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Secretary of Labor Thomas E. Perez
Prohibited Transaction Exemption 2002-26; Grant of Individual Exemptions; Holt Fleck & Free P.A. Profit Sharing Plan (the Plan), et al. [Notices] [05/22/2002]

EBSA (Formerly PWBA) Federal Register Notice

Prohibited Transaction Exemption 2002-26; Grant of Individual Exemptions; Holt Fleck & Free P.A. Profit Sharing Plan (the Plan), et al. [05/22/2002]

[PDF Version]

Volume 67, Number 99, Page 36030-36034

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Exemption Application No. D-11000]

 
Prohibited Transaction Exemption 2002-26; Grant of Individual 
Exemptions; Holt Fleck & Free P.A. Profit Sharing Plan (the Plan), et 
al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemption.

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SUMMARY: This document contains an exemption 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).
    A notice was published in the Federal Register of the pendency 
before the Department of a proposal to grant such exemption. The notice 
set forth a summary of facts and representations contained in the 
application for exemption and referred interested persons to the 
application for a complete statement of the facts and representations. 
The application has been available for public inspection at the 
Department in Washington, DC. The notice also invited interested 
persons to submit comments on the requested exemption to the 
Department. In addition the notice stated that any interested person 
might submit a written request that a public hearing be held (where 
appropriate). The applicant has represented that it has complied with 
the requirements of the notification to interested persons. No requests 
for a hearing were received by the Department. Public comments were 
received by the Department as described in the granted exemption.
    The notice of proposed exemption was issued and the exemption is 
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.

[[Page 36031]]

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 exemption is administratively feasible;
    (b) The exemption is in the interests of the plan and its 
participants and beneficiaries; and
    (c) The exemption is protective of the rights of the participants 
and beneficiaries of the plan.

Holt, Fleck & Free P.A. Profit Sharing Plan (the Plan) Located in 
Noblesville, Indiana

[Prohibited Transaction Exemption No. 2002-26; Exemption Application 
No. D-11000]

Exemption

    The restrictions of sections 406(a) and 406(b)(1) and (b)(2) of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1) (A) through (E) of the Code, 
shall not apply to the sale (the Sale) by the Plan to a Plan fiduciary 
of two parcels of improved real property (the Parcels). This exemption 
is conditioned upon the adherence to the material facts and 
representations described herein and upon the satisfaction of the 
following requirements:
    (a) All terms and conditions of the Sale are at least as favorable 
to the Plan as those that the Plan could obtain in an arm's-length 
transaction with an unrelated party;
    (b) The Sales price is the greater of $165,000 or the fair market 
value of the Parcels as of the date of the Sale;
    (c) The fair market value of the Parcels has been determined by an 
independent, qualified appraiser;
    (d) The Sale is a one-time transaction for cash; and
    (e) The Plan does not pay any commissions, costs or other expenses 
in connection with the Sale.
    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 March 18, 2002 at 67 FR 
12064.

FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department, 
telephone (202) 693-8540 (this is not a toll-free number).

Prudential Insurance Company of America and Its Affiliates 
(collectively, Prudential) Located in Newark, NJ

[Prohibited Transaction Exemption 2002-27; Exemption Application No. D-
11051]

