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Proposed Exemptions; MS Commodity Investments Portfolio II, L.P. (The Partnership, et al.) [11/24/1997]
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Volume 62, Number 226, Page 62622-62646
[DOCID:fr24no97-91]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10328, et al.]
Proposed Exemptions; MS Commodity Investments Portfolio II, L.P.
(the Partnership, et al.)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
[[Page 62623]]
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.
MS Commodity Investments Portfolio II, L.P. (the Partnership) and
Morgan Stanley Commodities Management, Inc. (MSCM, Collectively the
Applicants), Located in New York, NY
[Application Nos. D-10328 and D-10329]
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, August 10, 1990).
Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D), shall
not apply, effective April 3, 1996, to the acquisition or redemption of
units (the Units or Unit) in the Partnership by certain plans (the
Plans or Plan) that invest in the Partnership, where MSCM, the general
partner of the Partnership, and/or its affiliates are parties in
interest and/or disqualified persons with respect to such Plans;
provided that the conditions, as set forth below in Section II are
satisfied as of the effective date of this exemption.<SUP>1</SUP>
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\1\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section II. General Conditions
This proposed exemption, if granted, will be subject to the express
condition that the material facts and representations contained in the
applications are true and complete, and that the applications
accurately describe all material terms of the transactions to be
consummated pursuant to the exemption.
(a) Prior to the investment of the assets of a Plan in the
Partnership, a fiduciary of such Plan (the Plan Fiduciary or Plan
Fiduciaries) who is/are independent of MSCM and its affiliates must
approve such investment.
(b) MSCM has determined and documented and will determine and
document, pursuant to a written procedure, that the decision of a Plan
to invest in the Partnership was and will be made by a Plan Fiduciary
who was and is independent of MSCM and its affiliates and who was and
is capable of making an informed investment decision about investing in
the Partnership.
(c) The independent Plan Fiduciary of each Plan investing in the
Partnership has retained and will retain complete discretion with
respect to transactions initiated by such Plan involving the
acquisition or redemption of Units in the Partnership.
(d) Neither MSCM nor its affiliates has any discretionary authority
or control with respect to the investment of assets by Plans in the
Partnership nor renders investment advice (within the meaning of 29 CFR
2510.3-21(c) with respect to the investment of such assets.
(e) No Plan investing in the Partnership has acquired and held or
will acquire or hold Units in the Partnership that represent more than
20 percent (20%) of the assets of the Partnership.
(f) At the time of any acquisition of Units by a Plan, the
aggregate value of the Units acquired and held by such Plan does not
exceed 10 percent (10%) of the assets of such Plan.
(g) At the time transactions are entered into, the terms of such
transactions are at least as favorable to the Plans as those obtainable
in arm's length transactions with an unrelated party.
(h) No Plan has paid or will pay a fee or commission to MSCM or any
of its affiliates by reason of the acquisition or redemption of Units
in the Partnership.
(i) The total fees paid to MSCM have constituted and will
constitute no more than reasonable compensation, within the meaning of
sections 408(b)(2) and 408(c)(2) of the Act.
(j) Only Plans with assets having an aggregate market value of at
least $25 million have been and will be permitted to invest in the
Partnership, except that in the case of two or more Plans maintained by
a single employer or controlled group of employers, the $25 million
dollar requirement may be met by aggregating the assets of such Plans,
if the assets are commingled for investment purposes in a single master
trust.
(k) Prior to making an investment in the Partnership, the
independent Plan Fiduciary of each potential Plan investor, and/or such
Plan investor's authorized representative has been and will be provided
by MSCM or by an affiliate with a written copy of the following
offering materials:
(1) the Private Placement Memorandum of the Partnership (the
Memorandum) (which contains among other things, a description of the
offering of Units, all material facts concerning the purpose,
structure, and operation of the Partnership, as well as any associated
risk factors, and a description of the relationships existing
[[Page 62624]]
between MSCM, Morgan Stanley Asset Management Inc. (MSAM), Morgan
Stanley & Co. Incorporated (MS&Co), and Morgan Stanley Group Inc. (the
MS Group));
(2) the then-current limited partnership agreement (the LP
Agreement) between MSCM and the investors in the Partnership; and
(3) the then-current subscription agreement (the Subscription
Agreement) (an executed copy of which is delivered to a subscriber and/
or its authorized representative as soon as practicable following such
subscriber's investment in the Partnership) and the Investor
Certification previously furnished by MSCM or its affiliates to the
independent Plan Fiduciaries for completion which contains information
about each potential Plan investor, specifies such Plan's proposed
investment in the Partnership, and documents the fact that the
investment decision is being made by an independent Plan Fiduciary who
is capable of making an informed investment decision about investing in
the Partnership.
(l) With respect to the ongoing participation in the Partnership,
the independent Plan Fiduciary of each Plan invested in the Partnership
has received and will receive, within the time periods specified below,
the following additional written disclosures from MSCM or from its
affiliates:
(1) within ninety (90) days after the close of each fiscal year,
audited financial statements of the Partnership, prepared annually by a
qualified, independent, public accountant including:
(i) a balance sheet; (ii) a statement of income or a statement of
loss; (iii) the net asset value of the Partnership, as of the end of
the two preceding fiscal years; (iv) either: (A) the net asset value
per outstanding Unit as of the end of the reporting period or (B) the
total value of each participant's interest in the Partnership as of the
end of such period; (v) a statement of changes in partner's capital;
and (vi) the amount of the total fees paid to MSCM or to its affiliates
by the Partnership during such period.
(2) within thirty (30) days after the end of each calendar month, a
monthly statement of account prepared by MSCM or by its affiliates
containing the following unaudited financial information:
(i) the total amount of realized net gain or loss on commodity
interest positions liquidated during the reporting period; (ii) the
change in unrealized net gain or loss on commodity interest positions
during such reporting period; (iii) the total amount of net gain or
loss from all other transactions in which the Partnership engaged
during such reporting period; (iv) the total amount of management fees,
advisory fees, brokerage commissions, and other fees for commodity
interests and other investment transactions incurred or accrued by the
Partnership during such reporting period; (v) the net assets value of
the Partnership as of the beginning of such reporting period; (vi) the
total amount of additions to Partnership capital made during such
reporting period; (vii) the total amount of withdrawals from and
redemption of Units in the Partnership during such reporting period;
(viii) the total net income or loss of the Partnership during such
reporting period; (ix) the net assets value of the Partnership as of
the end of such reporting period; and (x) either (A) the net asset
value per outstanding Unit as of the end of such reporting period or
(B) the total value of each participant's interest in the Partnership
as of the end of such reporting period.
(m) The Partnership has not engaged and will not engage in swaps
transactions, as defined in Section III(d) below.
(n) The Partnership has not invested in and will not invest in any
entity in which MS Group or any of its affiliates has an ownership
interest.
(o) Affiliates of MSCM have not invested in and will not invest in
the Partnership.
(p) The non-U.S. commodity trading activities of the Partnership
has been and will be limited to the London Metals Exchange (the LME).
(q) The Applicants have not accepted and will not accept
subscriptions from Plans which permit participants to exercise control
over the decision to acquire or redeem Units;
(r) MSCM has maintained and shall maintain, for a period of six
years, the records necessary to enable the persons described in
paragraph (s) of this Section II to determine whether the conditions of
this exemption have been met, except that (a) a prohibited transaction
will not be considered to have occurred if, due to circumstances beyond
the control of MSCM and/or its affiliates, the records are lost or
destroyed prior to the end of the six (6) year period, and (b) no party
in interest or disqualified person other than MSCM 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 have not been maintained or are not maintained, or have not
been available or are not available for examination as required by
paragraph (s) of this Section II below.
(s)(1) Except as provided in subsection (2) of this paragraph (s)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (r) of
this Section II shall be unconditionally available at their customary
location during normal business hours by:
(a) any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(b) any fiduciary of any Plan investing as a limited partner in the
Partnership or any duly authorized representative of such fiduciary;
(c) any contributing employer to any Plan investing as a limited
partner or any duly authorized employee representative of such
employer;
(d) any participant or beneficiary of any participating Plan
investing as a limited partner, or any duly authorized representative
of such participant or beneficiary; and
(e) any other limited partner.
(2) None of the persons described above in subparagraphs (b)-(e) of
paragraph (s)(1) of this Section II shall be authorized to examine the
trade secrets of MSCM or commercial or financial information which is
privileged or confidential.
Section III. 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 of
such person. (For purposes of this subsection, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual.)
(2) any officer, director, or partner in such person, and
(3) any corporation or partnership of which such person is an
officer, director, or a 5 percent (5%) or more partner or owner.
(b) A Plan or the Plans has not included and will not include any
individual account plan(s) where participants have the right to
exercise control over the decision to acquire or redeem Units.
(c) A Plan Fiduciary or Plan Fiduciaries is defined as a fiduciary
or fiduciaries of a Plan who is/are independent of MSCM and its
affiliates.
(d) A swap transaction is defined as an individually negotiated,
non-standardized agreement between two parties to exchange cash flows
at specified intervals known as payment or
[[Page 62625]]
settlement dates. The cash flows of a swap are either fixed, or
calculated for each settlement date by multiplying the quantity of the
underlying asset (notional principal amount) by specified reference
rates or prices. Depending upon the type of underlying asset, the great
majority of these transactions are classified into interest rate,
currency, commodity, or equity swaps. Interim payments are generally
netted, with the difference being paid by one party to the other.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective retroactively, as of April 3, 1996, the date the
Partnership was organized.
Summary of Facts and Representations
1. The MS Group is a publicly-traded company whose shares are
listed on the New York Stock Exchange. The MS Group is a worldwide
financial services firm employing more than 9,000 people which
provides, directly or through its subsidiaries, services to a large and
diversified group of clients and customers, including corporations,
governments, and individual investors.
One subsidiary of the MS Group is MS&Co, a Delaware corporation
with business offices in New York, New York. MS&Co is a registered
futures commission merchant, a member of the National Futures
Associations (NFA), a registered broker-dealer, a member of the
National Association of Securities Dealers, and a member of most major
United States and foreign commodity exchanges.
MSCM, a Delaware corporation, is a wholly-owned subsidiary of the
MS Group. Since June 4, 1992, MSCM has been a registered commodity pool
operator and commodity trading advisor and, as of the same date, has
been a member of the NFA in such capacities. Currently, MSCM serves as
the trading advisor for several U.S. and offshore funds. As of January
31, 1997, MSCM had $10 million in total assets and $8.5 million in
total shareholder's equity. As of January 31, 1997, MSCM had total
assets under management of approximately $130,740,000.
Another wholly-owned subsidiary of the MS Group, MSAM, a Delaware
corporation, is registered with the Securities and Exchange Commission
as an investment adviser, is registered with the Commodity Futures
Trading Commission as a commodity trading advisor, and is a member of
the NFA in such capacity. MSAM also meets the definition of a
``qualified professional asset manager'' as contained in Part V of the
Department's Prohibited Transaction Class Exemption 84-14.<SUP>2</SUP>
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\2\ The final exemption for PTCE 84-14 was published in the
Federal Register on March 13, 1984, (49 FR 9494), and the proposed
exemption was published in the Federal Register on December 21,
1982, (47 FR 56945).
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2. The Partnership is a Delaware limited partnership with offices
in New York, New York. The aggregate fair market value of the total
assets of the Partnership, as of August 15, 1996, was approximately $15
million. The Partnership was organized on April 3, 1996, in order to
trade, buy, sell, or otherwise acquire, hold, or dispose of commodity
futures contracts (the Commodity Interests) on U.S. commodity exchanges
and on non-U.S. commodity exchanges. It is represented that the
Partnership may engage in the business of trading commodity interests
directly or through partnerships, joint ventures, or similar
arrangements.
It is represented that the trading strategy of the Partnership has
been and will be applied to a broad range of commodities, including
commodity interests on metals, energy products, grains, livestock, and
other commodities selected by MSCM from time to time. It is represented
that the assets of the Partnership has consisted and will consist
solely of cash, Treasury securities, and positions with respect to
exchange-traded futures contracts. Further, the Applicants have agreed
as a condition of this exemption that the Partnership will not engage
in swaps transactions, as defined in Section III(d) above.
The Applicants represent that the Partnership has invested and will
invest solely in assets for which independent, objective pricing
information is readily available. In this regard, the Applicants state
that the Partnership's open futures positions are valued by reference
to the closing price for each futures contract on the applicable
commodity exchange. It is represented that the current value of any
Treasury securities has been and will be determined by reference to
prices established in over-the-counter transactions by persons
unaffiliated with MSCM.
It is further represented that the trading strategy of the
Partnership has been and will be limited in the following manner: (a)
The Partnership has maintained and will maintain only long positions in
Commodity Interests; (b) The Partnership has traded and will trade only
futures contracts that are or may be traded on U.S. commodity exchanges
or the LME; (c) the Partnership has not traded and will not trade
interests on financial instruments (including stock indices) and
foreign currencies; (d) the underlying value of the positions entered
into in the commodity interest markets has been and will be targeted at
1.0 times the assets of the Partnership; (e) at the time of the initial
closing and thereafter upon every portfolio reweighting: a minimum of
10 percent (10%) of the Partnership's assets has been and will be
exposed to commodity sectors in energy, precious metals, and base
metals; a maximum of 25 percent (25%) of the Partnership's assets have
been and will be exposed to any one sector; and a maximum of 15 percent
(15%) of the Partnership's assets have been and will be exposed to one
particular commodity.
The Applicants have agreed that as a condition of this exemption,
any non-U.S. commodity trading activities of the Partnership will be
limited to the LME, which is subject to substantial regulation by the
Securities and Futures Authority and the Securities Investment Board in
the United Kingdom.
3. MSCM, as the sole discretionary general partner of the
Partnership, controls, conducts, and manages the business of the
Partnership, including executing various documents on behalf of the
Partnership, determining the distributions, if any, of profits and
income, and supervising the liquidation of the Partnership. It is
represented that the affairs of the Partnership will be wound up and
the Partnership liquidated as soon as practicable upon the first to
occur of: (a) December 31, 2026, or (b) certain other terminating
events, as set forth in the LP Agreement.
In addition, MSCM has retained MSAM, an affiliate of MSCM, as the
trading advisor for the Partnership and cash management advisor with
overall responsibility for the investment of the assets of the
Partnership and for the Partnership's trading. MSAM has selected MSCM
to make trading decisions on behalf of the Partnership of Commodity
Interests on all U.S. exchanges and on the LME. It is represented that
notwithstanding any such delegation, MSAM remains liable to the
Partnership for the trading of Commodity Interests on behalf of the
Partnership, to the same extent as if MSAM alone were making the actual
trading decision regarding such Commodity Interests.
With respect to the trading of Commodity Interests by the
Partnership, MSCM has retained: (1) MS&Co to act as the futures
commission merchant with respect to trading by the Partnership on U.S.
exchanges; and (2) Morgan Stanley International Limited to act as the
futures commission merchant with respect to trading by the Partnership
on the LME. In this regard, the Applicants
[[Page 62626]]
have represented that, in connection with the Partnership's commodity
trading activities, any transaction on the LME with respect to which it
eventuates that an affiliate of MSCM is the formal counterparty, will
be a ``blind transaction'' (i.e., one in which the identity of the
counterparty is not within the knowledge or control of MSCM or any
affiliate thereof). The Applicants represent that, in connection with
any commodity trading on the LME, the Partnership and any affiliates of
MSCM will retain independent floor brokers. Although it is possible
that the Partnership and an affiliate of MSCM will use the same floor
broker, the Applicants represent that MSCM will instruct any floor
broker retained on behalf of the Partnership not to cross trades with
an affiliate of MSCM.
4. The Partnership pays monthly to MSCM an administrative fee (the
Administrative Fee) computed daily and equal to a percentage of the net
assets of the Partnership, as of the beginning of each day (before
deduction of an incentive fee (the Incentive Fee) described below). It
is represented that MSCM, as general partner, is responsible for paying
all of the ordinary administrative expenses, brokerage commissions, any
per transaction service charges, and any other similar fees with
respect to trading by the Partnership. To the extent any expenses
exceed the amount of the Administrative Fee paid to MSCM, the
Partnership is not responsible for the payment of any such additional
expenses. However, it is represented that MSCM received from the
Partnership reimbursement for organizational expenses and initial
offering costs.
Further, the Partnership pays monthly to MSAM for services, as
described above, a management fee (the Management Fee) computed daily
and equal to a percentage of the net assets of the Partnership as of
the beginning of each day, before deduction of the Incentive Fee, as
more fully described in the paragraph below. In consideration for
making trading decisions with respect to the Partnership with regard to
its commodity interest trading, MSAM pays to MSCM 80 percent (80%) of
such Management Fee and 100 percent (100%) of the Incentive Fee.
