EBSA (Formerly PWBA) Federal Register Notice
Grant of Individual Exemptions; The Savings Plan for Employees of Florida Progress Corporation (the Plan) et al. [10/22/2001]
[PDF Version]
Volume 66, Number 204, Page 53438-53454
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 2001-38; Exemption Application No. D-
10953, et al.]
Grant of Individual Exemptions; The Savings Plan for Employees of
Florida Progress Corporation (the Plan) 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.
The Savings Plan for Employees of Florida Progress Corporation (the
Plan)Located in St. Petersburg, FL
[Prohibited Transaction Exemption 2001-38; Exemption Application No. D-
10953]
Exemption
The restrictions of sections 406(a), 406(b)(1) and (b)(2) and
section 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 (E) of the Code, shall not apply, effective
November 30, 2000, to (1) the receipt, by the Plan, of contingent value
obligations (the CVOs), as a result of the Plan's ownership of certain
common stock (the Florida Progress Stock) in Florida Progress
Corporation (Florida Progress), the Plan sponsor;
(2) the continued holding of the CVOs by the Plan; and the (3)
potential resale of the CVOs by the Plan to Progress Energy, Inc.
(Progress Energy), a party in interest with respect to the Plan.
This exemption is subject to the following conditions:
(a) The Plan received one CVO for each share of Florida Progress
Stock on the effective date of the share exchange between Florida
Progress and CP&L Energy, Inc. (CP&L Energy), the predecessor entity to
Progress Energy.
(b) All Florida Progress shareholders, including Plan participants,
received the CVOs in the same manner, so that the Plan participants and
beneficiaries were not in a less advantageous position than other
Florida Progress shareholders.
(c) The Plan's receipt of the CVOs, including other share exchange
[[Page 53439]]
consideration consisting of cash and/or shares of CP&L Energy stock,
resulted from shareholder approval and did not relate to any unilateral
exercise of discretion by a Plan fiduciary.
(d) Salomon Smith Barney, Inc. (Salomon Smith Barney) advised
Florida Progress that the consideration to be received by Florida
Progress shareholders in exchange for their shares of Florida Progress
Stock was ``fair,'' from a financial point of view.
(e) The Plan did not pay any fees or commissions in connection with
the acquisition of the CVOs, nor will it pay any fees or commissions in
connection with the holding or potential sale of the CVOs to Progress
Energy.
(f) An independent fiduciary, United States Trust Company, N.A.,
(1) Has overseen, and continues to oversee, the Plan's holding or
disposition of any CVOs for which the Plan does not receive any
investment direction and determines whether it is appropriate for the
Plan to sell the CVOs; and
(2) Retains the services of an independent appraiser to calculate
the price at which the CVOs are sold to Progress Energy in order to
ensure that adequate consideration is received.
(g) Plan participants have the same rights and flexibility as
unrelated parties and they may sell their CVOs at any time.
Effective Date:This exemption is effective as of November 30, 2000.
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 30, 2001 at 66 FR
39363.
Written Comments
During the comment period, the Department received one written
comment with respect to the proposed exemption and no requests for a
public hearing. The comment was submitted by the Plan's legal counsel
and is intended to clarify the Summary of Facts and Representations
(the Summary) of the proposal in two areas. First, in Representation 3
of the Summary, the third sentence of the initial paragraph states, at
39363, that at the time of the share exchange transaction, Progress
Energy, then known as CP&L Energy, Inc., operated through three
subsidiaries, CP&L, North Carolina Power & Gas, Inc. and Interpath
Communications, Inc. The applicant suggests that this sentence be
revised to read as follows to correct certain minor inaccuracies:
At the time of the share exchange transaction described in this
notice of proposed exemption, Progress Energy, then known as CP&L
Energy, Inc., operated primarily through three major subsidiaries,
CP&L, North Carolina Power & Gas, Inc. and Interpath Communications,
Inc. (ICI).
Second, in Representation 12 of the proposed exemption, the last
sentence of the paragraph states, at 39366, that Salomon Smith Barney
advised Florida Progress, in an opinion letter dated July 5, 2000 to
the company's Board of Directors, that due to the low trading volume in
the ``when, as and if issued'' market, a mass sale of the CVOs by the
Plan would likely depress the value of the CVOs, thereby adversely
affecting the interests of the Plan participants. The applicant
requests that the phrase ``in an opinion letter dated July 5, 2000 to
the company's Board of Directors'' be deleted since the letter related
solely to the fairness of the corporate transaction to the Florida
Progress shareholders from a financial point of view, whereas the
referenced advice was given separately. Therefore, the applicant
recommends that the sentence be revised to read as follows:
However, Salomon Smith Barney advised Florida Progress that due
to the low trading volume in the ``when, as and if issued'' market,
a mass sale of the CVOs by the plan would likely affect the value of
the CVOs, thereby adversely affecting the interests of the Plan
participants.
In response to the applicant's comment letter, the Department has
noted the foregoing changes to the Summary. For further information
regarding the applicant's comment and other matters discussed herein,
interested persons are encouraged to obtain copies of the exemption
application file (Exemption Application No. D-10953) the Department is
maintaining in this case. The complete application file, as well as all
supplemental submissions received by the Department, are made available
for public inspection in the Public Disclosure Room of the Pension and
Welfare Benefits Administration, Room N-1513, U.S. Department of Labor,
200 Constitution Avenue, N.W., Washington, D.C. 20210.
Accordingly, after giving full consideration to the entire record,
including the applicant's comment, the Department has decided to grant
the exemption.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Independent Fiduciary Services, Inc. (IFS) Located in Washington,
DC
[Prohibited Transaction Exemption (PTE) 2001-39; Exemption Application
Nos. D-10960 and D-10971]
Exemption
I. General Transactions
The restrictions of section 406(a)(1)(A) through (D) and the
sanctions resulting from the application of section 4975 of the Code by
reason of section 4975(c)(1)(A) through (D),\1\ shall not apply,
effective from November 3, 2000, to a transaction between a party in
interest with respect to the Plumbers and Pipe Fitters National Pension
Fund (the Fund) and an account (the Diplomat Account) that holds
certain assets of the Fund managed by IFS while serving as independent
named fiduciary (the Named Fiduciary) in connection with PTE 99-46 \2\;
provided that the following conditions are satisfied:
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\1\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to the corresponding provisions of the Code.
\2\ 64 FR 61944, November 15, 1999.
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(a) IFS, as Named Fiduciary of the Diplomat Account, is an
investment adviser registered under the Investment Advisers Act of
1940, as amended, (the Advisers Act) that has, as of the last day of
its most recent fiscal year, shareholders' equity or partners' equity,
as defined in Section III (h), below, in excess of $750,000;
(b) At the time of the transaction, as defined in Section III (i),
below, the party in interest or its affiliate, as defined in Section
III (a), below, does not have, and during the immediately preceding one
(1) year has not exercised, the authority to--
(1) Appoint or terminate the Named Fiduciary as a manager of the
Diplomat Account, or
(2) Negotiate the terms of the management agreement with the Named
Fiduciary (including renewals or modifications thereof) on behalf of
the Fund;
(c) The transaction is not described in--
(1) Prohibited Transaction Class Exemption 81-6 (PTCE 81-6)\3\
(relating to securities lending arrangements);
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\3\ 46 FR 7527, January 23, 1981.
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(2) Prohibited Transaction Class Exemption 83-1 (PTCE 83-1)\4\
(relating to acquisitions by plans of interests in mortgage pools), or
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\4\ 48 FR 895, January 7, 1983.
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(3) Prohibited Transaction Class Exemption 82-87 (PTCE 82-87)\5\
[[Page 53440]]
(relating to certain mortgage financing arrangements);
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\5\ 47 FR 21331, May 18, 1982.
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(d) The terms of the transaction are negotiated on behalf of the
Diplomat Account under the authority and general direction of the Named
Fiduciary, and either the Named Fiduciary, or (so long as the Named
Fiduciary retains full fiduciary responsibility with respect to the
transaction) a property manager acting in accordance with written
guidelines established and administered by the Named Fiduciary, makes
the decision on behalf of the Diplomat Account to enter into the
transaction, provided that the transaction is not part of an agreement,
arrangement, or understanding designed to benefit a party in interest;
(e) The party in interest dealing with the Diplomat Account is
neither the Named Fiduciary nor a person related to the Named
Fiduciary, as defined in Section III(f), below;
(f) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the Named Fiduciary, the terms of the transaction are at
least as favorable to the Diplomat Account as the terms generally
available in arm's length transactions between unrelated parties;
(g) Neither the Named Fiduciary nor any affiliate thereof, as
defined in Section III(b), below, nor any owner, direct or indirect, of
a 5 percent (5%) or more interest in the Named Fiduciary is a person
who, within the ten (10) years immediately preceding the transaction,
has been either convicted or released from imprisonment, whichever is
later, as a result of:
(1) Any felony involving abuse or misuse of such person's employee
benefit plan position or employment, or position or employment with a
labor organization;
(2) Any felony arising out of the conduct of the business of a
broker, dealer, investment adviser, bank, insurance company, or
fiduciary;
(3) Income tax evasion;
(4) Any felony involving the larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, or misappropriation of funds or securities;
conspiracy or attempt to commit any such crimes or a crime in which any
of the foregoing crimes is an element; or
(5) Any other crimes described in section 411 of the Act.
For purposes of this Section I(g), a person shall be deemed to have
been ``convicted'' from the date of the judgment of the trial court,
regardless of whether the judgment remains under appeal.
II. Specific Exemption Involving Places of Public Accommodation
The restrictions of sections 406(a)(1)(A) through (D) and 406(b)(1)
and 406(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, effective from
November 3, 2000, to the furnishing of services, facilities, and any
goods incidental thereto by a place of public accommodation owned by
the Diplomat Account managed by IFS, acting as the Named Fiduciary, to
a party in interest with respect to the Fund, if the services,
facilities, and incidental goods are furnished on a comparable basis to
the general public.
III. Definitions
(a) For purposes of Section I(b), above, of this exemption, an
``affiliate'' of a person means --
(1) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, 5 percent (5%)
or more partner, or employee (but only if the employer of such employee
is the plan sponsor), and
(3) any director of the person or any employee of the person who is
a highly compensated employee, as described in section 4975(e)(2)(H) of
the Code, or who has direct or indirect authority, responsibility, or
control regarding the custody, management, or disposition of plan
assets. A named fiduciary (within the meaning of section 402(a)(2) of
the Act) of a plan, and an employer any of whose employees are covered
by the plan will also be considered affiliates with respect to each
other for purposes of Section I(b) if such employer or an affiliate of
such employer has the authority, alone or shared with others, to
appoint or terminate the named fiduciary or otherwise negotiate the
terms of the named fiduciary's employment agreement.
