Proposed Exemptions Wells Fargo Bank [Notices] [04/04/1996]
Proposed Exemptions Wells Fargo Bank [04/04/1996]
Volume 61, Number 66, Page 15123-15145-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09334, et al.]
Proposed Exemptions Wells Fargo Bank
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 restriction 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.
Wells Fargo Bank, N.A. (the Bank); Located in San Francisco, CA
[Application No. D-09334]
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
Internal Revenue Code (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>1
\1\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to 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) of the Code,
shall not apply, effective July 2, 1993 until October 1, 1993, to the
in-kind transfer of all or a pro rata portion of the assets of employee
benefit plans (the Plans) that are held in certain collective
investment funds (the CIF or CIFs), for which the Bank or any of its
affiliates (collectively, Wells Fargo) serves as fiduciary, to the
Stagecoach
[[Page 15124]]
Funds, Inc. (the Fund or Funds), an open-end investment company
registered under the Investment Company Act of 1940 (the '40 Act), as
amended, for which Wells Fargo acts as investment adviser and may
provide other services, in exchange for shares of the Funds (the CIF
Exchanges), in connection with the partial termination of the CIFs.
This proposed exemption is subject to the following conditions and
the general conditions of Section II:
(a) The CIF Exchange is a one-time transaction between the Plan and
the respective Fund.
(b) No sales commissions or other fees are paid by the Plans in
connection with the CIF Exchanges and no redemption fees are paid by
the Plan in connection with the sale by the Plan of shares acquired in
a CIF Exchange.
(c) A fiduciary of each Plan who is independent of and unrelated to
Wells Fargo (the Second Fiduciary) receives advance written notice of
the CIF Exchange and full written disclosure of information concerning
the Funds which includes, but is not limited to the following:
(1) A current prospectus for each Fund in which the Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services, any secondary services (the Secondary Services) as
referred to in paragraph (h) of Section III, and all other fees to be
charged to, or paid by, the Plan (and by such Fund) to Wells Fargo,
including the nature and extent of any differential between the rates
of the fees;
(3) The reasons why Wells Fargo considers an investment in the Fund
to be appropriate for the Plan; and
(4) A statement describing whether there are any limitations
applicable to Wells Fargo with respect to which assets of a Plan may be
invested in a Fund, and, if so, the nature of such limitations.
(d) On the basis of the foregoing information, the Second Fiduciary
approves, in writing, the CIF Exchange.
(e) Each Plan receives shares of the Funds which have a total net
asset value equal to the value of all or the Plan's pro rata share of
the Plan's assets invested in the CIF on the date of the transfer,
based on the current market value of the CIF's assets, as objectively
determined in a single valuation, performed in the same manner at the
close of the same business day by a principal pricing service (the
Principal Pricing Service), disclosed previously by Wells Fargo to the
Second Fiduciary, and/or as applicable, by the amortized cost method.
(f) The terms of the transaction are no less favorable to each Plan
than those obtainable in an arm's length transaction with an unrelated
party.
(g) Wells Fargo sends by regular mail to each affected Plan a
written confirmation, not more than 7 days after the completion of the
transaction, containing the date of the transaction, the number of
shares acquired by the Plan in each of the Funds, the price paid per
share for the shares in each of the Funds and the total dollar amount
involved in the transaction with each Fund.
(h) As to each Plan, the combined total of all fees received by
Wells Fargo for the provision of services to such Plan, and in
connection with the provision of services to any of the Funds in which
the Plan may invest, is not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
(i) Wells Fargo does not receive any fees payable pursuant to Rule
12b-1 of the '40 Act in connection with the transactions involving the
Funds.
(j) The Plans are not sponsored or maintained by Wells Fargo.
(k) Wells Fargo provides the Second Fiduciary of such Plan with--
(1) A copy of the proposed exemption and/or the final exemption, if
granted;
(2) A copy of an updated prospectus of such Fund, at least
annually;
(3) 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) which contains a
description of all fees paid by the Fund to Wells Fargo, upon the
request of the Second Fiduciary; and
(4) A statement specifying--
(A) The total, expressed in dollars, of brokerage commissions that
are paid to Wells Fargo by such Fund;
(B) The total, expressed in dollars, of brokerage commissions that
are paid by such Fund to brokerage firms unrelated to Wells Fargo;
(C) The average brokerage commissions per share, expressed as cents
per share, paid to Wells Fargo by such Fund; and
(D) The average brokerage commissions per share, expressed as cents
per share, paid by such Fund to brokerage firms unrelated to Wells
Fargo. (Such statement will be provided at least annually with respect
to each of the Funds in which a Plan invests in the event a Fund places
brokerage transactions with Wells Fargo.)
(l) All dealings between the Plans and the Funds are on a basis no
less favorable to the Plans than dealings with other shareholders of
the Funds.
Section II. General Conditions
(a) Wells Fargo maintains for a period of six years the records
necessary to enable the persons described below in paragraph (b) of
Section II 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 Wells Fargo, the records are lost or destroyed prior to the end of
the six-year period, and (2) no party in interest, other than Wells
Fargo shall be subject to the civil penalty that may be assessed under
section 502(i) of the Act or 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 (b) below; and
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504 (a)(2) and (b) of the Act, the records
referred to in paragraph (a) are unconditionally available at their
customary location for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(B) Any fiduciary of the Plans who has authority to acquire or
dispose of shares of the Funds owned by the Plans, or any duly
authorized employee or representative of such fiduciary, and
(C) Any participant or beneficiary of the Plans or duly authorized
employee or representative of such participant or beneficiary;
(2) None of the persons described in paragraph (b)(1) (B) and (C)
shall be authorized to examine trade secrets of Wells Fargo, or
commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this proposed exemption,
(a) The term ``Wells Fargo'' means Wells Fargo Bank, N.A. and any
affiliate of Wells Fargo Bank, N.A., as defined in paragraph (b) of
this Section VI.
(b) An ``affiliate'' of Wells Fargo includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Wells Fargo;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee;
(c) The term ``control'' means the power to exercise a controlling
[[Page 15125]]
influence over the management or policies of a person other than an
individual.
(d) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(e) The term ``Second Fiduciary'' means a fiduciary of a Plan who
is independent of and unrelated to Wells Fargo. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to Wells Fargo if--
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by, or is under common control with Wells Fargo;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary is an officer, director,
partner, or employee of Wells Fargo (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.
If an officer, director, partner, or employee of Wells Fargo (or a
relative of such persons), is a director of such Second Fiduciary, and
if he or she abstains from participation in the choice of the Plan's
investment manager/adviser, the approval of any purchase or sale by the
Plan of shares of the Funds, and the approval of any change of fees
charged to or paid by the Plan, in connection with any of the
transactions described in Section I above, then paragraph (e)(2) of
this Section III, shall not apply.
(f) The term ``Fund or Funds'' means a diversified open-end
investment company or companies registered under the '40 Act for which
Wells Fargo serves as investment adviser and may also provide Secondary
Services as approved by such Fund. The Funds are limited to six
investment Fund portfolios of the Stagecoach Funds, Inc. These Fund
portfolios include include the Asset Allocation Fund, the Bond Index
Fund, the Growth Stock Fund, the Short-Intermediate Term Fund, the S&P
500 Stock Fund and the U.S. Treasury Allocation Fund.
(g) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales of shares in a Fund 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 such Fund, less the liabilities charged
to the Fund, by the number of outstanding shares in such Fund.
(h) The term ``Secondary Service'' means a service other than an
investment management, investment advisory or similar service which is
provided by Wells Fargo to the Funds. However, for purposes of this
proposed exemption, Secondary Services will include only brokerage
services provided to the Funds by Wells Fargo for the execution of
securities transactions engaged in by the Funds.
(i) The term ``Principal Pricing Service'' means an independent,
recognized pricing service that has determined the aggregate dollar
value of marketable securities involved in a CIF Exchange. Prior to the
CIF Exchange, the Principal Pricing Service was disclosed in writing by
Wells Fargo to the Second Fiduciary.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
from July 2, 1993 until October 1, 1993 with respect to CIF Exchanges
that occurred on July 2, August 19, and October 1, 1993.
Summary of Facts and Representations
Description of the Parties
1. The applicants involved herein are the Bank, Wells Fargo Nikko
Investment Advisors (WFNIA) and Wells Fargo International Trust Company
(WFITC).
(a) The Bank, a wholly owned subsidiary of Wells Fargo & Company
(WFC), is the eighth largest commercial bank in the United States. It
serves as a non-discretionary trustee to a number of employee benefit
plans. In addition, the Bank serves as a trustee of certain collective
trust funds, including certain of the CIFs involved herein. Six of the
CIFs, all of which are trusteed by the Bank, hold on a commingled
basis, assets of the Bank's Plan clients. These six CIFs do not invest
directly but instead are ``shadow'' CIFs (the Shadow CIFs) that hold
interests in separate corresponding ``master'' CIFs (the Master CIFs).
Two of the Master CIFs are trusteed by the Bank; the four remaining
Master CIFs are trusteed by WFITC. Aside from trusteeing some of the
CIFs, the Bank serves as an investment adviser to the Funds described
below. As of January 6, 1996, the Bank had total assets under
management of $5.5 billion.
(b) WFITC is a trust company that was formerly 99.9 percent owned
by WFNIA and 0.1 percent by WFC. In addition to serving as trustee to
some of the Master CIFs, WFITC serves as custodian of certain Wells
Fargo Funds.
(c) WFNIA is a general partnership that was formerly owned 50
percent by a subsidiary of the Bank and 50 percent by a subsidiary of
The Nikko Securities Co., Ltd., a Japanese securities firm unaffiliated
with the Bank or WFC. WFNIA, a registered investment adviser, serves as
sub-adviser to some of the Funds as well as adviser to WFITC.
Effective December 31, 1995, WFC sold interests in WFNIA and WFITC
to Barclays Bank PLC and certain of its affiliates which are entities
unrelated to Wells Fargo. WFNIA and WFITC were subsequently
incorporated into BZW Barclays Global Investors, N.A. (BZW).
2. The Plans include various pension plans, as defined in section
3(2) of the Act, as well as Wells Fargo-sponsored master and prototype
pension and profit sharing plans, independently sponsored pension and
profit sharing plans and qualified plans of owner-employees. None of
the Plans involved in the subject transactions are sponsored by Wells
Fargo and/or its affiliates.
3. The CIFs, as indicated in part above, consist of (a) six
separate portfolios of the Wells Fargo Bank Declaration of Trust
Establishing Funds for Retirement Plans, a collective investment trust
of which the Bank serves as trustee (i.e., the Shadow CIFs) and (b) six
corresponding Master CIFs (of which the Bank serves as trustee with
respect to two CIFs and WFITC serves as trustee with respect to four
CIFs). The six Shadow CIFs and their corresponding Master CIFs are
further identified as follows:
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Shadow CIFs Master CIFs
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Asset Allocation Fund for Employee WFITC U.S. Tactical Asset
Retirement Plans. Allocation E Fund.
Bond Index Fund for Employee Retirement WFITC Government/Corporate Bond
Plans. Fund.
Growth Stock Fund for Employee Growth Stock Fund for
Retirement Plans. Retirement Plans.
Intermediate Bond Fund for Retirement Intermediate Bond Fund for
Plans. Employee Retirement Plans.
S&P 500 Stock Fund for Employee WFITC Equity Index E Fund.
Retirement Plans.
U.S. Treasury Allocation Fund for WFITC U.S. Treasury Allocation
Employee Retirement Plans. E Fund.
