Proposed Exemptions; Wachovia Corporation (Wachovia)
[08/12/2005]
Volume 70, Number 155, Page 47246-47256
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11231, et al.]
Proposed Exemptions; Wachovia Corporation (Wachovia)
AGENCY: Employee Benefits Security 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
requests 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 requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), 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.
Wachovia Corporation (Wachovia), Located in Charlotte, NC
[Application No. D-11231]
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act (or ERISA) 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).
Proposed Exemption
Section I. Covered Transactions
If the proposed exemption is granted, 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
4975(c)(1)(A) through (E) of the Code,\1\ shall not apply, effective
January 2, 2002, to (1) the in kind transfer by the Wachovia Retirement
Savings Plan (the
[[Page 47247]]
Plan) of its shares in the Wachovia Equity Index Fund (the Index Fund),
a mutual fund in which Evergreen Investment Management Company, LLC
(Evergreen), a wholly owned subsidiary of Wachovia, the Plan sponsor,
serves as the investment adviser, to the Wachovia Enhanced Stock Market
Fund (the Enhanced Fund), a bank collective investment fund, also
maintained by Wachovia in exchange for Enhanced Fund units; \2\ and (2)
the in kind redemption by the Enhanced Fund of the Index Fund shares
received on behalf of the Plan in return for a pro rata distribution of
cash and transferable securities held by the Index Fund.
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\1\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
\2\ The Index Fund and the Enhanced Fund are collectively
referred to herein as the Funds.
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Section II. Specific Conditions
This proposed exemption is subject to the following conditions:
(a) Mercer Investment Consulting, Inc. (Mercer), a fiduciary, which
was acting on behalf of the Plan, and which was independent of, and
unrelated to, Wachovia and its subsidiaries, as defined in paragraph
(e) of Section IV below, had the opportunity to review the in kind
transfer and in kind redemption transactions, and received, in advance
of such transactions, full written disclosures concerning the Funds,
which included, but were not limited to the following:
(1) A prospectus or its equivalent for each of the Funds;
(2) The management fees, as negotiated under the applicable
investment management agreements, and the costs;
(3) The reasons why the Plan Committee (the Plan Committee)
considered such investment to be appropriate for the Plan; and
(4) Whether there were any limitations applicable to the Plan with
respect to which assets of the Plan could be invested in the Enhanced
Fund and the nature of such limitations.
(b) On the basis of the foregoing information, Mercer recommended,
(1) The in kind transfer of the mutual fund shares that were held
on behalf of the Plan in the Index Fund, in exchange for units in the
Enhanced Fund; and
(2) The in kind redemption by the Enhanced Fund of Index Fund
shares received from the Plan for cash and certain publicly-traded
securities.
(3) The Plan Committee followed Mercer's recommendation by acting
on such advice.
(c) Before recommending the covered transactions, Mercer determined
that:
(1) The terms of the transactions were fair to the participants in
the Plan, and were comparable to, and no less favorable than, the terms
obtainable at arm's length between unaffiliated parties; and
(2) The transactions were in the best interest of the Plan and its
participants and beneficiaries.
(d) The in kind transfer transaction was a one-time transaction for
the Plan and the mutual fund shares transferred were equivalent in
value to the units in the Enhanced Fund.
(e) The in kind redemption transaction was a one-time transaction
and the resulting cash and transferable securities constituted a pro
rata portion of the assets held on behalf of the Plan in the Index Fund
prior to the transaction.
(f) In the case of the exchange by the Plan of Index Fund shares
for Enhanced Fund units, the per unit value of the Enhanced Fund units
that were issued to the Plan in exchange for the Plan's Index Fund
shares had an aggregate value that was equal to the value of the mutual
fund shares transferred to the Enhanced Fund on the date of the
transfer, as determined in a single valuation performed in the same
manner and at the close of business on the same day in accordance with
Securities and Exchange Commission (SEC) Rule 17a-7 (Rule 17a-7) under
the Investment Company Act of 1940 (the 1940 Act), as amended, (using
sources independent of Wachovia), and the procedures established by the
Enhanced Fund pursuant to Rule 17a-7.
(g) In the in kind redemption transaction, the Enhanced Fund
received a pro rata portion of the cash and transferable securities
held on behalf of the Plan in the Index Fund that was equal in value to
the number of mutual fund shares redeemed for such cash and
transferable securities, as determined in a single valuation performed
in the same manner and at the close of business on the same day in
accordance with Rule 17a-7, (using sources independent of Wachovia),
and the procedures established by the Enhanced Fund pursuant to Rule
17a-7.
(h) For purposes of the covered transactions, the fair market value
of all transferable securities received by the Enhanced Fund in the in
kind redemption transaction was determined by reference to the last
sale price for transactions as reported in the consolidated transaction
reporting system (the Consolidated System), a recognized securities
exchange, or the National Association of Securities Dealers Automated
Quotation System (the NASDAQ System).
(i) Within 90 days after the completion of the transactions, Mercer
received confirmation of the following information:
(1) The number of Index Fund shares exchanged by the Plan and the
number of Enhanced Fund units received by the Plan immediately before
the in kind transfer transaction (and the related per share net asset
value and the total dollar value of the shares held) as reported by the
Funds; and
(2) The identity, the current market price of each transferable
security received by the Enhanced Fund in the in kind redemption, and
the aggregate dollar value of the securities allocated to the Plan in
the Enhanced Fund pursuant to the redemption, and the net asset value
of Enhanced Fund units after the redemption;
(j) Subsequent to the completion of the transactions, Mercer
conducted a post-transaction review in which it verified:
(1) The number and current market price of all Enhanced Fund units
transferred to the Plan in exchange for the Index Fund shares;
(2) The number and current market price of all Index Fund shares
transferred by the Plan to the Enhanced Fund in exchange for Enhanced
Fund units;
(3) The identity of each transferable security, the number of
shares of such security transferred, the closing price on the relevant
national exchange as of the date of the transfer, and the proper
valuation of the securities for the purposes of the transfer;
(4) The aggregate dollar value of the Index Fund shares that were
being held by the Plan immediately before the transfer and the
aggregate dollar value of the Enhanced Fund units held by the Plan
immediately after the transfer were valued at their daily net asset
values in accordance with their normal procedures.
(5) The use, by the Index Fund and the Enhanced Fund of the same
methodology to value the securities transferred by the Index Fund to
the Enhanced Fund in the in kind redemption transaction.
(k) No sales commissions, fees or other costs were paid by the Plan
in connection with the transactions, and no additional management fees
are being charged to the Plan by Wachovia through the Enhanced Fund.
(l) Wachovia did not enter into the transactions unless Mercer
concurred with such transactions.
(m) The Plan's dealings with the Index Fund, the Enhanced Fund and
Wachovia were on a basis that was no less favorable to the Plan than
dealings
[[Page 47248]]
between the Enhanced Fund and other investors.
