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Proposed Exemptions; The National Electrical Benefit Fund (the Plan) [11/08/2004]
[PDF Version]
Volume 69, Number 215, Page 64784-64789
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11165, et al.]
Proposed Exemptions; The National Electrical Benefit Fund (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 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.
The National Electrical Benefit Fund (the Plan) Located in Rockville,
MD
[Application No. D-11165]
Proposed Exemption
Based upon the facts and representations set forth in the
application, the Department of Labor is considering granting an
exemption under the authority of section 408(a) of the Act (or ERISA)
and section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of section 406(a)(1)(A) through (D) 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,\1\ shall not apply,
effective April 1, 2003, to (1) the collateral assignment (the
Collateral Assignment), by the Plan, of its rights and interests in the
Stonegate at Bellefaire, LLC (the LLC), a real estate operating company
(REOC), to M&T Real Estate, Inc. (the Senior Lender), a party in
interest with respect to the Plan; and (2) the guaranty (the Guaranty)
by the Plan, executed in favor of the Senior Lender, requiring the Plan
to reimburse the Senior Lender for any losses the Senior Lender may
incur as a result of certain affirmative ``bad acts'' that are
committed by the Plan as a member (the Member) of the LLC.
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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 the corresponding provisions of the Code.
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This proposed exemption is subject to the following conditions:
(a) The Plan's execution of the Collateral Assignment and the
Guaranty
[[Page 64785]]
was on terms no less favorable to the Plan than those which the Plan
could obtain in an arm's length transaction with an unrelated party;
(b) The decisions on behalf of the Plan to invest in the LLC and
consent to the terms of the Collateral Assignment and Guaranty in favor
of the Senior Lender were made by fiduciaries which were independent of
and unaffiliated with the Senior Lender;
(c) At the time of the transactions, the Plan had total assets that
were in excess of $5 billion, and not more than 1% of the Plan's total
assets was invested or will be invested in the LLC.
(d) The other member of the LLC (the Managing Member) also executed
Guaranties in favor of the Senior Lender;
(e) As a Member of the LLC, the Plan's total potential liability
with respect to its investment in the real estate project (the
Project), which is being developed and will be owned by the LLC, is
limited to:
(1) Capital contributions made by the Plan to the LLC.
(2) Amounts funded by the Plan to the LLC (the Plan Loan).
(3) Rights and interests given to the Senior Lender under the
Collateral Assignment.
(f) In the event the Plan engages in any of the specified ``bad
acts'' that are described in the Guaranty, the Plan's total potential
liability does not exceed the greater of $32.98 million or the
outstanding principal amount of the loan serving as the primary funding
vehicle for the Project (the Senior Loan).
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of April 1, 2003.
Summary of Facts and Representations
1. The Plan, also referred to herein as ``the Applicant,'' is a
multiemployer, defined benefit plan covering approximately 489,261
participants and beneficiaries as of December 31, 2003. As of December
31, 2003, which is the most recent date that financial information is
available, the Plan had net assets available for benefits of
approximately $9.5 billion.
2. The fiduciaries generally responsible for investment decisions
in real estate matters on behalf of the Plan, including the subject
transactions,\2\ are D.R. Borden,\3\ Jr. and Jeremiah J. O'Connor (the
Trustees). In addition, the Plan currently utilizes CS Capital
Management, Inc. (CSM), an unrelated party, to provide advisory
services with respect to the management of the LLC investment described
herein on an ongoing basis. However, CSM did not review or recommend to
the Trustees the making of this investment.
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\2\ The Plan has an in house real estate division that makes
recommendations concerning the Plan's real estate investments,
including the subject investment in the Project. With respect to the
Plan's investment in the Project, the Trustees also received
assistance and advice from The Weitzman Group (Weitzman), a New
York-based real estate appraisal/advisory firm, which advises the
Trustees on real estate acquisition and divestiture decisions. In
addition to conducting ongoing discussions with Weitzman, the
Trustees relied on the following written reports in making their
investment decision for the Plan: (a) An Investment Summary,
prepared by the Plan's in house real estate investment staff; (b) an
Executive Summary of the Project investment provided by Weitzman;
(c) a Real Property Valuation of the Project; (d) a Legal Review
Letter regarding a construction loan and equity investment in the
Project; and (e) a Closing Update prepared by the Plan's investment
staff.
