US Supreme Court Briefs

No. 99-579


In the Supreme Court of the United States

HARRIS TRUST AND SAVINGS BANK, ETC., ET AL., PETITIONERS

v.

SALOMON BROTHERS, INC., ET AL.

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING PETITIONERS


SETH P. WAXMAN
Solicitor General
Counsel of Record
EDWIN S. KNEEDLER
Deputy Solicitor General
BETH S. BRINKMANN
Assistant to the Solicitor
General
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217



HENRY L. SOLANO
Solicitor of Labor
ALLEN H. FELDMAN
Associate Solicitor
NATHANIEL I. SPILLER
Deputy Assistant Solicitor
ELIZABETH HOPKINS
Attorney
Department of Labor
Washington, D.C. 20210



QUESTION PRESENTED

Whether a civil action under Section 502(a)(3) of the Employee RetirementIncome Security Act of 1974 (ERISA), 29 U.S.C. 1132(a)(3), to obtain "appropriateequitable relief" to "redress" any "act or practicewhich violates" Title I of ERISA, may be brought to obtain restitutionfrom a nonfiduciary party in interest that engaged in a transaction prohibitedby Section 406(a) of ERISA, 29 U.S.C. 1106(a).



In the Supreme Court of the United States

No. 99-579

HARRIS TRUST AND SAVINGS BANK, ETC., ET AL., PETITIONERS
v.
SALOMON BROTHERS, INC., ET AL.

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING PETITIONERS

INTEREST OF THE UNITED STATES

This case arises out of a suit filed by petitioners, as trustees of an employeebenefit plan, to obtain restitution from respondent Salomon Brothers underSection 502(a)(3) of the Employee Retirement Income Security Act of 1974(ERISA), 29 U.S.C. 1132(a)(3), to redress a violation of ERISA's prohibitionagainst certain transactions between a benefit plan and a party in interestwith respect to the plan. See ERISA § 406(a), 29 U.S.C. 1106(a). Thequestion presented is whether a party in interest who is not a fiduciaryof the plan but who engages in a prohibited transaction with the plan issubject to suit under Section 502(a)(3) for restitution of the gains itrealized as a result of the transaction.

Section 502(a)(3) authorizes civil actions to be brought by plan participants,beneficiaries, and fiduciaries to obtain "appropriate equitable relief"to redress violations of the Act. The Secretary of Labor is authorized tobring the same types of suits under Section 502(a)(5) of ERISA, 29 U.S.C.1132(a)(5), and the Secretary has invoked that authority to sue partiesin interest that violate ERISA's prohibited-transaction rules. See, e.g.,Herman v. South Carolina Nat'l Bank, 140 F.3d 1413, 1421 (11th Cir. 1998),cert. denied, 525 U.S. 1140 (1999); Reich v. Compton, 57 F.3d 270, 285 (3dCir. 1995). This Court's interpretation of Section 502(a)(3) therefore mayaffect the scope of the Secretary's authority under Section 502(a)(5). Inaddition, the Secretary is charged with the administration and enforcementof Title I of ERISA, 29 U.S.C. 1101 et seq., including the assessment ofcivil penalties against parties in interest that engage in prohibited transactionswith a plan and obtaining correction of such transactions. See 29 U.S.C.1132(i) and (l), 26 U.S.C. 4975(h). Because of the "enormity of thetask" of enforcing the guarantees of ERISA, private civil actions underSection 502(a)(3) are a necessary complement to actions by the Secretary.Cf. Trafficante v. Metropolitan Life Ins. Co., 409 U.S. 205, 211 (1972).The United States therefore has a substantial interest in the sound interpretationof Section 502(a)(3) of ERISA.

STATEMENT

1. a. The Employee Retirement Income Security Act of 1974, 29 U.S.C. 1001et seq., is a complex statutory scheme crafted to establish safeguards forthe operation and administration of employee benefit plans and to ensuretheir financial soundness. 29 U.S.C. 1001(a). Congress intended to protectthe interests of plan participants and beneficiaries by, inter alia, "providingfor appropriate remedies, sanctions, and ready access to the Federal courts."29 U.S.C. 1001(b).

The civil enforcement provisions of ERISA are set forth in Section 502,29 U.S.C. 1132. Subsection (a) of Section 502, entitled "Persons empoweredto bring a civil action," identifies nine types of causes of actionthat may be brought by various specified persons. The civil action in thiscase was brought under Section 502(a)(3), which provides that an actionmay be brought-

by a participant, beneficiary, or fiduciary (A) to enjoin any act or practicewhich violates any provision of [Title I of ERISA] or the terms of the plan,or (B) to obtain other appropriate equitable relief (i) to redress suchviolations or (ii) to enforce any provisions of [Title I of ERISA] or theterms of the plan.

29 U.S.C. 1132(a)(3).

Title I of ERISA, 29 U.S.C. 1001-1169, relates to the protection of employeebenefit rights. Title I includes Section 406 of ERISA, 29 U.S.C. 1106, entitled"Prohibited transactions." Subsection (a) of Section 406, entitled"Transactions between plan and party in interest," states that,except as provided in Section 408, 29 U.S.C. 1108-

(1) A fiduciary with respect to a plan shall not cause the plan to engagein a transaction, if he knows or should know that such transaction constitutesa direct or indirect-

(A) sale or exchange, or leasing, of any property between the plan and aparty in interest;

(B) lending of money or other extension of credit between the plan and aparty in interest;

(C) furnishing of goods, services, or facilities between the plan and aparty in interest;

(D) transfer to, or use by or for the benefit of, a party in interest, ofany assets of the plan; or

(E) acquisition, on behalf of the plan, of any employer security or employerreal property in violation of section 1107(a).

29 U.S.C. 1106. Section 408 in turn sets forth various statutory exemptionsfrom the prohibited-transaction rules in Section 406 and authorizes theSecretary to grant additional administrative exemptions, after affordingpublic notice and an opportunity to comment. See 29 C.F.R. 2570.30-2570.52(procedures for considering exemption applications).

b. ERISA defines a "fiduciary" as a person (1) who exercises discretionaryauthority or control respecting management of the plan or management ordisposition of plan assets; (2) who renders, or has the authority or responsibilityto render, investment advice for compensation regarding money or propertyof the plan; or (3) who has discretionary authority or responsibility inthe administration of the plan. 29 U.S.C. 1002(21)(A). The term "partyin interest" includes, inter alia, any fiduciary, counsel, or employeeof a plan; a person providing services to the plan; an employer or employeeorganization any of whose employees or members are covered by the plan;a corporation or other entity that is owned by such a person; an employee,officer, or director of, or owner of a specified financial interest in,such a person; and a partner or joint venturer of such a person. 29 U.S.C.1002(14).

2. Petitioner Ameritech Corporation sponsors and administers two pensionplans whose assets are held in trust by Ameritech Pension Trust (APT). PetitionerHarris Trust and Savings Bank is a trustee of APT. National Investment Servicesof America (NISA) was an investment manager for APT during the relevanttime period. The two pension plans qualify as employee benefit plans underERISA. Both petitioners and NISA, by virtue of their relationships withAPT, were at all relevant times fiduciaries of the plans within the meaningof ERISA. See 29 U.S.C. 1002(21)(A); Pet. App. 16a-17a.1

Respondents, Salomon Brothers, Inc., and Salomon Brothers Realty Corp. (collectively"Salomon"), provided securities-brokerage and other services toAPT during the relevant time period. Pet. App. 2a, 17a. Accordingly, Salomonwas a party in interest with respect to the plans within the meaning ofERISA. See 29 U.S.C. 1002(14)(B).

In 1987, Salomon offered to sell to APT its interest in a written fee agreementthat granted Salomon various rights, including participation in the netcash flow, sale or refinancing proceeds, and property appreciation associatedwith certain hotel properties. Pet. App. 17a-18a. On October 28, 1987, APT,at the direction of NISA, purchased 95% of the fee agreement. APT, throughNISA, purchased 100% of a second fee agreement from Salomon in 1988, and95% of two other fee agreements in 1989. APT paid a total of approximately$20,915,000 for the four fee agreements. Id. at 2a, 17a-19a. Petitionersallege that Salomon failed to disclose information about the propertiesthat would have alerted petitioners to the precarious condition of the investments,and that, contrary to Salomon's representations, the fee agreements werevirtually worthless when they were acquired by APT. Id. at 19a.

The issuers of the fee agreements subsequently went into bankruptcy. Pet.App. 19a. Petitioners contend that, as a result, APT lost $19,889,602, whileSalomon realized a $20,915,000 profit on the transactions. Pet. 8.

3. Petitioners brought the instant suit against Salomon alleging violationsof various state and federal laws, including several provisions of ERISA.Pet. App. 14a. The parties filed motions and cross-motions for summary judgmentwith respect to various portions of the second amended complaint (complaint)and certain counterclaims. Id. at 14a-15a.

On June 13, 1996, the district court entered an order granting Salomon summaryjudgment on Count I of the complaint, which alleged breach of fiduciaryduty, based on the court's determination that Salomon was not a fiduciaryof the plan within the meaning of ERISA. Pet. App. 20a-30a. The court thenturned to the question whether, even though Salomon was not a fiduciary,it was nonetheless subject to suit under Section 502(a)(3) as a nonfiduciaryparty in interest. Specifically, the court considered whether petitionershave a cause of action against Salomon for restitution under Section 502(a)(3)based on either Salomon's participation in a transaction prohibited by Section406 of ERISA, 29 U.S.C. 1106 (Count II), or Salomon's knowing participationin the breach of fiduciary duty by NISA that occurred when NISA caused thetransaction prohibited by Section 406 (Count III). The district court ruledin petitioners' favor on Count II (Pet. App. 30a-51a) and in respondents'favor on Count III (id. at 51a-52a).

