EBSA Federal Register Notice
Proposed Exemptions; John Hancock Life Insurance Company, et al [11/14/2003]
[PDF Version]
Volume 68, Number 220, Page 64643-64657
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-10957, et al.]
Proposed Exemptions; John Hancock Life Insurance Company, et al
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).
[[Page 64644]]
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@.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 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.
John Hancock Life Insurance Company, Located in Boston, Massachusetts
[Application No. D-10957]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act 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 section 406(b)(2) of the Act shall not apply to the proposed
purchases and sales of farmland asset(s) (the Farmland Asset(s)), as
defined in Condition 12(b), or entire farmland account(s) (the Entire
Farmland Account(s)), as defined in Condition 12(n), between various
account(s) (the Account(s)), as defined in Condition 12(a), that are
managed by Hancock Natural Resource Group, Inc. (HNRG) or the
affiliate(s) (the Affiliate(s)), as defined in Condition 12(e), of John
Hancock Life Insurance Company (JHLIC).
Conditions and Definitions
This exemption is subject to the following conditions:
1. A plan or plans covered by the Act (the ERISA-Covered Plan(s)),
as defined in Condition 12(c), may participate in a subject transaction
only if each such plan has total assets in excess of $100 million.
2. At least 30 days prior to entering a subject transaction, each
affected customer (the Customer(s)), as defined in Condition 12(l),
invested in an Account participating in such transaction will be
provided with information regarding the Farmland Asset(s) or the Entire
Farmland Account involved and the terms of the transaction, including
the purchase price and how the transaction would meet the goals and
investment policies of each such affected Customer. Notice of any
change in the purchase price will be provided to each affected Customer
at least 30 days prior to the consummation of the transaction.
3. An independent fiduciary (an Independent Fiduciary), as defined
in Condition 12(h), is appointed by JHLIC or an Affiliate as follows:
(a) One Independent Fiduciary is appointed to represent the
Account(s) in which an ERISA-Covered Plan or ERISA-Covered Plans is/are
invested, whether the Account(s) is/are the buyer(s) or the seller(s)
in a subject transaction, where one side of such transaction involves
one or more: (i) ERISA-Covered Plan(s), (ii) pooled separate
account(s)(the Pooled Separate Account(s), as defined in Condition
12(k), in which an ERISA-Covered Plan or ERISA-Covered Plans invest,
and/or (iii) other Account(s) holding ``plan assets'' subject to the
Act \1\ and the other side of such transaction involves one or more
plan(s) or other customer(s) not covered by the Act (the Non-ERISA
Plan(s) or Non-ERISA Customer(s), as defined in Condition 12(d)),
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\1\ See 29 CFR 2510.3-101 for the Department's definition of
``plan assets'' relating to plan investments.
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(b) One Independent Fiduciary is appointed to represent the buying
account(s) (the Buying Account(s)), as defined in Condition 12(f), in a
subject transaction, where such transaction is between two (2) or more:
(i) ERISA-Covered Plans, (ii) Pooled Separate Accounts in which an
ERISA-Covered Plan or ERISA-Covered Plans invest, and/or (iii) other
Accounts holding ``plan assets'' subject to the Act, and the decision
to liquidate the Farmland Asset(s) or Entire Farmland Account is the
result of one or more ``triggering events,'' as described below. A
``triggering event'' will exist whenever:
(1) JHLIC or an Affiliate receives a direction from a Customer to
liquidate such Customer's Entire Farmland Account, and the decision to
liquidate such Entire Farmland Account is outside of the control of
JHLIC and its Affiliates; or
(2) JHLIC or an Affiliate receives a request by a Customer to
liquidate a specified Farmland Asset or Farmland Assets held in the
Customer's Account, and the decision to liquidate the Farmland Asset(s)
is outside of the control of JHLIC and its Affiliates; or
(3) a liquidation of all of the Farmland Assets held in a selling
account(s)(the Selling Account(s)), as defined in Condition 12(g), or
an Entire Farmland Account, or a particular Farmland Asset or Farmland
Assets held by such Account(s) is required under the terms of the
investment contract, insurance contract, or investment guidelines
[[Page 64645]]
governing the Account(s), and the decision to select any particular
Farmland Asset(s) to be sold or the decision to sell an Entire Farmland
Account is outside of the control of JHLIC and its Affiliates; and
(c) One Independent Fiduciary is appointed to represent the Buying
Account(s) and one Independent Fiduciary is appointed to represent the
Selling Account(s) involved in a subject transaction:
(1) Where such transaction is between two (2) or more: (i) ERISA-
Covered Plans, (ii) Pooled Separate Accounts in which an ERISA-Covered
Plan or ERISA-Covered Plans invest, and/or (iii) other Accounts holding
``plan assets'' subject to the Act, and there is no ``triggering
event,'' as described above in Condition 3(b), or
(2) Where such transaction is between two (2) or more: (i) ERISA-
Covered Plans, (ii) Pooled Separate Accounts in which an ERISA-Covered
Plan or ERISA-Covered Plans invest, and/or (iii) other Accounts holding
``plan assets'' subject to the Act, and one or more of the participants
in such transaction is a Pooled Separate Account and/or other Account
holding ``plan assets'' subject to the Act in which a John Hancock plan
(the Hancock Plan(s)), as defined in Condition 12(m) participates.
4. With respect to each transaction requiring the participation of
an Independent Fiduciary, as described in Condition 3, the purchase and
sale of a Farmland Asset or Farmland Assets or an Entire Farmland
Account shall not be consummated, unless the Independent Fiduciary
determines that the transaction, including the price to be paid or
received for each Farmland Asset or Entire Farmland Account, would be
in the best interest of the particular Account(s) involved based on the
investment policies and objectives of such Account(s).
5. Each Account which buys or sells a particular Farmland Asset or
Farmland Assets or Entire Farmland Account pays no more than or
receives no less than the fair market value of each Farmland Asset or
Entire Farmland Account at the time of the transaction. For a Farmland
Asset, fair market value shall be determined by a qualified,
independent real estate appraiser experienced with the valuation of
farmland properties similar to the type involved in the transaction,
and may include customary closing adjustments, as described in
Condition 12(o).
For an Entire Farmland Account, fair market value shall be
determined by a qualified, independent entity experienced in the
auditing and valuation of farmland accounts similar to the type
involved in the transaction and the valuation of assets or liabilities
other than Farmland Assets, including but not limited to assets such as
short-term investments or accounts receivable from prior crop sales or
leases, and liabilities such as investment or property management fees
payable or property taxes payable, and may include customary closing
adjustments, as described in Condition 12(o).
6. Each purchase or sale of a Farmland Asset or Farmland Assets or
Entire Farmland Account between Accounts is a one-time cash
transaction. A Buying Account may assume liabilities associated with an
Entire Farmland Account, subject to valuation procedures described in
Condition 5, above.
7. Each Account involved in the purchase or sale of a Farmland
Asset or Farmland Assets or Entire Farmland Account pays no real estate
commissions or brokerage fees relating to the transaction.
8. JHLIC or an Affiliate acts as a discretionary investment manager
for the assets of the Account(s) involved in each transaction, provided
that this condition will not fail to have been satisfied solely because
the Customer retains the right to veto or approve the purchase or sale
of a Farmland Asset or Farmland Assets or Entire Farmland Account.
9. An Account may not participate in a subject transaction, if the
assets of any Hancock Plan or Hancock Plans in the Account exceed 20
percent (20%) of the total assets of the Account.
10. No purchase or sale transaction shall be designed to benefit
the interests of one particular Account over another.
11. The general accounts (the General Accounts) of both JHLIC and
John Hancock Variable Life Insurance Company (JHVLIC) shall not
participate, directly or indirectly, in the subject transactions;
12. For purposes of this exemption:
(a) the term, ``Account(s),'' means a separate account or separate
accounts (the Separate Account(s)), as defined in Condition 12(i),
including Non-Pooled Separate Account(s), or Pooled Separate
Account(s), as well as holding entities (Holding Entities), such as a
partnership, corporation, or trust for which JHLIC or an Affiliate
serves as general partner, investment manager, or adviser and include
entities established or maintained by JHLIC, and limited liability
companies established by pension plan investors;
(b) the term, ``Farmland Asset(s),'' means a fee simple in farmland
(and appurtenant rights), an interest in related equipment, a farmland
lease, farm improvements, contractual agreements with respect to the
production and harvesting of farm products, such as crop quotas, crop
receivables, or delivery contracts, stock in farm cooperatives, and
direct or indirect interest in entities holding such assets. With
respect to any farmland lease: (i) the underlying fee simple must be
owned by a person other than JHLIC or an Affiliate or any Account at
the time of sale; and (ii) the entire lease originally acquired by the
Selling Account must be sold to the Buying Account;
(c) the term, ``ERISA-Covered Plan(s),'' means an employee benefit
plan or plans as defined under section 3(3) of the Act and not excluded
from coverage under section 4 of the Act;
(d) the terms, ``Non-ERISA Plans'' or ``Non-ERISA Customers,'' mean
entities or investors not covered by the provisions of Title I of the
Act, such as a governmental plan, a university endowment fund, or other
institutional investors, whose assets are managed in an Account for
which JHLIC or an Affiliate acts as investment manager;
(e) the term, ``Affiliate(s),'' means any person(s) directly or
indirectly through one or more intermediaries, controlling, controlled
by, or under common control with such person;
(f) the term, ``Buying Account(s),'' means the Account(s) that
seeks to purchase a Farmland Asset or Farmland Assets or an Entire
Farmland Account from another Account;
(g) the term, ``Selling Account(s),'' means the Account(s) that
seeks to sell a Farmland Asset or Farmland Assets or an Entire Farmland
Account to another Account;
(h) the term, ``Independent Fiduciary,'' means a person or entity
with authority to both review the appropriateness of a subject
transaction for an Account, that is considered to hold ``plan assets''
subject to the fiduciary responsibility provisions of the Act, based on
the investment policy established for that Account, and to negotiate
the terms of the transaction, including the price to be paid for the
Farmland Asset, the Farmland Assets, or the Entire Farmland Account. An
individual or firm selected to serve as an Independent Fiduciary shall
meet the following criteria:
(1) The individual or firm shall have no current employment
relationship with JHLIC or an Affiliate, although a prior employment
relationship would not disqualify the individual or firm;
(2) No individual or firm shall serve as an Independent Fiduciary
during any year in which gross receipts received from business with
JHLIC and its
[[Page 64646]]
Affiliates for that year exceed five (5) percent of such individual's
or firm's gross receipts from all sources for the prior year;
(3) The individual or firm must be an expert with respect to
farmland valuations;
(4) The individual or firm must have the ability to access (itself
or through persons engaged by it) appropriate farmland sales comparison
data and make appropriate adjustments to the subject property,
properties, or Account; and
(5) The individual or firm must not have a criminal record
involving fraud, fiduciary standards, or securities laws violations.
