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Proposed Exemptions; Landerholm, Memovich, Lansverk & Whitesides, P.S. 401(k) Profit Sharing Plan (the Plan) [03/24/2004]
[PDF Version]
Volume 69, Number 57, Page 13883-13904
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11132, et al.]
Proposed Exemptions; Landerholm, Memovich, Lansverk & Whitesides,
P.S. 401(k) Profit Sharing Plan (the Plan)
AGENCY: Employee Benefits Security Administration, Labor
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. --------, stated in each Notice of
Proposed
[[Page 13884]]
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: ``moffitt.betty@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.
Landerholm, Memovich, Lansverk & Whitesides, P.S.; 401(k) Profit
Sharing Plan (the Plan); Located in Vancouver, WA
[Application No. D-11132]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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\1\ For purposes of this proposed exemption, references to
specific provisions of title I of the Act, unless otherwise
specified, refer also to corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code shall not apply, effective January 1, 1998, to the past
acquisition by the Plan, through its real estate contract fund (the
Fund), of real estate mortgage contracts (the Contracts) from American
Equities, Inc. (AE), a party in interest with respect to the Plan.
In addition, if the exemption is granted, the restrictions of
section 406(a) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the (1)
future acquisition by the Plan, through the Fund, of additional
Contracts from AE; (2) the sale by the Plan of any of the Contracts to
AE; and (3) the exchange by the Plan of certain Contracts with AE for
other AE contracts and/or cash.
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) Any acquisition, sale or exchange is approved in advance by the
Plan's Trustees (the Trustees), who are independent of AE and the
borrowers. Furthermore, the terms of each transaction between the Plan
and AE involving the Contracts is not less favorable to the Plan than
those terms generally available in an arm's length transaction between
unrelated parties.
(b) The transactions are not a part of an agreement, arrangement or
understanding designed to benefit AE.
(c) For purposes of an acquisition, sale or exchange, the cost of a
Contract does not exceed its fair market value, as determined by the
Plan's Trustees using an objective appraisal methodology, and the yield
on all Contracts purchased, sold or exchanged exceeds the average yield
of comparable mortgage contract loans by not less then 1%.
(d) The aggregate fees paid to AE for its activities as loan
servicing agent for the Plan at all times do not exceed ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(e) No investment management, advisory, underwriting fees or sales
commissions are paid by the Plan to AE or any of its affiliates with
regard to the Plan's purchase, sale or exchange of a Contract.
(f) All Contracts acquired by the Plan satisfy the Trustees'
selection criteria (the Selection Criteria). In this regard, at the
time of the transaction:
(1) The loan to value ratio must be 75% or less;
(2) The ``Total Return'' on the Contract is at least 1.00% above
the prevailing 30 year home mortgage rate;
(3) The purchaser of the property provides a clean payment history
and a personal credit report of at least 12 months' duration;
(4) The property is in good condition with no defects discovered
upon inspection;
(5) A clean title report is required; and
(6) A first position lien is obtained on the property.
(g) For prospective purchases or exchanges of Contracts by or
between the Plan and AE,
(1) The Trustees engage an independent and unrelated consultant
(the Independent Consultant), trained and experienced in real estate
financing, to perform a written annual review of the Plan's Contract
selection process to assure that--
(i) The selection process produces a yield to the Plan consistent
with comparable market returns for first mortgage investments by direct
federally insured lenders in the Trustees' market area;
(ii) The selection process permits only the purchase of Contracts
which are not subordinated to other indebtedness; and
(iii) The selection process incorporates standards for loan to
value ratio and borrower credit worthiness appropriate for qualified
retirement plan investments; and
(2) No Contracts are purchased or exchanged in any year until the
Independent Consultant's review has been issued, and the Independent
Consultant has the authority to require that the Plan modify or replace
the Selection Criteria utilized by the Plan as a condition to issuance
of its review.
(h) The Trustees maintain for a period of six years, in a manner
that is accessible for audit and examination, the records necessary to
enable the persons, as described in (i) to determine whether the
conditions of this proposed exemption have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Trustees,
the records are lost or
[[Page 13885]]
destroyed prior to the end of the six year period; and
(2) No party in interest, other than the Trustees, shall be subject
to the civil penalty that may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if
the records are not maintained, or are not available for examination as
required by paragraph (h).
(i) Except as provided in (i)(1)-(2) and notwithstanding any
provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (h) above shall be unconditionally
available at their customary location for examination during normal
business hours by--
(1) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission;
(2) Any fiduciary of the Plan who has authority to acquire or
dispose of any assets of the Plan, or any duly authorized employee or
representative of such fiduciary; and
(3) Any participant or beneficiary of the Plans or duly authorized
employee or representative of such participant or beneficiary.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of January 1, 1998 with respect to the Plan's past acquisition of
the Contracts, and effective as of the date of publication of the final
exemption in the Federal Register for future acquisitions, sales or
exchanges of additional Contracts by the Plan.
Summary of Facts and Representations
1. The Plan is a defined contribution plan sponsored by Landerholm,
Memovich, Lansverk & Whitesides, P.S. (Landerholm), a professional
services corporation located in Vancouver, Washington. The Plan
includes both 401(k) and profit sharing contributions.\2\ Participant
accounts are invested, at the participants' discretion, in one of 13
mutual funds available or in the Fund, a real estate fund holding
mortgages, deeds of trust and real estate contracts.
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\2\ The Applicants represent that although the Trustees have not
sought to designate the Plan an ERISA section ``404 (c) plan,'' they
state that the level of investment discretion participants can
exercise under the Plan is consistent with section 404 (c) of the
Act and the regulations promulgated thereunder. The Applicants
explain that in the future, they intend to be fully compliant with
section 404 (c) of the Act. Hence, every participant will have
identical discretionary authority over his account and they may
invest in any combination of the 13 mutual funds offered under the
Plan or the Fund. The Applicants further explain that no charges or
penalties will accrue as a result of any exercise by a participant
of direction rights.
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The present Trustees of the Plan are Irwin C. Landerholm, T.
Randall Grove, and Philip Janney, all of whom are current Landerholm
shareholders. In addition to the current Trustees, the former Plan
Trustees also requesting exemptive relief are Gregory J. Dennis,
William C. Dudley, and Thomas B. Ericksen.\3\
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\3\ For purposes of this proposed exemption, the current and
former Trustees are collectively referred to herein as the Trustees.
Also, Landerholm and the Trustees are collectively referred to
herein as the Applicants.
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2. The Trustees determined that establishing the Fund would provide
Plan participants with lower risk, better stability and superior
investment returns. Through maintenance of a pool of third party
Contracts in the Fund, the Plan Trustees determined that the risks of
other investment options could be balanced and the risk of loss in any
single Contract would be moderated. All of the Contracts are ``whole''
Contracts that are held in the name of the Fund. The Contracts do not
represent loans from direct, federally-insured lenders, and as a
result, they normally trade at a discount to the current federally-
insured lending rates. A participant electing to have a portion of his
or her account invested in the Fund is essentially investing in an
open-end fund. In other words, from a participant's perspective, the
Fund includes both an undivided interest in all Contracts held by the
Fund at the time an investment is made, as well as in each new Contract
purchased as new participant funds become available and Contracts are
retired or paid off.
3. For the Plan year 2002, the Plan's Form 5500 reported 71
currently active, retired, or separated participants and/or
beneficiaries entitled to receive benefits. The Plan's total assets
were reported at $6,265,141 as of July 25, 2003.
4. AE, which is located in Vancouver, Washington, is a company that
is primarily engaged in the purchase and resale of real estate
contracts, such as the subject Contracts described herein.\4\ AE
acquires contracts at a discount and sells them at less than the
federally-insured lending rate on the secondary market. AE also
services contracts sold, if retained by the purchasers. In 1982, AE was
retained by the Trustees to present prospective Contracts that might be
appropriate for the Fund. Each package prepared by AE included relevant
documentation and performance history, as well as an independent
appraisal by a knowledgeable realtor in the property's locale, of the
underlying real estate securing the loans.
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\4\ Prohibited Transaction Class Exemption (PTCE) 1982-87 (47 FR
21331, May 8, 1982) defines the term ``established mortgage lender''
as an organized business enterprise which has as one of its
principal purposes in the normal course of business the origination
of loans secured by real estate mortgages or deeds of trust and
which has satisfied the qualification requirements of one of the
following categories: (1) Approval by the Secretary of the
Department of Housing and Urban Development for participation in any
mortgage insurance program under the National Housing Act; (2)
approval by the Federal National Mortgage Association (FNMA) or the
Federal Home Loan Mortgage Corporation (FHLMC) as a qualified
Seller/Servicer; or (3) a State agency or independent State
authority empowered by State law to raise capital to provide
financing for residential dwelling units.
In addition, PTCE 1982-87 defines the term ``recognized mortgage
loan'' as any mortgage loan on a ``residential dwelling unit''
which, at the time of its origination, was eligible, through an
established program, for purchase by the FNMA, the Government
National Mortgage Association or the FHLMC.
The Applicants represent that, in their opinion, AE is not an
``established mortgage lender'' nor would any of the Contracts be
characterized as ``recognized mortgage loans'' within the meaning of
PTCE 1982-87 because AE does not have the requisite authority from
state or federal regulatory agencies, as described in PTCE 1982-87,
and the Contracts purchased and resold by AE do not originate from
an established program, as described in PTCE 1982-87.
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The Trustees reviewed the proposed AE Contracts using various
selection criteria they had developed to evaluate the Contract's
investment worthiness. In this regard (a) the loan to value ratio had
to be 75% or less; (b) the ``Total Return'' on the Contract had to be
at least 1.00% above the prevailing 30 year home mortgage rate; (c) the
purchaser of the property had to provide a clean payment history and a
personal credit report of at least 12 months' duration; (d) the
property had to be in good condition with no defects discovered upon
inspection; (e) a clean title report was required; and (f) a first
position lien had to be obtained on the property. If the Contract was
to be purchased by the Plan, it was required to pass all of the
Selection Criteria. Since AE has no discretionary authority over the
Plan's assets, the decision to invest in the Contracts rested solely
with the Trustees. Moreover, the terms reflected arm's length dealings
between the parties.
5. In developing the Selection Criteria, the Applicants state that
the overall purpose was to ensure that selected Contracts met the
Fund's investment strategy. To evaluate whether each factor had been
met, Landerholm utilized the expertise of its real estate and
investment and lending practice groups.\5\ Once the screening
[[Page 13886]]
process was completed and the Trustees agreed that certain Contracts
were in the best interest of the Plan's investment strategy, the Plan
purchased the Contracts on behalf of the Fund. Initially, Landerholm
attempted to service the Contracts in-house, but it determined that it
was more costly and cumbersome than to outsource the task. During this
period, Landerholm bore the costs associated with servicing the
Contracts. Subsequently, Landerholm decided that AE should be retained
to service the Contracts and it would have no discretionary control
over any of the Fund's assets with respect to default decisions and
other determinations. AE began charging a service fee of $4 to $8 per
month per Contract and an initial set-up fee of $50 per Contract.\6\
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\5\ The Applicants state that the Landerholm firm has a large
and active real estate practice representing brokerage firms,
developers, investors, lenders, and businesses in all matters
pertaining to the acquisition, development, financing, sale and
leasing of real estate. Thus, the Applicants believe Landerholm
possesses skill sufficient to determine the appropriate fair market
value of the Contracts it acquires, sells or exchanges.
\6\ Although the Applicants represent that the fees paid to AE
for servicing the Contracts are reasonable compensation for services
necessary for the operation of the Plan in accordance with section
408(b)(2) of the Act, the Department expresses no opinion herein on
whether such compensation paid to AE in connection with its
provision of services to the Plan satisfies the terms and conditions
of section 408(b)(2) of the Act and the regulations promulgated
thereunder.
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During the period between April 11, 1994, through October 19, 2001,
the Plan acquired 26 Contracts on behalf of the Fund from AE. The
maturity dates range from July 1, 2002, through September 27, 2020,
according to an October 2001 spread sheet submitted by the Applicants.
The Contracts consisted of a mortgage and several real estate contracts
and deeds of trust. The Applicants state that as of December 31, 2002,
which is the most recent date that financial information is available,
the Fund had 21 participating individual accounts.
6. At the time the Contracts were purchased, the Plan paid AE fair
market value for the Contracts. The purchase price was determined by
adjusting the offered Contract's rate to that of the prevailing market
rate. In this regard, the Trustees obtained the prevailing market rate
by measuring each prospective Contract's yield (i.e., the interest rate
plus a discount) against the then current lending rates of independent
local lending institutions (typically, First Independent Bank and U.S.
Bank) all within the vicinity of Vancouver, Washington. In addition to
ensuring that the rate of return was current through the time of
purchase, the Trustees required each Contract to exceed the average
yield of mortgage rates by no less than 1% in order that the Plan could
capture a higher return.
The Applicants represent that this method for determining fair
market value simulates rate adjustments that take place in the bond
market that either result in a sale premium or a discount at the time
of purchase. Moreover, the Applicants state that the 1% above
prevailing average mortgage yields provided a further investment
safeguard for the Fund. Finally, the Plan paid no fees or commissions
to AE in connection with the Contract purchases.
7. Since the creation of the Fund, the Applicants represent that 51
Contracts have been retired, 26 Contracts are under current management,
2 have been foreclosed upon, and 3 have defaulted. The foreclosed
Contracts resulted in the sale of the underlying real properties by the
Plan to unrelated third party purchasers. Of the defaulted Contracts, 1
has been cured and 2 are in the process of being cured.\7\
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\7\ The Applicants state that curing refers to the process of
removing whatever default exists in a Contract to make it current.
For instance, if a Contract is 3 months in arrears, it will be cured
if the borrower makes a payment to bring the loan current.
As of February 10, 2004, the Applicants represent that three
Contracts were in default status. All three properties were
eventually sold, with the proceeds going to the Plan to pay in full
the Contract balances outstanding. Two of the Contract balances were
paid in full on December 12, 2003. The property on the third
Contract was sold and funds to pay the balance in full are
forthcoming.
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Furthermore, no Contract has involved a borrower who is a party in
interest with respect to the Plan. Within the past five years, the
Applicants represent that the Fund has outperformed the mutual funds
and has insulated the Plan from some of the market volatility to which
traditional securities investments are susceptible. The Fund's annual
return has ranged from 4.10% to 9.73%, whereas the mutual fund return
has ranged from (-11.71%) to 24.94%.
According to the Applicants, at no time during the Fund's inception
did the Trustees or Landerholm realize that having AE as Contract
seller and service provider raised the issue of a possible prohibited
transaction. The Applicants state that the Plan would have continued to
acquire Contracts from AE had it not been for the Department's Seattle
Regional Office (SRO) investigation into employee benefit plans holding
mortgage notes.
8. On December 1, 2002, Landerholm entered into a tolling agreement
(the Tolling Agreement) with the SRO as a result of the SRO's
investigation of the Contracts held by the Plan. Pursuant to the
Tolling Agreement, the SRO recommended that the Applicants seek
exemptive relief from the Department with respect to the Plan's
acquisition and holding of the Contracts.\8\
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\8\ Due to the Act's statute of limitations, the Department does
not propose to extend retroactive relief for any of the purchases
that took place between 1982 through 1997. Therefore, the
retroactive exemption will apply to purchases of Contracts occurring
after January 1, 1998.