With regard to Count III, the court relied on controlling circuit precedent,Reich v. Continental Casualty Co., 33 F.3d 754 (7th Cir. 1994), cert. denied,513 U.S. 1152 (1995). Continental Casualty in turn followed dicta in thisCourt's opinion in Mertens v. Hewitt Associates, 508 U.S. 248 (1993), wherethe majority found it "far from clear" that Section 502(a)(3)of ERISA generally provides a cause of action against a nonfiduciary thatknowingly participates in a fiduciary's breach of its duties to the plan,because no provision of ERISA explicitly imposes a duty on nonfiduciariesto refrain from such participation. See 508 U.S. at 253-255 & n.5. Thedistrict court in this case therefore concluded that "ERISA does notprovide a cause of action against nonfiduciaries for knowing participationin another person's fiduciary breaches." Pet. App. 51a.

The district court explained that its holding that petitioners do not havea cause of action under Count III did not require a similar conclusion withrespect to Count II. The court reasoned that "nonfiduciary partiesin interest may be held liable under § 1132 for their own involvementin a prohibited transaction because § 1106 can be read to affirmativelyimpose an obligation on parties in interest to avoid such transactions.Their status as a nonfiduciary party in interest, however, does not subjectsuch persons to derivative liability for another's violation of ERISA. Thus,to the extent that Salomon participated in a prohibited transaction, itmay be found directly liable under count II." Pet. App. 51a-52a. Thecourt noted that this Court in Mertens "specifically contrasted theabsence of any provision giving rise to a nonfiduciary's duty to avoid 'knowingparticipation,' with other provisions which, it recognized, can be readto impose an obligation on nonfiduciary parties in interest to avoid participationin § 1106(a) transactions." Id. at 33a (citing Mertens, 508 U.S.at 254 & n.4). The court also pointed out that the legislative historyof ERISA "reflects a congressional intent to obligate nonfiduciaryparties in interest to abstain from participation in § 1106(a) transactions."Id. at 34a.

Against this background, the district court held that Section 502(a)(3)of ERISA affirmatively authorizes a private civil action to obtain appropriateequitable relief, including restitution, from a nonfiduciary party in interestthat violates Section 1106(a). Pet. App. 35a-41a. The court emphasized thatthe fact "[t]hat § 1132(a)(3) does not identify specific categoriesof potential defendants makes it clear that it was intended to authorizesuit against any entity that violates ERISA," which a nonfiduciaryparty in interest does by engaging in a prohibited transaction. Id. at 36a.The court also pointed out that the courts of appeals that had addressedthe issue had "uniformly found that ERISA's civil enforcement provision,29 U.S.C. § 1132, provides the requisite authority" for a suitagainst a nonfiduciary party in interest. Id. at 35a-36a (citing Reich v.Stangl, 73 F.3d 1027, 1032 (10th Cir.), cert. denied, 519 U.S. 807 (1996);Landwehr v. Dupree, 72 F.3d 726, 734 (9th Cir. 1995); Reich v. Compton,57 F.3d 270, 285 (3d Cir. 1995); Reich v. Rowe, 20 F.3d 25, 31 n.7 (1stCir. 1994)).2

4. The district court certified its order regarding Count II for interlocutoryappeal under 28 U.S.C. 1292(b), Pet. App. 62a-65a, and the court of appealsreversed. Id. at 1a-13a. The court of appeals acknowledged that Section502(a)(3) of ERISA "allows plan fiduciaries like [petitioners] to seek'other appropriate equitable relief' for any act which violates ERISA."Pet. App. 7a. The court ruled, however, that the prohibited-transactionrules in ERISA Section 406 regulate only the conduct of fiduciaries anddo not regulate the conduct of nonfiduciary parties in interest or imposeany explicit duty on them. In reaching that conclusion, the court reliedon the placement of Section 406 in a part of ERISA entitled "FiduciaryResponsibility," and on the wording of Section 406, which states that"a fiduciary * * * shall not cause" the plan to engage in a prohibitedtransaction. Ibid. The court also reasoned that the fact that Section 406"mentions 'parties in interest' when it describes the transactionsthat fiduciaries must avoid does not mean that parties in interest are liablewhen a fiduciary does engage in a prohibited transaction." Id. at 8a;see also id. at 7a. The court therefore found no material distinction betweenthis case and Continental Casualty, in which the Seventh Circuit held "thatwhere ERISA does not expressly impose a duty, there can be no cause of action."Id. at 8a.

The court of appeals rejected petitioners' attempt to distinguish this casefrom Continental Casualty on the ground that Section 502(i) of ERISA, 29U.S.C. 1132(i), authorizes the Secretary of Labor to impose civil penaltieson a party in interest that engaged in a transaction prohibited by Section406. In the court's view, the provision for civil penalties in this situation"only makes the absence of a specific provision imposing civil liabilityon parties in interest all the more striking." Pet. App. 9a. The courtalso found it significant that when Congress enacted the final bill intolaw, it dropped a provision in the Senate bill that would have explicitlyimposed liability on parties in interest that participate in violationsof the Act. Id. at 12a.

SUMMARY OF ARGUMENT

A. Section 502(a)(3) of ERISA authorizes a civil action to be brought bya plan participant, beneficiary, or fiduciary "to enjoin any act orpractice which violates any provision" of Title I of ERISA and "toobtain other appropriate equitable relief * * * to redress such violations."29 U.S.C. 1132(a)(3). The text of Section 502(a)(3) is not limited to suitsagainst fiduciaries; it also readily embraces suits against nonfiduciaryparties in interest that engage in transactions prohibited by Section 406(a)in Title I of ERISA, 29 U.S.C. 1106(a). Such a transaction plainly constitutesa "violation" of ERISA and can, therefore, be redressed througha Section 502(a)(3) civil action.

B. The overall structure of ERISA's prohibited-transaction provisions confirmthat conclusion. Section 3003 of ERISA, 29 U.S.C. 1203, which requires coordinationof enforcement efforts by the Secretary of Labor and the Secretary of theTreasury with respect to prohibited transactions, expressly states thata party in interest that engages in a prohibited transaction is "violating"Section 406. The civil penalty provision in Section 502(i) of ERISA, 29U.S.C. 1132(i), and its companion tax provision, 26 U.S.C. 4975, expresslycontemplate "correction" of a prohibited transaction by the partyin interest, and thereby establish that a party in interest is not entitledto retain plan assets or profits it improperly acquired in such a transaction.And another civil penalty provision, in Section 502(l) of ERISA, 29 U.S.C.1132(l), establishes that Section 502(a)(5), which authorizes the Secretaryto bring civil actions on essentially the same terms as private partiesunder Section 502(a)(3), enables the Secretary to bring suit for equitablerelief against a nonfiduciary party in interest that engaged in a prohibitedtransaction with the plan. Because the relevant statutory language in thetwo provisions is identical, Section 502(a)(3) should be similarly interpreted.

The civil penalty provisions reflect ERISA's preference that a prohibitedtransaction be remedied by restoration of the plan's financial resourcesrather than through a civil penalty or tax-a preference that furthers thecentral purpose of ERISA to safeguard and ensure the financial soundnessof employee benefit plans. 29 U.S.C. 1001(a). An interpretation of Section502(a)(3) (or Section 502(a)(5)) that precluded suits for restitution fromnonfiduciary parties in interest would contradict that statutory preference.

C. The court of appeals' holding that such suits may not be brought underSection 502(a)(3) conflicts with established principles of trust law andequity, to which this Court looks when interpreting ERISA. Under those principles,appropriate equitable relief includes restitution of trust assets, generallythrough imposition of a constructive trust, from third-parties to whom trustproperty was transferred in breach of the trust. The ability to obtain restitutionfrom a transferee of trust property is not based on the nonfiduciary's ownbreach of a legal duty, but rather on a theory of unjust enrichment.

D. The court of appeals' interpretation of Section 502(a)(3) was based,in part, on its erroneous belief that there is no material distinction betweenthe issue in this case and the issue discussed by this Court in dicta inMertens v. Hewitt Associates, 508 U.S. 248, 254 (1993), regarding whetherSection 502(a)(3) provides for a cause of action against a nonfiduciaryfor knowing participation in a fiduciary breach. Even if the Mertens majority'sdoubts on the latter point were well founded, there would be no rationalefor extending that conclusion to bar suits against parties in interest,and indeed later in the opinion the Court specifically distinguished thesituation of parties in interest that violate Section 406's prohibited-transactionrules. Id. at 262.

E. The legislative history of ERISA, both as originally enacted and as amendedin 1989 to add the civil penalty provision in Section 502(l), also supportsan interpretation of Sections 502(a)(3) and (5) that authorizes civil actionsfor restitution against nonfiduciary parties in interest that engage inprohibited transactions with the plan.

ARGUMENT

SECTION 502(a)(3) OF ERISA PROVIDES A CAUSE OF ACTION FOR RESTITUTION AGAINSTA NONFIDUCIARY PARTY IN INTEREST THAT ENGAGED IN A TRANSACTION WITH THEPLAN THAT WAS PROHIBITED BY SECTION 406(a) OF ERISA

A. The Text Of Section 502(a)(3) And Section 406(a)

1. Section 502(a)(3) of ERISA states that a plan participant, beneficiary,or fiduciary may bring a civil action "to enjoin any act or practicewhich violates any provision" of Title I of the Act (the Title in whichSection 406 is located), or "to obtain other appropriate equitablerelief * * * to redress such violations." 29 U.S.C. 1132(a)(3). ERISAcontains no language limiting that provision to suits against fiduciaries.Because Section 502(a)(3) does not specify or in any way limit the entitiesthat may be sued, it authorizes suit against any entity from which appropriateequitable relief may be obtained to redress a violation of ERISA.3

A transaction that is prohibited by Section 406(a) of ERISA unquestionablyconstitutes a "violation" of ERISA. Section 406 flatly bars thespecified types of transactions, subject to the statutory and administrativeexemptions provided for in Section 408, 29 U.S.C. 1108. Congress entitledSection 406 "Prohibited transactions," and it entitled subsection(a) of that Section "Transactions between plan and party in interest."That structure manifests an intent to render unlawful the specified transactionsthemselves, and not merely to impose a duty on fiduciaries. Although Section406(a) expressly imposes on a fiduciary a duty not to cause the plan toengage in a prohibited transaction, "this in no sense lessens the factthat a transaction between a plan and a 'party in interest' remains a prohibitedtransaction under § 406"-a violation that can be redressed ina civil action under Section 502(a)(3) to obtain restitution to the planor other appropriate equitable relief. Herman v. South Carolina Nat'l Bank,140 F.3d 1413, 1421 (11th Cir. 1998), cert. denied, 525 U.S. 1140 (1999).