(b) For purposes of Section I(g), above, of this exemption, an
``affiliate'' of a person means --
(1) any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) any director of, relative of, or partner in, any such person,
(3) any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
(5%) or more partner or owner, and
(4) any employee or officer of the person who --
(A) Is a highly compensated employee (as described in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent (10%) or more
of the yearly wages of such person) or
(B) Has direct or indirect authority, responsibility or control
regarding the custody, management, or disposition of Fund assets.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``goods'' includes all things which are movable or
which are fixtures used by the Diplomat Account but does not include
securities, commodities, commodities futures, money, documents,
instruments, accounts, chattel paper, contract rights, and any other
property, tangible or intangible, which, under the relevant facts and
circumstances, is held primarily for investment.
(e) The term ``party in interest'' means a person described in
section 3(14) of the Act and includes a ``disqualified person,'' as
defined in section 4975(e)(2) of the Code.
(f) The Named Fiduciary is ``related'' to a party in interest for
purposes of Section I(e), above, of this exemption, if the party in
interest (or a person controlling, or controlled by, the party in
interest) owns a 5 percent (5%) or more interest in the Named
Fiduciary, or if the Named Fiduciary (or a person controlling, or
controlled by, the Named Fiduciary) owns a 5 percent (5%) or more
interest in the party in interest. For purposes of this definition:
(1) The term ``interest'' means with respect to ownership of an
entity --
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership; or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest held in any capacity
if the person has or shares the authority --
(A) To exercise any voting rights, or to direct some other person
to exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
[[Page 53441]]
(g) The term ``relative'' means a relative as that term is defined
in section 3(15) of the Act, or a brother, sister, or a spouse of a
brother or sister.
(h) For purposes of Section I(a) of this exemption, the term
``shareholders' equity'' or ``partners' equity'' means the equity shown
in the most recent balance sheet prepared within the two (2) years
immediately preceding a transaction undertaken pursuant to this
exemption, in accordance with generally accepted accounting principles.
(i) The ``time'' as of which any transaction occurs is the date
upon which the transaction is entered into. In addition, in the case of
a transaction that is continuing, the transaction shall be deemed to
occur until it is terminated. If any transaction is entered into on or
after the effective date of this exemption, or if a renewal that
requires the consent of the Named Fiduciary occurs on or after the
effective date of this exemption, and the requirements of this
exemption are satisfied at the time the transaction is entered into or
renewed, then the requirements will be deemed to continue to be
satisfied thereafter with respect to the transaction. Nothing in this
subsection shall be construed as exempting a transaction which becomes
a transaction described in section 406 of the Act or section 4975 of
the Code while the transaction is continuing, unless the conditions of
this exemption were met either at the time the transaction was entered
into or at the time the transaction would have become prohibited but
for this exemption.
Effective Date: This exemption is effective November 3, 2000, the
date when IFS was appointed to serve as the independent Named Fiduciary
for the Fund with respect to the Diplomat Account.
Background
The Diplomat Resort and Country Club (the Property) is located in
Hollywood and Hallandale, Florida. Constructed in the late 1950's, the
Property functioned as a premier hotel and resort in the decades from
the 1950's to the 1980's. During this period, the Property was in the
possession of the family of Samuel Friedland. After the death of Mr.
Friedland in 1985, his son-in-law, Irving Cowan, bought out the
interests in the Property held by other family members. In 1987, a
consortium of trade union pension funds, led by the Union Labor Life
Insurance Company (ULLICO) loaned Mr. Cowan $44 million to continue
operation of the Property. In 1991, ULLICO foreclosed on the loan to
Mr. Cowan and, as a result, acquired title to the Property through a
subsidiary. In 1991, the hotel on the Property was closed for
renovations and did not reopen. In 1997, ULLICO placed the entire
Property on the market for sale.\6\
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\6\ In this regard, for information on the history of the
Property, please refer to an article by Jeff Shields, published in
the Hollywood, Florida Sun-Sentinel on May 13, 2001, which was sent
to the Department attached to a letter from a commentator.
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When ULLICO offered the Property for sale, it is represented that
the Trustees of the Fund were interested in acquiring it as an
investment for the Fund. However, a non-negotiable condition of the
sale offer excluded assets of any employee benefit fund subject to the
Act from being used to purchase the Property, and prevented the Fund
from buying the Property. As a result of the offer to sell the
Property, it is represented that ULLICO's subsidiary received seven or
eight bids from prospective purchasers, including the United
Association of Journeymen and Apprentices of the Plumbing and Pipe
Fitting Industry of the United States and Canada, AFL-CIO (the Union).
As the successful bidder on the Property, the Union acquired title
to the Property on October 1, 1997. In this regard, a wholly-owned
subsidiary of the Union, the Diplomat Properties Limited Partnership
(the Partnership), purchased the Property from ULLICO's wholly-owned
subsidiary for a purchase price of $40 million, plus closing costs and
related expenses. The Partnership financed the purchase of the Property
by obtaining a loan from National City Bank of Cleveland, Ohio (NCB)
which was guaranteed by the Union and collateralized by Union assets
consisting of cash, cash equivalents, and securities held by NCB in a
custodial account.
On October 3, 1997, the Department received an exemption
application (D-10514) from the Fund. The transaction for which relief
was requested was initially described in the application, as the
purchase by the Fund from the Union of title to the Property for $40
million, plus the closing costs and related expenses incurred by the
Union in purchasing the Property from ULLICO's subsidiary. Upon
submission of application D-10514, the Fund had not yet consummated the
transaction, but planned to close the deal within a few days of filing
the application with the Department. Accordingly, the Fund requested
retroactive relief.
The closing occurred on October 9, 1997. Specifically, the
transactions involved in the closing included: (a) The transfer by the
Union to the Fund of the Union's limited partnership interests in the
Partnership, the sole asset of which was the Property, and (b) the
transfer to the Fund of 100 percent (100%) of the stock in Diplomat
Properties, Inc., the corporate general partner of the Partnership (the
General Partner), which was owned by the Union. In consideration of
these transfers, the Fund made a capital contribution to the
Partnership in the amount of $40 million, plus reasonable costs
incurred by the Union in purchasing the Property, on behalf of the
Partnership, from ULLICO's subsidiary. On October 10, 1997, the Fund's
capital contribution to the Partnership was used to pay off the loan
from NCB that the Union, on behalf of the Partnership, had incurred in
acquiring the Property. Once the loan was paid off, Union assets were
no longer pledged as collateral for the loan, and the Union was
released from its guaranty.
During the eight (8) months from October 3, 1997, when application
D-10514 was filed until May 29, 1998, when the proposed exemption was
published, the Department, in considering the application, received a
number of submissions from the Fund, in response to questions from the
Department about the details of the transactions and the
appropriateness of the acquisition of the Property by the Fund.
Representations were made that the $40 million purchase price paid by
the Fund would constitute less than 2% of the assets of the Fund
(approximately $3.1 billion in 1997). Application D-10514 included
several reports prepared by Chadwick, Saylor & Co., Inc. (CSC), an
investment advisor registered under the Investment Advisors Act of
1940. In this regard, CSC represented that it was independent and
qualified to serve as the independent fiduciary acting on behalf of the
Fund with regard to the acquisition by the Fund of the Property. In its
reports to the Department, CSC stated that, subject to certain
assumptions, the acquisition price of the Property was fair, the
transaction was a prudent investment for the Fund, and the transaction
was in the best interest of the participants and beneficiaries of the
Fund. Application D-10514 also contained a copy of an independent
appraisal report, dated August 22, 1997, prepared for the Union by Roe
Research, Inc., stating that, as of August 8, 1997, the fair market
value of the Property was $40 million ``as is'' in a ``bulk sale of all
parcels to a single purchaser.'' The appraiser indicated that the
highest and best use of the Property would be to renovate or to
demolish and replace some or all of the existing improvements on the
Property. In this
[[Page 53442]]
regard, when application D-10514 was filed, CSC represented in a letter
dated September 29, 1997, that ``even though redevelopment/construction
cost budgets and time schedules and projected operating budgets and
cash flow for the development/redevelopment and operational phases of
the project were not available, CSC believes that such budgets,
schedules and projections, if available, would support the opinion
offered herein.'' Thereafter, in response to questions from the
Department, CSC addressed, in a letter dated, December 15, 1997, ``* *
* the appropriateness of the acquisition of the Property and the
contemplated development and redevelopment related to the return and
risk characteristics of the Fund.'' In this regard, CSC represented
that nothing came to CSC's attention in reviewing a substantial amount
of physical property, area, governmental and legal information that
indicated that matters related to budgeting, scheduling and operation
could not be favorably resolved. Further, CSC stated its expectation
that such matters would be favorably resolved based on the work
undertaken at the Property since the issuance of the September 29,
1997, opinion letter.
On May 29, 1998, the Department published in the Federal Register a
notice of proposed exemption for the acquisition of the Property by the
Fund, effective October 9, 1997, from the prohibited transaction
provisions of section 406(a) and (b) of the Act and 4975 of the Code.
Notice of the publication of the proposed exemption for application D-
10514 was provided to all interested persons with respect to the Fund.
All comments and requests for a hearing were due on August 3, 1998.
During the comment period, the Department received comments from 65
commentators. It was during this comment period that the Department was
made aware from commentators that the hotel on the Property had been
demolished and that the amount of the Fund's assets to be invested in
the Property was likely to exceed the $40 million capital contribution
made by the Fund to acquire the Union's interest in the Partnership
which owned the Property.
In response to this issue raised by the commentators,
representatives of the Fund advised the Department in a letter, dated
August 12, 1998, that the Fund had committed to the Partnership a total
of $100 million (including the $40 million acquisition cost). It was
represented that the additional $60 million had been placed in a
separate account (i.e.; the Diplomat Account) to be drawn down by the
Partnership, as necessary. It was represented that, while redevelopment
plans for the Property were not yet final, the total cost was
anticipated to be approximately $400 million. However, it was
represented that there were no plans for the Fund to invest more than
the $100 million already committed.
On September 14, 1998, an additional submission from the applicant
included the Partnership's proposed investment structure for the
redevelopment of the Property which indicated equity capital of $100
million from the Fund, anticipated equity investment from third party
investors of $100 million, and a balance of $325 million to come from
debt financing. It was represented in this letter that any decision to
commit more of the Fund's assets to the redevelopment of the Property
would be subject to the approval of an independent fiduciary retained
by the Fund to monitor the investment. On September 24, 1998, an
additional submission from the applicant included a clarification that,
to date, less than $60 million (including the Fund's initial capital
contribution of $40 million to the Partnership) had been spent on the
Property.
Because of the facts that came to the Department's attention
regarding the Fund's involvement in the redevelopment of the Property,
the Department suspended processing the exemption application on
February 2, 1999, pending an investigation into the facts surrounding
the redevelopment of the Property. Further, the Department began
discussions with the Board of Trustees of the Fund (the Trustees) about
additional safeguards for inclusion in the final exemption.
