Proposed Exemptions; Deutsche Bank AG, et al. (Deutsche Bank) [Notices] [02/01/2000]
Proposed Exemptions; Deutsche Bank AG, et al. (Deutsche Bank) [02/01/2000]
Volume 65, Number 21, Page 4843-4852
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10384, et al.]
Proposed Exemptions; Deutsche Bank AG, et al. (Deutsche Bank)
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Attention: Application No. stated in each Notice of Proposed Exemption.
The applications for exemption and the comments received will be
available for public inspection in the Public Documents Room of Pension
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5507, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, U.S.C. App. 1 (1996) transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
[[Page 4844]]
Deutsche Bank AG, et al. (Deutsche Bank) Located in New York, NY
[Application No. D-10384]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply to (1) the sale to employee benefit plans (the
Plans) of a synthetic guaranteed investment contract (the Buy & Hold
Synthetic GIC) offered by Deutsche Bank, which is or may become a party
in interest with respect to the Plans; and (2) extensions of credit by
Deutsche Bank to the Plans for the purpose of funding benefit
withdrawals.
This proposed exemption is conditioned on the requirements set
forth below in Section II.
Section II. General Conditions
(a) The decision to enter into a Buy & Hold Synthetic GIC is made
on behalf of a participating Plan in writing by a fiduciary of such
Plan which is independent of Deutsche Bank.
(b) Only Plans with total assets having an aggregate market value
of at least $50 million are permitted to purchase Buy & Hold Synthetic
GICs; provided however that--
(1) In the case of two or more Plans which are maintained by the
same employer, controlled group of corporations or employee
organization (the Related Plans), whose assets are commingled for
investment purposes in a single master trust or any other entity the
assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan
Asset Regulation), which entity has purchased a Buy & Hold Synthetic
GIC, the foregoing $50 million requirement is deemed satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million; provided that, if the fiduciary responsible for making the
investment decision on behalf of such master trust or other entity is
not the employer or an affiliate of the employer, such fiduciary has
total assets under its management and control, exclusive of the $50
million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million, or
(2) In the case of two or more Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (the Unrelated Plans), whose assets are commingled for
investment purposes in a group trust or any other form of entity the
assets of which are ``plan assets'' under the Plan Asset Regulation,
which entity has purchased a Buy & Hold Synthetic GIC, the foregoing
$50 million requirement is deemed satisfied if such trust or other
entity has aggregate assets which are in excess of $50 million
(excluding the assets of any Plan with respect to which the fiduciary
responsible for making the investment decision on behalf of such group
trust or other entity or any member of the controlled group of
corporations including such fiduciary is the employer maintaining such
Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity--
(A) Has full investment responsibility with respect to Plan assets
invested therein; and
(B) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to Plan investment in the
commingled entity, which are in excess of $100 million.
(c) Prior to the execution of a Buy & Hold Synthetic GIC, the
independent Plan fiduciary receives a full and detailed written
disclosure of all material features concerning the Buy & Hold Synthetic
GIC, including--
(1) A copy of the contract (the Contract), underlying the Buy &
Hold Synthetic GIC, which has been executed by Deutsche Bank and the
Plan fiduciary, which stipulates the relevant provisions of such
instrument, the interest rate that is credited (the Crediting Rate) to
the book value account (the Book Value Account) of the Buy & Hold
Synthetic GIC, the applicable fees and the rights and obligations of
the parties;
(2) Information explaining in a manner calculated to be understood
by a Plan fiduciary that if adverse market conditions occur, that the
Crediting Rate to the Book Value Account of a Buy & Hold Synthetic GIC
may be as low as 0 percent; and
(3) Copies of the proposed exemption and grant notice with respect
to the exemptive relief provided herein.
(d) Following the receipt of such disclosure, the Plan fiduciary
approves, in writing, the execution of the Buy & Hold Synthetic GIC on
behalf of the Plan.
(e) Upon entering into a Buy & Hold Synthetic GIC with a Plan
fiduciary of a Plan that provides for participant investment selection
(the Section 404(c) Plan), Deutsche Bank informs the Plan fiduciary
that such fiduciary should provide each Plan participant with--
(1) A summary of the primary provisions of the Contract, including
the applicable fees; and
(2) Information explaining that if adverse market conditions occur,
the Book Value Account's Crediting Rate may be as low as 0 percent.
(f) Subsequent to a Plan's investment in a Buy & Hold Synthetic
GIC, the Plan fiduciary and, if applicable, the Plan participant, upon
such participant's request, receive a monthly report consisting of a
statement of the Book Value Account, which specifies, among other
things, the Book Value Account balance for the prior month, withdrawals
from the Contract, any reduction in the balance of the Book Value
Account on account of a security in the fixed portfolio (the Fixed
Portfolio) becoming an impaired security, interest credited to the Book
Value Account at the Crediting Rate, and the current month's ending
balance for the Book Value Account. The report will also specify the
Current Crediting Rate, the prior month's ending fair market value of
the Fixed Portfolio, the proceeds of any securities liquidated, fees
charged to the Plan, and the current month's ending fair market value
of the Fixed Portfolio and rate of return.
(g) As to each Plan, the combined total of all fees and charges
imposed under a Buy & Hold Synthetic GIC is not in excess of
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(h) Each Buy & Hold Synthetic GIC specifically provides an
objective method for determining the fair market value of the
securities owned by the Plan pursuant to such GIC.
(i) Each Buy & Hold Synthetic GIC has a predefined maturity date
selected by the Plan fiduciary and agreed to by Deutsche Bank.
(j) Neither Deutsche Bank nor its affiliates maintain custody of
the assets underlying the Buy & Hold Synthetic GIC or commingle those
assets with other funds under their management.
(k) The formulas for computing the Crediting Rate for the Buy &
Hold Synthetic GIC and a charge for terminating the Buy & Hold
Synthetic GIC within three years of its effective date (the Early
Termination Charge) are objectively determined. Further, the Early
Termination Charge compensates
[[Page 4845]]
Deutsche Bank for its direct costs incurred in connection with the Buy
& Hold Synthetic GIC.
(l) Deutsche Bank maintains books and records of each Buy & Hold
Synthetic GIC transaction for a period of six years in a manner that is
accessible for audit and examination. Such books and records are
subject to annual audit by independent, certified public accountants.
Summary of Facts and Representations
1. The parties involved in the proposed transactions are described
as follows:
(a) Deutsche Bank AG is a German banking institution founded in
1870 and based in Frankfurt, Germany. It is the largest triple-A rated
bank in the world. In terms of assets and deposits, Deutsche Bank AG is
the largest bank in the European union and among the ten largest banks
in the world. Through its affiliates, Deutsche Bank AG is engaged, on a
global basis, in investment banking, market making, distributing debt
and equity securities of both governmental and private issuers. In
addition, Deutsche Bank AG has capabilities worldwide in the areas of
corporate finance, financial advisory services, foreign exchange
transactions, over-the-counter derivative transactions and asset
securitization.
