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Employee Benefits Security Administration

EBSA Federal Register Notice

Grant of Individual Exemption; Comerica Bank [11/24/2004]

[PDF Version]

Volume 69, Number 226, Page 68398-68404

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DEPARTMENT OF LABOR

Emergency Benefits Security Administration

[Prohibited Transaction Exemption 2004-20; Exemption Application No. D-
11098, et al.]

 
Grant of Individual Exemption; Comerica Bank

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) 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).
    A notice was published in the Federal Register of the pendency 
before the Department of a proposal to grant such exemption. The notice 
set forth a summary of facts and representations contained in the 
application for exemption and referred interested persons to the 
application for a complete statement of the facts and representations. 
The application has been available for public inspection at the 
Department in Washington, DC. The notice also invited interested 
persons to submit comments on the requested exemption to the 
Department. In addition the notice stated that any interested person 
might submit a written request that a public hearing be held (where 
appropriate). The applicant has represented that it has complied with 
the requirements of the notification to interested persons. No requests 
for a hearing were received by the Department. Public comments were 
received by the Department as described in the granted exemption.
    The notice of proposed exemption was issued and the exemption is 
being granted solely by the Department because, 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 proposed to the Secretary of Labor.

Statutory Findings

    In accordance with section 4089a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:
    (a) The exemption is administratively feasible;
    (b) The exemption is in the interests of the plan and its 
participants and beneficiaries; and
    (c) The exemption is protective of the rights of the participants 
and beneficiaries of the plan.


Comerica Bank
Located in Detroit, Michigan
[Prohibited Transaction Exemption 2004-20; Exemption Application No. 
D-11098]

Exemption

Section I. Exemption for Receipt of Fees

    The restrictions of sections 406(a) and 406(b) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section

[[Page 68399]]

