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November 26, 2002
DOL Issues “Blackout Period” Regulations;
Effective January 26, 2003 |
The Department of Labor has
issued interim final regulations under the
Sarbanes-Oxley Act of 2002, regarding the
requirement that participants in plans that
feature participant-directed investments be
furnished advance notice of any blackout period.
The Act’s provision applies to plan
blackouts of 401(k) and other defined contribution
retirement plans, typically to implement recordkeeper
or investment fund changes. (The new law was
enacted largely in response to the collapse
of Enron Corp. and other corporate failures
that affected 401(k) plans.)
The regulations define “blackout period”,
essentially, as a period of more than three
consecutive business days in which the participant’s
ability to direct investments or obtain distributions
or loans is temporarily suspended or restricted.
Under the regulations, the Plan Administrator
must furnish participants notice of the pending
blackout period at least thirty days before
the blackout period commences. (Technically,
the thirty-day rule applies to most daily
valued plans; for plans that provide less
frequent investment and distribution elections,
the thirty day period must be counted back
from the date of the participant’s last
opportunity to take action before the commencement
of the blackout period.) The notice, however,
cannot be given more than sixty days before
the blackout period commences, because, according
to DOL, a notice furnished too early might
not have adequate impact on the participant
who reads it.
Exceptions to the minimum thirty-day notice
period can apply in cases of events that were
unforeseeable or circumstances beyond the
reasonable control of the Plan Administrator,
or in the case of certain mergers or acquisitions.
In these cases, however, the Plan Administrator
must provide the notice as soon as reasonably
possible.
The notice must describe (among other things)
the reason for the blackout period and the
rights of the participants that are affected
(e.g., investment changes, distributions,
etc.), and also include the beginning and
ending dates of the blackout period. In addition,
when investment rights are affected, the notice
must contain a statement specifically advising
the participants that they “should evaluate
the appropriateness of their current investment
decisions in light of their inability to direct
or diversify assets in their accounts during
the blackout period.” (Affected parties
should always check or coordinate with their
investment advisors.)
The DOL’s regulations contain a model
notice that may be used, with some obvious
tailoring to fit the circumstances of the
particular plan. In lieu of furnishing the
notice on paper, plans are given the option
to give the notice electronically.
Plans sponsored by publicly held companies
where employer stock in the plan is subject
to the blackout must also furnish the blackout
notice to the issuer (i.e., typically the
employer). Under the Act, such issuers are
required to notify the members of the board
of directors and the executive officers, as
well as the Securities Exchange Commission,
of the blackout period. (The Act forbids trading
of company stock by such directors and officers
during the blackout period.)
The Act provides for potentially severe penalties
for violation of the blackout notice rules.
For example, a penalty of $100-per-day, per
affected participant, can be assessed by the
DOL. The regulations spell out the penalty
assessment procedures.
The regulations apply to blackout periods
commencing on or after January 26, 2003.
If you or your investment provider have any
questions regarding the blackout period regulations,
please contact your NRS Account Manager. |
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