With respect to the Incentive Fee, it is represented that the
Partnership pays to MSAM at the end of each annual incentive period an
Incentive Fee equal to a percentage of the amount that the
Partnership's net performance exceeds a target return. Net performance
equals the realized and unrealized trading profits and losses of the
Partnership plus interest income credited to the Partnership, less the
Management Fee, the Administrative Fee, and other fees and costs of the
Partnership (but not including the Incentive Fee, initial offering
costs, and extraordinary expenses). Net Performance is measured over a
period of not less than one (1) year. The target return against which
this performance is compared is a predetermined objective index. It is
represented that the calculation of the Incentive Fee complies with the
terms and conditions of SEC Rule 205-3 and is reviewed by an
independent accounting firm as part of an annual audit of the
Partnership's financial statements.<SUP>3</SUP>
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\3\ The Applicants maintain that the Incentive Fee structure,
described herein, is comparable in several respects to the
performance fee arrangements previously reviewed by the Department
of Labor in certain advisory opinion letters, 86-20A. 86-21A, and
89-31A. In this regard, the Applicants have not requested relief for
the receipt of the Incentive Fee by MSAM and/or by its affiliates.
The Department, herein, offers no opinion as to whether the
Incentive Fee structure violates any provision of the prohibited
transaction provisions of section 406 of the Act, nor is the
Department providing relief, herein, for the receipt by MSCM or by
its affiliates of any Incentive Fee.
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5. It is represented that Units in the Partnership have been and
will be offered to investors under exemptions from registration,
pursuant to section 4(2) of the Securities Act of 1933 (the 1933 Act)
and Rule 506 of Regulation D promulgated thereunder.<SUP>4</SUP> It is
represented that, as the Partnership is not a private investment
company, it is not required to limit the number of its investors to
100.
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\4\ Rule 506 provides a special exemption for limited offers and
sales of securities by an issuer without regard to the dollar amount
of the offering. In particular, Rule 506(b)(2)(i) limits to 35 the
number of non-accredited investors in an offering.
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The Memorandum provided for an initial offering of Units in the
Partnership for sale through MS&Co for a period of thirty (30) days
from the date of the Memorandum (i.e., May 23, 1996), subject to the
discretion of MSCM to shorten or extend such period. No minimum amount
of sales of Units was necessary in order for the initial offering to
close. In this regard, it is represented that the date of the initial
closing was July 1, 1996.
Following the initial closing, Units in the Partnership have been
and will be continually offered on a daily basis through MS&Co to new
investors who are qualified and to existing limited partners of the
Partnership in a private offering (the Continuous Offering). In this
regard, the Partnership may continue indefinitely to sell Units,
subject to the discretion of MSCM which may at any time or from time to
time terminate and recommence the offering. The Applicants have agreed,
as a condition of this exemption, that affiliates of MSCM will not be
permitted to invest in the Partnership.
After the initial offering, the minimum investment in the
Partnership per subscriber is $5,000,000, with a $50,000 minimum for
additional investments by existing limited partners in the Partnership,
subject to exceptions at the discretion of MSCM. There is no limit on
the total capitalization of the Partnership. It is represented that as
of April 2, 1997, the capital of the Partnership totaled $25,400,000.
During the Continuous Offering, Units have been and will be issued
as of the close of business each business day at a price per Unit equal
to the net asset value per Unit, as of the date of issuance. The net
asset value of a Unit is defined as net assets allocated to capital
accounts divided by the aggregate number of Units. It is represented
that the net assets of the Partnership are determined in accordance
with generally accepted accounting principles consistently applied
under the accrual basis of accounting. It is represented that the
market values of the Commodity Interests of the Partnership are
determined by MSCM in good faith on a basis consistently applied in
accordance with generally accepted accounting principles.
6. The Applicants maintain that the assets of the Partnership may
be deemed to be plan assets pursuant to 29 CFR 2510.3-101 of
regulations issued by the Department (the Plan Asset Regulations).
Under the Plan Asset Regulations, when a plan acquires an equity
interest in an entity, such as the Partnership, which interest is not a
publicly offered security (as in the case of the Units), nor a security
issued by an investment company registered under the Investment Company
Act of 1940, the underlying assets of the entity will be deemed to
include plan assets, if 25 percent (25%) of the outstanding interests
of such entity are held by ``benefit plan investors,'' as defined in
the Plan Asset Regulations. It is anticipated that prior to the grant
of this proposed exemption the equity participation by Plans in the
Partnership may exceed 25 percent (25%) of the total value of all of
the Partnership Units. If and when such event occurs, the underlying
assets of the Partnership will constitute ``plan assets'' within the
meaning of 29 CFR 2510.3-101. Accordingly, the Applicants have
requested that the exemption be effective, as of April 3, 1996, the
date on which the Partnership was organized.
[[Page 62627]]
7. Once the assets of the Partnership are deemed to be assets of
the Plans which invest in the Partnership, by virtue of its
discretionary authority and control over such assets as general
partner, MSCM becomes a fiduciary within the meaning of section 3(21)
of the Act, and a party in interest, pursuant to section 3(14)(A) of
the Act, with respect to any Plan which invests in the Partnership.
Further, the MS Group anticipates that Plans for which the MS Group
or its affiliates perform services will invest in the Partnership. In
this regard, as set forth in the most recent Memorandum, it is
represented that the MS Group or its affiliates provide: (a) Brokerage
services to plans; (b) asset management and/or investment advisory
services to plans; and (c) services to plans as custodian, clearing
agent, and/or trustee. Accordingly, MSCM may also be a party in
interest with respect to Plans which invest in the Partnership by
virtue of the affiliation of MSCM with other entities that are
fiduciaries of Plans or that provide services to such Plans. It is
further represented that other partners of the Partnership, as yet
unidentified, may also be parties in interest with respect to Plans
which invest in the Partnership.
8. The Applicants seek a retroactive exemption for the acquisition
of Units in the Partnership by Plans from MSCM, the general partner of
the Partnership, and other potential parties in interest with respect
to such Plans, which may constitute prohibited transactions between
such Plans and such parties in interest under section 406(a) of the
Act. In this regard, the acquisition of Units by the Plans may be
characterized as an indirect sale by each existing partner of the
Partnership of a portion of its Partnership interest to such investing
Plan (and a corresponding transfer of Plan assets) in violation of
section 406(a)(1)(A) and/or 406(a)(1)(D) of the Act. Likewise, the
redemption of Units by a Plan may be characterized as an indirect sale
of a portion of such Plan's redeemed interest in the Partnership to
each remaining partner (and a corresponding transfer of Plan assets) in
violation of section 406(a)(1)(A) and/or 406(a)(1)(D) of the Act, if a
party in interest to the Plan is involved. Accordingly, the Applicants
request an administrative exemption from the Department with respect to
the acquisition and redemption of Units in the Partnership by Plan
investors.
As discussed above, the Applicants have represented that MSCM and
its affiliates provide various investment-related services to Plans
that may invest in the Partnership and also provide comparable services
to the Partnership. In this regard, the Applicants are of the opinion
that in the ordinary course of trading of commodities futures, any
prohibited transactions that may arise, other than those for which
relief is proposed herein, would result from the Partnership engaging
in trading through a futures commission merchant that is a party in
interest with respect to a Plan invested in the Partnership. To the
extent that the provision of services by MSCM and its affiliates to the
Partnership constitutes an indirect furnishing of services to Plans
invested in the Partnership which is prohibited under section 406(a) of
the Act, the Applicants intend to rely on the statutory exemption
provided by section 408(b)(2) of the Act.\5\ Furthermore, the
Applicants represent that any brokerage fees paid to affiliates of MSCM
have not and will not be expenses of the Partnership but have been and
will be paid by MSCM. Finally, with respect to the selection of MSCM or
an affiliate to provide services to the Partnership for a fee, the
Applicants represent that neither MSCM nor any of its affiliates have
investment discretion or render investment advice with respect to any
assets of the plans used to purchase Units in the Partnership. As a
result, it is the Applicant's opinion that the furnishing of these
services have not and will not constitute an act of self-dealing
prohibited by section 406(b) of the Act.\6\
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\5\ Section 406(b)(2) of the permits any reasonable arrangement
with a party in interest, for services necessary for the
establishment or operation of a plan, provided that no more than
reasonable compensation is received therefor. The Department express
no opinion, herein, as to whether the provision of services to the
Partnership by MSCM and/or its affiliates and the compensation
received therefor satisfy the terms and conditions of section
408(b)(2) of the Act.
\6\ The Applicants believe that the analysis contained in
Advisory Opinion 82-26A (June 9, 1982) is applicable to the
provision of multiple services by MSCM and/or its affiliates. This
opinion involved the provision of multiple services where a
fiduciary did not use the authority, control, or responsibility
which made it a fiduciary to cause the plan to select such fiduciary
or to pay any fee for the provision of services by such fiduciary.
In addition, the Applicants rely on Advisory Opinion 82-62A
(December 8, 1982) which involved a fiduciary's decision to retain
an affiliate to provide services to a plan, where the fee for such
services was paid by the plan sponsor not by the plan and where the
fiduciary of the plan was not in a position to benefit, or to cause
a person to whom the fiduciary had an interest to benefit from such
decision at the expense of such plan. Thus, the Department is not
offering relief, herein, for the provision of multiple services by
MSCM and/or its affiliates.
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9. At the time the application for exemption was submitted to the
Department, it was represented that the Plans that have been or may be
affected by the grant of this proposed exemption could not be
determined. Upon submission of the application, MSCM represented that
it did not anticipate investment in the Partnership by individual
retirement accounts, by Keogh plans, and or by employee benefit plans
which provide for participant-directed investments. However, the
application did not preclude such investment to the extent that such
plans could satisfy the investor certification requirements and other
conditions, as set forth in the Subscription Agreement. The Applicants
anticipate that sponsors or fiduciaries of plans providing for
participant-directed investment may wish to include Units in a
diversified portfolio that is one of several designated investment
alternatives. However, as a condition of the exemption, the Applicants
have agreed not to accept subscriptions by Plans which permit
participants to exercise control over the decision to acquire or redeem
Units.
10. Only Plans with assets having an aggregate market value of at
least $25 million will be permitted to invest in the Partnership,
except that in the case of two or more Plans maintained by a single
employer or controlled group of employers, the $25 million dollar
requirement may be met by aggregating the assets of such Plans, if the
assets are commingled for investment purposes in a single master trust.
In addition, prior to accepting a subscription from a prospective Plan
investor, the Plan Fiduciaries who are independent of the Applicants
and their affiliates complete certain investor certification
representations in the Subscription Agreement. In this regard, each
Plan and/or its authorized representative is required to represent that
such Plan is an ``accredited investor,'' within the meaning of Rule
501(a) of Regulation D promulgated under the 1933 Act, and a
``qualified eligible participant,'' as defined in Rule 4.7 under the
Commodities Exchange Act, as amended. Each Plan and/or its authorized
representative is also required to represent that such Plan, together
with any advisers retained by it, has sufficient knowledge and
experience in financial and business matters so as to be capable of
evaluating the merits and risks of investing in the
Partnership.<SUP>7</SUP> Furthermore, each
[[Page 62628]]
subscriber that is purchasing Units with the assets of a Plan is
required to represent: (a) That it has evaluated for itself the merits
of the investment; (b) that it has not solicited and has not received
from the Partnership, from MSCM, or from any affiliate thereof any
evaluation or investment advice in respect of the advisability of such
an investment in light of the Plan's assets, cash needs, investment
policies or strategy, overall portfolio, or diversification of assets;
(c) that it is not relying on and has not relied on MSCM, or on any
affiliate thereof, for any such investment advice; and (d) that neither
MSCM nor its affiliates has investment discretion with respect to the
assets of the Plan which have been or will be used to acquire or redeem
Units.<SUP>8</SUP>
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\7\ The Department wishes to note that ERISA's general standards
of fiduciary conduct would apply to the investment described in this
proposed exemption, and that satisfaction of the conditions of this
proposal should not be viewed as an endorsement of the investment by
the Department. Section 404 of ERISA requires, among other things,
that a fiduciary discharge his duties with respect to a plan solely
in the interest of the plan's participants and beneficiaries and in
a prudent fashion. Accordingly, the plan fiduciary must act
prudently with respect to the decision to enter into an investment
transaction. The Department further emphasizes that it expects the
plan fiduciary to fully understand the benefits and risks associated
with engaging in a specific type of investment, following disclosure
to such fiduciary of all relevant information. In addition, such
plan fiduciary must be capable of periodically monitoring the
investment, including any changes in the value of the investment.
Thus, in considering whether to enter into a transaction, a
fiduciary should take into account its ability to provide adequate
oversight of the particular investment.
\8\ The Department is not expressing an opinion on whether the
Applicants or their affiliates would be deemed to be fiduciaries
under section 3(21)(A)(ii) of the Act. In this regard, the
Department believes, as a general matter, that when a person is
deemed a fiduciary by virtue of rendering investment advice
described in regulation section 2510.3-21(c)(1)(ii)(B), the presence
of an unrelated second fiduciary acting on the investment adviser's
recommendations on behalf of the Plan is not sufficient to insulate
the investment adviser from fiduciary liability under section 406(b)
of the Act. The Department's regulation section 2510.3-
21(c)(1)(ii)(B) presupposes the existence of a second fiduciary who
by agreement or conduct manifests a mutual understanding to rely on
the investment adviser's recommendations as a primary basis for the
investment of Plan assets. In the presence of such an agreement or
understanding, the rendering of investment advice involving self-
dealing such as the acquisition of Units in the Partnership which
results in the payment of fees to the adviser, will subject the
investment adviser to liability under section 406(b) of the Act. The
Department is unable to conclude that fiduciary self-dealing of this
type (if present) is in the interests or protective of the Plans and
their participants and beneficiaries. If, however, the unrelated
second fiduciary has not agreed to rely on the investment adviser's
recommendations, the investment adviser will not be deemed to be a
fiduciary under section 3(21)(A)(ii) because the requirements of
regulation section 2510.3-(21)(c)(1)(ii)(B) will not be met.
Accordingly, the Department has limited exemptive relief for the
acquisition or redemption of Partnership Units to section 406(a)
violations only.
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11. Prior to investing in the Partnership, each potential investor
and/or its authorized representative (including a Plan and/or a Plan
Fiduciary) has been and will be provided with a copy of: (a) The
Memorandum (which contains, among other things, a description of the
offering and the relationships existing between MSCM, MSAM, MS&Co, and
the MS Group; (b) the then-current LP Agreement; (c) the then-current
Subscription Agreement (an executed copy of which is also delivered to
a subscriber and or its authorized representative, including a Plan
and/or a Plan Fiduciary, as soon as practicable following investment in
the Partnership by such subscriber). Further, the Applicants represent
that a copy of this notice of proposed exemption (the Notice) and a
copy of the final exemption (the Final Exemption), if granted, will be
provided to all Plans that invest in the Partnership subsequent to the
publication of the Final Exemption in the Federal Register.
12. It is represented that MSCM has distributed and will distribute
to each Plan that invests in the Partnership as a limited partner (a)
within ninety (90) days after the close of each fiscal year of the
Partnership, audited financial statements (including a balance sheet; a
statement of income or a statement of loss; the net asset value of the
Partnership, as of the end of the two preceding fiscal years; either
(A) the net asset value per outstanding Unit as of the end of the
reporting period or (B) the total value of each participant's interest
in the Partnership as of the end of such period; a statement of changes
in partner's capital; and the amount of the total fees paid to MSCM or
to its affiliates by the Partnership during such period.
It is also represented that MSCM has distributed and will
distribute to each Plan that invests in the Partnership as a limited
partner within thirty (30) days after the end of each calender month, a
report for such month specifying, among other things: (i) The total
amount of realized net gain or loss on commodity interest positions
liquidated during the reporting period; (ii) the change in unrealized
net gain or loss on commodity interest positions during such reporting
period; (iii) the total amount of net gain or loss from all other
transactions in which the Partnership engaged during such reporting
period; (iv) the total amount of management fees, advisory fees,
brokerage commissions, and other fees for commodity interests and other
investment transactions incurred or accrued by the Partnership during
such reporting period; (v) the net assets value of the Partnership as
of the beginning of such reporting period; (vi) the total amount of
additions to Partnership capital made during such reporting period;
(vii) the total amount of withdrawals from and redemption of Units in
the Partnership during such reporting period; (viii) the total net
income or loss of the Partnership during such reporting period; (ix)
the net assets value of the Partnership as of the end of such reporting
period; and (x) either (A) the net asset value per outstanding Unit as
of the end of such reporting period or (B) the total value of each
participant's interest in the Partnership as of the end of such
reporting period.
13. It is represented that a capital account is established for
each partner in the Partnership, including the Plans. However, in this
regard, it is represented that investors in the Partnership may not
allocate invested funds to any specific investment. Instead, the funds
raised through the offering of Units have been and will be deposited in
an account maintained by the Partnership with MS&Co or to the extent
the Partnership trades on the LME, deposited in certain accounts
maintained with non-U.S. banks and foreign brokers.
