Proposed Exemptions; Jacor Communications Inc. Retirement Plan [Notices] [04/25/1996]
Proposed Exemptions; Jacor Communications Inc. Retirement Plan [04/25/1996]
Volume 61, Number 81, Page 18421-18445-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09844, et al.]
Proposed Exemptions; Jacor Communications Inc. Retirement Plan
(the Plan)
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register notice. Comments and request 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. 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 request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 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 (43 FR 47713, October 17, 1978) 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.
Jacor Communications Inc. Retirement Plan (the Plan), Located in
Cincinnati, Ohio
[Application No. D-09844]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
and 407(a) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (E) of the Code shall not apply to (1) the past receipt by the
Plan of certain stock- purchase warrants (the Warrants) pursuant to the
restructuring of Jacor Communications, Inc. (Jacor), excluding that
portion of Warrants which was acquired by the Plan's Qualified Matching
Contribution Account (the QMCA, as described below); (2) the past and
proposed future holding of the Warrants by the Plan; and (3) the
[[Page 18422]]
disposition or exercise of the Warrants by the Plan; provided that the
following conditions are satisfied:
(A) With respect to all participant accounts other than the QMCA,
the Warrants were acquired pursuant to Plan provisions for
individually-directed investment of such accounts;
(B) The Plan's receipt and holding of the Warrants occurred in
connection with the restructuring of Jacor and the Warrants were made
available to all shareholders of common stock of Jacor;
(C) The Plan's receipt and holding of the Warrants resulted from an
independent act of Jacor as a corporate entity, and all holders of the
common stock of Jacor, including the Plan, were treated in the same
manner with respect to the restructuring of Jacor; and
(D) With respect to Warrants allocated to the QMCA, the authority
for all decisions regarding the holding, disposition or exercise of the
Warrants by the Plan will be exercised by an independent fiduciary
acting on behalf of the Plan, to the extent that such decisions have
not been passed through to Plan participants; and
(E) With respect to all other accounts (described below), the
decisions regarding the holding, disposition or exercise of the
Warrants have been, and will continue to be made in accordance with
Plan provisions for individually-directed investment of participant
accounts, by the individual Plan participants whose accounts in the
Plan received Warrants in connection with the restructuring.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
January 11, 1993, except with respect to the Warrants held by the QMCA.
With respect to those Warrants, the exemption, if granted, will be
effective July 26, 1995.
Summary of Facts and Representations
1. Jacor, the Plan sponsor, has its principal place of business in
Cincinnati, Ohio. Jacor owns and operates radio stations across the
United States and is the parent company of an affiliated group of
corporations. The Plan is a defined contribution employee benefit plan
intended to satisfy the requirements of sections 401(a) and 401(k) of
the Code. The Plan provides for individual participant accounts (the
Accounts) and participant-directed investment of the Accounts among
five investment funds, one of which invests exclusively in common stock
of Jacor (the Jacor Securities Fund). Participants can also choose to
invest in the Money Market Fund (replaced by the Stable Asset Fund as
of April 1, 1994), the Bond Fund (replaced by the International Fund as
of April 1, 1994), the Balanced Fund and the Growth Fund. The various
funds can be described as follows:
(a) Money Market Fund, which invests exclusively in short-term U.S.
Treasury obligations. The objective of this Fund is to provide
stability of principal and current income consistent with that
stability;
(b) Bond Fund, which invests in U.S. government and federal agency
securities along with high quality corporate obligations. The objective
of this Fund is to provide more income than short-term obligations, but
greater stability than long-term bonds;
(c) Balanced Fund, which invests in equity securities issued by a
broad range of companies along with corporate and government bonds. The
objective of this Fund is to provide a balance between the growth
potential of stock and the current income of bonds;
(d) Growth Fund, which invests in equity securities issued by a
broad range of companies. The objective of this Fund is long-term
growth;
(e) Jacor Securities Fund, which invests in equity securities
issued by Jacor;
(f) Stable Asset Fund, which invests in public and private debt
securities and mortgage loans. This Fund provides a fixed rate of
return that is adjusted annually; and
(g) International Fund, which invests in equity securities of
foreign corporations. The objective of this Fund is to provide long-
term growth with international diversification.
2. Each participant may have as many as four Accounts under the
Plan, known as the Elective Deferral Account, the Qualified Non-
Elective Contribution Account, the QMCA and the Rollover Account. As of
December 31, 1993, there were 416 participants in the Plan, all of whom
had at least one Account with an investment in the Jacor Securities
Fund. As of that same date, the Plan held total assets of approximately
$3,390,755. The trustees of the Plan as of January 8, 1993, were Terry
S. Jacobs, R. Christopher Weber and Jon M. Berry, all of whom were
officers and shareholders of Jacor. Terry S. Jacobs resigned as trustee
and officer of Jacor effective June 7, 1993 and as of the same date was
replaced by Randy Michaels.
3. Investment Direction.
In general, all contributions (and related earnings) allocated to
any of the Accounts on or before December 31, 1991 are invested in the
Jacor Securities Fund. Contributions (and related earnings) allocated
on or after January 1, 1992 to any Account other than the QMCA are
subject to participant-directed investment. In general, all
contributions (and related earnings) allocated to the QMCA on or after
January 1, 1992 continue to be invested in the Jacor Securities
Fund.<SUP>1
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1 The Plan has special provisions which provide increased
investment options to Plan participants once they attain age 55.
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In 1995, participants were given the authority to transfer all
contributions (and related earnings) allocated to the QMCA and all
other pre-1992 contributions and earnings to any of the other
investment funds available under the Plan, in accordance with the
following schedule:
(1) First Quarter of 1995--up to 25% of formerly restricted funds
(2) Second Quarter of 1995--up to 50% of formerly restricted funds
(3) Third Quarter of 1995--up to 75% of formerly restricted funds
(4) Fourth Quarter of 1995--up to 100% of formerly restricted funds
4. Jacor represents that it entered into a restructuring agreement
with Zell/Chilmark in September, 1992. Zell/Chilmark is a Delaware
limited partnership controlled by Samuel Zell and David Schulte. Zell/
Chilmark was formed to invest in and provide capital and management
support to companies that are engaged in significant recapitalizations
or corporate restructuring. At the time of Jacor's restructuring, Zell/
Chilmark had capital commitments or investments in excess of $1
billion. The Board of Directors of Jacor selected Zell/Chilmark to work
with Jacor's creditors to formulate a restructuring plan. Zell/Chilmark
was chosen because Jacor's Board believed that it would be able to
raise the cash necessary to make a substantial equity investment and
because of its experience in working with creditor groups.
5. The restructuring consisted of an equity infusion of
approximately $6 million by Zell/Chilmark and was accomplished by way
of a merger of a corporation wholly owned by Zell/Chilmark into Jacor.
As part of this process, Zell/Chilmark acquired approximately 91.44% of
Jacor's outstanding Common Stock. Upon approval by the Federal
Communications Commission of the transfer of control of Jacor to Zell/
Chilmark on April 23, 1994, Jacor's Class B Common Stock automatically
converted to Class A Common Stock (the combination of the 2 classes of
stock is now referred to as the New Common Stock). As a result of the
restructuring, on January 11, 1993, all shareholders not electing to
receive
[[Page 18423]]
cash, including the Plan, received for each share of Common Stock held
.0423618 shares of New Common Stock and .1611234 Warrants to purchase
New Common Stock. The New Common Stock and the Warrants trade on the
National Association of Securities Dealers Automated Quotation (NASDAQ)
National Exchange. The Warrants are exercisable at $8.30 per share and
expire on January 14, 2000. Jacor represents that the decision as to
whether to keep the New Common Stock and Warrants held in the Jacor
Securities Fund or to sell those securities for cash was passed through
to Plan participants for all Accounts under the Plan other than the
funds in the QMCA.<SUP>2 Decisions regarding securities held in the
QMCA were made by the Trustees.
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<SUP>2 The applicant explains that, although Plan participants
had no authority over the investment of pre-1992 contributions, they
were given the authority to make decisions regarding the acquisition
of employer securities for all funds in their Accounts other than
the QMCA.
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6. Along with the option of receiving New Common Stock and
Warrants, shareholders who held shares as of November 27, 1992, were
given the right to purchase additional New Common Stock (the Additional
Rights Offering) at $5.74 per share.<SUP>3 Holders of New Common Stock
could purchase 0.1237 additional shares of New Common Stock for each
share of New Common Stock held immediately after the merger of the
subsidiary of Zell/Chilmark with Jacor and after certain stock sales by
creditors of Jacor (who had been issued stock in exchange for debt
obligations) to Zell/Chilmark.<SUP>4 Pursuant to the Additional Rights
Offering, Jacor sold a total of 1,000,000 shares of New Common Stock.
The Plan Trustees made the decision, on behalf of the Plan, to purchase
4,457 shares of New Common Stock in the Additional Rights Offering.
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<SUP>3 The Department is not providing any exemptive relief for
any prohibited transactions that may have arisen in connection with
the Plan's ability to acquire such additional shares of New Common
Stock.
<SUP>4 Zell/Chilmark and creditors who retained New Common
Stock in the debt restructuring were also given the opportunity to
purchase stock in the Additional Rights Offering.
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7. Since the Warrants acquired by the Plan fail to satisfy the
definition of ``qualifying employer securities'' contained in section
407(d)(5) of ERISA, the applicant is aware of the fact that prohibited
transactions have occurred in violation of the Act. Accordingly, Jacor
represents that within 90 days of the grant of this proposed exemption,
Jacor will file Forms 5330 with the Internal Revenue Service and will
pay all applicable excise taxes due with respect to past prohibited
transactions not covered by this exemption.
8. Under the restructuring described above, the Plan received
36,038 shares of New Common Stock and 137,074 Warrants. Prior to the
restructuring, there were 9,004,093 shares of Jacor common stock, of
which 866,514 shares, <SUP>5 or approximately 9.6%, were in the Plan.
After the restructuring, there were 9,004,093 shares of New Common
Stock, so that the Plan held less than .5% of that amount. Jacor
represents that, at the time the 137,074 Warrants were issued to the
Plan, they represented 2.6% of the assets of the Plan. Since that time,
11,290 of the Warrants have been distributed to terminated
participants. As of December 31, 1993, the remaining 125,784 Warrants
represented 22.6% of the assets of the Plan. This increase is due to
the increase in the value of each Warrant from $.20 on January 11, 1993
to $6.09 on December 31, 1993. Jacor represents that the decision of
whether to hold, sell, or exercise the Warrants for all Accounts under
the Plan other than the QMCA were passed through to the Plan
participants.
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<SUP>5 As part of the restructuring, 15,774 shares of Jacor
common stock were tendered by Plan participants for cash. The
remaining 850,740 shares were converted to New Common Stock in the
restructuring.
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9. To the extent that Plan participants do not have investment
authority over the Warrants, decisions regarding Warrants held in the
QMCA will be made by an independent fiduciary retained specifically for
that purpose. The Fifth Third Bank (the Bank) has been retained as an
independent fiduciary to represent the interests of the Plan with
respect to all securities issued by Jacor including the Warrants,
except to the extent that such investment authority is being exercised
by participants in the Plan. At such time that the participants in the
Plan are given full authority over all employer securities held in the
Plan, the Bank states that it will no longer have any investment
authority under the terms of its Trust Agreement. The Bank represents
that, as of February 23, 1996, participants in the Plan have full
investment authority over employer securities held by the Plan (see
rep. 3, above).