4975(c)(1)(A) through (F) of the Code, shall not apply to the receipt 
of fees by Comerica Bank and its affiliates (Comerica) from the Munder 
Funds (the Funds), open-end investment companies registered under the 
Investment Company Act of 1940 (the 1940 Act), for acting as an 
investment adviser for the Funds which are not investment advisory 
services (``Secondary Services'' as defined in Section III(h) below) in 
connection with the purchase and sale of shares of the Funds by certain 
defined benefit and defined contribution pension plans and funded 
employee welfare benefit plans (Client Plans) for which Comerica serves 
as fiduciary with investment discretion, provided that the following 
conditions and the General Conditions set forth in Section II are met:
    (a) No sales commissions, redemption fees, or other fees are paid 
by the Client Plans in connection with the purchase or sale of shares 
of the Funds.
    (b) The price paid or received by a Client Plan for shares in a 
Fund is the net asset value per share, as defined in Section III(e), at 
the time of the transaction, and is the same price that would have been 
paid or received for the shares by any other investor at that time.
    (c) Comercia, including any officer or director of Comerica, does 
not purchase or sell shares of the Funds from or to any Client Plan.
    (d) Each Client Plan receives a credit, through a cash rebate of 
such Plan's proportionate share of all fees charged to the Funds by 
Comerica for investment advisory services, including any investment 
advisory fees paid by Comerica to third-party subadvisers. Cash rebates 
for investment advisory services provided to the Client Funds are 
received by a Plan on or before the date Comerica charges the Client 
Plan for plan-level investment management services. Comerica management 
fees and Munder advisory fees are paid in arrears for services provided 
to the Client Plans and the Funds, respectively. The crediting of all 
such fees is audited by Comerica through a system of internal controls 
to verify the proper crediting of the fees to each Client Plan.
    (e) Comerica will supply, annually and upon request, to the second 
fiduciary acting for a Client Plan, who is independent of and unrelated 
to Comerica (the Second Fiduciary), all information reasonably 
necessary for such fiduciary to verify that the fee credit calculation 
is correct and any additional information that the Second Fiduciary may 
require to determine that the conditions of this exemption are being 
met by Comerica.
    (f) For each Client Plan, the combined total of all fees received 
by Comerica for the provision of services to a Client Plan, and in 
connection with the provisions of services to the Funds in which the 
Client Plan may invest, is not in excess of ``reasonable compensation'' 
within the meaning of section 408(b)(2) of ERISA.
    (g) Comerica does not receive any fees payable pursuant to Rule 
12b-1 under the 1940 Act in connection with the transactions.
    (h) The Client Plans are not employee benefit plans sponsored or 
maintained by Comerica.
    (i) The Second Fiduciary receives, in advance of any initial 
investment by the Client Plan in a Fund, full and detailed written 
disclosure of information concerning the Fund, including, but not 
limited to:
    (1) A current prospectus for each Fund in which a Client Plan is 
considering investing;
    (2) A statement describing the fees for investment advisory or 
similar services and any Secondary Services as defined in Section 
III(h), and all other fees to be charged to or paid by the Client Plan 
and by the Funds, including the nature and extent of any differential 
between the rates of such fees;
    (3) The reasons why Comerica may consider such investment to be 
appropriate for the Client Plan; A statement describing whether there 
are any limitations applicable to Comerica with respect to which assets 
of a Client Plan may be invested in the Funds, and if so, the nature of 
such limitations; and upon the request of the Second Fiduciary, a copy 
of the proposed exemption and/or a copy of the final exemption once 
such documents are published in the Federal Register.
    (j) After consideration of the information described in paragraph 
(i) above, the Second Fiduciary authorizes in writing the investment of 
assets of the Client Plan in each particular Fund, the fees to be paid 
by such Fund to Comerica, and the cash rebate to the Client Plan of 
fees received by Comerica from the Funds for investment advisory 
services.
    (k) All authorizations made by a Second Fiduciary regarding 
investments in a Fund and the fees paid to Comerica are subject to an 
annual reauthorization wherein any such prior authorization referred to 
in paragraph (j) above shall be terminable at will by the Client Plan, 
without penalty to the Plan, upon receipt by Comerica of written notice 
of termination. A form expressly providing an election to terminate the 
authorization described in paragraph (j) above (the Termination Form) 
with instructions on the use of the form must be supplied to the Second 
Fiduciary no less than annually. However, if the Termination Form has 
been provided to the Second Fiduciary pursuant to paragraph (m) below, 
then the Termination Form need not be provided again for an annual 
reauthorization pursuant to this paragraph unless at least six months 
have elapsed since the form was provided in connection with the 
additional service or fee increase. The instructions for the 
Termination Form must include the following information:
    (1) The authorization is terminable at will by any of the Client 
Plans, without penalty to such Client Plans, upon receipt by Comerica 
of written notice from the Second Fiduciary; and
    (2) Failure by the Second Fiduciary to return the Termination Form 
on behalf of a Client Plan will result in continued authorization of 
Comerica to engage in the transactions described in paragraph (j) above 
on behalf of the Client Plan.
    (3) A copy of the Termination Form will be sent to the Second 
Fiduciary for the Client Plan upon request.
    (1) The Second Fiduciary receives full written disclosure, prior to 
the effective date, in a Fund prospectus or otherwise, of any increases 
in the rates of fees charged by Comerica to the Funds for investment 
advisory services even though such fees will be rebated as required by 
paragraph (d) above.
    (m) In the event that Comerica provides an additional Secondary 
Service to a Fund for which a fee is charged or there is an increase in 
the rate of any fee paid by the Funds to Comerica for any Secondary 
Services that results from either an increase in the rate of such fee 
or a decrease in the number or kind of services performed by Comerica 
for such fees in connection with a previously authorized Secondary 
Service, Comerica will, at least 30 days in advance of the 
implementation of such additional service for which a fee is charged or 
fee increase, provide written notice (that is separate from the 
prospectus of the Fund) to the Second Fiduciary explaining the nature 
and the amount of the additional services or of the effective increase 
in fees of the affected Fund. Such notice shall be accompanied by the 
Termination Form.
    (n) On an annual basis, Comerica provides the Second Fiduciary of a 
Client Plan investing in the Funds with: A copy of the current 
prospectus for the Funds and, upon such Second Fiduciary's request, a 
copy of the Statement of Additional Information for such Funds that 
contains a description

[[Page 68400]]

of all fees paid by the Funds to Comerica (including fees for 
investment advisory service);
    (2) A copy of the annual financial disclosure report of the Funds 
in which such Client Plan is invested, which includes information about 
the Fund portfolios, within 60 days of the preparation of the report; 
and
    (3) Oral or written responses to inquiries of the Second Fiduciary 
as they arise.
    (o) All dealings between the Client Plans and the Funds are on a 
basis no less favorable to the client Plans than dealings with other 
shareholders of the Funds.