14. Under current federal and state income tax laws, MSCM (in its
capacity as general partner of the Partnership) may be required to
maintain contributions to the capital of the Partnership in cash for
all fiscal years in amounts which equal at least one percent (1%) of
the aggregate capital contributions to the Partnership by all partners
for all fiscal years (including contributions by MSCM). On July 1,
1996, the date of the closing of the initial offering of Units in the
Partnership, MSCM had contributed $120,694 to the Partnership. As of
January 31, 1997, the aggregate contributions by MSCM to the
Partnership totaled $172,000. The Applicants represent that, MSCM will
not maintain an interest in the Partnership that exceeds one percent
(1%) of the aggregate capital contributions to the Partnership by all
partners. In the event that MSCM's interest in the Partnership exceeds
this amount by more than a de minimis amount, MSCM shall, within five
(5) business days, reduce its interest to the permitted level by
accepting additional subscriptions, if possible, or by withdrawing any
portion of its interest in the Partnership that is in excess of one
percent (1%) of the Partnership's capital, as permitted under the LP
Agreement.
15. It is represented that a limited partner in the Partnership,
including a Plan, may sell or transfer Units or any interest therein in
the Partnership only with the consent of MSCM. Such
[[Page 62629]]
consent may be withheld in the sole discretion of MSCM as general
partner of the Partnership.
A limited partner, including a Plan, may withdraw all or part of
its capital contributions and undistributed profits, if any, by
requiring the Partnership to redeem all or part of its Units, effective
as of the close of each business day. Redemptions may only be made in
amounts greater than or equal to $20,000, unless the limited partner,
including a Plan, is redeeming all of its interest in the Partnership.
A limited partner may not make a partial redemption of Units that would
reduce the net asset value of such limited partner's unredeemed Units,
as of the effective date of the redemption, to less than $5,000,000 or
the amount of such limited partner's initial investment, whichever is
less. Requests for redemption must be made by letter in a form
acceptable to MSCM and must be received by MSCM at its offices at least
two full business days prior to the effective date of the redemption.
In addition, MSCM may, in its sole discretion as general partner,
require any limited partner, including a Plan, to redeem all of its
Units or a portion of such Units upon written notice to such limited
partner. No fee or other charge is payable by a limited partner,
including a Plan, upon redemption of its Units. It is represented that
any distributions to a limited partner from the Partnership in
redemption of Units have been and will be made in cash.
16. It is represented that the requested exemption is protective of
the rights of the participants and beneficiaries of affected Plans in
that the decision to invest in the Partnership has been and will be
made by a Plan Fiduciary who is independent of MSCM and its affiliates.
In this regard, such Plan Fiduciaries retain complete discretion with
respect to transactions initiated by a Plan investor involving the
acquisition or redemption of Units. In addition, investors in the
Partnership are furnished with audited financial statements and
periodic reports that enable the Plan Fiduciaries to monitor the
investment activities of the Partnership and permit such parties to
discharge their oversight responsibilities.
Further protections are afforded by appropriate limitations which
are placed on Plan investment in the Partnership. In this regard, no
single Plan investor is permitted under any circumstances to acquire or
hold an amount of Units which causes the investment by such Plan to
exceed 20 percent (20%) of the total assets of the Partnership. In
addition, at the time of any acquisition of Units by a Plan, the
aggregate value of the Units acquired and held by such Plan has not and
will not exceed 10 percent (10%) of the total assets of such Plan.
17. The Applicants maintain that the terms and conditions of this
proposed exemption provide additional safeguards for the protection of
Plans which invest in the Partnership. In this regard, as a condition
of this exemption, MS&Co and its affiliates have agreed that the
Partnership has not invested and will not invest in any entity in which
MS&Co or any of its affiliates has an ownership interest. In addition,
the Partnership has not engaged and will not engage in swaps
transactions, as defined in Section III (d) above, nor does the
Partnership anticipate making any investment in U.S. or off-shore
funds. Furthermore, it is represented that the Partnership does not
anticipate making any equity investments in entities for which a party
in interest with respect to any Plan invested in the Partnership has an
ownership interest.
18. The Applicants represent that the requested exemption would be
administrative feasible, because the transactions involved have been
and will be well-documented through professionally maintained books and
records which are subject to government review and independent,
certified audits. As such, it is represented that the transactions can
be readily monitored to ensure compliance with the terms of the
exemption. In addition, the Applicants have borne and will bear all of
the costs of the exemption applications and will be responsible for the
costs of notifying interested persons.
19. It is represented that the requested exemption is in the
interest of the affected Plans (and their participants and
beneficiaries) in that the Partnership provides Plans with the type of
investment medium and risk factors that such Plans desire in their
investment portfolios.
Moreover the transactions are in the interest of the Plans which
invest in the Partnership, because no placement fee or other sales
charge has been or will be payable by the Partnership or by investors
in connection with the offering of the Units. In addition, Plans have
been and will be permitted to redeem their investments in the
Partnership upon reasonably short notice, without the payment of fees
or penalties of any sort. In this regard, it is represented that MSCM,
MSAM, MS&Co, the MS Group or their affiliates do not receive any fees
in connection with the acquisition or redemption of Units by Plan
investors.
20. In summary, it is represented that the proposed transactions
meet the statutory criteria for an exemption under section 408(a) of
the Act and section 4975(c)(2) of the Code because:
(a) The participation by Plans in the Partnership has been and will
be approved by Plan Fiduciaries prior investment by Plans in the
Partnership;
(b) The Applicants have instituted and maintained and will
institute and maintain a written procedure and records establishing
criteria for determining that the Plan Fiduciaries are independent of
the Applicants and their affiliates and are sufficiently knowledgeable
to make an informed decision regarding the investment by Plans in the
Partnership;
(c) A Plan Fiduciary maintains complete discretion with respect to
acquiring or redeeming Units in the Partnership on behalf of a Plan;
(d) Neither MSCM nor its affiliates has any discretionary authority
or control with respect to the investment of assets of the Plans in
Units of the Partnership nor renders investment advice with respect to
the investment of those assets;
(e) No Plan has acquired and held or will acquire or hold Units in
the Partnership that represents more than 20 percent (20%) of the
assets of the Partnership;
(f) At the time of any acquisition of Units by a Plan, the
aggregate value of the Units acquired or held by such Plan has not and
will not exceed 10 percent (10%) of the assets of such Plan;
(g) The terms of each acquisition or redemption of Partnership
Units has been and will be at least as favorable to an investing Plan
as those obtainable in an arm's length transaction with an unrelated
party;
(h) No Plan has paid or will pay a fee or commission by reason of
the acquisition or redemption of Partnership Units;
(i) The total fees paid to MSCM or their affiliates with respect to
services rendered have constituted and will constitute no more than
reasonable compensation, within the meaning of sections 408(b)(2) and
408(c)(2) of the Act;
(j) Only Plans with assets having an aggregate market value of at
least $25 million have been and will be permitted to invest in the
Partnership, except that in the case of two or more Plans maintained by
a single employer or controlled group of employers, the $25 million
dollar requirement may be met by aggregating the assets of such Plans,
if the assets are commingled for investment purposes in a single master
trust.
[[Page 62630]]
(k) The Applicants have made and will make periodic written
disclosures to Plans with respect to the financial condition of the
Partnership;
(l) The Partnership has not engaged and will not engage in swaps
transactions, as defined in Section III(d) above;
(m) The Partnership has not invested and will not invest in any
entity in which MS&Co or any of its affiliates has an ownership
interest;
(n) Affiliates of MSCM have not invested in and will not invest in
the Partnership;
(o) The non-U.S. commodity trading activities of the Partnership
has been and will be limited to the LME;
(p) The Applicants have not accepted and will not accept
subscriptions by Plans which permit participants to exercise control
over the decision to acquire or redeem Units; and
(q) As of the effective date of this exemption and thereafter, MSCM
has maintained and shall maintain for a period of time the records
necessary to enable certain persons to determine whether the conditions
of this exemption have been met.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption will include prospective Plan investors, and Plan
Fiduciaries of Plans which have already invested in the Partnership.
Because the Applicants are uncertain as to which Plans will invest in
the Partnership, the Department has determined that the only practical
form of providing notice to interested persons of the pendency of this
proposed exemption is the distribution by the Applicants of a copy of
the Notice, as published in the Federal Register, and a copy of the
supplemental statement, in the form set forth in the Department's
regulations under 29 CFR Sec. 2570.43(b)(2) to any Plan investors who
at the time the Notice is published are interested in investing in the
Partnership, and to the fiduciaries of all Plans that are invested in
the Partnership at the time the Notice is published. Such distribution
will be effected by first-class mail within fifteen (15) days of the
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
National Rural Utilities Cooperative Finance Corporation (CFC), Located
in Washington, D.C.
[Application No. D-10394]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570 Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
A. If this proposed exemption is granted, effective November 18,
1997, the restrictions of sections 406(a) of the Act and the taxes
imposed by section 4975(a) and (b) of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the following
transactions relating to the refinancing by CFC of certain rural
utility cooperative loans made to the Kansas Electric Power
Cooperative, Inc. (KEPCO), and certain notes issued by KEPCO in
connection with such loans which are assigned to trusts for which CFC
acts as servicer, and certificates evidencing interests in such trusts:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between CFC or an
underwriter and an employee benefit plan when CFC, the underwriter, or
the trustee is a party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A.(1) or (2); and
(4) The purchase by CFC of existing notes issued by KEPCO from the
existing trusts and the contribution by CFC of new notes to new trusts
pursuant to the refinancing of KEPCO's existing loans on the scheduled
refinancing date (i.e. December 18, 1997).
B. If the proposed exemption is granted, effective November 18,
1997, the restrictions of sections 406(a) and 406(b) of the Act and the
taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c) of the Code, shall not apply to transactions in
connection with the servicing, management and operation of a trust,
provided:
(1) Such transactions are carried out in accordance with the terms
of a binding trust agreement; and
(2) The trust agreement is provided to, or described in all
material respects in, the prospectus or private placement memorandum
provided to investing plans before they purchase certificates issued by
the trust.<SUP>9</SUP>
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\9\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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C. If this proposed exemption is granted, effective November 18,
1997, the restrictions of sections 406(a) of the Act and the taxes
imposed by sections 4975(a) and (b) of the Code, by reason of sections
4975(c)(1)(A) through (D) of the Code, shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of certificates
issued pursuant to this proposed exemption or issued pursuant to
Prohibited Transaction Exemption 89-93 (PTE 89-93, 54 FR 45816, October
31, 1989).<SUP>10</SUP>
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\10\ PTE 89-93 permits, as of July 22, 1987, certain
transactions between CFC and employee benefit plans where CFC may be
deemed to be a party in interest with respect to the plans as a
result of providing services to a trust in situations where the
assets of the trust are considered to be ``plan assets'' as a result
of the plans acquiring significant ownership interests in the trust
in the form of pass-through certificates.
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Section II--General Conditions
A. The relief described under Section I of this proposed exemption
will be available only if the following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Ratings Service
(S&P's) or Moody's Investors Service, Inc. (Moody's; together, the
Rating Agencies);
(4) The trustee is not an affiliate of any other member of the
Restricted
[[Page 62631]]
Group. However, the trustee shall not be considered to be an affiliate
of CFC, as servicer, solely because the trustee has succeeded to the
rights and responsibilities of CFC pursuant to the terms of a trust
agreement providing for such succession upon the occurrence of one or
more events of default by CFC;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by CFC, as sponsor, pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by CFC, as servicer,
represents not more than reasonable compensation for CFC's services
under the trust agreement and reimbursement of CFC's reasonable
expenses in connection therewith;
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission (SEC) under the Securities Act of
1933;
(7) Any swap transaction entered into by KEPCO which is assigned to
a trust is entered into with a bank or other financial institution of
high credit standing, initially Morgan Guaranty Trust Company of New
York (Morgan), with a credit rating of at least AA or an equivalent
rating from the Rating Agencies;
(8) The bank or other financial institution acting as the swap
counterparty to the trust is required, if there is an adverse change in
such counterparty's credit rating, to either: (i) Post collateral with
the trustee of the trust in an amount, determined daily, equal to all
payments owed by the counterparty if the swap transaction were
terminated; or (ii) find a replacement swap counterparty for the trust,
within a specified period under the terms of the swap agreement with
the trust, which has a credit rating of at least AA or an equivalent
rating from the Rating Agencies; provided that if the swap counterparty
fails to abide by its obligations under either (i) or (ii) above, the
swap agreement shall terminate in accordance with the rights and
obligations of each counterparty under the terms thereof, which shall
be enforced by the trustee to protect the rights of certificateholders
of such trust;
(9) Each swap transaction between a trust and Morgan, or other swap
counterparty, in connection with the refinancing of KEPCO's loans
requires payments to be made to the trust monthly (or at such other
times as required under the swap agreement) and requires payments to be
made by the trust no less frequently than semi-annually, but in no
event shall the trust be obligated to make payments to a swap
counterparty more frequently than those which it is entitled to receive
from a swap counterparty;
(10) The certificateholders have the right to exit the transaction
by tendering the certificates to an underwriter (initially, Alex. Brown
& Sons, Inc.) for purchase at par (plus accrued interest) on seven (7)
days' notice;
(11) The U.S. Government guarantees the payment of principal and
interest on the loans made by CFC to KEPCO;
(12) The purchase of notes issued by KEPCO from the existing trusts
is for a price which is at least equal to the outstanding principal
balance of such notes, plus accrued (but unpaid) interest, at the time
of the scheduled refinancing of the loans made by CFC to KEPCO (i.e.
December 18, 1997); and
(13) The certificates are not sold to any plans established and
maintained by KEPCO or CFC, or to plans for which any other member of
the Restricted Group (as defined in Section III.E. below) is an
investment fiduciary for the assets of the plan that are to be invested
in the certificates.
B. Neither CFC nor the trustee shall be denied the relief that
would be provided under Section I of this proposed exemption if the
provision of Section II.A.(6) above is not satisfied with respect to
acquisition or holding by a plan of such certificates, provided that:
(1) Such condition is disclosed in the prospectus or private placement
memorandum; and (2) in the case of a private placement of certificates,
the trustee obtains a representation from each initial purchaser which
is a plan that it is in compliance with such condition, and obtains a
covenant from each initial purchaser to the effect that, so long as
such initial purchaser (or any transferee of such initial purchaser's
certificates) is required to obtain from its transferee a
representation regarding compliance with the Securities Act of 1933,
any such transferees will be required to make a written representation
regarding compliance with the condition set forth in Section II.A.(6)
above.
Section III--Definitions
For purposes of this proposed exemption:
A. Certificate means:
(1) A certificate--
(a) That represents a beneficial ownership interest in the assets
of a trust; and
(b) That entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust.
For purposes of this proposed exemption, references to
``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust.
B. Trust means an investment pool, the corpus of which is held in
trust, and consists solely of:
(1) One or more notes issued by KEPCO which shall be guaranteed as
to payment of principal and interest by the U.S. Government, acting
through the U.S. Department of Agriculture's Administrator of the Rural
Utilities Service (RUS), including fractional undivided interests in
any such obligations;
(2) Property which has secured any of the obligations described in
subsection B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders; and
(4) Rights of the trustee under the trust agreement, and rights
under any insurance policies, third-party guarantees, swap agreements,
contracts of suretyship and other credit support arrangements with
respect to any obligations described in subsection B.(1).
C. Underwriter means an entity which has received an individual
prohibited transaction exemption from the Department that provides
relief for the operation of asset pool investment trusts that issue
``asset-backed'' pass-through securities to plans, that is similar in
format and structure to this proposed exemption (the Underwriter
Exemptions); <SUP>11</SUP> any person directly or indirectly, through
one or more intermediaries, controlling, controlled by or under common
control with such entity; and any member of an underwriting syndicate
or selling group of which such firm or person described above is a
manager or co-manager with respect to the certificates.
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\11\ For a listing of the Underwriter Exemptions, see Section
V(h) of PTE 95-60, 60 FR 35925, July 12, 1995.
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D. Trustee means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
E. Restricted Group with respect to a class of certificates means:
[[Page 62632]]
(1) Each underwriter/remarketing agent;
(2) The trustee;
(3) CFC;
(4) KEPCO;
(5) The swap counterparty/liquidity provider; or
(6) Any affiliate of a person described in subsection E.(1)-(5)
above.
F. Affiliate of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
G. Control means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
H. A person will be independent of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
I. Sale includes the entrance into a forward delivery commitment
(as defined in subsection J. below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's-length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of this delivery, all conditions of this proposed
exemption applicable to sales are met.
J. Forward delivery commitment means a contract for the purchase or
sale of one or more certificates to be delivered at an agreed future
settlement date. The term includes both mandatory contracts (which
contemplate obligatory delivery and acceptance of the certificates) and
optional contracts (which give one party the right but not the
obligation to deliver certificates to, or demand delivery of
certificates from, the other party).