(i) the term, ``Separate Account(s),'' means a segregated asset
Account or Accounts which receive premiums or contributions from
Customers, including employee benefit plans subject to the Act, in
connection with group annuity contracts and funding agreements, with
investments held in the name of JHLIC, but where the value of the
contract or agreement to the Customer (contract holder) fluctuates with
the value of the investment associated with such Account;
(j) the terms, ``Non-Pooled Separate Account(s)'' or ``Non-Pooled
Account(s),'' mean a Separate Account or Separate Accounts established
to back a single contract issued to one Customer, which may be an
employee benefit plan subject to the Act;
(k) the terms, ``Pooled Separate Account(s),'' or ``Pooled
Account(s),'' mean a Separate Account or Separate Accounts established
to back a group of substantially identical contracts issued to a number
of unrelated Customers, including employee benefit plans subject to the
Act;
(l) the term, ``Customer(s),'' means a person or persons or entity
or entities that act as the authorized representative for the investor
in an Account involved in a proposed purchase or sale of Farmland
Assets or an Entire Farmland Account, that is independent of JHLIC and
its Affiliates, provided, however, that for any Hancock Plan, as
defined in Condition 12(m), below, a ``Customer'' shall mean the Plan
Investment Advisory Committee of JHLIC;
(m) the term, ``Hancock Plan(s),'' means an employee benefit plan
or employee benefit plans sponsored by JHLIC or an Affiliate which
invest(s) in an Account;
(n) the term, ``Entire Farmland Account(s),'' means all the assets
and liabilities of an Account or Accounts, as defined in Condition
12(a), including but not limited to the Farmland Assets in such Account
or Accounts; and
(o) ``customary closing adjustments'' means adjustments that may
arise where agricultural land bearing crops is sold prior to harvest
and may involve an agreement between the buyer and seller that either:
(1) The buyer reimburse the seller for documented expenses incurred
during the growing period in the cultivation of such crops, up to the
date of closing; or (2) the buyer retain a certain amount of the crops
and the seller receive the proceeds for any crops in excess of the
amount retained by the buyer.
Summary of Facts and Representations
1. The applicant for the exemption is JHLIC, acting on behalf of
itself and on behalf of HNRG. HNRG, which was established in 1995, is a
wholly-owned indirect subsidiary of JHLIC. JHLIC is a wholly-owned
subsidiary of John Hancock Financial Services, Inc.
2. JHLIC offers group annuity contracts and funding agreements to
Customers (contract holders), including employee pension benefit plans
subject to the Act. JHLIC, through HNRG, manages farmland for
Customers. HNRG currently manages over 115,000 acres of farmland in the
United States valued at approximately $363 million, and 460 acres of
farmland in Australia valued at approximately $3.8 million.
3. Customers, including employee pension benefit plans, may invest
directly or indirectly in farmland through Pooled and Non-Pooled
Separate Accounts available under JHLIC group annuity contracts and
funding agreements.\2\
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\2\ It is represented that these contracts and agreements
provide that, in accordance with a contract holder's direction, the
premiums or contributions received from the contract holder will be
allocated internally on the books of JHLIC to segregated asset
account(s)(Separate Account(s)). The Investments of a Separate
Account are held in the name of JHLIC, but the value of the contract
or agreement to the contract holder fluctuates with the value of the
investments allocated to the Separate Account. The direct expenses
of managing the investments and JHLIC's fees are charged against the
value of the Separate Account.
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The Pooled Separate Accounts and Non-Pooled Separate Accounts that
invest in farmland are known as farmland separate accounts (the
Farmland Separate Account(s)). JHLIC has established a total of five
(5) such Farmland Separate Accounts. Five contract holders participate
in these Farmland Separate Accounts. ERISA-Covered Plans, including
Hancock Plans, and Non-ERISA Plans are contract holders of these
Farmland Separate Accounts.
Over 23,000 acres of farmland are allocated to the Farmland
Separate Accounts which had a value of over $81 million, as of
September 30, 2000. JHLIC is the sole legal owner of the assets of each
Farmland Separate Account. Assets invested in the Farmland Separate
Accounts are managed by JHLIC and HNRG in accordance with the
investment policies established for these accounts. The investment
policy for each Non-Pooled Account is established jointly by JHLIC and
the contract holder. For each Pooled Account, the investment policy is
established by JHLIC and adopted by each contract holder when choosing
to participate in the Pooled Account.
Under the applicable contract or agreement, JHLIC or, as described
below, HNRG has the right to control, manage, and administer the
Farmland Separate Account in accordance with the investment policy
established for the Farmland Separate Account. The management
responsibilities of JHLIC under the Farmland Separate Accounts are
performed by HNRG. HNRG is responsible for all decisions regarding the
acquisition and disposition of farmland properties held in the Farmland
Separate Accounts, although such decisions must be reviewed and
approved by JHLIC's internal investment committees. In addition, HNRG
has responsibility for the ongoing management of JHLIC's farmland
properties, including site preparation and planting, road building and
construction, leasing to tenants, maintenance, acquisition of
insurance, and payment of taxes.
4. Customers desirous of obtaining JHLIC's farmland management
expertise typically invest in the Farmland Separate Accounts. However,
Customers and the Farmland Separate Accounts may also invest directly
in Holding Entities that themselves own farmland, directly or
indirectly. These Holding Entities include corporations, partnerships,
or trusts. It is represented that these Holding Entities currently
include entities established or maintained by JHLIC (such as separate
accounts), and limited liability companies established by pension plan
investors. That is, there are no unaffiliated non-plan investors
currently invested in the Holding Entities. As of June 30, 2003, JHLIC
and its Affiliates owned interests in farmland through such Holding
Entities totaling over $100 million in value, including investments
valued at $947,719 in JHLIC's Australian farmland investment entities.
HNRG is usually appointed the investment manager of the Holding
Entity, or HNRG (or an employee) may be appointed an officer of the
entity that holds the property. HNRG's
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management responsibilities are exercised in accordance with investment
guidelines contained in the Holding Entity's governing agreements. HNRG
may have full investment discretion with respect to the management of
the Holding Entity's farmland, or it may be required to seek Customer
approval for acquisition and disposition decisions.
5. The General Accounts of both JHLIC and JHVLIC also invest in
farmland. Assets held in the General Accounts are used to support
various lines of insurance business. JHLIC and JHVLIC each have the
right to control, manage, and administer their respective General
Accounts, including the sole discretion to select and dispose of
investments held by the General Accounts. As of September 30, 2000, the
General Accounts held over 60,000 acres of U.S. Farmland Assets, with a
value of over $185 million. In addition, the General Accounts' holdings
in Australian farmland investment entities had a value of approximately
$1.9 million. Although the applicant initially requested relief for the
participation of the General Account in the subject transactions, in a
letter, dated, May 16, 2003, the applicant amended the requested
exemption to eliminate the General Account from the Accounts that are
eligible to participate in the transactions covered by the proposed
exemption.
6. The types of farmland held by the Farmland Separate Accounts and
the Holding Entities are diversified by geography and by crop type.
Farmland Assets include direct or indirect: \3\ (a) Interests in real
property that produces row crops or permanent crops including, but not
limited to, orchards, vineyards, and citrus groves, and (b) other
interests, such as interests in equipment related to the production or
harvesting of crops, farmland leases, farm improvements, contractual
agreements with respect to the production and harvesting of farm
products (such as crop quotas, crop receivables, or delivery
contracts), and stock in farm cooperatives. It is represented that with
respect to any farmland lease, the underlying fee simple will be owned
by a person other than JHLIC, its Affiliates, any Farmland Separate
Accounts, General Accounts, or Holding Entities at the time of any
covered transaction, and the entire lease will be sold in any covered
transaction. As a practical matter, the Farmland Assets are generally
illiquid investments, considered by JHLIC, HNRG, and their Customers to
be long-term investments.
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\3\ Occasionally, a Farmland Separate Account may own farmland
real property or other Farmland Assets indirectly through an
interest in an entity, such as a corporation, that owns the property
or assets.
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7. It is represented that from time to time, it may be appropriate
to liquidate a Farmland Asset held in a Farmland Separate Account, even
though the Farmland Asset remains an attractive investment. For
example, a Farmland Separate Account's investments may have so
increased in value that the farmland-related portion of such Account's
aggregate portfolio exceeds the Customer's current asset allocation
guidelines for that investment class. In addition, a Customer may
request that JHLIC liquidate a portion of its Farmland Assets in order
to recognize some of the portfolio's gains, to raise cash, or for other
reasons unrelated to investment performance, even though the particular
Farmland Asset remains an attractive investment. Also, JHLIC or HNRG
may conclude that a particular Farmland Asset, though individually an
attractive investment, is no longer appropriate, in light of the
composition of the Account, its liquidity needs, and other available
investment opportunities. In these and other situations in which a
Farmland Asset might be sold, the Farmland Asset chosen for liquidation
could be an appropriate investment for another Farmland Separate
Account.