Section III. General Conditions
This exemption is subject to the following general conditions:
(a) Wachovia maintains, or causes to be maintained, for a period of
six years from the date of the covered transactions, such records as
are necessary to enable the persons described in paragraph (b) of this
Section III to determine whether the conditions of this exemption have
been met, except that:
(1) If the records necessary to enable the persons described in
paragraph (b) to determine whether the conditions of the exemption have
been met are lost or destroyed, due to circumstances beyond the control
of the plan fiduciary, then no prohibited transaction will be
considered to have occurred solely on the basis of the unavailability
of those records; and
(2) No party in interest, other than the plan fiduciary responsible
for recordkeeping, shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act or to the taxes imposed by
section 4975(a) and (b) of the Code if the records are not maintained
or are not available for examination as required by paragraph (b)
below. (b)(1) Except as provided in paragraph (b)(2) of this Section
III and notwithstanding the provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to above in paragraph (a)
of this Section III are unconditionally available for examination
during normal business hours at their customary location to the
following persons or an authorized representative thereof:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Mercer or any other fiduciary of the Plan; or
(iii) Any participant or beneficiary of the Plan or any duly
authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described above in paragraphs (ii) and
(iii) of this paragraph (b)(1)(ii) and (iii) of this Section III shall
be authorized to examine trade secrets of Wachovia, or any commercial
or financial information, which is privileged or confidential.
Section IV. Definitions
For the purposes of this proposed exemption, (a) The term
``Wachovia'' means Wachovia Corporation and any affiliate of Wachovia
as defined below in Section IV(b).
(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) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``relative'' means a ``relative,'' as that term is
defined in section 3(15) of the Act, (or a ``member of 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.
(e) As applied to Mercer, the term ``independent fiduciary'' means
a fiduciary who is (1) independent of and unrelated to Wachovia and its
affiliates, and (2) appointed to act as investment adviser to the Plan
for all purposes related to, but not limited to, (i) the transfer of
Index Fund shares to the Enhanced Fund in exchange for units in the
Enhanced Fund, and (ii) the Enhanced Fund's redemption of the Index
Fund shares received from the Plan for cash and transferable
securities. For purposes of this exemption, a fiduciary will not be
deemed to be independent of and unrelated to Wachovia if (1) such
fiduciary directly or indirectly controls, is controlled by or is under
common control with Wachovia; (2) such fiduciary directly or indirectly
receives any compensation or other consideration in connection with any
transaction described in this exemption, except that Mercer may receive
compensation for acting as an independent fiduciary from Wachovia in
connection with the transactions contemplated herein and in connection
with the provision of ongoing investment advice to the Plan Committee
if the amount of payment of such compensation is not contingent upon or
in any way affected by Mercer's ultimate decision; and (3) the annual
gross revenue received by such fiduciary from Wachovia and its
affiliates during any year of its engagement, exceeds 5 percent (5%) of
Mercer's annual gross revenue from all sources for its prior tax year.
(f) The term ``transferable securities'' means securities (1) for
which market quotations are readily available (as determined under Rule
17a-7) and (2) which are not (i) Securities which, if distributed,
would require registration under the Securities Exchange Act of 1933
(the 1933 Act); (ii) securities issued by entities in countries which
(a) restrict or prohibit the holding of securities by non-nationals
other than through qualified investment vehicles, such as the Index
Fund, or (b) permit transfers of ownership of securities to be effected
only by transactions conducted on a local stock exchange; (iii) certain
portfolio positions (such as forward foreign currency contracts,
futures, and options contracts, swap transactions, certificates of
deposit and repurchase agreements) that, although they may be liquid
and marketable, involve the assumption of contractual obligations,
require special trading facilities or can only be traded with the
counter-party to the transaction to effect a change in beneficial
ownership; (iv) cash equivalents (such as certificates of deposit,
commercial paper and repurchase agreements) which are not readily
distributable; (v) other assets which are not readily distributable
(including receivables and prepaid expenses), net of all liabilities
(including accounts payable); and (vi) securities subject to ``stop
transfer'' instructions or similar contractual restrictions on
transfer. Notwithstanding the above, the term ``transferable
securities'' also includes securities that are considered private
placements intended for large institutional investors, pursuant to Rule
144A under the 1933 Act, which are valued by the unrelated investments
managers for the Funds, or if applicable, by the independent fiduciary,
which will confirm and approve all such valuations.
Effective Date: If granted, this proposed exemption will be
effective as of January 2, 2002.
Summary of Facts and Representations
1. Wachovia, headquartered in Charlotte, NC, the predecessor entity
to the current Wachovia, also headquartered in Charlotte, NC, was an
independent bank holding company providing a wide range of commercial
and retail banking and trust services to the public through its
individual banking subsidiaries. On September 1, 2001, First Union
Corporation (First Union) merged with Wachovia. The merger of Wachovia
and First Union was accomplished through a stock exchange whereby each
share of Wachovia common stock outstanding was converted into two
shares of common stock of First Union, with the appropriate number of
stock purchase rights under First Union's shareholder rights plan. In
addition to the two shares of First Union stock, each share of
[[Page 47249]]
Wachovia common stock was exchanged, at the shareholder's option, for
either a one-time cash payment of $0.48; or two of the combined
company's (i.e., Wachovia and First Union) Dividend Equalization Plan
``DEP'' rights, each of which entitled the holder to receive cumulative
quarterly dividends equal to the difference, if any, between $0.30 and
the amount of quarterly dividends paid by the combined company on each
share of common stock.
Wachovia Bank, NA (Wachovia Bank) is a federally chartered bank and
trust company based in Charlotte, North Carolina. It is also Wachovia's
primary subsidiary. Wachovia Bank provides a wide range of commercial
and retail banking and trust services through full-service banking
offices in Connecticut, Delaware, Pennsylvania, South Carolina,
Virginia and Washington, DC.
Wachovia, the surviving entity, is the fourth largest bank holding
company in the United States. Wachovia continues to provide the public
with banking and trust services through the merger-created subsidiary,
Wachovia Bank. As of March 31, 2005, Wachovia reported consolidated
assets of $506.8 million.
2. On January 1, 2002, following the merger of Wachovia and First
Union, the First Union Savings Plan (the First Union Plan) and the
Wachovia Retirement Savings and Profit Sharing Plan (the Wachovia
Plan), a predecessor to the current Plan, both tax qualified 401(k)
plans, were merged based on a decision by Wachovia's management. The
merged plan is referred to herein as ``the Plan'' and Wachovia Bank
serves as the Plan's directed trustee. Under the terms of the Plan,
each participant may direct the investments of his or her individual
account balances among various investment options offered under the
Plan.
The Plan is administered by the Wachovia Administrative Committee
(the Plan Committee), which is comprised of nine employees, who are
officers of Wachovia and its affiliates. As of May 4, 2005, the Plan
held total assets of $6.4 billion and had 96,963 participants and
beneficiaries.
3. The Plan Committee is advised by Mercer Investment Consultants,
Inc. of Atlanta, Georgia (Mercer), an investment adviser registered
under the 1940 Act. Mercer provides investment advisory services to tax
deferred compensation plans subject to ERISA with approximately $900
billion in assets as of September 16, 2004. Mercer is not affiliated
with either Wachovia or its predecessors. Mercer regularly advises the
Plan Committee on the performance investment options offered under the
Plan, as well as those formerly offered under the First Union Plan.
4. As a result of the Merger, two S&P 500 Index Funds were held by
the Plan. They were the ``Wachovia Index Equity Fund'' (e.g., the Index
Fund) and the ``First Union Enhanced Stock Market Fund'' (e.g., the
Enhanced Fund). The Index Fund, which was carried over from the former
Wachovia Plan, was an open-end investment management company registered
under the 1940 Act. Shares in the Index Fund were offered publicly to
individual and institutional investors. Evergreen of Boston,
Massachusetts, a wholly owned subsidiary of Wachovia, served as
investment adviser to the Index Fund.
