[Federal Register: November 24, 2004 (Volume 69, Number 226)]
[Notices]
[Page 68398-68404]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no04-109]
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DEPARTMENT OF LABOR
Emergency Benefits Security Administration
[Prohibited Transaction Exemption 2004-20; Exemption Application No. D-
11098, et al.]
Grant of Individual Exemption; Comerica Bank
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions 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).
A 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
application for a complete statement of the facts and representations.
The application has been available for public inspection at the
Department in Washington, DC. 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. No requests
for a hearing were received by the Department. Public comments were
received by the Department as described in the granted exemption.
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, 5 U.S.C. App. 1
(1996), 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 4089a) 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 makes the following findings:
(a) The exemption is administratively feasible;
(b) The exemption is in the interests of the plan and its
participants and beneficiaries; and
(c) The exemption is protective of the rights of the participants
and beneficiaries of the plan.
Comerica Bank
Located in Detroit, Michigan
[Prohibited Transaction Exemption 2004-20; Exemption Application No.
D-11098]
Exemption
Section I. Exemption for Receipt of Fees
The restrictions of sections 406(a) and 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section
[[Page 68399]]
4975(c)(1)(A) through (F) of the Code, shall not apply to the receipt
of fees by Comerica Bank and its affiliates (Comerica) from the Munder
Funds (the Funds), open-end investment companies registered under the
Investment Company Act of 1940 (the 1940 Act), for acting as an
investment adviser for the Funds which are not investment advisory
services (``Secondary Services'' as defined in Section III(h) below) in
connection with the purchase and sale of shares of the Funds by certain
defined benefit and defined contribution pension plans and funded
employee welfare benefit plans (Client Plans) for which Comerica serves
as fiduciary with investment discretion, provided that the following
conditions and the General Conditions set forth in Section II are met:
(a) No sales commissions, redemption fees, or other fees are paid
by the Client Plans in connection with the purchase or sale of shares
of the Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share, as defined in Section III(e), at
the time of the transaction, and is the same price that would have been
paid or received for the shares by any other investor at that time.
(c) Comercia, including any officer or director of Comerica, does
not purchase or sell shares of the Funds from or to any Client Plan.
(d) Each Client Plan receives a credit, through a cash rebate of
such Plan's proportionate share of all fees charged to the Funds by
Comerica for investment advisory services, including any investment
advisory fees paid by Comerica to third-party subadvisers. Cash rebates
for investment advisory services provided to the Client Funds are
received by a Plan on or before the date Comerica charges the Client
Plan for plan-level investment management services. Comerica management
fees and Munder advisory fees are paid in arrears for services provided
to the Client Plans and the Funds, respectively. The crediting of all
such fees is audited by Comerica through a system of internal controls
to verify the proper crediting of the fees to each Client Plan.
(e) Comerica will supply, annually and upon request, to the second
fiduciary acting for a Client Plan, who is independent of and unrelated
to Comerica (the Second Fiduciary), all information reasonably
necessary for such fiduciary to verify that the fee credit calculation
is correct and any additional information that the Second Fiduciary may
require to determine that the conditions of this exemption are being
met by Comerica.
(f) For each Client Plan, the combined total of all fees received
by Comerica for the provision of services to a Client Plan, and in
connection with the provisions of services to the Funds in which the
Client Plan may invest, is not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of ERISA.
(g) Comerica does not receive any fees payable pursuant to Rule
12b-1 under the 1940 Act in connection with the transactions.
(h) The Client Plans are not employee benefit plans sponsored or
maintained by Comerica.
(i) The Second Fiduciary receives, in advance of any initial
investment by the Client Plan in a Fund, full and detailed written
disclosure of information concerning the Fund, including, but not
limited to:
(1) A current prospectus for each Fund in which a Client Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services and any Secondary Services as defined in Section
III(h), and all other fees to be charged to or paid by the Client Plan
and by the Funds, including the nature and extent of any differential
between the rates of such fees;
(3) The reasons why Comerica may consider such investment to be
appropriate for the Client Plan; A statement describing whether there
are any limitations applicable to Comerica with respect to which assets
of a Client Plan may be invested in the Funds, and if so, the nature of
such limitations; and upon the request of the Second Fiduciary, a copy
of the proposed exemption and/or a copy of the final exemption once
such documents are published in the Federal Register.