2. The court of appeals read Section 406(a) not to impose any duties onparties in interest, because Section 406(a) expressly imposes a duty ona fiduciary not to cause the plan to engage in a prohibited transactionwith a party in interest, but does not address parties in interest in similarterms. Pet. App. 7a-8a. What the court of appeals failed to appreciate isthat the imposition of an express duty on fiduciaries not to cause a planto engage in prohibited transactions serves to make it clear that a fiduciarythat breaches that duty is subject to suit not only for engaging in a prohibitedtransaction that violates the Act, but also for breach of fiduciary duty.A suit under Section 502(a)(2) for breach of fiduciary duty allows for recoverynot only of equitable relief (which would be allowed as well in a suit underSection 502(a)(3) to obtain redress for a prohibited transaction), but alsofor recovery of legal damages. Section 502(a)(2) authorizes a suit by theSecretary (or by a plan participant, beneficiary, or fiduciary) for appropriaterelief under Section 409 of the Act, which in turn provides that a fiduciarywho "breaches any of the responsibilities, obligations, or duties imposedupon fiduciaries by [Title I of ERISA] shall be personally liable to makegood to such plan any losses to the plan resulting from each such breach,and to restore to such plan any profits of such fiduciary which have beenmade through use of assets of the plan by the fiduciary, and shall be subjectto such other equitable or remedial relief as the court may deem appropriate."29 U.S.C. 1109(a). See Lockheed Corp. v. Spink, 517 U.S. 882, 888 (1996);Mertens, 508 U.S. at 252.

Moreover, to interpret Section 502(a)(3) based on what "duties"are or are not expressly imposed by Section 406(a) would ignore the plainlanguage of Section 502(a)(3), which is couched in terms of suits to redressany act or practice that "violates" Title I of ERISA. A transactionprohibited by Section 406(a) plainly constitutes an "act or practice"that "violates" a provision of Title I of ERISA, and it thereforemay properly be the subject of an action under Section 502(a)(3) to obtain"appropriate equitable relief" to "redress" that violation.Appropriate equitable relief in these circumstances includes relief notonly against the fiduciary that caused the plan to engage in the prohibitedtransaction, but also against any other entity from which it would be appropriateto obtain equitable relief-certainly including a party in interest thatitself engaged in the prohibited transaction and that was unjustly enrichedby its improper receipt of plan assets. The term "redress" means"the setting right of what is wrong." The Random House Dictionaryof the English Language 1617 (2d ed. 1987); see also Webster's Third NewInternational Dictionary 1904 (1986). Accordingly, equitable relief appropriateto redress a violation of Section 406(a) "includes restitution of ill-gottenplan assets or profits." Mertens, 508 U.S. at 248.4

B. The Overall Structure Of ERISA's Prohibited-Transaction Provisions

Several other provisions of ERISA relating to prohibited transactions confirmthat Congress viewed a nonfiduciary party in interest that engaged in atransaction prohibited by Section 406(a) as having committed a violationof ERISA and as obligated to make the plan whole.

1. Congress made this conclusion explicit in Section 3003 of ERISA, 29 U.S.C.1203, which addresses the procedures that the Secretary of Labor and theSecretary of the Treasury must follow in order to ensure coordination oftheir duties with respect to prohibited transactions. Specifically, Section3003(c) states:

Whenever the Secretary of Labor obtains information indicating that a party-in-interestor disqualified person is violating section 1106 of this title [ERISA §406], he shall transmit such information to the Secretary of the Treasury.

29 U.S.C. 1203(c). Section 502(a)(3), which authorizes civil actions toredress "any" act or practice that constitutes a "violation"of "any" provision of Title I of the Act, must be read in parimateria with that provision, which unequivocally treats a party in interestthat engages in a transaction prohibited by Section 406 as "violating"that provision.

2. ERISA's civil penalty provisions reinforce the conclusion that a nonfiduciaryparty in interest is not a mere passive participant in a transaction prohibitedby Section 406(a) that might therefore be permitted by ERISA to retain anyprofits it realizes from such a transaction, but rather is itself in violationof ERISA and therefore not entitled to retain plan assets or profits thatunjustly enrich it.

a. Section 502(i) of ERISA, 29 U.S.C. 1132(i), provides that "[i]nthe case of a transaction prohibited by [Section 406] by a party in interestwith respect to a plan," the Secretary of Labor may assess a civilpenalty against the party in interest. Under a parallel provision in TitleII of ERISA, which is codified in the Internal Revenue Code (IRC), the Secretaryof the Treasury may impose a tax on a prohibited transaction, to be paidby the "disqualified person" (defined in a manner substantiallysimilar to "party in interest" under Title I) that engages inthe prohibited transaction. 26 U.S.C. 4975(a); see generally Commissionerv. Keystone Consol. Indus., Inc., 508 U.S. 152 (1993).5

The amount of the civil penalty or tax depends upon whether the transactionis "corrected" in a timely manner. Correcting a prohibited transactionmeans "undoing the transaction to the extent possible, but in any caseplacing the plan in a financial position not worse than that in which itwould be if the disqualified person were acting under the highest fiduciarystandards." 26 U.S.C. 4975(f)(5); accord 29 U.S.C. 1132(i) (providingfor correction of a prohibited transaction by the party in interest "insuch manner as the Secretary [of Labor] shall prescribe which shall be consistentwith section 4975(f)(5) of title 26").6 If the prohibited transactionis not corrected within 90 days after notice from the Secretary of Labor(or such longer time as the Secretary may permit), the penalty assessedagainst the party in interest may equal 100% of the amount involved in thetransaction. 29 U.S.C. 1132(i); see also 26 U.S.C. 4975(b) (providing forassessment of 100% tax if the transaction is not corrected within the taxableperiod); Keystone Consol. Indus., 508 U.S. at 155 n.1.7 Thus, it is clearthat Congress intended that parties in interest that engage in prohibitedtransactions would "correct" those transactions and thus wouldnot be entitled to remain unjustly enriched as a result of such transactions.Disgorgement or restitution by a party in interest therefore is "appropriateequitable relief" under Section 502(a)(3) to "redress" theprohibited transaction.

b. Another civil penalty provision, in Section 502(l) of ERISA, 29 U.S.C.1132(l), strongly reinforces that conclusion. Section 502(l) makes clearthat Section 502(a)(5), 29 U.S.C. 1132(a)(5), which authorizes the Secretaryof Labor to bring a civil action on the same terms as a plan participant,beneficiary, or fiduciary may bring an action under Section 502(a)(3) toredress a violation of the Act, enables the Secretary to bring suit againsta nonfiduciary party in interest to obtain restitution to the plan to remedya prohibited transaction.

Section 502(l), which was added to ERISA in 1989 (Pub. L. No. 103-239, §2101(a), 101 Stat. 2123), provides for a civil penalty that applies to abroader category of violations than does Section 502(i). It authorizes theSecretary of Labor to assess a civil penalty in the case of "(A) anybreach of fiduciary responsibility under (or other violation of) part 4"of Title I of ERISA "by a fiduciary," or "(B) any knowingparticipation in such a breach or violation by any other person." 29U.S.C. 1132(l)(1)(A) and (B). Violations of Part 4 of Title I include violationsof the prohibited-transaction rules in Section 406(a). The civil penaltyis equal to 20% of the "applicable recovery amount." 29 U.S.C.1132(l)(1). The latter term is defined to mean "any amount which isrecovered from a fiduciary or other person with respect to a breach or violationdescribed in paragraph (1)," either "(A) pursuant to any settlementagreement with the Secretary," or "(B) ordered by a court to bepaid by such fiduciary or other person to a plan or its participants andbeneficiaries in a judicial proceeding instituted by the Secretary undersubsection (a)(2) or (a)(5) of this section." 29 U.S.C. 1132(l)(2)(emphasis added). Subsection (a)(2) of Section 502 authorizes the Secretary(or a plan participant, beneficiary, or fiduciary) to bring a civil actionagainst a fiduciary for appropriate relief under Section 409 of the Act,29 U.S.C. 1109, to redress a fiduciary breach, and subsection (a)(5) authorizesthe Secretary to bring a civil action for appropriate equitable relief toredress a violation of Title I. Because subsection (a)(2) affords the Secretarya fully adequate means of obtaining redress against a fiduciary, the referenceto subsection (a)(5) plainly contemplates that the Secretary will invokethat subsection to obtain redress against the "other person[s]"mentioned in Section 502(l)-in this case, parties in interest that are notfiduciaries.

Indeed, there can be no doubt that, when it enacted Section 502(l) in 1989,Congress intended that the persons "other" than fiduciaries fromwhom the Secretary may obtain appropriate equitable relief under Section502(a)(5) include nonfiduciary parties in interest who violate the prohibited-transactionrules in Section 406. That is so because the final sentence of Section 502(l)specifies that "[t]he penalty imposed on a fiduciary or other personunder this subsection with respect to any transaction shall be reduced bythe amount of any penalty or tax imposed on such fiduciary or other personwith respect to such transaction under subsection (i) of this section andsection 4975 of title 26." 29 U.S.C. 1132(l)(4). As explained above,the penalty imposed under subsection (i) of Section 502 and the tax assessedunder Section 4975 apply to nonfiduciary parties in interest that engagein prohibited transactions. Thus, nonfiduciary parties in interest are necessarilyincluded among the "other person[s]" referred to in the finalsentence of Section 502(l).8 The reduction of the Section 502(l) penaltyimposed on "any other person" who engaged in a prohibited transaction-apenalty that is based on a percentage of the amount recovered in a civilaction by the Secretary under Section 502(a)(5)-makes sense only if the"other person" who engaged in the prohibited transaction (i.e.,the party in interest) is subject to suit by the Secretary under Section502(a)(5) to obtain appropriate equitable relief to redress the prohibitedtransaction.