10. The Bank is a subsidiary of Fifth Third Bancorp, Inc., a bank
holding company that is headquartered in Cincinnati, Ohio. The Bank has
been in existence for over 100 years. The trust department of the Bank
has $6.6 billion of assets under management, of which $2.5 billion of
assets is held by the Bank as fiduciary of over 500 plans that are
subject to the Act. The Bank is not related to Jacor.
11. The Bank represents that it is fully aware of its duties and
responsibilities as a fiduciary under the Act. In fulfilling its
duties, the Bank reviewed the terms and conditions of the Common Stock
and Warrants issued by Jacor and reviewed the most recent financial
statements of Jacor and other material it considered appropriate to
determine the financial condition of Jacor. Based on this review, and a
review of the current market for the securities issued by Jacor, the
Bank concluded, as of July 26, 1995, that it was currently in the best
interest of the Plan's participants and beneficiaries for the Plan to
retain all securities issued by Jacor that were currently held by the
Plan and that were subject to the investment discretion of the Bank.
12. The Bank represents that it will continue to monitor the Plan's
holding of those securities issued by Jacor that are subject to the
investment discretion of the Bank. In exercising that discretion as a
fiduciary under the Act, the Bank will on an on-going basis review all
relevant financial information related to Jacor to determine whether
the Plan should continue to hold or should sell the Jacor Common Stock
and to determine whether the Plan should hold, sell or exercise the
Warrants, or let the Warrants expire without exercise.<SUP>6
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6 The Bank represents that it would only let the Warrants
expire without exercise if they had no value, which could occur if
the value of the New Common Stock drops below the exercise price of
the Warrants ($8.30 per share) prior to the expiration of the
Warrants on January 14, 2000. As of February 20, 1996, the value of
the New Common Stock was $21.25. As a result, it is not likely that
the Warrants would be allowed to expire without exercise. In any
case, it is not anticipated that the Bank would be responsible for
that decision since all investment authority in connection with the
Warrants is currently with Plan participants.
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13. In summary, the applicant represents that the transactions
satisfy the criteria of section 408(a) of the Act for the following
reasons: (a) the Plan's acquisition of the Warrants resulted from an
independent act of the Employer; (b) with respect to all aspects of the
restructuring, all holders of the Common Stock were treated in the same
manner, including the Plan; (c) all decisions with respect to the
Plan's acquisition, holding and control of the Warrants were made by
the individual participants whose Accounts held interests in the Jacor
Securities Fund, except with respect to the QMCA; (d) with respect to
the QMCA, the Bank, an independent fiduciary reviewed the investments
as of July 26, 1995 and determined that the Plan's continued holding of
the employer securities was
[[Page 18424]]
appropriate and in the Plan's best interest; and (e) the Bank continued
to monitor the holding of the employer securities by the QMCA until
such time as Plan participants were given full authority over the
investment, and determined whether the Plan should hold, sell or
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exercise the Warrants or let the Warrants expire without exercise.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
EAI Partners, L.P. (EAI), Located in Norwalk, CT
[Application No. D-10147]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).<SUP>7
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7 For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section I. Exemption for the In-Kind Transfer of Assets
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (F) of the Code, shall not apply, as of December 29, 1995, to
the in-kind transfer of assets of employee benefit plans that are
participant-directed account plans intended to satisfy section 404(c)
of the Act and as to which EAI serves as a fiduciary (the Client
Plans), including a plan established by EAI (the EAI Plan), as well as
two plans that are sponsored by affiliates of EAI, namely, the Harding
Service Corporation et al. Profit Sharing Plan and Trust (the Harding
Plan) and the Stockwood VII, Inc. 401(k) Plan (the Stockwood
Plan),<SUP>8 that are held in the Small Managers Equity Fund Trust
(SMEF) maintained by EAI in exchange for shares of the EAI Select
Managers Equity Fund (the Fund), an open-end investment company
registered under the Investment Company Act of 1940 (the '40 Act) for
which Evaluation Associates Capital Markets, Inc. (EACM), a wholly
owned subsidiary of EAI, acts as investment adviser, in connection with
the partial termination of SMEF.
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\8\ The Client Plans, the EAI Plan, the Harding Plan and the
Stockwood Plan are collectively referred to herein as the Plans. In
addition, the EAI Plan, the Harding Plan and the Stockwood Plan are
collectively referred to herein as the Related Plans.
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This proposed exemption is subject to the following conditions:
(a) No sales commissions or other fees, including any fees payable
pursuant to Rule 12b-1 of the '40 Act (the 12b-1 Fees), are paid by a
Plan in connection with the purchase of Fund shares through the in-kind
transfer of SMEF assets.
(b) All of the assets of a Plan that are held in SMEF are
contributed by such Plan in-kind to the Fund in exchange for shares of
such Fund. A Plan not electing to invest in the Fund receives a
distribution of its allocable share of the assets of SMEF either in
cash or in-kind.
(c) Each Plan receives shares of the Fund which have a total net
asset value that is equal in value to such Plan's allocable share of
the assets of SMEF as determined in a single valuation performed in the
same manner at the close of the same business day, using independent
sources in accordance with the procedures set forth in Rule 17a-7(b)
(Rule 17a-7) under the 1940 Act, as amended, and the procedures
established by the Fund pursuant to Rule 17a-7 for the valuation of
such assets. Such procedures must require that all securities for which
a current market price cannot be obtained by reference to the last sale
price for transactions reported on a recognized securities exchange or
NASDAQ be valued based on an average of the highest current independent
bid and lowest current independent offer, as of the close of business
on the Friday preceding the weekend of the in-kind contribution of SMEF
assets to the Fund, determined on the basis of reasonable inquiry from
at least three sources that are broker-dealers or pricing services
independent of EAI.
(d) On behalf of each Plan, a second fiduciary who is independent
of and unrelated to EAI (the Second Fiduciary) receives advance written
notice of the in-kind transfer of assets of SMEF to the Fund and full
written disclosure, which includes, but is not limited to, the
following information concerning the Fund:
(1) A current prospectus for the Fund in which a Plan is
considering investing.
(2) A statement describing the fees for investment advisory or
similar services that are to be paid by the Fund to EACM; the fees
retained by EACM for secondary services (the Secondary Services), as
defined in paragraph g of Section II below; and all other fees to be
charged to or paid by the Plan and by such Fund to EAI, EACM or to
unrelated parties, including the nature and extent of any differential
between the rates of the fees.
(3) The reasons why EAI considers such investment to be appropriate
for the Plan.
(4) Upon request of the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption, if granted.
(e) On the basis of the foregoing information, the Second Fiduciary
authorizes in writing the in-kind transfer of a Plan's assets invested
in SMEF to the Fund, in exchange for shares of the Fund, and the fees
received by EACM in connection with its investment advisory services to
the Fund. Such authorization by the Second Fiduciary will be consistent
with the responsibilities, obligations and duties imposed on
fiduciaries under Part 4 of Title I of the Act.
(f) EAI sends by regular mail to the Second Fiduciary of each
affected Plan, the following information:
(1) Not later than 30 days after the completion of the in-kind
transfer transaction, a written confirmation which contains--
(A) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4) of the '40 Act;
(B) The price of each such security involved in the transaction;
and
(C) The identity of each pricing service or market maker consulted
in determining the value of such securities.
(2) Within 90 days after the completion of each transfer, a written
confirmation which contains--
(A) The number of SMEF units held by the Plan immediately before
the transfer, the related per unit value and the total dollar amount of
such SMEF units; and
(B) The number of shares in the Fund that are held by the Plan
following the transfer, the related per share net asset value and the
total dollar amount of such shares.
(g) On an ongoing basis, EAI provides a Plan investing in the Fund
with--
(1) A copy of an updated prospectus of such Fund, at least
annually; and
(2) Upon request, a report or statement (which may take the form of
the most recent financial report, the current statement of additional
information, or some other written statement) containing a description
of all fees paid by the Fund to EAI and its affiliates.
(h) As to each Plan, the combined total of all fees received by EAI
and/or its affiliates for the provision of services to the Plan, and in
connection with the provision of services to the Fund in
[[Page 18425]]
which the Plan invests, is not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
(i) All dealings between a Plan and the Fund are on a basis no less
favorable to the Plan than dealings between the Fund and other
shareholders.
(j) EAI maintains for a period of six years the records necessary
to enable the persons described below in paragraph (k) to determine
whether the conditions of this exemption have been met, except that (1)
a prohibited transaction will not be considered to have occurred if,
due to circumstances beyond the control of EAI, the records are lost or
destroyed prior to the end of the six year period, and (2) no party in
interest other than EAI, 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 the records are not maintained
or are not available for examination as required by paragraph (k) of
this Section II; and
(k)(1) Except as provided in paragraph (k)(2) and notwithstanding
any provisions of section 504 (a)(2) and (b) of the Act, the records
referred to in paragraph (j) are unconditionally available at their
customary location for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC);
(B) Any fiduciary of a Plan who has authority to acquire or dispose
of shares of the Fund owned by such Plan, or any duly authorized
employee or representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described in paragraph (k)(1)(B)-(D) shall
be authorized to examine trade secrets of EAI, or commercial or
financial information which is privileged or confidential.
Section II. Definitions
For purposes of this proposed exemption:
(a) The term ``EAI'' means EAI Partners, L.P. and the term ``EACM''
refers to Evaluation Associates Capital Markets, Inc.
(b) An ``affiliate'' of EAI includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with EAI. (For purposes of this paragraph, the term ``control'' means
the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(2) Any officer, director, employee, relative or partner in such
person, and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(c) The term ``Fund'' refers to the EAI Select Managers Investment
Fund, a diversified open-end investment company registered under the
'40 Act for which EACM serves as an investment adviser and may also
provide some other ``Secondary Service'' (as defined below in paragraph
(g) of this Section II) which has been approved by the Fund.
(d) The term ``net asset value'' means the amount for purposes of
pricing all purchases and redemptions of Fund shares, calculated by
dividing the value of all securities, determined by a method as set
forth in a Fund's prospectus and statement of additional information,
and other assets belonging to the Fund, less the liabilities chargeable
to the portfolio, by the number of outstanding shares.
(e) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or member of the ``family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(f) The term ``Second Fiduciary'' means a fiduciary of a plan who
is independent of and unrelated to EAI. For purposes of this exemption,
the Second Fiduciary will not be deemed to be independent of and
unrelated to EAI if--
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by, or is under common control with EAI;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary is an officer, director,
partner or employee of EAI (or is a relative of such persons;
(3) Such Second Fiduciary directly or indirectly receives any
compensation or other consideration for his or her own personal account
in connection with any transaction described in this proposed
exemption. However, with respect to the Related Plans (i.e., the EAI
Plan, the Harding Plan and the Stockwood Plan), the Second Fiduciary
may receive compensation from EAI in connection with the transaction
contemplated herein, but the amount or payment of such compensation may
not be contingent upon or be in any way affected by the Second
Fiduciary's ultimate decision regarding whether the Related Plans may
participate in such transaction.
With the exception of the Related Plans, if an officer, director,
partner or employee of EAI (or relative of such persons), is a director
of such Second Fiduciary, and if he or she abstains from participation
in the choice of a Client Plan's investment adviser, the approval of
any such purchase or sale between a Client Plan and the Fund, and the
approval of any change of fees charged to or paid by the Client Plan,
the transaction described in Section I above, then paragraph (f)(2) of
this Section II, shall not apply.
