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Secretary of Labor Thomas E. Perez
Proposed Exemptions: Standard & Poor's (S&P), Standard and Poor's Investment Advisory Service, LLC (SPIAS) [Notices] [03/22/2000]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions: Standard & Poor's (S&P), Standard and Poor's Investment Advisory Service, LLC (SPIAS) [03/22/2000]

[PDF Version]

Volume 65, Number 56, Page 15360-15370


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10720, et al.]

 
Proposed Exemptions: Standard & Poor's (S&P), Standard and Poor's 
Investment Advisory Service, LLC (SPIAS)

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

[[Page 15361]]

Act of 1974 (the Act) and/or the Internal Revenue Code of 1986 (the 
Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, 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, D.C. 
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 the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5638, 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, 5 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.

Standard & Poor's (S&P), Standard and Poor's Investment Advisory 
Services, LLC (SPIAS), Located in New York, New York

[Exemption Application No.: D-10720]

Proposed Exemption

    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). If the exemption 
is granted, the restrictions of sections 406(a) and 406(b) 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 (F) of the Code, shall 
not apply to the provision of asset allocation services (the Service) 
by SPIAS to plan participants and the receipt of fees by SPIAS from 
Service Providers in connection with the provision of such asset 
allocation services, provided that the following conditions are met.
I. General Conditions
    A. The retention of SPIAS to provide the Service will be expressly 
authorized in writing by an independent fiduciary of each Plan.
    B. SPIAS shall provide the independent fiduciary of each Plan with 
the following, in writing:
    (1) Prior to authorization, a complete description of the Service 
and disclosures of all fees and expenses associated with the Service.
    (2) Any other reasonably available information regarding the 
Service that the independent fiduciary requests.
    (3) A contract for the provision of the Service which defines the 
relationship between SPIAS, the Service Providers and the Plan sponsor, 
and the obligations thereunder. Such contract shall be accompanied by a 
termination form with instructions on the use of the form. The 
termination form must expressly state that a Plan may terminate its 
participation in the Service without penalty at any time. However, a 
Plan which terminates its participation in the Service before the 
expiration of the contract will pay its pro-rata share of the fees that 
it would otherwise owe for the Service under the contract and, if 
applicable, any direct costs actually incurred by SPIAS which would 
have been recovered from the Plan by SPIAS but for the termination of 
the contract, including any direct setup expenses not previously 
recovered. Thereafter, the termination form shall be provided no less 
than annually.
    (4) At least 45 days prior to the implementation of any material 
change to the Service or increase in fees or expenses charged for the 
Service, notification of the change and an explanation of the nature 
and the amount of the change in the Service or increase in fees or 
expenses.
    (5) A copy of the proposed and final exemption, if granted, as 
published in the Federal Register.
    (6) An annual report of Plan activity which summarizes the 
performance of the Service and asset allocation recommendations and 
provides a breakdown of all fees and expenses paid by the Plan or 
participants for the year. Such reports shall be provided no more than 
45 days after the period to which it relates. Upon the independent 
fiduciary's or Plan sponsor's request, such report may be provided more 
frequently.
    C. SPIAS will provide each Plan participant with the following:
    (1) Written notice that the Service is available and provided by 
SPIAS, an entity independent of the Service Provider and the Plan 
sponsor.
    (2) Prior to using the Service, full written disclosures that will 
include information about SPIAS and a description of the Service.
    (3) Access to SPIAS's website or paper-based communications which 
will clearly indicate that the Plan participant is receiving the 
Service from SPIAS, and that SPIAS is independent of the Service 
Provider.
    (4) A risk tolerance questionnaire which must be completed prior to 
utilization of the Service.
    D. Any investment advice given to a Plan participant by SPIAS under 
the Service will be based solely on the responses provided by the Plan 
participants through the Service's interactive computer program or 
through a paper or telephone interview and will be based on the 
application of an objective methodology developed by S&P Financial 
Information Service (S&P FIS) and the S&P Investment Committee.
    E. Any investment advice given to a Plan participant will be 
implemented

[[Page 15362]]

only at the express direction of the Plan participant.
    F. The total fees paid to SPIAS and a Service Provider, in 
connection with the provision of the Service, by each Plan does not 
exceed ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act.
    G. The only fees which are payable to SPIAS in connection with the 
provision of the Service include, subject to negotiation, one or more 
of the following:
    (1) An annual flat fee based on a fixed dollar amount per Plan 
participant for the Service. This fee may be paid by the Plan, Plan 
sponsor, Plan participant or the Service Provider.
    (2) A technology licensing fee payable by the Service Provider in 
the first year that the Service is provided to a Plan. The fee will be 
a fixed dollar amount based on the number of Plan participants and 
beneficiaries contained on the Service Provider's record-keeping 
system. Each time the number of Plan participants and beneficiaries on 
the Service Provider's record-keeping system increases by 10%, an 
additional fixed dollar amount based on the increase in Plan 
participants and beneficiaries will be assessed and charged to the 
Service Provider for the new participants and beneficiaries (the 
Revised Technology Fee).
    (3) For subsequent years, SPIAS will charge the Service Provider an 
annual technology maintenance fee equal to 20% of the technology 
licensing fee charged to the Service Provider in the first year plus 
20% of the Revised Technology Fee.
    (4) SPIAS will charge the Plan or Plan sponsor an Internet 
customization fee where a Plan sponsor contracts directly with SPIAS 
for the provision of the Service. This flat fee will be based on the 
time spent by SPIAS personnel on its customization of the Service for 
the particular Plan.
    (5) For those Plan sponsors electing to receive a Plan analysis 
report, an annual flat fee based on a fixed dollar amount per Plan 
investment analysis report. This fee will be paid by the Plan sponsor 
or Service Provider.
    H. No portion of any fee or other consideration payable by the 
Plans or the Plan sponsor to S&P or SPIAS in connection with the 
Service will be received or shared with a Service Provider.
    I. Neither the fees charged nor the compensation received by SPIAS 
will be affected by the investment elections or the decisions made by 
the Plan participants and beneficiaries regarding investment of the 
assets in their accounts.
    J. All dealings between the Service Provider and the Plans 
participating in the Service are on a basis no less favorable to the 
Plans than dealings with other investors of the Service Provider.
    K. All asset allocations are reviewed and approved by the S&P 
Investment Policy Committee (IPC) before they are made available to the 
Plan.
    L. No Service Provider will at any time own any interest, by vote 
or value in SPIAS, and neither SPIAS nor any affiliate will own any 
interest, by vote or value in a Service Provider.
    M. The annual revenues derived by SPIAS from any one Service 
Provider shall not constitute more than 5% of the annual revenues of 
S&P FIS.
    N. S&P will guarantee the payment of any liabilities of SPIAS that 
may arise by reason of a breach of a fiduciary duty described in 
section 404 of the Act or a violation of the prohibited transaction 
provisions in section 406 of the Act and 4975 of the Code.
    O. SPIAS will maintain for a period of six years, the records 
necessary to enable the persons described in paragraph (P) of this 
section to determine whether the conditions of the exemption are met, 
including records of the recommendations made to Plan participants and 
beneficiaries and their investment choices, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of SPIAS, the 
records are lost or destroyed prior to the end of the six year period.
    (2) No party in interest, other than SPIAS shall be subject to the 
civil penalty that may be assessed under section 502(i) of the Act, or 
the taxes imposed by section 4975(a) and (b) of the Code if records are 
not maintained or not available for examination as required by this 
paragraph and paragraph P(1) below.
    P. (1) Except as provided in subparagraph (2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of Section 
504 of the Act, the records referred to paragraph (O) of this section 
are unconditionally available at their customary location for 
examination during normal business hours by--
    (a) Any duly authorized employee or representative of the 
Department of Labor, the Internal Revenue Service, or the Securities 
and Exchange Commission;
    (b) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (c) Any contributing employer to any participating Plan, any duly 
authorized representative of such employer or an employee organization 
whose members are participants and beneficiaries of a participating 
Plan; or
    (d) Any Plan participant or beneficiary of any participating Plan 
or any duly authorized representative of such Plan participant or 
beneficiary.
    (2) None of the persons described in paragraph (1)(b)-(d) of this 
paragraph (P) shall be authorized to examine trade secrets of SPIAS, or 
commercial or financial information which is privileged or 
confidential.
II. Definitions
    A. The term ``Service'' means the asset allocation service provided 
by SPIAS to Plans which is accessed through computer software and other 
written communications in order to provide personalized recommendations 
to Plan participants regarding the allocation of their investments 
among the options offered under their Plan.
    B. The term ``Service Provider'' means an entity that has been in 
the financial services business for at least three years, and during 
such period, has not been found liable or guilty by a court of law, or 
has not been a party to a settlement agreement with the IRS or the 
Department related to any matter concerning an employee benefit plan, 
and which is described in one of the following categories:
    (1) A bank, savings and loan association, insurance company or 
registered investment adviser which meets the definition of a 
``qualified professional asset manager'' (QPAM) set forth in section 
V(a) of Prohibited Transaction Exemption 84-14 (49 Fed. Reg. 9494 (Mar. 
13, 1984), as corrected at 50 Fed. Reg. 41430 (Oct. 10, 1985) and in 
addition, has, as of the last day of its most recent fiscal year, total 
client assets under management and control in an amount not less than 
$250 million; or
    (2) A broker dealer registered under the Securities Exchange Act of 
1934, which has, as of the last day of its most recent fiscal year, $1 
million in shareholders' or partners' equity, and total client assets 
under management and control in an amount not less than $250 million.
    C. The term ``independent fiduciary'' means a Plan fiduciary which 
is independent of SPIAS and its affiliates and independent of the 
Service Provider and its affiliates.
    D. The term ``affiliate'' includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;