Exemption

Section I. Exemption for the Acquisition, Holding and Disposition of 
Prudential Stock
    The restrictions of sections 406(a)(1)(D), 406(b)(1) and section 
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)(D) and (E) 
of the Code,\1\ shall not apply, effective December 13, 2001, to the 
acquisition, holding and disposition of common stock issued by 
Prudential Financial, Inc. (the Prudential Financial Stock) and/or 
common stock issued by a Prudential affiliate (the Prudential Affiliate 
Stock; together, the Prudential Stock), by Index and Model-Driven Funds 
that are managed by Prudential, in which client plans of Prudential 
invest, provided that the following conditions and the General 
Conditions of Section II are met:
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    \1\ For purposes of this exemption, references to provisions of 
the Act refer also to corresponding provisions of the Code.
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    (a) The acquisition or disposition of Prudential Stock is for the 
sole purpose of maintaining strict quantitative conformity with the 
relevant index upon which the Index or Model-Driven Fund is based, and 
does not involve any agreement, arrangement or understanding regarding 
the design or operation of the Fund acquiring Prudential Stock which is 
intended to benefit Prudential or any party in which Prudential may 
have an interest.
    (b) Whenever Prudential Stock is initially added to an index on 
which an Index or Model-Driven Fund is based, or initially added to the 
portfolio of an Index or Model-Driven Fund, all acquisitions of 
Prudential Stock necessary to bring the Fund's holdings of such stock 
either to its capitalization-weighted or other specified composition in 
the relevant index, as determined by the independent organization 
maintaining such index, or to its correct weighting as determined by 
the model which has been used to transform the index, occur in the 
following manner:
    (1) Purchases are from, or through, only one broker or dealer on a 
single trading day;
    (2) Based on the best available information, purchases are not the 
opening transaction for the trading day;
    (3) Purchases are not effected in the last half hour before the 
scheduled close of the trading day;
    (4) Purchases are at a price that is not higher than the lowest 
current independent offer quotation, determined on the basis of 
reasonable inquiry from non-affiliated brokers;
    (5) Aggregate daily purchases do not exceed 15 percent of the 
average daily trading volume for the security, as determined by the 
greater of either (i) the trading volume for the security occurring on 
the applicable exchange and automated trading system on the date of the 
transaction, or (ii) an aggregate average daily trading volume for the 
security occurring on the applicable exchange and automated trading 
system for the previous 5 business days, both based on the best 
information reasonably available at the time of the transaction;
    (6) All purchases and sales of Prudential Stock occur either (i) on 
a recognized U.S. securities exchange (as defined in Section III(k) 
below), (ii) through an automated trading system (as defined in Section 
III(j) below) operated by a broker-dealer independent of Prudential 
that is registered under the Securities Exchange Act of 1934 (the 1934 
Act), and thereby subject to regulation by the Securities and Exchange 
Commission (the SEC), which provides a mechanism for customer orders to 
be matched on an anonymous basis without the participation of a broker-
dealer, or (iii) through an automated trading system (as defined in 
Section III(j) below) that is operated by a recognized U.S. securities 
exchange (as defined in Section III(k) below), pursuant to the 
applicable securities laws, and provides a mechanism for customer 
orders to be matched on an anonymous basis without the participation of 
a broker-dealer; and
    (7) If the necessary number of shares of Prudential Stock cannot be 
acquired within 10 business days from the date of the event which 
causes the particular Fund to require Prudential Stock, Prudential 
appoints a fiduciary which is independent of Prudential to design 
acquisition procedures and monitor compliance with such procedures.
    (c) Subsequent to acquisitions necessary to bring a Fund's holdings 
of Prudential Stock to its specified weighting in the index or model 
pursuant to the restrictions described in Section I(b) above, all 
aggregate daily purchases of Prudential Stock by the Funds do not 
exceed on any particular day the greater of:
    (1) 15 percent of the average daily trading volume for Prudential 
Stock occurring on the applicable exchange and automated trading system 
(as defined below) for the previous 5 business days, or

[[Page 36032]]