(g) The term ``Secondary Service'' means a service, other than
investment advisory or similar service which is provided by EACM to the
Fund. However, the term ``Secondary Service'' does not include any
brokerage services provided by EAI Securities Inc. (EAISI) to the Fund.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
December 29, 1995.
Summary of Facts and Representations
Description of the Parties
1. The parties involved in the subject transaction are described as
follows:
(a) EAI is a Delaware limited partnership maintaining its principal
executive office in Norwalk, Connecticut. EAI provides investment
consulting services to a number of employee benefit plan clients
through SMEF, a collective investment fund. As of October 1, 1995, EAI
had approximately $216 million of Plan assets under management in SMEF,
of which $62 million was held for participant-directed plans.
(b) SMEF, a collective investment fund established by EAI, has been
organized to comply with Revenue Ruling 81-100. SMEF is trusteed by
Boston Safe Deposit and Trust Company. Following the in-kind transfer
transaction that is described herein, SMEF has continued to exist
albeit with reduced assets.
(c) The Fund was organized on September 27, 1995 as a Massachusetts
business trust. It is registered as a no-load, open-end investment
company with the SEC under the '40 Act. Shares of beneficial interest
are being offered and sold pursuant to a registration statement under
the Securities Exchange Act of 1933 Act, as amended.
(d) EACM, a wholly owned subsidiary of EAI, manages the Fund and
[[Page 18426]]
negotiates investment advisory contracts and contracts for Secondary
Services. EACM also serves as the investment adviser to the Fund and
will receive investment advisory fees from the Fund.
(e) EAISI, a wholly owned subsidiary of EAI, serves as the
distributor of shares of the Fund but it does not receive any
compensation from the Fund.
(f) The Plans which are covered by the subject transaction include
certain Client Plans that are participant-directed account plans within
the meaning of section 404(c) of the Act for which EAI formerly served
as a fiduciary through its management of Plan assets that had been
invested in SMEF. Also covered by the subject transaction are the EAI
Plan as well as Plans that are sponsored by the Harding Services
Corporation (Harding) and Stockwood VII, Inc. (Stockwood), which are
affiliates of EAI.<SUP>9 EAI formerly provided investment management
services to the Related Plans by reason of their investment in SMEF
through the end of 1995 but it did not charge the Related Plans any
fees with respect to such services. The EAI Plan, the Harding Plan and
the Stockwood Plan are participant-directed, defined contribution
plans.
---------------------------------------------------------------------------
<SUP>9 Specifically, EAI and EACM both have officers and
directors and, in the case of EAI, equity holders who are officers,
directors and affiliates of Harding and Stockwood.
---------------------------------------------------------------------------
As of September 30, 1995, the participant, asset breakdown and the
identities of the trustees of the Related Plans were as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
No.
Related plans participants Total assets Trustees
--------------------------------------------------------------------------------------------------------------------------------------------------------
EAI Plan....................................... 121 $11,877,063 Elke Bartel, Jeanne Gustafson and
Malin Zergiebel.
Harding Plan................................... 99 9,800,000 Kurt Borowsky and Frank Richardson.
Stockwood Plan................................. 10 371,000 Kurt Borowsky and Frank Richardson.
--------------------------------------------------------------------------------------------------------------------------------------------------------
It is represented that none of the Related Plans is a party in interest
with respect to the other within the meaning of section 3(14) of the
Act.
(g) Wilmington Trust Company (WTC) of Wilmington, Delaware, has
been retained by EAI to serve as the Second Fiduciary for the Related
Plans. In such capacity, WTC was hired to approve the in-kind transfer
of the assets of the Related Plans that had been invested in SMEF to
the Fund, in exchange for shares of the Fund. WTC, the primary
subsidiary of Wilmington Trust Corporation, was established in 1903.
WTC is wholly independent of EAI and its affiliates.
As of December 31, 1994, WTC exercised discretionary authority over
approximately $26.5 billion of fiduciary assets, including
approximately $14.8 billion of the assets of plans covered by the Act
as well as non-qualified plans. Also as of December 31, 1994, WTC
served as directed trustee, agent or custodian with respect to more
than $5 billion of assets of plans covered by the Act and nonqualified
employee benefit plans.
Description of the Transaction
2. Prior to December 29, 1995, EAI required the Plans involved
herein to withdraw their assets from SMEF. It then provided these Plans
with the opportunity to contribute their withdrawn SMEF assets to the
Fund in exchange for shares of the Fund. The principal reason for the
in-kind transfer of the Plans' assets that had been invested in SMEF to
the Fund was an SEC ruling pertaining to section 3(c)(1) of the '40
Act.<SUP>10 In that ruling, the SEC opined that each participant in a
Plan providing for participant-directed investments would be counted
for purposes of subjecting a collective investment fund, such as SMEF,
to reporting and disclosure requirements applicable to open-end
companies. In accordance with the SEC interpretation, EAI believed that
the assets of the affected Plans had to be removed from SMEF prior to
January 1, 1996.
---------------------------------------------------------------------------
\10\ See Latham & Watkins, SEC No-Action Letter, 1994 SEC No
Act. LEXIS 910 (December 28, 1994).
---------------------------------------------------------------------------
In addition, EAI believed that the interests of these Plans would
be appropriately served by use of a mutual fund, such as the Fund.
According to EAI, mutual funds are under the supervision of the SEC,
which places a greater emphasis on participant disclosure and which
provides a mechanism for approval of disclosure documentation for the
Fund. Moreover, EAI noted that mutual funds would afford Plan sponsors
and participants with easier monitoring of investments since
information concerning investment performance of the Fund would be
available in daily newspapers of general circulation.
Accordingly, EAI requests retroactive exemptive relief from the
Department with respect to the in-kind transfer of the assets of
certain Plans that had been invested in SMEF, in exchange for shares of
the Fund. The in-kind transfer transaction occurred on December 29,
1995 in connection with the partial termination of SMEF. If granted,
the proposed exemption would be effective as of December 29,
1995.<SUP>11
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\11\ EAI is not requesting an exemption with respect to the
investment in the Fund by the EAI Plan, the Harding Plan or the
Stockwood Plan. EAI represents that the Related Plans may acquire or
sell share of the Fund pursuant to Prohibited Transaction Exemption
(PTE) 77-3 (42 FR 18734, April 8, 1977). PTE 77-3 permits 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, provided certain conditions are met. The
Department expresses no opinion on whether any transactions between
the Fund and the Related Plans would be covered by PTE 77-3.
Similarly, EAI is not requesting exemptive relief with respect
to future acquisitions or sales of shares of the Fund by the Client
Plans. EAI represents that such transactions would be covered under
PTE 77-4 (42 FR 18732, April 8, 1977). In pertinent part, PTE 77-4
permits the purchase and sale by an employee benefit plan of shares
of a registered open-end investment company when a fiduciary with
respect to the plan is also the investment adviser of the investment
company. However, again, the Department expresses no opinion on
whether any transactions between the Client Plans and the Fund would
be covered by PTE 77-4.
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3. Plan assets formerly invested in SMEF that were exchanged for
shares of the Fund occurred in two simultaneous phases. First, EAI
obtained written approvals from all Second Fiduciaries with respect to
the in-kind transfer. EAI then transferred to each Plan its allocable
share of all assets of SMEF. It is represented that such assets
consisted of marketable securities and cash balances. Second, the
distributed assets were transferred by the Plan to the Fund, and, in
exchange, the Fund issued to each Plan an appropriate number of shares
of the Fund. These shares had an aggregate value equal to the aggregate
value of each Plan's allocable share of SMEF assets that were
transferred to the Fund.
4. With respect to the initial disclosures provided to each Second
Fiduciary, EAI represents that prior to
[[Page 18427]]
investing in the Fund, it obtained the affirmative written approval of
a Second Fiduciary of a Plan who was generally the Plan's named
fiduciary, trustee or sponsoring employer. In the case of the Related
Plans, WTC was retained for this purpose. EAI provided each Second
Fiduciary with a current prospectus for the Fund. The disclosure
statement described the fees for investment advisory or similar
services, the fees for Secondary Services and all other fees to be
charged to, or paid by, a Plan (and by such Fund) to EACM or to
unrelated parties, including the nature and extent of any differential
between the rates of the fees. In addition, the disclosure statement
specified the reasons why EAI considered an investment in the Fund was
appropriate for a Plan.
On the basis of such information, the Second Fiduciary authorized
the investment of Plan assets in the Fund through an in-kind transfer
of assets received from SMEF. Such authorization was given by the
Second Fiduciary to EAI in writing.
5. EAI represents that the in-kind transfer transaction was
conducted over the weekend of December 29, 1995 in accordance with Rule
17a-7 under the '40 Act and the procedures established by the Fund
pursuant to Rule 17a-7 for the valuation of such assets. EAI notes that
Rule 17a-7 provides an exemption from section 17(a) of the '40 Act,
which prohibits, among other things, principal transactions between an
investment company and its investment adviser or affiliates of the
investment adviser.
Among the conditions of Rule 17a-7 <SUP>12 is the requirement that
the transaction be effected at the ``independent current market price''
for the security involved. In this regard, the ``current market price''
for specific types of SMEF assets involved in the in-kind transfer was
determined as follows:
---------------------------------------------------------------------------
\12\ Rule 17a-7 also includes the following requirements: (a)
the transaction must be consistent with the investment objectives
and policies of the Fund, as described in its registration
statement; (b) the security that is the subject of the transaction
must be one for which market quotations are readily available; (c)
no brokerage commissions or other remuneration may be paid in
connection with the transaction; and (d) the Fund's board of
directors (i.e., those directors who are independent of the Fund's
investment adviser) must adopt procedures to ensure that the
requirements of Rule 17a-7 are followed, and determine no less
frequently than quarterly that the transactions during the preceding
quarter were in compliance with such procedures.
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(a) If the security was a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the
'34 Act), the last sale price with respect to such security reported in
the consolidated transaction reporting system (the Consolidated System)
for December 29, 1995; or if there were no reported transactions in the
Consolidated System that day, the average of the highest current
independent bid and the lowest current independent offer for such
security (reported pursuant to Rule 11Ac1-1 under the '34 Act), as of
the close of business on December 29, 1995; or
(b) If the security was not a reported security, and the principal
market for such security was an exchange, then the last sale on such
exchange on December 29, 1995; or if there were no reported
transactions on such exchange that day, the average of the highest
current independent bid and lowest current independent offer on such
exchange as of the close of business on December 29, 1995; or
(c) If the security was not a reported security and was quoted in
the NASDAQ system, then the average of the highest current independent
bid and lowest current independent offer reported on Level 1 of NASDAQ
as of the close of business on December 29, 1995 or
(d) For all other securities, the average of the highest current
independent bid and lowest current independent offer as of the close of
business on December 29, 1995, determined on the basis of reasonable
inquiry.
6. As stated above, the in-kind transfer transaction occurred over
the weekend of December 29, 1995, using the market values as of the
preceding Friday. The value of SMEF was determined by the custodian and
portfolio accountant for the Fund in coordination with EAI. Securities
listed on the exchange were valued at their closing prices on that
Friday. Other securities were valued based on the average of current
independent bid and ask quotations as of that Friday obtained from
three independent brokers (or under a method otherwise in accordance
with Rule 17a-7). Any fees charged by independent brokers were the
responsibility of EAI. The contribution of securities was completed by
the opening of business on January 2, 1996, such that Plans whose SMEF
assets were contributed to the Fund held shares of the Fund which had
the same aggregate value as their units in SMEF as of the preceding
Friday. No sales commissions or other fees, including 12b-1 Fees, were
paid by the Plans in connection with the purchase of Fund shares
through the in-kind transfer of a Plan's assets that were invested in
SMEF.
