EBSA Federal Register Notice
Proposed Exemptions; Notice of Proposed Individual Exemption Involving the Plumbers & Pipefitters National Pension Fund (the Fund) [08/21/2006]
[PDF Version]
Volume 71, Number 161, Page 48767-48788
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Part VII
Department of Labor
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Employee Benefits Security Administration
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Employee Benefit Plans--Notice of Proposed Individual Exemption
Involving the Plumbers & Pipefitters National Pension Fund (the Fund)
and Grant of Individual Exemption for the Southwest Gas Corporation
(Southwest Gas); Notices
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11183, et al.]
Proposed Exemptions; Notice of Proposed Individual Exemption
Involving the Plumbers & Pipefitters National Pension Fund (the Fund)
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
moffitt.betty@dol.gov, or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11183]
Notice of Proposed Individual Exemption Involving the Plumbers &
Pipefitters National Pension Fund (The Fund) Located in Alexandria, VA
Proposed Exemption
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(A) through (D) and 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, effective June 5, 2001, to the transactions described below
involving the receipt by Diplomat Properties, Limited Partnership (DPLP
or the Partnership) of certain services and products from the hotel
management company, Westin Management Company East (after January 12,
2006, Westin Hotel Management, L.P.) (referred to collectively with its
parent company, Starwood Hotels & Resorts Worldwide, Inc., as Starwood)
and certain related entities (Related Companies), retained to operate
the Partnership's principal asset, the Westin Diplomat Resort & Spa and
the Diplomat Country Club and Spa (collectively, the Resort), provided
that there is adherence to the material facts and representations
contained in the Application and satisfaction of the applicable
requirements described in Parts II and III below.
I. Exemption Transactions
(a) The provision of Centralized Services or Additional Services
(collectively, the Proposed Services) to the Resort by Starwood or a
Related Company;
(b) The purchase of goods from Starwood or a Related Company in
connection with the provision of Centralized Services or Additional
Services (Purchase of Goods); and
(c) The participation of the Resort in the Associate Room Discount
Program (ARD Program).
II. General Conditions
(a) LaSalle, CHM or a successor independent QPAM for the
Partnership, will represent the interests of the Partnership for all
purposes with respect to the Proposed Services and the Purchase of
Goods for the duration of the arrangement. The QPAM, on behalf of the
Partnership, through negotiation and execution of the Operating
Agreements and periodic monitoring of the Proposed Services and the
Purchase of Goods, determines that:
(1) Starwood's provision of Centralized Services and Additional
Services to the Resort is in the best interests and protective of the
participants and beneficiaries of the Plumbers & Pipefitters National
Pension Fund (the Fund).
(2) The terms under which the provision of Centralized Services and
Additional Services are provided by Starwood to the Resort are at least
as favorable to the Resort as those which the Partnership could obtain
in arm's length transactions with unrelated parties in the relevant
market;
(3) The overall cost of services and products charged by Starwood
to the Resort on a centralized basis is consistent with the amounts
charged by other potential branded operators; and
(4) The Centralized Services and Additional Services made available
by Starwood and its affiliates are provided at prices and on terms at
least as favorable to the Partnership as are available in the relevant
market from
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unrelated parties and reflect the same prices and terms as are offered
by Starwood and its affiliates to other properties managed by Starwood
and its affiliates in the ordinary course of business.
(b) Under the Operating Agreements, at all times that the
Partnership is using Centralized Services and Additional Services,
Starwood has acknowledged in writing:
(1) Starwood's fiduciary status under section 3(21)(A) of the Act,
with respect to the Resort; and
(2) Starwood's indemnification of the Partnership with respect to
any claims, demands, actions, penalties, suits and liabilities arising
from Starwood's breach of fiduciary duty or violation of the Act.
(c) On an annual basis, the QPAM, on behalf of the Partnership,
approves the participation of the Resort in Centralized Services and
Additional Services as part of its approval of the Resort's Annual
Operating Plan.
(d) During any year, subject to exceptions for certain Variable
Expenses or Uncontrollable Expenses, Starwood does not, without the
approval of the QPAM, incur any cost or expense or make any expenditure
with respect to Centralized Services or Additional Services that would:
(i) Cause the total expenditures for any line item in the Annual
Operating Plan that includes payment of fees for Centralized Service or
Additional Services to exceed the budgeted expense for that line item
by more than 10%; (ii) cause total expenditures for any department of
the Resort that pays fees for Centralized Service or Additional
Services to exceed the budgeted expenses for that department by more
than 5%; or (iii) cause the actual aggregate expenditures for operating
expenses or capital expenditures to exceed the budget by more than 2%.
(e) All purchases of products and services by Starwood from (i)
itself, (ii) any person or entity directly or indirectly controlling,
or controlled by, or under common control with Starwood, or (iii) any
entity in which Starwood or its affiliates have any ownership,
investment or management interest or responsibility are first approved
by the QPAM (as part of the approval of the Annual Operating Plan or
otherwise), except in cases of purchases of not more than $50,000 per
annum where the price paid or charged for each such purchase and the
terms thereof are lower than those that could be obtained from
unrelated third parties in the applicable location.
(f) The QPAM approves (as part of the approval of the Annual
Operating Plan or otherwise) all contracts for Additional Services
(and, to the extent applicable, Centralized Services) that provide for
aggregate annual expenditure or revenue of more than $50,000 or have a
term of more than one year.
(g) The fees charged to the Resort for Centralized Services can be
increased only on a system-wide basis (i.e., not just for the Resort).
(h) The fees for Centralized Services are not greater than the
lowest of: (i) the fees initially agreed upon by the parties in the
Operating Agreement; (ii) Starwood's prevailing fee for the services or
products as generally charged by Starwood or its affiliates to other
properties managed by it; (iii) Starwood's cost, with no profit or
mark-up (although it may include overhead); or (iv) 5% of gross
revenues (exclusive of certain occupancy-related charges, such as
third-party reservations fees and frequent guest program charges) of
the hotel or country club, as applicable.
(i) Starwood does not, with respect to any Centralized Service or
Additional Service, solicit bids for the product or service in a manner
that could result in a ``right of first refusal'' or other bidding
advantage for the benefit of Starwood or its affiliates.
(j) The QPAM, on behalf of the Partnership, has the right to opt
out of any Centralized Services and to elect not to receive any
Additional Services.
(k) The QPAM, on behalf of the Partnership, retains the right to
conduct audits of transactions entered into by Starwood with respect to
Centralized Services and Additional Services, and, in the event that an
audit uncovers a discrepancy related to any payment to Starwood or its
affiliates, it must be corrected within ten days of notice being
provided.
(l) As part of its monitoring responsibilities, the QPAM, on behalf
of the Partnership, has the right to meet with representatives of
Starwood no less frequently than monthly (and otherwise at the request
of the Partnership) for the purposes of reviewing each Annual Operating
Plan, preparing, reviewing and updating rolling three-month forecasts
for the Resort, and analyzing Starwood's actual performance against the
Annual Operating Plan and the performance of the Resort relative to an
applicable competitive set of resorts.
(m) The QPAM, on behalf of the Partnership, retains the right to
receive monthly interim and annual accounting reports that include a
comparison of actual to budgeted expenses, and to have such reports
audited by an independent accounting firm not more than once in any
fiscal year.
III. ARD Program Conditions
(a)(1) Rooms are not made available to employees or associates of
Starwood or a Related Company pursuant to the Associate Room Discount
Program if the rooms could otherwise be sold to the public at a higher
rate; and
(2) In each case, the discounted rates fully cover the variable
cost to the Resort for the use of the room and the cost to the Resort
of the food, beverage and amenities.
(b) Participation in the Associate Room Discount Program is offered
by Starwood at all of its owned properties and properties that it
manages.
(c) The QPAM, acting on behalf of the Partnership, monitors the
Resort's participation in the Associate Room Discount Program and
retains the right to opt out of the Associate Room Discount Program.
IV. Definitions
(a) The term ``Partnership'' means Diplomat Properties, Limited
Partnership whose principle asset is the Resort. The Plumbers &
Pipefitters National Pension Fund (the Fund) is the sole member of
Diplomat Properties, LLC, the General Partner of the Partnership. The
QPAM is a non-member manager of the General Partner.
(b) The term ``QPAM'' means LaSalle Investment Management, Inc.
(LaSalle), Capital Hotel Management, LLC (CHM) or a successor qualified
professional asset manager (as defined in section V(a) of Prohibited
Transaction Class Exemption 84-14 at 49 FR 9494, March 13, 1984), as
amended at 71 FR 5887 (February 3, 2006) or such other entity that is
permitted by a U.S. Department of Labor individual exemption to
function with powers similar to that of a qualified professional asset
manager, that is exercising discretionary authority on behalf of the
Fund with respect the activities of the Partnership and the Resort.
(c) The term ``affiliate'' means:
(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.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) The term ``Related Company'' means wholly or partially owned
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affiliates of Starwood (including, without limitation, affiliates of
Starwood that are parties in interest by virtue of section 3(14)(G),
(H) or (I) of the Act or disqualified persons by virtue of sections
4975(e)(2)(G), (H), or (I) of the Code) or affiliates or other entities
in which Starwood has an ownership or other contractual interest.
(f) The term ``Additional Services'' means any service or product
other than Centralized Services: (1) Which is provided to the Resort by
Starwood or a Related Company and is typically provided by Starwood or
a Related Company on a property by property basis to properties
operated by Starwood or an affiliate; and (2) for which Starwood or a
Related Company receives a fee for providing such service or product
that is based on the level of usage by the Resort.
(g) The term ``Annual Operating Plan'' means the annual written
operating plan submitted by Starwood to the Partnership no later than
90 days before the commencement of each fiscal year, which plan shall
include monthly estimates and cover the operating budget (including
departmental revenue and expenses, taxes, insurance and reserves), the
capital budget, the marketing plan, the advertising program, working
capital requirements, litigation and any other matter reasonably deemed
appropriate by the QPAM, on behalf of the Partnership.
(h) The term ``Associate Room Discount Program'' means the program
maintained by Starwood with the approval of the QPAM pursuant to which
discounted room rates and discounted food, beverage and other amenities
at participating hotels are provided for Starwood associates or
associates of participating Starwood franchise hotels worldwide and
their immediate family.
(i) The term ``Centralized Services'' means any service or product,
including (without limitation) certain advertising, marketing and
promotional activities (including frequent guest programs),
reservations and distribution systems and networks, training and
similar items, provided that: (i) The service or product is provided to
the Resort by Starwood or a Related Company and is typically provided
by Starwood or a Related Company on a central, regional, chain or brand
basis, rather than specifically at an individual property; and (ii)
Starwood or a Related Company receives a fee for providing the service
or product that is based on the level of usage by the Resort.
(j) The term ``Operating Agreements'' means, collectively, the
parallel operating agreements, executed on June 5, 2001, between
LaSalle and Starwood, as amended, to brand and operate the Resort's
convention hotel as the ``Westin Diplomat Resort and Spa,'' and to
brand and operate the country club as ``The Diplomat Country Club and
Spa,'' as part of Starwood's Luxury Collection, and any successor
operating agreements that may be in effect between the parties or
successor parties from time to time.
(k) The term ``Variable Expense,'' as set forth in the Operating
Agreements, means operating expenses covered by the then-current Annual
Operating Plan that reasonably fluctuate as a direct result of business
volumes, including food and beverage expenses, other merchandise
expenses, operating supply expenses, and energy costs.
(l) The term ``Uncontrollable Expenses,'' as set forth in the
Operating Agreements, means certain expenses the amount of which cannot
be controlled by Starwood, which expenses include, without limitation,
real estate taxes, utilities, insurance premiums, license and permit
fees and charges provided in contracts entered into pursuant to the
Operating Agreement, provided, that Starwood agrees to use commercially
reasonable efforts to mitigate the expenses under such contracts; and
the QPAM, on behalf of the Partnership, agrees that Starwood shall have
the right to pay all Uncontrollable Expenses without reference to the
amounts provided for in respect thereof in the approved Annual
Operating Plan.
Summary of Facts and Representations
1. The Application for this proposed exemption is submitted by
LaSalle Investment Management, Inc. (LaSalle), as qualified
professional asset manager (QPAM) for, and on behalf of, the Plumbers &
Pipefitters National Pension Fund (the Fund). By letter dated April 30,
2006 (LaSalle Letter), LaSalle informed the Department that as of April
30, 2006, LaSalle was replaced by Capital Hotel Management, LLC (CHM)
as the QPAM for the Fund.\1\ The Fund is a Taft-Hartley, multi-
employer, defined benefit pension fund, as defined in section 3(37) of
ERISA. The Fund is funded solely by employer contributions negotiated
under collective bargaining agreements with the United Association of
Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of
the United States and Canada, AFL-CIO (the Union). The Fund is
administered by the Board of Trustees of the Fund (the Board), which
has six individual members, three of whom are appointed by employers
who contribute to the Fund, and three of whom are appointed by the
Union. By letter dated July 14, 2006 from CHM to the Department (CHM
Letter), CHM stated that as of July 1, 2005, the Fund had 66,513 active
participants, 17,697 terminated vested participants and 37,062 retirees
and beneficiaries in pay status. As of July 1, 2006, the Fund had
approximately $4.295 billion in total assets.
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\1\ See below for information on the April 30, 2006 appointment
of CHM as QPAM for the Fund.
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2. The Application states that on August 19, 1997, the Union
entered into a contract to acquire the Resort and related property from
an unaffiliated third party (a wholly owned subsidiary of Union Labor
Life Insurance Company). In late September 1997, the Union caused the
Partnership and its general partner, Diplomat Properties, Inc. (the
General Partner), to be organized, with the Union as the initial sole
limited partner of the Partnership and the sole owner of Diplomat
Properties, Inc. The Partnership was assigned the right to acquire the
Resort and arranged to borrow $40 million from a third-party lender to
fund the acquisition of the Resort and such related property. On
October 7, 1997, the Union assigned its interests in both the
Partnership and its General Partner to the Fund, in exchange for the
Fund's agreement to make a capital contribution to the Partnership of
$40 million plus certain costs incurred by the Union in connection with
the acquisition of the Resort and related property. On October 9, 1997,
the Partnership acquired the Resort from the third party seller for a
purchase price of approximately $40 million (plus reimbursement of
certain expenses to the Union); it thereupon repaid the loan from the
third party lender. As a result, the Fund became the indirect owner of
the Resort. The LaSalle Letter noted that ``the Fund paid off the $40
million bank loan. That $40 million paid by the Fund was treated as a
capital contribution by the Fund to the Partnership.''
