Proposed Exemptions; Camino Medical Group, Inc.
[07/20/2004]
Volume 69, Number 138, Page 43437-43452
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11160 & D-11161, et al.]
Proposed Exemptions; Camino Medical Group, Inc.
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
-----------------------------------------------------------------------
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
[[Page 43438]]
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.
Camino Medical Group, Inc. Matching 401(k) Plan (the 401(k) Plan) and
the Camino Medical Group, Inc. Employee Retirement Plan (the Retirement
Plan; Together, the Plans) Located in Santa Clara, California
[Application Nos. D-11160 & D-11161, respectively]
Proposed Exemption
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, 32847, August 10,
1990).\1\ If the exemption is granted, the restrictions of sections
406(a), 406(b)(1) and (b)(2) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to (1) the
leasing (the New Lease) of a medical treatment center (the Treatment
Center) by the Retirement Plan to Camino Medical Group, Inc. (CMG), the
sponsor of the Retirement Plan and a party in interest with respect to
such Retirement Plan; and (2) the exercise, by CMG, of options to renew
the New Lease, for two additional terms, provided that the following
conditions are met:
---------------------------------------------------------------------------
\1\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
---------------------------------------------------------------------------
(a) The terms and conditions of the New Lease are no less favorable
to the Retirement Plan than those obtainable by the Retirement Plan
under similar circumstances when negotiated at arm's length with
unrelated third parties.
(b) The Retirement Plan is represented for all purposes under the
New Lease, and during each renewal term, by a qualified, independent
fiduciary.
(c) The Retirement Plan's independent fiduciary has negotiated,
reviewed, and approved the terms and conditions of the New Lease and
the options to renew the New Lease on behalf of the Retirement Plan and
has determined that the transactions are appropriate investments for
the Retirement Plan and are in the best interests of the Retirement
Plan and its participants and beneficiaries.
(d) The rent paid to the Retirement Plan under the New Lease, and
during each renewal term, is no less than the fair market rental value
of the Treatment Center, as established by a qualified, independent
appraiser.
(e) The rent is subject to adjustment at the commencement of the
second year of the term of the New Lease and each year thereafter by
way of an independent appraisal. A qualified, independent appraiser is
selected by the independent fiduciary to conduct the appraisal. If the
appraised fair market rent of the Treatment Center is greater than that
of the current base rent, then the base rent is revised to reflect the
appraised increase in fair market rent. If the appraised fair market
rent of the Treatment Center is less than or equal to the current base
rent, then the base rent remains the same.
(f) The New Lease commences within 30 days after the granting of
the final exemption and is triple net, requiring all expenses for
maintenance, taxes, utilities and insurance to be paid by CMG, as
lessee.
(g) The Retirement Plan's independent fiduciary monitors compliance
with the terms of the New Lease and the conditions of the exemption
throughout the duration of the New Lease and each renewal term, and is
responsible for legally enforcing the payment of the rent and the
proper performance of all other obligations of CMG under the terms of
the New Lease.
(h) The Retirement Plan's independent fiduciary expressly approves
any renewal of the New Lease beyond the initial term.
(i) CMG provides the Retirement Plan's independent fiduciary with
documentation that the rent has been paid on a monthly basis.
(j) At all times throughout the duration of the New Lease and each
renewal term, the fair market value of the Treatment Center does not
exceed 25 percent of the value of the total assets of the Retirement
Plan.
(k) CMG files a Form 5330 with the Internal Revenue Service (the
Service) and pays all applicable excise taxes, if any, within 90 days
of the publication, in the Federal Register, of the grant notice with
respect to the past and continued leasing of the Treatment Center by
the 401(k) Plan and the Retirement Plan (together, the Plans) to CMG.
(l) To the extent CMG owes the 401(k) Plan or the Retirement Plan
additional rent by reason of the past and continued leasing of the
Treatment Center, (i) the independent fiduciary makes all such
determinations, including the payment of reasonable interest; and (ii)
CMG makes such payments to the Plans.
Summary of Facts and Representations
1. CMG, formerly known as the ``Sunnyvale Medical Clinic, Inc.''
(Sunnyvale), is one of northern California's largest physician-governed
multi-specialty medical groups, with more than 190 primary care and
specialist physicians, nurse practitioners and physician assistants. An
affiliate of the Palo Alto Medical Foundation, CMG is a not-for-profit,
community-based organization that contracts with most leading Health
Maintenance Organization and Preferred Provider Organization insurance
plans. While maintaining 12 California patient care sites in Cupertino/
San Jose, Los Altos, Mountain View, Santa Clara and Sunnyvale, CMG is
focused on delivery of health care services, patient education and
health care research, and offers 28 medical specialties, which include,
but are not limited to, pediatrics, urgent care, and infusion therapy.
2. CMG sponsors the Plans. Originally, CMG established the
Sunnyvale Medical Clinic, Inc. Employee Retirement and Profit Sharing
Plan (the ERPS Plan), which was a single plan with two trusts. The
retirement portion of the ERPS Plan was a money purchase pension plan
and the profit sharing portion of the ERPS Plan was a profit sharing
plan. Each portion of the ERPS Plan had its own separate trust.
3. Effective January 1, 1989, the 401(k) Plan was established.
Employees of CMG who were eligible to participate in the ERPS Plan were
also eligible to participate in the 401(k) Plan. Also, some physicians
who worked for CMG but who did not participate in the ERPS Plan were
eligible to participate in the 401(k) Plan.
On or about December 31, 1989, the ERPS Plan was restated as two
separate plans, the ``Sunnyvale Medical Clinic, Inc. Employee Profit
Sharing Plan'' (the Sunnyvale Profit Sharing Plan) for the profit
sharing portion of the ERPS Plan and the ``Sunnyvale Medical Clinic,
Inc. Retirement Plan'' (the Sunnyvale Retirement Plan, now known as the
Retirement Plan) for the money purchase pension portion of the ERPS
Plan.
On January 1, 1992, the Sunnyvale Profit Sharing Plan was merged
into the
[[Page 43439]]
401(k) Plan. As a result of the merger, the 401(k) Plan received the
Sunnyvale Profit Sharing Plan's assets and the flow of income deriving
from those assets.
4. As of June 30, 2003, the 401(k) Plan covered 758 participants.
As of the same date, the 401(k) Plan had total assets of $40,927,597.
T. Rowe Price serves as the 401(k) Plan trustee.
The Administrative Committee, which is comprised of physicians who
are shareholders of CMG, is the agent of CMG, and in such capacity is
generally responsible for the interpretation, application and
administration of the 401(k) Plan. The accounts in the 401(k) Plan are
participant-directed, although the Administrative Committee also has
the authority to direct the trustee's investment of the assets of the
401(k) Plan's trust. Currently, participants select from a menu of 13
investment choices. Participants can also choose to invest up to 50
percent of their vested account balance outside the menu of choices.
With the assistance of an investment adviser, the Administrative
Committee selects and monitors the menu of investment choices from
which participants direct the investment of their accounts.
5. The Retirement Plan is not a party in interest with respect to
the 401(k) Plan or vice versa. As of June 30, 2003, the Retirement Plan
had 965 participants. As of August 31, 2003, the Retirement Plan had
total assets of $36,055,367. The trustee of the Retirement Plan is
Wells Fargo Bank.
The Administrative Committee is generally responsible for the
administration of the Retirement Plan. To the extent that Retirement
Plan participants do not direct the investment of their own accounts,
the Administrative Committee directs the trustee's investment of the
assets of the Retirement Plan's trust. Investment decisions are made by
the Administrative Committee, with the exception of those participants
who choose to segregate their accounts. An investment adviser assists
the Administrative Committee in overseeing the investment of Retirement
Plan assets. There are currently 15 participants who direct the
investment of their own accounts in the Retirement Plan.
6. In 1980, the ERPS Plan acquired the real property presently
constituting the Treatment Center from Sunnyvale Medical Building
Company, Inc. (SMBC), a California corporation.\2\
---------------------------------------------------------------------------
\2\ A title search by the applicant revealed that on June 4,
1980, the Treatment Center was sold by Stephen Louis Millich to
Price Walker Associates, Ltd. who were unrelated parties, the latter
of which transferred the Treatment Center to SMBC on the same day.
The applicant states that it has not been able to obtain any records
which directly document the sales price for either of these
transfers. However, the applicant represents that the recorded deed
for each June 4, 1980, transfer includes a notation that the
transfer tax paid was $291.50. The applicant opines that because the
applicable transfer tax rate at that time was $1.10 per $1,000, it
is reasonable to conclude that the sale price for each June 4, 1980,
transfer was approximately $265,000.
Although the applicant explains that it searched all of its
Retirement Plan files for information regarding how the Treatment
Center was transferred to the ERPS Plan in 1980, the applicant
states that it did not find any information to indicate whether the
transfer could be characterized as an in kind contribution, a gift,
a sale, or something else, or any other information regarding the
circumstances or background of the transfer. The applicant believes
that the transfer did not result in the violation of any tax
qualification requirement under the Code.
Further, the applicant states that, to the best of its
knowledge, there was no financing involved in connection with the
acquisition of the Treatment Center by the ERPS Plan or deeds of
trust filed at or near the time of any of the 1980 property
acquisitions.
In addition, the applicant states that, while SMBC was an entity
owned and operated by physicians at Sunnyvale, it is not known
whether in 1980 its relationship to Sunnyvale or the ERPS Plan was
such as to make it a party in interest with respect to the ERPS
Plan. The applicant states that although SMBC was identified as a
party in interest with respect to the ERPS Plan in connection with
Prohibited Transaction Exemption (PTE 87-13) 87-13, 52 FR 2630
(January 23, 1987), it is unable to determine why SMBC was so
identified. Moreover, the applicant states that SMBC formally
dissolved in 1994, and to the best of its recollection, the ERPS
Plan was always intended to be the ultimate transferee of the
Treatment Center, with SMBC intended to serve merely as a conduit.
In this regard, the Department notes that it is not proposing,
nor has the applicant requested, exemptive relief regarding the
acquisition of the Treatment Center by the ERPS Plan from SMBC to
the extent SMBC was a party in interest with respect to the ERPS
Plan.
---------------------------------------------------------------------------
The property is located at 570, 574, 580 and 582 South Sunnyvale
Avenue, Sunnyvale, California. The property was occupied by retail
businesses and comprised over 5,000 square feet of space at the time of
acquisition. The property and the rental income were allocated to the
profit sharing portion of the ERPS Plan.
7. Following the acquisition, a portion of the Treatment Center
identified as 582 South Sunnyvale Avenue was leased to Richard P. Carr
Physical Therapy (Carr PT), an unrelated party. The lease term was for
a period of 125 months, commencing August 1, 1980, through December 31,
1990. The rental provided for under the lease was determined by a
qualified, independent real estate appraiser. Moreover, the lease
provided for an annual rental increase based upon the CPI.
8. Before entering into the lease of the 582 South Sunnyvale Avenue
property, Carr PT had subleased premises from CMG at a nearby location,
411 Old San Francisco Road, Sunnyvale, California. In addition, CMG
furnished Carr PT various billing and administrative services. The fee
charged for the administrative services was based upon a percentage of
Carr PT's billings. Further, Carr PT's patients consisted primarily of
referrals from CMG. The same arrangement continued after Carr PT
changed its location from the subleased premises to 582 South Sunnyvale
Avenue.