(b) Deutsche Bank North America Holding Corp. (DBNA), a direct
subsidiary of Deutsche Bank AG, was created on September 4, 1991 to
coordinate the North American activities of the DBNA and Deutsche Bank
AG branches and subsidiaries that offer commercial banking, investment
banking, asset management and capital markets products and services to
individuals and corporations in the United States, Canada and Mexico.
(c) Deutsche Bank New York (DBNY), the New York branch of Deutsche
Bank, is operated pursuant to a license issued by the Superintendent of
Banks of the State of New York on July 14, 1978. DBNY derives its
powers from the New York Banking Law and is subject to the supervision
of the New York State Banking Department, the Board of Governors of the
Federal Reserve System and the United States courts. DBNY serves
private individuals, enterprises, public corporations and institutional
investors and banks in the United States, as well as Deutsche Bank AG's
German clients.
(d) Deutsche Morgan Grenfell Financial Products (DMGFP), an
indirect subsidiary of DBNA and an unincorporated business division of
various Deutsche Bank AG branches and subsidiaries, markets investment
banking products and services worldwide. Specifically, DMGFP's main
activities include the marketing, arranging and hedging, in the name of
various branches of Deutsche Bank AG, of certain of Deutsche Bank AG's
fixed income activities which include Buy & Hold Synthetic GICs.
As of June 30, 1999, the aforementioned Deutsche Bank entities had
total assets, on a consolidated basis, of $877.317 billion.
(e) The Plans involved herein will consist primarily of defined
contribution plans that are subject to the Act as well as Plans that
are subject to sections 401(a) and 403(b) of the Code. As also noted
herein, a Plan may invest in a Buy & Hold Synthetic GIC through
commingled investment entities.
2. The transactions for which prospective exemptive relief is
requested would be entered into by Deutsche Bank AG, typically through
DBNY. The investment product would be marketed and arranged primarily
through DMGFP, a subsidiary established pursuant to section 4(c)(8) of
the Bank Holding Company Act of 1955, as amended, and supervised by the
Board of Governors of the Federal Reserve System. The Buy & Hold
Synthetic GIC will only be marketed to Plans by entities that are
Deutsche Bank affiliates located in the United States.
Accordingly, Deutsche Bank is requesting an exemption from the
Department in order to sell its Buy & Hold Synthetic GIC product to
Plans and to extend credit to such Plans for the purpose of funding
benefit withdrawals from the Contract. The Buy & Hold Synthetic GIC is
a variation of traditional guaranteed investment contracts (the GICs).
The Buy & Hold Synthetic GIC will be offered to an indeterminate number
of Plan investors and to commingled entities. Deutsche Bank will
negotiate the terms of the Buy & Hold Synthetic GIC with the
appropriate Plan fiduciary which is expected to be the Plan's named
fiduciary.\1\
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\1\ The Department notes that section 404(a)(1) of the Act
requires, among other things, that a fiduciary of a plan must act
prudently, solely in the interest of the plan's participants and
beneficiaries, and for the exclusive purpose of providing benefits
to participants and beneficiaries when making investment decisions
on behalf of a plan. The Department notes that in order to act
prudently in making investment decisions, plan fiduciaries must
consider, among other factors, the availability, risks and potential
return of alternative investments for the plan.
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3. Deutsche Bank represents that the Buy & Hold Synthetic GIC will
provide purchasers with the advantages of a traditional GIC along with
enhanced security that is not offered under a traditional GIC. Under
Deutsche Bank's Buy & Hold Synthetic GIC, each Plan will retain legal
title to all of the assets underlying the arrangement and have the
benefit of a contract pursuant to which all participant-initiated
benefit payments and transfers will be paid based on the balance of the
Book Value Account (see Representation 7.) For this purpose,
participant-initiated benefit payments and transfers mean withdrawals
necessary to accommodate any loans from the Plan to participants, in-
service withdrawals requested by participants, distributions arising
from termination of employment in the ordinary course and transfers, at
the direction of participants, from the investment fund in which the
Buy & Hold Synthetic GIC is held to another investment fund available
under the Plan other than a ``competing'' investment fund (see
Representation 11).
4. Like traditional GICs, Deutsche Bank's duties and obligations
with respect to the Buy & Hold Synthetic GIC will be governed by the
terms of a Contract which it will execute with the independent
fiduciary of the affected Plan. The Contract, which will have no
required minimum principal amount, will be issued pursuant to New York
Banking Law and will be subject to the supervision of the New York
State Banking Department and the Board of Governors of the Federal
Reserve System. The terms and conditions of each Contract will be
negotiated by the Plan fiduciary and Deutsche Bank. For example, the
maturity date for the Buy & Hold Synthetic GIC will be agreed to by the
Plan fiduciary and Deutsche Bank before the Contract is executed.
Effectively, the Plan fiduciary will determine the maturity date of a
Buy & Hold Synthetic GIC. However, in no event will the Buy & Hold
Synthetic GIC have a stated maturity date exceeding seven years. Once
the Contract is executed, Deutsche Bank will have no discretion over
any of the terms of the Contract, which may be amended or modified only
upon the mutual consent of the Plan fiduciary and Deutsche Bank.
5. Deutsche Bank represents that it will only market the Buy & Hold
Synthetic GIC to Plans (or to collective investment funds established
for the investment of assets of more than one Plan) that have at least
$50 million in assets. In the case of two or more Plans which are
maintained by the same employer, controlled group of corporations or
employee organization (i.e., the Related Plans), whose assets are
commingled for investment purposes in a single master trust or any
other entity
[[Page 4846]]
the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity has purchased a Buy & Hold Synthetic GIC, the
foregoing $50 million requirement will be deemed satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million. However, if the fiduciary responsible for making the
investment decision on behalf of such master trust or other entity is
not the employer or an affiliate of the employer, such fiduciary must
have total assets under its management and control, exclusive of the
$50 million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
In the case of two or more Plans which are not maintained by the
same employer, controlled group of corporations or employee
organization (i.e., the Unrelated Plans), whose assets are commingled
for investment purposes in a group trust or any other form of entity
the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity has purchased a Buy & Hold Synthetic GIC, the
foregoing $50 million requirement will be deemed satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million (excluding the assets of any Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of corporations including such fiduciary is the employer maintaining
such Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity will be required
to have (a) full investment responsibility with respect to Plan assets
invested therein; and (b) total assets under its management and
control, exclusive of the $50 million threshold amount attributable to
Plan investment in the commingled entity, which are in excess of $100
million.