Because a participant, beneficiary, or fiduciary may bring the same typeof actions under Section 502(a)(3) that the Secretary may bring under Section502(a)(5), see Varity Corp. v. Howe, 516 U.S. 489, 510 (1996),9 it followsthat Section 502(a)(3) likewise authorizes a civil action against a nonfiduciaryparty in interest to obtain appropriate equitable relief to redress a prohibitedtransaction. See Mertens, 508 U.S. at 260.

c. ERISA's civil penalty provisions applicable to prohibited transactionsmake it clear that obtaining restitution to a plan from a nonfiduciary partyin interest to redress a prohibited transaction is the primary focus ofthose statutory enforcement mechanisms, and that such redress takes priorityover assessing against the party in interest a civil penalty or tax to bepaid into the United States Treasury. First, before sending a notice oftax deficiency, the Secretary of the Treasury must notify the Secretaryof Labor and provide her a reasonable opportunity to obtain a correctionof the transaction or comment on the proposed tax assessment. 26 U.S.C.4975(h); 29 U.S.C. 1203(a). Moreover, as noted above (at p. 17), the civilpenalty or tax imposed under Section 502(i) of ERISA or 26 U.S.C. 4795 increasesto 100% of the amount of the transaction only if the party in interest doesnot correct the transaction-i.e., undo the transaction to the extent possibleor otherwise restore the plan's financial position-within a specified period.Finally, the civil penalty under Section 502(l) may be waived or reducedby the Secretary if the fiduciary or other person otherwise "will notbe able to restore all losses to the plan * * * without severe financialhardship." 29 U.S.C. 1132(l)(3)(B); see also 29 U.S.C. 1203(a) (authorizingSecretary of Treasury to waive tax imposed by Section 4975 in appropriatecases).

That preference for redress to the plan over imposition of civil penaltiesor fines is consistent with the central purpose of ERISA to safeguard andensure the financial soundness of employee benefit plans. 29 U.S.C. 1001(a).By contrast, to limit civil actions under Sections 502(a)(3) and 502(a)(5)in a manner that precludes suits for restitution of plan assets from nonfiduciaryparties in interest would contradict that statutory preference. It alsowould contradict ERISA's stated intent to provide for "ready accessto the Federal courts." 29 U.S.C. 1001(b). See also Varity Corp., 516U.S. at 512 (characterizing Section 502(a)(3) as a "safety net, offeringappropriate equitable relief for injuries caused by violations that §502 does not elsewhere adequately remedy").

C. Background Principles Of Trust Law And Equity And The Purposes Of ERISA

1. The court of appeals' holding that an action will not lie against a nonfiduciaryparty in interest under Section 502(a)(3) for restitution or disgorgementof assets and profits obtained in a prohibited transaction is inconsistentwith established common law trust principles to which this Court looks "todevelop a 'federal common law of rights and obligations under ERISA-regulatedplans.'" Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110(1989) (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56 (1987)).Congress defined the cause of action under Section 502(a)(3) in traditionaltrust terms-a civil action for "appropriate equitable relief."29 U.S.C. 1132(a)(3). Congress's choice of that terminology is naturallyunderstood as referring to background principles of trust law and equityfor further definition of the cause of action it created. See also S. Rep.No. 383, 93d Cong., 1st Sess. 105 (1973), reprinted in 1 Legislative Historyof the Employee Retirement Income Security Act of 1974, at 1173 (1976) (Leg.Hist.) (stating that appropriate relief would include the equitable remedyof a constructive trust). Cf. Mertens, 508 U.S. at 260 ("the 'equitablerelief' awardable under § 502(a)(5) includes restitution of ill-gottenplan assets or profits").

Traditionally, appropriate equitable relief included restitution of trustassets, generally through imposition of a constructive trust, from third-partiesto whom trust property was transferred in breach of the trust. See generallyRestatement (Second) of Trusts §§ 288, 289, 290, at 55-57 (1959);George Bogert & George Bogert, Trusts and Trustees § 868, at 109-112(1995); William Fratcher, Scott on Trusts § 291.1, at 77-78 (1989).10The ability to obtain restitution from a transferee of trust property wasnot based on the nonfiduciary's own breach of a legal duty, contrary tothe suggestion in Mertens, 508 U.S. at 255 n.5. A constructive trust toobtain restitution from a nonfiduciary was based on principles of unjustenrichment, not independent wrongdoing, Dan B. Dobbs, Law of Remedies §4.3(2), at 397 (2d ed. 1993), and the cause of action was typically viewedas arising from the duties imposed by equity on the breaching trustee. SeeStrauss v. United States Fidelity & Guar. Co., 63 F.2d 174, 178 (4thCir.), cert. denied, 289 U.S. 747 (1933); Safe Deposit & Trust Co. v.Cahn, 62 A. 819, 822 (Md. 1906); see also, e.g., George Bogert & GeorgeBogert, supra, § 889, at 257. Section 502(a)(3) therefore should beconstrued, consistently with those principles of trust law and equity, toallow a civil action for restitution or disgorgement against a party ininterest such as Salomon who is unjustly enriched by its unlawful receiptof plan assets or its improper profiting from a prohibited transaction witha plan.

2. The remedial purposes of Section 406-to bar categorically transactionsthat experience had shown were likely to injure or be unfair to the plan,Keystone Consol. Indus., 508 U.S. at 160-would be substantially weakenedif a cause of action did not lie against a party in interest in these circumstances."Such an interpretation of [S]ection 502(a)(5) [and therefore of Section502(a)(3)] * * * effectively create[s] a zone of immunity, protecting theillegitimate gains of parties in interest who have completed prohibitedtransactions that the Secretary could have enjoined while they were occurring."Stangl, 73 F.3d at 1031. For example, where a fiduciary accepts money froma party in interest in exchange for a recommendation that the plan investmillions of dollars in a real estate development, the developer that offeredthe illegal incentive and that consequently received the millions of dollarsin plan assets would be permitted to keep those plan assets under the courtof appeals' interpretation (albeit subject to an excise tax or civil penaltythat goes to the federal treasury rather than the plan). Nonfiduciary partiesin interest would be allowed to remain unjustly enriched, and the plan wouldbe unable to obtain full relief if the fiduciary that caused the transactionsis judgment-proof or has limited resources. Furthermore, in cases whereunique assets, such as real estate, have been transferred to a party ininterest, a remedy against the fiduciary that caused the transfer wouldnecessarily be inadequate.

D. This Court's Decision In Mertens

The majority in Mertens expressed doubt that ERISA provides a cause of actionagainst a nonfiduciary for knowing participation in a fiduciary breach.508 U.S. at 253-254. The dissenting opinion had no such doubts, however,see id. at 265 n.1, and the Court did not resolve the question, id. at 254-255.We continue to believe that Sections 502(a)(3) and 502(a)(5) do providesuch a cause of action.11 That question, however, is not squarely presentedin this case and, as in Mertens, the Court should not resolve it here.

Whether or not the Mertens majority's doubts on that issue were well founded,the majority did not suggest that it had doubts about whether Section 502(a)(3)authorizes an action against nonfiduciary parties in interest who violatethe prohibited-transaction rules in Section 406. To the contrary, at a laterpoint in the opinion, the Court stated that persons who provide servicesto a plan "must disgorge assets and profits obtained through participationas parties-in-interest in transactions prohibited by § 406, and payrelated civil penalties, see § 502(i), 29 U.S.C. § 1132(i), orexcise taxes, see 26 U.S.C. § 4975; and (assuming nonfiduciaries canbe sued under § 502(a)(3)) may be enjoined from participating in afiduciary's breaches, compelled to make restitution, and subject to otherequitable decrees." Mertens, 508 U.S. at 262. The Court thus distinguishedbetween the requirement that service providers disgorge assets and profitsobtained through participation as parties in interest in prohibited transactions,which the Court did not question, and potential liability for participationin a fiduciary's breach of its fiduciary duty, which the Court merely assumedfor purposes of its decision.

Furthermore, the Court made those observations in the course of discussinghow ERISA "allocates liability for plan-related misdeeds in reasonableproportion to respective actors' power to control and prevent the misdeeds."508 U.S. at 262. Even if the Mertens majority were correct in its suggestionthat Sections 502(a)(3) and 502(a)(5) do not generally provide a cause ofaction against nonfiduciary third parties who participate in fiduciary breaches,there would be no justification for extending that conclusion to bar a suitagainst a party in interest that had full control over its role in the prohibitedtransaction with the plan. As shown by background principles of trust lawand equity, as well as by the civil penalty and tax provisions of ERISAitself, a party in interest that receives plan assets through a prohibitedtransaction is properly subject to a civil action for restitution or otherappropriate equitable relief to redress the transaction.12

E. The Legislative History Of ERISA

The legislative history of ERISA supports an interpretation of Sections502(a)(3) and 502(a)(5) that authorizes actions for restitution againstnonfiduciary parties in interest who engage in prohibited transactions.

1. The Conference Report accompanying the final bill enacted as ERISA in1974 specifically states that the prohibited-transaction provisions "prohibit[]plan fiduciaries and parties-in-interest from engaging in a number of specifictransactions." H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess. 306 (1974),reprinted in 3 Leg. Hist. 4573. That clear statement confirms the commonsense reading of the prohibited- transaction provision-that such transactionsviolate the Act and that both parties are prohibited from engaging in suchtransactions.

