Grant of Individual Exemptions; Edward D. Jones & Co., L.P. (the
Applicant)
[03/20/2006]
Volume 71, Number 53, Page 14005-14012
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2006-01; Exemption Application No. D-
11216 et al.]
Grant of Individual Exemptions; Edward D. Jones & Co., L.P. (the
Applicant)
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 408(a) 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.
Edward D. Jones & Co., L.P. (the Applicant) Located in St. Louis,
Missouri
[Prohibited Transaction Exemption No. 2006-01; Application No. D-11216]
Exemption
The restrictions of sections 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, shall
not apply to the extension of credit to the Applicant, by certain IRAs
whose assets are held in custodian accounts by the Applicant, a party
in interest and a disqualified person with respect to the IRAs, in
connection with the Applicant's use of uninvested IRA cash balances
(Free Credit Balance(s)) in such accounts. This exemption is
conditioned upon the adherence to the material facts and
representations described herein and upon the satisfaction of the
following requirements:
(a) Neither the Applicant nor any affiliate has any discretionary
authority or control with respect to the investment of the cash
balances of the IRA that are held in the Free Credit Balance or
provides investment advice (within the meaning of 29 CFR 2510.3-21(c))
with respect to those assets;
(b) Edward Jones credits the IRA with monthly interest on its Free
Credit Balance at an annual rate no less than the bank national index
rate for interest checking, as reported in the Bank Rate Monitor. This
rate will be subject to a minimum rate level of 10 basis points
(0.10%);
(c) The interest rate will be no less than the rate paid by Edward
Jones on non-IRA Free Credit Balances;
(d) The IRA independent fiduciary has the ability to withdraw the
Free Credit Balance at any time without restriction;
(e) The Applicant provides in writing, to the IRA independent
fiduciary, prior to any transfer of the IRA's available cash into a
Free Credit Balance account, an explanation (i) that funds invested in
a Free Credit Balance are not segregated and may be used in the
operation of the business of the Applicant; (ii) of the method to be
used for crediting interest to the Free Credit Balance; and (iii) that
the funds are payable to the IRA on demand;
(f) On the basis of the information disclosed pursuant to paragraph
(e) above, the IRA independent fiduciary approves the transfer of the
IRA's available cash into a Free Credit Balance account. If the
disclosure includes a specified date before which the independent
fiduciary must object to the transfer of the IRA's existing cash
balances into a Free Credit Balance account, failure of the IRA
independent fiduciary to object to the transfer by that date will be
deemed an approval by the IRA independent fiduciary of the transfer to
and holding of the IRA's available cash in the Free Credit Balance
account.
The Applicant provides, with or as part of the customer's statement
of account, no less frequently than once every three months,
notification that the IRA independent fiduciary may, at any time and
without penalty, direct the Applicant in writing to withdraw the IRA's
available cash from the Free Credit Balance account. Failure of the IRA
independent fiduciary to provide such written direction will be deemed
an approval by the IRA independent fiduciary of the transfer to and
holding
[[Page 14006]]
of the IRA's available cash in the Free Credit Balance account; and
(g) The Applicant periodically provides a written statement
subsequent to the proposed transaction informing the IRA independent
fiduciary that (i) such funds are not segregated and may be used in the
operation of the business of such broker or dealer, and (ii) such funds
are payable on demand.
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 (the Notice) published on June 29,
2005 at 70 FR 37437.
Written Comments
The Department received 107 written comments from interested
persons in response to the Notice. The Department forwarded copies of
the comments to the Applicant and requested that the Applicant address
in writing the various concerns raised by the commentators. Many of the
comments fell into broad categories to which the Applicant responded
collectively. Where a single commentator raised a unique issue, such
issue was responded to individually. The comments and the Applicant's
responses are summarized below.
Four commenters favored granting the exemption, and one expressed
no objection. Six posed questions regarding the exemption without
taking a position. The remaining 96 commenters objected to granting the
exemption. Of those, 22 did not describe the reasons for their
objections, leaving 74 that made substantive comments on the proposed
exemption.
The principal objection to the exemption (reflected in 36 of the
comments) was that transferring IRA cash to Free Credit Balances in
place of the currently-used money market fund would negatively affect
the annual rate of return earned by the IRAs, providing a lower
checking account interest rate instead of a money market rate. While
the money market rates were low at one time, the commenters pointed out
that money market rates have risen to a level that is considerably
higher than the 10 basis points described as the current rate in the
Notice. Related to this concern was the view that the Applicant should
not impose a $3/month low balance fee on the Retirement Shares class of
its money market fund, with some pointing out that the Applicant
already charges an IRA custody fee. (One commenter, by contrast, saw
the Notice as unnecessary because the Applicant already has the option
to impose a minimum account balance requirement, which the person
thought would encourage IRA contributions--like some others, apparently
viewing the low balance fee as being imposed on IRAs themselves rather
than limited to the money market fund.)
