Grant of Individual Exemption; Plumbers and Pipe Fitters National
Pension Fund (the Fund), Located in Alexandria, VA [Notices] [11/15/1999]
Grant of Individual Exemption; Plumbers and Pipe Fitters National
Pension Fund (the Fund), Located in Alexandria, VA [11/15/1999]
Volume 64, Number 219, Page 61944-61947
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 99-46; Exemption Application No. D-
10514]
Grant of Individual Exemption; Plumbers and Pipe Fitters National
Pension Fund (the Fund), Located in Alexandria, VA
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemption.
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SUMMARY: This document contains an exemption issued by the Department
of Labor (the Department) 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).
Notice was published in the Federal Register of the pendency before
the Department of a proposal to grant such exemption. The notice set
forth a summary of facts and representations contained in the
application for exemption and referred interested persons to the
respective application for a complete statement of the facts and
representations. The application has been available for public
inspection at the Department in Washington, D.C. The notice also
invited interested persons to submit comments on the requested
exemption to the Department. In addition the notice stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicant has represented that it has
complied with the requirements of the notification to interested
persons.
The notice of proposed exemption was issued and the exemption is
being granted solely by the Department because, 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 proposed to the Secretary of
Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department finds that the exemption is:
(a) Administratively feasible;
(b) In the interests of the plan and its participants and
beneficiaries; and
(c) Protective of the rights of the participants and beneficiaries
of the plan.
Plumbers and Pipe Fitters National Pension Fund (the Fund), Located
in Alexandria, VA
[Prohibited Transaction Exemption 99-46 Application No. D-10514]
Exemption
The restrictions of sections 406(a)(1)(A), 406(a)(1)(B),
406(a)(1)(D), 406(b)(1), and 406(b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (E) of the Code <SUP>*</SUP> shall
not apply, effective October 9, 1997, to the transfer to the Fund from
the United Association of Journeymen and Apprentices of the Plumbing
and Pipe Fitting Industry of the United States and Canada, AFL-CIO (the
Union), a party in interest with respect to the Fund, of the Union's
limited partnership interests in Diplomat Properties, Limited
Partnership (the Partnership), the sole asset of which is the Diplomat
Resort
[[Page 61945]]
and Country Club (the Property); and to the transfer to the Fund of the
Union's holding of stock in Diplomat Properties, Inc., the corporate
general partner of such Partnership, in consideration for a capital
contribution by the Fund to the Partnership in the amount of $40
million dollars, plus reasonable costs incurred by the Union in
purchasing the Property, and in consideration for the release of a
certain loan obligation of the Partnership which was guaranteed by the
Union and collateralized by Union assets; provided that:
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\*\ 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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(1) The transaction was a one-time transaction;
(2) An independent fiduciary (the I/F) which has the following
qualifications acted on behalf of the Fund:
(a) The I/F is an individual, group of individuals, or a business
entity which has substantial experience and expertise in the commercial
real estate field;
(b) Neither the I/F nor any of its affiliates have any ownership or
other interest in the Union or its affiliates, nor does the Union or
any of its affiliates have any ownership interest in the I/F or its
affiliates; and
(c) Neither the I/F nor its affiliates engages in any business
transactions with the Union or its affiliates.
(3) Prior to the Fund entering the transaction, the I/F reviewed
and approved the terms of the transaction, determined that the
transaction was an appropriate investment for the Fund, that the amount
paid by the Fund to acquire ownership of the Property through the
Partnership was appropriate and fair, that the total costs incurred
were necessary for the acquisition of the Property and were reasonable,
and that the transaction was in the best interest of the Fund and its
participants and beneficiaries;
(4) The fair market value of the Property held by the Partnership
was determined by an independent, qualified appraiser, as of the date
of the transaction;
(5) The Fund paid no fees or commissions as a result of the
transaction; and
(6) The terms of the transaction were no less favorable to the Fund
than those it would have received under similar circumstances when
negotiated at arm's length with unrelated third parties.
