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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Amendment to Prohibited Transaction Exemption 2002-51 (PTE 2002-51) To Permit Certain Transactions Identified in the Voluntary Fiduciary Correction Program [04/06/2005]

[PDF Version]

Volume 70, Number 65, Page 17476-17479

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11261]

 
Proposed Amendment to Prohibited Transaction Exemption 2002-51 
(PTE 2002-51) To Permit Certain Transactions Identified in the 
Voluntary Fiduciary Correction Program

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Notice of proposed amendment to PTE 2002-51.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed amendment to PTE 
2002-51 (67 FR 70623 November 25, 2002). PTE 2002-51 is a class 
exemption that provides relief from certain prohibited transaction 
restrictions imposed by section 4975 of the Internal Revenue Code (the 
Code) of 1986 for certain eligible transactions identified in the 
Department's Voluntary Fiduciary Correction (VFC) Program, which was 
adopted on March 28, 2002. This exemption is being proposed in 
conjunction with the Department's Amendment and Restatement of the VFC 
Program (revised VFC Program), which is being published simultaneously 
in this issue of the Federal Register. The VFC Program allows certain 
persons to avoid potential civil actions under the Employee Retirement 
Income Security Act of 1974 (ERISA) initiated by the Department and the 
assessment of civil penalties under section 502(l) of ERISA in 
connection with an investigation or civil action by the Department. If 
granted, the proposed amendment to PTE 2002-51 would affect plans, 
participants and beneficiaries of such plans and certain other persons 
engaging in such transactions.

DATES: Written comments and requests for a public hearing on the 
proposed amendment must be received by the Department by June 6, 2005.

ADDRESSES: All written comments and requests for a public hearing 
(preferably three copies) concerning the proposed amendment should be 
sent to: U.S. Department of Labor, Employee Benefits Security 
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington, 
DC 20210, (Attention: Amendment to the VFC Program Exemption D-11261). 
Comments and requests for a hearing alternatively may be sent by fax to 
(202) 219-0204 or submitted electronically to moffitt.betty@dol.gov by 
the end of the comment period. All comments received from interested 
persons will be available for public inspection in EBSA's Public 
Disclosure Room, N-1513, Employee Benefits Security Administration, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210.

FOR FURTHER INFORMATION CONTACT: Brian J. Buyniski, Office of Exemption 
Determinations, Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-5649, 200 Constitution Avenue, NW., 
Washington, DC 20210, (202) 693-8545 (this is not a toll free number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed amendment to PTE 2002-51. PTE 2002-
51 provides relief from the sanctions resulting from the application of 
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) 
through (E) of the Code. The proposed amendment would expand the relief 
under the exemption to additional transactions included in the revised 
VFC Program. The Department is proposing to amend PTE 2002-51 on its 
own motion pursuant to section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR 2570, subpart B (55 
FR 32836, August 10, 1990).\1\
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978, 5 U.S.C. App. 1 [1996]) generally 
transferred the authority of the Secretary of the Treasury to issue 
administrative exemptions under section 4975(c)(2) of the Code of 
the Secretary of Labor.
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Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f) of the Executive 
Order, a ``significant regulatory action'' is an action that is likely 
to result in a rule: (1) Having an annual effect on the economy of $100 
million or more, or adversely and materially affecting a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. OMB has 
determined that this proposed amendment is not a ``significant 
regulatory action'' under Executive Order 12866, section 3(f). 
Accordingly, an assessment of the potential costs and benefits under 
section 6(a)(3) of that order is not required. In order to better 
inform the public, the Department has, however, included a brief 
analysis of the applicable costs and benefits of the proposed 
amendment.
    PTE 2002-51 provides relief from the sanctions resulting from the 
application of section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1)(A) through (E) of the Code. In general, the 
exemption enhances the benefits of participation in the VFC Program by 
granting relief from excise taxes under section 4975 for breaches of 
fiduciary duty that are prohibited transactions. The class exemption 
will have positive economic effects by eliminating such excise taxes 
and promoting increased participation in the VFC Program. The purpose 
of the VFC Program is to encourage the correction of breaches of 
fiduciary duty, resulting in the recovery of lost earnings or profits 
for the benefit of plan participants and beneficiaries.
    The Department has assumed that not all Plan Officials that apply 
to the VFC Program will necessarily take advantage of the excise tax 
relief provided under the exemption, either by choice or because the 
corrected transaction is not an eligible transaction to which this 
exemption applies. The Department has assumed that as many as one half 
of all applicants who take the opportunity to voluntarily correct a 
violation under the Program, or 350 Plan Officials annually, will 
choose to avail themselves of the opportunity for excise tax relief.
    This amendment to PTE 2002-51 is proposed in connection with the 
Amendment and Restatement of the VFC Program (revised VFC Program), 
which is published in this issue of the