The Applicant represents that these comments reflect a
misunderstanding of the context in which the Free Credit Balance
arrangement is to be made available. The large number of small accounts
in the Retirement Shares class has resulted in increased administrative
expense to the money market fund, depressing investment return. The
Applicant has determined to impose a minimum balance fee on the
Retirement Shares, as is already the case for the other class of fund
shares, to discourage small accounts and thereby restore returns to the
level of other money market funds. However, it was concerned that this
would leave IRAs without a convenient investment for their available
cash generated through interest and dividends. It therefore postponed
imposing the minimum balance fee until it could make Free Credit
Balances available to the IRAs.
Several of these commenters, along with two others, noted that the
minimum balance fee would represent additional income to the Applicant,
to which they objected, and some added that this additional income was
unnecessary since the Applicant already charges an IRA custody fee. The
Applicant represents that three points are relevant here. First, the
Applicant does not retain the entire low balance fee; it is in part
retained by the money market fund. Second, it is contemplated that only
a minimal number of customers would pay the fee instead of moving their
balance to the cash interest option. Third, as an offset to any fees
that the Applicant might collect, if the fund has fewer accounts as a
result of the minimum balance fee--as would likely be the case--the
Applicant's income would decrease, as the fund would pay to the
Applicant lower transfer and dividend disbursing agent fees (which are
based on the number of shareholder accounts). For these reasons, the
Applicant represents that the minimum balance fee is not expected to
increase the Applicant's bottom line, as one commenter suggested, or
otherwise benefit the Applicant at the fund's expense, as several
others alleged.
The other principal objection, reflected in 17 of the comments, was
that the change to using Free Credit Balances of the broker-dealer as
the IRAs' cash vehicle would place the IRAs' assets at higher risk,
because the money would no longer be ``protected'' or safe and/or would
be used for the Applicant's general business operations. The
Applicant's response states that several of the commenters do not
appear to understand the nature of the current cash vehicle. While a
money market fund attempts to maintain stability of principal, its
assets are not insured, either by the Federal Deposit Insurance
Corporation (as one commenter believed) or otherwise, and its
investments are subject to risk of loss. As stated in the fund
prospectus, the fund shares are not guaranteed or insured by any bank,
the U.S. government or any government agency. The Applicant represents
that in fact, the Free Credit Balances would be subject to reduced risk
in this regard, assuming that they are intended for the purpose of
purchasing securities (as would normally be the case for an IRA
account), because they would be covered by SIPC insurance. SIPC
insurance would protect the IRA holders against loss in the event the
Applicant was to file for bankruptcy (a concern expressed in at least
four of the comments). In addition, Free Credit Balances are subject to
reserve requirements. These provide further protection to customers
against a broker-dealer's misuse of the funds or insolvency by
requiring the broker-dealer to deposit the amount of its liabilities to
customers in excess of amounts owed to it by customers in a specially
designated bank account. The effect of the reserve requirements is to
restrict the use of the money to the financing of the broker-dealer's
customer-related business, not permitting the money to be used beyond
that for the broker-dealer's general business operations.
The Applicant represents that some of these comments reflected
misperceptions about the nature of the Free Credit Balances. Two
commenters assumed that the cash placed in the Free Credit Balances
would no longer be part of their IRAs. One was concerned that the cash
would therefore be at increased risk because it would lose the
protection that IRA funds have from creditors in the event of his
personal bankruptcy. The Applicant represents that that is not the
case. The money in the Free Credit Balances would still be part of the
IRAs, and as such would be protected from bankruptcy and exempt from
income tax to the same extent as any other assets of the IRAs.
Several of these commenters were concerned that the cash in the
Free Credit Balances would not be immediately available on demand, or
otherwise that the change would mean that they would lose control over
their
[[Page 14007]]
funds. The Applicant represents, by law, Free Credit Balances are
liabilities of the broker-dealer subject to immediate cash payment to
customers on demand. These liabilities are backed by special reserve
requirements, which further assure that the cash will be available as
needed. Therefore, the IRA holders will continue to control these
funds, having the ability to withdraw the cash on demand and to use it
to purchase other investments of their choosing.
Similarly, there were comments about the benefits that the
Applicant would receive as a result of the change in the cash sweep
vehicle, reflected in several of the comments concerned about greater
risk and reduced return. Four commenters specifically objected to
letting the Applicant keep the interest spread from taking in IRA funds
and investing those funds at a higher rate. The Applicant represents
that it is true that, in the ordinary conduct of its business, the
Applicant is permitted to use customer Free Credit Balances for the
purpose of making customer loans, and that these loans would be at a
higher interest rate than the Applicant would pay on the Free Credit
Balances. Importantly, however, the IRAs would still be receiving
market interest rates for small balance demand accounts--at the same or
higher rate that the Applicant pays to non-IRA Free Credit Balances--so
that they will be treated in a fair and reasonable manner. Furthermore,
the Applicant represents that the Applicant will be sacrificing other
fees on the money market fund assets as a result of the reduction in
the number of shareholder accounts, so that any additional income it
may earn may not result in additional profit. One of these commenters
added that offering a money market fund, even if not profitable, should
be a cost of doing business. However, the Applicant represents that the
issue is not one of profitability--it is whether the money market fund
is able to achieve market returns for its investors.