The applicant represents that it does not expect a Farmland Asset
to be broken into separate parcels for investment by more than one
Customer in most cases. It is represented that the Hancock Agricultural
Investment Group, Inc. (HAIG),\4\ will evaluate Farmland Assets to
determine whether they could be broken into smaller parcels to satisfy
a particular Farmland Account's portfolio needs but as noted above, the
applicant expects that such a separation would be suitable rarely, if
ever.
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\4\ HAIG is the agricultural investment subdivision of HNRG.
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In some situations, a Farmland Separate Account may decide to sell
a group of Farmland Assets and would sell those assets to a single
purchaser, if possible. Where a group of Farmland Assets is sold by a
Farmland Separate Account to another Farmland Separate Account, the
sale will be treated as a single transaction.
On occasion, an Entire Farmland Account might be sold to a Farmland
Separate Account. In that case, Farmland Assets and other assets of the
Account, such as short term investments, would be transferred to the
buyer, as well as the liabilities associated with the Entire Farmland
Account. These other assets might include short-term investments or
accounts receivable from prior period crop sales or leases. Liabilities
might include investment or property management fees payable or
property taxes payable. In the event that an Entire Farmland Account
could not be sold to a single buyer, it is represented that JHLIC will
separate the Farmland Assets held in such Entire Farmland Account and
sell these Farmland Assets individually or in groups of multiple
Farmland Assets.
8. When more than one Farmland Separate Account is interested in
purchasing a particular Farmland Asset or Farmland Assets, investments
are allocated by HAIG, based on its Investment Selection and Allocation
Policy (the Allocation Policy). Pursuant to the Allocation Policy, HAIG
reviews the investment policies and guidelines for each potential
Farmland Separate Account investor to determine whether the available
Farmland Asset or Farmland Assets is/are suitable for allocation to
that Farmland Separate Account. Suitability is determined based on the
anticipated effect on the Farmland Separate Account's crop type and
geographic diversification, cash flow and capital appreciation goals,
current income targets, and the Farmland Separate Account's property
size limitations. In addition to the suitability analysis, HAIG will
perform financial analyses that project and measure future portfolio
performance both with and without the proposed Farmland Asset(s) as
part of a Farmland Account's portfolio. In most situations, the
characteristics of Farmland Assets and Farmland Separate Accounts will
be sufficiently varied, such that a Farmland Asset will not be suitable
for multiple Farmland Separate Accounts seeking investment when such
asset is available.
In the event that two or more Farmland Separate Accounts have
objectives and constraints that are sufficiently similar, HAIG
implements its investment queue procedures. The investment queue is
based on the length of time that funds of a Farmland Separate Account
have been waiting for investment in a Farmland Asset or Farmland
Assets. Funds that have been committed to a farmland investment
program, but are not yet allocated, receive priority in the
chronological order each Farmland Separate Account committed to the
farmland investment program. It is represented that when an Entire
Farmland Account is to be sold and more than one investor holds assets
awaiting investment in Farmland
[[Page 64648]]
Assets, the sale of the Entire Farmland Account will follow the same
investment queue procedures, as described above for individual Farmland
Assets.
The applicant maintains that the Allocation Policy is objective,
because there is an established and easily administered rule that
determines the priority among competing Farmland Separate Accounts. The
Farmland Separate Account with the oldest outstanding commitment is
allocated the investment. The applicant further maintains that this
approach is also fair. In this regard, the applicant points out that
unlike other types of investments, the identification of appropriate
real estate investments, including farmland, takes time. Accordingly,
the applicant maintains that it is appropriate and fair to allocate
opportunities to those Farmland Separate Accounts that have the longest
outstanding commitments to JHLIC or HNRG awaiting investment. In this
regard, customers know that their commitments will be filled in full
before new competing requests are accommodated.
9. Assets held in the Farmland Separate Accounts are considered
assets of the plans participating in such Farmland Separate Accounts,
pursuant to 29 CFR 2510.3-101(h)(1)(iii) of the Department's
regulations. In addition, the assets of certain Holding Entities
through which JHLIC's Customers hold Farmland Assets may also
constitute plan assets if the Customer is an ERISA-Covered Plan and the
Holding Entity is a pass-through entity, pursuant to 29 CFR 2510.3-
101(a)(2) of the Department's regulations.
As investment managers for the Farmland Separate Accounts, JHLIC
and HNRG are both fiduciaries and parties in interest to ERISA-Covered
Plans participating in the Farmland Separate Accounts, pursuant to
section 3(14)(A), and (B) of the Act. As a discretionary manager of the
Farmland Assets held by the Holding Entities that are pass-through
entities, HNRG is a fiduciary and party in interest with respect to any
ERISA-Covered Plans that invest in these Holding Entities.
10. The transfer of a Farmland Asset or Farmland Assets or an
Entire Farmland Account from one Farmland Separate Account to another
could constitute a violation of section 406(b)(2) of the Act, if one of
the Accounts holds plan assets. Section 406(b)(2) of the Act provides
that a plan fiduciary shall not in his individual or in any other
capacity act in any transaction involving the plan on behalf of a party
(or represent a party) whose interests are adverse to the interests of
the plan or the interests of its participants or beneficiaries. Because
JHLIC or its Affiliate serves as investment manager to both the Buying
and Selling Account, it could be viewed as representing adverse parties
in a transaction involving a plan. Accordingly, the applicant requests
an exemption from the prohibitions of section 406(b)(2) of the Act to
cover the subject transactions.
11. The applicant maintains that the proposed exemption is
administratively feasible, because each transaction involving an ERISA-
Covered Plan can be readily identified and audited. The proposed
exemption would not require continued monitoring or other involvement
on behalf of the Department of Labor or the Internal Revenue Service.
12. The applicant represents that the proposed exemption is
protective of the rights of participants and beneficiaries of ERISA-
Covered Plans that are Customers, because decisions regarding which
Farmland Asset or Farmland Assets or Entire Farmland Account to be
transferred and the timing of the transfers will be made by JHLIC and
its Affiliates in conformance with each Customer's investment
guidelines, which have been agreed upon by the Customer. In addition,
if JHLIC or HNRG determines that it should liquidate a Farmland Asset
or Farmland Assets held in an Account or an Entire Farmland Account or
if as a result of certain ``triggering events,'' described in Condition
3 of this proposed exemption, such liquidation must occur and JHLIC
concludes that the particular Farmland Asset, Farmland Assets, or
Entire Farmland Account to be sold is an appropriate investment for the
portfolio of another Farmland Separate Account, JHLIC will engage an
Independent Fiduciary to represent the interests of any ERISA-Covered
Plans, as set forth in Condition 3. The individual or firm selected to
serve as an Independent Fiduciary; must satisfy the criteria, as set
forth in Condition 12(d) of this proposed exemption.
13. For each transaction requiring an Independent Fiduciary, the
purchase or sale of a Farmland Asset or Farmland Assets or Entire
Farmland Account may not be completed unless the Independent Fiduciary
determines that the transaction, including the purchase price, would be
in the best interest of the particular Account(s) involved based on
investment policies and procedures of the Account(s).
Where a transaction between ERISA-Covered Plans and a triggering
event has occurred, the fee for the services of the Independent
Fiduciary will be charged as an acquisition expense to the Buying
Account(s). In a transaction other than the one described in the above
sentence, each side would pay the fee for the services of the
Independent Fiduciary, to the extent that an Independent Fiduciary is
required by the terms of the exemption. For example, the Buying Account
would pay for an Independent Fiduciary, as required under the exemption
to represent the interest of the Buying Account, and the Selling
Account would pay for an Independent Fiduciary, as required under the
exemption to represent the interest of the Selling Account. In a
situation where more than one account is on the buying or on the
selling side of the transaction, it is expected that there will not be
more than one Independent Fiduciary required to represent the accounts
on a single side of the transaction. In that event, the costs of the
fees for the services of the Independent Fiduciary would be shared, as
negotiated by the accounts whose interests the Independent Fiduciary
represents in the transaction.
14. It is represented that the proposed exemption provides
sufficient safeguards for the protection of the participants and
beneficiaries of the ERISA-Covered Plans. In this regard, participation
in the proposed transactions by ERISA-Covered Plans is limited to plans
having total assets in excess of $100 million. The minimum asset
requirements will help ensure that the fiduciaries reviewing these
transactions are sophisticated investors familiar with complex
investments.
15. Further, the applicant represents that each Account that buys
or sells a Farmland Asset or Farmland Assets or Entire Farmland Account
will pay no more and receive no less than fair market value of the
Farmland Asset or Farmland Assets or Entire Farmland Account at that
time of the transaction. For a Farmland Asset, fair market value shall
be determined by a qualified, independent real estate appraiser
experienced with the valuation of farmland properties similar to the
type involved in the transaction, and may include customary closing
adjustments. It is represented that customary closing adjustments may
arise where agricultural land bearing crops is sold prior to harvest
and may involve an agreement between the buyer and seller that either:
(1) The buyer reimburse the seller for documented expenses incurred
during the growing period in the cultivation of such crops, up to the
date of closing; or (2) the buyer retain a certain amount of the crops
and the seller receive the proceeds for any crops
[[Page 64649]]
in excess of the amount retained by the buyer.