The Fund applied for an exemption from the prohibited transaction
provisions of ERISA and the Code, on October 3, 1997 for the
acquisition of the Resort. On November 15, 1999, the Department granted
PTE 99-46, at 64 FR 61944, which provided conditional relief for the
Fund's acquisition of the Resort from the Union. Additional
undertakings agreed to by the Fund, pursuant to an October 13, 1999
Term Sheet, were incorporated by reference into PTE 99-46. The Fund
agreed to the appointment of Actuarial Sciences Associates (ASA) as the
independent named fiduciary of the Fund's account that holds the
interests in the Partnership, the General Partner and
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other assets of the Fund invested in, or awaiting investment in, the
Resort (the Diplomat Account). ASA's responsibilities were subsequently
assumed, with the Department's approval, by its wholly owned
subsidiary, ASA Fiduciary Counselors, Inc. (ASA Counselors). ASA
Counselors resigned its appointment, effective as of November 3, 2000.
On September 12, 2000, the Board and Independent Fiduciary
Services, Inc. (IFS) entered into an Independent Named Fiduciary
Agreement (the IFS Agreement), the terms of which were reviewed and
approved by the Department prior to its execution, pursuant to which
IFS was appointed, effective as of November 3, 2000, as the successor
independent named fiduciary of the Fund with respect to the Diplomat
Account. A more complete description of the general background and
history of the development of the Resort is set forth in the
Department's grant of PTE 2001-39 at 66 FR 53439, October 22, 2001 (PTE
2001-39), providing relief to IFS which is similar to the relief
provided under Prohibited Transaction Class Exemption 84-14 at 49 FR
9494, March 13, 1984 (PTE 84-14).
3. In September 2002, the Department filed a lawsuit entitled Chao
v. Maddaloni, et al., Case No. 02-61289, in the United States District
Court for the Southern District of Florida, in which the Partnership
and the Fund trustees were named as defendants. The relevant facts are
set forth in the Complaint filed in such action by the Department
alleging that the trustees failed to prudently manage and invest the
Fund's assets through their involvement in the Resort project. The suit
arose from the Fund's acquisition and development of the Resort
project, beginning in 1997. The Secretary alleged that the trustees
acted imprudently and without regard to the Fund participants'
interests in entering into, and continuing the project, specifically by
failing to obtain, prior to the expenditure of Fund assets, necessary
analyses for the evaluation of the economic feasibility of the project,
failing to determine the Fund's rate of return, or risk, on the
investment, failing to evaluate the qualifications and experience of
various contractors with whom they entrusted discretionary authority
with respect to the disposition of Fund assets, and paying excessive
and unreasonable fees and expenses to the contractors. In August 2004,
the parties signed a final Consent Order resolving the claims contained
in this action.\2\ Prior to the Fund's retention of IFS, the Department
notified the Partnership that it had begun an investigation of the use
of the Fund's assets in the development of the Resort.\3\
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\2\ The Application states that LaSalle has been informed that
the Fund is the successor to the former Sabine Area Pipefitters
Local No. 195 Pension Trust Fund, which was involved in the
correction of a 1988 prohibited transaction that had occurred before
the former Local 195 Pension Fund merged into the Fund in 1990. IFS
has further been informed that the correction of the prohibited
transaction did not involve any assets of the Fund except to the
extent that the Local 195 Joint Apprenticeship Committee was
assessed first tier excise taxes under section 4975 of the Code for
its use of assets of the former Local 195 Pension Fund.
\3\ Although the Department has requested documents relating to
various aspects of the Resort's development and operation, LaSalle
states that it is unaware of any investigation or enforcement action
that is targeted at the retention of Starwood or its provision of
services and/or products to the Resort.
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4. The Applicant represents that, pursuant to IFS's authority as
independent named fiduciary, and after an extensive due diligence
process, which involved issuing a comprehensive request for proposal to
numerous major real estate investment managers and personal interviews
with several finalist candidates, IFS appointed LaSalle, effective
December 14, 2000, pursuant to a comprehensive discretionary investment
management agreement (the QPAM Agreement), to serve as the QPAM for the
Diplomat Account, with broad discretionary powers to manage the
Diplomat Account.
The Application notes that LaSalle, a member of the Jones Lang
LaSalle group (JLL), is a leading global real estate investment manager
with approximately $21.5 billion of public and direct real estate
assets under management. LaSalle represents many of the world's largest
and most sophisticated institutional investors, has expertise in the
management of all major real property types (including hotels) and
frequently acts as an ERISA fiduciary and QPAM for its clients. Various
divisions of JLL have assisted (and will continue to assist) LaSalle in
connection with the Resort, subject to LaSalle's supervisory authority.
Since its appointment, LaSalle has become integrally involved in all
aspects of the Diplomat Account, and has made all of the business,
operational and fiduciary decisions for the Diplomat Account, pursuant
to the QPAM Agreement (subject to the oversight or approval of IFS, as
appropriate). The fees of IFS are paid by the Fund; the fees of LaSalle
are paid by the Partnership.
In April 2003, Diplomat Properties, Inc. was converted to its
present form, a limited liability company, and it is now known as
Diplomat Properties, LLC (DPLLC). The Fund is the sole member of DPLLC,
and both IFS and LaSalle are non-member managers of DPLLC. DPLLC
remains the General Partner of the Partnership (DPLP).
5. The Resort, located in the cities of Hollywood and Hallandale
Beach, Florida, was initially constructed in the late 1950s and
consisted of several parcels. The original Diplomat Hotel operated as a
premier hotel and country club catering to the middle-income convention
trade, but has been closed since 1992. Since their appointment, IFS and
LaSalle have overseen the continuing development and initial operation
of the Resort, including the construction, development and opening of a
destination resort with multiple operating components, including a 998-
room ocean-front convention hotel with multiple food and beverage
outlets and recreational facilities, a 217,000 square-foot convention
center, two marinas, a country club (with 60 guest rooms, approximately
8,000 square feet of meeting space, and a clubhouse), a 30,000 square-
foot spa, an 18-hole golf course and a tennis center.
6. The Application states that the process of selecting a third-
party operator for the Resort formally commenced on or about April 1,
2000, at which time Hotel Investment Partners (HIP), a hotel consulting
firm selected by ASA, sent a request for proposal to potential
operators. Upon its retention in December 2000, LaSalle reviewed the
documentation collected in connection with HIP's initial search for an
operator. LaSalle determined that it should conduct further analyses
and reach its own conclusions regarding the appropriate operator for
the Resort because, among other things, it found, as had IFS, that the
initial process was not sufficiently organized or documented. During
the first few months of 2001, IFS and LaSalle spent a significant
amount of time and effort conducting due diligence and a competitive
bidding process for the selection of a world-class branded hotel
operator for the Resort.
LaSalle performed a comprehensive review of the relevant issues,
with the assistance of its affiliate, Jones Lang LaSalle Hotels (JLL
Hotels) (a hotel advisory group staffed by lodging industry
professionals experienced in hotel operations, hotel asset management
and hotel transactions, including financing), and in coordination with
IFS and its consultant, Strategic Hospitality Advisors (a hospitality
consultant that regularly advises institutional clients on
[[Page 48772]]
the investment characteristics of hotel and resort properties,
including feasibility, acquisition, planning, design, construction,
operation and disposition of hotels and resorts) (SHA). Based on such
review, LaSalle concluded that the retention of a third-party operator
for the Resort was an important component to securing any necessary
financing and ensuring that the Fund's investment in the Project will
be managed in a profitable and professional manner. LaSalle further
concluded that the Partnership should consider retaining a major
operating company that has a significant internal infrastructure and
global marketing resources.
The Application notes that, in light of these conclusions, LaSalle
then distributed a second, very detailed request for proposal to ten
hotel operating companies, which companies then competed for the right
to manage the Resort. The selected candidates included many of the
larger international hotel operating companies, including several
brands. After a detailed analysis of each candidate's written response
to the request for proposal and a comprehensive analysis of the
performance of the candidates' comparable properties, LaSalle concluded
that, given the Resort's size, location and recent history, the
selected operator should have a strong brand, including a marketing
program, a group sales network and global distribution and reservations
systems, in order to maximize revenues throughout the year in an area
of the country (south Florida) primarily known as a seasonal
destination.
This conclusion was based in part on the fact that, while there are
large-scale independent resort hotels in south Florida that operate
successfully without the benefit of an operator's brand, those resorts
are located in the more primary, upscale destinations of Boca Raton,
Palm Beach and Miami and, in most instances, are established hotels
that have been operating for many years. In addition, outside the key
destination markets, such as Orlando, New York, Los Angeles and
Chicago, there are, according to JLL Hotels, only eight independent
hotels with over 800 rooms. In fact, LaSalle observed that all recently
opened hotels over 1,000 rooms have been affiliated with a branded
``chain.''
Through a rigorous interview process, coupled with a detailed
analysis of each candidate's written response to the request for
proposal and a comprehensive analysis of the performance of the
candidates' comparable properties, the original field of ten was then
narrowed to three major operators--Starwood, Marriott International and
Hyatt. Further interviews and negotiations with each of these three
operator candidates, including an on-site review of the Resort by each
company and a review of their comments to a proposed operating
agreement, resulted in the selection of Starwood and Marriott
International as finalists for negotiation. Following meetings with
each of these companies and their counsel to review their comments on
the proposed operating agreement, LaSalle selected Starwood, through
its operating subsidiary, Westin Management Company East (effective as
of January 12, 2006, Westin Management Company East assigned its
interest in the Operating Agreements (described below) to Westin Hotel
Management, L.P., a wholly-owned subsidiary of Starwood Hotels &
Resorts Worldwide, Inc.) (Westin), as the candidate of first choice.
Starwood is one of the world's preeminent international hotel
owners and operators (with brands including St. Regis, W Hotels, Westin
and Sheraton). Among other items considered by LaSalle in selecting
Starwood was LaSalle's conclusion that the overall cost of services and
products offered by Starwood on a centralized basis was consistent with
the amounts charged by other potential operators.
7. The Application represents that following extensive negotiations
with Starwood, on June 5, 2001, LaSalle, on behalf of the Partnership
(Owner), and Starwood (Operator) signed parallel operating agreements
(collectively, the Operating Agreements) to brand and operate the
Resort's convention hotel and spa as the ``Westin Diplomat Resort and
Spa'' and to brand and operate the country club as ``The Diplomat
Country Club and Spa,'' as part of Starwood's Luxury Collection. In the
Operating Agreements, Starwood specifically acknowledged, represented
and warranted that it is a ``fiduciary,'' as defined in section
3(21)(A) of ERISA, with respect to the Resort and all assets of the
Fund subject to the Operating Agreements, and that it is not subject to
any of the disqualifications described in section 411 of ERISA.
The Applicant asserts that the 15-year term of each of the
Operating Agreements evidences Starwood's significant, long-term
business and financial commitment to the Resort. The Operating
Agreements required Starwood to provide up to $4 million to pay for
various pre-opening expenses. The Application states that Starwood also
agreed to provide loans to the Resort (without recourse to the general
assets of the Fund, other than the Diplomat Account) to fund, among
other things and subject to certain conditions, up to $11.75 million in
operating cash flow shortfalls at any given time and up to $50 million
for debt service shortfalls at any given time.
8. The Application states that Starwood, like other national or
international branded hotel operating companies, provides many of its
services and products through itself or through wholly or partially
owned affiliates (including, without limitation, the Starwood ERISA
Affiliates \4\ or other entities in which Starwood has an ownership
interest (all such affiliates or other entities referred to herein as
the Related Companies).\5\ Many of these services and products, such as
certain advertising, marketing and promotional activities (including
frequent guest programs), reservations and distribution systems and
networks, training and the like, are typically provided on a central,
regional, ``chain'' or ``brand'' basis, rather than specifically at a
property (such services and products referred to herein as Centralized
Services). Other
[[Page 48773]]
services or products (the Additional Services) are provided by Starwood
or Related Companies on a property by property basis to properties
operated by Starwood.\6\ Starwood has informed LaSalle that, where that
is the case, these Additional Services are offered to properties owned
and operated by Starwood, as well as to properties operated, but not
owned, by Starwood (such as the Resort); in each case on the same
basis.
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\4\ The parties in interest are Starwood Hotels & Resorts
Worldwide, Inc., its wholly owned subsidiary, Westin Management
Company East, and certain related entities that, because of their
relationship with Starwood, are parties in interest by virtue of
sections 3(14) (G), (H) or (I) of ERISA or disqualified persons by
virtue of sections 4975(e) (2) (G), (H), or (I) of the Code
(Starwood ERISA Affiliates).
\5\ The Application notes that Starwood has disclosed to the
Fund that its corporate and operating structure includes divisions
or departments within Starwood or its operating subsidiary Westin
Management Company East and a variety of affiliates that regularly
deal with Starwood's network or ``chain'' of branded properties to
provide both ``centralized'' services and products and regular,
property-specific services and sources of supply. As operator of the
components of the Resort, Starwood has presented an operating plan
that will include obtaining certain products and/or services for the
Resort (including the Centralized Services and Additional Services
defined below) from Starwood, its affiliates and other Related
Companies, subject to all the restrictions in the applicable
Operating Agreement.
In the LaSalle Letter, LaSalle further explained that the
Applicant is requesting an exemption in order to permit Starwood to
contract on behalf of the Applicant with any entity in which
Starwood has an interest which arguably might affect its independent
judgment. Because of the many and diverse entities in which Starwood
from time to time has an economic interest and which are included in
its operating programs, it is not feasible to break down the various
types of relationships or to speculate how large an economic
interest would have to be to create a prohibited transaction.
Therefore, in order to cover all parties in which Starwood has an
interest that might arguably affect its judgment, Starwood includes
all entities in which it has an investment, even if the investment
is very minor, as ``Related Companies.'' The references to ``ERISA
Affiliates'' and ``subsidiaries'' are descriptive only and not
meaningful to the Applicant because they are included in the larger
group of ``Related Companies'' for which relief is requested.
\6\ Starwood subsidiaries that may be involved in the provision
of the Centralized Services and Additional Services to the Resort
include the following: Galaxy Hotel Systems LLC; Westel Insurance
Company; Westin Payroll Company; Westin Management Company East;
Global Connextions, Inc.; and Starwood Reservations Corporation.
LaSalle notes that, as used in the Application, the term
``subsidiary'' refers to entities that are majority owned by
Starwood; however, this distinction is not meaningful because the
Application covers transactions with all Related Companies, which is
a broader term that encompasses minority subsidiaries.
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The Application provides the following list of entities in which
Starwood owns a minor equity interest and with which the Resort may
enter into arrangements for products or services: LastMinute.com--On-
line provider of last-minute travel and entertainment packages.
Plansoft Corporation--On-line meeting planning company that
provides meeting planning and technology and services including the
listing of basic meeting information on Starwood hotels.
Brightware--Software licensor of e-mail automation and interactive
one-to-one marketing solutions.
Worldres--On-line Internet reservation network service provider for
hotels and other lodging establishments that allows end-users to check
availability and make real-time reservations.
Big Vine--On-line business-to-business barter marketplace.