7. Following the in-kind transfer transaction, EAI provided each
affected Plan with a written confirmation statement on January 31,
1996. This statement set forth (a) the number of SMEF units held by the
Plan immediately before the conversion, the related per unit value and
the total dollar amount of such SMEF units; and (b) the number of
shares of the Fund that are held by the Plan following the conversion,
the related per share net asset value and the total dollar amount of
such shares.
In addition, on January 31, 1996, EAI provided each affected Plan
with written confirmation of (a) the identity of each security that was
valued for purposes of the transaction in accordance with Rule 17a-
7(b)(4); (b) the price of each such security for purposes of the
transaction; and (c) the identity of each pricing service or market
maker consulted in determining the value of such securities.
Representations of the Second Fiduciary for the Related Plans Regarding
the In-Kind Transfer
8. As stated above, WTC was retained by EAI as the Second Fiduciary
to oversee the in-kind transfer transaction on behalf of the EAI Plan,
the Stockwood Plan and the Harding Plan. In such capacity, WTC
represented that it understood and accepted the duties,
responsibilities and liabilities in acting as a fiduciary with respect
to the Related Plans including those duties, responsibilities and
liabilities that are imposed on fiduciaries under the Act.
WTC stated that it considered the effect and the implications of
the transaction on the Related Plans as well as other Plan clients of
EAI which had invested in SMEF. WTC noted that although SMEF would
continue to exist after December 31, 1995, it would be maintained for
Plans that were not participant-directed. Thus, WTC explained that the
in-kind transfer transaction was being offered to certain Plans
invested in SMEF on terms that were comparable to and no less favorable
than the terms that would have been reached among unrelated parties.
WTC represented that the in-kind transfer transaction was in the
best interest of the Related Plans and their participants and
beneficiaries for the following reasons: (a) In terms of the investment
policies and objectives pursued, the Fund substantially replicates SMEF
and thus the impact of the transaction on a Related Plan and its
participants would be de minimis; (b) the Fund would probably continue
to experience relative investment performance similar in nature to SMEF
given the continuity of investment objectives and policies, management
oversight and portfolio management personnel; (c) the in-kind transfer
[[Page 18428]]
transaction would not adversely affect the cash flows, liquidity or
investment diversification of a Related Plan; (d) the benefits to be
derived by the Related Plans and their participants investing in the
Fund (e.g., broader distribution permitted of the Fund to different
types of plans impacting positively on the asset size of the Fund and
resulting in cost savings to shareholders) would more than offset the
impact of minimum additional expenses that might be borne by the
Related Plans.
In opining on the appropriateness of the in-kind transfer
transaction, WTC represented that it conducted an overall review of the
Related and their respective Plan documents. WTC also stated that it
examined the total investment portfolios for the Related Plans to
determine whether or not the Related Plans were in compliance with
their investment objectives and policies. Further, WTC stated that with
respect to the Related Plans, it examined their overall liquidity
requirements and reviewed the concentration of their assets that had
been invested in SMEF as well as the portion of SMEF that comprised
their assets. Finally, WTC represented that it reviewed the
diversification provided by the investment portfolios of the Related
Plans. Based upon its review and analysis of the foregoing, WTC
represented that the in-kind transfer transaction would not adversely
affect the total investment portfolios of the Related Plans or
compliance by the Related Plans with their stated investment
objectives, policies, cash flows, liquidity positions or
diversification requirements.
As the Second Fiduciary, WTC represented that it was provided by
EAI with the confirmation statements described in Representation 7. In
addition, WTC stated that it supplemented its findings following review
of the post-transfer account information to confirm whether or not the
in-kind transfer transaction had resulted in the receipt by the Related
Plans of shares of the Fund equal in value to of each Related Plan's
pro rata share of assets of SMEF on the conversion date.
Ongoing Disclosures and Other Exemptive Conditions
9. On an annual basis, EAI will provide each affected Plan with a
copy of an updated prospectus for the Fund. Upon request, the Plan will
be provided with a report or statement (which may take the form of the
most recent statement of additional information, or some other written
statement) containing a description of all fees paid by the Fund to
EACM.
In addition, as to each individual Plan, the combined total of all
fees received by EAI and/or its affiliates for the provision of
services to the Plans, and in connection with the provision of services
to the Fund will not be in excess of ``reasonable compensation'' within
the meaning of section 408(b)(2) of the Act. Further, all dealings by
or between the Plans and the Fund will remain on a basis which is at
least as favorable to the Plans as such dealings are with other
shareholders of the Fund.
10. In summary, EAI represents that the in-kind transfer
transaction described herein satisfies the statutory criteria for an
exemption under section 408(a) of the Act because:
(a) A Second Fiduciary authorized in writing, such in-kind transfer
prior to the transaction and only after such Second Fiduciary received
full written disclosure of information concerning the Fund.
(b) Each Plan received shares of the Fund in connection with the
in-kind transfer of assets from SMEF to the Fund which were equal in
value to the Plan's allocable share of assets that had been invested in
SMEF on the date of the transfer as determined in a single valuation
performed in the same manner and at the close of the business day,
using independent sources in accordance with procedures established by
the Fund which complied with Rule 17a-7 of the '40 Act, as amended, and
the procedures established by the Fund pursuant to Rule 17a-7 for the
valuation of such assets.
(c) Within 30 days following the completion of the in-kind transfer
transaction, EAI provided the Second Fiduciary of each affected Plan
with written confirmation containing (1) the identity of the security
that was valued for purposes of the transaction in accordance with Rule
17a-7(b)(4) of the '40 Act, (2) the price of the security involved in
the transaction; and (3) the identity of the pricing service or market
maker consulted in determining the value of such securities.
(d) Within 90 days following the in-kind transfer, EAI mailed to
the Second Fiduciary of each Plan, written confirmation containing (1)
the number of SMEF units held by the Plan immediately before the
transfer, the related per unit value and the total dollar amount of
such SMEF units; and (2) the number of shares in the Fund that were
held by the Plan following the transfer, the related per share net
asset value and the total dollar amount of such shares.
(e) As to each Plan, the combined total of all fees received by EAI
and/or its affiliates for the provision of services to the Plans, and
in connection with the provision of services to the Fund will not be in
excess of ``reasonable compensation'' within the meaning of section
408(b)(2) of the Act.
(f) No sales commissions were paid by a Plan in connection with the
acquisition of shares of the Fund.
(g) With respect to investments in a Fund by the Plans, each Second
Fiduciary received full and detailed written disclosure of information
concerning the Fund, including a current prospectus and a statement
describing the fee structure, and such Second Fiduciary authorized, in
writing, the investment of the Plan's assets in the Fund and the fees
paid by the Fund to the EACM.
(h) EAI will provide ongoing disclosures to Second Fiduciaries of
Plans to verify the fees charged by the EACM to the Fund.
(i) All dealings by or between the Plans and the Fund have been and
will remain on a basis which is at least as favorable to the Plans as
such dealings are with other shareholders of the Fund.
Notice to Interested Persons
Notice of the proposed exemption will be given to Second
Fiduciaries of Plans that have investments in SMEF and from whom
approval was sought for the in-kind transfer of Plan assets to the
Fund. Such notice will be provided to interested persons by first class
mail within 14 days following the publication of the notice of pendency
in the Federal Register. Such notice will include a copy of the notice
of proposed exemption as published in the Federal Register as well as a
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2),
which shall inform interested persons of their right to comment on and/
or to request a hearing. Comments and requests for a public hearing are
due within 44 days of the publication of the notice of proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Pension Plan of Roper Hospital, Inc. (the Plan) Located in Charleston,
South Carolina
[Application No. D-10163]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and
[[Page 18429]]
in accordance with the procedures set forth in 29 CFR Part 2570,
Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the proposed cash sale (the Sale) by the
Plan of Separate Investment Account Group Annuity Policy No. GA-4619
(the Policy) maintained by New England Mutual Life Insurance Company
(NEL) to Roper Health System, Inc. (the Hospital), the Plan sponsor and
a party in interest with respect to the Plan, provided the following
conditions are satisfied: (a) The Sale is a one-time transaction for
cash; (b) the Plan receives no less than the greater of the fair market
value of the Policy at the time of the Sale, or $494,130; and (c) the
Plan does not pay any commissions or other expenses in connection with
the transaction.
Summary of Facts and Representations
1. The Hospital is a non-profit corporation with its principal
office at Charleston, South Carolina. The Hospital sponsors the Plan,
which is a defined benefit plan which had 2,431 participants and assets
of approximately $22,936,604 as of December 31, 1994. Wachovia Bank of
South Carolina, N.A. (the Bank) is the Plan's trustee. The Finance
Committee of the Board of Trustees of the Hospital (the Finance
Committee), however, has investment discretion with respect to the
Policy. The Finance Committee consists of officers of the Hospital.
2. In order to better serve the retirement goals of its employees,
the Board of Trustees of the Hospital (the Board) has determined to
restructure its retirement program. To that end, the Board has approved
the termination of the Plan effective as of September 30, 1995. In
place of the Plan, the Board has approved the adoption of a tax-
deferred savings plan under section 403(b) of the Code and an annuity
plan under section 403(a) of the Code. Pursuant to the termination
agreement (the Agreement), any assets remaining in the Plan after all
benefit liabilities have been satisfied in accordance with the Act will
be allocated and distributed to Plan participants in accordance with
the allocation formulas specified in the Agreement. Accordingly, it is
the Hospital's intent that the assets in the Plan be liquidated and
distributed or applied for the benefit of participants and
beneficiaries of the Plan. The applicant represents that pursuant to
the terms of the Agreement participants' accrued benefits (although not
surplus assets) were distributed on or about December 15, 1995.
Distribution of the surplus assets, which will include the proceeds
from the sale of the Policy to the Hospital (if the exemption proposed
herein is granted), will not occur until later in 1996.
3. Commencing in March of 1987 and continuing until March of 1988,
the Plan's prior trustees (the Prior Trustees), who consisted of
individuals who were officers of the Hospital, invested a total of
$1,398,064 in the Policy maintained by NEL. NEL maintains a separate
investment fund under the Policy known as the Developmental Properties
Account (the DPA). The DPA is invested in income-producing properties
throughout the United States. During the early 1990's, the DPA declined
significantly in value due to the recession and general downturn in the
real estate market, both of which adversely affected virtually all real
estate investment funds. The DPA currently is ``frozen'', meaning that
no withdrawal requests are being honored by NEL. In fact, withdrawal
requests have not been honored by NEL since June 30, 1991. Since that
date, the Policy has declined in value by approximately $909,316. The
Hospital first became aware that the DPA had been frozen at the same
time as other investors, on or about November 15, 1991, through the
1991 Third Quarter Report provided by NEL, and without any opportunity
to liquidate the Plan's investment. Accordingly, despite the DPA's
decline in value, the Plan has been forced to continue to hold the
Policy.<SUP>13 As of December 31, 1995, the fair market value of the
Plan's interest in the DPA was $494,130. The fair market value was
determined by NEL by multiplying the Plan's percentage ownership in the
DPA by the aggregate fair market value of the assets of the DPA.