Section II. General Conditions

    (a) Comerica maintains for a period of six years the records 
necessary to enable the persons described in paragraph (b) of Section 
II to determine whether the conditions of this exemption have been met, 
except that: a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Comerica, the 
records are lost or destroyed prior to the end of the six-year period, 
and no party in interest other than Comerica shall be subject to the 
civil penalty that may be assessed under section 502(i) of ERISA or to 
the taxes imposed by section 4975(a) and (b) of the Code if the records 
are not maintained or not available for examination as required by 
paragraph (b) below.
    (b)(1) Except as provided in paragraph (b)(2) below and 
notwithstanding any provisions of sections 504(a)(2) and (b) or ERISA, 
the records referred to in paragraph (a) of Section II are 
unconditionally available at their customary location for examination 
during normal business hours by: (1) Any duly authorized employee or 
representative of the Department of Labor or the Internal Revenue 
Service; (ii) Any fiduciary of a Client Plan who has authority to 
acquire or dispose of shares of the Funds owned by the Client Plan, or 
any duly authorized employee or representative of such fiduciary; and 
(iii) Any participant or beneficiary of a Client Plan or duly 
authorized employee or representative of such participant or 
beneficiary.
    (2) None of the persons described in subparagraph (b)(1)(ii) and 
(iii) above shall be authorized to examine trade secrets of Comerica, 
or commercial or financial information, which is privileged or 
confidential.

Section III--Definitions

    For purposes of this exemption:
    (a) ``Comerica'' means Comerica Bank, a Michigan banking 
corporation, and any affiliate thereof (as affiliate is defined below 
in paragraph (b) of this section).
    (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) ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    (d) The term ``Fund'' or ``Funds'' shall include the Munder Funds, 
each series thereof, or any other diversified open-end investment 
company registered under the 1940 Act for which Comerica serves as an 
investment adviser and may also serve as a Fund accountant, transfer 
agent or provide some other Secondary Service (as defined below in 
paragraph (h) of Section III) which has been approved by such Funds.
    (e) ``Net asset value'' means the amount for purposes of pricing 
all purchases and sales, calculated by dividing the value of all 
securities, determined by a method as set forth in a Fund's prospectus 
and statement of additional information, and other assets belonging to 
the Fund or portfolio of the Fund, less the liabilities charged to each 
such portfolio or Fund, by the number of outstanding shares.
    (f) ``Relatives'' means a ``relative'' as that term is defined in 
section 3(15) of ERISA (or a ``member for 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.
    (g) ``Second Fiduciary'' means a fiduciary of a Client Plan who is 
independent of and unrelated to Comerica. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to Comerica if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with Comerica;
    (2) Such fiduciary, or any officer, director partner, employee, or 
relative of the fiduciary is an officer, director, partner, or employee 
of Comerica (or is a relative of such persons); or
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this exemption.
    If an officer, director, partner, or employee of Comerica (or 
relative of such persons), is a director of such Second Fiduciary, and 
if he or she abstains from participation in (i) the choice of the 
Client Plan's investment adviser, (ii) the approval of any such 
purchase or sale between the Client Plan the Funds, and (iii) the 
approval of any change in fees charged to or paid by the Client Plan in 
connection with any of the transactions described in Section I and 
Section II above, then subparagraph (g)(2) of Section III shall not 
apply.
    (h) ``Secondary Service'' means a service other than an investment 
management, investment advisory, or similar services which is provided 
by Comerica to the Funds including but not limited to) custodian 
services, transfer and dividend disbursing agent services, 
administrator or sub-administrator services, accounting services, and 
shareholder servicing agent services.
    However, for purposes of this exemption, the term ``Secondary 
Service'' will not include any brokerage services provided to the Funds 
by Comerica for the execution of securities transactions engaged in by 
the Funds.
    (i) ``Termination form'' means the form supplied to the second 
Fiduciary that expressly provides an election to the Second Fiduciary 
to terminate on behalf of a Client Plan the authorization described in 
paragraph (j) of Section I above. Such Termination Form maybe used at 
will by the Second Fiduciary to terminate an authorization without 
penalty to the Plan and to notify Comerica in writing to effect a 
termination by selling the shares of the funds held by the Client Plan 
requesting such termination within one business day following receipt 
by Comerica of the form provided that if, due to circumstances beyond 
the control of Comerica, the sale cannot be executed within one 
business day, Comerica shall have one additional business day to 
complete such sale.