\3\ On May 22, 2002, the date the transactions closed, the
Trustee was John M. Grau, not D. R. Borden. Mr. Borden replaced Mr.
Grau in January of 2003.
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3. The Plan is one of two members of the LLC, a Delaware limited
liability company formed in May 2002 for the sole purpose of developing
and owning the Project, a senior living facility located at 1104 King
Street, Rye Brook, New York. The only other member of the LLC is the
Managing Member, FC Bellefair, LLC, a New York limited liability
company and an unrelated party. The Plan and the Managing Member are
referred to herein collectively as the ``Members,'' or each
individually, as a ``Member.'' The Plan and the Managing Member each
own 50% of the LLC. Eighty percent of the Managing Member is owned by
Forest City Residential Group, Inc. (FCRG), an Ohio corporation whose
sole shareholder is Forest City Rental Properties Corporation (FCRPC).
The remaining 20% of the Managing Member is owned by Four Corners
Ownership II, LLC (FCO), a New York single asset limited liability
company. FCRG and FCO are each a ``managing member'' of FC Bellefair,
LLC. The Applicant represents that the LLC qualifies as a ``real estate
operating company'' (i.e., a REOC) under the ``plan asset'' regulations
issued by the Department, 29 CFR 2510.3-101(e).\4\
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\4\ As noted above, the Applicant believes that the LLC is a
REOC for purposes of the plan asset regulations. Therefore, the
Applicant requests no ruling or determination with respect to this
issue. Furthermore, the Applicant states that according to the
Department's position in 29 CFR 2510.3-101(a), once plan assets are
invested in a REOC, they lose their character as ``plan assets.''
Thus, the Applicant explains that the equity it contributed to the
REOC in the form of a capital contribution would cease being an
asset of the Plan as soon as it is transferred to the REOC.
Thereafter, the Applicant indicates that the asset belongs to the
REOC, which in turn, may transfer these assets to a party in
interest with respect to the Plan without invoking the prohibited
transaction provisions of the Act. Accordingly, the Applicant
explains that any use of the Plan's capital contribution to repay
the Senior Loan described herein would not give rise to a prohibited
transaction.
Notwithstanding the Applicant's assumption about the REOC status
of the LLC, the Department expresses no opinion herein on whether
the LLC would be considered a REOC.
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4. The transactions at issue arise in the context of the financing
obtained by the LLC to fund construction of the Project. The Project
has a total budget of approximately $59,805,349, of which $32,980,000
is being primarily funded in the form of a loan (i.e., the Senior Loan)
dated May 24, 2002 from the Senior Lender (i.e., M&T Real Estate, Inc.)
to the LLC and another entity known as ``FCD Ryebrook, LLC,'' the
operator of the completed facility. In order to comply with New York
law, the Senior Loan has been bifurcated into a primary loan in the
amount of $28,750,995 for the ``hard'' costs evidenced by a Building
Loan Agreement, and a smaller loan in the amount of $4,229,005 for
``soft'' costs evidenced by a Non-Cost of Improvement Loan. The Senior
Loan requires a balloon payment of the outstanding principal and
interest on the maturity date of May 1, 2007. The amount of the balloon
is projected at $31,000,000. However, this amount is subject to
fluctuation based upon such variables as the actual monthly
construction/operating draw, the number of occupied units in the
Project, and the market rent for each unit. Interest only payments are
being made for the first 3 years the Senior Loan is in effect. Then,
these payments will be amortized, commencing June 1, 2005, based on a
25 year amortization schedule. The interest rate, which is an
adjustable rate, was initially set at 6 percent per annum. Effective
October 31, 2002, the interest rate floor was reduced to 5.25 percent,
and then lowered to 4%, effective June 1, 2003.