Moreover, the Conference Report indicates that the statutory language inSection 406(a) directed specifically at fiduciaries was not intended torender fiduciaries the only persons liable for engaging in a prohibitedtransaction, as the court of appeals believed. See Pet. App. 7a-8a. Rather,the wording of Section 406(a)-"[a] fiduciary * * * shall not causethe plan to engage in a transaction, if he knows or should know" thatthe transaction constitutes one of the listed prohibited transactions-wasintended to impose a knowledge requirement before a fiduciary could be heldpersonally liable, including for damages. The Report explains that thatlanguage reflects one of the distinctions between the prohibited-transactionprovisions and exemptions in Title I of ERISA and the corresponding provisionsin the IRC: "Under the labor provisions, a fiduciary will be liableonly if he knew or should have known that he engaged in a prohibited transaction.Such a knowledge requirement is not included in the tax provisions. Thisdistinction conforms to the distinction in present law in the private foundationprovisions (where a foundation's manager generally is subject to a tax onself-dealing if he acted with knowledge, but a disqualified person is subjectto tax without proof of knowledge)." H.R. Conf. Rep. No. 1280, supra,at 306-307, reprinted in 3 Leg. Hist. 4573-4574. Thus, the Conference Reportis consistent with parties in interest (and disqualified persons) beingliable without such knowledge, but only for equitable relief (e.g., an injunctionor disgorgement) under Section 502(a)(3) and (5) and for a civil penaltyunder Section 502(i) or a tax under 26 U.S.C. 4975.13

The court of appeals focused not on the Conference Report, but on the factthat the version of the bill that passed the Senate included a provisionthat would have expressly imposed personal liability, including for damages,on any party in interest who knowingly participated in a transaction prohibitedby the Act. See Pet. App. 12a (quoting H.R. 2, 93d Cong., 2d Sess. §511, at 533 (1974) (with amendments as passed by the Senate), reprintedin 3 Leg. Hist. at 3780. The court of appeals inferred from the omissionof that provision in the final bill that Congress did not intend to subjectnonfiduciary parties in interest to a civil action for restitution or otherappropriate equitable relief. Pet. App. 12a. The court failed to recognize,however, that at the same time the Conference Committee declined to adoptthe specific provision in the Senate bill subjecting a party in interestto liability, it broadened the general civil enforcement section, beyondthe provision in the House bill that allowed suits to enjoin any act orpractice that violates Title I (H.R. 2, 93d Cong., 2d Sess., § 503(e)(3),at 150, reprinted in 3 Leg. Hist. at 4047), to include as well the provisionin Sections 502(a)(3) and 502(a)(5) for other "appropriate equitablerelief" to "redress" such a violation. See H.R. Conf. Rep.No. 1280, supra, at 327, reprinted in 3 Leg. Hist. at 4594 (conferees expandedSection 502 to allow the Secretary to bring "an action for breach ofa fiduciary duty or to enjoin any act or practice which violates * * * titleI of the Act or to obtain any other appropriate relief to enforce any provisionof that title"). In light of that broad language ultimately chosenby Congress, an interpretation of Section 502(a)(3) that allows actionsagainst nonfiduciary parties in interest for restitution or other appropriateequitable relief is fully consistent with the legislative record. See Stangl,73 F.3d at 1033-1034.

2. That conclusion is reinforced by Congress's enactment in 1989 of Section502(l) which, as discussed above (at pp. 18-20), authorizes a civil penaltyagainst parties in interest who engage in prohibited transactions in circumstanceswhere the Secretary has obtained a recovery in a settlement or a civil actionbrought by the Secretary under Section 502(a)(5). The text of Section 502(l)presupposes that the Secretary has authority to bring a civil action againsta nonfiduciary party in interest who engages in a prohibited transaction.

The legislative history of the 1989 amendment shows that Congress declinedto enact a separate provision in the House bill that was intended to clarifythat a third party generally could be liable for knowing participation ina fiduciary breach. H.R. Rep. No. 247, 101st Cong., 2d Sess. 77 (1989).There was no suggestion, however, that any clarification was necessary regardingthe availability of civil actions against nonfiduciary parties in interestthat participate in prohibited transactions, which had been recognized bythe courts. To the contrary, the Report noted that the Committee proposedthe amendment because a divided panel of the Ninth Circuit had recentlyheld in Nieto v. Ecker, 845 F.2d 868 (1988), that a court could not ordera remedy against a nonfiduciary, "except to the extent that the non-fiduciaryengaged in a transaction specifically prohibited by section 406 of ERISAas a party in interest." H.R. Rep. No. 247, supra, at 77. See Nieto,845 F.2d at 873-874 (holding that plaintiffs stated a cause of action underSection 502(a)(3) against a nonfiduciary party in interest that engagedin a prohibited transaction).

Moreover, the Conference Report accompanying the enactment of Section 502(l)reinforced ERISA's emphasis on restoring the financial strength of the plan.The Report stated that "the conferees expect that in all circumstancesthe Department of Labor will take all necessary actions to restore assetslost to the plan as a result of a fiduciary breach." H.R. Conf. Rep.No. 386, 101 Cong., 2d Sess. 432 (1989). The Report also emphasized ERISA'spolicy of encouraging enforcement by both the Secretary and private partiesthrough both administrative and judicial measures:

The conferees believe strengthened civil penalties will better enable theDepartment to protect participants and beneficiaries. The conferees furtherbelieve that the need for strengthened enforcement and deterrence of violationsof ERISA applies not only to the Department of Labor, but to judicial oversightof private rights of action affecting employee benefit plans. It remainsthe intent of Congress that the courts use their power [to] fashion legaland equitable remedies that not only protect participants and beneficiariesbut deter violations of the law as well. The conferees expect that the executiveagencies and the courts will use their substantial authority to achievethese goals and to safeguard the rights of plan participants.

Id. at 432-433. The enactment of Section 502(l) in 1989 therefore once againconfirmed that a judicial order requiring a party in interest to make restitutionto the plan of assets or profits it realized through a prohibited transactionwith the plan constitutes "appropriate equitable relief" to redresssuch a violation of ERISA.

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.


SETH P. WAXMAN
Solicitor General
EDWIN S. KNEEDLER
Deputy Solicitor General
BETH S. BRINKMANN
Assistant to the Solicitor
General


HENRY L. SOLANO
Solicitor of Labor
ALLEN H. FELDMAN
Associate Solicitor
NATHANIEL I. SPILLER
Deputy Assistant Solicitor
ELIZABETH HOPKINS
Attorney
Department of Labor



FEBRUARY 2000

1 This case comes to the Court based on rulings by the district court oncross-motions for summary judgment. In ruling on those motions, the districtcourt viewed the evidence in the non-moving party's favor and did not makefindings of fact. Pet. App. 56a. Our statement of facts is based on thelower courts' recitations. Respondents have reserved the right to disputecertain facts should the case go to trial. Id. at 6a.

2 The district court rejected Salomon's argument that, under Seventh Circuitprecedent, restitution is not available as an equitable remedy in this case.Pet. App. 41a (emphasizing that limiting restitution to an equitable remedyin cases involving participation in a fiduciary breach "would be inappropriatein light of traditional trust law which provides rules permitting equitableactions to regain improperly transferred trust property for reasons otherthan the recipient's knowing participation in the trustee's breach of itsfiduciary duties"). The court also rejected Salomon's argument regardingfailure of proof (id. at 41a-42a), denied petitioners' motion for summaryjudgment insofar as it sought to establish the inapplicability of a prohibited-transactionexemption for security transactions because it found genuine issues of materialfact on that question (id. at 44a-51a), concluded that a ruling on Salomon'sstatute-of-limitations defense would be premature (id. at 52a-53a), andgranted summary judgment to petitioners on Salomon's counterclaims for contribution(id. at 53a-54a).

3 Section 502(a)(3) also authorizes civil actions to enjoin any act or practicethat violates the terms of a plan and to obtain other equitable relief toenforce any term of a plan. That provision also allows actions against defendantsother than a fiduciary. See, e.g., Administrative Comm. v. Gauf, 188 F.3d767, 770-771 (7th Cir. 1999) (allowing Section 502(a)(3) claim against participant,under plan's subrogation provision, for reimbursement following participant'stort recovery); Blue Cross & Blue Shield v. Sanders, 138 F.3d 1347,1353 (11th Cir. 1998) (same); Southern Council of Indus. Workers v. Ford,83 F.3d 966, 969 (8th Cir. 1996) (same).

4 The court of appeals erred in concluding that suits for violations ofSection 406 should be limited to suits against fiduciaries because Section406 appears in Part 4 of Title I of ERISA, which is captioned "FiduciaryResponsibility." Despite that caption, Part 4, which encompasses 29U.S.C. 1101-1114, contains provisions that unquestionably impose dutieson persons other than fiduciaries. For example, Section 411, 29 U.S.C. 1111,forbids individuals convicted of certain enumerated felonies from servingnot only as plan fiduciaries but also as service providers. And Section412, 29 U.S.C. 1112, requires the bonding of both plan fiduciaries and anyother person who handles plan property. That Section also makes it unlawfulfor any person to purchase such bonds from a company in which the plan orany party in interest has a significant or controlling interest. 29 U.S.C.1112(a) and (c).

5 Whether it is the Secretary of Labor or the Secretary of the Treasurywho has jurisdiction to assess a penalty or tax depends on whether the planis a tax-qualified plan, and thus covered by 26 U.S.C. 4975(e)(1) (1994& Supp. III 1997). See 29 U.S.C. 1132(i) (Subsection (i) does "notapply to a transaction with respect to a plan described in section 4975(e)(1)of title 26"). In general, pension plans are covered by 26 U.S.C. 4975,while welfare benefit plans are covered by 29 U.S.C. 1132(i). The tax provisiondefines "prohibited transaction" in a manner that is substantiallysimilar to that in which Section 406 defines that term under Title I ofERISA. See 26 U.S.C. 4975(c) (1994 & Supp. III 1997). The tax provisionalso defines "disqualified person" in a manner that is substantiallysimilar to that in which Section 3(14) of ERISA, 29 U.S.C. 1002(14), defines"party in interest" for purposes of Title I. See 26 U.S.C. 4975(e)(2).

The court of appeals erred in treating this case as one in which the Secretaryof Labor could impose a civil penalty on respondents under 29 U.S.C. 1132(i).See Pet. App. 8a-9a. Because this case apparently involves a tax-qualifiedplan within the meaning of Section 4975(e)(1), respondents would be subjectto imposition of a tax by the Secretary of the Treasury, but only afterreferral to the Secretary of Labor to provide her a reasonable opportunityto obtain a correction by respondents of the prohibited transaction. See29 U.S.C. 4975(h).