K. Reasonable compensation has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
L. Trust Agreement means the agreement or agreements among KEPCO,
CFC and the trustee establishing a trust. In the case of certificates
which are denominated as debt instruments, Trust Agreement also
includes the indenture entered into by the trustee of the trust issuing
such certificates and the indenture trustee.
M. RUS means the U.S. Department of Agriculture, acting through the
Administrator of the Rural Utilities Service or any successor to the
guarantee obligations of such organization.
The Department notes that this proposed exemption, if granted, will
be included within the meaning of the term ``Underwriter Exemption'' as
it is defined in Section V(h) of the Grant of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts,
which was published in the Federal Register on July 12, 1995 (see PTE
95-60, 60 FR 35925).
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of November 18, 1997.
Preamble
On October 31, 1989, the Department granted an individual
administrative exemption under section 408(a) of the Act to CFC (PTE
89-93) for several prohibited transactions relating to CFC's role as a
financial intermediary in the refinancing of various loans to rural
utility cooperatives. CFC now proposes that two of the loans involving
KEPCO that were refinanced using the structure involved in PTE 89-93 be
refinanced through a new series of transactions. CFC requests a new
individual exemption for these refinancing transactions.
CFC states that the restructured KEPCO loans and the trust
structure through which interests in these loans will be offered to
institutional investors, including employee benefit plans, are in many
respects similar to the transactional structure presented in PTE 89-93.
However, under the new refinancing structure, the interest rate on the
trust certificates will be a variable rate rather than a fixed rate
guaranteed by the U.S. Government. The floating rate will be paid
through an interest rate swap transaction between the trust and a bank
or other financial institution acting as a swap counterparty
(initially, Morgan). Thus, the variable rate on the certificates will
not be guaranteed by the U.S. Government, although if the bank fails to
make the variable rate payments, as required, the fixed rate guaranteed
payments on the notes will be applied to the variable rate payments due
on the certificates.
In addition, the new exemption requested by CFC has been expanded
to include: (i) The purchase by CFC of the existing KEPCO notes and the
contribution of amended KEPCO notes to the new trusts; and (ii) the
servicing, management and operation of the trusts in a manner that is
generally the same as the relief provided by the Department in other
exemptions involving asset-backed securities (i.e., the Underwriter
Exemptions).
Summary of Facts and Representations
1. The Applicant. CFC is a tax-exempt, not-for-profit cooperative
association organized in 1969 under the laws of the District of
Columbia. CFC was established by its members to provide them with a
source of financing to supplement the loan programs of RUS (which was
formerly known as the Rural Electrification Administration (REA)), a
guarantor of loans made to rural electric utilities. CFC is a finance
company that makes loans to its rural utility system members to enable
them to acquire, construct and operate electric distribution,
generation, transmission and related facilities. Most CFC long-term
loans to its members are made in conjunction with concurrent loans from
RUS and are secured equally and ratably with RUS' loans by a single
mortgage. The principal and interest obligations under CFC's loans are
guaranteed by RUS (the RUS Guarantee).
CFC also provides guarantees for tax-exempt financings of pollution
control facilities and other properties constructed or acquired by its
members, and provides guarantees of other debt in connection with
certain leases and other transactions of its members. CFC presently has
loans outstanding to its members in the aggregate principal amount of
approximately $8.0 billion and has guaranteed on behalf of members an
additional $2.3 billion in obligations. CFC acts as the servicer under
six trusts that were established in 1988 to refinance certain rural
utility cooperative loans guaranteed by REA in transactions eligible
for the exemption provided by PTE 89-93. CFC also provides financial
advisory services to its members.
As of May 31, 1996, CFC's 1051 members were generally non-profit
cooperative electric utilities and service organizations and
represented approximately 95 percent of the total number of such
entities in the United States. As of December 31, 1995, CFC's member
systems owned approximately $66.5 billion (before depreciation of $19.4
billion) in total utility plants and
[[Page 62633]]
equipment. Funds for CFC's programs are derived primarily from the sale
to its members of its subordinated debt, the sale of collateral trust
bonds, medium-term notes and commercial paper in the capital markets
and from retained earnings. As of May 31, 1996, outside investors held
approximately $1 billion of CFC collateral trust bonds, $604 million of
CFC medium term notes and $4.7 billion of CFC commercial paper. CFC has
approximately $1.0 billion principal amount of bonds listed on the New
York Stock Exchange and registered under Section 12(b) of the
Securities Exchange Act of 1934.
In the refinancing transactions that are the subject of this
proposed exemption, CFC will act as the servicer of the new trust that
will be established for purposes of holding the note or notes (with the
RUS Guarantee) that are issued by KEPCO, a rural utility cooperative
(KEPCO Notes). In addition, there will be a fixed to floating interest
rate swap entered into between KEPCO and Morgan Guaranty Trust Company
of New York (Morgan), a financial counterparty of high credit standing.
The interest rate swap will be assigned to the trust by KEPCO. CFC will
service the KEPCO Note(s) and the RUS Guarantee in accordance with the
terms and conditions of the trust agreement (the Trust Agreement) under
which the trust (the Trust) will be established.
2. The Trustee. The Trustee, which is The First National Bank of
Chicago (First Chicago), is the legal owner of the assets in the Trust.
The Trustee is also a party to, or beneficiary of, all the documents
and instruments deposited in the Trust. The Trustee is responsible for
enforcing all the rights created by the Trust in favor of the
certificateholders. In the proposed transactions, the Trustee will be
an independent entity and, therefore, will be unrelated to CFC, KEPCO,
the swap counterparty and the underwriter. The Trustee will monitor and
administer the swap agreement that will be assigned to the Trust.
CFC represents that the Trustee will be a substantial financial
institution or trust company experienced in trust activities. The
Trustee receives a fee for its services, which will be specified in the
trust agreement and will be disclosed in the prospectus or private
placement memorandum relating to the offering of the certificates.
3. The Underwriter. It is anticipated that the certificates will be
registered under the Securities Act of 1933 and will be sold in a
public offering on a firm commitment basis. Each underwriter will be an
entity which has received an individual prohibited transaction
exemption from the Department that provides relief for the operation of
asset pool investment trusts that issue so-called ``asset-backed''
pass-through securities to plans (an Underwriter Exemption), an
affiliate of such entity, or a member of an underwriting syndicate of
which such entity is a manager or co-manager (see Section III.C above).
The lead underwriter will act as the remarketing agent (Remarketing
Agent) with respect to the certificates. If the certificates are sold
to institutional investors in a private placement under Section 4(2) of
the Securities Act and Rule 144A thereunder, the registered broker-
dealer acting as placement agent will also act as the Remarketing Agent
with respect to the certificates. The role of the Remarketing Agent is
described further below.
4. The Swap Counterparty. The swap counterparty will be a bank or
financial institution of high credit standing with a credit rating of
at least AA or an equivalent rating from the Rating Agencies. As noted
earlier, initially the swap counterparty will be Morgan. Morgan will
continue to be the swap counterparty unless there is an event, such as
a credit rating downgrade of Morgan, which requires a replacement of
the swap counterparty under the terms of the swap. Thus, if there is
such an adverse change in Morgan's credit rating, the swap agreement
will require Morgan to either: (i) post collateral with the Trustee of
the Trust in an amount, determined daily, equal to all payments owed by
Morgan if the swap transaction were to be terminated by KEPCO; or (ii)
find a replacement swap counterparty for the Trust, within a specified
period, which has a credit rating of at least AA or an equivalent
rating from the Rating Agencies. Otherwise, the swap agreement will
terminate in accordance with its terms and the Trustee will be
responsible for enforcing all rights created in favor of the
certificateholders of the Trust.
The Subject Transactions
5. The proposed transactions for which exemptive relief is
requested are described by the Applicant in the context of certain
refinancing arrangements involving loans that were made by CFC to KEPCO
(i.e. Kansas Electric Power Cooperative Inc). These refinancing
transactions were initiated with the cooperation of the U.S. Department
of Agriculture, acting through the Administrator of RUS. The Applicant
represents that the subject transactions have been designed to further
a U.S. Congressional policy to facilitate the reduction of the
financing costs for rural electric power cooperatives and to reduce the
U.S. Government's possible exposure as the guarantor of the debt of
such cooperatives.
6. In 1988, KEPCO had outstanding certain loans from the U.S.
Federal Financing Bank (the FFB Loans) which were guaranteed by RUS
(then, the REA). Pursuant, to Section 306A of the Rural Electrification
Act of 1936, as amended (the RE Act) and the implementing regulations
thereunder (the Regulations), the FFB loans were refinanced in the
following manner.
First, CFC loaned KEPCO the amount necessary to prepay the FFB
Loans pursuant to a Loan Agreement, dated as of February 15, 1988 (the
Loan Agreement). To evidence its repayment obligations to CFC, KEPCO
executed three lender loan notes (the Notes). Then, CFC deposited each
of the three Notes in a separate grantor trust--Trust K-1, Trust K-2,
and Trust K-3 (collectively, the 1988 Trusts), pursuant to three Trust
Agreements between CFC, KEPCO and First Chicago, as Trustee. The
original REA guarantee of the FFB Loans (the Guarantees) was
transferred to each of the Notes before they were deposited in the 1988
Trusts.
The obligations of (i) CFC to service the Notes while they were in
the 1988 Trusts, (ii) the U.S. Government acting through the
Administrator of the REA, as guarantor, to guarantee payment of
principal and interest (as defined in the Loan Agreement) on the Notes
under the Guarantees, and (iii) the Trustee with respect to the
Guarantees, were contained in a Loan Guarantee and Servicing Agreement
dated February 15, 1988 (the Loan Guarantee Agreement). Trust K-1,
Trust K-2, and Trust K-3 issued certificates of beneficial interest in
the assets of the 1988 Trusts (the Series 1988 Certificates) to CFC as
depositor of the 1988 Trusts. CFC then sold the Series 1988
Certificates (other than from Trust K-3) to investors pursuant to a
registered public offering of the Series 1988 Certificates. The
Applicant states that these transactions were the subject of the relief
provided by PTE 89-93, and similar refinancing transactions were
effected for other rural electric cooperatives.
Note One and Note Two (the Outstanding Notes), which were deposited
in Trust K-1 and Trust K-2, respectively, will mature on December 4,
2002 and December 4, 2017, respectively. <SUP>12</SUP> Pursuant to the
terms of the Loan Agreement, Note One and Note
[[Page 62634]]
Two will become available for purchase at the election of KEPCO by a
purchaser designated by KEPCO on any business day on or after the day
immediately prior to December 15, 1997. The Series 1988 Certificates
representing ownership interests in Trust K-1 and Trust K-2 are subject
to purchase or redemption upon the prepayment or purchase of the
Outstanding Notes.
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\12\ Note Three, originally deposited in Trust K-3, matured by
its terms on December 4, 1988, and the certificates representing
ownership interests in Trust K-3 were redeemed and Trust K-3 was
terminated by the Trustee.
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7. The Proposed Refinancing Transaction. KEPCO and RUS are
proposing to refinance the Outstanding Notes using the transactions
described below. KEPCO will redeem the outstanding Series 1988
Certificates by exercising, on December 18, 1997 (the Refinancing
Date), the right given in the Loan Agreement to have the Outstanding
Notes purchased by CFC at a specified premium over par <SUP>13</SUP>
(plus accrued interest), and the Outstanding Notes will thereafter be
amended (the Amended Outstanding Notes) to reduce the guaranteed
interest rate payable by KEPCO or by RUS, as guarantor of the
Outstanding Notes.
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\13\ This premium amount will be distributed to the
certificateholders of the Series 1988 Certificates issued by Trust
K-1 and Trust K-2.
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CFC will direct the Trustee (i.e. First Chicago), as trustee of
Trust K-1 and Trust K-2, to terminate Trust K-1 and Trust K-2 after the
owners of the Series 1988 Certificates are paid in full. The Trustee
will be directed to transfer the Amended Outstanding Notes, with the
Guarantees attached, to a single new grantor trust (the Series 1997
Trust) established pursuant to the Trust Agreement. The Trustee of the
Series 1997 Trust will be First Chicago.
This refinancing structure was designed to lock in current interest
rates for new loans to KEPCO as of the preliminary closing date for
such refinancing (December 20, 1996), instead of waiting until the
actual Refinancing Date (December 18, 1997) when rates may be higher.
In particular, KEPCO has entered into a forward interest rate swap
agreement (the Swap Agreement) with Morgan as the swap counterparty.
KEPCO will assign its right to receive and make payments under the Swap
Agreement, effective as of the Refinancing Date, to the Trustee for the
Series 1997 Trust (i.e. First Chicago). Morgan is currently rated AAA
by S&P and Aa1 by Moody's. The Swap Agreement will require Morgan to
post collateral with the Trustee, for the benefit of certificate-
holders, if Morgan's credit ratings are reduced to below AA or an
equivalent rating by the Rating Agencies during the term of the Swap
Agreement. Such collateral must be in the form of highly stable and
liquid fixed-income securities, such as short-term debt securities
issued and/or guaranteed by the U.S. Government or an agency or
instrumentality thereof or debt securities issued by non-U.S.
Government entities which have credit ratings comparable to those of
the certificates. The amount of such collateral will be determined
daily and will be equal to all payments owed by Morgan under the Swap
Agreement in the event the swap were terminated.
Pursuant to the terms of the Swap Agreement, KEPCO will agree to
pay a fixed rate of interest to Morgan on each December 4th and June
4th following the Refinancing Date until the maturity of the Amended
Outstanding Notes. In return, Morgan will agree to pay to KEPCO a
variable rate of interest at the times interest is payable on the
Series 1997 Certificates. As noted earlier, KEPCO will assign its right
to receive and make payments under the Swap Agreement to the Trustee on
the Refinancing Date. On such date, CFC will deposit the Amended
Outstanding Notes, with the RUS Guarantees attached, into the Series
1997 Trust. The Series 1997 Trust will issue certificates of beneficial
interest (the Series 1997 Certificates) which will have interest
distributable to holders of the Series 1997 Certificates (the Series
1997 Certificateholders) at a variable market rate of interest. The
variable market rate will be initially set by the Remarketing Agent,
and reset weekly by the Remarketing Agent, based on an independent
index for 30-day commercial paper known as the H.15 Index, which is
compiled daily by the New York Federal Reserve Bank. The variable rate
of interest on the Series 1997 Certificates will determine the variable
rate of interest payable to the Trustee by Morgan pursuant to the Swap
Agreement, which payments will be distributed monthly to the Series
1997 Certificateholders, or at other times as set forth in the Series
1997 Trust Agreement. The initial variable rate on the certificates
will be known to investors, including plans, approximately one week
before the Refinancing Date.
When installments or payments are made by KEPCO on the Amended
Outstanding Notes, the funds are placed in a segregated account
established in the name of the Trustee (on behalf of
certificateholders) to hold funds received between distribution dates.
The account is under the sole control of the Trustee. However, the
account's assets are invested at the direction of CFC in short-term
securities described in the Trust Agreement which have received a
rating comparable to the rating assigned to the certificates. In
addition, CFC will furnish a report on the operation of the Trust to
the Trustee on a monthly basis.
Because of the structure of the refinancing, the credit behind the
Series 1997 Certificates will be bifurcated. First, if KEPCO fails to
pay the Trustee any amounts on the KEPCO Notes, Series 1997
Certificateholders will look to the guarantee provided by the U.S.
Government (acting through RUS) for payment of principal, which will
continue to be distributed to Series 1997 Certificateholders annually
each December 15. Second, Series 1997 Certificateholders will look to
the credit of Morgan for the variable rate payments of interest to be
made on the Series 1997 Certificates.<SUP>14</SUP> If Morgan fails to
make any variable rate payment when due, amounts received by the
Trustee from KEPCO (or RUS as guarantor) for interest on the Amended
Outstanding Notes, less a servicing fee payable to CFC, will become
payable, to the extent of the amount of the defaulted payment, to the
Series 1997 Certificateholders. Morgan, or another financial
institution of comparable credit standing selected by Morgan, will
provide liquidity support for the tender rights (Tender Rights) that
attach to the Series 1997 Certificates. The Tender Rights will enable
certificateholders to sell the Series 1997 Certificates back to the
Remarketing Agent at any time upon seven (7) days notice.
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\14\ Morgan has the obligation to continue to make timely
payments under the Swap Agreement even in the event of a default by
KEPCO. In such instances, Morgan will look to the guarantee provided
by the U.S. Government for future payments of interest on the
Amended Outstanding Notes, which the Trustee will use to make the
semi-annual payments to Morgan under the Swap Agreement.