[[Page 15363]]

    (2) Any officer, director, employee, relative, or partner in any 
such person and
    (3) Any corporation or partnership of which such person is an 
officer, director partner or employee.
    E. The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.

Summary of Facts and Representations

    1. McGraw-Hill Companies (McGraw-Hill) is a New York Stock Exchange 
registered company with a market capitalization of approximately $11 
billion. Standard & Poors (S&P), a division of the McGraw-Hill 
Companies has provided the public with investment information and 
guidance for more than 130 years. Investors rely on Standard & Poor's 
Marketscope, Stock Reports, Stock Guide, Industry Surveys and other 
services for independent and accurate information. S&P is comprised of 
S&P Financial Information Services (S&P FIS) and S&P's Ratings 
Services. In 1998, S&P Ratings Services and S&P FIS had, in the 
aggregate, revenues of approximately $1.1 billion.
    2. S&P Ratings Services provides timely, objective credit analysis 
and information, and has been rating conventional-term debt and general 
obligation corporate and municipal bonds since 1916. S&P Ratings 
Services serves more than 60 countries through a global office network 
staffed by local analysts from the world's major capital markets.
    3. S&P FIS provides financial data, information and analysis on 
various domestic and foreign financial markets to individual investors, 
brokerage firms, investment advisors, money managers and other 
investment professionals. S&P FIS is also responsible for maintaining 
market indices such as the S&P 500 and provides various other products 
and services to the investment community.
    4. McGraw-Hill established Standard & Poors Investment Advisory 
Services, LLC (SPIAS), a wholly-owned subsidiary in 1995. SPIAS was 
created as part of S&P FIS's expansion into the provision of 
personalized investment advice and related investment advisory 
activities, and is a registered investment adviser under the Investment 
Advisers Act of 1940. SPIAS furnishes a variety of services which can 
be broadly characterized as: (1) Internet-based personal advisory 
services; (2) advisory services aimed at enabling market professionals 
to provide services to retail clients; (3) asset allocation advisory 
services; (4) advisory consulting services; and (5) management of 
investment companies. The services that SPIAS operates include: S&P's 
Personal Wealth and S&P's Bank Investment Center. SPIAS has also been 
retained by the independent distributor of the product known as 
``WEBS'' to provide investment and economic research describing 
prevailing international economic and currency related trends and their 
impact on investments in several countries.
    SPIAS's income is included with S&P FIS for financial reporting 
purposes. In 1998, S&P FIS contributed approximately $600 million to 
McGraw-Hill's total $3.7 billion in revenues. Most employees of SPIAS 
are also employed by S&P FIS business units. To the extent that SPIAS's 
employees derive a portion of their compensation based on the financial 
performance of a business unit, the compensation is based on the 
overall performance of S&P FIS and or the relevant S&P FIS business 
unit.
    5. The Applicant represents that the Service will be beneficial to 
Plan participants because the Service will integrate retirement 
planning recommendations and fund allocation recommendations, including 
current Plan savings, other retirement savings, personal retirement 
income goals, tolerance for risk, time horizon to retirement, and the 
fund choices specifically available in a participant's Plan.
    The Applicant represents that the Service entails the provision of 
personalized asset allocation advice to Plan participants (see 
paragraph 7). Before a Plan's independent fiduciary may authorize the 
Plan's participation in the Service, SPIAS must provide the fiduciary 
with a complete description of the Service, written disclosures of all 
fees and expenses associated with the Service, and a written contract 
for the provision of the Service which defines the relationship between 
SPIAS, the Service Provider and the Plan sponsor and the obligations 
thereunder.\1\ Such contract will be renewable annually and will 
include: (a) A provision under which the Plan shall have 45 days notice 
prior to implementation of any material change to the Service or any 
fee or expense increases in connection with the provision of the 
Service by SPIAS; and (b) a provision which states that a Plan may 
terminate its participation in the Service at any time without penalty. 
However, a Plan which terminates the Service before the expiration of 
the contract will be responsible for paying its pro-rata share of the 
fees otherwise owed under the contract as of the date of termination, 
and, if applicable, any direct costs actually incurred by SPIAS which 
would have been recovered from the Plan by SPIAS but for the 
termination of the contract, including any direct setup expenses not 
previously recovered. In addition, SPIAS shall provide such fiduciary 
with a copy of the proposed and the final exemption, if granted, as 
published in the Federal Register.
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    \1\ In this regard, the Department notes that the fiduciary 
responsibility provisions of the Act apply to the decision of a 
Plan's independent fiduciary to authorize the Plan's participation 
in the Service. Section 404 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. Accordingly, the Plan's independent fiduciary must 
act prudently when deciding to participate in the Service, and in 
considering the fees associated with the Service. The Department 
expects the Plan's independent fiduciary, prior to authorizing the 
Plan's participation in the Service, to understand fully the 
operation of the Service, and the compensation paid thereunder, 
following disclosure by SPIAS of all relevant information pertaining 
to the Service.
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    6. SPIAS will provide the Service either directly to Plan 
participants through an agreement with the Plan sponsor or through an 
agreement with the Service Providers sponsoring the investment vehicles 
offered to Plan participants. \2\ Where the Service is contracted for 
directly with the Plan sponsor, SPIAS anticipates that these Plan 
sponsors will be predominately Fortune 500 companies, and SPIAS will 
customize the Service for each Plan. In many instances, SPIAS will need 
to coordinate with the Plan's record-keeper or another service provider 
in offering the Service to a Plan's participants.