The Index Fund managed its portfolio in a manner intended to
duplicate the performance of the S&P 500 Index. The Index Fund charged
the Wachovia Plan annualized expenses and advisory fees of
approximately 44 basis points with respect to the Class Y shares held
by the Plan. As of December 31, 2001, the Wachovia Plan held
approximately 33% of the outstanding Index Fund Y shares, valued at
$122,058,370. Following the merger, the Index Fund was eliminated
because its management style duplicated the Enhanced Fund, a bank
collective investment fund maintained by First Union and offered as an
investment option under the First Union Plan.
The Enhanced Fund's objective is to provide total rate of return
equal to or exceeding that of the S&P 500 Index. To achieve this
objective, the Enhanced Fund invests primarily in a diversified
portfolio of common stock and S&P 500 futures.
Prior to the merger, the First Union Plan held 54.9% of the
outstanding units in the Enhanced Fund. Immediately following the
merger, the Plan's Enhanced Fund holdings increased to 59.6% of the
outstanding units. Other employee benefit plan investors, unrelated to
Wachovia, own the remaining units in the Enhanced Fund.
The Enhanced Fund does not charge any management fees to the Plan.
The costs associated with providing investment advisory services to the
Enhanced Fund are borne by Wachovia and its affiliates. Unaffiliated
qualified plans holding units in the Enhanced Fund pay Wachovia asset-
based investment advisory fees. However, the Plan does not pay any such
fees.
5. Mercer was initially retained by the First Union Plan to act as
its independent investment adviser. Mercer counseled the fiduciaries of
the First Union Plan with respect to the impending merger of the two
Plans. Subsequent to the corporate merger, the Wachovia Plan Committee
retained Mercer to serve as its investment adviser for the Plan. In
this respect, Mercer acknowledged its fiduciary status with respect to
the Plan. Mercer's fees were to be paid by Wachovia.
Mercer and the Plan Committee determined that two S&P 500 Index
Funds would be inconsistent with the Plan's design and would present
communication problems. Mercer compared the performance of both Funds,
the fees charged thereunder, considered the potential confusion to Plan
participants arising from the offering of two similar Funds, and the
desire to streamline Plan administration. During the fall of 2001,
Mercer then recommended, and the Plan Committee accepted, the
elimination of the Index Fund through a ``mapping transaction,'' which
involved two separate transactions.\3\ First, the Plan exchanged its
5,825,619.074 shares of the Index Fund for 1,711,987.3214 units of the
Enhanced Fund, which represented equivalent fair market value. Once the
Index Fund shares entered the asset base of the Enhanced Fund, the
Enhanced Fund immediately redeemed the Index Fund shares in kind for
the underlying transferable securities and cash consideration totaling
$5,881,028. The transactions were conducted contemporaneously at the
closing prices of the applicable securities on January 2, 2002. As
noted above, the transactions resulted in the receipt, by the Enhanced
Fund, of approximately 33% of each securities position held on behalf
of the Plan by the Index Fund. The Enhanced Fund has held these
transferable securities for investment, subject to normal trading and
portfolio turnover.
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\3\ It is represented that the two-step ``mapping transaction''
minimized the transaction costs that would have been incurred by the
Plan otherwise and the adverse tax consequences to other Index Fund
shareholders. Specifically, if the Index Fund had redeemed the
Plan's shares in cash, it would have been forced to liquidate large
amounts of its holdings and incurred significant transaction costs,
such as brokerage and other administrative costs, which could have
been borne proportionately by the Plan. In addition, the Index Fund
reserved the right to pay the Plan in kind upon the redemption of
its shares. If the Index Fund had exercised this right, the Plan
would have been required to receive and manage a securities
portfolio which it was not equipped to manage (as a self-directed
plan), which costs were avoided.
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6. At the time of entering into the transactions, Wachovia and
Mercer had no reason to believe that a prohibited transaction would
occur. Rather, Wachovia believed that the Act's prohibited transaction
provisions were not violated because the Index Fund shares were
exchanged for Enhanced
[[Page 47250]]
Fund units at fair market value. However, upon review of the foregoing
transactions by Wachovia's counsel, it was determined that Prohibited
Transaction Class Exemption (PTCE) 77-3 (42 FR 18734, April 8, 1977),
might not apply to the transactions nor could Wachovia avail itself of
the statutory exemptive relief provided under section 408(b)(8) of the
Act.\4\ Wachovia explains that because it was unclear whether PTCE 77-3
and section 408(b)(8) apply to (a) a noncash disposition of mutual fund
shares and (b) an acquisition of common trust fund units for noncash
consideration, counsel for Wachovia advised it to seek retroactive
exemptive relief from the Department.
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\4\ In relevant, PTCE 77-3 permits the acquisition or sale of
shares of a registered, open-end investment company by an employee
benefit plan covering only employees of such investment company,
employees of the investment adviser or principal underwriter for
such investment company, or employees of any affiliated person (as
defined therein) of such investment adviser or principal
underwriter, provided certain conditions are met.
Section 408(b)(8) of the Act provides statutory exemptive
relief, in pertinent part, for any transaction between a plan and a
common or collective trust fund maintained by a party in interest
which is a bank or trust company supervised by a state or federal
agency, if the following conditions are met: (a) The transaction is
a sale or purchase of an interest in the fund, (b) the bank or trust
company receives not more than reasonable compensation, and (c) such
transaction is expressly permitted by the instrument under which the
plan is maintained, or by a fiduciary (other than the bank or trust
company or an affiliate) who has authority to manage and control the
assets of the plan.
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Accordingly, Wachovia requests an administrative exemption from the
Department with respect to (a) the in kind transfer by the Plan of its
shares in the Index Fund in exchange for units in the Enhanced Fund;
and (b) the in kind redemption, by the Enhanced Fund, of the Index Fund
shares received on behalf of the Plan in return for a pro rata
distribution of cash and transferable securities held by the Index
Fund. If granted, the exemption will be effective as of January 2,
2002.
7. In advance of the decision to eliminate the Plan's Index Fund
holdings, Mercer received full written disclosures concerning the Funds
from Wachovia. Such disclosures included: (a) a prospectus or its
equivalent for each of the Funds; (b) the management fees, as
negotiated under the applicable investment management agreements, and
the costs; (c) the reasons why the Plan Committee considered such
investment to be appropriate for the Plan; and (d) whether there were
any limitations applicable to the Plan with respect to which assets of
the Plan could be invested in the Enhanced Fund and the nature of such
limitations. As noted above, on January 2, 2002, acting on Mercer's
advice, the Plan Committee caused the Plan to enter into the
recommended transactions.
8. Mercer also evaluated the transactions in terms of their
fairness to the Plan and to the Plan participants and the arm's length
nature of such transactions. The three key areas that Mercer evaluated
included: (a) a performance comparison of the two Funds; (b) an
analysis of the expense ratios of each Fund; and (c) the specific
details of the transactions. These evaluations are further described
below.
(a) Performance. As of December 31, 2001, Mercer explains that both
Funds had performances similar to the S&P 500 Index. However, the
Enhanced Fund tracked the return of the Index more closely than that of
the Index Fund for one, three, and five year periods ending December
31, 2001. Mercer illustrates these findings in the following table:
Performance After Fees for Periods Ending December 31, 2001
[In percent]
----------------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 7 years
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Enhanced Fund................................... -10.9 -1.1 10.8 16.0
Index Fund...................................... -12.2 -1.5 10.2 N/A
S&P 500......................................... -11.9 -1.0 10.7 15.9
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(b) Expense Ratio. Mercer states that the Index Fund's expense
ratio for December 31, 2001 was 0.41%. However, Mercer explains that a
participant's account in the Enhanced Fund would not incur a fee
because fees in this Fund are billed internally and are absorbed by the
human resource department. Additionally (and as noted above), Wachovia
Bank does not charge asset-based management or other fees to the Plan.