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[[Page 15126]]
The interests in the Shadow CIFs are owned by the Bank's trust
clients whereas the interests of the Master CIFs are owned by the
clients of BZW. Each of the Shadow CIFs is invested exclusively in the
corresponding Master CIF.
3. The Funds consist of six series or portfolio investment funds of
the Stagecoach Funds, Inc., an open-end investment company which was
organized on October 15, 1992 and registered under the '40 Act. The
Funds are designed to have investment goals that correspond to the CIFs
described above and generally have corresponding names. The Funds are
comprised as follows: (a) the Asset Allocation Fund; (b) the Bond Index
Fund; (c) the Growth Stock Fund; (d) the Short-Intermediate Term Fund;
(e) the S&P 500 Stock Fund; and (f) the U.S. Treasury Allocation Fund.
The Bank serves as investment adviser to each of the Funds. WFNIA
serves as the sub-adviser with respect to all of the Funds except the
Growth Stock Fund and the Short-Intermediate Term Fund. As investment
adviser to Funds sub-advised by WFNIA, Wells Fargo provides investment
guidance and policy direction with respect to the Funds' daily
portfolio management. As sub-adviser, WFNIA is responsible for
investing and reinvesting Fund assets, including implementing and
monitoring the performance of the investment models used in connection
with model-driven funds.
The Bank also serves as the transfer agent and selling agent for
the Funds. WFITC serves as the custodian. Stephens, Inc. (Stephens), a
broker-dealer and investment advisory firm which is unrelated to Wells
Fargo, is the sponsor and administrator of the Funds. The Funds are
managed by a board of directors, a majority of whose members are
independent of Wells Fargo and Stephens.
The CIF Exchanges
4. Since July 2, 1993, Wells Fargo has been offering the Funds
primarily to Plans as a commingled investment vehicle alternative to
the CIFs. Wells Fargo believes that the CIFs and the Funds have
identical investment objectives and that the Fund option would be
selected by Plans that desire readily obtainable daily price quotations
and ease of trading. Further, Wells Fargo believes that the ability of
a Plan to transfer its CIF assets to a corresponding Fund would
substantially reduce the transaction costs that otherwise would be
incurred in selling such securities for cash and subsequently acquiring
shares in the Funds. To this end, Wells Fargo has offered a Plan the
opportunity to designate one or more Funds in lieu of the CIFs with
respect to all or a pro rata portion of the Plan's assets through a CIF
Exchange. Wells Fargo represents that the decision by a Plan to invest
in any Fund has been made solely by a Second Fiduciary which is
independent of Wells Fargo. Also, no dealer mark-up or sales
commissions have been paid by the Plans in connection with any CIF
Exchange. Further, Wells Fargo nor an affiliate, including any officer
or director, has been permitted to purchase from or sell to any of the
Plans shares of the Funds.
Accordingly, Wells Fargo requests retroactive exemptive relief from
the Department with respect to the CIF Exchanges commencing in July
1993. Wells Fargo is not requesting exemptive relief with respect to
future acquisitions or sales of shares of the Funds by the affected
Plans. Instead, Wells Fargo represents that such transactions would be
covered under Prohibited Transaction Exemption (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.<SUP>2 In addition,
Wells Fargo states that it is not receiving any commissions or 12b-1
fees in connection with the investment of Plan assets in shares of the
Funds. Further, Wells Fargo has confirmed that as to each Plan
investing in the Funds, the combined total of all fees it or its
affiliates are receiving for the provision of services to the Plans,
and in connection with the provision of investment advisory services or
Secondary Services to any of the Funds in which the Plans may invest,
has not and will not be in excess of ``reasonable compensation'' within
the meaning of section 408(b)(2) of the Act.<SUP>3
\2\ In this proposed exemption, the Department expresses no
opinion on whether any transactions between the Plans the Funds
would be covered by PTE 77-4.
\3\ The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
fiduciaries of the Plans from the general fiduciary responsibility
provisions of section 404 of the Act. Thus, the Department cautions
the fiduciaries of the Plans investing in the Funds that they have
an ongoing duty under section 404 of the Act to monitor the services
provided to the Plans to assure that the fees paid by the Plans for
such services are reasonable in relation to the value of the
services provided. Such responsibilities would include
determinations that the services provided are not duplicative and
that the fees are reasonable in light of the level of services
provided.
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5. Wells Fargo represents that the CIF Exchanges were effected on
July 2, August 19, and October 1, 1993. On these dates, all or a Plan's
pro rata interest in the securities held by the Shadow CIFs were
exchanged for shares of the Funds.<SUP>4 Each affected Plan was
notified of the opportunity to participate in a CIF Exchange with
respect to its interest. The Master CIFs also participated in the CIF
Exchanges to the extent that they held securities which were required
to be transferred in-kind or redeemed. Further, a Second Fiduciary
approved, in writing, the CIF Exchange. Plans that elected to engage in
the CIF Exchanges, received shares in the respective Fund. In effect,
the applicants represent that the disclosures and approvals were
consistent with the requirements of PTE 77-4.<SUP>5
\4\ Due to the ``feeder'' relationship existing between the
Shadow CIFs and the Master CIFs, the effect of the in-kind transfers
was such that all or a pro rata portion of a Plan's interest held in
the Master CIFs was exchanged for shares of the Funds.
\5\ Section II(d) of PTE 77-4 requires, among other things, that
an independent plan fiduciary receive a current prospectus issued by
the investment company and a full and detailed written disclosure of
the investment advisory and other fees charged to or paid by the
plan and the investment company, including a discussion of whether
there are any limitations on the fiduciary/investment adviser with
respect to which plan assets may be invested in shares of the
investment company and, if so, the nature of such limitations.
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6. The assets exchanged during the CIF Exchanges consisted of
stocks, U.S. Treasury obligations, other government and agency
obligations, certain fixed income obligations, asset-backed securities
and other securities. All of the securities exchanged were valued on
the date of the transfer, by an independent, recognized Principal
Pricing Service, <SUP>6 except that debt securities that were within 60
days of maturity were valued by the amortized cost method, <SUP>7 in
the
[[Page 15127]]
same manner and at the close of the same business day.
<SUP>6 Wells Fargo represents that a pricing service is
recognized within the industry when it is used on a regular basis by
a number of clients other than Wells Fargo. In effect, the Principal
Pricing Service agrees to perform all of the functions of obtaining
the (closing) market price or last-reported bid price where
available, determining a price where market or bid prices are not
available or consulting with market-makers where it cannot determine
the price. For this purpose, Wells Fargo asserts that the Principal
Pricing Service would have its own internal procedures and pricing
methodologies and would provide a single quotation to its clients.
<SUP>7 Wells Fargo states that the ``amortized cost'' method
refers to an approach to valuing debt securities that are recognized
in different contexts by various regulatory agencies and accounting
standards boards. Wells Fargo notes that the amortized cost method
is a permitted, rather than required, valuation approach and that
the term also refers to the value of a security derived from the
methodology. For example, Wells Fargo explains that the Securities
and Exchange Commission's ``Codification of Financial Reporting
Policies,'' describes in detail the use of the amortized cost
methodology and recognizes that a mutual fund's board of directors
may determine in good faith that, except in unusual circumstances,
amortized cost approximates the fair market value of debt securities
with remaining maturities of 60 days or less (based on cost for
securities acquired within 60 days of maturity or fair market value
on the 61st day prior to maturity for securities already owned).
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7. Wells Fargo represents that with respect to the CIF Exchanges,
on each of the closing dates, the CIFs did not hold any securities
other than securities that could be valued by a Principal Pricing
Service selected by Wells Fargo, or, if applicable, by the amortized
cost method, prior to such CIF Exchange. In this regard, Wells Fargo
states that pricing of the securities held by the CIFs and the Funds
was determined by the same Principal Pricing Service such that the
price of each security involved in each CIF Exchange was identical for
the purposes of valuing the Plan's interest in the CIF and for purposes
of valuing the net asset value of the relevant Funds. In effect, Wells
Fargo explains that the determination of the net asset value of the
Funds and of the value of securities held by the CIF involved in the
exchange was objectively determined because, for purposes of the
transaction, each security was valued either by an independent,
recognized Principal Pricing Service identified prior to each CIF
exchange or mechanically by the amortized cost method.
8. Wells Fargo states that the pro rata interest of the Plans in
the securities underlying the CIFs were transferred to the Funds in
connection with each CIF exchange, except to the extent that fractional
shares of the underlying securities would have been created by the
transaction. In this event, the fraction of the share to be transferred
was automatically rounded up or down to the next nearest whole number
(i.e., up or down from 0.50 for fractional shares or up and down from
$0.005 in the case of fractional dollar amounts). The cash value of any
fractional shares of securities that were transferred to the respective
Fund or retained by the CIFs was calculated. To the extent the value of
the fractional shares retained by the respective CIF exceeded the value
of the fractional shares transferred to the respective Fund, that net
amount was transferred in cash to the respective Fund. Assuming the
value of the fractional shares involved in the transfer to the
respective Fund was less than the value of the fractional shares to be
retained by the respective CIF, the net amount was transferred in cash
from the Fund to the CIF.
Written Disclosures
9. After a CIF Exchange, each Plan received a confirmation which
provided the date of the transaction, the number of shares acquired by
the Plan in each of the Funds, the price paid per share for the shares
in each of the Funds and the total dollar amount involved in the
transaction with each Fund. Such confirmations were sent to Plan
investors not more than 7 days after the completion of the transaction.
With respect to ongoing disclosures, Wells Fargo represents that it
will provide a copy of the proposed exemption and/or the final
exemption, if granted, to the Second Fiduciary of each affected Plan.
In addition, at least annually, Wells Fargo will furnish the Second
Fiduciary of a Plan with a copy of a current prospectus for the Funds
and, upon the request of the Second Fiduciary, with a copy of the
statement of additional information containing a description of all
fees paid by the Funds to Wells Fargo. Further, in the event that a
Fund places brokerage transactions with it, Wells Fargo will provide
the Second Fiduciary, at least on an annual basis, with a statement
specifying (a) the total, expressed in dollars, of brokerage
commissions that are paid to Wells Fargo by such Fund; (b) the total,
expressed in dollars, of brokerage commissions that are paid by such
Fund to brokerage firms unrelated to Wells Fargo; (c) the average
brokerage commissions per share, expressed as cents per share, paid to
Wells Fargo by such Fund; and (d) the average brokerage commissions per
share, expressed as cents per share, paid by such Fund to brokerage
firms that are unrelated to Wells Fargo.
10. In summary, it is represented that the CIF Exchanges have
satisfied the statutory criteria for an exemption under section 408(a)
of the Act for the following reasons:
(a) Neither the CIFs nor the Plans have paid any sales commissions
or redemption fees in connection with the CIF Exchanges nor will they
pay any fees in connection with purchases or redemptions of shares of
the Funds.
(b) Prior to the investment by a Plan in the Funds, the Second
Fiduciary has received a full and detailed written disclosure of
information concerning such Fund and, on the basis of such disclosures,
such Second Fiduciary has authorized the transactions.
(c) Each CIF or Plan has received shares of a Fund that are equal
in value to the assets of the CIF or the Plan exchanged for such
shares, as determined in a single valuation performed in the same
manner and as of the close of the same business day using either an
independent, recognized Principal Pricing Service that has been
disclosed by Wells Fargo to the Second Fiduciary prior to the CIF
Exchange and/or, if applicable, by the amortized cost method.