Also prior to entering into the lease with Carr PT, the
Administrative Committee of the ERPS Plan sought and obtained an
opinion of legal counsel that the lease by the ERPS Plan to Carr PT
would not be a prohibited transaction because Carr PT was not a party
in interest with respect to such plan.
As Carr PT grew, it leased more of the premises belonging to the
ERPS Plan. In February, 1983, 580 South Sunnyvale Avenue was added; in
July 1985, 574 South Sunnyvale Avenue was added; and in January, 1987,
570 South Sunnyvale Avenue was added, completing its occupancy of the
entire building comprising the Treatment Center. The lease was amended
to reflect these additions.
9. As of August 1, 1991, a lease extension agreement was entered
into between the Sunnyvale Profit Sharing Plan and Carr PT, as lessee,
to extend the lease from August 1, 1991, through December 31, 1995.
About 2 years later, as of March 1, 1993, by mutual agreement between
Carr PT and the 401(k) Plan, the successor in interest to the Sunnyvale
Profit Sharing Plan, the lease was terminated and simultaneously
replaced by a lease between the 401(k) Plan and Advanced Infusion
Systems (AIS), an unrelated party, as the new lessee. AIS provides
infusion therapy services, more commonly known as chemotherapy. The new
lease was for a 5-year term, from March 1, 1993, through February 28,
1998. AIS made substantial tenant improvements to the Treatment Center
in order to carry out its business. In addition, AIS and CMG entered
into an agreement under which CMG provided administration and
management services to AIS.
10. Before the end of the lease term, the Administrative Committee
for the 401(k) Plan and the Retirement Plan and AIS engaged in
discussions relating to the renewal of the lease of the Treatment
Center. The Administrative Committee anticipated that AIS would renew
the lease. However, at the end of February 1998, AIS chose not to renew
the lease and vacated the premises. Accordingly, on March 1, 1998, CMG
[[Page 43440]]
stepped into the shoes of AIS to continue the flow of rental income and
the provision of infusion therapy to the CMG patients.
11. Currently, the Treatment Center consists of .5 acres of fully-
landscaped land improved by a single-story building containing
approximately 5,184 square feet of space and a parking lot that has 17
uncovered spaces. The Treatment Center is contiguous to other parcels
of real property, a residence (the Residence) and an urgent care center
(the Urgent Care Center), owned by the Plan and leased to CMG. The
Treatment Center is also located in close proximity to certain real
property that is owned by CMG. In addition, five parking spaces at the
Residence are allocated for Treatment Center patients and Treatment
Center employees are required to park in a nearby employee parking lot.
12. The Plans' Administrative Committee decided that it was in the
best interests of the 401(k) Plan and its participants and
beneficiaries to switch the 401(k) Plan's investment program and plan
administration to a family of mutual funds, and to allow the
participants and beneficiaries to make their own portfolio selections
from a ``menu'' offered by the mutual fund provider. The Committee
determined that savings would be realized if the same provider provided
the investment options, the administrative services and the trustee
services. After examination and consideration was given, the Committee
chose T. Rowe Price as the provider for all such services.
13. Because T. Rowe Price would only serve as the trustee of mutual
fund assets, the firm decided it would not serve as the trustee for the
401(k) Plan's other real estate interests.\3\ In order to maintain the
efficiency and cost effectiveness of the ``one-stop shop,'' and thus
avoid a second trustee for the 401(k) Plan to hold only the real estate
assets, the Committee determined that the 401(k) Plan should dispose of
its interests in the real estate. On the other hand, since the real
estate interests had proven to be a good source of income and a good
vehicle for investment diversification for the Plans, the Committee
chose to transfer the 401(k) Plan's interests to the Retirement Plan
rather than dispose of them entirely. Accordingly, the Committee
determined to cause the 401(k) Plan to sell its 76.5 percent interest
in the Urgent Care Center and the Residence, and its 100 percent
interest in the Treatment Center, to the Retirement Plan. Such
properties represented approximately 8.97 percent of the 401(k) Plan's
assets and approximately 14.16 percent of the Retirement Plan's assets.
Hence, on June 17, 1999, in an all cash transaction, the 401(k) Plan
sold its real estate interests, including the Treatment Center, to the
Retirement Plan for $4,081,471. No fees or commissions were paid by
either Plan. The expenses associated with the transaction were borne by
CMG. At present, CMG leases the Treatment Center from the Retirement
Plan and it pays such Plan a monthly rental of $1,456.
---------------------------------------------------------------------------
\3\ In this regard, in 1987, the ERPS Plan, which was a
predecessor plan to the 401(k) Plan, applied for and received a
prohibited transaction exemption (i.e., PTE 87-13) from the
Department for the purchase and leaseback of two parcels of real
estate, consisting of the Urgent Care Center and the Residence. The
ERPS Plan purchased (the Original Purchase) the properties from the
ERPS Plan sponsor, Sunnyvale (now known as CMG), for $3.4 million on
July 17, 1985 and leased (the Original Lease) such properties back
to Sunnyvale, under the provisions of a triple net lease, for an
initial term of ten years, followed by two additional five-year
renewal periods, for a combined total duration of 20 years which
expires in 2007. Of the purchase price paid for the Urgent Care
Center and the Residence, 76.5 percent came from the trust
established for the profit sharing portion of the ERPS Plan and the
other 23.5 percent came from the trust setup for the money purchase
pension plan portion of the ERPS Plan. Rental income from the
properties was allocated between the two trusts in accordance with
the foregoing proportions. The initial rental, as determined by
qualified, independent appraisers, was $28,216 per month. To
represent the interests of the ERPS Plan, Barclays Bank of
California (Barclays), the ERPS Plan trustee, reviewed, approved,
and agreed to monitor such transactions as the independent
fiduciary.
By letter dated May 29, 1996, the Department concluded that PTE
87-13 was still effective. This letter was requested as a result of:
(a) The merger of the Sunnyvale Profit Sharing Plan into the 401(k)
Plan and the 401(k) Plan's receipt of rent; (b) the renaming of
Sunnyvale to CMG; and (c) the substitution of Barclays with Wells
Fargo, as the new trustee, into which Barclays had merged.
---------------------------------------------------------------------------
14. Due to the lack of oversight by a qualified, independent
fiduciary with full investment discretion to review, approve and
monitor the past and continuing leasing arrangements between the Plans
and CMG, and the absence of contemporaneous independent appraisals
establishing the fair market value or the fair market rental value of
the Treatment Center at the inception of each lease or at the time of
the sale of the Treatment Center by the 401(k) Plan to the Retirement
Plan, the Department is not prepared to provide exemptive relief with
respect to such transactions. Therefore, within 90 days of the
publication in the Federal Register of the notice granting this
exemption, CMG will file a Form 5330 with the Service and pay all
applicable excise taxes that are due. In addition, to the extent the
leases resulted in rental deficiencies to either the 401(k) Plan or the
Retirement Plan, or the 401(k) Plan received less than fair market
value when it sold the Treatment Center to the Retirement Plan, the
present independent fiduciary is required to make such determinations,
including the payment of reasonable interest by CMG to the affected
Plans. In addition, CMG will be required to make such payments to the
Plans.
Accordingly, the Administrative Committee and CMG request a
prospective administrative exemption from the Department in order to
allow the Retirement Plan to lease the Treatment Center to CMG under
the provisions of a new written lease and to allow the exercise, by
CMG, of options to renew the New Lease for two additional terms. The
initial term of the New Lease will commence within 30 days after the
granting of the final exemption and it will have an expiration date of
February 28, 2008. The New Lease will also have options to renew for
two additional five year terms, only with the express approval of the
Retirement Plan's independent fiduciary. The New Lease will be triple
net and will require CMG to pay all real estate taxes on the Treatment
Center for the Retirement Plan, as well as all expenses that are
associated with insurance, maintenance and utilities. In addition, the
base rent under the New Lease will be the greater of $14,256 per month
or the fair market value of the Treatment Center, as determined by a
qualified, independent appraiser.\4\ Moreover, CMG will provide the
Retirement Plan's independent fiduciary with documentation that the
rent has been paid on a monthly basis.
---------------------------------------------------------------------------
\4\ This is the rental amount that is currently paid by CMG to
the Retirement Plan.
---------------------------------------------------------------------------
The applicant represents that, at the commencement of the second
year of the initial term of the New Lease and each year thereafter, the
Retirement Plan's independent fiduciary will select a qualified,
independent appraiser to reappraise the Treatment Center to determine
the appropriate fair market rental value, and based upon such
determinations, it will make appropriate adjustments to the rent.
However, in no event will the independent fiduciary adjust the rent
below the rental amount for the preceding New Lease term.
15. In an independent appraisal report dated October 14, 2003 (the
2003 Appraisal), Walter D. Carney, MAI and Larry W. Hulberg, MAI, both
independent, certified-general appraisers affiliated with Hulberg &
Associates, Inc. (H&A), of San Jose, California, updated an October 18,
2002, appraisal that was prepared by their firm, in which the fair
market value of
[[Page 43441]]
a leased fee interest in the Treatment Center as well as its monthly
fair market rental value were placed at $1,150,000 and $10,368 (or
$2.00 per square foot), respectively, as of October 15, 2002. Mr.
Carney, a Principal and Executive Vice President, who has been
associated with H&A since November 1984, states that he has been
involved with commercial, industrial and residential appraisal
assignments, as well as other assignments involving agricultural land,
easements, railroad and public utility corridors, ``plottage parcels,''
wetlands and waters of the U.S., reservoirs, abandoned public streets,
eminent domain/condemnation, and litigation. Mr. Hulberg, an appraiser
with H&A since 1997, states that he has dealt with commercial,
industrial and residential appraisal assignments, as well as special
purpose assignments involving mixed-use properties, single room
occupancy hotels, and residential care facilities.
Both Mr. Carney and Mr. Hulberg certify that they have no present
or contemplated future interest in the Treatment Center and that they
have no personal interest or bias with respect to the Treatment Center
or the parties involved. In addition, Messrs. Carney and Hulberg
certify that their compensation is not contingent upon the reporting of
a predetermined value or direction in value that favors the cause of
the client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event.
16. In the 2003 Appraisal, Messrs. Carney and Hulberg determined
that a leased fee interest in the Treatment Center had a fair market
value of $1,460,000 as of October 1, 2003. Messrs. Carney and Hulberg
gave the most weight in their analysis to the Income Approach to
valuation because of this methodology's reasonable support of rent,
overall capitalization data, widespread use and its understandability
to investors who would be the most likely purchasers of the Treatment
Center. On the same date, Messrs. Carney and Hulberg also determined
that the estimated monthly fair market rental value of the Treatment
Center was $11,664 or $2.25 per square foot.\5\ In a letter dated March
17, 2004, Mr. Hulberg represented that the Treatment Center has no
special or unique value to CMG, either in terms of parking availability
or property value, despite its proximity to other real estate owned or
leased by CMG.
---------------------------------------------------------------------------
\5\ The applicant represents that, to the best of its knowledge,
to the extent that the rent to be paid by CMG to the Retirement Plan
exceeds fair market rental value, such excess rent (if treated as an
employer contribution) will not cause the annual additions to such
Plan to exceed the limitations prescribed by section 415 of the
Code.