For an Entire Farmland Account, it is represented that fair market
value shall be determined by a qualified, independent entity
experienced in the auditing and valuation of farmland accounts similar
to the type involved in the transaction and the valuation of assets or
liabilities other than Farmland Assets, including but not limited to
assets such as short-term investments or accounts receivable from prior
crop sales or leases, and liabilities such as investment or property
management fees payable or property taxes payable, and may include
customary closing adjustments. It is represented that the valuation of
an Entire Farmland Account would be similar to valuation of a business
or going concern in any transaction. If the entity that performs the
valuation of the Entire Farmland Account is not a qualified real estate
appraiser, then it is represented that such a qualified real estate
appraiser will be engaged to value the Farmland Assets included in the
Entire Farmland Account.
16. JHLIC will provide a notice to each Customer investing in the
Accounts participating in the purchase or sale of a Farmland Asset or
Farmland Assets or Entire Farmland Account. The notice will be provided
at least 30 days before entering a subject transaction, and will
include information regarding the Farmland Asset(s) or Entire Farmland
Account involved and the proposed terms of the transaction, including
the approved purchase price and how the transaction would meet the
goals and investment policies of each Customer. If there is any change
in the purchase price, notice of such change in the purchase price will
be provided to the Customer at least 30 days prior to the consummation
of the transaction.
17. An Account will not participate in a subject transaction, if
the assets of any Hancock Plan or Hancock Plans in the Account exceed
20 percent (20%) of the total assets of the Account.
18. The applicant maintains that the proposed exemption is in the
interest of JHLIC's plan Customers and their participants and
beneficiaries because it will provide those Customers with attractive
and appropriate investment opportunities that might not otherwise be
available to them. In this regard, it is represented that transfers of
a Farmland Asset, Farmland Assets, or an Entire Farmland Account
between Farmland Separate Accounts, including Accounts in which a
Hancock Plan invests, allow the Buying Accounts to invest more quickly
and to invest in Farmland Assets that might not otherwise be available
to them. JHLIC believes that investors commit to establishing a
farmland investment portfolio because they have identified a current
need for such an asset category. Once a Customer has committed to a
farmland program, it is important to invest the funds as rapidly as is
prudent. As attractive farm properties are relatively scarce, allowing
a transfer of farm parcels in accordance with this proposed exemption
would provide an opportunity for the Buying Accounts to invest funds
more rapidly than would be possible if the purchase involved a seller
having no relationship to JHLIC.
Further, both the Selling and Buying Accounts will incur lower
transaction or start-up costs as a result of the proposed exemption. In
this regard, it is represented that a transfer of legal ownership of
property is not necessary when the transfer is between Farmland
Separate Accounts maintained by the same insurer. As JHLIC has legal
title to all assets allocated to its Separate Accounts, and generally
may reallocate these assets among such Accounts without a change in
legal title, significant transaction costs can be avoided. In addition,
real estate sales commissions and brokerage fees, which can amount to
over half the entire cost of a transaction, will be avoided in all
cases.
Furthermore, because JHLIC or HNRG is the manager of both the
Selling and Buying Account, more information about the property would
be available to the Buying Account than would be if both Accounts were
not managed by JHLIC or HNRG. This significantly reduces the risk to
the Buying Account. In addition, because JHLIC or HNRG is already
familiar with the property, the Buying Account would avoid certain
``due diligence'' expenses normally associated with the purchase of a
new property, such as the costs of well testing, soil and root
analysis, and environmental testing.
19. The applicant maintains that denial of this proposed exemption
would prevent the transfer of properties from one Farmland Separate
Account to another and would require instead that a property be
liquidated and sold to an unrelated third party. The Buying Account
would therefore be deprived of attractive and appropriate investment
opportunities, when such opportunities are scarce. In addition, the
Selling and Buying Accounts would incur higher transaction or start-up
costs if they were each required to enter into transactions with
parties whose assets are not managed by JHLIC or HNRG.
20. In summary, the applicant represents that the proposed
transactions satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
a. The minimum asset requirement for ERISA-Covered Plan
participation in the proposed transactions will ensure that the
fiduciaries reviewing such transactions are sophisticated investors
familiar with complex investments;
b. Prior to entering a subject transaction, each affected Customer
will receive disclosures regarding the Farmland Asset(s) or Entire
Farmland Account involved in the proposed transaction and the terms of
such transaction;
c. Any change in the terms of a proposed transaction must be
disclosed to the affected Customer at least 30 days prior to the
consummation of such transaction;
d. An Independent Fiduciary will be appointed by JHLIC or an
Affiliate to review and approve the proposed transactions, as set forth
in Condition 3;
e. In each transaction requiring the participation of an
Independent Fiduciary, the purchase and sale of a Farmland Asset or
Farmland Assets or an Entire Farmland Account will not be consummated,
unless the Independent Fiduciary determines that the transaction is in
the best interest of the particular Account involved based on the
investment policies and objectives of such Account;
f. Each Account which buys or sells a particular Farmland Asset or
Farmland Assets or Entire Farmland Account will pay no more than or
receive no less than the fair market value of the Farmland Asset(s) or
Entire Farmland Account at the time of the transaction;
g. Each purchase or sale of a Farmland Asset or Farmland Assets or
Entire Farmland Account between Accounts will be a one-time cash
transaction;
h. Each Account involved in the purchase or sale of a Farmland
Asset or Farmland Assets or Entire Farmland Account will pay no real
estate commissions or brokerage fees relating to the transaction;
i. An Account will not participate in a proposed transaction, if
the assets of any Hancock Plan or Hancock Plans in the Account exceed
20 percent (20%) of the total assets of the Account;
j. No purchase or sale transaction will be designed to benefit the
interests of one particular Account over another; and
k. The General Accounts of both JHLIC and JHVLIC will not
participate, directly or indirectly, in the subject transactions.
[[Page 64650]]
Notice to Interested Persons
It is represented that those persons who may be interested in the
publication in the Federal Register of the Notice of Proposed Exemption
(the Notice) include all ERISA-Covered Plans currently participating in
any Farmland Separate Account and those ERISA-Covered Plans
participating in any Holding Entity whose assets are managed by JHLIC
or HNRG.
JHLIC proposes to provide notification of the publication of the
Notice to the plan trustee or other fiduciary of all ERISA-Covered
Plans which currently participate in any Farmland Separate Account and/
or in any Holding Entity whose assets are managed by JHLIC or HNRG by
first class mail or overnight delivery within fifteen (15) calendar
days of the date of publication of the Notice in the Federal Register.
Such notification will contain a copy of the Notice, as it appears in
the Federal Register on the date of publication, plus a copy of the
supplemental statement (the Supplemental Statement), as required,
pursuant to 29 CFR 2570.43(b)(2) of the Department's regulations. The
Supplemental Statement will include a statement informing the plan
trustee or fiduciary or other interested persons of their right, to
comment and/or request a hearing on the proposed exemption.
The applicant also represents that for ERISA-Covered Plans who
invest after the date of the publication of the Notice and before the
publication in the Federal Register of the final exemption, if granted,
JHLIC will provide a copy of the Notice and a copy of the Supplemental
Statement via U.S. first class mail or hand delivery prior to such
plan's initial investment in a Farmland Separate Account and/or Holding
Entity. In addition, the applicant represents that a copy of the final
exemption, if granted, will be provided by hand delivery or U.S. first
class mail to the independent fiduciary of each ERISA-Covered Plan
prior to any such plan's initial investment in a Farmland Separate
Account.
Written comments and/or requests for a hearing on the proposed
exemption must be received by the Department on or before 45 days from
the date following publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
United States Steel and Carnegie Pension Fund (UCF or the Applicant),
Located in New York, NY
[Application No. D-11191]
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 (or ERISA) 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).\5\
---------------------------------------------------------------------------
\5\ For purposes of this proposed exemption, reference to Title
I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
---------------------------------------------------------------------------
Section I. Covered Transactions
(A) 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 in kind
contribution of certain timber rights (the Timber Rights), under two
timber purchase and cutting agreements (the Timber Rights Agreements)
to The United States Steel Corporation Plan for Employee Pension
Benefits (Revision of 2003) (the Plan) by the United Steel Corporation
(US Steel), the Plan sponsor and a party in interest with respect to
the Plan.
(B) 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 following
ancillary transactions between the Plan and U.S. Steel arising from
certain rights retained by U.S. Steel related to the timberland (the
Property) on which the Timber Rights are based:
(1) The receipt of compensation by the Plan from U.S. Steel under
the Timber Rights Agreements in the event that either (a) U.S. Steel
exercises its right to early termination of an Agreement, which
requires a termination payment to the Plan at a premium over the fair
market value of the Timber Rights as determined by a qualified,
independent appraiser, which has been selected by the independent
fiduciary (the Independent Fiduciary); or (b) U.S. Steel owes
compensation to the Plan for mineral activities that interfere with the
Plan's use of the land for timber purposes.
(2) The guarantee by U.S. Steel to make the Plan whole in the event
of a decline in value of the Timber Rights after five years.
(3) Any ongoing obligation incurred by U.S. Steel to maintain the
Property in a fashion that does not unreasonably interfere with the
Plan's use thereof.
(4) The indemnity given by U.S. Steel to the Plan for any
environmental claims arising out of activities engaged in prior to the
execution and closing of the proposed Timber Rights contribution.
Section II. General Conditions
This proposed exemption is conditioned upon adherence to the
material facts and representations described herein and upon
satisfaction of the following general conditions:
(a) A qualified independent fiduciary (the Independent Fiduciary)
acting on behalf of the Plan, represents the Plan's interests for all
purposes with respect to the Timber Rights contribution, and determines
prior to entering into any of the transactions described herein, that
each such transaction, including the Timber Rights contribution, is in
the interest of the Plan.