The Senior Loan is secured by ``[a]ll property, tangible or
intangible, real or personal, or fixtures, now or hereafter subject to
any security instrument or mortgage in favor of the [Senior] Lender
securing payment of the obligations of the [LLC], including without
limitation membership interests in the [LLC], permits, licenses and the
Debt Reserve Account.'' \5\ The documents that specifically
collateralize the Senior Loan are (a) the Collateral Assignment; (b)
the Guaranty; (c) certain Senior Mortgages; (d) general Security
Agreements contained in the Senior Mortgages; and (e) Assignments of
[[Page 64786]]
Leases and Rents from Tenants contained in the Senior Mortgages.
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\5\ The Debt Reserve Account is an account in which an amount
equal to six months of principal and interest payable to the Senior
Lender is kept in reserve.
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During the construction loan period for the Senior Loan, interest
was calculated on the basis of a 360 day year consisting of 12 months
with the actual number of days of each month. However, during the
permanent loan period, interest is being calculated on the basis of a
360 day year consisting of 12, thirty day months.
Once the Senior Loan was fully funded, an additional $13,412,674 in
Project budget costs were funded by the Plan to the LLC in the form of
a loan (i.e., the Plan Loan). The Plan Loan, dated May 24, 2002,
requires a balloon payment of the outstanding principal and interest on
the maturity date of April 30, 2006. The amount of the balloon will be
$10,747,583. However, this amount is also subject to fluctuation based
upon such variables as the actual monthly construction/operating draw,
the number of occupied units in the project, and the market rent for
each unit. Payments of principal and interest can be made only after
the Senior Lender has determined that funds are available to pay the
Plan and no default of the Senior Loan has occurred. Interest on the
Plan Loan is equal to 15 percent per annum.
Like the Senior Loan, the Plan Loan is bifurcated to comply with
New York law. The Plan Loan is thus evidenced by a Building Loan
Agreement dated May 24, 2002, in the amount of $2,956,505 for ``hard
costs'' and a Non-Cost of Improvement Loan of the same date for
$10,456,169 for ``soft costs.''
In addition, the Plan Loan is secured by ``all of the property and
interests encumbered by the Security Documents.'' Such collateral
includes (a) certain Subordinate Mortgages on the Project; \6\ (b)
certain Lease Assignments; (c) the Assignment of Project Documents and
Development Rights; (d) the Limited Liability Interest Pledge
Agreement; (e) the Guaranty of Completion; (f) the Non-Recourse
Exception Guaranty; and (g) certain UCC Financing Statements.
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\6\ The Subordinate Mortgages refer to two components of the
Plan Loan, i.e., the Building Loan Agreement covering the ``hard
costs'' and the Non-Cost of Improvement Loan covering the ``soft
costs.''
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In accordance with a General Subordination and Intercreditor
Agreement, dated May 24, 2002, between the Applicant and the Senior
Lender, the Senior Loan was made senior in priority to the Plan Loan.
The remaining Project budget costs were funded to the LLC by the Plan's
initial capital contribution of $6,706,337 (or 11.2 percent of the
total Project budget costs) and by the Managing Member's initial
capital contribution of $6,706,337 (or 11.2 percent of the total
Project budget costs). As of January 31, 2004, each Member had made
capital contributions to the LLC totaling $7,060,774 and the Senior
Lender had funded $27,780,337 of the Senior Loan. The remainder of the
Senior Loan was funded as of April 2004. The Plan began making monthly
disbursements on the Plan Loan in June 2004.