[[Page 15364]]

Such entities will be independent of SPIAS. All fees for the Service 
will be paid by the Plan sponsor or the Plan to SPIAS.
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    \2\ The provision of investment advisory services to plans would 
be exempt from the prohibitions of section 406(a) of ERISA if the 
conditions of section 408(b)(2) are met. Section 2550.408b-2(a) of 
the Department's regulations provides that section 408(b)(2) of the 
Act exempts from the prohibitions of section 406(a), payment by a 
Plan to a party in interest, including a fiduciary for * * * any 
service (or combination of services) if (1) such * * * service is 
necessary for the establishment or operation of the Plan; (2) such * 
* * service is furnished under a contract or arrangement which is 
reasonable; and (3) no more than reasonable compensation is paid for 
such * * * service. The regulation also provides that section 
408(b)(2) does not contain an exemption from acts described in 
section 406(b) even if such act occurs in connection with a 
provision of services that is exempt under section 408(b)(2). 
Section 2550.408b-2(e)(1) further provides that a fiduciary does not 
engage in an act described in section 406(b)(1) of the Act if the 
fiduciary does not use any of the authority, control or 
responsibility which makes such person a fiduciary to cause the Plan 
to pay additional fees for a service furnished by such fiduciary or 
to pay a fee for a service furnished by a person in which the 
fiduciary has an interest which may affect the exercise of such 
fiduciary's best judgement as a fiduciary. In general, whether a 
violation of section 406(b) occurs during the operation of an 
investment advisory program is an inherently factual matter. See 
Advisory Opinion 84-04 (January 4, 1984).
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    In the second situation, SPIAS will provide the Service to Plan 
participants pursuant to a contract that the Plan sponsor enters into 
with a Service Provider. In these instances, the fees for the Service 
will be based on a flat dollar amount per participant which will be 
paid to SPIAS by the Service Provider, the Plan, Plan sponsor or Plan 
participants. In addition, SPIAS will enter into a written agreement 
with the Plan sponsor defining the relationship of the Plan sponsor, 
SPIAS and the Service Provider.
    7. The Applicant states that, once a Plan fiduciary has authorized 
its Plan's participation in the Service, Plan participants will receive 
notice that the Service is available and provided by SPIAS, an entity 
which is independent of the Service Provider. This notice will also 
state that when using the Service, a Plan participant is receiving 
services separate and apart from those provided by the Service 
Provider. Prior to utilizing the Service, Plan participants will 
receive full disclosures about SPIAS and the Service.
    Plan participants will access the Service through the Internet, by 
written materials or by telephone interview. Each Plan participant will 
receive a risk tolerance questionnaire which must be completed prior to 
utilization of the Service. A Plan participant will answer a 
questionnaire which consists of ten to fifteen questions with three or 
four multiple choice answers per question. These questions enable a 
Plan participant to quantify his or her time horizon and risk 
tolerance. This questionnaire has been developed by S&P over the last 
five years based on actual use in 401(k) plans and similar investment 
programs. For those Plan participants who elect to receive their advice 
in paper form, the questionnaire will be provided via the human 
resources department of the plan sponsor. If the plan sponsor elects to 
use a telephone voice response unit, Plan participants will receive 
their questionnaire over the phone. The paper-based and telephone 
versions of the questionnaire will be scored by the Plan participant by 
categorizing his/her answers (as discussed below).
    If a Plan participant elects to receive his/her advice through the 
Internet, the Plan participant will first access a website provided by 
the Service Provider or the Plan sponsor. There will be an electronic 
link from the Plan sponsor's or Service Provider's website to SPIAS's 
website where the questionnaire and investment advice is housed. In 
certain situations, this data may be housed on servers owned and 
operated by the Service Provider. The Applicant represents that SPIAS 
will always retain sole control over the content of the Service and the 
advice contained therein. SPIAS will regularly monitor the contents of 
the Service and the advice contained therein to ensure that it remains 
the product of the objective methodology developed by S&P FIS and the 
S&P Investment Committee (discussed below). It will be apparent to the 
Plan participant that SPIAS is the sole-provider of such advice.
    For those Plan participants using the Internet, the completed 
questionnaire is scored by computer. For those Plan participants using 
the paper based or telephone based questionnaires, the scoring is done 
by the Plan participants using materials and instructions provided by 
SPIAS. Based on the score, the Plan participant is categorized into one 
of six investment recommendations. Each recommendation contains a 
description of the investor profile associated with such recommendation 
which a Plan participant can review to see if he or she feels that he 
or she has been correctly classified.
    The advice provided to a Plan participant through the Service may 
only be implemented if it is expressly authorized in writing by the 
Plan participant. Plan participants are advised that the investment 
advice is valid for one year and that they need to repeat the 
questionnaire process in future years in order to receive updated 
recommendations. In this regard, Plan participants are informed that if 
they experience major life changes, they may need to repeat the 
questionnaire process more often than once a year. In connection with 
the Plan sponsor's annual renewal of the Service, Plan participants are 
strongly encouraged by SPIAS to complete a new questionnaire. SPIAS has 
built in an annual reminder that will be sent to all Plan participants 
concerning the need for them to update their Plan investment 
allocations. Plan participants are also notified if SPIAS' 
recommendations change during the year, and notified of the possible 
need to update their Plan investment allocations.
    The Applicant states that the advice provided to Plan participants 
will be based on the application of an objective methodology, developed 
by S&P FIS and the S&P Investment Committee, in accordance with 
generally accepted investment theories. SPIAS will apply this 
methodology to the investment options offered by a plan and to the 
participant's investor profile classification which is based on his 
responses to the questionnaire.
    8. The Applicant represents that its role in performing the Service 
on behalf of a Plan, includes gathering information about the 
investment options offered in a particular Plan, and developing a 
recommended portfolio for each investor type. The Applicant states that 
the analysis is based on modern portfolio theory and related work in 
economics and finance. S&P and SPIAS use the concept of efficient 
portfolios in developing asset allocation recommendations. This concept 
is based on the premise that the only way to achieve higher returns is 
to accept more risk and the only way to reduce risk is to accept lower 
potential returns. SPIAS states that in any set of investments, there 
is always a group of efficient portfolios, and an investor who holds an 
inefficient portfolio can improve his or her situation by moving to an 
efficient one.
    SPIAS states that some analysts use market indexes rather than 
specific investment options because there is historical data available 
for most widely used market indexes. While a long historic record is 
always welcome, SPIAS believes that it is usually more important to 
know how a specific investment performed over the last 3, 5 or 10 years 
rather than how the market index performed. Accordingly, SPIAS develops 
its recommendations using the specific investment options wherever 
possible because Plan participants will be investing in these funds, 
not in an index or other measure.
    9. In order to evaluate a specific investment option, SPIAS 
requires that a minimum of three years of monthly total return data be 
available. If this data is not available, SPIAS will work with the Plan 
sponsor to identify alternative data to assist SPIAS in its analysis. 
However, if there is no reasonable applicable data, SPIAS will not 
include the investment option in its recommendations. SPIAS may, 
however, include discussions and analysis of the investment option and 
its characteristics in separate supplemental materials provided to Plan 
participants and the Plan sponsor as part of the Service.
    S&P and SPIAS will use the following standards to evaluate the 
investment options offered by the Plans which might use the Service:
    (A) Evaluation at the Plan Level:
    (1) Sufficient Number of Funds: If a Plan has more than five 
investment options that meet the requirements for investment options 
described below, the Plan satisfies this requirement. If there