Site 59.com Inc.--On-line provider of last-minute travel and
entertainment packages.
Classwave Wireless Inc.--Canadian company with a global strategy to
transform the delivery of data to and from mobile devices.
StarCite Inc.--On-line meeting planning company that provides
meeting planning and technology and services including the listing of
basic meeting information on Starwood hotels.
Hotel Distribution Systems LLC--Joint venture to create a stable,
low cost, high quality online distribution outlet for the services and
products of its members currently consisting of Starwood, Hilton Hotels
Corporation, Marriott International Hotels, Inc. Six Continents Hotels,
Inc. and Pegasus Solutions, Inc.
The Application notes that although the foregoing identifies the
types of arrangements that Starwood currently expects to enter into
with itself and Related Companies with respect to the Resort, it is
possible that, due to changing business needs, other arrangements with
these or other Related Companies will be consummated subject to the
terms of the Operating Agreements.
9. The Applicant states that the primary services and products
provided by Starwood and its affiliates are classified as Centralized
Services. In some cases, the products provided by Starwood and its
affiliates (with respect to both Centralized Services and Additional
Services) are incidental to the services it provides; in others they
are not. Centralized Services, and the fee structure applicable
thereto, were set forth in the Operating Agreements negotiated and
executed by LaSalle for the Resort and were, therefore, approved by a
QPAM. Changes to services and products or fees are presented to and
approved, if applicable, by LaSalle in connection with the annual
budget process (as described below). In addition, the amount of fees
for Centralized Services is limited as described above to, among other
limitations, the cost incurred by Starwood and its affiliates with no
mark-up or profit. The Application provides a description of the
Additional Services, Centralized Services and fees proposed in
connection with the Operating Agreements.\7\ The Partnership (through
LaSalle) has the right to opt out of any Centralized Service.
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\7\ The Fund notes that due to the ever changing nature of the
hospitality business, it is anticipated that services and products
(whether Centralized Services or Additional Services) may be added,
discontinued or modified from time to time in the future, subject to
the limitations and LaSalle's rights to approve any such changes as
described in the Operating Agreements.
---------------------------------------------------------------------------
The Applicant provides that Centralized Services for which fees are
payable to Starwood and affiliates include the following major
components:
Reservations Services, for which there are fees based on gross room
revenue and per room charges, plus additional fees for specialized
services.
Frequency Programs, which are the preferred guest programs and
airline programs used to increase loyalty to the Starwood brands. Fees
are a percentage of qualified charges \8\ plus usage fees for training,
program materials, program audits, bonus points and customer service.
---------------------------------------------------------------------------
\8\ In the LaSalle Letter, LaSalle explained that ``qualified
charges'' are charges on the guest's room account based on the U.S.
dollars or equivalent spent on eligible room rate, food and
beverage, direct dialed telephone, laundry/valet, and in-room movies
only. Qualified charges also include food and beverage charges of
US$10 or more in participating Starwood dining outlets, even if the
guest is not a registered guest. Other charges such as parking,
business center, retail stores, greens fees, etc., as well as taxes,
gratuities, service charges and other applicable charges, such as
energy charges, resort fees, etc, are not qualified charges. Banquet
or meeting room charges billed back to a member's room are not
qualified charges. Amounts earned or accrued for charges master-
billed or paid by wholesale rates including WFNR, and all other
rates from pre-paid channels, such as but not limited to,
priceline.com, expedia.com, hotels.com, hrn.com, hotwire.com,
lastminute.com, site59.com, etc. tour or tour operator or other
vouchers or for certain other discounted rates including, without
limit, airline vouchers or for certain other discounted rates are
also not qualified charges. Charges from tour operator rates;
wholesaler rates; stays longer than 30 days, Free Night Awards, TAED
rates; room rates billed to master account, crew room rates, and
employee rates are not qualified charges.
---------------------------------------------------------------------------
Sales and Marketing Services, for which there is a fee based on
gross revenues plus certain specified transaction based fees.
Human Resources, which provides administration of employee benefits
and payroll for the Resort for a per capita and per check fee
respectively.
Information Technology, which includes the Integrated Property
System, which is the standard and mandated property management system
for all Starwood hotels and resorts; the Starwood SAP Accounting
System; Technology Management Services; Revenue Management Services,
and Network Services. Oracle has been selected as Starwood's database
for all future systems, including StarwoodONE, the Starwood company
portal. In order to use StarwoodONE (and any of the following systems:
Opera PMS, Starwood Customer Relationship Marketing System, Topline
Prophet, and Rate Shopper), the Resort must participate in the Starwood
Enterprise Oracle License Program, either through a purchase of the
right to use the licenses or payment of an annual user fee.
The Application notes that, in addition, it will become mandatory
over the next few years for all Starwood hotels to offer high-speed
Internet services in accordance with Starwood's Broadband Standards.
Broadband refers to the technology infrastructure that delivers large
amounts of data, voice and video over a network. There are two
components to the Broadband Standards--the Guest Portal Standards and
the Broadband Technology Standards. The Starwood Broadband
[[Page 48774]]
Guest Portal is the customer access point to the Internet and is a
mandatory Westin standard requiring the payment of fees to Starwood
based on estimates by Starwood of its costs and expenses. The costs and
expenses are tracked by Starwood and the fees are adjusted up or down
as appropriate. The Broadband Technology Standard can be met by the
property by using the Starwood Broadband Solution or another solution
that meets required standards.
Internal Audit Services, with fees based on the size of the hotel.
Six Sigma, which applies training and other tools to improve
business processes in order to increase revenue and decrease costs.
Reimbursable Expenses. The Application states that, on an as needed
basis, properties pay directly or reimburse Starwood and its
affiliates, for specified charges and fees, which may include, without
limitation, rooms programs and services, food and beverage programs and
services, travel expenses of supervisors, website design and
consulting, training courses, brand audits, central accounting,
treasury services, property directories and other brand collateral, and
payments made to third parties for items such as surveys, employee
handbooks and similar publications, property photography, internet
booking services, printing and distribution of manuals and similar
publications, and the costs incurred by Resort personnel in attending
management seminars and conferences organized by the corporate
divisions of Starwood and its affiliates.
The Application represents that, in some cases, Centralized
Services are provided in exchange for a fee that cannot be affected by
Starwood's exercise of discretion. For example, the fee for certain
Centralized Services is based on the number of rooms at the Resort.
However, there are other Centralized Services with respect to which
Starwood or a Related Company receives a fee for providing the service
or product that is based on the level of usage by the Resort where
Starwood can, through the exercise of its discretion as operator of the
Resort, affect the level of usage by the Resort of the product or
service. For example, one Centralized Service involves SPG Bonus
Points, pursuant to which Starwood, through the General Manager of a
particular hotel, can attempt to increase business during slow periods
by running a promotion that increases the frequent guest award for
stays at that hotel. The cost of the promotion, which is 1.25 cents for
each bonus point awarded, is paid to a fund maintained by Starwood and
used to pay the cost of the program, which includes the overhead cost.
Another example of this situation involves training courses
provided by Starwood on a centralized basis. For example, Starwood
offers at the regional level an ``ABCs of Housekeeping'' training
course. A fee, based on the cost of the program (including overhead),
is paid to Starwood and is based on the number of persons who attend.
Since this course is mandatory for all housekeeping staff, Starwood can
theoretically affect the level of its fee for this program by hiring
more housekeeping staff. There are other training courses, such as
arrival training, that are not mandatory for all of the staff of a
department. This gives Starwood, through the hotel's General Manager,
the discretion as to which hotel employees receive arrival training
and, therefore, the level of fees it receives.
10. The Applicant represents that in addition to the Centralized
Services involving Starwood and Related Companies, the Resort may also
acquire Additional Services (i.e., arrangements for products or
services) with entities in which Starwood has made an investment, but
which are not controlled by Starwood. These Additional Services are
being provided by entities connected to Starwood. One example of the
Additional Services is insurance. LaSalle has decided to obtain general
liability, automotive liability, employment practices liability
insurance, automobile physical damage and umbrella/excess liability
coverage through the Starwood Risk Management Program. Starwood
provides this coverage to its owned hotels and makes it available to
managed hotels on an optional basis for all or only selected coverage.
(There is an exception for workers' compensation insurance, which must
be provided through Starwood because Starwood is the employer of the
employees who operate the Resort.) The Resort will receive first dollar
protection (with no deductibles) with respect to this coverage with the
exception of automobile physical damage coverage, which has a small
deductible, and employment practices liability insurance, which has a
$100,000 deductible for the Resort vs. a $250,000 deductible for the
policy purchased by Starwood. To fund this coverage, Starwood purchases
high deductible insurance and funds projected losses and related
administrative costs through its subsidiary Westel Insurance Company,
with premiums to Westel allocated to participating hotels on a cost
recovery basis. The potential underwriting surplus is retained or the
potential deficit is absorbed by Westel. LaSalle believes that the cost
of insurance purchased in this manner is more attractive to the
Partnership than if it purchased comparable insurance through an
unrelated party.
11. The Application notes that another program Starwood typically
implements at hotels it manages is the Associate Room Discount Program
(ARD Program) that provides discounted room rates and discounted food,
beverage and other amenities (to be determined in advance with
LaSalle's approval) at participating hotels, including the Resort, for
Starwood associates (including employees of Starwood and their
immediate families) or associates of participating Starwood franchise
hotels worldwide and their immediate families. Starwood associates are
all regular full time and part time employees who have been employed by
Starwood entities or participating Starwood franchise hotel employers
for more than 90 days. The ARD Program is offered to all of the
properties that Starwood owns, manages or has an interest in. All
hotels owned or managed by Starwood participate in the Associate Room
Discount Program. Most hotels franchised by Starwood also participate
in the Program.
The Applicant states that under the ARD Program, the Resort's
management would have control over the number of rooms rented at the
discounted rate on any given night based on occupancy levels at the
Resort (and where this would not cause higher rate business to be
displaced). The discounted rates under this program fully cover the
variable cost to the hotel for the use of the room and the cost to the
hotel of the food, beverage and amenities. In return for its
participation in this program and its offering discounted rates, the
Resort enjoys a substantial benefit in that employees of the Resort are
entitled to discount rates at other hotels participating in the
program. The Application asserts that this allows the Resort to provide
its employees with a valuable employee benefit that is low in cost
relative to the value it provides (particularly because it is available
only when rooms could not otherwise be sold at a higher rate). In
addition, since this arrangement is typically offered by Starwood and
all other international branded operators, refraining from offering
this benefit to its employees would place the Resort in a distinct
hiring disadvantage vis-[agrave]-vis other competing hotels. Further,
to the extent that an individual taking advantage of the ARD Program
spends money on food, beverage and incidentals, he or
[[Page 48775]]
she will bring additional revenues to the Resort.
The LaSalle Letter noted that there is not a specific document
executed by the Partnership describing the ARD Program that LaSalle, on
behalf of the Partnership, has agreed to or signed. However, LaSalle
provided to the Department a March 17, 2004 Starwood Corporate/
Divisional HR Policies and Procedures document on ``Hot Rates,''
Starwood's Associate Room Discount policy. LaSalle, on behalf of the
Partnership, and Starwood entered into the Operating Agreements. In
these agreements, Starwood has the authority to determine employment
practices, (including wages, hiring, discipline, and discharge), and
similarly has the authority to participate in ``Centralized Services,''
or those programs that Starwood performs as Operator at all other
hotels managed by Operator. Although LaSalle did not specifically
negotiate the terms of the ARD Program, it approved of the
participation in the ARD Program as part of a more global approval of
the terms on which Starwood was retained. LaSalle elected not to opt
out of the ARD Program because it concluded that the program was
standard industry practice and that the Resort would enjoy a
substantial benefit from the program. In addition, from time to time,
LaSalle conducts operational audits, the most recent of which was March
31, 2005, to ensure that Starwood is complying with its procedures.\9\
Although the scope of these operational audits varies from audit to
audit, a review of Starwood's compliance with the ARD Program has been
the subject of some prior audits.
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\9\ See 13.(c) below for more information on the latest
operational audit conducted by LaSalle.
---------------------------------------------------------------------------
In the LaSalle Letter, LaSalle stated that it would be overly
burdensome to cross-reference the very long list of Fund participants,
Trustees and contributing employers against the very long list of
participants in the ARD Program. However, LaSalle confirms that no
participant, Trustee or contributing employer of the Fund could be a
participant in the Associate Room Discount Program by virtue of that
status. Rather, such an individual would only be a participant in the
Program if he or she were an employee of a Starwood entity or a
participating franchise hotel (in accordance with the eligibility
criteria described above).
12. Section 5.01 of the Operating Agreements requires that: With
respect to its decisions concerning the operation of the [Resort], the
Operator shall at all times act in good faith and in the best interests
of the Owner, using all commercially reasonable efforts to maximize the
profits from operation of the [Resort] for [the Partnership], subject
to the terms and conditions of this Agreement.
The Applicant represents that consistent with this requirement,
Starwood has indicated that as a major owner of hotels, its primary
objective in establishing Centralized Services and Additional Services
is to deliver value to all hotel properties it represents. LaSalle
believes that it is through the aggregation of these properties, the
implementation of demonstrated practices and its hospitality industry
expertise that Starwood is able to provide services and products that
will result in improved operating performance beyond that which can be
provided by an operator of a single hotel or smaller group of hotels.
LaSalle believes that (a) by centralizing this sourcing function,
Starwood is also able to capture economies of scale designed to reduce
the cost of the procurement function in the Resort and (b)
participation in these programs by the Resort should result in
increased efficiencies and lower operating costs.
In this regard, LaSalle states that there is objective industry
data indicating that chain hotels are better performers than
independent hotels in terms of both average daily rate and occupancy.
While there is data comparing chain and independent hotels on an
overall performance basis, there are no specific benchmarks that allow
for a comparison of specific services. Accordingly, at the time it
retained Starwood on behalf of the Partnership, LaSalle considered the
generally accepted principle in the hospitality industry that such
services can be aggregated and delivered more effectively and
efficiently on behalf of a chain of hotels rather than individual
hotels. In so doing, it relied on various sources of industry data
bearing upon this issue. By way of example, LaSalle provided to the
Department an example of one data compilation, prepared by Smith Travel
Research, on which LaSalle relied when it decided to retain a chain
hotel that provides Centralized Services, rather than an independent
hotel that does not. In addition, LaSalle notes that there are several
services provided by a chain such as Starwood that could not be easily
replicated by an individual property, such as a frequent traveler
program, reservation center, and similar services. No benchmark would
exist that compares the services of chain and independent hotels in
that regard because the independent hotels do not provide the service
at all.