5. In addition to the Plan's agreement to subordinate the Plan Loan
in favor of the Senior Loan, the Plan executed two documents in favor
of the Senior Lender which are intended to provide additional comfort
to the Senior Lender that the Senior Loan will be repaid. First, on May
24, 2002, both the Plan and the Managing Member executed the Collateral
Assignment of Membership Interests Agreement (i.e., the Collateral
Assignment) in favor of the Senior Lender, which provided that, in
order to induce the Senior Lender to make the Senior Loan, each of the
Members agreed to assign all their respective rights and interests to
the LLC in such things as compensation, voting, access to the LLC's
records, proceeds or payments due the assignors, etc., in the event the
LLC defaults on the Senior Loan. Second, the Plan executed an
Unconditional and Continuing Limited Liability Guaranty and Indemnity
Agreement (i.e., the Guaranty) in favor of the Senior Lender, which
provided that the Plan would indemnify the Senior Lender for any losses
incurred by the Senior Lender in connection with any affirmative ``bad
acts''\7\ of the Plan in its capacity as a Member of the LLC.\8\ The
subject transactions involve less than 1 percent of the fair market
value of the total assets of the Plan.\9\
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\7\ According to Article II, Section 2.1 of the Unconditional
and Continuing Limited Guaranty and Indemnity Agreement, ``bad
acts'' include, but are not limited to, the following: fraud,
material misrepresentation, concealment, failure to pay real estate
taxes, misappropriation of rents, revenues, profits or security
deposits by the Guarantor or at the direction of the Guarantor, or
other acts of willful misconduct. It should be noted that the
Guaranty does not extend to ``bad acts'' of any other party that
could be imputed to the Plan, or to any passive conduct on the part
of the Plan (e.g., a failure to investigate or disclose).
Besides the Plan's Guaranty, the Managing Member of the LLC and
other entities provided Guaranties to the Senior Lender in the form
of (a) Unconditional and Continuing Limited Guaranty and Indemnity
Agreements similar to those executed by the Plan (These agreements
were entered into by (i) the Managing Member; (ii) FCRG (the 80
percent owner of the Managing Member); (iii) FCO (the 20 percent
owner of the Managing Member); (iv) FCRPC (FCRG's parent); and (v)
Forest City Enterprises, Inc. (FCEI)(FCRPC Corporation's parent.);
(b) a Completion Guaranty (A Guaranty of Completion was executed by
the Managing Member's parent, FFCEI. This blanket guaranty obligates
FCEI (to the extent necessary) to complete the Project in accordance
with the plans and specifications); and (c) Guaranties of the Plan
Loan and the Plan's Equity Interest in the Project (The Managing
Member has provided the following guaranties in favor of the Plan as
the subordinated lender: (i) A Non-Recourse Exception Guaranty; (ii)
a Guaranty of Completion; (iii) a Guaranty of Completion (Equity);
and (iv) a Guaranty of Fraudulent Acts (Equity)).
\8\ In order to induce a construction lender to fund a
construction loan, the Applicant states that it is customary for the
lending bank to be provided with certain guaranties of repayment
from a party other than the borrower. Such a guaranty by a ``deep
pocket'' is often required to make the lender comfortable that all
or a portion of the loan it will make to the borrower will be repaid
in the event of a default of the borrower. When the borrower is a
REOC, the Applicant explains that it is customary for the
construction lender to require the guaranty from one or more
constituent members of the REOC. In the event that the lender will
begin funding the construction loan before the members of the REOC
have fully funded their equity commitments to the REOC, as is the
case here, the Applicant indicates that the members will assign
their interests in the REOC to the lender in the event of default.
\9\ According to the Applicant, the Plan's total potential
liability in connection with its capital contribution, the Plan
Loan, and the Collateral Assignment will not exceed the value of the
investment the Plan actually makes in the Project. The total
potential investment by the Plan in the Project equals the potential
capital contribution of $7,206,337, plus a maximum Plan Loan of
$13,412,674. Thus, the Plan's total liability in connection with
this investment will not exceed $20,619,011. Although the Guaranty
separately provides that the Plan may be liable in connection with
any wrongful acts it takes for losses incurred by the Senior Lender
in connection with these wrongful acts, this potential liability,
according to the Applicant, is akin to liability the Plan would
incur with any willful and tortious actions it may take, and would
not likely exceed $32.98 million or the amount of the outstanding
loan.
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As a Member of the LLC, the Plan's total potential liability with
respect to its investment in the Project, is limited to: (a) Capital
contributions it has made to the LLC; (b) amounts funded to the LLC
under the Plan Loan; and (c) rights and interests given to the Senior
Lender under the Collateral Assignment. Also, in the event the Plan
ever engages in any of the specified ``bad acts'' that are described in
the Guaranty, the Plan's total potential liability will not exceed the
greater of $32.98 million or the outstanding principal amount of the
Senior Loan.