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Accordingly, the Applicants request an administrative exemption
from the Department in connection with the Plan's past acquisition of
the Contracts from AE. In addition, the Applicants request prospective
exemptive relief with respect to the Plan's future acquisition of
additional Contracts from AE, the Plan's holding of such future
Contracts, the sale of the Contracts to AE by the Plan, and the
exchange by the Plan of such Contracts with AE for other Contracts and/
or cash. If granted, the proposed exemption will be effective as of
January 1, 1998, with respect to the Plan's past acquisitions and
holding of the Contracts. The exemption will be prospective with
respect to additional purchases of Contracts by the Plan from AE, the
holding of such Contracts by the Plan and the Sale or exchange of the
Contracts.
9. For prospective acquisitions of additional Contracts by the Plan
from AE, the Trustees will follow the following guidelines:
The terms of the transactions between the Plan
and AE involving the Contracts must not be less favorable to the Plan
than those terms generally available in an arm's length transaction
between unrelated parties.
The transactions are not a part of an agreement,
arrangement or understanding designed to benefit AE.
The cost of a Contract must not exceed its fair
market value, as determined by the Trustees using an objective
appraisal methodology, and the yield on all Contracts purchased must
exceed the average yield of comparable mortgage contract loans by no
less than 1%.
The aggregate fees paid to AE for its activities
as loan servicing agent for the Plan, have, and at all times, represent
reasonable compensation for services necessary for the operation of the
Plan in accordance with section 408(b)(2) of the Act.
No investment management, advisory, underwriting
fees or sales commissions must be paid by the Plan to AE or any of its
affiliates with regard to the Plan's purchase of additional Contracts.
All Contracts acquired by the Plan must satisfy
the Trustees' Selection Criteria. In this regard, (1) the loan to value
ratio must be 75% or less; (2) the ``Total Return'' on the Contract
must be
[[Page 13887]]
at least 1.00% above the prevailing 30 year home mortgage rate; (3) the
purchaser of the property must provide a clean payment history and a
personal credit report of at least 12 months' duration; (4) the
property must be in good condition with no defects discovered upon
inspection; (5) a clean title report must be required; and (6) a first
position lien must be obtained on the property.
The Trustees maintain for a period of six years,
in a manner that is accessible for audit and examination, the records
necessary to enable (1) any duly authorized employee or representative
of the Department, the Internal Revenue Service, or the Securities and
Exchange Commission; (2) any fiduciary of the Plan who has authority to
acquire or dispose of any assets of the Plan, or any duly authorized
employee or representative of such fiduciary; and (3) any participant
or beneficiary of the Plans or duly authorized employee or
representative of such participant or beneficiary to determine whether
the conditions of this proposed exemption have been met.
In addition, the Trustees will retain an Independent Consultant to
perform an annual review of the Plan's current Selection Criteria to
ensure that the selection process produces a yield to the Plan
consistent with comparable market returns for first mortgage
investments by independent, direct federally-insured lenders in
Landerholm's market area. Such Independent Consultant will be a
certified public accountant having substantial experience in real
estate financing. The Independent Consultant will perform its annual
review prior to the purchase of any further Contracts by the Plan. The
Independent Consultant will have the authority to modify or replace the
Plan's Selection Criteria to the extent the Independent Consultant
believes such modification or replacement is necessary for the Plan's
Selection Criteria to comply with Selection Criteria customarily
employed in the purchase of Contracts within the Plan's market area.
The Independent Consultant will also review the Plan's valuation
methodology for the Contracts to ensure that the Plan's methodology
will permit the purchase of Contracts only where the Plan's security
interest is not subordinate to any other indebtedness, and where the
credit worthiness of the borrower and the loan to value ratio of the
underlying real estate held as security are appropriate for qualified
retirement plan investments. This review of Plan methodology by the
Independent Consultant will take place prior to the beginning of each
Plan Year during which the Plan will purchase additional Contracts from
AE.
10. The Applicants represent that at some point, it may become
advisable to sell one or more of the Contracts, held by the Fund, to
AE. Under such circumstances, the Applicants explain that a sale would
favor the Plan by permitting the purchase of a more favorable Contract
or providing the Fund with additional liquidity in order to make
distributions or transfers between funds, as participants may elect.
Therefore, the Applicants represent that any prospective sales of
Contracts by the Plan to AE would include the same safeguards
applicable to the prospective acquisitions by the Plan, as set forth in
Representation 9 of the proposal. In addition, the Applicants state
that such a sale by the Plan to AE would only be for cash.
11. The Applicants represent that since AE is one of the larger
marketers of Contracts in the Southwestern Washington area, engaging in
an exchange of existing Contracts with AE would be beneficial to the
Plan. Such an exchange, the Applicants state, would occur where the
Trustees have considered the Plan's liquidity needs and determined that
it would be in the best interests of the Plan to dispose of a large
Contract in exchange for a combination of cash and smaller Contracts
from AE. The Applicants propose that an exchange transaction will be
subject to all of the safeguards already required for prospective
acquisitions, as described in Representation 9.
12. In addition, for each prospective sale or exchange transaction,
the fair market value of a Contract will be determined by the Trustees
using an objective appraisal methodology. Further, such transactions
will be subject to the Selection Criteria described above, which will
be reviewed and approved annually by the Independent Consultant, to
ensure that the Plan receives neither less than fair market value or
pays more than fair market value for a Contract sold or exchanged.
13. In summary, it is represented that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) Any acquisition, sale or exchange will be approved in advance
by the Plan's Trustees, who are independent of AE and the borrowers.
Furthermore, the terms of each transaction between the Plan and AE
involving the Contracts have not been and will not be less favorable to
the Plan than those terms generally available in an arm's length
transaction.
(b) The transactions are not a part of an agreement, arrangement or
understanding designed to benefit AE.
(c) For purposes of an acquisition, sale or exchange, the cost of a
Contract has not exceeded and will not exceed its fair market value,
and the yield on all Contracts have exceeded and will exceed the
average yield of comparable mortgage contract loans.
(d) The aggregate fees paid to AE for its activities as loan
servicing agent for the Plan have represented and will represent, at
all times, reasonable compensation for services necessary for the
operation of the Plan in accordance with section 408(b)(2) of the Act.
(e) No investment management, advisory, underwriting fees or sales
commissions have been paid or will be paid by the Plan to AE in
connection with the purchase, sale or exchange of a Contract.
(f) All Contracts acquired by the Plan have satisfied or will
satisfy the Trustees' Selection Criteria.
(g) For prospective purchases or exchanges of Contracts by or
between the Plan and AE, (1) the Trustees will engage an Independent
Consultant.
(h) The Trustees have maintained and will maintain, at their
customary location for examination during normal business hours, the
records necessary to enable certain persons to determine whether the
conditions of the exemption have been met.
Notice to Interested Persons
Notice of proposed exemption will be provided to all interested
persons by first class mail within 10 days of publication of the notice
of pendency in the Federal Register. Such notice shall include a copy
of the notice of pendency, as published in the Federal Register, and
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2),
which shall inform interested persons of their right to comment on the
proposed exemption. Comments are due within 40 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 (202) 693-8553. (This is not a toll-free number.)
[[Page 13888]]
DuPont Capital Asset Management Corporation (DCMC); Located in
Wilmington, DE
[Application Nos. D-11157--D-11159]
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, August 10, 1996).\9\
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\9\ For purposes of this proposed exemption, references to
specific provisions of the title I of Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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Section I. Covered Transactions
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
transfer of certain debt securities (the Debt Securities) that are held
in the DuPont and Related Companies Defined Contribution Plan Master
Trust (the Master Trust) in which the assets of the E.I. du Pont de
Nemours and Company Savings and Investment Plan (the SIP), the DuPont
Specialty Grains Savings Plan (the DSG Savings Plan), and the Thrift
Plan for Employees of Sentinel Transportation Company (the Sentinel
Thrift Plan; collectively, the DuPont Plans) invest, in exchange for
units in a newly-established group trust (the Group Trust), where DCMC,
a wholly owned subsidiary of E.I. duPont de Nemours and Company
(DuPont), one of the sponsors of the DuPont Plans, acts as both a
fiduciary for the Master Trust and the Group Trust.
Section II. Specific Conditions
This proposed exemption is subject to the following conditions:
(a) A fiduciary (the Independent Fiduciary), who is acting on
behalf of the DuPont Plans, who is independent of and unrelated to
DuPont and its subsidiaries, as defined in paragraph (e) of Section IV
below, has the opportunity to review the proposed in kind transfer of
the Debt Securities that are held in the Master Trust, to the Group
Trust, in exchange for units in the Group Trust, and receives, in
advance of the investment by the Master Trust in the Group Trust, full
written disclosures concerning the Group Trust, which include, but are
not limited to the following:
(1) A private offering memorandum describing the transaction;
(2) A table listing management fees, as negotiated under the
applicable investment management agreements, and projected costs;
(3) A chart showing the effect of such fees and costs on an
investment in the Group Trust for different amounts of Debt Securities
managed in the Group Trust;
(4) A statement of the reasons why DCMC may consider such
investment to be appropriate for the DuPont Plans;
(5) A statement on whether there are any limitations applicable to
DCMC with respect to which assets of a DuPont Plan may be invested in
the Group Trust and the nature of such limitations; and
(6) Copies of the proposed and final exemption.
(b) On the basis of the foregoing information, the Independent
Fiduciary authorizes, in writing, the in kind transfer of the Debt
Securities that are held on behalf of the DuPont Plans in the Master
Trust to a series of subtrusts under the Group Trust, in exchange for
units in the Group Trust. Such authorization is to be consistent with
the responsibilities, obligations, and duties imposed on fiduciaries by
part 4 of title I of the Act. Specifically, the Independent Fiduciary,
before authorizing the transfer of assets by the DuPont Plans from the
Master Trust to the Group Trust, determines that:
(1) The terms of the in kind transfer transaction, are fair to the
participants in the DuPont Plans, and are comparable to, and no less
favorable than, terms obtainable at arm's length between unaffiliated
parties; and
(2) The in kind transfer transaction is in the best interest of the
DuPont Plans and their participants and beneficiaries.
(c) No sales commissions, fees or other costs are paid by the
DuPont Plans in connection with the in kind transfer transaction.
Furthermore, no additional management fees are charged to the DuPont
Plans by DCMC in the Group Trust.
(d) The in kind transfer transaction is a one-time transaction for
the DuPont Plans, the transferred assets constitute a pro rata portion
of all of the assets of the DuPont Plans that are held in the total
return tier portion of the DuPont Stable Value Fund (the Fund) within
the Master Trust prior to the transfer.
(e) The per unit value of the units representing interests in the
subtrusts created under the Group Trust that are issued to each DuPont
Plan have an aggregate value that is equal to the value of the Debt
Securities transferred to the Group Trust on the date of the transfer,
as determined in a single valuation performed in the same manner and at
the close of business on the same day in accordance with Securities
Exchange Commission Rule 17a-7 under the Investment Company Act of 1940
(the 1940 Act), as amended (Rule 17a-7), (using sources independent of
DCMC), and the procedures established by the Master Trust to Rule 17a-
7.
(f) Fair market value of the Debt Securities for which a current
market price can be obtained is determined by reference to the last
sale price for transactions reported in the consolidated transaction
reporting system (the Consolidated System), a recognized securities
exchange, or the National Association of Securities Dealers Automated
Quotation System (the NASDAQ System). If there are no reported
transactions or if the Debt Securities are not quoted in the NASDAQ
System, fair market value is determined by taking the average of the
highest current independent bid and lowest current independent ask
prices as of the close of business as provided to the Master Trust's
investment managers and the trustee of the Group Trust by three
independent third-party commercial pricing sources. If a price is
unavailable through such sources, the Master Trust's investment
managers solicit bids from at least three independent dealers who stand
ready to trade at such bids. All commercial pricing sources and dealers
are pre-approved by the such investment managers. The fair market value
of any illiquid debt securities is provided to the Independent
Fiduciary by DCMC for review and approval of the methodology and the
application of such methodology in valuing such Debt Securities.
(g) DCMC provides, within 30 days after the completion of the
proposed transaction, a confirmation statement to the Independent
Fiduciary containing the following information:
(1) The identity of each Debt Security that DCMC deemed suitable
for transfer from the Master Trust to the Group Trust;
(2) The current market price of each Debt Security for purposes of
the transfer, as determined on the date of such in kind transfer;
(3) The identity of each Debt Security that does not fall into at
least one of the following categories: (i) A reported security; (ii) a
security principally traded on an exchange; or (iii) a security quoted
on the NASDAQ System;
(4) The identity of each pricing service or market maker consulted
in determining the fair market value of the Debt Securities, and
[[Page 13889]]
(5) The aggregate dollar value of the Debt Securities that were
held on behalf of the DuPont Plans in the Master Trust immediately
before the in kind transfer, and the number of Group Trust units held
by the Master Trust for the DuPont Plans immediately after the transfer
(the related per unit value and the aggregate value).
(h) After the transfer of Debt Securities from the Master Trust to
the Group Trust, the Independent Fiduciary performs a review verifying
the pricing information supplied by the investment managers and the
Group Trustee.
(i) The Debt Securities that are transferred from the Master Trust
to the Group Trust are valued using the same methodology currently used
by the Master Trust to value such securities. Similarly, the Group
Trust uses the same valuation methodology.
(j) DCMC does not execute the in kind transfer transaction unless
the Independent Fiduciary for the DuPont Plans consents to such in kind
transfer in writing.
(k) DCMC does not execute the in kind transfer transaction unless
the wrap contracts issued by certain unrelated banks and insurance
companies to the Master Trust agree in advance to maintain the then-
current book value for accounting purposes with respect to the assets
transferred to the Group Trust. In addition, DCMC absorbs all costs
associated with the commitments.
(l) Each of the DuPont Plan's dealings with the Master Trust, the
Group Trust and DCMC is on a basis that is no less favorable to such
Plan than dealings between the Group Trust and other holders of Group
Trust units.
Section III. General Conditions
This proposed exemption is subject to the following general
conditions:
(a) DCMC maintains for a period of six years the records necessary
to enable the persons described below in paragraph (b) of this Section
III to determine whether the conditions of this exemption have been
met, except that (1) a prohibited transaction will not be considered to
have occurred if, due to circumstances beyond the control of DCMC, the
records are lost or destroyed prior to the end of the six year period,
and (2) no party in interest other than DCMC shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act or
to the taxes imposed by section 4975(a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) of this Section III,
and notwithstanding any provisions of sections 504(a)(2) and (b) of the
Act, the records referred to in paragraph (a) are unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) The Independent Fiduciary described in paragraph (e) of
Section IV; or
(iii) Any participant or beneficiary of the DuPont Plans or any
duly authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described in paragraph (b)(1)(ii) and (iii)
of this Section III shall be authorized to examine trade secrets of
DCMC, or commercial or financial information which is privileged or
confidential.
Section IV. Definitions
For the purposes of this proposed exemption,
(a) The term ``DCMC'' means DuPont Capital Management Corporation
and any affiliate of DCMC, as defined below in Section IV(b).