(j) After consideration of the information described in paragraph
(i) above, the Second Fiduciary authorizes in writing the investment of
assets of the Client Plan in each particular Fund, the fees to be paid
by such Fund to Comerica, and the cash rebate to the Client Plan of
fees received by Comerica from the Funds for investment advisory
services.
(k) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to Comerica are subject to an
annual reauthorization wherein any such prior authorization referred to
in paragraph (j) above shall be terminable at will by the Client Plan,
without penalty to the Plan, upon receipt by Comerica of written notice
of termination. A form expressly providing an election to terminate the
authorization described in paragraph (j) above (the Termination Form)
with instructions on the use of the form must be supplied to the Second
Fiduciary no less than annually. However, if the Termination Form has
been provided to the Second Fiduciary pursuant to paragraph (m) below,
then the Termination Form need not be provided again for an annual
reauthorization pursuant to this paragraph unless at least six months
have elapsed since the form was provided in connection with the
additional service or fee increase. The instructions for the
Termination Form must include the following information:
(1) The authorization is terminable at will by any of the Client
Plans, without penalty to such Client Plans, upon receipt by Comerica
of written notice from the Second Fiduciary; and
(2) Failure by the Second Fiduciary to return the Termination Form
on behalf of a Client Plan will result in continued authorization of
Comerica to engage in the transactions described in paragraph (j) above
on behalf of the Client Plan.
(3) A copy of the Termination Form will be sent to the Second
Fiduciary for the Client Plan upon request.
(1) The Second Fiduciary receives full written disclosure, prior to
the effective date, in a Fund prospectus or otherwise, of any increases
in the rates of fees charged by Comerica to the Funds for investment
advisory services even though such fees will be rebated as required by
paragraph (d) above.
(m) In the event that Comerica provides an additional Secondary
Service to a Fund for which a fee is charged or there is an increase in
the rate of any fee paid by the Funds to Comerica for any Secondary
Services that results from either an increase in the rate of such fee
or a decrease in the number or kind of services performed by Comerica
for such fees in connection with a previously authorized Secondary
Service, Comerica will, at least 30 days in advance of the
implementation of such additional service for which a fee is charged or
fee increase, provide written notice (that is separate from the
prospectus of the Fund) to the Second Fiduciary explaining the nature
and the amount of the additional services or of the effective increase
in fees of the affected Fund. Such notice shall be accompanied by the
Termination Form.
(n) On an annual basis, Comerica provides the Second Fiduciary of a
Client Plan investing in the Funds with: A copy of the current
prospectus for the Funds and, upon such Second Fiduciary's request, a
copy of the Statement of Additional Information for such Funds that
contains a description
[[Page 68400]]
of all fees paid by the Funds to Comerica (including fees for
investment advisory service);
(2) A copy of the annual financial disclosure report of the Funds
in which such Client Plan is invested, which includes information about
the Fund portfolios, within 60 days of the preparation of the report;
and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
(o) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the client Plans than dealings with other
shareholders of the Funds.
Section II. General Conditions
(a) Comerica maintains for a period of six years the records
necessary to enable the persons described in paragraph (b) of Section
II to determine whether the conditions of this exemption have been met,
except that: a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Comerica, the
records are lost or destroyed prior to the end of the six-year period,
and no party in interest other than Comerica shall be subject to the
civil penalty that may be assessed under section 502(i) of ERISA or to
the taxes imposed by section 4975(a) and (b) of the Code if the records
are not maintained or not available for examination as required by
paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) below and
notwithstanding any provisions of sections 504(a)(2) and (b) or ERISA,
the records referred to in paragraph (a) of Section II are
unconditionally available at their customary location for examination
during normal business hours by: (1) Any duly authorized employee or
representative of the Department of Labor or the Internal Revenue
Service; (ii) Any fiduciary of a Client Plan who has authority to
acquire or dispose of shares of the Funds owned by the Client Plan, or
any duly authorized employee or representative of such fiduciary; and
(iii) Any participant or beneficiary of a Client Plan or duly
authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described in subparagraph (b)(1)(ii) and
(iii) above shall be authorized to examine trade secrets of Comerica,
or commercial or financial information, which is privileged or
confidential.
Section III--Definitions
For purposes of this exemption:
(a) ``Comerica'' means Comerica Bank, a Michigan banking
corporation, and any affiliate thereof (as affiliate is defined below
in paragraph (b) of this section).