6. In December 2002, shareholders of M&T Bank (MTB), the Senior
Lender's parent company, and Allied Irish Banks, PLC, (AIB) approved
MTB's acquisition of Allfirst (Allfirst), AIB's U.S. subsidiary, with
the resulting merger (the Merger) being consummated on April 1, 2003.
Under the terms of the acquisition agreement, AIB received 26.7 million
shares of MTB common stock, plus approximately $886 million in cash, in
exchange for all of the outstanding stock of Allfirst. (For purposes of
this proposed exemption, the enlarged entity is referred to as
[[Page 64787]]
MTB/Allfirst). As a result of the Merger, the Senior Lender is now a
company that is wholly owned by MTB/Allfirst. The Plan is obligated to
the Senior Lender (a) to the extent of the Plan's equity interest in
the LLC in the event that the LLC defaults on the Senior Loan pursuant
to the Collateral Assignment; and (b) in the form of the Guaranty in
that it will reimburse the Senior Lender in the event the Plan commits
certain affirmative ``bad acts'' in connection with the LLC.
Accordingly, the Applicant requests an administrative exemption from
the Department.
7. The Applicant represents that for reasons unrelated to the
transactions described herein, Allfirst is a party in interest with
respect to the Plan insofar as it provides two types of banking
services to the Plan. First, the Plan maintains an operating checking
account with Allfirst that is used to pay day-to-day administrative
expenses of the Plan. Second, at least one local collection agent used
by the Plan in connection with the collection of employee benefit plan
contributions from local covered employers maintains a bank account
with Allfirst in which it deposits the pension contributions made by
contributing employers in the area. On a regular basis, the Plan sweeps
the local Allfirst account of all the contributions that have been
accumulated.
8. The Applicant represents that Allfirst does not exercise
discretionary authority or discretionary control respecting the
management of the funds deposited with it or the administration of the
Plan, and thus it is not a fiduciary with respect to the Plan. The
Applicant further represents that there are no Plan assets invested in
loans to Allfirst, in property leased to Allfirst, or in securities
issued by Allfirst. In addition, the Applicant explains that Allfirst
is not involved in any manner with the Plan Trustees' decision to
engage in these transactions and it will not be involved in any
decision making or in an advisory capacity with respect to the Plan.
9. The Applicant represents that prior to the Merger, MTB was not a
party in interest with respect to the Plan. Thus, any possible benefits
or guarantees given to MTB at the time of the Senior Loan were not
prohibited transactions. The Applicant explains that since the Merger,
MTB/Allfirst has continued to service the foregoing Allfirst accounts
under the name of M&T Bank. As a result, MTB/Allfirst is a service
provider to the Plan as defined in section 3(14)(B) of the Act. In
addition, the Applicant states that the Senior Lender became a party in
interest with respect to the Plan under section 3(14)(G) of the Act
insofar as it is a corporation in which 50 percent or more of the
combined voting power is owned post-merger by MTB/Allfirst.
10. Finally, the Applicant states that the transactions were not
part of an agreement, arrangement or understanding designed to benefit
a party in interest. In this regard, the Applicant explains that the
Senior Lender was not, at the time the underlying transactions were
being entered into, a party in interest to the Plan, nor did the Plan
have an expectation that Allfirst would be merged into the parent of
the Senior Lender. The Applicant represents that the Plan's primary
intent in executing the Guaranty and the Collateral Assignment was to
further its investment in the LLC, not to benefit a party in interest.