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<SUP>13 The Department notes that the decisions to acquire and
hold the Policy are governed by the fiduciary responsibility
requirements of Part 4, Subtitle B, Title I of the Act. In this
regard, the Department is not herein proposing relief for any
violations of Part 4 which may have arisen as a result of the
acquisition and holding of the Policy issued by NEL.
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4. The applicant states that Mr. Fred Hyder of NEL has represented
that at least one investor in the DPA sold its interest in the DPA to
an unrelated buyer for one-third of its fair market value as determined
by NEL. The investor was a retirement plan that had been terminated by
the sponsoring employer. The trustee of the retirement plan was forced
to sell its interest in the DPA to an unrelated buyer well below its
stated fair market value in order to make distributions to participants
upon termination. Mr. Hyder also indicated that in his opinion there is
very little activity in the secondary market due to the inability of a
DPA investor to sell its interest in the DPA to an unrelated buyer for
its stated fair market value.
5. The Hospital has offered to purchase the Plan's interest in the
DPA for the greater of its current fair market value as determined by
NEL (without any diminution in value as described in rep. 4, above), or
$494,130. Under Section V of the Policy, the Plan cannot sell its
interest in the DPA without the consent of NEL (which consent cannot be
unreasonably withheld). However, NEL has agreed to the transfer of the
Plan's interest in the DPA to the Hospital, provided the exemption
proposed herein is granted. The applicant represents that the Finance
Committee has determined that the sale of the Policy to the Hospital is
in the best interests of the Plan and its participants and
beneficiaries because the sale will allow the Bank to liquidate the
Plan's investment in the DPA for the investment's current fair market
value and to distribute or apply the proceeds from the sale to
participants and beneficiaries in accordance with the Agreement. If the
exemption proposed herein is denied, there is no viable purchaser for
the DPA other than the Hospital. In addition, the Finance Committee
represents that if the exemption were denied, then the Plan would be
required to continue as a wasting trust solely for the purpose of
holding the Policy until it can be liquidated, which is unlikely to
occur in the near future.
6. The fair market value of the Policy will be determined by the
value reported by NEL as of the end of the quarter preceding the date
of sale. There will be no reduction in this value as described in rep.
4, above. Copley Real Estate Advisors (Copley), an indirect subsidiary
of NEL, acts as an asset manager and advisor to NEL with respect to the
DPA. Copley selects qualified appraisal firms to conduct annual outside
appraisals on the properties which make up the DPA. At quarterly dates
between annual appraisals, Copley's asset management group prepares
internal valuations. Copley represents that the internal valuations are
based on the work that is completed by the outside appraiser and the
same basic valuation methods used by the outside appraisers are used
for the internal valuation. The Hospital represents that the valuations
reported by NEL provide a reliable indication of the fair market value
of the Policy and
[[Page 18430]]
the DPA. NEL and Copley are independent of the Hospital and the Bank.
7. In summary, the applicant represents that the proposed
transaction satisfies the criteria contained in section 408(a) of the
Act because: (a) The Sale is a one-time transaction for cash, and the
Plan will pay no commissions or other expenses in connection with the
Sale; (b) the Plan will receive cash for the Policy in an amount not
less than the greater of the fair market value of the Policy as of the
date of the Sale, or $494,130; (c) the fair market value of the Policy
will be established by NEL, a party unrelated to the Plan and the
Hospital; and d) the Sale will remove the Policy, which has been
declining in value and is illiquid, from the Plan.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
First Virginia Banks, Inc., Located in Falls Church, Virginia
[Application Nos. D-10175 thru D-10177]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
The restrictions of sections 406(a), 406(b)(1) 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 (E) of the Code,
shall not apply to the following transactions provided that all of the
conditions set forth in Section II below are met:
(a) The cash sale on December 23, 1994 of certain variable rate
certificates of deposit (CDs) issued by Merrill Lynch National Bank,
Salt Lake City, Utah (the Merrill Lynch CDs) by forty (40) employee
benefit plans, Keogh plans and individual retirement accounts (IRAs),
for which First Knoxville Bank in Knoxville, Tennessee (the Bank)
serves as a fiduciary, to First Virginia Banks, Inc. (First Virginia),
a party in interest or disqualified person with respect to such plans
and IRAs;
(b) The cash sale on various dates during 1995 of certain fixed
rate CDs issued by various unrelated financial institutions (the Fixed
Rate CDs) by eighteen (18) employee benefit plans, Keogh plans and
IRAs, for which the Bank serves as a fiduciary to First Virginia, a
party in interest or disqualified person with respect to such plans and
IRAs; and
(c) The proposed cash sale of certain additional fixed rate CDs
issued by various unrelated financial institutions (the Additional
Fixed Rate CDs) by approximately twenty-one (21) employee benefit
plans, Keogh plans and IRAs, for which the Bank serves as a fiduciary,
to First Virginia, a party in interest or disqualified person with
respect to such plans and IRAs.
Section II--Conditions
(a) Each sale is a one-time transaction for cash;
(b) Each plan or IRA (hereafter referred to as ``Plan'') receives
an amount which is equal to the greater of (i) the face amount of the
CDs owned by the Plan, plus accrued but unpaid interest, at the time of
sale, or (ii) the fair market value of the CDs owned by the Plan as
determined by an independent, qualified appraiser at the time of the
sale;
(c) The Plans do not pay any commissions or other expenses with
respect to the sale of such CDs;
(d) The Bank, as trustee of the Plans, determines that the sale of
the CDs is in the best interests of each Plan and its participants and
beneficiaries at the time of the transaction;
(e) The Bank takes all appropriate actions necessary to safeguard
the interests of the Plans and their participants and beneficiaries in
connection with the transactions;
(f) Each Plan receives a reasonable rate of interest on the CDs
during the period of time such CDs are held by the Plan;
(g) The Bank or an affiliate maintains for a period of six years
the records necessary to enable the persons described below in
paragraph (h) to determine whether the conditions of this exemption
have been met, except that (1) a prohibited transaction will not be
considered to have occurred if, due to circumstances beyond the control
of the Bank or affiliate, the records are lost or destroyed prior to
the end of the six-year period, and (2) no party in interest other than
the Bank or affiliate 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 the records are not maintained
or are not available for examination as required by paragraph (h)
below; and
(h) (1) Except as provided below in paragraph (h)(2) and
notwithstanding any provisions of section 504(a)(2) of the Act, the
records referred to in paragraph (g) are unconditionally available at
their customary location for examination during normal business hours
by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (h)(1)(ii) and (iii)
shall be authorized to examine trade secrets of the Bank, or commercial
or financial information which is privileged or confidential.
EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of December 23, 1994, for the transactions described in Section I(a)
above, and the various appropriate sale dates in 1995 for the
transactions described above in Section I(b).
Summary of Facts and Representations
1. The Bank is a wholly-owned subsidiary of First Virginia. The
Bank, formerly called the First National Bank of Knoxville, was
acquired by First Virginia in June 1994. The Bank serves as trustee,
directed trustee, or custodian of various small employee benefit plans,
Keogh plans and IRAs (collectively, the Plans). The Bank, as trustee,
has investment discretion for the assets of the Plans.
The Bank represents that following its acquisition by First
Virginia, a number of problems surfaced upon review of the investment
portfolios of the Plans regarding their acquisition and holding of
certain CDs, as discussed below.<SUP>14
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\14\ The Department is expressing no opinion in this proposed
exemption regarding whether the acquisition and holding of the CDs
by the Plans violated any of the fiduciary responsibility provisions
of Part 4 of Title I of the Act.
The Department notes that section 404(a) of the Act requires,
among other things, that a fiduciary of a plan act prudently, solely
in the interest of the plan's participants and beneficiaries, and
for the exclusive purpose of providing benefits to participants and
beneficiaries when making investment decisions on behalf of a plan.
Section 404(a) of the Act also states that a plan fiduciary should
diversify the investments of a plan so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent
not to do so.
In this regard, the Department is not providing any opinion as
to whether a particular category of investments or investment
strategy would be considered prudent or in the best interests of a
plan as required by section 404 of the Act. The determination of the
prudence of a particular investment or investment course of action
must be made by a plan fiduciary after appropriate consideration to
those facts and circumstances that, given the scope of such
fiduciary's investment duties, the fiduciary knows or should know
are relevant to the particular investment or investment course of
action involved, including the plan's potential exposure to losses
and the role the investment or investment course of action plays in
that portion of the plan's investment portfolio with respect to
which the fiduciary has investment duties (see 29 CFR 2550.404a-1).
The Department also notes that in order to act prudently in making
such investment decisions, a plan fiduciary must consider, among
other factors, the availability, risks and potential return of
alternative investments for the plan. Thus, a particular investment
by a plan, which is selected in preference to other alternative
investments, would generally not be prudent if such investment
involves a greater risk to the security of a plan's assets than
comparable investments offering a similar return or result.
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[[Page 18431]]
The Merrill Lynch CDs
2. On October 18, 1993, the Bank, in its capacity as a fiduciary of
certain Plans, purchased the Merrill Lynch CDs through the brokerage
firm of Dunham & Associates Investment Counsel, Inc. (Dunham) of San
Diego, California. The Bank states that Dunham did not provide any
investment advice as a fiduciary regarding the investments made by the
Bank in the Merrill Lynch CDs for the Plans.
There were 40 Plans involved in the purchase of the Merrill Lynch
CDs by the Bank. Of these 40 Plans, approximately 32 Plans had only one
participant covered by the Plan. The Plan with the largest number of
participants was the Collier Development Company Profit Sharing Plan
(the Collier P/S Plan), which had 83 participants and beneficiaries.
The Collier P/S Plan had $101,149 in total assets, of which $26,000 or
approximately 26 percent was invested in the Merrill Lynch CDs. The
Plan with the largest amount of assets was the Theodore Haase, M.D.,
IRA (the Haase IRA) which had total assets of $1,172,511, at the time
of the transactions. The Haase IRA had $21,000 invested in the Merrill
Lynch CDs, which represented approximately two (2) percent of its total
assets. The Plan with the largest investment in the Merrill Lynch CDs
was the Gordon S. Hutchins IRA, which had such CDs with a face amount
of $99,000. This amount represented approximately 64 percent of such
Plan's total assets.
The percentage of a Plan's total assets represented by investments
in the Merrill Lynch CDs varied from as little as one (1) percent [e.g.
the Mulford Enterprises Profit Sharing Plan] to as much as 92 percent
[e.g. the Audrey Denton IRA]. However, most of the Plans had less than
25 percent of their total assets invested in the Merrill Lynch CDs.
3. The Merrill Lynch CDs were issued by Merrill Lynch National Bank
in Salt Lake City, Utah, with a total face value of $1,995,000, and are
scheduled to mature on October 18, 1998. The Merrill Lynch CDs owned by
the Plans had a total face value of $894,500. The Bank states that the
interest rate on the Merrill Lynch CDs was fixed at 5.00 percent per
annum for the first year. However, the interest rate in the subsequent
years until maturity on October 18, 1998, is a stated interest rate
offset by the current six-month London Interbank Offered Rate (LIBOR)
as follows: (i) years two and three--8.50 percent per annum minus six-
month LIBOR; and (ii) years four and five--10.50 percent minus six-
month LIBOR.
4. The Bank represents that the information provided by Dunham to
the Bank prior to the Bank's purchase of the Merrill Lynch CDs on
behalf of the Plans indicated that there was no early withdrawal
penalty. However, the Bank states that when it requested to redeem the
Merrill Lynch CDs without a withdrawal penalty, the request was
declined by Dunham, who indicated that such CDs could not be redeemed
prior to maturity, with or without penalty.
