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