EBSA Federal Register Notice
Proposed Exemptions; The JPMorgan Chase Bank [03/21/2003]
[PDF Version]
Volume 68, Number 55, Page 13954-13965
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. D-11062, et al.]
Proposed Exemptions; The JPMorgan Chase Bank
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No.------ stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or fax. Any such
comments or requests should be sent either by e-mail to:
``moffittb@pwba.dol.gov'', or by fax to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed
[[Page 13955]]
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
The JPMorgan Chase Bank (Located in New York, New York)
[Application No. D-11062]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, August 10, 1990).
Section I--Transactions
If the exemption is granted, 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)-(E) of the Code, shall not apply as of December 31, 2000,
to:
(A) The continuation of a lease (the Lease), by the Commingled
Pension Trust Fund (Strategic Property) of JPMorgan Chase Bank (the
Fund) with respect to which JPMorgan Chase Bank (JPMCB) is the trustee
(the Trustee), of office space in a certain commercial office building
(the Property) to Chase Global Funds Service Company (CGF), a party in
interest with respect to employee benefit plans whose assets are
invested in the Fund (Plans) and an affiliate of JPMCB; and
(B) the continued and future provision by JPMCB or its affiliates
of letters of credit (Letter(s) of Credit) to guarantee the obligations
of unrelated third-party tenants to pay rent to the Fund under
commercial real estate leases.
This exemption is subject to the conditions set forth in Section
II.
Section II--Conditions
(A) The Fund is represented by a fiduciary independent of JPMCB and
its affiliates (the independent fiduciary) with respect to the Lease to
perform the following functions:
(1) Confirm that when the Lease originally was entered into, and as
modified to date, all the terms and conditions of the Lease, including
those relating to renewal options and rights of first refusal, were
commercially reasonable and at least as favorable to the Plans as those
terms and conditions which could have been obtained at arm's length
with an unrelated third party;
(2) Determine, based upon a written appraisal report by a qualified
appraiser independent of JPMCB and its affiliates, that the leasing
renewal rate the Fund will charge CGF if CGF elects to exercise its
renewal options under the Lease, effective in 2004 and thereafter, and
that the leasing rate with respect to any space leased by CGF in the
Property pursuant to any rights of first refusal CGF has under the
Lease, accurately reflect at least fair market rental value;
(3) Negotiate and approve, subject to the appropriate ERISA
fiduciary standards, such amendments to the Lease upon renewal(s) as it
deems appropriate, including, for example: (i) A shorter renewal term
than the current five year term; (ii) additional renewal period(s)
(provided that the rent paid in any time periods after February 28,
2009, under any newly granted renewal option(s) would be at 100% of
fair rental value, as opposed to the 95% of fair rental value that
applies for periods through February 28, 2009); (iii) the lease of less
square footage than the current square footage covered under the Lease;
(iv) the lease of more square footage than the current square footage
covered under the Lease (provided that the rent paid for any square
footage in excess of the current square footage would also be leased at
100% of fair rental value, and not 95% of fair rental value); (v) using
a ``base year'' under the Lease (upon which certain periodic increases
such as taxes are calculated) updated to the year 2004, and (vi)
allowing CGF to install shatter-proof glass in the space it leases;
provided that all such amendments are not more favorable to the lessee
than the terms generally available in arm's length transactions between
unrelated parties, as determined by the independent fiduciary; and
(4) Represent the Fund and the participants (Participants) in the
Plans as independent fiduciary in any circumstances in addition to
those described in subsection (3) above while the Lease (including any
periods of renewal) is in effect which would present a conflict of
interest for the Trustee, including but not limited to: default by CGF
or disagreement on an economic computation under the Lease.
(B) The Fund is represented by an independent fiduciary with
respect to any existing or future Letters of Credit to perform the
following functions:
(1) Monitor monthly reports of rental payments of tenants utilizing
a Letter of Credit issued by JPMCB or any affiliate to guarantee their
lease payments;
(2) Confirm whether an event has occurred that calls for the Letter
of Credit to be drawn upon; and
(3) Represent the Fund and the Participants as an independent
fiduciary in any circumstances with respect to the Letters of Credit
which would present a conflict of interest for the Trustee, including
but not limited to: the need to enforce a remedy against itself or an
affiliate with respect to its obligations under a Letter of Credit.
(C) Future Letters of Credit are issued by JPMCB or an affiliate to
guarantee the obligations of third-party tenants to pay rent to the
Fund under commercial real estate leases only if the following
additional conditions are met:
(1) JPMCB or its affiliate, as the issuer of a Letter of Credit,
has at least an ``A'' credit rating by at least one nationally
recognized statistical rating service at the time of the issuance of
the Letter of Credit;
(2) The Letter of Credit has objective market drawing conditions
and states precisely the documents against which payment is to be made;
(3) JPMCB does not ``steer'' the Fund's tenants to itself or its
affiliates in order to obtain the Letter of Credit;
(4) Letters of Credit are issued only to tenants which are
unrelated to JPMCB; and
(5) The terms of any future Letters of Credit are not more
favorable to the tenants than the terms generally available in
transactions with other similarly situated unrelated third-party
commercial clients of JPMCB or its affiliates.
Section III--Definitions
(A) The term ``independent fiduciary'' means Aon Fiduciary
Counselors, Inc. (AFC) or any successor independent fiduciary, provided
that AFC or the successor independent fiduciary is: (1) Independent of
and unrelated to JPMCB and its affiliates, and (2) appointed to act on
behalf of the Fund for the purposes described in conditions II(A) and
(B) above. For purposes of this exemption, a fiduciary will not be
deemed to be independent of and unrelated to JPMCB if: (1) Such
fiduciary directly or indirectly controls, is controlled by or is under
common control with JPMCB, (2) such fiduciary directly or indirectly
receives any compensation or other consideration in connection with any
transaction described in this exemption, except that an independent
fiduciary may receive compensation for acting as an
[[Page 13956]]
independent fiduciary from JPMCB in connection with the transactions
contemplated herein if the amount or payment of such compensation is
not contingent upon or in any way affected by the independent
fiduciary's ultimate decision and (3) more than 5 percent of such
fiduciary's annual gross revenue in its prior tax year will be paid by
JPMCB and its affiliates in the fiduciary's current tax year.
(B) The term ``affiliate'' means:
(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, relative or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(C) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Effective Date: The exemption, if granted, will be effective as of
December 31, 2000.
Summary of Facts and Representations
1. The applicant, JPMorgan Chase Bank (JPMCB), is a subsidiary of
J.P. Morgan Chase & Co. and is based in New York, NY. J.P. Morgan Chase
& Co. is the resulting company from a merger (the Merger) of J.P.
Morgan & Co. Incorporated and The Chase Manhattan Corporation,
effective as of December 31, 2000. As of the date of the Merger, which
was accounted for as a pooling of interests, J.P. Morgan Chase & Co.
became the second largest banking institution in the United States,
with approximately $715 billion in assets and $42 billion in
stockholders' equity. J.P. Morgan Chase & Co. is now a global financial
services firm with operations in over 60 countries. Prior to November
10, 2001, it had as its principal subsidiaries: The Chase Manhattan
Bank and Morgan Guaranty Trust Company (MGT), each a New York banking
corporation headquartered in New York City, and Chase Manhattan Bank
USA, National Association, headquartered in Delaware. On November 10,
2001, MGT merged into The Chase Manhattan Bank and changed its name to
JPMorgan Chase Bank.
J.P. Morgan Chase & Co. is internally organized for management
reporting purposes into five major business groups: (i) Investment
banking, (ii) Treasury and securities services, (iii) J.P. Morgan
Partners (a private equity investment firm), (iv) retail and middle-
market banking and (v) investment management and private banking. Only
the fifth business group is relevant to the applicant's exemption
request.