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As noted earlier, the documentation executed and delivered for the
KEPCO refinancing will be executed in three closings:
(i) The preliminary closing on December 20, 1996, at which time
most of the operative documents were executed and delivered (the
Preliminary Closing);
(ii) The Deposit Date closing on November 18, 1997 (the Deposit
Date Closing), at which time the offering documentation was delivered
and CFC deposited the purchase price for KEPCO's Outstanding Notes with
the Series 1988 Trustee and gave advance notice that the purchase is to
occur on December 18, 1997; and
(iii) The Refinancing Date closing on December 18, 1997, at which
time KEPCO's Outstanding Notes will be purchased by CFC from the 1988
Trusts
[[Page 62635]]
and the amended Outstanding Notes will be delivered to the Trustee of
the Series 1997 Trust, after which the Series 1997 Certificates will be
issued and sold to investors.
The Applicant states that in order to eliminate or to minimize
creditors' risks, forward purchase transactions are structured so that
as little as possible is left to the discretion of the parties after
the first commitment is made. Consequently, virtually all of the
binding commitments for the proposed refinancing were made at the
Preliminary Closing. The fixed rate payable to Morgan by KEPCO under
the Swap Agreement (i.e. 7.654 percent per annum) was established at
the time of the signing of such Agreement. That fixed rate, plus the
servicing fee payable to CFC, will determine the new guaranteed
interest rate on the Amended Outstanding Notes, effective upon the sale
of the Certificates to the Underwriters on the Refinancing Date.
KEPCO and CFC entered into a First Amendment to the Loan Agreement
at the Preliminary Closing which obligates CFC, subject to certain
conditions, to provide the funds for the purchase of Note One and Note
Two on the Deposit Date Closing. In addition, the First Amendment to
the Loan Agreement contains the operative amendments to the Loan
Agreement, which will serve to reduce the interest rate on the
Outstanding Notes and to remove any call protection or call premium
from the Outstanding Notes. The amendments will become effective on the
Refinancing Date. However, if upon issuance of the Certificates to CFC
the Certificates are not sold to the Underwriter for any reason, CFC
will hold the Certificates and receive the existing fixed interest rate
on the Amended Outstanding Notes. Pursuant to a separate agreement,
KEPCO will make up any loss CFC may incur in funding the carrying of
the Certificates and will receive a credit for any ``float'' CFC
realizes while holding the Certificates. The RUS does not guarantee any
such additional payments to CFC that may be required from KEPCO.
8. The Sale of the Certificates. At the Preliminary Closing, KEPCO
and CFC entered into a forward certificate purchase agreement with
Alex. Brown & Sons, Inc. (Alex Brown), as Underwriter of the Series
1997 Certificates, pursuant to which KEPCO and CFC obligated
themselves, subject to certain conditions, to sell the Series 1997
Certificates to Alex Brown on the Refinancing Date. Alex Brown
committed to purchase and resell the Series 1997 Certificates at par on
such date in a firm commitment public offering registered with the SEC.
The prospectus (or private placement memorandum if the sale to
investors is converted to a private placement under SEC Rule 144A) for
the Certificates will provide detailed information about the Amended
Outstanding Notes, the RUS Guarantee, the Trust, the Swap Agreement,
and the rights and entitlements of the Series 1997 Certificateholders.
The compensation payable to CFC, as servicer of the Trusts, and to the
Trustee will be set forth in the Trust Agreement and will be described
in detail in the prospectus relating to the Series 1997 Certificates.
The Applicant states that once the lower fixed guaranteed interest
rate on the Amended Outstanding Notes is established and the Series
1997 Certificates are sold to investors, neither the KEPCO nor RUS will
ever have to pay more than such rate. Morgan, as the swap counterparty,
will be paying the ``market rate'' on the Series 1997 Certificates for
the remaining terms of the Notes. Consequently, Morgan has an interest
in insuring that the Series 1997 Certificates are sold at an
appropriate market rate and that such rate is reset weekly at an
appropriate market rate. If investors (including plans) are not
satisfied with the variable interest rates paid on the Series 1997
Certificates, as reset weekly by the Remarketing Agent, then such
Certificateholders may exercise their Tender Rights to require the
Remarketing Agent to repurchase the Certificates at par plus accrued
interest. In such instances, Morgan or another qualified financial
institution of comparable credit quality will stand behind the
Remarketing Agent with liquidity support to enable that entity to honor
the Tender Rights.
The rate payable for the Series 1997 Certificates will be
determined by a Remarketing Agent (initially, Alex Brown) as being the
minimum rate of interest necessary, in the Remarketing Agent's
judgment, to enable the Remarketing Agent to sell the Series 1997
Certificates at par. As noted above, when the Series 1997 Certificates
are in the ``weekly rate mode'', the Certificateholders will have the
right at all times to exercise their Tender Rights to tender their
Certificates for repurchase by the Remarketing Agent at par (plus
accrued interest) on any business day upon seven (7) days
notice.<SUP>15</SUP> CFC, as servicer, will verify and confirm to the
Trustee the information provided by Morgan and the Remarketing Agent
for the variable interest rate payments.
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\15\ As noted earlier, the 7-day reset by the Remarketing Agent
will be priced based on the H.15 Index, a 30-day commercial paper
index, which is compiled daily by the New York Federal Reserve Bank.
The H.15 Index is readily available to fixed income investors
through data services, conversations with broker-dealers, on-line
reports, and other transactions in which such investors participate.
This information would be used by certificateholders on a continuous
basis to determine both the anticipated level of repricing as well
as to evaluate whether the repriced certificates continue to meet
their investment needs.
---------------------------------------------------------------------------
Although the Series 1997 Trust Agreement permits the swap
counterparty (i.e. Morgan) and the Remarketing Agent (i.e. Alex Brown)
to lengthen the interest reset period from seven (7) days (and the
right to tender Certificates would exist only at the end of such longer
reset period), any such change will result in a mandatory repurchase of
all outstanding certificates (at par plus accrued interest) before it
becomes effective. Thus, any Certificateholders that want to continue
to invest in the Certificates under the new conditions will have to
make an affirmative decision to do so. As stated above, in order to
assure the operation of these provisions regarding Tender Rights of
Certificateholders, KEPCO will enter into a liquidity protection
agreement with Morgan pursuant to which Morgan will agree to provide,
or cause another qualified financial institution of comparable credit
quality to provide, a liquidity facility during the term of the Swap
Agreement.
The Swap Agreement will be in effect until the maturity of the
Series 1997 Certificates. After the Refinancing Date, the financial
condition or performance of KEPCO will not affect the requirement of
Morgan's performance under the Swap Agreement. However, KEPCO and RUS
(should RUS become the payor of the Amended Outstanding Notes pursuant
to the Guarantees) will have the right to terminate the Swap Agreement
and prepay or purchase the Amended Outstanding Notes at any time after
the Refinancing Date (after providing notice as specified in the Loan
Agreement and the Trust Agreement). There are no prepayment penalties
attached to KEPCO's right to prepay the Amended Outstanding Notes.
However, with respect to the resulting termination of the Swap
Agreement, prior to prepaying or purchasing the Amended Outstanding
Notes, any termination payment owing under the Swap Agreement must be
paid by KEPCO (or RUS). Consequently, depending on market conditions
and interest rates, KEPCO (or RUS) could be obligated to make a payment
to Morgan or could be entitled to receive a
[[Page 62636]]
payment from Morgan, in the event of termination of the Swap
Agreement.<SUP>16</SUP>
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\16\ In no event will the Trust be obligated to make termination
payments to Morgan, or another swap counterparty, in the event KEPCO
purchases the Amended Outstanding Notes.
---------------------------------------------------------------------------
The Applicant states that the refinancing is intended to emulate,
as closely as possible, the 1988 refinancing, except that the
certificates will have a variable rate of return. The parties to the
1997 transaction are the same as the parties to the 1988 transaction
with the exception of Morgan and Alex Brown--the parties involved in
making the Series 1997 Certificates available as variable rate
securities. As with the 1988 refinancing, the Applicant anticipates
that the Certificates will be acquired by employee benefit plans
subject to the Act.
CFC is participating in this transaction to facilitate the
refinancing of the existing loans (as evidenced by Note One and Note
Two) to KEPCO under applicable U.S. Department of Agriculture
regulations and guarantee programs. CFC does not intend to take a
proprietary interest in the Amended Outstanding Notes. The purchase of
the Amended Outstanding Notes by CFC and the contribution of such Notes
to the Series 1997 Trust will occur virtually simultaneously and will
be for the same consideration. CFC will continue to receive servicing
fees for the Series 1997 Trust (as discussed below) and a fee for the
30-day period between its prepayment of the purchase price for the
Amended Outstanding Notes and the closing of the sale of the Series
1997 Certificates to the Underwriters on the Refinancing Date.
The Series 1997 Certificates will have received one of the three
highest ratings available from either S&P or Moody's, or both. The
Applicant states that these ratings will be based, in part, on the RUS
Guarantee and the high credit standing of Morgan as the swap
counterparty and the liquidity provider.
In this regard, the entire KEPCO refinancing transaction (including
the proposed swap transaction) has been reviewed by Moody's and S&P for
the purpose of rating the certificates. S&P has concluded the
following: (a) the long-term rating on the certificates would be the
lower of (i) ``AAA'', based on the guarantee provided by the U.S.
Government acting through the Administrator of the RUS, or (ii) the
rating of the swap counterparty (i.e. Morgan, which is currently rated
``AAA''). The short-term rating on the certificates would be the short-
term rating of the entity providing the standby certificate purchase
agreement. This entity will be either Morgan or another financial
institution that is rated P-1, the highest short-term credit rating
available. Moody's has also concluded that the certificates would be
rated Aa1 (long-term) and P-1 (short-term), based on the guaranty
provided by the U.S. Government, the swap agreement with Morgan, and
the standby certificate purchase agreement provided by either Morgan or
another P-1 rated entity.
9. Disclosure. The prospectus (or private placement memorandum) to
be issued in connection with the original issuance of the Series 1997
Certificates, will contain information material to a fiduciary's
decision to invest in the Certificates, including:
(i) Information concerning the payment terms of, and the rating of,
the Series 1997 Certificates;
(ii) A description of the operation of the Trust as a separate
entity and of how the Trust was formed by CFC;
(iii) Identification of First Chicago as the independent trustee
for the Trust;
(iv) A description of the assets contained in the Trust (i.e. the
Amended Outstanding Notes, the RUS Guarantee and the swap, including
their principal terms and their material legal aspects, as well as
financial information regarding Morgan, as the swap counterparty);
(v) A description of CFC, its role in the refinancing and its role
as the servicer of the Trust;
(vi) A description of the Trust Agreement, including a description
of the procedures for collection of payments on the Notes, the payments
to be made under the Swap Agreement and the procedures for making
distributions to certificateholders; a description of the accounts into
which such payments are deposited and from which such distributions are
made; identification of the servicing compensation that may be deducted
from any payments before distributions are made to certificateholders;
a description of periodic statements to be provided to the Trustee and
provided to or made available to certificateholders by the Trustee; and
a description of the events that constitute events of default under the
Trust Agreement and a description of the Trustee's and the
certificateholders' remedies with respect thereto;
(vii) A description of the RUS Guarantee;
(viii) A general discussion of the principal federal income tax
consequences of the purchase, ownership and disposition of the pass-
through certificates by a typical investor;
(ix) A general discussion of the fiduciary and prohibited
transaction considerations that are to be taken into account by a
fiduciary under the Act considering the purchase of the Series 1997
Certificates, <SUP>17</SUP> including a brief description of the
exemption (if granted) and a discussion of the potential need for
compliance by plan investors with certain prohibited transaction class
exemptions issued by the Department in connection with the swap
transaction; <SUP>18</SUP>
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\17\ The Department wishes to note that ERISA's general
standards of fiduciary conduct would apply to the investment
described in this proposed exemption, and that satisfaction of the
conditions of this proposal should not be viewed as an endorsement
of the investment by the Department. Section 404 of ERISA requires,
among other things, that a fiduciary discharge his duties with
respect to a plan solely in the interest of the plan's participants
and beneficiaries and in a prudent fashion. Accordingly, the plan
fiduciary must act prudently with respect to the decision to enter
into an investment transaction. The Department further emphasizes
that it expects the plan fiduciary to fully understand the benefits
and risks associated with engaging in a specific type of investment,
following disclosure to such fiduciary of all relevant information.
In addition, such plan fiduciary must be capable of periodically
monitoring the investment, including any changes in the value of the
investment. Thus, in considering whether to enter into a
transaction, a fiduciary should take into account its ability to
provide adequate oversight of the particular investment.
\18\ See PTE 84-14, 49 FR 9494, March 13, 1984 (regarding
transactions entered into for plans by a ``qualified professional
asset manager'' or ``QPAM''), PTE 90-1, 55 FR 2891, January 29, 1990
(regarding transactions entered into by insurance company separate
accounts), PTE 91-38, 56 FR 31966, July 12, 1991 (regarding
transactions entered into by bank collective investment funds), PTE
95-60, 60 FR 35925, July 12, 1995 (regarding transactions entered
into by insurance company general accounts), or PTE 96-23, 61 FR
15975, April 10, 1996 (regarding transactions entered into for plans
by ``in-house'' asset managers). In this regard, the Department is
not providing any opinion in this proposed exemption as to whether
the conditions of such class exemptions would be met for a swap
transaction between the Trust and Morgan, or any other bank or
financial institution acting as a swap counterparty to the Trust.
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(x) A description of the underwriters' plan for distributing the
pass-through certificates to investors, including the structure and
operation of the variable interest rate reset mechanism; and
(xi) Information about the scope and nature of the secondary market
for the certificates, the operation of the put rights, the role of the
liquidity provider and financial information regarding the liquidity
provider (which will be Morgan or a financial institution of comparable
credit standing).
10. The RUS Guarantee. The Applicant states that RUS has endorsed
on each Outstanding Note its guarantee of the timely payment of
principal and interest on such Note and, on or before the Preliminary
Closing, will have consented to an amendment of each Outstanding Note
to lower the
[[Page 62637]]
guaranteed interest rate thereon and to make the other amendments
described below for the servicing of the Outstanding Notes. The RUS
Guarantee is a full faith and credit obligation of the United States of
America. RUS will be required to pay the Trust the amount of any
principal and interest not paid when due on an Outstanding Note within
five business days of notice of such default from CFC, acting in its
capacity as servicer.
11. Servicing of KEPCO's Loans. CFC will contract with RUS and the
Trust to service the Amended Outstanding Notes, thereby establishing an
agency relationship (as the ``Servicer'') with respect to the Trustee
in a manner that complies with the RE Act and the Regulations and
described in the terms of the Trust Agreement.
Under the Trust Agreement, the Trustee appoints the Servicer as its
attorney-in-fact to prosecute any claims to enforce or collect on each
Amended Outstanding Note and Guarantee. However, the Servicer as such
attorney-in-fact may not rescind, cancel, release, waive or reschedule
the right to collect the unpaid balance on any such Note from KEPCO or
RUS. If a court holds that the Servicer is not entitled or able to
enforce an Amended Outstanding Note or Guarantee, the Trustee, on
behalf of the Trust, is obligated to take such steps as the Servicer
deems necessary to enforce such Note or Guarantee.
In administering, servicing and enforcing an Amended Outstanding
Note or Guarantee according to the terms of the Trust Agreement, the
Servicer after a default in payment on such Note is obligated to
exercise such of the rights and powers vested in it by the Trust
Agreement and to use the same degree of care and skill in their
exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs. Prior to a
default in payment on an Amended Outstanding Note, the Servicer is
obligated to perform only those duties that are specifically set forth
in the Trust Agreement. The Servicer has no liability for any error of
judgment made in good faith by it (unless it is proved that the
Servicer was negligent in ascertaining the pertinent facts) or for any
action it takes or omits to take in good faith in accordance with a
direction received by it from the Trustee or the Certificateholders.
In addition to enforcing the Trustee's rights under the Amended
Outstanding Note (including the RUS Guarantee) held by the Trust, CFC
as the Servicer for the Trust is obligated to fulfill a number of
administrative and notice functions under the Trust Agreement. For
example, the Servicer is obligated to deliver a notice to KEPCO and the
Trustee specifying the date any payment is due on the Note held by such
Trust and the amount of such payment. The Servicer is responsible for
notification of RUS of any default in the payment of interest and
principal on the Amended Outstanding Note held in the Trust. The
Servicer is obligated to submit to RUS reports assessing the causes
behind, and seriousness of, the default. The Servicer is also obligated
to notify RUS of any known violations, defaults or conditions which
might lead to a default or violation by KEPCO under the Loan Agreement,
the Loan Guarantee Agreement or an Amended Outstanding Note. The
Servicer is further obligated to notify RUS of any redemption of the
Amended Outstanding Note held by a Trust and to calculate the amount
payable on such Note and the related Certificates pursuant to any
redemption or purchase of such Note.