6 The procedures for assessment of civil sanctions by the Secretary of Laborunder Section 502(i) are set forth at 29 C.F.R. 2570.1 to 2570.12. Thoseprocedures afford the party in interest an opportunity for a hearing, anadministrative appeal, and judicial review pursuant to the AdministrativeProcedure Act, 5 U.S.C. 704. See 29 C.F.R. 2570.1, 2570.8(b), 2570.10, 2570.12(b).The 90-day correction period under Section 502(i) ends 90 days after thefinal agency order with respect to the transaction or, if the party in interestseeks judicial review of a final agency order, 90 days after the entry ofa final order in the judicial action. See 29 C.F.R. 2560.502i-1(d).

7 If the prohibited transaction is corrected in a timely manner, the taxshall not exceed 15% of the amount of the transaction for each year (orpart thereof) in the taxable period, 26 U.S.C. 4975(a) (Supp. III 1997),and the civil penalty shall not exceed 5% of the amount of the transactionfor each year (or part thereof) during which the prohibited transactioncontinues, 29 U.S.C. 1132(i).

8 In Mertens, the Court suggested that the reference in Section 502(l) to"any other person" who knowingly participates in a fiduciary breachmight be to a co-fiduciary, since Section 405(a) of the Act, 29 U.S.C. 1105(a),renders a co-fiduciary liable for breaches of fiduciary duty by anotherfiduciary in certain circumstances. See 508 U.S. at 260-261. But co-fiduciariesare fiduciaries. The only reading of the references in Section 502(l) to"fiduciary or other person" that gives meaning to all of its wordsis one in which "other person" means a person who is not a fiduciary-including a person, such as respondent Salomon, who is a nonfiduciary partyin interest. The term "person" is specifically defined in ERISAto mean "an individual, partnership, joint venture, corporation, mutualcompany, joint-stock company, trust, estate, unincorporated organization,association, or employee organization." 29 U.S.C. 1002(9). That definitionis not limited to "fiduciary," a term that is separately definedin 29 U.S.C. 1002(21). The discussion of "other person" in Mertensdid not advert to the separate definition of "person."

9 The only difference between Subsections (a)(3) and (a)(5) is that theformer includes actions to redress violations of, or to enforce, terms ofa plan as well as the Act; under the latter, the Secretary is limited tobringing actions to redress violations of, or to enforce, the Act itself.

10 Restitution is a core concept in equity, employed principally throughthe remedy of a constructive trust. Elaine Shoben & William Tabb, Casesand Problems on Remedies 711 (1989); Restatement of Restitution § 160,at 140, Introductory Note 9 (1937); John Dawson, Unjust Enrichment 26 (1951);Stauffer v. Stauffer, 351 A.2d 236, 241 (Pa. 1976) (constructive trust "isan equitable remedy designed to prevent unjust enrichment").

11 We sought certiorari on that issue after Mertens in Reich v. ContinentalCasualty Co., No. 94-1094, but the Court denied the petition. 513 U.S. 1152(1995).

12 In Lockheed Corp., 517 U.S. at 889 n.3, the Court noted that its discussionin Mertens of the liability of parties in interest to disgorge assets andprofits obtained in violation of Section 406(a) was dicta. The Court alsonoted that its discussion in Mertens in any event suggested such liabilityonly when a violation of Section 406(a) is established, which, under Lockheed,"requires a showing that a fiduciary caused the plan to engage in thetransaction in question." Ibid. The Court went on to say that, therefore,the lower court in Lockheed "was not necessarily wrong in saying that'a party in interest who benefitted from an impermissible transaction canbe held liable under ERISA.'" Ibid. (emphasis added by this Court).This case has proceeded on the assumption that a fiduciary (NISA) causedthe plan to engage in the prohibited transaction, which establishes a violationof Section 406. See Lockheed, 517 U.S. at 888-889. Salomon, as a nonfiduciaryparty in interest, benefitted from that impermissible transaction. Accordingly,it should be liable for restitution to the plan.

13 The Conference Report further explains, however, that, "[i]n general,it is expected that a transaction will not be a prohibited transaction (undereither the labor or the tax provisions) if the transaction is an ordinary'blind' purchase or sale of securities through an exchange where neitherbuyer nor seller (nor the agent of either) knows the identity of the otherparty involved. In this case, there is no reason to impose a sanction ona fiduciary (or party-in-interest) merely because, by chance, the otherparty turns out to be a party-in-interest (or plan)." H.R. Conf. Rep.No. 1280, supra, at 307, reprinted in 3 Leg. Hist. 4574. Again, the Reportcould not be clearer in its view that parties in interest are prohibitedfrom engaging in particular transactions with a plan and can be sanctionedfor their violation of that prohibition.



 

APPENDIX

1. Section 502 of Employee Retirement Income Security Act of 1974, 29 U.S.C.1132 (1994 & Supp. III 1997), provides, in relevant part:

Civil enforcement

(a) Persons empowered to bring a civil action

A civil action may be brought-

(1) by a participant or beneficiary-

(A) for the relief provided for in subsection (c) of this section, or

(B) to recover benefits due to him under the terms of his plan, to enforcehis rights under the terms of the plan, or to clarify his rights to futurebenefits under the terms of the plan;

(2) by the Secretary, or by a participant, beneficiary or fiduciary forappropriate relief under section 1109 of this title;

(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act orpractice which violates any provision of this subchapter or the terms ofthe plan, or (B) to obtain other appropriate equitable relief (i) to redresssuch violations or (ii) to enforce any provisions of this subchapter orthe terms of the plan;

(4) by the Secretary, or by a participant, or beneficiary for appropriaterelief in the case of a violation of 1025(c) of this title;

(5) except as otherwise provided in subsection (b) of this section, by theSecretary (A) to enjoin any act or practice which violates any provisionof this subchapter, or (B) to obtain other appropriate equitable relief(i) to redress such violation or (ii) to enforce any provision of this subchapter;

(6) by the Secretary to collect any civil penalty under paragraph (2), (4),(5), or (6) of subsection (c) of this section or under subsection (i) or(l) of this section;

(7) by a State to enforce compliance with a qualified medical child supportorder (as defined in section 1169(a)(2)(A) of this title);

(8) by the Secretary, or by an employer or other person referred to in section1021(f)(1) of this title, (A) to enjoin any act or practice which violatessubsection (f) of section 1021 of this title, or (B) to obtain appropriateequitable relief (i) to redress such violation or (ii) to enforce such subsection;or

(9) in the event that the purchase of an insurance contract or insuranceannuity in connection with termination of an individual's status as a participantcovered under a pension plan with respect to all or any portion of the participant'spension benefit under such plan constitutes a violation of part 4 of thistitle1 or the terms of the plan, by the Secretary, by any individual whowas a participant or beneficiary at the time of the alleged violation, orby a fiduciary, to obtain appropriate relief, including the posting of securityif necessary, to assure receipt by the participant or beneficiary of theamounts provided or to be provided by such insurance contract or annuity,plus reasonable prejudgment interest on such amounts.

* * * * *

(i) Administrative assessment of civil penalty

In the case of a transaction prohibited by section 1106 of this title bya party in interest with respect to a plan to which this part applies, theSecretary may assess a civil penalty against such party in interest. Theamount of such penalty may not exceed 5 percent of the amount involved ineach such transaction (as defined in section 4975(f)(4) of title 26) foreach year or part thereof during which the prohibited transaction continues,except that, if the transaction is not corrected (in such manner as theSecretary shall prescribe in regulations which shall be consistent withsection 4975(f)(5) of title 26) within 90 days after notice from the Secretary(or such longer period as the Secretary may permit), such penalty may bein an amount not more than 100 percent of the amount involved. This subsectionshall not apply to a transaction with respect to a plan described in section4975(e)(1) of title 26.

* * * * *

(l) Civil penalties on violations by fiduciaries

(1) In the case of-

(A) any breach of fiduciary responsibility under (or other violation of)part 4 of this subtitle by a fiduciary, or

(B) any knowing participation in such a breach or violation by any otherperson,

the Secretary shall assess a civil penalty against such fiduciary or otherperson in an amount equal to 20 percent of the applicable recovery amount.

(2) For purposes of paragraph (1), the term "applicable recovery amount"means any amount which is recovered from a fiduciary or other person withrespect to a breach or violation described in paragraph (1)-

(A) pursuant to any settlement agreement with the Secretary, or

(B) ordered by a court to be paid by such fiduciary or other person to aplan or its participants and beneficiaries in a judicial proceeding institutedby the Secretary under subsection (a)(2) or (a)(5) of this section.

(3) The Secretary may, in the Secretary's sole discretion, waive or reducethe penalty under paragraph (1) if the Secretary determines in writing that-

(A) the fiduciary or other person acted reasonably and in good faith, or

(B) it is reasonable to expect that the fiduciary or other person will notbe able to restore all losses to the plan (or to provide the relief orderedpursuant to subsection (a)(9) of this section) without severe financialhardship unless such waiver or reduction is granted.

(4) The penalty imposed on a fiduciary or other person under this subsectionwith respect to any transaction shall be reduced by the amount of any penaltyor tax imposed on such fiduciary or other person with respect to such transactionunder subsection (i) of this section and section 4975 of title 26.

2. Section 3003 of ERISA, 29 U.S.C. 1203, provides:

Procedures in connection with prohibited transactions

(a) Notification to Secretary of Labor; opportunity to comment on impositionof tax under Section 4975 of title 26; waiver; requests for investigations

Unless the Secretary of the Treasury finds that the collection of a taxis in jeopardy, in carrying out the provisions of section 4975 of title26 (relating to tax on prohibited transactions) the Secretary of the Treasuryshall, in accordance with the provisions of subsection (h) of such section,notify the Secretary of Labor before sending a notice of deficiency withrespect to the tax imposed by subsection (a) or (b) of such section, and,in accordance with the provisions of subsection (h) of such section, affordthe Secretary an opportunity to comment on the imposition of the tax inany case. The Secretary of the Treasury shall have authority to waive theimposition of the tax imposed under section 4975(b) in appropriate cases.Upon receiving a written request from the Secretary of Labor or from the

Pension Benefit Guaranty Corporation, the Secretary of the Treasury shallcause an investigation to be carried out with respect to whether the taximposed by section 4975 of title 26 should be applied to any person referredto in the request.

