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DOL Regulations on Advance Notice of Blackout Periods Keep Plan Participants Out of the Dark

February 28, 2003

Authors: Richard I. Cohen

Being "kept in the dark" is not often the wisest approach when it comes to important financial matters. Knowing about something well in advance gives people the time to plan for it. Extending this basic common-sense principle to the world of Blackout Periods involving certain Retirement Plans was what Congress had in mind when it enacted Section 306(b)(1) of the Sarbanes-Oxley Act of 2002 in July 2002.

By requiring plan administrators to notify all plan participants (and beneficiaries in the event the participant is deceased) of an upcoming "Blackout Period" at least 30 days but not more than 60 days before the "Blackout Period" commences, Congress's goal was to put participants and beneficiaries in a position to react "to the Blackout Period" in a calm and deliberate fashion -- for example, to change their investment allocations ahead of the "Blackout Period" to protect their accounts against the possibility of potentially volatile markets during a time when investment changes wouldn't be allowable. By requiring that the notice not be given too far in advance, Congress was hoping that the notice would not be forgotten by its intended audience.

New ERISA Provision and New DOL Regulations. Section 306(b)(1) of the Sarbanes-Oxley Act of 2002 ("SOX") amended Section 101 of ERISA by adding a new subsection (i), which requires the plan administrator of individual account plans (e.g., profit sharing plans and 401(k) plans other than one-participant retirement plans) to notify all affected plan participants and beneficiaries generally at least 30 days (but not more than 60 days) prior to the commencement of a Blackout Period applicable to the plan. The Notice must be in writing, and may be delivered via regular mail, email or other electronic media, or by hand delivery.

The U.S. Department of Labor ("DOL"), on January 24, 2003, issued its final Regulations ("DOL Regulation") setting forth the retirement plan rules applicable to SOX's Blackout Period notification. (29 CFR 2520.101-3) The DOL notice requirement is broader than the SEC’s new regulation (issued January 15, 2003) governing the Blackout Trading Restriction applicable to directors and executive officers of public companies (17 CFR 245, Rules 100-104) in that the DOL-required notice must be provided to affected plan participants and beneficiaries whose plans undergo a Blackout Period, whether or not the plan offers employer securities as one of the plan's investment choices.

General Requirements. The DOL Regulation defines a Blackout Period as generally any time period during which (1) a right to direct plan investments or diversify plan assets within a self-directed account; (2) a right to obtain a plan loan, or (3) a right to obtain a plan distribution, is temporarily suspended, limited or restricted for more than three consecutive business days. Certain types of suspensions, limitations or restrictions are not considered Blackout Periods within the meaning of the Regulation, such as (1) those resulting from the federal securities laws; (2) those that are regularly scheduled, provided they have been previously disclosed to affected participants and beneficiaries in the plan's summary plan description, in other plan-related documents, or forms or materials furnished to them; and (3) those currently applicable to individual participants and beneficiaries (but not to plan participants and beneficiaries on a plan-wide basis) arising in special situations such as for divorce, tax levies, and beneficiary designation disputes.

The DOL Regulation provides exceptions to the 30-day advance notice requirement when: (1) in order to comply, a plan fiduciary determines it would have to breach its fiduciary duty under ERISA; (2) failure to comply is due to events that were unforeseeable or beyond the reasonable control of the plan administrator; or (3) the Blackout Period is solely in connection with a merger, acquisition, divestiture or similar transaction involving the plan or plan sponsor. When an exception applies, notice of the Blackout Period is to be provided to affected participants and beneficiaries as soon as reasonably possible under the circumstances, unless giving any advance notice prior to the end of the Blackout Period would be impracticable.

In addition to notifying plan participants and beneficiaries of a Blackout Period, the DOL Regulation also requires the plan administrator to notify the issuer of employer securities held by the plan in the event the Blackout Period applies to the employer securities. Sending the Notice to the issuer's agent for service of legal process shall suffice, unless the issuer has previously given the plan administrator the name of someone else to receive it. If the person consents, then the plan administrator can transmit the notice electronically or in another written form. If the issuer designates the plan administrator as the person to receive the notice, then the DOL Regulation doesn't require the plan administrator to send the notice to itself.

Content of the Notice. The Notice must (a) explain the reasons for the Blackout Period; (b) describe the types of rights under the plan that are being temporarily suspended, limited, or restricted by the Blackout Period (e.g., make investment switches; receive a plan loan; obtain a plan distribution), and identify the plan investments subject to the Blackout Period; (c) specify the length of the Blackout Period, including beginning and ending dates, or if those dates aren't yet known, the calendar weeks during which the Blackout Period is expected to begin and end, so long as the actual commencement and ending dates are readily obtainable during those weeks, and the Notice explains how to get that information (e.g., toll-free telephone number; website); (d) a reminder statement to participants and beneficiaries advising them to evaluate their current investment choices in light of the impending Blackout Period; (e) in the event advance notice isn't given at least 30 days prior to the commencement of the Blackout Period, the reasons why the plan administrator was unable to provide the Notice at least 30 days in advance; and (f) the name, address and telephone number of the plan administrator or other contact responsible for answering questions about the Blackout Period. If after furnishing the Notice, the original Blackout Period changes, a follow-up Notice must be sent containing the updated information and the reasons for the change.

Model Notice: The DOL Regulation contains a Model Notice for plan administrators to use. Using the DOL model is not mandatory, but plan administrators that do use it will be deemed to satisfy the requirements that the Notice contain the advisory statement on investment evaluations and, if applicable, the disclosure regarding why the general 30-day advance notice requirement under federal law was not met. The Model Notice's advisory statement contains a special reminder to participants and beneficiaries of the potential for greater price swings from employer securities during short periods of time and the enhanced risks therefore posed by the Blackout Period.

Penalties: Section 306(b)(3) of SOX added new ERISA Section 502(c)(7) to provide for a penalty of up to $100 per day per affected participant or beneficiary who fails to receive a timely notice of the Blackout Period. The DOL regulations that implement the penalty (29 CFR 2560.502c-7) provide that the penalty continues to run until the end of the Blackout Period, even for situations where the notice is issued but is late by a few days; in other words, the DOL position is that late notices do not stop the penalty from continuing to grow. However, subsection (e) of this DOL regulation does allow the plan administrator within 30 days after the DOL provides the plan administrator with notice of the proposed penalty assessment to request a reduction or waiver of the penalty based on a showing of reasonable cause. A plan administrator's failure to file a statement of reasonable cause within the 30-day period will be treated as a waiver of the plan administrator's right to contest the proposed penalty. The DOL's decision on the reasonable cause showing can be appealed by the plan administrator through a further administrative hearing. If more than one person serves as the plan administrator (e.g., where a Committee administers the plan), then each person is jointly and severally liable for any monetary penalty.

Effective Date: The DOL Regulation is effective on January 26, 2003, and applies to any Blackout Period beginning after January 26, 2003. Although there is no delayed effective date for blackouts beginning between January 26th and February 25th, the DOL regulations waive the 30-day advance-notice requirement, but still require the plan administrator to furnish the Notice as soon as reasonably possible.

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