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Employee Benefits Security Administration

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

[[Page 64647]]

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.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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