(b) Consultation

The Secretary of the Treasury and the Secretary of Labor shall consult witheach other from time to time with respect to the provisions of section 4975of title 26 (relating to tax on prohibited transactions) and with respectto the provisions of subchapter I of this chapter relating to prohibitedtransactions and exemptions therefrom in order to coordinate the rules applicableunder such standards.

(c) Transmission of information to Secretary of the Treasury

Whenever the Secretary of Labor obtains information indicating that a party-in-interestor disqualified person is violating section 1106 of this title, he shalltransmit such information to the Secretary of the Treasury.

3. Section 4975 of Title 26 of the United States Code (1994 & Supp.III 1997) provides:

Tax on prohibited transactions

(a) Initial taxes on disqualified person.

There is hereby imposed a tax on each prohibited transaction. The rate oftax shall be equal to 15 percent of the amount involved with respect tothe prohibited transaction for each year (or part thereof) in the taxableperiod. The tax imposed by this subsection shall be paid by any disqualifiedperson who participates in the prohibited transaction (other than a fiduciaryacting only as such).

(b) Additional taxes on disqualified person.

In any case in which an initial tax is imposed by subsection (a) on a prohibitedtransaction and the transaction is not corrected within the taxable period,there is hereby imposed a tax equal to 100 percent of the amount involved.The tax imposed by this subsection shall be paid by any disqualified personwho participated in the prohibited transaction (other than a fiduciary actingonly as such).

(c) Prohibited transaction.

(1) General rule.

For purposes of this section, the term "prohibited transaction"means any direct or indirect-
(A) sale or exchange, or leasing, of any property between a plan and a disqualifiedperson;

(B) lending of money or other extension of credit between a plan and a disqualifiedperson;

(C) furnishing of goods, services, or facilities between a plan and a disqualifiedperson;

(D) transfer to, or use by or for the benefit of, a disqualified personof the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals withthe income or assets of a plan in his own interest or for his own account;or

(F) receipt of any consideration for his own personal account by any disqualifiedperson who is a fiduciary from any party dealing with the plan in connectionwith a transaction involving the income or assets of the plan.

(2) Special exemption.

The Secretary shall establish an exemption procedure for purposes of thissubsection. Pursuant to such procedure, he may grant a conditional or unconditionalexemption of any disqualified person or transaction, orders of disqualifiedpersons or transactions, from all or part of the restrictions imposed byparagraph (1) of this subsection. Action under this subparagraph may betaken only after consultation and coordination with the Secretary of Labor.The Secretary may not grant an exemption under this paragraph unless hefinds that such exemption is-

(A) administratively feasible,

(B) in the interests of the plan and of its participants and beneficiaries,and

(C) protective of the rights of participants and beneficiaries of the plan.

Before granting an exemption under this paragraph, the Secretary shall requireadequate notice to be given to interested persons and shall publish noticein the Federal Register of the pendency of such exemption and shall affordinterested persons an opportunity to present views. No exemption may begranted under this paragraph with respect to a transaction described insubparagraph (E) or (F) of paragraph (1) unless the Secretary affords anopportunity for a hearing and makes a determination on the record with respectto the findings required under subparagraphs (A), (B), and (C) of this paragraph,except that in lieu of such hearing the Secretary may accept any recordmade by the Secretary of Labor with respect to an application for exemptionunder section 408(a) of title I of the Employee Retirement Income SecurityAct of 1974.

(3) Special rule for individual retirement accounts.

An individual for whose benefit an individual retirement account is establishedand his beneficiaries shall be exempt from the tax imposed by this sectionwith respect to any transaction concerning such account (which would otherwisebe taxable under this section) if, with respect to such transaction, theaccount ceases to be an individual retirement account by reason of the applicationof section 408(e)(2)(A) or if section 408(e)(4) applies to such account.

(4) Special rule for medical savings accounts.

An individual for whose benefit a medical savings account (within the meaningof section 220(d)) is established shall be exempt from the tax imposed bythis section with respect to any transaction concerning such account (whichwould otherwise be taxable under this section) if section 220(e)(2) appliesto such transaction.

(5) Special rule for education individual retirement accounts.

An individual for whose benefit an education individual retirement accountis established and any contributor to such account shall be exempt fromthe tax imposed by this section with respect to any transaction concerningsuch account (which would otherwise be taxable under this section) if section530(d) applies with respect to such transaction.

(d) Exemptions.

Except as provided in subsection (f)(6), the prohibitions provided in subsection(c) shall not apply to-

(1) any loan made by the plan to a disqualified person who is a participantor beneficiary of the plan if such loan-

(A) is available to all such participants or beneficiaries on a reasonablyequivalent basis,

(B) is not made available to highly compensated employees (within the meaningof section 414(q)) in an amount greater than the amount made available toother employees,

(C) is made in accordance with specific provisions regarding such loansset forth in the plan,

(D) bears a reasonable rate of interest, and

(E) is adequately secured;

(2) any contract, or reasonable arrangement, made with a disqualified personfor office space, or legal, accounting, or other services necessary forthe establishment or operation of the plan, if no more than reasonable compensationis paid therefor;

(3) any loan to an2 leveraged employee stock ownership plan (as definedin subsection (e)(7)), if-

(A) such loan is primarily for the benefit of participants and beneficiariesof the plan, and

(B) such loan is at a reasonable rate of interest, and any collateral whichis given to a disqualified person by the plan consists only of qualifyingemployer securities (as defined in subsection (e)(8));

(4) the investment of all or part of a plan's assets in deposits which beara reasonable interest rate in a bank or similar financial institution supervisedby the United States or a State, if such bank or other institution is afiduciary of such plan and if-

(A) the plan covers only employees of such bank or other institution andemployees of affiliates of such bank or other institution, or

(B) such investment is expressly authorized by a provision of the plan orby a fiduciary (other than such bank or institution or affiliates thereof)who is expressly empowered by the plan to so instruct the trustee with respectto such investment;

(5) any contract for life insurance, health insurance, or annuities withone or more insurers which are qualified to do business in a State if theplan pays no more than adequate consideration, and if each such insureror insurers is-

(A) the employer maintaining the plan, or

(B) a disqualified person which is wholly owned (directly or indirectly)by the employer establishing the plan, or by any person which is a disqualifiedperson with respect to the plan, but only if the total premiums and annuityconsiderations written by such insurers for life insurance, health insurance,or annuities for all plans (and their employers) with respect to which suchinsurers are disqualified persons (not including premiums or annuity considerationswritten by the employer maintaining the plan) do not exceed 5 percent ofthe total premiums and annuity considerations written for all lines of insurancein that year by such insurers (not including premiums or annuity considerationswritten by the employer maintaining the plan);

(6) the provision of any ancillary service by a bank or similar financialinstitution supervised by the United States or a State, if such serviceis provided at not more than reasonable compensation, if such bank or otherinstitution is a fiduciary of such plan, and if-

(A) such bank or similar financial institution has adopted adequate internalsafeguards which assure that the provision of such ancillary service isconsistent with sound banking and financial practice, as determined by Federalor State supervisory authority, and

(B) the extent to which such ancillary service is provided is subject tospecific guidelines issued by such bank or similar financial institution(as determined by the Secretary after consultation with Federal and Statesupervisory authority), and under such guidelines the bank or similar financialinstitution does not provide such ancillary service-

(i) in an excessive or unreasonable manner, and

(ii) in a manner that would be inconsistent with the best interests of participantsand beneficiaries of employee benefit plans;

(7) the exercise of a privilege to convert securities, to the extent providedin regulations of the Secretary, but only if the plan receives no less thanadequate consideration pursuant to such conversion;

(8) any transaction between a plan and a common or collective trust fundor pooled investment fund maintained by a disqualified person which is abank or trust company supervised by a State or Federal agency or betweena plan and a pooled investment fund of an insurance company qualified todo business in a State if-

(A) the transaction is a sale or purchase of an interest in the fund,

(B) the bank, trust company, or insurance company receives not more thanreasonable compensation, and

(C) such transaction is expressly permitted by the instrument under whichthe plan is maintained, or by a fiduciary (other than the bank, trust company,or insurance company, or an affiliate thereof) who has authority to manageand control the assets of the plan;

(9) receipt by a disqualified person of any benefit to which he may be entitledas a participant or beneficiary in the plan, so long as the benefit is computedand paid on a basis which is consistent with the terms of the plan as appliedto all other participants and beneficiaries;

(10) receipt by a disqualified person of any reasonable compensation forservices rendered, or for the reimbursement of expenses properly and actuallyincurred, in the performance of his duties with the plan, but no personso serving who already receives full-time pay from an employer or an associationof employers, whose employees are participants in the plan or from an employeeorganization whose members are participants in such plan shall receive compensationfrom such fund, except for reimbursement of expenses properly and actuallyincurred;

(11) service by a disqualified person as a fiduciary in addition to beingan officer, employee, agent, or other representative of a disqualified person;

(12) the making by a fiduciary of a distribution of the assets of the trustin accordance with the terms of the plan if such assets are distributedin the same manner as provided under section 4044 of title IV of the EmployeeRetirement Income Security Act of 1974 (relating to allocation of assets);

(13) any transaction which is exempt from section 406 of such Act by reasonof section 408(e) of such Act (or which would be so exempt if such section406 applied to such transaction) or which is exempt from section 406 ofsuch Act by reason of section 408(b)(12) of such Act;

(14) any transaction required or permitted under part 1 of subtitle E oftitle IV or section 4223 of the Employee Retirement Income Security Actof 1974, but this paragraph shall not apply with respect to the applicationof subsection (c)(1)(E) or (F); or

(15) a merger of multiemployer plans, or the transfer of assets or liabilitiesbetween multiemployer plans, determined by the Pension Benefit GuarantyCorporation to meet the requirements of section 4231 of such Act, but thisparagraph shall not apply with respect to the application of subsection(c)(1)(E) or (F).

