Grant of Individual Exemptions; Kinder Morgan, Inc.
[07/07/2004]
Volume 69, Number 129, Page 40969-40979
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2004-08; Exemption Application No. D-
11079 et al.]
Grant of Individual Exemptions; Kinder Morgan, Inc.
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 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemption is administratively feasible;
[[Page 40970]]
(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.
Kinder Morgan, Inc.
[Prohibited Transaction Exemption 2004-08; Exemption Application Number
D-11079]
Exemption
Section I. Transactions Involving Contributions In-Kind
The restrictions of sections 406(a)(1)(E), 407(a)(2), 406(b)(1),
and 406(b)(2) of the Act shall not apply to: (1) The acquisition of
publicly traded Employer Stock by the Trusts through the voluntary in-
kind contribution (the Contribution) of such Stock by the Employer for
the purpose of pre-funding welfare benefits provided by the Plans; and
(2) the holding by the Trusts of Employer Stock acquired pursuant to a
Contribution, provided that:
(a) Each Contribution is authorized pursuant to, and made in
conformity with, all relevant provisions of each affected Plan;
(b) The Plans and/or Trusts do not pay any amount or type of
consideration whether in cash or other property (including the
diminution of any Employer obligation to fund a Plan) for Employer
Stock contributed in-kind by the Employer;
(c) Each Contribution is voluntary and unrelated to any Employer
obligation to fund a Plan;
(d) The Plans do not cede any right to receive a cash contribution
from the Employer as a result of any Contribution made to any Plan;
(e) The Plans and/or Trusts do not pay any fees or commissions in
connection with any Contribution; and
(f) Each condition set forth below in Section II is satisfied.
Section II. Conditions
The exemption is conditioned upon the adherence by the Employer to
the material facts and representations described herein and in the
notice of proposed exemption, and upon the satisfaction of the
following requirements:
(a) Only Employer Stock that constitutes ``qualifying employer
securities'' (QES), as such term is set forth in section 407(d)(5) of
the Act, will be transferred by the Employer to a Trust pursuant to a
Contribution; \1\
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\1\ Section 407(d)(5) of the Act provides that the term
``qualifying employer security'' means an employer security that is
stock or a marketable obligation (as defined in subsection (e)).
After December 17, 1987, in the case of a plan other than an
individual account plan, stock is considered a ``qualifying employer
security'' only if such stock satisfies the requirements of
subsection 407(f)(1) of the Act. Section 407(f)(1) of the Act
provides that stock satisfies such requirement if, immediately
following the acquisition of such stock--(A) no more than 25 percent
of the aggregate amount of stock of the same class issued and
outstanding at the time of acquisition is held by the plan, and (B)
at least 50 percent of the aggregate amount referred to in
subparagraph (A) is held by persons independent of the issuer.
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(b) Employer Stock transferred by the Employer on behalf of a Plan
will thereafter be held by the Trust (or Trusts) for the purpose of
funding welfare benefits for the participants and beneficiaries of such
Plan;
(c) Employer Stock contributed to, or otherwise acquired by, a
Trust will be held in a separate account (an Account) under such Trust;
(d) The appropriate fair market value of any Employer Stock
contributed by the Employer to a Trust will be established by an
Independent Fiduciary, as such term is defined in section III(c) of
this exemption;
(e) The Independent Fiduciary will represent the interests of the
Plans for all purposes related to each Contribution for the duration of
the Trust's holding of such Employer Stock, and will authorize the
trustee of each Trust to accept Employer Stock pursuant to a
Contribution only after such Independent Fiduciary determines, at the
time of the transaction, that such transaction is feasible, in the
interest of the affected Plans, and protective of the participants and
beneficiaries of such Plans;
(f) The Independent Fiduciary will: (1) Verify that the price of
Employer Stock contributed by the Employer is appropriate and,
thereafter, monitor the Employer Stock and have sole responsibility for
the ongoing management of the Accounts; and (2) take whatever action is
necessary to protect the rights of the Plans funded by the Trusts,
including, but not limited to, the making of all decisions regarding
the acceptance and acquisition of Employer Stock contributed by the
Employer, the retention and any disposition of such Stock, and the
exercise of any voting rights associated with such Stock;
(g) With certain exceptions described in paragraphs (h) and (i)
below, the total amount of: (1) Employer Stock; (2) qualifying employer
real property (QERP), as defined by section 407(d)(4) of the Act; and
(3) QES other than the Employer Stock (collectively, the Limited
Assets) held by each Plan shall not comprise more than twenty-five
percent (25%) of the fair market value of the assets held by such Plan
as determined on the date of each such transaction;
(h) For purposes of calculating the percentage limitation described
in paragraph (g) of this section, and to the extent the conditions of
Prohibited Transaction Exemption (PTE) 91-38 have been met,\2\ Employer
Stock will not constitute a ``Limited Asset'' to the extent that such
Employer Stock:
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\2\ PTE 91-38 (56 FR 31966 (July 12, 1991)) requires, among
other things, that the interests of a plan in an unrelated common or
collective trust fund may not exceed ten percent (10%) of the total
of all assets in such common or collective trust fund.
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(1) Is held by an unrelated common or collective trust fund
maintained by an independent bank in which any of the Plans through the
Trusts may invest; and
(2) Has a total fair market value that does not exceed five percent
(5%) of the fair market value of each such common or collective trust
fund;
(i) Notwithstanding the requirement set forth in paragraph (g)
above, the amount of Limited Assets held by a Plan may only exceed 25%
of the total assets held by such Plan where:
(1) The Limited Assets appreciate in value at a rate that is
greater than the rate attributable to the Plan's non-Limited Assets,
and such difference in rates causes the value of the Limited Assets to
exceed 25% of the Plan's total asset value; or
(2) The non-Limited Assets have declined in value at a rate that is
greater than the rate attributable to the Plan's Limited Assets, and
such difference in rates causes the value of the Limited Assets to
exceed 25% of the Plan's total asset value; and
(j) At no time will any of the assets of the Trusts revert to the
use or benefit of the Employer.
