EBSA (Formerly PWBA) Federal Register Notice
AEW Capital Management, L.P. (AEW) Located in Boston, MA [10/30/1997]
[PDF Version]
Volume 62, Number 210, Page 58749-58752
[DOCID:fr30oc97-100]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 97-59, Exemption Application No. D-
10393]
AEW Capital Management, L.P. (AEW) Located in Boston, MA
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemption to replace Prohibited Transaction
Exemption (PTE) 93-40 involving Aldrich, Eastman & Waltch, L.P. and
Aldrich, Eastman & Waltch, Inc. (collectively, Old AEW).
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SUMMARY: This document contains an individual exemption which
supersedes PTE 93-40 (58 FR 34821, June 29, 1993).<SUP>1</SUP> This
exemption permits the replacement of Old AEW with an entity known as
``AEW Capital Management, L.P.'' <SUP>2</SUP> The exemption provides
conditional relief that is identical to that provided by PTE 93-40, and
it will affect participants and beneficiaries of, and fiduciaries with
respect to, plans utilizing real estate investment management services
provided by AEW.
\1\ PTE 93-40 provided exemptive relief from section 406(b)(1)
and (b)(2) of the Employee Retirement Income Security Act of 1974
(the Act) and the sanctions resulting from the application of
section 4975 of the Internal Revenue Code of 1986 (the Code), by
reason of section 4975(c)(1)(E) of the Code, with respect to the
payment by employment benefit plans of certain initial investment
fees and disposition fees to Old AEW. In addition, PTE 93-40
provided exemptive relief from the restrictions of section
406(a)(1)(A) through (D) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, with respect to the
investment by the plans in a multiple client commingled account
managed by Old AEW.
\2\ Effective December 10, 1996, old AEW was renamed ``AEW
Capital Management, L.P.'', which is hereinafter referred to in this
grant notice as AEW.
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EFFECTIVE DATE: This exemption is effective as of December 10, 1996.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: On September 5, 1997, the Department of
Labor (the Department) published a notice of proposed exemption in the
Federal Register (62 FR 47056) that would replace PTE 93-40. PTE 93-40
provided an exemption from certain prohibited transaction restrictions
of section 406 of the Act and from the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1) of the Code. The proposed exemption was requested in an
application filed by AEW pursuant to 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, 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. Accordingly, this replacement
exemption is being issued solely by the Department.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility
[[Page 58750]]
provisions of section 404 of the Act, which require, among other
things, a fiduciary to discharge his or her duties respecting a plan
solely in the interest of the participants and beneficiaries of the
plan and in a prudent fashion in accordance with section 404(a)(1)(B)
of the Act; nor does it affect the requirements of section 401(a) of
the Code that the plan operate for the exclusive benefit of the
employees of the employer maintaining the plan and their beneficiaries;
(2) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, the Department has found that the exemption is
administratively feasible, in the interests of the plans and their
participants and beneficiaries, and protective of the rights of
participants and beneficiaries of the plans; and
(3) The exemption is supplemental to, and not in derogation of, any
other provisions of the Act and the Code, including statutory or
administrative exemptions. Furthermore, the fact that a transaction is
subject to an administrative or statutory exemption is not dispositive
of whether the transaction is in fact a prohibited transaction.
(4) The exemption is applicable to the transactions previously
described in PTE 93-40 only if the conditions specified herein are
satisfied.
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, the Department hereby replaces PTE 93-
40 as follows:
Part I. Exemption for Payment of Certain Fees to AEW
The restrictions of section 406 (b)(1) and (b)(2) of the Act and
the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(E) of the Code, shall not apply
to the payment of certain initial investment fees (the Investment Fee)
and disposition fees (the Disposition Fee) to AEW by employee benefit
plans for which AEW provides investment management services (the Client
Plans), pursuant to an investment management agreement (the Agreement)
entered into between AEW and the Client Plans either individually,
through the establishment of a single client separate account (Single
Client Account), or collectively, as participants in a multiple client
commingled account (Multiple Client Account), provided that the
conditions set forth below in Part III are satisfied. (Single Client
Accounts and Multiple Client Accounts are collectively referred to
herein as Accounts).