(b) The Independent Fiduciary negotiates and approves the terms of
any of the transactions between the Plan and U.S. Steel that relate to
the Timber Rights.
(c) The Independent Fiduciary manages the holding, disposition, and
assignment of the Timber Rights and takes whatever actions it deems
necessary to protect the rights of the Plans with respect to the Timber
Rights.
(d) The terms of any transactions between the Plan and U.S. Steel
are no less favorable to the Plan than terms negotiated at arm's length
under similar circumstances between unrelated third parties.
(e) The Independent Fiduciary determines the fair market value of
the Timber Rights contributed to the Plan on the date of such
contribution. In determining the fair market value of the Timber Rights
Contribution, the Independent Fiduciary obtains an updated appraisal
from a qualified, independent appraiser selected by the Independent
Fiduciary, and ensures that the appraisal is consistent with sound
principles of valuation.
(f) The fair market value of the Timber Rights does not exceed 5%
of the Plan's total assets at the time of such contribution.
(g) The Plan pays no fees or commissions in connection with the
Timber Rights contribution. (This condition does not preclude the Plan
from paying the Independent Fiduciary's ongoing management fees once
the contribution has been
[[Page 64651]]
approved and accepted. It also does not restrict the Plan from paying
the due diligence costs connected with the acquisition of the Property,
such as the expenses for a title search, appraisal and environmental
review.)
(h) Five years from the date of the Timber Rights contribution,
U.S. Steel contributes, to the Plan, an amount in cash calculated as
follows:
(1) The fair market value of the Timber Rights as of the date of
the contribution, less
(2) The sum of (i) the fair market value of the Timber Rights held
by the Plan as of the date five years from the date of the
contribution, as determined by a qualified, independent appraiser,
which has been selected by the Independent Fiduciary, plus (ii) the net
cash distributed to the Plan LLC or the Plan relating to all or any
part of the Timber Rights (and/or the related timber) prior to such
date; provided, that if a contribution is due and if, for the taxable
year of U.S. Steel in which the contribution is to be made, such
contribution (i) is not deductible under section 404(a)(1) of the Code
or (ii) results in the imposition of an excise tax under section 4972
of the Code, such contribution will not be made until the next taxable
year of U.S. Steel for which the contribution is deductible under
section 404(a)(1) of the Code and does not result in an excise tax
under section 4972 of the Code.
(i) U.S. Steel indemnifies the Plan with respect to all liability
for hazardous substances released on the Property prior to the
execution and closing of the Timber Rights contribution.
(j) The Plan retains the right to sell or assign, in whole or in
part, any of its Timber Rights interests to any third party purchaser.
Section III. Definitions
(a) The term ``Independent Fiduciary'' means a fiduciary who is:
(1) independent of and unrelated to U.S. Steel or its affiliates, and
(2) appointed to act on behalf of the Plan for purposes related to (i)
the in kind contribution of the Timber Rights by U.S. Steel to the Plan
and (ii) other transactions between the Plan and U.S. Steel related to
the Property on which the Timber Rights are based. For purposes of this
proposed exemption, a fiduciary will not be deemed to be independent of
and unrelated to U.S. Steel if: (1) Such fiduciary directly or
indirectly controls, is controlled by or is under common control with
U.S. Steel, (2) such fiduciary directly or indirectly receives any
compensation or other consideration in connection with any transaction
described in this proposed exemption; except that an Independent
Fiduciary may receive compensation for acting as an Independent
Fiduciary from U.S. Steel 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) the annual gross revenue
received by such fiduciary, during any year of its engagement, from
U.S. Steel and its affiliates exceeds 5% of the Independent Fiduciary's
annual gross revenue from all sources for its prior 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 of 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.
Summary of Facts and Representations
1. UCF is a Pennsylvania non-stock membership corporation created
in 1914 to manage the pension plan of the United States Steel
Corporation (predecessor to the current U.S. Steel) and an endowment
fund created by Andrew Carnegie for the benefit of the company's
employees. Despite its name, UCF is not itself a pension fund but
rather an entity that manages pension funds. Its principal office is
located in New York, New York. UCF currently serves as the plan
administrator and/or trustee of several employee benefit plans
sponsored by U.S. Steel and by U.S. Steel affiliates, as well as
certain former affiliates of U.S. Steel. It is registered as an
investment adviser with the Securities and Exchange Commission under
the Investment Advisers Act of 1940.
As a non-stock membership corporation, UCF has no shareholders, but
rather is governed by its members (the Members). There are currently
eleven Members, with any vacancy in the Membership being filled by the
vote of the majority of the remaining Members. The Members also serve
as the directors of UCF and manage its affairs in that capacity. A
majority of the Members/directors of UCF are employees of U.S. Steel.
As of December 31, 2002, UCF managed a total of $8.5 billion in
assets. The majority of these assets, $7.2 billion, were held in two
trusts for pension plans for the employees of U.S. Steel (a union plan
and a non-union plan), which are in the process of being merged into a
single plan, the Plan. Another $465 million in assets was managed by
UCF for funds used to provide retired U.S. Steel employees with welfare
benefits. In addition, the category of investments managed by UCF
include domestic and international equities, fixed-income securities,
real estate, mortgage-backed loans and options. UCF makes investments
in accordance with its internal investment policies, guidelines and
procedures.
2. U.S. Steel is a publicly-traded company that owns and operates
the former steel business of USX Corporation, which after the spin-off,
effective January 1, 2002, is now known as ``Marathon Oil
Corporation''. U.S. Steel is the largest integrated steel producer in
North America, and through a subsidiary, the largest integrated flat-
rolled producer in Central Europe. U.S. Steel's domestic operations,
which employ over 20,000 people, are engaged in the production, sale
and transportation of steel mill products, coke, taconite pellets and
coal; the management of mineral resources; real estate development; and
engineering and consulting services. In 2002, U.S. Steel had total
revenues of $7.1 billion.
3. U.S. Steel has sponsored and maintained two defined benefit
plans for its employees and retirees. In this regard, the United States
Steel Corporation Plan for Employee Pension Benefits (Revision of 1950)
covers employees and retirees who are subject to collective bargaining
agreements, which include the United Steelworkers of America, as well
as a limited number of other groups of employees. The United States
Steel Corporation Plan for Non-Union Employee Pension Benefits
(Revision of 1998) generally covers management and other non-union
employees and retirees. Effective on or before November 30, 2003, the
two plans are to be merged, with the surviving plan being The United
States Steel Corporation Plan for Employee Pension Benefits (Revision
of 2003). As noted above, this plan is referred herein as ``the Plan''.
As of December 31, 2002, the combined assets for the two plans
totaled $7.222 billion. Also as of December 31, 2002, the plans had
approximately 120,500 participants and beneficiaries, including
actives, retirees and deferred vesteds. The Applicant represents that
the plans together were slightly overfunded, with a funding
[[Page 64652]]
ratio calculated in accordance with the Retirement Protection Act of
106%.
The Applicant further represents that preliminary funding
valuations indicate that the newly-merged Plan will not require
contributions for the 2003 or 2004 Plan years. U.S. Steel currently
anticipates annual funding requirements, broadly estimated, to be
approximately $90 million beginning in 2005. The actual amount will
depend upon various factors such as future asset performance, the level
of interest rates used to measure ERISA minimum funding levels, the
impacts of business acquisitions or sales, union-negotiated changes and
future government regulation. For example, the Applicant states that
the obligation could be much larger if the securities markets continue
to show negative returns and the interest rates required to be used for
funding calculations continue to decrease.
UCF is the Named Fiduciary and Plan Administrator of the Plan. It
also will serve as trustee of the Plan (the Trustee), with
responsibility for managing its assets. The assets of the Plan are
diversified across several asset classes. As of December 31, 2002, the
overall allocation of the $7.2 billion in assets of the two plans was
as follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Equities........................................................ 63%
Fixed Income.................................................... 31%
Real Estate..................................................... \6\ 2%
Cash............................................................ 4%
------------------------------------------------------------------------
\6\ This percentage does not include the Plan's investment in publicly-
traded real estate investment trusts (REITs), which the Plan
classifies as equity or fixed income depending on the nature of the
interest held. Equity interests in the REITs constitute 2.4% of the
Plan's assets, and fixed income interests in REITs constitute 2.7%.
4. In 1907, U.S. Steel's predecessor acquired approximately a
quarter million acres of timberland when it bought Tennessee Coal and
Iron. This land is generally situated around Birmingham, Alabama.
Nearly 100,000 acres were harvested in the late 1980's and early
1990's, of which approximately 30% were clearcut harvested and
replanted with pine. These areas will be available for harvest again
approximately 25-30 years after planting, with harvesting to begin
within the next ten years. Plantation thinning has begun on the older
pine plantations, a process in which deformed and smaller trees are
harvested, leaving the more valuable final crop trees to grow. More
limited harvesting has occurred over the last five to seven years, with
those areas also being planted with pine.
U.S. Steel currently is engaged in an effort to divest itself of
its ``non-strategic'' assets, i.e., those not related to its core steel
business. One of the assets it is expected to divest is the timberland.
However, because the timber is still in the early stages of growth, the
market price U.S. Steel would obtain in a sale to a third party would
be relatively low, as timber assets are assigned low values in early
growth years and only appreciate significantly as the timber matures
and can be harvested.