Section III. Definitions
(a) The term ``Employer'' means Kinder Morgan, Inc., any successor
to Kinder Morgan, Inc., and/or any affiliates of Kinder Morgan, Inc.;
(b) The term ``Employer Stock'' means shares of publicly traded
common stock of the Employer and includes any replacement publicly
traded shares of such stock;
(c) The term ``Independent Fiduciary'' means W.H. Reaves & Company
Investment Management only to the extent that W.H. Reaves & Company
Investment Management: (1) Is an investment manager; (2) is independent
of and unrelated to the Employer; and (3) acts solely on behalf of the
Plans with respect to each Contribution. For purposes of this
exemption, W.H. Reaves & Company Investment
[[Page 40971]]
Management will not be deemed to be independent of and unrelated to the
Employer if (i) W.H. Reaves & Company Investment Management directly or
indirectly controls, is controlled by or is under common control with
the Employer; or (ii) the Employer pays W.H. Reaves & Company
Investment Management an amount of income during the fiduciary's
current tax year that exceeds one percent (1%) of such fiduciary's
gross income (for federal income tax purposes) over its prior tax year;
(d) The term ``Plan'' means an employee welfare benefit plan
maintained by the Employer; and
(e) The term ``Trust'' means a trust which is qualified under
Section 501(c)(9) of the Code, and established for the purpose of
funding life, sickness, accident, and other welfare benefits for the
participants and beneficiaries of the Plans.
Written Comments
Subsequent to the publication of the notice of proposed exemption
(the Notice), Kinder Morgan, Inc. (hereinafter, either Kinder Morgan or
the Applicant) notified the Department that it selected W.H. Reaves &
Company Investment Management to act as the Independent Fiduciary.
The Department received two written comments in response to the
Notice. The first written comment inquired: (1) Does the contribution
of stock by Kinder Morgan limit Kinder Morgan's liability to fund the
Plan; (2) What purpose does the proposed exemption serve; (3) Are the
transactions described in the proposed exemption just a ``scheme;'' (4)
Has the Securities and Exchange Commission (the SEC) reviewed the
proposed transactions; and (5) Does Kinder Morgan have to contribute
more shares if the value of the previously contributed shares
significantly decreases?
The Applicant responded to (1) above as follows: Kinder Morgan is
not required to pre-fund the Plans except for required contributions
made as part of certain rate agreements with the Federal Energy
Regulatory Commission.\3\ Kinder Morgan is required to make
contributions to the Plans only as benefit payments become due. The
contribution of Employer Stock increases the assets in the Plan. This
increases Kinder Morgan's ability to make benefit payments in the
future. These contributions do not limit Kinder Morgan's liability to
fund the Plan.
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\3\ As stated in the proposed exemption, Kinder Morgan is
currently subject to two rate agreements (the Rate Agreements) that
require the Employer to make annual cash contributions of specified
amounts to a Trust for an indefinite period of time. The Applicant
states that all of the contributions made by Kinder Morgan to
satisfy the funding requirements under the Rate Agreements will be
accounted for separately.
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The Applicant responded to (2) above as follows: Kinder Morgan
desires to pre-fund the Plans in order to provide both current and
future eligible participants (and their beneficiaries) with greater
assurance that funds will be available in future years to make benefit
payments. This desire to pre-fund (rather than utilizing a ``pay-as-
you-go'' approach) should be perceived very positively by eligible
participants. Pre-funding eliminates the risk associated with having
company general asset funds available in future years to make benefit
payments.
With respect to (3) above, Kinder Morgan represents that there is
no ``scheme'' involved with its prohibited transaction exemption
request. According to the Applicant, contributions of Employer Stock
will enable the Plans to more securely fund benefit payments in the
future. In response to (4) above, Kinder Morgan states that the
requested exemption does not affect the SEC's jurisdiction. With
respect to (5) above, Kinder Morgan represents that the purpose of the
prohibited transaction exemption request is to increase the amount of
assets that would otherwise be contributed to the Plans by pre-funding
the Plans with additional contributions of Employer Stock; but since
any contributions of Employer Stock into the Plans are voluntary Kinder
Morgan contributions, no additional contributions are required if
previously contributed Employer Stock shares decrease in value.
The other written comment expressed general concern regarding the
transactions described in the proposed exemption. In response to this
comment, Kinder Morgan states that the contributions of Employer Stock
described in the proposed exemption are voluntary. Once made, all
Employer Stock contributed in-kind will be subject to the control of an
Independent Fiduciary who will represent the interests of the Plans for
all purposes with respect to the Employer Stock for the duration of the
Trusts' holding of any of such Employer Stock as Plan assets. Kinder
Morgan represents that no assets of any of the Trusts may be used
except for the exclusive purpose of providing life, sickness, accident,
and other benefits covered under the Code to Kinder Morgan employees,
retirees, and their dependents and beneficiaries and for reasonable
expenses.
In addition, the Applicant represents that the Independent
Fiduciary is reputable and qualified as an investment manager. The
Applicant states that: (1) The Independent Fiduciary is and will remain
independent of, and unrelated to, Kinder Morgan; and (2) the
Independent Fiduciary's income from Kinder Morgan will not represent a
significant percentage (i.e., not more than one percent) of its total
income. The Applicant further represents that the requested
transactions are structured so that: (1) The Plans will not give up any
rights to cash or other property in connection with the acceptance of
the Employer Stock contributions; (2) no consideration will be paid for
Employer Stock contributed in-kind; (3) no obligation to pre-fund
welfare benefits will be satisfied by the contribution of Employer
Stock; (4) the Independent Fiduciary will be authorized to sell the
Employer Stock at any time; (5) the Plans will pay no commissions in
connection with the acquisition of the Employer Stock; (6) acceptance
of the Employer Stock will be consistent with the guidelines and asset
allocation policies applicable to the Trusts; and (7) the Employer
Stock will be subject to no restrictions on marketability and fully
transferable.
Accordingly, after full consideration and review of the entire
record, including the written comments, the Department has determined
to grant the exemption, as modified herein. The comments submitted by
the commentators to the Department and the Applicant's response thereto
has been included as part of the public record of the exemption
application. The complete application file, including all supplemental
submissions received by the Department, is available for public
inspection in the Public Disclosure Room of the Employee Benefits
Security Administration, Room N-1513, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210.
For a complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the Notice published on June 24, 2003 (68 FR 37534).
FOR FURTHER INFORMATION CONTACT: Christopher Motta of the Department,
telephone (202) 693-8544. (This is not a toll-free number.)
[[Page 40972]]
Landerholm, Memovich, Lansverk & Whitesides, P.S. 401(k) Profit Sharing
Plan (the Plan) Located in Vancouver, WA
[Prohibited Transaction Exemption 2004-09; Exemption Application No. D-
11132]
Exemption
Section I. Covered Transactions
The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (D) of the Code \4\ shall not apply,
effective January 1, 1998, to the past acquisition by the Plan, through
its real estate contract fund (the Fund), of real estate mortgage
contracts (the Contracts) from American Equities, Inc. (AE), a party in
interest with respect to the Plan.
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\4\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to corresponding provisions of the Code.
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In addition, the restrictions of section 406(a) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not
apply to the (1) future acquisition by the Plan, through the Fund, of
additional Contracts from AE; (2) the sale by the Plan of any of the
Contracts to AE; and (3) the exchange by the Plan of certain Contracts
with AE for other AE contracts and/or cash.