[[Page 15365]]

are three, four or five investment options, S&P FIS and SPIAS will 
advise the Plan sponsor that consideration should be given to adding 
more investment options. If there are fewer than three acceptable 
investment options, S&P and SPIAS will decline to provide the Service 
to the Plan. If a Plan offers employer stock as an investment option, 
S&P and SPIAS will not consider this option in applying this test, nor 
in applying the other Plan level tests described in 2 and 3 below.
    (2) Diversity of Funds: SPIAS's minimum building block for asset 
class coverage will be cash/bonds/stocks. This means that the minimal 
mix should include a money market fund, an investment grade bond fund 
and a diversified equity fund. A stable value fund or a GIC fund may be 
substituted for one of the fixed income funds. If these are present, 
S&P will permit a range of allocations where the lowest volatility 
allocation is equivalent to investing 90% of the funds in the money 
market fund and where the highest volatility allocation is equivalent 
to investing 90% of the funds in equities. If this range cannot be 
achieved, S&P and SPIAS will advise the Plan sponsor that adjustments 
should be made to widen the range of available allocations.
    (3) Limits on Timing and Investment Transfers: The only limits on a 
Plan participant's ability to transfer funds among investment options 
should be those necessary to protect all Plan participants from 
excessive Plan expenses. In particular, Plan participants must be able 
to move funds from one investment option to another at least four times 
a year on no more than ten business days notice. If this is not 
possible, S&P and SPIAS will decline to provide the Service to the 
Plan. Second, there should be no restrictions on transferring funds 
from an investment option in one asset class to an investment option in 
another asset class. If this is not permitted, S&P and SPIAS will 
advise the Plan sponsor that these rules should be reviewed, and will 
decline to provide the Service under such circumstances.
    (B) Evaluation At the Fund Level: S&P and SPIAS will review each 
fund in terms of the investment's return history, prospectus and size 
as described below.
    (1) SPIAS will require three years of monthly total return history. 
If the investment option is a private fund with quarterly data, then 
five years of history will be required. All fund performances will be 
calculated according to industry standard procedures prescribed by the 
National Association of Securities Dealers and the Securities and 
Exchange Commission. Private fund performance will be calculated 
according to these procedures or according to Association for 
Investment Management and Research guidelines. Private funds with less 
than this amount of historical data will not be considered by S&P and 
SPIAS. If the investment option is an ``index fund,'' SPIAS may accept 
less performance data provided that sufficient information on fees is 
available to use the return data on the index to develop pro forma data 
on the fund. If the index is less than three years old, the index data 
cannot be used.
    (2) A prospectus or written investment policy statement must be 
available to S&P and SPIAS.
    (3) An investment fund's total net assets must be greater than $25 
million for all share classes of the fund combined. If the investment 
option is a private fund offered by a money management firm, the firm 
must have at least $25 million in assets under management. Further, the 
firm must be at least three years old.
    (4) If a Plan includes synthetic funds, such as a so-called ``funds 
of funds,'' that do not have the requisite performance history, S&P and 
SPIAS would apply its standard criteria as described above with respect 
to each fund component. Each fund component would have to satisfy the 
criteria in order for S&P and SPIAS to provide advice with respect to 
such synthetic fund.
    (5) If the Plan includes employer stock, the stock may be included 
in the recommended allocations, subject to the policy on investing in 
employer stock approved by the IPC.
    All data is entered into a computer program developed by SPIAS that 
estimates the efficient frontier and calculates various statistics that 
describe alternative asset allocations. Based on the results of this 
computer-based analysis, SPIAS will develop a series of at least six 
recommendations covering a range of risks.\3\ In developing these 
allocations, the general guidelines that SPIAS uses include the 
following: Higher risk funds, such as equity sector funds, 
international funds or small cap stock funds are usually limited to the 
two or three riskiest portfolios. Employer stock may only be included 
in the riskiest or two riskiest portfolios, and may not have an 
allocation greater than 20% in any portfolio. SPIAS will not include 
employer stock if S&P's separately published recommendation on the 
stock has consistently been ``avoid or sell.''
---------------------------------------------------------------------------

    \3\ Each Plan participant who completes the risk-tolerance 
questionnaire will be categorized, based on his/her score, into one 
of these six recommendations as discussed in paragraph 7.
---------------------------------------------------------------------------

    If an investment option's performance declines or fails to meet 
expectations since the date of SPIAS's prior review, this will be 
recognized and considered by SPIAS in its updated annual review. As 
part of its annual review, SPIAS will initiate discussions with the 
Plan sponsor about replacing or adding an investment option if the 
circumstances warrant. If a Plan sponsor chooses not to drop an 
investment option or add options, SPIAS will not include the poorly 
performing investment option in its asset allocation advice or may 
decline to continue providing the Service to the Plan.
    10. The Applicant represents that S&P's experience and expertise 
will be an integral part of the Service, and S&P will stand behind the 
investment advice provided by SPIAS through the Service, and will 
guarantee the payment of any liability of SPIAS that may arise by 
reason of a breach by SPIAS of a fiduciary duty described in section 
404 of the Act or a violation of the prohibited transaction provisions 
of section 406 of the Act or section 4975 of the Code. The content of 
the advice contained in the Service is produced by S&P FIS's equity 
analytical department, and as described below, reviewed by the S&P 
Investment Policy Committee (IPC), (see representation number 11). The 
equity analytical department and the IPC operate independently of SPIAS 
and produce investment recommendations independent of any business 
relationships between S&P and its clients.
    11. All asset allocation recommendations are reviewed by the IPC. 
The IPC is a senior committee responsible for oversight on all 
investment recommendations provided through all of S&P's products and 
services. Membership on the IPC includes the Senior Vice President for 
the S&P Investment Advisory Services unit (who is also the President of 
SPIAS), the Director of Equity Research, the Chief Economist, the 
Senior Sector Strategist, the Chief Technical Analyst, the Editor of 
S&P's The Outlook and senior analysts from the Portfolio Services and 
Quantitative Services departments of S&P. The IPC meets weekly to 
discuss current financial market conditions and the economy. Asset 
allocation plans are reviewed at the regular weekly meeting. Only after 
the analysis is completed and the recommendations have been reviewed by 
the IPC, or a subcommittee thereof, will the recommendations be 
considered as final and delivered to the Plan.

