The Sarbanes-Oxley Act, enacted on July 30, 2002 (the "Act") requires each administrator of an "individual account" plan under ERISA to provide advance notice to plan participants and beneficiaries (collectively, "participants") of any "blackout" period. Advance notice of a blackout period must be given under interim final rules issued by the Department of Labor/Pension and Welfare Benefits Administration (DOL). The interim final rules are effective for blackout periods commencing on or after January 26, 2003. DOL has requested comments on certain issues which must be submitted by November 20, 2002.
For these rules, a blackout generally means any period of at least 3 business days where the plan administrator will suspend, limit or restrict the participants’ or beneficiaries’ ability to:
- Direct or diversify assets credited to their accounts;
- Obtain loans from the plan that are otherwise allowed under the plan terms, or
- Obtain distributions from the plan that are otherwise allowed thereunder.
More information on the Sarbanes-Oxley Act provisions affecting plans is in our August 2002 Legal Alert.
Plans Affected
Individual account plans generally include 401(k) and profit sharing plans. Plan provisions affected by a blackout period may include participant-directed investment options, plan loans, in-service withdrawals, and standard distribution procedures. Generally, plan administrators impose blackout periods to ensure proper accounting and record transfer upon events, such as changing available investment options, a change in plan recordkeepers, trustees or other service providers, or a corporate transaction, such as a merger, that impacts the coverage of groups of participants under a plan.
Advance Notice Requirements - Timing
The notice must go to affected participants and beneficiaries at least 30 days, but not more than 60 days prior to the beginning of the blackout period and include both the beginning and ending date of the blackout period. Administrators must count back 30 calendar days from last date on which participants had the right to take actions that will be affected by the blackout. For example, if the plan investments can only be changed on 10 days notice, if the blackout period starts on the first of the month, the 30 days is determined by adding the 10 day period to the 30 days so that participants have 30 days in which to make changes before the blackout. Specific plan provisions will need review before the minimum advance notice may be determined.
Notice must be given as soon as reasonably practicable, even if the 30 day advance notice is not possible. Mergers, acquisitions, divestitures and similar transactions that result in individuals becoming or ceasing to be participants are not required to give 30 days advance notice but must provide notice as soon as reasonably practicable. Similarly, if ERISA’s "exclusive purpose" and "prudence" requirements require faster action (e.g., plan with employer stock announces bankruptcy filing and administrator stops participant direction of investments into employer stock) or unforeseeable circumstances, such as a computer failure, that temporarily disable certain plan functions such as processing loans and distributions occur, notice as soon as practicable with an explanation why advance notice was not possible can suffice for these "primary" exceptions. The rules provide for a plan administrator to make a written determination, signed and dated, of circumstances requiring a primary exception.
The 60 day maximum is designed to ensure notice is not so far in advance as to undermine its importance. Notice more than 60 days in advance needs to be supplemented by notice within the 30 to 60 day window. If the beginning or ending date of a blackout period changes, the plan administrator must update the notice, explaining reasons for the change, as soon as reasonably possible, unless advance notice is impracticable.
Advance Notice Requirements – Content
The notice, written under the SPD standard (to be understood by the average plan participant), must explain the rights that will be temporarily suspended, including the investment options that are subject to the blackout. The DOL has issued a model notice which is at the end of this Legal Ale rt. Item 4 of the model letter meets the requirement of a statement that participants should review current investments in light of the inability to direct or diversity assets during a blackout period. The notice must also identify the person to contact if there are questions concerning the blackout period. The notice can be delivered electronically, as well as by hard copy.
Civil Penalties
To enforce the notice requirement, the Act also amended ERISA to allow the DOL to assess civil penalties of up to $100 per day per each affected participant for notice failures. The interim final rules provide procedures for the assessment of civil penalties, computed for the period starting with the date the plan administrator is deemed to have failed or refused to provide the notice and ending on the final day of the blackout notice period. If more than one person is responsible as administrator with respect to the failure, liability is joint and several.
The DOL must first provide notice of its intent to assess, including the proposed penalty amount, the number of participants on which the penalty is based, the period to which the penalty applies and reasons for the penalty. The plan administrator can file a statement to show reasonable cause for the blackout notice failure. In response, the DOL can choose to waive the penalty in whole or in part. In any event, the plan administrator may request a hearing on the assessment. Such hearing will be before an Administrative Law Judge and can be appealed. The DOL will use existing rules of practice and procedure for administrative proceedings before the Office of Administrative Law Judges.
SEC Blackout Period Rules Not Covered
Besides the blackout notice requirement, the Act also makes it unlawful for a director or executive officer of an issuing company, during any blackout period applicable to the trading of such company’s equity securities, to directly or indirectly buy, sell or otherwise acquire or transfer such equity securities. This provision of the Act becomes effective January 26, 2003, and the Securities and Exchange Commission (SEC) and, perhaps, the DOL should be providing guidance on such provision in the near future. The interim final rules just issued do not cover these additional blackout period rules for plans with employer securities. However, the interim final rules do require that the advance notice be provided to the issuer of employer securities so that the issuer can, in turn, notify directors, executive officers and the SEC of the blackout period.
MODEL NOTICE
Important Notice Concerning Your Rights
Under the [Enter Name of Individual Account Plan]
[Enter date of notice]
1. This notice is to inform you that the [enter name of plan] will be [enter reasons for blackout period, as appropriate: changing investment options, changing recordkeepers, etc.].
2. As a result of these changes, you temporarily will be unable to [enter as appropriate: direct or diversify investments in your individual accounts (if only specific investments are subject to the blackout, those investments should be specifically identified), obtain a loan from the plan, or obtain a distribution from the plan]. This period, during which you will be unable to exercise these rights otherwise available under the plan, is called a ‘‘blackout period.’’ Whether or not you are planning retirement in the near future, we encourage you to carefully consider how this blackout period may affect your retirement planning, as well as your overall financial plan.
3. The blackout period for the plan will begin on [enter date] and end [enter date].
4. [In the case of investments affected by the blackout period, enter the following: During the blackout period you will be unable to direct or diversify the assets held in your plan account. For this reason, it is very important that you review and consider the appropriateness of your current investments in light of your inability to direct or diversify those investments during the blackout period. For your long-term retirement security, you should give careful consideration to the importance of a well-balanced and diversified investment portfolio, taking into account all your assets, income and investments. You should be aware that there is a risk to holding substantial portions of your assets in the securities of any one company, as individual securities tend to have wider price swings, up and down, in short periods of time, than investments in diversified funds. Stocks that have wide price swings might have a large loss during the blackout period, and you would not be able to direct the sale of such stocks from your account during the blackout period.]
5. [If timely notice cannot be provided (see paragraph (b)(1)(v) of this section) enter: (A) Federal law generally requires that you be furnished notice of a blackout period at least 30 days in advance of the last date on which you could exercise your affected rights immediately before the commencement of any blackout period in order to provide you with sufficient time to consider the effect of the blackout period on your retirement and financial plans. (B) [Enter explanation of reasons for inability to furnish 30 days advance notice.]]
6. If you have any questions concerning this notice, you should contact [enter name, address and telephone number of the plan administrator or other person responsible for answering questions about the blackout period].
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