DATES: This exemption is effective on or after November 24, 2004.
    The Department received no comments or requests for a public 
hearing. After giving full consideration to the entire record, the 
Department has decided to grant the exemption. For a more complete 
statement of the facts and representations supporting he Department's 
decision to grant this exemption, refer to the notice of proposed 
exemption published on September 10, 2004, at 69 FR 54804.
    For information regarding the matters described herein, interested 
persons are encouraged to obtain copies of the exemption application 
file (Exemption

[[Page 68401]]

Application No. D-11098) the Department is maintaining in this case. 
The complete application file is available for public inspection in the 
Public Disclosure Room of the Employee Benefits Security 
Administration, Room N-1513, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington, DC 20210.
    For Further Information Contact: Ms. Wendy McColough of the 
Department, telephone (202) 693-8561. This is not a toll-free number.

Camino Medical Group, Inc. matching 401(k) Plan (the 401(k) Plan) and 
the Camino Medical Group, Inc. Employee Retirement Plan (the Retirement 
Plan; together, the Plans) Located in Sunnyvale, California.

[Prohibited Transaction Exemption 2004-21; Exemption Application 
Nos. D-11160 & D-11161, respectively]

Exemption

    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 reply to (1) the leasing (the New Lease) of a medical 
treatment center (the Treatment Center) by the Retirement Plan to 
Camino Medical Group, Inc. (CMG), the sponsor of the Retirement Plan 
and a party in interest with respect to such Retirement Plan; and (2) 
the exercise, by CMG, of options to renew the New Lease for two 
additional terms.
    This exemption is subject to the following conditions:
    (a) The terms and conditions of the New Lease are no less favorable 
to the Retirement Plan than those obtainable by the Retirement Plan 
under similar circumstances when negotiated at arm's length with 
unrelated third parties.
    (b) The Retirement Plan is represented for all purposes under the 
New Lease, and during each renewal term, by a qualified, independent 
fiduciary.
    (c) The Retirement Plan's independent fiduciary has negotiated, 
reviewed, and approved the terms and conditions of the New Lease and 
the options to renew the New Lease on behalf of the Retirement Plan and 
has determined that the transactions are appropriate investments for 
the Retirement Plan and are in the best interests of the Retirement 
Plan and its participants and beneficiaries.
    (d) The rent paid to the Retirement Plan under the New Lease, and 
during each renewal term, is no less than the fair market rental value 
of the Treatment Center, as established by a qualified, independent 
appraiser.
    (e) The rent is subject to adjustment at the commencement of the 
second year of the term of the New Lease and each year thereafter by 
way of an independent appraisal. A qualified, independent appraiser is 
selected by the independent fiduciary to conduct the appraisal. If the 
appraised fair market rent of the Treatment Center is greater than that 
of the current base rent, then the base rent is revised to reflect the 
appraised increased in fair market rent. If the appraised fair market 
rent of the Treatment Center is less than or equal to the current base 
rent, then the base rent remains the same.
    (f) The New Lease is triple net and requires all expenses for 
maintenance, taxes, utilities and insurance to be paid by CMG, as 
lessee.
    (g) The Retirement Plan's independent fiduciary monitors compliance 
with the terms of the New Lease and the conditions of the exemption 
throughout the duration of the New Lease and each renewal term, and is 
responsible for legally enforcing the payment of the rent and the 
proper performance of all other obligations of CMG under the terms of 
the New Lease.
    (h) The Retirement Plan's independent fiduciary expressly approves 
any renewal of the New Lease beyond the initial term.
    (i) CMG provides the Retirement Plan's independent fiduciary with 
documentation that the rent has been paid on a monthly basis.
    (j) At all times throughout the duration of the New Lease and each 
renewal term, the fair market value of the Treatment Center does not 
exceed 25 percent of the value of the total assets of the Retirement 
Plan.
    (k) CMG files a Form 5330 with the Internal Revenue Service (the 
Service) and pays all applicable excise taxes, if any, within 90 days 
of the publication, in the Federal Register, of the grant notice with 
respect to the leasing of the Treatment Center by the Plans to CMG 
prior to July 1, 2003.
    (1) To the extent CMG owes the 401(k) Plan or the Retirement Plan 
additional rent by reason of the past leasing of the Treatment Center, 
(i) the independent fiduciary makes all such determinations, including 
the payment of reasonable interest; and (ii) CMG makes such payments to 
the Plans.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on July 20, 2004, at 69 FR 
43438.