The Servicer will handle the billing of Note payments from KEPCO,
and will notify RUS promptly of any default under a Loan and of adverse
developments affecting KEPCO, but payments on the Note will be made
directly to the Trustee and not to CFC. The Trustee will be responsible
for monitoring and enforcing the Swap Agreement. In this regard, the
Servicer will verify and confirm to the Trustee the information
provided by Morgan and the Remarketing Agent with respect to the
variable rate of return. The Servicer will also prepare for
distribution by the Trustee to Certificateholders regular semiannual
reports concerning distributions on the Certificates and its fees, as
well as tax information required by Certificateholders. No less often
than annually, an independent public accountant will audit the books
and records of the Trust. Upon completion, copies of the auditor's
reports will be provided to the Trustee.
12. Servicing Compensation. The Servicer will be compensated out of
payments on the KEPCO Notes. The servicing fee (out of which the
Servicer will pay the Trustee's fees and expenses) will total not more
than approximately \1/10\ of one (1) percent per annum of the principal
amount of the Notes. Because the return to the certificateholders is
based upon the floating rate payments made under the Swap Agreement,
these reimbursements will not affect the payments to
certificateholders.
The Servicer may transfer its duties and obligations with the
consent of 51 percent of the certificateholders and the swap
counterparty. The Servicer may also be terminated following certain
defaults or events of bankruptcy relating to the Servicer. The
insolvency of the Trustee or the Servicer will not affect the
certificateholders' rights, because the Servicer will not hold any
Trust assets, and assets held in a fiduciary capacity by the Trustee
should not be subject to claims of the Trustee's general creditors.
13. Description of Certificates. Each Certificate will represent a
fractional undivided interest in the Trust. The Certificates will be
issued in denominations of $100,000 (and in integral multiples of
$5,000 above such amount), and will not be divisible into certificates
with original principal amounts below $100,000. The Certificates will
be transferable, and may be listed on a national securities exchange.
Payments on the Certificates will represent a pass-through of both (i)
payments of principal received by the Trustee on the KEPCO Notes held
by the Trust, and (ii) the payments to be made by Morgan under the Swap
Agreement.<SUP>19</SUP> Interest on the KEPCO Notes will be payable
semi-annually, whereas interest on the floating-rate Certificates will
be paid monthly (or on such other periodic basis as may be reset in
accordance with the Trust Agreement). Principal payments on both the
KEPCO Notes and the Certificates will be payable annually for the
period during which each Note amortizes.
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\19\ It should be noted that the notional principal amount for
the swap transaction between the Trust and Morgan, used to determine
the payments to be made between the parties, initially will be
$57,390,000. As principal payments on the KEPCO Notes are received
by the Trustee and passed-through to the certificateholders, the
notional principal amount for the swap transaction will be adjusted
to equal the outstanding principal balance of the certificates. It
should also be noted that, based on the confirmation statement
submitted by Morgan, all payments made between the parties will be
based on the applicable notional principal amount, the day count
fractions, the fixed or floating rates (determined by objective
third party sources) designated under the swap agreement, calculated
on a one-to-one ratio and not on a multiplier of such rates or with
formulas that produce leveraged amounts. However, because the
payments will be made between the parties on different dates, there
will be no netting of payments. Thus, both parties will be
responsible for making the full payments that are due on the
designated dates (i.e. semi-annually for KEPCO and monthly for
Morgan).
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The Certificates will be prepaid at any time a Note is prepaid. The
Notes will be prepayable at the KEPCO's option in whole (but not in
part) at any time at par. KEPCO will be required to accompany its
notice of prepayment (to be given in advance in order to permit the
Trustee in turn to notify certificateholders of the impending
retirement of the Certificates) with cash
[[Page 62638]]
equal to the amount that will be due on such Note at the time of
prepayment. This procedure will assure that funds will be available for
the prepayment of the Note at the appropriate time. These funds will be
invested in obligations issued by the United States or in repurchase
agreements.
With the exception of prepayments by KEPCO, all payments on the
Note obligations are supported by the full faith and credit of the
United States. If KEPCO defaults in making its payments or in its other
obligations to RUS, RUS has the option either to pay under the RUS
Guarantee principal and interest as they fall due on the KEPCO Note, to
proceed against KEPCO and to assume KEPCO's obligations under the KEPCO
Note or, if KEPCO could at that time make an optional prepayment of the
KEPCO Note, to optionally prepay or purchase the Note. The Trustee (or
the Servicer as its agent), and not the certificateholders, will
enforce payments due on the KEPCO Notes (or the RUS Guarantee) and the
Trustee will enforce payments due under the Swap Agreement. However, a
specified percentage of certificateholders may direct the time, method
and place of exercising any remedy available to the Trustee or the
Servicer, subject to customary trust indenture exceptions. The Trustee
may not resign until the Trust is liquidated and the proceeds
distributed to certificateholders, unless a successor Trustee has been
designated and has accepted such trusteeship.
14. Distributions for the Certificates. Scheduled distributions on
the Certificates attributable to payments of principal on the KEPCO
Notes will be made 11 days (in the case of regular payments of
principal) following the corresponding payment on the Note. This
interval will allow time for the Servicer to notify RUS if there is a
default by KEPCO in making a payment on the Note and to permit the five
business days that RUS has requested before it is obligated to make a
payment under the guarantee to elapse before the payment date on the
Certificates. As a consequence, if KEPCO defaults, the full faith and
credit guarantee payment will fall due before the scheduled payment on
the Certificates. As indicated above, if KEPCO elects to prepay its
Loan, distributions on the Certificates will be made only after advance
receipt of the amounts to be prepaid. This procedure will permit notice
of the resulting distribution to be given to certificateholders.
During these periods pending distribution, payments on the KEPCO
Notes received by the Trust will be invested at the direction of CFC,
as servicer for the Trust, in: (i) obligations issued by the United
States (and supported by its full faith and credit), or (ii) repurchase
agreements with respect to such obligations, over-collateralized on a
basis that will not result in a reduction in the ratings of the
Certificates. All such investments must mature before the next
scheduled distribution date on the Certificates. The obligations
collateralizing the repurchase agreements in question would be marked
to market on a daily basis and kept in the possession of the Trustee or
in its control through book-entry, unless the Rating Agencies indicate
that this is not necessary to maintain the Certificates' rating. The
Applicant states that assuming all amounts then due on the KEPCO Notes
have been paid in full, any yield on these investments will be returned
to KEPCO (or to RUS to the extent of any unreimbursed payments on the
RUS Guarantee). The Applicant states further that such yield will not
flow through to the Servicer or the certificateholders, or increase the
return on their investment, and the prospectus (or private placement
memorandum) will make this clear to the certificateholders.
Other Information
15. The Applicant represents the proposed exemption (if granted)
for plan investments in the Certificates and the participation by CFC
in the refinancing program would be effective as of November 18, 1997,
the Deposit Closing Date for the refinancing of KEPCO's existing loans.
The plans affected by the requested exemption are those plans that will
acquire and hold Certificates representing an interest in a trust
established under a trust agreement as described herein, including any
plans that own certificates for trusts that were established as a part
of the 1988 refinancings. The Applicant states that the Certificates
will not be sold to plans established by KEPCO or CFC, or to plans for
which either the Trustee, the swap counterparty/liquidity provider, or
the underwriter/remarketing agent (or any affiliate of any of the
foregoing entities) is an investment fiduciary for the assets of the
plan that are to be invested in the Certificates.
16. The Applicant represents that the Department's regulations
defining plan assets for purposes of the prohibited transaction
provisions of the Act <SUP>20</SUP> provide that a plan that acquires
an equity interest in an entity, such as certificates of beneficial
ownership in a grantor trust, will be required under certain
circumstances to treat the underlying assets of the entity as assets of
the plan for purposes of the Act. Generally, this ``plan asset look-
through'' occurs if there is significant participation by benefit plan
investors (i.e. 25 percent or more) and the class of equity interests
in question are not: (i) held by 100 or more investors independent of
the issuer and of each other, (ii) freely transferable, and (iii)
either registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 (the '34 Act) or sold as a part of an offering
pursuant to an effective registration statement under the Securities
Act of 1933, and then timely registered under Section 12(b) or 12(g) of
the '34 Act. In this regard, the Applicant states that although there
will be no restrictions imposed on the transfer of the Certificates and
CFC intends to cause the registration requirements to be satisfied, the
Certificates may be held by fewer than 100 independent investors at the
conclusion of the initial offering. Therefore, if benefit plan
investors (including employee benefit plans covered by the Act,
governmental plans, etc.) hold, in the aggregate, Certificates
representing a 25 percent or greater interest in the Trust, the plan
certificateholder's assets will be deemed to include assets of the
Trust.
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\20\ See 29 CFR 2510.3-101.
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As discussed herein, CFC performs certain services for the Trust as
agent for the Trustee according to the terms of the Trust Agreement.
CFC will be compensated for such services out of interest payments on
KEPCO's Note before payments are made by the Trust to Morgan under the
Swap Agreement. The Trustee also has duties and responsibilities for
the assets of the Trust for which it will be compensated. Therefore, if
the assets of the Trust are deemed to be ``plan assets'' for the
reasons discussed above, the activities of CFC for the Trust would
cause it to become a service-provider to the participating plans.
The Applicant states that this ``service provider'' status gives
rise to potential prohibited transactions between the participating
plans and CFC. In addition, the ``plan asset look-through'' may create
prohibited transactions between the participating plans and any other
parties in interest with respect to such plans that have a relationship
to the trust (i.e. members of the Restricted Group, as defined in
Section III.E).
17. In summary, the Applicant represents that the proposed
transactions will satisfy the statutory criteria of section 408(a) of
the Act because:
(a) The decision to acquire a certificate will be made on behalf of
a
[[Page 62639]]
plan by a fiduciary of the plan who is independent of CFC after receipt
of full and detailed disclosure of all material features of the trust
and the certificates, including all applicable fees and charges.
(b) The assets of the Trust (i.e. the notes, the RUS Guarantee and
the Swap Agreement) are described to prospective purchasers of
certificates. Neither CFC nor the Trustee has discretion to substitute
assets once the Trust has been formed (except in the limited
circumstances where KEPCO is required to obtain a substitute swap
agreement from another financial institution of comparable credit
quality).
(c) KEPCO's notes are guaranteed as to principal and interest by
the United States of America and the certificates will be rated in one
of the three highest rating categories by S&P's and/or Moody's.
(d) All actions by CFC and the Trustee with respect to the trust,
the assets of the Trust, the certificates and certificateholders will
be governed by the Trust Agreement, which will be available to plan
fiduciaries for their review prior to the plan's investment in
certificates.
(e) The certificates will bear a variable rate of return that will
be generally reset weekly; any change in the reset period will require
a new investment decision by the certificateholder because of the
mandatory redemption (at par plus accrued interest) feature of the
certificates.
(f) The variable rate should be closely related to a published
independent index (e.g. the H.15 index for 30-day commercial paper, as
compiled by the New York Federal Reserve Bank) so that it can be
readily monitored by certificateholders. Given the historical range of
reset rates, and the put and redemption features of the certificates,
any adverse change in the variable rate would have only a de minimis
impact on a plan investor's overall return on the certificates.
(g) Alex Brown, a currently identified underwriter, anticipates
that it will make a secondary market in the certificates, and the
certificateholders will have certain put rights (at par plus accrued
interest) which are supported by a liquidity facility provided by a
financial institution that is rated in one of the three highest rating
categories by S&P's and/or Moody's.
(h) All fees and charges under the Trust and for the Certificates
are fixed and reasonable and are disclosed to certificateholders.
(i) CFC and the Trustee will maintain books and records of all
transactions which will be subject to annual audit by a certified
public accountant.
(j) The certificates will be offered and sold in a public offering
or an exempt private placement, with full disclosure in the prospectus
or private placement memorandum.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption will include prospective plan investors, and
fiduciaries of plans which have already invested in certificates of a
trust which holds an existing KEPCO Note. Because CFC is uncertain as
to which plans will invest in a new trust, the Department has
determined that the only practical form of providing notice to
interested persons is the publication of this notice of proposed
exemption in the Federal Register. However, with respect to plans that
are invested in a trust holding an existing KEPCO Note at the time this
notice is published, CFC will distribute in redemption notices for the
outstanding certificates of the existing trusts a statement that plan
investors may request a copy of this notice of proposed exemption
within 15 days of the receipt of the notice of redemption. CFC
represents that transmittal of redemption notices will occur shortly
after the publication of this notice of proposed exemption in the
Federal Register.
Comments and requests for a public hearing are due within sixty
(60) days following the publication of this notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Pentair Retirement Savings and Stock Incentive Plan (the Plan), Located
in St. Paul, MN
[Application No. D-10472]
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 406(b)(1) and
(b)(2) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to the past sale by the Plan (the
Sale) of the Plan's remaining interest (the Interest) in two guaranteed
investment contracts (the GICs) of Confederation Life Insurance Company
(CL) to Pentair, Inc. (Pentair), the sponsoring employer and a party in
interest with respect to the Plan; provided the following conditions
were met:
(1) The Sale was a one-time transaction for cash;
(2) The Plan received no less than the fair market value of the
Interests at the time of the Sale;
(3) The Plan and its participants and beneficiaries have not
incurred any expenses or any losses from the Sale; and
(4) Any future distributions from the GICs that exceed the
consideration paid by Pentair to the Plan for the Interests shall be
paid to the Plan and allocated to the respective accounts of the
affected Plan participants.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
on June 13, 1997.
Summary of Facts and Representations
1. Pentair, a Minnesota corporation and located in St. Paul, is a
publicly held corporation whose stock is traded on the New York Stock
Exchange. It is a diversified manufacturer and vendor of electrical and
electronic enclosures, portable and stationary tools and equipment,
water products, and sporting and law enforcement ammunition.
The Plan, established by Pentair on January 1, 1984, is a defined
contribution plan that is intended to qualify under section 401(a) of
the Code. The Plan includes a cash or deferred arrangement that is
intended to qualify under section 401(k) of the Code.<SUP>21</SUP> As
of December 31, 1996, the Plan had approximately 9,700 participants and
total assets with a fair market value of approximately $270,000,000.
The Plan provides for individual participant accounts and permits its
participants to self-direct their respective accounts in the Plan
(other than the ESOP part of the Plan) into various investment options
pursuant to section 404(c) of the Act, including an investment option
referred to as the Pooled Stable Return Trust (the PSR Fund), which
acquires and holds a pool of fixed income investments. As of December
31, 1996, the PSR Fund held assets with a total fair market value of
approximately $72,000,000.
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\21\ A component of the Plan is an employee stock ownership plan
(ESOP) of the stock bonus variety, with its assets held under a
separate trust and invested in the stock of Pentair.
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Pentair, as named Plan fiduciary, delegates the administrative
responsibilities of the Plan to a Plan
[[Page 62640]]
Committee (the Committee), currently comprised of Richard W. Ingman,
Debby S. Knutson, John T. Moynihan, and Roy T. Rueb, each of whom is an
employee of Pentair. Two of the members of the Committee, Richard W.
Ingman and Roy T. Rueb (the Fund Trustees), are also the trustees of
the PSR Fund.
2. Among the fixed income investments purchased by the Fund
Trustees on behalf of the PSR Fund are the GICs, described as follows:
(a) Contract No. 62541 is a single deposit contract acquired from
CL on July 26, 1991, for $3,500,000, with a maturity date on June 30,
1996, providing for a guaranteed rate of compound interest at 8.53
percent through maturity.
(b) GIC No. 62608 is a single deposit contract acquired from CL on
January 22, 1992, for $5,000,000, with a maturity date on December
31,1996, and which provides for a guaranteed rate of simple interest at
7.21 percent through maturity.
3. On August 11, 1994, Canadian insurance company regulatory
authorities seized the assets of CL because of serious liquidity
problems confronting CL. On August 12, 1994 (the Seizure Date), the
assets of CL located in the United States of America were seized by the
Insurance Commissioner for the State of Michigan. On the Seizure Date,
legal action was taken to freeze the operations of CL in the United
States and to initiate a rehabilitation CL's operations in the United
States. Pentair represents that, as of August 12, 1994, the book value
of both of the GICs totaled $9,685,734.43 (the Seizure Date
Values).<SUP>22</SUP> Pentair represents that as of the Seizure Date,
GIC No. 62541 had a book value of $4,491,311.71 and GIC No. 62608 had a
book value of $5,194,422.72, with the total representing approximately
11.7 percent of the total assets in the PSR Fund as of the Seizure
Date. Immediately after the Seizure Date, the Fund Trustees took action
to freeze a portion of the account balance of each participant account
invested in the PSR Fund, and the frozen amount of each such account
equaled the percentage of the total PSR Fund assets represented by the
Seizure Date Value of the GICs, approximately 11.7% as of the Seizure
Date.
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\22\ Book value represents total deposits under the GICs plus
interest at the rates guaranteed under the GICs (the Contract Rates)
through August 12, 1994, less previous withdrawals.