To retain, at least indirectly, the benefit of the future
appreciation of these assets, U.S. Steel would like to contribute
certain rights in the Property toward the funding of its employee
benefit plans. U.S. Steel announced this possibility in its earnings
release of January 28, 2003, in describing a series of business and
asset dispositions it has under consideration, and in its Form 10-K
annual report for the 2002 fiscal year that was filed with the
Securities and Exchange Commission in March 2003. After considering the
needs and current investments of its different plans, U.S. Steel
decided that because of the minimum funding requirements for defined
benefit plans, the recent increases in funding liabilities due to
falling interest rates, the recent declines in asset levels due to
negative stock market performance, and the need for asset
diversification, the Plan is in the best position to benefit from
receiving growing, cutting and harvesting rights in the timber assets.
5. Accordingly, UCF requests an administrative exemption from the
Department to receive the contribution of Timber Rights on behalf of
the Plan from U.S. Steel and to engage, on behalf of the Plan, in
subsequent transactions between the Plan and U.S. Steel (e.g.,
compensating the Plan for the timber value on the Property in the event
that a parcel is sold for development) that may arise from the
retention and exercise of the Timber Rights. Such transactions will be
approved and monitored by The Campbell Group (TCG), the Independent
Fiduciary for the Plan with respect to the proposed transactions.
However, U.S. Steel will remain in control of the underlying Property
from which the Timber Rights are derived and will make decisions
affecting such Property.
The Plan will pay no fees or commissions in connection with the
Timber Rights contribution. Absent administrative exemptive relief from
the Department or a statutory exemption, such in kind contribution of
the Timber Rights in lieu of cash in satisfaction of U.S. Steel's
obligation to contribute to the Plan would constitute a prohibited
transaction in violation of the Act.
6. The Property on which the Timber Rights are based involves
approximately 170,000 acres of land situated within a 35 mile radius
south and west of Birmingham, Alabama. Environmental reports of the
Property have revealed that certain areas within the Property are
identified as being likely locations where hazardous substances have
been released. To have the Plan avoid potential legal liability under
the Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), TCG and UCF have requested (and U.S. Steel agreed) to
``carve out'' or otherwise exclude from the Timber Rights conveyance
those areas which would present a higher risk or have actual evidence
of hazardous substances. Nevertheless, because large portions of the
subject Property present historical environmental concerns, UCF and the
Independent Fiduciary have determined that it would not be prudent for
the Plan to become an owner of the underlying land under CERCLA.
Therefore, to minimize the Plan's legal risk, the proposed transactions
have been specifically structured to convey limited timber and access
rights only, as opposed to a perpetual fee simple interest in the
underlying Property as initially contemplated. As a further measure to
protect the Plan from CERCLA liability, U.S. Steel proposes to
indemnify the Plan with respect to all liability for hazardous
substances released on the Property prior to the execution and closing
of the contemplated transactions. However, U.S. Steel will not be
required to indemnify the Plan for the release of hazardous substances
due to the Plan's gross negligence or willful misconduct in its timber
harvesting activities. Under the Timber Rights Agreements, the Plan
also retains the right to sell or assign, in whole or in part, its
interests in the Timber Rights to a bona fide third party purchaser.
The Plan will remain liable and responsible for the sale or assignment
to U.S. Steel, unless such sale or assignment is approved by U.S.
Steel. U.S. Steel will not unreasonably withhold its approval, but will
condition it on consideration of the technical and financial capability
and integrity of the proposed successor or assignee.
7. Of the 170,000 acres of the Property from which the Timber
Rights are derived, 135,000 of those acres will be covered under a
long-term timber purchase and cutting agreement (the Timber Agreement)
and the remaining 35,000 acres will be covered under the U.S. Steel
Agreement (USS Agreement).
[[Page 64653]]
The Timber Rights Agreements will provide the Plan with the right to
grow, cut and harvest timber from the underlying Property for 99 years,
and will include a compensation formula in the event U.S. Steel, as
owner of the underlying Property, interferes with the Plan's Timber
Rights. Upon commencement of the Timber Rights Agreements, title to the
timber will be held by a limited liability corporation (the Plan LLC).
Such company through UCF, as Trustee, will be 100% owned by the Plan.
The Timber Agreement will convey to the Plan all rights and
interests to timber, forest products, crops and vegetation, and
includes the right to hunting, fishing, and other licensing activities
derived from the Property. The Timber Agreement is for a term of 99
years, with U.S. Steel, as the owner of the Property, having a right of
termination at the end of year 50, and again at the end of year 75.\7\
Early termination compensation by U.S. Steel prior to the 50th and 75th
year will be at a premium of the then fair market value of the
remaining term of the Timber Agreement. Such premium will be 115% in
the 50th year and 107% in the 75th year. After year 50, U.S. Steel may
terminate on any portion of the property sold to a bona fide third
party purchaser at a 115% premium in years 50 through 74, and at 107%
in years 75 through 99.
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\7\ Although initially, the Timber Agreement will be with U.S.
Steel, in the event that the Property is subsequently conveyed to a
third party purchaser, then the third party purchaser will succeed
to the rights and obligations of U.S. Steel under such agreement.
---------------------------------------------------------------------------
Throughout the 99 year term of the Timber Agreement, U.S. Steel
will retain the right to terminate the Plan's Timber Rights,
temporarily, if U.S. Steel's use of such timberland is for typical
mining activities or lasts less than 15 years,\8\ does not pose a risk
of contamination or nuisance, and U.S. Steel restores the surface land
to its prior condition upon cessation of the mining activities. The
Plan's compensation for said temporary termination will be the fair
market rental value of the affected timberland surface plus the present
fair market value of the affected merchantable and pre-merchantable
timber.
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\8\ Section 12.2 of the Timber Agreement states that the
following types of existing and potential temporary uses by U.S.
Steel related to surface or strip mining activities would cause a
temporary termination of the Timber Rights Agreements in less than
15 years: Well sites for oil or gas or salt water disposal wells,
roads, pipelines, power lines, telephone lines, power substations,
non-commercial tower sites, dehydration facilities, tank batteries,
transfer and pumping stations, conveyors, equipment yards, field
offices, water disposal ponds, compressor sites, temporary sale
stockpiles and temporary treatment or washing facilities.
---------------------------------------------------------------------------
The remaining 35,000 acres of the Property on which the Plan's
Timber Rights are based also will remain under U.S. Steel's ownership
and governed under the USS Agreement for a period of 99 years. Under
the USS Agreement, this acreage will be subject to future commercial
development. For this reason, U.S. Steel will retain the right to
terminate the USS Agreement on any portion of this acreage at any time.
Should U.S. Steel not dispose of the Property before the current timber
is cut, the Plan will continue to replant and U.S. Steel will be
obligated to pay the greater of (a) The fair market value of such
Property, as determined by a qualified, independent appraiser which has
been selected by the Independent Fiduciary, (based upon the greater of
the current market value for timber or the average price for the
preceding 5 years) for such replanted trees or (b) the Plan's capital
investment for the timber plus an 8% per annum, compounded annually
from the later of the date of acquisition or the date of planting or
establishment of the timber through the date of termination.
Throughout the 99 year term of the USS Agreement, U.S. Steel also
will retain the right to terminate the Plan's Timber Rights,
temporarily, if U.S. Steel's use of such timberland is for typical
mining activities or lasts less than 15 years,\9\ does not pose a risk
of contamination or nuisance, and U.S. Steel restores the surface land
to its prior condition upon cessation of the mining activities. The
Plan's compensation for such temporary termination will be the fair
market rental value of the affected timberland surface plus the present
fair market value of the affected merchantable and pre-merchantable
timber.
---------------------------------------------------------------------------
\9\ Id.
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8. To protect the Plan against economic loss related to the
acceptance and holding of the Timber Rights, U.S. Steel has agreed to
make the Plan whole for any economic loss sustained from the Timber
Rights contribution. This ``make whole'' contribution will apply to the
first five years of the Timber Agreements. On the fifth year, U.S.
Steel will contribute to the Plan the value of the economic losses
related to the Timber Rights contribution. These losses will represent
an amount in cash calculated as follows: (a) The fair market value of
the Timber Rights as of the date of the contribution, less (b) the sum
of (i) the fair market value of the Timber Rights held by the Plan as
of the date five years from the date of the contribution, as determined
by a qualified, independent appraiser, which has been selected by the
Independent Fiduciary, plus (ii) the net cash distributed to the Plan
LLC or the Plan related to all or any part of the Timber Rights (and/or
the related timber) prior to such date; provided, however, that if a
contribution is due and if, for the taxable year of U.S. Steel in which
such contribution is to be made, such contribution (i) will not be
deductible under section 404(a)(1) of the Code or (ii) will result in
the imposition of an excise tax under section 4972 of the Code, such
contribution will not be made until the next taxable year of U.S. Steel
for which the contribution will be deductible under section 404(a)(1)
of the Code and will not result in an excise tax under section 4972 of
the Code.
9. Under the Timber Rights Agreements, the Plan will pay Alabama
state property taxes for the portion of the Property attributable to
the Timber Rights. However, U.S. Steel and its successors, as
underlying Property owners, will remain liable for property taxes
attributable to the underlying Property and the minerals derived
therefrom. According to existing Alabama law, property taxes are
assessed based on the value of the property's current use, as opposed
to any potential use for the property that might have a higher value.
Because the subject property will be used for timber growth, its value,
for property tax purposes, will be based on the value of the timber.
Therefore, the process for determining the value of the timber will
require a discounted cash flow analysis that will consider such factors
as the timber inventory, current stumpage prices, and planned harvest,
to determine the Plan's Alabama property tax assessment.
10. In January 2003, UCF and The Campbell Group (TCG) of Portland,
Oregon, which will serve on behalf of the Plan as the Independent
Fiduciary with respect to the proposed transactions, retained the
services of Larson & McGowin, Inc. (L&M), a qualified, independent
appraisal firm based in Mobile, Alabama to procure a valuation of the
Timber Rights, specifically the rights of the Plan to grow and harvest
timber on the Property for 99 years under the terms of the Timber
Rights Agreements. L&M specializes in forest timber management and
related consulting. In particular, Messrs. Robert J. Foster and L.