Extension of Comment Period

    The notice of proposed exemption invited interested persons to 
submit comments or requests for a hearing to the Department by 
September 3, 2004. The applicant agreed to provide notice to interested 
persons by first class mail within ten days of the date that the 
proposal appeared in the Federal Register. CMG had valid addresses for 
all but 28 interested persons, all of whom were former employees of CMG 
with interests in one or both Plans. CMG submitted those 28 names to a 
commercial locating service, and received addresses for 23 of them. 
Notice was sent by first class mail to all but the 5 ``missing'' 
interested persons on July 26, 2004.
    CMG submitted the Social Security Numbers of the 5 ``missing'' 
interested persons to a second commercial locating service. The notice 
was sent by first class mail to the last known address provided by the 
second commercial locating service for these five individuals on July 
29, 2004.
    On September 2, 2004, the applicant decided to extend the comment 
period until September 10, 2004. The need for the extension arose 
because the applicant changed legal representation with respect to this 
exemption and therefore required additional time to provide its 
comments to the Department.

Written Comments

    During the comment period, the Department received one written 
comment with respect to the proposed exemption, and no requests for 
public hearing. The comment, which was submitted by CMG, is intended to 
(1) inform the Department of certain historical substantive and 
procedural matters related to the exemption; (2) request retroactive 
relief with respect to the exemption; and (3) correct minor errors in 
the proposal. In this regard, CMG has provided the following additional 
information in order to update the proposed exemption and to support 
its request for retroactive relief:
    1. History of Lease of Treatment Center by CMG. Representation 9 of 
the Summary of Facts and Representations (the Summary) states, in 
relevant part, that the 401(k) Plan and Advanced Infusion Systems 
(AIS), an unrelated party, entered into a new lease for the Treatment 
Center for a 5 year term, from March 1, 1993 through February 28, 1998. 
Representation 10 of the Summary further states, in pertinent part, 
that before the end of the lease term, the Administrative Committee for 
the Plans (the Administrative Committee) and AIS

[[Page 68402]]