(d) With respect to the CIF Exchanges, Wells Fargo has sent the
Second Fiduciary of each affected Plan written confirmation, not more
than 7 days after the completion of each transaction, containing the
date of the transaction, the number of shares acquired by the Plan in
each of the Funds, the price paid per share for each of the Funds and
the total dollar amount involved in the transaction with each Fund.
(e) Neither Wells Fargo nor an affiliate, including any officer or
director has been or will be permitted to purchase from or sell to any
of the Plans shares of any of the Funds.
(f) Wells Fargo has not and will not receive any 12b-1 Fees in
connection with the transactions.
(g) As to each individual Plan, the combined total of all fees
received by Wells Fargo for the provision of services to the Plan, and
in connection with the provision of services to any of the Funds in
which the Plan may invest, has not and will not be in excess of
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(h) All dealings between the Plans, the Funds and Wells Fargo have
or will be on a basis no less favorable to such Plans than dealings
between the Funds and other shareholders holding the same shares of the
same class as the Plans.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include fiduciaries of Plans invested in the CIFs
or the Funds on each of the dates the CIF Exchanges were completed.
Accordingly, the Department has determined that the only practical form
of providing notice to interested persons is the distribution, by Wells
Fargo, of a copy of the proposed exemption by first class mail within
30 days of the date of the publication of the pendency notice in the
Federal Register. Such distribution will be made to Second Fiduciaries
of the Plans that engaged in the CIF Exchanges. The distribution 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
hearing requests with
[[Page 15128]]
respect to the proposed exemption are due 60 days after the date of
publication of the 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.)
Teachers Insurance and Annuity Association of America (TIAA), Located
in New York, New York
[Application No. D-09915]
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--Exemption for Certain Transactions Involving the Purchase
and Sale of Certain Units in a Real Estate Separate Account by TIAA
If the exemption is granted, 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, effective
October 2, 1995, to the transactions described below, if each of the
conditions set forth in
Section III have been satisfied:
(a) the purchase by TIAA of certain units (the Liquidity Units), as
defined in Section IV(g) below, in a real estate separate account
established and operated by TIAA (the Separate Account), as defined in
Section IV(l) below, in the event of net withdrawals from the Separate
Account; and
(b) the sale of Liquidity Units of the Separate Account by TIAA in
the event of net contributions to the Separate Account.
Section II--Exemption for the Purchase of Liquidity Units owned by TIAA
in the Separate Account In Connection with a Decrease in TIAA's
Participation in the Separate Account under Certain Circumstances
If the exemption is granted, the restrictions of section 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, effective
October 2, 1995, to: (a) the use of cash flow from the Separate Account
(the Cash Flow), as defined in Section IV(d) below; (b) the use of
liquid investments in the Separate Account; or (c) the use of the
proceeds from the sale of certain properties (the Properties), as
defined in Section IV(i) below, owned by the Separate Account, for the
purpose of purchasing Liquidity Units in the Separate Account from TIAA
in connection with a decrease in the participation by TIAA in the
Separate Account after the trigger point (the Trigger Point), as
defined in Section IV(o) below, has been reached or during the wind
down period of the Separate Account (the Wind Down), as defined in
Section IV(q) below, provided that the conditions set forth in Section
III have been satisfied.<SUP>8
\8\ For purposes of this proposed exemption references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
Section III--General Conditions
The exemption is conditioned upon the adherence by TIAA to the
material facts and representations described in this notice of proposed
exemption (the Notice) and upon satisfaction of the following
requirements:
(a) The decision to elect to add the Separate Account as an
additional pension funding option for employee benefit plans (the Plan
or Plans), as defined in Section IV(h) below, which invest in the
Separate Account has been and is made by the fiduciaries of such Plans
(the Fiduciary or Fiduciaries), as defined in Section IV(e) below, or
in the case of a contract between TIAA and a supplemental retirement
account (SRA) or an individual retirement account (IRA), the decision
to elect to add the Separate Account as an additional pension funding
option to a SRA or an IRA has been and is made by the participant in
such SRA or IRA, if the Fiduciaries of the Plans and the IRA and SRA
participants are unrelated to TIAA and its affiliates (the Affiliates
or Affiliate), as defined in Section IV(b) below;
(b) Each of the Properties in the Separate Account has been and is
valued at least annually by an independent, qualified appraiser;
(c) Except as otherwise specified below in paragraph (c)(10) of
this Section III, prior to investment of funds in the Separate Account
by any participant in a Plan (the Participant or Participants) (and, if
applicable, by any of the Plans) which participate in the Separate
Account, TIAA has furnished and will furnish to the Fiduciaries of such
Plans and, in the case of a contract between TIAA and a SRA or an IRA,
to the participant in such SRA or IRA, the following information:
(1) a copy of the most recent prospectus for the Separate Account,
the most recent quarterly and other financial reports for the Separate
Account filed with the Securities and Exchange Commission (SEC), and
the most recent copy of any supplemental schedule of information,
publications, or ancillary materials which have been made available to
Plan Sponsors or Participants invested in the Separate Account;
(2) full disclosure concerning the investment guidelines,
structure, manner of operation, and administration of the Separate
Account; the method of valuation applicable to accumulation units (the
Accumulation Units), as defined in Section IV(a) below, and the method
of valuation of the Properties, and all other assets owned by the
Separate Account;
(3) a written description of potential conflicts of interest that
may result from TIAA's acquisition, purchase, retention, redemption, or
sale of Accumulation Units in the Separate Account;
(4) the rules and procedures for withdrawal, transfer, redemption,
distribution, and payout applicable throughout the term of the Separate
Account to TIAA, to individual Participants (and, if applicable, to
Plans) which participate in the Separate Account;
(5) the expense and fee provisions of the Separate Account
(including but not limited to a description of any services rendered by
TIAA, a schedule of fees for such services, and an estimate of the
amount of fees to be paid by the Separate Account annually);
(6) a list of all assets in the Separate Account, as of the end of
the most recent fiscal period of the Separate Account, and a list of
the Properties which the Separate Account acquired or sold within
twelve months prior to the end of the most recent fiscal period of the
Separate Account;
(7) the appropriate financial statements pertaining to the Separate
Account (including but not limited to the most recent audited annual
report, income statement, and balance sheet on the Separate Account);
(8) copies of the most recent reports on the Separate Account,
including but not limited to information relating the value of units in
the Separate Account (the Units), as defined in Section IV(p) below;
and the quarterly return for the Separate Account, and the most recent
quarterly updates of the valuation of the Separate Account (including a
list of the holdings of the Separate Account during the period);
(9) any reasonably available information which TIAA believes to be
necessary, or which any fiduciary of a plan or any sponsor of a plan
reasonably
[[Page 15129]]
requests in order to determine whether such plan should elect to add
the Separate Account as an additional pension funding option for the
benefit of participants (or, if applicable, for such plan), or, in the
case of a contract between TIAA and a SRA or an IRA, which the
participant in such SRA or IRA reasonably requests in order to
determine if he or she should elect to add the Separate Account as an
additional pension funding option under such SRA or IRA contract with
TIAA; and
(10) upon publication of this Notice, a copy of such Notice, as it
appears in the Federal Register, shall be provided to the Fiduciaries
of the Plans, to the sponsors of the Plans (the Plan Sponsors or Plan
Sponsor), to the sponsors of any SRA, and to the participants in any
TIAA IRA which have elected to add the Separate Account as an
additional pension funding option and which have been or are invested
in the Separate Account. If this proposed exemption is granted, the
Fiduciaries of the Plans, the Plan Sponsors, the sponsors of any SRA,
and the participants in any TIAA IRA which have elected to add the
Separate Account as an additional pension funding option and which have
been or are invested in the Separate Account shall receive upon
publication of a Grant of Exemption (the Grant), a copy of such Grant,
as it appears in the Federal Register. If subsequent to the publication
of the Grant, any fiduciaries of plans, any sponsors of plans, the
sponsors of any SRA, or the participants in any TIAA IRA choose to
elect to add the Separate Account as an additional pension funding
option to enable such plans to invest in the Separate Account, the
fiduciaries of such plans, the sponsors of such plans, the sponsors of
such SRA, and the participants in any such IRA shall be provided, at
least thirty (30) days prior to investment in the Separate Account,
with a copy of both the Notice and the Grant, as such documents
appeared upon publication in the Federal Register.
(d) TIAA has made and will make available, within the time periods
specified below in subparagraphs (1) through (4) of this paragraph (d),
to the Fiduciaries of the Plans, or in the case of a contract between
TIAA and a SRA or an IRA, to the participant in such SRA or IRA:
(1) information relating to the value of the Units in the Separate
Account to be available daily over a toll-free telephone number and/or
to be distributed in writing to Participants in the Separate Account in
quarterly confirmation statements within five (5) to ten (10) days
after the end of each calendar quarter;
(2) information concerning the quarterly return of the Separate
Account to be available daily over a toll-free telephone number and/or
to be distributed in writing to Participants in the Separate Account in
quarterly confirmation statements within five (5) to ten (10) days
after the end of each calendar quarter;
(3) a prospectus for the Separate Account to be distributed
annually; and
(4) any information or TIAA publication, to be distributed from
time to time, which TIAA reasonably believes to be necessary or which
the Fiduciaries request, or in the case of a contract between TIAA and
a SRA or an IRA, which the participant in such SRA or IRA requests
(including but not limited to quarterly financial reports filed with
the SEC) in order to determine whether any Participant in such Plan, or
participant in such SRA or IRA should buy, sell, or continue to hold
the Units in the Separate Account, as defined in Section IV(p) below;
(e) An independent, qualified fiduciary (the Independent
Fiduciary), as defined in Section IV(f) below, has been appointed prior
to or coincident with the start of operations of the Separate Account
(and is subject to renewal and removal described herein) whose
responsibilities include, but are not limited to:
(1) reviewing and approving the written investment guidelines of
the Separate Account as established by TIAA, and approving any changes
to such investment guidelines;
(2) monitoring whether the Properties acquired by the Separate
Account conform with the requirements of such investment guidelines;
(3) reviewing and approving valuation procedures for the Separate
Account and approving changes in those procedures;
(4) reviewing and approving the valuation of Units in the Separate
Account and the valuation of Properties held in the Separate Account,
as described in the Summary of Facts and Representations in the Notice;
(5) approving the appointment of all independent, qualified
appraisers retained by TIAA to perform periodic valuations of the
Properties in the Separate Account;
(6) requiring appraisals in addition to those normally conducted,
whenever, the Independent Fiduciary believes that the characteristics
of any of the Properties have changed materially, or with respect to
any of the Properties, whenever the Independent Fiduciary deems an
additional appraisal to be necessary or appropriate in order to assure
the correct valuation of the Separate Account;
(7) reviewing the purchases and sales of Units in the Separate
Account by TIAA and the Participants (and, if applicable, by the Plans)
which participate in the Separate Account to assure that the correct
values of the Units and of the Separate Account are applied; reviewing
the fixed repayment schedule applicable to the redemption of certain
seed money units (the Seed Money Units), as defined in Section IV(k)
below, as approved by the State of New York Insurance Department;
reviewing any exercise of discretion by TIAA to accelerate the fixed
repayment schedule applicable to the redemption of Seed Money Units;
and, approving TIAA's exercise of discretion only if such acceleration
would benefit the Participants in the Separate Account;
(8) after (and, if necessary, during) the Start Up Period, as
defined in Section IV(m) below, determining the appropriate Trigger
Point, with respect to the ongoing ownership by TIAA of Liquidity
Units; establishing a method to implement any changes to the Trigger
Point; adjusting the percentage which serves as the Trigger Point;
approving or requiring any reduction of TIAA's interest in the Separate
Account; and, approving the manner in which such reduction of TIAA's
participation in the Separate Account in excess of the Trigger Point is
to be effected;
(9) in the event the Trigger Point is reached, participating and
planning any program of sales of the assets of the Separate Account,
which would include the selection of the Properties to be sold, the
guidelines to be followed in making such sales, and the approval of
such sales, if in the opinion of the Independent Fiduciary, such sales
are desirable at the Trigger Point in order to reduce the ownership by
TIAA of Liquidity Units in the Separate Account or to facilitate the
Wind Down;
(10) supervising the operation of the Separate Account during the
Wind Down of such Separate Account;
(11) during the Wind Down, planning any program of sales of the
assets of the Separate Account, including the selection of the
Properties to be sold, determining the guidelines to be followed in
making such sales, and approving the sale of the Properties in the
Separate Account, in the event of the termination of the Separate
Account, if in the opinion of the Independent Fiduciary, such sales are
desirable to facilitate the Wind Down; and
(12) reviewing any other transactions or matters involving the
Separate Account that are submitted to the
[[Page 15130]]
Independent Fiduciary by TIAA and determining whether such transactions
or other matters are fair to the Separate Account and in the best
interest of the Separate Account.