Six commenters expressed a preference to continue to place their
cash in the money market fund. The Applicant represents that under the
terms of the Notice as it would be implemented by the Applicant, they
will be able to do so. A current IRA customer will be notified of the
Applicant's intention to transfer the IRA's cash to a Free Credit
Balance at least 30 days in advance of the effective date of such a
change, and will have the ability to request to continue to use the
money market fund. New customers will be able to make this request when
they enter into the IRA account agreement. Furthermore, customers will
be able at any time to request not to have their cash placed in Free
Credit Balances. Therefore, IRA holders will not be forced to use Free
Credit Balances as their cash sweep vehicle if they object to doing so.
Eight commenters said that there would be no advantage to the IRA
holders from switching to Free Credit Balances. However, the Applicant
represents that once the minimum balance fee is imposed on the
Retirement Shares, the income on the Free Credit Balances would exceed
the income in the money market fund for amounts in the Retirement
Shares below the minimum balance. For such accounts, there will be an
advantage to switching over to Free Credit Balances.
Two commenters appeared to view the Notice as imposing additional
burdens specifically on small IRAs, indicating that it would be unfair
for that reason. The Applicant represents that these commenters should
understand that the minimum balance fee will be imposed on small
investments in the Retirement Shares, without regard to the overall
size of the IRAs.
One commenter complained that the Notice would permit the Applicant
to ``arbitrarily'' transfer IRA cash balances into Free Credit
Balances, with the investor only finding out after the fact. The
Applicant represents under the approval requirements under condition
(f) above, the Applicant could make the transfer only after advance
notice to the IRA holder.
Two commenters complained that making the change to Free Credit
Balances would not be consistent with their existing agreements with
the Applicant. The Applicant represents that there is nothing in the
Applicant's standard form of IRA agreement that would prohibit the use
of Free Credit Balances as an IRA's cash sweep vehicle. Furthermore,
the change would be disclosed to the IRA holders, and they would have
the opportunity to object to the change.
Five commenters indicated that they prefer to permit their cash to
accumulate to a certain level, such as $5,000, before investing it, and
that the lower interest rate paid by the Free Credit Balances would
pressure them to monitor their accounts more closely and either take
more frequent distributions or make more frequent investments. If they
are forced to make more frequent investments, they said, they would
have to pay higher commissions to the Applicant. The Applicant
represents that the majority of the Applicant's IRA customers find it
prudent to invest cash as it becomes available, as evidenced by the
large number of zero-balance accounts in the Retirement share class of
the money market fund. Should a customer wish to accumulate cash as
described, the accumulation could take place in a Free Credit Balance
until the amount reaches the level at which the money market low-
balance fee is avoided, and then the cash could be transferred without
any commission charge to the money market fund and credited to the
customer's account on the next business day. This would not create
undue pressure to monitor one's account.
One commenter objected for the reason that there are no alternative
ways of handling any funds not immediately invested. The Applicant
represents that the Retirement Shares of the money market fund would
still be available if the IRA holder decides not to use a Free Credit
Balance.
Another commenter did not think there was a problem because
interest rates would rise. The Applicant represents that while the
problem with low returns on the Retirement Shares is not as serious as
it was in 2003 when the Applicant filed its exemption application, due
to rising interest rates, there still is an issue of administrative
fees for carrying small accounts decreasing returns for the Retirement
Shares as compared to the Investment Shares. Furthermore, the problem
may recur in the future should interest rates again fall. The Applicant
believes it is in the interest of all of its customers to find a more
efficient way to handle cash so that those who seek large cash
investments can earn competitive rates in the money market fund, while
those who keep very small cash amounts can make use of Free Credits
Balances as their cash sweep vehicles.
Some of the commenters complained about having lost money from
their investments with the Applicant (and in one case, also A.G.
Edwards). The Applicant represents that these comments are not relevant
to this Notice proceeding.
Four of the commenters requested a hearing, but did not specify any
particular issues to be addressed at such a hearing. The Applicant
represents that as the issues described above either represent a
misunderstanding of the transaction or can be addressed by opting out
of use of the Free Credit Balance as the cash sweep vehicle for a
particular IRA, there is no need for a hearing. The Department concurs.
The Department also received a written comment submitted by the
Applicant. This comment sought
[[Page 14008]]
changes to a condition in the Notice, which is discussed below.
The Applicant seeks changes to condition (f) of the Notice.
Condition (f) of the Notice reads as follows:
The IRA independent fiduciary approves the transfer of the IRA's
available cash into a Free Credit Balance account no less frequently
than once every three months, or once every month if there is
account activity for the particular month other than the crediting
of interest, together with or as a part of the customer's statement
of account;
The Applicant raises two issues regarding condition (f). First, the
condition does not adequately address the initial approval by the IRA
independent fiduciary of the use of free credit balances. Second, it
does not permit the approval to take the form of ``negative consent.''
The Department concurs with the Applicant and has modified
condition (f) of the Notice to read as follows:
On the basis of the information disclosed pursuant to paragraph
(e) above, the IRA independent fiduciary approves the transfer of
the IRA's available cash into a Free Credit Balance account. If the
disclosure includes a specified date before which the independent
fiduciary must object to the transfer of the IRA's existing cash
balances into a Free Credit Balance account, failure of the IRA
independent fiduciary to object to the transfer by that date will be
deemed an approval by the IRA independent fiduciary of the transfer
to and holding of the IRA's available cash in the Free Credit
Balance account.