Section II. General Conditions
This exemption is conditioned upon adherence to the material facts
and representations described herein and upon satisfaction of the
following general conditions:
(a) Any acquisition, sale or exchange is approved in advance by the
Plan's Trustees (the Trustees), who are independent of AE and the
borrowers. Furthermore, the terms of each transaction between the Plan
and AE involving the Contracts is not less favorable to the Plan than
those terms generally available in an arm's length transaction between
unrelated parties.
(b) The transactions are not a part of an agreement, arrangement or
understanding designed to benefit AE.
(c) For purposes of an acquisition, sale or exchange, the cost of a
Contract does not exceed its fair market value, as determined by the
Plan's Trustees, using an objective appraisal methodology, and the
yield on all Contracts purchased, sold or exchanged exceeds the average
yield of comparable mortgage contract loans by not less then 1%.
(d) The aggregate fees paid to AE for its activities as loan
servicing agent for the Plan at all times do not exceed ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(e) No investment management, advisory, underwriting fees or sales
commissions are paid by the Plan to AE or any of its affiliates with
regard to the Plan's purchase, sale or exchange of a Contract.
(f) All Contracts acquired by the Plan satisfy the Trustees'
selection criteria. In this regard, at the time of the transaction:
(1) The loan to value ratio is 75% or less;
(2) The ``Total Return'' on the Contract is at least 1.00% above
the prevailing 30 year home mortgage rate;
(3) The purchaser of the property provides a clean payment history
and a personal credit report of at least 12 months' duration;
(4) The property is in good condition with no defects discovered
upon inspection;
(5) A clean title report is required; and
(6) A first position lien is obtained on the property.
(g) For prospective purchases or exchanges of Contracts by or
between the Plan and AE,
(1) The Trustees engage an independent and unrelated consultant
(the Independent Consultant), trained and experienced in real estate
financing, to perform a written annual review of the Plan's Contract
selection process to assure that--
(i) The selection process produces a yield to the Plan consistent
with comparable market returns for first mortgage investments by direct
federally insured lenders in the Trustees' market area;
(ii) The selection process permits only the purchase of Contracts
which are not subordinated to other indebtedness; and
(iii) The selection process incorporates standards for loan to
value ratio and borrower credit worthiness appropriate for qualified
retirement plan investments; and
(2) No Contracts are purchased or exchanged in any year until the
Independent Consultant's review has been issued, and the Independent
Consultant has the authority to require that the Plan modify or replace
the Selection Criteria utilized by the Plan as a condition to issuance
of its review.
(h) The Trustees maintain for a period of six years, in a manner
that is accessible for audit and examination, the records necessary to
enable the persons, as described in (i) to determine whether the
conditions of this exemption have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Trustees,
the records are lost or destroyed prior to the end of the six year
period; 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 examination as
required by paragraph (h).
(i) Except as provided in (i)(1)-(2) and notwithstanding any
provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (h) above shall be unconditionally
available at their customary location for examination during normal
business hours by--
(1) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission;
(2) Any fiduciary of the Plan who has authority to acquire or
dispose of any assets of the Plan, or any duly authorized employee or
representative of such fiduciary; and
(3) Any participant or beneficiary of the Plan or duly authorized
employee or representative of such participant or beneficiary.
EFFECTIVE DATE: This exemption is effective as of January 1, 1998 with
respect to the Plan's past acquisition of the Contracts and effective
as of the date of publication of the final exemption in the Federal
Register for further acquisitions, sales or exchanges of additional
Contracts by the Plan.
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 March 24, 2004 at 69 FR
13884.
Written Comments
During the comment period, the Department received two written
comments. The first comment letter was submitted by a former employee
of Landerholm, Memovich, Lansverk & Whitesides (Landerholm), the Plan
sponsor. The second comment letter was submitted by Landerholm.
Discussed below are the comments, including the responses made by
Landerholm to the first commenter and the Department's responses to
Landerholm's comment.
Former Employee's Comments
1. Arm's Length Transaction. The former employee's first comment
concerned whether ``the Fund [would]
[[Page 40973]]
maintain an arm's length Plan.'' Landerholm notes that although the
Plan has always functioned on an arm's length basis with respect to
transactions with AE, all discretion to purchase either administrative
services or Contracts from AE has resided with the Trustees, who are
wholly independent of AE. Landerholm also points out that the exemption
would add an Independent Consultant to review the decision-making
parameters employed by the Trustees in selecting investment Contracts.
In Landerholm's view, the addition of the Independent Consultant would
not compromise the arm's length nature of the transactions.
In addition, Landerholm wishes to remind the commenter that the
changes resulting from the exemption relate only to the Fund, which is
an investment option offered to participants under the Plan. Should the
commenter have concerns about the arm's length nature of transactions
involving the Fund, Landerholm suggests that the commenter could pursue
other investment alternatives offered under the Plan.
2. AE's Ownership Interests. The commenter's second comment
concerned the ownership status of AE and whether any Landerholm
attorneys own interests in AE. Landerholm states that AE is a wholly
independent company owned by Mr. Ross Niles and Ms. Maureen Wile.
Landerholm also explains that none of its attorneys, nor their
relatives or related entities, have any ownership interest in AE.
3. Impact of Contract Default on Plan. The commenter's third
comment concerned the impact of a Contract failure upon her retirement
benefits. Landerholm explains that there would be no adverse effect on
the commenter's retirement benefits since the commenter has not
invested any of her account balance in the Fund. On a more generic
basis, Landerholm notes that any investments in mortgages, deeds of
trust or other real estate financing instruments may involve some
degree of risk of default for delayed performance by the borrower.
However, Landerholm states that the Trustees have worked diligently to
minimize this risk by the application of stringent underwriting
standards to evaluate the borrower, the Contracts being purchased, and
the incidences of default. In addition, Landerholm asserts that the
Plan has intentionally diversified its investment in the Fund among a
large number of Contracts to minimize the risk that default on any one
Contract would seriously harm the Fund or its cash flow. Landerholm
explains that historically, Contracts have either been refinanced or
foreclosed upon. Although these processes may temporarily delay cash
flow on a particular Contract, Landerholm indicates that the
diversification of Contracts and their maturities is intended to
minimize or eliminate the impact on Plan distributions to participants.
Finally, Landerholm believes that after implementing the exemptive
safeguards, the Plan's processes for selecting, holding and monitoring
the Contracts provides a high degree of protection for those
participants choosing to invest in the Fund.