11. In summary, the Applicant represents that the transactions have
satisfied and will satisfy the statutory criteria for an exemption
under section 408(a) of the Act for the following reasons:
(a) The Plan's execution of the Collateral Assignment and the
Guaranty was on terms no less favorable to the Plan than those which
the Plan could obtain in an arm's length transaction with an unrelated
party;
(b) The decisions on behalf of the Plan to invest in the LLC and
consent to the terms of the Collateral Assignment and Guaranty in favor
of the Senior Lender were made by fiduciaries which were independent of
and unaffiliated with the Senior Lender;
(c) At the time of the transactions, the Plan had total assets that
were in excess of $5 billion, and not more than 1% of the Plan's total
assets was invested or will be invested in the LLC;
(d) The other member of the LLC also executed Guaranties in favor
of the Senior Lender;
(e) As a Member of the LLC, the Plan's total potential liability
with respect to its investment in the real estate Project, will be
limited to:
(1) Its capital contributions to the LLC.
(2) Amounts funded under the Plan Loan.
(3) Rights and interests given to the Senior Lender under the
Collateral Assignment; and
(f) In the event the Plan engages in any of the specified ``bad
acts'' that are described in the Guaranty, the Plan's total potential
liability will not exceed the greater of $32.98 million or the
outstanding principal amount of the Senior Loan.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested
persons by either hand delivery or overnight mail within 4 days of the
date of publication of the notice of pendency in the Federal Register.
Such notice will include a copy of the notice of proposed exemption, as
published in the Federal Register, and a supplemental statement, as
required pursuant to 29 CFR 2570.43(b)(2), which will inform interested
persons of their right to comment on the proposed exemption. All
comments are due within 34 days after publication of the proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Arjumand A. Ansari of the
Department, telephone (202) 693-8566. (This is not a toll-free number.)
Roy A. Herberger Defined Benefit Pension Plan (the Plan) Located in
Phoenix, Arizona
[Application No. D-11259]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, 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 three
past in-kind contributions (the Contribution(s)) to the Plan of common
stock (the Stock) of Pinnacle West Capital Corporation (PNW) by Roy A.
Herberger, Jr. (the Applicant), a disqualified party with respect to
the Plan,\10\ provided that the following conditions are met:
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\10\ Since the Applicant is a sole proprietor and the only
participant in the Plan, there is no jurisdiction under Title I of
the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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(a) The transactions involved publicly traded securities, the fair
market values of which were based upon published prices at the time of
each Contribution;
(b) The cumulative value of the Contributions represented no more
than 18% of the total assets of the Plan;
(c) The Plan has not paid any commissions, costs or other expenses
in connection with the Contributions;
(d) The Applicant, who is the only person affected by the
transactions, believes that the transactions were in the best interest
of the Plan;
(e) The Applicant made the Contributions based on erroneous advice
from his tax adviser; and
[[Page 64788]]
(f) The terms of the transactions between the Plan and the
Applicant are no less favorable to the Plan than terms negotiated at
arm's length under similar circumstances between unrelated third
parties.
Summary of Facts and Representations
1. The Plan is a defined benefit pension plan. The Plan
administrator is the Applicant and is the sole participant in the Plan.
The Applicant receives income from serving on various boards of
directors. A portion of his fees for serving on the board of directors
of PNW is paid in the form of common stock of PNW. The Applicant is a
non-employee outside director of PNW. PNW is a public company, whose
stock is publicly traded on the New York Stock Exchange. The Applicant
beneficially owns 8660 shares of the Stock.
2. On July 23, 2002, the Applicant contributed 900 shares of the
Stock from his brokerage account to the Plan. On August 14, 2002, the
Applicant contributed another 2700 shares of the Stock from his
brokerage account to the Plan. Finally, on July 7, 2003, the Applicant
contributed another 900 shares of the Stock to the Plan. However, these
900 shares were transferred back to the Plan months later and cash was
contributed in its place when it was discovered that the Contributions
constituted prohibited transactions. The Applicant represents that the
third transaction was corrected within the meaning of the Code.\11\ The
values of the Stock used for purposes of the contributions were as
follows: (1) July 23, 2002 (900 shares) $28.05 (Closing Price); (2)
August 14, 2002 (2700 shares) $33.53 (Closing Price); and (3) July 7,
2003 (900 shares) $37.31 (Closing Price).
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\11\ The Department has no jurisdiction with respect to what
constitutes correction with respect to a prohibited transaction
under section 4975 of the Code. Therefore, the Department expresses
no opinion herein on the whether the transfer of 900 shares of the
Stock back to the Plan constituted a correction within the meaning
of the Code.