(c) Transaction Details. Mercer states that prior to the
transactions, it reviewed the proposed structure and determined that
the transactions would be fair to the Plan and no less favorable to the
Plan than an arm's length transactions between unrelated parties.
9. The in kind transfer of the Index Fund shares by the Enhanced
Fund was a one-time transaction. The per unit value of the Enhanced
Fund units that were issued to the Plan in exchange for the Plan's
Index Fund shares had an aggregate value that was equal to the value of
the mutual fund shares transferred to the Enhanced Fund on the date of
the transfer, as determined in a single valuation performed in the same
manner and at the close of business on the same day in accordance with
Rule 17a-7 (using sources independent of Wachovia), and the procedures
established by the Enhanced Fund pursuant to Rule 17a-7.
10. The in kind redemption of the Index Fund shares by the Enhanced
Fund for the underlying transferable securities and cash, was a one-
time transaction. In the redemption transaction, the Enhanced Fund
received a pro rata portion of the cash and transferable securities
held on behalf of the Plan in the Index Fund that was equal in value to
the number of mutual fund shares redeemed for such cash and
transferable securities, as determined in a single valuation performed
in the same manner and at the close of business on the same day in
accordance with Rule 17a-7, (using sources independent of Wachovia),
and the procedures established by the Enhanced Fund pursuant to Rule
17a-7. Furthermore, the fair market value of all transferable
securities received by the Enhanced Fund in the in kind redemption
transaction was determined by reference to the last sale price for
transactions as reported in the Consolidated System, a recognized
securities exchange, or the NASDAQ System.
11. Within 90 days following the completion of the transactions,
Mercer received confirmation of the following information from
Wachovia: (a) The number of Index Fund shares exchanged by the Plan and
the number of Enhanced Fund units received by the Plan immediately
before the in kind
[[Page 47251]]
transfer transaction (and the related per share net asset value and the
total dollar value of the shares held) as reported by the Funds; and
(b) the identity and current market price of each security received by
the Enhanced Fund in the in kind redemption, the aggregate dollar value
of the securities allocated to the Plan in the Enhanced Fund pursuant
to such redemption and the net asset value of Enhanced Fund units after
the redemption. Mercer represents that compliance with the above SEC
rules precluded the exercise of discretion and required that the
transactions between affiliated funds be conducted at arm's length.
12. Additionally, Mercer states that it reviewed the results of the
transactions with the Plan Committee.\5\ The review was made to ensure
that the transactions had been executed as planned, that none of the
parties had exercised discretion and/or deviated from the plan, and
that in all respects the transactions were carried out as planned.
Among the items reviewed by Mercer with the Plan Committee were the
following: (a) The number and current market price of all Enhanced Fund
units transferred to the Plan in exchange for the Index Fund shares;
(b) the number and current market price of all Index Fund shares
transferred by the Plan to the Enhanced Fund in exchange for Enhanced
Fund units; (c) the identity of each security, the number of shares of
such security transferred, the closing price on the relevant national
exchange as of the date of the transfer, and the proper valuation of
the securities for the purposes of the transfer; and (d) the aggregate
dollar value of the Index Fund shares that were held by the Plan
immediately before the transfer and the aggregate dollar value of the
Enhanced Fund units held by the Plan immediately after the transfer
were valued at their daily net asset values in accordance with their
normal procedures. In addition, Mercer confirmed that the Index Fund
and the Enhanced Fund used the same methodology to value the securities
received by the Enhanced Fund in the in kind redemption. Specifically,
Mercer determined that all securities were valued at their closing
prices on the relevant national exchange as of January 2, 2002, the
date the transactions were consummated, and all Fund shares and units
were valued at their daily net asset values in accordance with Rule
17a-7. Based upon the foregoing, Mercer concluded that the value of the
Enhanced Fund units received by the Plan in the exchange was equal to
the net asset value of the Index Fund shares given by the Plan.
Moreover, Mercer noted that the participants' accounts reflected
equivalent value before and after the transactions.
---------------------------------------------------------------------------
\5\ Mercer notes that in its review, it found a discrepancy of
$11,650.66 between the valuation of the Index Fund shares and the
Enhanced Fund units. Mercer explains that this discrepancy was
determined to be immaterial as the discrepancy represented less than
one tenth of one basis point of the total value of the investment.
Moreover, Mercer determined that no Plan participant had been
adversely affected by the $11,650.66 discrepancy.
---------------------------------------------------------------------------
Mercer represents that the transactions involved 3% of the Plan's
aggregate assets, and that the transactions resulted in the receipt by
the Enhanced Fund of approximately 33% of each securities position held
by the Index Fund. As noted above, subsequent to the in kind
redemption, the Enhanced Fund has held these securities for investment,
subject to normal trading and portfolio turnover.
13. Wachovia represents that had the Plan carried out an in kind
exchange it would have been required to establish a separate account,
engage an investment manager, and establish a daily valuation system in
order to integrate the assets received through the in kind redemption
into the Plan's self-directed design. This result would have meant
significant start-up and ongoing administrative fees for the Plan. In
the case of a cash redemption, which would have required the consent
from the Index Fund manager, Wachovia explains that the Plan would have
borne its ratable share of the transaction costs associated with
liquidating the Index Fund investments to cover the Plan's cash
redemption. The Plan would also have borne its ratable share of the
transaction costs associated with the purchase by the Enhanced Fund of
securities with the cash transferred to it by the Plan in exchange for
the purchase of Enhanced Fund units.
14. In summary, it is represented that the transactions have
satisfied (or will satisfy) the statutory criteria for an exemption
under section 408(a) of the Act because:
(a) Mercer had the opportunity to review in advance the in kind
transfer of the mutual fund shares that were held on behalf of the Plan
in the Index Fund, in exchange for units in the Enhanced Fund, after it
had received full written disclosures concerning the Funds.
(b) On the basis of the disclosures, Mercer recommended both the in
kind transfer transaction and the in kind redemption transaction, and
the Plan Committee followed Mercer's recommendation by acting on such
advice.
(c) Before recommending the transactions, Mercer determined that
(1) the terms of the transactions were fair to the participants in the
Plan, and were comparable to, and no less favorable than, the terms
obtainable at arm's length between unaffiliated parties; and (2) the
transactions were in the best interest of the Plan and its participants
and beneficiaries.
(d) The in kind transfer transaction was a one-time transaction for
the Plan and the mutual fund shares transferred were equivalent in
value to the units in the Enhanced Fund.
(e) The in kind redemption of the Index Fund shares by the Enhanced
Fund was a one-time transaction and the resulting cash and transferable
securities constituted a pro rata portion of the assets held on behalf
of the Plan in the Index Fund prior to the transaction.
(f) In the case of the exchange by the Plan of Index Fund shares
for Enhanced Fund units, the per unit value of the Enhanced Fund units
that were issued to the Plan in exchange for the Plan's Index Fund
shares had an aggregate value that was equal to the value of the mutual
fund shares transferred to the Enhanced Fund on the date of the
transfer, as determined in a single valuation performed in the same
manner and at the close of business on the same day in accordance with
Rule 17a-7 (using sources independent of Wachovia), and the procedures
established by the Enhanced Fund pursuant to Rule 17a-7.