In this regard, the Trustees agreed by way of a Term Sheet dated
October 13, 1999 (the Term Sheet), to several undertakings in addition
to the conditions published in the Notice of Proposed Exemption. The
Department was not a party to the Term Sheet. One such safeguard agreed
to by the Trustees, pursuant to the Term Sheet, was a percentage
limitation on the amount of the total assets of the Fund to be invested
in the redevelopment of the Property. The relevant provision of the
Term Sheet states that:
[t]he Trustees will instruct the custodian of the Fund to
transfer to the Diplomat Account any additional amounts * * * for
the operations or expenses of the Diplomat Account or the
Partnership, so long as the total amount of the Fund assets at risk
(i.e., the Fund's investment in the Partnership plus any recourse
debt in excess of the value of the assets in the Partnership) does
not exceed 13 percent of the Fund assets at the time of the transfer
(the 13% Limitation).
Further, the Trustees agreed, pursuant to the Term Sheet, to the
appointment of a Named Fiduciary to oversee the Fund's investment in
the Partnership and to oversee the continuing redevelopment of the
Property. In this regard, on November 8, 1999, the Trustees appointed
Actuarial Sciences Associates, Inc. (ASA), to serve as the Named
Fiduciary of the Diplomat Account, an account which was established to
hold the Fund's interest in the Partnership, the Fund's interest in the
General Partner, and any other Fund assets invested in or awaiting
investment in the Property. ASA's service contract was subject to the
approval of the Secretary of Labor. The performance of ASA's services
and responsibilities commenced on the date when the final exemption was
executed by the Secretary of Labor or her delegate.
The final exemption for application D-10514 was published in the
Federal Register by the Department on November 15, 1999, as Prohibited
Transaction Exemption 99-46 (PTE 99-46).\7\ PTE 99-46 provided
retroactive relief, effective October 9, 1997, from the prohibited
transaction provisions of section 406(a) and (b) of the Act and section
4975 of the Code. In this regard, the transaction for which retroactive
relief was granted involved the transfer to the Fund by the Union of
the Union's limited partnership interests in the Partnership, the sole
asset of which is the Property, and the transfer to the Fund of the
Union's stock in the General Partner, in consideration of a capital
contribution by the Fund to the Partnership in the amount of $40
million, plus reasonable costs incurred by the Union in purchasing the
Property, and in consideration of the release of a certain loan
obligation of the Partnership which was guaranteed by the Union and
collateralized by Union assets; provided that certain conditions were
satisfied. The Department noted in the final exemption that the
additional undertakings agreed to by the Trustees, pursuant to the Term
Sheet, including the appointment of ASA, to serve as Named Fiduciary on
behalf of the Fund, were material factors in the Department's
determination to grant PTE 99-46. Accordingly, the provisions of the
Term Sheet, which were described in the written comment section of the
final exemption, were incorporated by reference into PTE 99-46.
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\7\ 64 FR 61944.
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[[Page 53443]]
Pursuant to the provisions of the Term Sheet, ASA, as the Named
Fiduciary of the Fund, could be replaced by the Trustees only upon the
concurrence of the Department or pursuant to a court order for cause.
Subsequently, when ASA established a wholly-owned subsidiary, ASA
Fiduciary Counselors, Inc. (ASA Counselors) to provide the investment
advisory services previously performed by ASA for the Diplomat Account,
ASA sought and received the consent of the Trustees of the Fund and the
Department before assigning those responsibilities to ASA Counselors.
On March 15, 2000, the Department received an exemption application
(D-10879) from ASA and from ASA Counselors, requesting retroactive
relief from the prohibited transaction provisions of section 406(a) and
(b) of the Act and section 4975 of the Code. The requested relief was
similar to that available under Prohibited Transaction Class Exemption
84-14 (PTCE 84-14),\8\ to a qualified professional asset manager
(QPAM), provided certain conditions are satisfied. As neither ASA nor
ASA Counselors were able to satisfy all of the requirements of PTCE 84-
14, reliance on the class exemption was not available, and accordingly,
an administrative exemption was requested. The Department published a
Notice of Proposed Exemption for application D-10879 in the Federal
Register on June 26, 2000.\9\ The comment period for application D-
10879 ended on August 31, 2000. All comments and requests for hearing
from interested persons were due for application D-10879 on August 31,
2000. During the comment period, the Department received eleven (11)
letters from commentators. Generally, the commentators expressed
concern over the acquisition by the Fund of the Property, and over ASA
Counselors' authority to use assets of the Fund for the operation of
the Property.
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\8\ 50 FR 41430, October 10, 1985.
\9\ 65 FR 39435.
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After giving full consideration to the entire record for
application D-10879, including the comments from commentators and the
response to such comments from ASA and ASA Counselors, the Department
determined to grant the requested relief. The final exemption for
application D-10879, was published in the Federal Register on October
11, 2000, as Prohibited Transaction Exemption 2000-49 (PTE 2000-
49).\10\ PTE 2000-49 permitted ASA, effective from November 8, 1999, to
December 20, 1999, and thereafter ASA Counselors, while serving as the
Named Fiduciary of the Fund with respect to the Diplomat Account, to
engage, on behalf of the Diplomat Account, in certain transactions with
parties in interest with respect to the Fund. In the case of
transactions involving places of public accommodation, PTE 2000-49 also
permitted, effective November 8, 1999, the furnishing of services,
facilities, and any goods incidental thereto by a place of public
accommodation owned by the Diplomat Account that is managed by ASA or
ASA Counselors, when acting as the Named Fiduciary, to parties in
interest with respect to the Fund, if such services, facilities, and
incidental goods are furnished on a comparable basis to the general
public.
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\10\ 65 FR 60454.
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Effective as of November 3, 2000, ASA Counselors resigned its
appointment as Named Fiduciary with respect to the Fund and the
Diplomat Account. Prior to that date, the Trustees entered into an
agreement with IFS, dated September 12, 2000, the terms of which were
reviewed and found acceptable by the Department. Pursuant to the terms
of such agreement IFS was appointed, effective November 3, 2000, as the
successor Named Fiduciary of the Fund. On December 7, 2000, IFS hired
LaSalle Investment Management, Inc., a member of the Jones, Lang,
LaSalle group, to act as the investment manager with respect to the
Property.
On December 21, 2000, the Department received an exemption
application (D-10960) in which IFS requested relief from the prohibited
transaction provisions of section 406(a) and (b) of the Act and section
4975 of the Code. IFS, as successor Named Fiduciary of the Fund, sought
relief identical to that received by its predecessors, ASA and ASA
Counselors, pursuant to PTE 2000-49. In this regard, although IFS could
not satisfy certain conditions of PTCE 84-14, IFS requested an
administrative exemption which would permit IFS to be treated as a QPAM
for certain purposes related to the redevelopment and operation of the
Property (the Project).
On January 10, 2001, officials of the Department met with IFS to
discuss IFS' concern that completion of construction of improvements on
the Property would not be possible under a conservative interpretation
of the 13% Limitation,\11\ contained in the Term Sheet described in PTE
99-46. Subsequently, on February 23, 2001, the Department received an
exemption application (D-10971) from IFS, acting as Named Fiduciary on
behalf of the Fund, in which IFS requested a modification of the 13%
Limitation in the Term Sheet. Because applications D-10960 and D-10971
were both filed by IFS and involved the assets of the Fund in the
Diplomat Account, the Department determined to combine its
consideration of the relief requested in both applications. In this
regard, the Notice of Proposed Exemption (the Notice) for applications
D-10960 and D-10971 was published in the Federal Register on March 21,
2001.\12\
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\11\ IFS seeks the relief requested because of its concern that
one possible interpretation of the 13% Limitation could result in
the Fund exceeding such Limitation.
\12\ 66 FR 15900.
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Written Comments
In the Notice, the Department invited all interested persons to
submit written comments and requests for a hearing on the proposed
exemption for applications D-10960 and D-10971 within forty-five (45)
days of the date of the publication of the Notice in the Federal
Register on March 21, 2001. All comments and requests for hearing on
the proposed exemption for applications D-10960 and D-10971 were due by
April 30, 2001.
In notifying interested persons of the pendency of the proposed
exemption for applications D-10960 and D-10971 and notifying such
interested persons of the right to comment and/or request a hearing on
the proposed exemption, IFS furnished by first class mailing, within
ten (10) days of the publication of the Notice in the Federal Register,
a copy of the Notice along with a copy of the supplemental statement,
as described at 29 CFR Sec. 2570.43(b)(2), to the Trustees of the Fund
and to the interested persons who had commented in writing to the
Department in connection with PTE 99-46. In this regard, IFS believes
that providing notification to the Trustees of the Fund and to
interested persons who commented in writing to the Department in
connection with PTE 99-46 was sufficient, because the requested relief
was technical in nature, and because it was unlikely that individuals
other than the Trustees and those who commented on PTE 99-46 would be
concerned with such an exemption.
During the comment period, certain commentators objected to the
fact that IFS had only provided notification of the pendency of the
proposed exemption for applications D-10960 and D-10971 to the Trustees
of the Fund and to those interested persons who had commented on PTE
99-46. In this regard, these commentators believe
[[Page 53444]]
that such notification was inadequate where the requested relief,
specifically the modification of the provision of the Term Sheet
concerning the 13% Limitation, might seriously affect the stability of
the Fund. Accordingly, these commentators suggested that the Department
require that every participant and beneficiary in the Fund be notified
of the publication of the proposed exemption for applications D-10960
and D-10971 in the Federal Register.
The Department has considered the concern raised by commentators
that the notification provided by IFS to interested persons was
inadequate because the requested relief might seriously affect the
stability of the Fund. In this regard, the Department notes that the
administrative record for applications D-10960 and D-10971 includes a
letter, dated April 2, 2001, from the Fund's counsel which addressed
the impact of the proposed exemption on the stability of the Fund. In
this regard, the April 2 letter indicates that the Fund's administrator
has determined that granting the requested modification to the
provisions of the Term Sheet concerning the 13% Limitation would not
adversely affect the liquidity of the Fund and/or the ability of the
Fund to pay benefits when due.
Further, the Department has considered the expense to the Fund
involved in providing notification of the publication of the proposed
exemption for applications D-10960 and D-10971 to all the participants
and beneficiaries of the Fund. In this regard, the expense of mailing
first class to the approximately 123,000 participants and beneficiaries
of the Fund would constitute an additional burden to the Fund.
Accordingly, the Department has determined that the notification to
interested persons as provided by IFS with regard to the publication of
the proposed exemption for applications D-10960 and D-10971 was
adequate and reasonable under the circumstances.
During the comment period, the Department received four (4)
requests from commentators that the Department hold a hearing to
evaluate the merits of the representations from IFS with respect to the
proposed transactions. In this regard, the commentators requested that
the Department delay approval of the requested exemption until all
participants and beneficiaries had a chance to review the materials and
to present objections to the proposed transactions at a hearing.