Landerholm's Comments
1. Current Plan Trustees. On page 13885 of the proposed exemption,
the fourth sentence of Representation 1 states ``The present Trustees
of the Plan are Irwin C. Landerholm, T. Randall Grove, and Philip
Janney, all of whom are current Landerholm shareholders.'' Landerholm
wishes to note that Mr. Landerholm is retired and is no longer a
shareholder. Landerholm suggests rewording the sentence to read as
follows: ``The present Trustees of the Plan are Irwin C. Landerholm, T.
Randall Grove, and Philip Janney. Mr. Grove and Mr. Janney are current
Landerholm shareholders, and Mr. Landerholm is a former Landerholm
shareholder. The Department notes this clarification to the proposed
exemption.
2. Fund's Ownership Interest in the Contracts. On page 13885 of the
proposal, the third sentence of Representation 2 states ``All of the
Contracts are ``whole'' Contracts that are held in the name of the
Fund.'' Landerholm wishes to clarify that all Contracts, whether
``whole'' Contracts or partial interests in Contracts are held in the
name of the Fund, are secured by a first mortgage, deed of trust, or
equivalent first security, and provide the Plan with the right to
proceed with foreclosure in the event of a default by the borrower. In
this regard, Landerholm states that there are two types of co-
ownerships involved in the Contracts. For instance, the Plan may hold
either a stream of a fixed number of payments (the Stream) or an
undivided interest in a Contract. Where a Stream is involved,
Landerholm explains that the Plan receives the first of (x) number of
Contract payments. Any remaining payments will be made to the seller of
the Plan, i.e., AE. Currently, Landerholm indicates the Plan holds
thirteen Contracts which break down as follows: 6 entire Contracts, 1
undivided interest in a Contract, 4 entire Streams, and 2 undivided
interests in a Stream.
Landerholm further explains that in all of the co-ownership
situations, the Plan's interest in the Contracts is secured by a first
real estate mortgage or deed of trust. Upon default by the borrower on
the underlying Contract, Landerholm indicates that the Contract
documents provide the Plan (together with any undivided co-owner) the
right to foreclose on the underlying property. If the Plan's interest
is in a Stream, the Plan must give thirty (30) days notice to AE, as
seller and holder of any residue interest after the Stream. Up until
there is a foreclosure of the property, Landerholm states that AE can
pay the Plan an amount equal to the entire Stream (including accrued
interest), together with all costs and expenses incurred by the Plan,
and thereby protect its residuary interest. If such a payoff occurs,
Landerholm represents that the Plan is made whole. However, if AE does
not pay off the entire Stream, then the Plan will complete the
foreclosure process, sell the underlying property and retain the entire
net foreclosure proceeds as a Plan asset. Thus, in the case of an
undivided interest, Landerholm states that the Plan (acting in concert
with the joint owner) has the same right it would if the Plan were the
sole owner of the Contract with first security position. In the case of
a Stream, other than AE's ability to pay off the Plan to protect AE's
residuary interest, Landerholm explains that the Plan has the same
first lien position and foreclosure rights that it would have if it
were the whole Contract holder with first security position.
Landerholm further notes that as a technical matter, all of the
Streams involve AE, a party in interest, since AE retains a residuary
interest after all of the payments of the Stream have been made. Other
than AE's residuary interest, Landerholm points out that only two
active Contracts have a party in interest, Mr. Irwin Landerholm, a co-
trustee of the Plan, as a co-owner. Landerholm explains that at the
time the Plan purchased its interests in these Contracts, the Fund
lacked sufficient free cash to purchase full Contracts. Therefore, Mr.
Landerholm agreed to purchase a fifty percent undivided interest in one
undivided Contract and one undivided Stream to facilitate the Plan's
investment of the cash it did have available in the other fifty percent
interest.
Landerholm further states that Mr. Landerholm's 50% co-ownership
interest in the Contracts is identical to the Plan's 50% interest. In
this respect, Landerholm indicates that Mr. Landerholm does not receive
payment or distribution preferences. Until the
[[Page 40974]]
time the Contracts are paid, or Mr. Landerholm sells or otherwise
transfers his interest to a third party, all payments under the
Contracts are allocated equally between the Plan and Mr. Landerholm.
Landerholm further represents that in the event of a Contract
foreclosure the Plan and Mr. Landerholm have a joint first security
interest, and either party can instigate the foreclosure proceeding. In
this regard, Landerholm notes that Mr. Landerholm would not receive
distribution or payment preferences of any kind.
Landerholm further represents that with respect to Mr. Landerholm's
current fiduciary status, whether as Trustee, Real Estate Committee
member, or otherwise, Mr. Landerholm will recuse himself from any and
all decision making by the relevant fiduciary body with respect to
matters involving any payment default and/or foreclosure on either of
the Contracts in which Mr. Landerholm is co-owner. In addition,
Landerholm notes that one of the Contracts in which Mr. Landerholm is
co-owner will be fully paid off in a matter of a few months.
Landerholm explains that both it and Mr. Landerholm desire to
complete Mr. Landerholm's retirement from his remaining Plan functions
(principally as a Trustee and Real Estate Committee member) shortly
after this exemption is granted. Upon that severance, Landerholm states
that Mr. Landerholm will no longer be a fiduciary, and thus, he will
have no discretionary authority over any Plan decision, including
whether to proceed with a Contract foreclosure. The Department
acknowledges the foregoing clarification to the proposal.\5\
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\5\ The Department notes that Mr. Landerholm will recuse himself
from all decisions regarding payment default and/or foreclosure on
either of the Contracts in which he is a co-owner with the Plan.
Although this issue may become moot due to Mr. Landerholm's
contemplated retirement and resignation as Trustee and Real Estate
Committee member, the Department wishes to point out that where a
plan fiduciary removes himself from all consideration by the plan of
whether or not to engage in a transaction, and by not otherwise
exercising, with respect to the transaction, any of the authority,
control or responsibility which makes such person a fiduciary, and
absent any arrangement, agreement or understanding with respect to
who will render the decision concerning the propriety of the
transaction, the fiduciary may avoid engaging in an act described in
section 406(b)(1) and (b)(2) of the Act. (See ERISA Advisory Opinion
97-72A, October 10, 1979.)
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3. Federally-Insured Mortgage Lenders. On page 13885 of the
proposed exemption, the fourth sentence of Representation 2 states
``The loans do not represent loans from direct, federally-insured
lenders, and as a result, they normally trade at a discount to the
current federally-insured lending rates.'' Landerholm explains that
while it agrees with this statement, it would like to emphasize that
the Contracts must provide a premium return over current rates due to
the fact that they are not federally insured. Landerholm proposes that
the sentence be reworded to read ``The loans do not represent loans
from direct, federally-insured lenders, and as a result, the Contracts
must normally provide a return which is superior to the current
federally-insured lending rates.'' The Department notes this
clarification to the proposed exemption.