The Applicant provides, with or as part of the customer's
statement of account, no less frequently than once every three
months, notification that the IRA independent fiduciary may, at any
time and without penalty, direct the Applicant in writing to
withdraw the IRA's available cash from the Free Credit Balance
account. Failure of the IRA independent fiduciary to provide such
written direction will be deemed an approval by the IRA independent
fiduciary of the transfer to and holding of the IRA's available cash
in the Free Credit Balance account.
The Department has considered the entire record and has determined
to grant the exemption with the revisions noted herein.
For Further Information Contact: Khalif I. Ford of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)
Pennsylvania Institute of Neurological Disorders, Inc. Profit Sharing
Plan (the Plan) Located in Sunbury, Pennsylvania
[Prohibited Transaction Exemption 2006-02; Application No. D-11306]
Exemption
Based on the facts and representations set forth in the
application, the Department is granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). The restrictions
of sections 406(a), 406(b)(1) and (b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to
the sale (the Sale) by the Plan of a parcel of unimproved real property
known as Lot 20, Section ``F'', Monroe Manor, Inc., (Lot 20
Kingswood Drive, Selinsgrove, PA 17870) (the Property) to Mahmood
Nasir, M.D. (Dr. Nasir), a party in interest with respect to the Plan,
provided that the following conditions are satisfied:
(a) All terms and conditions of the Sale are at least as favorable
to the Plan as those that the Plan could obtain in an arm's-length
transaction with an unrelated party;
(b) The Sales price is the greater of $81,000 or the fair market
value of the Property as of the date of the Sale;
(c) The fair market value of the Property has been determined by a
qualified independent appraiser;
(d) The Sale is a one-time transaction for cash;
(e) The Plan does not pay any commissions, costs, or other expenses
in connection with the Sale; and
(f) The Plan fiduciaries will determine, among other things,
whether it is in the interest of the Plan to go forward with the Sale
of the Property, will review and approve the methodology used in the
appraisal that is being relied upon, and will ensure that such
methodology is applied by a qualified independent appraiser in
determining the fair market value of the Property as of the date of the
Sale.
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 December 28, 2005 at 70
FR 76870.
For Further Information Contact: Ms. Blessed Chuksorji of the
Department, telephone (202) 693-8567 (this is not a toll-free number).
The Zieger Health Care Corporation Retirement Fund (the Plan) Located
in Farmington, Michigan
[Prohibited Transaction Exemption 2006-03 Exemption Application No. D-
11313]
Exemption
I. Transactions
The restrictions of sections 406(a), 406(b)(1), 406(b)(2), and
407(a) of the Employee Retirement Income Security Act (the Act) and the
sanctions resulting from the application of section 4975, by reason of
sections 4975(c)(1)(A) through (E) of the Internal Revenue Code of 1986
(the Code),\1\ shall not apply to:
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\1\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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(a) The in-kind contribution and transfer to the Plan (the In-Kind
Contribution) by Zieger Health Care Corporation (ZHCC), acting through
its wholly-owned subsidiary, Botsford General Hospital (the Hospital),
both of which are parties in interest with respect to the Plan, of the
Hospital's right, title, and interest in five (5) limited liability
corporations, (collectively, the LLCs or individually, an LLC) where
the sole asset of each such LLC is one of five (5) parcels of improved
real property situated in southeastern Michigan (individually, an
Underlying Property, collectively, the Properties).
(b) The holding by the Plan of ownership interests in the LLCs that
own the Properties.
(c) The leaseback by the Plan to the Hospital of the Underlying
Property held by each of the LLCs, (individually, a Lease or
collectively, the Leases).
(d) The sale of an Underlying Property (or ownership interest in an
LLC, as the case may be) by the Plan to ZHCC or its affiliates,
pursuant to the right of first offer (the RFO), as described in each
Lease, at any time during the term of such Lease.
(e) Any payment or payments to the Plan by the Hospital, pursuant
to contingent rent payment(s) (the Contingent Rent Payment(s)), as
described in each Lease, during the term of such Lease.\2\
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\2\ The transactions described in section I(a)-(e), above,
collectively, are referred to herein as the Transactions.
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II. Conditions
The exemption is conditioned upon adherence to the material facts
and representations described herein and upon satisfaction of the
following requirements:
(a) ZHCC contributes to the Plan no less than:
(1) Cash in the amount of $3.3 million in the year 2005;
(2) Cash in the amount of $2 million in each of the years 2006,
2007, and 2008; and
(3) cash in the amount of $3 million in the year 2009.
(b) A qualified, independent fiduciary, as defined in section
III(c), below, (the Independent Fiduciary),
[[Page 14009]]
acting on behalf of the Plan, determines in accordance with the
fiduciary provisions of the Act, whether and on what terms to enter
into each of the Transactions.
(c) The Independent Fiduciary represents the Plan's interests for
all purposes with respect to each of the Transactions and determines,
prior to entering into any of the Transactions, that each such
transaction is feasible, in the interest of the Plan, and protective of
the Plan and its participants and beneficiaries.
(d) The Independent Fiduciary reviews, negotiates, and approves the
specific terms of each of the Transactions.