---------------------------------------------------------------------------
Thus, on the basis of the 2003 Appraisal, the fair market value of
the Treatment Center currently represents approximately 4.1 percent of
the Retirement Plan's total assets. Messrs. Carney and Hulberg will
reevaluate the fair market rental value of the Treatment Center at the
time the New Lease is executed by the Retirement Plan and CMG.
17. An independent party, Mr. Thomas J. Nault, has served as the
Retirement Plan's independent fiduciary since March 3, 2003. Mr. Nault
represents that he is qualified to act as an independent fiduciary for
the Retirement Plan because he has more than 22 years of experience
managing assets of all types, including settlement work for the
Department, intellectual property, limited partnerships, raw land
development, joint venture agreements, asset recovery and liquidation,
assigning and evaluating asset managers, and ESOP, profit sharing and
401(k) plans. Mr. Nault further represents that he has been acting as a
court-appointed trustee of tax-qualified plans since 1994, that he has
replaced trustees who were removed in connection with ERISA violations,
and that in two recent cases he has been responsible for evaluating and
deciding the disposition of real estate assets. Mr. Nault confirms that
he has had no prior contact nor any past or current relationship with
any interested party in this matter. Mr. Nault also confirms that he is
not now nor has he ever been related to CMG or its principals in any
way, and that he currently derives approximately 5 percent of his gross
annual income from CMG.\6\ Further, Mr. Nault acknowledges and accepts
his fiduciary responsibilities and liabilities in acting as an
independent fiduciary on behalf of the Retirement Plan.
---------------------------------------------------------------------------
\6\ In the ensuing years that the New Lease is in effect, Mr.
Nault expects to derive less than 3 percent of his gross revenues
from CMG.
---------------------------------------------------------------------------
18. As the Retirement Plan's independent fiduciary, Mr. Nault
agreed to (a) determine whether the lease provisions between the 401(k)
Plan and CMG were reasonable and whether the 401(k) Plan received fair
market value rent; (b) determine if the 401(k) Plan received fair
market value from the Retirement Plan upon upon the sale of the 401(k)
Plan's interests in the Treatment Center, the Residence and the Urgent
Care Center; (c) analyze the lease of the Treatment Center after its
transfer to the Retirement Plan from the 401(k) Plan to determine if
the lease provisions were reasonable and if the rental was at, or
better than, market value; (d) examine the Retirement Plan's investment
portfolio and investment policy to determine if the ownership of the
Treatment Center is prudent and in compliance with such investment
policy; and (e) negotiate and/or monitor the New Lease on behalf of the
Retirement Plan on an ongoing basis.
Following his analysis of the transactions, Mr. Nault believes that
the 401(k) Plan received fair market value on the sale of its interests
in the Treatment Center, the Residence and the Urgent Care Center to
the Retirement Plan. In addition, Mr. Nault has determined that the
lease provisions were strongly in favor of the participants of the
Plans and, averaged from 1998 to 2003, the rent paid on the Treatment
Center has been well over market. Mr. Nault explains that there was
only one year (1998) that CMG was paying below market rent on the
Treatment Center to the Plans by $.10 per square foot and, after 2001,
CMG has paid the Retirement Plan more than $.50 per square foot over
market on the Treatment Center.
Mr. Nault also indicates that the terms and conditions of the New
Lease are more favorable to the Retirement Plan than those obtainable
by the Retirement Plan in an arm's length transaction with unrelated
third parties. Mr. Nault attributes this observation to the timing of
the New Lease and the decline in the real estate market at the
contemplated inception of the New Lease. In reaching this conclusion,
Mr. Nault states that he has considered the terms of similar leases
between unrelated parties, the Retirement Plan's overall investment
portfolio, the Retirement Plan's liquidity and diversification
requirements.
Further, Mr. Nault certifies that the proposed transactions are
appropriate investments for the Retirement Plan and are in the best
interests of the Retirement Plan and its participants and
beneficiaries. Mr. Nault bases his statement on all data at his
disposal, discussions with the independent appraisers, as well as
reviews of the Treatment Center's performance.
Finally, Mr. Nault represents that he will monitor, on behalf of
the Retirement Plan, compliance with the New Lease terms throughout the
duration of such lease, and each renewal term, and, if necessary, he
will take the appropriate actions to enforce the payment of the rent
and the proper performance of all other obligations of CMG under the
terms of the New Lease.
19. In summary, it is represented that the transactions will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
[[Page 43442]]
(a) The terms and conditions of the New Lease are no less favorable
to the Retirement Plan than those obtainable by the Retirement Plan
under similar circumstances when negotiated at arm's length with
unrelated third parties.
(b) The Retirement Plan is represented for all purposes under the
New Lease, and during each renewal term, by a qualified, independent
fiduciary.
(c) The Retirement Plan's independent fiduciary has negotiated,
reviewed, and approved the terms and conditions of the New Lease and
the options to renew the New Lease on behalf of the Retirement Plan and
has determined that the transactions are appropriate investments for
the Retirement Plan and are in the best interests of the Retirement
Plan and its participants and beneficiaries.
(d) The rent paid to the Retirement Plan under the New Lease and
during each renewal term will be no less than the fair market rental
value of the Property, as established by a qualified, independent
appraiser.
(e) The rent is subject to adjustment at the commencement of the
second year of the term of the New Lease and each year thereafter by
way of an independent appraisal. A qualified, independent appraiser
will be selected by the independent fiduciary to conduct the appraisal.
If the appraised fair market rent of the Treatment Center is greater
than that of the current base rent, then the base rent will be revised
to reflect the appraised increase in fair market rent. If the appraised
fair market rent of the Treatment Center is less than or equal to the
current base rent, then the base rent will remain the same.
(f) The New Lease will commence within 30 days after the granting
of the final exemption and will be triple net, requiring all expenses
for maintenance, taxes, utilities and insurance to be paid by CMG, as
lessee.
(g) The Retirement Plan's independent fiduciary will monitor
compliance with the terms of the New Lease and the conditions of the
exemption throughout the duration of the New Lease and each renewal
term, and is responsible for legally enforcing the payment of the rent
and the proper performance of all other obligations of CMG under the
terms of the New Lease.
(h) The Retirement Plan's independent fiduciary will expressly
approve any renewal of the New Lease beyond the initial term.
(i) CMG will provide the Plan's independent fiduciary with
documentation that the rent has been paid on a monthly basis.
(j) At all times throughout the duration of the New Lease and each
renewal term, the fair market value of the Treatment Center will not
exceed 25 percent of the value of the total assets of the Retirement
Plan.
(k) CMG will file a Form 5330 with the Service and will pay all
applicable excise taxes, if any, within 90 days of the publication of
the grant notice in the Federal Register with respect to the past and
continued leasing of the Treatment Center by the 401(k) Plan and the
Retirement Plan.
(1) To the extent CMG owes the 401(k) Plan or the Retirement Plan
additional rent by reason of the past and continued leasing of the
Treatment Center, (i) the independent fiduciary will make all such
determinations, including the payment of reasonable interest; and (ii)
CMG will make such payments to the Plans.
Tax Consequences of the Transactions
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and,
therefore, must be examined under applicable provisions of the Internal
Revenue Code, including sections 401(a)(4), 404 and 415.
FOR FURTHER INFORMATION CONTACT: Ms. Anna M.N. Mpras of the Department,
telephone (202) 693-8565. (This is not a toll-free number.)
The Prudential Insurance Company of America (Prudential) Located in
Newark, New Jersey
[Application No. D-11213]
Proposed Exemption
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, 32847, August 10,
1990).\7\ If the exemption is granted, as of November 21, 2003,
Prudential shall not be precluded from functioning as a ``qualified
professional asset manager'' (QPAM), pursuant to Prohibited Transaction
Class Exemption 84-14 (PTCE 84-14), 49 FR 9494 (March 13, 1984), solely
because of a failure to satisfy Section I(g) of PTCE 84-14, as a result
of Prudential's affiliation with an entity convicted of violating a
dual-penalty law of Korea, Japan or Taiwan, provided that the following
conditions have been met:
---------------------------------------------------------------------------
\7\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
---------------------------------------------------------------------------
(a) The affiliate convicted under a dual-penalty law does not
provide fiduciary or QPAM services to ERISA-covered plans or otherwise
exercise discretionary control over ERISA assets.
(b) ERISA-covered assets are not involved in the misconduct that is
the subject of the affiliate's conviction(s).
(c) Prudential imposes its internal procedures, controls, and
protocols on the affiliate to reduce the likelihood of any recurrence
of misconduct to the extent permitted by local law.
(d) This exemption is not applicable if Prudential, or any
affiliate (other than affiliates convicted of violating a dual-penalty
law of Korea, Japan or Taiwan) is convicted of any of the crimes
described in Section I(g) of PTCE 84-14.
(e) Prudential maintains records that demonstrate that the
conditions of the exemption have been and continue to be met for at
least six years following the conviction of an affiliate under the
dual-penalty laws of Korea, Japan or Taiwan.
(f) The criminal acts in question are neither authorized nor
condoned by Prudential.
(g) Prudential complies with the other conditions of PTCE 84-14,
combined with the procedures it adopts to afford ample protection of
the interests of participants and beneficiaries of employee benefit
plans.
Effective Date: If granted, this proposed exemption will be
effective as of November 21, 2003.
Summary of Facts and Representations
1. Prudential is a life insurance company organized under the laws
of New Jersey. Prudential is a subsidiary of Prudential Financial Inc.,
a financial services holding company. Prudential provides a wide range
of financial services and products including investment management,
brokerage, mutual funds and real estate services. In addition,
Prudential provides fiduciary and other services to employee benefit
plans described in section 3(3) of the Act. Prudential currently
manages billions of dollars representing ERISA-covered plan assets.
2. Section I(g) of PTCE 84-14 precludes a person who otherwise
qualifies as a QPAM from serving as a QPAM if such person or an
affiliate thereof has, within 10 years immediately preceding the
transaction, been either convicted or released from imprisonment,
whichever is later, as a result of certain specified criminal
[[Page 43443]]
activity described under Section I(g) of PTCE 84-14, section 411 of the
Act and various laws incorporated by reference in section 411 of the
Act. On July 9, 2003, Prudential received Final Authorization Number
(FAN) 2003-10E, made pursuant to PTCE 96-62 (61 FR 39988, July 31,
1996) (EXPRO). Such authorization allows Prudential to maintain its
QPAM status, notwithstanding its possible failure to satisfy Section
I(g) of PTCE 84-14 following its acquisition of a Korean corporation
which has been convicted of certain Korean dual-penalty securities law
violations. The corporate acquisition giving rise to Prudential's
affiliation with the Korean company described in FAN 2003-10E was
eventually finalized on February 26, 2004.\8\
---------------------------------------------------------------------------
\8\ On February 26, 2004, Prudential Financial, Inc. announced
that it had closed the purchase of an 80 percent interest of Hyundai
Investment and Securities Co., Ltd. (HITC) and its subsidiary,
Hyundai Investment Trust Management Co., Ltd. (HIMC), with an option
to purchase the remaining 20 percent three to six years after the
closing date. At that time Prudential assumed operational control of
HITC and HIMC. The names of the Hyundai units acquired have been
subsequently changed from HITC to Prudential Investment & Securities
Co., Ltd.