The Department has carefully considered the concerns expressed by
the individuals who requested a hearing. After a review of these
concerns, the Department does not believe that there are material
factual issues relating to the proposed exemption that were raised by
commentators during the comment period which would require the
convening of a hearing. Thus, the Department has determined not to
delay consideration of the final exemption by holding a hearing on
applications D-10960 and D-10971.
During the comment period, the Department received eleven (11)
letters from nine (9) interested persons commenting on the transactions
involved in applications D-10960 and D-10971. At the close of the
comment period, the Department forwarded copies of these comment
letters to IFS and requested that IFS address in writing the various
issues raised by the commentators.
As an initial matter, IFS noted in responding to the Department's
request, that none of the comments was directed at application D-10960.
Rather, the comments relate to application D-10971 in which IFS
requested modification of a provision of the Term Sheet concerning the
13% Limitation. Accordingly, the responses provided by IFS, herein,
generally discuss D-10971, but to the extent applicable, are intended
by IFS to provide responses with respect to both applications. A
description of the comments and the responses from IFS thereto are
summarized in the numbered paragraphs, below.
1. A number of commentators expressed concern that the decision to
invest the Fund's assets in the Partnership has not been and would not
be, made solely to benefit the participants and beneficiaries of the
Fund, and that the investment by the Fund in the Partnership has not
been, and would not become, profitable.
As an initial matter, IFS notes ``that these comments are
inapposite to the extent that they relate to the Fund's investment in
the Project up to the 13% Allocation Limit.'' In this regard, IFS
maintains that, pursuant to PTE 99-46, the Department has already
sanctioned the investment of Fund assets in the Partnership to that
extent.\13\
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\13\ The Department notes that, in granting PTE 99-46, the
Department exempted the initial investment by the Fund in the
Partnership. The 13% Limitation or any other limitation on Fund
expenditures relating to the Property should not be viewed as an
endorsement by the Department of either the amount of the
expenditures or its appropriateness. The appointment of an
independent named fiduciary and the 13% Limitation were agreed to by
the Trustees of the Fund in response to commentator concerns about
the risks and costs involved in acquiring and redeveloping the
Property. The Department further notes that the fact that a
transaction is the subject of an exemption under section 408(a) of
the Act does not relieve a fiduciary or other party in interest from
the general fiduciary responsibility provisions of section 404 of
the Act. Section 404 (a)(1)(A) and (B) of the Act requires, among
other things, that a fiduciary discharge his duties with respect to
a plan solely in the interest of the plan's participants and
beneficiaries in a prudent fashion. Accordingly, it is the
responsibility of the Fund's fiduciaries to develop the Property in
a manner designed to maximize the Fund's rate of return, consistent
with their fiduciary duties under section 404 of the Act.
---------------------------------------------------------------------------
With regard to whether an additional investment by the Fund above
the 13% Limitation would be in the interest of participants and
beneficiaries of the Fund, IFS maintains that the requested
modification to the provision of the Term Sheet concerning the 13%
Limitation will allow an additional investment that can be reasonably
expected to enhance the Fund's overall investment and, likely will
reduce the risk that the Fund will suffer a significant financial loss.
As indicated in the applications, IFS represents that the Project,
since December 14, 2000, has been under the management of LaSalle
Investment Management, Inc. (LaSalle), acting as a QPAM within the
meaning of PTCE 84-14 with respect to the Project. In its capacity as
an independent expert in the hospitality, real property, and
construction industries, and after an extensive review of the status of
the Project, it is represented that LaSalle (with the assistance of
various divisions of the Jones Lang LaSalle group, including the Jones
Lang LaSalle Hotels group) has concluded, based on its acknowledged
expertise, that a further investment in the Project by the Fund would
likely maximize the benefits to the Fund and would, therefore, be in
the interest of participants and beneficiaries of such Fund.
It is represented that LaSalle has determined that, due to risk
factors inherent in the development process and the still uncompleted
state of the Project, the current value of the partially-completed
Property (expressed as a percentage of completion) is well below its
conceptual completion value, and that an appraiser, bank, or
prospective purchaser would discount significantly the current value of
the Property for purposes of an appraisal, loan, or purchase,
respectively. It is further represented that LaSalle believes, based on
its significant expertise within the hospitality and real estate
industries, that most investors interested in the Project would view
any current effort to sell the Property as akin to a distressed sale
and therefore would be looking for a very high opportunistic
[[Page 53445]]
rate of return on their investment. Accordingly, it is represented that
to sell the Property at this stage (rather than to complete it) would
likely lead to substantial losses for the Partnership.
In addition, it is represented that if the Project were abandoned
or interrupted, because additional investment from the Fund was not
permitted by the Department, there would be significant costs
associated with shutting down the Project, including operational,
legal, contractual, and degradation avoidance costs, many of which
costs would not otherwise be incurred. LaSalle has estimated that these
costs alone could cause the Fund to substantially exceed the 13%
Limitation in any event.
In contrast, it is represented that if additional cash infusions
from the Fund enable the Project to be completed and if, as LaSalle
expects, the Project subsequently achieves stabilized income, LaSalle
projects that the increased value of the Project from completion and
income stabilization, less the remaining cost of completion, will
likely be significantly higher than the value of the Project, if the
Fund was forced to abandon or sell it as a distressed asset. In
addition, opening the Property would give the Partnership the
opportunity to receive cash flow from operations, as well as to
establish a ``track record'' of performance in actual operation, which
is likely to enhance the sale value of the Property. Thus, it is
represented that, if the Project were not completed, significant losses
would be incurred by the Fund, and the Fund would be prevented from
enjoying the benefits of completion, which LaSalle has concluded likely
would significantly outweigh the additional costs of completion.
As discussed in the applications, the three principal financing
alternatives to further cash infusion from the Fund include outside
debt financing (on a non-recourse basis), outside equity investment,
and sale of a portion of the assets of the Property. In this regard, it
is represented that LaSalle has concluded, based on a conservative
interpretation of the 13% Limitation, that completion of the Project is
not feasible, absent a modification to that Limitation because none of
these three alternatives would be sufficient to provide the requisite
financing. First, in light of the status of construction and retention
of an operator, it is represented that the Partnership could not timely
obtain the requisite non-recourse financing to remain within the 13%
Limitation (assuming that non-recourse financing could be obtained at
all). Second, it is represented that bringing in an equity partner at
this juncture (assuming that one could be found) would take an
unacceptable amount of time (thereby delaying completion of the Project
significantly) and would likely result in an extremely unfavorable
business arrangement for the Fund because any equity investor would
likely treat this as a distressed sale. Finally, it is represented that
asset sales of components of the Project, such as future development
sites and the country club hotel, would not provide sufficient capital
to avoid exceeding the 13% Limitation, and could ultimately reduce the
overall return to the Fund.
For the foregoing reasons, IFS maintains that regardless of the
merit of the initial investment by the Fund in the Partnership, it is
clear that an additional investment by the Fund in the Partnership
would be in the interest of participants and beneficiaries and would
improve the Fund's investment return on the Project, based on LaSalle's
conclusion that such an investment would permit the Fund to realize the
substantial benefits of completion (including avoidance of the losses
attendant to abandonment, sale, or interruption of the Project at this
stage) which are projected to outweigh the completion costs.
2. A number of commentators indicated a concern about a lack of
diversification in the Fund's investments resulting from its investment
in the Project.
In the opinion of IFS, ``[b]y granting PTE 99-46, the Department
effectively determined that an investment in the Partnership of 13
percent of Fund assets would not result in a lack of
diversification.''\14\ Accordingly, IFS maintains that the only matter
raised by the commentators, that is relevant to application D-10971, is
whether the marginal increase in the Fund's investment (i.e., the
amount by which $800 million exceeds 13 percent (13%) of Fund assets)
results in a violation of section 404(a)(1)(C) of the Act.
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\14\ The Department wishes to correct IFS' apparent
misunderstanding of the Department's authority under section 408(a)
of the Act. As previously noted, in footnote 13, an exemption under
section 408(a) of the Act does not relieve a fiduciary from certain
other provisions of the Act, including the general fiduciary
responsibility provisions of section 404 of the Act. Section
404(a)(1)(C) of the Act requires, among other things, that a plan
fiduciary diversify plan assets in order to minimize the risk of
large losses unless, under the circumstances, it is clearly prudent
not to do so. It is the responsibility of the appropriate Fund
fiduciary or fiduciaries to determine whether the diversification
requirements of section 404(a)(1)(C) have been satisfied.
---------------------------------------------------------------------------
IFS notes that neither section 408(a) of the Act nor the
regulations thereunder require a showing of compliance with section
404(a)(1)(C) of the Act in an application for a prohibited transaction
exemption.\15\ In addition, IFS maintains that it is the independent
Named Fiduciary of the Fund only with respect to the Fund's investment
in the Project and, as such, is not charged with making any decisions
with respect to the overall diversification of the Fund's assets or the
Fund's compliance with section 404(a)(1)(C) of the Act. It is the
understanding of IFS that this decision generally is made by the
Trustees.\16\
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\15\ Conversely, it is the Department's position that both
section 408(a) of the Act and the regulations promulgated thereunder
make clear that the fiduciaries of a plan that has received an
administrative exemption are not insulated from responsibility and/
or potential liability under section 404 of the Act.
\16\ The Department is expressing no views, herein, as to the
person or persons ultimately responsible under the Fund for the
overall diversification of the Fund assets.
---------------------------------------------------------------------------
IFS notes that, even in light of the recent significant downturn in
the equity markets, an $800 million investment in the Partnership
represents less than 18.5% of the Fund's assets. In addition, based on
information provided by the Fund, IFS understands that most of the
remaining Fund assets are invested in a broad range of diversified
investments, including investment in at least three other asset classes
(domestic and international fixed income, domestic and international
equity and alternative investments).
Even if it could be argued that the Fund's investments would not be
sufficiently diversified as a result of an additional investment in the
Project, IFS points out that one could conclude that it would
nevertheless be prudent under the Act to have less diversification,
because of the unique circumstances involving the Project. In this
regard, independent of any consideration of the overall portfolio of
the Fund, LaSalle has concluded that an additional investment in the
Partnership would be prudent because of the substantial economic harm
to the Fund and the Partnership that would result if application D-
10971 were denied. It is represented that if the additional investment
were not made (which could be the case if application D-10971 was not
granted), the Project likely would not be completed even though the
projected benefits of completion (including avoidance of the loss
attendant to interruption and/or abandonment) significantly outweigh
the additional costs of completion.
In contrast, it is represented that granting the exemption would
allow the Project to be completed which, in turn, should allow the
Partnership (and,
[[Page 53446]]
therefore, the Fund) to realize the expected significant net economic
gain of completion, without incurring the potentially substantial costs
of interruption or abandonment of the Project.
3. One commentator noted that application D-10514 indicated that
the Project was ``camouflaged * * * to be about a $40 million
project.''