2. JPMCB serves as trustee (the Trustee) to the Commingled Pension
Trust Fund (Strategic Property) of JPMorgan Chase Bank (the Fund).\1\
The Fund has net assets of approximately $4.5 billion invested in 74
developed real estate properties, primarily office buildings,
industrial parks, multi-family properties and retail properties. The
applicant represents that approximately 126 employee benefit plans have
invested in the Fund, both employee benefit plans subject to Title I of
ERISA and section 4975 of the Code (Plans) and those not so subject,
such as governmental plans within the meaning of section 3(32) of
ERISA. The average investment per Plan is approximately $35.3 million.
Currently, no Plan has an interest exceeding 10% of the Fund. The
applicant represents that one pension plan invested in the Fund is
sponsored by JPMCB and its investment represents 2.2% of the Fund's
interests as of December 31, 2002.
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\1\ Prior to December 31, 2000, MGT served as trustee of the
Fund.
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The applicant represents that prior to December 31, 2000, in order
to avoid triggering prohibited transactions under section 406 of the
Act or section 4975 of the Code, the trustee, as the ERISA fiduciary of
the Fund, relied on Prohibited Transaction Exemption (PTE) 84-14 (49 FR
9494, March 13, 1984) or Prohibited Transaction Exemption (PTE) 91-38
(56 FR 31966, July 12, 1991), as the circumstances dictated, in order
to conduct the real estate activities of the Fund. The applicant
represents that the Fund is a bank collective investment fund within
the meaning of PTE 91-38, and an investment fund within the meaning of
PTE 84-14. The applicant further represents that the Trustee, JPMCB, is
a ``bank'' maintaining the Fund within the meaning of PTE 91-38 and
meets the definition of a qualified professional asset manager (QPAM)
under PTE 84-14.
As a result of the Merger, the applicant represents that the
Trustee's ability to rely on PTE 84-14 and PTE 91-38 was affected with
respect to two transactions discussed herein (the Lease Transaction and
the Letters of Credit), as entities which may be parties in interest
with respect to Plans became affiliates of the Trustee. Therefore, the
applicant represents that conditions in both exemptions requiring that
the party in interest involved in the transaction not be related to the
qualified professional asset manager (QPAM) of the investment fund in
the case of PTE 84-14, or the trustee of the bank collective investment
fund in the case of PTE 91-38, could no longer be met.
With respect to the JPMCB plan invested in the Fund, the applicant
represents that JPMCB has been, and is, operating the Fund in
accordance with the conditions of PTE 91-38 except for the conditions
it is unable to meet due to the Merger.
The Lease Transaction
3. The applicant represents that the Fund owns a rehabilitated
office building located at 73 Tremont Street in Boston, Massachusetts
(the Property). The Property represents 1.92% of the net asset value of
the Fund. Chase Global Funds Service Company (CGF) is currently the
largest tenant, occupying 136,010 square feet or 44.75% of the
Property, pursuant to a lease (the Lease) executed on December 31,
1992, with a predecessor of CGF. The current Lease term commenced on
March 1, 1994. CGF pays rent of $24.50 per square foot on 131,469
square feet and $20.50 per square foot on the remaining 4,541 square
feet. CGF reimburses the Fund for a prorated share of common area
maintenance, real estate taxes and property insurance over a 1994
``base year,'' including its share of any increases for those costs
over the base year. CGF is separately metered for electricity which is
not included in the rent. If CGF sublets the space, any profits earned
are split 50/50 with the Fund.
The Lease currently expires on February 28, 2004, and CGF gave
notice on or before December 31, 2002 of its intent to renew the Lease
for a period of five years which would begin on March 1, 2004, and end
on February 28, 2009, at a rent of ``95% of fair market rent.'' The
applicant represents that while the Lease renewal rate is expressed in
terms of ``95% of fair market rent,'' this rate constitutes fair market
rental value for space leased pursuant to a renewal option when the
terms of the original Lease were negotiated as a package. The 5%
discount is intended to reflect the cost savings to the Fund for not
having to grant the normal concessions to the tenant that are typically
given for initial free rent, so-called ``workout allowances,'' and the
costs saved by the Fund for not having to advertise for a new tenant
and pay real estate brokers. The Lease also provides that if any other
space in the building occupied by another tenant becomes available, the
Fund has the obligation to offer such space to CGF at the then fair
market rent but otherwise pursuant to the terms of the Lease. CGF has
five days from
[[Page 13957]]
receiving notice of the space becoming available to notify the Fund
whether it will take such space and then proceed to negotiate the
rental rate. The applicant represents that both the renewal option and
the right of first refusal option features in the Lease are
advantageous to the Fund because they provide a potential captive
market for space in the building as it becomes available without the
Fund having to advertise for another tenant, negotiate a new lease,
incur legal fees and closing costs or risk periods of vacancy.
4. In connection with CGF's election to renew its option to extend
the term of the Lease beyond February 28, 2004, it may elect to
negotiate for an amendment of the Lease to permit: (a) A shorter
renewal term than the current five-year term, (b) additional renewal
option period(s), (c) the lease of less square footage then the current
square footage covered under the Lease and/or (d) the lease of more
such square footage. The rent paid by CGF for any time periods after
February 28, 2009, under any newly granted renewal option, would be at
100% of fair rental value, as opposed to the 95% of fair rental value
that applies for periods through February 28, 2009. Similarly, any
square footage leased in excess of the current square footage would
also be leased at 100% of fair rental value. (As a practical matter,
any such space necessarily would become available from space given up
from other tenants, so would be subject to the terms of CGF's right of
first refusal which provides for rent at 100% of fair rental value.)
CGF may, in the course of electing to review its option to extend
the term of the Lease beyond February 28, 2004, elect to negotiate with
the independent fiduciary for other amendments to the Lease. Examples
of the anticipated type of amendments to the Lease include using a
``base year'' under the Lease (upon which certain periodic increases
such as taxes are calculated) updated to 2004 and allowing CGF to
install shatter-proof glass in the space it leases.
5. The predecessor of CGF, Mutual Fund Service Company (MSFC),
originally negotiated the Lease. The primary business of MSFC was to
act as a third-party service provider to 401(k) plans, providing
customer service personnel to answer questions to plan participants
about their investment funds in 401(k) plans sponsored by their
employers. MSFC also generated computerized monthly and quarterly
statements as well as mailings to their customers. MSFC moved in
September of 1993 and occupied the space rent free for six months,
paying rent beginning on March 1, 1994. In 1997, CGF purchased the
assets of MSFC, and the Fund consented to assumption of the Lease by
CGF. After the purchase, CGF retained the personnel and business
activities of MSFC. Thus, the applicant represents that the original
Lease was negotiated by a party unrelated to both the Trustee and CGF.
6. The applicant represents that Aon Fiduciary Counselors, Inc.
(AFC) is an independent fiduciary which has been retained by the
Trustee on behalf of the Fund and the Plans. AFC is an investment
adviser registered with the Securities and Exchange Commission under
the Investment Advisers Act of 1940. AFC has acknowledged its duties,
responsibilities and obligations to the Fund and the Plans'
participants and beneficiaries as a fiduciary under the Act. AFC acts
primarily as independent fiduciary for large pension plans. Nell
Hennessy, President of AFC, will lead the project. Ms. Hennessy has
been involved in a variety of transactions involving pension plan
investment in real estate, including acquisition of individual
properties, creation of real estate holding companies, and obtaining
prohibited transaction exemptions for real estate syndications designed
for pension plan investors. Ms. Hennessy represents that AFC is
independent of J.P. Morgan Chase & Co. and its affiliates and the
sponsors of the Plans. Ms. Hennessy further represents that AFC has
never previously performed any services for J.P. Morgan Chase & Co. or
its affiliates, and, as of the date of the applicant's submission,
AFC's affiliates derived less than 1% of their annual gross income from
J.P. Morgan Chase & Co. and its affiliates. Ms. Hennessy represents
that no more than 5 percent of AFC's annual gross revenue in its prior
tax year will be paid by JPMCB and its affiliates in AFC's current tax
year. The applicant represents that AFC will remain on retainer for the
entire term of the Lease; additionally, in the event that AFC
terminates its services as independent fiduciary, the applicant will
notify the Department, and any successor will be as independent, of
equal experience, and have responsibilities similar to those of AFC and
will assume its responsibilities prior to AFC's departure.