(b) an ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
(d) The term ``Fund'' or ``Funds'' shall include the Munder Funds,
each series thereof, or any other diversified open-end investment
company registered under the 1940 Act for which Comerica serves as an
investment adviser and may also serve as a Fund accountant, transfer
agent or provide some other Secondary Service (as defined below in
paragraph (h) of Section III) which has been approved by such Funds.
(e) ``Net asset value'' means the amount for purposes of pricing
all purchases and sales, calculated by dividing the value of all
securities, determined by a method as set forth in a Fund's prospectus
and statement of additional information, and other assets belonging to
the Fund or portfolio of the Fund, less the liabilities charged to each
such portfolio or Fund, by the number of outstanding shares.
(f) ``Relatives'' means a ``relative'' as that term is defined in
section 3(15) of ERISA (or a ``member for the family'' as that term is
defined in section 4975(e)(6) of the Code), or a brother, a sister, or
a spouse of a brother or a sister.
(g) ``Second Fiduciary'' means a fiduciary of a Client Plan who is
independent of and unrelated to Comerica. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to Comerica if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with Comerica;
(2) Such fiduciary, or any officer, director partner, employee, or
relative of the fiduciary is an officer, director, partner, or employee
of Comerica (or is a relative of such persons); or
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption.
If an officer, director, partner, or employee of Comerica (or
relative of such persons), is a director of such Second Fiduciary, and
if he or she abstains from participation in (i) the choice of the
Client Plan's investment adviser, (ii) the approval of any such
purchase or sale between the Client Plan the Funds, and (iii) the
approval of any change in fees charged to or paid by the Client Plan in
connection with any of the transactions described in Section I and
Section II above, then subparagraph (g)(2) of Section III shall not
apply.
(h) ``Secondary Service'' means a service other than an investment
management, investment advisory, or similar services which is provided
by Comerica to the Funds including but not limited to) custodian
services, transfer and dividend disbursing agent services,
administrator or sub-administrator services, accounting services, and
shareholder servicing agent services.
However, for purposes of this exemption, the term ``Secondary
Service'' will not include any brokerage services provided to the Funds
by Comerica for the execution of securities transactions engaged in by
the Funds.
(i) ``Termination form'' means the form supplied to the second
Fiduciary that expressly provides an election to the Second Fiduciary
to terminate on behalf of a Client Plan the authorization described in
paragraph (j) of Section I above. Such Termination Form maybe used at
will by the Second Fiduciary to terminate an authorization without
penalty to the Plan and to notify Comerica in writing to effect a
termination by selling the shares of the funds held by the Client Plan
requesting such termination within one business day following receipt
by Comerica of the form provided that if, due to circumstances beyond
the control of Comerica, the sale cannot be executed within one
business day, Comerica shall have one additional business day to
complete such sale.
DATES: This exemption is effective on or after November 24, 2004.
The Department received no comments or requests for a public
hearing. After giving full consideration to the entire record, the
Department has decided to grant the exemption. For a more complete
statement of the facts and representations supporting he Department's
decision to grant this exemption, refer to the notice of proposed
exemption published on September 10, 2004, at 69 FR 54804.
For information regarding the matters described herein, interested
persons are encouraged to obtain copies of the exemption application
file (Exemption
[[Page 68401]]
Application No. D-11098) the Department is maintaining in this case.
The complete application file is available for public inspection in the
Public Disclosure Room of the Employee Benefits Security
Administration, Room N-1513, U.S. Department of Labor, 200 Constitution
Avenue, NW., Washington, DC 20210.
For Further Information Contact: Ms. Wendy McColough of the
Department, telephone (202) 693-8561. This is not a toll-free number.
Camino Medical Group, Inc. matching 401(k) Plan (the 401(k) Plan) and
the Camino Medical Group, Inc. Employee Retirement Plan (the Retirement
Plan; together, the Plans) Located in Sunnyvale, California.
[Prohibited Transaction Exemption 2004-21; Exemption Application
Nos. D-11160 & D-11161, respectively]
Exemption
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 of
the Code, by reason of section 4975(c)(1)(A) through (E) of the Code,
shall not reply to (1) the leasing (the New Lease) of a medical
treatment center (the Treatment Center) by the Retirement Plan to
Camino Medical Group, Inc. (CMG), the sponsor of the Retirement Plan
and a party in interest with respect to such Retirement Plan; and (2)
the exercise, by CMG, of options to renew the New Lease for two
additional terms.