6. Prior to the execution of a Buy & Hold Synthetic GIC, the
independent Plan fiduciary will receive a full and detailed written
disclosure of all material features concerning the Buy & Hold Synthetic
GIC, including (a) the Contract underlying the Buy & Hold Synthetic
GIC, which has been executed by Deutsche Bank and the Plan fiduciary,
which stipulates the relevant provisions of such instrument, the
applicable fees and the rights and obligations of the parties; (b)
information, explaining in a manner calculated to be understood by the
Plan fiduciary, that if adverse market conditions occur, the interest
rate that is credited (i.e., the Crediting Rate) to the Book Value
Account of a Buy & Hold Synthetic GIC may be as low as 0 percent; and
(c) copies of the proposed exemption and grant notice with respect to
the exemptive relief provided herein. Following the receipt of such
disclosure, the Plan fiduciary will approve, in writing, the execution
of the Buy & Hold Synthetic GIC on behalf of the Plan.
Upon entering into a Buy & Hold Synthetic GIC with a Plan fiduciary
of a Section 404(c) Plan, Deutsche Bank will inform the Plan fiduciary
that such fiduciary should provide each Plan participant with (a) a
summary of the primary provisions of the Contract; and (b) information
explaining that, if adverse market conditions occur, the Book Value
Account's Crediting Rate may be as low as 0 percent.
Subsequent to a Plan's investment in a Buy & Hold Synthetic GIC,
the Plan fiduciary and, if applicable, the Plan participant, upon such
participant's request, will receive a monthly report consisting of a
statement of the Book Value Account, which specifies, among other
things, the Book Value Account balance for the prior month, withdrawals
from the Contract, any reduction in the balance of the Book Value
Account on account of a security in the Fixed Portfolio becoming an
impaired security, interest credited to the Book Value Account at the
Crediting Rate, and the current month's ending balance for the Book
Value Account. The report will also specify the Current Crediting Rate,
the prior month's ending fair market value of the Fixed Portfolio, the
proceeds of any securities liquidated, fees charged to the Plan, and
the current month's ending fair market value of the Fixed Portfolio and
rate of return.
7. Every Buy & Hold Synthetic GIC will consist of two components.
One component will be the underlying securities or portfolio of assets
(i.e., the Fixed Portfolio), title to which will remain with the Plan's
trustee. The Fixed Portfolio will be comprised primarily of high grade,
fixed income securities, which will be selected and managed by the
Plan's trustee or another Plan fiduciary which is unaffiliated with
Deutsche Bank. The Fixed Portfolio may consist of a single security or
a fixed portfolio of securities that will be established at the
inception of the Contract and is intended to be held until maturity.
The value of the securities will be determined by objective standards
(see Representation 16 below).
Although the Fixed Portfolio will not come under Deutsche Bank's
administration or control, it affects the second component of each
Contract, the Book Value Account, an accounting record established by
Deutsche Bank to record the Plan's interest under the Buy & Hold
Synthetic GIC. This is the amount that will be available to satisfy
participant-initiated benefit payments and transfers.
At the inception of the Contract, the Book Value Account will be
equal to the value of the Fixed Portfolio. Thereafter, the Book Value
Account will be credited with a rate of interest (i.e., the Crediting
Rate) that will be reset periodically (monthly, quarterly, semi-
annually or annually) in accordance with the following formula which
will be set forth in the Contract:
[GRAPHIC] [TIFF OMITTED] TN01FE00.010
Where BV=The balance of the Book Value Account (as determined under the
Contract provisions) on the determination date;
net cash flow<INF>k</INF>=(1) In the case where the Fixed Portfolio
consists of one security, the expected cashflows from that security, or
(2) in the case where the Fixed Portfolio consists of more than one
security, the aggregate expected cashflows from the securities (in
either case, excluding all fees and charges applicable under the Buy &
Hold Synthetic GIC) at time k; \2\
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\2\ For purposes of the formula, the expected cashflows from a
security in the Fixed Portfolio and the total number of expected
cashflows from the security will be determined under a three-part
method in the following order of preference: (a) from widely-
available published sources independent of Deutsche Bank and its
affiliates (such as Bloomberg); (b) if such information is not
provided by widely-available, independent, published sources, the
Plan fiduciary will cause the lead underwriter of the security (if
the underwriter is not an affiliate of Deutsche Bank) to determine
and provide such information to Deutsche Bank; or (c) if such
information is not available from the lead underwriter or if the
lead underwriter is an affiliate of Deutsche Bank, the Plan
fiduciary will cause the issuer of the security to provide such
information to Deutsche Bank. Deutsche Bank believes that the vast
majority of the securities that will be included in the Fixed
Portfolio will be publicly-traded securities for which cashflow
information may be obtained from widely-available, independent,
published sources. However, where the Plan fiduciary has
specifically requested, Deutsche Bank will enter into a Buy & Hold
Synthetic GIC with respect to one or more securities that are not
publicly-traded. Then, methods (b) or (c) above will be applied to
determine cashflow information.
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IRR=The internal rate of return for the Fixed Portfolio;
n=The determination date (as determined under the Contract provisions);
and
[[Page 4847]]
N=The time of final cashflow from the Fixed Portfolio.
The foregoing formula, which will be objectively determined by a Plan
fiduciary that is independent of Deutsche Bank (see Representation 9),
is intended to produce a Crediting Rate that will equal the projected
``internal rate of return'' of each security comprising the Fixed
Portfolio, with a floor of 0 percent. In addition, as described in
Representations 4 and 12, the Contract will mature on a stated maturity
date.
8. The Buy & Hold Synthetic GIC will be supported by one or more
specific fixed income securities that are bought in the primary or
secondary market and are intended to be held until maturity. High
quality mortgage-backed securities will be the primary type of security
utilized, although other high quality securities may be used to support
a Buy & Hold Synthetic GIC. All securities in the Fixed Portfolio will
have predictable yield and cash flow characteristics. As principal,
interest and other payments are made on the Fixed Portfolio, such
amounts will be made available for investment outside of the Buy & Hold
Synthetic GIC at the direction of a Plan fiduciary independent of
Deutsche Bank. Generally, the Fixed Portfolio will be sold only upon
termination of the Contract in order to provide amounts for benefit
payments or for participant-directed transfers to other investment
funds available under the Plan.
9. Deutsche Bank believes that one of the attractive features of
the Buy & Hold Synthetic GIC to a Plan is that Deutsche Bank will
assume certain obligations with respect to the availability of funds
for benefit withdrawals and participant-directed transfers between
investment funds and the return realized from the Fixed Portfolio.
Mechanically, this is accomplished through the establishment of the
Book Value Account.
The Book Value Account will reflect the value of the Fixed
Portfolio at the inception of the Contract, as increased by the
Crediting Rate determined pursuant to the formula set forth in the
Contract and described above. The formula is intended to produce a
Crediting Rate that will be equal to the projected internal rate of
return \3\ of the Fixed Portfolio, but the Crediting Rate is guaranteed
never to be below 0 percent. The Crediting Rate will be reset
periodically so that it will at all times reflect the projected
internal rate of return of the Fixed Portfolio. Each component of this
formula will be set forth in the Contract and explained to the Plan
fiduciary who will decide whether to purchase the Buy & Hold Synthetic
GIC on behalf of any Plan. At all times during the term of the
Contract, the Crediting Rate will be determined pursuant to the
formula.
