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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Moody-Day, Inc. [Notices] [11/09/1998]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Moody-Day, Inc. [11/09/1998]

[PDF Version]

Volume 63, Number 216, Page 60386-60391

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10535, et al.]

 
Proposed Exemptions; Moody-Day, Inc.

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 
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

[[Page 60387]]

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.

Moody-Day, Inc. Profit Sharing Plan, (the Plan), Located in 
Carrollton, Texas

(Application No. D-10535)

Proposed Exemption

    The Department of Labor (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).\1\ If the exemption is granted, the restrictions of sections 
406(a), 406(b)(1) and (b)(2) of the Act and the sanctions resulting 
from the application of section 4975(a) and (b) of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to 
the past sale (the Sale) by the Plan of an unimproved three-acre tract 
of real property located in Austin, Texas (the Property) to Metroport 
Realty Corporation (Metroport), an affiliate of Moody-Day, Inc., the 
Plan sponsor and a party in interest with respect to the Plan, provided 
the following conditions were satisfied:
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally 
transferred the authority of the Secretary of the Treasury to issue 
exemptions under section 4975(c)(2) of the Code to the Secretary of 
Labor. In the discussion of the exemption, references to sections 
406 and 408 of the Act should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
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    (a) the Sale was a one-time transaction for cash;
    (b) the Plan received the fair market value of the Property on the 
date of the Sale;
    (c) the Property was appraised by qualified, independent real 
estate appraisers;
    (d) a qualified, independent fiduciary determined that the Sale was 
in the best interests of the Plan; and
    (e) the Plan paid no commissions or other expenses relating to the 
Sale.

    Effective Date of Exemption: If granted, the effective date of this 
exemption will be May 24, 1995.

Summary of Facts and Representations

    1. The Applicants are Donald J. Carter, William J. Hendrix, and M. 
Douglas Adkins in their capacity as trustees (Trustees) of the Moody-
Day, Inc. Profit Sharing Plan, and Ronald L. Carter and Jeffery Fink 
who were directors of Moody-Day, Inc. (Moody-Day) on the date of the 
Sale.
    2. The Applicants state that the Plan is a defined contribution 
plan which had 50 participants as of the end of the 1994 Plan year. The 
Applicants state further that at the time of consummation of the Sale, 
the fair market value of the total assets of the Plan was $217,545. The 
fair market value of the Property was determined to be $165,000 (see 
paragraph 8 below) at that time. Thus, approximately 76% of the Plan's 
assets was involved in the subject transaction.\2\
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    \2\ It is represented that a high percentage of the Plan's 
assets was involved in the Sale because the Property was one of the 
only remaining assets of the Plan at the time of the transaction. In 
this regard, the Sale was carried out in connection with completing 
the affairs of the Plan for termination.
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    3. The Property was owned by the Plan at the time of the Sale free 
and clear of any encumbrances. The Property consists of approximately 3 
acres of unimproved land at the Northeast corner of Middle Fiskville 
Road and Northcape Drive in the City of Austin, Travis County, Texas. 
The Property was not adjacent to any property owned by the Plan sponsor 
or a party in interest with respect to the Plan.
    The Property was acquired by the Plan in 1977 from an unrelated 
party, for $47,154. The Applicants represent that the Property has been 
held by the Plan since it was acquired in 1977 and it has not been 
leased to or used by any party in interest or other related party 
during such time.\3\
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    \3\ The Department expresses no opinion herein regarding whether 
the acquisition and holding of the Property by the Plan violated any 
of the provisions of Part 4 of Title I of the Act. The Department is 
providing no retroactive exemptive relief herein with respect to the 
acquisition and holding of the Property by the Plan.
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    4. The Applicants represent that the motivation for the Sale of the 
Property by the Plan to Metroport was solely to benefit the Plan's 
participants and beneficiaries. The Plan had been frozen since 1991 and 
the participants and beneficiaries were requesting that distributions 
of their assets be made. The Plan had tried, without success, to sell 
the Property on the open market since 1989. The Applicants represent 
that the Sale of the Property was in the best interests of the Plan and 
its participants and beneficiaries. At the time of the Sale, the 
Property was the last remaining asset of the Plan. Thus, the Sale 
provided the necessary liquidity to allow for a termination of the Plan 
and a final distribution of its assets.
    Prior to the Sale, the Applicants were advised by their legal 
counsel (Counsel) that the Property could be sold to Metroport pursuant 
to Prohibited Transaction Exemption (PTE) 84-14 (49 FR 9494, March 13, 
1984), a class exemption for certain prohibited transactions by a plan 
whose assets are managed by a ``qualified professional asset manager'' 
or ``QPAM'' (the QPAM Exemption).\4\ The Applicants represent that they 
now believe that the conditions of PTE 84-14 may not have been 
satisfied with respect to the Sale. As a result, they request that the 
Department consider granting an individual exemption under section 
408(a) of the Act, which would be effective as of May 24, 1995, the 
date of the Sale.
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    \4\ PTE 84-14 provides relief from the restrictions of section 
406(a) of the Act for transactions between parties in interest and 
plans where a QPAM (as defined in Part V(a) of that class exemption) 
is the decision-maker for the assets of the plan involved, and 
certain other conditions are met.
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    5. In order to fulfill what the Applicants, Moody-Day, Inc., 
Metroport and Counsel believed to be the requirements of PTE 84-14 with 
respect to the Sale, on or about December 19, 1994, the Applicants, on 
behalf of the Plan, hired Lucian L. Morrison (Mr. Morrison) as an 
independent fiduciary for the purpose of appointing a QPAM to sell the 
Property owned by the Plan. Prior to this time, Counsel had contacted 
Mr. Morrison, the past President of Heritage Trust Company in Houston, 
Texas, with regard to his willingness to act as an independent 
fiduciary for the Plan. Counsel, on behalf of the Applicants, had 
contacted Mr. Morrison because he had acted in a fiduciary capacity in 
a number of