(e) The Independent Fiduciary monitors compliance by ZHCC and its
affiliates, as defined in section III(a), below, with the terms of each
of the Transactions and with the conditions of this exemption to ensure
that such terms and conditions are at all times satisfied.
(f) The Independent Fiduciary manages the acquisition, holding,
leasing, and disposition of the Plan's ownership interests in the LLCs
that own the Properties and takes whatever actions are necessary to
protect the rights of the Plan with respect the Plan's ownership
interests in such LLCs.
(g) The terms and conditions of each of the Transactions are no
less favorable to the Plan than terms negotiated at arm's length under
similar circumstances between unrelated third parties.
(h) The Independent Fiduciary determines the fair market value of
the In-Kind Contribution, as of the date such contribution is made. In
determining the fair market value of the In-Kind Contribution, the
Independent Fiduciary obtains an updated appraisal from an independent,
qualified appraiser selected by the Independent Fiduciary and ensures
that the appraisal is consistent with sound principles of valuation.
(i) Each Lease has a term of years, commencing on the closing date
of the In-Kind Contribution and ending ten (10) years thereafter. Each
Lease is a triple net ``bondable'' lease in which the Hospital's
obligation to pay rent to the Plan is absolute and unconditional. The
rental payment under each Lease is no less than the fair market rental
value of the leased premises, as determined by the Independent
Fiduciary, and is net of all costs related to the leased premises,
including costs of capital improvements and all other costs to operate,
maintain, repair and replace in good condition, and repair the systems
and structural and non-structural components of the buildings on the
leased premises, including without limitation, the roof, foundation,
landscaping, storm water management, utilities, and all other capital
and non-capital repairs and replacements, all in a manner befitting
office buildings comparable to the buildings on the leased premises and
in accordance with all applicable laws. Each Lease contains a
commercially reasonable standard for determining whether repair or
replacement is necessitated. All such maintenance, repair, and
replacement work is the responsibility of the Hospital. As discussed in
paragraph number 6 in the Summary of Facts and Representations in the
Notice of Proposed Exemption, and except as otherwise provided in each
Lease, the Hospital is required to restore the leased premises in the
event of casualty or condemnation, regardless of any lack or
insufficiency of insurance proceeds or condemnation awards therefore
(but subject to all applicable laws);
(j) ZHCC and the Hospital agree to make one or more Contingent Rent
Payment(s) to the Plan, if the Plan does not earn an annual return on
each of the Properties equal to a fixed interest rate of 8 percent (8%)
in any year (the Minimum Funding Rate). Each Contingent Rent Payment is
due on the earliest of: (1) The end of the ten (10) year term of the
Leases, (2) the termination of any of the Leases (including a
termination due to default, destruction, or condemnation), or (3) the
sale by the Plan of any parcel included in the Properties (or the sale
by the Plan of the entity that owns any parcel) (each a Minimum Return
Date). If the actual return to the Plan (the Actual Return), as defined
in section III(d), below, is less than the sum of the contribution
value of the Properties, plus a return on such contribution value equal
to the Minimum Funding Rate (the Minimum Return), then ZHCC and the
Hospital shall pay to the Plan a Contingent Rental Payment equal to the
amount of any such difference. ZHCC and the Hospital shall pay each
Contingent Rent Payment to the Plan in cash within 180 days after each
Minimum Return Date.
(k) If the Plan desires to sell or convey any of the Properties (or
any of the LLCs, as the case may be), during the term of a Lease, the
Plan shall first offer the Hospital the right to purchase or otherwise
acquire such property or LLC, pursuant to the RFO: (1) On such terms
and conditions as the Plan proposes to market such property or such LLC
for sale (Soliciting Offer), which terms and conditions shall reflect
the Plan's good faith determination of market conditions and the fair
market value for such property or LLC, or (2) on such terms and
conditions as are contained within an unsolicited bona fide offer from
an unaffiliated third party that the Plan desires to accept
(Unsolicited Offer). The parties shall negotiate in good faith the
terms and conditions of any purchase based on a Soliciting Offer for a
period of thirty (30) days following the Plan's notice to the Hospital.
In all events, the Hospital shall exercise such right to purchase, if
at all, upon notice to the Plan within the thirty (30) day period
described above with respect to a Soliciting Offer or within thirty
(30) days after notice to the Hospital of an Unsolicited Offer. If the
Hospital fails to exercise such right to purchase, the Plan is free to
sell such property or LLC (i.e., close on the transfer) to a third
party on such terms for the next 360 days. However, the Plan shall not
have the right to sell to a third party at a lower effective purchase
price or on any other materially more favorable term than the effective
purchase price and terms proposed by the Plan to the Hospital without
first re-offering such property or LLC to the Hospital at such lower
effective purchase price or other more favorable term, nor to sell on
any terms following the expiration of such 360-day period, without in
either event first re-offering such property or LLC to the Hospital.
The RFO shall terminate upon the commencement of the exercise by the
Plan of its remedies under the Leases as the result of a monetary event
of default by the Hospital that continues uncured following notice and
the expiration of applicable cure periods (and a second notice and cure
period provided fifteen (15) days before the loss of such right on
account of such default).
(l) Subject to the Hospital's RFO, the Plan retains the right to
sell or assign, in whole or in part, any of its interests in the
Properties (or any of its interests in the LLCs, as the case may be) to
any third party purchaser.