[[Page 17477]]

Federal Register. This proposed amendment would expand the relief under 
the exemption to an additional transaction included in the revised VFC 
Program. As described in detail below, the additional eligible 
transaction generally includes the purchase of an asset by a plan where 
the asset has been determined to be illiquid as described in the 
revised VFC Program, and the sale of the illiquid asset by the plan to 
a party in interest.
    The proposed addition of this eligible transaction may increase 
participation in the VFC Program, and utilization of the exemption. 
However, the Department is unable to estimate the impact of these 
changes because participation in the Program has steadily increased 
without any revisions to the Program such as those adopted today. Due 
to a lack of information regarding the substantial increases, it is not 
possible to identify factors that influence the decision to participate 
or to make use of the exemption, or to predict how this proposed 
amendment would influence future participation.
    Applicants must meet all of the applicable requirements of the 
revised VFC Program and must have received a no action letter from EBSA 
with respect to the eligible transaction at issue. Additional costs 
will accrue to applicants seeking relief under the VFC Program and this 
exemption because of the notice requirements. The cost of preparing and 
distributing such notices is estimated to be about $31,000 per year 
based on the projected use of the exemption by 350 applicants. This 
estimate does not take into account any increase related to the 
additional eligible transaction. This cost is accounted for in burden 
estimates submitted to and approved by OMB pursuant to the Paperwork 
Reduction Act (PRA).

Paperwork Reduction Act

    The Amended and Restated Voluntary Fiduciary Correction Program 
includes a revision to its information collection provisions. 
Accordingly, the revisions have been submitted to OMB for review and 
approval under the PRA. Because the exemption is used in connection 
with the Program, and for ease of public review, the burden of the 
Information Collection Request (ICR) in the VFC Program is combined 
with the burden of the information collection provisions of the 
exemption for purposes of accounting for burden under the PRA. These 
information collection provisions are currently approved under OMB 
control number 1210-0118. That approval is scheduled to expire on 
December 31, 2006. Because the information collection provisions of 
this proposed exemption are unchanged from those of existing PTE 2002-
51, no submission is made to OMB in connection with these proposed 
amendments.