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\3\ The term ``internal rate of return'' means the rate of
return on the Fixed Portfolio determined without regard to any
return from the reinvestment of interest, dividends and other
proceeds on the Fixed Portfolio. Those amounts will be reinvested
outside the Buy & Hold Synthetic GIC by a Plan fiduciary independent
of Deutsche Bank.
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10. Under the Contract, all participant-initiated benefit payments
and transfers will be paid based on the balance of the Book Value
Account. The Book Value Account will be reduced each month dollar-for-
dollar for the amount of participant-initiated benefit payments and
transfers made under the Plan and for the amount of principal payments,
coupon interest and other payments received by the Plan from the Fixed
Portfolio. Benefit payments or transfers resulting from an action of
the Plan's sponsor may result in the Book Value Account being subject
to an additional reduction due to the premature withdrawal of such
assets depending on the relationship of the balance of the Book Value
Account to the market value of the Fixed Portfolio at the time of the
withdrawal.
11. Deutsche Bank's agreement to bear the economic effects of
participant-initiated benefit payments and transfers through the use of
the Book Value Account will be subject to certain conditions that are
intended to assure that the factors under which Deutsche Bank has
agreed to assume these effects do not change without its consent. If
those conditions are not satisfied, Deutsche Bank will not be obligated
to ensure the availability of the funds from the Fixed Portfolio to
satisfy those benefit payments and transfers based on the balance of
the Book Value Account, but rather withdrawals will be effected at the
market value of the Fixed Portfolio. First, the Plan may not permit
participant-directed transfers directly (or with less than a 90 day
``equity wash'') from the investment fund in which the Buy & Hold
Synthetic GIC is held to another ``competing'' investment fund
available under the Plan, i.e., to another investment fund that has an
investment objective of providing a stable rate of return with limited
risk of loss of principal. This condition is intended to assure that
participants will not have an economic incentive to direct transfers
from the Buy & Hold Synthetic GIC to obtain a temporary improvement in
the return on their accounts without any material change in their risk
profile.
Second, the Plan may not be amended without Deutsche Bank's consent
in order to change the provisions of the Plan pertaining to
participant-initiated benefit payments and transfers or otherwise in a
manner which may affect Deutsche Bank's obligations in this regard. For
example, if a Plan provides that amounts necessary to fund loans from
the Plan to participants were to be withdrawn pro rata from all
investment funds (e.g., equity, balanced and fixed income), the Plan
could not be amended to require that the funds for all such loans be
withdrawn solely from the investment fund in which the Buy & Hold
Synthetic GIC is held unless Deutsche Bank consents to the amendment.
Third, if any withdrawal arises from an action of the Plan's
sponsor that affects a significant number of employees (e.g., layoffs,
plant closings, divestitures, mergers or consolidations, the complete
or partial termination of the Plan and the implementation of an early
retirement incentive program), the effect of such withdrawal on the
Book Value Account will generally be comparable to that of a similar
withdrawal under a traditional GIC, i.e., such withdrawal from the
Contract will be effected at the market value of the Fixed Portfolio. A
Plan fiduciary may negotiate with Deutsche Bank that the Contract shall
provide that any such withdrawal will be effected at the market value
of the Fixed Portfolio only after similar employer-initiated
withdrawals over a specified period (e.g., the preceding 12 months or
the term of the Contract) have exceeded a specified percentage of the
Book Value Account.
12. The Contract will mature on the stated maturity date of the
security in the Fixed Portfolio or, if there is more than one security
in the Fixed Portfolio, the latest stated maturity date of any of the
securities. The stated maturity date of a security is the date of the
expected maturity of the security at the time of the purchase. If the
principal of the security (or the securities) in the Fixed Portfolio is
actually repaid faster or slower than expected, the Contract will not
mature on the stated maturity of the security (or the latest maturity
date), but instead will mature on the date the last principal payment
is actually received by the Plan. In no event will the Contract mature
later than the actual maturity date of the security.
Notwithstanding the foregoing, the Contract may also mature on a
fixed date mutually agreed upon by the Plan fiduciary and Deutsche
Bank.\4\
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\4\ As noted in Representation 4, no Buy & Sell Synthetic GIC
described herein will have a stated maturity date exceeding seven
years.
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[[Page 4848]]
If, on the maturity date, the balance of the Book Value Account
exceeds the fair market value of the Fixed Portfolio, Deutsche Bank
will pay the Plan the difference (see Representation 15). Because the
Book Value Account's Crediting Rate will be equal to the underlying
Fixed Portfolio's projected internal rate of return, any difference
between the balance of the Book Value Account and the fair market value
of the Fixed Portfolio on the maturity date of the Contract should be
insignificant. Thus, any payment Deutsche Bank will have to make to
support the Book Value Account should be negligible.
13. A Plan fiduciary may also elect to terminate the Buy & Hold
Synthetic GIC at any time on 30 days (or such shorter period as
mutually agreed upon by the Plan fiduciary and Deutsche Bank) prior
notice to Deutsche Bank. Deutsche Bank may also terminate the Buy &
Hold Synthetic GIC on 30 days prior notice to the Plan fiduciary only
under limited circumstances, e.g., (a) on account of regulatory
restrictions, or (b) if the Plan has breached one of its obligations
under the Contract or has taken actions that would constitute an event
of default under the Contract. Specifically, the Contract may be
terminated by Deutsche Bank if (a) any fee or charge payable to
Deutsche Bank under the Contract has not been timely paid, (b) a
representation upon which Deutsche Bank has relied upon in entering
into the Contract was or becomes untrue, (c) if withdrawals are
effected from the Contract other than as permitted, or (d) if there are
material changes in the arrangement that may have a material adverse
effect on Deutsche Bank's obligations under the Contract (including
changes in the Plan or its administration).\5\
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\5\ According to the applicant, a change in custodial bank would
not be considered a material change warranting a termination of the
Contract by Deutsche Bank.
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Although the decision to terminate the Contract under these
circumstances will be made by Deutsche Bank, such action can only be
taken after the Plan has breached one of its obligations under the
Contract or unilaterally has taken other actions that could materially
modify, in an adverse manner, Deutsche Bank's obligations under the
Contract. Thus, the Plan can preclude Deutsche Bank from terminating
the arrangement merely by satisfying its contractual obligations and by
not acting in a manner that materially alters the underwriting
assumptions relied upon by Deutsche Bank in entering into the
arrangement.