Effective Date: The exemption is effective October 9, 1997.
Written Comments
In the Notice of Proposed Exemption (the Notice), the Department
invited all interested persons to submit written comments and requests
for a hearing on the proposed exemption within 45 days of the date of
the publication of the Notice in the Federal Register on May 29, 1998.
All comments and requests for hearing were due by August 3, 1998.
During the comment period, the Department received four (4)
requests for a hearing. The Department has considered the concerns
expressed by the individuals who have requested a hearing. After due
deliberation, the Department does not believe that any issues have been
raised by the commentators which would require the convening of a
hearing.
The Department received letters from 65 interested persons
commenting on the proposed transaction. At the close of the comment
period, the Department forwarded copies of these letters to the
applicant for response. The applicant responded in writing to the
various concerns raised by the commentators. A description of the
comments and the applicant's responses thereto are summarized below.
1. Many commentators questioned whether the acquisition, holding,
and redevelopment of the Property by the Fund was an appropriate
investment. In this regard, some commentators opined that real estate
is a poor investment and that either hotels, in general, and/or the
Property, in particular, which is the subject of the exemption, are
poor real estate investments. Further, some commentators were concerned
about the prudence and/or risks associated with the acquisition of the
Property by the Fund in what commentators perceived to be a declining
hotel market. Other commentators expressed concerns about the
rehabilitation costs of the Property and questioned whether the Fund
could make a profit where previous owners of the Property had failed.
In this regard, a number of commentators noted that the cost to the
Fund to repair and redevelop the Property would likely exceed the $40
million expended by the Fund in acquiring the Partnership which holds
title to the Property. Finally, a commentator was concerned about the
loss to the Fund that might result from damage to the Property because
of hurricanes.
Other commentators were concerned about conflicts of interest
arising in connection with the use of the Property or the operations of
the Partnership. In this regard, it was alleged by several commentators
that the purchase of the Property was an effort to divert plan assets
to benefit private individuals. Another commentator alleged that the
Property was acquired for the personal use of union officials. One
commentator noted that ``there would be too great of a chance of graft
and unwise decisions to enter in this venture.'' Another commentator
questioned whether ``outside investors'' could become involved in the
Partnership.
In response to these concerns raised by the commentators, the
trustees of the Fund (the Trustees) have agreed to a number of
additional requirements, including the retention by the Fund of an
independent named fiduciary to oversee the Fund's investment in the
Property. A term sheet dated October 13, 1999, attached as part of the
representations made to the Department in a letter dated October 29,
1999 on behalf of the Trustees, details these additional requirements
and the retention of the independent named fiduciary. In this regard,
the Trustees will undertake such actions as are required, including
amendment of the Trust Agreement, and entering into a services
contract, to appoint Actuarial Sciences Associates (ASA) as named
fiduciary of the Fund account which holds the Partnership, Diplomat
Properties, Inc. (the general partner of the Partnership) (the GP), and
other assets of the Fund either invested in or awaiting investment in
the Property (collectively, the Diplomat Account).
ASA's services contract shall be subject to approval by the
Secretary of Labor (the Secretary). The performance of ASA's services
and responsibilities shall commence on the date when this exemption is
executed by the Secretary or her delegate. Upon the effective date of
the services contract, ASA or its designees will be substituted for the
current board and officers of the GP. The parties agree to provide to
the Secretary such information related to the Diplomat project as may
be requested in order to perform her duties under the Act.
Pursuant to the terms of such services contract, ASA shall have
full and complete authority, control, and discretion with respect to
the construction, use and/or sale of the Property and all of its
components, including, but not limited to, authority to cease or modify
any construction, sell or lease any component of the project or the
entire project, terminate or modify any or all existing contractual
relationships, enter into new contracts and perform whatever other
tasks might be necessary to maximize the financial return to the Fund
of its investment in the Partnership. ASA shall (and shall have the
authority to) retain on its own behalf or on behalf of the Fund or the
Partnership, or continue the retention of, such individuals and
entities as ASA determines are necessary and appropriate for ASA to
carry out its responsibilities under the services contract consistent
with its fiduciary
[[Page 61946]]
duties under the Act with respect to the Fund.