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``relative'' means a ``relative,'' as that term is
defined in section 3(15) of the Act, (or a ``member of the family,'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(e) The term ``Independent Fiduciary'' means a fiduciary who is:
(1) independent of and unrelated to DCMC and its affiliates, and (2)
appointed to act on behalf of the Plan for all purposes related to, but
not limited to, (A) the in kind transfer of the Debt Securities by the
Master Trust to the Group Trust, (B) the Group Trust, in turn,
transferring units equal in value to the assets of the Master Trust
held in certain stable value funds. For purposes of this proposed
exemption, a fiduciary will not be deemed to be independent of and
unrelated to DCMC if: (1) Such fiduciary directly or indirectly
controls, is controlled by or is under common control with DCMC; (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 DCMC
in connection with the transaction contemplated herein if the amount of
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 from DCMC and its
affiliates during any year of its engagement, exceeds 5 percent (5%) of
the Independent Fiduciary's annual gross revenue from all sources for
its prior tax year.
(f) The term ``transferable securities'' means securities (1) for
which market quotations are readily available (as determined under Rule
17a-7 of the 1940 Act) and (2) which are not: (i) Securities which, if
distributed, would require registration under the Securities Exchange
Act of 1933 (the 1933 Act); (ii) securities issued by entities in
countries which (a) restrict or prohibit the holding of securities by
non-nationals other than through qualified investment vehicles, such as
the Mutual Funds, or (b) permit transfers of ownership of securities to
be effected only by transactions conducted on a local stock exchange;
(iii) certain portfolio positions (such as forward foreign currency
contracts, futures, and options contracts, swap transactions,
certificates of deposit and repurchase agreements) that, although they
may be liquid and marketable, involve the assumption of contractual
obligations, require special trading facilities or can only be traded
with the counter-party to the transaction to effect a change in
beneficial ownership; (iv) cash equivalents (such as certificates of
deposit, commercial paper and repurchase agreements) which are not
readily distributable; (v) other assets which are not readily
distributable (including receivables and prepaid expenses), net of all
liabilities (including accounts payable); and (vi) securities subject
to ``stop transfer'' instructions or similar contractual restrictions
on transfer. Notwithstanding the above, the term ``transferrable
securities'' also includes securities that are considered private
placements intended for large institutional investors, pursuant to Rule
144A under the 1933 Act, which are valued by the unrelated investments
managers for the
[[Page 13890]]
DuPont Stable Value Fund (the Fund), or if applicable, by the
Independent Fiduciary, which will confirm and approve all such
valuations.
Summary of Facts and Representations
1. DCMC, a wholly owned subsidiary of DuPont, is a registered
investment adviser under the Investment Advisers Act of 1940. DCMC is
intended to qualify as an ``in house asset manager'' or ``INHAM'' \10\
with respect to the DuPont Plans. DCMC acts as investment manager with
respect to the Fund, which is offered as an investment option under
each of the DuPont Plans. The assets of the Fund are held in the Master
Trust. DCMC is responsible for managing the Fund, including certain
underlying Debt Securities that, together with certain bank and
insurance contracts, constitute a portion of the synthetic guaranteed
investment contracts held by the Fund. However, DCMC directly manages
approximately 20% of the Debt Securities, valued in excess of $3.5
billion, and it has appointed four outside investment managers to
manage the remainder of the debt securities. DCMC receives no fees for
its services to the DuPont Plans, but it does charge back to the DuPont
Plans, a pro rata share of direct costs related to its management
activities.
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\10\ See Prohibited Transaction Class Exemption (PTCE) 96-23 (61
FR 15975, April 10, 1996) (the INHAM Exemption).
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2. The DuPont Plans are tax-qualified, defined contribution plans
described in section 401(a) of the Code. Each of the DuPont Plans
offers a ``cash or deferred arrangement,'' matching contributions, and
may also offer discretionary employer contributions. Each of the DuPont
Plans offers a selection of investment options to participants in a
manner intended to satisfy the requirements of an ERISA ``section
404(c) plan.'' \11\ Several of the investment options offered to ERISA
section 404(c) plans are common among the DuPont Plans, including the
Fund. The common funds are pooled under the Master Trust while
investment options that are unique to a DuPont Plan are held under a
separate trust. The separate trusts and the Master Trust are exempt
from taxation under the provisions of section 501(a) of the Code. As of
January 31, 2004, the DuPont Plans covered approximately 68,000
participants and beneficiaries.\12\ The fair market value of the DuPont
Plans' assets as of January 31, 2004 exceeded $9.5 billion.
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\11\ See 29 CFR 2550.404c-1.
\12\ As of January 31, 2004, the SIP covered approximately
66,866 participants and it had total assets in excess of $9.5
billion. As of January 31, 2004, the Sentinel Thrift Plan covered
approximately 485 participants and it had total assets of
approximately $22.1 million. As of January 31, 2004, the DSG Savings
Plan covered approximately 91 participants and it had total assets
of approximately $8.6 million. Generally, there is no overlap of
participants.
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The Named Fiduciary of each DuPont Plan is responsible for the
selection of investment options for such Plan and for the selection of
investment advisers and managers.\13\ Each DuPont Plan permits the
Named Fiduciary to appoint investment managers and to delegate to an
investment manager the authority to appoint additional investment
managers. The Named Fiduciary of each DuPont Plan has delegated
investment fiduciary authority with respect to investment in the Fund
to the Vice President DuPont Capital Management (DCM), \14\ who, in
turn, has entered into an investment management agreement with DCMC to
manage assets of the Fund and to appoint additional investment managers
to manage assets of the Fund.
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\13\ The Named Fiduciary for SIP is the Vice President of DuPont
Capital Management; Named Fiduciary authority for the Sentinel
Thrift Plan is divided between Sentinel Transportation, L.L.C. and
an Employee Benefit Plans Board; and the Named Fiduciary for the DSG
Savings Plan is Optimum Quality Grains, Inc.
\14\ DCM is a division of DuPont, while DCMC is a wholly owned
subsidiary of DuPont.
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3. The Fund constitutes one of several investment options made
available to participants in the DuPont Plans, and as of September 30,
2002, it represented more than 60% of total combined assets of such
plans. The Fund is a ``stable value fund'' with an investment objective
of providing a stable rate of return that exceeds the rate of return on
money market funds with comparable risk. The Fund is also managed to
accommodate daily participant-related liquidity needs as provided by
the DuPont Plans. As such, the Fund is structured into two tiers (a) a
``liquidity tier,'' which holds cash and other marketable securities
consisting of one or two short-term synthetic guaranteed investment
contracts (synthetic GICs), which are backed by mutual or commingled
bond funds, maturing guaranteed investment contracts (GICs), maturing
separate account GICs, and or maturing synthetic GICs; and (b) a
``total return tier'' consisting entirely of synthetic GICs, which are
managed on a total return basis with no established maturity date
(known as ``evergreen synthetic GICs'').\15\ The liquidity tier and the
total return tier each comprise approximately 50% of the Fund's assets.
The overall rate of return on the Fund represents a combination of the
rates of return of each of the tiers.
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\15\ Unlike traditional GICs which contain a contractual promise
to pay a specified rate of interest over the life of the contract, a
synthetic GIC consists of a discreet portfolio of debt securities
and a ``wrap'' contract associated with the portfolio that
guarantees a rate of return with respect to the portfolio over a
crediting period. Wrap contracts are typically issued by banks and
insurance companies. Synthetic GICs became an important component of
stable value funds after the collapse of a few large GIC issuers in
the early 1990's. Since the investing plan retains the portfolio of
debt securities underlying the synthetic GIC, the potential loss to
the plan is limited to the value of the wrap contracts.
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4. The proposed Group Trust, which will be utilized for the total
return tier of the Fund, will be a group trust described in Rev. Rul.
81-100. The Group Trustee, which has been selected by DCMC, will be
State Street Bank & Trust (SSB), a subsidiary of State Street
Corporation.\16\ SSB will act as a directed trustee with respect to the
Group Trust.\17\
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\16\ DCMC is not affiliated with any banks or insurance
companies used as wrap providers for the Fund. State Street Global
Advisors (SSGA), a division of SSC, and DCMC are 50-50 joint venture
partners in Wilton Asset Management, a marketer of closed-end
private equity funds, SSB has not issued wrap contracts to the
DuPont Plans and it is not anticipated that SSB will issue wrap
contracts to Plans that invest in the Group Trust. Furthermore, SSB
will not have any role in the selection of the wrap issuers or
investment managers.
\17\ As Group Trustee, SSB will be entitled to receive the
following fees relating to the Group Trust: asset-based fees,
transaction fees, pooled accounting fees, performance reporting
fees, securities lending fees, short-term investment fees, and
reimbursement for audit, courier, communication and other applicable
miscellaneous expenses. According to DCMC, these fees are
statutorily exempt under section 408(b)(2) of the Act and the
regulations promulgated thereunder. However, the Department
expresses no opinion herein on whether such fees satisfy the
requirements of section 408(b)(2) of the Act.
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5. Besides the DuPont Plans, the Investment Plan for Salaried
Employees of CONSOL Energy, Inc. (the CONSOL Energy Plan) a defined
contribution plan sponsored by CONSOL Energy, Inc. (CONSOL Energy), an
employer who is not affiliated with DuPont but for which DCMC has been
appointed as an investment manager, may participate in the
establishment of the Group Trust. CONSOL Energy was previously a wholly
owned business of DuPont. In connection with the divestiture of CONSOL
Energy, assets were transferred to a stable value fund established
under the CONSOL Energy Plan. As of September 30, 2003, the CONSOL
Energy Plan had total assets of $917,209,067.07 and 5,560 participants.
The Independent Fiduciary of the CONSOL Energy Plan appointed DCMC as
an investment manager of the Plan's stable value fund and of the
underlying Debt Securities in such fund. As with the Fund, DCMC has
appointed four
[[Page 13891]]
investment managers to assist in the management of the Debt Securities
in the CONSOL Energy Plan's stable value fund.
DCMC has not secured any commitments from the CONSOL Energy Plan to
participate in the Group Trust. However, it anticipates such Plan's
investment. If the CONSOL Energy Plan does choose to participate in the
Group Trust, DCMC does not believe there would be a violation of
section 406(a)(1)(D) of the Act because the decision to invest in the
Group Trust will be made by a fiduciary for the CONSOL Energy Plan who
is independent of DuPont and its subsidiaries. DCMC states that the
fact that it will realize a benefit incidental to the transaction does
not cause the transaction to violate section 406(a)(1)(D) of the Act.
Therefore, this exemption will apply only to the DuPont Plans currently
investing in the Master Trust.
In addition, to the DuPont Plans and potentially, the CONSOL Energy
Plan, tax-qualified plans of other unrelated employers will be allowed
to participate in the Group Trust at a future date. However, DCMC will
have no prior management responsibilities with respect to such plans.
6. Thus, the remaining parties to the proposed transaction will be
the investment managers DCMC will appoint as fiduciaries to assist it
in the management of Group Trust assets. DCMC will retain the
discretion to appoint or remove any or all of such managers. In this
regard, DCMC may appoint four unrelated managers who will manage
approximately 20% each of the Debt Securities held in the Group Trust
or retain the existing managers.
7. DCMC will propose to the Independent Fiduciary for the DuPont
Plans, the establishment of the Group Trust to hold the Debt Securities
which DCMC currently manages for the Fund. Specifically, the
Independent Fiduciary, before authorizing the transfer of assets by the
DuPont Plans from the Master Trust to the Group Trust, will determine
that (a) the terms of the transaction, are fair to the participants in
the DuPont Plans and are comparable to, and no less favorable than,
terms obtainable at arm's length between unaffiliated parties; and (b)
the transaction is in the best interest of the DuPont Plans, their
participants and beneficiaries.
In addition, the Independent Fiduciary will receive written
disclosures that will include, but will not be limited to, the
following information: (a) A private offering memorandum describing the
transaction; \18\ (b) a table listing management fees, as negotiated
under the applicable investment management agreements, and projected
costs; (c) a chart showing the effect of such fees and costs on an
investment in the Group Trust for different amounts of Debt Securities
managed in the Group Trust; (d) a statement of the reasons why DCMC may
consider such investment to be appropriate for the DuPont Plans; (e) a
statement of whether there are any limitations applicable to DCMC with
respect to which assets of a DuPont Plan may be invested in the Group
Trust and the nature of such limitations; and (f) copies of the
proposed and final exemption.
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\18\ The private offering memorandum will contain substantially
the same information that would be included in a prospectus for a
registered security. Moreover, the DuPont Plans will have an
opportunity to request whatever additional information they may need
for purposes of evaluating the offering.
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As stated above, DCMC will establish the Group Trust as a trust
intended to qualify as tax-exempt under Rev. Rul. 81-100. DCMC will
then, upon approval of the Independent Fiduciary, transfer the Debt
Securities under DCMC's management into five separate funds or
subtrusts established under the Group Trust for each investment manager
of Debt Securities.\19\ In exchange for the Debt Securities transferred
to the Group Trust, the DuPont Plans will receive units in the Group
Trust of equal value to the Debt Securities transferred to the Group
Trust in a one-time transaction. The Debt Securities will have readily
ascertainable market values.\20\ The value of the units will be
determined by dividing the total fair market value of the transferred
Debt Securities on the day of transfer by the number of Group Trust
units issued to the DuPont Plans. No sales commissions, fees or other
costs will be paid by the DuPont Plans in connection with the in kind
transfer transaction.
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\19\ For the DuPont Plans, all of the Debt Securities held in
the total return tier of the Fund will be transferred to the Group
Trust.
\20\ It is possible that an investment manager for the Fund may
have purchased Debt Securities through a private placement offering.
Such securities may either be ``144A private placements,'' which
trade similarly to public securities or others that are not as
readily tradable. The latter category of private placement is
intended to be held to maturity or traded on a limited basis. The
value of such securities will be determined by an unrelated Fund
investment manager or if applicable, by the Independent Fiduciary on
the transfer date based on credit quality, length to maturity and
current interest rates. Based on values on September 30, 2002, less
than 3.2% of the Group Trust is expected to be invested in such Debt
Securities.
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8. The wrap contracts held by the Master Trust will not be
transferred to the Group Trust. Instead, DCMC will secure commitments
from the banks and insurance companies which issued the wrap contracts
to substitute the Group Trust units under the wrap contracts for the
Debt Securities that are transferred to the Group Trust. DCMC will
cover any additional costs associated with the wrap contract
commitments. Under the terms of the agreement, the book value of the
evergreen synthetic GICs as a whole after the substitution of Group
Trust units will not be less than the book value of the evergreen
synthetic GICs prior to the transfer of Debt Securities to the Group
Trust.\21\
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\21\ According to AICPA Statement of Position 94-4, ``book
value'' is defined as the measurement of value of stable value
investments, including synthetic GICs. Generally, book value
consists of the amount paid for the underlying portfolio of debt
securities, plus the interest credited with respect to the portfolio
under the terms of the wrap contract. The wrap contract specifies
the types of securities including units of funds that can be
wrapped. Since the wrap will apply to units after the transfer to
the Group Trust, the applicant states that the wrap contract likely
will require minor modification to continue book value treatment
with respect to the units at the same levels that applied to the
Debt Securities before the transfer to the Group Trust.