14. If the Plan fiduciary voluntarily terminates the Contract or if
Deutsche Bank terminates the Contract for one of the reasons specified
in the Contract (such as the Plan's breach of a contractual
obligation), the Plan fiduciary will have complete control over the
Fixed Portfolio (i.e., the Portfolio may be invested without any
contractual constraints) and will realize the fair market value of the
Fixed Portfolio. Deutsche Bank will have no obligation with respect to
the Book Value Account (see Representation 21). If the Contract is
terminated by the Plan fiduciary voluntarily within three years after
its effective date, an Early Termination Charge payable by the Plan may
apply that will be determined under an objective formula set forth in
the Contract, which is intended to enable Deutsche Bank to recoup its
costs incurred (e.g., research and underwriting resources, internal and
external legal and other professional charges, and operational and
systems expenses) in connection with the Contract. The formula is set
forth as follows:
[(F * BV)] * N,
Where
F = The expense charge payable to Deutsche Bank as agreed upon by
Deutsche Bank and the Plan's independent fiduciary at the inception of
the Contract, expressed as an annual percentage rate;
BV = The balance of the Book Value Account on the termination date; and
N = The number of days in the period from the termination date through
the third anniversary date of the effective date of the Contract,
divided by 365.
Under no circumstances will the Early Termination Charge be payable by
the Plan if Deutsche Bank has breached any of its obligations under the
Contract or has defaulted under the Contract.
15. Under the Buy & Hold Synthetic GIC, Deutsche Bank will assume
the obligation for the availability of funds to satisfy participant-
initiated benefit payments and transfers up to the amount of the
balance of the Book Value Account as of any date. Deutsche Bank, the
Plan, the Plan fiduciaries or other agents will not have any discretion
over when a withdrawal may be made from the Contract. The Contract will
not be accessed for withdrawals until other specified sources of funds
(e.g., contributions to the Plan's investment fund under which the Buy
& Hold Synthetic GIC is held, current investment income, maturing
proceeds, cash equivalents, available cash attributable to the
underlying Fixed Portfolio and other investment contracts which are to
be accessed for withdrawals before the Contract under a ``last-in-
first-out'' hierarchy) have been depleted. If a withdrawal is made from
the Contract, such withdrawal will be made from cash realized on the
sale of a portion of the Fixed Portfolio or, if an election is made by
the Plan fiduciary and consented to by Deutsche Bank, such withdrawal
amount will be paid to the Plan in cash by Deutsche Bank and the Plan
will be obligated to repay such amount to Deutsche Bank as principal,
interest and other amounts paid to the Plan on the Fixed Portfolio
become available.\6\
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\6\ The election available to Deutsche Bank to pay the amount of
the withdrawal instead of liquidating a portion of the Fixed
Portfolio to satisfy the withdrawal is intended to create liquidity
for the Plan in circumstances where the security that would
otherwise be liquidated would be difficult to sell (e.g., where the
principal amount of the security is small) rather than a situation
where the value of the Fixed Portfolio falls below a minimum level.
Deutsche Bank represents that the election would benefit the Plan by
saving costs that would otherwise be incurred if the Plan was forced
to sell the security on the open market. Deutsche Bank further
represents that its election to pay the amount of a withdrawal will
not affect its obligations to the Plan under the Buy & Hold
Synthetic GIC.
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16. If a withdrawal is to be satisfied by the sale of assets in the
Fixed Portfolio, the Plan fiduciary will do so in a manner consistent
with its fiduciary responsibilities under the Act. The Contract
provides that the fair market value of the securities sold will be
determined based upon the actual proceeds received by the Plan
fiduciary in an arm's length transaction. Under the Contract, the fair
market value of any security in the Fixed Portfolio will be determined
by averaging three competitive bids for such security received from
parties independent of, and mutually agreed upon by, Deutsche Bank and
the Plan.
17. The portion of the Fixed Portfolio sold will also depend upon
the type of Contract negotiated by the Plan fiduciary. In this regard,
Deutsche Bank will offer Plans two types of Contracts (or a combination
thereof). In the first type of Contract, as withdrawals occur during
the term of such Contract, only the portion of the Fixed Portfolio
necessary to satisfy the withdrawal having a fair market value equal to
the amount of the withdrawal will be sold. Then, the Book Value Account
will be correspondingly reduced by the amount of such payment. However,
if the amount of the withdrawal is greater than the fair market value
of the entire Fixed Portfolio (which could happen if the fair market
value of the Fixed
[[Page 4849]]
Portfolio is less than the balance of the Book Value Account), Deutsche
Bank will be required to sell the entire Fixed Portfolio to satisfy the
withdrawal. In addition, Deutsche Bank will be required to pay the Plan
the difference between the amount of the withdrawal and the fair market
value of the Fixed Portfolio in cash. Conversely, if the value of the
Fixed Portfolio exceeds the amount of the withdrawal, the Plan will not
be required to pay the difference to Deutsche Bank.
When a withdrawal occurs under the second type of Contract, the
portion of the Fixed Portfolio sold will be that portion having a fair
market value equal to the amount of the withdrawal multiplied by a
fraction, the numerator of which is the fair market value of the entire
Fixed Portfolio and the denominator of which is the balance of the Book
Value Account, and, if the sale proceeds are less than the amount of
the withdrawal, Deutsche Bank will pay the Plan the amount of the
deficiency in cash or, if the sale proceeds are greater than the amount
of the withdrawal, the Plan will pay Deutsche Bank the amount of the
excess in cash.\7\
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\7\ The underlying principle of the second type of contract is
that a withdrawal resulting from a participant-initiated benefit
payment or transfer does not affect the rate of interest credited to
the Book Value Account. The credited rate of interest is maintained
principally by keeping the ratio of the balance of the Book Value
Account to the fair market value of the Fixed Portolio the same
before and after the withdrawal. This is illustrated in the
following example where--
<bullet> Before the withdrawal, the balance of the Book Value
Account is $100 and the market value of the Fixed Portfolio is $90.
Assume a withdrawal of $10 occurs.
<bullet> After the withdrawal, the balance of the Book Value
Account is reduced by $10 (amount of the withdrawal) to $90. The
market value of the Fixed Portfolio is reduced by the product of $10
(amount of the withdrawal) and $90 (the market value of the Fixed
Portfolio before the withdrawal), over $100 (balance of the Book
Value Account before the withdrawal), an amount equal to $81. (In
other words, $10 x $90/$100 = $9. $90-$9 = $81.)
---------------------------------------------------------------------------
18. To illustrate the method for making a withdrawal under the
second type of Contract, assume that a withdrawal of $10,000 is needed
and to effect the withdrawal the Plan sells a portion of the Fixed
Portfolio having a book value of $10,000, but a then current market
value of $9,500. The Book Value Account will be reduced by $10,000, the
value of the Fixed Portfolio will be reduced by $9,500 and Deutsche
Bank will make a cash payment to the Plan of $500 to make up the
difference. If, however, the market value of the portion of the Fixed
Portfolio sold were $10,500, the Book Value Account would still be
reduced by $10,000, the Fixed Portfolio would be reduced by the full
$10,500 and the Plan would pay Deutsche Bank an additional fee of $500.