[[Page 60388]]

situations for various entities. On July 11, 1994, Counsel informed the 
Applicants that Mr. Morrison was willing to act on behalf of the Plan 
in appointing a QPAM to have investment discretion with respect to the 
Sale. Counsel advised Moody-Day and the Applicants that in order to 
comply with PTE 84-14, the Sale would proceed as follows:
    (1) Mr. Morrison would appoint a QPAM to represent the Plan with 
respect to the potential sale of the Property;
    (2) the QPAM would hire its own appraiser or appraisers and 
attorney to represent it in the transaction and, if appropriate, to 
negotiate the terms of the sale between the Plan and Metroport; and
    (3) after the final terms of any transaction were negotiated and 
approved, the sale would close with all appropriate documents properly 
executed.
    Therefore, on December 19, 1994, Mr. Morrison was engaged as an 
independent fiduciary of the Plan to select and hire a QPAM to evaluate 
the proposed transaction and to negotiate the terms thereof. Mr. 
Morrison had full authority to select the QPAM and to allocate a 
portion of his fiduciary authority to the QPAM. No recommendations for 
the selection of the QPAM were made by either Moody-Day, the 
Applicants, or any other party in interest with respect to the Plan.
    6. On December 19, 1994, a ``Limited Purpose Independent Fiduciary 
Agreement'' (the Limited Agreement) was formally entered into between 
Moody-Day, the Trustees, and Mr. Morrison. The purpose of the Limited 
Agreement was to facilitate the Sale of the Property. The Limited 
Agreement stated that the Sale would be a prohibited transaction unless 
an exemption from the prohibited transaction rules of the Act was 
utilized. The Limited Agreement further specified that the QPAM 
Exemption was available for this purchase if the conditions of that 
exemption were met.\5\
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    \5\ In this regard, Part I(a) of PTE 84-14 provides that:
    (a) At the time of the transaction (as defined in section V(i)) 
the party in interest, or its affiliate (as defined in section 
V(c)), does not have, and during the immediately preceding one year 
has not exercised, the authority to--
    (1) Appoint or terminate the QPAM as a manager of any of the 
plan's assets, or (2) negotiate the terms of the management 
agreement with the QPAM (including renewals or modifications 
thereof) on behalf of the plan; * * *
    Part I(c) of PTE 84-14 provides that:
    (c) The terms of the transaction are negotiated on behalf of the 
investment fund by, or under the authority and general directions 
of, the QPAM, and either the QPAM or (so long as the QPAM retains 
full fiduciary responsibility with respect to the transaction) a 
property manager acting in accordance with written guidelines 
established and administered by the QPAM, makes the decision on 
behalf of the investment fund to enter into the transaction, 
provided that the transaction is not part of an agreement, 
arrangement or understanding designed to benefit a party in 
interest; * * *
    Part V(c)(3) of PTE 84-14 provides, in relevant part, that a 
named fiduciary (within the meaning of section 402(a)(2) of the Act) 
of a plan and an employer any of whose employees are covered by the 
plan will also be considered affiliates with respect to each other 
for purposes of Part I(a) if such an employer * * * has the 
authority * * * to appoint or terminate the named fiduciary or 
otherwise negotiate the terms of the named fiduciary's employment 
agreement.
    Section 402(a) of ERISA provides that every employee benefit 
plan shall be established and maintained pursuant to a written 
instrument. This instrument must provide for one or more named 
fiduciaries who have the authority to control and manage the 
operation and administration of the plan. Under sections 402(c)(3) 
and 403(a) of ERISA, only a named fiduciary has the authority to 
appoint an investment manager, and such an appointment may be made 
only as specifically provided in the plan instrument.
    The preamble to the proposed class exemption, 47 FR 56945 at 
56947 (December 21, 1982), explains that the Department is prepared 
to grant broad exemptive relief only where an independent asset 
manager has, and in fact exercises, discretionary authority to cause 
an investment fund to enter into a transaction which is otherwise 
prohibited. Party in interest transactions that are negotiated by, 