[[Page 15366]]

    Once the IPC completes its analysis and review, the recommendations 
are delivered to the Plan, and the Plan-specific asset allocation 
analysis is considered valid for one year. After a year, SPIAS will 
review and re-do the analysis and provide the Plan sponsor with revised 
recommendations. If the Plan sponsor does not continue its relationship 
with SPIAS, the recommendations will be withdrawn and will be 
unavailable to Plan participants. In those instances where Plan 
sponsors want the analysis reviewed more frequently than once per year, 
SPIAS and the Plan sponsor will negotiate a review schedule.
    12. The Applicant represents that potential Service Providers will 
include banks and trust companies, mutual fund companies, brokerage 
firms and insurance companies. They will be required to meet minimum 
standards prior to participating in the provision of the Service. To 
qualify as a Service Provider, the entity must either be: (a) A 
commercial bank or trust company, savings and loan association, 
insurance company, or registered investment adviser which meets the 
definition of a ``qualified professional asset manager'' (QPAM) as set 
forth in Part V(a) of Prohibited Transaction Exemption 84-14 and has, 
as of the last day of its most recent fiscal year, total client assets 
under management and control in an amount of not less than $250 
million; or (b) a broker-dealer regulated under the Securities Exchange 
Act of 1934 which had, as of the last day of its most recent fiscal 
year, $1 million in shareholders' or partners' equity, and total client 
assets under management and control in an amount of not less than $250 
million.
    In addition, the Applicant will evaluate each candidate and 
consider: (1) The availability of multiple investment options across a 
number of asset classes; (2) whether there are adequate service 
capabilities and service performance standards; with an ongoing 
adherence to those standards; (3) whether providing a bundled product 
\4\ for defined contribution Plans is not the only financial service 
business in which the entity is involved; and (4) whether the entity, 
in SPIAS's view, has a high level of professionalism and 
accountability.
---------------------------------------------------------------------------

    \4\ Bundled products provide employers with record-keeping, 
legal, administrative, trust, educational, investment, etc., service 
with respect to establishing and maintaining a plan.
---------------------------------------------------------------------------

    Further, the entity must have been in the financial services 
business for three years, and during such period, must not have been 
found liable or guilty by a court of law in any litigation, concerning 
an employee benefit plan, brought by the IRS or the Department, or a 
party to a settlement agreement with the IRS or the Department on any 
matter concerning an employee benefit plan.
    13. The fees which are payable to SPIAS in connection with 
providing the Service, subject to negotiation, are limited to one or 
more of the following fees. A technology licensing fee will be charged 
to the Service Provider. This fee is a one-time fee charged in the 
first year the Service is provided to a Plan based on the number of 
Plan participants contained on a Service Provider's record-keeping 
system. Each time the number of Plan participants and beneficiaries on 
the Service Provider's record-keeping system increases by 10%, an 
additional amount based on a flat dollar per Plan participant will be 
assessed and charged to the Service Provider for the new participants 
(the Revised Technology Fee). For subsequent years, SPIAS will charge a 
Service Provider a technology maintenance fee equaling 20% of the first 
year's technology licensing fee plus 20% of the Revised Technology Fee.
    Where a Plan sponsor contracts directly with SPIAS to customize the 
Service to its particular Plan, SPIAS will charge an Internet 
customization fee to the Plan or the Service Provider. This flat fee is 
based on the time spent by SPIAS personnel on its customization of the 
Service to a particular Plan. In addition, SPIAS will charge an annual 
flat fee based on a fixed dollar amount per Plan participant which may 
be paid by the Plan, Plan sponsor, the Plan participants or the Service 
Provider.
    Finally, SPIAS will also offer a Plan investment analysis report to 
Plan sponsors. This report is separate from the investment analysis 
advice provided to Plan participants and is optional. SPIAS will 
analyze the Plan and its investment options comparing the rates of 
return earned by the Plan's investment options relative to other 
available funds. For those Plan sponsors who elect to receive a Plan 
investment analysis by SPIAS, SPIAS will charge a Plan investment 
analysis fee based on a flat dollar amount per year. This fee may be 
paid by the Plan, Plan sponsor or the Service Provider.
    14. In summary, it is represented that the proposed transaction 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) Participation in the Service will be expressly authorized in 
writing by an independent fiduciary.
    (b) SPIAS will provide the independent fiduciary of each Plan with, 
written disclosures describing the Service and all fees and expenses 
associated with the Service, a written contract for the provision of 
the Service, a copy of the proposed and final exemption, if granted, 
and a summary of annual Plan activity and expense reports.
    (c) SPIAS will furnish the Plan participants with the following: 
notice that the Service is provided by SPIAS, an entity that is 
independent from the Service Provider and the Plan sponsor; and full 
disclosure about the Service and SPIAS; and a risk tolerance 
questionnaire.
    (d) Any investment advice given to Plan participants will be based 
on the Plan participants' responses to the questionnaire and any 
investment advice will only be implemented at the express direction of 
the Plan participant.
    (e) The total fees paid to SPIAS and a Service Provider by each 
Plan participant participating in the Service does not exceed 
reasonable compensation within the meaning of section 408(b)(2) of the 
Act.
    (f) No portion of any fee or other consideration paid to SPIAS or 
S&P in connection with the Service will be shared or received by a 
Service Provider.
    (g) Neither the fees charged nor the compensation received by SPIAS 
will be affected by the investment elections of Plan participants.
    (h) Participation in the Service will not cause the Plan to pay any 
additional fees or commissions with respect to acquisition or 
disposition of investments offered under the Plan.
    (i) All asset allocations are reviewed and approved by the IPC 
before they are delivered to the Plan.
    (j) No Service Provider will own any interest in SPIAS, and neither 
SPIAS nor any affiliate will own any interest in a Service Provider.
    (k) The annual revenues derived by SPIAS from any one Service 
Provider shall not be more than 5% of the annual revenues of S&P FIS.
    (l) S&P will guarantee the payment of any liability of SPIAS that 
may arise by reason of a breach of a fiduciary duty described in 
section 404 of the Act or a violation of the prohibited transaction 
provisions in section 406 of the Act or section 4975 of the Code.

Notice to Interested Persons

    The Applicant represents that because potentially interested Plan 
participants and beneficiaries cannot be identified at this time, the 
only practical means of notifying such Plan participants and 
beneficiaries of this proposed exemption is by publication in the

[[Page 15367]]

Federal Register. Therefore, comments and requests for a hearing must 
be received by the Department not later than April 21, 2000.

FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne, U.S. 
Department of Labor, (202) 219-8971. (This is not a toll free number.)