---------------------------------------------------------------------------
As described in Prudential's submission for FAN 2003-10E, the
violations which would jeopardize Prudential's QPAM status involved
convictions of a potential Korean affiliate of Article 215 of the
Korean Securities and Exchange Law (KSEL). Article 215 is codified in
the ``penalty'' section of the KSEL. An English translation of Article
215 of the KSEL provides the following:
If a representative of a juristic person, or an agent, servant,
or other employee of a juristic person or individual commits any
offense as prescribed in Articles 207-2 through 212 of the KSEL in
connection with the affairs of the juristic person or individual,
the fine as prescribed in the respective article shall also be
imposed on such juristic person or individual, in addition to a
punishment of the offender.
Under Article 215 of the KSEL, liability for certain criminal
violations committed by an employee is imposed automatically on an
employer without regard to fault. Under this provision, like other
Korean dual-penalty laws, when an employee is convicted of certain
enumerated criminal securities violations (in this case, violations of
Articles 207-2 through 212 of the KSEL), a criminal penalty is imposed
against the employee's employer even though there is no required
showing of wrongdoing on the part of the company. There is no
requirement to show intent to commit the wrongful act or negligence on
the part of the company in order to be fined under Article 215 of the
KSEL. These penalties are imposed without regard to whether the company
was negligent in any way in hiring or supervising the employee or
otherwise acted unreasonably. Therefore, when a company is fined under
a dual-penalty provision, it is automatically criminally fined for the
wrongdoing of its employee. Fines under Article 215 of the KSEL are
imposed by a court, rather than a governmental agency. The applicant
states that it is not aware of any similar automatic imposition of
criminal liability on an employer in connection with violations of an
employee in American criminal jurisprudence.
3. Dual-penalty provisions similar to Article 215 of the KSEL are
found in many areas of Korean law including Korean securities,
financial, construction, labor and employment laws. For example, at
least six major Korean securities laws contain dual-penalty provisions
that are nearly identical to and impose automatic liability similar to
Article 215 of the KSEL. In addition, the applicant represents that it
has identified several laws in Japan and Taiwan that contain similar
dual-penalty provisions.\9\ The dual-penalty laws which the applicant
has identified are listed in the Appendix.
---------------------------------------------------------------------------
\9\ The applicant states that although the dual-penalty
provisions that it has identified under Japanese law closely
resemble Korean and Taiwanese dual-penalty laws, Japanese dual-
penalty provisions differ slightly from those of Korea and Taiwan.
For example, under the Securities and Exchange Laws of Japan, the
burden of proof is transferred to the defendant company wherein
penalties are automatically imposed unless the company mounts a
successful defense. Thus, companies may be able to assert certain
defenses to liability that are unavailable under similar Korean and
Taiwanese laws. However, the applicant represents that it has been
advised by Japanese counsel that while there may be a right to a
defense under Japanese law, no company has succeeded in avoiding
dual-penalty liability once it has been indicted, so that the
imposition of a dual penalty on the Japanese company remains
virtually certain.
---------------------------------------------------------------------------
4. Because the liability of a company under a dual-penalty
provision derives from a criminal violation committed by an employee,
there may be no liability of a company without a finding of an
underlying violation by an employee. The underlying violations that may
give rise to employer liability under a dual-penalty law are likewise
codified in the ``penalty'' provisions of the relevant statutes, as are
the dual-penalty provisions themselves.
In court proceedings involving allegations of a dual-penalty
violation, the applicant explains that the company/employer is named as
a defendant along with the employee. However, the company's opportunity
to defend itself is limited to supporting the employee's arguments that
the employee is innocent of the alleged underlying violation or
challenging the amount of the penalty. Accordingly, Prudential points
out that the company would have no opportunity to argue that it should
not be liable under a dual-penalty law because it was not negligent in
hiring or supervising the employee or otherwise acted reasonably under
the circumstances.\10\
---------------------------------------------------------------------------
\10\ As noted above, the applicant understands that Japanese
dual-penalty laws may provide an opportunity for an employer to
present evidence in its own defense in response to an allegation of
liability under certain dual-penalty provisions under relevant case
law, subject to the limitations described above.
---------------------------------------------------------------------------
5. According to Prudential, certain Korean legal commentators have
expressed the view that liability under a dual-penalty provision such
as Article 215 of the KSEL is based on a theory that a principal shall
be liable for the acts of its agent. Prudential represents that these
laws reflect a cultural belief that the principal has a duty to
supervise its employees and thus should be held accountable for the
acts of its employees, regardless of whether the principal has any
wrongful intent or has engaged in any misconduct.
The applicant states that it understands that the legal systems of
certain European countries such as Germany may have enacted dual-
penalty laws such as those found in Korea. Specifically, in Germany
there were efforts made to change certain penalties imposed for
violations of administrative regulations (such as finance-related
regulations) from criminal sanctions to administrative sanctions. In
response, in 1952, amendments were made to certain German laws which
reclassified many of the penalties under certain financial laws from
criminal violations to administrative fines. No similar amendments have
been made to Korean statutes, and as such, these dual-penalty
provisions remain classified as criminal violations.
6. The applicant has reviewed the range of fines that may be
imposed under several of the major Korean dual-penalty statutes. In
general, the maximum fine that may be imposed against a company for a
dual-penalty violation is less than $100,000 U.S. dollars. Courts in
their discretion may impose fines less than the maximum permitted fine
depending on the severity of the violation and other relevant
circumstances. The applicant states that, in its limited experience,
fines actually imposed under Article
[[Page 43444]]
215 of the KSEL have amounted to less than $10,000 U.S. dollars. Given
that expenses associated with challenging the imposition of these fines
or settling these matters can easily exceed $100,000 U.S. dollars or
more, Prudential explains that companies faced with these penalties
frequently choose to pay fines rather than incur the much higher cost
of settling the case or challenging the fine.\11\ Even though these
fine amounts are relatively minor, the applicant indicates that it is
concerned that, because of the criminal nature of the penalties, they
would cause a company like it to fail to satisfy the requirements of
Section I(g) of PTCE 84-14.
---------------------------------------------------------------------------
\11\ The following list describes the range of fines that may be
imposed for violations of some of Korea's dual-penalty laws: (a)
Korean Securities and Exchange Law, Article 215: up to the greater
of (i) 30 million won ($26,000 U.S. dollars) or (ii) 3 times the
profit gained (or loss evaded) by the offense (depending on the type
of crime, up to 2 million won, 5 million won, 10 million won or 30
million won); (b) Futures and Exchange Law, Article 100: up to the
greater of (i) 20 million won ($17,000 U.S. dollars) or (ii) 3 times
the profit gained (or loss evaded) by the offense (depending on the
type of crime, up to 5 million won, 10 million won, or 20 million
won); (c) Foreign Exchange Transactions Act, Article 31: up to the
greater of (i) 200 million won ($174,000 U.S. dollars) or (ii) 3
times the value of the object with respect to which a violation is
committed (depending on the type of crime, up to 50 million won, 100
million won or 200 million won); (d) Foreign Investment Promotion
Act, Article 36: up to not less than twice and not more than ten
times the amount of the illegal transfer (depending on the type of
crime, up to 10 million won or 30 million won ($36,000 U.S.
dollars)); (e) Securities Investmet Trust Business Act, Article 63:
up to 30 million won ($26,000 U.S. dollars) (depending on the type
of crime, up to 5 million won, 20 million won, or 30 million won);
(f) Securities Investment Company Act, Article 89: up to 30 million
won ($26,000 U.S. dollars) (depending on the type of crime, up to 5
million won, 20 million won, or 30 million won); (g) Labor Standards
Act, Article 116: up to 30 million won ($26,000 U.S. dollars)
(depending on the type of crime, 5 million won, 10 million won, 20
million won or 30 million won).
---------------------------------------------------------------------------
7. Prudential has several foreign affiliates in Japan, Korea and
Taiwan.\12\ As stated above, in these countries, criminal liability is
automatically imposed on employers in connection with the criminal
actions of their employees through so-called dual-penalty laws, and
liability is imposed even though there is no finding of actual criminal
conduct by the company. For QPAMs that have foreign affiliates in these
countries, such as Prudential, convictions of affiliates under these
laws may jeopardize QPAM status even though the misconduct at issue
places no ERISA-covered assets at risk.
---------------------------------------------------------------------------
\12\ The following list contains a sampling of the current
foreign affiliates of Prudential located in Korea, Japan and Taiwan:
(a) POK Securitization Specialty Co., Inc. located in Seoul, Korea;
(b) Prudential Asset Management Co., Ltd. (previously Hyundai
Investment Trust Management, HIMC) located in Seoul, Korea; (c)
Prudential Asset Management Japan, Inc. located in Tokyo, Japan; (d)
Prudential Holdings of Japan, Inc. located in Tokyo, Japan; (e)
Prudential Financial Securities Investment Trust Enterprise located
in Taipei, Taiwan; and (f) Prudential Life Insurance Company of
Taiwan Inc. located in Taipei, Taiwan.
---------------------------------------------------------------------------
However, the applicant states that convictions of individual
employees of Prudential affiliates in the United States would not, by
themselves, disqualify Prudential from serving as a QPAM because, in
this regard, individual employees of Prudential affiliates would not
constitute ``affiliates'' of Prudential for purposes of Section I(g) of
PTCE 84-14.\13\
---------------------------------------------------------------------------
\13\ For purposes of Section I(g) of PTCE 84-14, the term
``affiliate'' includes only certain employees of the QPAM (certain
officers and highly compensated employees, and employees possessing
authority, responsibility or control over plan assets). Pursuant to
Section V(d)(4) of PTCE 84-14, it does not include employees of an
affiliate of the QPAM unless the employee is a director of, a
relative of, or a partner in the QPAM.
---------------------------------------------------------------------------
Inasmuch as the dual-penalty laws in Korea, Japan and Taiwan
automatically impose criminal liability on an employer in connection
with certain convictions of employees, the applicant believes that
QPAMs that have these foreign affiliates in countries that have enacted
dual-penalty laws, such as Korea, Japan and Taiwan, are unfairly
disadvantaged. The applicant believes this because any time an employee
of such a foreign affiliate is convicted of certain underlying criminal
violations that give rise to automatic employer liability under a dual-
penalty law, the U.S. parent's QPAM status is jeopardized under Section
I(g) of PTCE 84-14. This is the case even if the foreign affiliate has
no ERISA-covered business, exercises no control or discretion over
ERISA plan assets and has no intention of doing so in the future. The
applicant believes that this is an unfair result given that the purpose
of Section I(g) of PTCE 84-14 is to protect ERISA-covered assets
against risk of loss arising from criminal misconduct. The applicant
states that when a foreign affiliate has no contact with ERISA-covered
assets whatsoever, no risk of loss arises from any misconduct that may
result in the criminal liability of a foreign affiliate under a dual-
penalty statute. The applicant opines that these dual-penalty laws will
present increasing problems for QPAMs given the growing trend of
globalization among major companies providing QPAM services, such as
Prudential.