4. Contract Purchase Price. On page 13885 of the proposed
exemption, the second sentence of Representation 4 reads ``AE acquires
Contracts at a discount and sells them at less than the federally-
insured lending rate on the secondary market.'' Landerholm proposes the
sentence be reworded to read ``AE sells the Contracts at a discount to
reflect the fact that the return must be at a premium to the federally-
insured lending rate.'' The Department acknowledges this clarification
to the proposal.
5. Prospective Contract Disclosure to Plan. On page 13885 of the
proposed exemption, the fifth sentence of Representation 4 reads ``Each
package prepared by AE included relevant documentation and performance
history, as well as an independent appraisal by a knowledgeable realtor
in the property's locale, of the underlying real estate securing the
loans.'' Landerholm states that under Washington law special licensure
is required to provide an ``appraisal'' and a realtor is not normally
licensed to provide ``appraisals''. As a result, Landerholm proposes
the sentence be reworded to read ``Each package prepared by AE included
relevant documentation and performance history, as well as an
independent market evaluation by a knowledgeable realtor in the
property's locale, of the underlying real estate securing the loans.''
The Department notes the foregoing clarification to the proposal.
6. Contract Yield. On page 13886 of the proposed exemption, the
third bullet point of Representation 9 reads ``The cost of a Contract
must not exceed its fair market value, as determined by the Trustees
using an objective appraisal methodology, and the yield on all
Contracts purchased must exceed the average yield of comparable
mortgage contract loans by no less than 1%.'' Landerholm notes that the
Trustees focus on each Contract and the determination of yield at the
time of acquisition. Therefore, Landerholm proposes the bullet language
be modified to read ``* * *and the yield on each Contract, determined
at the time of acquisition, must exceed the average yield of comparable
mortgage contract loans at that time by no less than 1%.'' The
Department notes this clarification to the proposal.
Accordingly, after giving full consideration to the entire record,
including the two comment letters, the Department has determined to
grant the exemption. For further information regarding the comments and
other matters discussed herein, interested persons are encouraged to
obtain copies of the exemption application file (Exemption Application
No. D-11132) the Department is maintaining in this case. The complete
application file, as well as the comments and all supplemental
submissions received by the Department, are made 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. Silvia M. Quezada of the
Department, telephone (202) 693-8553. (This is not a toll-free number.)
DuPont Capital Management Corporation (DCMC)
[Prohibited Transaction Exemption 2004-10; Exemption Application Nos.
D-11157--D-11159]
Exemption
Section I. Covered Transactions
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 apply to the in kind transfer of certain debt securities (the
Debt Securities) that are held in the DuPont and Related Companies
Defined Contribution Plan Master Trust (the Master Trust), in which the
assets of the E.I. du Pont de Nemours and Company Savings and
Investment Plan (the DuPont Savings and Investment Plan), the DuPont
Specialty Grains Savings Plan, and the Thrift Plan for Employees of
Sentinel Transportation Company (collectively, the DuPont Plans)
invest, in exchange for units in a newly-established group trust (the
Group Trust), where DCMC, a wholly owned subsidiary of E.I. du Pont de
Nemours and Company (DuPont), one of the sponsors of the DuPont Plans,
acts as both a fiduciary for the Master Trust and the Group Trust.
[[Page 40975]]
Section II. Specific Conditions
This exemption is subject to the following conditions:
(a) A fiduciary (the Independent Fiduciary), who is acting on
behalf of the DuPont Plans, who is independent of and unrelated to
DuPont and its subsidiaries, as defined in paragraph (e) of Section IV
below, has the opportunity to review the in kind transfer of the Debt
Securities that are held in the Master Trust, to the Group Trust, in
exchange for units in the Group Trust, and receives, in advance of the
investment by the Master Trust in the Group Trust, full written
disclosures concerning the Group Trust, which include, but are not
limited to the following:
(1) A private offering memorandum describing the transaction;
(2) A table listing management fees, as negotiated under the
applicable investment management agreements, and projected costs;
(3) A chart showing the effect of such fees and costs on an
investment in the Group Trust for different amounts of Debt Securities
managed in the Group Trust;
(4) A statement of the reasons why DCMC may consider such
investment to be appropriate for the DuPont Plans;
(5) A statement on whether there are any limitations applicable to
DCMC with respect to which assets of a DuPont Plan may be invested in
the Group Trust and the nature of such limitations; and
(6) Copies of the proposed and final exemption.
(b) On the basis of the foregoing information, the Independent
Fiduciary authorizes, in writing, the in kind transfer of the Debt
Securities that are held on behalf of the DuPont Plans in the Master
Trust to a series of subtrusts under the Group Trust, in exchange for
units in the Group Trust. Such authorization is to be consistent with
the responsibilities, obligations, and duties imposed on fiduciaries by
Part 4 of Title I of the Act. Specifically, the Independent Fiduciary,
before authorizing the transfer of assets by the DuPont Plans from the
Master Trust to the Group Trust, determines that:
(1) The terms of the in kind transfer transaction, are fair to the
participants in the DuPont Plans, and are comparable to, and no less
favorable than, terms obtainable at arm's length between unaffiliated
parties; and
(2) The in kind transfer transaction is in the best interest of the
DuPont Plans and their participants and beneficiaries.
(c) No sales commissions, fees or other costs are paid by the
DuPont Plans in connection with the in kind transfer transaction.
Furthermore, no additional management fees are charged to the DuPont
Plans by DCMC in the Group Trust.
(d) The in kind transfer transaction is a one-time transaction for
the DuPont Plans, the transferred assets constitute a pro rata portion
of all of the assets of the DuPont Plans that are held in the total
return tier portion of the DuPont Stable Value Fund (the Fund) within
the Master Trust prior to the transfer.
(e) The per unit value of the units representing interests in the
subtrusts created under the Group Trust that are issued to each DuPont
Plan have an aggregate value that is equal to the value of the Debt
Securities transferred to the Group Trust 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
Exchange Commission Rule 17a-7 under the Investment Company Act of 1940
(the 1940 Act), as amended (Rule 17a-7), (using sources independent of
DCMC), and the procedures established by the Master Trust to Rule 17a-
7.
(f) Fair market value of the Debt Securities for which a current
market price can be obtained is determined by reference to the last
sale price for transactions 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). If there are no reported
transactions or if the Debt Securities are not quoted in the NASDAQ
System, fair market value is determined based on the evaluated mean
price provided by a pricing service that is independent of DCMC, or, in
the absence of an evaluated mean price from an independent pricing
service, based on the average of the highest current independent bid
and lowest current independent offer, as of the close of business on
the day of the transaction determined on the basis of reasonable
inquiry from at least two market makers as shall be provided to the
trustee and custodian of the stable value fund of the Master Trust. All
commercial pricing sources and dealers are pre-approved by the Master
Trust's investment managers. The fair market value of any illiquid Debt
Securities is provided to the Independent Fiduciary by DCMC for review
and approval of the objective methodology and the application of such
methodology in valuing such Debt Securities.