19. Under the second type of Contract, if the proceeds realized on
the sale of a portion of the Fixed Portfolio are greater than the
amount of the withdrawal, the Plan fiduciary may exercise its right to
terminate the Contract and take full control over the Fixed Portfolio
and, thereby, avoid paying an additional fee to Deutsche Bank equal to
the excess. The purpose of this additional fee is to protect Deutsche
Bank from the additional risks that were not intended to be assumed by
Deutsche Bank in the context of the Buy & Hold Synthetic GIC. When a
Plan fiduciary enters into a Buy & Hold Synthetic GIC, both the
fiduciary and Deutsche Bank intend that the Fixed Portfolio will be
held to maturity. Participant-initiated benefit payments and transfers
that would require selling a portion of the Fixed Portfolio are
possible, but are not contemplated. If such a sale were required and,
at such time, the overall market value of the Fixed Portfolio exceeded
the balance of the Book Value Account, Deutsche Bank would expect that
a Plan fiduciary might decide to exercise its option to terminate the
arrangement and ``cash-in'' the benefit of the appreciation in the
market value of the Fixed Portfolio.\8\ This is because, as the Buy &
Hold Synthetic GIC is designed, the value of the Book Value Account and
the Fixed Portfolio are expected to be equal at maturity. If, at any
given point in time, the market value of the Fixed Portfolio exceeds
the balance of the Book Value Account, it would generally reflect an
unanticipated increase in the market value of the underlying Fixed
Portfolio, the benefit of which could likely be lost if the Fixed
Portfolio were held to maturity. If, however, the market value of the
Fixed Portfolio does not exceed the balance of the Book Value Account,
but an asset in the Fixed Portfolio with a market value above its book
value were sold to effect a withdrawal following the selection of such
security by the Plan fiduciary, Deutsche Bank would be placed in the
situation of having an obligation with respect to the performance of
assets that, as a whole, are underperforming while an asset that
exceeded projected performance was disposed of at a profit. To allow
the Plan to reap the benefit of the profit on this asset would fail to
reflect the ``book loss'' on the entire Fixed Portfolio, a loss which
Deutsche Bank is contractually obligated to bear. Thus, the profit is
payable to Deutsche Bank as an additional fee and reflects the fact
that this ``profit,'' if realized at maturity, would otherwise have
offset or reduced the amount Deutsche Bank would ultimately have been
required to pay in respect of the Book Value Account of the remaining
underperforming assets.
---------------------------------------------------------------------------
\8\ Under such circumstances, the Plan would not incur any costs
unless the termination occurs prior to the third anniversary of the
effective date of the contract (see Representation 14).
---------------------------------------------------------------------------
Alternatively, if the Plan fiduciary does not wish to pay Deutsche
Bank this additional fee, the fiduciary may elect to enter into the
first type of Contract described above. The two types of Contracts
offer different risk levels from which the fiduciary may choose the one
appropriate for the Plan.
20. Under either type of Contract, a fiduciary of the Plan
independent of Deutsche Bank will, in its sole discretion, determine
which of the securities in the Fixed Portfolio will be sold. If any
portion of the Fixed Portfolio has to be sold to effect any withdrawal,
the Plan fiduciary will do so in a manner consistent with its fiduciary
responsibilities under the Act. The Contract provides that the fair
market value of the securities sold will be determined based upon the
actual proceeds received by the Plan fiduciary in an arm's length
transaction.
21. If at the time the Contract matures, the balance of the Book
Value Account exceeds the fair market value of the Fixed Portfolio,
Deutsche Bank will make a payment to the Plan equal to such excess (the
Book Value Payment). If the fair market value of the Fixed Portfolio
equals or exceeds the balance of the Book Value Account, no Book Value
Payment will be made and such excess belongs exclusively to the Plan.
During the term of the Contract, the Plan fiduciary will reinvest
the proceeds of the Fixed Portfolio as the fiduciary sees fit in other
investments. Any principal, interest and other proceeds paid to the
Plan with respect to the Fixed Portfolio will not become subject to the
Contract but instead will be reinvested by the Plan fiduciary.
Accordingly, the value of the Fixed Portfolio will decline over time as
principal and interest payments are made on the underlying security or
securities. The Book Value Account will be correspondingly reduced as
amounts are distributed from the arrangement. By reason of these
distributions, it is expected that the Book Value Account will decrease
significantly from its initial value by the time the Contract matures.
Given this reduction in the Book Value Account and the fact that the
Book Value Account's Crediting Rate is calculated based on the expected
rate of return on the fixed Portfolio, any
[[Page 4850]]
Book Value Payment made should be de minimus. \9\
---------------------------------------------------------------------------
\9\ It is expected that, as of the maturity date of the
Contract, there will be only a de minimus difference between the
value of the Fixed Portfolio and the balance of the Book Value
Account. However, during the term of the Contract, parity between
Book Value and fair market value may not exist. For example, if a
participant-initiated benefit payment or transfer occurs and such
payment or transfer is made from cash realized on the sale of a
portion of the Fixed Portfolio, the value of the Fixed Portfolio
remaining after such sale and the Book Value Account after the
reduction for the amount of such benefit payment may be quite
different depending on the relationship of the Book Value of the
portion of the Fixed Portfolio sold and the market value.
---------------------------------------------------------------------------
22. Deutsche Bank believes that the Buy & Hold Synthetic GIC is
superior to traditional GICs in that each Buy & Hold Synthetic GIC
serves the dual functions of (a) affording a Plan substantially greater
protection against the risks of loss of its principal investment and
(b) providing the Plan with an opportunity for a greater rate of return
than a traditional GIC. Under the Buy & Hold Synthetic GIC, Deutsche
Bank will make payments to the Plan such that all participant-initiated
benefit payments and transfers will be paid based on the balance of the
Book Value Account. This means that, despite fluctuations in the market
value of the Fixed Portfolio, each participant, in making participant-
initiated benefit payments and transfers, will be protected against any
loss of principal by Deutsche Bank's contractual commitment. In the
ordinary course, the effect of this commitment will be to enable the
Plan to account for the value of the assets of the Plan held pursuant
to the Contract without regard to any interim fluctuation in the market
value of such assets. However, this commitment will have a real
economic effect for Plan participants in the event that withdrawals are
made from the Buy & Hold Synthetic GIC.
23. To recap, the Fixed Portfolio to be held under the Contract
will be determined at the inception of the Contract. Generally, the
Fixed Portfolio will be disposed of only upon termination of the
Contract (if determined by the Plan fiduciary) or upon the occurrence
of certain events specified in the Contract (see Representation 15
above). A security will be removed from the Fixed Portfolio if it
becomes an impaired security (i.e., generally a defaulted or
accelerated security or a security that no longer satisfies specified
credit-related criteria) as objectively determined under the provisions
of the Contract.\10\
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\10\ In this regard, Deutsche Bank represents that it uses a
standard, commercial definition of the term ``impaired security''
which is also used by many other issuers of synthetic GICs. Although
this definition will appear in the template agreement provided by
Deutsche Bank to a prospective customer for review, the specific
definition of ``impaired security,'' will be subject to negotiation
by Deutsche Bank and the Plan fiduciary before the Contract is
executed.