ASA shall not be responsible for fiduciary breaches, if any, which
occurred prior to its appointment, but shall use its best efforts to
mitigate any losses arising from such breaches. ASA shall be
responsible for any losses caused by its own breaches of fiduciary
responsibility, and by the breaches of others as provided in the Act or
as set forth below.
ASA will be retained for a period of three (3) years from the date
of the issuance of the exemption unless removed by the Trustees with
the concurrence of the Department or pursuant to a court order for
cause. In this regard, ``cause'' shall mean a material breach by ASA of
its services contract with the Fund, a breach of fiduciary duty under
the Act by ASA with respect to the Fund, a change in control of ASA, or
the bankruptcy or insolvency of ASA. If ASA is removed during such
three-year period, the Trustees shall appoint a replacement named
fiduciary that is acceptable to the Department and shall designate such
acceptable replacement and arrange for its acceptance of responsibility
prior to the effective date of the removal. ASA may not resign during
such three-year period prior to the designation of a replacement
acceptable to the Department.
The Trustees will instruct the custodian of the Fund to transfer to
the Diplomat Account any additional amounts requested by ASA for the
operations or expenses of the Diplomat Account or the Partnership, so
long as the total amount of Fund assets at risk (i.e., the Fund's
investment in the Partnership plus any recourse debt in excess of the
value of the assets in the Partnership) does not exceed 13 percent of
the Fund assets at the time of the transfer.
ASA will be reimbursed for expenses to the extent permitted under
the Fund's guidelines for expense reimbursement (the Guidelines). The
auditor for the Fund will review annually ASA's expense reimbursement
for compliance with the Guidelines.
ASA will request and Department will expeditiously consider a
separate exemption that will permit ASA to act as a QPAM with respect
to the Diplomat Account, to be retroactively effective as of the date
that ASA's appointment is effective.
ASA will be permitted to retain, or continue the existing services
of, such third party service providers as it deems appropriate. To the
extent that ASA retains or continues to retain any such service
providers to carry out any functions currently contained in the
contracts of Saylor, Driscoll, and Structure Tone, Inc., with respect
to the Diplomat Account, the Partnership or the successor(s) thereof,
ASA shall indemnify the Fund for any losses or damages resulting from
the fiduciary breaches of such service providers which occur subsequent
to the appointment of ASA. ASA shall not be precluded from obtaining
indemnification from any such service providers or from exercising any
rights that the Fund has for indemnification under its existing
agreements with any service providers and collecting any damages owed
to the Fund. To the extent that the Fund, directly or indirectly,
maintains a controlling interest in the underlying assets of the
Partnership, or any successor(s) thereof, ASA will continue to exercise
control over the Partnership, its successor(s) and any general partner
thereof, including acting as or designating the board of directors and
officers of said Partnership, successor(s) or general partner. In the
event that the fiduciary responsibility provisions of the Act no longer
apply to the underlying assets of the Partnership or its successor(s),
and in the event that the Fund, directly or indirectly, maintains a
controlling interest in the Partnership or its successor(s), ASA or
such designees for whom ASA agrees to take full responsibility, shall
make, and shall retain full responsibility for: all decisions regarding
the purchase, sale, acquisition, exchange, lease, or encumbrance or
sale and leaseback of any real property owned by the Partnership and of
any personalty for which the transaction cost, or series of related
transaction costs, exceeds $1,000,000; all decisions regarding brand
affiliation for the hotel or any other piece of Partnership Property;
and all decisions to assign or lease general management responsibility
over the Partnership Property or any major component thereof.