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3. The Applicant's motivation for contributing the Stock, rather
than selling the Stock, contributing the cash proceeds and then
repurchasing the Stock, was to save brokerage fees. The Stock
contributed to the Plan was and is publicly traded on the New York
Stock Exchange and the price was determined based on the closing price
of the Stock on the day of each Contribution.
4. Prior to making the first Contribution, the Applicant consulted
a Deloitte & Touche LLP (Deloitte & Touche) tax specialist regarding
the Contributions and was mistakenly advised that the Contributions
were not prohibited transactions. Deloitte & Touche acknowledges
providing the erroneous advice regarding the Contributions.
5. On a cumulative basis, the Contributions never constituted more
than 18% of the assets of the Plan. The value of the Stock has
increased since the Contributions.
6. In summary, the Applicant represent that the transactions
satisfy the statutory criteria for an administrative exemption under
section 4975(c)(2) of the Code because: (a) The Stock was valued at its
fair market value at the time of each Contribution; (b) the cumulative
value of the Contributions represented no more than 18% of the total
assets of the Plan; (c) the Plan has not paid any commissions, costs or
other expenses in connection with the Contributions; (d) the Applicant,
who is the only person affected by the transactions, believes that the
Contributions were in the best interest of the Plan; (e) the Applicant
made the Contributions based on erroneous advice from his tax adviser;
and (f) the terms of the transactions between the Plan and the
Applicant are no less favorable to the Plan than terms negotiated at
arm's length under similar circumstances between unrelated third
parties.
Notice to Interested Persons
It has been determined that there is no need to distribute the
notice of proposed exemption (the Notice) to interested persons.
Comments and requests for a hearing are due thirty (30) days after
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)
The North Texas Electrical Joint Apprenticeship and Training Trust Fund
(the Plan) Located in Grand Prairie, Texas
[Application No. L-11245]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the restrictions of
section 406(a) of the Act shall not apply to the sale (the Sale(s)) of
(1) a 1.112 acres of land (Parcel 1) to the North Texas Chapter,
National Electrical Contractors Association (NECA), a party in interest
to the Plan; and (2) a 5.383 acres of land (Parcel 2) to Local Union
20, International Brotherhood of Electrical Workers (IBEW), a
party in interest to the Plan. This proposed exemption is conditioned
upon adherence to the material facts and representations described
herein and upon the satisfaction of the following requirements:
(a) The Sales are one-time transactions for cash;
(b) The Plan does not pay any commissions, costs or other expenses
in connection with the Sale of Parcel 1 and Parcel 2 (collectively the
Parcels); and
(c) The Plan will receive an amount equal to the greater of: (i)
$145,000 or the current fair market value of Parcel 1 as established by
an independent, qualified, appraiser and updated at the time of the
Sale; and (ii) $655,000; or the current fair market value of Parcel 2
as established by an independent, qualified, appraiser and updated at
the time of the Sale; and
(d) The terms of the Sales will be no less favorable to the Plan
than terms it would have received under similar circumstances in an
arm's length negotiation with an unrelated party.
Summary of Facts and Representations
1. The Plan is an apprenticeship training trust fund. The trustees
(the Trustees) consist of three members appointed by IBEW and three
members representing management appointed by NECA. The Trustees have
investment discretion over all assets of the Plan. As of March 25,
2004, the Plan has 230 participants. The Plan's assets have an
aggregate fair market value of $1,807,444.63 as of December 2003. The
Parcels have an estimated fair market value of $800,000 and constitute
approximately 44% of the total value of Plan assets. The Plan is
organized exclusively for educational purposes within the meaning of
section 501(c)(3) of the Code and operates as a tax exempt nonprofit
fund solely and exclusively for the purposes of providing a program for
the training and education of electrical apprentices, journeymen, or
other appropriate persons, and programs in furtherance thereof and to
defray the reasonable expense of administering the apprenticeship and
training programs established under the provisions of the collective
bargaining agreement.