(g) In the in kind redemption transaction, the Enhanced Fund
received a pro rata portion of the cash and transferable securities
held on behalf of the Plan in the Index Fund that was equal in value to
the number of mutual fund shares redeemed for such cash and
transferable securities, as determined in a single valuation performed
in the same manner and at the close of business on the same day in
accordance with Rule 17a-7, (using sources independent of Wachovia),
and the procedures established by the Enhanced Fund pursuant to Rule
17a-7.
(h) For purposes of the covered transactions, the fair market value
of all transferable securities received by the Enhanced Fund in the in
kind redemption transaction was determined by reference to the last
sale price for transactions as reported in the Consolidated System or
the NASDAQ System.
(i) Within 90 days after the completion of the transactions, Mercer
received confirmation of the following information: The number of Index
Fund
[[Page 47252]]
shares exchanged by the Plan and the number of Enhanced Fund units
received by the Plan immediately before the in kind transfer
transaction (and the related per share net asset value and the total
dollar value of the shares held) as reported by the Funds; (2) the
identity, the current market price of each security received by the
Enhanced Fund in the in kind redemption, and the aggregate dollar value
of the transferable securities allocated to the Plan in the Enhanced
Fund pursuant to the redemption, and the net asset value of Enhanced
Fund units after the redemption;
(j) Subsequent to the completion of the transactions, Mercer
conducted a post-transaction review in which it verified: (1) The
number and current market price of all Enhanced Fund units transferred
to the Plan in exchange for the Index Fund shares; (2) the number and
current market price of all Index Fund shares transferred by the Plan
to the Enhanced Fund in exchange for Enhanced Fund units; (3) the
identity of each transferable security, the number of shares of such
security transferred, the closing price on the relevant national
exchange as of the date of the transfer, and the proper valuation of
the securities for the purposes of the transfer; (4) the aggregate
dollar value of the Index Fund shares that were being held by the Plan
immediately before the transfer and the aggregate dollar value of the
Enhanced Fund units held by the Plan immediately after the transfer
were valued at their daily net asset values in accordance with their
normal procedures; and (5) the use, by the Index Fund and the Enhanced
Fund, of the same methodology to value the securities transferred by
the Index Fund to the Enhanced Fund in the in kind redemption.
(k) No sales commissions, fees or other costs were paid by the Plan
in connection with the transactions, and no additional management fees
are being charged to the Plan by Wachovia through the Enhanced Fund.
(l) Wachovia did not enter into the transactions unless Mercer
concurred with such transactions.
(m) The Plan's dealings with the Index Fund, the Enhanced Fund and
Wachovia were on a basis that was no less favorable to the Plan than
dealings between the Enhanced Fund and other investors.
Notice to Interested Persons
Notice of proposed exemption will be provided to all interested
persons by first class mail within 45 days of publication of the notice
of pendency in the Federal Register. Such notice shall include a copy
of the notice of pendency, as published in the Federal Register, and
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2),
which shall inform interested persons of their right to comment on the
proposed exemption. Comments are due within 75 days of the date of
publication of the proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Silvia M. Quezada of the
Department, telephone (202) 693-8553. (This is not a toll-free number.)
Dakotas and Western Minnesota Electrical Workers Apprenticeship Plan
(the Plan), Located in Fargo, ND
[Exemption Application No: L-11316]
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Act in accordance with
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
32847, August 10, 1990). If the proposed exemption is granted, the
restrictions of sections 406(a)(1)(A) through (D), 406(b)(1), and
406(b)(2) of the Act shall not apply to the lease (the Lease) of a
portion of a parcel of improved real property (the Premises) by the
Plan from the Dakotas Chapter of the National Electrical Contractors
Association (the Dakotas NECA), a party in interest with respect to the
Plan; provided that, at the time the transaction is entered into, the
following conditions are satisfied:
(a) An independent, qualified fiduciary (the I/F), acting on behalf
of the Plan, determines prior to entering into the transaction that the
transaction is feasible, in the interest of, and protective of the Plan
and the participants and beneficiaries of the Plan;
(b) Before the Plan enters into the proposed Lease of the Premises,
the I/F reviews the transaction, negotiates the terms of the
transaction to ensure that such terms are at least as favorable to the
Plan as an arm's length transaction with an unrelated party, and
determines whether or not to approve the transaction, in accordance
with the fiduciary provisions of the Act;
(c) The I/F monitors compliance with the terms and conditions of
this exemption, as described herein, and ensures that such terms and
conditions are at all times satisfied;
(d) Throughout the duration of the Lease of the Premises, the I/F
monitors compliance with the terms of the Lease of the Premises and
takes any and all steps necessary to ensure that the Plan is protected,
including, but not limited to, notifying Dakotas NECA of the Plan's
intention to extend the Lease of the Premises at the conclusion of the
initial five (5) year term of the Lease;
(e) The rent paid by the Plan for the Premises under the terms of
the Lease and under the terms of any subsequent extension of the Lease
is at no time greater than the fair market rental value of the
Premises, as determined by an independent, qualified appraiser retained
by the Board of Trustees of the Plan (the Trustees);
(f) The Plan pays no rent for the Premises, any remodeling or
maintenance costs, any taxes, insurance, operating expenses or other
costs, expenses, or charges for the Premises for the period from the
date of the Plan's first occupancy of the Premises to the date the
final exemption is published in the Federal Register. Nothing in this
condition (f) shall preclude the payment by the Plan of rent plus its
proportionate share of the cost of taxes, maintenance, and insurance on
the Premises after the final exemption is published in the Federal
Register and the Lease of the Premises is executed;
(g) Under the provisions of the Lease, the transaction is on terms
and at all times remains on terms that are at least as favorable to the
Plan as those that would have been negotiated under similar
circumstances at arm's length with an unrelated third party;
(h) The transaction is appropriate and helpful in carrying out the
purposes for which the Plan is established or maintained;
(i) The Trustees maintain, or cause to be maintained within the
United States for a period of six (6) years in a manner that is
convenient and accessible for audit and examination, such records as
are necessary to enable the persons described, below, in paragraph
(j)(1) of this exemption to determine whether the conditions of this
exemption have been met; except that--
(1) If the records necessary to enable the persons described,
below, in paragraph (j)(1) of this exemption to determine whether the
conditions of this exemption have been met are lost or destroyed, due
to circumstances beyond the control of the Trustees, then no prohibited
transaction will be considered to have occurred solely on the basis of
the unavailability of those records; and
(2) No party in interest, other than the Trustees shall be subject
to the civil penalty that may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if
the records are not maintained, or are not available for
[[Page 47253]]
examination as required by paragraph (i) of this exemption; and
(j)(1) Except as provided, below, in paragraph (j)(2) of this
exemption and notwithstanding any provisions of sections (a)(2) and (b)
of section 504 of the Act, the records referred to in paragraph (i) of
this exemption are unconditionally available at their customary
location for examination during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or any other applicable
federal or state regulatory agency;
(B) Any fiduciary of the Plan, or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to the Plan and any employee
organization whose members are covered by the Plan, or any duly
authorized employee or representative of these entities; or
(D) Any participant or beneficiary of the Plan, or any duly
authorized representative of such participant or beneficiary.
(2) None of the persons described, above, in paragraph (j)(1)(B)-
(D) of this exemption are authorized to examine trade secrets or
commercial or financial information that is privileged or
confidential.\6\
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\6\ The Department notes that the relief proposed herein, is
conditioned upon the adherence by the Trustees to the material facts
and representations set forth in the application file and upon
compliance with the conditions, as set forth in this exemption.