Part II. Exemption for Investments in a Multiple Client Account
The restrictions of section 406(a)(1) (A) through (D) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1) (A) through (D) of the Code,
shall not apply to any investment by a Client Plan in a Multiple Client
Account managed by AEW, provided that the conditions set forth below in
Part III are satisfied.
Part III. General Conditions
(a) The investment of plan assets in a Single or Multiple Client
Account, including the terms and payment of any Investment Fee and
Disposition Fee, shall be approved in writing by a fiduciary of a
Client Plan which is independent of AEW and its affiliates and, in the
case of a Multiple Client Account for which ultimate investment
discretion is exercised by a bank trustee, a fiduciary which is
independent of the bank trustee and AEW and its affiliates (the
Independent Fiduciary). Notwithstanding the foregoing, AEW may
authorize the transfer of cash from a Single Client Account to a
Multiple Client Account, provided that: (1) the Multiple Client Account
has similar investment objectives and the identical fee structure as
the Single Client Account; (2) the Agreement governing the Single
Client Account authorizes AEW to invest in a Multiple Client Account;
(3) AEW receives no additional fees from the Single Client Account for
cash invested in the Multiple Client Account and no additional
Investment Fee is paid with respect to cash transferred to the Multiple
Client Account; (4) a binding commitment to make the transfer to the
Multiple Client Account is made by AEW within six months of the
Independent Fiduciary's decision to allocate assets to the Single
Client Account or, in the event that AEW's binding commitment to make
the transfer occurs more than six months after such Fiduciary's
decision, AEW obtains an additional authorization from the Independent
Fiduciary; and (5) each transfer of assets from the Single Client
Account to the Multiple Client Account occurs within 60 days of the
actual transfer of such assets to the Single Client Account.
(b) The terms of any investment in an Account and of any Investment
Fee or Disposition Fee shall be at least as favorable to the Client
Plans as those obtainable in arm's length transactions between
unrelated parties.
(c) At the time any Account is established and at the time of any
subsequent investment of assets (including the reinvestment of assets)
in such Account:
(1) Each Client Plan shall have total net assets with a value in
excess of $50 million; and
(2) No Client Plan shall invest, in the aggregate, more than five
percent of its total assets in any Account or more than 10 percent of
its total assets in all Accounts established by AEW.
(d) Prior to making an investment in any Account, the Independent
Fiduciary of each Client Plan investing in an Account shall receive
offering materials from AEW which disclose all material facts
concerning the purpose, structure, and operation of the Account,
including any fee arrangements.
(e) With respect to its ongoing participation in an Account, each
Client Plan shall receive the following written information from AEW:
(1) Audited financial statements of the Account prepared by
independent public accountants selected by AEW no later than 90 days
after the end of the fiscal year of the Account;
(2) Quarterly and annual reports prepared by AEW relating to the
overall financial position and operating results of the Account and, in
the case of a Multiple Client Account, the value of each Client Plan's
interest in the Account. Each such report shall include a statement
regarding the amount of fees paid to AEW during the period covered by
such report;
(3) Annual appraisals indicating the fair market value of the
Account's assets as established by an M.A.I. licensed real estate
appraiser independent of AEW and its affiliates which has been approved
by the Client Plan prior to investing in the Account, provided that if
a new appraiser for a property is chosen by AEW, the appraiser shall be
approved by the Independent Fiduciary of the Client Plan or the
responsible independent fiduciaries of Client Plans and other
authorized persons acting for investors in a Multiple Client Account
(the Responsible Independent Fiduciaries, as defined in Part IV(e)
below), prior to any valuation of such property; and
(4) In the case of any Multiple Client Account, a list of all other
investors in the Account.
(f) The total fees paid to AEW shall constitute no more than
reasonable compensation.