This exemption is subject to the following conditions:
(a) The terms and conditions of the New Lease are no less favorable
to the Retirement Plan than those obtainable by the Retirement Plan
under similar circumstances when negotiated at arm's length with
unrelated third parties.
(b) The Retirement Plan is represented for all purposes under the
New Lease, and during each renewal term, by a qualified, independent
fiduciary.
(c) The Retirement Plan's independent fiduciary has negotiated,
reviewed, and approved the terms and conditions of the New Lease and
the options to renew the New Lease on behalf of the Retirement Plan and
has determined that the transactions are appropriate investments for
the Retirement Plan and are in the best interests of the Retirement
Plan and its participants and beneficiaries.
(d) The rent paid to the Retirement Plan under the New Lease, and
during each renewal term, is no less than the fair market rental value
of the Treatment Center, as established by a qualified, independent
appraiser.
(e) The rent is subject to adjustment at the commencement of the
second year of the term of the New Lease and each year thereafter by
way of an independent appraisal. A qualified, independent appraiser is
selected by the independent fiduciary to conduct the appraisal. If the
appraised fair market rent of the Treatment Center is greater than that
of the current base rent, then the base rent is revised to reflect the
appraised increased in fair market rent. If the appraised fair market
rent of the Treatment Center is less than or equal to the current base
rent, then the base rent remains the same.
(f) The New Lease is triple net and requires all expenses for
maintenance, taxes, utilities and insurance to be paid by CMG, as
lessee.
(g) The Retirement Plan's independent fiduciary monitors compliance
with the terms of the New Lease and the conditions of the exemption
throughout the duration of the New Lease and each renewal term, and is
responsible for legally enforcing the payment of the rent and the
proper performance of all other obligations of CMG under the terms of
the New Lease.
(h) The Retirement Plan's independent fiduciary expressly approves
any renewal of the New Lease beyond the initial term.
(i) CMG provides the Retirement Plan's independent fiduciary with
documentation that the rent has been paid on a monthly basis.
(j) At all times throughout the duration of the New Lease and each
renewal term, the fair market value of the Treatment Center does not
exceed 25 percent of the value of the total assets of the Retirement
Plan.
(k) CMG files a Form 5330 with the Internal Revenue Service (the
Service) and pays all applicable excise taxes, if any, within 90 days
of the publication, in the Federal Register, of the grant notice with
respect to the leasing of the Treatment Center by the Plans to CMG
prior to July 1, 2003.
(1) To the extent CMG owes the 401(k) Plan or the Retirement Plan
additional rent by reason of the past leasing of the Treatment Center,
(i) the independent fiduciary makes all such determinations, including
the payment of reasonable interest; and (ii) CMG makes such payments to
the Plans.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on July 20, 2004, at 69 FR
43438.
Extension of Comment Period
The notice of proposed exemption invited interested persons to
submit comments or requests for a hearing to the Department by
September 3, 2004. The applicant agreed to provide notice to interested
persons by first class mail within ten days of the date that the
proposal appeared in the Federal Register. CMG had valid addresses for
all but 28 interested persons, all of whom were former employees of CMG
with interests in one or both Plans. CMG submitted those 28 names to a
commercial locating service, and received addresses for 23 of them.
Notice was sent by first class mail to all but the 5 ``missing''
interested persons on July 26, 2004.
CMG submitted the Social Security Numbers of the 5 ``missing''
interested persons to a second commercial locating service. The notice
was sent by first class mail to the last known address provided by the
second commercial locating service for these five individuals on July
29, 2004.
On September 2, 2004, the applicant decided to extend the comment
period until September 10, 2004. The need for the extension arose
because the applicant changed legal representation with respect to this
exemption and therefore required additional time to provide its
comments to the Department.
Written Comments
During the comment period, the Department received one written
comment with respect to the proposed exemption, and no requests for
public hearing. The comment, which was submitted by CMG, is intended to
(1) inform the Department of certain historical substantive and
procedural matters related to the exemption; (2) request retroactive
relief with respect to the exemption; and (3) correct minor errors in
the proposal. In this regard, CMG has provided the following additional
information in order to update the proposed exemption and to support
its request for retroactive relief:
1. History of Lease of Treatment Center by CMG. Representation 9 of
the Summary of Facts and Representations (the Summary) states, in
relevant part, that the 401(k) Plan and Advanced Infusion Systems
(AIS), an unrelated party, entered into a new lease for the Treatment
Center for a 5 year term, from March 1, 1993 through February 28, 1998.