Texas Iron Workers and Employers Apprenticeship Training and Journeyman 
Upgrading Fund (the Plan), Located in San Antonio, Texas

[Application No. D-10777]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the 
restrictions of sections 406(a), 406(b)(1) and (b)(2) of the Act 
shall not apply to the purchase of a classroom/office building (the 
Classroom Building) and a shop building (the Shop Building; 
together, the Buildings) and an adjacent lot (the Adjacent Lot) by 
the Plan from Local Union No. 66 of the International Association of 
Bridge, Structural, Ornamental and Reinforcing Iron Workers (the 
Union), for $63,000, provided that: (a) The purchase is a one-time 
transaction for cash, and no commissions are paid by the Plan with 
respect to the transaction; (b) the Plan pays a price for the 
Buildings and the Adjacent Lot (collectively, the Properties) that 
is no more than the fair market value of the Properties at the time 
of the transaction, as determined by a qualified, independent 
appraiser; (c) the Plan's independent fiduciary has determined that 
the transaction is appropriate for the Plan and in the best 
interests of the Plan and its participants and beneficiaries; and 
(d) the Plan's independent fiduciary monitors the purchase of the 
Properties by the Plan and takes whatever action is necessary to 
safeguard the interests of the Plan and its participants and 
beneficiaries.

Summary of Facts and Representations

    1. The Plan is a multi-employer apprenticeship plan with 
approximately 300 participants and beneficiaries. It is a state-wide 
training program for training apprentice iron workers and upgrading 
the skills of experienced iron workers. The Plan has three Union 
trustees and three management trustees. As of March 31, 1999, the 
Plan had total assets with an estimated fair market value of 
$1,197,307.
    2. The Properties consist of a land parcel of approximately 
21,750 square feet, located at 4318 Clark Avenue, San Antonio, 
Texas, containing the Buildings--the Classroom Building and the Shop 
Building. The Shop Building is a one-story, steel-frame structure on 
a concrete slab containing 2,420 square feet. The Shop Building was 
built in 1971. The Classroom Building is also a one-story, steel-
frame structure on a concrete slab containing 4,004 square feet. It 
contains four classrooms, two offices, a storage room, a reception 
area and bathrooms, and was completed in 1972-1973. The Plan 
incurred approximately $45,000 of costs relating to the construction 
of the Classroom Building. The Union has maintained ownership of the 
Properties and has paid all property taxes associated therewith. The 
Plan has been responsible for maintaining the Classroom Building, 
including the landscaping, plumbing and security.
    3. The Properties are part of a larger parcel (the Property), 
which has been owned by the Union since 1966. In addition to the 
Classroom and the Shop Buildings, the Property contains the Union 
headquarters building at the front of the Property and five empty 
lots at the rear.
    4. The Union has decided to relocate its headquarters to a 
larger building with more office space and sell the subject 
Properties. However, the Plan's Trustees do not wish to relocate the 
San Antonio training operations provided for under the terms of the 
Plan. Therefore, the Plan would like to purchase the Buildings for 
training purposes and the Adjacent Lot for additional parking. This 
transaction will allow the Plan to continue its apprenticeship and 
training programs at their current location. The applicants have 
requested an exemption to permit only the sale of the Adjacent Lot 
and the Shop Building by the Union to the Plan.\5\ In this regard, 
the transaction will also formally recognize that the Plan is and 
has been the formal owner of the Classroom Building since it was 
constructed in 1973. The applicants represent that the Plan is the 
equitable owner of the Classroom Building because it incurred the 
costs of constructing and maintaining the Classroom Building as 
described in Representation 2, above.
---------------------------------------------------------------------------

    \5\ The applicants previously sought relief for the transaction 
which is the subject of this proposed exemption, but that request 
was denied by the Department because, among other reasons, the Plan 
had not been represented by an independent fiduciary at the time the 
sale transaction took place. The applicants represent that they have 
paid the civil sanction for such transaction under section 502(i) of 
the Act as agreed upon with the Department, reversed the 
transaction, and have now re-applied for the relief proposed herein.
---------------------------------------------------------------------------

    5. The Plan retained Courtland Partners, Ltd. (Courtland) of 
Cleveland, Ohio to review the subject transaction. With respect to 
Courtland's qualifications to review the subject transaction, 
Courtland represents that it is a registered investment adviser 
under the Investment Advisers Act of 1940 and currently manages over 
$100 million of real estate investments on behalf of its pension 
fund clients. Additionally, Courtland has retainer relationships 
with pension fund clients with real estate investments exceeding 
well over $1 billion. Mr. Michael J. Humphrey (Mr. Humphrey) is the 
principal officer at Courtland responsible for the review of the 
subject transaction. Mr. Humphrey represents that he has personally 
evaluated well over $400 million of acquisitions and dispositions as 
an adviser/fiduciary on behalf of pension fund clients. Mr. Humphrey 
further represents that Courtland had no prior relationship or 
arrangement with either the Union or the Plan before being retained 
to perform its review function for the Plan with respect to the 
subject transaction.
    6. Mr. Adolph A. Ramirez (Mr. Ramirez), an independent real 
estate appraiser in San Antonio, Texas, has appraised the Adjacent 
Lot and the Shop Building as having a fair market value of $63,000, 
as of October 20, 1998. Mr. Ramirez's appraisal relied primarily on 
the market approach to value the Adjacent Lot and the Shop Building, 
with an analysis of recent sales of similar properties.
    Mr. Humphrey represents that Courtland has reviewed all of the 
terms and conditions of the proposed purchase of the Shop Building 
and the Adjacent Lot by the Plan, has considered the history of the 
arrangements made between the Union and the Plan, and the appraisal 
of the Properties completed by Mr. Ramirez. Mr. Humphrey states that 
Mr. Ramirez's appraisal has considered all of the factors necessary 
to accurately determine the fair market value of the Shop Building 
and the Adjacent Lot. Mr. Humphrey has determined, as of May 7, 
1999, that the purchase price of $63,000 for the Adjacent Lot and 
the Shop Building is reasonable. Furthermore, Courtland believes 
that the Classroom Building's value should not be included in the 
sales price for determining the appropriate consideration to be paid 
by the Plan since the understanding of the parties was that the 
Classroom Building was already effectively owned by the Plan (see 
Representation 2, above).
    7. The Plan has retained Mr. Thomas W. Hatfield (Mr. Hatfield), 
a Certified Public Accountant (CPA) in North Richland Hills, Texas, 
to act as an independent fiduciary with respect to the proposed 
transaction. Mr. Hatfield has served as an auditor and adviser to 
the Plan since its inception. Mr. Hatfield represents that he does 
not perform any accounting or other work for the Union and is not 
related to, or affiliated with, any person who is a party in 
interest with respect to the Plan. Mr. Hatfield states that he has 
been a CPA since 1978 and has concentrated on audits of not-for-
profit organizations during his career. Mr. Hatfield states that he 
will obtain, if necessary, expert advice from an experienced ERISA 
counsel as to what is required to properly execute the duties of an 
independent fiduciary for the Plan. Mr. Hatfield acknowledges and 
accepts his duties, responsibilities and liabilities as a fiduciary 
under the Act.
    After consideration of the proposed transaction, Mr. Hatfield 
has determined that the proposed transaction would be appropriate 
for the Plan and in the best interests of the Plan's participants 
and beneficiaries. As the Plan's independent fiduciary, Mr. Hatfield 
will monitor the parties' compliance with the terms and conditions 
of the proposed transaction. Mr. Hatfield represents that he will 
take whatever action is necessary to safeguard the interests of the 
Plan and its participants and beneficiaries. In this regard, Mr. 
Hatfield will ensure that the sales price paid by the Plan for the 
Shop Building and the Adjacent Lot will in no way reflect any 
additional consideration for the Classroom Building. In addition, 
Mr. Hatfield will ensure that the current appraisal of the Shop 
Building and the Adjacent Lot is updated at the time of the 
transaction and that the Plan pays no more