The applicant represents that AFC, as the independent fiduciary,
will:
(a) Confirm that when the Lease was originally entered into, and as
modified to date, all the terms and conditions of the Lease, including
those relating to the renewal option and any rights of first refusal,
were commercially reasonable and at least as favorable to the Plans as
those terms and conditions which could have been obtained at arm's
length with an unrelated third party;
(b) Determine, based upon a written appraisal report by an
independent qualified appraiser, that the leasing renewal rate the Fund
will charge CGF if CGF elects to renew its option(s) under the Lease,
effective in 2004 and thereafter, and the leasing rate with respect to
any space taken by CGF in the Property, pursuant to any rights of first
refusal that CGF has under the Lease, accurately reflect at least fair
market rental value;
(c) Negotiate and approve, subject to the appropriate ERISA
fiduciary standards, such amendments to the Lease upon renewal(s) as it
deems appropriate, including, for example: (i) A shorter renewal term
than the current five year term; (ii) additional renewal period(s)
(provided that the rent paid in any time periods after February 28,
2009, under any newly granted renewal option(s) would be at 100% of
fair rental value, as opposed to the 95% of fair rental value that
applies for periods through February 28, 2009); (iii) the lease of less
square footage than the current square footage covered under the Lease;
(iv) the lease of more square footage than the current square footage
covered under the Lease (provided that the rent paid for any square
footage in excess of the current square footage would also be leased at
100% of fair rental value, and not 95% of fair rental value); (v) using
a ``base year'' under the Lease (upon which certain periodic increases
such as taxes are calculated) updated to the year 2004, and (vi)
allowing CGF to install shatter-proof glass in the space it leases;
provided that all such amendments are not more favorable to the lessee
than the terms generally available in arm's length transactions between
unrelated parties, as determined by AFC as independent fiduciary; and
(d) Represent the Fund and the Plans' participants as independent
fiduciary in any circumstances in addition to those described
immediately above while the Lease (including any periods of renewal) is
in effect which would present a conflict of interest for the Trustee,
including but not limited to: default by CGF or disagreement on an
economic computation under the Lease.
The Letters of Credit
7. The applicant represents that prior to the Merger, The Chase
Manhattan Bank issued a series of letters of credit (the Letters of
Credit) to guarantee rent payment obligations of unrelated third-party
tenants of buildings owned by the Fund. The tenants were not affiliates
of J.P. Morgan & Co., Incorporated or The
[[Page 13958]]
Chase Manhattan Corporation prior to the Merger and are not affiliates
of J.P. Morgan Chase & Co., post-Merger.
The applicant represents that a letter of credit is an instrument
issued by a bank or other lending institution, whose function is
similar to that of a guaranty and is used in commercial leasing
transactions as a substitute for a security deposit. The applicant
represents that the lending institution, upon issuing a letter of
credit, promises that if actions of the tenant trigger certain default
events set forth in the lease, such as bankruptcy of the tenant, it
will make such lease payments directly to the Fund up to the face
amount of the letter of credit. The beneficiary of the letter of
credit, the Fund, is issued a redeemable instrument that it may take
directly to the lending institution and demand payment merely by
stating that payment is due pursuant to the terms of the lease. The
bank is obligated to pay without further inquiry and generally cannot
be sued by the tenant for having paid under the letter of credit,
absent fraud on its part. The Fund is not required to have any further
involvement with the tenant in order to receive payment under the
letter of credit from the bank. The letters of credit automatically
renew annually until their final stated expiration date, and are either
cash collateralized by the tenants or, in the case of particularly
creditworthy tenants, the tenants enter into a reimbursement agreement
with the bank. The applicant represents that ``cash collateralized''
does not mean that cash is deposited as collateral. Rather, the
collateral is a security interest in cash held by the bank in the name
of the tenant. The applicant represents that the terms of the Letters
of Credit are governed by the 1993 Uniform Customs and Practice for
Documentary Credits (Customs and Practice) that contain standard
provisions widely accepted in the banking industry promulgated by the
International Chamber of Commerce Commission on Banking Technique and
Practice which most banking institutions incorporate by reference in
their letters of credit.
8. One Letter of Credit, P-398582, was issued by Chase Manhattan
Bank with respect to property referred to in the application as the
Glendale Plaza property. The Letter of Credit currently has an
aggregate amount of $500,000 and names Glendale Plaza Realty Holding
Co., (a wholly-owned subsidiary of the Fund) as beneficiary. The
Glendale Plaza property was acquired by Glendale Plaza Realty Holding
Company from an unrelated third party on November 30, 2000. The tenant
subsequently directed that the Letter of Credit be transferred to
Glendale Plaza Realty Holding Co., as beneficiary. The letter
automatically renews, without action by JPMCB, through its final
expiration date of March 22, 2004.
9. A second Letter of Credit, P-264349, was issued by Chase
Manhattan Bank with respect to property referred to by the applicant as
the 303 Wacker Drive property, located in Chicago, Il. The property was
purchased from Metropolitan Life Insurance Co (MetLife) in December
1997 by the Fund's wholly-owned subsidiary 303 Wacker Realty, LLC. The
letter of credit was purchased by the tenant in favor of the original
landlord, MetLife, in an amount of $18,845. The Letter of Credit
provided that the face amount of the letter could be reduced over the
course of the lease in proportion to the tenant's remaining obligations
thereunder and was accordingly reduced to a face amount of $12,563 as
of October 1, 1998. The applicant represents that this type of
reduction for a tenant in good standing is traditional in the real
estate industry. The letter expired on September 30, 2001, and was not
reissued in the name of 303 Wacker Realty, LLC and was not renewed. The
applicant represents that the tenant is currently in bankruptcy and had
rent in arrears discharged in the bankruptcy in the amount of
$17,733.87. On the recommendation of the independent fiduciary, the
property manager has reimbursed the Fund for $12,563, the full face
amount of the Letter of Credit.
The applicant represents that on July 5, 2000, a new Letter of
Credit was issued with respect to the same tenant in favor of 303
Wacker Realty, LLC, in the amount of $6,990. This letter covers
additional space leased by the tenant with final annual automatic
renewal dates until June 30, 2005, the final expiration date. The
applicant requests relief for both Letters of Credit associated with
the property owned by 303 Wacker Realty, LLC.
10. The applicant also requests exemptive relief for any future
Letters of Credit issued by JPMCB or its affiliates to third-party
tenants in Fund-owned buildings. The applicant represents that such
future Letters of Credit would be structured similarly to the current
outstanding Letters of Credit.
The applicant represents that the Letters of Credit function to
ensure continuous and timely rental payments in the case of default by
one of the tenants in the buildings owned by the Fund and their use is
customary in the real estate and banking industries. The applicant
represents that it is generally difficult for tenants to obtain a
Letter of Credit from an institution with which they do not otherwise
have a business banking relationship. Therefore, if JPMCB or its
affiliate is the tenant's commercial bank, it may be the tenant's only
source to obtain a Letter of Credit. In addition, the applicant
represents that given the increasing number of bank mergers, there are
fewer banks available from which to purchase a Letter of Credit. The
applicant represents that eliminating JPMCB or its affiliates from the
available pool of Letters of Credit providers would be disadvantageous
to the Fund and the Plans.\2\
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\2\ The applicant states that several more Letters of Credit
were issued to joint ventures in which the Fund has an interest. The
applicant represents that such ventures constitute ``real estate
operating companies'' within the meaning of the plan asset
regulations set forth in 29 CFR section 2510.3-101. The applicant
notes the existence of these other Letters of Credit to show that
the ability of JPMCB and its affiliates to provide such Letters of
Credit are an important source of economic protection for the Fund.
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11. The applicant represents that AFC has been retained as
independent fiduciary to determine whether it is appropriate to draw on
any currently outstanding or future Letter of Credit. AFC will be given
periodic (monthly) reports of rental payments by the tenant so it can
confirm whether the Letter of Credit should be called. In addition, AFC
will act in place of the Trustee in any situation which presents a
conflict of interest for the Trustee, including but not limited to: the
need to enforce a remedy against itself or an affiliate with respect to
its obligations under a Letter of Credit.