e.g., an employer which sponsors a plan, and are then presented to a 
QPAM for approval would not qualify for the class exemption as 
proposed.
    It is the view of the Department that the retention of a QPAM 
solely to approve a specific transaction presented for its 
consideration by a plan sponsor at the time of its engagement is 
inconsistent with the underlying intent of the exemption, i.e., the 
transfer of plan assets to an independent, discretionary manager 
free from the undue influence of the sponsor. Such a transaction 
also raises issues under section I(c) of the exemption which 
requires that the transaction not be a part of an agreement, 
arrangement or understanding designed to benefit a party in 
interest.
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    Mr. Morrison accepted his appointment as a limited purpose 
independent fiduciary and agreed to act as provided for under the 
Limited Agreement, the Plan Document, and the Act. Mr. Morrison 
selected Sarofim Realty Advisors (SRA) as a ``QPAM'' to transact the 
Sale of the Property by the Plan. SRA, as a fiduciary of the Plan, 
served as investment manager with exclusive investment discretion over 
the Property. The Applicants represent that SRA, as fiduciary of the 
Plan, was not related to or otherwise affiliated with Moody-Day, Inc., 
Metroport, Counsel or the Applicants.
    7. On December 22, 1994, Mr. Morrison, SRA and Moody-Day entered 
into an ``Investment Management Agreement'' (the IMA). As independent 
fiduciary, Mr. Morrison appointed SRA as an Investment Manager (IM) of 
the Plan for purposes of the proposed transaction. In Section 2 of the 
IMA, SRA acknowledged that in acting as an IM under the IMA, it would 
be acting as a fiduciary of the Plan as defined under section 3(21) of 
the Act. Section 4 of the IMA provides, in pertinent part, that the IM 
shall: (1) Evaluate the proposed transaction and, if appropriate; (2) 
negotiate the terms of the Sale. Section 4 also provides that the IM 
shall sell the Property to Metroport if, in the IM's judgement, the 
sale price negotiated by the IM represented the fair market value of 
the Property as determined by the IM after considering one or more 
appraisals obtained from qualified, independent appraisers. Finally, 
section 6 of the IMA provides that the agreement shall terminate on the 
closing date of the proposed sale in the event that the IM directs the 
Plan to enter into the sale of the Property to Metroport.
    8. In order to determine the fair market value of the Property, 
SRA, in its capacity as IM, retained the independent appraisal firm of 
Bach Thoreen McDermott, Inc., of Houston, Texas, to appraise the 
Property. Mr. Steven N. Bach (Mr. Bach), MAI, prepared the appraisal 
that was used to establish the value of the Property for the Sale. 
<SUP>6</SUP> Using the Sales Comparison Approach (i.e. which relied on 
recent sales of similar properties in the open market) to value the 
Property, Mr. Bach determined that the fair market value of the 
Property, as of January 30, 1995, was $165,000. Mr. Bach reported his 
finding to SRA on the same date.
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    \6\ SRA also secured an appraisal from Crosson Dennis, Inc., an 
independent real estate appraisal firm, who determined that the 
Property had a fair market value of $95,000 as of December 22, 1994. 
However, after consulting with Counsel and the Trustees, SRA 
selected Mr. Bach for the purpose of securing a second appraisal of 
the Property.
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    9. On February 1, 1995, SRA in its capacity as IM, opined that 
$165,000 represented the fair market value of the Property and 
determined that the Sale to Metroport at that price would be in the 
best interests of the Plan and its participants and beneficiaries.
    10. Pursuant to SRA's findings and instructions for the Sale, the 
Plan sold the Property to Metroport for $165,000 in cash on May 24, 
1995. In this regard, a Special Warranty Deed conveying title to the 
Property from the Plan to Metroport was signed on May 24, 1995 by a 
Trustee of the Plan. With respect to the Sale, the Plan paid no 
commissions or other expenses.
    Moody-Day represents that all parties involved in the Sale 
recognized that Metroport was paying the Plan an amount which 
represented no less than the current fair market value of the Property.
    11. In summary, the Applicants represent that the requested 
exemption

