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Secretary of Labor Thomas E. Perez
EBSA (Formerly PWBA) Federal Register Notice Prohibited Transaction Exemption 2001-32; Grant of Individual Exemptions; Development Company Funding Corporation, et al. [09/07/2001]

EBSA (Formerly PWBA) Federal Register Notice

Prohibited Transaction Exemption 2001-32; Grant of Individual Exemptions; Development Company Funding Corporation, et al. [09/07/2001]

[PDF Version]

Volume 66, Number 174, Page 46823-46826


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Exemption Application No. D-10926, et al.]

 
Prohibited Transaction Exemption 2001-32; Grant of Individual 
Exemptions; Development Company Funding Corporation, et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of Individual Exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) from certain of the prohibited transaction 
restrictions of the Employee Retirement Income Security Act of 1974 
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
    Notices were published in the Federal Register of the pendency 
before the Department of proposals to grant such exemptions. The 
notices set forth a summary of facts and representations contained in 
each application for exemption and referred interested persons to the 
respective applications for a complete statement of the facts and 
representations. The applications have been available for public 
inspection at the Department in Washington, DC. The notices also 
invited interested persons to submit comments on the requested 
exemptions to the Department. In addition the notices stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicants have represented that they 
have complied with the requirements of the notification to interested 
persons. No public comments and no requests for a hearing, unless 
otherwise stated, were received by the Department.
    The notices of proposed exemption were issued and the exemptions 
are being granted solely by the Department because, 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 proposed to the Secretary of 
Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:
    (a) The exemptions are administratively feasible;
    (b) They are in the interests of the plans and their participants 
and beneficiaries; and
    (c) They are protective of the rights of the participants and 
beneficiaries of the plans.

Development Company Funding Corporation, Located in the District of 
Columbia

[Prohibited Transaction Exemption 2001-32; Application No. D-10926]

Exemption

Section I. Transactions

    A. Effective August 25, 2000, the restrictions of sections 406(a) 
and 407(a) of the Act, and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code, shall not apply to the following transactions 
involving Trusts and Certificates evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
Certificates in the initial issuance of Certificates between the 
Underwriter of the Certificates and an employee benefit plan when the 
SBA, the Fiscal Agent, the Selling Agent, the Central Servicing Agent, 
the Trustee, the Underwriter, or an Obligor is a party in interest with 
respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
Certificates by a plan in the secondary market for such Certificates; 
and
    (3) The continued holding of Certificates acquired by a plan 
pursuant to subsection I.A.(1) or (2).
    Notwithstanding the foregoing, Section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 of the Act for the acquisition or holding of a Certificate on 
behalf of an Excluded Plan, by any person who has discretionary 
authority or renders investment advice with respect to the assets of 
that Excluded Plan.\1\
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    \1\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 of the Act for any person rendering investment 
advice to an Excluded Plan within the meaning of section 
3(21)(A)(ii) of the Act and regulation 29 CFR section 2510.3-21(c).
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    B. Effective August 25, 2000, the restrictions of section 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)(E) of the 
Code, shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
Certificates in the initial issuance of Certificates between the 
Underwriter and a plan, when the person who has discretionary authority 
or renders investment advice with respect to the investment of plan 
assets in the Certificates is (a) an Obligor with respect to 5 percent 
or less of the fair market value of the 504 Program Loans underlying 
the Debentures related to that Series of Certificates, or (b) an 
affiliate of a person described in (a); if
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of Certificates in 
connection with the initial issuance of the Certificates, at least 50 
percent of each Series of Certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group, 
and at least 50 percent of the aggregate interest in the Series is 
acquired by persons independent of the Restricted Group.
    (iii) A plan's investment in each Series of Certificates does not 
exceed 25 percent of all of the Certificates of that Series outstanding 
at the time of the acquisition; and
    (iv) Immediately after the acquisition of the Certificates, no more 
than 25 percent of the assets of a plan with