LaSalle has concluded that the Centralized Services and Additional
Services are likely to result in improved operating performance that is
both monetary and non-monetary. Starwood has represented to LaSalle
that utilizing these services and products will result in cost savings
through aggregation of Starwood's purchasing and organizational power,
and, as more fully described below, the Operating Agreements include
specific provisions to assure that the Resort will benefit from such
arrangements. LaSalle also shares Starwood's belief that value will be
achieved through enhancements in quality and service resulting from the
economies of scale and joint participation in such arrangements with
Starwood's branded hotels. In attempting to select the right supplier
for the hotels it operates, Starwood considers a variety of other
factors, such as financial, operational (including availability of
supplies), health and safety issues, and LaSalle ultimately expects
that Starwood's services and purchasing program will maximize the value
of the properties.
13. The Application states that as of January 2003, Starwood's
portfolio consisted of over 750 properties owned, managed or franchised
by Starwood in 80 countries. By aggregating certain service and other
activities described above, Starwood believes that it obtains a
substantial net cost savings for owners (including itself) of
properties it manages. Nevertheless, recognizing the Partnership's
unique status as an ERISA plan asset, the Applicant asserts that
Starwood has agreed to significant conditions and that the Operating
Agreements include stringent limitations on Starwood's ability to enter
into transactions and arrangements concerning the Resort. The
Application provides the following examples.\10\
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\10\ The Partnership and Starwood have entered into two
Operating Agreements, one covering the country club and spa and one
covering the hotel and convention center. The Application notes that
although it references specific terms and conditions related to the
Resort in general, these terms and conditions are included in each
of the two Operating Agreements.
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(a) Limitations on Transactions and Arrangements
In order to ensure that Starwood treats the Resort at least as well
as the other properties it manages (and to make it more likely that the
Resort will be operated in accordance with customary industry
standards), the Operating Agreements provide that the general operating
policies applied to the Resort must (in all material respects) be at
prices and on terms and conditions no less favorable to the Resort (in
terms of
[[Page 48776]]
increasing gross revenues and decreasing gross operating expenses) than
the general operating policies applied by Starwood and/or its
affiliates to the other properties managed by Starwood and/or its
affiliates. Additionally, Starwood is required by the Operating
Agreements to act in the best interests of the Partnership and to use
all commercially reasonable efforts to maximize its profits from the
Resort.
There are limitations on Starwood's ability to enter into
contracts. Specifically, any contracts, leases, licenses and concession
agreements (other than collective bargaining agreements or terminable
group sales contracts) providing for an aggregate annual expenditure or
revenue that exceeds $50,000 for the Resort, or with a term in excess
of one year for contracts,
(i) require the Partnership's prior approval (through LaSalle),
whether as part of the Annual Operating Plan or otherwise; and
(ii) must be subject to the competitive bidding procedures included
in the Operating Agreement. Similarly, any single purchase providing
for the purchase of products and services that requires an expenditure
that exceeds $50,000 requires the Partnership's prior approval (through
LaSalle), whether as part of the annual operating plan or otherwise.
Capital expenditures in excess of $25,000 (as adjusted for increases of
CPI), or in excess of $100,000 (as adjusted for increases of CPI) in
the aggregate in any fiscal year, also require Partnership approval.
There are specific limitations on the fees that may be charged for
Centralized Services, which may not be greater than the lowest of: (i)
Fees initially agreed upon by the parties in the Operating Agreements
(which are the same as those currently offered to other, similar
properties that Starwood manages), (ii) Starwood's prevailing fee for
such services as offered from time to time, (iii) Starwood's cost, with
no profit or mark-up, or (iv) 5% of gross revenues (exclusive of
certain occupancy-related charges, such as third-party reservations
fees and frequent guest program charges) of the hotel or country club,
as applicable.
Centralized Services and Additional Services provided by Starwood
affiliates must be provided at prices and on terms and conditions no
less favorable to the Resort than the fees and terms and conditions
charged or included generally by Starwood (and its affiliates) to other
properties Starwood manages. The fees charged to the Resort for
Centralized Services can only be modified on a system-wide basis (i.e.,
not just for the Resort).
The fee for reservations services, which includes participation in
Starwood's proprietary reservations network system, is determined
according to actual usage of the services and system on a basis no less
favorable than that of any other property that is furnished such
services and system. The Application notes that, to the extent that
usage is determined by individuals unrelated to Starwood or Related
Companies, it is likely that the use of this system will not constitute
a prohibited transaction in the first instance.
Under section 5.07 of the Operating Agreements, unless the
Partnership's prior consent is obtained (as part of the approval of the
Annual Operating Plan or otherwise), any transaction for the purchase
of products or services from Starwood, its affiliates \11\ or any
entity in which Starwood or any of its affiliates has any ownership,
investment or management interest or responsibility must (i) be on
prices and terms better than the prices and terms that could be
obtained from third parties for delivery or performance in Hollywood,
Florida (for the hotel and convention center) or Hallandale Beach,
Florida (for the country club and spa) and (ii) not exceed $50,000. To
ensure that this provision is not undermined by suspect bidding
practices, the Operating Agreements also provide that Starwood may not
solicit bids in a manner that could result in a right of first refusal,
or any other bidding advantage, for Starwood or any of its affiliates,
as defined in the Operating Agreement.
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\11\ Section 1.01 of the Operating Agreement defines an
``Affiliate'' of Starwood as ``any [other] person or entity directly
or indirectly controlling, or controlled by, or under common control
with [Starwood].''
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The Partnership (through LaSalle) has the right to opt out of any
Centralized Services and may choose not to participate in the Associate
Room Discount Program. As the Additional Services are provided on a
case-by-case basis and are subject to the limitations described above,
the Partnership may elect not to receive any Additional Services.
(b) Partnership Involvement in the Budgeting Process
The Operating Agreements include detailed and elaborate budgeting
and reporting requirements that limit significantly Starwood's
discretion with respect to all transactions and purchases, particularly
those with or from Starwood and/or its affiliates. Starwood must submit
to the Partnership (no later than 90 days before the commencement of
each fiscal year) an Annual Operating Plan for the Resort. The
Partnership (through LaSalle) has specific line-item approval of the
Annual Operating Plan, which includes monthly estimates and covers the
operating budget (including departmental revenue and expenses, taxes,
insurance and reserves), the capital budget, the marketing plan, the
advertising program, working capital requirements, litigation and any
other matter reasonably deemed appropriate by the Partnership.
Starwood is required to work within the approved Annual Operating
Plan, with very strict parameters for permitted variation. During any
year, Starwood may not, without the Partnership's prior approval
(through LaSalle), and subject to certain variable or
``uncontrollable'' expenses (which are defined in the Operating
Agreements and include such items as real estate taxes and the like),
(i) incur any cost or expense that would cause total expenditures for
any line item to exceed the budgeted expense for that line item by more
than 10%, (ii) incur any cost or expense that would cause total
expenditures for any department to exceed the budgeted expenses for
that department by more than 5%, or (iii) incur any cost or expense
that would cause total operating or capital expenditures to exceed the
budget by more than 2%. Other than for emergency reasons, Starwood may
not exceed the budgeted amount for capital expenditures.
(c) Reporting and Disclosure Obligations
The Applicant asserts that the Operating Agreements allow the
Partnership and LaSalle to monitor Starwood's compliance with the
budget and all major expenditures and transactions. The Partnership,
through LaSalle, controls all bank accounts, and has signatories on the
operating accounts that Starwood will use to manage the Resort. Upon
the occurrence of an Event of Default (as described below), the
Partnership may freeze these accounts and prevent Starwood from making
any additional payments.
The Operating Agreements also provide that representatives of
Starwood and the Partnership (through LaSalle) must meet no less
frequently than monthly, for the purposes of (i) reviewing each annual
operating plan; (ii) analyzing Starwood's actual performance against
the annual operating plan; (iii) reviewing and updating rolling revenue
disbursements and three-month forecasts for the Resort; and (iv)
analyzing Starwood's actual
[[Page 48777]]
performance against the performance of an applicable competitive set of
resorts.
Under Article 11 of the Operating Agreements, LaSalle, on behalf of
the Partnership, has the right to conduct audits with respect to the
Resort. The Partnership receives interim (delivered within 20 days
after the end of each fiscal month) and annual (audited, and delivered
within 90 days after the end of each fiscal year) accounting reports,
which include a comparison of actual to budgeted expenses. The
Partnership, through LaSalle, has the right to have these reports
audited by an independent accounting firm. If any discrepancy is
discovered with respect to payments to Starwood or any of its
affiliates, including in the payment of fees for Centralized Services
or reimbursement of expenses, the Operating Agreements provide for
adjustment within 10 days following notice thereof. In addition, if the
audit discloses weaknesses or the need for changes in internal control
systems pertaining to safeguarding the Partnership's assets, Starwood
is required to make the necessary changes.
By letter dated July 13, 2006 from LaSalle to the Department, La
Salle provided that the last operational audit was completed on March
31, 2005 and was conducted by a third party, Gallogly, Fernandez &
Riley, LLP, a prominent local accounting firm. A written report was
provided to LaSalle and found no breaches of the Operating Agreements.
The scope of the audit was to review areas such as the calculation and
payment of management fees, allocation of salaries and wages, return of
vendor rebates, use of complimentary rooms and other similar areas
which are prone to miscalculations, inaccuracies or abuse.
Additionally, LaSalle represented that they are not aware of any areas
in which Starwood has exceeded its authority under the Operating
Agreements and that LaSalle has not asked Starwood to discontinue
providing any of the Centralized Services that Starwood provides under
the Operating Agreements. LaSalle noted that it did instruct Starwood
not to participate in the Starwood program for Worker's Compensation
and elected to obtain coverage through a third-party.
(d) Recourse for Breach
As described above, the Partnership, acting through LaSalle,
exercises a significant level of oversight through the budgeting,
reporting, monitoring and audit process, which will facilitate
LaSalle's ability to detect and rectify any violation of the
restrictions discussed above. If Starwood breaches its obligations
under the Agreement, there are readily exercisable avenues of recourse
for the Partnership.
For example, upon the occurrence of an ``Event of Default,'' (which
includes breaches of material covenants, undertakings, obligations or
conditions (which are not cured within 30 days), the Partnership may
terminate the Operating Agreements (or the relevant one) and pursue any
other remedies available to it in law and in equity, other than those
specifically excluded in the applicable Operating Agreement.
Furthermore, as the funding of the operations of the Resort is
primarily done through the Partnership's agency and reserve accounts,
upon the occurrence of an Event of Default, the Partnership may freeze
these accounts and prevent Starwood from making any additional
payments.
Additionally, the nature of the relationship between Starwood and
the Partnership is one of fiduciary and agency. Accordingly, if, for
any reason, the Partnership determines that Starwood is putting its
assets at risk, the Partnership could protect itself by terminating the
agency and demanding possession of the Resort.\12\
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\12\ The Application provides that such an action could subject
the Partnership to damages if, for example, the termination were a
breach of contract. However, there is an extra layer of protection
afforded the Partnership because it would have the right to remove
Starwood from the Resort during the pendency of any dispute,
assuring the Partnership that if such a dispute were to arise, it
could conduct the litigation after Starwood left the property.
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The Partnership is also entitled to indemnification with respect to
any claims, demands, actions, penalties, suits and liabilities arising
from Starwood's breach of fiduciary duty, violation of ERISA or breach
of or default on the Operating Agreements.
14. LaSalle, after consulting with JLL Hotels (its hotel advisory
firm) and following substantial review, determined that:
(a) The provision of Centralized Services and the Additional
Services is a critical component of management by a major third-party
branded operator in order to allow the managed property to realize the
benefits of retention of such an operator;
(b) Given their existing infrastructure and agreements, neither
Starwood nor any major competitive national or international third-
party operator could, as a practical contractual matter, provide these
types of services and products on an effective basis without these
sorts of arrangements;
(c) The effect of aggregation in a multi-property system (e.g.,
enhanced by the buying power of over 750 hotels) and the affiliate
relationships inherent in these arrangements are both reasonable and
customary and, in light of the effect on costs and revenues, beneficial
to the Partnership, as owner of the Resort;
(d) The Partnership will be able to monitor these arrangements in
an effective manner through the significant and ongoing controls
available to it under the Operating Agreements (to be exercised by
LaSalle); to the extent it determines that it is advisable to do so, it
can opt out and/or discontinue some or all of these arrangements;
(e) As noted above, in connection with the operator selection
process, LaSalle reviewed in detail the Centralized Services offered by
Starwood and concluded that the overall cost of services and products
offered by Starwood on a centralized basis was consistent with the
amounts charged by other potential international branded operators; and
(f) Delivery of services and products such as the Centralized
Services and Additional Services and participation in programs such as
the Associate Room Discount Program is customary in the hotel industry,
and comparable operators, such as Hilton, Marriott International and
Hyatt, have similar policies and processes.
Based on these determinations, LaSalle concluded that it would be
appropriate to submit an application to the Department for the reasons
set forth below.
15. As noted above, the transactions undertaken by Starwood are
subject to the authority and general direction of LaSalle. Pursuant to
the IFS Agreement, IFS is the independent named fiduciary with respect
to the Diplomat Account. IFS retained LaSalle to serve as investment
manager and QPAM with respect to the Resort pursuant to the QPAM
Agreement, which provides that IFS retains significant oversight
responsibilities with respect to LaSalle's performance hereunder.
Starwood, as property manager for the Resort, is acting under the
authority and general direction of LaSalle pursuant to the Operating
Agreements. As discussed above, the Operating Agreements contain both
significant limitations on the ability of Starwood to exercise
discretion and significant oversight of Starwood by LaSalle.
(a) Centralized Services and Additional Services
(1) Self-Dealing Transactions
Because of the additional fees that could be earned by Starwood or
a Related Company as a result of management decisions by Starwood,
[[Page 48778]]
Starwood could be viewed as having an interest that might affect its
judgment in violation of section 406(b) of ERISA. Accordingly, Starwood
seeks relief to the extent that either (i) the Related Company is a
Starwood ERISA Affiliate or (ii) Starwood has an interest in the
Related Company that could arguably affect its judgment in operating
the assets of the Partnership.
(2) Party-In-Interest Transactions Involving Non-Incidental Goods
Starwood's corporate and operating structure as well as its
contractual obligations result in arrangements pursuant to which
Starwood (or Starwood ERISA Affiliates) would be providing services
and/or selling products to the Partnership. Any furnishing of services
or products to the Fund by, or transfer of Fund assets to, Starwood or
Starwood ERISA Affiliates could constitute a prohibited transaction in
violation of ERISA and the Code, absent the applicability of a specific
exemption.\13\
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\13\ The Application notes that the provision of Additional
Services is often by Related Companies in which Starwood owns less
than 10% of the total outstanding equity. LaSalle believes that in
cases in which Additional Services are provided by Related Companies
that are not Starwood ERISA Affiliates, the provision of Additional
Services would not constitute a prohibited transaction under section
406(a) of ERISA because these entities in which Starwood has made an
investment are not parties in interest or disqualified persons.