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9. Accordingly, DCMC requests an administrative exemption from the
Department in order to allow it to engage in the in kind transfer
transaction. It is represented that the exchange of Debt Securities
held by the Master Trust through the Fund for Group Trust units
constitutes a prohibited transaction described in section 406(a) of the
Act due to the ``sale or exchange'' of plan assets for Group Trust
units. It is also represented that DCMC is a fiduciary of the DuPont
Plans and will cause such plans to transfer Debt Securities to the
Group Trust in exchange for Group Trust units. Further, DCMC will
continue to manage the assets as investment manager of the Group Trust
after the in kind transfer. Because DCMC is directing an exchange in
which it is on both sides of the transaction, DCMC does not believe the
INHAM Exemption applies to the contemplated transaction.
In addition, it is represented that the establishment of the Group
Trust with Fund assets may result in a violation of section 406(b) of
the Act because of the potential for increased management fees payable
to DCMC in the future by unrelated plans willing to invest in the Group
Trust. Although the applicant believes that the establishment of the
Group Trust with assets of the DuPont Plans will likely result in a net
decrease in fees and costs to the Plans over time, DCMC states that the
expected future increase in asset values as assets accumulate and as
unrelated plans contribute assets to the Group Trust may result in
larger fees collected by DCMC
[[Page 13892]]
than DCMC would have collected if the Group Trust had not been
established.
10. DCMC is also requesting that the exemption encompass DCMC's
methodology for valuing Group Trust units utilized in PTCE 97-41 (62 FR
42830, August 8, 1997), but adapted to a non-bank context. In this
regard, PTCE 97-41 provides a methodology for converting interests in
bank-sponsored collective investment funds to mutual funds for which
the bank acts as an investment adviser. Specifically, DCMC proposes
valuing the exchanged Debt Securities on the transfer date in exchange
for Group Trust units in a manner consistent with PTCE 97-41.\22\
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\22\ In this regard, the ``current market price'' for specific
types of Debt Securities will be determined as follows:
(a) If the security is a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the 1934 Act, the last sale price with
respect to such security reported in the Consolidated System on the
Group Trust valuation date; or if there are no reported transactions
in the Consolidated System that day, the average of the highest
current independent bid and the lowest current independent offer for
such security (reported pursuant to Rule 11Ac1-1 under the 1934
Act), as of the close of business on the Group Trust valuation date.
(b) If the security is not a reported security, and the
principal market for such security is an exchange, then the last
sale on such exchange on the Group Trust valuation date; or if there
are no reported transactions on such exchange that day, the average
of the highest current independent bid and lowest current
independent offer on such exchange as of the close of business on
the Group Trust valuation date.
(c) If the security is not a reported security and is quoted in
the NASDAQ system, then the average of the highest current
independent bid and lowest current independent offer reported on
NASDAQ as of the close of business on the Group Trust valuation
date.
(d) For all other securities, the average of the highest current
independent bid and lowest current independent offer as of the close
of business on the Group Trust valuation date, determined on the
basis of reasonable inquiry. (For securities in this category, DCMC
represents that it will obtain quotations from at least three
sources which were either broker-dealers or pricing services
independent of and unrelated to DCMC and, where more than one valid
quotation was available, used the average of the quotations to value
the securities, in conformance with interpretations by the SEC and
practice under Rule 17a-7.)
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Thus, fair market value will be determined by the average of the
highest current independent bid and the lowest current independent
offer as of the close of business as provided to the investment
managers by three independent third-party commercial pricing sources.
If a price is unavailable through such sources, the investment managers
will solicit bids from at least three independent dealers who stand
ready to trade at such bids. All commercial pricing sources and dealers
will be pre-approved by the investment managers. The fair market value
of any private placement Debt Securities that are not readily tradable
will be provided by DCMC to the Independent Fiduciary for review and
approval of the methodology and the application of such methodology in
valuing such Debt Securities.\23\
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\23\ As stated previously, as of September 30, 2002, such
securities comprise less than 3.2% of the expected value of the
Group Trust.
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In addition, as noted in Representation 8, DCMC will not make any
transfer of Debt Securities to the Group Trust without the advance
agreement of the wrap issuers to wrap the Group Trust units at a book
value that is not less than the book value reported to the Fund by the
wrap issuers prior to the transfer.\24\ Also, DCMC will pay for any
increase.
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\24\ The ``wrap'' value will be the difference between the fair
(or market) value of the underlying Debt Securities and the book (or
contract) value of each synthetic GIC. According to DCMC, AICPA
Statement of Position SOP 94-4 values stable value investment
contract, at contract value. DCMC further states that all of the
contracts contained in the Fund satisfy the requirement of SOP 94-4.
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11. Thus, with respect to the in kind transfer transaction, Group
Trust units will be valued by the Group Trustee based on the aggregate
asset value of the Debt Securities held by the Group Trust as of the
transfer date as determined in accordance with Rule 17a-7, divided by
the number of units issued. The unit value, market value of exchanged
securities and the number of units issued will be provided to the
Independent Fiduciary of the DuPont Plans within 30 days of the
transfer to the Group Trust.
In this regard, the confirmation statement will contain the
following information:
(a) The identity of each Debt Security that DCMC deemed suitable
for transfer from the Master Trust to the Group Trust; (b) the current
market price of each Debt Security for purposes of the transfer as
determined on the date of the in kind transfer; (c) the identity of
each Debt Security that does not fall into at least one of the
following categories: a reported security; a security principally
traded on an exchange; or a security quoted on the NASDAQ System; (d)
the identity of each pricing service or market maker which was
consulted in determining the fair market value of the Debt Securities,
and the aggregate dollar value of the Debt Securities that were held on
behalf of the DuPont Plans in the Master Trust immediately before the
in kind transfer transaction and the number of Group Trust units held
by the Master Trust for the DuPont Plans immediately after the in kind
transfer transaction (the related per unit value and the aggregate
value).
12. Once the Group Trust is established, DCMC expects that plans of
unrelated employers will invest therein. It is anticipated that most of
the investing plans will do so to fund all or a portion of their stable
value funds. However, some plans may invest solely to hold a
diversified portfolio of debt securities without associating the Group
Trust units with a wrap contract. Because the valuation of Group Trust
units is not dependent on the existence of a wrap contract, the number
of issued units will be determined on the day of the transfer of any
Debt Securities by dividing the fair market value of the transferred
Debt Securities by the unit value of the applicable funds in the Group
Trust. If cash is transferred, the number of units issued will be the
cash amount divided by unit value, as determined by the Group Trustee.
13. If the Group Trust is established as proposed, DCMC will not
charge an investment management fee to the DuPont Plans, but it will
continue to charge to the DuPont Plans a proportionate share of direct
costs incurred by the subtrust under the Group Trust managed by
DCMC.\25\ In addition, DCMC or an affiliate will charge the DuPont
Plans direct costs for investment management of the Group Trust, only
after full disclosure of the Group Trust's fee arrangement to the
Independent Fiduciary. The overall fee structure will be similar, if
not less costly, to the DuPont Plans than the fee structure currently
in effect.
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\25\ Such costs will be allocated equally among subtrust units
owned by the DuPont Plans.
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It is anticipated that DCMC's (or an affiliate's) total reimbursed
expenses attributable to the assets of the DuPont Plans in the Group
Trust will not exceed (and maybe less) than the amount of such
reimbursed expenses before the transfer of DuPont Plan's assets in the
Master Trust to the Group Trust. The cost savings, are expected to
result from the ability of DCMC to consolidate investment management
decisions and resources over a larger portfolio as opposed to separate
and smaller portfolios maintained under separate trusts. In addition,
DCMC expects investment management fees, as a percentage of assets,
will decline as the asset base increases in size.
14. In order to address the potential conflict caused by the
establishment of the Group Trust with Fund assets, the DuPont Plans
will retain an independent fiduciary to review the proposed
establishment of the Group Trust. DuPont or DCMC will pay the
Independent Fiduciary a flat fee in advance of its review of the
proposed
[[Page 13893]]
transaction.\26\ The fee is payable regardless of whether the proposed
transaction is consummated. Prior to approving the transaction, the
Independent Fiduciary will receive an offering memorandum for the
proposed transaction and will be given access to Fund reports and
transaction data in order to determine whether the proposed transaction
is in the best interests of the participants of the DuPont Plans.
Should the Independent Fiduciary approve the transaction and direct the
exchange of Debt Securities for Group Trust units, the Independent
Fiduciary will receive confirmation from DCMC of the transfer of Debt
Securities from the Master Trust to the Group Trust. The Independent
Fiduciary will also have the opportunity to confirm that the transfer
was executed as described in the offering memorandum and to confirm and
approve the proper valuations for the Debt Securities, including the
private placements. The Independent Fiduciary, before authorizing the
transfer of the DuPont Plans assets to the Group Trust, must determine
that the terms of the transfer are fair to the participants in the
DuPont Plans and comparable to and no less favorable than terms
obtainable at arm's length between unaffiliated parties and that the
transfer is in the best interest of the DuPont Plans and their
participants and beneficiaries.
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\26\ The fee may be a flat fee or hourly fee. If a flat fee, it
will be paid in advance of the Independent Fiduciary's review. If an
hourly fee, the fee will be estimated and substantially paid in
advance to the Independent Fiduciary as a retainer. The purpose of
the advance payment is to remvoe any appearance that the independent
Fiduciary's fee is contingent on its recommendation to the DuPont
Plans.
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15. DCMC represents that U.S. Trust Company, N.A. (U.S. Trust) has
confirmed its independence from DCMC and is qualified to serve as the
Independent Fiduciary for the DuPont Plans with respect to the proposed
in kind transfer transaction. U.S. Trust, in turn, represents that it
understands and will accept the duties, responsibilities and
liabilities in acting as a fiduciary under the Act for the Plan. U.S.
Trust represents that as the Independent Fiduciary, it will be
responsible for (a) analyzing, from an investment perspective, the
fairness and reasonableness of the methodology used with respect to the
in kind transfer transaction; and (b) giving its opinion as to the
fairness and reasonableness of such methodology, as compared with a
redemption for cash and subsequent reinvestment of such cash, based on
such analysis. This determination and opinion are set forth in a
written report dated December 17, 2003 (the Report). Specifically, in
the Report, U.S. Trust concludes that--
(a) The in kind transfer transaction will likely avoid certain
transaction costs otherwise incurred in a cash redemption;
(b) The Debt Securities associated with the proposed transaction
will be calculated based on the Master Trust's respective statements of
assets and liabilities, valued in accordance with the pricing
procedures established by the Master Trust's Board of Trustees. In this
regard, U.S. Trust has reviewed a sample spreadsheet developed by DCMC
to calculate the exact number of Debt Securities to be transferred, and
believes the information provided to be conceptually and mathematically
correct;
(c) All Debt Securities held by the Master Trust will be
``qualifying'' securities;
(d) The proposed transaction will be in compliance with the Plan's
investment guidelines;
(e) The methodology used to conduct the in kind transfer
transaction will be comparable to, and no less favorable than, similar
in kind transfer transactions reached at arm's length between
unaffiliated parties.
U.S Trust represents that, if this proposed exemption is granted
and the in kind transfer transaction is thereafter undertaken, it will
be responsible for updating its findings and opinions to confirm
whether such findings and opinions are applicable as of the anticipated
date of such transaction. In this regard, U.S. Trust states that it
will review the in kind transfer transaction and confirm in writing
whether such transaction has been effectuated consistent with the
required criteria and procedures set forth in the Report. In carrying
out this duty, U.S. Trust represents that, if the proposed exemption is
granted and the in kind transfer transaction occurs, it will conduct a
post-exemption review, which will include (a) reviewing each DuPont
Plan's current investment policy guidelines; (b) reviewing each DuPont
Plan's investment portfolio and the Master Trust's assets as of the
most recent common date for which such data is available; and (c)
ascertaining whether the policies, procedures and controls established
for effectuating the transfer remains unchanged. Moreover, U.S. Trust
represents that it will conduct a post-transfer review to provide an
additional safeguard to the Plan. In this regard, U.S. Trust will
evaluate and test whether the in kind transfer transaction has been
effectuated consistent with the required criteria and procedures and
confirm this in writing. Consistent with this requirement, U.S. Trust
represents that if the exemption is granted and the in kind transfer
transaction occurs, it will update the findings and opinions as set
forth in the Report so as to confirm whether they still apply as of the
expected date of the transfer. U.S. Trust will provide its opinion that
the methodologies for the proposed transaction is fair to the DuPont
Plans and reasonable in all material respects. In addition, U.S. Trust
will state that the proposed transaction is in the interest of the
participants and beneficiaries of the DuPont Plans since the
anticipated costs savings are likely to be material. Further, U.S.
Trust will conclude that if the exemption is granted, and all other
essential facts and circumstances of the in kind transfer transaction
remains materially unchanged at the time DCMC seeks to effectuate the
transaction, it will issue a favorable recommendation regarding the
commencement of such effectuation.
16. The costs of applying for the exemption, establishing the Group
Trust and preparing disclosure documents for review by the Independent
Fiduciary will be borne by DuPont or DCMC and not by the DuPont Plans.
Furthermore, DCMC will maintain for a period of six years in a manner
that is accessible for audit and examinations, records necessary to
enable certain persons, such as representatives from the Department,
the Service, the Independent Fiduciary, or any participant or
beneficiaries of the DuPont Plans to determine whether the conditions
of the exemption have been met.
The exchange of Debt Securities by the Master Trust for units in
the Group Trust will not result in any commissions being paid to DCMC
or any of the investment managers appointed by the DuPont Plans. For
the exchange of Debt Securities for Group Trust units, the Group
Trustee will calculate the unit value based on the market value of the
Debt Securities transferred so that the value of the units issued to
the Fund is equal to the fair market value of the Debt Securities
transferred. Statements indicating the fair market value at which the
Debt Securities are exchanged, the number of units issued in connection
with such exchange, and the calculation of unit value will be provided
to the Independent Fiduciary.
17. In summary, it is represented that the proposed transaction
will satisfy the statutory criteria for an exemption under section
408(a) of the Act for the following reasons:
(a) The in kind transfer transaction will be a one-time
transaction, and for
[[Page 13894]]
the DuPont Plans, the transferred assets will constitute a pro rata
portion of all of the assets of the DuPont Plans that are held in the
total return tier portion of the Fund, which comprises part of the
Master Trust prior to the transfer.
(b) The DuPont Plans will pay no sales commissions, or other
similar fees in connection with the in kind transfer transaction.
Furthermore, no additional management fees will be charged to the
DuPont Plans by DCMC in the Group Trust.
(c) The assets transferred to the Group Trust pursuant to the in
kind transfer transaction will consist of Debt Securities which are
deemed to be ``transferable securities.''
(d) Each DuPont Plan will receive a proportionate share of the
transferable securities which will equal in value to the number of
units in the Group Trust such plan will receive, as determined in a
single valuation performed in the same manner in accordance with
valuation procedures prescribed by Rule 17a-7 of the 1940 Act.
(e) Prior to the in kind transfer transaction, DCMC will provide to
the Independent Fiduciary a full and detailed written disclosure of
information regarding the transaction and, on the basis of the
foregoing information, such Independent Fiduciary will provide written
authorization for the transaction.
(f) The Independent Fiduciary will determine that (1) the terms of
the in kind transfer transaction are fair to the participants in the
DuPont Plans, and are comparable to, and no less favorable than, terms
obtainable at arm's length between unaffiliated parties; and (2) the in
kind transfer transaction is in the best interest of the DuPont Plans
and their participants and beneficiaries.