The standard definition of an ``impaired security'' is as
follows: An ``impaired security'' means (a) a security with respect
to which an event has occurred or exists which, under one or more
agreements or instruments relating to such security, has resulted in
the principal of, and/or interest on, such security becoming due and
payable before any such amount would otherwise have been due or
payable other than as a result of a call or other prepayment of a
security made in accordance with its terms that does not constitute
a default under such security; (b) a security with respect to which
the issuer has failed to make one or more payments of principal or
interest when due (giving effect to any applicable grace period); or
(c) a security (1) with respect to which the specified rate of
interest is not paid or distributed when due, (2) with respect to
which interest is accruing on a principal balance that is less than
the difference between the original par or face amount of such
security and the amount of principal previously paid on such
security, or (3) where the rate of interest thereon has been reset
other than pursuant to the original terms thereof.
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In addition, the Plan will hold legal title to the Fixed Portfolio.
Subject to the Plan's obligation to pay Deutsche Bank's fees, any
appreciation in the market value of the Fixed Portfolio, as well as
current interest and principal payments, will belong to the Plan.
Thus, the only risk to the Fixed Portfolio posed by the financial
condition of Deutsche Bank will relate to the amount representing the
excess, if any, of the balance of the Book Value Account over the fair
market value of the Fixed Portfolio. Therefore, Deutsche Bank
represents that the Buy & Hold Synthetic GIC will provide greater
security than a traditional GIC wherein a Plan places a substantial
amount of its assets at risk based on the creditworthiness of the
issuer of the GIC.
24. Deutsche Bank will maintain, for a period of six years
following the execution of each Buy & Hold Synthetic GIC transaction
full and complete records and books reflecting the various accounts
established in accordance with the Buy & Hold Synthetic GIC. Such
records will be kept in a manner that is accessible for audit and
examination. Upon written request by a Plan representative, Deutsche
Bank will make its records pertaining to the Buy & Hold Synthetic GIC
available during normal business hours for audit by independent,
certified public accountants hired by the Plan fiduciary.
25. Deutsche Bank and the Plan fiduciary will agree to an expense
charge (determined at the inception of the Contract) payable to
Deutsche Bank with respect to the Buy & Hold Synthetic GIC that will be
stated as an annual fee equal to a fixed percentage of the balance of
the Book Value Account and will accrue on a daily compound basis. This
charge will cover four elements: (a) A benefit risk charge, (b) a
maturity risk charge, (c) an expense charge, and (d) a profit charge.
The benefit risk charge is a fee for assuming the risk of loss
associated with participant-initiated benefit payments and transfers.
It will be developed on a Plan-specific basis after a review of the
Plan's benefit payment cashflow history and the structure of the Plan
itself (i.e., the frequency at which withdrawals and investment
transfers are permitted, and the structure of alternate investment
opportunities). The maturity risk charge will be based on a review of
the volatility of, and the guidelines for investment of, the Fixed
Portfolio. The expense and profit charges will be assessed based on the
expected expenses related to the arrangement and the payment to
Deutsche Bank of a reasonable profit. Such negotiated charge would
remain in effect throughout the term of the Contract.
Based on its review of competitive practices, Deutsche Bank
represents that the aggregate charges with respect to the Buy & Hold
Synthetic GICs offered by Deutsche Bank are, and are expected to
continue to be, comparable to the charges made by other Buy & Hold
Synthetic GIC providers.
26. In summary, it is represented that the subject transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The decision to enter into a Buy & Hold Synthetic GIC will be
made on behalf of a Plan, in writing, by a fiduciary of the Plan which
is independent of Deutsche Bank.
(b) Each Plan or commingled entity investing in a Buy & Hold
Synthetic GIC will have at least $50 million in assets.
(c) Prior to and subsequent to the execution of a Buy & Hold
Synthetic GIC, the Plan fiduciary, and if applicable, Plan
participants, will receive full and detailed written disclosures of all
material features of the Contract, including a description of all
applicable fees and charges as well as ongoing disclosures with respect
to such investment.
(d) As to each Plan, the combined total of all fees and charges
under the Buy & Hold Synthetic GIC will not be in excess of
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(e) Each Buy & Hold Synthetic GIC will specifically provide an
objective method for determining the fair market value of the
securities owned by the Plan pursuant to such GIC.
[[Page 4851]]
(f) Deutsche Bank will maintain, for a period of six years from the
date of each Buy & Hold Synthetic GIC transaction, in a manner for
audit and examination, books and records of all transactions which will
be subject to annual audit by certified, public accountants selected by
and responsible solely to the Plan.
Notice to Interested Persons
The applicant represents that because those potentially interested
participants and beneficiaries cannot all be identified, the only
practical means of notifying such participants and beneficiaries of
this proposed exemption is by publication in the Federal Register.
Therefore, comments and requests for a hearing must be received by the
Department not later than 30 days from the date of publication of this
notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Cullen Incorporated Profit Sharing Plan and Trust (the Profit
Sharing Plan), Cullen Incorporated Employees Defined Contribution
Pension Plan and Trust (the Money Purchase Plan) (Collectively the
Plans) Located in Fredericksburg, Virginia
[Exemption Application No. D-10823 and D-10824]
Proposed Exemption
The Department of Labor (the Department) is considering granting an
exemption under the authority of section 408(a) of the Act and section
4975(c)(2) of the Code and in accordance with the procedures set forth
in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10,
1990).\11\ If the exemption is granted, the restrictions of sections
406(a), 406(b)(1) and (b)(2) of the Act and the sanctions resulting
from the application of section 4975(a) and (b) of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to
the past sale (the Sale) by the Plan of property located in
Fredericksburg, Virginia (the Property) to Robert C. O'Neill (Mr.
O'Neill), the trustee of the Plans, President and sole shareholder of
the Plan Sponsor, and a party in interest with respect to the Plans,
provided that the following conditions are satisfied: (a) the Sale was
a one time transaction for a lump sum cash payment; (b) the purchase
price was the fair market value of the Property as of the date of the
Sale; (c) the Property has been appraised by a qualified, independent
real estate appraiser; and (d) the Plans paid no commissions or other
expenses relating to the Sale.
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\11\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally
transferred the authority of the Secretary of the Treasury to issue
exemptions under section 4975(c)(2) of the Code to the Secretary of
Labor.
In the discussion of the exemption, references to section 406
and 408 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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EFFECTIVE DATE OF EXEMPTION: The effective date of this exemption
is November 6, 1998.