(f) The exemption is also subject to the condition that the
following transactions involving the Separate Account have not occurred
and will not occur:
(1) participation by the Independent Fiduciary, TIAA, any Affiliate
of TIAA, TIAA's general account (the General Account), or any other
separate account over which TIAA or its Affiliates has any investment
control in any joint venture with the Separate Account, or in the
ownership of the Properties of the Separate Account either alone or
together with a joint venture partner;
(2) the borrowing of funds from the Separate Account by the
Independent Fiduciary, TIAA, any Affiliate of TIAA, TIAA's General
Account, or any other separate account over which TIAA or its
Affiliates has investment control, or the lending of funds to the
Separate Account by the Independent Fiduciary, TIAA, any Affiliate of
TIAA, TIAA's General Account, or any other separate account over which
TIAA or its Affiliates has investment control in order to leverage any
purchase by the Separate Account of any of the Properties, or
otherwise; and
(3) the acquisition by the Separate Account of any Properties from
or the sale by the Separate Account of any Properties to the
Independent Fiduciary, TIAA, any Affiliate of TIAA, TIAA's General
Account, or any other separate account over which TIAA or its
Affiliates has investment control.
(g) The liquidation of any Accumulation Units held by a Participant
or participating Plan, for which a withdrawal request is pending, has
not been and will not be delayed by reason of the redemption of Seed
Money Units held by TIAA, and TIAA has advanced and will always advance
funds by purchasing Liquidity Units to fund the withdrawal requests of
Participants or Plans on a timely basis;
(h) TIAA must maintain for a period of six (6) years from the date
of any transaction, the records necessary to enable the persons
described in paragraph (i) of this Section III to determine whether the
conditions of this exemption have been met. However, a prohibited
transaction will not be considered to have occurred if, due to
circumstances beyond the control of TIAA and its Affiliates, the
records are lost or destroyed prior to the end of the six-year period,
and no parties in interest, other than TIAA or its Affiliates, shall be
subject to a civil penalty that may be assessed under section 502(i) of
the Act, or to 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 (i) below.
(i)(1) Except as provided in subparagraph (2) of this paragraph (i)
and notwithstanding any provision of subsection (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (h) of
this Section III are unconditionally available at their customary
location for examination during normal business hours by:
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service;
(B) Any Fiduciary of a Plan which participates in the Separate
Account, or in the case of a contract between TIAA and a SRA or an IRA,
any participant in such SRA or IRA, who has authority to acquire or
dispose of the interests of such SRA or IRA contract, or any duly
authorized employee or representative of such Fiduciary of a Plan or
participant in such SRA or IRA;
(C) Any contributing employer to any Plan participating in the
Separate Account, or any duly authorized employee or representative of
such employer; and
(D) Any Participant or beneficiary of any Plan participating in the
Separate Account, or any duly authorized employee or representative of
such Participant or beneficiary.
(2) None of the persons described in subparagraphs (1)(B) through
(D) of this paragraph (i) shall be authorized to examine the trade
secrets of TIAA or any of its Affiliates, or any of its commercial or
financial information which is privileged or confidential.
Section IV--Definitions
For the purpose of this exemption:
(a) ``Accumulation Units'' mean the units of interest into which
equity participation in the Separate Account is divided during the
accumulation phase of the annuity contracts prior to retirement by a
Participant. Seed Money Units, as defined in Section IV(k) below, and
Liquidity Units, as defined in Section IV(g) below, are Accumulation
Units.
(b) ``Affiliate'' or ``Affiliates'' of TIAA include(s):
(1) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
TIAA.
(2) any officer, director, or employee of TIAA, or of a person
described in paragraph (b)(1) of Section IV, and
(3) any partnership in which TIAA is a partner.
(c) ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
(d) ``Cash Flow'' means: (1) the sum of: (a) income received by the
Separate Account from investments (including dividends and/or interest
from non-real estate investments, and net operating income, less
payment of capital expenditures and changes in reserves for capital
expenditures, from equity real estate investments); and (b) Participant
and Plan contributions (including transfers to the Separate Account)
MINUS (2) the sum of: (a) Separate Account expense charges (including
investment and administrative expenses for mortality and expense
guarantees); and (b) any redemption of Seed Money Units at fair market
value.
(e) ``Fiduciary'' or ``Fiduciaries'' mean(s) the individual
fiduciary or fiduciaries acting on behalf of each of the Plans that
invest in the Separate Account.
(f) ``Independent Fiduciary''--
(1) For purposes of this definition, an Independent Fiduciary means
a person who:
(A) Is not an Affiliate of TIAA;
(B) Does not have an ownership interest in TIAA or its Affiliates;
(C) Is not a corporation or partnership in which TIAA or any of its
Affiliates has an ownership interest;
(D) Is not a Fiduciary with respect to any Plan which participates
in the Separate Account;
(E) Has acknowledged in writing acceptance of fiduciary
responsibility; and
(F) Is either:
(i) a business organization which has at least five (5) years of
experience with respect to commercial real estate investments or other
appropriate experience;
(ii) a committee comprised of three to five individuals who each
have had at least five (5) years of experience with respect to
commercial real estate investments or other appropriate experience; or
(iii) a committee comprised both of a business organization or
organizations and individuals having the qualifications described in
paragraphs (f)(1)(A) through (E) of Section IV above.
(2) For the purposes of the definition of Independent Fiduciary, no
organization or individual may serve as Independent Fiduciary for the
Separate Account for any fiscal year, if the gross income received from
TIAA or its Affiliates by such organization or
[[Page 15131]]
individual (or by any partnership or corporation of which such
organization or individual is an officer, director, or ten percent
(10%) or more partner or shareholder) for that fiscal year exceeds five
percent (5%) of its or his annual gross income from all sources for the
prior fiscal year. If such organization or individual had no income for
the prior fiscal year, the five percent (5%) limitation is applied with
reference to the fiscal year in which such organization or individual
serves as an Independent Fiduciary. The income limitation includes
services rendered to the Separate Account as Independent Fiduciary, as
described in this exemption.
(3) No organization or individual who is an Independent Fiduciary,
and no partnership or corporation of which such organization or
individual is an officer, director, or ten percent (10%) or more
partner or shareholder, during the period that such organization or
individual serves as an Independent Fiduciary and continuing for a
period of six (6) months after such organization or individual ceases
to be an Independent Fiduciary, may
(A) acquire any property from or sell any property to TIAA, its
Affiliates, TIAA's General Account, or any separate account maintained
by TIAA or its Affiliates, including the Separate Account;
(B) borrow any funds from, or lend any funds to TIAA, its
Affiliates, TIAA's General Account, or any separate account maintained
by TIAA or its Affiliates, including the Separate Account;
(C) participate in any joint venture with TIAA, its Affiliates,
TIAA's General Account, or any separate account maintained by TIAA or
its Affiliates, including the Separate Account, or participate, either
alone or together with a joint venture partner, in the ownership of the
Properties with TIAA, its Affiliates, TIAA's General Account, or any
separate account maintained by TIAA or its Affiliates, including the
Separate Account; or
(D) negotiate any such transactions, described above in paragraph
(f)(3) (A) through (C) of Section IV.
(4) No Fiduciary of a Plan or Plan Sponsor which participates in
the Separate Account or a designee of such Fiduciary, Plan Sponsor, or
Plan may serve as the Independent Fiduciary with respect to the
Separate Account.
(g) ``Liquidity Units'' mean Accumulation Units, as defined in
Section IV(a) above, that are purchased from Participants (or, if
applicable, from the Plans who participate in the Separate Account) by
TIAA's General Account, when the Cash Flow of the Separate Account, as
defined above in Section IV(d), and liquid investments of the Separate
Account are insufficient, in order to guarantee liquidity for such
Participants (or, if applicable, for such Plans) who wish to withdraw
or transfer funds from the Separate Account.
(h) ``Plan or Plans'' mean(s) an employee benefit plan or employee
benefit plans (primarily participant-directed defined contribution
plans, but also some defined benefit plans) qualified pursuant to
sections 401(a), 403(a), 403(b), 414(d) and 457(b) of the Code, as well
as any TIAA IRA and SRA, as described, respectively, under section 408
and section 403(b) of the Code, which may participate in ownerships of
Units in the Separate Account and which are subject to section 406 of
the Act and/or section 4975 of the Code.
(i) ``Properties'' mean the geographically dispersed retail and
office buildings, light industrial facilities, and residential
apartment space with good operating income (and such other Properties
that may be acquired pursuant to changes in the investment guidelines
for the Separate Account that are approved by the Independent
Fiduciary) which TIAA has acquired on behalf of the Participants (and,
if applicable, the Plans) that invest in the Separate Account.
(j) ``Seed Money'' means the total amount (not to exceed $100
million) actually contributed by TIAA's General Account to the Separate
Account for the purpose of acquiring Properties for the Separate
Account. Seed Money will be applied to purchase Accumulation Units at
the fair market value of those Units at the time of purchase.
(k) ``Seed Money Units'' mean the Accumulation Units, as defined in
Section IV(a) above, that are issued by the Separate Account to TIAA's
General Account in exchange for Seed Money, as defined above in Section
IV(j), during the Start Up Period of the Separate Account.
(l) ``Separate Account'' means the real estate equity pooled
separate account invested in by Participants (and, if applicable by
Plans), as described herein.
(m) ``Start Up Period'' means the period during which repayment of
TIAA's General Account of Seed Money, as defined in Section IV(j)
above, must be made on a fixed repayment schedule as approved by the
State of New York Insurance Department (NYID). In this regard, the
redemption of Seed Money Units by TIAA will begin on the earlier to
occur of:
(1) two (2) years from the date on which TIAA first opened the
Separate Account to Participants (and, if applicable, to Plans) for
paying premiums to the Separate Account, or
(2) the date on which the value of the Separate Account first
reaches $200 million. Thereafter, at least 20 percent (20%) of the
original number of Seed Money Units acquired by TIAA's General Account
from the contribution of Seed Money to the Separate Account are to be
redeemed on predetermined dates in each year, as established by TIAA,
for a period of five (5) years (at fair market value based on the value
of Accumulation Units on the date of each redemption). The exercise of
any discretion by TIAA to accelerate the fixed repayment schedule
applicable to the redemption of Seed Money Units is subject to the
advance review and approval of the Independent Fiduciary, and any such
acceleration will not be applied so as to prevent a redemption of Seed
Money Units scheduled to occur on any of the predetermined dates during
any year. The Start Up Period will expire when all the Seed Money Units
originally acquired by TIAA's General Account from the contribution of
Seed Money to the Separate Account have been redeemed by TIAA.