---------------------------------------------------------------------------
Summary of Facts and Representations
1. The Plan is a multi-employer employee welfare benefit plan, as
that term is defined in section (3)(1) of the Act. The Plan is exempt
from federal income taxation under section 501(c)(3) of the Code. As of
March 24, 2005, the date the application was filed, there were 850
participants in the Plan. The Plan had assets totaling $564,407, as of
June 30, 2004.
The Plan is maintained under a collective bargaining agreement
between the Dakotas NECA, representing contributing employers, and four
(4) local unions (the Locals) representing employees who are members of
the International Brotherhood of Electrical Workers. Specifically, the
Locals and their geographic locations have been identified as: (a)
Local 426 (Sioux Falls, SD); (b) Local 1250 (Rapid City, SD); (c) Local
714 (Bismarck and Minot, ND); and (d) Local 1426 (Fargo and Grand
Forks, ND). As employee organizations any of whose members are covered
by the Plan, the Locals are parties in interest with respect to the
Plan, pursuant to section 3(14)(D) of the Act.
2. Eight (8) individuals serve as Trustees of the Plan. Four (4) of
the Trustees are appointed by contributing employers and either are
employed by or are members of the Board of Directors of the Dakotas
NECA. Four (4) of the Trustees are appointed by members of the Locals.
One such Trustee is a representative of Local 1426.
Under the Agreement and Declaration of Trust, the Trustees may use
Plan assets to lease premises to house the functions of the Plan, to
pay proper and necessary expenses, and to enter into contracts. It is
represented that this is a sufficient conveyance of authority to permit
the Trustees to enter into the proposed transaction, if granted. The
Trustees are parties in interest with respect to the Plan, pursuant to
section 3(14)(A) of the Act, and fiduciaries, as defined in section
3(21) of the Act.
3. The Dakotas NECA is a North Dakota non-profit corporation
founded in 1949. Its membership currently comprises 34 electrical
contractors in North and South Dakota and western Minnesota, who are
signatories to collective bargaining agreements with the Locals. The
Dakotas NECA is a party in interest with respect to the Plan, pursuant
to section 3(14)(C) of the Act, as an employer association.
It is represented that the Dakotas NECA currently provides office
space and other services to the Plan under an arrangement that is
represented to meet the requirements of section 408(b)(2) of the
Act.\7\ In this regard, it is represented that an entry in the Plan's
financial statement relates to an arrangement whereby Dakotas NECA and
the Plan share the cost of office space and administrative services,
including secretarial and bookkeeping services, the services of the
Plan's Director, and ancillary costs for office equipment and supplies.
---------------------------------------------------------------------------
\7\ The Department is offering no view, herein, as to whether
the provision of office space and other services rendered to the
Plan by the Dakotas NECA is covered by the statutory exemption
provided in sections 408(b)(2) of the Act and the Department's
regulations, thereunder, pursuant to 29 CFR 2550.408b-2. Further,
the Department is not providing, herein, any relief with respect to
the provision of office space and other services to the Plan by the
Dakotas NECA.
---------------------------------------------------------------------------
4. The Plan provides benefits in the form of apprenticeship and
other training programs to persons employed as commercial and
residential electricians in the states of North Dakota, South Dakota,
and the western regions of Minnesota. The Plan sponsors a five (5) year
course of study for apprentices entering the electrical trade and other
courses of study that allow journeyman electricians to upgrade their
skills. Generally, apprentices attend classes two (2) nights a week.
There are currently 98 apprentices enrolled in training programs.
It is represented that the geography of the Dakotas includes a
number of small to mid-sized population centers, but no single large
metropolitan area. In order to satisfy its purposes, the Plan has
established training facilities located throughout its jurisdiction. In
this regard, the Locals in Bismarck, Minot, and Grand Forks, North
Dakota and the Locals in Sioux Falls and Rapid City, South Dakota offer
space in their union halls to the Plan for use as training facilities.
It is represented that the Plan pays rent (currently $2,600 per year
per facility) to these Locals to help defray expenses for the use of
the space in these union halls. It is represented that the Locals that
make training space available for the Plan rely on the exemption
provided by and satisfy the requirements of Prohibited Transaction
Class Exemption 78-6 (PTCE 78-6).\8\
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\8\ PTCE 78-6 permits, in part, collectively bargained multiple
employer apprenticeship plans to lease real property (other than
office space) from a sponsoring employee organization; provided the
terms of the transaction are at least as favorable to the
apprenticeship plan as an arm's length transaction with an unrelated
party; the transaction is appropriate and helpful in carrying out
the apprenticeship plan's purposes; and the apprenticeship plan
maintains certain records for a period of six (6) years. The
Department is not offering a view, herein, as to whether the relief
provided by PTCE 78-6 covers the leasing of training space between
the Plan and certain Locals. Further, the Department is not
providing, herein, any relief with respect to the leasing of
training space to the Plan by such Locals.
---------------------------------------------------------------------------
It is represented that the Fargo area has the largest population
base of all the cities within the geographic coverage of the Plan. A
significant portion of the participant base of the Plan, in particular,
63 out of 98 apprentices reside in or near Fargo. Prior to the
occupancy of the Premises by the Plan in November 2003, apprentices
from Local 1426 in Fargo, received training in space rented from
Northwest Technical College (NTC) in Moorhead, Minnesota. The rent at
NTC was approximately $2,380 per year for approximately fifty (50)
evenings of use. It is represented that the Plan also incurred expenses
of several thousand dollars annually for additional space to conduct
journeyman training and other functions. It is represented that the
space at NTC was too small and was subject to repeated and numerous
scheduling conflicts. The arrangement at NTC permitted no flexibility
in the training schedule. The NTC facility provided no storage and did
not allow the Plan's apprentices to use its training modules or
computers.
[[Page 47254]]
In this regard, instructors had to set up modules or computers for
hands-on training projects during the early part of each class and
dismantled the project by the end of each class to leave the classroom
ready for the students of the NTC.
It is represented that the Plan recognized the inadequacy of the
NTC facility as long ago as 1997. In this regard, the Plan looked at
several buildings to buy and space to lease, but did not find a
suitable affordable facility. Specifically, in the fall of 1999, the
Plan viewed space to lease at the Skills and Technology Center. It is
represented that this building was being renovated, and raw space was
available to lease at a base rent of $4.00 to $5.00 per square foot.
The cost of building out the space would have been in addition to the
rent. Also, taxes, utilities, and maintenance expenses would have been
added to the rent. In late 2000, the Plan considered the purchase of a
building adjacent to the Fargo Labor Temple, but found it unsuitable
because of its size and price.
It is represented that, unlike the other Locals, Local 1426 in
Fargo does not own a union hall and prefers to lease space for a union
hall and union activities from the Fargo Labor Temple. In this regard,
it is represented that there is no space in the Fargo Labor Temple to
accommodate apprenticeship and journeyman training.
In order to provide a training facility in Fargo, contributing
employers in that area agreed, beginning June 1, 1997, to increase
contributions to the Plan by four cents (4[cent]) per hour. This
funding has been segregated into a separate Plan account (the Fargo
Account). It is represented that the contributing employers and Local
1426 intend to continue contributions to the Fargo Account at four
cents (4[cent]) per hour for the duration of the transaction that is
the subject of this proposed exemption. This source of funding is
expected to generate approximately $20,000 per year. The decision
whether to allocate more than the current four cents (4[cent]) per hour
rests with the membership of Local 1426. As of June 30, 2004, the
assets in the Fargo Account totaled $271,361. It is proposed that the
current balance and the cash flow attributable to future special
contributions to the Fargo Account are to be fully expended by the Plan
to purchase or lease and equip a training facility in Fargo.