Accordingly, relief is not sought in that circumstance. The
Department expresses no views as to whether selection of these
entities by Starwood would raise any issues under section 406(b) of
ERISA.
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Notwithstanding the foregoing, the Application asserts that most
such transactions will not constitute prohibited transactions (and
relief is not sought with respect thereto) because specific exemptions
will apply in most cases. To the extent that Centralized Services and
Additional Services consist of services (as opposed to goods that are
not incidental to such services), section 408(b)(2) of ERISA would
exempt these services from the prohibited transaction rules because the
services are ``reasonable arrangements'' under which Starwood (or an
entity related to Starwood) provides ``services necessary for the
establishment or operation of the plan, if no more than reasonable
compensation is paid therefor[e].'' The Department notes, however, that
section 408(b)(2) of the Act provides no relief from violations of
section 406(b) of ERISA that may arise in connection with any provision
of services.
The Application states that section 408(b)(2) of ERISA does not
provide an exemption with respect to goods that are not incidental to
the furnishing of necessary services described in the preceding
paragraph. PTE 84-14 would generally provide relief for transactions
where a QPAM, e.g., LaSalle, or a property manager acting under its
authority and general direction, approves a particular transaction.
However, the Application notes that PTE 84-14 generally does not
provide relief from violations of section 406(b) of ERISA. Accordingly,
to the extent that the property manager has limited discretionary
authority to affect the amount of non-incidental goods purchased by the
Partnership, the Application states that this could constitute a
prohibited transaction that is not exempted by either PTE 84-14 or
section 408(b)(2) of ERISA. Relief is, therefore, being sought for such
transactions.
(b) Associate Room Discount Program
As a participant in the Associate Room Discount Program, the Resort
provides Starwood associates, including its employees and employees of
certain Starwood ERISA Affiliates, or associates of participating
Starwood franchise hotels with discounted room rates and discounted
food, beverage and other amenities, subject to various limitations.
Under section 3(14) of ERISA, the term ``party in interest''
includes employees of Starwood, an entity providing services to the
Fund, and certain Starwood ERISA Affiliates, as well as certain other
individuals (such as family members of parties in interest). In
addition, by offering these discounts to its associates, Starwood could
be viewed as dealing with the assets of the Fund in its own interest or
acting on behalf of the associates, who could be viewed as parties with
interests adverse to those of the Fund. Accordingly, the provision of
discounts to employees of Starwood or Starwood ERISA Affiliates and
their families could constitute a prohibited transaction in violation
of ERISA, absent the applicability of a specific exemption.\14\
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\14\ The Application notes that Part IV of PTE 84-14 (regarding
Transactions Involving Places of Public Accommodation) would not
provide an exemption for the Associate Room Discount Program because
the rooms, food, beverage and other amenities are not furnished on a
comparable basis to the general public. However, the rooms are not
made available under the Associate Room Discount Program if they
could otherwise be sold to the public at a higher rate. In addition,
in each case, the discounted rates fully cover the variable cost to
the hotel for the use of the room and the cost to the hotel of the
food, beverage and amenities.
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16. LaSalle believes that Starwood's ability to provide (by itself
or via Related Companies) the Centralized Services and Additional
Services provides significant operational and economic benefits to the
Partnership and, therefore, the Fund. LaSalle has concluded that the
provision of these sorts of services is a critical component of
management by a major third-party branded operator. After careful
consideration and full analysis during the operator selection process
(as described above), LaSalle concluded that the retention of a major
international branded hotel operator was in the best interests of the
Partnership because it would, among other things, increase the gross
revenues and/or decrease certain expenses generated by the Resort, as
well as permit the Partnership to obtain any necessary financing on
more desirable terms than may otherwise be available to the
Partnership. Services, such as the Starwood proprietary group sales and
global reservations system, should provide the Resort with greater
occupancy and revenues than could be obtained without engaging such a
brand and operator.
LaSalle asserts that the conflicts of interest that arise due to
the fact that these services are provided by Starwood or a Related
Company can be mitigated, if not eliminated, by (i) restrictions in the
Operating Agreements relating to the amount and nature of charges for
such services and products and the requirement that such arrangements
be beneficial to the Partnership, such as those discussed above; (ii)
the ability of the Partnership to review the effect of these
transactions through its review of its financial information; and (iii)
the Partnership's ability to opt out or discontinue some or all of
these services or products.
While the Partnership is entitled not to participate in certain
Centralized Services or Additional Services and obtain the products and
services on its own, overall these arrangements provide precisely the
types of advantages that the Partnership (and LaSalle) intended to
obtain by engaging a major international branded hotel operator to
manage the Resort. For its part, Starwood has contractual arrangements
in place with some Related Companies and other entities that require
that Starwood utilize these entities in providing products and/or
services, or that require a specific manner of obtaining services or
products through these entities for its own properties.
Based on information obtained during the process of selecting a
brand and an operator for the Resort, as well as the experience of JLL
Hotels, LaSalle believes these sorts of arrangements are customary in
(and endemic to) the hotel
[[Page 48779]]
industry, and that each of the other candidates for operator--including
the other finalist candidates (i.e., Hyatt and Marriott) have the same
or similar arrangements. Therefore, it is extremely unlikely that the
Partnership would be able to continue to retain a major hotel operator
that would not have similar arrangements.\15\ LaSalle believes that, if
the Partnership were forced to opt out of these arrangements, it would
lose important benefits of being part of a major national branded
operation (which, in LaSalle's considered view, would likely
substantially reduce the profitability of the Resort and its value as
an investment of the Fund).
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\15\ The Application notes that even if the Partnership were
able to negotiate a different agreement with an alternative branded
operator, it would incur the significant expense of negotiating
another complicated operating agreement with the newly selected
operator, whom both IFS and LaSalle believe would not be more
qualified than Starwood to operate the Resort. Additionally, the
Operating Agreements provide terms and conditions that are extremely
favorable to the Partnership. There is a significant risk that an
Operating Agreement with another entity would contain significantly
less favorable terms and conditions.
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In addition, as discussed above, the Operating Agreements provide
significant limitations on Starwood's use of affiliated entities. If
products or services are provided to or performed by Starwood
affiliates, as defined in the Operating Agreements, they must be
(unless approved by the Partnership, through LaSalle), in the
aggregate, on terms and prices lower (or at least as favorable) than
those that could be obtained from unaffiliated parties in the relevant
market. The fee for a significant number of these services or products
(whether performed by affiliates or non-affiliates) may not exceed
``the cost incurred by [Starwood or its affiliates] * * * with no
profit or mark-up.'' Specific approval by LaSalle is required for
agreements or purchases that are in excess of $50,000, or with a term
in excess of one year for agreements, whether they are made with
affiliates or with unrelated third parties.
With respect to the Associate Room Discount Program, the Applicant
notes that the Resort's participation enables the Resort to offer its
employees discount rates at other hotels participating in the program.
Although this provides employees with a valuable benefit that attracts
high-level candidates, it is relatively low in cost to provide
(particularly because it is available only when rooms would otherwise
remain vacant and would not generate revenue). In addition, since this
arrangement is typically offered by Starwood and all other
international branded operators, refraining from offering this benefit
to its employees would place the Resort in a distinct hiring
disadvantage vis-a-vis other competing hotels.
The Application states that the percentage of the Fund's assets
involved in the provision of any service or the sale of any products by
Starwood or a Related Company or with respect to the Associate Room
Discount Program is not currently determinable. However, as discussed
in greater detail above, the Operating Agreements include various
protections against the use of significant assets in these transactions
without the Partnership's approval. These include, by way of example,
budgeting requirements, prohibitions on incurring costs significantly
in excess of budget, specific limitations on the costs of Centralized
Services, and requirements for Partnership approval of significant
expenses and contractual undertakings.
Accordingly, through written, enforceable assurances from Starwood
in its agreements with the Partnership, LaSalle believes it has
adequately provided for the Partnership's ability to profit from these
arrangements and to control any abuse of authority or potential breach
of duties by Starwood; but relief is sought in light of the concern
that such transactions would otherwise be viewed as prohibited
transactions.
17. The Applicant asserts that the Partnership, the Fund and the
Fund's participants and beneficiaries would suffer hardship and
substantial economic loss if this Application were denied because the
prohibited transaction rules of ERISA and the Code would not permit
Starwood (or Related Companies) to provide certain Centralized Services
and Additional Services and to participate in the Associate Discount
Room Program. If this Application were to be denied, the Partnership
may have to opt out of all of these arrangements and obtain the
products and/or services on its own, likely on less favorable terms, or
LaSalle will need to be intimately involved in managing, negotiating
and approving each and every transaction involving the purchase of
products and/or services, which would be very costly and highly
impractical and negate much of the benefit to be derived from the
Operating Agreements with Starwood and from engaging a major
international branded hotel operating company. The Applicant states
that the arrangements for Centralized Services and Additional Services,
as described above, provide precisely the types of advantages that the
Partnership (and LaSalle) intended to obtain by engaging a major
international branded hotel operator to manage the Resort, such as
increased operating revenues and economies of scale designed to reduce
procurement costs. Additionally, LaSalle (and its and IFS's hotel
advisors) has concluded that, given the size and location of the
Resort, the utilization of the Centralized Services and Additional
Services (such as a strong marketing program, groups sales network and
reservation system) is absolutely essential to achieve acceptable
occupancy rates, and to ensure that the Fund's investment is managed in
a profitable and professional manner. Thus, the Fund would suffer
significant economic loss and substantial hardship if, as a result of
its inability to enter into transactions that are otherwise standard in
the hotel industry, it was unable to retain (or optimally utilize the
resources of) a major branded operating company with significant
internal infrastructure and marketing resources. LaSalle is also of the
opinion that maintaining an international branded operator enhances the
ability of the Fund to obtain financing for the Resort, should this be
needed in the future.
18. The Application requests that the exemption be made applicable
as of June 5, 2001, the execution date of the Operating Agreements. The
circumstances surrounding the transactions are that the Fund and
LaSalle believe that these products and/or services are essential for
effective management of the Resort and in the interest of the Fund and
its participants. If it had not engaged in these transactions, the Fund
would not have been able to realize the critical benefits of retaining
a third-party operator.
19. The Applicant represents that an exemption would be
administratively feasible for the Fund because it would allow Starwood
to operate the Resort in accordance with its industry accepted,
standard procedures. In contrast, if the exemption were not granted, at
the present time, the Partnership would incur significant
administrative and operating costs in purchasing and obtaining the
services and/or products (that would otherwise be provided by Starwood
or its affiliates) by itself, or, possibly, reviewing its rights with
respect to terminating the Operating Agreements (and possibly searching
for a smaller, less qualified operator). The Fund believes that an
exemption would be administratively feasible for the Department because
it does not add any additional material burden to the Department's
already significant ongoing oversight of the Diplomat Account.
[[Page 48780]]
The Applicant asserts that the proposed exemption would be
protective of the rights of participants and beneficiaries of the Fund
because the Operating Agreements contain (a) substantial limitations on
Starwood's ability to provide services or sell products directly or
through its affiliates and Related Companies;\16\ (b) provisions for
significant involvement by the Partnership (generally, through LaSalle)
in the budgetary process; (c) provisions for significant after the fact
reporting and disclosure to the Partnership on these types of
transactions; and (d) provisions for correction in the event that an
audit uncovers a discrepancy related to any payments to Starwood or its
affiliates or a weakness in internal control systems. The Application
states that these protections, some of which are general, some of which
are specific to affiliate transactions and some of which are triggered
by expenditures in excess of a certain amount, significantly reduce the
probability of an abuse of authority or conflict of interest that
results in harm to participants and beneficiaries. The Application
provides that, furthermore, each of these protections will be
periodically monitored and scrutinized by LaSalle, who can cause the
Partnership to cease to participate in most if not all of the
transactions discussed herein.
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\16\ The Application notes that the Operating Agreements provide
that, if services are performed by Starwood affiliates in lieu of
Starwood, the affiliates are not entitled to be paid more than
Starwood would have been paid. Additionally, if goods or services
are provided or performed by affiliates, such goods or services will
be provided on terms and at prices: (i) better than (or, with the
Partnership's approval, at least as favorable to the Resort as) what
is available in the relevant market; and (ii) consistent with terms
made available to other similar properties operated by Starwood and
its affiliates.
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20. By letter dated April 25, 2006, LaSalle advised the Department
that, in connection with an internal restructuring of Starwood Hotels &
Resorts Worldwide, Inc., effective as of January 12, 2006, Westin
Management Company East assigned its interest in the Operating
Agreements to Westin Hotel Management, L.P., a wholly-owned subsidiary
of Starwood Hotels & Resorts Worldwide, Inc. References in the
Application to Westin Management Company East should therefore be read
to include Westin Hotel Management, L.P. Additionally, as of April 30,
2006, LaSalle was replaced by Capital Hotel Management, LLC (CHM) as
the qualified professional asset manager for the Fund.
21. In the CHM Letter, CHM confirms that, pursuant to the
Discretionary Investment Management Agreement by and among Diplomat
Properties, L.P., Independent Fiduciary Services, Inc., on behalf of
the Plumbers & Pipefitters National Pension Fund, and Capital Hotel
Management, LLC dated February 27, 2006 (CHM Agreement), CHM has been
appointed as the successor investment manager and QPAM with respect to
the Resort. CHM has also replaced LaSalle as a non-member manager of
DPLLC. CHM represents that it is an SEC registered investment advisor,
which serves as a QPAM and one of the largest independent hotel asset
and investment management companies operating in the U.S. today. CHM is
a privately-held hotel investment management company, providing a full-
range of acquisition and disposition expertise for its investors, as
well as customized strategies proven to maximize asset/portfolio value
and increase overall hotel investment returns. CHM has under management
a hotel portfolio representing more than 14,000 rooms, collectively
valued at more than $5.2 billion. Hotel investments are comprised of
urban landmark properties, high-profile destination resorts and
convention center hotels operating in major markets across the U.S. and
the Caribbean.
CHM provides that, since its appointment as QPAM for the Fund, it
has become integrally involved in all aspects of the Diplomat Account,
and has made all of the business, operational and fiduciary decisions
for the Diplomat Account, pursuant to the CHM Agreement (subject to the
oversight or approval of IFS, as appropriate). CHM confirms that it is
responsible for monitoring the performance of Westin Hotel Management,
L.P. under the terms of the Operating Agreements, including the ongoing
tasks described in the Application. CHM states that, for example, CHM
is responsible for performing the actions ascribed to the QPAM as they
relate to the general limitations on Starwood's activities described in
this proposed exemption at 13. above, including with respect to (i)
line-item approval of the Resort's Annual Operating Plan; (ii) approval
of costs, expenses and expenditures; (iii) audits related to the
Resort; and (iv) control of bank accounts. Similarly, CHM is
responsible for performing the actions ascribed to the QPAM as they
relate to the specific limitations on Starwood's activities including
with respect to (i) the approval of certain purchases of products and
services by Starwood from itself or its affiliates; (ii) the approval
of certain contracts with an aggregate annual expenditure or revenue of
more than $50,000 or having a term of more than one year, as well as
certain capital expenditures; and (iii) the right to opt out of any
Centralized Services and to elect not to receive any Additional
Services. Further, as described in this proposed exemption at 9. above,
changes to services and products or fees (as limited by the Operating
Agreements) will be presented to and approved, if applicable, by CHM in
connection with the annual budget process. Therefore, on and after
April 30, 2006, references in the Application to LaSalle should,
therefore, be deemed to refer to CHM.
