Black Out Notices (Conversion plans)

Attached is a summary of the black out notice rules as defined in the Sarbanes-Oxley Act of 2002. This law is effective for all conversion plans effective January 26, 2003. An exception may be a non-daily valued Trustee directed plan. Although this is a well intentioned law meant to protect plan participants from what happened at ENRON, it will add a greater administrative burden to an already time consuming and confusing process. This law will almost always delay the typical plan installation and conversion time prior to its enactment. The previous providers’ time frames must be identified for supplying complete and accurate data to Paragon. This time frame varies with each individual provider.

The ultimate liability to provide this notice rests with the Plan Sponsor. Listed below is how we typically assist our conversion clients and referral sources in the process

1. Paragon will e-mail to the Plan Sponsor a copy of our “best estimate” participant black-out notice along with a draft term letter, actual wiring instructions & conversion data needs.

2. The client will review these letters, customize with our assistance, obtain trustee signature and forward directly to the prior plan provider(s). Depending on the conversion timing, the Plan Sponsor may elect to provide the “best estimate” notice to all affected employees 30 days in advance of any black out period.
 
3. After receipt of the term letter, the prior provider will typically communicate the beginning black out date (sometimes prior to actual asset redemption). In addition, they should establish the timing on when all the necessary conversion data will be provided, which will enable us to establish the ending black out date. Hopefully these dates will be very close to our “best estimate” blackout letter and a revised blackout notification will not be necessary.

As a reminder, Paragon, acting in our capacity as Third Party Administrator cannot be held accountable for the actual distribution of this notice. In addition, since the black out period is largely controlled by the prior provider, Paragon cannot be held responsible for the actual black out dates.

As a reminder, this law provides for significant criminal penalties if it is not adhered to.

Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the accounting reform legislation known as the Sarbanes-Oxley Act of 2002 "SOA". It is effective for blackouts beginning January 26, 2003, or later. The penalty section of SOA is effective immediately. Any required plan amendments must be made by the end of the first plan year beginning after the effective date of the provision. For calendar year plans, amendments have to be made by December 31, 2004.

What is a Blackout Period?
It is a period of more than three consecutive business days during which participants or beneficiaries are temporarily suspended or restricted from:

1. Directing or diversify assets credited to their accounts;
2. Obtaining loans from the plan;, or
3. Obtaining distributions from the plan

Exceptions to the Blackout Period rules.
Under ERISA 101(i), a suspension, limitation, or restriction is not considered a blackout period if it :

1. Occurs by reason of the application of the securities laws
2. Is a regularly scheduled suspension, limitation, or restriction which is disclosed to participants or beneficiaries;
3. Affects only the participant or alternate payee under a qualified domestic relations order.
4. a one-participant plan.

Form and Content of the Blackout Notice.
The notice must be written in a manner calculated to be understood by the average plan participant and it must include:

1. The reason or reasons for the blackout period
2. A description of the investments or other rights affected
3. The expected beginning date and length of the blackout period
4. A statement advising the participant or beneficiary to evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets during the blackout period; and
5. Any other requirement DOL may impose by regulation

Timing of notice
The notice must be given as soon as reasonably possible under the circumstances. In most cases the notice must be provided to affected parties no later than 30 days before the blackout period starts. However, the 30-day advance notice requirement is waived if a fiduciary can demonstrate that:

1. Delaying the blackout period would violate the exclusive purpose rule under ERISA or that the delay would be imprudent; or
2. The inability to provide notice 30 days in advance is due to events that were unforeseeable or circumstances beyond the reasonable control of the plan administrator.

Insider Trading Restrictions During Blackout Periods
This insider trading restriction applies only if the affected plan contains employer securities. Directors and executive officers are restricted from trading the employer stock held outside the plan during that blackout period. The term "blackout" has a different meaning for these purposes than for the advance notice requirement. For purposes of this requirement, the term "blackout" means any period of more than three consecutive business days during which the ability of at least half of the participants or beneficiaries of all the defined contribution plans of the plan sponsor to purchase, sell, acquire, or transfer securities is temporarily suspended.

The term Blackout Period has a different meaning for insider trading purposes. It does not include:

1. Regularly scheduled periods during which participants are restricted from trading, as long as the period is incorporated into the plan document and timely disclosed to employees before they become participants under the plan or as a subsequent amendment; or
2. Suspensions imposed solely in connection with a corporate business merger, acquisition, divestiture, or similar transaction.

Criminal Penalties
SOA provides for increased criminal penalties. For an individual, the maximum fine is now $100,000 (increased from $5,000) and the maximum prison term is 10 years (increased from 1 year). For a corporation, the maximum fine is now $500,000 (increased from $100,000). The penalty section of SOA is effective immediately.

Civil penalties
The DOL has the authority to impose a civil penalty, not to exceed $100 per day for each failure to give each affected participant the required blackout notice on a timely basis. Therefore, if a plan administrator failed to give notice to 500 participants or beneficiaries, the maximum penalty could be $50,000 PER DAY (500X$100).

The following was added 10/22/2002:

The new regulations add requirements that were not in the Sarbanes-Oxley Act of 2002 (SAO). For instance, the name, address and telephone number of the individual responsible for answering questions concerning the blackout period must be included in the notice to participants. Additionally, if 30 days advance notice is not furnished to participants, the plan administrator must provide a written explanation as to why the plan was unable to furnish notice within the 30-day limit.

SAO requires a 30-day notice before the start of the blackout period. The regulations expand this requirement in two ways. First, the 30-day begins on the last date on which participants are affected. Second, the notice can't be provided more than 60 days prior to the blackout period.

These interim regulations provide a model notice. This is just a sample notice, the plan my use any notice as long as it meets the requirements of the interim regulations. The notice may be delivered by US Mail, private delivery services or by electronic delivery. If mailed by first class mail, the notice is treated as given on the date of mailing. If provided through a private delivery service, the notice is treated as given when it is received. If provided by electronic delivery, the notice is treated as given on the date of the electronic transmission.

There are exceptions to the 30-day rule. If the exceptions are used, the plan administrator must give notice "as soon as reasonably possible" under the circumstances. The regulations provide for three exceptions to the 30-day rule:

(1)) Delay of the blackout period would violate the exclusive purpose rule or the prudence rule under ERISA;

(2) The blackout period commences due to events that were unforeseeable or circumstances that were beyond the control of the plan administrator; or

(3) The blackout period applies in connection with a merger, acquisition, divestiture, or similar transaction involving the plan or plan sponsor, and occurs solely in connection with becoming or ceasing to be a participant or beneficiary under the plan by reason of such merger, acquisition, divestiture, or similar transaction.

The law provides for a civil penalty up to $100 per day for non-compliance with the blackout notice requirements. What's more, the plan administrator is the person liable for penalties. This means that the penalty can't be paid with plan assets.

The potential liability is significant. Each failure to notify each participant or beneficiary is treated as a separate violation. For example, if there are 100 affected participants for 5 days, the maximum penalty is $100 x 5 (days) x 100 (participants) = $50,000.

Under SAO the new rules are effective January 26, 2003. However, for blackout periods commencing between January 26 and February 25, 2003, plan administrators must furnish notice "as soon as reasonably possible" instead of at least 30 days before the blackout period begins.

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