    (2) 15 percent of the trading volume for Prudential Stock occurring 
on the applicable exchange and automated trading system (as defined 
below) on the date of the transaction, as determined by the best 
available information for the trades that occurred on such date.
    (d) All transactions in Prudential Stock not otherwise described 
above in Section I(b) are either-(i) entered into on a principal basis 
in a direct, arm's length transaction with a broker-dealer, in the 
ordinary course of its business, where such broker-dealer is 
independent of Prudential and is registered under the 1934 Act, and 
thereby subject to regulation by the SEC, (ii) effected on an automated 
trading system (as defined in Section III(j) below) operated by a 
broker-dealer independent of Prudential that is subject to regulation 
by either the SEC or another applicable regulatory authority, or an 
automated trading system operated by a recognized U.S. securities 
exchange (as defined in Section III(k) below) which, in either case, 
provides a mechanism for customer orders to be matched on an anonymous 
basis without the participation of a broker-dealer, or (iii) effected 
through a recognized U.S. securities exchange (as defined in Section 
III(k) below), so long as the broker is acting on an agency basis.
    (e) No transactions by a Fund involve purchases from, or sales to, 
Prudential (including officers, directors, or employees thereof), or 
any party in interest that is a fiduciary with discretion to invest 
plan assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption).
    (f) No more than 5 percent of the total amount of Prudential Stock, 
that is issued and outstanding at any time, is held in the aggregate by 
Index and Model-Driven Funds managed by Prudential.
    (g) Prudential Stock constitutes no more than 5 percent of any 
independent third party index on which the investments of an Index or 
Model-Driven Fund are based.
    (h) A fiduciary of a plan which is independent of Prudential 
authorizes the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds Prudential Stock, pursuant to 
the procedures described herein.
    (i) A fiduciary independent of the Prudential directs the voting of 
Prudential Stock held by an Index or Model-Driven Fund on any matter in 
which shareholders of Prudential are required or permitted to vote.
Section II. General Conditions
    (a) Prudential maintains or causes to be maintained for a period of 
six years from the date of the transaction the records necessary to 
enable the persons described in paragraph (b) of this Section II to 
determine whether the conditions of this 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 Prudential, the 
records are lost or destroyed prior to the end of the six year period, 
and (2) no party in interest other than Prudential 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 by paragraph (b) below.
    (b)(1) Except as provided in paragraph (b)(2) of this Section II 
and notwithstanding any provisions of section 504(a)(2) and (b) of the 
Act, the records referred to in paragraph (a) of this Section II are 
unconditionally available at their customary location for examination 
during normal business hours by -
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the SEC,
    (B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of 
the plan, or any duly authorized employee or representative of such 
fiduciary,
    (C) Any contributing employer to any plan participating in an Index 
or Model-Driven Fund or any duly authorized employee or representative 
of such employer, and
    (D) Any participant or beneficiary of any plan participating in an 
Index or Model-Driven Fund, or a representative of such participant or 
beneficiary.
    (2) None of the persons described in subparagraphs (B) through (D) 
of this Section II(b)(1) shall be authorized to examine trade secrets 
of Prudential or commercial or financial information which is 
considered confidential.
Section III. Definitions
    (a) The term Index Fund means any investment 
fund, account or portfolio sponsored, maintained, trusteed, or managed 
by Prudential, in which one or more investors invest, and-
    (1) Which is designed to track the rate of return, risk profile and 
other characteristics of an independently maintained securities Index, 
as described in Section III(c) below, by either (i) replicating the 
same combination of securities which compose such Index or (ii) 
sampling the securities which compose such Index based on objective 
criteria and data;
    (2) For which Prudential does not use its discretion, or data 
within its control, to affect the identity or amount of securities to 
be purchased or sold;
    (3) That contains plan assets subject to the 
Act, pursuant to the Department's regulations (see 29 CFR 2510.3-101, 
Definition of plan assets-plan investments); and,
    (4) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund which is intended to 
benefit Prudential or any party in which Prudential may have an 
interest.
    (b) The term Model-Driven Fund means any 
investment fund, account or portfolio sponsored, maintained, trusteed, 
or managed by Prudential, in which one or more investors invest, and-
    (1) Which is composed of securities the identity of which and the 
amount of which are selected by a computer model that is based on 
prescribed objective criteria using independent third party data, not 
within the control of Prudential, to transform an independently 
maintained Index, as described in Section III(c) below;
    (2) Which contains plan assets subject to the 
Act, pursuant to the Department's regulations (see 29 CFR 2510.3-101, 
Definition of plan assets-plan investments); and
    (3) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund or the utilization of any 
specific objective criteria which is intended to benefit Prudential or 
any party in which Prudential may have an interest.
    (c) The term Index means a securities index 
that represents the investment performance of a specific segment of the 
public market for equity or debt securities in the United States, but 
only if-
    (1) The organization creating and maintaining the index is-
    (A) Engaged in the business of providing financial information, 
evaluation, advice or securities brokerage services to institutional 
clients,
    (B) A publisher of financial news or information, or
    (C) A public stock exchange or association of securities dealers; 
and,
    (2) The index is created and maintained by an organization 
independent of Prudential; and,
    (3) The index is a generally-accepted standardized index of 
securities which

[[Page 36033]]