[[Page 15368]]

than the fair market value of such Properties at that time.
    8. Mr. Hatfield represents that the Plan's acquisition of the 
Shop Building and the Adjacent Lot for $63,000 in cash will not 
adversely affect the Plan's ability to meet all of its current 
expenses after the proposed transaction. Thus, Mr. Hatfield states 
that the transaction will not adversely affect the Plan's liquidity 
needs.
    Mr. Hatfield states further that the Properties are suitable 
facilities for the Plan to continue carrying out its apprenticeship 
and training programs. Accordingly, Mr. Hatfield concludes that the 
purchase of the Properties by the Plan would be a prudent 
transaction, and in the best interest of the Plan, since the Plan 
needs to continue to use this site as a training facility.
    9. In summary, the applicants represent that the proposed 
transaction satisfies the criteria of section 408(a) of the Act 
because: (a) The sale is a one-time transaction for cash, and no 
commissions will be paid by the Plan with respect to the sale; (b) 
the fair market value of the Properties being acquired by the Plan 
represent approximately 5% of the Plan's total assets; (c) the fair 
market value of the Adjacent Lot and the Shop Building have been 
determined by Mr. Ramirez, a qualified, independent appraiser, and 
such appraisal will be updated at the time of the transaction to 
ensure that the Plan pays no more than the fair market value for the 
Properties; (d) Courtland, an independent expert, has reviewed the 
terms of the proposed transaction and the most recent appraisal of 
the Properties, and has determined that such terms and appraisal are 
reasonable; (e) Mr. Hatfield, the Plan's independent fiduciary for 
purposes of the proposed transaction, has reviewed the terms and 
conditions of the proposed transaction and has determined that the 
transaction would be appropriate for the Plan and in the best 
interests of the Plan and its participants and beneficiaries; and 
(f) Mr. Hatfield will monitor the transaction, as the Plan's 
independent fiduciary, and will take whatever action is necessary to 
protect the interests of the Plan and its participants and 
beneficiaries.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Taylor M. Cole IRA Rollover (the IRA) Located in Deerfield, VA

[Application No. D-10859]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 C.F.R. Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990.) If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to 
the proposed sale of certain unimproved property (the Property) by the 
IRA to Taylor M. Cole, the IRA participant and a disqualified person 
with respect to the IRA; \6\ provided that the following conditions are 
met:
---------------------------------------------------------------------------

    \6\ Pursuant to CFR 2510.3-2(d), there is no jurisdiction with 
respect to the IRA under Title I of the Act. However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
---------------------------------------------------------------------------

    (a) the sale is a one-time cash transaction;
    (b) the IRA receives the current fair market value for Property, as 
established at the time of the sale by an independent qualified 
appraiser; and (c) the IRA pays no commissions or other expenses 
associated with the sale.

Summary of Facts and Representations

    1. The IRA is an individual retirement account, as described in 
section 408(a) of the Code, which was established by Taylor M. Cole 
(Mr. Cole) on June 27, 1998. As of January, 2000, the IRA had 
approximately $261,165 in total assets. The Tredegar Trust Company, 
located in Richmond, Virginia, is the custodian of the IRA.
    2. On July 27, 1998, the IRA purchased the Property from Richard 
and Ruth Mansfield, who were unrelated third parties, for $200,000 in 
cash. The Property represents over 80% of the IRA's total assets. The 
Property is adjacent to Mr. Cole's personal residence. It is 
represented that Mr. Cole made the decision to purchase the Property as 
a investment for the IRA.\7\
---------------------------------------------------------------------------

    \7\ The Department notes that section 4975(c)(1) (D) and (E) of 
the Code prohibits the use by or for the benefit of a disqualified 
person of the assets of a plan and prohibits a fiduciary from 
dealing with the assets of a plan in his own interest or for his own 
account. Accordingly, to the extent there were violations of section 
4975(c)(1) (D) and (E) of the Code with respect to the decision to 
purchase the Property for the IRA, the Department notes that this 
proposed exemption is providing no relief for such transaction.
---------------------------------------------------------------------------

    3. The Property is an approximately 176 acre parcel of unimproved 
land, located at 1352 Marble Valley Road, Deerfield, Virginia. The 
applicant represents that since the acquisition of the Property by the 
IRA, the Property has not been leased to or used by anyone, including 
any disqualified persons, as defined under section 4975(e)(2) of the 
Code. In addition, the Property has not generated any income for the 
IRA since its acquisition.\8\
    4. The Property was appraised on March 25, 1999 (the Appraisal). 
The Appraisal was prepared by James H. Woods, RM (Mr. Woods), who is an 
independent Virginia state licensed real estate appraiser. Mr. Woods is 
with Blue Ridge Appraisal Company L.L.C.., which has offices in 
Staunton, Virginia and Winchester, Virginia. Mr. Woods relied primarily 
on the market approach, with an analysis of recent sales of similar 
properties in the geographic area. Mr. Woods determined that the 
Property had a fair market value of approximately $212,350, as of March 
25, 1999.
---------------------------------------------------------------------------

    \8\ The Department notes that the Internal Revenue Service has 
taken the position that a lack of diversification of investments in 
a qualified plan may raise questions in regard to the exclusive 
benefit rule under section 401(a) of the Code. See, e.g., Rev. Rul. 
73-532, 1973-2 C.B. 128. The Department further notes that section 
408(a) of the Code, which describes tax qualifications provisions 
for IRAs, mandates that an IRA trust be created for the exclusive 
benefit of an individual and his or her beneficiaries. However, the 
Department is expressing no opinion in this proposed exemption 
regarding whether any violations of the Code have taken place with 
respect to the acquisition and holding of the Property by the IRA.
---------------------------------------------------------------------------

    Mr. Woods updated the Appraisal on February 22, 2000 (the Update). 
In the Update, Mr. Woods considered more recent sales of similar 
properties located near or adjacent to the Property as well as other 
circumstances relating to the proposed sale of the Property to Mr. 
Cole. Specifically, because the Property is adjacent to other property 
owned by Mr. Cole, Mr. Woods considered whether the adjacency factor 
merits a premium above fair market value in a sale of the Property to 
Mr. Cole. Mr. Woods states that the Property has no road frontage, no 
access easement or right of way, and can be accessed only by crossing 
over other property. Based on the Property's location, size and other 
factors, Mr. Woods concludes that combining the Property with property 
already owned by Mr. Cole will have no effect on the Property's fair 
market value. Therefore, Mr. Woods states that the fair market value of 
the Property remains at approximately $212,350, as of February 22, 
2000.
    5. The applicant proposes that Mr. Cole purchase the Property from 
the IRA in a one-time cash transaction. The applicant represents that 
the proposed transaction would be in the best interest and protective 
of the IRA because the IRA will be able to dispose of the Property at 
its fair market value and will not pay any commissions or expenses 
associated with the sale. In this regard, Mr. Cole will pay the IRA an 
amount in cash equal to the current fair market value at the time of 
the transaction, based on a further update of the Appraisal. The sale 
of the Property will increase the liquidity of the IRA's portfolio, 
will enable the trustees to diversify the assets of the IRA, and will 
enable the IRA to sell an illiquid non-income producing asset.
    6. In summary, the applicant represents that the proposed 
transaction

[[Page 15369]]

satisfies the statutory criteria of section 4975(c)(2) of the Code 
because:
    (a) the sale will be a one-time cash transaction;
    (b) the IRA will receive the current fair market value for the 
Property, as established at the time of the sale by an independent 
qualified appraiser;
    (c) the IRA will pay no commissions or other expenses associated 
with the sale; and
    (d) the sale will provide the IRA with more liquidity, will enable 
the IRA to diversify its assets, and will allow the IRA to reinvest the 
proceeds of the sale in other investments that potentially could yield 
greater returns.