8. Accordingly, the applicant requests an exemption to enable
Prudential and any of its current or future affiliates to act as a QPAM
despite their failure to satisfy Section I(g) of PTCE 84-14 solely as a
result of a violation of a dual-penalty law of Korea, Japan or Taiwan.
The transactions covered by the proposed exemption would include the
full range of transactions that can be executed by investment managers
who qualify as QPAMs pursuant to PTCE 84-14. If granted, the exemption
will enable Prudential and its current and future affiliates to qualify
as QPAMs by satisfying all conditions of PTCE 84-14, except that when
an employee of a Korean, Japanese or Taiwanese affiliate is convicted
of certain underlying criminal violations that give rise to automatic
employer liability under dual-penalty law, such conviction will not
prevent satisfaction of the condition stated in Section I(g) of PTCE
84-14 solely because of Prudential's affiliation with such affiliate.
9. The applicant maintains that the requested exemption is
protective of the rights of participants and beneficiaries of affected
plans because: (a) None of the alleged misconduct involved ERISA-
covered plan assets; (b) the applicant is not involved in any of the
alleged misconduct; (c) any Korean, Japanese or Taiwanese affiliate
charged with criminal misconduct is not and will not in the future be
involved in the provision of QPAM or investment management services to
ERISA plans and will not otherwise exercise discretionary control over
plan assets; (d) the fines are imposed against the Korean, Japanese or
Taiwanese affiliate without any finding that such affiliate itself
engaged in any wrongful conduct in its corporate capacity or that it
may have ratified the acts of its employees and generally without any
opportunity to present mitigating evidence; \14\ and (e) the applicant
will take steps to implement its internal control procedures on the
Korean, Japanese or Taiwanese affiliate during a transition period
after acquisition of the affiliate, to the extent permitted by foreign
law, to reduce the likelihood of recurrence of misconduct consistent
with its worldwide operations.\15\
---------------------------------------------------------------------------
\14\ As noted, certain defenses to liability may exist under
Japanese dual-penalty laws that are unavailable under similar Korean
or Taiwanese provisions. However, the applicant believes that,
notwithstanding the defenses, the imposition of the dual penalty is
virtually automatic once a company is indicted.
\15\ Prudential states that it has adopted substantial
compliance policies and procedures intended to ensure that
applicable legal requirements are satisfied and the highest standard
of business integrity is maintained wherever Prudential conducts
business. Prudential further states that the compliance program for
Prudential's International Investments organizations has been
developed over the last five years. Prudential explains that the
compliance program was initially modeled after Prudential's domestic
programs and has now evolved into a global program. Prudential
maintains that, whether it has acquired an international business or
grown one from within, the compliance approach has been uniformly
applied.
Prudential's compliance program requires that the following
steps be taken: (a) An assessment of the regulatory environment is
conducted, which includes an identification (through local counsel)
of applicable local laws and regulations, including any special laws
or requirements that apply because of the nature of particular
investment activities, and an analysis of applicable regulatory and
enforcement schemes; (b) due diligence is conducted on possible
acquisition candidates; (c) regulatory examination issues are
evaluated and action plans are developed to avoid repeat issues; (d)
reviews are conducted to assess the adequacy of a company's written
compliance policies and procedures, including recommendations that
may be made to improve compliance activities to address local legal
and Prudential requirements, and progress is tracked on
recommendations made during compliance reviews; (e) a core set of
policies and procedures is established, and these policies and
procedures, as well as ethical standards, are documented in
compliance manuals; (f) a local compliance staff is hired and
reports to the Chief Compliance Officer of International Investments
to ensure independence; (g) training is conducted in the local
language; (h) monitoring programs are put in place, and periodic
regulatory risk assessments are conducted during compliance reviews
to assure compliance as legal, regulatory, and Prudential
requirements change. Prudential states that, since no control system
can guarantee compliance, in the event of a breach of the policies
and/or procedures, an evaluation is performed to determine if any
modifications are needed in the overall compliance structure.
The applicant also notes that the process of implementing
Prudential's internal procedures and controls on recently acquired
foreign entities could take as many as 12 to 18 months from the date
of Prudential's acquisition of a foreign entity, subject to the
constraints of local law.
---------------------------------------------------------------------------
[[Page 43445]]
The proposed exemption also contains conditions, in addition to
those imposed by PTCE 84-14, which are designed to ensure the presence
of adequate safeguards to protect the interests of the ERISA plan
participants and beneficiaries against wrongdoers now and in the
future. In this regard, the proposed exemption will be applicable if:
(a) The affiliate convicted under a dual-penalty law has not provided,
nor in the future will it provide, fiduciary or QPAM services to ERISA-
covered plans, or otherwise exercise discretionary control over ERISA
assets; (b) ERISA-covered assets have not been involved nor will they
be in the future involved in the misconduct that is the subject of the
affiliate's conviction(s); (c) Prudential has imposed and will continue
to impose its internal procedures, controls, and protocols on the
affiliate to reduce the likelihood of any recurrence of misconduct to
the extent permitted by local law; (d) Prudential has kept and will
continue to keep records that demonstrate that the conditions of the
exemption have been and continue to be met for at least 6 years
following the conviction of an affiliate of the dual-penalty laws of a
foreign country; (e) the criminal acts in question have been neither
authorized nor condoned by Prudential; and (f) the other conditions of
PTCE 84-14, combined with the procedures adopted by Prudential, have
afforded and will continue to afford ample protection of the interests
of participants and beneficiaries of employee benefit plans.
10. The applicant represents that the proposed exemption is
administratively feasible because it does not require the Department to
oversee or administer any aspect of the relief provided. For example,
the applicant states that the exemption, as drafted, does not require
the Department to review or make findings regarding Prudential's
acquisition of entities that may have been convicted under a dual-
penalty law of Korea, Japan or Taiwan.
Further, the applicant represents that the requested exemption does
not require the Department to review the laws to determine if exemptive
relief is appropriate. The applicant opines that the Department
oversight of the convictions described in the requested exemption
should not be required because the exemption requires that the
convicted entity provide no fiduciary or QPAM services to ERISA plans
and that no ERISA assets were involved in the subject conviction.
In addition, the applicant believes that the exemption is
administratively feasible because the burden will be on Prudential to
demonstrate that the conditions of the exemption have been met should
the Department audit Prudential's compliance with the described
requested exemption.
Moreover, the applicant notes that if the Department denies the
requested exemption, Prudential will be forced to obtain individual
exemptive relief or final authorization under EXPRO each time
Prudential either seeks to acquire an entity in one of the covered
foreign jurisdictions with a dual-penalty conviction or an existing
Prudential affiliate is convicted under a described dual-penalty law.
The applicant believes that this process will be costly and time-
consuming for both the Department and Prudential.
Finally, because the conditions of the proposed exemption require
the entity convicted provide no fiduciary or QPAM services to ERISA-
covered plans, and that ERISA plan assets not be involved in the
misconduct that is the subject of the conviction, the applicant
represents that the proposed exemption poses no risk to ERISA-covered
assets. In this regard, the applicant believes that the requested
exemption is more administratively feasible than approaching the
Department for individual relief on a case-by-case basis.
11. In the absence of an exemption, Prudential states that it could
be precluded from engaging in numerous routine, non-abusive
transactions for its employee benefit plan customers, resulting in the
loss of investment opportunities for those customers. Prudential
further states that these opportunities would be lost even though the
ERISA-covered assets were not placed at any risk by the criminal
conduct giving rise to the conviction of the Prudential affiliate.
12. In summary, it is represented that the transactions have
satisfied and will satisfy the statutory criteria for an exemption
under section 408(a) of the Act because:
(a) The affiliate convicted under a dual-penalty law has not
provided and will not provide fiduciary or QPAM services to ERISA-
covered plans or otherwise exercise discretionary control over ERISA
assets.
(b) ERISA-covered assets have not been involved and will not be
involved in the misconduct that is the subject of the affiliate's
conviction(s).
(c) Prudential has continued and will continue to impose its
internal procedures, controls, and protocols on the affiliate to reduce
the likelihood of any recurrence of misconduct to the extent permitted
by local law.
(d) This exemption is not applicable and will not be applicable if
Prudential, or any affiliate (other than affiliates convicted of
violating a dual-penalty law of Korea, Japan or Taiwan) is convicted of
any of the crimes described in Section I(g) of PTCE 84-14.
(e) Prudential has maintained and will maintain records that
demonstrate that the conditions of the exemption have been met for at
least six years following the conviction of an affiliate of the dual-
penalty laws of a foreign country.
(f) The criminal acts in question have not been authorized or
condoned and will not be authorized or condoned by Prudential.
(g) The other conditions of PTCE 84-14, combined with the
procedures adopted by Prudential, have afforded and will afford ample
protection of the interests of participants and beneficiaries of
employee benefit plans.
Notice to Interested Persons
The Applicant represents that because those potentially interested
ERISA-covered plans cannot all be identified, the only practical means
of notifying such plans of this proposed exemption is by publication in
the Federal Register. Therefore, comments and
[[Page 43446]]
requests for a public hearing must be received by the Department not
later than 30 days from the publication of this notice of proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Anna M.N. Mpras of the Department,
telephone (202) 693-8565. (This is not a toll-free number.)
Appendix--Sample Dual-Penalty Provisions of Foreign Countries
The following list contains English translations of Korean,
Japanese, and Taiwanese dual-penalty laws. The dual-penalty
provisions cited below are codified within the ``penalty'' section
of the statute, and fines imposed under these laws are imposed by a
court rather than a governmental agency.
Korean Laws
Securities and Exchange Act, Article 215
Joint Penal Provisions ``If a representative of a juristic
person, or an agent, servant, or other employee of a juristic person
or individual commits any offense as prescribed in Articles 207-2
through 212 in connection with the affairs of the juristic person or
individual, the fine as prescribed in the respective article shall
also be imposed on such juristic person or individual, in addition
to a punishment of the offender.''
Foreign Investment Promotion Act, Article 36
Joint Penal Provisions ``Where the representative of a
corporation or agent, full-time or part-time employee of a
corporation or individual person has committed with respect to
business matters of the corporation or individual person, a
violation as prescribed by the provisions of Articles 35, the
corporation or individual person shall be sentenced to the fine
prescribed by the provisions of the respective Articles, in addition
to the punishment of the person who has committed the violation.''
Securities Investment Company Act, Article 89
Provisions of Dual Punishment ``When a representative of a
corporation, or an agent or employee of a corporation or an
individual violates Article 86 through Article 88 with respect to
the business affairs of such corporation or individual, a fine
falling under each pertinent Article shall also be imposed to such
corporation or individual, in addition to a punishment against the
offenders.''
Securities Investment Trust Business Act, Article 63
Joint Penal Provisions ``If a representative of a juristic
person, or an agent, employee or other personnel of a juristic
person or an individual, commits an offense prescribed by Articles
59 though 62 in connection with the affairs of the juristic person
of the individual, the fine prescribed in the respective Article
shall also be imposed on such a juristic person or individual in
addition to the punishment upon the offender.''
Foreign Exchange Transactions Act, Article 31
Joint Penal Provisions ``If the representative of a juristic
person, or an agent, an employee or other employed persons of a
juristic person or a private person commits such violations as
provided in Articles 27 through 29 in connection with the property
of affairs of the juristic person or the private person, not only
such violators shall be punished, but the juristic person or the
private person shall be punished by a fine as provided in the
respective pertinent Articles.''