As noted above, IFS maintains that the subject of application D-
10971 is not whether the Fund's initial investment in the Partnership
was appropriate. Rather, IFS seeks an amendment to the 13% Limitation,
because the increase to that limitation (i.e., the amount by which $800
million exceeds 13 percent (13%) of the assets of the Fund) would, for
the reasons set forth above, be in the interest of participants and
beneficiaries. Therefore, in the opinion of IFS no further response to
this comment would appear to be necessary.
4. Various commentators expressed concern about past actions of the
Trustees and the prior independent Named Fiduciary, including whether
Fund assets have been wasted or mismanaged with respect to the Project.
Other commentators questioned how information could be obtained
regarding how the Fund's investment in the Project has been expended,
and claimed that IFS did not provide an adequate explanation of the
steps to be taken to protect the interests of participants and
beneficiaries.
As the current independent named fiduciary, IFS is charged with the
responsibility of appropriately reviewing prior (and future) management
and expenditure of Fund assets with respect to the Project. It is
represented that such review is currently being conducted. However, in
the opinion of IFS, the subject of these applications is not whether
the Fund's Trustees, the prior Named Fiduciary, service providers, or
other fiduciaries mismanaged assets but whether an additional
investment by the Fund, as determined by the current independent Named
Fiduciary, should be permitted on the grounds that it would clearly be
in the interest of the participants and beneficiaries of the Fund.
As discussed in application D-10960, the interests of participants
and beneficiaries are protected because IFS is acting prudently as an
independent Named Fiduciary under an Independent Named Fiduciary
Agreement, dated September 12, 2000 (the IFS Agreement), the terms of
which were reviewed and approved by the Department prior to its
execution.
Under the IFS Agreement, IFS has a continuing responsibility to
furnish the Trustees and the Department with monthly written reports
concerning the progress of the Project (including, inter alia, the
operations, assets, receipts, and disbursements with respect to the
Project). The IFS Agreement also requires IFS to provide the Department
with certain documents upon request and to meet with the Department and
its agents as reasonably requested. This will enable the Department to
exercise continuing oversight regarding IFS' performance of services
under the IFS Agreement, and with respect to the Project overall.
Additionally, there are very strict limitations on the ability of
the Trustees to remove IFS from its position as independent Named
Fiduciary, which allow IFS to maintain strict independence from the
Trustees. Section 14 of the IFS Agreement provides that, until November
5, 2002, no termination of IFS:
shall become effective until the effective date of the appointment
of a replacement independent named fiduciary that is acceptable to
the U.S. Department of Labor and, in the case of a termination by
the Trustees or their duly appointed delegate, such termination
shall not be effective unless (i) it has received the concurrence of
the U.S. Department of Labor, or (ii) it is pursuant to a court
order obtained for ``cause''* * * after reasonable notice to the
Secretary of Labor * * *
IFS recognizes the concern expressed by these commentators that,
unless an independent named fiduciary, such as IFS, remains involved in
the Project for an extended time period, the Trustees could again
control the Project. However, IFS understands that, if the applications
are granted, the Trustees have agreed that the Project will be managed
by an independent party for so long as the Fund has a controlling
interest in the underlying assets of the Partnership or its
successors.\17\
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\17\ In this regard, the Department notes that the chairman of
the Trustees executed such an agreement on May 31, 2001.
---------------------------------------------------------------------------
IFS respectfully requests that any exemption granted in connection
with application D-10960 be coextensive with IFS' service as
independent Named Fiduciary, rather than be limited to five (5) years,
from November 3, 2000, until November 3, 2005 (as proposed), because
the revised arrangement between the Trustees and the Department
contemplates a long-term relationship between the Fund and an
independent named fiduciary, and because it would be expensive for the
Fund to incur the costs of subsequent applications to renew or modify
the exemption.
It is anticipated that the existence of an independent named
fiduciary on a long-term basis will help assure completely independent
fiduciary decision-making with respect to all aspects of the Project,
and will further protect the interests of participants and
beneficiaries of the Fund. In addition, the concerns expressed in the
comments regarding prior actions by the Trustees or other fiduciaries
of, or service providers to, the Fund are inapposite, because IFS will,
with the assistance of LaSalle, other industry professionals, and legal
counsel independent of the Trustees, continue to exercise its fiduciary
discretion independent of any influence from such individuals.
The Department concurs with IFS' request that the effectiveness of
the final exemption not be limited to the five (5) year period, from
November 3, 2000, until November 3, 2005. Accordingly, the Department
has modified the final exemption, as follows:
(a) By deleting the phrase, ``until November 3, 2005,'' from
Section I, as published in the Federal Register on page 15900, column
1, lines 21-22 of the Notice; and from Section II, as published in the
Federal Register on page 15901, column 2, lines 51-53 of the Notice;
(b) By deleting in its entirety the paragraph entitled, ``Temporary
Nature of Exemption,'' as published in the Federal Register on page
15902, column 2, of the Notice; and adding in place of such paragraph
the sentence, EFFECTIVE DATE: This exemption is effective November 3,
2000, the date upon which IFS was appointed to serve as the Named
Fiduciary for the Fund with respect to the Diplomat Account; and
(c) by modifying a sentence in the definition of the ``time'' as of
which any transaction occurs, as published in Section III(i) of the
Notice on page 15902, column 1, lines 60-69, and column 2, lines 1-3 of
the Federal Register. In this regard, words that have been deleted from
Section III(i) have been stricken from the language, below, and phrases
which have been added to the language appear in brackets, below:
If any transaction is entered into [on or after the effective
date of this exemption] or if a renewal that requires the consent of
the Named Fiduciary occurs [on or after the effective date of this
exemption] and the requirements of this proposed exemption are
satisfied at the time the transaction is entered into or renewed,
then the requirements will be deemed to continue to be satisfied
thereafter with respect to the transaction.
The Department emphasizes that the relief provided for the
transactions
[[Page 53447]]
described in the final exemption will be available to IFS, only for the
period of time that IFS serves as the independent Named Fiduciary for
the Fund with respect to the Diplomat Account. In the event that IFS,
resigns, is removed, or is replaced as the independent Named Fiduciary
for the Fund, IFS may no longer rely on the relief provided by this
exemption for the transactions, described in application D-10960.
Under the agreement, executed by the chairman of the Trustees on
May 31, 2001, it is the Department's understanding that the Diplomat
Account will be managed by an independent Named Fiduciary for so long
as the Fund has a controlling interest in the Project. Accordingly,
upon the resignation, replacement, or removal of IFS, as independent
Named Fiduciary with respect to the Diplomat Account, any successor to
IFS who will serve as the independent Named Fiduciary for the Fund with
respect to the Diplomat Account, may submit an application for
exemption to the extent that such successor independent Named Fiduciary
does not qualify as a QPAM and would need an exemption to be treated as
if they were a QPAM.
The relief requested in application D-10971 pertains to the
modification of the 13% Limitation described in PTE 99-46. The
requested modification involves setting the limitation at $800 million
rather than the 13% Limitation, as set forth in the Term Sheet. If the
modification is approved by the Department by the granting of the
subject exemption, IFS and any successor to IFS who serves as the
independent Named Fiduciary for the Fund with respect to the Diplomat
Account would be subject to the $800 million fixed amount. By letter
dated October 11, 2001, IFS indicated that, if the proposed amendment
to PTE 99-46 is granted, it does not foresee any circumstances under
which it will request from the Department any additional amendments to
PTE 99-46 that would have the effect of increasing the maximum amount
of assets of the Fund that may be invested in the Project.
5. Various commentators requested information regarding the
Department's investigation of the use of Fund assets in the development
of the Project. Other commentators indicated that IFS is required to
submit copies of all correspondence regarding the substantive issues
involved in that investigation.
With respect to the commentators' indication that IFS did not
submit copies of all correspondence regarding the substantive issues
involved in the Department's investigation of the use of Fund assets in
connection with the development of the Project, IFS noted that it was
not, at the time the applications were submitted, aware of any
correspondence with the Department that addresses the substantive
issues related to the investigation and that is required to be provided
to the Department, pursuant to 29 CFR Sec. 2570.35(a)(7) of the
Department's regulations.
Since the applications were submitted, IFS has become aware of
certain correspondence that cannot clearly be classified as substantive
correspondence related to any investigation. However, IFS has submitted
certain correspondence that, based on a conservative interpretation of
29 CFR Sec. 2570.35(a)(7), arguably may be appropriate to provide to
the Department in connection with the applications. It is IFS' position
that the request concerning the release of information about the
Department's investigation is solely within the purview of the
Department.
The Department notes that the disclosure required by 29 CFR
Sec. 2570.35(a)(7) of the Department's regulation (relating to
investigations, examinations, litigation, and continuing controversy by
or with certain specified Federal agencies), is necessary to ensure
that the Department's exemption activities do not compromise its
enforcement efforts. In this regard, the Department does not require
submission by an applicant of copies of all correspondence, but only
requires submission of copies of correspondence relating to substantive
issues involved in such investigation, examination, litigation, or
controversy. Once copies of such correspondence become part of the
administrative record of an application for exemption, 29 CFR
Sec. 2570.51 of the Department's regulations provides that the public
may examine and copy the administrative record of each exemption
application and all correspondence and documents submitted in
connection therewith.
To the extent that information submitted in connection with an
investigation, examination, litigation, or continuing controversy by or
with certain specified Federal agencies, is not contained in the
administrative record of an application for exemption, such information
is not available to the public and is not considered by the Department
in making its determination that the transaction for which relief has
been requested is administratively feasible and in the interest of, and
protective of a plan, and its participants and beneficiaries, pursuant
to section 408(a) of the Act. Thus, the Department's final decision on
any exemption is based on the information contained in the official
exemption application file. The Department further notes that an
exemption does not take effect or protect parties in interest from
liability with respect to the exemption transaction unless the material
facts and representations contained in the application, and in any
materials and documents submitted in support of the application, are
true and complete (see 29 CFR Sec. 2570.49(a)).
The final decision on the merits of a requested exemption by the
Department entails an administrative process which is based on a
careful review of the entire public record of facts and representations
as documented in the application file. The Department may not grant an
exemption, pursuant to section 408(a) of the Act, unless a
determination is made on the record with respect to the findings that
such an exemption is administratively feasible, in the interest of the
plan and of its participants and beneficiaries, and protective of the
rights of the participants and beneficiaries of such plan.
6. One commentator questioned whether IFS and ASA ``have a clue
about what is going on, except spending the Pension Fund's money.''
In response to such comment, IFS notes that neither ASA nor ASA
Counselors now has any ongoing relationship with the Fund or the
Project. As noted in application D-10960, IFS replaced ASA Counselors
as independent Named Fiduciary of the Fund. Pursuant to its authority
as independent Named Fiduciary, effective December 14, 2000, IFS
appointed LaSalle as QPAM, pursuant to PTCE 84-14, with respect to the
Project.
It is represented that both IFS and LaSalle have devoted
significant personnel and enormous amounts of time to the Project. In
this regard, IFS, the most senior officers of which are personally
involved in the Project on a daily basis, has broad expertise in a wide
range of subjects and, in particular, the financial and fiduciary
aspects of pension fund investing.