(m) ZHCC indemnifies the Plan with respect to any liability for
hazardous materials released on the Properties, whether such release
occurs prior to or after the execution of the Leases or the In-Kind
Contribution;
(n) The In-Kind Contribution is conditioned on the Independent
Fiduciary's receipt of favorable engineering and environmental reports
prior to closing.
(o) The Plan incurs no fees, commissions, or other charges or
expenses as a result of its participation in any of the Transactions.
III. Definitions
(a) The term, ``affiliate,'' means:
[[Page 14010]]
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(b) The term, ``control,'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(c) The term, ``Independent Fiduciary,'' means a fiduciary that:
(1) Has a minimum of five (5) years of experience acting on behalf
of employee benefit plans covered by the Act and/or the Code;
(2) Can demonstrate, through experience and/or education,
proficiency in matters involving the acquisition, management, leasing,
and disposition of real property;
(3) Is an expert with respect to the valuation of real property or
has the ability to access (itself or through persons engaged by it)
appropriate data regarding the purchase, sale, and leasing of real
property located in the relevant market;
(4) Has not engaged in any criminal activity involving fraud,
fiduciary standards, or securities law violations;
(5) Is appointed to act on behalf of the Plan for all purposes
related to, but not limited to (i) the In-Kind Contribution, (ii) the
Leases, (iii) the RFO, (iv) the Contingent Rent Payment(s), and (v) any
other transactions between the Plan and ZHCC and its affiliates related
to the LLCs and Properties; and
(6) Is independent of and unrelated to ZHCC or its affiliates. For
purposes of this exemption, a fiduciary will not be deemed to be
independent of and unrelated to ZHCC and its affiliates if:
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with ZHCC,
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration in connection with any Transactions
described in this exemption; except that an Independent Fiduciary may
receive compensation from ZHCC for acting as an Independent Fiduciary
in connection with the Transactions contemplated herein if the amount
or payment of such compensation is not contingent upon or in any way
affected by the Independent Fiduciary's ultimate decisions, and
(iii) The annual gross revenue received by such fiduciary, during
any year of its engagement, from ZHCC and its affiliates exceeds five
percent (5%) of the fiduciary's annual gross revenue from all sources
for its prior tax year.
(d) The definition of Actual Return to be used in calculating the
amount of each Contingent Rent Payment is the sum of: (1) The sales
price of any parcel sold, net of selling costs, (2) any net insurance
proceeds or net condemnation awards received by the Plan (if any Lease
is terminated due to destruction or condemnation), (3) the fair market
value of any parcel(s) that the Plan continues to hold, as determined
by a three appraiser method (if the parties are unable to otherwise
agree), plus (4) the rental income received by the Plan under the
Leases prior to the Minimum Return Date, less expenses incurred by the
Plan with respect to the Properties and the Leases up to the Minimum
Return Date. The liabilities and obligations of the Hospital and ZHCC
survive the expiration date of a Lease, or a termination of a Lease,
and continue until such liabilities and obligations have been fully
paid and fulfilled.
Temporary Nature of Exemption
This exemption is temporary and becomes effective on the date of
publication of the grant of the final exemption in the Federal
Register. The exemption will expire on the date which is ten (10) years
from the date of the grant of the exemption. If the Hospital wishes to
renew the Leases on the Properties between the Hospital and the LLCs
(or between the Hospital and the Plan, as the case may be), the
Department would encourage the applicant to submit another application
prior to the expiration of this exemption, provided that the
Independent Fiduciary determines that the conditions of the renewal are
feasible, in the interest and protective of the Plan and the Hospital
can demonstrate that it can satisfy the terms of such renewal.
Written Comments
In the Notice of Proposed Exemption (the Notice), the Department of
Labor (the Department) invited all interested persons to submit written
comments and requests for a hearing on the proposed exemption within
thirty-seven (37) days of the date of the publication of the Notice in
the Federal Register on December 28, 2005. All comments and requests
for a hearing were due by February 3, 2006.
During the comment period, the Department received no requests for
a hearing. However, the Department did receive one comment letter from
a commentator and a comment letter from the applicant.
In a facsimile dated February 9, 2006, the commentator provided the
Department with a list of six (6) historical events concerning the
operations of the Hospital and ZHCC during the 1980's and the early
1990's. In addition to this list, the commentator also expressed
concern for the safety of the funding of the Plan. In this regard, the
commentator suggested that, if the exemption were granted, the
Department ``strictly monitor and enforce the financial activities'' of
the Hospital to ensure the safety of the Plan.
In response, to the concern expressed by the commentator, the
applicant submitted a letter dated February 15, 2006, to the
Department. In this letter, ZHCC expressed its opinion that adequate
measures to protect the Plan and the interests of its participants and
beneficiaries already exist under the terms and conditions of the
exemption. Specifically, as set forth in the Notice in subsections (b)
through (f) and (h) of section II, it is represented that the
Retirement Committee for the Plan appointed Fiduciary Counselors, Inc.
(FCI) as the Independent Fiduciary, as defined in section III(c) of the
Notice, to act on behalf of the Plan with regard to the subject
Transactions and to serve as investment manager with authority and
discretion over the LLCs and the Properties.