(g) The Investment Fee shall be equal to a specified percentage of
the net value of the Client Plan assets allocated to the Account, which
shall be payable either:
[[Page 58751]]
(1) At the time assets are deposited (or deemed deposited in the
case of reinvestment of assets) in the Account; or
(2) In periodic installments, the amount (as a percentage of the
aggregate Investment Fee) and timing of which have been specified in
advance based on the percentage of the Client Plan's assets invested in
real property as of the payment date, provided that (i) the installment
period is no less than three months, and (ii) if the percentage of the
Client Plan assets which have actually been invested by a payment date
is less than the percentage required for the aggregate Investment Fee
to be paid in full through that date (both determined on a cumulative
basis), the Investment Fee paid on such date shall be reduced by the
amount necessary to cause the percentage of the aggregate Investment
Fee paid to equal only the percentage of the Client Plan assets
actually invested by that date. The unpaid portion of such Investment
Fee shall be deferred to and payable on a cumulative basis on the next
scheduled payment date (subject to the percentage limitation described
in the preceding sentence).
(h) The Disposition Fee shall be payable after the Client Plan has
received distributions from the Account in excess of an amount equal to
100 percent of its invested capital plus a pre-specified annual
compounded cumulative rate of return (the Threshold Amount), except
that in the case of AEW's removal or resignation, AEW shall be entitled
to receive a Disposition Fee payable either at the time of removal or,
in the event of AEW's resignation, upon sale of the assets to which the
fee is allocable or upon termination of the Account as the case may be,
subject to the requirements of paragraph (k) below, as determined by a
deemed distribution of the assets of the Account based on an assumed
sale of such assets at their fair market value (in accordance with
independent appraisals), only to the extent that the Client Plan would
receive distributions from the Account in excess of an amount equal to
the Threshold Amount at the time of AEW's removal or resignation. Both
the Threshold Amount and the amount of the Disposition Fee, expressed
as a percentage of the amount distributed (or deemed distributed) from
the Account in excess of the Threshold Amount, shall be established by
the Agreement and agreed to by the Independent Fiduciary of the Client
Plan.
(i) The Threshold Amount for any Disposition Fee shall include at
least a minimum rate of return to the Client Plan, as defined below in
Part IV(f).
(j) For any sale of property in an Account which shall give rise to
the payment of a Disposition Fee to AEW prior to the termination of the
Account, the sales price of the property shall be at least equal to a
target amount (the Target Amount), as defined in Part IV(g), in order
for AEW to sell the property and receive its Disposition Fee. If the
proposed sales price of the property is less than the Target Amount,
the proposed sale shall be disclosed to and approved by the Independent
Fiduciary for a Single Client Account or the Responsible Independent
Fiduciaries for a Multiple Client Account, in which event AEW shall be
entitled to sell the property and receive its Disposition Fee. If the
proposed sales price is less than the Target Amount and the Independent
Fiduciary's or Responsible Independent Fiduciaries' approval is not
obtained, AEW shall still have the authority to sell the property, if
the Agreement provides AEW with complete investment discretion for the
Account, provided that the Disposition Fee which would have been
payable to AEW is paid only at the termination of the Account.
(k) In the event AEW resigns as investment manager for an Account,
the Disposition Fee shall be calculated at the time of resignation as
described above in paragraph (h) and allocated to each property based
upon the relationship that the appraised value of such property bears
to the total appraised value of the Account. Each amount arrived at
through this calculation shall be multiplied by a fraction, the
numerator of which shall be the actual sales price received by the
Account on disposition of the property (or in the case of a property
which has not been sold prior to the termination of the Account, the
appraised value of the property as of the termination date) and to the
denominator of which shall be the appraised value of the property which
was used in connection with determining the Disposition Fee at the time
of resignation, provided that this fraction shall never exceed 1.0. The
resulting amount for each property shall be the Disposition Fee payable
to AEW upon sale of such property or termination of the Account, as the
case may be.