(g) DCMC provides, within 30 days after the completion of the
transaction, a confirmation statement to the Independent Fiduciary
containing the following information:
(1) The identity of each Debt Security that DCMC deemed suitable
for transfer from the Master Trust to the Group Trust;
(2) The current market price of each Debt Security for purposes of
the transfer, as determined on the date of such in kind transfer;
(3) The identity of each Debt Security that does not fall into at
least one of the following categories: (i) a reported security; (ii) a
security principally traded on an exchange; or (iii) a security quoted
on the NASDAQ System;
(4) The identity of each pricing service or market maker consulted
in determining the fair market value of the Debt Securities, and
(5) The aggregate dollar value of the Debt Securities that were
held on behalf of the DuPont Plans in the Master Trust immediately
before the in kind transfer, and the number of Group Trust units held
by the Master Trust for the DuPont Plans immediately after the transfer
(the related per unit value and the aggregate value).
(h) After the transfer of Debt Securities from the Master Trust to
the Group Trust, the Independent Fiduciary performs a review verifying
the pricing information supplied by the investment managers and the
Group Trustee.
(i) The Debt Securities that are transferred from the Master Trust
to the Group Trust are valued using the same methodology currently used
by the Master Trust to value such securities. Similarly, the Group
Trust uses the same valuation methodology.
(j) DCMC does not execute the in kind transfer transaction unless
the Independent Fiduciary for the DuPont Plans consents to such in kind
transfer in writing.
(k) DCMC does not execute the in kind transfer transaction unless
the wrap contracts issued by certain unrelated banks and insurance
companies to the Master Trust agree in advance to maintain the then-
current book value for accounting purposes with respect to the assets
transferred to the Group Trust. In addition, DCMC absorbs all costs
associated with the commitments.
(l) Each of the DuPont Plan's dealings with the Master Trust, the
Group Trust and DCMC is on a basis that is no less favorable to such
Plan than dealings between the Group Trust and other holders of Group
Trust units.
Section III. General Conditions
This exemption is subject to the following general conditions:
[[Page 40976]]
(a) DCMC maintains for a period of six years the records necessary
to enable the persons described below in paragraph (b) of this Section
III to determine whether the conditions of this exemption have been
met, except that (1) a prohibited transaction will not be considered to
have occurred if, due to circumstances beyond the control of DCMC, the
records are lost or destroyed prior to the end of the six year period,
and (2) no party in interest other than DCMC 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 any provisions of sections 504(a)(2) and (b) of the
Act, the records referred to in paragraph (a) are unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) The Independent Fiduciary described in paragraph (e) of
Section IV; or
(iii) Any participant or beneficiary of the DuPont Plans or any
duly authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described in paragraph (b)(1)(ii) and (iii)
of this Section III shall be authorized to examine trade secrets of
DCMC, or commercial or financial information which is privileged or
confidential.
Section IV. Definitions
For the purposes of this exemption,
(a) The term ``DCMC'' means DuPont Capital Management Corporation
and any affiliate of DCMC, 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) The term ``Independent Fiduciary'' means a fiduciary who is:
(1) Independent of and unrelated to DCMC and its affiliates, and (2)
appointed to act on behalf of the Plan for all purposes related to, but
not limited to, (A) the in kind transfer of the Debt Securities by the
Master Trust to the Group Trust, (B) the Group Trust, in turn,
transferring units equal in value to the assets of the Master Trust
held in certain stable value funds. For purposes of this exemption, a
fiduciary will not be deemed to be independent of and unrelated to DCMC
if: (1) Such fiduciary directly or indirectly controls, is controlled
by or is under common control with DCMC; (2) such fiduciary directly or
indirectly receives any compensation or other consideration in
connection with any transaction described in this exemption, except
that an Independent Fiduciary may receive compensation for acting as an
Independent Fiduciary from DCMC in connection with the transaction
contemplated herein if the amount of payment of such compensation is
not contingent upon or in any way affected by the Independent
Fiduciary's ultimate decision; and (3) the annual gross revenue
received by such fiduciary from DCMC and its affiliates during any year
of its engagement, exceeds 5 percent (5%) of the Independent
Fiduciary'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 of the 1940 Act) and (2) which are not: (i) Securities which, if
distributed, would require registration under the Securities Exchange
Act of 1933; (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 Mutual Funds,
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 DuPont Stable Value Fund, or if applicable, by the
Independent Fiduciary, which will confirm and approve all such
valuations.
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 March 24, 2004 at 69 FR
13888.
Written Comments
During the comment period, the Department received two written
comments and no requests for public hearing. The first comment letter
was submitted by a DuPont Plan participant, who is a retired employee.
The second comment letter, which was submitted by DCMC, is intended to
clarify the proposal. Discussed below are both comments, including
responses made by DCMC and the Department.
Retired Employee's Comments
1. DCMC's Seeking Financial Relief. The former employee's first
comment concerns whether DCMC is looking for some type of financial
relief. However, as discussed at some length in the exemption
application, and as confirmed by the Independent Fiduciary, DCMC states
that it is in no way seeking ``financial relief.'' Rather, DCMC states
that it receives no compensation (other than the reimbursement of
direct expenses) for managing assets attributable to the DuPont Plans,
and it anticipates that the Group Trust structure will ultimately
result in lower costs for all Participating Plans.
2. Recent Mutual Fund Scandals. The commenter's second comment
concerns his general opposition to DCMC's exemption request due to
recent mutual fund activities and events occurring within the DuPont
Savings and Investment Plan which he believes were not in the best
interests of the Plan's participants. DCMC explains that the commenter
never specifies the activities
[[Page 40977]]
to which he is referring, and therefore DCMC is unable to respond to
the commenter's concerns in a constructive manner. DCMC indicates that
it is well aware of its fiduciary responsibilities. However DCMC
explains it is not aware of any recent ``events'' that might not be
considered to be in the best interests of participants in the DuPont
Plans.
3. Divestment Activities. The commenter's third comment expresses
concern over ``activities in divestment-associated businesses [sic]
units (i.e., Invista to Koch Industries) that are not identified in the
notice.'' DCMC believes that the commenter's concerns on divestment
issues relate solely to DuPont corporate matters and do not relate to
plan administration or to the proposed exemption.