engaged in discussions relating to the renewal of the lease of the 
Treatment Center and that the Administrative Committee anticipated that 
AID would renew the lease. However, Representation 10 of the Summary 
states that at the end of February 1998, AIS chose not to renew its 
lease and vacated the premises, and that on March 1, 1998, CMG stepped 
into the shoes of AIS in order to continue the flow of rental income 
and the provision of infusion therapy to the CMG patients.
    CMG confirms that, in regard to the history of its lease of the 
Treatment Center, an unrelated third party which was leasing the 
Treatment Center unexpectedly abandoned the Treatment Center at the end 
of February 1998 and did not renew its lease. CMG explains that it 
believed the most prudent course of action was for it to immediately 
lease the Treatment Center (a medical clinic) from the 401(k) Plan. CMG 
opines that in leasing the Treatment Center it could (a) continue to 
provide its patients with infusion therapy for AIDS patients, and (b) 
continue to provide the 401(k) Plan with $9,500 in monthly rental 
income. CMG notes that it was informed that it might take months for 
the 401(k) Plan to find a tenant for the medical clinic. CMG states 
that it did not consider it prudent, either financially for the 401(k) 
Plan or with regard to treating its patients, to have the Treatment 
Center empty for that period of time.
    Notwithstanding the exigent circumstances precipitating CMG's 
leasing of the Treatment Center from the 401(k) Plan in 1998 and CMG's 
goodwill intentions, the Department wishes to emphasize that the lease 
became a prohibited transaction in violation of the Act at the moment 
CMB assumed lessee responsibilities. Due to the absence of adequate 
independent safeguards existing at the inception of the lease, CMB has 
represented that it will file a Form 5330 with the Service and pay all 
applicable excise taxes that may be due by virtue of its prohibited 
leasing arrangement with the 401(k) Plan and subsequently, with the 
Retirement Plan.
    2. Attorney's Concealment of Lack of Action on Application for 
Exemption. CMG states that although it instructed its attorney to apply 
for a prohibited transaction exemption immediately to cover its lease 
of the Treatment Center on March 1, 1998, the attorney did not file an 
application for an exemption until December 1999. CMG explains that 
after the initial filing, the attorney did not follow up with requests 
by the Department for additional information. Consequently, CMG states, 
a second application was required to be made. CMG represents that the 
second application was filed in November 2001, almost two years after 
the first application was filed. CMG notes that even after filing the 
second application, the attorney did not comply promptly with the 
Department's request for additional information, resulting in 
additional delay publishing in the proposed exemption in the Federal 
Register. CMG represents that it had no knowledge, or ability to know, 
of the attorney's dilatory actions since the fact that the attorney was 
not proceeding on this matter was not disclosed to CMG. CMG states that 
it was assured at all times that each of the exemption requests was in 
progress.
    The Department can take no remedial action to remedy any harm CMG 
may have suffered. The Department notes that any grievance CMG may have 
against its former counsel should be addressed in the appropriate legal 
forum.
    3. Retroactive Effect of Exemption. Representation 14 of the 
Summary states in relevant part that--

    Due to the lack of oversight by a qualified, independent 
fiduciary with full investment discretion to review, approve and 
monitor the past and continuing leasing arrangements between the 
Plans and CMG, and the absence of contemporaneous independent 
appraisals establishing the fair market value or the fair market 
rental value of the Treatment Center at the inception of each lease 
or at the time of the sale of the Treatment Center by the 401(k) 
Plan to the Retirement Plan, the Department is not prepared to 
provide exemptive relief with respect to such transactions.

    CMG notes that ERISA Technical Release 85-1 (TR 85-1) provides that 
if the applicant has acted in good faith (evidenced by an independent 
fiduciary or appraisal) and there was no loss to the plan in question 
the Department may favorably consider making a prohibited transaction 
exemption retroactive. CMG explains that all the conditions set out in 
TR 85-1 for a retroactive exemption are present in this case. 
Consequently, CMG requests that the exemption be made retroactive to 
November 1998, which is the date of the first appraisal of the fair 
market rental value of the Treatment Center after it was leased by CMG. 
CMG explains that the appraisal was done by a qualified independent 
appraiser, Hulberg & Associates (Hulberg), under the direction of two 
independent fiduciaries.
    CMG further explains that the first lease agreement covering the 
lease of the Treatment Center to CMG was dated March 1, 1999. The fair 
market rental value of that lease was also determined by Hulberg, under 
the direction of the same independent trustees. The March 1999 lease 
provided for rental increases (if any) each year based on an annual 
appraisal by the independent appraiser of market rents. Because the 
rental market went up and then went down for several years, under the 
lease agreement CMG states that it paid in excess of market rates each 
year except one. CMG also maintains that not only was there no loss to 
participants in the rental transaction, there was a significant gain. 
In July 2003, CMG explains that a second lease was signed for the 
Treatment Center. In that case, the independent fiduciary was Thomas J. 
Nault and the independent appraiser chosen by Mr. Nault was also 
Hulberg. CMG indicates that Mr. Nault has continued to serve on behalf 
of the Retirement Plan as the independent fiduciary.
    CMG maintains that in both leases covering the Treatment Center, 
there was an independent appraisal of the fair market rental value of 
such property. Also, CMG asserts that the appraisals were under the 
direct supervision of independent fiduciaries. Although CMG believes 
the conditions are present for the exemption to be made retroactive to 
November 1998, at the very minimum, CMG suggest that the exemption be 
made retroactive to March 1, 1999, or July 1, 2003, the commencement 
dates of the leases, or retroactive to March 2003, the date of Mr. 
Nault's appointment as independent trustee for the Retirement Plan.
    As an additional factor, CMG requests that the Department consider 
that prior to Mr. Nault's assumption of independent fiduciary duties, 
at all times since the Treatment Center was leased to CMG, Wells Fargo 
Bank, N.A. (Wells Fargo), has been the trustee of the Retirement Plan. 
Although the bank was and is a directed trustee, CMG states that it has 
provided the Department with a letter from Wells Fargo which states 
that the bank reviewed the Treatment Center's lease appraisal for 
reasonableness and adjusted the monthly rental income, accordingly. CMG 
notes that Wells Fargo also stated that it reviewed the terms of the 
leases to ensure compliance and to ensure that lease payments were 
received and deposited to the trust in a timely manner each month.
    In response to CMG's comment, the Department wishes to emphasize 
that further distinctions must be made to the independent fiduciary and 
independent appraisal criteria set forth in TR 85-1. This is because 
the safeguards implemented for a prospective exemption must be in place 
for a