Future Letters of Credit issued by JPMCB or its affiliates will be
permitted only if: (a) JPMCB or its affiliate, as the issuer of a
Letter of Credit, has at least an ``A'' credit rating by at least one
nationally recognized statistical rating service at the time of the
issuance of the Letter of Credit; (b) the Letter of Credit has
objective market drawing conditions; (c) JPMCB does not ``steer'' the
Fund's tenants to itself or its affiliates in order to obtain the
Letter of Credit; (d) Letters of Credit are issued only to tenants
which are unrelated to JPMCB; and (e) the terms of any future Letters
of Credit are not more favorable to the tenants than the terms
generally available in transactions with other similarly situated
unrelated third-party commercial clients of JPMCB or its affiliates.
12. The applicant represents that prior to the Merger, affiliates
of The Chase Manhattan Corporation leased space in the Park Central
office complex owned by the Fund in Dallas, Texas. Since December 31,
2000, the Fund has leased
[[Page 13959]]
office space to J.P. Morgan Chase & Co. affiliates under four separate
leases in the Park Central office complex. The complex is comprised of
Park Central Buildings VII, VIII, and IX, although all of the space
leased to J.P. Morgan Chase & Co. affiliates is located in building
VII.
The leases in question are as follows:
----------------------------------------------------------------------------------------------------------------
Rate (psf/ Execution
J.P. Morgan Chase & Co. Affiliate Suite Size (sf) yr) date Expiration
----------------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank (now JPMCB)........... 102 6,536 $16.50 10/1/96 9/30/01
Chase Manhattan Mortgage Corp.................. 1400 7,845 23.50 6/1/99 3/31/04
Chase Manhattan Mortgage Corp.................. 1440 1,798 23.50 4/1/99 3/31/04
Chase Manhattan Mortgage Corp.................. 750 2,500 21.00 7/9/01 (\1\)
----------------------------------------------------------------------------------------------------------------
\1\ Month to month.
The applicant represents that each lease meets the conditions of
Part III of PTE 84-14 for real estate leases, and therefore a
prohibited transaction exemption is not necessary to cover the leases.
Specifically, the applicant represents that the following conditions of
PTE 84-14, Part III, are met: First, the unit of space subject to the
lease is suitable (or adaptable without excessive cost) for use by
different tenants. Second, at the time the transaction is entered into
(and at the time of any subsequent renewal or modification that
requires the consent of the Trustee as QPAM), the terms of the
transaction may not be more favorable to the lessee than the terms
generally available in arm's-length transactions between unrelated
parties. Third, no commission or other fee is paid by the Fund in
connection with the lease to the Trustee, or to any person or entity
(or any affiliate) who made the decision to have, or had the direct
authority to direct, any Plan to invest in the Fund. The applicant
represents that the fourth condition of Part III also is met which
requires that the amount of space covered by the lease does not exceed
the greater of 7,500 square feet or one percent (1%) of the available
space of the office building, integrated office park or commercial
center in which the Fund has the investment. In this latter regard, the
applicant represents that Park Central Buildings VII, VIII and IX owned
by the Fund constitute one commercial center or integrated office park
and that all of the leases constitute less than 1% of the square
footage of the Park Central commercial center or office park.\3\
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\3\ The applicant is not requesting exemptive relief in this
proposed exemption for the leases in the Park Central office
complex, nor is the Department providing any views in this proposed
exemption as to whether the conditions of PTS 84-14 would be met for
such transactions.
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13. In summary, with respect to the Lease transaction, the
applicant represents that the exemption will satisfy the statutory
criteria under section 408(a) of the Act for the following reasons:
(a) The Fund was represented by a qualified independent fiduciary
(i.e., the Trustee, who was not then affiliated with the tenant, CGF)
when the original Lease and all amendments thereto were negotiated and
executed; and
(b) The Fund at all times on or after December 31, 2000, will be
represented by a qualified independent fiduciary (i.e., AFC) to perform
the following functions:
(i) Confirm that when the Lease was originally entered into, and as
modified to date, all the terms and conditions of the Lease, including
those relating to renewal options and rights of first refusal, were
commercially reasonable and at least as favorable to the Plans as those
terms and conditions which could have been obtained at arm's length
with an unrelated third party;
(ii) Determine, based upon a written appraisal report by an
independent qualified appraiser, that the leasing renewal rate the Fund
will charge CGF if CGF elects to renew its option(s) under the Lease,
effective in 2004 and thereafter, and the leasing rate with respect to
any space leased by CGF in the Property, pursuant to any rights of
first refusal CGF has under the Lease, accurately reflect at least fair
market rental value;
(iii) Negotiate and approve, subject to the appropriate ERISA
fiduciary standards, such amendments to the Lease upon renewal(s) as it
deems appropriate, including, for example: (i) A shorter renewal term
than the current five year term; (ii) additional renewal period(s)
(provided that the rent paid in any time periods after February 28,
2009, under any newly granted renewal option(s) would be at 100% of
fair rental value, as opposed to the 95% of fair rental value that
applies for periods through February 28, 2009); (iii) the lease of less
square footage than the current square footage covered under the Lease;
(iv) The lease of more square footage than the current square footage
covered under the Lease (provided that the rent paid for any square
footage in excess of the current square footage would also be leased at
100% of fair rental value, and not 95% of fair rental value); (v) using
a ``base year'' under the Lease (upon which certain periodic increases
such as taxes are calculated) updated to the year 2004, and (vi)
allowing CGF to install shatter-proof glass in the space it leases;
provided that all such amendments are not more favorable to the lessee
than the terms generally available in arm's length transactions between
unrelated parties, as determined by the independent fiduciary; and
(iv) Represent the Fund and the Plans' participants as an
independent fiduciary in any circumstances in addition to those
described above while the Lease (including any periods of renewal) is
in effect which would present a conflict of interest for the Trustee,
including but not limited to: default by CGF or disagreement on an
economic computation under the Lease.
14. With respect to the Letters of Credit, the applicant represents
that the exemption will meet the statutory criteria under section
408(a) of the Act for the following reasons:
(a) The Fund was represented by a qualified independent fiduciary
(i.e., the Trustee, who was not then affiliated with The Chase
Manhattan Bank, the issuer of the Letters of Credit) when the existing
Letters of Credit were executed;
(b) The Fund at all times on or after December 31, 2000, will be
represented by a qualified independent fiduciary with respect to any
existing or future Letters of Credit to perform the following
functions:
(i) Monitor monthly reports of rental payments of tenants utilizing
a Letter of Credit issued by JPMCB or any affiliate to guarantee their
lease payments;
(ii) Confirm whether an event has occurred that calls for the
Letter of Credit to be drawn upon; and
(iii) Represent the Fund and the Participants as an independent
fiduciary in any circumstances with respect to the Letter of Credit
which would present a conflict of interest for the Trustee, including
but not limited to: the need to enforce a remedy against itself or an
[[Page 13960]]
affiliate with respect to its obligations under a Letter of Credit; and
(c) Future Letters of Credit may be issued by JPMCB or an affiliate
only if the following additional conditions are met:
(i) JPMCB or its affiliate, as the issuer of a Letter of Credit,
has at least an ``A'' credit rating by at least one nationally
recognized statistical rating service at the time of the issuance of
the Letter of Credit;
(ii) The Letter of Credit has objective market drawing conditions;
(iii) JPMCB does not ``steer'' the Fund's tenants to itself or its
affiliates in order to obtain the Letter of Credit;
(iv) Letters of Credit are issued only to tenants which are
unrelated to JPMCB; and
(v) The terms of any future Letters of Credit are not more
favorable to the tenants than the terms generally available in
transactions with other similarly situated unrelated third-party
commercial clients of JPMCB or its affiliates.
For Further Information Contact: Karen E. Lloyd of the Department,
telephone (202) 693-8540. (This is not a toll-free number).