Further, the applicant points out that other safeguards to protect
the Plan and its participants and beneficiaries are set forth in the
Notice in subsections (g) and (i) through (o) of section II. In this
regard, section II(g) requires that the terms and conditions of the
Transactions ``are no less favorable to the Plan than terms negotiated
at arm's length under similar circumstances between unrelated third
parties.'' Participating in the Transactions will not subject the Plan
to fees, commission, or other charges or expenses. Fair market value
rental payments, as determined by the Independent Fiduciary are
required. The Leases are triple net ``bondable'' leases having a term
of ten (10) years. Under the terms of these Leases, the Hospital bears
not only the ordinary maintenance, tax, and insurance expenses, but
also is responsible for all capital expenses associated with the
Properties. The Plan retains the right to sell or assign the Properties
to any third party purchaser, subject to the Hospital's RFO. The Plan
and its participants and beneficiaries are further protected by ZHCC's
indemnification with respect to any liability for hazardous materials
released on the Properties.
The In-Kind Contribution is conditioned on the Independent
[[Page 14011]]
Fiduciary receiving favorable engineering and environmental reports on
the Properties before closing. Finally, if the Plan does not earn an
annual return on each of the Properties equal to a fixed interest rate
of 8 percent (8%) in any year, ZHCC and the Hospital have agreed to
make one or more Contingent Rent Payment(s), as described in each of
the Leases. Accordingly, the applicant believes that adequate
safeguards to protect the Plan and its participants and beneficiaries
are already in place under the terms of the exemption. In the opinion
of the applicant, no additional safeguards are necessary.
In addition to the letter from the commentator, the applicant, in a
letter dated February 2, 2006, informed the Department that although
the representations in the Notice were accurate, certain
representations were made in anticipation of the final exemption for
the In-Kind Contribution being granted in calendar year 2005.
Accordingly, the applicant updated the following statements to reflect
an actual cash contribution in 2005 and the anticipated In-Kind
Contribution in calendar year 2006.
The applicant's comments are discussed in the numbered paragraphs
below.
1. Section II(a)(1), as set forth in the Notice, at 70 FR 76872,
column 2, lines 16-19, requires that ZHCC contribute to the Plan no
less than cash in the amount of $3.3 million in the year 2005. In its
comment letter, the applicant confirms that in September 2005, ZHCC
contributed in cash $4,057,000 to the Plan--$3.3 million of which
constituted the contribution negotiated by FCI, the Plan's Independent
Fiduciary and which is also required under section II(a)(1), as set
forth in the Notice. In this regard, the applicant informed the
Department that the entire $4,057,000 cash contribution was in excess
of the minimum funding obligations of ZHCC under section 302 of the Act
and section 412 of the Code. The applicant also represents that the
contribution enabled ZHCC to avoid making a variable rate premium
payment to the Pension Benefit Guaranty Corporation.
2. In section 17(q), as set forth in the Notice, at 70 FR 76882,
column 2, lines 51-55, it is represented that the In-Kind Contribution
plus the additional voluntary cash contributions will exceed the
minimum funding requirement for the year 2005. It is anticipated that
the In-Kind Contribution will be contributed to the Plan during 2006,
once the exemption is finalized. The applicant represents that if the
exemption is finalized in time for the In-Kind Contribution to be made
to the Plan by September 15, 2006, then the In-Kind Contribution will
be applied to the 2005 Plan year for the purpose of the funding rules
under section 302 of the Act and section 412 of the Code. Accordingly,
the applicant represents that all contributions credited to the Plan
for Plan year 2005 will exceed the minimum funding requirement for Plan
year 2005.
3. The applicant notified the Department that the name of the Plan
Trustee, as set forth in the Notice in paragraph 6 of the Summary of
Facts and Representations (the SFR), at 70 FR 76874, column 2, lines
44-60, has changed to LaSalle Bank N.A.--Global Securities and Trust
Services. It is represented that this name change is pursuant to the
acquisition by LaSalle Bank of Standard Federal Bank. In addition, the
applicant clarified that the discretion to invest the assets of the
Plan generally resides with the Zieger Health Care Corporation Finance
Committee (the Committee) and any investment managers appointed by it.
It is further represented that the Committee has granted the Trustee
the discretion to manage Plan assets that are invested in funds
sponsored by the Trustee.
4. Paragraph 6 of the SFR in the Notice, at 70 FR 76877, column 2,
lines 1-4, reads as follows, ``Currently, portions of the Kidney
Center, the SPO Building and the Medical Center are leased to unrelated
third parties.'' The applicant notes that, as previously stated in the
SFR in the Notice, at 70 FR 76874, column 3, lines 48-58, the Botsford
Kidney Center building is leased to two (2) parties--a tenant owned by
the Hospital and Botsford Kidney Center, Inc. (BKCI). BKCI is a
Michigan business corporation owned 80 percent (80%) by individual
physicians and 20 percent (20%) by the Hospital.
After giving full consideration to the entire record, including the
written comments from the commentator and the applicant, the Department
has decided to grant the exemption, as described and clarified, above.