Summary of Facts and Representations
1. The applicant is Robert C. O'Neill (Mr. O'Neill). Mr. O'Neill is
the trustee for the Plans. He is also the President and sole
shareholder of Cullen Incorporated (Cullen Inc.), the Plans' sponsor.
As of October 8, 1999, there were 14 participants in each Plan.
2. The Applicant understands that at the time of consummation of
the Sale, the approximate fair market value of the total assets of the
Profit Sharing Plan and Money Purchase Plan were $348,139 and $557,948,
respectively and that approximately 11% and 12%, respectively, of the
total assets for the 1997 Plan year were involved in the subject
transaction.
The applicant represents that at the time of the Sale, Mr. O'Neill
was the Plans' trustee. Cullen Inc., was the Plans' sponsor and a party
in interest with respect to the Plans. Cullen Inc. is a property
management company which manages various properties owned by the Cullen
Land Corporation (Cullen Land).
3. The applicant states that the Property was owned by the Plans at
the time of the Sale. The Property consisted of a building (the Kayo
Building), a 850 square foot cinder block structure on 8,809 square
feet located at 530 Princess Anne Street, Fredericksburg, Virginia
22401.
The applicant represents that on March 21, 1989 the Cullen Trust
Limited Partnership, a Virginia Limited Partnership, was formed to
purchase the Property from an unrelated third party. Cullen Land was
the General Partner and the Plans were Limited Partners. The applicant
further represents that the Property was purchased for $103,384 by the
Plans on September 1, 1991. The Profit Sharing Plan was a 39.5% limited
partner with a capital contribution of $38,933 and the Money Purchase
Plan, a 59.5% limited partner with a capital contribution of $63,391.
Cullen Land owned a 1% interest with a capital contribution of $1060.
The applicant represents that the Property was purchased to
diversify the portfolios of the Plans. The site of the Property is one
block from the terminus of the Virginia Railway Express, the commuter
rail service to the Washington, D.C. area. The applicant states that it
was anticipated that the commuter rail would have a major impact on
property values.
In addition, the applicant represents that the Property was leased
to various unrelated third party commercial tenants from 1989 to 1998.
Cullen Inc. leased and managed the Property and received no commissions
or fees.
4. The Applicant represents that the motivation for the Plans' 1998
Sale of the Property to Mr. O'Neill was solely to benefit Plans'
interests. The Plans owned the Property for about ten years. The
applicant states that by 1997 and 1998 the annual rental income \12\
from leasing the Kayo building to third parties did not produce the
annual return commensurate with other alternative investments and the
forecast for appreciation in the value of the Property was not adequate
to justify its continued retention.\13\
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\12\ In this regard, the applicant represents that from 1989 to
1998 the gross rent was $48,877 and the total expenses incurred to
be $30,281. Accordingly, the Plans' total return on this investment
amounted to approximately $18,596.
\13\ The Department expresses no opinion as to whether the
acquisition and holding of the Property by the Plans met the
requirements of section 404 of the Act.
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In addition, the applicant represents that the Property would have
required improvements at considerable cost to the Plans to increase
returns. Accordingly, the applicant represents that it would not have
been prudent to have the Plans take on debt, invest additional capital
in the Property, and subsequently find a tenant.
5. The applicant represents that the services of Lawrence J. Gorman
(Mr. Gorman) of Retirement Plan Services, Inc., located in
Fredericksburg, Virginia, were retained to provide administrative
services to the Plans. In addition, the applicant states that Mr.
Gorman was a pension trust officer with the National Bank of
Fredericksburg, in Fredericksburg, Virginia. Thereafter, the applicant
represents, Mr. Gorman established his own pension administration
business in the Fredericksburg area and the Plans transferred their
business to Mr. Gorman's company.
The applicant represents that Mr. Gorman prepared the Plans' tax
returns and Department of Labor reports since
[[Page 4852]]
1989. The applicant further represents that he relied on the advice and
counsel of Mr. Gorman prior to engaging in the Sale of the Property.
The applicant states that Mr. Gorman was kept abreast of all
developments relating to the transaction. The applicant further states
that Mr. Gorman advised that the transaction as executed would be
acceptable under applicable law as long as it would be documented by a
qualified real estate appraiser that the price was at its fair market
value.
6. The applicant retained the services of Mr. William R. Johnson
(Mr. Johnson), MAI, an accredited appraiser with the Johnson Real
Estate Services, Inc., located in Fredericksburg, Virginia. Mr. Johnson
appraised the Property on April 25, 1998. Mr. Johnson represented that
he is a certified general real estate appraiser, and represented that
he and his firm were independent of the parties involved. After
analyzing the Property, Mr. Johnson concluded that the fair market
value of the Property, the ``as is'' market value of the fee simple
interest in the Property, was $125,000. In reaching this conclusion as
to the value of the Property, Mr. Johnson used the sales comparison
approach. Last, Mr. Johnson indicated in his report that the exposure
time for this value is about 10 months and the estimated marketing time
to be between 9 and 12 months.
7. The applicant represents that on November 6, 1998, he purchased
the limited partnership interests from the Plans for $125,000, the
value of the Property as appraised by Mr. Johnson within the exposure
time of 10 months.
Mr. O'Neill allocated $49,874 to the Profit Sharing Plan for its
interest and $75,126 to the Money Purchase Plan for its interest. Mr.
O'Neill determined to convert the Property into an office building for
Cullen Inc. The cost of the conversion was $245,000. The applicant
represents that Cullen Inc. currently leases the Property.
8. The applicant represents that in late 1998, Cullen Inc. learned
that Mr. Gorman had sold his business and his company and left the
area. O'Neill secured the services of Phipps, Buckholder, located in
Fredericksburg, Virginia, to provide administrative services and tax
return preparation for the Plans. Phipps, Buckholder discovered the
prohibited transaction during the review of the records of the Plans.
Shortly thereafter, the applicant voluntarily sought advice from
counsel and accordingly, filed this exemption application with the
Department.
9. The applicants represent that the exemption would be
administratively feasible in that unwinding the transaction would
likely cause losses to the Plans. It is in the interest of the Plans'
participants and beneficiaries because the Plans' assets are now more
liquid and investments can be more diversified. It is protective of
their rights because the parties to the transaction obtained an
independent appraisal prior to consummating the transaction and the
purchase price of the Property was equal to its fair market value.
10. In summary, the Applicant represents that the requested
retroactive individual exemption will satisfy the criteria of section
408(a) of the Act for the following reasons: (a) the Sale was a one
time transaction for a lump sum cash payment; (b) the Plans received
the fair market value of the Property at the time of the transaction;
(c) the fair market value of the Property was determined by an
independent, qualified real estate appraiser; and (d) the Plans paid no
commissions or other expenses relating to the Sale.
FOR FURTHER INFORMATION CONTACT: J. Martin Jara of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 25th day of January, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 00-2122 Filed 1-31-00; 8:45 am]
BILLING CODE 4510-29-U
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