[[Page 46824]]

respect to which the person has discretionary authority or renders 
investment advice are invested in Certificates representing an interest 
in a Trust containing assets sold or serviced by the same entity.\2\ 
For purposes of this subparagraph (iv) only, an entity will not be 
considered to service assets contained in a Trust if it is merely a 
subservicer of that Trust.
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    \2\ For purposes of this exemption, each plan participating in a 
commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
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    (2) The direct or indirect acquisition or disposition of 
Certificates by a plan described in paragraph B.(1) in the secondary 
market for such Certificates, provided that conditions set forth in 
paragraphs B.(1)(i), (iii) and (iv) are met; and
    (3) The continued holding of Certificates acquired by a plan 
pursuant to subsection I.B.(1) or (2).
    C. Effective August 25, 2000, the restrictions of sections 406(a), 
406(b) and 407(a) of the Act, and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 4975(c) 
of the Code, shall not apply to transactions in connection with the 
servicing, management and operation of a Trust, provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding Trust Agreement; and
    (2) The Trust Agreement is provided to, or described in all 
material respects in the offering circular or other disclosure document 
provided to the investing plans before they purchase Certificates 
issued by the Trust.\3\
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    \3\ The offering circular or other disclosure document must 
contain substantially the same information that would be disclosed 
in a prospectus if the offering of the Certificates were made in a 
registered public offering under the Securities Act of 1933. In the 
Department's view, the offering circular or other disclosure 
document must contain sufficient information to permit plan 
fiduciaries to make informed investment decisions.
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    D. Effective August 25, 2000, the restrictions of sections 406(a) 
and 407(a) of the Act, and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code, shall not apply to any transaction to which those 
restrictions or sanctions would otherwise apply merely because a person 
is deemed to be a party in interest or disqualified person (including a 
fiduciary) with respect to a plan by virtue of providing services to 
the plan (or by virtue of having a relationship to such service 
provider described in section 3(14)(F), (G), (H), or (I) of the Act or 
section 4975(e)(2)(F), (G), (H), (I) of the Code), solely because of 
the plan's ownership of Certificates.

Section II. Conditions

    The relief provided under Section I is available only if the 
following conditions are met:
    A. The acquisition of Certificates by a plan is on terms (including 
the Certificate price) that are at least as favorable to the plan as 
such terms would be in an arm's-length transaction with an unrelated 
party;
    B. The rights and interests evidenced by the Certificates are not 
subordinated to the rights and interests evidenced by other 
Certificates in the same Series;
    C. The Certificates and Debentures are guaranteed as to the timely 
payment of principal and interest by the SBA, and are therefore backed 
by the full faith and credit of the United States;
    D. The Trustee is not an affiliate of any other member of the 
Restricted Group.

Section III. Definitions

    For purposes of this exemption:
    A. ``Certificate'' means a certificate:
    (1) That represents a beneficial ownership interest in a discrete 
pool of Debentures and all payments thereon, held in Trust by the 
Trustee pursuant to the Trust Agreement;
    (2) That entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the discrete pool 
of Debentures held as part of such Trust; and
    (3) That is issued by the Trustee as agent for the SBA and 
guaranteed by the SBA as to timely payment of principal and interest 
pursuant to section 505 of the Small Business Investment Act of 1958, 
as amended (the Small Business Investment Act).
    B. ``Trust'' means the trust created pursuant to the Trust 
Agreement, under which, with respect to each Series of Certificates, 
the Trustee holds in Trust for the benefit of the certificateholders of 
the Series the following property:
    (1) The discrete pool of Debentures related to the Series;
    (2) A debenture guarantee agreement executed by the SBA pursuant to 
section 503 of the Small Business Investment Act pursuant to which the 
SBA guarantees timely payment of principal and interest on the 
Debentures related to the Series; and
    (3) The certificate account maintained by the Central Servicing 
Agent for such Series into which the Central Servicing Agent deposits 
payments due in respect of the Debentures on each semiannual debenture 
payment date.
    C. ``Debentures'' means debentures issued by a certified 
development company and guaranteed as to timely payment of principal 
and interest by the SBA pursuant to section 503 of the Small Business 
Investment Act.
    D. ``504 Program Loans'' means loans made by a certified 
development company to a small business concern and funded with the 
proceeds of a Debenture pursuant to section 503 of the Small Business 
Investment Act.
    E. ``SBA'' refers to the U.S. Small Business Administration.
    F. ``Underwriter'' means an entity which has received an individual 
prohibited transaction exemption from the Department that provides 
relief for the operation of asset pool investment trusts that issue 
``asset-backed'' pass-through securities to plans, that is similar in 
format and structure to this exemption (the Underwriter Exemptions); 
\4\ any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
such entity; and any member of an underwriting syndicate or selling 
group of which such firm or person described above is a manager or co-
manager with respect to the Certificates.
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    \4\ For a listing of the Underwriter Exemptions, see the 
description provided in footnote 1 of Prohibited Transaction 
Exemption 2000-58 (65 FR 67765, November 13, 2000).
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    G. ``Fiscal Agent'' means the entity that has contracted with the 
SBA to assess the financial markets, arrange for the production of 
required documents, and monitor the performance of the Trustee and the 
Underwriter.
    H. ``Selling Agent'' means the entity appointed by a certified 
development company to select Underwriters, negotiate the terms and 
conditions of Debenture offerings with the Underwriters, and direct and 
coordinate Debenture sales.
    I. ``Central Servicing Agent'' means the entity that has entered 
into a master servicing agreement with the SBA to support the orderly 
flow of funds among borrowers, certified development companies and the 
SBA.
    J. ``Trustee'' means an entity that is the trustee of the Trust.
    K. ``Obligor'' means any person that is obligated to make payments 
under a Section 504 Loan related to a Debenture contained in the Trust.
    L. ``Excluded Plan'' means any employee benefit plan with respect 
to which any member of the Restricted Group is a ``plan sponsor'' 
within the meaning of section 3(16)(B) of the Act.
    M. ``Restricted Group'' with respect to a class of Certificates 
means:

[[Page 46825]]

    (1) Each Underwriter;
    (2) The Fiscal Agent;
    (3) The Selling Agent;
    (4) The Trustee;
    (5) The Central Servicing Agent;
    (6) Any Obligor with respect to loans relating to Debentures 
included in the Trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the Trust, determined on 
the date of the initial issuance of Certificates by the Trust;
    (7) The SBA; or
    (8) Any affiliate of a person described in (1)-(7) above.
    N. ``Affiliate'' of another person includes:
    (1) Any person, directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), brother, sister, or spouse of a brother 
or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    O. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    P. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
that has investment management authority or renders investment advice 
with respect to assets of such person.
    Q. ``Sale'' includes the entrance into a Forward Delivery 
Commitment, provided:
    (1) The terms of the Forward Delivery Commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's-length transaction with an unrelated party;
    (2) The offering circular or other disclosure document is provided 
to an investing plan prior to the time the plan enters into the Forward 
Delivery Commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to Sales are met.
    R. ``Forward Delivery Commitment'' means a contract for the 
purchase or sale of one or more Certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
Certificates) and optional contracts (which give one party the right 
but not the obligation to deliver Certificates to, or demand delivery 
of Certificates from, the other party).
    S. ``Trust Agreement'' means that trust agreement by and among the 
SBA, the Fiscal Agent and the Trustee, as amended, establishing the 
Trust and, with respect to each Series of Certificates, the supplement 
to the trust agreement pertaining to such Series.
    T. ``Series'' means any particular series of Certificates issued 
pursuant to the Trust Agreement that, in the aggregate, represent the 
entire beneficial interest in a discrete pool of Debentures held by the 
Trustee pursuant to the Trust Agreement.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on July 10, 2001 at 66 FR 
36005.
    For Further Information Contact: Karen Lloyd of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)

Merganser Capital Management LP (Merganser), Located in Cambridge, 
Massachusetts

[Prohibited Transaction Exemption 2001-33 Application No. D-10951]

Exemption

Section I. Transaction

    Merganser shall not be precluded from functioning as a ``qualified 
professional asset manager'' pursuant to Prohibited Transaction 
Exemption 84-14 (49 Fed. Reg. 9494, Mar. 13, 1984) (PTE 84-14) for the 
period between April 6, 2000 and December 31, 2006, solely because of 
its failure to satisfy the shareholders' or partners' equity 
requirement under section V(a)(4) of PTE 84-14, provided that the 
conditions set forth in Section II are met.

