On November 7, 2008, the Department of Labor proposed four individual prohibited transaction exemptions, requested by broker-dealers, that would facilitate liquidity for ERISA plans or IRAs holding auction rate securities (ARS) for which the Dutch auction process has failed.

Three of the proposed exemptions involve securities firms that acted as brokers, dealers, and principals in the ARS market. Where the securities firm was broker, dealer, non-bank custodian or fiduciary with respect to ARS held by retirement plans, the proposed exemption would provide ERISA §406(a) and (b) relief for:

  • The sale of the ARS by the plan to its plan sponsor for par value plus any accrued and unpaid interest, in a cash transaction against prompt delivery; 
  • An unconditional exchange of the ARS by the plan to its plan sponsor for (i) certain listed securities, (ii) a U.S. Treasury obligation, (iii) a fixed-income security meeting certain requirements, or (iv) an FDIC-insured certificate of deposit. The exchange must be at fair market value, with the ARS valued again at par value plus any accrued and unpaid interest; or 
  • A loan to the plan in connection with its holding of the ARS from the securities firm (or affiliates) or certain other introducing or clearing broker-dealers, where the loan is documented, unsecured, and guaranteed by the plan sponsor; bears interest at specified rates; and does not exceed in principal amount the total value of ARS held by the plan.

These proposed exemptions include special provisions to the extent the ARS are held in a plan sponsored by the securities firm or in a qualified plan not subject to Title I of ERISA (typically, because it does not cover common-law employees).

The fourth proposed exemption involves a securities firm that acted only as a “downstream” broker in the ARS market and provides ERISA §406(a) relief for the cash purchase by that firm of ARS from client plans at the greater of (i) par value plus accrued and unpaid interest or (ii) fair market value on the date of purchase as determined by an independent appraiser.

The proposed exemptions are individual exemptions; they provide relief in respect only of their respective applicants. Each of the proposed exemptions provides retroactive relief and is subject to a number of conditions, including the following:

  • A fiduciary independent of the securities firm (subject to the special provisions noted above) determines on behalf of the plan to enter into the transaction; 
  • The plan pays no fees or expenses; and 
  • The plan does not waive any rights or claims as a condition of engaging in the transaction.