5. In March 2003, the Dakotas NECA purchased a building at 2901
First Avenue North, Fargo, North Dakota (the Building). The Dakotas
NECA acquired the Building when it was required to relocate because its
lease had expired. It is represented that the Dakotas NECA occupies
Suite 1 of the Building that constitutes approximately 4,940 square
feet in size.
It is represented that the Premises, located in Suite 2 of the
Building, also constituting approximately 4,940 square feet, is
suitable for a training facility. At its expense, the Dakotas NECA
improved the space in order to meet the needs of the Plan. In this
regard, the Premises contain three classrooms, one computer lab, hands-
on training areas, a welding training area, and storage space. It is
represented that the Plan purchased the necessary equipment and
furniture for the Premises using money from the Fargo Account.
Dakotas NECA proposes to lease the Premises to the Plan. In this
regard, it is represented that the Plan has occupied the Premises, at
no expense to the Plan, since November 1, 2003. The Dakotas NECA has
agreed to waive receipt of payment of any rent, taxes, operating
expenses, or other costs or expenses as the result of the Plan's
occupancy of the Premises from the date of such occupancy to the date
the final exemption is published in the Federal Register.
Notwithstanding the Plan's occupancy of the Premises since November
2003, the applicant maintains that retroactive relief is not necessary
and has not been requested. In the opinion of the applicant, the term
of the Lease of the Premises has not begun and will not begin to run
until after the proposed exemption is granted. In this regard, it is
represented that the date of the Lease will reflect a date no earlier
than the date of the publication of the final exemption in the Federal
Register. Accordingly, the applicant seeks only a prospective exemption
to permit the Plan to enter into the Lease of the Premises with Dakotas
NECA.\9\
---------------------------------------------------------------------------
\9\ The Department is not providing any retroactive relief,
herein, with respect to any violations of section 406 of the Act
that may have arisen in connection with the Plan's occupancy of the
Premises since November 2003.
---------------------------------------------------------------------------
The applicant represents that relief provided by PTCE 78-6 is
analogous to the type of lease transaction for which the Plan seeks an
exemption. Furthermore, the applicant states that the proposed
transaction satisfies the conditions specified in PTCE 78-6. However,
as the relief provided by PTCE 78-6 from sections 406(a)(1)(A), (C) of
the Act does not extend to an association of contributing employers,
such as the Dakotas NECA, the applicant has requested an administrative
exemption from section 406(a) of the Act.
The Trustees representing the contributing employers and the
Trustee representing Local 1426 have abstained from deliberations and
have not voted on the subject transaction in order to avoid actual and
colorable conflicts of interest. Nevertheless in order to make certain
that all necessary relief is granted, the applicant has also requested
an exemption from the self-dealing and conflict of interest provisions,
as set forth in section 406(b)(1) and (b)(2) of the Act.
6. The proposed term of the Lease of the Premises is five (5)
years, commencing no sooner than the date of the publication in the
Federal Register of the final exemption for the subject transaction.
The proposed net rental amount is $7.85 per square foot of rentable
area, plus the Plan's proportionate share of the cost of taxes,
maintenance, and insurance on the Premises. The Plan is expected to
lease 4,940 square feet of space in the Building. Upon expiration of
the initial five (5) year term of the Lease, the Plan may exercise a
series of one (1) year options to continue occupying the Premises,
provided that: (a) the Plan gives the Dakotas NECA not less than two
(2) months' prior written notice exercising its option to extend the
term of the Lease; and (b) the Plan is not in default of the Lease at
the time it exercises its option to extend. It is represented that the
base rent during the extended term shall be the lesser of: (a) $2,600
per year or the arrangement in effect for the Plan's facilities in
other areas, or (b) the fair market rental of the Premises. It is
represented that with the exception of the Plan's option to renew the
Lease, the terms of the proposed Lease are typical of a standard
commercial lease.
7. The applicant maintains that the proposed exemption is
administratively feasible, because the Plan will maintain records for
review by the Department and others to insure that the conditions of
the exemption are satisfied. Further, it is represented that all the
terms of the proposed transaction are known and have been disclosed in
the application. Further, the applicant maintains that the proposed
exemption is administratively feasible in that the Dakotas NECA, the
contributing employers, and the Locals all share the same interest in a
skilled and satisfied workforce.
8. The applicant maintains that the proposed transaction is in the
interest of the Plan, as the rent under the proposed Lease of the
Premises is more affordable to the Plan than an arm's length market
rate transaction would be. In this regard, the Plan has obtained
opinions of the fair market rental value of the Premises
[[Page 47255]]
from the following four (4) appraisers all of which are familiar with
the real estate market in Fargo:
(a) Chuck Helmstetter, a real estate broker with Property Resources
Group, opined that, as of October 16, 2003, rentable space in the Fargo
area similar to the Premises would lease at a rental rate of from
$11.50 to $14.00 per square foot annually with the tenant paying a
prorated share of operating costs;
(b) Arnie Kuhn, CRB, CRS, ABR, a licensed real estate broker and
President of Rust-National, Inc. d.b.a. Arnie & Mary Realtors, as of
October 16, 2003, estimated that the fair market rental value in Fargo
for space similar to the Premises would range from $12 to $14 per
square foot on a triple net basis;
(c) Scott M. Mandy, MAI, of Appraisal Services, Inc., as of May 11,
2004, using five comparable rental properties in Fargo, estimated the
gross rent for the Premises to be from $12.50 to $13.00 per square
foot; and
(d) Nathan J. Brooberg, John G. Flaherty, MAI, and Robert J.
Strachota (Mr. Strachota), MAI, CRE, MCBA, FIBA, and President of the
Shenehon Company, prepared a market rental analysis which indicated
that, as of October 13, 2004, the fair market net rent of the Premises
was within a range of from $11.50 to $12.50 per square foot on a gross
rental basis for a new lease in which the tenant pays all the operating
expenses and taxes. Based on these estimates of the range of rental
values for the Premises, it is the applicant's position that the net
rent under the terms of the proposed Lease of $7.85 per square foot is
at a minimum $3.65 to as much as $6.15 below the market rate in the
Fargo area. Accordingly, the applicant maintains that if the exemption
were denied the Plan would have to pay higher rent for equivalent space
elsewhere.
Further, the applicant maintains that the proposed Lease is in the
interest of the Plan in that at the conclusion of the initial five (5)
year term, the Plan at its option may extend its lease of the Premises
on a basis which is both financially favorable and consistent with the
lesser of: (a) $2,600 per year or the arrangement in effect for the
Plan's facilities in other areas; or (b) the fair market value of the
Premises.
It is also represented that the subject transaction is in the
interest of the Plan and its participants in that under the proposed
Lease, the Plan enjoys a dedicated training facility tailored to meet
the needs of providing appropriate apprenticeship training in Fargo now
and in the future.
9. It is represented that the Plan has sufficient cash to pay for
the rent on the Premises under the terms of the proposed Lease. In this
regard, the entire corpus of the assets of the Plan ($564,407, as of
June 30, 2004) is available to cover the Plans' expenses. The annual
projected rental amount under the Lease is $38,779. Based on the Plan's
most recent financial statements, dated June 30, 2004, this annual
projected rental amount represents 6.8 percent (6.8%) of the Plan's
assets. It is estimated that the Plan's total annual outlay on the
Premises, which includes rent and the Plan's proportionate share of the
cost of taxes, maintenance, and insurance is $50,870 or 9 percent of
the Plan's assets.