(l) AEW or its affiliates shall maintain, for a period of six
years, the records necessary to enable the persons described in
paragraph (m) of this Part III 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 AEW or its affiliates, the records are lost or destroyed
prior to the end of the six year period; and (2) no party in interest,
other than AEW, shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act or to the taxes imposed by
section 4975(a) and (b) of the Code if the records are not maintained
or are not available for examination as required by paragraph (m)
below.
(m)(1) Except as provided in paragraph (m)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (l) of this Part III shall be unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of a Client Plan or any duly authorized employee
or representative of such fiduciary;
(iii) Any contributing employer to a Client Plan or any duly
authorized employee or representative of such employer; and
(iv) Any participant or beneficiary of a Client Plan or any duly
authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described above in paragraph (m)(1)(ii)-
(iv) shall be authorized to examine the trade secrets of AEW and its
affiliates or any commercial or financial information which is
privileged or confidential.
Part IV. Definitions
For purposes of this exemption:
(a) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner of such
person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term ``management services'' means:
(1) Development of an investment strategy for the Account and
identification of suitable real estate-related investments;
(2) Directing the investments of the assets of the Account,
including the determination of the structure of each investment, the
negotiation of its terms and conditions and the performance of all
requisite due diligence;
(3) Timing and directing the disposition of any assets of the
Account
[[Page 58752]]
and directing the liquidation of the Account;
(4) Administration of the overall operation of the investments of
the Account, including all applicable leasing, management, financing,
and capital improvement decisions;
(5) Establishing and maintaining accounting records of the Accounts
and distributing reports to Client Plans as described in Part III; and
(6) Selecting and directing all service providers of ancillary
services as defined in this Part IV.
(d) The term ``ancillary services'' means:
(1) Legal services;
(2) Services of architects, designers, engineers, hazardous
materials consultants, contractors, leasing agents, real estate
brokers, and others in connection with the acquisition, construction,
improvement, management and disposition of investments in real
property;
(3) Insurance brokerage and consultation services;
(4) Services of independent auditors and accountants in connection
with auditing the books and records of the Accounts and preparing tax
returns;
(5) Appraisal and mortgage brokerage services; and
(6) Services for the development of income-producing real property.
(e) The term ``Responsible Independent Fiduciaries'' means with
respect to a Multiple Client Account the Independent Fiduciary of each
Client Plan invested in the Account and other authorized persons acting
for investors in the Account which are not employee benefit plans as
defined under section 3(3) of the Act (such as governmental plans,
university endowment funds, etc.) that are independent of AEW and its
affiliates and are persons other than the bank trustee for the Account,
and that collectively hold at least 50% of the interests in the
Account.
(f) The term ``Threshold Amount'' means with respect to any
Disposition Fee an amount which equals all of a Client Plan's capital
invested in an Account plus a pre-specified annual compounded
cumulative rate of return that is at least a minimum rate of return
determined as follows:
(1) A non-fixed rate which is at least equal to the rate of change
in the consumer price index (CPI) during the period from the deposit of
the Client Plan's assets into the Account until distributions of the
Client Plan's assets from the Account equal or exceed the Threshold
Amount; or
(2) A fixed rate which is at least equal to the rate of change in
the CPI over some period of time specified in the Agreement, which
shall not exceed 10 years.
(g) The term ``Target Amount'' means a value assigned to each
property in the Account established by AEW either (1) at the time the
property is acquired, by mutual agreement between AEW and the
Independent Fiduciary for a Single Client Account or the Responsible
Independent Fiduciaries for a Multiple Client Account, or (2) pursuant
to an objective formula approved by such Fiduciaries at the time the
Account is established. However, in no event will such value be less
than the acquisition price of the property.
For a more complete statement of the facts and representations
supporting the Department's decision to grant PTE 93-40, refer to the
notice of proposed exemption and grant notice which are cited above.
Signed at Washington, D.C., this 23rd day of October 1997.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-28592 Filed 10-29-97; 8:45 am]
BILLING CODE 4510-29-P
