On November 20, 2007, the Department of Labor (“DOL”) proposed to expand the categories of assets that can be accepted by an employee benefit plan in settlement of litigation under Prohibited Transaction Class Exemption (“PTE”) 2003-39. (Click here for a copy.) That ERISA class exemption currently permits receipt of cash by a plan when releasing its claims to settle actual or threatened litigation against a related party (a “party in interest”), and any related extension of credit for installment payments. Based on input from practitioners and independent fiduciaries and its own review of ERISA class action settlements, DOL concluded that there are circumstances where plan participants and beneficiaries are well-served by settlements involving other forms of consideration. Accordingly, DOL proposed on its own motion to amend the exemption.

The proposed amendment would, in general, permit plans to accept as a litigation settlement, in addition to cash:

  •  Non-cash consideration, including the written promise of future employer contributions and benefit enhancements, where that consideration can be objectively valued; and
  • Non-qualifying employer securities such as warrants and stock rights. (ERISA restricts the securities issued by an employer than a plan may acquire or hold, and to date individual exemptions have been required for a plan to accept “non-qualifying” securities in settlements.) The expanded relief would encompass the acquisition of such securities in settlement of litigation, including bankruptcy proceedings, and the plan’s subsequent holding, exercise and disposition of those securities.

The plan may not pay any commission in connection with the acquisition of non-cash assets.

The DOL also proposed to redraft the exemption to clarify that an independent “Authorizing Fiduciary” must:

  • Acknowledge in writing that it is acting as a fiduciary for the plan;
  • Review the reasonableness of the entire settlement – including the scope of the release of claims, the value of any non-cash consideration, and the reasonableness of attorneys fees for plaintiff’s counsel paid from the plan’s recovery;
  • Make specified determinations with respect to accepting non-cash consideration generally and benefit enhancements specifically; and
  • Authorize the settlement.

Also, at the time of settlement and thereafter, the Authorizing Fiduciary or another independent fiduciary generally must act for the plan with respect to any non-cash property received from the employer.

The proposed amendments to PTE 2003-39 would be effective upon publication in final form in the Federal Register. Comments on the proposal are due before January 22, 2008.