(g) Not later than 30 days after the completion of an in kind
transfer transaction, DCMC will provide to the Independent Fiduciary
for the DuPont Plans, a written confirmation regarding such
transaction.
(h) Subsequent to the in kind transfer transaction, the Independent
Fiduciary will perform a post-transaction review which will include,
among other things, a random sampling of the pricing information
supplied by the Group Trustee.
(i) Each of the DuPont Plan's dealings with the Master Trust, the
Group Trust and DCMC will be on a basis that is no less favorable to
such Plan than dealings between the Group Trust and other holders of
Group Trust units.
(j) The Debt Securities that are transferred from the Master Trust
to the Group Trust will be valued using the same methodology currently
used by the Master Trust to value such securities. Similarly, the Group
Trust will use the same valuation methodology.
(k) DCMC will not execute the in kind transfer transaction unless
the Independent Fiduciary for the DuPont Plans consents to such in kind
transfer in writing.
(l) DCMC will not execute the in kind transfer transaction unless
the wrap contracts issuers to the Master Trust agree in advance to
maintain the then-current book value for accounting purposes with
respect to the assets transferred to the Group Trust.
Notice to Interested Persons
DCMC represents that it will distribute, by either first class mail
or by e-mail to DuPont Plan participants who have affirmatively elected
to access their account statements electronically, a copy of the notice
of proposed exemption (the Notice) within thirty (30) days of the date
of such Notice is published in the Federal Register. The Notice will
also be sent to the Named Fiduciaries and the Independent Fiduciary for
the DuPont Plans. The Notice will include a copy of the proposed
exemption, as published in the Federal Register, and a supplemental
statement, as required pursuant to 29 CFR 2570.43(b)(2), which informs
all interested persons of their right to comment on and/or request a
hearing with respect to the proposed exemption. Comments and requests
for a public hearing are due within sixty (60) days following the
publication of the proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Arjumand A. Ansari of the
Department at (202) 693-8566. (This is not a toll-free number.)
The UNITE National Retirement Fund; Located in New York, New York
[Exemption Application No. D-11185]
Proposed Exemption
I. Covered Transactions
The Department is considering granting an exemption under the
authority of section 408 of the Act and section 4975 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).\27\ If the exemption
is granted, the restrictions of sections 406(a)(1)(A) through(D),
406(b)(1), and 406(b)(2) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the proposed
purchase by the Union of Needletrades, Industrial and Textile Employees
(UNITE) and certain regional entities affiliated with and chartered by
UNITE (the UNITE Affiliates) from the UNITE National Retirement Fund
(the Pension Fund) of shares of perpetual cumulative convertible
preferred stock (the Preferred Stock) representing fifteen percent
(15%) of the outstanding equity interests in the ALICO Services
Corporation (ASC), a wholly-owned entity of the Pension Fund; provided
the conditions set forth in section II, below, are satisfied.
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\27\ For purposes of this exemption, references to specific
provisions of title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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II. Conditions
Prior to entering into the transactions, (a) an independent,
qualified fiduciary,(the Independent Fiduciary), as defined in section
III(a), below, determines, on behalf of the Pension Fund, whether the
Preferred Stock should be sold to UNITE and to the UNITE Affiliates;
(b) the Independent Fiduciary approves of the terms underlying the
Preferred Stock to be issued by ASC; (c) the Independent Fiduciary
negotiates and approves of the terms of the sales of the Preferred
Stock to UNITE and to the UNITE Affiliates; (d) the Independent
Fiduciary monitors the terms of the transactions and ensures that ASC,
UNITE, and the UNITE Affiliates comply with the approved terms of the
sales of the Preferred Stock; (e) the Independent Fiduciary determines
that the terms of the sales of the Preferred Stock are no less
favorable to ASC than terms that would be offered to an unrelated third
party under similar circumstances; (f) the Independent Fiduciary
determines that the purchase price for the Preferred Stock paid by
UNITE and by the UNITE Affiliates is no less than the fair market value
of such Preferred Stock, as of the date each of the transactions is
entered; (g) the Independent Fiduciary determines the fair market value
of the Preferred Stock, as of the date each of the transactions is
entered; (h) in determining the fair market value of the Preferred
Stock, the Independent Fiduciary obtains an appraisal from an
independent qualified appraiser selected by the Independent Fiduciary
and ensures that the appraisal and the Independent Fiduciary's analysis
of the appraisal are consistent with sound principles of valuation and
the elements described in paragraph 8, in the Summary of Facts and
Representations in this proposed exemption; and (i) the Pension Fund
incurs no fees, commissions, or other charges or
[[Page 13895]]
expenses as a result of its participation in the transactions other
than the fees incurred in requesting this exemption and the fee payable
to the Independent Fiduciary.
III. Definitions
For purposes of this exemption:
(a) the term, ``Independent Fiduciary,'' means an individual or
firm which is independent of and unrelated to ASC, UNITE, the UNITE
Affiliates, and any other party to the subject transactions (the
Parties), and which has acknowledged and agreed that it is a fiduciary
appointed to act on behalf of the Pension Fund for all purposes related
to the subject transactions. For purposes of this exemption:
(1) A fiduciary will not be deemed to be independent of and
unrelated to the Parties, if:
(i) such fiduciary directly or indirectly controls, is controlled
by or is under common control with such Parties;
(ii) such fiduciary directly or indirectly receives any
compensation or other consideration from such Parties in connection
with the transactions described in this proposed exemption; except that
an Independent Fiduciary may receive compensation for acting as an
Independent Fiduciary 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
decisions with regard to the subject transactions;
(2) No individual or firm shall serve as an Independent Fiduciary
during any year in which annual gross revenues received from business
with the Parties for that year exceeds five (5) percent of such
individual's or firm's annual gross revenues from all sources for the
prior tax year; and
(3) The individual or firm selected as an Independent Fiduciary
must be qualified to serve as fiduciary and to carry out the duties
responsibilities, as set forth herein.
Summary of Facts and Representations
1. The Pension Fund is a multiemployer pension plan jointly
trusteed by individuals selected by UNITE and individuals selected by
various employers who contribute to the plan (the Trustees). Certain
Trustees of the Pension Fund are also officers of UNITE and directors
of ASC. The Pension Fund provides pension benefits to workers covered
by collective bargaining agreements in the cotton garment and other
related unionized segments of the garment, textile, laundry, and allied
industries. The Pension Fund is an ``employee pension benefit plan,''
as defined under section 3(2) of the Act. As of December 31, 2001,
there were approximately 95,995 participants and beneficiaries in the
Pension Fund. As of December 31, 2001, the approximate aggregate fair
market value of the total assets of the Pension Fund was $577,684,500.
Effective December 1, 2003, the name of the Pension Fund was changed
from the UNITE National Cotton Retirement Fund to the Unite National
Retirement Fund as a result of a merger with the ILGWU National
Retirement Fund. It is represented that the merged fund has
approximately $1.5 billion in assets.
2. ASC is a holding company organized under the laws of New York
that is wholly-owned by the Pension Fund. The Trustees of the Pension
Fund appoint the ASC Board of Directors (the Board). ASC wholly owns
each of the following four (4) subsidiaries: (a) Amalgamated Life
Insurance Company (ALICO); (b) Alicare Inc. (Alicare); (c) Alicare
Medical Management, Inc. (AMM); and (d) UNITE Fund Administrators, Inc.
(UFA) (collectively, the ASC Subsidiaries).
ALICO provides life, disability, and medigap insurance primarily to
unions and union-sponsored trust funds. It also provides fully
retrospectively rated group life insurance to various jointly
administered funds.
Alicare is a full-service third-party fund administrator focusing
on the market for such service among Taft-Hartley plans. Alicare also
offers computer services, insurance brokerage and printing services.
Alicare's services are delivered through its four (4) divisions: (a)
Alicare, (b) Alicomp, (c) Aligraphics and (d) Amalgamated Agency.
AMM provides medical cost management services, including
utilization management, comprehensive claims cost containment, and a 24
Hour Nurse HelpLine to provide health information and education to
patients.
UFA, a not-for-profit tax-exempt enterprise, provides third-party
administration for the Pension Fund and several other funds sponsored
by UNITE and entities affiliated with UNITE (collectively, the Patron
Funds).\28\ The specific services provided by UFA include claims
processing, distribution and preparation of plan documents, collections
of contributions by employers and participants, record retention and
reporting to government authorities.\29\
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\28\ The Patron Funds for which UFA currently provides services
include, but are not limited to: the Pension Fund; UNITE National
Cotton Health Fund; Amalgamated Insurance Fund-Insurance Fund;
Amalgamated Insurance Fund-Retirement Fund; Laundry & Dry Cleaning
Workers Health Fund, UNITE; Laundry & Dry Cleaning Workers Pension
Fund, UNITE; Amalgamated Washable Sportswear and Allied Industries
Insurance Fund; Amalgamated Washable Clothing Sportswear and Allied
Industries Retirement Fund; Amalgamated Retail Fund; Barney's Retail
Employees Union Health Fund; ILGWU Death Benefit Fund; and UNITE
Staff Retirement Plan, ACTWU Unit.
\29\ The applicant has not requested, and the Department is not
providing any relief, herein, for transactions involving the
provision of services by UFA to the any of the Patron Funds,
including the Pension Fund, nor is the Department providing relief
for the decision by the fiduciaries of the such funds to retain UFA
to provide such services. In the opinion of the applicant,
prohibited transactions would not be an issue for the Pension Fund
where: (1) the interested Pension Fund Trustees recuse themselves
from any decision regarding the retention of UFA, see, Advisory
Opinion 99-09A (AO 99-09A) issued on May 21, 1999, in a letter to
Patricia A. Shlonsky, and (2) the services are provided to the
Pension Fund by UFA in accordance with Section 408(b)(2) of the Act.
AO 99-09A states that a fiduciary may avoid engaging in an act
described in section 406(b)(1) and 406(b)(2) by removing himself or
herself from all consideration by the plan of whether or not to
engage in such a transaction, and by not otherwise exercising, with
respect to the transaction, any of the authority, control or
responsibility which makes him or her a fiduciary, absent any
arrangement, agreement or understanding with respect to who will
ultimately provide the services in question.
Section 408(b)(2) of the Act provides a statutory exemption for
``contracting or making reasonable arrangements with a party in
interest for office space, or legal, accounting, or other services
necessary for the establishment or operation of the plan, if no more
than reasonable compensation is paid therefor.'' The Department is
offering no view, herein, as to the applicant's reliance on AO 99-
09A and/or the statutory exemption, as set forth in section
408(b)(2) of the Act and 29 CFR 2550.408(b)(2) of the Department's
regulations.
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3. UNITE was formed in 1995 by the merger of two unions, the
International Ladies Garment Workers Union (ILGWU) and the Amalgamated
Clothing and Textile Workers Union (ACTWU). Under the merger agreement,
UNITE is deemed a consolidation and continuation of ILGWU and ACTWU and
their respective affiliates. Further, UNITE has several affiliated
organizations, the UNITE Affiliates, which are chartered by UNITE.
UNITE members work in the apparel and textile industries, industrial
laundries, distribution and retail, auto parts and auto supply, and
other industries in the United States and Canada.
4. The Pension Fund has requested an individual exemption in order
that ASC may issue and sell shares of stock to UNITE and to certain
UNITE Affiliates. As set forth in more detail below, it is represented
that the proposed transactions will provide the Pension Fund: (i) With
the ability to increase the value of its ownership interests in ASC by
providing ASC with access to additional working capital, (ii) with the
[[Page 13896]]
potential for increased profitability, and (iii) with the potential for
new business opportunities.
At present, ASC has one class of outstanding equity in the form of
common stock (the Common Stock), the entirety of which is held by the
Pension Fund. There are currently 10,000 shares of ASC Common Stock
outstanding. In connection with the proposed transactions, ASC proposes
issuing a new class of shares, the Preferred Stock, to be purchased by
UNITE and by the UNITE Affiliates for cash.\30\ It is anticipated that
UNITE will purchase shares of the Preferred Stock equal to
approximately five percent (5%) of the outstanding equity of ASC, and
that the UNITE Affiliates will purchase shares of Preferred Stock
representing approximately ten percent (10%) of the outstanding equity
of ASC.
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\30\ It is represented that the decision was made to issue the
Preferred Stock, rather than sell 15% of the Common Stock, because
UNITE and the UNITE Affiliates generally invest in fixed income or
fixed income-type investments that provide a set rate of return.
UNITE and the UNITE Affiliates seek a fixed rate of return in order
to generate cash from investments on an annual basis to ensure that
union-related activities are adequately funded. As structured, the
Preferred Stock will enable UNITE and the UNITE Affiliates to obtain
an equity interest in ASC while simultaneously providing an income
stream similar to that offered by a fixed income investment.
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5. The terms underlying the Preferred Stock will be determined by
the issuer, ASC. However, the Independent Fiduciary has the discretion
to accept or reject the terms of the Preferred Stock.
A fixed dividend rate of five percent (5%), declared annually, has
been established for the Preferred Stock. It is represented that
Preferred Stock dividends will only be paid when (1) there is surplus
capital and (2) the Board declares a dividend. If there is not a
surplus, the dividend cannot be paid under applicable corporate law.
Further, the Board can exercise its discretion not to pay a dividend
when there is a capital surplus. If dividends are not paid in a
particular year, they accumulate. No dividends may be paid on the
Common Stock until all accrued and unpaid dividends on the Preferred
Stock are paid.
It is represented that the Board does not have the discretion to
alter the five percent (5%) dividend rate, but such rate is subject to
customary anti-dilution adjustments. For example, if the number of
issued and outstanding shares of Preferred Stock is increased by a
stock split from 100 to 200, the dividend rate paid with respect to
each share would decrease to 2.5%.
ASC can redeem the Preferred Stock, on a pro rata basis at anytime
it may lawfully do so.\31\ In such event, and when the holder has not
elected to convert the Preferred Stock into the Common Stock of ASC (if
applicable) the holder of the Preferred Stock will receive an amount
equal to the price paid for the Preferred Stock, plus any accrued but
unpaid dividends. Written notice of such redemption shall be provided
to the holders of Preferred Stock at least fifteen (15) days but no
more than thirty (30) days prior to the date of redemption. At that
date, all rights associated with the Preferred Stock, except the right
to receive the redemption price shall cease. In the event of
liquidation, the holders of Preferred Stock will be entitled to
receive, on a pro rata basis, prior to the holders of the ASC Common
Stock, an amount equal to the price paid for the Preferred Stock, plus
any accrued but unpaid dividends.
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\31\ The applicant has not requested, and the Department is not
providing, herein, relief for the redemption or call by ASC of the
Preferred Stock or the shares of Common Stock issued upon conversion
of the Preferred Stock from UNITE or the UNITE Affiliates. See,
discussion of potential future prohibited transactions in paragraph
12, herein.