22. In determining to propose exemptive relief for the transactions
involving the provision of services by Starwood and Related Companies,
the Department placed a great deal of emphasis on the significant
involvement of IFS, as named fiduciary, and LaSalle and CHM, as
investment managers (the Independent Fiduciaries) and their considered
and objective evaluation of the subject transactions. These Independent
Fiduciaries have represented for the record that the retention of
Starwood was in the interests of the Partnership and that the written
agreement and the limitations contained therein permit the Independent
Fiduciaries to effectively monitor and scrutinize the actions
undertaken by Starwood. The initial and continued involvement of the
Independent Fiduciaries on behalf of the Fund with respect to the
transactions that are the subject of this proposed exemption is a
critical factor in the Department's determination to propose exemptive
relief. In addition, as the Department has previously stated in PTE
2001-39, the fact that a transaction is the subject of an exemption
under section 408(a) of the Act does not relieve a fiduciary from the
general fiduciary responsibility provisions of section 404 of the Act.
IFS' appointment of an investment manager and QPAM to manage the
Diplomat Account and its ongoing determination to continue to retain
LaSalle and CHM with respect to the management of the Diplomat Account
are subject to section 404 of the Act. Both LaSalle and CHM, as
investment managers for the Diplomat Account, retain fiduciary
responsibility for the activities undertaken by Starwood on behalf of
the Resort. In this regard, section 404(a)(1)(A) and (B) of ERISA
requires that a fiduciary discharge his duties to a plan solely in the
interests of the participants and beneficiaries, for the exclusive
purpose of providing benefits to participants and beneficiaries and
defraying reasonable administrative expenses, and in a
[[Page 48781]]
prudent manner. Accordingly, it is the responsibility of the Fund's
fiduciaries to operate the Resort in a manner designed to maximize the
Fund's rate of return, consistent with their fiduciary duties under
section 404 of the Act. The fiduciary obligation to act prudently
requires, at a minimum, that the Independent fiduciaries conduct an
ongoing objective, thorough and analytical critique of the management
of the Diplomat Account. If the transactions that are the subject of
this proposed exemption result in activity that is not ``prudent,'' and
not ``solely in the interest'' of the participants and beneficiaries of
the Fund, the responsible fiduciaries of the Fund would be liable for
any losses resulting from such a breach of fiduciary responsibility,
even if the transactions involved do not constitute prohibited
transactions under section 406 of ERISA.
Notice to Interested Persons
The notice to interested persons, along with the supplemental
statement required by Department Regulation 2570.43(b)(2), will be
given to each member of the Board and to anyone who commented with
respect to PTE 99-46, PTE Application D-10960 or D-10971.
Notice will be provided by way of first class mail. The Application
states that the Fund will notify interested persons within 15 days
following publication by the Department of a notice of the Proposed
Exemption in the Federal Register. It is intended, therefore, that
there will be a 45-day period available for notice and comment (i.e.,
15 days for notice and 30 days for comment).
FOR FURTHER INFORMATION CONTACT: Wendy McCollough of the Department,
telephone (202) 693-8561. (This is not a toll-free number.)
Mellon Financial Corporation (Mellon) Located in Pittsburgh, PA
[Application No. D-11342]
Proposed Exemption
Section I--Exemption for In-Kind Redemption of Assets
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and 4975(c)(2) of the Code, and
in accordance with the procedures set forth in 29 CFR Part 2570 Subpart
B (55 FR 32836, 32847, August 10, 1990). If the proposed exemption is
granted, the restrictions in sections 406(a)(1)(A) through (D) and
406(b)(2) of the Act, and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(D) of the Code, shall not apply, effective November 30, 2005, to
certain in-kind redemptions (the Redemption(s)) by the Mellon 401(k)
Retirement Savings Plan or by any other employee benefit plan sponsored
by Mellon or an affiliate (the Plan(s)), of shares (the Shares) of
certain proprietary mutual funds in which the Plans were invested as of
November 30, 2005 (the Funds), for which Mellon or an affiliate
(collectively, referred to also as Mellon) provides investment advisory
and other services, provided that the following conditions are
satisfied:
(A) The Plan pays no sales commissions, redemption fees, or other
similar fees in connection with the Redemption--other than customary
transfer charges paid to parties other than Mellon;
(B) The assets transferred to the Plan pursuant to the Redemption
consist entirely of cash and Transferable Securities, as such term is
defined in Section II, below. Notwithstanding the foregoing,
Transferable Securities that are odd lot securities, fractional shares,
and accruals on such securities may be distributed in cash;
(C) With certain exceptions described below, the Plan receives in
any Redemption its pro rata portion of the securities of the Funds
equal in value to that of the number of Shares redeemed, as determined
in a single valuation (using sources independent of Mellon) performed
in the same manner and as of the close of business on the same day, in
accordance with the procedures established by the Fund pursuant to Rule
2a-4 under the Investment Company Act of 1940, as amended from time to
time (the 1940 Act), and the then-existing procedures established by
the board of the Funds that are in compliance with the rules
administered by the Securities Exchange Commission (SEC);
(D) Mellon does not receive any direct or indirect compensation or
any fees, including any fees payable pursuant to Rule 12b-1 under the
1940 Act, in connection with any Redemption of the Shares;
(E) Prior to a Redemption, Mellon provides in writing to an
independent fiduciary (Independent Fiduciary, as such term is defined
in Section II, below), a full and detailed written disclosure of
information regarding the Redemption;
(F) The Independent Fiduciary provides written authorization in
advance of the Redemption to Mellon, such authorization being
terminable at any time prior to the date of the Redemption without
penalty to the Plan, provided that the termination is effectuated by
the close of business following the date of receipt by Mellon of
written or electronic notice regarding such termination (unless
circumstances beyond the control of Mellon delay termination for no
more than one additional business day);
(G) Before approving a Redemption, based on the disclosures
provided by the Funds to the Independent Fiduciary and discussions with
appropriate operational personnel of the Plan, the Independent
Fiduciary determines that the terms of the Redemption are fair to the
Plan and comparable to, and no less favorable than, terms obtainable at
arm's length between unaffiliated parties, and that the Redemption is
in the best interests of the Plan and its participants and
beneficiaries;
(H) Mellon makes a ``make-whole payment'' to ensure that the dollar
value of the interests received by the Plan from the collective
investment funds is not diminished by transaction costs nor by
valuation differences as a result of the Redemption;
(I) No later than thirty (30) business days after the completion of
a Redemption, Mellon or the relevant Funds provides to the Independent
Fiduciary a written confirmation regarding such Redemption containing:
(i) The number of Shares held by the Plan immediately before the
Redemption and the related per Share net asset value and the total
dollar value of the Shares held;
(ii) The identity and related aggregate dollar value of each
security provided to the Plan pursuant to the Redemption, including
each security valued (using sources independent of Mellon) in
accordance with Rule 2a-4 under the 1940 Act and the then-existing
procedures established by the board of the Fund for obtaining current
prices from independent pricing services or market-makers;
(iii) The current market price of each security received by the
Plan pursuant to the Redemption; and
(iv) The identity of each pricing service or market-maker consulted
in determining the value of such securities;
(J) The value of the securities and cash received by the Plan for
each redeemed Share equals the net asset value of such Share at the
time of the transaction, and such value equals the value that would
have been received by any other investor for shares of the same class
of the relevant Fund at that time;
(K) Subsequent to a Redemption, the Independent Fiduciary performs
a post-transaction review which will include, among other things,
testing a sampling of material aspects of the Redemption
[[Page 48782]]
deemed in its judgment to be representative, including pricing;
(L) Each of the Plan's dealings with the Funds, Mellon, the
principal underwriter for the Funds, or any affiliate thereof, are on a
basis no less favorable to the Plan than dealings between the Funds and
other shareholders holding shares of the same class as the Shares;
(M) Mellon maintains, or causes to be maintained, for a period of
six years from the date of any covered transaction, such records as are
necessary to enable the persons described in paragraph (N)(1)(i)-(v),
below, to determine whether the conditions described in this Section I
have been met, except that--
(i) if the records necessary to enable the persons described in
paragraph (N)(1)(i)-(v), below, to determine whether the conditions of
this exemption, if granted, have been met are lost, or destroyed, due
to circumstances beyond the control of Mellon, then no prohibited
transaction will be considered to have occurred, solely on the basis of
the unavailability of those records; and
(ii) no party in interest with respect to the Plan other than
Mellon shall be subject to the civil penalty that may be assessed under
section 502(i) of the Act, or to the taxes imposed by section 4975(a)
and (b) of the Code, if such records are not maintained or are not
available for examination as required by paragraph (N) below.
(N)(1) Except as provided in subparagraph (2) of this paragraph
(N), and notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in paragraph (M), above, are
unconditionally available at their customary locations for examination
during normal business hours by:
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the SEC,
(ii) any fiduciary of the Plan or any duly authorized
representative of such fiduciary,
(iii) any participant or beneficiary of the Plan or duly authorized
representative of such participant or beneficiary,
(iv) any employer whose employees are covered by the Plan, and
(v) any employee organization whose members are covered by such
Plan;
(2) None of the persons described in paragraphs (N)(1)(ii) through
(v) shall be authorized to examine trade secrets of Mellon or the
Funds, or commercial or financial information which is privileged or
confidential; and
(3) Should Mellon or the Funds refuse to disclose information on
the basis that such information is exempt from disclosure pursuant to
paragraph (N)(2) above, Mellon or the Funds shall, by the close of the
30th day following the request, provide a written notice advising that
person of the reasons for the refusal and that the Department may
request such information.
Section II--Definitions
(A) The term ``affiliate'' means:
(1) Any person (including a corporation or partnership) 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.
(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 ``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 the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund, less the liabilities charged to each such Fund,
by the number of outstanding shares.
(D) The term ``Independent Fiduciary'' means a fiduciary who is:
(i) Independent of and unrelated to Mellon and its affiliates, and
(ii) Appointed to act on behalf of the Plan with respect to the in-
kind transfer of assets from one or more Funds to, or for the benefit
of, the Plan. A fiduciary will not be independent of, and unrelated to,
Mellon if:
(i) Such fiduciary directly or indirectly controls, is controlled
by or is under common control with, Mellon;
(ii) Such fiduciary, directly or indirectly, receives any
compensation or other consideration in connection with any transaction
described herein (except that an Independent Fiduciary may receive
compensation from Mellon 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 any decision made by the
Independent Fiduciary); or
(iii) More than 1 percent (1%) of such fiduciary's gross income,
for federal income tax purposes, in its prior tax year, will be paid by
Mellon and its affiliates in the fiduciary's current tax year.
(E) The term ``Transferable Securities'' means securities--
(1) for which market quotations are readily available, as
determined pursuant to procedures established by the Funds under Rule
2a-4 of the 1940 Act; and
(2) That are not:
(i) Securities that, if publicly offered or sold, would require
registration under the Securities Act of 1933;
(ii) Securities issued by entities in countries that (a) restrict
or prohibit the holding of securities by non-nationals other than
through qualified investment vehicles, such as the Funds, or (b) permit
transfers of ownership of securities to be effected only by
transactions conducted on a local stock exchange;
(iii) Certain portfolio positions (such as forward foreign currency
contracts, futures and options contracts, swap transactions,
certificates of deposit and repurchase agreements) that, although
liquid and marketable, involve the assumption of contractual
obligations, require special trading facilities, or can be traded only
with the counter-party to the transaction to effect a change in
beneficial ownership;
(iv) Cash equivalents (such as certificates of deposit, commercial
paper, and repurchase agreements);
(v) Other assets that are not readily distributable (including
receivables and prepaid expenses), net of all liabilities (including
accounts payable); and
(vi) Securities subject to ``stop transfer'' instructions or
similar contractual restrictions on transfer.
(F) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family,'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
sister, or a spouse of a brother or a sister.
Summary of Facts and Representations
1. Mellon is a global financial services company headquartered in
Pittsburgh, Pennsylvania, with approximately $4.5 trillion in assets
under management, administration, or custody, including approximately
$766 billion under management, as of September 30, 2005. Mellon is
regulated as a bank holding company and a financial holding company
under the Bank Holding Company Act of 1956, as amended by the Gramm-
Leach-Bliley Act, and subject to the supervision of the Board of
Governors of the Federal Reserve System.
The Mellon 401(k) Retirement Savings Plan (i.e., the Plan) is a
defined
[[Page 48783]]
contribution plan maintained by Mellon to provide retirement benefits
to eligible employees of Mellon and its subsidiaries and is intended to
satisfy the qualification requirements of section 401(a) of the Code.
The Plan accepts contributions attributable to ``cash or deferred
arrangements'' described in Code section 401(k) (Pre-Tax
Contributions), and Mellon makes matching contributions on those Pre-
Tax Contributions. Mellon Bank, N.A., a subsidiary of Mellon, serves as
Trustee of the Plan. Investments under the Plan are directed by the
Plan participants.
2. The applicant represents that the selection and monitoring of
the Plan's investment options are overseen by Mellon's Benefits
Investment Committee (the BIC), the Plan's named fiduciary for
investment purposes and whose members are Mellon corporate officers.
Until November 30, 2005, the Plan made available three categories of
investment options to Plan participants. The first category, the
``Basic Funds,'' consisted of six Mellon Bank, N.A. collective
investment funds and Mellon common stock. The second category, the
``Actively Managed Funds,'' consisted of 14 proprietary mutual funds
(i.e., the Funds)\17\ and the Mellon Stable Value Fund, a Mellon Bank,
N.A. collective investment fund. The third category was a self-directed
brokerage window that provided access to more than 7,000 mutual funds.
---------------------------------------------------------------------------
\17\ The applicant represents that the Plan was invested in the
Funds pursuant to the terms and conditions of Prohibited Transaction
Exemption (PTE) 77-3. PTE 77-3 (42 Fed. Reg. 18734, April 8, 1977)
is a class exemption that permits, under certain conditions, the
acquisition or sale of shares of a registered, open-end investment
company by an employee benefit plan covering only employees of such
investment company, employees of the investment adviser or principal
underwriter for such investment company, or employees of any
affiliated person (as defined therein) of such investment adviser or
principal underwriter. Thus, the applicant is not requesting
exemptive relief with respect to the Plan's past investment in the
Funds. The Department expresses no opinion herein as to whether the
terms and conditions of PTE 77-3 were satisfied.