Representation 10 of the Summary further states, in pertinent part,
that before the end of the lease term, the Administrative Committee for
the Plans (the Administrative Committee) and AIS
[[Page 68402]]
engaged in discussions relating to the renewal of the lease of the
Treatment Center and that the Administrative Committee anticipated that
AID would renew the lease. However, Representation 10 of the Summary
states that at the end of February 1998, AIS chose not to renew its
lease and vacated the premises, and that on March 1, 1998, CMG stepped
into the shoes of AIS in order to continue the flow of rental income
and the provision of infusion therapy to the CMG patients.
CMG confirms that, in regard to the history of its lease of the
Treatment Center, an unrelated third party which was leasing the
Treatment Center unexpectedly abandoned the Treatment Center at the end
of February 1998 and did not renew its lease. CMG explains that it
believed the most prudent course of action was for it to immediately
lease the Treatment Center (a medical clinic) from the 401(k) Plan. CMG
opines that in leasing the Treatment Center it could (a) continue to
provide its patients with infusion therapy for AIDS patients, and (b)
continue to provide the 401(k) Plan with $9,500 in monthly rental
income. CMG notes that it was informed that it might take months for
the 401(k) Plan to find a tenant for the medical clinic. CMG states
that it did not consider it prudent, either financially for the 401(k)
Plan or with regard to treating its patients, to have the Treatment
Center empty for that period of time.
Notwithstanding the exigent circumstances precipitating CMG's
leasing of the Treatment Center from the 401(k) Plan in 1998 and CMG's
goodwill intentions, the Department wishes to emphasize that the lease
became a prohibited transaction in violation of the Act at the moment
CMB assumed lessee responsibilities. Due to the absence of adequate
independent safeguards existing at the inception of the lease, CMB has
represented that it will file a Form 5330 with the Service and pay all
applicable excise taxes that may be due by virtue of its prohibited
leasing arrangement with the 401(k) Plan and subsequently, with the
Retirement Plan.
2. Attorney's Concealment of Lack of Action on Application for
Exemption. CMG states that although it instructed its attorney to apply
for a prohibited transaction exemption immediately to cover its lease
of the Treatment Center on March 1, 1998, the attorney did not file an
application for an exemption until December 1999. CMG explains that
after the initial filing, the attorney did not follow up with requests
by the Department for additional information. Consequently, CMG states,
a second application was required to be made. CMG represents that the
second application was filed in November 2001, almost two years after
the first application was filed. CMG notes that even after filing the
second application, the attorney did not comply promptly with the
Department's request for additional information, resulting in
additional delay publishing in the proposed exemption in the Federal
Register. CMG represents that it had no knowledge, or ability to know,
of the attorney's dilatory actions since the fact that the attorney was
not proceeding on this matter was not disclosed to CMG. CMG states that
it was assured at all times that each of the exemption requests was in
progress.
The Department can take no remedial action to remedy any harm CMG
may have suffered. The Department notes that any grievance CMG may have
against its former counsel should be addressed in the appropriate legal
forum.
3. Retroactive Effect of Exemption. Representation 14 of the
Summary states in relevant part that--
Due to the lack of oversight by a qualified, independent
fiduciary with full investment discretion to review, approve and
monitor the past and continuing leasing arrangements between the
Plans and CMG, and the absence of contemporaneous independent
appraisals establishing the fair market value or the fair market
rental value of the Treatment Center at the inception of each lease
or at the time of the sale of the Treatment Center by the 401(k)
Plan to the Retirement Plan, the Department is not prepared to
provide exemptive relief with respect to such transactions.
CMG notes that ERISA Technical Release 85-1 (TR 85-1) provides that
if the applicant has acted in good faith (evidenced by an independent
fiduciary or appraisal) and there was no loss to the plan in question
the Department may favorably consider making a prohibited transaction
exemption retroactive. CMG explains that all the conditions set out in
TR 85-1 for a retroactive exemption are present in this case.
Consequently, CMG requests that the exemption be made retroactive to
November 1998, which is the date of the first appraisal of the fair
market rental value of the Treatment Center after it was leased by CMG.
CMG explains that the appraisal was done by a qualified independent
appraiser, Hulberg & Associates (Hulberg), under the direction of two
independent fiduciaries.