(n) ``TIAA Pension Plans'' mean certain defined benefit and certain
defined contribution plans maintained by TIAA. Among the defined
contribution plans maintained by TIAA are the TIAA Retirement Plan,
which is tax-qualified under the Code, and the TIAA Tax-Deferred
Annuity Plan, which is a salary reduction annuity plan, pursuant to
section 403(b) of the Code. Participants in the TIAA Retirement Plan
and the TIAA Tax-Deferred Annuity Plan are permitted to invest in the
Separate Account.
(o) ``Trigger Point'' means the point, as established by the
Independent Fiduciary, at which TIAA's participation in the Separate
Account through the ownership of Liquidity Units is decreased with the
approval of or as required by the Independent Fiduciary, acting on
behalf of the Participants (and, if applicable, the Plans).
(p) ``Units'' mean the units of interest into which equity
participation in the Separate Account is divided.
(q) ``Wind Down'' means the period which begins on the date on
which TIAA notifies all Participants (and, if applicable, all Plans
invested in the Separate Account) that TIAA has decided to terminate
the Separate Account and concludes on the date on which no Accumulation
Units are held
[[Page 15132]]
by Participants (or, if applicable, by Plans).
Effective Date: If the proposed exemption is granted, the exemption
will be effective, as of October 2, 1995, the date the Separate Account
was first opened to Participants and Plans for investment.
Summary of Facts and Representations
1. TIAA, a non-profit stock life insurance company, was founded on
March 18, 1918, by the Carnegie Foundation for the Advancement of
Teaching. TIAA offers traditional annuities, which guarantee principal
and a specified rate of interest while providing the opportunity for
the crediting of additional amounts. TIAA also offers life insurance,
long-term disability insurance, and long-term care insurance.
TIAA is organized as a corporation under the laws of the State of
New York. All of the stock of TIAA is held by the TIAA Board of
Overseers, a non-profit New York corporation. The TIAA Board of
Overseers generally monitors TIAA's affairs to assure that TIAA is
meeting its Charter purpose. The Board of Overseers do not directly
supervise the management of TIAA, but they do elect members of the
Board of Trustees of TIAA, which does exercise such supervision. The
Board of Trustees consists of twenty (20) members, three of whom are
employees of TIAA.
TIAA is the companion organization of the College Retirement
Equities Fund (CREF). CREF is a non-profit membership corporation
established under the laws of the State of New York in 1952. CREF is
registered with the SEC as an investment company under the Investment
Company Act of 1940. CREF typically offers to Plans individual annuity
contracts with a variety of investment funds. In this regard, CREF
currently offers seven (7) investment funds, namely, a stock fund, a
money market fund, a bond fund, a social choice fund, a global equities
fund, an equity index fund, and a growth fund.
As of December 31, 1993, TIAA had approximately $67 billion in
assets. As of the same date, the combined assets of TIAA and CREF
totalled approximately $128 billion. In 1993, TIAA's General Account
contained $7 billion in real estate investments.
2. It is represented that TIAA and CREF together form the principal
retirement annuity funding system for education and research
communities in the United States. In this regard, TIAA and CREF serve
approximately 1.8 million individuals who are employed at approximately
5,500 educational and research institutions. Typically, TIAA and CREF
issue individual annuity contracts (and occasionally group annuity
contracts) in order to provide funding for pension plans which are
sponsored by these educational institutions for their employees.
It is represented that the Plans involved in the proposed
transactions are participant directed defined contribution plans, as
described in section 401(a), 403(a), 403(b), 414(d) and 457(b) of the
Code, as well as any TIAA IRA and SRA, as described, respectively,
under section 408 and section 403(b) of the Code. In addition,
participants in certain TIAA Pension Plans, as defined in Section IV(n)
above, are permitted to invest in the Separate Account.<SUP>9 Further,
it is represented that less than fifty (50) defined benefit pension
plans may also be involved in the proposed transactions.
\9\ It is represented that any acquisition of Units in the
Separate Account by plans sponsored by TIAA will not violate section
406(a) or 406(b) of the Act by reason of the statutory exemption
contained in section 408(b)(5) of the Act. The Department is
offering no view, herein, as to whether the acquisition by any plans
sponsored by TIAA of Units in the Separate Account is covered by the
statutory exemption provided in section 408(b)(5) of the Act.
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3. TIAA anticipates that almost all of the educational institutions
participating in the TIAA annuity funding system are interested in
adding a real estate separate account as an endorsed enhancement to
individual annuity contracts. For this reason, TIAA established the
Separate Account in which certain Plans covered by the Act and their
participants and beneficiaries have invested and will invest.<SUP>10
\10\ TIAA has represented its understanding that this proposed
exemption, if granted, will apply only to those Plans that are
subject to section 406 of the Act and/or section 4975 of the Code.
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4. The Separate Account is an open-end commingled equity real
estate separate account which invests eligible retirement plan assets
primarily in equity real estate, and other real estate related
investments, including marketable securities. It is represented that
the Separate Account has not invested and will not invest in loans and
leases to, or securities issued by, TIAA or its Affiliates. The
Separate Account is a separate account, as defined in section (3)(17)
of the Act, and was established and is operated in accordance with
section 4240 of the New York Insurance law. Units in the Separate
Account are registered with the SEC under the Securities Act of 1933.
It is represented that TIAA operates the Separate Account so that it is
not subject to registration as an investment company under the
Investment Company Act of 1940.
TIAA provides investment management services to the Separate
Account.<SUP>11 As investment manager to the Separate Account, TIAA is
a fiduciary, within the meaning of section 3(21)(A) of the Act, with
respect to the assets of the Plans held in the Separate Account, and
therefore, qualifies as a party in interest, pursuant to section
3(14)(A) of the Act, with respect to the Plans which participate in the
Separate Account.
\11\ It is represented that TIAA receives fees for serving as
investment manager of the Separate Account. In this regard, TIAA
anticipates that the total investment management fees to
Participants (and, if applicable, to Plans) which invest in the
Separate Account will be in the range of from 50 to 75 basis points.
It is represented that the overall expenses charged for the Separate
Account will not exceed a maximum of 250 basis points. No other fees
or charges are made or will be made, except for operating expenses
and taxes that are net of gross income for a specific Property. TIAA
maintains that statutory exemptions, pursuant of sections 408(b)(2)
or 408(b)(5) of the Act, are available to provide relief for the
fees received by TIAA with respect to the management of the Separate
Account. The Department is offering no view, herein, as to whether
the receipt of fees from the Separate Account by TIAA is covered by
the statutory exemptions provided in sections 408(b)(2) or 408(b)(5)
of the Act, nor is the Department providing any relief herein with
respect to such fees charged by TIAA to the Separate Account.
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5. TIAA proposes to operate the Separate Account with a
sufficiently diverse portfolio of Properties to offer to investing
Participants (and, if applicable, to investing Plans). In this regard,
it is anticipated that the Properties acquired by the Separate Account
will be geographically dispersed retail and office buildings, light
industrial facilities, and residential apartment space with good
operating income. In order to acquire such Properties, TIAA believes
that the Separate Account required an initial contribution of $100
million in Seed Money.
Accordingly, on July 3, 1995, TIAA contributed $100 million in Seed
Money in a lump sum to the Separate Account from its General Account.
In return for the contribution of Seed Money, TIAA received from the
Separate Account, Seed Money Units representing 100% of the value of
the Separate Account at the time of the contribution. Thereafter, TIAA
proposes to redeem Seed Money Units under a fixed repayment schedule,
subject to the approval of the NYID. In the opinion of TIAA, this
approach would permit the Separate Account flexibility to acquire
equity real estate investments, thereby enhancing the ability of the
Separate Account to generate greater returns sooner for Participants
(and, if applicable, for Plans).
[[Page 15133]]
It is represented that the NYID has approved the redemption by TIAA
of its Seed Money Units to begin on the earlier to occur of: (i) two
years from the date (i.e. October 2, 1995) on which TIAA first opened
the Separate Account to Participants (and, if applicable, to Plans) for
paying premiums to the Separate Account, or (ii) the date on which the
value of the Separate Account first reaches $200 million. Thereafter,
it is represented that at least 20 percent (20%) of the original number
of Seed Money Units acquired by TIAA's General Account from the
contribution of the Seed Money to the Separate Account will be redeemed
on predetermined dates in each year, as established by TIAA, for a
period of five (5) years. In this regard, it is represented that TIAA
will select twelve dates each year (i.e. the fifteenth day of each
calendar month, or if such date is not a business day, then the next
following day on which TIAA is open for business) on which it will
redeem one-twelfth of the number of Seed Money Units to be redeemed in
that calendar year in order to satisfy the requirement that at least 20
percent (20%) of its Seed Money Units is redeemed annually.<SUP>12
\12\ TIAA believes that the analysis contained in Advisory
Opinion 83-38A (July 22, 1983) is applicable to TIAA's transfer of
the Seed Money to the Separate Account, and to the Separate
Account's redemption of Seed Money Units from TIAA which were
acquired when TIAA contributed the Seed Money to the Separate
Account. This opinion held that seed money allocated to separate
accounts by an insurance company in order to aid in the start-up and
management of those accounts would not be treated as assets of the
plans which invested in the separate accounts, and that the
redemption by the insurance company of participation units in the
separate accounts would not constitute a violation of the prohibited
transaction provisions of the Act, solely by reason of the transfer
of seed money from the separate accounts to the insurance company's
general account. In this regard, TIAA maintains that similar
transfers of Seed Money between its Separate Account and its General
Account do not violate section 406(a)(1) (A) and (D) or section 406
(b)(1) and (b)(2) of the Act. The Department is offering no relief,
herein, for the transfer of the Seed Money into the Separate Account
or the redemption by the Separate Account of TIAA's Seed Money Units
acquired with the Seed Money, as above described. The Department
notes that Advisory Opinion 83-38A did not address the situation
involving the redemption of units of the separate account by the
insurance company, when, at the same time, there were outstanding
requests for withdrawal or transfer by participants (or, if
applicable, plans) invested in the separate account.
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Notwithstanding the fixed repayment schedule, described above, TIAA
has discretion to accelerate the redemption of Seed Money Units, but
represents that it will exercise such discretion, subject to the
advance review and approval of the Independent Fiduciary, and only if
such exercise would be in the best interest of the Participants
invested in the Separate Account. It is further represented that any
such acceleration will not be applied so as to prevent a redemption of
Seed Money Units scheduled to occur on any of the predetermined dates
during any year.
TIAA proposes to redeem the Seed Money Units at the fair market
value of such Units on the date of each redemption. TIAA believes that
the redemption by the General Account of TIAA's Seed Money Units at the
fair market value of such units on the date redeemed is equitable and
appropriate from the standpoint of both the General Account and the
Separate Account. In this regard, it is represented that New York
Insurance law requires TIAA to invest General Account assets in a
prudent fashion. Further, TIAA maintains that Seed Money, as part of
the General Account, must be invested for the benefit of those who
depend upon the assets of the General Account to support their
contractual obligations. Accordingly, in the opinion of TIAA, the
General Account must share in both the upside and downside risks
resulting from its investment of the Seed Money in the Separate
Account.