DCMC's Comments
1. Correction of Name of DCMC. On page 13888 of the proposed
exemption, DCMC requests that the Department make a correction to its
listed name. DCMC states that its proper name is ``DuPont Capital
Management Corporation.''
Accordingly, in response to this comment, the Department has
revised DCMC's listed name to reflect the correct name for this entity.
2. Valuation of Debt Securities Held in the Master Trust. On page
13888 of the proposal, Section II(f) specifies how valuations are to be
determined for Debt Securities for which a current market price can be
obtained, as well as for Debt Securities for where no current market
price is available. Section II(f) requires, in relevant part, that the
fair market value of Debt Securities for which a current market price
is unavailable be determined by taking the average of the highest
current independent bid and lowest current independent ask prices as of
the close of business as provided to the Master Trust's investment
managers and the trustee of the Group Trust by three independent third
party commercial pricing sources.
DCMC represents that it has been informed by the custodian for the
DuPont Stable Value Fund of the Master Trust that current industry
practice for valuing such securities involves reliance on values
provided by independent pricing services. DCMC states that the pricing
service used by the custodian develops prices using proprietary vendor
models in conjunction with quoted values received from in house trading
desks where available. In this connection, DCMC notes that the
Department has acknowledged reliance on a pricing service as
appropriate and consistent with standard industry practice in
Prohibited Transaction Exemption (PTE) 2002-21, an individual exemption
issued to the Pacific Investment Management Company (67 FR 14988, March
28, 2002 and 67 FR 36037, May 22, 2002). Accordingly, DCMC requests
that the Department modify the second sentence of Section II(f) of the
proposal to read as follows:
* * * If there are no reported transactions or if the Debt
Securities are not quoted in the NASDAQ System, fair market value is
determined based on the evaluated mean price provided by a pricing
service that is independent of DCMC, or, in the absence of an
evaluated mean price from an independent pricing service, based on
the average of the highest current independent bid and lowest
current independent offer, as of the close of business on the day of
the transaction determined on the basis of reasonable inquiry from
at least two market makers as shall be provided to the trustee and
custodian of the stable value fund of the Master Trust * * *
In response to this comment, the Department has revised Section
II(f) of the final exemption.\6\
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\6\ The Department notes that, consistent with the fiduciary
responsibility provisions of section 404 of the Act, it is
ultimately the responsibility of the fiduciaries for the DuPont
Plans to determine whether the Debt Securities are appropriately
valued.
---------------------------------------------------------------------------
3. Former DuPont Affiliate Plans. On page 13890 of the proposed
exemption, Representation 5 identifies a defined contribution plan
whose sponsoring employer was formerly affiliated with DuPont. DCMC
requests that the proposed exemption be modified to refer to the
sponsor as the ``Former DuPont Affiliate'' but not by its actual name.
Furthermore, DCMC requests that the Department refer to the sponsor's
respective plan as the ``Former DuPont Affiliate Plan.''
In response to this comment, the Department acknowledges these
clarifications to the proposal.
4. State Street Bank and Trust (SSB) as an Issuer of Wrap
Contracts. On page 13890 of the proposed exemption, Footnote 16 states,
in part, that SSB, the directed trustee of the Group Trust, has not
issued wrap contracts to the DuPont Plans nor is it anticipated that
SSB will be issuing wrap contracts to Plans that invest in the Group
Trust. However, DCMC wishes to clarify that in the past, SSB has issued
wrap contracts to the DuPont Plans that may invest in the Group Trust
and may continue to do so in the future. DCMC believes that as a
directed trustee of the Group Trust, SSB would have no investment
discretion over Plan assets. Since SSB would not use any of the
authority, control or responsibility that makes it a fiduciary to cause
a DuPont Plan to purchase wrap contracts from SSB, therefore, DCMC
believes such a purchase would not violate section 406(b) of the Act.
However, DCMC explains that SSB would be a party in interest to the
Plans participating in the Group Trust, including the DuPont Plans, by
reason of its provision of services to such Group Trust. Therefore,
DCMC explains that any purchase of a wrap contract by SSB on behalf of
these participating Plans would need to comply with the requirements of
one or more prohibited transaction exemptions, for example, class PTE
84-14 (49 FR 9494, March 13, 1984) and/or class PTE 96-23 (61 FR 15975,
April 10, 1996).
In response to this comment, the Department notes this
clarification to the proposal.
5. Reference to ``Board of Trustees.'' On page 13893 of the
proposed exemption, Representation 15 describes the qualifications,
duties and written determinations made by U.S. Trust Company, N.A.
(U.S. Trust), the Independent Fiduciary for the DuPont Plans with
respect to the proposed in kind transfer transaction. Paragraph (b) of
Representation 15, which pertains to conclusions reached by U.S. Trust
in a December 17, 2003 written report, indicates that the Debt
Securities associated with the proposed transaction will be valued in
accordance with pricing procedures ``established by the Master Trust's
Board of Trustees.'' DCMC explains that this reference should be to the
``custodian of the Stable Value Fund of the Master Trust.''
In response to this comment, the Department notes this
clarification to the proposal.
6. Cost Savings. On page 13893 of the proposed exemption, the
second paragraph of Representation 15 refers to how U.S. Trust will
conclude that the proposed exemption transaction is in the interest of
the participants and beneficiaries of the DuPont Plans since the
anticipated costs savings are likely to be material. DCMC states that
there is no need to modify this description of U.S. Trust's conclusion.
However, DCMC would like to emphasize that the anticipated cost savings
are expected to be realized over a period of time rather than
immediately.
In response to this comment, the Department acknowledges this
clarification to the proposed exemption.
Accordingly, after giving full consideration to the entire record,
including the comment letters, the Department has determined to grant
the exemption. For further information regarding the comments and other
matters discussed herein, interested
[[Page 40978]]
persons are encouraged to obtain copies of the exemption application
file (Exemption Application Nos. D-11157 through D-11159) the
Department is maintaining in this case. The complete application file,
as well as the comments and all supplemental submissions received by
the Department, are made 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: Mr. Arjumand A. Ansari of the
Department at (202) 693-8566. (This is not a toll-free number.)
Pan-American Life Insurance Corporation (Pan-American) Located in New
Orleans, LA
[Prohibited Transaction Exemption 2004-11; Exemption Application No. D-
11202]
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 apply to the cash sale, on November 17, 2003, by certain
defined contribution plans (the Plans), which invest in Separate
Account V (the Account), a pooled separate account, whose assets are
invested in units of the Dreyfus-Certus Stable Value Fund (the Fund),
of Fund units, to Pan-American, the Account's investment manager and a
fiduciary with respect to such Account.