Notice to Interested Persons

    Because Mr. Cole is the sole participant of the IRA, it has been 
determined that there is no need to distribute the notice of proposed 
exemption to interested persons. Comments and requests for a hearing 
are due thirty (30) days from the date of publication of this notice in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department 
at (202) 219-8883. (This is not a toll-free number.)

Foodcraft, Inc. Defined Benefit Plan (the Plan), Located in Los 
Angeles, California

[Exemption Application No. D-10864]

Proposed Exemption

    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 32826, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a) and 406(b)(1) and 
(b)(2) 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 
(E) of the Code, shall not apply to the cash sale (the Sale) of certain 
improved real property (the Property) by the Plan to the trustees of 
the Plan, Ernest Lieblich and Caryl Lieblich (collectively, the 
Trustees), parties in interest and disqualified persons with respect to 
the Plan, provided that the following conditions are met:
    (a) All terms and conditions of the Sale are no less favorable to 
the Plan than those which the Plan could obtain in an arm's length 
transaction with an unrelated party;
    (b) The Trustees will purchase the Property from the Plan for the 
greater of $315,000 or the Property's fair market value as of the date 
of the transaction as determined by a qualified, independent appraiser;
    (c) The Sale will be a one-time transaction for cash; and
    (d) The Plan will pay no fees or commissions in connection with the 
Sale.

Summary of Facts and Representations

    1. Foodcraft, Inc. (Foodcraft), a California corporation, is the 
sponsor of the Plan which is a defined benefit plan located in Los 
Angeles, California. The Plan has forty seven (47) participants, and 
approximately $3,582,286 in total assets as of January 1, 1998. The 
trustees of the Plan are Ernest Lieblich and Caryl Lieblich 
(collectively, the Trustees).
    2. The Property, located at 1625 Riverside Drive, consists of lots 
184 & 206 and those portions of lots 185, 186, 204 & 205 of tract 5963 
in Los Angeles, California.
    3. The Property was acquired by the Plan from the Trustees for 
$165,000 on February 29, 1984. On November 3, 1982, an appraisal of the 
Property was performed by an independent appraiser, Gail A. Anderson, 
which determined that the fair market value of the Property, exclusive 
of improvements, was $303,220. The acquisition of the Property was 
executed pursuant to an exemption granted by the Department, Prohibited 
Transaction Exemption (PTE) 83-159 (48 FR 44948, September 30, 1983).
    4. The Property has generated rental income (the Rental Income) for 
the Plan as a result of leasing said Property to the Trustees, who in 
turn, subleased it to Foodcraft from November 8, 1983 until November 8, 
2013.\9\ In this regard, the Plan has received Rental Income totaling 
$496,521. The applicants represent that the Plan has not incurred any 
expenses as a result of the Plan's ownership of the Property.
---------------------------------------------------------------------------

    \9\ PTE 83-159 also provided exemptive relief for the subsequent 
lease of the Property by the Plan to the Trustees.
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    5. The applicants represent that the Plan was audited by the 
Internal Revenue Service (IRS) in 1992. The audit disclosed the 
Trustees' failure to obtain periodic appraisals of the Property and 
requisite rent adjustments as mandated by PTE 83-159.\10\ The IRS noted 
that prohibited transactions occurred and that they have been 
corrected. Accordingly, Form 5330 excise tax returns were filed by the 
Trustees and the excise tax was remitted to the IRS.
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    \10\ Specifically, in the Proposal to PTE 83-159, 48 FR 35740 
(August 5, 1983), line item ``3.'' of the ``Summary of Facts and 
Representations,'' provides that, ``[t]he rental rent will be 
adjusted periodically, but at a minimum of every three years, as 
determined by an independent appraiser, to the greater of 10% of the 
fair market value of the property, or the fair market rental value 
of the property.'' (48 FR at 35741).
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    Furthermore, the Department conducted its own investigation of the 
prohibited transactions. In this regard, on November 24, 1992, 
Foodcraft reimbursed the Plan $45,000 for five years of adjusted rent 
and $4,500 in interest. By letter dated April 19, 1993, the Department 
concluded that the prohibited transactions have been corrected and the 
funds restored to the Plan. A subsequent audit by the IRS was conducted 
in 1997. In that audit, the IRS concluded that the Trustees complied 
with the exemption.\11\
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    \11\ In this regard, the Department is not offering any opinion 
as to the continued availability of PTE 83-159 for the period 
beginning 1992, when the Trustees' failed to obtain an appraisal of 
the Property to determine the fair market rental value, to the 
present.
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    6. The Property was appraised on April 5, 1999 by Ronald L. 
Macksoud (Mr. Macksoud) for Babcock Abelmann & Associates, an appraisal 
company independent of the Plan and the Trustees. Mr. Macksoud, a 
California certified real estate appraiser, used the direct sales 
comparison approach to evaluate the fair market value of the Property. 
Based on this approach, Mr. Macksoud represents that the fair market 
value of the Property, as of April 5, 1999, was $315,000.
    7. The Trustees propose to purchase the Property for a cash price 
of $315,000. It is represented that the Sale is administratively 
feasible in that it will be a one-time transaction for cash in which 
the Plan will pay no fees or commissions. It is also represented that 
the Sale is in the best interest of the Plan since it allows the Plan 
to disgorge an illiquid asset to be replaced by conventional 
investments, e.g. money instruments and securities. This would improve 
the Plan's liquidity and ability to meet its obligation for payment of 
benefits. In addition, the Plan will no longer be involved in the 
enforcement of its leasehold interest under the lease, which sets forth 
the rights of the parties for the next fourteen years.
    8. In summary, the Trustees represent that the proposed transaction 
meets the statutory criteria of section 408(a) of the Act because:
    (a) The terms and conditions of the Sale are at least as favorable 
to the Plan as those obtainable in an arm's length transaction with an 
unrelated party;
    (b) The Trustees will purchase the Property from the Plan for the 
greater of $315,000 or the Property's fair market value as of the date 
of the transaction as

[[Page 15370]]

determined by a qualified, independent appraiser;
    (c) The proposed transaction is a one-time transaction for cash; 
and
    (d) The Plan will pay no fees or commissions associated with the 
proposed Sale.

FOR FURTHER INFORMATION CONTACT: J. Martin Jara, U.S. Department of 
Labor, telephone (202) 219-8883. (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 or 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 that each application accurately describes 
all material terms of the transaction which is the subject of the 
exemption.

    Signed at Washington, DC, this 17th day of March, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 00-7113 Filed 3-21-00; 8:45 am]
BILLING CODE 4510-29-P