TIAA represents that cash to redeem its Seed Money Units at fair
market value will be obtained from the following sources: (a) Cash Flow
from the Separate Account; (b) liquid investments in the Separate
Account; or (c) the proceeds from the sale of Properties held by the
Separate Account. TIAA believes this method of redemption of TIAA's
Seed Money Units will allow the Separate Account to purchase additional
Properties even during the time when the Seed Money initially
contributed by TIAA is being repaid. In the opinion of TIAA, the
creation of a more substantial, more diverse real estate portfolio in
the Separate Account benefits Participants (and, if applicable, Plans)
which invest in the Separate Account by achieving greater investment
returns.
6. In accordance with the provisions of the Separate Account, each
Participant (and, if applicable, each Plan) that invests in the
Separate Account is entitled to withdraw or transfer funds from the
Separate Account at the current daily fair market value of the Units of
the Separate Account pursuant to the valuation methodology described
below. Payouts to individual Participants are made in accordance with
any limitations on the timing and frequency of such payouts which may
be imposed under applicable Plan provisions.
In order to ensure that Participants (and, if applicable, Plans)
may withdraw or transfer amounts from the Separate Account at any time,
TIAA proposes to guarantee the liquidity of the Separate Account. In
this regard, TIAA will provide a ``safety net'' or ``back-up''
liquidity feature to the Separate Account whenever certain sources of
funds in the Separate Account are insufficient to satisfy all of the
requests for withdrawal or for transfer from the Separate Account. In
this regard, it is represented that in satisfying withdrawal or
transfer requests from Participants (and, if applicable, from Plans),
the Separate Account first relies on Cash flow, as defined in Section
IV(d).
If the Cash Flow of the Separate Account is not sufficient to fund
such requests, then TIAA looks to the liquid investments in the
Separate Account. It is represented that generally the liquid
investments of the Separate Account are expected to represent from 10
to 25 percent (10%-25%) of the assets of the Separate Account and to
include Treasury bonds and notes, corporate bonds, money market
instruments, collateralized mortgage obligations, shares of real estate
investment trusts, and other real estate related companies. Finally, if
the Cash Flow and liquid investments of the Separate Account are
insufficient, TIAA represents that it will purchase a sufficient number
of Liquidity Units, as defined in Section IV(g), from the Separate
Account to fund the request for withdrawal or transfer from an exiting
Participant (or, if applicable, from an exiting Plan).
TIAA recognizes that, through potential purchases of Liquidity
Units, it may retain an unanticipated level of ownership in the
Separate Account. As a result of such purchases, TIAA's interest in the
Separate Account may at any time increase beyond a predetermined
percentage (i.e. the Trigger Point, as defined in Section IV(o)) of the
total value of the Accumulation Units of the Separate Account, as
defined in Section IV(a). In the event of such an increase beyond the
Trigger Point through the purchase of Liquidity Units by TIAA from the
Separate Account, TIAA proposes to reduce its holding of Liquidity
Units by selling such Liquidity Units to the Separate Account. In this
regard, cash to purchase Liquidity Units is obtained from the following
sources: (a) Cash Flow from the Separate Account; (b) liquid
investments in the Separate Account; or (c) the proceeds from the sale
of Properties held by the Separate Account.
7. TIAA retains the authority to terminate the Separate Account and
wind down the operation of the Separate Account. It is represented that
[[Page 15134]]
the Wind Down will begin when TIAA informs the Participants (and, if
applicable, the Plans) which participate in the Separate Account of its
intention to terminate the Separate Account, and will conclude on the
date on which no Units are held by any of the Participants or Plans
which participate in the Separate Account. Such notification of the
intent to terminate the Separate Account must be provided in writing by
TIAA at least one year in advance of the termination of the Separate
Account to Participants (and, if applicable, Plans) at their last known
addresses in TIAA's business records. It is represented, that for one
year prior to its termination, the Separate Account will continue to
operate and honor withdrawal requests from Participants (and, if
applicable, Plans). However, no new contributions or transfers from
Participants (and, if applicable, from Plans) will be permitted into
the Separate Account during that one-year period.
TIAA has provided rules for the redemption of Units during the Wind
Down by Participants (and, if applicable, by Plans) which must be
approved by the Independent Fiduciary prior to becoming effective. It
is represented that once such rules are approved, TIAA has no
discretion regarding their application. Under the rules applicable to
Participants, there is no limitation on the amount of withdrawals
during Wind Down. With respect to any Plan funded with a TIAA deposit
administration type group annuity contract, the redemption of
Accumulation Units is tied to the size of such Plan's interest in the
Separate Account. If the value of the Accumulation Units held by such a
Plan is equal to or less than $1 million on the effective date of the
termination of the Separate Account, the entire interest of the Plan
will be redeemed. If the value of the Accumulation Units held by such
Plan exceeds $1 million on the effective date of the termination of the
Separate Account, the distribution of the value of the Accumulation
Units of that Plan will occur pro rata (with other similarly situated
Plans) over no longer than a twelve (12) month period. It is further
represented that any Participant (and, if applicable, any Plan) may
elect to defer the redemption of Accumulation Units until all
Properties in the Separate Account are sold. It is represented that
upon termination and liquidation of the Separate Account, any
Accumulation Units held by TIAA will be the last Units redeemed, unless
the Independent Fiduciary directs otherwise.
8. In the absence of an exemption, under the circumstances
described above, the transactions which may be deemed to violate the
prohibited transactions provisions of the Act include: (a) the purchase
of Liquidity Units by TIAA to provide liquidity to the Participants
(and, if applicable, to the Plans) which participate in the Separate
Account in the event of net withdrawals; (b) the purchase of Liquidity
Units by the Separate Account from TIAA in the event of net
contributions to the Separate Account; and (c) the use of Cash Flow and
liquid investments in the Separate Account and proceeds from the sale
of Properties owned by the Separate Account in order to generate cash
to purchase TIAA's Liquidity Units after the Trigger Point has been
exceeded or during the Wind Down Period. In addition, because cash is
transferred indirectly between the General Account and the Separate
Account, in connection with contributions, withdrawals, and transfers
of Units, such acquisitions or dispositions theoretically could be
viewed as an indirect transfer or use of plan assets between TIAA and
the Plans and their Participants. TIAA believes that the methods of
reducing TIAA's ownership in the Separate Account to a percentage equal
to or below the Trigger Point and the process of increasing and
decreasing TIAA's interest in the Separate Account through the purchase
or sale of Liquidity Units, involve transactions between the General
Account and the Separate Account which may constitute prohibited
transactions. Accordingly, TIAA requests exemptive relief from sections
406(a), 406(b)(1) and 406(b)(2) of the Act for the subject
transactions.
9. TIAA believes that the requested exemption is in the best
interest of Participants (and, if applicable, Plans) who participate in
the Separate Account. The establishment and operation of the Separate
Account permits Participants in the TIAA-CREF annuity funding system to
take advantage of valuable investment opportunities available in real
estate. In this regard, it is represented that Participants (and, if
applicable, Plans) in the Separate Account are better able to diversify
risk in a mixed asset pension portfolio. Moreover, the Separate Account
is designed to permit unlimited withdrawal and transfer flexibility.
This structure makes it possible for Participants (and, if applicable,
Plans) to invest in real estate which is by nature too illiquid to
permit rapid withdrawals and transfers. In this regard, TIAA represents
that under no circumstances will the liquidation of any Accumulation
Units held by a Participant or participating Plan, for which a
withdrawal request is pending, be delayed by reason of the redemption
of Seed Money Units held by TIAA. It is represented that TIAA will
always advance funds by purchasing Liquidity Units to fund withdrawal
requests from Participants or Plans on a timely basis.
10. TIAA has adopted a number of safeguards intended to fully
protect the interests of Participants (and, if applicable, Plans) which
invest in the Separate Account. In this regard, the Independent
Fiduciary approves and monitors nearly all material transactions that
occur during the establishment, operation, and Wind Down of the
Separate Account. In addition, other procedures have been adopted to
ensure that appropriate valuations and appraisals are made of the Units
and of the assets in the Separate Account. Moreover, TIAA is required
to provide disclosures to participants and to plans that contemplate
investing in the Separate Account and is required to provide
Participants, Plan Fiduciaries, and Plan Sponsors access to certain
information about the Separate Account on a continuing basis.
One such safeguard is the specified valuation rules and procedures
which TIAA and the Independent Fiduciary use in the operation of the
Separate Account. In this regard, it is represented that on the day the
Separate Account was established, the initial value of each of the
Accumulation Units in the Separate Account was set at $100. Thereafter,
the value of one Accumulation Unit equals the total value of the net
assets of the Separate Account divided by the number of outstanding
Accumulation Units in the Separate Account. It is represented that as
of October 2, 1995, when the Separate Account was opened for investment
by Participants (and, if applicable, Plans), the value of a Unit was
$101.25.
In order to calculate the value of an Accumulation Unit, each of
the Properties held in the Separate Account is valued at its initial
price. Thereafter, each of the Properties is valued annually (the
Annual Appraisals) by an independent, qualified appraiser. TIAA is
responsible for designating one or more independent appraisers, subject
to the approval of the Independent Fiduciary, to perform such Annual
Appraisals.
It is represented that the Annual Appraisals are conducted during
an assigned valuation month for each Property. Each assigned valuation
month is chosen with the intent to schedule the independent appraisals
in as even a pattern as is practical over the course of a calendar
year. It is represented that the Independent
[[Page 15135]]
Fiduciary is involved in the assignment of each valuation month and any
alternative thereto.
It is represented that procedures are in place to obtain
independent appraisals of the Properties and to ensure the integrity of
the valuation of the assets of the Separate Account. In this regard, it
is represented that the portfolio manager of the Separate Account has
no contact with the independent appraisers of the Properties. Instead,
asset managers for the Separate Account, who are responsible for the
leasing strategy and capital improvement program for each of the
Properties and for oversight of the performance of third-party property
managers, convey information about the Properties to the independent
appraisers. In addition, TIAA's appraisal group, which reports directly
to the Senior Vice President of TIAA's Mortgage & Real Estate Division,
is responsible for communicating with the independent appraisers on an
ongoing basis, and for reviewing draft appraisals in order to recommend
corrections of misinformation and obvious errors, such as mathematical
calculations.
It is represented that the independent appraisers have the final
authority in the preparation of the Annual Appraisals. In this regard,
in preparing the Annual Appraisals of the Properties in the Separate
Account, the independent appraiser(s) take into account appropriate
valuation methodologies which may include replacement cost, comparable
costs, comparable sales, discounted cash flow, current and projected
occupancy levels, market conditions, and the condition of the Property
where appropriate. The cost of the Annual Appraisals, and any other
appraisals as necessary, are reflected in the investment management fee
charged to the Separate Account. Once prepared, it is represented that
the Independent Fiduciary receives copies of the Annual Appraisals
which are subject to the Independent Fiduciary's review and approval.
The Annual Appraisals, as approved by the Independent Fiduciary,
are updated at least once every three (3) months by the staff of TIAA
(the Quarterly Updates) and will be updated more frequently should
events occur which have an impact on the value of any Property. TIAA
takes into consideration the current rate of interest and inflation,
occupancy levels, cash flow, regional and local market conditions, and
other relevant factors, including such other appraisal tools and
methodologies as in TIAA's judgment are deemed reasonable, prudent, and
appropriate. It is represented that the Quarterly Updates are subject
to approval by the Independent Fiduciary and are effective as of the
quarterly anniversary of the Annual Appraisals. If at any time between
Quarterly Updates or between Quarterly Updates and the Annual
Appraisals, an event occurs which impacts the value of any of the
Properties, TIAA will review such impact on value. It is represented
that the Independent Fiduciary receives copies of the internal
appraisals for review and any change in the value of a Property is
subject to the approval of the Independent Fiduciary. In addition, the
Independent Fiduciary has the authority to require an independent
appraisal whenever necessary. In that circumstance, the Independent
Fiduciary would select such independent appraiser, who would be deemed
approved by TIAA, if TIAA does not object within fourteen (14) days
thereof. If TIAA does not object to the Independent Fiduciary's choice,
then the independent appraiser will be retain to perform the appraisal.