2. One commentator asked why Chadwick, Saylor & Co. Inc. (CSC) had
rendered its September 1997 opinion ``without all of the information
that was available.'' In response, the applicant represents that
although the Partnership's consultants and advisors were in the process
of finalizing certain economic and financial models for the project,
CSC's opinion was rendered utilizing all ``available'' information.
Further, the applicant maintains that there was sufficient information
at the time for CSC to determine that the transaction was a prudent
investment for the Fund.
3. One commentator asked what would happen if the exemption were
not granted. Another commentator asked why the transaction did not
include a contingency clause relating to the requested prohibited
transaction exemption. In response, the applicant expressed its
understanding that in the event the exemption were denied, the Fund's
transaction with the Union must be rescinded, pursuant to the
Department's regulations and applicable law. Further, the applicant
stated that the terms of the Fund's acquisition of the Property did not
contain a contingency clause, because the applicant believed and
intended that the transaction would satisfy the Department's
requirements for an administrative exemption.
4. One commentator questioned whether the transaction was a way for
the Fund to finance alleged losses of the Union Labor Life Insurance
Company (ULLICO) in which the Fund had invested some of its assets. In
response, the applicant represents that the Fund acquired the Property
solely as an investment for the exclusive benefit of participants and
beneficiaries of the Fund. It is represented that the transfer of the
Property to ULLICO, then to the Union, and finally from the Union to
the Fund was in no way intended to finance ULLICO financial losses, if
any, nor were such transactions related to any investment that the Fund
has in several ULLICO separate accounts and other investment vehicles.
5. A number of commentators stated that their pensions and/or the
cost-of-living increases to their pensions were not large enough.
Several individuals requested increased ``medical'' benefits, even
though the Fund does not provide such benefits, or asked for a transfer
of pension plan assets to a medical fund. One commentator objected to
the denial by the Board of Trustees (the Trustees) of a pension
disability claim.
The Trustees believe that the Prohibited Transaction Exemption
Procedure is not the appropriate venue in which to address concerns
about the administration of the Fund, benefits levels, or individual
benefit claims. Accordingly, the Trustees have made no attempt to
address these comments.
6. One commentator expressed opposition to the acquisition of the
Property by the Fund on the basis that a pension fund sponsored by the
United Association Local 777, an affiliate of the Union, improperly
invested the assets of such pension fund. After researching the public
records, the applicant informed the Department that consent judgments
were entered on May 5, 1998, against a broker and the trustees of the
[[Page 61947]]
Connecticut Plumbers and Pipefitters Pension Fund (the Connecticut
Fund) for violations of the Act involving imprudent investment in risky
mortgage-backed securities. The applicant maintains that, as a legal
matter, the Connecticut Fund is a separate and distinct entity, and the
activities of its broker and trustees are unrelated to the Fund and the
Union and, therefore, should not affect the requested exemption.
Accordingly, based upon the representations made by the applicant,
the written comments received in response to the proposal and the
applicant's responses, including the agreement to undertake the actions
described in the term sheet, the Department has determined to grant the
exemption. In this regard, the Department notes that the additional
undertakings agreed to by the applicant, including the appointment of
ASA as an independent fiduciary, were material factors in the
Department's determination to grant a final exemption. Finally, the
Department notes that the representations and term sheet contained in
the applicant's letter dated October 29, 1999, supercede any of the
applicant's earlier responses to the comments received by the
Department to the extent inconsistent.
The comments submitted by the commentators to the Department and
the applicant's response thereto have been included as part of the
public record of the exemption application. The complete application
file, including all supplemental submissions received by the
Department, is available for public inspection in the Public Documents
Room of the Pension Welfare Benefits Administration, Room N-5638, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
For a complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the Notice published on May 29, 1998, 63 FR 29453.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (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 or disqualified
person from certain other provisions to which the exemptions 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) This exemption is supplemental to and not in derogation of, any
other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Signed at Washington, DC, this 8th day of November, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-29678 Filed 11-12-99; 8:45 am]
BILLING CODE 4510-29-P