---------------------------------------------------------------------------
Thirteen of the proprietary Funds are managed by the following
subsidiaries of Mellon: (i) The Dreyfus Corporation (Dreyfus), which is
headquartered in New York, New York and serves as the investment
adviser to the Dreyfus family of mutual funds; and (ii) Founders Asset
Management LLC (Founders), an indirect, wholly-owned subsidiary of
Dreyfus that is headquartered in Denver, Colorado, and serves as the
investment adviser to the Dreyfus Founders mutual funds (the Dreyfus
family of mutual funds and the Dreyfus Founders mutual funds are
hereinafter collectively referred to as the Dreyfus Funds). The
distributor, transfer agent, and custodian of the Dreyfus Funds
relevant to this application are also affiliates of Mellon. As of
September 30, 2005, the Dreyfus Funds included more than 200 mutual
fund portfolios holding approximately $172 billion. The Plan was
invested in 13 of the Dreyfus Funds, as described above. The fourteenth
proprietary Fund also has an adviser affiliated with Mellon.
As of September 30, 2005, the assets held in trust under the Plan
were valued at $1,380,761,939.46 and were allocated among the following
investment options in the following amounts:
Basic Funds:
Daily Liquidity Money Market................. $89,949,424.10
Daily Liquidity Asset Allocation............. 18,537,191.45
Daily Liquidity Stock Index.................. 234,057,799.50
Daily Liquidity Small Cap Stock Index........ 7,354,298.25
Daily Liquidity International Stock Index.... 22,742,989.30
Daily Liquidity Aggregate Bond Index......... 50,485,047.00
Mellon Stock................................. 409,606,522.50
Actively Managed Funds:
Mellon Stable Value Dreyfus LifeTime 92,584,517.21
Portfolios..................................
Income Portfolio............................. 6,954,841.82
Growth and Income Portfolio................ 61,604,892.28
Growth Portfolio........................... 30,662,384.91
Dreyfus Appreciation......................... 4,005,837.40
Dreyfus Premier Core Value................... 39,396,197.50
Dreyfus Disciplined Stock.................... 113,489,817.05
Dreyfus Premier Third Century................ 4,255,733.72
Dreyfus Premier Technology Growth............ 12,967,651.48
Dreyfus Founders Growth...................... 9,086,042.62
Dreyfus Premier New Leaders.................. 5,982,309.07
Dreyfus Founders Discovery................... 52,011,463.46
Dreyfus Founders Worldwide Growth............ 24,425,613.04
Dreyfus Premier International Value.......... 24,027,831.95
The Boston Company International Small Cap... 25,566,295.14
Self Directed Account.......................... 18,287,358.28
Participant Loan Fund.......................... 22,719,880.43
------------------------
Total...................................... 1,380,761,939.46
3. The applicant represents that the BIC made a decision to
simplify the Plan's investment offerings for the benefit of Plan
participants; it decided to make available only the Basic Funds as
``core'' options, i.e., as funds in which Pre-Tax Contributions and
Mellon matching contributions can be directly invested. The result was
to eliminate the Actively Managed Funds from the ``core'' Plan
investment line-up. The Mellon Stable Value Fund was moved to the Basic
Funds category, and the other 14 Actively Managed Funds continue to be
available only through the self-directed brokerage window. In addition
to simplifying the investment offerings, the change also has had the
advantage of reducing the investment management expenses borne by the
Plan and Plan participants, as Mellon absorbs all of the investment
management costs for the collective investment funds that comprise the
Basic Funds but did not do so for the mutual funds in the Actively
Managed Funds category. The BIC believes that being able to offer a
streamlined menu of no-cost options to Plan participants represents a
tremendous advantage over the long term and is in the best interests of
Plan participants.
[[Page 48784]]
The change was adopted by the BIC on May 20th, to be effective no
later than December 31, 2005. After taking into account the
administrative, recordkeeping, and communication issues related to a
transaction of this size, as well as the availability of the internal
and external resources necessary to effect the implementation, the BIC
decided to implement the changes effective December 1, 2005. The Plan
participants were notified of the upcoming changes and advised to
review their investment elections. An announcement entitled ``Important
Changes to the Investment Funds in the Mellon 401(k) Retirement Savings
Plan,'' dated October 2005, was distributed on or about October 3,
2005.
On the effective date of the transfer, the Actively Managed Fund
assets were transferred to the following Mellon collective investment
funds included within the Basic Funds:
Fund Transfer or ``Mapping'' Chart
------------------------------------------------------------------------
Actively managed fund [rtrif] Recipient basic fund
------------------------------------------------------------------------
Dreyfus LifeTime Portfolios, Inc....... [rtrif] Daily Liquidity Asset
Allocation Fund.
Income Portfolio.....................
Growth and Income Portfolio..........
Growth Portfolio.....................
Dreyfus Appreciation...................
Dreyfus Premier Core Value.............
Dreyfus Disciplined Stock.............. [rtrif] Daily Liquidity Stock
Index.
Dreyfus Premier Third Century Fund, Inc
Dreyfus Premier Technology Growth......
Dreyfus Founders Growth................
Dreyfus Premier New Leaders............
Dreyfus Founders Discovery............. [rtrif] Daily Liquidity Small
Cap Stock Index.
Dreyfus Founders Worldwide Growth...... [rtrif] Daily Liquidity
International Stock Index.
Dreyfus Premier International Value....
The Boston Company International Small
Cap.
------------------------------------------------------------------------
4. According to the applicant, the BIC requested that the Plan
receive these redemptions in cash from all of the Funds. However, the
Funds have reserved in their prospectuses the authority to ``redeem in
kind,'' or make payments in securities rather than cash, if the amount
to be redeemed is large enough to affect Fund operations--for example,
if it exceeds 1% of fund assets.
In October, the Dreyfus Disciplined Stock Fund (the Stock Fund) and
the Dreyfus Founders Worldwide Growth Fund (the Growth Fund)--of which
the Plan holds approximately 10% and 30% of Fund shares, respectively--
advised the BIC that they would be requiring that the redemptions from
those Funds be taken in the form of securities rather than cash (i.e.,
the Redemptions). In response to this decision, the BIC: (i) Explored
bifurcating the mapping of these two Funds from the overall Fund
transfer, (ii) Considered pushing back the overall effective date, and
(iii) Reconsidered the merits of the entire mapping transaction. As a
result of these efforts, the BIC determined that: (a) It was
inconsistent with the BIC's investment philosophy to exempt these Funds
from the mapping entirely; (b) Due to the administrative,
recordkeeping, and communication effort involved in a transaction of
this size, it was unreasonable to defer the mapping of two Funds to a
later date; and (c) Since offering a streamlined menu of no-cost
options was advantageous to Plan participants, it was in their
interests to implement the change in its entirety, effective December
1, 2005.
To carry out the Redemptions with minimal disruption and expense,
the BIC employed a ``transition management service'' affiliated with
Mellon, whereby: (i) The securities received from the two Funds were
placed in separate transition management accounts under the Plan; (ii)
The transition account investment adviser directed the sale of
securities so as to retain only those securities that would be accepted
in kind by the applicable target Basic Fund; and (iii) The restructured
portfolio of securities and cash were then transferred to the
applicable target Basic Fund. The Redemption, restructuring, and
transfer occurred overnight on November 30, 2005, without any
``blackout'' period on investment changes.
The Plan did not pay any fees or transaction costs to Mellon
affiliates or any other party in connection with the transition. Mellon
covered all transaction costs related to the transition, as well as any
differences arising from sales of securities by the transition account
or the acceptance of the securities by the Basic Funds at values
different from the Funds' valuation of the securities. The intended
result was that the dollar value of the amounts redeemed from the Funds
was no less than the dollar value of the interests acquired in the
target Basic Funds on December 1, 2005.
5. The applicant requests that the Department grant individual
retroactive exemptive relief for the Redemptions of the Fund Shares.
Investment option decisions for the Plan, which is sponsored by Mellon,
are made by or under the authority of the BIC, the Plan's named
fiduciary for investment purposes and whose members are Mellon
corporate officers. Because subsidiaries of Mellon serve as the
investment advisers and certain other service providers for the Dreyfus
Funds, a transaction between the Plan and the Funds may be prohibited.
The role of Mellon in deciding whether to redeem in kind the Plan's
shares of the Stock Fund and Growth Fund, and under what conditions,
raises the possibility of Mellon's acting in a transaction involving
the Plan on behalf of a party whose interests are adverse to the
interests of the Plan or its participants and beneficiaries, as well as
raising the possibility of self-dealing.
The applicant notes that PTE 77-3 provides exemptive relief for the
sale of shares of a mutual fund by an employee benefit plan covering
employees of the investment adviser for the mutual fund and its
affiliates, subject to certain conditions. However, in three published
exemptions, in which the Department has granted individual relief for
the in-kind redemption of shares by plans of the investment advisers of
mutual funds--see PTE 2003-01 (Northern Trust Company and Affiliates);
PTE 2002-20 (Union Bank of California); PTE 2001-46 (Bank of America
Corporation)--the exemption notices describe PTE 77-3 as being
available for
[[Page 48785]]
a redemption of shares for cash, implying that PTE 77-3 would not be
available for an in-kind redemption. See, e.g., PTE 2003-01, Proposed
Exemption for Northern Trust Company and Affiliates, 67 FR 69561, 69563
(2002).
As the Plan did not have the option of redeeming its investment in
the two Funds in cash, Mellon had discussions with the Department,
through outside counsel, about obtaining individual relief for the
contemplated in-kind Redemptions, modeled on the prior individual
exemptions, above, as well as two authorizations granted under PTE 96-
62--see Final Authorization Number (F.A.N.) 2003-16E (AmSouth
Bancorporation) and F.A.N. 2005-01E (U.S. Trust Company of New York).
As further evidence of good faith, Mellon also made efforts to submit
an exemption application to the Department in advance of the Redemption
date, once it was determined that in-kind Redemptions would be
necessary, although it was not possible to obtain a final exemption
prior to that date.
Mellon also requests prospective relief for future in-kind
Redemptions involving the Funds, in the event that such opportunities
should arise, to be carried out in accordance with the conditions of
this exemption, if granted.
6. It is represented that Mellon structured the Redemptions based
on prior relief granted by the Department for in-kind redemptions from
affiliated mutual funds, as described above. The securities transferred
in kind from the Funds were a pro rata portion of the Funds' holdings
to the extent possible,\18\ subject to adjustments for odd lots and
securities that cannot be transferred, as determined in accordance with
the Funds' valuation and in-kind redemption procedures that are
designed to be objective and to comply with the requirements of the
1940 Act. Mellon hired and paid for an Independent Fiduciary to oversee
and approve the Redemptions, as described further in item 7, below.
Mellon also committed to making a make-whole payment to ensure that the
value of the participants' accounts was not diminished by transaction
costs or valuation differences as a result of the Redemptions.
---------------------------------------------------------------------------
\18\ As further explained by the applicant, the reason for the
``to the extent possible'' language here and elsewhere in this
paragraph is that it may not always be possible to divide a Fund's
holdings of securities on a fully proportionate basis, due to the
minimum increments in which the particular securities are traded.
For example, the smallest unit of an equity security is typically a
share. If the proportionate division of the portfolio would require
dividing single shares into fractional shares, then the shares that
would otherwise have to be divided would be sold and the cash
proceeds divided instead. Even where the proportionate division
could be done by dividing down to single shares, it may not be
economical to do so because that would result in the creation of
``odd lots''--lots of less than 100 shares--which are more expensive
to sell. In such instances, it may be to the advantage of both
parties for the round lot of 100 shares to be sold rather than
divided, and the parties can then divide the cash proceeds. Bonds
are held in larger units, generally of a minimum of $1,000 principal
value, so some of those, too, may require conversion to cash to
achieve a proportionate distribution.
---------------------------------------------------------------------------
Because the in-kind Redemptions from the two Funds involved
ministerial transactions performed in accordance with pre-established
objective procedures, in accordance with applicable regulatory
requirements, including the 1940 Act and the rules and regulations
thereunder, Mellon was unable to use its influence or control to cause
the Plan to receive particular securities from the Funds.\19\ To the
extent possible, the Plan exchanged its Fund Shares for a proportionate
share of the ``Transferable Securities''--securities for which market
quotations are readily available and that are otherwise freely
transferable\20\--held by each Fund portfolio. Securities that were not
``Transferable Securities'' (including certain contractual obligations
and cash equivalents) were either to be liquidated or retained by the
Fund, and the sale proceeds or equivalent value transferred in cash.
The value of odd lot securities, fractional shares, and accruals on
such securities also were transferred in cash, as appropriate.
Therefore, the Redemptions were carried out, to the extent possible, on
a pro rata basis as to the number and kind of securities transferred to
the Plan.
---------------------------------------------------------------------------
\19\ According to the applicant, the Funds have adopted
``Procedures Relating to Redemptions-In-Kind By Affiliated Persons''
(``Procedures''). As the Plan is considered to be an ``affiliated
person'' under the 1940 Act, the Redemptions were made in accordance
with the Procedures. The Procedures include the requirement that
``[s]ecurities distributed in connection with any such redemption-
in-kind shall represent the affiliated shareholder's pro rata
portion of all assets held by the Fund immediately prior to the
redemption, with any adjustments as may be necessary in connection
with, for example, restricted securities, odd lots or fractional
shares.'' The applicant acknowledges that securities held in each
Fund may have different purchase dates and tax bases attached to
them. In redeeming the Plan's shares of the Funds, each Fund
distributed the Plan's pro rata portion of the Fund's assets,
including a pro rata portion of each tax lot for each Fund portfolio
security, held immediately prior to the Redemption, with any
adjustments necessary with respect to odd lots and fractional
shares. Among other requirements of the Procedures, the distributed
securities were valued in the same manner as they were valued for
purposes of computing the Fund's net asset value per share, and the
Redemption was consistent with the Fund's redemption policies and
undertakings (as set forth in each Fund's then current prospectus
and statement of additional information). The Procedures are
reflected in the terms and conditions of the requested exemption.
\20\ According to the applicant, for purposes of the proposed
exemption, the Funds treat as ``securities for which market
quotations are readily available'' any securities for which market
quotations are normally available, but for which market quotations
may not be available on the day of the in-kind distributions, due to
events outside the control of Mellon. For example, if the Taiwan
stock market were to close because of a typhoon, no market
quotations would be available on that day for securities traded on
that market, even though those securities are publicly traded. As
described further below, such securities would be ``fair valued''
based on the most recent available trading information and any
information that would indicate a change in value since the most
recent trades or quotations.