2. The Trustees represent that the Sale is in the interest of the
Plan, and its participants and beneficiaries. The Plan participants
(the Participants) currently have to drive from the school in Grand
Prairie to the IBEW office in Dallas for job referrals, benefit
information, and other business that is handled for them
[[Page 64789]]
by the union as their collective bargaining representative. These
offices are approximately twenty-five miles apart. NECA handles the
collection and disbursement of benefit funds for the Participants, and
their office is in Arlington, TX which is approximately three miles
away from the school. IBEW and NECA seek to purchase the Parcels from
the Plan and build offices at this location which would be much more
convenient for the Participants.
If the exemption is denied, the parties in interest, IBEW and NECA,
will not be able to build their buildings next to the Plan facility.
This will cause the Plan participants to have to drive approximately
twenty-five miles to the IBEW office and three miles to the NECA office
in order to conduct business. NECA and IBEW have not indicated any
desire to build a new building unless it is next to Plan. The
transactions will be in the best interests of the Plan and will also
make the school building more accessible to members of the IBEW and
NECA for their training needs.
3. On July 26, 2002 an unimproved 11.7 acre of real property (the
Land) was conveyed to the Plan by an unrelated third party. Fifty
percent of the Land was donated to the Plan and fifty percent was sold
to the Plan for $575,000. The Parcels are sections of the Land that the
applicant now seeks to sell. Parcel 1 consists of a vacant unimproved
parcel of land containing an area of approximately 1.112 acres located
at W. Tarrant Road, Grand Prairie, Dallas County, Texas. Parcel 2
consists of a vacant unimproved parcel of land containing an area of
approximately 5.383 acres located at W. Tarrant Road, Grand Prairie,
Dallas County, Texas. The remaining Land is road accessible and is
surplus property for the Plan.
4. The Parcels were appraised on October 13, 2003, by Donald J.
Sherwood (Mr. Sherwood), a MAI Certified General Real Estate Appraiser.
Mr. Sherwood is independent of the parties to the transactions and is
an appraiser with Integra Realty Resources located in Dallas, Texas.
Mr. Sherwood determined the best use and highest value of the
Parcels was associated with valuing the Parcels with the so-called
direct sales comparison method. Under this method, sales of similar
land in the market area are compared to the subject to arrive at an
indication of value. In arriving at value conclusions, the tracts are
compared as to the rights conveyed, financing terms, sale conditions,
market conditions, location, and physical characteristics. Therefore,
based on the valuation procedures employed by Mr. Sherwood, he
determined that the fair market value of the Parcels was as follows:
(i) Parcel 1 = $145,000; and (ii) Parcel 2 = $655,000.
5. The Plan will receive an amount equal to the greater of: (i)
$145,000; or (ii) the current fair market value of Parcel 1 as
established by an independent, qualified, appraiser updated at the time
of the Sale. The Plan also will receive an amount equal to the greater
of: (i) $655,000; or (ii) the current fair market value of Parcel 2 as
established by an independent, qualified, appraiser updated at the time
of the Sale.
6. In summary, the applicant represents that the subject
transaction satisfies the statutory criteria contained in section
408(a) of the Act and section 4975(c)(2) of the Code for the following
reasons:
(a) The Sale is a one-time transaction for cash;
(b) The Plan does not pay any commissions, costs or other expenses
in connection with the Sale;
(c) The Plan will receive an amount equal to the greater of: (i)
$145,000; or (ii) the current fair market value of Parcel 1 as
established by an independent, qualified, appraiser and updated at the
time of the Sale; and the Plan will receive an amount equal to the
greater of: (i) $655,000; or (ii) the current fair market value of
Parcel 2 as established by an independent, qualified, appraiser and
updated at the time of the Sale; and
(d) The terms of the Sales will be no less favorable to the Plan
than terms it would have received under similar circumstances in an
arm's length negotiation with an unrelated party.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department,
telephone (202) 693-8540 (this is not a toll-free number).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 1st day of November, 2004.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 04-24648 Filed 11-5-04; 8:45 am]
BILLING CODE 4510-29-P