Background

    Title I of ERISA, which establishes certain standards of conduct 
for fiduciaries of employee benefit plans covered by ERISA, includes 
provisions prohibiting fiduciaries from causing a plan to engage in 
certain classes of transactions with persons defined as parties in 
interest. Similarly, Title II of ERISA prohibits plans described in 
section 4975(e)(1) of the Code from engaging in certain classes of 
transactions with persons defined under the Code as disqualified 
persons. Generally, such transactions are subject to taxation under 
section 4975 of the Code.
    The VFC Program was adopted by the Department on a permanent basis 
in March 2002.\2\ Under the VFC Program, persons who are potentially 
liable for a breach can avoid the possibility of civil investigations 
and/or civil actions initiated by the Department for that breach and 
the imposition of civil penalties under section 502(l) of ERISA if they 
satisfy the conditions for correcting the breach as described in the 
VFC Program. The VFC Program was based on the Department's experience 
with the Pension Payback Program, 61 FR 9203 (March 7, 1996), and 
continued public interest in such correction programs. In response to 
comments received on the VFC Program requesting that the Department 
provide relief from the excise taxes imposed by section 4975 of the 
Code for prohibited transactions, the Department proposed a class 
exemption for four of the eligible transactions described in the VFC 
Program. A final exemption, PTE 2002-51, was published in the Federal 
Register on November 25, 2002. The four eligible transactions described 
in the exemption are as follows:
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    \2\ 67 FR 15062 (March 28, 2002). Prior to adoption in March 
2002, the VFC Program was made available on an interim basis during 
which the Department invited and considered public comments on the 
Program. (See 65 FR 14164, March 15, 2000).
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    (A) The failure to transmit participant contributions to a pension 
plan within the time frames described in the Department's regulations 
at 29 CFR 2510.3-102 and/or the failure to transmit participant loan 
repayments to a pension plan within a reasonable time after withholding 
or receipt by the employer.
    (B) The making of a loan by a plan at a fair market interest rate 
to a party in interest \3\ with respect to the plan.
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    \3\ The Department notes that the term ``party in interest'' was 
used in the description of the eligible transactions covered under 
PTE 2002-51 although that exemption provided, and this proposed 
amendment will provide, relief only from the sanctions imposed under 
section 4975 of the Code, which prohibits certain transactions 
between a plan and a disqualified person. For purposes of clarity, 
references in the exemption to a party in interest will be changed 
to disqualified person in the final exemption.
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    (C) The purchase or sale of an asset (including real property) 
between a plan and a party in interest at fair market value.
    (D) The sale of real property to a plan by the employer and 
leaseback of such property to the employer, at fair market value and 
fair market rental value, respectively.
    Based on growing public utilization and over two years experience 
in administering the original VFC Program, EBSA has decided to amend 
the Program, effective immediately upon publication of a notice which 
is being published simultaneously in this issue of the Federal 
Register. The Department is amending the VFC Program, in part, to 
expand the categories of eligible transactions. Specifically, the 
revised VFC Program will, in part, include relief under Title I of 
ERISA for the purchase of an asset by a plan where the asset was 
determined to be illiquid as described under the revised VFC Program, 
either from a party in interest at no greater than fair market value at 
that time or from an unrelated third party, and the subsequent sale of 
such asset to a party in interest, provided the plan receives the 
correction amount as described in Section 5 of the revised VFC Program.
    To the extent that the original purchase of an asset by a plan 
where the asset was determined to be illiquid as described under the 
revised VFC Program was from a person defined as a party in interest 
under section 3(14) of ERISA and a disqualified person under section 
4975(e)(2) of the Code, the transactions would violate the prohibited 
transaction rules under both Title I of ERISA and section 4975 of the 
Code. Moreover, as distinguished from the eligible transactions covered 
in the VFC Program \4\ and PTE 2002-51, correction as specified in the 
revised VFC Program in the case of an asset that was illiquid, as 
described under the revised VFC Program, while owned by the plan will 
in most instances involve an additional prohibited transaction. In

[[Page 17478]]

this regard, correction under the revised VFC Program would permit the 
plan to dispose of the illiquid asset in a sale to a party in interest. 
If the party in interest that purchases the illiquid asset from the 
plan pursuant to the terms of the revised VFC Program is also a 
disqualified person under section 4975(e)(2) of the Code, then the 
correction permitted for holding the illiquid asset would violate the 
prohibited transaction rules under section 4975 of the Code.
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    \4\ Under the VFC Program prior to the current revision, 
correction could not be achieved by engaging in a new prohibited 
transaction. See VFC Program, 67 FR 15073 (March 28, 2002) Section 
2(d).
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    The revised VFC Program provides relief for both the original 
acquisition of the asset by the plan that was determined to be illiquid 
under the revised VFC Program, as well as the correction involving the 
sale of such asset to a party in interest, provided all of the 
requirements of the revised VFC Program are met. The Department has 
determined that it would be appropriate to amend PTE 2002-51 to provide 
additional exemptive relief from the sanctions imposed under section 
4975 of the Code in conjunction with the revision of the VFC Program.