Futures Trading Act, Article 100
Joint Penal Provisions ``Where a representative of a juristic
person, or an agent, employer or other employee of a juristic person
or individual, violates Article 96 through 98, during the course of
carrying out business of such juristic person or individual, such
juristic person or individual, in addition to the very person who
committed such offence, shall be subject to a fine to the extent of
the amount prescribed in respective Articles.''
Mortgage-Backed Securitization Company Act, Article 25
Provisions of Dual Punishment ``When a representative of
corporation an agent or servant for corporation or individual, and
other employees violated Sec. 23 or Sec. 24 against the
corporation or the individual, in addition to punishment, the fine
pursuant to the corresponding Article shall be imposed on the
corporation or the individual.''
Banking Act, Article 68-2
Joint Penal Provisions ``When a representative of a juristic
person, or an agent, employee or other employed person of a juristic
person or an individual has violated Article 67 or 68 concerning the
business of the relevant juristic person or individual, the juristic
person or individual shall be punished by a fine as prescribed by
each Article concerned in addition to punishment of the offender.''
Depositor Protection Act, Article 43
Joint Penal Provisions ``When a representative or an agent, an
employee or other employed person of an insured financial
institution performs any act of violating the provisions of
subparagraph 2 of Article 40 or Article 41 with respect to the
business of the insured financial institution, the insured financial
institution shall be sentenced to a fine as stated in the same
Article, in addition to punishing the offender.''
Financial Holding Company Act, Article 71
[No English translation currently available.]
Insurance Business Act, Article 208
Joint Penal Provisions (1) ``In case of a representative of a
juristic person (hereinafter in this paragraph, including an
unincorporated association or foundation which has a representative
or a system of administrator), or an agent, employee or other
workers or a juristic person or of an individual has committed any
offense prescribed in Article 200-, 202, or 204 in connection with
the business of such juristic person or of the individual, the
person who has committed such offense as well as the juristic person
or the individual concerned shall be subject to a fine as prescribed
in each respective Article.
(2) In case where an unincorporated association or foundation is
subject to punishment in accordance with paragraph (1), the
representative or administrator thereof shall represent the
association or foundation concerned with regard to the procedures
and the provisions of those Acts dealing with criminal sanctions
which apply to a juristic person as a defendant, which shall be
applicable mutatis mutandis thereto.''
Trade Union and Labor Relations Adjustment Act, Article 94
Joint Penal Provisions ``When the representative of a juristic
person or association, or an agent, servant or any employee of a
juristic person, association or individual commits an action in
violation of Article 88 through 93 with respect to the business of
the juristic person, association, or individual, a fine as
prescribed in each of the pertinent Articles shall be imposed on the
juristic person, association or individual in addition to the
punishment of the actual offenders.''
Japanese Laws
Foreign Exchange and Foreign Trade Control Law, Article 73
``When representatives of a juridical person* * *, or an agent,
employee, or other operator engaged by a juridical or natural person
committed any offense mentioned in the provisions of article 69-6,
up to the preceding Article in regard to the business or property of
such a juridical or natural principal, the juridical or natural
principal shall be liable to the fine specified in each Article, in
addition to the offender himself.''
Banking Law, Article 64
``When representatives of a corporation (including
representatives, or administrators or organizations, not
corporations. Hereinafter in the Paragraph, the same), or an agent,
employee, or other operator engaged by a juridical or natural person
committed an act violating any of the three previous articles, in
regard to the business or property of such a juridical or natural
principal, in addition to punishing the perpetrator, the juridical
or natural principal shall be liable to the punishments specified in
each Article.''
Trademark Law, Article 82
Dual Liability ``Where an officer representing a legal entity or
a representative, employee or any other servant of a legal entity or
of a natural person has committed an act in violation of the
following paragraphs with regard to the business of the legal entity
or natural person, the legal entity shall, in addition to the
offender, be liable to the fine prescribed in the following
paragraphs and the natural person shall be liable for the fine
prescribed in those sections:
section 78, subject to a fine up to 150 million yen; section 79
or 80, subject to a fine up to 100 million yen.
[[Page 43447]]
Taiwanese Law
Fair Trade Law, Article 38
``In the event that the violator referred to in any of the three
preceding Articles is a legal person, in addition to the punishment
to be imposed upon the person committing the act, the said legal
person shall also be subject to the fine specified in the respective
Article.''
The Employees' Retirement Plan of Storytown U.S.A., Inc. and
Participating Affiliated Companies (the Plan) Located in Glen Falls,
New York
[Application No. D-11251]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).\16\ If the
exemption is granted, the restrictions of sections 406(a), 406(b)(1)
and (b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to: (1) The making of a loan (the
Loan) to the Plan in an original principal amount sufficient to cover
the Plan's unfunded liability upon termination, by Storytown U.S.A.,
Inc. (Storytown), the Plan sponsor and a party in interest with respect
to the Plan; (2) the assignment (the Assignment) by the Plan to
Storytown of all rights, title and interest the Plan has in claims (the
Claims) against certain investment advisers (the Responsible Parties),
in connection with losses the Plan incurred during 2003 and 2004; and
(3) the potential repayment, by the Plan to Storytown, of the Loan
obligation from proceeds recovered on the Claims against the
Responsible Parties.
---------------------------------------------------------------------------
\16\ For purposes of this proposed exemption, references to
specific sections of the Act, unless otherwise specified, refer also
to the corresponding provisions of the Code.
---------------------------------------------------------------------------
This proposed exemption is subject to the following conditions:
(a) The Plan pays no interest in connection with the Loan.
(b) The Loan proceeds only are utilized to satisfy the Plan's
unfunded liability.
(c) None of the assets of the Plan are pledged to secure the Loan
amount.
(d) The Loan is a non-recourse obligation of the Plan.
(e) The Plan is properly terminated and Mr. Charles Wood, the
principal shareholder of Storytown, agrees to waive any benefits he
will receive on the termination of the Plan.
(f) The Plan's rights to any Claims that are not resolved before
final distributions are completed are assigned by the Plan to Storytown
under the terms of the Assignment.
(g) The Assignment is deemed a repayment in full of the Loan by the
Plan. As a result, the Plan has no liability for the Loan and no
interest in the Claims. However,
(1) If the net amount recovered on the Claims against the
Responsible Parties after the Assignment, from any judgment or
settlement of any arbitration proceeding, is equal to or less than the
amount of the Loan, the balance due on the Loan is automatically
forgiven and such unpaid balance is treated by Storytown as an employer
contribution to the Plan; or
(2) If the net amount recovered on the Claims against the
Responsible Parties from any judgment or settlement of arbitration
proceeding exceeds the amount of the Loan (the Excess Amount), such
Excess Amount is treated as a reversion paid by the Plan to Storytown
pursuant to the Plan document.
(h) Notwithstanding the Assignment, the Plan does not release any
claims, demands and/or causes of action which it may have against
Storytown and/or its affiliates.
(i) The Plan incurs no expenses, commissions or transaction costs
in connection with the contemplated transactions, all of which are one-
time occurrences.
(j) All terms of the transactions are at least as favorable to the
Plan as those which the Plan could obtain in similar transactions
negotiated at arm's length with unrelated third parties.
(k) The subject transactions do not involve any risk of loss to
either the Plan or to any of the participants and beneficiaries of the
Plan.
(l) Prior to the Plan's entering the transactions, a qualified,
independent fiduciary (the I/F), which is acting on behalf of the Plan
and which is unrelated to Storytown and/or its affiliates,
(1) Reviews, negotiates and approves the terms and conditions of
the Loan and the Assignment exclusively (but does not monitor legal
proceedings against the Responsible Parties following the Assignment);
(2) Determines that such transactions are prudent and in the
interest of the Plan and its participants and beneficiaries; and
(3) Confirms that the Loan amount will be sufficient to satisfy all
Plan liabilities, including the Plan's unfunded liability, and permit
the Plan to terminate on a standard termination basis.
(m) If the I/F resigns, is removed, or for any reason is unable to
serve as I/F, prior to the Plan's entering into the transactions, such
I/F is replaced by a successor I/F:
(1) Who is appointed immediately upon the occurrence of such event;
(2) Who is independent of Storytown and its affiliates;
(3) Who is qualified to serve as the I/F; and
(4) Who assumes the duties and responsibilities of the predecessor
I/F.
The Department is also provided written notification of such change
in I/F.
Summary of Facts and Representations
1. Storytown is a New York State corporation with its principal
headquarters in Glen Falls, New York. Storytown is a privately-held
corporation engaged in the amusement park industry. Its principal
shareholder is Mr. Charles Wood. Since 1996 (when a majority of its
assets were sold to an unrelated party), Storytown has been winding up
its operations in order to complete a corporate dissolution under New
York State Business Corporation Law. As part of this process, Storytown
wishes to terminate the Plan it sponsors, which is described below.
2. The Plan was established on June 30, 1970, but amended and
restated on January 1, 2001. The Plan is a defined benefit plan, which
is designed to qualify under section 401(a) of the Code. All
contributions to provide Plan benefits and to cover administrative
expenses are made by Storytown. As of December 31, 2002, the Plan had
approximately 24 participants and total assets of approximately
$1,889,006.
Storytown, as Plan sponsor, appointed Glen Falls National Bank and
Trust Company (GFNB), as the Plan trustee (the Trustee) and Georgia
Beckos-Wood and Shirley Myott, both employees of Storytown, as members
of the Plan's Trustee Committee.
As discussed more fully below, GFNB will also serve as the I/F with
respect to the transactions that are the subject of this proposed
exemption.
3. As of the end of the 2000 Plan Year, the Plan was substantially
overfunded. In this regard, no contributions had been required to be
made to the Plan for several years and Plan assets exceeded liabilities
by $3 million. As part of its proposed dissolution, Storytown retained
the services of certain unrelated investment advisers to address the
Plan's overfunded status. Storytown followed the advice of these
Responsible Parties by amending the
[[Page 43448]]
Plan to increase benefits and provide for flexible premium variable
life insurance policies for the Plan participants. The action was taken
in December 2000 and it absorbed all of the excess Plan assets.
Although the Plan was amended as of July 2003 to freeze future benefit
accruals,\17\ the stock market dropped and interest rates dropped.
Thus, the once overfunded Plan became underfunded by approximately $2
million as of March 30, 2004.\18\ As of May 13, 2004, the Plan had
filed claims (i.e., the Claims) with the National Association of
Securities Dealers, Inc. (NASD) to commence arbitration proceedings
against the Responsible Parties.
---------------------------------------------------------------------------
\17\ The purpose of the freeze was to ensure that the Plan was
in compliance with section 204(h) of the Act. Section 204(h) of the
Act provides that a pension plan may not be amended to significantly
reduce the rate of future benefit accruals unless the plan
administrator provides timely written notification of the amendment
to participants and certain other parties likely to be affected.
\18\ The initial strategy adopted by Storytown to deal with the
Plan's underfunding problem was to ``wait and see'' if adverse
market conditions would become more favorable. However, the
situation never changed.