This exemption is subject to the following conditions:
(a) Prior to the transaction (the Transaction), a fiduciary (the
Independent Fiduciary), acting on behalf of the Plans, who was
independent of and unrelated to Pan-American and its subsidiaries,
determined that the subject Transaction (1) was fair to the
participants in the Plans investing in the Account; (2) was comparable
to, and no less favorable than, terms obtainable at arm's length
between unaffiliated parties; and (3) was in the best interest of the
Plans investing in the Account and their participants and
beneficiaries.
(b) The Independent Fiduciary monitored the Transaction on behalf
of the Plans investing in the Account.
(c) Subsequent to the closing of the Transaction, the Independent
Fiduciary performed a post-Transaction review, which included, among
other things, a determination that the fair market value of the Plan's
interests in the Account as of November 14, 2003, as determined by the
Fund trustee, was accurate and consistent with the Fund's valuation
method.
(d) No sales commissions, fees or other costs were paid by the
Plans in connection with the Transaction.
(e) The sale was a one-time transaction for cash.
(f) The fair market value of the units was determined in good faith
by The Dreyfus Trust Company, an unrelated party, at the time of the
Transaction.
EFFECTIVE DATE: This exemption is effective as of November 17, 2003.
For a 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 March 24, 2004 at 69 FR
13900.
FOR FURTHER INFORMATION CONTACT: Mr. Arjumand A. Ansari of the
Department at (202) 693-8566. (This is not a toll-free number.)
Svenska Cellulosa Aktiebolaget SCA (publ) (SCA) Located in Stockholm,
Sweden
[Prohibited Transaction Exemption 2004-12; Exemption Application Nos.
L-11217 through L-11219]
Exemption
The restrictions of section 406(a) and (b) of the Act shall not
apply to the reinsurance of risks and the receipt of premiums therefrom
by SCA Reinsurance Limited (SCA Re), through its USVI Branch, in
connection with insurance contracts sold by Aetna, Inc. (Aetna), or any
successor insurance company to Aetna which is unrelated to SCA, to
provide long-term disability, accidental death and dismemberment, and
basic and supplemental life insurance benefits to participants in
programs maintained by SCA North America, Inc. (SCA North America) to
provide such benefits to its employees (the Plans),\7\ provided the
following conditions are met:
---------------------------------------------------------------------------
\7\ Each Plan will be considered an ``employee welfare benefit
plan'' as defined in section 3(1) of the Act.
---------------------------------------------------------------------------
(a) SCA Re--
(1) Is a party in interest with respect to the Plans by reason of a
stock or partnership affiliation with SCA that is described in section
3(14)(E) or (G) of the Act;
(2) Is licensed to sell insurance or conduct reinsurance operations
in at least one State as defined in section 3(10) of the Act;
(3) Has obtained a Certificate of Authority from the Insurance
Commissioner of its domiciliary state that has not been revoked or
suspended;
(4)(A) Has undergone an examination by an independent certified
public accountant for its last completed taxable year immediately prior
to the taxable year of the reinsurance transaction; or
(B) Has undergone a financial examination (within the meaning of
the law of its domiciliary State, the U.S. Virgin Islands) \8\ by the
Insurance Commissioner of the State within 5 years prior to the end of
the year preceding the year in which the reinsurance transaction
occurred; and
---------------------------------------------------------------------------
\8\ The U.S. Virgin Islands are considered a ``State,'' as
defined in section 3(10) of the Act.
---------------------------------------------------------------------------
(5) Is licensed to conduct reinsurance transactions by a State
whose law requires that an actuarial review of reserves be conducted
annually by an independent firm of actuaries and reported to the
appropriate regulatory authority; and
(b) The Plans pay no more than adequate consideration for the
insurance contracts;
(c) No commissions are paid by the Plans with respect to the direct
sale of such contracts or the reinsurance thereof;
(d) In the initial year of any contract involving SCA Re, there
will be an immediate and objectively determined benefit to the Plans'
participants and beneficiaries in the form of increased benefits;
(e) In subsequent years, the formula used to calculate premiums by
Aetna or any successor insurer will be similar to formulae used by
other insurers providing comparable coverage under similar programs.
Furthermore, the premium charge calculated in accordance with the
formula will be reasonable and will be comparable to the premium
charged by the insurer and its competitors with the same or a better
rating providing the same coverage under comparable programs;
(f) The Plans only contract with insurers with a rating of A or
better from A.M. Best Company. The reinsurance arrangement between the
insurers and SCA Re will be indemnity insurance only, i.e., the insurer
will not be relieved of liability to the Plans should SCA Re be unable
or unwilling to cover any liability arising from the reinsurance
arrangement;
(g) SCA Re retains an independent fiduciary (the Independent
Fiduciary), at SCA North America's expense, to analyze the transactions
and render an opinion that the requirements of sections (a) thorough
(f) have been complied with. For purposes of this exemption, the
Independent Fiduciary is a person who:
[[Page 40979]]
(1) Is not directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with SCA, SCA North America or SCA Re (this relationship hereinafter
referred to as an ``Affiliate'');
(2) Is not an officer, director, employee of, or partner in, SCA,
SCA North America or SCA Re (or any Affiliate of either);
(3) Is not a corporation or partnership in which SCA, SCA North
America or SCA Re has an ownership interest or is a partner;
(4) Does not have an ownership interest in SCA or SCA Re, or any of
either's Affiliates;
(5) Is not a fiduciary with respect to the Plans prior to the
appointment; and
(6) Has acknowledged in writing acceptance of fiduciary
responsibility and has agreed not to participate in any decision with
respect to any transaction in which the Independent Fiduciary has an
interest that might affect its best judgment as a fiduciary.
For purposes of this definition of an ``Independent Fiduciary,'' no
organization or individual may serve as an Independent Fiduciary for
any fiscal year if the gross income received by such organization or
individual (or partnership or corporation of which such individual is
an officer, director, or 10 percent or more partner or shareholder)
from SCA, SCA Re, or their Affiliates (including amounts received for
services as Independent Fiduciary under any prohibited transaction
exemption granted by the Department) for that fiscal year exceeds 5
percent of that organization or individual's annual gross income from
all sources for such fiscal year.
In addition, no organization or individual who is an Independent
Fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director, or 10 percent or more partner or
shareholder, may acquire any property from, sell any property to, or
borrow funds from SCA, SCA Re, or their Affiliates during the period
that such organization or individual serves as Independent Fiduciary,
and continuing for a period of six months after such organization or
individual ceases to be an Independent Fiduciary, or negotiates any
such transaction during the period that such organization or individual
serves as Independent Fiduciary.
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 May 4, 2004 at 69 FR
24679.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 693-8546. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions to which the 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 at Washington, DC, this 1st day of July, 2004.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 04-15362 Filed 7-6-04; 8:45 am]
BILLING CODE 4510-29-P
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