[[Page 60389]]

will satisfy the criteria of section 408(a) of the Act for the 
following reasons: (a) The Sale was a one-time transaction for cash; 
(b) the Plan received the fair market value of the Property on the date 
of the Sale; (c) the fair market value of the Property was determined 
by an independent, qualified real estate appraiser at the time of the 
Sale; (d) a qualified, independent fiduciary acting on behalf of the 
Plan appointed an independent investment manager who negotiated the 
terms of the transaction, determined that the Sale was in the best 
interests of the Plan, and assured that the Plan received an amount in 
cash equal to the fair market value of the Property; and (e) the Plan 
paid no commissions or other expenses relating to the Sale.

FOR FURTHER INFORMATION CONTACT: Janet L. Schmidt of the Department, 
telephone (202) 219-8883. (This is not a toll-free number.)

Mohammad J. Iqbal Employee Profit Sharing Plan and Trust (the 
Plan), Located in Elizabethtown, KY

(Application Number D-10614)

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). If the exemption is 
granted the restrictions of 406(a), 406(b)(1) and (b)(2) of the Act and 
the sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c)(1)(A) through (E) of the Code, shall 
not apply to the proposed cash sale (the Sale) of 12 Krugerrand gold 
coins (the Coins) by the individually directed account (the Account) in 
the Plan of Dr. Mohammad J. Iqbal (Dr. Iqbal), to Dr. Iqbal, a party in 
interest and disqualified person with respect to the Plan, provided 
that the following conditions are met:
    (a) The Sale is a one-time transaction for cash;
    (b) The terms and conditions of the Sale are as least as favorable 
to the Account as those obtainable in an arm's length transaction with 
an unrelated party;
    (c) The Account receives the fair market value of the Coins as of 
the date of Sale; and
    (d) The Account is not required to pay any commissions, costs, or 
other expenses in connection with the Sale.