---------------------------------------------------------------------------
4. As stated above, a majority of Storytown's assets have been sold
to an unrelated third party. Since that time, Storytown has been in the
process of a corporate dissolution under the New York State Business
Corporation Law, but it has not made a formal filing of articles of
dissolution. As a Plan sponsor, Storytown represents that it cannot
dissolve until the Plan is fully terminated in order to avoid impairing
the Plan's qualified status under section 401(a) of the Code.
Upon termination of the Plan, Storytown represents that it will
formally commence the corporate dissolution process.
5. On September 27, 2003, Storytown initially applied to the
Pension Benefit Guaranty Corporation (PBGC) to have the Plan terminated
on a ``negotiated'' termination basis under section 4042 of the
Act.\19\ During the course of PBGC's review, the health of Storytown's
sole shareholder, Mr. Wood, began to fail. Thus, a decision was
subsequently made to withdraw the application for the Plan's
termination under section 4042 of the Act and instead have the Plan
terminated on a ``standard'' termination basis.
---------------------------------------------------------------------------
\19\ A termination under section 4042 of the Act or, for that
matter, section 4041(c) of the Act, occurs when a plan is
underfunded on a termination basis. When a plan is underfunded and
certain circumstances exist, the PBGC may, in its discretion, take
over a plan to effect a termination on either a distress termination
basis under section 4041(c) of the Act or on a negotiated
termination basis under section 4042 of the Act. Under these
terminations, the PBGC takes over the plan and its assets,
terminates the plan, and pays benefits, that have been adjusted for
required cutbacks and the amount of PBGC guarantees.
In Storytown's case, the Plan's assets were substantially less
than the Plan's liabilities. This resulted in the Plan being
underfunded on a termination basis. Thus, Storytown originally
applied to the PBGC for termination on a negotiated termination
basis under section 4042 of the Act.
---------------------------------------------------------------------------
For the Plan to terminate on a standard termination basis, the Plan
would need to cover the unfunded liability, which is currently
projected at slightly under $2 Million. Therefore, Mr. Wood agreed to
waive any benefits he might receive from the Plan under a standard
termination and lend Storytown, an amount sufficient to cover the
unfunded liability. Then, Storytown proposed to take Mr. Wood's loan
and make a prospective interest-free loan to the Plan to cover the
unfunded liability. The Loan would also be unsecured and a non-recourse
obligation of the Plan.
6. In exchange for the Loan, the Plan would assign Storytown, under
the terms of the Loan and Assignment agreement, its rights, title and
interest in the Claims \20\ against the Responsible Parties who advised
the Plan to purchase flexible premium variable life insurance policies
that insure the lives of each Plan participant for a premium of over $3
million. These Claims against the Responsible Parties include, among
other things, misrepresentation, fraud, breach of contract, breach of
fiduciary duties, unsuitability, violations of the Securities and
Exchange Act, violations of the NASD Rules of Fair Practice, aiding and
abetting, failure to supervise and common law fraud.
---------------------------------------------------------------------------
\20\ The Plan's rights also include, but are not limited to, any
and all rights in and to any recovery thereon and the recovery of
any expenses of pursuing the Claims against the Responsible Parties.
---------------------------------------------------------------------------
Accordingly, Storytown requests an administrative exemption from
the Department to permit the proposed Loan, the Assignment and the
Plan's potential repayment of its Loan obligation to Storytown from
proceeds recovered from the Claims.
7. Due to the uncertainty in the outcome of the arbitration
proceedings between the Plan and the Responsible Parties, it is
represented that it is difficult to calculate a precise value of the
rights against the Responsible Parties which the Plan proposes to
assign to Storytown. In this regard, as stated in Representation 9, the
I/F has reviewed and determined that the Assignment is appropriate to
essentially repay the Loan. It is represented that to the extent the
net amount recovered from the Claims against the Responsible Parties,
if any, from such arbitration proceedings is equal to or less than the
aggregate amount of the Loan, the Plan will not be responsible for any
amount. Such unpaid balance will be treated by Storytown as an employer
contribution to the Plan. Furthermore, in the event that the net
recovery on the Claims exceeds the amount of the Loan, such Excess
Amount will be treated as a reversion paid by the Plan to Storytown
pursuant to the Plan document.
8. Storytown represents that the proposed transactions will
adequately protect the rights of the participants and beneficiaries of
the Plan. In this regard, the Loan will bear no interest. Assets of the
Plan, other than the Claims, will not be pledged as collateral to
secure the Loan, nor will assets of the Plan, other than the Claims, be
used to repay the Loan.
As discussed fully above, in exchange for the Loan, the Plan
intends to assign to Storytown any and all the Plan's rights, title and
interests in the Claims, it may have against the Responsible Parties
pursuant to the arbitration proceedings.
In addition, Storytown states that the proposed transactions are
designed to resolve the Plan's unfunded liability problem. On a
standard termination basis, the proposed transactions are deemed to be
in the best interests of the Plan and its participants and
beneficiaries because they will allow the Plan to terminate quickly
without any benefit cutbacks.
Further, Storytown notes that with respect to a defined benefit
plan such as the Plan, it is permitted to recapture the residual assets
of the Plan upon termination, provided all Plan liabilities to
participants and beneficiaries have been satisfied, the distribution is
not contrary to any law, and the Plan provides for such distribution
upon termination. Thus, Storytown explains that the net recovery on the
Claims exceeding the amount of the Loan will not be needed to pay
benefits pursuant to the Plan's standard termination and that such
Excess Amount from the recovery will be properly payable to it as a
reversion pursuant to the Plan document.
9. As an additional safeguard, GFNB has agreed to serve as the I/F
with respect to the proposed transactions. The Department notes the
proposed exemption is conditioned upon the I/F reviewing and monitoring
the terms and conditions of the proposed transactions to ensure that
such terms and conditions are at all times satisfied. The proposed
exemption contains a further condition which specifies in the event the
I/F resigns, is removed, or for any reason is unable to serve,
including but not limited to the death or disability of
[[Page 43449]]
such I/F, or if at any time such I/F does not remain independent of
Storytown and its affiliates, such I/F will be replaced by a successor:
(a) Who is appointed immediately upon the occurrence of such event; (b)
who is independent of Storytown and its affiliates; (c) who is
qualified to serve as the I/F; and (d) who assumes all the duties and
responsibilities of the predecessor I/F. The Department will also be
notified of such successor I/F.
GFNB represents that it has extensive experience as a custodian
and/or trustee for over 250 qualified retirement plans. GFNB states
that it has been in the qualified plan business for over 25 years. In
addition to maintaining its own daily valuation platform, wholesaling
qualified retirement plan investment and record-keeping services to
other banks, GFNB explains that it has significant experience with
employee stock ownership plans and other sophisticated fiduciary
transactions. Further, GFNB represents that it, its affiliates and its
holding company, Arrow Financial Corporation (Arrow Financial), are
independent of all parties involved in the proposed exemption. In this
regard, although GFNB explains that it has a depository relationship
with both Storytown and Mr. Wood, its gross revenues from these
deposits amount to less than 1 percent (1%) of GFNB's total gross
revenues. Further, GFNB states that the sum of the assets of Storytown
and Mr. Wood on deposit with, or held by it, over its total assets on
deposit is less than 1 percent. Finally, GFNB explains that it has no
loan relationships with either Storytown or Mr. Wood, and that Mr. Wood
is not an officer or director of GFNB, Arrow Financial or any of GFNB's
affiliates.
GFNB has acknowledged its status as an I/F under the Act, including
the responsibilities and duties of a fiduciary involving the assets of
the Plan. Specifically, prior to the Plan's entering the proposed
transactions, GFNB is responsible for reviewing, negotiating, and
approving the terms and conditions of the Loan and the Assignment, and
determining whether such transactions are prudent, administratively
feasible, in the interest of the Plan and its participants and
beneficiaries, and protective of the participants and beneficiaries of
the Plan. In this regard, GFNB as the Plan Trustee, has examined the
Plan's overall investment portfolio, considered the Plan's liquidity
needs, examined the diversification of the Plan's assets in light of
the proposed transactions and fully considered whether the proposed
transactions comply with the Plan's investment objectives and policies.
GFNB has determined that the proposed transactions are necessary in
the event that the Claims are not fully resolved before final
distributions are required pursuant to the Plan termination. According
to GFNB, the Loan is designed to solve the Plan's unfunded liability on
a standard termination basis and the Assignment of Claims is
appropriate to repay the Loan.
Additionally, GFNB notes that if the net recovery on the Claims
exceeds the amount of the Loan, any Excess Amounts will be properly
payable to Storytown as a reversion pursuant to the Plan document. As a
result of these transactions, GFNB concludes that there will not be any
benefit cutbacks to participants and beneficiaries and the Plan will
not be harmed or impaired, legally or financially.
Finally, GFNB represents that it will continue to monitor the
proposed transactions on behalf of the Plan through the termination of
the Plan, and it will take all actions that are necessary and proper to
safeguard the interests of the Plan and its participants and
beneficiaries. In addition, GFNB will confirm that the Loan amount will
be sufficient to satisfy all Plan liabilities, including the Plan's
unfunded liability, and permit the Plan to terminate on a standard
termination basis.
10. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Plan will pay no interest in connection with the Loan.
(b) The Loan proceeds will be utilized to satisfy the Plan's
unfunded liability.
(c) None of the assets of the Plan will be pledged to secure the
amount of the Loan.
(d) The Loan will be a non-recourse obligation of the Plan.
(e) When the Plan properly terminates, Mr. Charles Wood, the
principal shareholder of Storytown, agrees to waive any benefits he
will receive on the termination of the Plan.
(f) The Plan's rights to any Claims that are not resolved before
final distributions are completed will be assigned by the Plan to
Storytown under the terms of the Assignment.
(g) The Assignment will be deemed a repayment in full of the Loan
by the Plan. As a result, the Plan will have no liability for the Loan
and no interest in the Claims. However, if the net amount recovered on
the Claims against the Responsible Parties after the Assignment, from
any judgment or settlement of any arbitration proceeding, is equal to
or less than the amount of the Loan, the balance due on the Loan will
be automatically forgiven and such unpaid balance will be treated by
Storytown as an employer contribution to the Plan.
(h) Notwithstanding the Assignment, the Plan will not release any
claims, demands and/or causes of action which it may have against
Storytown and/or its affiliates.
(i) The Plan will incur no expenses, commissions or transaction
costs in connection with the contemplated transactions, all of which
will be one-time occurrences.
(j) All terms of the transactions are at least as favorable to the
Plan as those which the Plan could obtain in similar transactions
negotiated at arm's length with unrelated third parties.
(k) The subject transactions will not involve any risk of loss to
either the Plan or to any of the participants and beneficiaries of the
Plan.
(l) Prior to the Plan's entering the transactions, a qualified I/F,
which is acting on behalf of the Plan and which is unrelated to
Storytown and/or its affiliates,
(1) Will review, negotiate and approve the terms and conditions of
the Loan and the Assignment exclusively (but will not monitor legal
proceedings against the Responsible Parties following the Assignment);
(2) Will determine that such transactions are prudent and in the
interest of the Plan and its participants and beneficiaries; and
(3) Will confirm that the Loan amount will be sufficient to satisfy
all Plan liabilities, including the Plan's unfunded liability, and
permit the Plan to terminate on a standard termination basis.