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4. Subsequent to the Seizure Date, a formal plan of rehabilitation
of CL (the Rehab Plan) was developed which offered contract holders
such as the PSR Fund the option of participation in the Rehab Plan, by
receiving payments over several years, or nonparticipation in the Rehab
Plan by receiving a lump sum settlement. The Rehab Plan was approved by
rehabilitation authorities on October 23, 1996, and became final 21
days later, and the Fund Trustees elected that the PSR Fund participate
in the Rehab Plan. The Fund Trustees represent that pursuant to the
Rehab Plan, the Plan has already received from CL's available liquid
assets in excess of 100 percent of the Seizure Date Values of the GICs,
and that they anticipate from the Rehab Plan an eventual recovery of
approximately 110% of the Seizure Date Values. Pentair represents that
as of June 13, 1997, the Plan had received a total of $9,723,592 from
the Rehab Plan with respect to its investments in the GICs, and that
these funds were immediately invested in the PSR Fund's money market
fund.
In addition to the funds realized from the Rehab Plan, the Plan has
received funds from a state guaranty association. During development of
the Rehab Plan, the State of Minnesota, through its Minnesota Life and
Health Insurance Guaranty Association (MGA), accepted and confirmed
guaranty coverage for the two GICs and thereby provided additional
funds to compensate those affected Plan participants residing in
Minnesota. Pentair represents that 62.221 percent of the PSR Fund's
investment in the GICs was allocable to the participant accounts of
Minnesota residents. Pentair represents that as of June 13, 1997, the
Plan had received a total of $1,307,732 from MGA with respect to its
investments in the GICs, and that these funds were immediately invested
in the PSR Fund's money market fund.
Pentair represents that in addition to the funds realized from the
Rehab Plan and MGA, as of June 13, 1997 the PSR Fund had also earned a
total of $59,080 in interest on the Rehab Plan and MGA payments which
had been deposited in the PSR Fund's money market account.
5. In order to assure that all affected participants, regardless of
their state of residency, receive a timely and equivalent recovery of
their frozen account balances invested in the GICs, and in order to
restore to all affected Plan participants complete access to their
entire account balances invested in the PSR Fund, Pentair represents
that it proceeded on June 13, 1997 to purchase from the Plan the
Interest, which is the PSR Fund's entire remaining interest in the GICs
(the Interest) by depositing cash into the PSR Fund. For this past
purchase of the Interest from the Plan for cash, Pentair requests as
exemption under the terms and conditions described herein.
6. Pentair represents that it purchased the Interest from the Plan
by depositing cash into the PSR Fund in the amount of $635,672, which
was the amount necessary to enable the Plan to have received, from all
sources, a total recovery on the GICs in the amount of $11,726,076 (the
Total Recovery Amount). Pentair represents that in receiving the Total
Recovery Amount, the Plan recovered the Seizure Date Values of the GICs
plus interest thereon at the Contract Rates through the maturity dates
of each GIC, plus post-maturity interest on each GIC at the rate of
five percent from the maturity dates through March 31, 1997, the date
established under the Rehab Plan for contract valuation. Pentair
represents that the 5 percent rate of interest was the rate of interest
established under the Rehab Plan, and accepted by MGA, for the purposes
of crediting earnings to the GICs after their contract maturity dates.
7. Pentair represents that by purchasing the Interest from the PSR
Fund, it has assumed all risks with respect to the future payments by
the Rehab Plan and MGA with respect to the GICs. Upon receipt of the
purchase price for the Interest, the Fund Trustees were able to lift
the freeze on the portion of the participant accounts invested in the
GICs and they restored to each affected account its pro-rata share in
the Total Recovery Amount. Pentair represents that it proceeded with
the purchase of the Interest on June 13, 1997 in order that affected
Plan participants residing outside Minnesota would not be required both
to await future Rehab Plan and to accept a lesser recovery with respect
to their frozen account balances. Pentair represents that its purchase
of the Interest also enabled all affected participants, regardless of
residency, to have immediate access to their account balances for
purposes of making investment transfers, obtaining hardship withdrawals
or plan loans, and receiving distributions of the portion of their
account balances which had been frozen when they became entitled for
distributions. Pentair represents that in the event the amount of
future distributions from the GICs exceeds the purchase price paid to
the Plan for the Interest, such excess amounts shall be transferred to
the Plan and allocated pro rata among the accounts of the affected Plan
participants.
8. In summary, the applicant represents that the transaction
satisfies the criteria of section 408(a) of the Act because (a) the
Sale was a one-time transaction for cash; (b) the purchase
[[Page 62641]]
price paid by Pentair for the Interest enabled the Plan to have
recovered the Total Recovery Amount, representing the sum of (i) the
book value of the GICs as of the Seizure Date, (ii) Contract Rate
interest thereon through the GICs' maturity dates, (iii) post-maturity
interest at the rate of 5 percent through March 31, 1997; (c) the
transaction enabled the PSR Fund to avoid any risk associated with the
continuation of the Rehab Plan and enabled the participants to direct
PSR Fund assets to other investments; and (d) the Plan did not incur
any expenses or suffer any losses from the transaction.
FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Robert H. Herzog Profit Sharing Plan, (the Plan) Located in Santa
Barbara, California
[Application No. D-10494]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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). If the exemption is granted, the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (E) of the Code, shall not apply to the proposed
cash sale (the Sale) of a certain residential condominium (the
Property) by the Plan <SUP>23</SUP> to Robert H. Herzog (Mr. Herzog), a
disqualified person with respect to the Plan, provided that the
following conditions are met:
---------------------------------------------------------------------------
\23\ Because Mr. Herzog is the only participant in the Plan,
there is no jurisdiction under 29 CFR Sec. 2510.3-3(b). However,
there is jurisdiction under Title II of the Act pursuant to section
4975 of the Code.
---------------------------------------------------------------------------
(a) The Sale is a one-time transaction for cash;
(b) The terms and conditions of the Sale are at least as favorable
to the Plan as those obtainable in an arm's length transaction with an
unrelated party;
(c) The Plan receives the fair market value of the Property at time
of the Sale; and
(d) The Plan is not required to pay any commissions, costs or other
expenses in connection with the Sale.
Summary of Factual Representations
1. The Plan is a profit sharing plan which was established by Mr.
Herzog, the sole participant and beneficiary. As of August 1997, the
Plan held assets valued at approximately $141,500. The trustee of the
Plan is Mr. Herzog.
2. The Property is a residential condominium unit located at 362
Old Mammoth Road, Unit 62, Sherwin Villas in Mammoth Lakes, California.
The Property consists of one bedroom, one-and-a-quarter baths and has a
total living area of 704 square feet. The specific zoning
classification and description of the Property is ``RF-2 Residential
Multiple Family.''
3. According to the applicant, the Plan originally acquired the
Property as a real estate investment. The Plan purchased the Property
in October 1996 from an unrelated third party in a cash transaction for
$40,271, including expenses. The applicant represents that the Plan has
rented out the Property on a short-term basis to visitors of the
Mammoth Lakes resort, and all income and expenses attributable to the
Property are applied to the Plan. Since purchasing the Property, the
Plan has spent approximately $9,723 on improvements but, because of
rental income, has shown a net profit of approximately $945.
Mr. Herzog represents that the Property has not been leased to, or
used by, any disqualified persons.
4. The applicant requests an exemption for the proposed sale of the
Property by the Plan to Mr. Herzog. According to Mr. Herzog, he desires
to sell the Property because it has failed to produce the desired rate
of return and because it has become unwieldy investment from a
management perspective. As noted above, the Plan would receive cash for
the Property in an amount equal to the fair market value of such
Property, as determined by a qualified, independent appraiser at the
time of the Sale.
The applicant represents that the proposed transaction would be
feasible in that it would be a one-time transaction for cash.
Furthermore, the applicant states that the transaction would be in the
best interests of the Plan because it would permit the Sale of the
Property, enabling the Plan to invest the proceeds from the Sale in
assets with a higher rate of return. Finally, the applicant asserts
that the transaction will be protective of the rights of the
participant and beneficiary as indicated by the fact that the Plan will
receive the fair market value of the Property, as determined by a
qualified, independent appraiser on the date of sale, and will incur no
commissions, costs, or other expenses as a result of the Sale.
5. Cheryl L. Schafer (Ms. Schafer), an accredited appraiser with
Mammoth Lakes Appraisal, located in Mammoth Lakes, California,
appraised the Property on July 14, 1997. Ms. Schafer states that she is
a full time qualified, independent appraiser, as demonstrated by her
status as a Certified Residential Real Estate Appraiser licensed by the
State of California. In addition, Ms. Schafer represents that both she
and her firm are independent of Mr. Herzog. After inspecting the
Property, Ms. Schafer determined that a fee simple interest in the
Property is worth $50,000.
In her appraisal, Ms. Schafer relied primarily on the direct sales
comparison approach. According to Ms. Schafer this method best
represents the actions of buyers and sellers in the marketplace. This
method of appraisal involves an analysis of similar recently sold
properties in the area in question so as to derive the most probable
sales price of the Property. Ms. Schafer's appraisal indicates that she
compared the Property to six recently sold condominium units in the
Mammoth Lakes area before reaching a conclusion as to the value of the
Property.
6. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria of section 4975(c)(2) of
the Code because: (a) The terms and conditions of the Sale would be at
least as favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated party; (b) the Sale would be a one-time
cash transaction allowing the Plan to invest in assets with a higher
rate of return; (c) the Plan would receive the fair market value of the
Property, established by a qualified independent appraiser; and (d) the
Plan would not be required to pay any commissions, costs or other
expenses in connection with the Sale.
Notice to Interested Persons
Because Mr. Herzog is the only participant in the Plan, it has been
determined that there is no need to distribute the notice of proposed
exemption (the Notice) to interested persons. Comments and requests for
a hearing are due thirty (30) days after publication of the Notice in
the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. James Scott Frazier, telephone
(202) 219-8881. (This is not a toll-free number).
CoreStates GIC and BIC Fund (the Fund), Located in Philadelphia,
Pennsylvania
[Application No. D-10522]
Proposed Exemption
The Department of Labor is considering granting an exemption
[[Page 62642]]
under the authority of section 408(a) of the Act and section 4975(c)(2)
of the Code and in accordance with the procedures set forth in 29 CFR
Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the
exemption is granted, the restrictions of sections 406(a) and 406(b)(1)
and (b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to the sale (the Sale) by the Fund of
the Fund's remaining interest in two Guaranteed Investment Contracts
(the GICs) of Confederation Life Insurance Company (CL) to CoreStates
Bank, N.A. (the Bank), a party in interest with respect to the Fund;
provided (1) the Sale was a one-time transaction for cash, (2) the Fund
received no less than the fair market value of the GICs at the time of
the Sale, (3) the Fund and its participants and beneficiaries did not
incur any costs or expenses with respect to the Sale, and (4) any
future distributions from the GICs that exceed the consideration paid
to the Fund by the Bank in the Sale shall be paid to the Fund and
allocated to the respective accounts of the affected employee benefit
plans.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
December 31, 1997.
Summary of Facts and Representations
1. The Bank, which is the applicant, is a wholly-owned subsidiary
of CoreStates Financial Corp., a bank holding company organized under
federal and Pennsylvania laws and located in Philadelphia. The Bank is
the successor to Hamilton Bank, which the Bank acquired in 1980. The
Bank offers traditional commercial banking services to individuals and
privately and publicly created entities located in the Middle Atlantic
states.
Until 1993, Hamilton Bank served as trustee or investment custodian
for approximately 250 employee benefit plans, and had investment
discretion for either some or all of the assets of such plans (the
Plans). Commencing in 1993, the Bank undertook such activities and
duties for the Plans. The Plans include both defined benefit and
defined contribution plans, such as profit sharing, money purchase
pension, 401(k), and Keogh plans.
2. The Fund is a pooled fund sponsored and administered by the Bank
in which the Plans invest portions of their assets. The investments
made by the Fund are limited to guaranteed investment contracts issued
by insurance companies and to bank investment contracts issued by
banks. The applicant states that CoreStates Investment Advisers, Inc.
(Advisers), a wholly-owned subsidiary of the Bank, is the investment
adviser for the Fund and has investment discretion over the assets of
the Fund. The applicant represents that with respect to each Plan that
has invested in the Fund, the determination to invest Plan assets in
the Fund is made by a fiduciary of the Plan independent of the Bank or
by the participants of a Plan which provides for self-directed
investment of individual participant accounts. As of September 30,
1997, the applicant represents that the fair market value of the assets
of the Fund was approximately $5,638,341.
3. The Fund has invested a portion of its assets in the two GICs
issued by CL, a Canadian insurance corporation doing business in the
United States through branches in the states of Georgia and Michigan.
The two GICs involved in the transaction for which the exemption is
requested are described as follows:
----------------------------------------------------------------------------------------------------------------
GIC No. 61977 GIC No. 62403
----------------------------------------------------------------------------------------------------------------
Date Purchased................................. Dec. 4, 1989................... March 1, 1991.
Original Maturity Date......................... Dec. 3, 1994................... April 30, 1996.
Amount Deposited............................... $500,000.00.................... $1,000,000.00.
Contract Rate of Interest...................... 8.50 percent................... 8.20 percent.
8/12/94 Book Value <SUP>24.......................... $528,615.00.................... $1,036,045.00
----------------------------------------------------------------------------------------------------------------
<SUP>24 Book Value is the sum of the total principal deposits plus interest thereon at the rates guaranteed under the
terms of the GICs, less previous withdrawals.
4. On August 11, 1994, the Canadian insurance regulatory
authorities placed CL into liquidation and a winding-up process. On
August 12, 1994, the insurance authorities of the state of Michigan
commenced legal action to place the U.S. operations of CL into
rehabilitation, which involved liquidating the assets of CL and
establishing the methodology for determining and paying its contractual
obligations. The applicant represents that a plan of rehabilitation
(the Rehab Plan) has been approved by the rehabilitation authorities,
and payments to CL contract holders, including the Fund, commenced
under the Rehab Plan in April of 1997.
In addition to the amounts paid to the Fund by CL under the Rehab
Plan, the GICs have also been afforded protection by the Pennsylvania
Life and Health Insurance Guaranty Association (PLHIGA). Under the
terms of the enabling statute of PLHIGA, the principal amount of the
GICs was fully insured, and a substantial portion the interest due
under the terms of the GICs was also insured by PLHIGA.<SUP>25</SUP>
---------------------------------------------------------------------------
\25\ The applicant represents that PLHIGA's coverage of interest
on a GIC's principal (a) is limited to the four years prior to the
rehabilitation date during which the GIC was in effect, (b) does not
exceed 2 percentage points below the Moody Corporate Bond Average,
and (c) for the period after the rehabilitation date up to the date
of payment by PLHIGA, does not exceed 3 percentage points below the
Moody Corporate Bond Yield Average.
---------------------------------------------------------------------------
5. The applicant states that In accordance with the Rehab Plan,
substantial payments have been made by CL to the Fund with respect to
the GICs. The applicant represents that in combination with the
additional payments to the Fund by PLHIGA, the Fund already has
recovered 100 percent of is principal investment in the GIC, plus
substantial portions of the interest due under the GICs within the
limits of PLHIGA's coverage. The applicant represents that CL has
predicted that some additional amounts will be paid from various
reserve funds over the next few years as the remaining assets of CL are
liquidated.
The details of payments to the Fund are as follows:
------------------------------------------------------------------------
GIC No. 61977 GIC No. 62403
------------------------------------------------------------------------
Paid 4/25/97 by CL...................... $458,773.70 $910,105.36
Paid 5/20/97 by CL...................... 9,578.40 5,429.83
[[Page 62643]]
Paid 5/27/97 by CL...................... 60,480.93 120,522.70
Paid 5/30/97 by PLHIGA.................. 75,085.11 164,396.53
Paid 9/2/97 by CL....................... 11.96 23.73
-------------------------------
Total to date received.............. 603,930.10 1,220,478.15
===============================
Projected future payments............... 3,714.00 8,347.00
------------------------------------------------------------------------
6. In order to enable the Fund and its participating Plans to
achieve a completed liquidation of the Fund's investment in the GICs
and avoid additional accounting expenses related to monitoring and
allocating future Rehab Plan payments, the Bank proposes to purchase
the Fund's remaining interests in the GICs by acquiring the Fund's
right to all future payments from CL pursuant to the Rehab Plan with
respect to the GICs. The Bank is requesting an exemption for this
purchase transaction under the terms and conditions described herein.
As purchase price for all rights to future CL payments with respect to
the GICs, the Bank proposes to pay the Fund cash in the amount of
$12,061.00, which the applicant represents to be the amount of
projected future payments on the GICs as calculated in accordance with
the terms of the Rehab Plan. The Bank intends the cash sale transaction
to take place December 31, 1997. The applicant represents that the Sale
will enable the Plans invested in the Fund and their affected
participants and beneficiaries to realize immediately the future Rehab
Plan payments with respect to the GICs without awaiting the four years
which is estimated for complete payment under the Rehab Plan. The
applicant represents that the Fund and the Plans will not incur any
costs or expenses with respect to the sale transaction. In the event
the Bank should receive future payments on behalf of the GICs in excess
of the purchase price of $12,061.00, such excess amounts shall be
transferred to the Fund.