---------------------------------------------------------------------------
The boards of the respective Funds have adopted procedures for the
fulfillment of in-kind redemption requests in conformity with the no-
action letter issued by the SEC staff to Signature Financial Group
Inc.\21\ The pricing methodology to be applied with respect to a
redemption in kind under these procedures complies with Rule 2a-4 under
the 1940 Act, the general rule that governs the valuation process for
purposes of determining the current price of mutual fund shares.
Pursuant to these procedures, for purposes of the in-kind Redemptions,
the values of the securities is determined based on, as applicable,
current market prices or quotations, as of close of business, other
approved valuation methodologies, and any ``fair value'' determinations
(as described further below) on the date of the redemption request (the
``Valuation Date''), in accordance with Rule 2a-4
[[Page 48786]]
under the 1940 Act and the procedures, using sources independent of
Mellon. In general, values are determined as of close of trading on the
New York Stock Exchange on the particular day, using market prices such
as the last sale price or the most recent bid and asked quotations. In
the event that a Fund holds securities for which market quotations are
not readily available or illiquid securities, the Fund would determine
the fair value of the security in accordance with its ``fair value''
procedures that have been adopted by its board (including a majority of
disinterested directors). The fair value procedures require the Fund
board, its pricing committee or the Fund's valuation committee to
determine an appropriate price or pricing methodology for the
particular security, as appropriate, considering such factors as
fundamental analytical data, the nature and duration of restrictions on
disposition, an evaluation of relevant market forces, and public
trading in similar securities. The minutes of any meetings of the
pricing and valuation committees describing the action they have taken
and information they considered are presented to the Fund board and
included in the board minutes. The Fund is required to preserve all
relevant records for no less than six years.
---------------------------------------------------------------------------
\21\ In the no action letter to Signature Financial Group, Inc.
(Dec. 28, 1999), the Division of Investment Management of the SEC
states that it will not recommend enforcement action pursuant to
section 17(a) of the 1940 Act for certain in-kind distributions of
portfolio securities to an affiliate of a mutual fund. Funds seeking
to use this ``safe harbor'' must value the securities to be
distributed to an affiliate in an in-kind distribution ``in the same
manner as they are valued for purposes of computing the distributing
fund's net asset value.'' As explained in footnote 3, above, the
Dreyfus Funds have adopted Procedures in accordance with the
Signature Financial Letter for use in affiliated transactions, and
those Procedures must be followed for transactions with the Plan.
The Signature Financial letter does not address the
marketability of the securities distributed in kind. The range of
securities distributed pursuant to this ``safe harbor'' may
therefore be broader than the range of securities covered by SEC
Rule 17a-7, 17 CFR 270.17a-7. In granting past exemptive relief with
respect to in-kind transactions involving mutual funds, the
Department has required that the securities being distributed in-
kind fall within Rule 17a-7. One of the requirements of Rule 17a-7
is that the securities are those for which ``market quotations are
readily available.'' SEC Rule 17a-7(a). Under this exemption
request, exemptive relief also would be limited to in-kind
distribution of securities for which market quotations are readily
available, as defined in footnote 4, above. The value of any other
security was paid to the Plan in cash. In addition, consistent with
the Signature Financial letter, the Procedures adopted by the
Dreyfus Funds require pro rata distributions for any in-kind
redemptions.
---------------------------------------------------------------------------
The Growth Fund includes a substantial percentage of non-U.S.
securities. Under its valuation procedures, this fund values foreign
equity securities under certain circumstances using ``fair value''
prices provided by an approved independent pricing service. The service
uses a model to adjust the foreign closing price of a security to
reflect the historical correlation of that security with subsequent
movements in the U.S. market, market indices, and other appropriate
market measures, and the fund uses the adjusted price when the change
in the U.S. stock market on that day exceeds a pre-determined ``trigger
point'' and the security meets a ``minimum confidence interval.'' (The
``confidence interval'' is the confidence level that the pricing
service assigns to the fair value price it determines for a particular
security based on its historical data on price movements in that
security. Founders requires that the adjusted price meet a minimum
confidence level to ensure reliability.) Although the Stock Fund
invests principally in securities of U.S. issuers, it would use a
similar pricing methodology in the event it holds foreign securities.
Each Fund's fair value procedures was provided to, reviewed, and
approved by the Independent Fiduciary in advance of the Redemption. The
respective Funds retained documentation, in the form of the fair value
reports prepared in accordance with the fair value procedures, showing
how the procedures were applied and followed for each security valued
in this manner.
It was possible that the securities received by the transition
accounts would be sold at prices different from the values used by the
Funds in determining their distributions. Also, as the collective
investment fund that is the target fund for the assets of the Growth
Fund generally uses market value pricing for foreign securities, rather
than the fair value procedure adopted by the Growth Fund, it was
possible that the collective fund would assign a different value to the
foreign securities it received than did the Growth Fund. As indicated
above, Mellon made up any difference in value such that the dollar
value of the interests received by the Plan from the collective funds
was no less than the corresponding dollar value distributed by the two
Funds.
Not later than 30 business days after completion of a Redemption,
the Funds confirmed in writing:
(i) The number of Fund Shares held by the Plan immediately before
the Redemption (and the related net asset value per Share and the
aggregate dollar value of the Shares held);
(ii) the identity (and related aggregate dollar value) of each
security provided to the Plan pursuant to the Redemption, including
each security valued in accordance with Rule 2a-4 under the 1940 Act
and the then-existing procedures established by the board of the Funds
(using sources independent of Mellon) for obtaining current prices from
independent pricing services and market-makers;
(iii) the price of each such security for purposes of the
Redemption; and
(iv) the identity of each pricing service or market-maker consulted
in determining the value of such securities.
7. U.S. Trust Company, N.A. (U.S. Trust), a national bank, was
retained by the BIC as the ``Independent Fiduciary'' for purposes of
this proposed exemption. U.S. Trust has confirmed its independence from
Mellon and its eligibility to serve as Independent Fiduciary--that it
is not controlled by, or under common control with, Mellon, does not
control Mellon, and that no more than one percent of its gross income
for federal income tax purposes will be paid by Mellon. U.S. Trust has
acknowledged that it is a fiduciary to the Plan, as defined in section
3(21) of the Act, and has represented that it understands and accepts
the duties, responsibilities, and liabilities in acting as a fiduciary
under the Act for the Plan.
In its capacity as Independent Fiduciary to the Plan, U.S. Trust's
responsibilities pursuant to the terms of an engagement letter, dated
November 22, 2005, by and between Mellon and U.S. Trust, were to (i)
make a determination as to whether the terms of the Redemptions were
fair to the participants and beneficiaries of the Plan and are
comparable to, and no less favorable than, terms that would be reached
as a result of arms' length negotiations between unaffiliated parties,
(ii) provide its opinion in a written report, dated November 29, 2005,
(the Report) on behalf of the Plan as to the fairness and
reasonableness of each Redemption, as compared to redemption of the
Plan's shares for cash, which would involve the liquidation of Fund
securities, the transfer of cash to the Plan, and the reinvestment of
such cash by, or on behalf of the Plan, in a designated collective
investment fund, and (iii) consider and conclude, on behalf of the
Plan, whether to approve each Redemption.
In the Report, U.S. Trust has stated that, based upon its review of
the methodology of the Redemptions from the Funds and the difference in
the costs associated with an in-kind redemption versus a hypothetical
cash redemption for the Plan's assets held by each of the Funds, it
believes that the proposed Redemptions would be fair to the
participants of the Plan and no less favorable than the terms that
would be reached at arms' length between unaffiliated parties.
Furthermore, U.S. Trust believes that the method to be used in
conducting the Redemptions is comparable to, and no less favorable
than, a similar in-kind redemption reached at arms' length between
unaffiliated parties.
This was because, among other things, Mellon would be paying the
transaction costs associated with the Redemptions and would make a cash
payment to the Plan to eliminate any implementation shortfall, so that
the Plan would be able to redeem its investment in the Funds without
bearing the typical costs associated with a redemption, whether that
redemption be in cash or in kind. Therefore, U.S. Trust approved the
Redemptions from the Funds, provided that the Redemptions were
conducted in accordance with the information provided to U.S. Trust by
Mellon and the Funds.
8. U.S. Trust conducted a post-transfer review, summarized in a
letter
[[Page 48787]]
dated January 23, 2006,\22\ in which it confirmed that the transfer was
carried out in accordance with the required criteria and procedures, by
testing a sampling of certain material aspects of the redemption
transactions.\23\
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\22\ The applicant notes that the post-transaction review was
completed within 60 days and represents that other post-transaction
reviews in connection with future in-kind Redemptions, if any, would
also be completed within that time frame.
\23\ Condition (K) of the operative language refers to testing
``a sampling'' of material aspects of the Redemptions by the
Independent Fiduciary. The applicant represents, however, that the
Independent Fiduciary was provided with data as of the Redemption
date that listed each security transferred or sold for both the
Stock Fund and the Growth Fund. With all of the data available to
it, the Independent Fiduciary chose to review all of the individual
security transactions, not merely a sampling.
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According to U.S. Trust, the Plan received (into two collective
investment funds) its pro rata portion of each Transferable Security
(rounded to the nearest round lot) held by the Funds and its pro rata
portion of the cash that the Funds held based upon the ownership
percentage that the Plan held in each Fund. The amount of cash
transferred to the collective investment funds from each of the Funds
was adjusted for the value of all the shares that did not transfer in
kind due to rounding and was adjusted for the cash value of the Plan's
pro rata share of the Funds' other balance sheet assets (receivables
and prepaid expenses net of current liabilities). Neither of the Funds
held non-transferable securities,\24\ so there was no cash adjustment
to reflect the value of any non-transferable securities. Finally, the
assets transferred to the Plan were valued in accordance with the
Funds' procedures and applicable law.
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\24\ The applicant further represents that no Rule 144A
securities were involved in the Redemptions.
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In the Pre-Trade analysis performed by Mellon Transition Management
Services, the costs to sell securities distributed by the Stock Fund
that would not be accepted in kind by the corresponding collective
investment fund were estimated to be $4,286, combined for both
commissions and spread. For the securities distributed by the Growth
Fund, that would not be accepted in kind, the combined costs were
estimated to be $12,724. The Plan was immediately reinvested after the
Transfer; therefore potential opportunity costs associated with
reinvestment risk was minimized. If the Plan had received cash instead
of its pro rata portion of the assets of the Funds, it would have been
forced to incur its pro rata portion of the sell side transactions
costs, and it would have had to incur all of the buy side transactions
costs when it reinvested the proceeds. Furthermore, there may have been
a time lag from the date of the redemption request to the time the Plan
had fully redeployed the proceeds. This time lag would have imposed an
opportunity cost by not being invested in securities that would have
had the potential to match the Plan's stated objective for this portion
of the Plan's assets.
After the completion of the transitions from the Funds, a post-
trade analysis was performed by Mellon Transition Management Services
that listed the actual costs that were incurred. For the Stock Fund,
94% of the portfolio transferred in kind, leaving only 6% that was
traded in the open market. The total cost of these trades was $3,163
compared to the pre-trade estimate of $4,286. For the Growth Fund, 42%
of the portfolio transferred in kind, and 58% was traded on the open
market. The total cost of these trades was $7,886 compared to the pre-
trade estimate of $12,724.
Mellon represented that it would pay all of the expenses incurred,
including the commissions and spread costs, to conduct the transfer. In
addition, Mellon guaranteed that the Plan would not suffer an
implementation shortfall if the portfolios of securities fell in value
during the transfer. Mellon provided this protection with respect to an
implementation shortfall while not seeking to require the Plan to give
up its upside if the portfolios of securities increased in value during
the transfer. Because the transaction was designed so that the Plan
would receive no less than its entire investment in each of the Funds,
while not sacrificing any potential upside during the transition
period, the Plan held cash and securities equal to or greater in value
at the market open on December 2, 2005 than it did at the market open
on November 30, 2005.\25\
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\25\ According to U.S. Trust, it determined that the Plan held
cash and securities at the market open on December 1, 2005 equal in
value to the shares it had redeemed, with the share values
determined as of the close of business on November 30, 2005.
However, a small number of the securities received were sold by the
Plan on December 1st because the Plan did not want to retain them as
investments. Mellon reimbursed the Plan for the costs related to
these sales. U.S. Trust represents that it then looked at the value
of the Plan's holdings as of the market open on December 2nd, by
which time the in-kind redemption, sales, and reimbursements had
been completed, to ensure that the plan suffered no loss.
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The applicant represents that, if there is an opportunity for
additional Redemptions under this exemption, if granted, involving the
Funds, such transactions will occur only if the Independent Fiduciary
concludes that an in-kind transaction is in the best interests of the
Plan, consistent with the above-described procedures.
9. In summary, the applicant represents that the Redemptions
satisfy the statutory criteria for an exemption under section 408(a) of
the Act for the following reasons:
(a) By accepting an in-kind redemption and using a transition
management account strategy, the Plan lowered its transaction costs
compared to the expenses that would have been incurred if it had
withdrawn its investments in the two affected Funds in cash and then
reinvested the cash because the Plan paid no brokerage commissions nor
other fees, either directly or through its investment in either the
transferring or receiving funds, in connection with the redeemed
amounts (other than customary transfer charges paid to parties other
than Mellon and its affiliates);
(b) The Plan received a pro rata portion of the securities of the
two affected Funds in the Redemption equal in value to the Fund Shares
redeemed, as determined in a single valuation (using sources
independent of Mellon) performed at the close of business on the
Redemption date, in accordance with Rule 2a-4 under the 1940 Act;
(c) The Redemption was overseen by U.S. Trust as Independent
Fiduciary and was subject to prior written authorization by U.S. Trust
based on U.S. Trust's determination, following full and detailed
written disclosure of information regarding the Redemption, that the
terms of the Redemption were fair and reasonable to the Plan, and
comparable to and no less favorable than terms obtainable at arm's
length between unaffiliated parties, and that the Redemption was in the
best interests of the Plan and its participants and beneficiaries; and
(d) Each of the Plan's dealings with the Funds, the investment
advisers of those Funds, or any affiliated person thereof, would be on
a basis no less favorable to the Plan than dealings between the Funds
and other shareholders holding shares of the same class of the
particular Fund.
Notice to Interested Persons: The applicant will provide notice of
the proposed exemption, after publication in the Federal Register, to
(i) active participants in the Plan, and (ii) retiree and terminated
vested participants, alternate payees, and beneficiaries in pay status.
Notice to active participants in (i) above will either be by an
individual direct interoffice mailing, or electronically in accordance
with the conditions of 29 CFR 2520.104b-1. Notice to participants and
beneficiaries in (ii) above will be provided by first
[[Page 48788]]
class mail, or electronically in accordance with the conditions of 29
CFR 2520.104b-1.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8557. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 14th day of August, 2006.
Ivan Strasfeldm,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department Of Labor.
[FR Doc. E6-13623 Filed 8-18-06; 8:45 am]
BILLING CODE 4510-29-P