Summary of Facts and Representations

    1. The Plan is a defined contribution profit-sharing plan that 
provides its 3 participants with the opportunity to direct the 
investment of their individual accounts. The Plan is sponsored by Dr. 
Iqbal, who also serves as Plan Trustee and Plan Administrator. As of 
December 31, 1997, the Plan held assets valued at approximately 
$2,199,000. As of the same date, Dr. Iqbal's Account held assets valued 
at approximately $2,110,000.
    2. Among the assets in the Account are 12 Krugerrand gold coins. 
The Coins, issued by the South African government, were purchased by 
the Account on March 6, 1992, for $4,848 from the Gumer & Company 
brokerage firm located in Louisville, Kentucky.<SUP>7</SUP> As of 
Friday, October 23, 1998, the asking price in the Wall Street Journal 
was $300 per coin.
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    \7\ The applicant represents that, at the time of the original 
acquisition, the Plan was not an ``individually directed account 
plan.'' The Department notes that section 408(m) of the Code 
provides, in pertinent part, that ``[t]he acquisition * * * by an 
individually-directed account under a plan described in section 
401(a) of any collectible shall be treated (for purposes of this 
section and section 402) as a distribution from such account in an 
amount equal to the cost to such account of such collectible.'' 
Section 408(m)(2)(A) includes coins in the definition of the term 
collectible. In this regard, the Department is not providing any 
exemptive relief to the extent section 408(m) is applicable to the 
facts in this case.
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    3. The applicant requests an exemption for the proposed Sale of the 
Coins by the Account to Dr. Iqbal. Dr. Iqbal represents that he will 
pay fair market value for the Coins on the date of the Sale, as 
determined by the asking price listed in the ``Cash Prices'' table in 
the Wall Street Journal on such date. The applicant wishes to engage in 
the proposed transaction because the Coins have steadily declined in 
value.<SUP>8</SUP> Dr. Iqbal wishes to have the Account reinvest the 
proceeds from the proposed Sale in assets which may generate a higher 
rate of return.
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    \8\ The Department expresses no opinion in this proposed 
exemption as to whether the acquisition and the subsequent holding 
of the Coins by the Account violated any of the fiduciary 
responsibility provisions of Part 4 of Title I of the Act.
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    4. The applicant represents that the proposed transaction would be 
administratively 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 Account because the Sale of the Coins 
would enable the Account to invest the proceeds from the Sale in other 
assets and potentially achieve 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 
Account will receive the fair market value of the Coins as of the date 
of Sale, and will incur no commissions, costs or other expenses as a 
result of the Sale.
    5. In summary, the applicant represents that the proposed 
transaction satisfies the statutory criteria of section 408(a) of the 
Act and section 4975(c)(2) of the Code because: (a) The Sale will be a 
one-time transaction for cash; (b) the terms and conditions of the Sale 
will be at least as favorable to the Account as those obtainable in an 
arm's length transaction with an unrelated party; (c) the Account will 
receive the fair market value of the Coins as of the date of Sale; and 
(d) the Account will not be required to pay any commissions, costs, or 
other expenses in connection with the Sale.
    Notice to Interested Persons: Because Dr. Iqbal is the only 
participant to be affected by the proposed transaction, it has been 
determined that there is no need to distribute the notice of proposed 
exemption to (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.)

Individual Retirement Accounts (Collectively, the IRAs) for William 
N. Albright, Victor Hamre, and Richard Pearson, (Collectively, the 
Participants) Located in Westerville, Ohio; Chicago, Illinois; and 
New York, New York, Respectively

(Application No. D--10656, 10657, 10658)

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 sales (the Sales) of certain shares of stock (the Stock) in the 
First Community Bancshares Corp. (First Community) by each IRA to its 
respective Participant, a disqualified person with respect to the 
IRA,<SUP>9</SUP> provided that the following conditions are met:
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    \9\ There is no jurisdiction under 29 CFR Sec. 2510.3(b) since 
the IRAs have only one participant. However, there is jurisdiction 
under Title II of the Act pursuant to section 4975 of the Code.
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    (a) The terms and conditions of the Sales will be at least as 
favorable to each

[[Page 60390]]

IRA as those obtainable in arm's length transactions with an unrelated 
party;
    (b) The Sales will be one-time transactions for cash;
    (c) The IRAs will receive the fair market value of the Stock as 
established by a qualified, independent appraiser; and
    (d) The IRAs will pay no commissions, costs or other expenses with 
respect to the Sales.