If TIAA objects to the Independent Fiduciary choice, the Independent
Fiduciary will choose another independent appraiser. Further, the
Independent Fiduciary is authorized to select the appropriate value in
the event any appraisals of Properties performed by TIAA conflict with
those prepared by independent third party appraisers or a conflict
arises between different appraisals each of which was prepared by an
independent appraiser.
In addition to updating and reviewing the values of the Properties,
TIAA calculates daily accruals (the Daily Accruals) for the recognition
of income and expenses of the Properties in the Separate Account. It is
represented that such Daily Accruals are based on the projected net
monthly operating income or loss for each of the Properties divided by
the number of days in the month. The projected net monthly operating
income or loss for each of the Properties is based on occupancy and
rental information, anticipated expenses and other information. In this
regard, it is represented that the Daily Accruals are modified as
actual performance is determined and projected amounts change. The
Independent Fiduciary is responsible for reviewing and approving the
methodology to calculate such Daily Accruals and for monitoring the
recurring calculation of such Daily Accruals. The Independent
Fiduciary's duties also include observing the methodology and analyzing
the calculations employed by TIAA in arriving at the Unit value set by
the Daily Accruals and by the ongoing monthly reviews of the value of
the Properties.
It is represented that all of the valuation procedures utilized by
TIAA regarding the value of Properties in the Separate Account, as well
as any other investments in the Separate Account, are subject to the
monitoring and approval of the Independent Fiduciary. In this regard,
non-real estate assets of the Separate Account are generally liquid
investments. For public market securities, TIAA calculates the value of
the assets as of the close of every valuation day. It is represented
that TIAA generally uses market quotations or independent pricing
services to value securities and other investments of the Separate
Account. If market quotations or independent pricing services are not
readily available, and for ``non-public market assets'' (e.g.,
mortgages), TIAA uses the fair market value of such assets, as
determined in good faith by TIAA. It is represented that as of February
29, 1996, there are no ``non-public market assets'' in the Separate
Account. In this regard, TIAA represents that while there is no maximum
percentage limitation on the amount of ``non-public market assets,''
TIAA does not anticipate that the Separate Account will invest in a
significant percentage of such assets.
It is represented that TIAA's valuations are subject to examination
every five (5) years by the New York State Insurance Department.
Further, the Separate Account is audited periodically by TIAA's
internal auditor and annually by an independent outside auditor,
currently the firm of Deloitte & Touche LLP (Deloitte). As part of its
audit, Deloitte examines samples of valuations performed by TIAA,
including valuations of assets for which there is no readily
ascertainable market value. In addition, Deloitte is responsible for
determining whether the valuation methods used by TIAA are in
accordance with generally accepted accounting principles.
It is represented that TIAA will not alter its valuation
methodology without the approval of the Independent Fiduciary and that
all valuations of investments of the Separate Account are subject to
review and approval by the Independent Fiduciary. Further, without the
prior approval of the Independent Fiduciary, TIAA is not permitted to
alter any valuation, which results in an increase or decrease of: (a)
more than 6 percent (6%) of the value of any of the Properties in the
Separate Account since the last independent Annual Appraisal; or (b)
more than 2 percent (2%) of the value of the Separate Account since the
prior month; or (c) more than 4 percent (4%) in the
[[Page 15136]]
value of the Separate Account within any calendar quarter. In addition
to these percentage limitations, it is represented that any adjustments
to the value of the Properties which are made by TIAA during the first
three (3) months after receipt of an Annual Appraisal prepared by an
independent, qualified appraiser, are subject to the review and
approval of the Independent Fiduciary.
11. It is represented that the proposed exemption is feasible in
that it imposes no continuing administrative burden on the Department,
because the Independent Fiduciary is responsible for monitoring and
approving all significant transactions relating to the establishment
and operation of the Separate Account. In this regard, among other
things, the Independent Fiduciary must review and approve prior to
adoption, the investment guidelines of the Separate Account established
by TIAA under which the day-to-day investments of the Separate Account
are made. Thereafter, the Independent Fiduciary is responsible for
approving any changes to such investment guidelines. Further, it is the
duty of the Independent Fiduciary to monitor whether the Properties
acquired by the Separate Account conform to the requirements of such
investment guidelines.
Prior to adoption by TIAA, the Independent Fiduciary must review
and approve the valuation procedures of the Separate Account. In this
regard, the Independent Fiduciary, among other things, is responsible
for overseeing the methodology used in establishing the value of the
Units, monitoring the calculation of Daily Accruals and the procedures
for valuing the Properties and other assets of the Separate Account,
and assigning the valuation month for each of the Properties. Further,
any changes to the existing valuation procedures of the Separate
Account are also subject to review and approval by the Independent
Fiduciary.
The Independent Fiduciary must oversee the quality of the appraisal
functions performed by TIAA and by outside independent, qualified
appraisers with respect to the valuation of the Properties in the
Separate Account. In this regard, the appointment of all the
independent appraisers retained by TIAA to perform periodic valuation
of the Properties in the Separate Account must first be reviewed and
approved by the Independent Fiduciary. Further, the Independent
Fiduciary is responsible for approving the list of appraisers submitted
by TIAA, and is authorized to remove any names of appraisers from such
list.
The Independent Fiduciary is responsible for reviewing and
approving the valuation of the Units in the Separate Account and the
value of the Properties held in the Separate Account. In this regard,
the Independent Fiduciary is authorized to conduct visits to the
Properties. The Independent Fiduciary has discretion to adjust the
valuation of the Properties at any time. Whenever the Independent
Fiduciary believes that the characteristics of any of the Properties
have changed materially, or with respect to any of the Properties,
whenever it deems an additional appraisal to be necessary or
appropriate in order to assure the correct valuation of the Separate
Account, the Independent Fiduciary has discretion to require appraisals
in addition to those normally conducted. TIAA is not permitted to alter
the valuation of any Property or the Separate Account beyond the
limits, described in paragraph ten above, without first obtaining the
prior approval of the Independent Fiduciary. The opinion of the
Independent Fiduciary on the value of any Property controls in the
event of a conflict.
As described earlier in this proposed exemption, TIAA received from
the Separate Account Seed Money Units upon contribution of the Seed
Money to the Separate Account from its General Account, and
subsequently intends to redeem such Seed Money Units under a fixed
repayment schedule. It is represented that such fixed repayment
schedule in addition to being subject to the approval of the NYID is
also subject to review and approval by the Independent Fiduciary.
Further, the Independent Fiduciary is responsible for reviewing any
exercise of discretion by TIAA to accelerate the fixed repayment
schedule applicable to the redemption of Seed Money Units, and
approving TIAA's exercise of discretion only if such acceleration would
benefit the Participants in the Separate Account.
The Independent Fiduciary must monitor and oversee the liquidity
guarantee feature of the Separate Account, as described herein, if,
during or after the Start Up Period, the Cash Flow or liquid
investments of the Separate Account are insufficient to fund requests
for withdrawal by Participants (and, if applicable, by Plans). In this
regard, the Independent Fiduciary is responsible for reviewing the
purchase and sale of Units by TIAA and the Participants (and, if
applicable, the Plans) that are withdrawing from the Separate Account,
in order to assure that the correct values of Units and of the Separate
Account are applied.
As noted earlier, it is intended that TIAA's interest in the
Separate Account will not exceed a certain percentage of the Separate
Account established by the Independent Fiduciary as a Trigger Point. In
this regard, it is represented that the Independent Fiduciary is
responsible for determining the appropriate percentage to serve as the
Trigger Point. Further, the Independent Fiduciary must determine
whether or not to impose a Trigger Point during or after the Start Up
Period with respect to TIAA's ongoing ownership of Liquidity Units in
the Separate Account, or whether to impose different Trigger Points
during or after the Start Up Period. With respect to TIAA's ongoing
ownership of Liquidity Units, both during and after the Start Up
Period, the duties of the Independent Fiduciary include: (a)
establishing a method to implement any changes to the Trigger Point;
(b) adjusting the percentage which serves as the Trigger Point; (c)
approving or requiring any adjustment of TIAA's ownership interest in
the Separate Account in the form of Liquidity Units; and (d) approving
the manner in which TIAA' participation in the Separate Account in
excess of the Trigger Point is effected.
In the event the Trigger Point is reached, during or after the
Start Up Period, the Independent Fiduciary is authorized to sell assets
of the Separate Account, if in the opinion of the Independent Fiduciary
such sales are desirable at the Trigger Point to reduce TIAA's
ownership of Liquidity Units in the Separate Account. In this regard,
the Independent Fiduciary is responsible for: (a) participating in the
planning of any program of sales of the assets of the Separate Account,
including the selection of Properties to be sold; (b) approving the
order which causes the sale of any of the Properties; (c) establishing
the guidelines to be allowed in making such sales; and (d) approving of
such sales. It is represented that the opinion of the Independent
Fiduciary controls in any conflict with TIAA over the sale of any of
the Properties, and that the Independent Fiduciary is authorized to
request appraisals upon the sale of any of the Properties in the
Separate Account.
In addition to overseeing the redemption of Seed Money Units,
controlling the Trigger Point, and managing the liquidity feature
offered by TIAA's General Account to the Separate Account, the
Independent Fiduciary is responsible for the activity of the Separate
Account in the event of
[[Page 15137]]
its termination and during the subsequent liquidation of its assets.
During the Wind Down, the Independent Fiduciary must supervise the
operation of the Separate Account. It is represented that in the event
of termination of the Separate Account, the Independent Fiduciary is
responsible for approving all sales of Properties in the Separate
Account, and will do so, only if in the opinion of the Independent
Fiduciary such sales are desirable to facilitate the Wind Down. In this
regard, the Independent Fiduciary must review any program of sales of
the assets of the Separate Account, including the selection of
Properties to be sold, and the guidelines to be followed in making such
sales. It is represented that the Independent Fiduciary also is
responsible for approving the order in which the Properties are sold,
approving the price for such Properties, and determining the timing of
the disposition of such Properties.
It is represented that in addition to performing the duties
described herein, the Independent Fiduciary, acting on behalf of
Participants (and, if applicable, Plans) invested in the Separate
Account, is responsible for reviewing any other transactions or matters
involving the Separate Account that are submitted to the Independent
Fiduciary by TIAA, and determining whether such transactions are fair
to the Separate Account and in the best interest of such account. In
order to fulfill all of its duties, it is represented that the
Independent Fiduciaries is responsible for developing formats for
periodic reports of information on the Separate Account to be provided
by TIAA.
12. The Independent Fiduciary must be qualified to act on behalf of
the Plans with respect to this proposed exemption. In this regard, the
Independent Fiduciary must be an established firm with substantial
expertise in real estate matters, such as the acquisition, management,
investment valuation, financing, and disposition of real estate.