It is further represented that LaSalle is a leading global real
estate investment manager that frequently acts as a fiduciary. In
addition, LaSalle is a member of the Jones Lang LaSalle group, various
divisions of which have assisted (and will continue to assist) LaSalle
in connection with the Project. These divisions, including Jones Lang
LaSalle Hotels, the Project and Development Management Group, the Risk
Management Group, and Jones
[[Page 53448]]
Lang LaSalle Capital Markets, are staffed with industry professionals
collectively familiar with all major aspects of the Project.
IFS' conclusions set forth in application D-10971 regarding the
benefit to participants and beneficiaries of further investment in the
Project are premised in large part on expert conclusions by LaSalle. In
this regard, (based on its careful review of the status of the Project
and its extensive expertise as a real estate investment manager),
LaSalle has concluded that the Fund is likely to suffer significant
economic harm, if the Fund was not able to complete the Project (which
would be the case if the Fund could not invest further assets in the
Partnership because of the 13% Limitation). It is represented that the
various reports prepared by both LaSalle and IFS with respect to the
Project are clear evidence of the considerable knowledge of both
entities with respect to the Project.
7. One commentator requested information on whether there is a
criminal investigation regarding the Project.
IFS has not been formally advised that there is any pending
criminal investigation with respect to the Project.
8. Various commentators indicated that IFS did not provide an
adequate explanation of whether the exemption transaction is customary
in the industry.
IFS disagrees with the contention of the commentators in that
regard. It is IFS' view that in granting PTE 99-46, the Department has
implicitly determined that the underlying transaction (i.e., the Fund's
purchase of the Property and investment in the Partnership) is
customary in the industry.\18\
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\18\ In granting an exemption, the Department expresses no
opinion as to whether or not a particular transaction for which
relief is provided is customary in the industry. In this regard, the
Department notes that pursuant to 29 CFR Sec. 2570.34(a)(6) of the
Department's regulations, it is the responsibility of the applicant
to inform the Department whether the transaction for which relief is
requested is customary for the industry or class involved.
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Furthermore, as noted in application D-10971, it is customary for
an equity investor to use its capital to financially support a real
estate project (so long as the investor believes that the incremental
investment will either earn a reasonable return or avoid significant
losses) and establish an operating history before abandoning the
project or engaging in a distressed sale of assets or obtaining equity
co-investment on onerous terms that may result in a substantial
economic loss that exceeds the benefit of completion of the project. It
is represented that the requested amendment would permit the Fund to
continue to financially support the Project to completion, without
incurring the risk of possibly violating PTE 99-46.
In summary, IFS maintains that if the relief requested in
application D-10971 is not granted, the Fund may not be able to make an
additional investment in the Partnership, because of the 13%
Limitation. It is represented that after a careful review of the
Project, LaSalle has concluded that such an additional investment
should (i) allow the Partnership to realize a stabilized value of the
Property in excess of its estimated current market value (if the
Property were sold today in a distressed sale) plus the costs of
completion; (ii) allow the Partnership to receive from operations a
current cash yield on its investment; (iii) allow the Partnership to
avoid the costs of interruption or abandonment of the Project; and (iv)
prevent the Partnership from being forced to sell the Property as a
distressed asset and at a significantly reduced amount. Thus, it is
represented that LaSalle (and, based on LaSalle's advice, IFS) has
concluded that, if the requested relief is not granted, the
Partnership, and, through it, the Fund, could suffer significant
adverse consequences, which clearly would not be in the interest of
participants and beneficiaries.
9. In a letter dated June 15, 2001, IFS notified the Department of
a development regarding the Property that, in the opinion of IFS,
further supports LaSalle's conclusion that completing the Project is
likely to lead to a more financially attractive result for the Fund
than not completing it. In this regard, it is represented that LaSalle
has conducted a competitive process for the selection of a hotel
operator in which a field of ten (10) candidates was narrowed to three
(3) major operators. Further, interviews and negotiations with each of
the three finalists resulted in the selection of Starwood Hotels and
Resorts Worldwide (Starwood) through its corporate vehicle, Westin
Management Company East, Inc. It is represented that Starwood is the
owner of such well-known brands as Sheraton, Westin, and St. Regis.
Further, it is represented that on June 5, 2001, LaSalle signed a
brand and management agreement (together, the Operating Agreement) with
Starwood to brand and operate the Property as the Westin Diplomat
Resort and Spa and to operate the country club, pursuant to a parallel
operating agreement, as a member of Starwood's Luxury Collection. It is
represented that the terms of the 15-year Operating Agreement evidence
Starwood's significant, long-term business and financial commitment to
the Property. In this regard, it is represented that the Operating
Agreement requires Starwood to provide a substantial amount of ``key
money'' to pay for various pre-opening expenses and to provide loans,
at very attractive terms, to the Property (without recourse to the
Fund), in certain circumstances, including the occurrence of actual
future cash flow shortfalls related to either the operation of the
Property or its ability to service debt.
It is represented that the willingness of a major international
hotel management company to enter into a long-term agreement, the terms
of which are very favorable to the Partnership and the Property should
be viewed as further evidence of the economic viability of the Property
and the commercial reasonableness of permitting the Fund to fund the
development of the Property to completion.
As a result of the terrorist attacks of September 11, 2001 and its
potential impact on the hotel and convention industry, the Department
specifically requested that IFS, as the independent Named Fiduciary of
the Fund, confirm that the most prudent course of action for the Fund
to follow is completion of the Project. In response to this request,
IFS, in a letter dated October 5, 2001, noted that it sought the views
of LaSalle and Starwood. Both LaSalle and Starwood, in letters dated
October 4, 2001 and October 5, 2001, respectively, indicated that none
of the groups that had booked space cancelled their reservations
subsequent to the September 11, 2001 events. Both parties also noted
that it is not possible to do an assessment of the impact of these
events on the The Westin Diplomat Resort and Spa's future hotel and
convention business--other than to note the absence of cancellations--
because the hotel will not begin operations until January 2002. In a
letter dated October 5, 2001, LaSalle stated that it has not changed
its opinion that the prudent course of action is to complete
construction of the Property as soon as possible. In a separate letter
dated October 5, 2001, IFS states that ``IFS has discussed this opinion
with appropriate parties and finds this conclusion reasonable.''
Accordingly, after full consideration and review of the entire
administrative record, including the written comments from the
commentators and the responses thereto by IFS, the Department has
determined to grant the exemption, as modified and amended herein.
[[Page 53449]]
The comments submitted by the commentators to the Department and
the response by IFS thereto has been included as part of the public
administrative record of the exemption application. The complete
application file, including all supplemental submissions received by
the Department, is available for public inspection in the Public
Disclosure Room of the Pension Welfare Benefits Administration, Room N-
1513, U.S. Department of Labor, 200 Constitution Avenue N.W.,
Washington, D.C. 20210.
For a complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the Notice published on March 21, 2001, 66 FR 15900.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
Sierra Health Services, Inc. Profit Sharing Plan (the Plan)Located
in Las Vegas, Nevada
[Prohibited Transaction Exemption No. 2001-40; Application No. D-10884]
Exemption
The restrictions of sections 406(a), 406(b)(1), and 406(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 proposed sale by the Plan of certain
limited partnership interests (collectively, the Interest(s)) to Sierra
Health Services, Inc., (the Employer) the sponsor of the Plan and a
party in interest with respect to the Plan, provided that the following
conditions are met:
(a) The sale is a one-time transaction for cash;
(b) The Plan pays no commissions or any other expenses relating to
the sale;
(c) The sales price is the greater of (i) the fair market value of
the Interests as determined by a qualified, independent, appraiser (ii)
the value of the Interests, as determined by the general partner of
each partnership and reported on the most recent account statements
available at the time of the sale or (iii) the Plan's original
acquisition and holding costs.
(d) The Plan suffers no loss, as a result of its acquisition and
holding of the Interests, taking into account all cash distributions
received by the Plan as a result of owning the Interests.
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 30, 2001 at 66 FR
39356.
Written Comments
The Department received one comment from an interested person on
the proposed exemption. The Department forwarded a copy of the comment
to the 401(k) committee (the Committee), which approves the guidelines
for investment of the Employer directed fund, and requested that the
Committee respond in writing to the concerns raised by the commentator.
A description of the comment and the Committee's response are
summarized below.
The commentator urged that the exemption not be granted because she
believed that the Property had been under valued and requested another
independent appraisal of the Property.
The Committee, in response represents the following: The valuation
used for the purchase price is the highest of the following three
items: (1) The fair market value of the Interests, as determined by a
qualified independent appraiser; (2) the value of the Interests as
determined by the General Partner of each partnership; or (3) the
Plan's original acquisition and holding costs.
As part of a long-term employee retention strategy, the Employer
ceased to direct the investment of the employer's contributions to the
Plan. Prudential Securities was engaged as Trustee, and both the
employer's and employees' contributions were combined in a single
account. Every participant now has the ability to direct his/her
investments, on a daily basis if they so desire. The holding of these
Interests prevents participants from being able to direct their
investment to the extent that these Interests constitute a portion of
their Plan assets.
The qualified, independent, certified appraisal was completed by
William P. Geary, a Nevada Certified General Appraiser. The appraisal
was prepared in conformity with the current requirements of the Uniform
Standards of Professional Appraisal Practice as published by the
Appraisal Foundation, and the federal financial institutions regulating
agencies. The compensation for the appraisal was not contingent upon
the reporting of a predetermined value or direction in value that
favors SHS, the amount of the value estimate, the attainment of
stipulated result or the occurrence of a subsequent event.
Accordingly, after giving full consideration to the entire record,
including the comment by the commentator, and the responses of the
Committee, the Department has determined to grant the exemption as
proposed. In this regard, the comment submitted to the Department has
been included as part of the public record of the exemption
application. The complete application file, including all supplemental
submissions received by the Department, is made available for public
inspection in the Public Documents Room of the Pension and Welfare
Benefits Administration, Room N-1513, U.S. Department of Labor, 200
Constitution Ave. NW, Washington DC 20210.
FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department,
telephone (202) 219-8883 (this is not a toll-free number).
Barclays Bank PLC and Barclays Capital Inc. Located in London,
England and New York, New York
[Prohibited Transaction Exemption 2001-41; Application No. D-10966]
Exemption
Section I--Transactions
The restrictions of section 406(a)(1)(A) through (D) 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 as of January 24, 2001, to:
(a) The lending of securities, under certain exclusive borrowing
arrangements, to:
(1) Barclays Bank plc (Barclays);
(2) Barclays Capital Inc. (BCI) and any other affiliate of Barclays
that, now or in the future, is a U.S. registered broker-dealer or a
government securities broker or dealer or U.S. bank;
(3) Barclays Capital Securities Limited, which is subject to
regulation in the United Kingdom by the Securities and Futures
Authority of the United Kingdom (the UK SFA); and
(4) Any broker-dealer or bank that, now or in the future, is an
affiliate of Barclays which is subject to regulation by the UK SFA or
the Bank of England,(each such affiliated foreign broker-dealer or bank
referred to as a ``Foreign Borrower,'' and, together with Barclays and
BCI, collectively referred to as the ``Borrowers''), by employee
benefit plans, including commingled investment funds holding assets of
such plans (Plans), with respect to which Barclays or any of its
affiliates is a party in interest; and
(b) The receipt of compensation by Barclays or any of its
affiliates in connection with securities lending transactions, provided
that the following conditions set forth in Section II, below, are
satisfied.