Proposed Amendment

    PTE 2002-51 provided limited exemptive relief from the excise taxes 
imposed under section 4975 of the Code for certain eligible 
transactions identified in the VFC Program. The proposed amendment to 
PTE 2002-51 will provide limited relief for an additional eligible 
transaction identified in the revised VFC Program. Specifically, the 
proposed amendment to PTE 2002-51 will cover the purchase of an asset 
by a plan where the asset has been determined to be illiquid as 
described in the revised VFC Program (including real property) from a 
party in interest at no greater than fair market value at that time, 
and/or the subsequent sale of such asset to a party in interest 
provided the plan receives the correction amount as described in 
Section 5 of the revised VFC Program.
    The Department notes that all the safeguards already embodied in 
PTE 2002-51 must be met under the amended class exemption. With respect 
to the additional eligible transaction identified above, the amendment 
includes a requirement that the plan pay no brokerage fees or 
commissions in connection with the sale of the asset to the party in 
interest.
    The additional eligible transaction may be illustrated by the 
following example:
    Example: Corporation D sponsors a pension plan for its employees. 
Corporation D's plan has total assets of $1,000,000. In June 1999, the 
plan purchases undeveloped real property from a party in interest/
disqualified person with respect to the plan for $60,000 (which is the 
fair market value of the property at the time). In April 2004, Plan 
Officials determine that the property is an illiquid asset in 
accordance with the revised VFC Program. A qualified independent 
appraiser appraises the property at a current fair market value of 
$20,000. To correct the transaction under the revised VFC Program, the 
plan sponsor purchases the property from the plan for the Principal 
Amount as described in section 5(b)(2) of the revised VFC Program 
($60,000), plus Lost Earnings as described in section 5(b)(6) of the 
revised VFC Program. Provided that all other requirements of the 
revised VFC Program are met and proper application is made to the 
appropriate EBSA Regional Office, the plan sponsor receives a no action 
letter with respect to the breaches involved in the original purchase 
by the plan of the asset and the subsequent sale of the illiquid asset 
to a party in interest. Upon compliance with the terms of PTE 2002-51, 
as amended, the original purchase by the plan of the asset and the 
subsequent sale of the illiquid asset to the plan sponsor will be 
exempt from the excise taxes imposed under section 4975 of the Code for 
prohibited transactions. For the sake of convenience and clarity, the 
Department is restating the entire text of PTE 2002-51 in this notice 
of proposed amendment.

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 4975(c)(2) of the Code does not relieve a fiduciary or 
other party in interest or disqualified person with respect to a plan 
from certain other provisions of ERISA and the Code, including any 
prohibited transaction provisions to which the exemption does not 
apply, the requirement that all assets of an employee benefit plan be 
held in trust by one or more trustees, and the general fiduciary 
responsibility provisions of ERISA which require, among other things, 
that a fiduciary discharge his or her duties respecting the plan solely 
in the interests of the participants and beneficiaries of the plan and 
in a prudent fashion; 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) The proposed amendment, if granted, will not extend to 
transactions prohibited under section 4975(c)(1)(F) of the Code.
    (3) Before this amendment may be granted under section 4975(c)(2) 
of the Code, the Department must find that the amendment is 
administratively feasible, in the interests of plans and their 
participants and beneficiaries, and protective of the rights of 
participants and beneficiaries of such plans.
    (4) The proposed amendment, if granted, will be supplemental to, 
and not in derogation of other provisions of ERISA and 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.
    (5) If granted, the proposed amendment will be applicable to a 
transaction only if the conditions specified in the class exemption are 
satisfied.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a public hearing on the proposed amendment to the address 
above and within the time period set forth above. All comments received 
will be made part of the record and will be available for public 
inspection at the above address.

Proposed Amendment

    Under 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), the Department proposes to amend Sections I and II of 
PTE 2002-51 as set forth below.

Section I: Eligible Transactions

    The sanctions resulting from the application of section 4975(a) and 
(b) of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the following eligible transactions described 
in section 7 of the Voluntary Fiduciary Correction (VFC) Program, as 
amended and restated, published simultaneously in this issue of the 
Federal Register, provided that the applicable conditions set forth in 
Sections II, III and IV are met:
    A. Failure to transmit participant contributions to a pension plan 
within the time frames described in the Department's regulation at 29 
CFR section 2510.3-102. (See VFC Program, section 7.A.1.), and/or the 
failure to transmit participant loan repayments to

[[Page 17479]]

a pension plan within a reasonable time after withholding or receipt by 
the employer.
    B. Loan at a fair market interest rate to a party in interest with 
respect to a plan. (See VFC Program, section 7.B.1.).
    C. Purchase or sale of an asset (including real property) between a 
plan and a party in interest at fair market value. (See VFC Program, 
sections 7.D.1. and 7.D.2.).
    D. Sale of real property to a plan by the employer and the 
leaseback of the property to the employer, at fair market value and 
fair market rental value, respectively. (See VFC Program, section 
7.D.3.).
    E. Purchase of an asset by a plan where the asset has been 
determined to be illiquid (including real property) as described under 
the revised VFC Program from a party in interest at no greater than 
fair market value at that time, and/or the subsequent sale of such 
asset to a party in interest, provided the plan receives the correction 
amount as described in section 5(b) of the Program. (See VFC Program, 
as amended, section 7.D.6.).