CMG further explains that the first lease agreement covering the
lease of the Treatment Center to CMG was dated March 1, 1999. The fair
market rental value of that lease was also determined by Hulberg, under
the direction of the same independent trustees. The March 1999 lease
provided for rental increases (if any) each year based on an annual
appraisal by the independent appraiser of market rents. Because the
rental market went up and then went down for several years, under the
lease agreement CMG states that it paid in excess of market rates each
year except one. CMG also maintains that not only was there no loss to
participants in the rental transaction, there was a significant gain.
In July 2003, CMG explains that a second lease was signed for the
Treatment Center. In that case, the independent fiduciary was Thomas J.
Nault and the independent appraiser chosen by Mr. Nault was also
Hulberg. CMG indicates that Mr. Nault has continued to serve on behalf
of the Retirement Plan as the independent fiduciary.
CMG maintains that in both leases covering the Treatment Center,
there was an independent appraisal of the fair market rental value of
such property. Also, CMG asserts that the appraisals were under the
direct supervision of independent fiduciaries. Although CMG believes
the conditions are present for the exemption to be made retroactive to
November 1998, at the very minimum, CMG suggest that the exemption be
made retroactive to March 1, 1999, or July 1, 2003, the commencement
dates of the leases, or retroactive to March 2003, the date of Mr.
Nault's appointment as independent trustee for the Retirement Plan.
As an additional factor, CMG requests that the Department consider
that prior to Mr. Nault's assumption of independent fiduciary duties,
at all times since the Treatment Center was leased to CMG, Wells Fargo
Bank, N.A. (Wells Fargo), has been the trustee of the Retirement Plan.
Although the bank was and is a directed trustee, CMG states that it has
provided the Department with a letter from Wells Fargo which states
that the bank reviewed the Treatment Center's lease appraisal for
reasonableness and adjusted the monthly rental income, accordingly. CMG
notes that Wells Fargo also stated that it reviewed the terms of the
leases to ensure compliance and to ensure that lease payments were
received and deposited to the trust in a timely manner each month.
In response to CMG's comment, the Department wishes to emphasize
that further distinctions must be made to the independent fiduciary and
independent appraisal criteria set forth in TR 85-1. This is because
the safeguards implemented for a prospective exemption must be in place
for a
[[Page 68403]]
retroactive exemption. In this regard, the Department does not believe
the lease can be made retroactive to March 1, 1999,\1\ due to the lack
of adequate independent safeguards. Specifically, there was no
contemporaneous appraisal or other objective means to establish the
fair market rental value of the Treatment Center at the inception of
the 1999 lease, despite the fact that CMG has, for the most part, paid
the CMG Plans more than fair market value rent. The Department notes
that the only written independent appraisal of the Treatment Center
existing at that time was issued by Hulberg on December 20, 1998. The
appraisal, which was commissioned primarily for the sale of the
Treatment Center by the 401(k) Plan to the Retirement Plan reflected,
among other things, the fair market rental value of the Treatment
Center as of November 24, 1998. Due to its relative staleness and the
absence of documentation in the application file showing that an
updated appraisal was obtained on the date the parties entered into the
1999 lease, the 1998 appraisal could not be utilized to substantiate
the fair market value of the Treatment Center at the inception of the
1999 lease. Further, although Wells Fargo may have represented the
interests of the 401(k) Plan and later the Retirement Plan, the
Department notes that there is not indication that the bank ever
possessed ``full'' discretion as an independent fiduciary with respect
to the approval and monitoring the leasing of Treatment Center or
advising CMG that it would be engaged in a prohibited transaction.
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\1\ In this regard, the lease had actually been entered into by
CMG and the 401(k) Plan, the previous owner of the Treatment Center
on March 1, 1998. However, that lease, which was executed by the
Retirement Plan (the current owner of the Treatment Center) and CMG,
was not reduced to writing until March 1, 1999.
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Similarly, it appears that the lease cannot be made retroactive to
March 1, 2003. This is the date that Mr. Nault was appointed as the
Retirement Plan's successor independent fiduciary. Again, the
Department believes that independent safeguards to protect the
interests of the Retirement Plan and its participants and beneficiaries
were lacking. Although Mr. Nault was then serving as the independent
fiduciary, his appointment could not be utilized to validate the lease,
which was already in existence.