The applicant represents that the valuation methodologies used to
determine the projected future payments on the GICs have been reviewed
and accepted by the Michigan Insurance Commissioner, the Circuit Court
of Ingham County, Michigan, the National Organization of Life and
Health Guaranty Associations, and ACLIC, an organization of large
financial institutions and plan sponsors that invested in CL GICs.
7. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act because
(a) the Sale will be a one-time transaction for cash; (b) the
transaction will enable the Fund to avoid the additional administrative
costs that will be experienced from retention of the Fund's remaining
interests in the GICs; (c) no costs or expenses will be incurred by the
Fund with respect to the Sale; (d) the plans participating in the Fund,
and their participants and beneficiaries, will receive promptly all
anticipated amounts owed by CL rather than over an anticipated next
four years; and (e) any future distributions from the GICs that exceed
the consideration paid to the Fund by the Bank in the Sale shall be
paid to the Fund and allocated to the accounts of the Plans invested in
the Fund at the time of the Sale.
FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Hawaii Laborers' Apprenticeship and Training Trust Fund (the Trust
Fund)
[Application No. L-10485]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the restrictions of
sections 406(a), 406 (b)(1) and (b)(2) of the Act shall not apply to
the purchase of a certain parcel of unimproved real property (the
Property) by the Trust Fund from the Laborers International Union of
North America, Local 368, AFL-CIO (a/k/a the Hawaii Laborers Union), a
party in interest with respect to the Plan, provided that the following
conditions are met:
(a) The purchase of the Property by the Trust Fund is a one-time
transaction for cash;
(b) The Trust Fund pays no more than the lesser of: (i) $1,570,000;
or (ii) the fair market value of the Property as determined at the time
of the transaction;
(c) The fair market value of the Property is established by an
independent, qualified real estate appraiser that is unrelated to the
Hawaii Laborers Union or any other party in interest with respect to
the Trust Fund;
(d) The Trust Fund does not pay any commissions or other expenses
with respect to the transaction;
(e) The Hawaiian Trust Company, Ltd. (Hawaiian Trust), acting as an
independent, qualified fiduciary for the Trust Fund, determines that
the proposed transaction is in the best interest of the Trust Fund and
its participants and beneficiaries;
(f) Hawaiian Trust monitors various aspects of the purchase of the
Property until closing, including the environmental reports concerning
the Property, and takes whatever action is necessary to protect the
interests of the Trust Fund; and
(g) The purchase price paid by the Trust Fund for the Property
represents no more than 25 percent of the Trust Fund's total assets at
the time of the transaction.
Summary of Facts and Representations
1. The Trust Fund is an apprenticeship training plan the assets of
which are subject to the fiduciary responsibility provisions of Part 4
of Title I of the Act. The Trust Fund is also established and
administered pursuant to the provisions of section 302 of the Labor
Management Relations Act of 1947. Currently, there are approximately
2800 participants and beneficiaries covered by the Trust Fund. As of
May 1997, the Trust Fund had total assets of $6,221,075.
2. The Property is a parcel of unimproved real property located at
96-150 Farrington Highway in Waiawa on the island of Oahu in the State
of Hawaii. The Property is currently owned by the Hawaii Laborers'
Union (the Union).
The Property is an irregularly shaped parcel with a gross land area
of 3,981 acres or approximately 173,412 square feet. Approximately,
40,000 square feet of the Property is adjacent to the Waiawa Stream and
is considered unusable for development. Thus, the usable portion of the
Property represents approximately 133,412 square feet. The Property is
[[Page 62644]]
undeveloped and partially overgrown with trees and shrubs along its
perimeter. The interior portions of the Property are terraced, due to
varying topography, with open yard areas.
The Property was recently re-zoned as an I-2 Intensive Industrial
District. In this regard, the I-2 zoning designation is intended to set
aside areas of Waiawa for a full range of industrial uses necessary to
support the city. The applicant states that the current zoning
designation will allow for the planned construction of a building to be
used as a training school for participants in the Hawaii Laborers'
Union apprenticeship and training plan (see Paragraph 3 below). The
Property is located at the fringe of the Pearl City commercial area and
is in close proximity to major freeways in Waiawa. Real estate
appraisals of the Property state that an industrial complex which
maximizes allowed density would represent the highest and best use of
the site.
3. The applicant states that the Trust Fund's trustees (the Fund
Trustees) would like to have the Trust Fund purchase the Property from
the Union, a party in interest with respect to the Trust Fund. The
proposed transaction would allow the Trust Fund to construct a building
on the Property for use as a training facility for the Trust Fund's
participants. At the present time, training classes are being held in
temporary quarters--10 by 40 foot trailers--which limit the amount of
students per class. The Fund Trustees believe that the Property is an
ideal location for a training facility.
Current plans call for the construction of a three-story building
(the Building), which will house six classrooms, a multi-purpose room,
a kitchen, restrooms, and storage areas. In addition, a dormitory for
neighboring island students and caretaker's quarters will be located on
the second floor of the Building. The third floor of the Building will
accommodate the administrative offices. The Building would be designed
to meet the applicable zoning specifications.
The Building will provide a permanent facility for classrooms and
``hands-on'' training for laborer employment in various construction
trades as well as housing accommodations for trainees from the
neighboring islands. The Trust Fund currently lodges the trainees in
hotels, which is fairly expensive for the Trust Fund.<SUP>26</SUP>
---------------------------------------------------------------------------
\26\ The Department is providing no opinion in this proposed
exemption as to whether the current expenditures made by the Trust
Fund for providing training, or whether future expenditures to be
made by the Trust Fund for the construction of the Building and for
the maintenance of the Building as a training facility, are or will
be consistent with the fiduciary responsibilities contained in Part
4 of Title I of the Act. In this regard, the Department notes that
section 404(a) of the Act requires, among other things, that plan
fiduciaries act prudently and solely in the interest of the plan and
its participants and beneficiaries when providing benefits to such
participants and beneficiaries and defraying reasonable expenses of
administering the plan.
---------------------------------------------------------------------------
The applicant states that if the Trust Fund is unable to purchase
the Property, it will have to consider other locations which are more
expensive and possibly not as conducive to the activities for the
proposed training facility. According to information supplied by
independent real estate appraisers,<SUP>27</SUP> the cost of purchasing
a similarly sized property suitable to the Trust Fund would be almost
twice the cost of the proposed transaction. Thus, the applicant
represents that if the Trust Fund is unable to proceed with the
proposed transaction, and if no other affordable properties are
available, the Trust Fund's existence may be in jeopardy.
---------------------------------------------------------------------------
\27\ Other sites, as stated by The Hallstrom Group, Inc. (the
Trust Fund's real estate appraiser for the Property as discussed in
Paragraph 4 above) were valued at $40 per square foot, $37.85 per
square foot, $24.73 per square foot, and $31 per square foot,
whereas the Property was determined to be $11.75 per usable square
foot. In addition, Art Balmaceda of Prudent Investors' Choice Realty
Inc., an independent realtor in Honolulu, Hawaii, investigated two
other properties for the Trust Fund. One property was 97,936 square
feet (approximately 73 percent of the size of the Property) and
valued at $2.5 million or $25.53 per square foot. The other
property, which was approximately 7.52 acres and valued at $8.9
million, was too expensive for the Trust Fund.
---------------------------------------------------------------------------
4. The Property was appraised by James E. Hallstrom, Jr., MAI, SRA,
of The Hallstrom Group, Inc. (Hallstrom), a real estate consultant and
appraisal firm located in Honolulu, Hawaii. Hallstrom determined that
the fair market value of the net usable area (i.e., approximately
133,412 square feet) of the Property was approximately $1,570,000, as
of January 31, 1997. Thus, based on Hallstrom's appraisal, the unusable
portion of the Property does not add any value to the Property. The
applicant states that in the proposed transaction the Trust Fund would
not pay any additional amount to acquire this portion of the Property.
Hallstrom utilized a sales comparison methodology in valuing the
Property. Hallstrom compared the Property with recent sales of four
other industrial zoned properties, all within immediate and/or
competitive market areas of the Property. In order to equate these four
transactions with the Property, Hallstrom made adjustments for various
comparative factors including appreciation/depreciation over time,
location, zoning, frontage/access, off-site improvements, current
easements and restrictions,<SUP>28</SUP> physical characteristics, and
size. After making the necessary adjustments, Hallstrom concluded that
the unencumbered fee simple interest in the Property would have a fair
market value of approximately $11.75 per usable square foot, which
would be rounded to a total of approximately $1,570,000. Hallstrom also
concluded that an industrial complex, such as the Trust Fund's proposed
training facility, would represent the highest and best use of the
Property.
---------------------------------------------------------------------------
\28\ Hallstrom's appraisal notes that there is a 12-foot wide
easement, in favor of the Hawaiian Electric Company, for power poles
and overhead electrical wires. However, the Hawaiian Electric
Company is currently negotiating with the Trust Fund to cancel the
existing easement and relocate it so as not to interfere with the
proposed Building.
---------------------------------------------------------------------------
5. The Union has agreed to sell the Property to the Trust Fund for
$1,570,000 in cash, subject to the review and approval of an
independent fiduciary (see Paragraph 6 below). The parties will obtain
an updated appraisal of the Property from Hallstrom at the time of the
proposed transaction to ensure that the appraised amount (i.e.,
$1,570,000) still reflects the fair market value of the Property at
that time. The parties have agreed that the Trust Fund will pay the
lesser of either: (i) $1,570,000, or (ii) the fair market value of the
Property at the time of the transaction. In addition, the applicant
states that the Trust Fund will not pay any commissions, transaction
costs, or other expenses associated with the sale of the Property by
the Union, other than the fees necessary for services of the Trust
Fund's independent fiduciary, Hawaiian Trust. Thus, the Union will pay,
among other things, the costs of the title search and title insurance
premiums, the cost of recording the deeds conveying title to the
Property to the Plan, all sales and transfer taxes (including the
conveyance tax), the escrow fees, and the cost of Hallstrom's
appraisal.
6. Hawaiian Trust has been appointed by the Fund Trustees to act as
an independent fiduciary for the Trust Fund for purposes of the
proposed transaction. Hawaiian Trust represents that it is a trust
company organized under the laws of Hawaii and that it exercises
fiduciary powers similar to those of national banks. Hawaiian Trust
states that it is an experienced fiduciary in matters concerning
employee benefit plans subject to the Act and is also experienced with
real estate transactions and investments. Hawaiian Trust acknowledges
its duties, responsibilities and liabilities in acting
[[Page 62645]]
as a fiduciary for the Trust Fund for purposes of the proposed
transaction.
Hawaiian Trust represents that it is an independent fiduciary and
not an affiliate of, or related to, the entities involved in the
subject transaction. In this regard, Hawaiian Trust certifies that: (i)
less than one (1) percent of its total deposits, or outstanding loans,
are attributable to the deposits of, or loans to, the Union and its
affiliates; and (ii) less than one (1) percent of its annual income
(measured on the basis of the prior year's income) comes from business
derived from the Union and its affiliates.
7. Hawaiian Trust has reviewed all of the terms and conditions of
the proposed purchase of the Property by the Trust Fund. Hawaiian
Trust's review and analysis included an on-site inspection of the
Property as well as meetings with the appraiser, Hallstrom, and a
thorough review of their most recent appraisal of the Property.
Hawaiian Trust states that Hallstrom's appraisal has considered all of
the factors necessary to accurately determine the fair market value of
the Property, including its location vis-a-vis Waiawa Stream, the
Hawaiian Electric Company's easement, the applicable zoning
restrictions for industrial usage, the Property's accessibility to the
Farrington Highway, and the offsite improvements surrounding the
Property.
Based of this review and analysis, Hawaiian Trust concludes that
the proposed transaction would be in the best interests of the Trust
Fund and its participants and beneficiaries. In this regard, Hawaiian
Trust states that the purchase of the Property would be a prudent
transaction taking into consideration that the Trust Fund will be using
this site as a training facility. Hawaiian Trust states that the agreed
upon purchase price of $1,570,000, based on the Hallstrom appraisal,
accurately reflects the current market value of the Property.
Hawaiian Trust states further that it will monitor the proposed
purchase of the Property by the Trust Fund and will take whatever
actions are necessary to protect the interests of the Trust Fund's
participants and beneficiaries with regard to the transaction. To this
end, Hawaiian Trust represents that it will ensure that the current
appraisal of the Property is updated at the time of the transaction and
that the Trust Fund pays no more than the fair market value of the
Property. Hawaiian Trust will also ensure that the purchase price paid
by the Trust Fund represents no more than 25 percent of the Trust
Fund's total assets at the time of the transaction.
Hawaiian Trust represents that the Trust Fund will be able to meet
all of its current expenses after the proposed transaction and that the
transaction will not adversely affect the Trust Fund's liquidity needs.
By letter dated August 22, 1997, Hawaiian Trust states that it has
reviewed the Trust Fund's most recent financial information, including
audited financial reports for the past six years, budget and financial
statements for the last three full years, and the revised budget for
the current plan year through July 31, 1997. In addition, Hawaiian
Trust states that it spoke with the Trust Fund's Investment Manager,
Brian H. Morikuni of T.M. Hogan, Inc., regarding the latest asset
valuations and investment earnings. These valuations show that the
proposed purchase price of $1.57 million should be less than 25 percent
of the Trust Fund's total assets as of December 1997 (the projected
time of closing).
Hawaiian Trust is responsible for ensuring that inspections of the
Property are conducted by appropriate professionals prior to the
transaction. These inspections will ensure that there are no hidden or
unapparent surface or subsurface conditions on the Property--including
soils, subsoils, geologic formulations, ground water or drainage
conditions--that would adversely affect improvements and the value of
the Property. Hawaiian Trust will review the latest soil analysis
<SUP>29</SUP> and environmental assessment <SUP>30</SUP> (Phase I)
reports for the Property, prior to the proposed transaction. In the
event that there are significant environmental concerns regarding the
Property (e.g. groundwater contamination exceeding State or Federal
standards), Hawaiian Trust will not approve the proposed purchase of
the Property by the Trust Fund. Hawaiian Trust will also verify the
cancellation of the Hawaiian Electric Company's easement (see Footnote
2 herein) prior to the transaction. Finally, Hawaiian Trust represents
that it will continue to review and monitor the proposed transaction
until closing to ensure that the transaction is in the best interests
of the participants and beneficiaries of the Trust Fund.
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\29\ C.W. Associates, Inc. d/b/a GeoLabs-Hawaii (GeoLabs), a
geotechnical engineering firm in Honolulu, Hawaii, was hired to
conduct a soil analysis of the Property. An October 14, 1997 letter
from GeoLabs states that the Property will support the proposed
Building utilizing spread footing foundations.
\30\ M&E Pacific, Inc. (M&E), an independent, qualified
environmental assessment firm located in Honolulu, Hawaii, has
conducted a Phase I report, as of October 1997. The purpose of the
Phase I report was to inventory the presence of potential on-site
hazardous waste or hazardous substance contamination (e.g.
hydrocarbons), and to detect potential noncompliance in relation to
current and past activities conducted on or adjacent to the
Property. According to the findings of M&E, there is no physical
evidence of environmental concerns regarding the Property. However,
two previous petroleum pipeline spills have been documented in the
vicinity of the Property. Thus, M&E recommends further groundwater
sampling on the southern boundary of the Property to determine the
extent of any contamination.
In this regard, Hawaiian Trust will ensure that appropriate
groundwater sampling tests are conducted prior to the transaction.
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8. In summary, the applicant states that the proposed transaction
will satisfy the statutory criteria of section 408(a) of the Act
because: (a) The purchase of the Property by the Trust Fund will be a
one-time transaction for cash; (b) the Trust Fund will pay no more than
the lesser of either $1,570,000, or the fair market value of the
Property as determined at the time of the transaction; (c) the fair
market value of the Property will be established by an independent,
qualified real estate appraiser; (d) the Trust Fund will not pay any
commissions or other expenses with respect to the transaction, other
than the services of an independent fiduciary (as described herein);
(e) Hawaiian Trust, acting as the Trust Fund's independent fiduciary,
has determined that the proposed transaction would be in the best
interest of the Trust Fund and its participants and beneficiaries; (f)
Hawaiian Trust will monitor the proposed transaction and will take
whatever actions are necessary to protect the interests of the Trust
Fund; and (g) the purchase price paid by the Trust Fund for the
Property will represent no more than 25 percent of the Trust Fund's
total assets at the time of the transaction.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section
[[Page 62646]]
401(a) of the Code that the plan must operate for the exclusive benefit
of the employees of the employer maintaining the plan and their
beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 19th day of November, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-30826 Filed 11-21-97; 8:45 am]
BILLING CODE 4510-29-P