Summary of Facts and Representations

    1. The IRAs are individual retirement accounts, as described in 
Section 408(a) of the Code. Each IRA owns shares of Stock in First 
Community. First Community is a bank holding company located in Milton, 
Wisconsin with 230,789 shares of Stock issued and outstanding. First 
Community's primary assets are First Community's 100% ownership of two 
banks: Citizens Savings Bank located in Anamosa, Iowa with 
approximately $37.6 million in total assets and First Community Bank 
located in Milton, Wisconsin with approximately $62.7 million in total 
assets.
    2. The Participants of the IRAs are: William N. Albright, the 
president of First Community Bank; Victor Hamre, the president of 
Citizens Savings Bank; and Richard Pearson, a director at both First 
Community Bank and Citizens Savings Bank. The Participants describe the 
IRAs as follows:
    (a) The IRA of William N. Albright (the Albright IRA) currently 
holds total assets valued at approximately $289,538. The Albright IRA's 
ownership of 9,200 shares of the Stock comprises 99.74% of the Albright 
IRA's total assets and represents a 3.99% interest in First 
Community.<SUP>10</SUP> The Albright IRA acquired the Stock in 1995 for 
investment purposes from an existing First Community shareholder for 
$23.00 per share.
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    \10\ The Department notes that the Internal Revenue Service has 
taken the position that a lack of diversification of investments may 
raise questions with respect to the exclusive benefit rule under 
section 401(a) of the Code. See, e.g. Rev. Rul. 73-632, 1973-2 C.B. 
128. The Department further notes that section 408(a) of the Code, 
which describes the tax qualification provisions for IRAs, mandates 
that a trust be created for the exclusive benefit of an individual 
or his beneficiaries. However, the Department is expressing no 
opinion in this proposed exemption regarding whether violations of 
the Code have taken place with respect to the purchase and 
subsequent retention of the Stock by the Participants.
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    (b) The IRA of Victor Hamre (the Hamre IRA) currently holds total 
assets valued at approximately $82,907. The Hamre IRA's ownership of 
1,087 shares of the Stock comprises 41.16% of the Hamre IRA's total 
assets and represents a 0.47% interest in First Community. The Hamre 
IRA acquired the Stock in 1995 for investment purposes from an existing 
First Community shareholder for $23.00 per share.
    (c) The IRA of Richard Pearson (the Pearson IRA) currently holds 
total assets valued at approximately $413,084. The Pearson IRA's 
ownership of 5,941 shares of the Stock comprises 41.73% of the Pearson 
IRA's total assets and represents a 2.57% interest in First Community. 
The Pearson IRA acquired the Stock for investment purposes from First 
Community when First Community issued new shares in 1991 and 1992 for 
$17.15 and $19.14 per share, respectively.<SUP>11</SUP>
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    \11\ To the extent that First Community or other sellers of the 
Stock were not disqualified persons with respect to the IRAs under 
section 4975(e)(2), the purchase of the Stock by the IRAs does not 
constitute a prohibited transaction under section 4975(c)(1)(A) of 
the Code. However, the purchase and holding of the Stock raises 
questions under section 4975(c)(1)(D) and (E) depending on the 
degree (if any) of the IRA participant's interest in the 
transaction. Section 4975(c)(1)(D) and (E) of the Code prohibits the 
use by or for the benefit of a disqualified person of the assets of 
a plan and prohibits a fiduciary from dealing with the assets of a 
plan in his own interest or for his own account. The IRA sponsors, 
as presidents or director of the First Community Bank or Citizens 
Savings Bank, may have interests in the proposed transactions which 
may have affected their best judgment as fiduciaries of their IRAs. 
In such circumstances, the transactions may have violated 
4975(c)(1)(D) and (E) of the Code. See Advisory Opinion 90-20A (June 
15, 1990). Accordingly, to the extent there were violations of 
section 4975(c)(1)(D) and (E) of the Code with respect to the 
purchases and holdings of the Stock by the IRAs, the Department is 
extending no relief for these transactions herein.
