the Labor Department had previously granted two "substantially similar" exemptions to other plans; both investments and risks should be similar.
Plan sponsors also would have to show that there is little, if any, risk of abuse or loss to the plan in doing the proposed transaction.
In its proposed regulation issued in the Nov. 27 Federal Register, the Labor Department said many routine transactions are quite similar to those for which individual exemptions already have been granted.
"You can't explicitly rely on the exemption, but you can cite it," said Will Sollee, of counsel at Kilpatrick & Cody, Washington.
Sources said that although this is a step in the right direction, it's not the complete answer in expediting the exemption process. While the process may take as little as 75 days, plan sponsors will have to put together more information to get on this fast track.
"If administered properly, this will be a very good" proposal, said Richard Susko, a partner at Cleary, Gottleib, Steen & Hamilton, New York. But he said demonstrating there is little risk of abuse or loss "may knock out a lot of transactions that should be covered on an expedited basis."
Mr. Susko said more than 28 exemptions have been issued for asset-backed securities. These exemptions are routine and should be granted on an expedited basis; but on the other hand, one cannot say there is no risk to the plan in these investments, he said.
Mr. Susko questioned why plan sponsors need to prove the investment would not pose any risk of loss, because the proposed investment is required to be similar to two approved investments that would have comparable risk.
But Ivan Strasfeld, director of the office of exemption determinations, said the Labor Department wants to make certain there is little or no risk involved.
"We're shooting for something that we'll feel comfortable enough" for an exemption.
Mr. Strasfeld said the plan sponsor's proposed exemption will not be exactly identical to ones already approved by the department; that's why they need two examples of prior exemptions instead of one.
"We want it to be something that's routine," he said.
Some examples include when the plan makes a collateralized loan to the employer and when there is a lease transaction between the plan and the employer. But the loan structure needs to be the same as two previously approved examples. A five-year level principal loan vs. a 10-year balloon loan do not match, he said.
But Mr. Sollee said plan sponsors should be able to rely on independent fiduciaries for some of the routine prohibited transactions.
For these routine procedures, "why should people have to go through this process and then wait 75 days when (the transaction) is time-sensitive?" he said.
Mr. Sollee agreed the Labor Department should be involved in special or unique situations, such as the $10 billion stock/cash contribution by General Motors Corp. finalized in March.
But the independent fiduciary might be the best venue for the typical prohibited transaction, he said.