is not specifically tailored for the use of Prudential.
    (d) The term opening date means the date on 
which investments in or withdrawals from an Index or Model-Driven Fund 
may be made.
    (e) The term Buy-up means an acquisition of 
Prudential Stock by an Index or Model-Driven Fund in connection with 
the initial addition of such stock to an independently maintained index 
upon which the Fund is based or the initial investment of a Fund in 
such stock.
    (f) The term Prudential refers to Prudential 
Insurance Company of America, its indirect parent and holding company, 
Prudential Financial, and any current or future affiliates, as defined 
below in paragraph (h).
    (g) The term Prudential Financial refers to 
Prudential Financial, Inc., the indirect parent and holding company of 
Prudential Insurance Company of America.
    (h) An affiliate of Prudential includes:
    (1) Any person, directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
the person;
    (2) Any officer, director, employee or relative of such person, or 
partner of any such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (i) The term control means the power to 
exercise a controlling influence over the management or policies of a 
person other than an individual.
    (j) The term automated trading system means 
an electronic trading system that functions in a manner intended to 
simulate a securities exchange by electronically matching orders on an 
agency basis from multiple buyers and sellers, such as an 
alternative trading system within the meaning of 
the SEC's Reg. ATS [17 CFR Part 242.300], as such definition may be 
amended from time to time, or an automated quotation 
system as described in Section 3(a)(51)(A)(ii) of the 1934 
Act [15 USC 8c(a)(51)(A) (ii)].
    (k) The term recognized U.S. securities 
exchange means a U.S. securities exchange that is registered 
as a national securities exchange under Section 6 
of the 1934 Act (15 USC 78f), as such definition may be amended from 
time to time, which performs with respect to securities the functions 
commonly performed by a stock exchange within the meaning of 
definitions under the applicable securities laws (e.g., 17 CFR Part 
240.3b-16).

Effective Date: This exemption is effective as of December 13, 2001.
    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 January 18, 2002 at 67 FR 
2692.

Written Comments

    The Department received two written comments with respect to the 
proposed exemption and no requests for a public hearing. The comments, 
which were submitted by representatives of two Prudential client plans, 
expressed concern that allowing Index and Model-Driven Funds managed by 
Prudential to invest in Prudential Stock would create a conflict of 
interest for Prudential. One of the commenters also referred to the 
Enron situation and the general concerns of the 
public with respect to conflicts of interest in large company 401(k) 
plan investments.
    In response to these comments, Prudential notes that it applied to 
the Department for exemptive relief because of the possibility of 
conflicts of interest where Prudential manages Index and Model-Driven 
Funds that invest in Prudential Stock. However, Prudential believes 
that the conditions imposed by the proposed exemption effectively 
protect investing plans from these conflicts. Prudential points out 
that at their core, the conditions of the proposed exemption are 
designed to eliminate any exercise of discretion by Prudential in 
determining when and how Prudential Stock is bought or sold in 
connection with Index or Model-Driven Funds. By operating in accordance 
with these conditions, Prudential states that it has none of the 
discretion that would permit it to engage in conflicts of interest. 
Prudential also explains that in the first condition of the proposal, 
the sole purpose for the acquisition of Prudential Stock is to maintain 
strict quantitative conformity with the relevant index upon 
which the Index or Model-Driven Fund is based, and does not involve any 
agreement, arrangement or understanding regarding the design or 
operation of the Fund acquiring Prudential Stock which is intended to 
benefit Prudential or any party in which Prudential has an 
interest. Further, Prudential states that the proposed 
exemption includes numerous other conditions that limit any potential 
for conflicts of interest.
    In addition, Prudential notes that the Department has issued 
several exemptions to financial institutions permitting the purchase of 
their own stock by index and model-driven funds they manage, subject to 
nearly identical conditions. Therefore, Prudential argues that it would 
be unfair if the Department were not to grant it the same exemptive 
relief its competitors have received.
    Finally, Prudential notes that the proposed exemption does not 
raise Enron-type concerns because the proposal does not cover 
investments by Prudential's in-house plans in Prudential Stock. Also, 
Prudential explains that the proposal does not present the investment 
diversification issue that was raised in connection with Enron's 40l(k) 
plan since Prudential Stock will always constitute a small portion of 
the stock held by the Index and Model-Driven Funds and Prudential Stock 
will always comprise a small fraction of the indexes these Funds track.
    Accordingly, after giving full consideration to the entire record, 
including the written comments, the Department has decided to grant the 
exemption subject to the clarifications described above. For further 
information regarding the comments and other matters discussed herein, 
interested persons are encouraged to obtain copies of the exemption 
application file (Exemption Application No. D-11051) 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 Labor, 
200 Constitution Avenue, NW., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 693-8556. (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 exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the

[[Page 36034]]

employees of the employer maintaining the plan and their beneficiaries;
    (2) This exemption is supplemental to and not in derogation of, any 
other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional rules. Furthermore, the 
fact that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (3) The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

    Signed at Washington, DC, this 17th day of May, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 02-12829 Filed 5-21-02; 8:45 am]
BILLING CODE 4510-29-P