Deutsche Bank AG (Deutsche Bank)
[Application Nos. D-11086; D-11087; D-11088; D-11089; and D-11090]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, August 10, 1990).
Section I: Basic Transaction
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) of the Act and the taxes imposed by section
4975 (a) and (b) of the Code, by reason of 4975(c)(1)(A) through (D) of
the Code, shall not apply to a transaction between a party in interest
with respect to a plan (as defined in section (V(h)) and such plan,
provided that the Deutsche Bank In-house Manager (DBIM) (as defined in
section IV(a)) has discretionary authority or control with respect to
the plan assets involved in the transaction and the following
conditions are satisfied:
(a) The terms of the transaction are negotiated on behalf of the
plan by, or under the authority and general direction of, the DBIM, and
either the DBIM, or (so long as the DBIM retains full fiduciary
responsibility with respect to the transaction) a property manager
acting in accordance with written guidelines established and
administered by the DBIM, makes the decision on behalf of the plan to
enter into the transaction. Notwithstanding the foregoing, a
transaction involving an amount of $5,000,000 or more, which has been
negotiated on behalf of the plan by the DBIM will not fail to meet the
requirements of this section I(a) solely because the plan sponsor or
its designee retains the right to veto or approve such transaction;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 81-6 \4\ (relating to
securities lending arrangements),
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\4\ 46 FR 7527; January 23, 1981.
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(2) Prohibited Transaction Exemption 83-1 \5\ (relating to
acquisitions by plans of interests in mortgage pools), or
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\5\ 48 FR 895; January 7, 1983.
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(3) Prohibited Transaction Exemption 88-59 \6\ (relating to certain
mortgage financing arrangements);
---------------------------------------------------------------------------
\6\ 53 FR 24811; June 30, 1988.
---------------------------------------------------------------------------
(c) The transaction is not part of an agreement, arrangement or
understanding designed to benefit a party in interest;
(d) 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 DBIM, the terms of the transaction are at least as
favorable to the plan as the terms generally available in arm's length
transactions between unrelated parties;
(e) The party in interest dealing with the plan: (1) 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; and (2) does not have discretionary authority
or control with respect to the investment of the plan assets involved
in the transaction and does not render investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
(f) The party in interest dealing with the plan is neither the DBIM
nor a person related to the DBIM (within the meaning of section IV(d));
(g) The DBIM adopts written policies and procedures that are
designed to assure compliance with the conditions of the exemption;
(h) An independent auditor, who has appropriate technical training
or experience and proficiency with ERISA's fiduciary responsibility
provisions and so represents in writing, conducts an exemption audit
(as defined in section IV(f)) on an annual basis. Following completion
of the exemption audit, the auditor shall issue a written report to the
plan presenting its specific findings regarding the level of compliance
with the policies and procedure adopted by the DBIM in accordance with
section I(g); and
(i) In addition to the above:
(1) The DBIM is a bank that has the power to manage, acquire or
dispose of assets of a plan, which bank has, as of the last day of its
most recent fiscal year, equity capital in excess of $1,000,000 and is
either supervised by a state or federal agency, or by the German
Federal Banking Supervisory Authority, Bundesanstalt fur
Finanzdienstleistungsaufsicht (BAFin) in cooperation with the Deutsche
Bundesbank (Bundesbank);
(2) Prior to entering into any transaction described in the
exemption, the DBIM agrees in writing:
(A) To submit to the jurisdiction of the United States;
(B) To appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(C) To consent to service of process on the Process Agent;
(D) That it may be sued in the United States courts in connection
with the transactions described in this proposed exemption;
(E) To comply with, and be subject to, all relevant provisions of
the Act; and
(F) That enforcement of any claim arising between a plan(s) and the
DBIM, resulting from a transaction described in the proposed exemption,
will occur in the United States courts.
Section II: Leasing of Office Space
If the exemption is granted, the restrictions of sections 406(a),
406(b)(1), 406(b)(2) and 407(a) of the Act and the taxes imposed by
section 4975 (a) and (b) of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to:
(a) The leasing of office or commercial space owned by a plan
managed by a DBIM to an employer any of whose employees are covered by
the plan or an affiliate of such an employer (as defined in section
407(d)(7) of the Act), if--
(1) The plan acquires the office or commercial space subject to an
existing lease with an employer, or its affiliate as a result of
foreclosure on a mortgage or deed of trust;
(2) The DBIM makes the decision on behalf of the plan to foreclose
on the mortgage or deed of trust as part of the exercise of its
discretionary authority;
(3) The exemption provided for transactions engaged in with a plan
[[Page 13961]]
pursuant to section II(a) is effective until the later of the
expiration of the lease term or any renewal thereof which does not
require the consent of the plan lessor;
(4) The amount of space covered by the lease does not exceed
fifteen (15) percent of the rentable space of the office building or
the commercial center; and
(5) The requirements of sections I(c), I(g), and I(h) are satisfied
with respect to the transaction.
(b) The leasing of residential space by a plan to a party in
interest if--
(1) The party in interest leasing space from the plan is an
employee of an employer any of whose employees are covered by the plan
or an employee of an affiliate of such employer (as defined in section
407(d)(7) of the Act);
(2) The employee who is leasing space does not have any
discretionary authority or control with respect to the investment of
the assets involved in the lease transaction and does not render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets;
(3) The employee who is leasing space is not an officer, director,
or a ten percent (10%) or more shareholder of the employer or an
affiliate of such employer;
(4) 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 DBIM, the terms of the transaction are not less
favorable to the plan than the terms afforded by the plan to other,
unrelated lessees in comparable arm's length transactions;
(5) The amount of space covered by the lease does not exceed five
percent (5%) of the rentable space of the apartment building or multi-
unit residential subdivision, and the aggregate amount of space leased
to all employees of the employer or an affiliate of such employer does
not exceed ten percent (10%) of such rentable space; and
(6) The requirements of section I(a), I(c), I(d), I(g), and I(h)
are satisfied with respect to the transaction.
Section III: Places of Public Accommodation
If the exemption is granted, the restrictions of sections
406(a)(1)(A) through (D) and 406(b) (1) and (2) of the Act and the
taxes imposed by section 4975 (a) and (b) of the Code, by reason of
section 4975(c)(1)(A) through (E) of the Code, shall not apply to the
furnishing of services and facilities (and goods incidental thereto) by
a place of public accommodation owned by a plan and managed by an DBIM
to a party in interest with respect to the plan, if the services and
facilities (and incidental goods) are furnished on a comparable basis
to the general public.
Section IV: Definitions
For the purposes of this exemption:
(a) The term ``Deutsche Bank In-house Manager'' or ``DBIM'' means
an organization which is--
(1) Deutsche Bank, or a direct or indirect wholly-owned bank or
trust company subsidiary of Deutsche Bank, supervised under the laws of
the United States, a State, or Germany, that (A) Has the power to
manage, acquire, or dispose of assets of a plan, (B) has, as of the
last day of its most recent fiscal year, equity capital (i.e., common
and preferred stock, surplus, undivided profits, contingency reserves,
group contingency reserves, and other capital reserves) in excess of
$1,000,000,\7\ and (C) has as of the last day of its most recent fiscal
year under its management and control total assets attributable to
plans maintained by affiliates of the DBIM (as defined in section
IV(b)) in excess of $50 million; provided that if it has no prior
fiscal year as a separate legal entity as a result of it constituting a
division or group within the employer's organizational structure, then
this requirement will be deemed met as of the date during its initial
fiscal year as a separate legal entity that responsibility for the
management of such assets in excess of $50 million was transferred to
it from the employer.
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\7\ The condition in Part IV(a) of the proposed exemptioin that
the INHAM have in excess of $1 million in equity capital mirrors the
parallel requirement in Part IV(a) of QPAM, PTE 84-14.
---------------------------------------------------------------------------
In addition, plans maintained by affiliates of the DBIM and/or the
DBIM, must have, as of the last day of each plan's reporting year,
aggregate assets of at least $250 million.