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The Preferred Stock will have no voting rights, except as required
by section 804 of the New York Business Corporation Laws. Section 804
of the New York Business Corporation Laws provides that preferred
shares of stock have voting power when a proposed charter amendment
would: (a) Exclude or limit the shareholder's right to vote on any
matter, except as such right may be limited by voting rights given to
new shares then being authorized of any existing or new class or
series; (b) reduce the par value of the shares (if they have par
value); (c) change the shares of the class into a different number of
shares; (d) change the class or series of the shares; (e) fix, change,
or abolish the designation of the preferred, or any of the relative
rights, preferences and limitation of any of the shares of the
preferred, whether issued or unissued, including any provisions in
respect to undeclared dividends, whether or not cumulative or accrued,
or the redemption of any shares, or any sinking fund for the redemption
or purchase of any shares, or any preemptive right to acquire shares or
other securities; (f) provide that the shares may be converted into
shares of any other class or into shares of any other series of the
same class, or alter the terms or conditions upon which the
shareholders' shares are convertible or change the shares issuable upon
conversion of the shareholders' shares, if such action would adversely
affect such shareholders, or (g) subordinate the rights of the
preferred shares by authorizing shares having preferences that would be
in any respect superior to the shareholders' rights.
The term of the Preferred Stock will be perpetual. After five (5)
years, the Preferred Stock will be convertible at any time at the
option of each holder, into shares of the ASC Common Stock on a one to
one basis. This ratio may only be adjusted for customary anti-dilution
purposes. The Board cannot otherwise adjust the conversion ratio.
Further, each of the shares of Preferred Stock shall be automatically
converted into ASC Common Stock upon the first sale under the
Securities Act of 1933 of at least twenty-five percent (25%) of the
total voting power of ASC. In the event of a conversion, the conversion
price will be adjusted for certain dilutive issuances, splits, and
combinations.\32\
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\32\ The applicant has not requested, and the Department is not
providing relief, herein, with respect to the conversion of the
Preferred Stock into Common Stock. See, discussion of potential
future prohibited transactions in paragraph 12, herein.
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If at any time following initial public offering, ASC proposes to
register shares of the Common Stock with the Securities and Exchange
Commission, the holders of the Preferred Stock will be allowed to
include in such registration the shares of Common Stock into which
their Preferred Stock are convertible (i.e., the holders have ``piggy-
back'' registration rights). In addition, the Preferred Stock (and the
shares of Common Stock issued upon conversion of the Preferred Stock)
will be subject to ``drag along'' and ``tag along'' rights. In this
regard, if the Pension Fund sells its shares in ASC to an unrelated
third party, the Pension Fund will be able to force UNITE and the UNITE
Affiliates to also sell their Preferred Stock (and the shares of Common
Stock issued upon conversion of the Preferred Stock) to the third party
buyer, while UNITE and the UNITE Affiliates will be able to force the
third party buyer to buy their Preferred Stock (and the shares of
Common Stock issued upon conversion of the Preferred Stock), as part of
the transaction.
UNITE will also have a right of first refusal in the event any of
the UNITE Affiliates wishes to dispose of its Preferred Stock (and the
shares of Common Stock issued upon conversion of the Preferred Stock).
If UNITE fails to purchase such shares, then ASC and/or the Pension
Fund shall have a right of first refusal to purchase the shares in
question. Furthermore, if UNITE wishes to sell its Preferred Stock (and
the shares of Common Stock issued upon conversion of the Preferred
Stock), ASC
[[Page 13897]]
and/or the Pension Fund will have a right of first refusal with respect
to such shares.\33\
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\33\ The applicant has not requested, and the Department is not
providing, herein, relief for the purchase by the Pension Fund and/
or ASC, pursuant to a right of first refusal, of the Preferred Stock
or the shares of Common Stock issued upon conversion of the
Preferred Stock from UNITE or the UNITE Affiliates. The applicant
may submit an application for exemption prior to engaging in such
transaction.
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6. Absent an exemption, the proposed transactions would constitute
sales of property between a plan and parties in interest, and transfers
of assets from a plan to parties in interest in violation of section
406(a)(1)(A) and section 406(a)(1)(D) of the Act. Accordingly, the
Pension Fund is seeking relief with respect to section 406(a)(1)(A) and
406(a)(1)(D) of the Act. Further, to the extent that UNITE and the
UNITE Affiliates are disqualified persons, the proposed transactions
would also violate sections 4975(c)(1)(A) and 4975(c)(1)(D) of the
Code, for which relief is also requested.
The proposed transactions may also raise issues under section
406(b)(1) of the Act and section 4975(c)(1)(E) of the Code which
provide that ``a fiduciary with respect to a plan shall not'(1) deal
with the assets of the plan in his own interest or for his own
account.'' Further, the proposed transactions may also raise issues
under section 406(b)(2) of the Act, because certain Trustees of the
Pension Fund are also officers of UNITE affiliated with UNITE and/or
the UNITE Affiliates (the Overlapping Trustees) and directors of ASC.
In this regard, the Overlapping Trustees could be viewed as acting on
behalf of UNITE and the UNITE Affiliates, adverse parties to the
Pension Fund, in connection with the proposed transactions. Because of
the potential concerns that may be raised, the Pension Fund has also
requested relief with respect to sections 406(b)(1) and 406(b)(2) of
the Act and section 4975(c)(1)(E) of the Code.
7. For purposes of determining the fair market value of the
Preferred Stock, ASC sought the opinion of Willamette Management
Associates (WMA), an independent, qualified appraiser. WMA is
experienced in that it has prepared valuations relating to ASC for
approximately six (6) years. As described more fully in paragraph 8,
below, it is represented that the Independent Fiduciary will review the
valuation prepared by WMA in determining the per share price of the
Preferred Stock, as well as any other appropriate documents, for the
purpose of evaluating the proposed sales of the Preferred Stock to
UNITE and to the UNITE Affiliates. The Independent Fiduciary is
authorized to obtain another valuation if it believes that it would be
in the interest of the Pension Fund.
WMA is independent in that the average percentage of WMA's annual
income derived from work for the Pension Fund over the past six (6)
year period is less than one percent (1%). Further, the Pension Fund
and ASC represent that professional fees of WMA are not contingent upon
the opinion expressed in the valuation report, and WMA represents that
other than the services provided attendant to the valuation of ASC,
neither it nor any of its employees has a present or intended financial
interest in ASC.
In anticipation of the issuance of the Preferred Stock and the
entry into the subject transactions, WMA prepared a valuation report,
dated July 29, 2003, which offered WMA's preliminary opinion of the
fair market value of ASC's equity, as of May 31, 2003. Specifically,
WMA was asked to submit, as of a certain date, an opinion of: (1) The
fair market value of an ownership interest in the Preferred Stock that
is convertible into a one percent (1%) ownership interest in the
outstanding Common Stock of ASC on a fully-diluted basis; and (2) the
fair market value of an ownership interest in the Preferred Stock that
is convertible into a fifteen percent (15%) ownership interest in the
outstanding Common Stock of ASC on a fully-diluted basis. It is
represented that WMA was asked to provide the fair market value of one
percent (1%) of ASC's equity in case ASC elected to issue more or less
than fifteen percent (15%) ownership interest in ASC's outstanding
common shares (e.g. sell Preferred Stock convertible into a sixteen
percent (16%) ownership interest in ASC's outstanding common shares).
In a letter dated February 10, 2004, the applicant represented that it
has been determined that ASC will sell Preferred Stock convertible into
a fifteen percent (15%) interest in ASC's outstanding common shares.
After giving consideration to the historical and prospective
operating characteristics of ASC, as well as the after-tax expected
cash flows and earnings attributable to ASC, the current and forecasted
capital structure of ASC, the risk/return relationship reflected for
comparative companies having securities traded in the public market,
the capital market and related industry macroeconomic evidence
available, and other relevant factors, it is the opinion of WMA that
the range of value for the equity of ASC is between $33 million and
$38.4 million, as of May 31, 2003.
Based on values for ASC's equity with a low of $33 million and a
high of $38.4 million, it is the opinion of WMA that 118 shares of the
Preferred Stock, which is convertible into a one percent (1%) ownership
interest in the outstanding Common Stock of ASC on a fully-diluted
basis, would be valued at a low of approximately $536,000 and a high of
approximately $624,000, respectively, as of May 31, 2003. Based on
values for ASC's equity with a low of $33 million and a high of $38.4
million, it is the opinion of WMA that 1,765 shares of the Preferred
Stock, which upon conversion, would be convertible into 1,765 shares of
Common Stock, or fifteen percent (15%) of the total shares of ASC
outstanding on a fully-diluted basis, would be valued in the aggregate,
respectively, at a low of approximately $8,040,000 ($4,557 per share)
and a high of approximately $9,360,000 ($5,303 per share), as of May
31, 2003. It is represented that the number of shares of Preferred
Stock that are issued as part of the transaction will have no impact on
the per share value of the Common Stock or the Preferred Stock for
purposes of this transaction. It is represented that this is due to the
fact that the number of shares will increase at the same rate as the
value of the Preferred Stock. It is further represented that WMA's
valuation of a one percent (1%) and a fifteen percent (15%) ownership
interest in the outstanding Common Stock of ASC on a fully-diluted
basis is based on WMA's understanding: (1) That there are currently
10,000 shares of Common Stock of ASC outstanding; (2) that ASC plans to
issue 1,765 shares of Preferred Stock; and (3) that the terms of the
Preferred Stock included a mandatory dividend of five percent (5%) into
perpetuity.
It is represented that the final appraisal conducted by WMA in
connection with the sale of the Preferred Stock will set a fixed price
for the Preferred Stock. It is represented as possible that the price
set by WMA could fall outside the range of values, discussed in the
paragraphs above. However, in no event will the Pension Fund receive
less than fair market value for the Preferred Stock.
8. It is represented that the determination of whether to sell the
Preferred Stock, and the oversight and negotiations with respect to the
terms of the sales of the Preferred Stock shall be the sole
responsibility of Fiduciary Counselors, Inc. (formerly, Aon Fiduciary
Counselors, Inc.) (hereinafter, Fiduciary Counselors), which has been
[[Page 13898]]
retained by the Pension Fund to act as the Independent Fiduciary on its
behalf. Specifically, in its capacity as Independent Fiduciary for the
Pension Fund, Fiduciary Counselors shall: (1) Determine, on behalf of
the Pension Fund, whether the Preferred Stock should be sold by ASC to
UNITE and to the UNITE Affiliates; (2) approve of the terms underlying
the Preferred Stock to be issued by ASC; (3) negotiate and approve the
terms of the sales of such Preferred Stock to UNITE and to the UNITE
Affiliates; (4) determine that the terms of the sales of Preferred
Stock are no less favorable to ASC than would be offered to an
unrelated third party under similar circumstances; and (5) determine
that the purchase price for the Preferred Stock paid by UNITE and by
the UNITE Affiliates is no less than the fair market value of such
Preferred Stock on the date of the purchases.
In addition, in a letter agreement between the Pension Fund and
Fiduciary Counselors, dated August 7, 2003, Fiduciary Counselors
acknowledged that the services of a qualified independent appraiser
must be utilized to determine the purchase price for the Preferred
Stock. Fiduciary Counselors further acknowledged that the selection and
continuing retention of the appraiser and the acceptance of the
appraiser's valuation of the Preferred Stock are fiduciary decisions
governed by the provisions of part 4 of title I of the Act. Fiduciary
Counselors represents that it understands that in discharging its
obligations under Section 404(a) of the Act, it must take steps
calculated to obtain the most accurate valuation of the Preferred Stock
available. Fiduciary Counselors recognizes that the obligation to act
prudently requires, at a minimum that it conduct a thorough and
analytical critique of the Preferred Stock valuation and that in
conducting such verification, it must evaluate a number of factors
relating to the accuracy and methodology of the valuation and the
expertise of the independent qualified appraiser. In addition it is
represented that Fiduciary Counselors may cause the Pension Fund to
replace the appraiser if necessary.
It is represented that Nell Hennessy, Esq. (Ms. Hennessy),
President of Fiduciary Counselors, shall be the lead individual from
Fiduciary Counselors in the execution of the duties of the Independent
Fiduciary set forth above. Further, under the terms of its agreement
with the Pension Fund, Fiduciary Counselors is responsible for
maintaining records with respect to the performance of its duties for a
period of six (6) years from the date on which the proposed
transactions close, or the date on which Fiduciary Counselors
determines that ASC should not issue and sell the Preferred Stock, or
the date on which UNITE and the UNITE Affiliates determine not to
purchase the Preferred Stock from ASC.
Fiduciary Counselors has acknowledged and agreed that it is a
fiduciary, under section 3(21) of the Act, with respect to any actions
taken, pursuant to its agreement with the Pension Fund to serve as
Independent Fiduciary. Further, Fiduciary Counselors has represented
that it is independent of and unrelated to the parties to the proposed
transactions.
9. It is represented that the proposed transactions are protective
of the Pension Fund and of its participants and beneficiaries in that
Fiduciary Counselors has been retained to serve as the Independent
Fiduciary. Among other things, Fiduciary Counselors, as set forth
above, will review and evaluate the terms of the Preferred Stock and
the subject transactions. Fiduciary Counselors will also review and
evaluate the independent appraisal of the fair market value of the
Preferred Stock prepared by WMA, as well as any other relevant
documents. Further, Fiduciary Counselors will make a determination as
to whether the proposed sales satisfy the fiduciary requirements of
prudence and loyalty.
In a letter to the Department, dated August 14, 2003, Ms. Hennessy
set forth the preliminary conclusions of Fiduciary Counselors regarding
the proposed transactions. Specifically, Fiduciary Counselors: (1)
Determined, based on the terms of the transactions, including the
tentative range for the fair market value of the Preferred Stock, that
such stock should be sold to UNITE and to the UNITE Affiliates; (2)
determined that the transactions, as structured would be in the
interest of and would benefit the Pension Fund's participants and
beneficiaries; (3) approved the proposed terms underlying the Preferred
Stock, as set forth in the draft term sheet; (4) determined that such
terms are consistent with what is ``market'' with respect to such
securities; (5) reviewed the valuation provided by WMA; (6) determined
that the transactions as structured are protective of the participants
and beneficiaries of the Pension Fund; and (7) determined, on a
preliminary basis, that ASC will receive no less than fair market value
for the Preferred Stock. Ms. Hennessy further represented that
Fiduciary Counselors is currently in the process of negotiating the
terms of the sales with the representatives of UNITE and of the UNITE
Affiliates, and will ensure that the terms of the sales are no less
favorable to ASC than would be offered to an unrelated third party
under similar circumstances. It is also represented that Fiduciary
Counselors will ensure that at closing, the subject transactions will
be conducted in compliance with the negotiated terms, including that
ASC receives no less than the fair market value of the Preferred Stock
and that the transactions remain prudent, in the interest of, and
protective of the participants and beneficiaries of the Pension Fund.
In connection with the foregoing, Ms. Hennessy represented that
Fiduciary Counselors will provide a detailed report to the Department
upon the closing of the transactions.
10. It is represented that the proposed transactions are feasible
in that the sales of the Preferred Stock to UNITE and to the UNITE
Affiliates will be one time occurrences for cash with no ongoing
oversight requirements.
11. It is represented that the proposed transactions are in the
interests of the Pension Fund, because the transactions will provide
ASC with an infusion of capital from an outside source which could be
used to invest in the continued growth of ASC and the development of
new product lines and markets with the goal of further increasing the
value of ASC. The proposed transactions will permit ASC to raise
capital while ensuring that the Pension Fund retains control of ASC.