In addition, the Plan has assets in the Fargo Account dedicated to
the purchase or leasing and equipping of a training facility in Fargo.
It is represented that over the initial five (5) year term of the
Lease, the total amount of rent payable by the Plan will be $193,895.
It is represented the total expenses, including rent, and the Plan's
proportionate share of the cost of taxes, maintenance, and insurance
will be $256,820. It is represented that the total amount payable by
the Plan either has been or will be accumulated in the Fargo Account
over the five (5) year term of the Lease. In this regard, the sum of
the contributions to the Fargo Account, as of June 30, 2004, ($271,361)
plus the projected future contributions to such account of $20,000 per
year until May 2008, ($80,000) totals approximately $351,361 which
exceeds the rent, plus the proportionate share of the cost of taxes,
maintenance, and insurance payable by the Plan ($256,820) over the
initial five (5) year term by $94,541.
10. The proposed exemption contains conditions that are designed to
ensure the presence of adequate safeguards to protect the interests of
the Plan regarding the subject transaction. In this regard, Mr.
Strachota, who assisted in the preparation of the appraisal prepared by
the Shenehon Company, as discussed in paragraph 8(d) above, has been
retained to act as the I/F with respect to the decision whether the
proposed Lease is an appropriate and prudent transaction for the Plan.
It is represented that the engagement of Mr. Strachota as the I/F
also addressed the issue of the effectiveness of the abstention by the
employer Trustees under section 302(c)(5) of the Taft Hartley Act.
Mr. Strachota has agreed on behalf of the Plan to prepare a market
rental analysis of the Building. In addition, Mr. Strachota has
consented to act as an I/F on behalf of the Plan. In this regard, in a
letter dated February 15, 2005, Mr. Strachota represents that he
understands that he is acting as a fiduciary to the Plan, as that term
is defined in section 3(21) of the Act.
It is represented that Mr. Strachota is qualified to act as the I/F
in that he is an expert in the field of real estate valuation and real
estate acquisition and leasing. In this regard, Mr. Strachota is the
President of Shenehon Company, a real estate and business valuation
firm established in 1929, and located in Minneapolis, Minnesota. Mr.
Strachota is a graduate of the University of St. Thomas in St. Paul,
Minnesota and holds a master of business administration from the
University of Minnesota where he also has teaching experience. Among
many professional associations and societies, Mr. Starchota is a Fellow
of the Institute of Business Appraisers, holds a designation of
Counselor of Real Estate (CRE) from the American Society of Real Estate
Counselors, and is a member of the Appraisal Institute (MAI) certified
through December 31, 2007. Mr. Strachota's professional duties include
the preparation of valuations and market analyses of real estate,
business enterprises, and intangible property rights, among many other
assignments.
Mr. Strachota represents that he has no personal interest or bias
with respect to the subject matter of his rental analysis or to the
parties involved. It is represented that Dakotas NECA is responsible
for paying Mr. Strachota's fee. Mr. Strachota represents that the
market rental analysis he prepared of the Building conforms to accepted
professional, ethical, and performance standards of real estate
appraisal practice.
In a letter dated May 20, 2005, the parameters of the scope of the
I/F's assignment included the following elements: (a) Mr. Strachota
must determine that the transaction is feasible and in the best
interests of and protective of the interests of the Plan and its
participants and beneficiaries; (b) before the Plan enters into the
proposed Lease, Mr. Strachota must review the transaction, negotiate
the terms of the transaction to ensure that such terms are at least as
favorable to the Plan as an arm's length transaction with an unrelated
party, and determine whether or not to approve the transaction, in
accordance with the fiduciary provisions of the Act; (c) Mr. Strachota
must monitor compliance with the terms of the exemption and the Lease
and ensure that such terms are at all times satisfied; and (d) Mr.
Strachota is responsible for taking any and all steps necessary to
insure that the Plan is at all times protected, including but
[[Page 47256]]
not limited to providing notice of the Plan's intention to extend or
terminate the Lease and negotiating any such extension at the
conclusion of the initial five (5) year term of the Lease.
Based on the Trustees prior determinations that it is necessary,
reasonable, and appropriate that the Plan have a training facility in
Fargo, that the Premises is suitable in size and attributes, and that
the Plan has the financial ability to undertake the proposed Lease, Mr.
Strachota concurs with the Trustees assessment that it is necessary,
reasonable, and appropriate for the Plan to have a dedicated training
facility in Fargo and that the Plan is financially capable of entering
into the Lease.
Based on the market analysis prepared by the Shenehon Company, as
discussed in paragraph 8(d), above, Mr. Strachota has concluded that
the proposed net rent per square foot under the terms of the Lease is
below the current fair market net rent for the Premises. Further, Mr.
Strachota points out that fair market net rents may be expected to
increase over time, so that the net rent under the Lease is likely to
become even more favorable. Mr. Strachota finds that the non-financial
terms of the Lease are unremarkable and typical of a commercial lease
of space and are at least as favorable to the Plan as would be found in
an arm's length transaction with an unrelated party.
Based on all of the above analysis, Mr. Strachota concludes that
the proposed transaction is feasible and in the best interest of and
protective of the Plan and its participants and beneficiaries. Finally,
Mr. Strachota directs that the transaction proceed, conditional upon
the issuance of a final exemption by the Department.
11. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) Mr. Strachota, acting as the I/F on behalf of the Plan, will
determine prior to entering the transaction(s) whether the transaction
is feasible, in the interest of, and protective of the Plan and the
participants and beneficiaries of the Plan;
(b) Mr. Strachota will review, negotiate, and approve the terms of
the transaction prior to entering into the Lease of the Premises and
will determine whether or not to accept the transaction for the Plan in
accordance with the fiduciary provisions of the Act;
(c) Mr. Strachota will monitor compliance with the terms and
conditions of this exemption, as described herein, and will ensure that
such terms and conditions are at all times satisfied;
(d) Throughout the duration of the Lease of the Premises, Mr.
Strachota will monitor compliance with the terms of the Lease of the
Premises and will take any and all steps necessary to ensure that the
Plan is protected, including but not limited to notifying Dakotas NECA
of the Plan's intention to extend the Lease of the Premises at the
conclusion of the initial five (5) year term of the Lease;
(e) The rent paid by the Plan for the Premises under the terms of
the Lease and under the terms of any subsequent extension of the Lease
at no time will be greater than the fair market rental value of the
Premises, as determined by an independent, qualified appraiser retained
by the Trustees;
(f) The Plan will not pay any rent for the Premises, any remodeling
or maintenance costs, any taxes, insurance, operating expenses or other
costs, expenses, or charges for the Premises for the period from the
date of the Plan's first occupancy of the Premises to the date the
final exemption is published in the Federal Register;
(g) Under the provisions of the Lease, the transaction will be on
terms and at all times will remain on terms that are at least as
favorable to the Plan as those that would have been negotiated under
similar circumstances at arm's length with an unrelated third party;
(h) The transaction is appropriate and helpful in carrying out the
purposes for which the Plan is established or maintained; and
(i) The Trustees will maintain, or cause to be maintained within
the United States for a period of six (6) years in a manner that is
convenient and accessible for audit and examination, such records as
are necessary to determine whether the conditions of this exemption
have been met.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540 (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 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 9th day of August, 2005.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 05-16045 Filed 8-11-05; 8:45 am]
BILLING CODE 4510-29-P
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