(b) For purposes of section IV(a) and section IV(h), an
``affiliate'' of an DBIM means a member of either: (1) a controlled
group of corporations (as defined in section 414(b)) of the Code of
which the DBIM is a member; or (2) a group of trades or businesses
under common control (as defined in section 414(c))of the Code of which
the DBIM is a member; provided that ``50 percent'' shall be substituted
for ``80 percent'' wherever ``80 percent'' appears in section 414(b) or
414(c) of the Code or the rules thereunder.
(c) 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.
(d) An DBIM is ``related'' to a party in interest for purposes of
section I(f) of this exemption if the party in interest (or a person
controlling, or controlled by, the party in interest) owns a five
percent (5%) or more interest in the DBIM or if the DBIM (or a person
controlling, or controlled by, the DBIM) owns a five 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;
(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; and
(3) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) For purposes of this exemption, 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 April 8, 2002, or any renewal
that requires the consent of the DBIM occurs on or after April 8, 2002,
and the requirements of this exemption are satisfied at the time the
transaction is entered into or renewed, the requirements will continue
to be satisfied thereafter with respect to the transaction. Nothing in
this paragraph shall be construed as exempting a transaction entered
into by a plan 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 the 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. In
determining compliance with the conditions of the exemption at the time
that the transaction was entered into for purposes of the preceding
sentence, section I(e) will be
[[Page 13962]]
deemed satisfied if the transaction was entered into between a plan and
a person who was not then a party in interest.
(f) Exemption Audit. An ``exemption audit'' of a plan must consist
of the following:
(1) A review of the written policies and procedures adopted by the
DBIM pursuant to Section I(g) for consistency with each of the
objective requirements of this exemption (as described in Section
IV(g)).
(2) A test of a representative sample of the plan's transactions in
order to make findings regarding whether the DBIM is in compliance with
(i) the written policies and procedures adopted by the DBIM pursuant to
section I(g) of the exemption and (ii) the objective requirements of
the exemption.
(3) A determination as to whether the DBIM has satisfied the
definition of an DBIM under the exemption; and
(4) Issuance of a written report describing the steps performed by
the auditor during the course of its review and the auditor's findings.
(g) For purposes of section IV(f), the written policies and
procedures must describe the following objective requirements of the
exemption and the steps adopted by the DBIM to assure compliance with
each of these requirements:
(1) The definition of an DBIM in section IV(a).
(2) The requirements of Part I and section I(a) regarding the
discretionary authority or control of the DBIM with respect to the plan
assets involved in the transaction, in negotiating the terms of the
transaction, and with regard to the decision on behalf of the plan to
enter into the transaction.
(3) That any procedure for approval or veto of the transaction
meets the requirements of section I(a).
(4) For a transaction described in section I:
(A) That the transaction is not entered into with any person who is
excluded from relief under section I(e)(1), section I(e)(2), to the
extent such person has discretionary authority or control over the plan
assets involved in the transaction, or section I(f), and
(B) That the transaction is not described in any of the class
exemptions listed in section I(b).
(5) For a transaction described in Part II:
(A) If the transaction is described in section II(a),
(i) That the transaction is with a party described in section
II(a);
(ii) That the transaction occurs under the circumstances described
in section II(a)(1) and (2);
(iii) That the transaction does not extend beyond the period of
time described in section II(a)(3); and
(iv) That the percentage test in section II(a)(4) has been
satisfied or
(B) If the transaction is described in section II(b),
(i) That the transaction is with a party described in section
II(b)(1);
(ii) That the transaction is not entered into with any person
excluded from relief under section II(b)(2) to the extent such person
has discretionary authority or control over the plan assets involved in
the lease transaction or section II(b)(3); and
(iii) That the percentage test in section II(b)(5) has been
satisfied.
(h) The term ``plan'' means a plan maintained by the DBIM or an
affiliate of the DBIM which is an employee benefit plan described in
ERISA section 3(3) and/or a plan described in section 4975(e)(1) of the
Code. Notwithstanding the foregoing, the term ``plan'' includes a plan
maintained by any entity in which the DBIM, or an affiliate of the DBIM
(as defined in section IV(b) of the proposal), holds more than a 20
percent equity interest, provided that such plan's assets are
commingled for investment purposes in an entity the assets of which are
plan assets under 29 CFR 2510.3-101 and 50 percent or more of the units
of beneficial interest in such entity are held by plans maintained by
the DBIM or affiliates of the DBIM.
Effective Date of Exemption: The effective date of this exemption
is April 8, 2002.
Summary of Facts and Representations
1. The affected plans will consist of employee benefit plans that
are covered under the provisions of Title I of the Act, as amended,
and/or subject to section 4975 of the Code and that are sponsored by
the applicant or its affiliates.
2. Deutsche Bank, a German banking corporation and a leading
commercial bank, provides a wide range of banking, fiduciary, record
keeping, custodial, brokerage and investment services to corporations,
institutions, governments, employee benefit plans, governmental
retirement plans and private investors worldwide. Deutsche Bank has a
physical presence worldwide. Deutsche Bank is currently one of the
largest financial institutions in the world in terms of assets. As of
2001, total assets of Deutsche Bank were 928,994 million Euros.
Shareholders equity equaled 43,683 million Euros. Deutsche Bank manages
over $585 billion in assets either through collective trusts,
separately managed accounts or mutual funds.
Under PTE 84-14, which provides conditional relief for transactions
with a plan that are managed by a qualified professional asset manager
(QPAM), the Department explicitly provided for banks to act as
QPAMs.\8\ Deutsche Bank, which is in the business of managing assets,
and supervised in that business by a variety of governmental
regulators, including the German banking authorities, the Federal
Reserve Board and other foreign local bank regulators, may manage the
assets of its own plans, and those of its affiliates, and, therefore,
seeks section 406(a) relief for dealing with parties in interest to its
own plans, other than parties affiliated with it.
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\8\ See Section V(a)(1) of PTE 84-14, 49 FR at 9506.
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3. Outside the United States, Deutsche Bank, as a whole, is not
supervised by a state or by the United States. However, Deutsche Bank
is regulated and supervised globally by the Bundesanstalt fur
Finanzdienstleistungsaufsicht--BAFin (BAFin) in cooperation with the
Deutsche Bundesbank, (Bundesbank).\9\
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\9\ In addition, Deutsche Bank, New York Branch, is regulated
and supervised by the New York State Banking Department. Certain
activities of Deutsche Bank's New York branch are also regulated and
supervised by the Federal Reserve Bank of New York. Bankers Trust
Company, an indirect wholly owned subsidiary of Deutsche Bank, is a
New York State bank and a member of the Federal Reserve System.
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The BAFin is a federal institution with ultimate responsibility to
the German Ministry of Finance.\10\ The Deutsche Bundesbank is the
central bank of the Federal Republic of Germany and an integral part of
the European Central Banks. The BAFin supervises the operations of
banks, banking groups, financial holding groups and foreign bank
branches in Germany, and has the authority to (a) Issue and withdraw
banking licenses, (b) issue regulations on capital and liquidity
requirements of banks, (c) request information and conduct
[[Page 13963]]
investigations, (d) intervene in cases of inadequate capital or
liquidity endangered deposits, or bankruptcy by temporarily prohibiting
certain banking transactions. The BAFin ensures that Deutsche Bank has
procedures for monitoring and controlling its worldwide activities
through various statutory and regulatory standards. Among these
standards are requirements for adequate internal controls, oversight,
administration, and financial resources. The BAFin reviews compliance
with these operational and internal control standards through an annual
audit performed by the year-end auditor and through special audits
ordered by the BAFin. The supervisory authorities require information
on the condition of Deutsche Bank and its branches through periodic,
consolidated financial reports and through a mandatory annual report
prepared by the auditor. The supervisory authorities also require
information from Deutsche Bank regarding capital adequacy, country risk
exposure, and exposures. German banking law mandates penalties to
ensure correct reporting to the supervisory authorities, and auditors
face penalties for gross violations of their duties.