5. The Bank represents that the fair market value of the Merrill
Lynch CDs was significantly below their face value as of December 1994.
The Bank states that the significant decline in the fair market value
of the Merrill Lynch CDs was attributable to two factors: (i) the fact
that the interest rate on the CDs dropped to 2.54 percent (8.50 percent
minus LIBOR), effective for the six-month period beginning October 18,
1994; <SUP>15 and (ii) rising interest rates in the marketplace for
comparable fixed income investments of the same duration, as measured
by various interest rate indexes at the time.
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\15\ In this regard, the applicant states that the six-month
LIBOR rate was 3.375 percent on October 18, 1993, the date on which
the Merrill Lynch CDs were acquired, and 6.9375 percent on December
13, 1994, prior to the sale of such CDs to the Holding Company
discussed herein. The interest paid originally on the Merrill Lynch
CDs was 5.00 percent as of October 18, 1993, and 2.54 percent as of
December 13, 1994.
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Therefore, the Bank made a determination that it would be in the
best interests of the Plans to sell the CDs to the Holding Company to
avoid the investment losses which would result to the Plans from any
sale on the open market.
6. Davenport & Company of Virginia, Inc. (Davenport), an
independent qualified appraiser located in Richmond, Virginia,
appraised the Merrill Lynch CDs as having a fair market value of
approximately $70.75 per $100 of face value, as of December 23, 1994.
Davenport's analysis described the Merrill Lynch CDs as ``inverse
floaters'' paying below market interest rates at the time of the
transaction. Davenport states that the Merrill Lynch CDs are a
``derivative type of security'' which involves a complicated pricing
process to determine market value. Davenport represents that dealers
trading such securities use data from the interest rate swap market and
various interest rate forecasts to determine their bid prices. In
addition, Davenport notes that since the Merrill Lynch CDs are traded
over-the-counter and are not listed on an exchange, dealers have
different options as to how to value such securities. Davenport
concluded that as a result of the then current interest rates, as
measured by LIBOR and other indexes at the time of the transaction, and
market data concerning interest rate forecasts, there were few dealers
or other buyers interested in purchasing the Merrill Lynch CDs without
a significant discount on their face value.
7. On December 23, 1994, the Holding Company purchased the Merrill
Lynch CDs from the Plans for cash at their full face value, an amount
which was significantly above the fair market value of the CDs at that
time as determined by Davenport. In addition, the Holding Company paid
the Plans interest at the originally stated rate of 5.00 percent per
annum through the date of purchase, even though the Merrill Lynch CDs
began earning interest at an annual rate of 2.54 percent on October 18,
1994. The Plans did not pay any commissions or other expenses with
respect to the transactions.
The Bank states that it engaged in the transaction on behalf of the
Plans for the following reasons: (i) the purchase of the Merrill Lynch
CDs by the Holding Company provided the Plans with full access to the
total face value of the CDs, without any withdrawal penalty, and
avoided the investment loss which would have occurred from a sale of
the CDs on the open market; (ii) as a result of the transaction, the
Plans had the funds immediately available for either reinvestment at
the current higher market interest rates or for distribution to the
Plan participants and beneficiaries, as appropriate; (iii) the interest
rate of 5.00 percent per annum paid on the CDs by the Holding Company
was significantly higher than the effective interest rate of 2.54
percent per annum being paid on the CDs at the time of the transaction;
and (iv) since the Merrill Lynch CDs could not be redeemed prior to
maturity, such CDs became effectively an illiquid
[[Page 18432]]
investment which was unsuitable for the Plans.
Certain Fixed Rate CDs
8. On various dates prior to June 1994, the Bank, in its capacity
as a fiduciary of certain Plans, purchased the Fixed Rate CDs through
brokerage firms unrelated to the Bank and its affiliates. The Bank
states that these brokerage firms did not provide any investment advice
as a fiduciary regarding the investments made by the Bank in the Fixed
Rate CDs for the Plans. There were approximately forty-three (43)
different Fixed Rate CDs held by such Plans as of December 1994.
There were 18 Plans involved in the purchase of the Fixed Rate CDs
by the Bank. Of these 18 Plans, approximately 13 Plans had only one
participant covered by the Plan. The Plan with the largest number of
participants was the Farragut Ditching Profit Sharing Plan (the
Farragut P/S Plan), which had approximately 50 participants and
beneficiaries and total assets of $694,803 at the time of the
transactions. The Farragut P/S Plan had $196,000 invested in the Fixed
Rate CDs, which represented approximately 28 percent of its total
assets. The Plan with the largest amount of total assets was the Jayne
C. Tilley IRA (the Tilley IRA), which had approximately $989,733 at the
time of the transactions. The Plan with the largest investment in the
Fixed Rate CDs was also the Tilley IRA, which had such CDs with a face
amount of $209,000. This amount represented approximately 21 percent of
such Plan's total assets at the time of the transactions.
The percentage of a Plan's total assets represented by investments
in the Fixed Rate CDs varied from as little as one (1) percent [e.g.
the Dean Cox IRA] to as much as 96 percent [e.g. the National Fuel
SEP]. However, most of the Plans had less than 30 percent of their
total assets invested in the Fixed Rate CDs.
9. The Fixed Rate CDs were issued by various financial
institutions, all of which were unrelated to the Bank and its
affiliates. These financial institutions were: (a) First USA Bank, in
Wilmington, Delaware; (b) Bluebonnet Savings Bank, FSB, in Dallas,
Texas; (c) State Bank of India, in New York, New York; (d) Columbia
First Bank, in Arlington, Virginia; (e) Amerifed Bank, FSB, in Joliet,
Illinois; (f) Home Savings of America, in Los Angeles, California; (g)
FNB Boston, in Boston, Massachusetts; (h) Provident Bank, in
Cincinnati, Ohio; (i) Home Federal Bank of Tennessee, FSB, in
Knoxville, Tennessee; (j) Investors Thrift and Loan, in Monterey,
California; (k) Greenwood Trust Company, in New Castle, Delaware; and
(l) Merrill Lynch National Bank, in Salt Lake City, Utah.
The Fixed Rate CDs held by the Plans had a total face value of
$1,199,150, with maturity dates ranging from May 1995 to January 1999.
The Bank states that the interest rates on these CDs was fixed in each
case for the entire length of the CDs. The interest rates paid on the
Fixed Rate CDs ranged from 4.80 percent per annum for the CD issued by
Amerifed Bank [with a par value of $10,000 and maturity on August 18,
1995] to 6.25 percent per annum for the CD issued by FNB Boston [with a
par value of $20,100 and maturity on January 1, 1999]. However,
subsequent to the purchase of the Fixed Rate CDs by the Plans, the Bank
learned that these CDs could not be redeemed prior to maturity, with or
without penalty.
10. The Bank represents that the fair market value of each of the
Fixed Rate CDs was below its face value during 1995. The Bank states
that the decline in the fair market value of the Fixed Rate CDs was
attributable to rising interest rates in the marketplace for comparable
fixed income investments of the same duration, as measured by various
interest rate indexes at the time.
Therefore, the Bank made a determination that it would be in the
best interests of the Plans to sell the Fixed Rate CDs to the Holding
Company prior to their maturity to avoid any investment losses which
could result to the Plans from a sale of such CDs on the open market.
11. Davenport also appraised each of the Fixed Rate CDs as having a
fair market value which was below its face value at the time of the
subject transactions in 1995. These valuations ranged from
approximately $91.658 per $100 of face value, as of March 14, 1995, for
the Fixed Rate CD issued by Greenwood Trust [which pays 5.00 percent
per annum and is due to mature on September 28, 1998], to approximately
$99.216 per $100 face value, as of April 19, 1995, for the Fixed Rate
CD issued First USA Bank [which paid 6.15 percent per annum and matured
on May 29, 1995].
Davenport's analysis was based on information from brokerage firms
and banks that trade such CDs. Davenport represents that the Fixed Rate
CDs are not as liquid as other fixed income securities due to a number
of factors including par amount, lack of issuer recognition, limited
secondary market, lack of knowledge of the issuers financial strength
and their non-rated status. Davenport states that dealers that trade
such CDs usually demand yields between 50-70 basis points above the
yield for comparable U.S. Treasury securities to account for these
factors, despite the U.S. Government guarantee for CDs with face
amounts under $100,000. Davenport's analysis estimated that bids for
the Fixed Rate CDs would require an average yield of approximately 60
basis points above the yield for comparable U.S. Treasury securities,
before deducting approximately $7.50 per $1,000 face amount as an
average commission for an open market transaction. Davenport's
conclusions regarding the market value of the Fixed Rate CDs supported
the Bank's determinations to sell these CDs to the Holding Company.
12. On various dates during 1995, the Holding Company purchased the
Fixed Rate CDs from the Plans for cash prior to maturity at their full
face value, an amount which was above the fair market value of the CDs
at that time as determined by Davenport. The Bank states that these
transactions occurred on the following dates: (i) 10 Fixed Rate CDs
were sold on March 14, 1995; (ii) one Fixed Rate CD was sold on March
31, 1995; (iii) three Fixed Rate CDs were sold on April 7, 1995; (iv)
two Fixed Rate CDs were sold on April 19, 1995; (v) one Fixed Rate CD
was sold on April 27, 1995; (vi) three Fixed Rate CDs were sold on May
26, 1995; (vii) four Fixed Rate CDs were sold on June 1, 1995; (viii)
three Fixed Rate CDs were sold on June 2, 1995; (ix) one Fixed Rate CD
was sold on August 2, 1995; (x) five Fixed Rate CDs were sold on August
7, 1995; (xi) four Fixed Rate CDs were sold on August 8, 1995; and
(xii) six Fixed Rate CDs were sold on August 11, 1995. In each case,
the Holding Company paid the Plans any accrued but unpaid interest at
the stated fixed rate for the CD through the date of purchase. The
Plans did not pay any commissions or other expenses with respect to the
transactions.
The Bank states that it engaged in these transactions on behalf of
the Plans for the following reasons: (i) The purchase of the Fixed Rate
CDs by the Holding Company provided the Plans with full access to the
total face value of the CDs, without any withdrawal penalty, and
avoided the investment loss which would have occurred from a sale of
the CDs on the open market; (ii) as a result of the transaction, the
Plans had the funds immediately available for either reinvestment at
the current higher market interest rates or for distribution to the
Plan participants and beneficiaries, as appropriate; and (iii) since
the Fixed Rate CDs could not be redeemed prior to maturity, such CDs
became effectively illiquid investments which were unsuitable for the
Plans.
[[Page 18433]]
Additional Fixed Rate CDs
13. On various dates prior to June 1994, the Bank, in its capacity
as a fiduciary of certain Plans, purchased the Additional Fixed Rate
CDs through brokerage firms unrelated to the Bank and its affiliates.
The Bank states that these brokerage firms did not provide the Bank
with any investment advice as a fiduciary regarding the investments in
the Additional Fixed Rate CDs made for the Plans. There are
approximately sixteen (16) different Additional Fixed Rate CDs held by
such Plans.
There were 21 Plans involved in the purchase of the Additional
Fixed Rate CDs by the Bank. Of these 21 Plans, approximately 16 Plans
currently have only one participant covered by the Plan. The Plan with
the largest number of participants is the Bandit Lites Profit Sharing
Plan (the Bandit Lites P/S Plan), which has approximately 37
participants and beneficiaries. The Bandit Lites P/S Plan has
approximately $240,935 in total assets, of which $53,000 or
approximately 21 percent of such assets are invested in the Additional
Fixed Rate CDs. The Plan with the largest amount of assets is the
Douglas G. Slater IRA (the Slater IRA), which has approximately
$2,454,803. The Plan with the largest investment in the Additional
Fixed Rate CDs is also the Slater IRA, which has such CDs with a face
amount of $383,000. This amount represents approximately 15.5 percent
of such Plan's total assets.