Section II: Conditions

    A. With respect to a transaction involving participant 
contributions or loan repayments to pension plans described in Section 
I.A., the contributions or repayments were transmitted to the pension 
plan not more than 180 calendar days from the date the amounts were 
received by the employer (in the case of amounts that a participant or 
beneficiary pays to an employer) or the date the amounts otherwise 
would have been payable to the participant in cash (in the case of 
amounts withheld by an employer from a participant's wages).
    B. With respect to the transactions described in Sections I.B., 
I.C., I.D., or I.E., the plan assets involved in the transaction, or 
series of related transactions, did not, in the aggregate, exceed 10 
percent of the fair market value of all the assets of the plan at the 
time of the transaction.
    C. The fair market value of any plan asset involved in a 
transaction described in Sections I.C., I.D., or I.E. was determined in 
accordance with section 5 of the VFC Program.
    D. The terms of a transaction described in Sections I.B., I.C., 
I.D., or I.E., were at least as favorable to the plan as the terms 
generally available in arm's-length transactions between unrelated 
parties.
    E. With respect to any transaction described in Section I, the 
transaction was not part of an agreement, arrangement or understanding 
designed to benefit a party in interest.
    F. (1) With respect to any transaction described in Section I, the 
applicant has not taken advantage of the relief provided by the VFC 
Program and this exemption for a similar type of transaction(s) 
identified in the current application during the period which is three 
years prior to submission of the current application.
    (2) Notwithstanding the foregoing, Section II.F.(1) shall not apply 
to an applicant provided that:
    (a) The applicant was a broker-dealer registered under the 
Securities Exchange Act of 1934, a bank supervised by the United States 
or a State thereof, a broker-dealer or bank subject to foreign 
government regulation, an insurance company qualified to do business in 
a State, or an affiliate thereof;
    (b) The applicant was a party in interest (including a fiduciary) 
solely by reason of providing services to the plan or solely by reason 
of a relationship to such service provider described in section 
3(14)(F), (G), (H) or (I) of ERISA (and/or the corresponding provisions 
of section 4975 of the Code);
    (c) Neither the applicant nor any affiliate (i) was a fiduciary 
(within the meaning of section 3(21)(A) of ERISA) with respect to the 
assets of the plan involved in the transaction and (ii) used its 
discretion to cause the plan to engage in the transaction;
    (d) Individuals acting on behalf of the applicant had no actual 
knowledge or reason to know that the transaction was not exempt 
pursuant to a statutory or administrative exemption under ERISA and/or 
the Code; and
    (e) Prior to the transaction, the applicant established written 
policies and procedures that were reasonably designed to ensure 
compliance with the prohibited transaction rules and the applicant 
engaged in periodic monitoring for compliance.
    G. With respect to a transaction involving a sale of an illiquid 
asset under the VFC Program by the plan to a party in interest 
described in Section I.E., the plan paid no brokerage fees, or 
commissions in connection with the sale of the asset.

Section III: Compliance With the Revised VFC Program

    A. The applicant has met all of the applicable requirements of the 
revised VFC Program.
    B. EBSA has issued a no action letter to the applicant pursuant to 
the revised VFC Program with respect to a transaction described in 
Section I.

Section IV: Notice

    A. Written notice of the transaction(s) for which the applicant is 
seeking relief pursuant to the revised VFC Program, and this exemption, 
and the method of correcting the transaction, was provided to 
interested persons within 60 calendar days following the date of the 
submission of an application under the revised VFC Program. A copy of 
the notice was provided to the appropriate Regional Office of the 
United States Department of Labor, Employee Benefits Security 
Administration within the same 60-day period, and the applicant 
indicated the date upon which notice was distributed to interested 
persons. Plan assets were not used to pay for the notice. The notice 
included an objective description of the transaction and the steps 
taken to correct it, written in a manner reasonably calculated to be 
understood by the average Plan participant or beneficiary. The notice 
provided for a period of 30 calendar days, beginning on the date the 
notice was distributed, for interested persons to provide comments to 
the appropriate Regional Office. The notice included the address and 
telephone number of such Regional Office.
    B. Notice was given in a manner that was reasonably calculated, 
taking into consideration the particular circumstances of the plan, to 
result in the receipt of such notice by interested persons, including 
but not limited to posting, regular mail, or electronic mail, or any 
combination thereof. The notice informed interested persons of the 
applicant's participation in the revised VFC Program as amended and 
intention of availing itself of relief under the exemption.

    Signed at Washington, DC, this 30th day of March, 2005.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits, Security 
Administration, U.S. Department of Labor.
[FR Doc. 05-6626 Filed 4-5-05; 8:45 am]

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