Furthermore, it is anticipated that the proposed transactions will
increase the profitability of ASC. It is represented that the fact that
UNITE and the UNITE Affiliates will own the Preferred Stock of ASC will
enhance the standing of ASC with its existing trade union customers,
leading to additional business opportunities with such clients.
Furthermore, it is represented that the fact that UNITE and the UNITE
Affiliates own the Preferred Stock of ASC could serve as an effective
marketing tool for obtaining business from other trade unions or trade
union sponsored groups that have not previously purchased products from
ASC or that do not currently utilize the services provided by ASC.
12. The Department notes that it is providing no relief for any
potential down-the-road prohibited transactions that may arise after
the sale of the Preferred Stock, including any that may arise in
connection with (a) decisions by the Trustees of the Pension Fund to
vote the Common Stock of ASC in a manner which could advantage the
Preferred Stockholders, and (b) any decisions made by or actions
undertaken by the ASC Board with respect to the Preferred Stock.
[[Page 13899]]
With respect to decisions by the Trustees of the Pension Fund to
vote the Common Stock of ASC when the vote concerns the Preferred Stock
held by UNITE and the UNITE Affiliates, the applicant has agreed that
Trustees affiliated with UNITE and/or the UNITE Affiliates would recuse
themselves from any decision to vote the Common Stock of ASC when
participation by such Trustees would give rise to conflicts of
interest. The applicant does not believe that such recusal is
prohibited under the Taft-Hartley Act or the Labor Management Relations
Act. In this regard, the applicant represents that the Taft-Hartley Act
merely requires equal representation of employees and employers in
connection with the receipt of payments by a trust fund. The purpose of
restricting employers from making payments to benefit funds was to
avoid union control and abuse--not employer control.
Potential conflicts may also arise with respect to any decision by
the directors of ASC to redeem the Preferred Stock and any decision to
pay dividends with respect to such stock.
In the opinion of the applicant, the redemption or call of the
Preferred Stock or the conversion of the Preferred Stock, among other
transactions, would not be prohibited, because the transaction would
take place between UNITE and/or the UNITE Affiliates, and ASC, rather
than with the Pension Fund. In this regard, the applicant maintains
that once the Preferred Stock has been sold to UNITE and to the UNITE
Affiliates, ASC no longer constitutes a plan asset look-through vehicle
with respect to the Pension Fund under the Department's regulations at
29 CFR 2510.3-101(h) (the Plan Asset Regulation).\34\ Accordingly, the
applicant maintains that Trustees who are members of the ASC Board
would be acting as directors of an operating company and not as
fiduciaries under the Act controlling assets of the Pension Fund when
making decisions regarding the Preferred Stock. The applicant further
maintains that members of the ASC Board would be subject to the
mandates of the New York state corporate laws, including those
applicable to related party transactions, in the exercise of their
duties as directors of ASC.
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\34\ The Plan Asset Regulation provides that where a plan ``owns
all of the outstanding equity interests (other than director's
qualifying shares) in an entity, its assets include those equity
interests and all of the underlying assets of the entity.''
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As the Department noted in it's regulations at 29 CFR 2509.75-2:
if a transaction between a party in interest and a plan would be a
prohibited transaction, then such a transaction between a party in
interest and such corporation or partnership will ordinarily be a
prohibited transaction if the plan may, by itself, require the
corporation or partnership to engage in such transaction.
In any event, the Department is providing no relief herein, other than
with respect to the sale of the Preferred Stock to UNITE and the UNITE
Affiliates.
The applicant understands the concerns of the Department and has
represented that conflicted directors of ASC will recuse themselves
from participating in any decision or action involving the Preferred
Stock. Thus, for example the ASC Directors affiliated with UNITE and/or
the UNITE Affiliates would recuse themselves from any decision to issue
dividends with respect to the Preferred Stock and any decision to
redeem the Preferred Stock.
13. In summary, the applicant represents that the proposed
transactions satisfy the statutory criteria of section 408(a) of the
Act and section 4975 of the Code because: (a) Fiduciary Counselors will
determine, on behalf of the Pension Fund, whether the Preferred Stock
should be sold to UNITE and to the UNITE Affiliates; (b) Fiduciary
Counselors will approve of the terms underlying the Preferred Stock to
be issued by ASC; (c) Fiduciary Counselors will negotiate and approve
the terms of the sales of the Preferred Stock to UNITE and to the UNITE
Affiliates; (d) Fiduciary Counselors will monitor the terms of the
transactions and ensure that ASC, UNITE, and the UNITE Affiliates
comply with the approved terms; (e) Fiduciary Counselors will determine
that the terms of the sales of Preferred Stock are no less favorable to
ASC than would be offered to an unrelated third party under similar
circumstances; (f) Fiduciary Counselors will determine that the
purchase price for the Preferred Stock paid by UNITE and by the UNITE
Affiliates is no less than the fair market value of such Preferred
Stock, as of the date the transactions are entered; (g) Fiduciary
Counselors will determine the fair market value of the Preferred Stock,
as of the date each of the transactions is entered; (h) in determining
the fair market value of the Preferred Stock, Fiduciary Counselors will
obtain an appraisal from an independent qualified appraiser selected by
it and ensure that the appraisal and Fiduciary Counselors's analysis of
the appraisal are consistent with sound principles of valuation and the
elements described in paragraph 8, in the Summary of Facts and
Representations in this proposed exemption; and (i) the Pension Fund
will incur no fees, commissions, or other charges or expenses as a
result of its participation in the transactions, other than the fee
payable to Fiduciary Counselors.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include all of the active participants and
beneficiaries of the Pension Fund, the retirees receiving benefits from
the Pension Fund, vested deferred participants and beneficiaries of the
Pension Fund, the Trustees of the Pension Fund, all contributing
employers to the Pension Fund, the members of the Board of ASC and the
ASC Subsidiaries, UNITE, the UNITE Affiliates, and all locals, joint
boards, and regional offices of UNITE who represent members who are
participants in the Pension Fund. It is represented that these various
classes of interested persons will be notified as follows.
All of the active participants and beneficiaries of the Pension
Fund, the retirees receiving benefits from the Pension Fund, the
Trustees of the Pension Fund, UNITE, and the members of the Board of
ASC and the ASC Subsidiaries will be provided with a copy of the notice
of pendency of this proposed exemption (the Notice), plus a copy of the
supplemental statement (the Supplemental Statement), as required,
pursuant to 29 CFR 2570.43(b)(2), which will advise such interested
persons of their right to comment and to request a hearing. The Notice
and the Supplemental Statement will be delivered by first class mail
within fifteen (15) days of the publication of the Notice in the
Federal Register.
In addition, a copy of the Notice and the Supplemental Statement
will be provided, within fifteen (15) calendar days of the date of
publication of the Notice in the Federal Register, to all locals, joint
boards, and regional offices of UNITE who represent members who are
participants in the Pension Fund and to contributing employers that
employ members who are participants in the Pension Fund. The Pension
Fund represents that immediately upon receipt of a copy of the Notice
and Supplemental Statement such locals, joint boards, regional offices
of UNITE, and contributing employers will post such Notice and the
Supplemental Statement at those locations which are customarily used
for notices regarding employee benefits matters and/or will post such
Notice and Supplemental Statement at the union hall.
It is represented that for the purpose of sending the Notice and
Supplemental
[[Page 13900]]
Statement by mail, current addresses maintained by the Pension Fund
will be used.
All written comments and requests for a hearing must be received by
the Department no later than forty-five (45) days from the date of the
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
Pan-American Life Insurance Corporation (Pan-American); Located in New
Orleans, LA
[Application No. D-11202]
Proposed Exemption
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, August 10, 1996).\35\ 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 cash sale,
on November 17, 2003, by certain defined contribution plans (the
Plans), which invest in Separate Account V (the Account), a pooled
separate account, whose assets are invested in units of the Dreyfus-
Certus Stable Value Fund (the Fund), of Fund units, to Pan-American,
the Account's investment manager and a fiduciary with respect to such
Account.
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\35\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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This proposed exemption is subject to the following conditions:
(a) Prior to the transaction (the Transaction), a fiduciary (the
Independent Fiduciary), acting on behalf of the Plans, who was
independent of and unrelated to Pan-American and its subsidiaries,
determined that the subject Transaction (1) was fair to the
participants in the Plans investing in the Account; (2) was comparable
to, and no less favorable than, terms obtainable at arm's length
between unaffiliated parties; and (3) was in the best interest of the
Plans investing in the Account and their participants and
beneficiaries.
(b) The Independent Fiduciary monitored the Transaction on behalf
of the Plans investing in the Account.
(c) Subsequent to the closing of the Transaction, the Independent
Fiduciary performed a post-Transaction review, which included, among
other things, a determination that the fair market value of the Plan's
interests in the Account as of November 14, 2003, as determined by the
Fund trustee, was accurate and consistent with the Fund's valuation
method.
(d) No sales commissions, fees or other costs were paid by the
Plans in connection with the Transaction.
(e) The sale was a one-time transaction for cash.
(f) The fair market value of the units was determined in good faith
by The Dreyfus Trust Company (TDTC), an unrelated party, at the time of
the Transaction.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of November 17, 2003.
Summary of Facts and Representations
1. Pan-American is a mutual life insurance company based in New
Orleans, Louisiana and is subject to the supervision and examination of
the Louisiana Commissioner of Insurance. Pan-American is licensed in 40
states and the District of Columbia, Puerto Rico and the Virgin
Islands. The insurer has affiliates in Panama, Guatemala and Colombia,
and branch offices in Ecuador, El Salvador and Honduras. As of December
31, 2002, Pan-American had total assets under management of
approximately $2.3 billion. As of that date, Pan-American managed about
$900 million in retirement plan assets for approximately 1,200 employee
benefit plans, covering about 50,000 plan participants. The insurer's
most recent A.M. Best rating is ``A-'' (Excellent).
2. Among the insurance products and services it offers, Pan-
American and certain of its affiliates provide funding, asset
management and other services for employee benefit plans, some of which
are subject to the provisions of title I of the Act. In particular,
Pan-American maintains pooled separate accounts in which Title I
pension, profit sharing, and other plans invest. The assets of a
separate account are established and maintained by Pan-American
separate and apart from its general account. The income and realized
gains or losses from the assets in the separate account are credited or
charged against the account without regard to the other investment
gains or losses of Pan-American. Under the terms of the Pan-American
contracts, either an independent Plan fiduciary or a participant can
direct the investment of contract values among the investment options
offered by Pan-American, in separate accounts or subaccounts. Pan-
American manages all or a portion of the assets of such separate
accounts.
3. Among the separate accounts managed by Pan-American was Separate
Account V, otherwise referred to herein as ``the Account.'' The Account
was established by Pan-American on or about November 24, 1992, and it
was available only to defined contribution retirement plans, many of
which are subject to Title I of the Act. The purpose of the Account was
to provide a stable value fund option as an investment alternative in a
pooled vehicle for Title I Plans. The unit value of the Account was set
at $10.00 when the first investment was made by a Plan in August 1995.
The unit value was adjusted each Valuation Date (i.e., each business
day on which the Home Office of Pan-American was open to transact
business and on which the New York Stock Exchange was open for
unrestricted trading) to reflect the value of the assets of the
Account, less any charges due Pan-American. The gross unit value of the
Account on October 31, 2003 was $14.4934. The net unit value for the
Account varied according to differences in the charge structures for
different group annuity contracts attributed to Plans participating in
the Account.
A Plan's participation in the Account was governed by the Separate
Account V Rider appended to the contracts issued by Pan-American to a
participating Plan. The Account was not registered under the Investment
Company Act of 1940. For purposes of the Act, the assets of the Account
were treated as ``plan assets'' within the meaning of 29 CFR 2510.3-
101(h)(1)(iii).
Approximately, 417 small to mid-sized client Plans of Pan-American
invested in the Account.\36\ As of October 31, 2003, the Plans had
approximately $75,517,418 invested in the Account and the Fund
described herein. No Plan sponsored by Pan-American ever invested in
the Account.
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\36\ The smallest Plan invested in the Account had an interest
valued at $29 and one participant while the largest Plan invested in
the Account had an interest valued at over $3 million and 1,243
participants. For 2001, 2002 and 2003, the net cash flow into the
Account was $17,785,258, $32,727,395 and $5,039,484, respectively.
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Accordingly, Pan-American was a party in interest with respect to
such Plans, and a fiduciary with respect to the Account. Pan-American
represents that neither it nor its affiliates had any discretionary
authority over the decision to invest a Plan's assets in the Account.
Instead, a Plan fiduciary or participant independent of Pan-American
and its affiliates was
[[Page 13901]]
responsible for such investment decisions.
4. The Account began investing in the Fund in August 1995. The Fund
is a collective investment fund invested primarily in guaranteed
investment contracts (GICs) and other similar instruments intended to
achieve high current income and stability of principal. The Fund is
designed for employee benefit plans, and for financial institutions
acting as trustee, investment manager, custodian, or agent for one or
more employee benefit plans as a convenient means of participating in a
professionally managed, diversified portfolio consisting primarily of
GICs and other stable value instruments.
Specifically, the Fund invests primarily in a diversified portfolio
of GICs issued by insurance companies, bank investment contracts
(BICs), corporate investment contracts, synthetic GICs(the wrap issuers
of whom are not Pan-American), separate account GICs, floating rate
GICs, repurchase agreements, and cash and cash equivalents, including
money market instruments and certificates of deposit.
The trustee and portfolio manager of the Fund is TDTC, which has
appointed Standish Mellon Asset Management Company LLC (Standish
Mellon) as an investment advisor (prior to June 1, 2003, was doing
business as Certus Asset Advisors). Both TDTC and Standish Mellon LLC
are not affiliated with and are independent of Pan-American, which has
no involvement in the operation or administration of the Fund. As of
December 31, 2002, the Fund had total assets of $588,015,081.
5. Units in the Fund are valued each business day at fair value, as
determined in good faith by TDTC. At the Fund's inception, and all the
times thereafter, the Fund has maintained a unit value of $1.00. In
other words, Fund units can never be worth more than $1.00. Income
distributed from the Fund is applied to the purchase of additional Fund
units. Thus, an investor is entitled to receive a return on the
investment plus the $1.00 per unit value.\37\ Units in the Fund are
offered by TDTC for purchase or redemption on a continuous basis,
except that TDTC reserves the right to defer redemptions for a period
of time, generally not to exceed twelve months, as necessary for a fair
and orderly liquidation of Fund assets. There is no secondary market
for units in the Fund.
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\37\ The Plans investing in the Fund through the Account
received a return on investment in the form of an increase or
decrease in the number of units held. Pan-American did not issue any
synthetic, stabilizing or other wrappers with respect to the Fund.
The Fund was designed to provide the Account with stability of
principal and high-current income through the assets it purchased,
and the Fund did not separately provide a guarantee of principal,
nor did Pan-American provide a guarantee of principal or earnings by
issuing any wrappers with respect to the Fund. Although neither the
value of the Fund's portfolio nor an investment in the Fund is
insured or guaranteed, certain investments within the Fund, such as
money market funds issued by banks, provided the Account with a
guarantee of principal.