The percentage of a Plan's total assets represented by investments
in the Additional Fixed Rate CDs varies from as little as two (2)
percent [e.g. the Donald Campbell SEP-IRA] to as much as 87 percent
[e.g. the William Myers IRA]. However, most of the Plans have less than
30 percent of their total assets invested in the Additional Fixed Rate
CDs.
14. The Additional Fixed Rate CDs were issued by various financial
institutions unrelated to the Bank and its affiliates (see list in
Paragraph 9 above). The Additional Fixed Rate CDs held by the Plans
have a total face value of $875,150, with maturity dates ranging from
June 1996 until January 1999. The Bank states that the interest rates
on these CDs are fixed in each case for the entire length of the CDs.
The interest rates on the Additional Fixed Rate CDs range from 5.00
percent per annum for the CD issued by Bluebonnet Savings Bank [with a
par value of $10,000 and maturity on June 14, 1996] to 5.50 percent per
annum for the CD issued by Provident Bank [with a par value of $19,000
and maturity on December 10, 1997].
The Bank represents that at the time the Additional Fixed Rate CDs
were purchased, the Bank believed that there was no early withdrawal
penalty. However, the Bank states that it subsequently learned that
these CDs cannot be redeemed prior to maturity, with or without
penalty.
15. The Bank proposes to sell the Additional Fixed Rate CDs to the
Holding Company for cash prior to their maturity at an amount equal to
the greater of either: (i) The face amount of such CDs, plus accrued
interest; or (ii) the fair market value of such CDs, plus accrued
interest, as determined by an independent, qualified appraiser at the
time of the transaction.
Davenport has provided an opinion as to the market value of the
Additional Fixed Rate CDs, as of September 21, 1995. Davenport's
valuations for these CDs as of such date ranged from approximately
$95.112 per $100 of face value for the Additional Fixed Rate CD issued
by Greenwood Trust [which pays 5.00 percent per annum and is due to
mature on September 29, 1998], to approximately $98.28 per $100 of face
value for the Additional Fixed Rate CD issued by Bluebonnet Savings
Bank [which pays 5.00 percent per annum and is due to mature on June
14, 1996].
The Bank states that it wants to engage in the proposed
transactions on behalf of the Plans for the following reasons: (i) The
purchase of the Additional Fixed Rate CDs by the Holding Company would
provide the Plans with full access to the total face value of the CDs,
without any withdrawal penalty, and would avoid the possibility of
investment losses that may occur in a sale of the CDs on the open
market; (ii) as a result of the transaction, the Plans will have the
funds immediately available for either reinvestment at any higher
market interest rates currently available at the time of the proposed
transaction or for distribution to the Plan participants and
beneficiaries, as appropriate; and (iii) since the Additional Fixed
Rate CDs cannot be redeemed prior to maturity, such CDs are effectively
illiquid investments which are unsuitable for the Plans.
Therefore, the Bank believes that it would be in the best interests
of the Plans to sell certain of the Additional Fixed Rate CDs to the
Holding Company prior to their maturity. The Bank states that the Plans
will not pay any commissions or other expenses with respect to the
sale.
16. In summary, the Bank represents that the subject transactions
satisfy the statutory criteria of section 408(a) of the Act because:
(a) Each sale has been and will be a one-time transaction for cash; (b)
each Plan has received or will receive an amount which is equal to the
greater of (i) the face amount of the CDs owned by the Plan, plus
accrued but unpaid interest, at the time of sale, or (ii) the fair
market value of the CDs owned by the Plan as determined by an
independent, qualified appraiser at the time of the sale; (c) the Plans
have not paid and will not pay any commissions or other expenses with
respect to the sales of the CDs; (d) the Bank, as trustee of the Plans,
has determined and will determine that each sale of the CDs was or will
be in the best interests of the Plan and its participants and
beneficiaries at the time of the transaction; (e) the Bank has taken
and will take all appropriate actions necessary to safeguard the
interests of the Plans and their participants and beneficiaries in
connection with the transactions; and (f) each Plan has received and
will receive a reasonable rate of interest on the CDs during the period
of time such CDs were or are held by the Plan.
Notice to Interested Persons
The applicant states that notice of the proposed exemption shall be
made by first class mail to the appropriate Plan fiduciaries within
fifteen days following the publication of the proposed exemption in the
Federal Register. This notice shall include a copy of the notice of
proposed exemption as published in the Federal Register and a
supplemental statement (see 29 CFR 2570.43(b)(2)) which informs
interested persons of their right to comment on and/or request a
hearing with respect to the proposed exemption. Comments and requests
for a public hearing are due within forty-five days following the
publication of the proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
First Security Group Life Insurance Plan (the Plan) Located in Salt
Lake City, Utah
[Application No. L-10178]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of sections 406 (a) and (b) of the Act shall not apply to the
reinsurance of risks and the receipt of
[[Page 18434]]
premiums therefrom by First Security Life Insurance Company of Arizona
(FSLIA) from the insurance contracts sold by Minnesota Mutual Life
Insurance Company (MM) or any successor insurance company to MM which
is unrelated to First Security Corporation (FSC), to provide life
insurance benefits to participants in the Plan, provided the following
conditions are met:
(a) FSLIA--
(1) Is a party in interest with respect to the Plan by reason of a
stock or partnership affiliation with FSC that is described in section
3(14) (E) or (G) of the Act,
(2) Is licensed to sell insurance or conduct reinsurance operations
in at least one of the United States or in the District of Columbia,
(3) Has obtained a Certificate of Authority from the Insurance
Commissioner of its domiciliary state which has neither been revoked
nor suspended, and
(4)(A) Has undergone an examination by an independent certified
public accountant for its last completed taxable year immediately prior
to the taxable year of the reinsurance transaction; or
(B) Has undergone a financial examination (within the meaning of
the law of its current domiciliary State, Arizona) by the Insurance
Commissioner of the State of Arizona within 5 years prior to the end of
the year preceding the year in which the reinsurance transaction
occurred.
(b) The Plan pays no more than adequate consideration for the
insurance contracts;
(c) No commissions are paid with respect to the direct sale of such
contracts or the reinsurance thereof; and
(d) For each taxable year of FSLIA, the gross premiums and annuity
considerations received in that taxable year by FSLIA for life and
health insurance or annuity contracts for all employee benefit plans
(and their employers) with respect to which FSLIA is a party in
interest by reason of a relationship to such employer described in
section 3(14) (E) or (G) of the Act does not exceed 50% of the gross
premiums and annuity considerations received for all lines of insurance
(whether direct insurance or reinsurance) in that taxable year by
FSLIA. For purposes of this condition (d):
(1) the term ``gross premiums and annuity considerations received''
means as to the numerator the total of premiums and annuity
considerations received, both for the subject reinsurance transactions
as well as for any direct sale or other reinsurance of life insurance,
health insurance or annuity contracts to such plans (and their
employers) by FSLIA. This total is to be reduced (in both the numerator
and the denominator of the fraction) by experience refunds paid or
credited in that taxable year by FSLIA.
(2) all premium and annuity considerations written by FSLIA for
plans which it alone maintains are to be excluded from both the
numerator and the denominator of the fraction.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective August 1, 1993.
Preamble
On August 7, 1979, the Department published a class exemption
[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44 FR 46365] which
permits insurance companies that have substantial stock or partnership
affiliations with employers establishing or maintaining employee
benefit plans to make direct sales of life insurance, health insurance
or annuity contracts which fund such plans if certain conditions are
satisfied.
In PTE 79-41, the Department stated its views that if a plan
purchases an insurance contract from a company that is unrelated to the
employer pursuant to an arrangement or understanding, written or oral,
under which it is expected that the unrelated company will subsequently
reinsure all or part of the risk related to such insurance with an
insurance company which is a party in interest with respect to the
plan, the purchase of the insurance contract would be a prohibited
transaction.
The Department further stated that as of the date of publication of
PTE 79-41, it had received several applications for exemption under
which a plan or its employer would contract with an unrelated company
for insurance, and the unrelated company would, pursuant to an
arrangement or understanding, reinsure part or all of the risk with
(and cede part or all of the premiums to) an insurance company
affiliated with the employer maintaining the plan. The Department felt
that it would not be appropriate to cover the various types of
reinsurance transactions for which it had received applications within
the scope of the class exemption, but would instead consider such
applications on the merits of each individual case.
Summary of Facts and Representations
1. FSC is incorporated under the laws of the State of Delaware and
is a regional bank holding company with banking subsidiaries in six
western states. In addition, it has ten other subsidiaries, including a
leasing company, a mortgage company, a life insurance company (FSLIA),
an insurance agency company, a discount securities brokerage company,
two financial services companies, and two companies providing technical
and logistical services to other FSC subsidiaries.
2. FSLIA is a corporation organized under the laws of Arizona with
its principal administrative offices in Salt Lake City, Utah. FSLIA was
originally organized in Texas in August, 1954 and operated as a life
insurance company domiciled in that State until 1991. On December 20,
1991, FSLIA moved its corporate domicile from Texas to Arizona. FSLIA
has always been a wholly owned subsidiary of FSC and is currently
licensed to underwrite life insurance business in Arizona. FSLIA is
primarily engaged in the businesses of: (i) Fully underwriting credit
life and disability insurance indirectly to the general public through
an unrelated insurance underwriter; and (ii) reinsurance of credit life
and disability policies sold by other insurance companies.
3. The Plan is sponsored by FSC and most of its subsidiaries. The
Plan is composed of two parts, the First Security Basic Group Term Life
Insurance Plan, and the First Security Add-on Group Life Insurance Plan
(which provides both optional add-on employee coverage and optional
dependent coverage. It is a welfare benefit plan providing life
insurance on the lives of all employees who are regularly scheduled to
work 25 hours per week, as well as add-on life insurance on the lives
of such employees and life insurance on the lives of the dependents of
such employees who voluntarily elect to have and pay for the coverage.
The Basic Term Life Insurance Plan had 7,044 participants as of
September 30, 1995, and the Add-on Group Life Insurance Plan had 3,333
participants with coverage on their own lives and 2,698 participants
with dependent coverage as of that date. Premiums for basic coverage
are paid for by the employers, while premiums for add-on and dependent
insurance are wholly paid for by the employees through payroll
deduction. The premiums are transferred twice monthly to a VEBA, from
which they are remitted monthly to the direct insurer.
4. The life insurance is currently underwritten by MM, an
unaffiliated insurance carrier. The life insurance benefits under the
Plan are provided by MM and reinsured on a 50% basis by FSLIA, i.e.,
FSLIA receives 50% of the premiums paid and pays 50% of the claims
under the MM policy. The
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reinsurance contract between FSLIA and MM was entered into effective
August 1, 1993, and was actually implemented in stages between that
date and December 31, 1993. The applicants have requested that this
proposed exemption apply to any successor company to MM that is also
unrelated to FSC should FSC decide to insure this life insurance
coverage with another carrier under the same kind of arrangement.