(e) Definitions.

(1) Plan.

For purposes of this section, the term "plan" means-

(A) a trust described in section 401(a) which forms a part of a plan, ora plan described in section 403(a), which trust or plan is exempt from taxunder section 501(a),

(B) an individual retirement account described in section 408(a),

(C) an individual retirement annuity described in section 408(b),

(D) a medical savings account described in section 220(d),

(E) an education individual retirement account described in section 530,or

(F) a trust, plan, account, or annuity which, at any time, has been determinedby the Secretary to be described in any preceding subparagraph of this paragraph.

(2) Disqualified person.

For purposes of this section, the term "disqualified person" meansa person who is-

(A) a fiduciary;

(B) a person providing services to the plan;

(C) an employer any of whose employees are covered by the plan;

(D) an employee organization any of whose members are covered by the plan;

(E) an owner, direct or indirect, of 50 percent or more of-

(i) the combined voting power of all classes of stock entitled to vote orthe total value of shares of all classes of stock of a corporation,

(ii) the capital interest or the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated enterprise,

which is an employer or an employee organization described in subparagraph(C) or (D);

(F) a member of the family (as defined in paragraph (6)) of any individualdescribed in subparagraph (A), (B), (C), or (E);

(G) a corporation, partnership, or trust or estate of which (or in which)50 percent or more of-

(i) the combined voting power of all classes of stock entitled to vote orthe total value of shares of all classes of stock of such corporation,

(ii) the capital interest or profits interest of such partnership, or

(iii) the beneficial interest of such trust or estate,

is owned directly or indirectly, or held by persons described in subparagraph(A), (B), (C), (D), or (E);

(H) an officer, director (or an individual having powers or responsibilitiessimilar to those of officers or directors), a 10 percent or more shareholder,or a highly compensated employee (earning 10 percent or more of the yearlywages of an employer) of a person described in subparagraph (C), (D), (E),or (G); or

(I) a 10 percent or more (in capital or profits) partner or joint venturerof a person described in subparagraph (C), (D), (E), or (G).

The Secretary, after consultation and coordination with the Secretary ofLabor or his delegate, may by regulation prescribe a percentage lower than50 percent for subparagraphs (E) and (G) and lower than 10 percent for subparagraphs(H) and (I).

(3) Fiduciary.

For purposes of this section, the term "fiduciary" means any personwho-

(A) exercises any discretionary authority or discretionary control respectingmanagement of such plan or exercises any authority or control respectingmanagement or disposition of its assets,

(B) renders investment advice for a fee or other compensation, direct orindirect, with respect to any moneys or other property of such plan, orhas any authority or responsibility to do so, or

(C) has any discretionary authority or discretionary responsibility in theadministration of such plan.
Such term includes any person designated under section 405(c)(1)(B) of theEmployee Retirement Income Security Act of 1974.

(4) Stockholdings.

For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken intoaccount indirect stockholdings which would be taken into account under section267(c), except that, for purposes of this paragraph, section 267(c)(4) shallbe treated as providing that the members of the family of an individualare the members within the meaning of paragraph (6).

(5) Partnerships; trusts.

For purposes of paragraphs (2)(E)(ii) and (iii), (G)(ii) and (iii), and(I) the ownership of profits or beneficial interests shall be determinedin accordance with the rules for constructive ownership of stock providedin section 267(c) (other than paragraph (3) thereof), except that section267(c)(4) shall be treated as providing that the members of the family ofan individual are the members within the meaning of paragraph (6).

(6) Member of family.

For purposes of paragraph (2)(F), the family of any individual shall includehis spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.

(7) Employee stock ownership plan.

The term "employee stock ownership plan" means a defined contributionplan-
(A) which is a stock bonus plan which is qualified, or a stock bonus anda money purchase plan both of which are qualified under section 401(a),and which are designed to invest primarily in qualifying employer securities;and

(B) which is otherwise defined in regulations prescribed by the Secretary.

A plan shall not be treated as an employee stock ownership plan unless itmeets the requirements of section 409(h), section 409(o), and, as applicable,section 409(n) and section 664(g) and, if the employer has a registration-typeclass of securities (as defined in section 409(e)(4)), it meets the requirementsof section 409(e).

(8) Qualifying employer security.

The term "qualifying employer security" means any employer securitywithin the meaning of section 409(l). If any moneys or other property ofa plan are invested in shares of an investment company registered underthe Investment Company Act of 1940, the investment shall not cause thatinvestment company or that investment company's investment adviser or principalunderwriter to be treated as a fiduciary or a disqualified person for purposesof this section, except when an investment company or its investment adviseror principal underwriter acts in connection with a plan covering employeesof the investment company, its investment adviser, or its principal underwriter.

(9) Section made applicable to withdrawal liability payment funds.

For purposes of this section-

(A) In general.

The term "plan" includes a trust described in section 501(c)(22).

(B) Disqualified person.

In the case of any trust to which this section applies by reason of subparagraph(A), the term "disqualified person" includes any person who isa disqualified person with respect to any plan to which such trust is permittedto make payments under section 4223 of the Employee Retirement Income SecurityAct of 1974.

(f) Other definitions and special rules.

For purposes of this section-

(1) Joint and several liability.

If more than one person is liable under subsection (a) or (b) with respectto any one prohibited transaction, all such persons shall be jointly andseverally liable under such subsection with respect to such transaction.

(2) Taxable period.

The term "taxable period" means, with respect to any prohibitedtransaction, the period beginning with the date on which the prohibitedtransaction occurs and ending on the earliest of-

(A) the date of mailing a notice of deficiency with respect to the tax imposedby subsection (a) under section 6212,

(B) the date on which the tax imposed by subsection (a) is assessed, or

(C) the date on which correction of the prohibited transaction is completed.

(3) Sale or exchange; encumbered property.

A transfer of real or personal property by a disqualified person to a planshall be treated as a sale or exchange if the property is subject to a mortgageor similar lien which the plan assumes or if it is subject to a mortgageor similar lien which a disqualified person placed on the property withinthe 10-year period ending on the date of the transfer.

(4) Amount involved.

The term "amount involved" means, with respect to a prohibitedtransaction, the greater of the amount of money and the fair market valueof the other property given or the amount of money and the fair market valueof the other property received; except that, in the case of services describedin paragraphs (2) and (10) of subsection (d) the amount involved shall beonly the excess compensation. For purposes of the preceding sentence, thefair market value-

(A) in the case of the tax imposed by subsection (a), shall be determinedas of the date on which the prohibited transaction occurs; and

(B) in the case of the tax imposed by subsection (b), shall be the highestfair market value during the taxable period.

(5) Correction.

The terms "correction" and "correct" mean, with respectto a prohibited transaction, undoing the transaction to the extent possible,but in any case placing the plan in a financial position not worse thanthat in which it would be if the disqualified person were acting under thehighest fiduciary standards.

(6) Exemptions not to apply to certain transactions.

(A) In general.

In the case of a trust described in section 401(a) which is part of a planproviding contributions or benefits for employees some or all of whom areowner-employees (as defined in section 401(c)(3)), the exemptions providedby subsection (d) (other than paragraphs (9) and (12)) shall not apply toa transaction in which the plan directly or indirectly-

(i) lends any part of the corpus or income of the plan to,

(ii) pays any compensation for personal services rendered to the plan to,or

(iii) acquires for the plan any property from, or sells any property to,

any such owner-employee, a member of the family (as defined in section 267(c)(4))of any such owner-employee, or any corporation in which any such owner-employeeowns, directly or indirectly, 50 percent or more of the total combined votingpower of all classes of stock entitled to vote or 50 percent or more ofthe total value of shares of all classes of stock of the corporation.

(B) Special rules for shareholder-employees, etc.

(i) In general.

For purposes of subparagraph (A), the following shall be treated as owner-employees:

(I) A shareholder-employee.

(II) A participant or beneficiary of an individual retirement plan (as definedin section 7701(a)(37)).

(III) An employer or association of employees which establishes such anindividual retirement plan under section 408(c).
(ii) Exception for certain transactions involving shareholder-employees.

Subparagraph (A)(iii) shall not apply to a transaction which consists ofa sale of employer securities to an employee stock ownership plan (as definedin subsection (e)(7)) by a shareholder-employee, a member of the family(as defined in section 267(c)(4)) of such shareholder-employee, or a corporationin which such a shareholder-employee owns stock representing a 50 percentor greater interest described in subparagraph (A).

(C) Shareholder-employee.

For purposes of subparagraph (B), the term "shareholder-employee"means an employee or officer of an S corporation who owns (or is consideredas owning within the meaning of section 318(a)(1)) more than 5 percent ofthe outstanding stock of the corporation on any day during the taxable yearof such corporation.

(g) Application of section.

This section shall not apply-

(1) in the case of a plan to which a guaranteed benefit policy (as definedin section 401(b)(2)(B) of the Employee Retirement Income Security Act of1974) is issued, to any assets of the insurance company, insurance service,or insurance organization merely because of its issuance of such policy;

(2) to a governmental plan (within the meaning of section 414(d)); or

(3) to a church plan (within the meaning of section 414(e)) with respectto which the election provided by section 410(d) has not been made.

In the case of a plan which invests in any security issued by an investmentcompany registered under the Investment Company Act of 1940, the assetsof such plan shall be deemed to include such security but shall not, byreason of such investment, be deemed to include any assets of such company.

(h) Notification of Secretary of Labor.

Before sending a notice of deficiency with respect to the tax imposed bysubsection (a) or (b), the Secretary shall notify the Secretary of Laborand provide him a reasonable opportunity to obtain a correction of the prohibitedtransaction or to comment on the imposition of such tax.

(i) Cross reference.

For provisions concerning coordination procedures between Secretary of Laborand Secretary of the Treasury with respect to application of tax imposedby this section and for authority to waive imposition of the tax imposedby subsection (b), see section 3003 of the Employee Retirement Income SecurityAct of 1974.

1 So in original. Probably should be "subtitle".

2 So in original. Probably should be "a".

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