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6. Pan-American determined to discontinue the sale of its group
annuity contracts and to transfer its existing business to another
carrier in a reinsurance transaction because it could not reach the
critical asset level needed to attain profitability in the retirement
plan market. In particular, with respect to the group annuity contracts
previously issued by Pan-American and remaining in force (the
Contracts), Pan-American entered into agreements to transfer such
business to Securian Retirement Services (Securian), a business unit of
Minnesota Life Insurance Company (Minnesota Life). The Contracts
included all of the group annuity contracts with amounts allocated to
the Account.
Minnesota Life provides financial security for individuals and
businesses in the form of insurance, retirement plans and investments.
The company serves over seven million people with nearly $350 billion
of life insurance in force and $22 billion in assets under management.
Minnesota Life's combined work force of 4,400 employees and
representatives is located at its St. Paul headquarters and agencies
and offices across the country.
Minnesota Life is highly rated by the major independent rating
agencies (e.g., A++ (Superior) by A.M. Best) that analyze the financial
soundness and claims-paying ability of insurance companies. The
Securian business unit of Minnesota Life currently manages assets of
more than $5.7 billion for more than 2,700 plans and over 180,000
participants nationwide. Securian consistently receives superior
service ratings in independent surveys of plan sponsors and was one of
the first retirement plan providers to offer transactional services on
line.
7. The insurance commissioners of Louisiana and Minnesota approved
the reinsurance transaction (the Reinsurance Transaction) on October
17, 2003, and October 28, 2003, respectively. Pan-American closed both
the subject Transaction and the Reinsurance Transaction on November 17,
2003. On that date, Securian took responsibility for the administration
and operation of the Contracts. Subsequently, subject to the consent of
the insurance commissioners in other jurisdictions, Securian agreed to
co-insure the risks under the Contracts and, if the Plan owning the
Contracts consented, to issue its own group annuity contracts in
substitution for the Contracts.
In connection with the Reinsurance Transaction, Securian advised
that it would not offer the Fund as an investment option for the
Contracts nor a comparable stable value product.\38\ Therefore, in
accordance with industry practice, the Contracts provided, in pertinent
part, that ``[i]f in the judgment of the Insurance Company it [became]
necessary or desirable to terminate Separate Account V by reason of any
federal or state statute, any judicial decision or any rule or
regulation of any governmental authority, or because it [was] no longer
commercially feasible, the Insurance Company [could] liquidate the
assets credited to the contractholder in Separate Account V and
transfer them at the contractholder's election, to the Deposit Fund or
other separate accounts maintained under the Group Annuity Contract or
to any alternative funding agency.''
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\38\ It is represented that Securian would offer all of the
Plans invested in the Account and Fund a fixed income investment
option that is supported and guaranteed by Minnesota Life's general
account.
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In order to make all Plan monies immediately available for
investment or reinvestment in the investment options to be offered by
Securian, Pan-American requested that TDTC effect a redemption of the
Account's interest in the Fund effective November 13, 2003, the
original contemplated date of the Transaction. TDTC advised that it
would not be able to fully redeem all of the Account's interests as of
November 13, 2003, but, as allowed by the instruments governing the
Fund, committed to redeeming $8,000,000 of the Account's interests in
the Fund each month beginning November 2003, until such time as all
interests are redeemed.
8. Pan-American believed that it was appropriate and in the best
interest of the Plans and their participants and beneficiaries for the
monies invested in the Account to be made available for Plan
fiduciaries and participants for reinvestment in other options. Because
there was no secondary market for units in the Fund, to the best of
Pan-American's information and belief, there was no available unrelated
purchaser for the Fund units held by the Account.
9. Therefore, on November 17, 2003, Pan-American purchased in the
ordinary course of business, for its own account, the Fund units held
by the Account, at a per unit value of $1.00, as
[[Page 13902]]
determined by TDTC on November 14, 2003.\39\ Pan-American acquired
55,010,750.23 units from the Account for cash.\40\ (The redemption
proceeds for the Fund units that are received over the following six to
twelve months will be paid by TDTC to Pan-American.) Thus, the purchase
price for the Transaction was at the full unit value on November 14,
2003, without any discount or other reduction for the deferral of the
redemption of those Fund units.
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\39\ Based on its review of information provided by Pan-American
and TDTC, the Independent Fiduciary concluded that the purchase of
the Fund units by Pan-American was effectuated in a manner
consistent with the required criteria and procedures set forth in
its preliminary report and that the fair market value of the Plan's
interest in the Account as of November 14, 2003, as determined by
TDTC, was accurate and consistent with the Fund's valuation
methodology.
\40\ As noted in Representation 3, the Account had total assets
in excess of $75 million as of October 31, 2003 invested in the
Fund. However, the Account sold approximately $55 million in Fund
units to Pan-American. The applicant explains that prior to the date
of the Transaction and the Reinsurance Transaction, TDTC redeemed
approximately 20,000,000 Fund units held by the Account at the
request of certain Plan fiduciaries electing not to participate in
the Reinsurance Transaction, thereby reducing the Account size.
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Both the subject Transaction and the entire Reinsurance Transaction
were completed on November 17, 2003. The Plans received their pro rata
portion of cash based upon their ownership percentage in the Fund at
the close of business on November 14, 2003. No commissions or other
fees were paid by the Account in connection with the Transaction.\41\
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\41\ The applicant represents that the economic burdens and
benefits of the Fund units in the future will accrue to the
detriment or benefit of Pan-American rather than to the Plans.
Because the Fund units were purchased at fair market value, the
purchase price reflected the market's assessment of the opportunity
for future gains in the value of the Fund, balanced against the risk
of future loss in value. The purchase price was the fair market
value of the units determined in the ordinary course of business by
TDTC for that date. The purchase price, which was credited to the
Account, and to the Plans, compensated the Plans for the transfer of
the future risks and rewards of Fund ownership. As a result, the
applicant does not believe that the Transaction, and in particular,
the form and timing of the payment by Pan-American to the Plans for
the Fund units, provided financial benefit to Pan-American for which
the Plans were not being compensated.
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In addition, the value of the interests of Plans and participants
and beneficiaries in the Account on November 14, 2003, was exactly the
same as it would have been had the Transaction not occurred. The cash
in the Account resulting from the Transaction was immediately available
to the Plans and their participants for reinvestment in the options
then offered under the Contracts. Following the reinvestment of these
monies at the direction of the Plans and their participants, the
Account was terminated.
Accordingly, Pan-American requests an administrative exemption from
the Department with respect to the Transaction. If granted, the
exemption will be effective as of November 17, 2003.
10. U.S. Trust Company, National Association (U.S. Trust) agreed to
act on behalf of the Plans investing in the Account as the Independent
Fiduciary with respect to the Transaction. The Independent Fiduciary is
a national banking association formed under the laws of the United
States and authorized to exercise all fiduciary powers that may be
exercised by state banks and trust companies under the laws of the
State of Connecticut. The Independent Fiduciary, which is a wholly
owned subsidiary of The Charles Schwab Corporation, has served as an
independent fiduciary for employee benefit plans in connection with
exemption requests from Department over the past fifteen years. The
Independent Fiduciary has certified that it meets the following
requirements:
The Independent Fiduciary is not directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with Pan-American, Minnesota Life,
Securian, TDTC, or Standish Mellon.
The Independent Fiduciary is not an officer,
director, employee of, or partner in Pan-American, Minnesota Life,
Securian, TDTC, or Standish Mellon.
The Independent Fiduciary is not a corporation or
partnership in which Pan-American, Minnesota Life, Securian, TDTC, or
Standish Mellon has an ownership interest or is a partner.
The Independent Fiduciary does not have an ownership
interest in Pan-American, Minnesota Life, Securian, TDTC, or Standish
Mellon or any of their affiliates (except for possibly de minimis
holdings in Minnesota Life).
The Independent Fiduciary was not a fiduciary with
respect to the Account prior to its appointment as an independent
fiduciary.
The Independent Fiduciary has acknowledged in
writing acceptance of fiduciary responsibility and has agreed not to
participate in any decision with respect to any transaction in which it
has an interest that might affect its best judgment as a fiduciary.
The Independent Fiduciary has not received, for any
fiscal year, from Pan-American, Minnesota Life, Securian, TDTC, or
Standish Mellon or their affiliates (including amounts received for
services provided by the Independent Fiduciary associated with the
Transaction) gross income for that fiscal year that exceeds one percent
of the Independent Fiduciary's annual gross income from all sources for
such fiscal year.
Lastly, neither the Independent Fiduciary nor any
partnership or corporation of the Independent Fiduciary is an officer,
director, or 10 percent or more partner or shareholder, will acquire
any property from, sell any property to, or borrow funds from Pan-
American, Minnesota Life, Securian, TDTC, or Standish Mellon during the
period that the Independent Fiduciary serves as independent fiduciary
of the Plans, and continuing for a period of six months after the
Independent Fiduciary ceases to be an independent fiduciary of the
Plans, or negotiate any such transaction during the period that the
Independent Fiduciary serves as an independent fiduciary of the Plans.
11. Thus, the Independent Fiduciary is independent of and has no
affiliation with Pan-American, Minnesota Life, Securian, TDTC, or
Standish Mellon, and the fees paid to the Independent Fiduciary in
connection with the Transaction will constitute less than one percent
of its revenue for 2003. Furthermore, the Independent Fiduciary has
acknowledged and accepted the duties, responsibilities of an
Independent Fiduciary.
Prior to the closing of the Transaction, the Independent Fiduciary
(a) Conducted a due diligence review of the Transaction; (b) determined
whether the Transaction was in the interest and protective of the Plans
and their participants and beneficiaries; (c) issued a written
preliminary report to the Department; and (d) a final report to the
Department within 30 days of the closing of the Transaction.
In making its determinations, the Independent Fiduciary was
required to (a) Review the terms of the Transaction; (b) review the
written procedures by which TDTC calculates the net asset value of the
Fund; (c) conduct discussions, as necessary to make the determinations
described above, with appropriate personnel of Pan-American, Standish
Mellon, and/or TDTC; and (d) if the Transaction was effectuated,
confirm in writing whether the Transaction was effectuated consistently
with the required terms set forth in the exemption application, based
on written representations that the Independent
[[Page 13903]]
Fiduciary would request from Pan-American and TDTC and a test of a
sample of material aspects of the Transaction, deemed in the
Independent Fiduciary's judgment to be representative.
In connection with its analysis of the Transaction, the Independent
Fiduciary states that it reviewed and considered various documents,
including, but not limited to, the Separate Account V Rider, the
Optional Investment Contract, the Fund's product description brochure,
the December 31, 2002 Annual Report of the Fund, and the exemption
request. However, the Independent Fiduciary states that it did not make
any independent investigation to verify the accuracy of such
information, data, analyses and representations. Instead, the
Independent Fiduciary represents that it relied upon information
provided by Pan-American, which Pan-American deemed to be accurate.
In anticipation of the Transaction, the Independent Fiduciary notes
that as of August 31, 2003, the Fund was valued at $643.2 million by
TDTC, as based on a daily valuation of the Fund, and that the value of
each unit was $1.00 per unit. The Independent Fiduciary states that
investments in GICs and other similar investments were valued at their
contract values, and would provide for benefit responsive withdrawals
at contract value and daily dividends to Fund unitholders that would be
automatically reinvested on a monthly basis. In reviewing the Account's
July Fund statement, the Independent Fiduciary demonstrated the
methodology implemented by TDTC in calculating the net asset value of
the Account's interest in the Fund as follows:
Number of units Beginning of July..................... $77,442,676.88
Value of units.................................... 1.00
Account's Equity Beginning of July.................... 77,442,676.88
Value of units acquired through Contributions (at 4,238,607.63
$1.00 per unit)......................................
Value of units acquired through Reinvestment of 260,589.89
dividends (at $1.00 per unit)........................
Value of units withdrawn (at $1.00 per unit).......... (2,720,669.48)
Account's Equity End of July.......................... 79,221,204.92
The Independent Fiduciary opined that the Transaction would be in
the interest and protective of the Plans and their participants and
beneficiaries because:
Securian had determined not to continue the Fund as
an investment alternative following the Transaction. Therefore, the
Independent Fiduciary believed it imperative that the Account's
interest in the Fund be redeemed.
TDTC had the discretion to defer redemptions over an
extended period of time and had chosen to do so.
There was no secondary market for the Fund units
and, to the best of Pan-American's knowledge, there was no available
unrelated purchaser for the Fund units held by the Account.
The fair market value of the Account's units in the
Funds as of November 14, 2003, would be determined by TDTC in the same
manner that the units were historically valued by TDTC.
Pan-American would purchase the Account's units at
the determined value for cash which would allow the Plans to reinvest
the full amount of the proceeds immediately rather than extending the
receipt of redemption proceeds over 6-12 months.
The Plans would pay no fees or commissions
associated with the Transaction.
Furthermore, the Independent Fiduciary believed the terms of the
Transaction were no less favorable to the Account than the terms
obtainable in an arm's length transaction with an unrelated party at
the time of such Transaction.
Subsequent to the closing of the Transaction, the Independent
Fiduciary performed a post-transaction review which included, among
other things, a determination of whether the fair market value of the
Plans' interests in the Account, as determined by TDTC, was accurate
and consistent with TDTC's valuation methodology of the Fund. Based
upon the results of such review, the Independent Fiduciary concluded
that the purchase of Fund units by Pan-American was effectuated in a
manner consistent with the required criteria and procedures set forth
in its preliminary report, and that the value paid by Pan-American for
the Plan's interests in the Account was accurate and consistent with
the Fund's valuation methodology.
12. In summary, it is represented that the Transaction satisfied
the statutory criteria for an exemption under section 408(a) of the Act
for the following reasons:
(a) Prior to the Transaction, the Independent Fiduciary, acting on
behalf of the Plans, determined that the subject Transaction (1) was
fair to the participants in the Plans investing in the Account; (2) was
comparable to and no less favorable than terms obtainable at arm's
length between unaffiliated parties; and (3) was in the best interest
of the Plans investing in the Account and their participants and
beneficiaries.
(b) The Independent Fiduciary monitored the Transaction on behalf
of the Plans investing in the Account.
(c) Subsequent to the closing of the Transaction, the Independent
Fiduciary performed a post-Transaction review, which included, among
other things, a determination that the fair market value of the Plan's
interests in the Account as of November 14, 2003, as determined by
TDTC, was accurate and consistent with the Fund's valuation method.
(d) No sales commissions, fees or other costs were paid by the
Plans in connection with the Transaction.
(e) The sale was a one-time transaction for cash.
(f) The fair market value of the units was determined in good faith
by TDTC, at the time of the Transaction.
Notice to Interested Persons
Pan-American represents that it will distribute, by first class
mail, a copy of the notice of proposed exemption (the Notice) within
five (5) days of the date of such Notice is published in the Federal
Register to the independent fiduciaries of the Plans affected by the
Transaction. The Notice will include a copy of the proposed exemption,
as published in the Federal Register, and a supplemental statement, as
required pursuant to 29 CFR 2570.43(b)(2), which informs all interested
persons of their right to comment on and/or request a hearing with
respect to the proposed exemption. Comments and requests for a public
hearing are due within 35 days following the publication of the
proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Arjumand A. Ansari of the
Department at (202) 693-8566. (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
[[Page 13904]]
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 19th day of March, 2004.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 04-6584 Filed 3-23-04; 8:45 am]
BILLING CODE 4510-29-P