[[Page 53450]]
Section II--Conditions
(a) For each Plan, neither the Borrower nor any affiliate has or
exercises discretionary authority or control over the Plan's investment
in the securities available for loan, nor do they render investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets.
(b) The party in interest dealing with the Plan is a party in
interest with respect to the Plan (including a fiduciary) solely by
reason of providing services to the Plan, or solely by reason of a
relationship to a service provider described in section 3(14)(F), (G),
(H) or (I) of the Act.
(c) The Borrower directly negotiates an exclusive borrowing
agreement (the Borrowing Agreement) with a Plan fiduciary which is
independent of the Borrower and its affiliates.
(d) The terms of each loan of securities by a Plan to a Borrower
are at least as favorable to such Plan as those of a comparable arm's-
length transaction between unrelated parties, taking into account the
exclusive arrangement.
(e) In exchange for granting the Borrower the exclusive right to
borrow certain securities, the Plan receives from the Borrower either
(i) a flat fee (which may be equal to a percentage of the value of the
total securities subject to the Borrowing Agreement from time to time),
(ii) a periodic payment that is equal to a percentage of the value of
the total balance of outstanding borrowed securities, or (iii) any
combination of (i) and (ii) (collectively, the Exclusive Fee). If the
Borrower deposits cash collateral, all the earnings generated by such
cash collateral shall be returned to the Borrower; provided that the
Borrower may, but shall not be obligated to, agree with the independent
fiduciary of the Plan that a percentage of the earnings on the
collateral may be retained by the Plan or the Plan may agree to pay the
Borrower a rebate fee and retain the earnings on the collateral (the
Shared Earnings Compensation). If the Borrower deposits non-cash
collateral, all earnings on the non-cash collateral shall be returned
to the Borrower; provided that the Borrower may, but shall not be
obligated to, agree to pay the Plan a lending fee (the Lending Fee)(the
Lending Fee and the Shared Earnings Compensation are collectively
referred to as the ``Transaction Lending Fee''). The Transaction
Lending Fee, if any, shall be either in addition to the Exclusive Fee
or an offset against such Exclusive Fee. The Exclusive Fee and the
Transaction Lending Fee may be determined in advance or pursuant to an
objective formula, and may be different for different securities or
different groups of securities subject to the Borrowing Agreement. Any
change in the Exclusive Fee or the Transaction Lending Fee that the
Borrower pays to the Plan with respect to any securities loan requires
the prior written consent of the independent fiduciary of the Plan,
except that consent is presumed where the Exclusive Fee or the
Transaction Lending Fee changes pursuant to an objective formula. Where
the Exclusive Fee or the Transaction Lending Fee changes pursuant to an
objective formula, the independent fiduciary of the Plan must be
notified at least 24 hours in advance of such change and such
independent Plan fiduciary must not object in writing to such change,
prior to the effective time of such change.
(f) The Borrower may, but shall not be required to, agree to
maintain a minimum balance of borrowed securities subject to the
Borrowing Agreement. Such minimum balance may be a fixed U.S. dollar
amount, a flat percentage or other percentage determined pursuant to an
objective formula.
(g) By the close of business on or before the day the loaned
securities are delivered to the Borrower, the Plan receives from the
Borrower (by physical delivery, book entry in a securities depository
located in the United States, wire transfer, or similar means)
collateral consisting of U.S. currency, securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by a U.S. bank other than
Barclays or any affiliate thereof, or any combination thereof, or other
collateral permitted under Prohibited Transaction Exemption 81-6 (46 FR
7527, Jan. 23, 1981, as amended at 52 FR 18754, May 19, 1987) (PTE 81-
6) (as amended or superseded)\19\ Such collateral will be deposited and
maintained in an account which is separate from the Borrower's accounts
and will be maintained with an institution other than the Borrower. For
this purpose, the collateral may be held on behalf of the Plan by an
affiliate of the Borrower that is the trustee or custodian of the Plan.
---------------------------------------------------------------------------
\19\ PTE 81-6 provides an exemption under certain conditions
from section 406(a)(1)(A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
a U.S. broker-dealer registered under the Securities Exchange Act of
1934 (the 1934 Act) (or exempted from registration under the 1934
Act as a dealer in exempt Government securities, as defined therein)
or to a U.S. bank, that is a party in interest with respect to such
plan.
---------------------------------------------------------------------------
(h) The market value (or in the case of a letter of credit, the
stated amount) of the collateral initially equals at least 102 percent
of the market value of the loaned securities on the close of business
on the day preceding the day of the loan and, if the market value of
the collateral at any time falls below 100 percent (or such higher
percentage as the Borrower and the independent fiduciary of the Plan
may agree upon) of the market value of the loaned securities, the
Borrower delivers additional collateral on the following day to bring
the level of the collateral back to at least 102 percent. The level of
the collateral is monitored daily by the Plan or its designee, which
may be Barclays or any of its affiliates which provides custodial or
directed trustee services in respect of the securities covered by the
Borrowing Agreement for the Plan. The applicable Borrowing Agreement
shall give the Plan a continuing security interest in and lien on the
collateral.
(i) Before entering into a Borrowing Agreement, the Borrower
furnishes to the Plan the most recent publicly available audited and
unaudited statements of its financial condition, as well as any
publicly available information which it believes is necessary for the
independent fiduciary to determine whether the Plan should enter into
or renew the Borrowing Agreement.
(j) The Borrowing Agreement contains a representation by the
Borrower that, as of each time it borrows securities, there has been no
material adverse change in its financial condition since the date of
the most recently furnished statements of financial condition.
(k) The Plan receives the equivalent of all distributions made
during the loan period, including, but not limited to, cash dividends,
interest payments, shares of stock as a result of stock splits, and
rights to purchase additional securities, that the Plan would have
received (net of tax withholdings) \20\ had it remained the record
owner of the securities.
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\20\ The Department notes the Applicants' representation that
dividends and other distributions on foreign securities payable to a
lending Plan are subject to foreign tax withholdings and that the
Borrower will always put the Plan back in at least as good a
position as it would have been had it not loaned securities.
---------------------------------------------------------------------------
(l) The Borrowing Agreement and/or any securities loan outstanding
may be terminated by either party at any time without penalty (except
for, if the Plan has terminated its Borrowing Agreement, the return to
the Borrower of a pro-rata portion of the Exclusive Fee paid by the
Borrower to the Plan)
[[Page 53451]]
whereupon the Borrower delivers securities identical to the borrowed
securities (or the equivalent thereof in the event of reorganization,
recapitalization, or merger of the issuer of the borrowed securities)
to the Plan within the lesser of five business days of written notice
of termination or the customary settlement period for such securities.
(m) In the event that the Borrower fails to return securities in
accordance with the Borrowing Agreement, the Plan will have the right
under the Borrowing Agreement to purchase securities identical to the
borrowed securities and apply the collateral to payment of the purchase
price. If the collateral is insufficient to satisfy the Borrower's
obligation to return the Plan's securities, the Borrower will indemnify
the Plan in the U.S. with respect to the difference between the
replacement cost of securities and the market value of the collateral
on the date the loan is declared in default, together with expenses
incurred by the Plan plus applicable interest at a reasonable rate,
including reasonable attorneys' fees incurred by the Plan for legal
action arising out of default on the loans, or failure by the Borrower
to properly indemnify the Plan.
(n) Except as otherwise provided herein, all procedures regarding
the securities lending activities, at a minimum, conform to the
applicable provisions of PTE 81-6 (as amended or superseded), as well
as to applicable securities laws of the United States and/or the United
Kingdom, as appropriate.
(o) Only Plans with total assets having an aggregate market value
of at least $50 million are permitted to lend securities to the
Borrowers; provided, however, that--
(1) In the case of two or more Plans which are maintained by the
same employer, controlled group of corporations or employee
organization (the Related Plans), whose assets are commingled for
investment purposes in a single master trust or any other entity the
assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan
Asset Regulation), which entity is engaged in securities lending
arrangements with the Borrowers, the foregoing $50 million requirement
shall be deemed satisfied if such trust or other entity has aggregate
assets which are in excess of $50 million; provided that if the
fiduciary responsible for making the investment decision on behalf of
such master trust or other entity is not the employer or an affiliate
of the employer, such fiduciary has total assets under its management
and control, exclusive of the $50 million threshold amount attributable
to plan investment in the commingled entity, which are in excess of
$100 million.
(2) In the case of two or more Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (the Unrelated Plans), whose assets are commingled for
investment purposes in a group trust or any other form of entity the
assets of which are ``plan assets'' under the Plan Asset Regulation,
which entity is engaged in securities lending arrangements with the
Borrowers, the foregoing $50 million requirement is satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million (excluding the assets of any Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of corporations including such fiduciary is the employer maintaining
such Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million. (In
addition, none of the entities described above are formed for the sole
purpose of making loans of securities.)
(p) Prior to any Plan's approval of the lending of its securities
to the Borrowers, a copy of this exemption (and the notice of pendency)
is provided to the Plan, and the Borrower informs the independent
fiduciary that the Borrower is not acting as a fiduciary of the Plan in
connection with its borrowing securities from the Plan.\21\
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\21\ The Department notes the Applicants' representation that,
under the proposed exclusive borrowing arrangements, neither the
Borrower nor any of its affiliates will perform the essential
functions of a securities lending agent, i.e., the Applicants will
not be the fiduciary who negotiates the terms of the Borrowing
Agreement on behalf of the Plan, the fiduciary who identifies the
appropriate borrowers of the securities or the fiduciary who decides
to lend securities pursuant to an exclusive arrangement. However,
the Applicants or their affiliates may monitor the level of
collateral and the value of the loaned securities.
---------------------------------------------------------------------------
(q) The independent fiduciary of the Plan receives monthly reports
with respect to the securities lending transactions, including but not
limited to the information set forth in the following sentence, so that
an independent Plan fiduciary may monitor such transactions with the
Borrowers. The monthly report will list for a specified period all
outstanding or closed securities lending transactions. The report will
identify for each open loan position, the securities involved, the
value of the security for collateralization purposes, the current value
of the collateral, the rebate or premium (if applicable) at which the
security is loaned, and the number of days the security has been on
loan. At the request of the Plan, such a report will be provided on a
daily or weekly basis, rather than a monthly basis. Also, upon request
of the Plan, the Borrower will provide the Plan with daily
confirmations of securities lending transactions.