Section II. Conditions

    (a) Merganser shall obtain an irrevocable Letter of Credit, which 
shall be reduced only by ERISA Claims paid on behalf of ERISA Clients.
    (b) The amount available under the Letter of Credit shall be at 
least $750,000 as of the first day of each fiscal year during which the 
Letter of Credit is maintained.
    (c) Merganser shall cause the Letter of Credit to be issued to an 
Agent to be held for the benefit of all ERISA Clients.
    (d) Merganser shall notify current and future ERISA Clients in 
writing of: (i) Their status as beneficiaries of the Letter of Credit; 
(ii) their right to make a draw against the Letter of Credit by 
presenting the Agent with the documentation described in (g) below; and 
(iii) the U.S. address of the Agent at which an ERISA Client may 
present such documentation. Merganser shall promptly notify all ERISA 
Clients of any changes in the information as to how to contact the 
Agent.
    (e) Merganser shall provide current and future ERISA Clients with a 
copy of the proposed and final exemption as published in the Federal 
Register.
    (f) Merganser shall provide the Agent with a complete list of all 
ERISA Clients, which shall be updated each time Merganser obtains a new 
ERISA Client.
    (g) The Letter of Credit shall be payable on demand solely to any 
ERISA Client (or its agent) if the ERISA Client provides the Agent 
with:
    (i)(A) a certified copy of the final judgment against Merganser 
based on an ERISA Claim of such client, entered by a court of competent 
jurisdiction with all rights of appeal having expired or having been 
exhausted, or (B) a true copy of a settlement agreement between the 
ERISA Client and Merganser providing for damages to the ERISA Client 
with respect to an ERISA Claim;
    (ii) in the case of a final court judgment, a certified true copy 
of a Sheriff's or Marshall's levy and execution on the judgment, 
returned unsatisfied, or such other documentation, certified by an 
officer of the court in which the judgment was entered, stating that 
the judgment remains unsatisfied following attempts to collect the 
judgment in accordance with local court rules; and
    (iii) a certificate of an authorized representative of the ERISA 
Client stating the amount of the judgment or settlement which remains 
unsatisfied.
    (h)(i) The Letter of Credit shall be maintained until the earlier 
of December 31, 2006 or Merganser's satisfaction of the partners' 
equity requirement under section V(a)(4) of PTE 84-14.
    (ii) Notwithstanding subparagraph (i), in the event that one or 
more ERISA Clients has a Pending ERISA Claim on December 31, 2006, 
Merganser shall either (A) cause the Letter of Credit to be maintained 
until the earlier of December 31, 2008 or a final judgment or 
settlement disposing of all such Pending ERISA Claims, or (B) cause a 
bond to be purchased which fully insures all such Pending ERISA Claims 
in the total amount equal to the amount of such Pending ERISA claims 
but not to exceed $750,000.

Section III. Definitions

    (a) ``Agent'' shall mean a commercial bank, trust company or other 
financial institution subject to federal or state

[[Page 46826]]

banking regulation that is independent of Merganser.
    (b) ``Claim'' shall mean a civil proceeding for monetary relief 
which is commenced by the filing or service of a civil complaint or 
similar pleading, or a request for monetary relief which could have 
been the subject of such a complaint or pleading but for a settlement 
agreement.
    (c) ``ERISA Claim'' shall mean a Claim filed against Merganser or 
with respect to which a settlement is reached with Merganser prior to 
December 31, 2006, by reason of Merganser's alleged breach or violation 
of a duty described in sections 404 or 406 of the Act.
    (d) ``ERISA Client'' shall mean any employee benefit plan covered 
by Title I of ERISA to which Merganser provides or provided investment 
management services on or before December 31, 2006.
    (e) ``Letter of Credit'' shall mean a standby letter of credit in 
the amount of $750,000 issued by a commercial bank, trust company or 
other financial institution subject to federal or state banking 
regulation that is independent of Merganser.
    (f) ``Pending ERISA Claim'' shall mean an ERISA Claim that: (i) has 
been filed in court and is not the subject of a final judgment or 
settlement; or (ii) has been the subject of a final judgment or 
settlement which remains unsatisfied.
    (g) A person will be ``independent'' of another person only if:
    (i) For purposes of this exemption, such person is not an affiliate 
of that other person; and
    (ii) The other person, or an affiliate thereof, is not a fiduciary 
that has investment management authority or renders investment advice 
with respect to assets of such person.
    (h) An ``affiliate'' of a person means:
    (i) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person. (For purposes of this paragraph, the term ``control'' 
means the power to exercise a controlling influence over the management 
or policies of a person other than an individual);
    (ii) Any officer, director, employee or relative (as defined in 
section 3(15) of the Act) of any such other person or any partner in 
any such person; and
    (iii) Any corporation or partnership of which such person is an 
officer, director or employee, or in which such person is a partner.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on June 4, 2001 at 66 FR 
30012.
    For Further Information Contact:
    Karen Lloyd of the Department, telephone (202) 219-8194. (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 to which the exemptions 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) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional 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
    (3) The availability of these exemptions is subject to the express 
condition that the material facts and representations contained in each 
application accurately describes all materiall terms of the transaction 
which is the subject of the exemption.

    Signed at Washington, DC, this 4th day of September, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 01-22478 Filed 9-6-01; 8:45 am]
BILLING CODE 4510-29-P