5. The applicants represent that the subject transaction has not
and will not in any way affect the cost to the insureds of the group
life insurance contracts, and the Plan has paid and will pay no more
than adequate consideration for the insurance. Also, Plan participants
are afforded insurance protection from MM, one of the largest and most
experienced group insurers in the United States, at competitive rates
arrived at through arm's-length negotiations. MM is rated A++ by the
A.W. Best Company, whose insurance ratings are widely used in financial
and regulatory circles. MM has assets in excess of $8.5 billion and
reserves set aside for group life and accident and health policies of
nearly $346 million. MM will continue to have the ultimate
responsibility in the event of loss to pay insurance benefits to the
employee's beneficiary.<SUP>16 The applicants represent that FSLIA is a
sound, viable company which does a substantial amount of business
outside its affiliated group of companies. FSLIA is substantially
dependent upon insurance customers that are unrelated to itself and its
affiliates for premium revenue.
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\16\ The applicants represent that any successor to MM would be
a legal reserve life insurance company with assets of not less than
$500,000,000, and thus be of such a size as to afford similar
protection and responsibility.
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6. The applicants represent that the subject reinsurance
transaction has met and will continue to meet all of the conditions of
PTE 79-41 covering direct insurance transactions:
(a) FSLIA is a party in interest with respect to the Plan (within
the meaning of section 3(14)(G) of the Act) by reason of stock
affiliation with FSC, which maintains the Plan.
(b) FSLIA is licensed to do business in Arizona;
(c) FSLIA has been audited by the independent certified public
accounting firm of Deloitte & Touche for each of its fiscal years since
1992 and has therefore undergone such an examination for each completed
taxable year of the reinsurance transaction.
(d) FSLIA has received Certificates of Authority from its
respective domiciliary states (first Texas, then Arizona) which have
been audited or reviewed annually since its organization and which have
neither been revoked nor suspended.
(e) The Plan has paid and will pay no more than adequate
consideration for the insurance. The subject transaction has not and
will not in any way affect the cost to the insureds of the group life
insurance transaction.
(f) No commissions have been or will be paid with respect to the
direct insurance or the reinsurance agreements between MM (or any
successor thereto) and FSC and FSLIA.
(g) For each taxable year of FSLIA, the ``gross premiums and
annuity considerations received'' in that taxable year for group life
and health insurance (both direct insurance and reinsurance) for all
employee benefit plans (and their employers) with respect to which
FSLIA is a party in interest by reason of a relationship to such
employer described in section 3(14)(E) or (G) of the Act have not
exceeded and will not exceed 50% of the ``gross premiums and annuity
considerations received'' by FSLIA from all lines of insurance in that
taxable year. Most of the premium income of FSLIA comes from
reinsurance, but some is credit life insurance written on a direct
basis. FSLIA is principally in the business of reinsurance. The
applicants represent that the premiums for the Plan insurance have
never exceeded 18.8% of FSLIA's total premiums. In 1995, the premium
income of FSLIA came from the following sources in the following
amounts:
(1) MM reinsurance on the subject Plan group policy: $559,209.
(2) Reinsurance of credit life insurance sold to individual
customers of FSC group--
(A) American Bankers Credit reinsurance: $1,463,747
(B) Central States of Omaha Visa Credit reinsurance: $807,049
(C) Balboa Credit reinsurance on commercial loans: $154,000.
Thus, more than 81% of FSLIA's premiums for 1995 were derived from
insurance (or reinsurance thereon) sold to entities other than FSC and
its affiliated group.
7. In summary, the applicants represent that the subject
transaction has met and will continue to meet the criteria of section
408(a) of the Act because: a) Plan participants and beneficiaries are
afforded insurance protection by MM, one of the largest and most
experienced group insurers in the United States, at competitive market
rates arrived at through arm's-length negotiations; b) FSLIA is a
sound, viable insurance company which does a substantial amount of
public business outside its affiliated group of companies; and c) each
of the protections provided to the Plan and its participants and
beneficiaries by PTE 79-41 has been and will continue to be met under
the subject reinsurance transaction.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Chicago Trust Company (Chicago Trust) Located in Chicago, IL
[Application No. D-10222]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).<SUP>17
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17 For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section I. Exemption for the In-Kind Transfer of Assets
If the exemption is granted, the restrictions of section 406(a) and
section 406(b) 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 (F) shall not apply, effective September 21, 1995, to the
in-kind transfer to any diversified open-end investment company (the
Fund or Funds) registered under the Investment Company Act of 1940 (the
'40 Act) to which Chicago Trust or any of its affiliates (collectively,
Chicago Trust) serves as investment adviser and/or may provide other
services, of the assets of various employee benefit plans (the Client
Plans), including plans established or maintained by Chicago Trust (the
In-House Plans; collectively, the Plans) that are either held in
certain collective investment funds (the CIF or CIFs) maintained by
Chicago Trust as trustee, investment manager, in exchange for shares of
such Funds, provided that the following conditions are met:
(a) A fiduciary (the Second Fiduciary) who is acting on behalf of
each affected In-House Plan or Client Plan and who is independent of
and unrelated to Chicago Trust, as defined in paragraph (h) of Section
III below, receives advance written notice of the in-kind transfer of
assets of the CIFs in exchange
[[Page 18436]]
for shares of the Funds and the disclosures described in paragraph (f)
of Section II below.
(b) On the basis of the information described in paragraph (f) of
Section II below, the Second Fiduciary authorizes in writing the in-
kind transfer of assets of an In- House Plan or a Client Plan in
exchange for shares of the Funds, the investment of such assets in
corresponding portfolios of the Funds, and, in the case of a Client
Plan, the fees received by Chicago Trust pursuant to its investment
advisory agreement with the Funds. Such authorization by the Second
Fiduciary is to be consistent with the responsibilities, obligations
and duties imposed on fiduciaries by Part 4 of Title I of the Act.
(c) No sales commissions or redemption fees are paid by an In-House
Plan or a Client Plan in connection with the in-kind transfers of
assets of the CIFs in exchange for shares of the Funds.
(d) All or a pro rata portion of the assets of an In-House Plan or
a Client Plan held in the CIFs are transferred in-kind to the Funds in
exchange for shares of such Funds. A Plan not electing to participate
in the Funds receives a cash payment representing a pro rata portion of
the assets of the terminating CIF before the final liquidation takes
place.
(e) The CIFs receive shares of the Funds that have a total net
asset value equal in value to the assets of the CIFs exchanged for such
shares on the date of transfer.
(f) The current value of the assets of the CIFs to be transferred
in-kind in exchange for shares is determined in a single valuation
performed in the same manner and at the close of business on the same
day, using independent sources in accordance with the procedures set
forth in Rule 17a-7(b) (Rule 17a-7) under the '40 Act, as amended from
time to time or any successor rule, regulation, or similar
pronouncement and the procedures established pursuant to Rule 17a-7 for
the valuation of such assets. Such procedures must require that all
securities for which a current market price cannot be obtained by
reference to the last sale price for transactions reported on a
recognized securities exchange or NASDAQ be valued based on an average
of the highest current independent bid and lowest current independent
offer, as of the close of business on the Friday preceding the weekend
of the CIF transfers determined on the basis of reasonable inquiry from
at least three sources that are broker-dealers or pricing services
independent of Chicago Trust.
(g) Not later than 30 days after completion of each in-kind
transfer of assets of the CIFs in exchange for shares of the Funds,
Chicago Trust sends by regular mail to the Second Fiduciary, who is
acting on behalf of each affected Plan and who is independent of and
unrelated to Chicago Trust, as defined in paragraph (h) of Section III
below, a written confirmation that contains the following information:
(1) The identity of each of the assets that was valued for purposes
of the transaction in accordance with Rule 17a-7(b)(4) under the '40
Act;
(2) The price of each such assets for purposes of the transaction;
and
(3) The identity of each pricing service or market maker consulted
in determining the value of such assets.
(h) Not later than 90 days after completion of each in-kind
transfer of assets of the CIFs in exchange for shares of the Funds,
Chicago Trust sends by regular mail to the Second Fiduciary, who is
acting on behalf of each affected In-House Plan or Client Plan and who
is independent of and unrelated to Chicago Trust, as defined in
paragraph (h) of Section III below, a written confirmation that
contains the following information:
(1) The number of CIF units held by each affected Plan immediately
before the in-kind transfer (and the related per unit value and the
aggregate dollar value of the units transferred); and
(2) The number of shares in the Funds that are held by each
affected Plan following the conversion (and the related per share net
asset value and the aggregate dollar value of the shares received).
(i) The conditions set forth in paragraphs (c), (d), (e), (p) and
(q) of Section II below as they would relate to all Plans are
satisfied.
Section II. Exemption for the Receipt of Fees From Funds
If the exemption is granted, the restrictions of section 406(a) and
section 406(b) 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 (F) of the Code shall not apply, effective
September 21, 1995, to (1) the receipt of fees by Chicago Trust from
the Funds for investment advisory services to the Funds; and (2) the
receipt or retention of fees by Chicago Trust from the Funds for acting
as custodian or shareholder servicing agent to the Funds, as well as
any other services provided to the Funds which are not investment
advisory services (i.e., the Secondary Services), in connection with
the investment of shares in the Funds by the Client Plans for which
Chicago Trust acts as a fiduciary, provided that--
(a) No sales commissions are paid by the Client Plans in connection
with purchases or sales of shares of the Funds and no redemption fees
are paid in connection with the redemption of such shares by the Client
Plans to the Funds.
(b) The price paid or received by the Client Plans for shares in
the Funds is the net asset value per share, as defined in paragraph (e)
of Section III, at the time of the transaction and is the same price
which would have been paid or received for the shares by any other
investor at that time.
(c) Chicago Trust, any of its affiliates or their officers or
directors do not purchase from or sell to any of the Client Plans
shares of any of the Funds.
(d) For each Client Plan, the combined total of all fees received
by Chicago Trust for the provision of services to such Plan, and in
connection with the provision of services to any of the Funds in which
the Client Plans may invest, is not in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(e) Chicago Trust does not receive any fees payable, pursuant to
Rule 12b-1 (the 12b-1 Fees) under the '40 Act in connection with the
transactions involving the Funds.
(f) A Second Fiduciary who is acting on behalf of a Client Plan and
who is independent of and unrelated to Chicago Trust, as defined in
paragraph (h) of Section III below, receives in advance of the
investment by a Client Plan in any of the Funds a full and detailed
written disclosure of information concerning such Fund including, but
not limited to--
(1) A current prospectus for each portfolio of each of the Funds in
which such Client Plan is considering investing;
(2) A statement describing the fees for investment advisory or
other similar services, any fees for Secondary Services, as defined in
paragraph (i) of Section III below, and all other fees to be charged to
or paid by the Client Plan and by such Funds to Chicago Trust,
including the nature and extent of any differential between the rates
of such fees;
(3) The reasons why Chicago Trust may consider such investment to
be appropriate for the Client Plan;
(4) A statement describing whether there are any limitations
applicable to Chicago Trust with respect to which assets of a Client
Plan may be invested in the Funds, and, if so, the nature of such
limitations;
(5) A copy of the proposed exemption and/or a copy of the final
exemption, if
[[Page 18437]]
granted, upon the request of the Second Fiduciary; and
(6) The last date as of which consent to an in-kind transfer may be
given by the Second Fiduciary, along with the disclosure that if
consent is not given by that date, the Second Fiduciary will be deemed
to have withheld consent to an in-kind transfer.
(g) On the basis of the information described in paragraph (f) of
this Section II, the Second Fiduciary authorizes in writing--
(1) T |