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\10\ Following the adoption on April 22, 2002 of the Law on
Integrated Financial Services Supervision (Gesetz uber die
integrierte Finanzaufsicht--FinDAG), the German Financial
Supervisory Authority, BAFin was established on 1 May 2002. The
functions of the former offices for banking supervision
(Bundesaufsichtsamt fur das Kreditwesen--BAKred), insurance
supervision (Bundesaufsichtsamt fur das Versicherungswesen--BAV) and
securities supervision (Bundesaufsichtsamt fur den
Wertpapierhandel--BAWe) have been combined in a single state
regulator that supervises banks, financial services institutions and
insurance undertakings across the entire financial market and
comprises all the key functions of consumer protection and solvency
supervision. The BAFin is a federal institution governed by public
law that belongs to the portfolio of the Federal Ministry of Finance
and as such, has a legal personality. Its two offices are located in
Bonn and Frankfurt/Main. The BAFin supervises about 2,700 banks, 800
financial services institutions and over 700 insurance undertakings.
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Additionally, the BAFin, in cooperation with the Bundesbank
supervises all branches of Deutsche Bank, wherever located, subjecting
them to announced and unannounced on-site audits, and all other
supervisory controls applicable to German banks.\11\ With respect to
branches located in the member states, such audits are carried out
consistent with the applicable European Directives, and with respect to
branches outside the EEA, consistent with applicable international
agreements, memoranda of understanding, or other arrangements with the
relevant foreign supervisory authorities.\12\
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\11\ Deutsche Bank's branches domiciled outside the European
Economic Area (EEA) are also subject to local regulation and
supervision by the host country's supervisory authority, e.g., the
Ministry of Finance in Japan, the Swiss Federal Banking Commission
in Switzerland, the Australian Prudential Regulation Authority in
Australia, and the Office of the Superintendent of Financial
Institutions in Canada. For Deutsche Bank's branches domiciled in
EEA member states, the BAFin is the lead supervisory authority
pursuant to the rules on the ``European passport'', and only some
aspects are subject to complementary supervision by the host
country's supervisory authority (e.g., the Securities and Futures
Authority in the United Kingdom supervises the conduct of the
investment business of Deutsche Bank in the United Kingdom).
\12\ As a result of meetings between the U.S. and German
regulators in October 1993, the U.S. Department of Treasury has
accorded national treatment to German bank branches, and the German
Ministry of Finance has granted relief to branches of U.S. banks in
Germany, in particular with respect to ``dotation'' or endowment
capital requirements and capital adequacy standards. Since the
German Banking Act (s. 53c) allows such exemptions only insofar as
branches of German companies are afforded equal exemptions in the
foreign state, this confirms indirectly the recognition of the
German banking supervisory standards by the U.S. regulators.
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Deutsche Bank's subsidiaries that pursue banking and other
financial activities (other than insurance) or activities that are
closely related thereto are consolidated with Deutsche Bank and form a
banking group for purposes of the capital ratios and the large exposure
limits that the bank is required to meet also on a group-wide basis. In
conformity with European Directives,\13\ the BAFIN supervises such
banking groups (where their parent institution is domiciled in Germany)
on a consolidated basis.
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\13\ See, e.g., Council Directive 92/30/EEC of 6 April 1992 on
the supervision of credit institutions on a consolidated basis,
Council Directive 92/121/EEC of 21 December 1992 on the monitoring
and control of large exposures of credit.
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While oversight is less individualized for subsidiaries than for
branches, the supervision extends to adequacy of equity capital of
banking and financial holding groups and compliance with the
regulations regarding large loans granted by such groups. Thus,
Deutsche Bank is subject to comprehensive supervision and regulation on
a consolidated basis by its home country supervisor.\14\
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\14\ This is also the conclusion reached by the Board of
Governors of the Federal Reserve System in its Order approving
Deutsche Bank's application to become a bank holding company,
effective May 20, 1999.
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There are two deposit insurance programs that cover Deutsche Bank
and its foreign branches. The first is a European Union required
mandatory deposit insurance system established in 1998 that insures
deposits denominated in the currency of an EEA member state up to the
lesser of 90% of the deposit amount or 20,000 euros. This statutory
deposit protection scheme is maintained, as far as private commercial
banks like Deutsche Bank are concerned, by a separate institution
(Entschaedigungseinrichtung deutscher Banken mbH) that is subject to
supervision by the BAFIN. In addition, since 1976, the Association of
German Banks (Bundesverband deutscher Banken e.V.) has maintained a
voluntary deposit protection program called the Deposit Protection Fund
(Einlagensicherungsfonds) that safeguards liabilities in excess of the
thresholds guaranteed by the European Union program, up to a protection
ceiling for each creditor of 30% of the liable capital of the bank.\15\
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\15\ Liable Capital means the sum of core capital and
supplementary capital as defined in section 10, subsection (2) of
the German Banking Act. However, for measurement of the protection
ceiling, the supplementary capital, as defined in section 10,
subsection (2b) of the German Banking Act, shall only be taken into
account up to an amount of 25% of the core capital, as defined in
section 10, subsection (2a) of the German Banking Act. Financial
data on the date of the last published annual financial statements
of the bank shall be determinative.
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The Deposit Protection Fund was created to give assistance, in the
interest of depositors, in the event of imminent or actual financial
difficulties of banks, particularly when the suspension of payments is
threatened, and to prevent the impairment of public confidence in
private banks. The Deposit Protection Fund is funded by regular
contributions paid by every German bank that has elected to participate
in the Deposit Protection Fund. Participating banks may be required to
make special contributions to the extent requested by the Deposit
Protection Fund to enable it to fulfill its purpose.
The Deposit Protection Fund relies on the Auditing Association of
German Banks (Pruefungsverband deutscher Banken e.V. or Auditing
Association) to audit banks and make recommendations to the banks.
Following those recommendations is a requirement for all banks covered
by the Deposit Protection Fund. Banks are no longer permitted to be
part of the Deposit Protection Fund if, inter alia, they give
incomplete or incorrect information to the Federal Association of
German Banks in connection with the Fund; if they are in default with
the payment of contributions for more than two months after a written
reminder; if they do not support the Auditing Association in its
auditing activity or do not promptly fulfill any condition set by the
Auditing Association; if they fail to make correct disclosure to
depositors; or if they make incorrect statements or incorrectly
advertise the deposit insurance program. Thus, the German deposit
protection system protects deposits throughout the world wherever a
branch of a participating German bank is located.
4. The proposed exemption is similar to PTE 96-23.\16\ Generally,
PTE 96-23 conditionally permits: (1) Plans whose assets are managed by
an in-house asset manager (INHAM) to enter into transactions with
parties in interest where the INHAM directs the transaction; (2) the
leasing of office or commercial space owned by a plan managed by an
INHAM to an employer whose employees are covered under the plan (or the
employer's affiliate), where the plan acquires the office or commercial
space subject to an existing
[[Page 13964]]
lease with an employer, or its affiliate, as a result of foreclosure on
a mortgage or deed of trust directed by the INHAM; (3) the leasing of
residential space by a plan to a party in interest who is an employee
of a covered employer or affiliate thereof, but not an officer,
director, or a 10% or more shareholder of the employer or affiliate or
a fiduciary with respect to the leased assets; and (4) the furnishing
of services and facilities (and goods incidental thereto) by a place of
public accommodation owned by a plan and managed by an INHAM to a party
in interest with respect to the plan, if the services and facilities
(and incidental goods) are furnished on a comparable basis to the
general public.
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\16\ 61 FR 15,975 (Apr. 10, 1996).
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One of the requirements of PTE 96-23 is that the INHAM meet the
definition of INHAM under section IV(a). In pertinent part, Part
IV(a)(2) of PTE 96-23 requires an ``INHAM'' to be:
An investment adviser registered under the Investment Advisers
Act of 1940 that, as of the last day of its most recent fiscal year,
has under its management and control total assets attributable to
plans maintained by affiliates of the INHAM (as defined in section
IV(b)) in excess of $50 million; provided that if it has no prior
fiscal year as a separate legal entity as a result of it
constituting a division or group within the employer's
organizational structure, then this requirement will be deemed met
as of the date during its initial fiscal year as a separate legal
entity that responsibility for the management of such assets in
excess of $50 million was transferred to it from the employer.\17\
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\17\ 61 FR at 15982.