[[Page 68403]]

retroactive exemption. In this regard, the Department does not believe 
the lease can be made retroactive to March 1, 1999,\1\ due to the lack 
of adequate independent safeguards. Specifically, there was no 
contemporaneous appraisal or other objective means to establish the 
fair market rental value of the Treatment Center at the inception of 
the 1999 lease, despite the fact that CMG has, for the most part, paid 
the CMG Plans more than fair market value rent. The Department notes 
that the only written independent appraisal of the Treatment Center 
existing at that time was issued by Hulberg on December 20, 1998. The 
appraisal, which was commissioned primarily for the sale of the 
Treatment Center by the 401(k) Plan to the Retirement Plan reflected, 
among other things, the fair market rental value of the Treatment 
Center as of November 24, 1998. Due to its relative staleness and the 
absence of documentation in the application file showing that an 
updated appraisal was obtained on the date the parties entered into the 
1999 lease, the 1998 appraisal could not be utilized to substantiate 
the fair market value of the Treatment Center at the inception of the 
1999 lease. Further, although Wells Fargo may have represented the 
interests of the 401(k) Plan and later the Retirement Plan, the 
Department notes that there is not indication that the bank ever 
possessed ``full'' discretion as an independent fiduciary with respect 
to the approval and monitoring the leasing of Treatment Center or 
advising CMG that it would be engaged in a prohibited transaction.
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    \1\ In this regard, the lease had actually been entered into by 
CMG and the 401(k) Plan, the previous owner of the Treatment Center 
on March 1, 1998. However, that lease, which was executed by the 
Retirement Plan (the current owner of the Treatment Center) and CMG, 
was not reduced to writing until March 1, 1999.
---------------------------------------------------------------------------