Alexander McCall, who are principals with L&M conducted the appraisal
along with Mr. Edward F. Travis, an independent MAI appraiser. In a
final appraisal report dated September 2,
[[Page 64654]]
2003, L&M placed the fair market value of the Timber Rights at $60
million. L&M arrived at this valuation by utilizing the discounted cash
flow analysis in the Income Approach and will update such valuation on
the date of the contribution. Because the Plan had total assets having
fair market value of $7.222 billion as of December 31, 2002, the Timber
Rights will represent less than 1% of the Plan's assets at the time of
contribution.
In its capacity as Independent Fiduciary, TCG represents that L&M
is qualified to serve as the independent appraiser. Specifically, TCG
states that its selection of L&M, as the finalist of three other
independent appraisal firm candidates, to complete the appraisal of the
Timber Rights was based on a review of specific methodologies that were
used in developing the appraisal and the appropriateness of the
methodologies utilized. TCG also represents that sample work provided
by L&M was reviewed as part of the selection process. Thus, TCG
concludes that the valuation of the Timber Rights is appropriate.
Moreover, TCG represents that on the day of the Timber Rights
contribution, it will obtain an updated appraisal of the Timber Rights
from L&M, which will reflect any changes in fair market value relative
to the September 2, 2003 valuation. TCG states that L&M will utilize
the same valuation methodologies to update the appraised value as those
used in the initial appraisal report. TCG explains that it will review
the updated appraisal report and the resulting appraised value for
appropriateness prior to the contribution.
11. U.S. Steel and its wholly owned subsidiary, U.S. Steel Mining
Co., currently hold most of the mineral rights appurtenant to the
Property, which they lease or operate for the production of coal and
coal seam gas. However, U.S. Steel and U.S. Steel Mining Co. are
currently negotiating with a third party to sell the mineral rights
with respect to the underlying land under the terms of a mineral rights
agreement (the Mineral Rights Agreement). To ensure that the Mineral
Rights Agreement will be subject and subordinate to the terms of the
Timber Rights Agreements, U.S. Steel will have the Timber Rights
Agreements in place before the Mineral Rights Agreement is finalized.
12. Because the proposed contribution to the Plan of the Timber
Rights will likely occur after the execution of the Mineral Rights
Agreement, U.S. Steel LLC (US Steel LLC) will hold the Timber Rights
until the Department grants the final exemption, at which point, U.S.
Steel LLC will transfer the Timber Rights and its obligations to the
Plan. The Plan, in turn, will create the Plan LLC to hold and exercise
the Timber Rights on behalf of the Plan. The Plan LLC will be 100%
owned by the Plan. As Trustee, UCF will oversee the Plan LLC's
management and operations.
13. Following a selection process, UCF determined that TCG had the
best overall skills and experience to act as the Independent Fiduciary
for the proposed transactions and to serve as manager of the Timber
Rights after the proposed contribution is made. As noted in
Representation 5 above, U.S. Steel will remain in control of the
underlying Property and will make decisions with respect to such
Property.
14. TCG is a full-service timberland investment advisory firm
founded in 1981. The firm, which focuses exclusively on acquiring,
managing and disposing of timberland properties, is one of the largest
timber investment managers in the world, with current assets under
management that exceed $1.5 billion. Its clients include endowments,
trusts, public and private pension funds and individual investors. For
a ten year period ending in 1997, TCG was associated exclusively with
the Hancock Timber Resource Group, handling its timber management
business in the western United States and Canada.
As Independent Fiduciary, TCG represents that it has two principal
responsibilities. First, TCG is responsible for reviewing the terms and
conditions under which the contribution of the Timber Rights will be
made to the Plan, providing an opinion on whether the contribution is
in the interests of an protective of the Plan and its participants and
beneficiaries, and, if warranted on the basis of such opinion,
approving the contribution of the Timber Rights. As noted previously in
Representation 10, in the course of its review, TCG is also required to
give due consideration to the selection of the independent appraiser
for the Timber Rights and the fair market value of such Timber Rights.
Furthermore, TCG is required to ensure that the proposed contribution
complies with the following conditions:
[sbull] The Independent Fiduciary, acting on behalf of the Plan,
represents the Plan's interests for all purposes with respect to the
Timber Rights contribution, and determines prior to entering into any
of the transactions described herein, that each such transaction,
including the Timber Rights contribution, is in the interest of the
Plan.
[sbull] The Independent Fiduciary negotiates and approves the terms
of any of the transactions between the Plan and U.S. Steel that relate
to the Timber Rights.
[sbull] The Independent Fiduciary manages the holding, disposition,
and assignment of the Timber Rights and takes whatever actions it deems
necessary to protect the rights of the Plans with respect to the Timber
Rights.
[sbull] The terms of any transactions between the Plan and U.S.
Steel are no less favorable to the Plan than terms negotiated at arm's
length under similar circumstances between unrelated third parties.
[sbull] The Independent Fiduciary determines the fair market value
of the Timber Rights contributed to the Plan on the date of such
contribution. In determining the fair market value of the Timber Rights
Contribution, the Independent Fiduciary obtains an updated appraisal
from a qualified, independent appraiser selected by the Independent
Fiduciary, and ensures that the appraisal is consistent with sound
principles of valuation.
[sbull] The fair market value of the Timber Rights does not exceed
5% of the Plan's total assets at the time of such contribution.
[sbull] The Plan pays no fees or commissions in connection with the
Timber Rights contribution. (This condition does not preclude the Plan
from paying the Independent Fiduciary's ongoing management fees once
the contribution has been approved and accepted. It also does not
restrict the Plan from paying the due diligence costs connected with
the acquisition of the Property, such as the expenses for a title
search, appraisal and environmental review.)
[sbull] Five years from the date of the Timber Rights contribution,
U.S. Steel contributes, to the Plan, an amount in cash calculated as
follows: (1) The fair market value of the Timber Rights as of the date
of the contribution, as determined by a qualified, independent
appraiser, less (2) The sum of (i) the fair market value of the Timber
Rights held by the Plan as of the date five years from the date of the
contribution, as determined by a qualified, independent appraiser,
which has been selected by the Independent Fiduciary, plus (ii) the net
cash distributed to the Plan LLC or the Plan relating to all or any
part of the Timber Rights (and/or the related timber) prior to such
date; provided, that if a contribution is due and if, for the taxable
year of U.S. Steel in which the contribution is to be made, such
contribution (i) is not deductible under section 404(a)(1) of the Code
or (ii)
[[Page 64655]]
results in the imposition of an excise tax under section 4972 of the
Code, such contribution will not be made until the next taxable year of
U.S. Steel for which the contribution is deductible under section
404(a)(1) of the Code and does not result in an excise tax under
section 4972 of the Code.
[sbull] US Steel indemnifies the Plan with respect to all liability
for hazardous substances released on the Property prior to the
execution and closing of the Timber Rights contribution.
[sbull] The Plan retains the right to sell or assign, in whole or
in part, any of its Timber Rights interests to any third party
purchaser.
Second, following the completion of the Timber Rights contribution,
TCG will be authorized to exercise all of the rights and
responsibilities otherwise exercisable by the Plan in connection with
any subsequent transactional dealings with U.S. Steel, regarding the
Timber Rights under the Timber Rights Agreements, or as may be required
pursuant to the terms of this exemption. These rights and
responsibilities and the transactions to which they pertain include the
following:
[sbull] Determining that the Plan receives the compensation due to
it under the Timber Rights Agreements in the event that either (1) U.S.
Steel exercises its right to early termination of an Agreement, which
requires a termination payment to the Plan at a premium over the fair
market value of the Timber Rights, as determined by a qualified,
independent appraiser, which has been selected by the Independent
Fiduciary; or (2) U.S. Steel owes compensation to the Plan for mineral
activities that interfere with the Plan's use of the land for timber
purposes.
[sbull] Overseeing and enforcing the requirements of the exemption
for a ``make-whole'' contribution that may be required in the event of
a decline in value of the Timber Rights after five years.
[sbull] Enforcing U.S. Steel's ongoing obligations to maintain the
Property in a fashion that does not unreasonably interfere with the
Plan's use thereof.
[sbull] Enforcing the Plan's indemnification rights against U.S.
Steel for any environmental claims that may arise.
In its Management Agreement with UCF, TCG represents to UCF that
(a) it is independent of, and unrelated to, U.S. Steel and its
affiliates; (b) to the extent it provides services to U.S. Steel, its
affiliates or its retirement plans during the term of its Management
Agreement with the Plan, TCG's annual gross revenues for such services
will be less than 5% of its total annual gross revenues; and (c) it has
experience with the type of transactions for which it is acting as an
Independent Fiduciary, and acknowledges and accepts it is acting as an
ERISA fiduciary with an understanding of its duties, liabilities, and
responsibilities under that statute.
15. As Independent Fiduciary, TCG duties will encompass, but are
not limited to rendering investment management and advisory services,
such as buy-hold-sell analysis; coordinating appraisals; providing
long-term management planning; determining investment strategies;
performing price forecasting; managing regulatory changes and impact on
operations; management-level services such as financial accounting,
budgeting, reporting, audit supervision, performance measurement, any
acquisition and disposition of services; and determining whether it is
appropriate to sell or assign, in whole or in part, the Plan's
interests in the Timber Rights.
UCF will oversee TCG's Property management. TCG will establish an
annual management plan and budget for the Property each year that will
be reviewed and approved by UCF. It will include a harvest plan, timber
sale plan, capital expenditure plan, silviculture plan (with
recommendations regarding such activities as site preparation,
planting, fertilization, thinning and application of herbicides,
stumpage management), and budget (by calendar year) for the Property.
