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Compliance Corner
November 26, 2002

DOL Issues “Blackout Period” Regulations; Effective January 26, 2003.   (Updated as of November 11, 2014)
The Department of Labor has issued  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 between  thirty and sixty 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, as noted above, cannot be given more than sixty days before the blackout period commences, because, according to the DOL, a notice furnished too early might not have adequate impact on the participant who reads it. References to the 30-60 day notice period refer to calendar days, not business days.

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. Other exceptions include, by example, but not by limitation: a suspension of rights due to the processing of a (divorce related)  QDRO for a specific individual, or the individual's receipt of a tax levy, or a dispute over a deceased participant's account among putative beneficiaries. Obviously, permanent restrictions caused by a plan document amendment eliminating participant loans is not a blackout event, since it is not a temporary restriction. Likewise, one participant plans are exempt from this "notice" requirement as the only participant (usually the business owner)  has no need for this information.

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.) Contact information in this notice may refer to an individual, or a department, such as the corporate benefits department, along with the corresponding name, address, and phone number of the contact.

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. Thus, if the blackout notice is 10 days late for a 100 participant plan, the penalty could be as high as $100,000. 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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