(r) In addition to the above conditions, all loans involving
Foreign Borrowers must satisfy the following supplemental requirements:
(1) Such Foreign Borrower is a bank which is subject to regulation
by the Bank of England or is a registered broker-dealer subject to
regulation by the UK SFA;
(2) Such Foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 (17 C.F.R. 240.15a-6) under the Securities
Exchange Act of 1934 (the 1934 Act) which provides foreign broker-
dealers a limited exception from United States registration
requirements;
(3) All collateral is maintained in United States dollars or in
U.S. dollar-denominated securities or letters of credit, or other
collateral permitted under PTE 81-6 (as amended or superseded);
(4) All collateral is held in the United States and the situs of
the Borrowing Agreement is maintained in the United States under an
arrangement that complies with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 C.F.R. 2550.404(b)-1; and
(5) Prior to entering into a transaction involving a Foreign
Borrower, Barclays or the Foreign Borrower must:
(i) Agree to submit to the jurisdiction of the United States;
(ii) Agree to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(iii) Consent to the service of process on the Process Agent; and
(iv) Agree that enforcement by a Plan of the indemnity provided by
Barclays or the Foreign Borrower will occur in the United States
courts.
(s) Barclays or the Borrower maintains, or causes to be maintained,
within the United States for a period of
[[Page 53452]]
six years from the date of such transaction, in a manner that is
convenient and accessible for audit and examination, such records as
are necessary to enable the persons described in paragraph (t)(1) to
determine whether the conditions of the exemption have been met, except
that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Barclays and/or
its affiliates, the records are lost or destroyed prior to the end of
the six year period; and
(2) No party in interest other than the Borrower shall be subject
to the civil penalty that may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if
the records are not maintained, or are not available for examination as
required below by paragraph (t)(1).
(t)(1) Except as provided in subparagraph (t)(2) of this paragraph
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (s) are
unconditionally available at their customary location for examination
during normal business hours by--
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (SEC);
(ii) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(iii) Any contributing employer to any participating Plan or any
duly authorized employee representative of such employer; and
(iv) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs
(t)(1)(ii)-(t)(1)(iv) are authorized to examine the trade secrets of
Barclays or its affiliates or commercial or financial information which
is privileged or confidential.
Section III--Definitions
(a) 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.
(b) The term ``Foreign Borrower'' or ``Foreign Borrowers'' means
Barclays Capital Securities Limited and any broker-dealer or bank that,
now or in the future, is an affiliate of Barclays which is subject to
regulation by the UK SFA or the Bank of England.
(c) The term ``Borrower'' includes Barclays, BCI, the Foreign
Borrowers and any other affiliate of Barclays that, now or in the
future, is a U.S. registered broker-dealer or a government securities
broker or dealer or U.S. bank.
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 (the Notice) published on June 28,
2001 at 66 FR 34475.
Effective Date: This exemption will be effective as of January 24,
2001.
Written Comments
The Department received one comment letter with respect to the
Notice. The comment letter was submitted by Barclays Bank PLC and
certain of its affiliates (the Applicants). The Applicants made three
comments that concerned minor modifications to the language of the
exemption, as proposed.
First, the Applicants requested that the word ``remaining'' be
deleted from the second sentence in Section II(e) of the Notice.
Second, the Applicants requested that the term ``financial statements''
in Section II(j) of the Notice be replaced with the term ``statements
of financial condition'' in the final exemption. Finally, the
Applicants requested that the following language be added to the end of
the sentence in Section II(r)(3) of the Notice: ``or such other
collateral as may be permitted under PTE 81-6 from time to time.''
The Department concurs with the Applicants' comments and suggested
changes, and has modified the language of the final exemption
accordingly.
After giving full consideration to the entire record, including the
written comments from the Applicants, the Department has decided to
grant the exemption, as modified herein.
FOR FURTHER INFORMATION CONTACT: Karen Lloyd of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Columbia Savings Plan (the Plan) Located in Wilmington, DE
[Prohibited Transaction Exemption 2001-42; Exemption Application No. D-
10977]
Exemption
The restrictions of sections 406(a), 406(b)(1) and (b)(2) and
section 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 (E) of the Code, shall not apply, effective
November 1, 2000, to (1) the receipt, by the Plan, of Stock
Appreciation Income Linked Securities (SAILS), in exchange for common
stock in Columbia Energy Group (Columbia Energy), the Plan sponsor; (2)
the extension of credit by the Plan to NiSource, Inc. (NiSource), a
party in interest, in connection with the receipt of the zero coupon
bond portion of the SAILS; (3) the continued holding of the SAILS by
the Plan; and (4) the potential sale of the SAILS by the Plan to
NiSource.
This exemption is subject to the following conditions:
(a) The Plan automatically received the SAILS in exchange for its
shares of Columbia Energy common stock, in accordance with the terms of
an agreement and plan of merger, and it paid no fees or commissions in
connection with its receipt of the SAILS and other merger
consideration.
(b) All Columbia Energy shareholders, including Plan participants,
received SAILS in the same manner, so that the Plan participants and
beneficiaries were not in a less advantageous position than other
Columbia Energy shareholders.
(c) The Plan's receipt of the SAILS resulted from shareholder
approval and did not relate to any unilateral exercise of discretion by
a Plan fiduciary.
(d) Morgan Stanley and Salomon Smith Barney, Inc. advised Columbia
Energy that the consideration consisting of NiSource common stock,
SAILS and cash for Columbia Energy common stock was ``fair,'' from a
financial point of view.
(e) Duff & Phelps, Inc. provided Fidelity Investments, Inc., the
Plan trustee (the Trustee), and the Plan's Savings Plan Committee with
independent financial advice concerning the valuation of the SAILS.
(f) The Plan did not pay any fees or commissions in connection with
the acquisition and holding of the SAILS, nor will it pay any fees or
commissions if any SAILS are sold to NISource.
(g) An independent fiduciary, United States Trust Company, N.A.
(U.S. Trust),
(1) Monitored the Plan's holding and disposition of the SAILS;
[[Page 53453]]
(2) Determined whether it was appropriate for the Plan to dispose
of the SAILS (either on the open market or through a direct sale to
NiSource) and instructed the Trustee regarding such disposition;
(3) Would determine, in the event of a sale of any SAILS to
NiSource, the fair market value of such SAILS either (i) based on their
closing price on the New York Stock Exchange (the NYSE) on the date of
the transaction, or (ii) on the basis of an independent appraisal if
the SAILS were not carried on the NYSE, or in the event it concluded
that the closing price on the NYSE was not representative of the fair
market value of the SAILS as of the transaction date; and
(4) Disposed of all SAILS held by the Plan on the NYSE before the
end of calendar year 2001.
(h) The Plan would not be required to pay any fees or commissions
in the event any SAILS were sold to NiSource.
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 30, 2001 at 66 FR
39367.
Written Comments
The Department received one written comment with respect to the
proposed exemption and no requests for a public hearing. The comment
was submitted by a Plan participant who stated that she was initially
given the choice of how she wanted her shares of Columbia Energy common
stock converted. Although the commenter chose to exchange her Columbia
Energy common stock for NiSource common stock, she ended up receiving
both NiSource common stock and SAILS. The commenter declared this form
of consideration to be unacceptable to herself and to other Plan
participants who were treated similarly. The commenter also questioned
whether participants who received SAILS would be again taken advantage
of by not having a choice or say in the matter and she suggested that
Columbia Energy provide meetings and clearer explanations to questions
in layman's terms so that all parties involved could make informed
choices.
Columbia Energy responded to the commenter's concerns by stating
that the Trustee and the Plan fiduciaries had acted prudently and in
the best interests of the Plan participants with respect to the subject
transactions. In this regard, Columbia Energy noted that the Plan was
treated in the same manner as any other holder of Columbia Energy
common stock that had made a valid election to receive NiSource common
stock in exchange for Columbia Energy common stock, or to receive
consideration in the form of cash and SAILS, in exchange for Columbia
Energy common stock. Columbia Energy also noted that due to uncertainty
on whether the SAILS constituted qualifying employer securities, the
Trustee was required, under the terms of the Trust Agreement and
applicable law, to override all Plan participant elections to receive
cash and SAILS consideration, and to elect, in the alternative NiSource
common stock. However, because a large number of Columbia Energy's
shareholders elected to receive NiSource common stock, the stock
elections had to be prorated. Thus, Columbia Energy explained that the
Plan (and Plan participants) ultimately received SAILS, in addition to
shares of NiSource common stock, and cash. The SAILS were held in a
separate fund, which was not subject to participant direction, and
disposed of during the 2001 calendar year.
To protect the interests of the Plan participants, Columbia Energy
indicated that it retained U.S. Trust to serve on behalf of the Plan as
an independent fiduciary and oversee the Plan's holding and eventual
disposition of the SAILS on the NYSE. As a result of such disposition,
Columbia Energy stated that each Plan participant received the proceeds
attributable to the number of SAILS held in the participant's SAILS
account, thereby entitling the participant to direct the proceeds into
one or more investment options under the Plan.
Because the Plan has already disposed of all SAILS it held on the
NYSE rather than selling them directly to NiSource, the Department has
decided to modify Conditions (g) and (h) of the proposed exemption to
reflect more accurately the role of U.S. Trust and what actually
transpired. Thus, Conditions (g) and (h) of the final exemption have
been revised to read as follows:
(g) An independent fiduciary, United States Trust Company, N.A.
(U.S. Trust),
(1) Monitored the Plan's holding and disposition of the SAILS;
(2) Determined whether was appropriate for the Plan to dispose
of the SAILS (either on the open market or through a direct sale to
NiSource) and instructed the Trustee regarding such disposition;
(3) Would determine, in the event of a sale of any SAILS to
NiSource, the fair market value of such SAILS either (i) based on
their closing price on the New York Stock Exchange (the NYSE) on the
date of the transaction, or (ii) on the basis of an independent
appraisal if the SAILS were not carried on the NYSE, or in the event
it concluded that the closing price on the NYSE was not
representative of the fair market value of the SAILS as of the
transaction date; and
(4) Disposed of all SAILS held by the Plan on the NYSE before
the end of calendar year 2001.
(h) The Plan would not be required to pay any fees or
commissions in the event any SAILS were sold to NiSource.
Accordingly, after giving full consideration to the entire record,
including the written comment and clarifications noted above, the
Department has decided to grant the exemption.
For further information regarding the comment and other matters
discussed herein, interested persons are encouraged to obtain copies of
the exemption application file (Exemption Application No. D-10977) the
Department is maintaining in this case. The complete application file,
as well as all supplemental submissions received by the Department, are
made available for public inspection in the Public Disclosure Room of
the Pension and Welfare Benefits Administration, Room N-1513, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest 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
[[Page 53454]]
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 material terms of the transaction
which is the subject of the exemption.
Signed at Washington, DC, this 17th day of October, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 01-26568 Filed 10-19-01; 8:45 am]
BILLING CODE 4510-29-P