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    3. The Participants represent that business considerations have 
recently caused First Community to elect to be taxed as a Subchapter S 
corporation. This election is tentatively scheduled to become effective 
as of the close of business on December 31, 1998. The Participants 
propose to purchase the Stock from their respective IRAs to avoid the 
violation of section 1361 of the Code which prohibits IRAs from holding 
stock in a Subchapter S corporation.
    4. Mr. Kent Fisher and Mr. Neal Richardson (collectively, the 
Appraisers) appraised the Stock on June 30, 1998. The Appraisers are 
both experienced business appraisers for Lindgren, Callihan, Van Osdol 
& Co., Ltd., an appraisal company independent of the IRAs and the 
Participants. The Appraisers represent that they have no present or 
contemplated financial interest in First Community and their fees were 
not contingent upon the results of their findings. In their evaluation 
of the Stock, the Appraisers relied solely on the Private Market 
Method.<SUP>12</SUP> The Appraisers concluded that the fair market 
value of the Participants' interest in the non-marketable, non-
controlling Stock was $31.39 per share.<SUP>13</SUP>
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    \12\ Although the Appraisers considered the Public Market Method 
in their evaluation, they determined that this method was too 
difficult to implement due to First Community's geographic location 
and financial structure. The Appraisers additionally considered the 
prices paid for the Stock in previous Stock purchases but determined 
that there were no recent purchases which would provide an accurate 
valuation of the Stock.
    \13\ The Appraisers calculated the price of the Stock by first 
adjusting the equity levels of a comparable group of recently sold 
banks to reflect 8% or ``normal'' capitalization levels. The 
Appraisers then determined the average price to ``normal'' equity 
ratio for this group of banks and multiplied this ratio against 
First Community's adjusted book value. After subtracting First 
Community's debt from this amount to calculate First Community's 
value, this value was then divided by the number of outstanding 
shares to determine the Stock's price per share. Finally, the 
Appraisers discounted the resulting price per share to reflect the 
Stock's non-marketable and non-controlling nature.
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    5. The Participants propose to purchase the Stock from their 
respective IRAs in one-time transactions for cash. The Participants 
represent that the Sales will be in the best interest of the IRAs 
because the Sales will allow for greater diversification of the IRAs' 
assets and the Stock will be purchased at a price per share greater 
than the price per share initially paid by the IRAs. Additionally, the 
Participants represent that the Sales will be protective of the rights 
of each IRA's participant because each IRA will receive cash equal to 
the fair market value of the Stock, as determined by a qualified, 
independent appraiser, and each IRA will incur no commissions, costs, 
or other expenses as a result of the Sales.
    6. In summary, the Participants represent that the Sales satisfy 
the statutory criteria of section 4975(c)(2) of the Code because:
    (a) The terms and conditions of the Sales will be at least as 
favorable to each IRA as those obtainable in arm's length transactions 
with an unrelated party;
    (b) The Sales will be one-time transactions for cash;
    (c) The IRAs will receive the fair market value of the Stock as 
established by a qualified, independent appraiser; and
    (d) The IRAs will pay no commissions, costs or other expenses with 
respect to the Sales.
    Notice to Interested Persons: It has been determined that there is 
no need to distribute the notice of proposed exemption (the Notice) to 
interested persons since the Participants are the only participants in 
the IRAs. Comments and requests for a hearing are

[[Page 60391]]

due thirty (30) days after publication of the Notice in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Mr. Christopher J. Motta of the 
Department, telephone (202) 219-8881. (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 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 4th day of November, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 98-29962 Filed 11-5-98; 8:45 am]
BILLING CODE 4510-29-P