    Similarly, it appears that the lease cannot be made retroactive to 
March 1, 2003. This is the date that Mr. Nault was appointed as the 
Retirement Plan's successor independent fiduciary. Again, the 
Department believes that independent safeguards to protect the 
interests of the Retirement Plan and its participants and beneficiaries 
were lacking. Although Mr. Nault was then serving as the independent 
fiduciary, his appointment could not be utilized to validate the lease, 
which was already in existence.
    With respect to the July 1, 2003, retroactivity date, Mr. Nault has 
provided the Department with certain additional information. In a 
letter dated October 7, 2004, Mr. Nault states that a new lease (i.e., 
the ``New Lease'' referred to above in the operative language) of the 
Treatment Center was executed between CMG and the Retirement Plan on 
July 1, 2003, at the time the New Lease was executed, he explains that 
he relied on other objective means of valuation to determine the fair 
market rental value of the Treatment Center at the time this lease was 
executed. Such objective means included several discussions with 
Hulberg in order to ascertain the fair market rental value of the 
Treatment Center and due diligence conducted from the time of his 
independent fiduciary appointment onward. Specifically, Mr. Nault 
explains that during his discussions with Hulberg, he reviewed rental 
statistics for the Sunnyvale-San Jose area that clearly showed that the 
rent being paid for the Treatment Center was above market. Further, as 
part of his own due diligence, Mr. Nault states that he drove around 
the area to check the vacancy information he received from Hulberg, he 
did an online analysis of rents and market conditions to ascertain rent 
levels in the area, and researched the effect of the 2001 implosion of 
Dot-Com businesses on the office vacancy rate in that area. Mr. Nault 
states that his findings at the time the New Lease was executed 
indicated that CMG was paying above market rent prior to such lease. 
Consequently, Mr. Nault represents that the rental amount being paid by 
CMB under the New Lease provides that the rent will be changed only if 
the amount that CMG is paying falls below market value.
    Although there was no contemporaneous, written appraisal of the 
Treatment Center at the inception of the New Lease, the Department 
believes that Mr. Nault has demonstrated that he utilized an objective 
means of valuation of the Treatment Center immediately prior to, and at 
the time of, the New Lease by analyzing the prevailing market 
conditions. In addition, the Department notes that for assistance, Mr. 
Nault obtained significant guidance from Hulberg, the Retirement Plan's 
independent appraiser. Therefore, the Department believes that adequate 
independent safeguards existed at the inception of the New Lease. 
Accordingly, the Department has determined that the exemption should be 
made retroactive to July 1, 2003.
    In addition, in order that the operative language of the exemption 
may be consistent with the July 1, 2003, effective date, the Department 
has modified conditions (f), (k) and (l) of the final exemption to read 
as follows:

    (f) The New Lease is triple net and requires all expenses for 
maintenance, taxes, utilities and insurance to be paid by CMG, as 
lessee.
    (k) CMG files a Form 5330 with the Internal Revenue Service (the 
Service) and pays all applicable excise taxes, if any, within 90 
days of the publication, in the Federal Register, of the grant 
notice with respect to the leasing of the Treatment Center by the 
Plans to CMG prior to July 1, 2003.
    (l) To the extent CMG owes the 401(k) Plan or the Retirement 
Plan additional rent by reason of the past leasing of the Treatment 
Center, (i) the independent fiduciary makes all such determinations, 
including the payment of reasonable interest; and (ii) CMG makes 
such payments to the Plans.

    4. Miscellaneous Comments. CMG notes that the caption of the 
proposed exemption states, in relevant part, that the Plans are located 
in Santa Clara, California. CMG clarifies that the Plans are located in 
``Sunnyvale (County of Santa Clara), California.''
    In addition, Representation 1 of the Summary states, in pertinent 
part, that CMG is a ``not-for-profit'' organization. CMG explains that 
it is a ``for-profit'' organization and that the Palo Alto Medical 
Foundation, of which CMG is an affiliate, is a ``not-for-profit'' 
organization.
    Further, Representation 13 of the Summary states, in relevant part, 
that CMG presently leases the Treatment Center and pays a monthly 
rental of $1,456. CMG notes that the monthly rental which it currently 
pays the Retirement Plan for its lease of the Treatment Center is 
$14,256.
    In response to the foregoing comments, the Department notes the 
clarifications to the proposed exemption.
    Accordingly, after giving full consideration to the entire record, 
including the comment letter, the Department has determined to grant 
the exemption as modified herein. For further information regarding the 
comment, additional information provided by the independent fiduciary, 
and other matters discussed herein, interested persons are encouraged 
to obtain copies of the exemption application file (Exemption 
Application Nos. D-11160 and D-11161) the Department is maintaining in 
this case. The complete application file, as well as all supplemental 
submissions received by the Department, are made available for public 
inspection in the Public Disclosure Room of the Pension and Welfare 
Benefits Administration, Room N-1513, U.S. Department of Labor, 200 
Constitution Avenue, NW., Washington, DC 20210.
    For Further Information Contact: Ms. Anna M.N. Mpras of the 
Department, telephone (202) 693-8565. (This is not a toll-free number.)

[[Page 68404]]

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 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) This exemption is supplemental to and not in derogation of, any 
other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional 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
    (3) The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

    Signed in Washington, DC, this 19th day of November, 2004.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, Department of Labor.
[FR Doc. 04-26068 Filed 11-23-04; 8:45 am]

BILLING CODE 4510-29-M