TCG will be able to make expenditures in accordance with the approved
annual budget, and within 10% of any budgeted line item, without
further approval by UCF, as well as to make extra-budgetary
expenditures without prior approval as are required to protect the
Property in case of emergencies. TCG will inform UCF promptly of any
variance from a budgeted line item, and will (subject to the exception
for emergencies) obtain UCF's approval before expending or failing to
expend funds at variance with the limits in the management plan. UCF
may modify the management plan and annual budget at any time on a
prospective basis. TCG also will prepare a strategic plan, setting
forth the overall objectives and strategies for the Property, and a
five year operating plan to support the strategic plan that contains
projections with respect to silviculture and harvesting, which will be
updated at least annually. TCG will report all events that, in its
judgment, make it impracticable to follow the annual or five-year
operating plan and will recommend appropriate modifications. Among its
duties as Property manager, TCG will also be responsible for both the
on-site and management level forest operations. Services in this
category will include long- and short-term harvesting planning;
obtaining all necessary permits and federal, state, and local tax
filings; managing log sale contracts and road planning; overseeing
subcontractors, including log-harvesting, road construction and
maintenance; managing timber inventory and land records; managing risk,
such as fire prevention planning; and procuring geographical
information systems and mapping.
16. TCG represents that the Property is expected to generate a
positive cash flow during the early years of the Timber Rights
contribution. The source of this income is from an expected, but small
scale timber harvest and from the sale of hunting and recreation
leases, which will be managed by TCG. In addition to the timber being
in the early stages of growth, TCG believes that the Property will
benefit from silviculture programs to improve its long-term value, and
thereby enhance the overall economic benefit to the Plan of the timber
contribution. TCG will run models on possible expenditures for
silvicultural programs that it will then describe in its proposed
management plan for the Property, which will be reviewed and approved
by UCF before any funds are spent.
17. TCG will receive the following fees \10\ from UCF for its
services to the Plan:
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\10\ The Applicant states that the fees will represent
reasonable compensation and will be statutorily exempt under section
408(b)(2) of the Act. However, the Department expresses no opinion
herein on whether such fees will satisfy the terms and conditions of
section 408(b)(2) of the Act.
---------------------------------------------------------------------------
[sbull] Investment Management and Advisory Service Fees, which are
initially determined as a percentage of the initial asset value (as
determined by an independent appraisal) and are thereafter adjusted
annually based on the Consumer Price Index for all urban consumers. The
value of the basis will be decreased by UCF to reflect land sales
(including any acres that U.S. Steel has exercised its right to
terminate under either the Timber Agreement or the USS Agreement).
[sbull] Asset Management Service Fees, which will consist of a flat
rate per acre for total acres managed, and a percentage of net stumpage
and net log sales provided for in the annual budget that is approved by
UCF. Such fees will also include a percentage of ancillary revenue,
such as hunting rights income, subject to the approved annual budget.
[[Page 64656]]
[sbull] Incentive Fee (the Incentive Fee),\11\ which will be based
on whether the return on the amount the Plan has invested in the timber
assets, as determined by the cash distributions to the Plan and the
current appraised value of the timber assets, exceeds a ``hurdle
rate.'' The Incentive Fee will be calculated to include both realized
and unrealized gains and losses. It will be a ``rolling'' fee, inasmuch
as performance will be measured based on cumulative performance over
the life of TCG's Management Agreement, rather than over a discrete
period. The Incentive Fee will consist of three components--a fixed
hurdle rate, cash distributions, and the appraised value of the timber
assets with respect to the Plan's Timber Rights. The hurdle rate will
be a percentage fixed in the TCG service contract. The Incentive Fee
will reflect 20% of the cumulative performance exceeding the hurdle
rate, with the Plan retaining 80%. Such percentage has been approved
and set by UCF, the Plan fiduciary independent of TCG, and it is not
subject to TCG's discretion. The cash distributions to the Plan will be
the actual outflow net after expenses of payments made to the Plan out
of the timber assets and any miscellaneous income expected to be
generated by the Timber Rights, such as those derived from hunting,
fishing and other licensing activities, reducing the value of the
timber assets being managed. Thus, the Incentive Fee will not include
amounts reinvested in the timber assets nor expenses paid with respect
to those assets, which would be reflected instead in the appraised
value. The appraised value of the timber assets will be determined by a
qualified, independent appraiser, using standard methods for valuing
timber. The timber appraiser will be selected by UCF. TCG will not have
any discretion over the determination of the appraised asset value
component of its fee calculation. The Incentive Fee will be calculated
every three years and paid at three-year intervals, subject to
withholding 50% of the accrued performance fee until final disposition
to avoid any overpayment in any particular period.
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\11\ The Applicant represents that the Incentive Fee payable to
TCG will meet the criteria in the Department's advisory opinions on
performance fees (see Advisory Opinions 86-20A, 86-21A, and 89-28A).
However, the Department is providing no opinion in this proposed
exemption on whether the Incentive Fee payable to TCG by the Plan is
or will be consistent with the fiduciary responsibilities contained
in Part 4 of Title I of the Act. In this regard, the Department
notes that section 404(a)(1) of the Act requires, among other
things, that the plan fiduciary act prudently and solely in the
interest of the plan and its participants and beneficiaries when
making investment decisions on behalf of a plan.
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Duties of the Independent Fiduciary
The Department notes that the appointment of an independent
fiduciary to represent the interests of the Plan with respect to the
proposed transactions that are the subject of the exemption request is
a material factor in its determination to propose exemptive relief. The
Department believes that it would be helpful to provide general
information regarding its views on the responsibilities of an
independent fiduciary in connection with the in kind contribution of
property to an employee benefit plan. As noted in the Department's
Interpretive Bulletin, 29 CFR 2509.94-3(d) (59 FR 66736, December 28,
1994), apart from consideration of the prohibited transaction
provisions, plan fiduciaries must determine that acceptance of an in
kind contribution is consistent with the general standards of fiduciary
conduct under the Act. It is the view of the Department that acceptance
of an in kind contribution is a fiduciary action subject to section 404
of the Act. In this regard, section 404(a)(1)(A) and (B) of the Act
requires that fiduciaries discharge their duties to a plan solely in
the interests of the participants and beneficiaries, for the exclusive
purpose of providing benefits to participants and beneficiaries and
defraying reasonable administrative expenses, and with the care, skill,
prudence, and diligence under the circumstances then prevailing that a
prudent person acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with
like aims. In addition, section 404(a)(1)(C) requires that fiduciaries
diversify plan investments so as to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do so.
Accordingly, the fiduciaries of a plan must act ``prudently,'' ``solely
in the interest'' of the plan's participants and beneficiaries, and
with a view to the need to diversify plan assets when deciding whether
to accept an in kind contribution. If accepting an in kind contribution
is not ``prudent,'' not ``solely in the interest'' of the participants
and beneficiaries of the plan, or would result in an improper lack of
diversification of plan assets, the responsible fiduciaries of the plan
would be liable for any losses resulting from such a breach of
fiduciary responsibility, even if a contribution in kind does not
constitute a prohibited transaction under section 406 of the Act.
18. In summary, the Applicant represents that the proposed
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The Independent Fiduciary, acting on behalf of the Plan, will
represent the Plan's interests for all purposes with respect to the
Timber Rights contribution, and will determine prior to entering into
any of the transactions described herein, that each such transaction,
including the Timber Rights contribution, is in the interest of the
Plan;
(b) The Independent Fiduciary will negotiate and approve the terms
of any of the transactions between the Plan and U.S. Steel that relate
to the Timber Rights;
(c) The Independent Fiduciary will manage the holding, disposition,
and assignment of the Timber Rights and take whatever actions it deems
necessary to protect the rights of the Plan with respect to the Timber
Rights;
(d) The terms of any transactions between the Plan and U.S. Steel
will be no less favorable to the Plan than terms negotiated at arm's
length under similar circumstances between unrelated third parties;
(e) The Independent Fiduciary will determine the fair market value
of the Timber Rights contributed to the Plan as of the date of such
contribution. In determining the fair market value of the Timber Rights
Contribution, the Independent Fiduciary will obtain an appraisal from a
qualified, independent appraiser selected by the Independent Fiduciary,
and will ensure that the appraisal is consistent with sound principles
of valuation;
(f) The fair market value of the Timber Rights will not exceed 5%
of the Plan's total assets at the time of such contribution.
(g) In general, the Plan will pay no fees or commissions in
connection with the Timber Rights contribution.
(h) Five years from the date of the Timber Rights contribution,
U.S. Steel will contribute, to the Plan, an amount in cash calculated
to make the Plan ``whole.''
(i) U.S. Steel will indemnify the Plan with respect to all
liability for hazardous substances released on the Property prior to
the execution and closing of the Timber Rights contribution.
(j) The Plan will retain the right to sell, in whole or in part,
any of its Timber Rights' interests to any third party purchaser.
Notice to Interested Persons
Notice of proposed exemption will be provided to all interested
persons by first class mail within 4 days of
[[Page 64657]]
publication of the notice of pendency in the Federal Register. Such
notice shall include a copy of the notice of pendency of the exemption
as published in the Federal Register and a supplemental statement, as
required pursuant to 29 CFR 2570.43(b)(2), which will inform interested
persons of their right to comment on the proposed exemption and/or to
request a hearing. Comments and hearing requests are due within 34 days
of the date of publication of the proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ms. Silvia M. Quezada of the
Department, telephone number (202) 693-8553. (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 10th day of November, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 03-28546 Filed 11-13-03; 8:45 am]
BILLING CODE 4510-29-P