Such Independent Fiduciary appointed for the Separate Account must
be independent of TIAA or its Affiliates. In this regard, the
Independent Fiduciary cannot have an ownership interest in TIAA or its
Affiliates, and cannot be a fiduciary with respect to any of the Plans
that participate in the Separate Account. Further, the Independent
Fiduciary may not receive from TIAA or its Affiliates more than 5
percent (5%) of such Independent Fiduciary's annual gross income from
all sources, including amounts received for services rendered to the
Separate Account during its term as Independent Fiduciary. The
Independent Fiduciary must also agree that during its term as
Independent Fiduciary (and for six (6) months after the conclusion of
its term as Independent Fiduciary), it will not: (a) acquire property
from, sell any property to, borrow money from, or lend money to TIAA,
its Affiliates, TIAA's General Account, or any separate account over
which TIAA or its Affiliates have any investment control, including the
Separate Account; (b) participate in any joint venture with TIAA, its
Affiliates, TIAA's General Account, or any separate account maintained
by TIAA or its Affiliates, including the Separate Account, or
participate, either alone or together with a joint venture partner, in
the ownership of the Properties with TIAA, its Affiliates, TIAA's
General Account, or any separate account maintained by TIAA or its
Affiliates, including the Separate Account; or (c) negotiate any such
transactions.
It is represented that TIAA has the discretion to appoint the
Independent Fiduciary. The Board of Trustees of TIAA established on
December 19, 1995, a special subcommittee (the Subcommittee) of the
Mortgage Committee. The Mortgage Committee is one of several standing
committees of the Board of Trustees of TIAA which traditionally has
been responsible for supervising the investment of funds of TIAA's
General Account in real estate mortgages and real estate. The
Subcommittee is composed exclusively of trustees who are independent
outside members of the Mortgage Committee. In this regard, it is
represented that the Subcommittee consists of five (5) individuals at
least two (2) of which are employees of institutions participating in
the TIAA annuity funding system and three (3) of which are otherwise
independent of TIAA.
It is represented that TIAA has contractually bound itself to rely
solely on the judgment of the Subcommittee with respect to the removal
of the Independent Fiduciary ``with'' or ``without cause,'' under the
terms of the Agreement between TIAA and the current Independent
Fiduciary. It is represented that the current Independent Fiduciary,
was appointed for an initial term of five (5) years and thereafter may
be reappointed for successive terms of three (3) years each. It is
represented that the Subcommittee may remove the Independent Fiduciary,
``without cause,'' only at the expiration of the initial 5-year term or
at the expiration of any successive 3-year term. In this regard, the
Independent Fiduciary is subject to removal ``with'' or ``without
cause,'' if a majority of the Subcommittee members (i.e. three of the
five members) vote in favor of such removal, following receipt by the
Subcommittee of a report on the Independent Fiduciary's activities
respecting the Separate Account.
It is represented that the Board of Trustees has delegated to the
Subcommittee alone the power to renew the Independent Fiduciary
agreement. In this regard, any agreement with the Independent Fiduciary
will not be renewed, if 40 percent (40%) of the Subcommittee members
(i.e. two of the five members) disapprove of such renewal.
In the event the Independent Fiduciary is removed or the agreement
with Independent Fiduciary is not renewed, it is represented that the
Board of Trustees of TIAA will delegate to the Subcommittee the
authority to select and appoint any successor Independent Fiduciary for
the Separate Account. In this regard, it is represented that any
successor Independent Fiduciary will perform all of the duties of
Independent Fiduciary and comply with all of the conditions, as
described herein.
The Independent Fiduciary may resign upon providing TIAA with 180
days' advance written notice of such resignation. In the event of
resignation, it is represented that the Board of Trustees of TIAA will
delegate to the Subcommittee the authority to select and appoint any
successor Independent Fiduciary for the Separate Account, who will
perform all of the duties of Independent Fiduciary and comply with all
of the conditions, as described herein.
Prior to investing in the Separate Account, it is represented that
each prospective participant (and, if applicable, each fiduciary of
prospective participating plans) has been and will be provided with
information regarding the role of the Independent Fiduciary with
respect to the Separate Account and has been and will be advised of the
identity of the party appointed to serve as the Independent Fiduciary.
In this regard, a decision by a Fiduciary or Plan Sponsor or by a
participant in a SRA or IRA to elect to add the Separate Account as an
additional pension funding option and to participate in the Separate
Account, after full disclosure by TIAA, constitutes approval and
acceptance by such Fiduciary or Plan Sponsor or such participant in a
SRA or IRA of such Independent Fiduciary.
Further, it is represented that in the event the Independent
Fiduciary were to change, TIAA would within thirty (30) days of such
change supplement the prospectus of the Separate Account
[[Page 15138]]
and distribute such prospectus to participating institutions and to
participants who express an interest in the Separate Account or who
transfer money into the Separate Account.
13. As of May 17, 1995, TIAA appointed Institutional Property
Consultants, Inc. (IPC) to serve as the Independent Fiduciary on behalf
of the Separate Account. Thereafter, TIAA and IPC entered into an
agreement (the Agreement) for a term of five (5) years which describes
the conditions of such appointment and the duties performed by each
party in accordance with the requirements of the Act. It is represented
that on June 9, 1995, IPC accepted and executed the Agreement.
IPC is a sub-Chapter S Corporation, 100% owned by its senior
professionals, which provides professional real estate counseling
services nationwide. In this regard, it is represented that IPC
maintains a principal office in San Diego, California, and a secondary
office in Hudson, Wisconsin. It is further represented that IPC is a
Registered Investment Advisor under the Investment Advisors Act of 1940
and qualifies as a Women Business Enterprise.
IPC provides services for business, financial, and non-profit
institutions. In this regard, IPC clients are tax-exempt institutions,
including public pension funds, corporate funds, Taft Hartley funds,
and retirement funds. It is represented that the total plan assets of
the IPC client group are approximately $250 billion, with real estate
investments comprising $12 billion. Of IPC's corporate and Taft Hartley
clients, approximately 10 percent (10%), calculated on the basis of
total plan assets, are subject to the Act.
It is represented that IPC has considerable background,
qualifications, and expertise in order to perform Independent Fiduciary
services for the Separate Account. In this regard, IPC has represented
to TIAA that it has at least five (5) years of experience with respect
to commercial real estate investments.
It is represented that IPC is independent of TIAA and its
Affiliates. In this regard, it is represented that gross income
received by IPC (or by any partnership or corporation of which IPC is a
10 percent (10%) or more partner or shareholder) from TIAA and its
Affiliates for any fiscal year ending during the term of the Agreement
does not exceed 5 percent (5%) of its annual gross income from all
sources for the preceding fiscal years. Such income limitation includes
the fees for services rendered to the Separate Account by IPC for
serving as the Independent Fiduciary.
It is represented that IPC has acknowledged in writing that it has
assumed responsibility, as a fiduciary under the Act, with regard to
the Separate Account, particularly on behalf of the Participants (and,
if applicable, the Plans) who participate in the Separate Account. It
is represented that IPC has undertaken to perform for the exclusive
benefit for the individual Participants in the Plans and their
beneficiaries the duties of the Independent fiduciary, as described in
TIAA's Application for a Prohibited Transaction Exemption and in
subsequent supplemental information submitted by TIAA, and as described
herein.
On September 13, 1995, IPC provided the Department with a report on
its activities to date with respect to the Separate Account. As of that
date, IPC reported that the Separate Account was in its Start-Up
Period, no Properties had been acquired by the Separate Account, and no
Units had been issued to the public. Nevertheless, subsequent to its
appointment as Independent Fiduciary, it is represented that TIAA
furnished IPC with detailed information on the expected operation of
the Separate Account. Further, IPC has engaged in numerous discussions
with the senior TIAA real estate staff involved in establishing and
managing the Separate Account. In this regard, IPC represents that to
date, it has reviewed and approved the investment guidelines
established by TIAA for the Separate Account and that TIAA and IPC are
currently working out specific procedures to ensure the flow, on a
weekly and monthly basis, of all the information, including real estate
valuations, that IPC deems necessary to fulfill its fiduciary
obligation to the Separate Account.
With respect to valuation, IPC has reviewed, and approved the
valuation procedures of the Separate Account. In this regard, IPC
represents that it understands the need for independence in the
valuation structure and has maintained an independent position with
respect to TIAA and its staff. Because no Properties had, as of
September 13, 1995, been acquired by the Separate Account, no
independent appraisers had been appointed. IPC has been provided with a
list of appraisers that TIAA intends to use for valuation purposes, and
IPC has approved such list. In carrying out its responsibility as
Independent Fiduciary once Properties are acquired by the Separate
Account, IPC will oversee the appraisal function conducted by TIAA and
by outside independent appraisers and will, if it deems necessary,
conduct surprise visits of Separate Account Properties. Further, IPC
has authority to require an independent appraisal whenever it deems it
necessary to do so. While TIAA would hire the independent appraiser in
that circumstance, such independent appraiser would initially be chosen
by IPC and will be deemed approved, if TIAA does not object within
fourteen (14) days thereof.
IPC expects that the structuring of the relationship between TIAA,
as investment manager, and IPC, as Independent Fiduciary, protects
against the manipulation of the Separate Account by TIAA. Further, IPC
represented that it will maintain a written record of its monitoring of
appraisals and valuation of Properties acquired by the Separate
Account. In this regard, IPC believes that the monitoring process is
protective of the interests of Participants (and, if applicable, of
Plans) in the Separate Account.
14. It is represented that during the operation of the Separate
Account, no member of the Board of Trustees of TIAA or of CREF has had
or will have a role in the selection of the Separate Account as a
funding vehicle for any of the Plans or has served or will serve as a
Fiduciary to any Plan participating in TIAA investment funding options.
In this regard, Fiduciaries of the Plans unrelated to TIAA, or in the
case of a SRA or an IRA, participants unrelated to TIAA who participate
in such SRA or IRA, have made and will make the decision to invest in
the Separate Account.<SUP>13
\13\ TIAA has not requested and the Department is not proposing,
herein, any relief for the selection of the Separate Account as a
funding vehicle for any of the Plans for which TIAA or CREF issue
annuity contracts.
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Before making the decision to invest in the Separate Account, TIAA
is required to make certain disclosures to prospective investors in the
Separate Account. Such disclosures include the information described
above in Section III(c) of this proposed exemption. TIAA proposes to
meet these disclosure obligations, by distributing a prospectus of the
Separate Account, under the Securities Act of 1933. It is represented
that the prospectus contains, among other things, a list of all the
Properties in the Separate Account and their values, detailed audited
financial information, and information about the operation and
investment objectives of the Separate Account. Specifically, TIAA
represents that prior to the investment in the Separate Account by any
Participants (and, if applicable, by
[[Page 15139]]
any Plans), it has furnished and will furnish, either in a prospectus
of the Separate Account or in ancillary materials, the disclosures, as
required pursuant to Section III(c) of this proposed exemption, to any
participant who expresses an interest in the Separate Account, all Plan
Sponsors and Fiduciaries of Plans which participate in the Separate
Account, and in the case of a contract between TIAA and a SRA or an
IRA, to the participant in such SRA or IRA. In the event a Participant
transfers money to the Separate Account before receiving a prospectus,
it is represented that such a prospectus is sent to him concurrently
with the required confirmation statement.
With respect to disclosure on an on-going basis to Fiduciaries of
the Plans or in the case of a contract between TIAA and an SRA or an
IRA, to the participant in such SRA or IRA, it is represented that TIAA
under the Securities Act of 1933 is required to update information set
forth in the prospectus on an annual basis. In addition, the prospectus
is updated as the Separate Account acquires or sells Properties;
provided such acquisition or sale has a material impact on the Separate
Account. It is represented that each Participant and all of the Plan
Sponsors have received and will receive annually an updated prospectus
and such updated information has and will become part of the prospectus
sent to potential investors in the Separate Account.
The Separate Account is required to file quarterly and other
financial reports with the SEC, pursuant to the Securities and Exchange
Act of 1934. It is |