With respect to the July 1, 2003, retroactivity date, Mr. Nault has
provided the Department with certain additional information. In a
letter dated October 7, 2004, Mr. Nault states that a new lease (i.e.,
the ``New Lease'' referred to above in the operative language) of the
Treatment Center was executed between CMG and the Retirement Plan on
July 1, 2003, at the time the New Lease was executed, he explains that
he relied on other objective means of valuation to determine the fair
market rental value of the Treatment Center at the time this lease was
executed. Such objective means included several discussions with
Hulberg in order to ascertain the fair market rental value of the
Treatment Center and due diligence conducted from the time of his
independent fiduciary appointment onward. Specifically, Mr. Nault
explains that during his discussions with Hulberg, he reviewed rental
statistics for the Sunnyvale-San Jose area that clearly showed that the
rent being paid for the Treatment Center was above market. Further, as
part of his own due diligence, Mr. Nault states that he drove around
the area to check the vacancy information he received from Hulberg, he
did an online analysis of rents and market conditions to ascertain rent
levels in the area, and researched the effect of the 2001 implosion of
Dot-Com businesses on the office vacancy rate in that area. Mr. Nault
states that his findings at the time the New Lease was executed
indicated that CMG was paying above market rent prior to such lease.
Consequently, Mr. Nault represents that the rental amount being paid by
CMB under the New Lease provides that the rent will be changed only if
the amount that CMG is paying falls below market value.
Although there was no contemporaneous, written appraisal of the
Treatment Center at the inception of the New Lease, the Department
believes that Mr. Nault has demonstrated that he utilized an objective
means of valuation of the Treatment Center immediately prior to, and at
the time of, the New Lease by analyzing the prevailing market
conditions. In addition, the Department notes that for assistance, Mr.
Nault obtained significant guidance from Hulberg, the Retirement Plan's
independent appraiser. Therefore, the Department believes that adequate
independent safeguards existed at the inception of the New Lease.
Accordingly, the Department has determined that the exemption should be
made retroactive to July 1, 2003.
In addition, in order that the operative language of the exemption
may be consistent with the July 1, 2003, effective date, the Department
has modified conditions (f), (k) and (l) of the final exemption to read
as follows:
(f) The New Lease is triple net and requires all expenses for
maintenance, taxes, utilities and insurance to be paid by CMG, as
lessee.
(k) CMG files a Form 5330 with the Internal Revenue Service (the
Service) and pays all applicable excise taxes, if any, within 90
days of the publication, in the Federal Register, of the grant
notice with respect to the leasing of the Treatment Center by the
Plans to CMG prior to July 1, 2003.
(l) To the extent CMG owes the 401(k) Plan or the Retirement
Plan additional rent by reason of the past leasing of the Treatment
Center, (i) the independent fiduciary makes all such determinations,
including the payment of reasonable interest; and (ii) CMG makes
such payments to the Plans.
4. Miscellaneous Comments. CMG notes that the caption of the
proposed exemption states, in relevant part, that the Plans are located
in Santa Clara, California. CMG clarifies that the Plans are located in
``Sunnyvale (County of Santa Clara), California.''
In addition, Representation 1 of the Summary states, in pertinent
part, that CMG is a ``not-for-profit'' organization. CMG explains that
it is a ``for-profit'' organization and that the Palo Alto Medical
Foundation, of which CMG is an affiliate, is a ``not-for-profit''
organization.
Further, Representation 13 of the Summary states, in relevant part,
that CMG presently leases the Treatment Center and pays a monthly
rental of $1,456. CMG notes that the monthly rental which it currently
pays the Retirement Plan for its lease of the Treatment Center is
$14,256.
In response to the foregoing comments, the Department notes the
clarifications to the proposed exemption.
Accordingly, after giving full consideration to the entire record,
including the comment letter, the Department has determined to grant
the exemption as modified herein. For further information regarding the
comment, additional information provided by the independent fiduciary,
and other matters discussed herein, interested persons are encouraged
to obtain copies of the exemption application file (Exemption
Application Nos. D-11160 and D-11161) the Department is maintaining in
this case. The complete application file, as well as all supplemental
submissions received by the Department, are made available for public
inspection in the Public Disclosure Room of the Pension and Welfare
Benefits Administration, Room N-1513, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210.
For Further Information Contact: Ms. Anna M.N. Mpras of the
Department, telephone (202) 693-8565. (This is not a toll-free number.)
[[Page 68404]]
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 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) 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 in Washington, DC, this 19th day of November, 2004.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 04-26068 Filed 11-23-04; 8:45 am]
BILLING CODE 4510-29-M