In this regard, the comment letters submitted by the commentator and
the applicant to the Department have been included as part of the
public record of the exemption application. The complete application
file, including all supplemental submissions received by the
Department, is made available for public inspection in the Public
Documents Room of the Employee Benefit Security Administration, Room N-
1513, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the Notice published on December 28, 2005, at 70 FR 76872.
For Further Information Contact: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
The Donlar Corporation Profit Sharing Plan (the Plan) Located in
Roseville, MN
[Prohibited Transaction Exemption 2006-04 Exemption Application No. D-
11325]
Exemption
The restrictions of sections 406(a)(1)(A) through (D), 406(b)(1),
and 406(b)(2) of the Employee Retirement Income Security Act (the Act),
and the sanctions resulting from the application of section 4975, by
reason of section 4975(c)(1)(A) through (E) of the Internal Revenue
Code of 1986 (the Code), \3\ shall not apply, in connection with the
termination of the Plan, to the cash sale of a parcel of improved real
property (the Property) owned by the Plan to Mr. Donald A. Kainz (Mr.
Kainz), a party in interest with respect to the Plan; provided that:
---------------------------------------------------------------------------
\3\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
(a) The Plan receives a price for the sale of the Property to Mr.
Kainz equal to the greater of:
(1) $418,000; or
(2) The fair market value of the Property, plus the ``assemblage
value'' to Mr. Kainz, as determined by an independent, qualified
appraiser, as of the date of such sale; or
(3) The cost to the Plan to acquire and hold the Property;
(b) The Plan incurs no fees, commissions, or other charges or
expenses as a result of its participation in the sale of the Property
to Mr. Kainz;
(c) Prior to entering into the subject transaction:
(1) With respect to the past use and/or leasing of the Property by
the Donlar Corporation (the Employer), the Employer files a Form 5330
with the Internal Revenue Service (IRS);
(2) With respect to the entire period of such use and/or leasing,
the Employer pays all appropriate excise taxes, plus interest on such
taxes to the IRS; and
(3) With respect to the past use and/or leasing of the Property by
the Employer, the Employer pays to the Plan the present value of the
fair market rent, including interest, due to the Plan from the Employer
in the form of a lump
[[Page 14012]]
sum total rent payment in arrears with respect to the past use and/or
leasing of the Property by the Employer, as determined by Mike Amo (Mr.
Amo) an independent, qualified appraiser, for the entire period of such
use and/or leasing of the Property by the Employer;
(d) The termination of the Plan and the distribution of its assets
is in accordance with the provisions of the Plan and all applicable
statutes and regulations, including section 4044 of the Act, relating
to the allocation of assets; and
(e) Upon termination of the Plan, each participant in the Plan
receives 100 percent (100%) of the balance of his or her account in the
Plan in cash, including each participant's pro rata share of the value
of the Property, as of the date of the sale of the Property to Mr.
Kainz.
After giving full consideration to the entire record, the
Department has decided to grant the exemption, as described above. The
complete application file, including all supplemental submissions
received by the Department, is made available for public inspection in
the Public Documents Room of the Employee Benefit Security
Administration, Room N-1513, U.S. Department of Labor, 200 Constitution
Avenue, NW., Washington, DC 20210.
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 December 28, 2005, at 70
FR 76882.
For Further Information Contact: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
Anchorage Area Pipe Trades 367 Joint Apprenticeship Committee (the
Plan) Located in Anchorage, Alaska
[Prohibited Transaction Exemption 2006-05; Exemption Application No. L-
11293]
Exemption
The restrictions of sections 406(a) and 406(b)(2) of the Act shall
not apply to a loan (the Loan), in the amount of $750,000, to the Plan,
to serve as permanent financing for a training facility (the Training
Facility) constructed by the Plan, by the Local No. 367 of the United
Association of Journeymen and Apprentices of the Plumbing and
Pipefitting Industry of the United States and Canada (Local No. 367), a
party in interest with respect to the Plan. This exemption is subject
to the following conditions:
(a) The Plan does not pay any commissions, fees, or other expenses
with respect to this transaction, except certain specified third party
closing costs;
(b) An independent, qualified fiduciary (the I/F), after analyzing
the terms of the Loan, determines that such Loan is in the best
interests of the Plan and its participants and beneficiaries;
(c) In determining the fair market value of the Training Facility,
the I/F obtains a current written appraisal report (the Appraisal) from
an independent, qualified appraiser, as of the date of the transaction,
and ensures that such Appraisal is consistent with sound principles of
valuation;
(d) The Loan is for the duration of 15 years at the prime rate, as
listed in the Wall Street Journal;
(e) Under the terms of the Loan agreement, the Loan is secured by
the Training Facility and, in the event of default by the Plan, Local
No. 367 has recourse only against such facility and not the general
assets of the Plan;
(f) The terms and conditions of the Loan are at least as favorable
to the Plan as those that the Plan could have obtained in an arm's
length transaction with an unrelated third party; and
(g) The Loan is repaid by the Plan with the funds that the Plan
retains after paying all of its operational expenses.
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 November 3, 2005 at 70 FR
66856.
For Further Information Contact: Ms. Karin Weng of the Department
at (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 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.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E6-3821 Filed 3-17-06; 8:45 am]
BILLING CODE 4510-29-P
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