The registered investment adviser requirement ``assure[s] that the
INHAM is in the business of investment management and, thus, in a
position to develop experience and sophistication in dealing with
investment issues.''\18\ The requirement also assures that the INHAM is
subject to government supervision. Registration of the INHAM as an
investment adviser assures that the INHAM is subject to regulation
under the Investment Advisers Act of 1940 and oversight by the
Securities and Exchange Commission. In granting the final PTE 96-23,
the Department noted that ``oversight by the Securities and Exchange
Commission as a result of registration as an investment adviser under
the Investment Advisers Act of 1940 provides an important safeguard
under the exemption.''\19\ Additionally, the Department explained that
the $50 million in plan assets requirement provides further protection
by ensuring that the INHAM is well qualified:
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\18\ 60 FR at 15599.
\19\ 61 FR at 15980.
* * * INHAMs of large plans are more likely to have an appropriate
level of expertise in financial and business matters. In this
regard, the Department believes that the requirement that the INHAM
have a significant dollar amount of assets under its management and
control attributable to plans maintained by affiliates which are
separately accountable for the operation of their respective plans
provides an additional safeguard under the exemption.\20\
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\20\ 61 FR at 15980.
Like registered investment advisers, banks may also be experienced
investment managers.
Domestic banks, such as Bankers Trust Company, like registered
investment advisers, are also subject to government regulation. Bankers
Trust Company is a bank supervised by New York State and the Federal
Reserve Bank.
In developing the QPAM class exemption, the Department noted that
each of the categories of asset manager [e.g., banks] is subject to
regulation by Federal or State agencies.\21\
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\21\ Preamble to Proposed PTE 84-14, 47 FR 56945, 56947 (Dec.
21, 1982).
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For these reasons, it is represented that the proposed exemption is
similar to PTE 96-23. The proposed exemption treats Bankers Trust,
Deutsche Bank, or any affiliated bank regulated under the laws of the
United States, or Germany as an INHAM under Part IV. To this end, the
following subparagraph will replace subparagraphs (1) and (2) of
section IV(a) of PTE 96-23:
(1) Deutsche Bank, or a direct or indirect wholly-owned bank or
trust company subsidiary of Deutsche Bank, supervised under the laws
of the United States, a State, or Germany, (A) has the power to
manage, acquire, or dispose of assets of a plan and (B) has, as of
the last day of its most recent fiscal year, equity capital (i.e.,
common and preferred stock, surplus, undivided profits, contingency
reserves, group contingency reserves, and other capital reserves) in
excess of $1,000,000.
5. The applicant represents that the proposed exemption would be
protective of participants and beneficiaries because it essentially
contains the same protective conditions found in PTE 96-23.
Additionally, the proposed exemption would be protective because
regulation under the laws of Germany is comparable to regulation under
the laws of the United States or a State.
6. In summary, it is represented that the subject transactions will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because the proposed exemption: (a) Will benefit in-house plans
by ensuring that plans have greater flexibility in choosing among
expert, experienced investment managers; (b) will not be detrimental to
plans because banks have proven expertise and experience in managing
plan assets and the banking laws and regulations of Germany provide
protection and oversight that is comparable to those of the United
States or a State; (c) would allow plans to take greater advantage of
the investment management expertise and experience of the world's
largest bank in terms of assets and one of the world's largest asset
managers; and (d) would allow a plan's DBIM to consider existing
service providers when seeking goods, services, and facilities, thus
increasing the plan's choices (which may afford greater quality at
lower costs) and eliminating the compliance costs of ensuring that a
counter-party is not a party in interest (i.e., as a service provider
or as related to a service provider).
Notice to Interested Persons: The applicant represents that because
those potentially interested participants and beneficiaries cannot all
be identified, the only practical means of notifying such participants
and beneficiaries of this proposed exemption is by publication in the
Federal Register. Therefore, comments and requests for a hearing must
be received by the Department not later than 45 days from the date of
publication of this notice of proposed exemption in the Federal
Register.
For Further Information Contact: Mr. Khalif I. Ford of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
Law Offices of Richard D. Gorman Pension & Profit Sharing Plan (the
Plan) Located in Monterey, California
[Application No. D-11104]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 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 proposed sale of unimproved real property
(the Property) by the Plan to Mr. Richard Gorman (Mr. Gorman), a
trustee of the Plan, and a party in interest with respect to the Plan,
provided that the following conditions are satisfied:
[[Page 13965]]
(a) The sale is a one-time cash transaction;
(b) The Plan receives the greater of either: (i) $290,000; or (ii)
the fair market value for the Property established at the time of the
sale by an independent, qualified appraiser; and
(c) The Plan pays no commissions or other expenses associated with
the sale.
(B) Summary of Facts and Representations
1. The Plan is a discretionary profit sharing plan. The Plan's
current trustee is Mr. Gorman. The Plan sponsor is a single
practitioner law firm, with one secretary as an employee. The Plan has
2 participants. As of July 8, 2002, the Plan had approximately
$408,567.64 in total assets.
2. On August 20, 1996, the Plan purchased the Property from Bruce
Munro and Shirley G. Mackintosh, unrelated third parties, for $143,000.
Mr. Gorman propose to pay the fair market value of the Property, which
would be paid in full in cash at a closing to be held subsequent to the
granting of the proposed exemption.
The applicant states that the Property has not been an income-
producing asset and has been held for possible appreciation. The Plan
has paid for taxes, insurance and maintenance on the Property since the
acquisition (the Holding Costs). Specifically, the Plan has paid the
following Holding Costs since its acquisition of the Property: (i) Real
estate taxes, $9,600; (ii) Insurance, $1,500; (iii) Maintenance fees,
$3,000. The applicant states that the Holding Costs for the Property
have been approximately $14,100. Therefore, the total cost for the
Property (i.e., the acquisition price of $143,000, plus the Holding
Costs of approximately $14,100) is approximately $157,100 as of July
2002.
3. The Property is an unimproved 909 square foot parcel of land
located at 19 Yankee Point Drive, Carmel, California. The Property was
appraised on April 15, 2002. The appraisal was prepared by Raymond A.
Elarmo (Mr. Elarmo), who is an independent, licensed real estate
appraiser in the state of California.
Mr. Elarmo represents that although the Property is adjacent to the
home of Mr. Gorman, the Property may or may not increase the value of
Mr. Gorman's home due to concerns regarding water availability for the
Property.
Mr. Elarmo states that consideration was given in the appraisal to
three approaches to value, i.e., the cost approach, sales comparison
approach, and income approach. Mr. Elarmo relied on the sales
comparison approach to determine the fair market value of the Property.
Mr. Elarmo has determined that the fair market value of the Property is
$290,000.
4. The applicant now proposes that the sale of the Property would
provide liquidity to the Plan. Plan assets would then not be locked
into a piece of land that has little foreseeable use. The Plan will pay
no commissions or other expenses associated with the sale. The
applicant will pay the Plan in cash, the greater of either:(a)
$290,000; or (b) the fair market value of the Property, as established
by a qualified, independent appraiser at the time of the transaction.
5. In summary, the applicant represents that the transaction will
satisfy the statutory criteria of section 408(a) of the Act and section
4975(c)(2) of the Code because: (a) The proposed sale will be a one-
time cash transaction; (b) the Plan will receive the greater of either:
(i) $290,000; or (ii) the current fair market value for the Property,
as established at the time of the sale by an independent, qualified
appraiser; (c) the Plan will pay no fees, commissions or other expenses
associated with the sale; and (d) the sale will enable the Plan to
divest itself of a non-income producing asset and acquire investments
which may yield higher returns.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
For Further Information Contact: Khalif I. Ford of the Department
at (202) 693-8540. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC this 18th day of March, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 03-6851 Filed 3-20-03; 8:45 am]
BILLING CODE 4510-29-P