(m) If the I/F resigns, is removed, or for any reason is unable to
serve as I/F, prior to the Plan's entering into the transactions, such
I/F will be replaced by a successor I/F:
(1) Who is appointed immediately upon the occurrence of such event;
(2) Who is independent of Storytown and its affiliates;
(3) Who is qualified to serve as the I/F; and
(4) Who assumes the duties and responsibilities of the predecessor
I/F.
In addition, the Department will be provided written notification
of such change in I/F.
Notice to Interested Persons
Notice of proposed exemption will be provided to all interested
persons by first class mail within 7 days of publication of the notice
of pendency in the Federal Register. Such notice shall include a copy
of the notice of pendency of the exemption as published in the Federal
Register and a
[[Page 43450]]
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2),
which will inform interested persons of their right to comment on the
proposed exemption and/or to request a hearing. Comments and hearing
requests are due within 37 days of the date of publication of the
proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Shelly Mui of the Department,
telephone (202) 693-8530. (This is not a toll-free number.)
Carpenters' Joint Training Fund of St. Louis (the Plan), Located in St.
Louis, Missouri
[Application No. L-11181]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the restrictions of
sections 406(a), 406(b)(1) and (b)(2) of the Act shall not apply to:
(1) The purchase of a parcel of improved real property located at 8300
Valcour Avenue, St. Louis County, Missouri, (the Property) by the Plan
from the Carpenters District Council of Greater St. Louis (the CDC), a
party in interest to the Plan; (2) The guarantee (the Guarantee) by the
CDC of a $6 million loan from an unrelated bank (the Bank Loan) for the
benefit of the Plan; and (3) An unsecured loan for up to $1 million
from the CDC to the Plan (the CDC Loan), provided that the following
conditions are met:
(a) The Plan pays the lesser of (1) $7,985,000 or (2) the fair
market value of the Property at the time of the purchase of the
Property;
(b) The fair market value of the Property is established by an
independent, qualified real estate appraiser that is unrelated to the
CDC or any other party in interest with respect to the Plan;
(c) The Plan will not pay any commissions or other expenses with
respect to the transactions;
(d) An independent, qualified fiduciary (the I/F), after analyzing
the relevant terms of the transactions, determines that the
transactions are in the best interest of the Plan and its participants
and beneficiaries;
(e) In determining the fair market value of the Property, the I/F
obtains an appraisal from an independent, qualified appraiser and
ensures that the appraisal is consistent with sound principles of
valuation;
(f) The terms and conditions of the CDC Loan are at least as
favorable to the Plan as those which the Plan could have obtained in an
arm's-length transaction with an unrelated party;
(g) The Bank Loan is repaid by the Plan solely with funds the Plan
retains after paying all of its operational expenses;
(h) The I/F will ensure that the terms and conditions relating to
the Guarantee are in the best interest of the Plan and its participants
and beneficiaries;
(i) The CDC will waive any right to recover from the Plan in the
event that the Bank enforces the Guarantee against the CDC;
(j) If at any time the Plan does not have sufficient funds to make
a payment on the CDC Loan, after meeting operational expenses and
payments on the Bank Loan, then payments on the CDC Loan will be
suspended, without additional interest or penalty, until such funds are
available; and
(k) The I/F will take whatever actions it deems necessary to
protect the rights of the Plan with respect to the Property and the
transactions.
Summary of Facts and Representations
1. The Plan is an apprenticeship training plan, the assets of which
are subject to the fiduciary responsibility provisions of part 4 of
Title I of the Act. The Plan is a Taft-Hartley trust established
pursuant to collective bargaining, jointly trusteed by representatives
of employer and labor organizations. The Plan is an employee welfare
benefit plan within the meaning of section 3(1) of ERISA, and a
multiemployer plan within the meaning of section 3(37). The Plan is
established in accordance with the requirements for representation on
the Board of Trustees imposed by section 302(c)(5) of the Labor
Management Relations Act. Currently, there are approximately 2745
participants covered by the Plan. As of August 1, 2003, the Plan had
total assets of $4,528,000.
The CDC is an employee organization, some of whose members are
covered in the Plan, and is, therefore, a party in interest within the
meaning of section 3(14) of ERISA with respect to the Plan. The CDC
purchased the Property from an unrelated third party in 2001 for
$3,702,164, slightly less than its appraised value. The CDC expended
over $5.4 million to renovate the Property for the particular needs of
the training programs carried out by the Plan. The CDC is willing to
sell the Property to the Carpenters' Plan for $7,985,000, approximately
$1.1 million less than the CDC expended for the acquisition and
renovation of the Property.
2. The Property is a parcel of improved real property located at
8300 Valcour Avenue, St. Louis County, Missouri, containing a building
of approximately 171,000 square feet that has been renovated to provide
shop, classroom and office space designed for the particular needs of
the training programs conducted by the Plan.
3. In order for the Plan to carry out the purpose of providing
apprentice and journeyman training for the benefit of its participants,
the trustees of the Plan (the Trustees) have determined that the Plan
requires the use of facilities including shop space, classrooms, and
offices for faculty and administrative staff of the training programs.
The Property has been renovated especially for the needs of the Plan,
and it is unlikely that another facility as well suited to these needs
could be found for lease without additional expenditures for tenant
improvements. By owning the Property, the Plan will be free to make any
changes or additions to meet future requirements without consent of a
landlord; the Plan will be assured of the continued availability of the
facility indefinitely; and the Plan will acquire an equity interest in
the property having future value.
4. The Plan began to occupy the Property on September 1, 2002. The
Plan has paid no rent or other expenses during its occupancy. The CDC
has determined to forego any claims for rent or other compensation from
the Plan for the use of the Property.\21\
---------------------------------------------------------------------------
\21\ The Department expresses no opinion herein concerning the
decision by the CDC to forego rent and other expenses as described
above.
---------------------------------------------------------------------------
5. The Property was appraised by J. Lawrence Von Trapp, a State of
Missouri Certified General Real Estate Appraiser of McReynolds, Von
Trapp and Daniel-Gentry (the Appraiser), a real estate appraisal firm
located in St. Louis, Missouri. The Appraiser determined that the fair
market value of the Property was $7,985,000, as of September 1, 2002.
On May 3, 2004, McReynolds, Von Trapp and Daniel-Gentry updated the
appraisal of the Property and stated that the fair market value of the
Property is $8,800,000. However, the CDC agrees to allow the Plan to
purchase the Property for $7,985,000.
The Appraiser analyzed among other factors the following in
determining the fair market value of the Property: (1) The level of
activity in the local economy, particularly as it pertains to and
affects the value of the Property; (2) recent trends in real estate
development,
[[Page 43451]]
occupancy, rental rates, and property values; and (3) the comparable
sales and rental information.
6. The purchase of the Property will be financed, in part, by the
Bank Loan, which will be a first mortgage loan to the Plan from a
commercial bank for $6 million, secured by a mortgage on the Property,
with an initial term of five years at a fixed rate of interest and
twenty year amortization. Principal may be prepaid at any time. CDC
will provide the Guarantee with respect to the first mortgage loan. The
CDC will waive any right to recover from the Plan in the event that the
Bank enforces the Guarantee against the CDC. Therefore, the Guarantee
by the CDC will be non-recourse to the Plan.
The CDC Loan is to be an unsecured loan from the CDC to the Plan
for $1 million. The interest rate will be one-half per cent less than
the Bank Loan. The loan terms will provide that, if at any time the
Plan does not have sufficient funds to make a payment on the CDC Loan,
after meeting operational expenses and payments on the Bank Loan, then
payments on the CDC Loan will be suspended, without additional interest
or penalty, until such funds are available. Except as stated, the terms
of the CDC Loan will be the same as the Bank Loan. The Plan will not
pay any commissions or other expenses with respect to the transactions.
7. The Plan has engaged Brian Goding (Mr. Goding), of the firm
Fiduciary Consultants, Inc., (FCI) to act as the Plan's I/F. FCI is an
investment consulting firm, of which Mr. Goding is the principal. Mr.
Goding and his firm are experienced in the investment of assets of
ERISA funds, including real estate. Mr. Goding acknowledges his duties,
responsibilities and liabilities in acting as a fiduciary for the Plan
for purposes of the proposed transaction. Mr. Goding represents that he
is an independent fiduciary and not an affiliate of, or related to, the
entities involved in the subject transaction. In this regard, Mr.
Goding certifies that: (i) Less than one (1) percent of FCI's annual
income (measured on the basis of the prior year's income) comes from
business derived from the CDC.
8. Mr. Goding has reviewed all of the terms and conditions of the
proposed transactions. Mr. Goding states he has reviewed the essential
documents (including the collective bargaining agreement) associated
with the transactions. With respect to the proposed purchase and loan
transactions, Mr. Goding concluded that, based on the historical
financial statements and projected operating results, it is
economically feasible, and within the range of reasonable and prudent
judgment, for the Trustees to proceed with the proposed transactions.
Mr. Goding represents that the Plan is in a position to make the
requisite down payment for the purchase of the Property while retaining
adequate reserves for its activities. In analyzing the proposed
purchase, Mr. Goding represents that the purchase price of the Property
does not exceed a reasonable price, and is in fact advantageous to the
Plan. Furthermore, the cost of purchasing the Property at the price
offered by the CDC is comparable to, and likely to be lower than, the
cost of leasing similar property.
It is Mr. Goding's opinion that the decision of the Trustees to
purchase the Property from the CDC is reasonable and prudent under the
circumstances and the Trustees are justified in concluding that the
terms of the Bank Loan are the best of the available alternatives. Mr.
Goding has also examined the Appraiser's reports and has found the
methodology and analysis to be consistent with sound principles of real
estate valuation. Additionally, Mr. Goding represents that, based on
his analysis, it is in the best interest of the Plan to engage in the
$1 million CDC Loan, rather than increase the Bank Loan amount by $1
million. As I/F, Mr. Goding will take whatever actions he deems
necessary to protect the rights of the Plan with respect to the
Property and the transactions. In conclusion, Mr. Goding represents
that under the current collective bargaining agreement, which extends
to 2009, there will be sufficient funds to enable the Plan to make both
Bank and CDC Loan payments. Mr. Goding also represents that it is in
the best interest of the Plan to engage in the transactions.
9. In summary, the applicant states that the transactions have
satisfied the statutory criteria of section 408(a) of the Act because:
(a) The Plan pays the lesser of (1) $7,985,000 or (2) the fair market
value of the Property at the time of the purchase of the Property; (b)
The fair market value of the Property is established by an independent,
qualified real estate appraiser that is unrelated to the CDC; (c) The
Plan does not pay any commissions or other expenses with respect to the
transactions; (d) The I/F determines, after analyzing the relevant
terms of the transactions, that the transactions are in the best
interest and protective of the Plan and its participants and
beneficiaries; In determining the fair market value of the Property,
the I/F obtains an appraisal from an independent, qualified appraiser
and ensures that the appraisal is consistent with sound principles of
valuation; (f) The terms and conditions of the CDC Loan are at least as
favorable to the Plan as those which the Plan could have obtained in an
arm's-length transaction with an unrelated party; (g) The Bank Loan is
repaid by the Plan solely with funds the Plan retains after paying all
of its operational expenses; (h) The I/F ensures that the terms and
conditions relating to the Guarantee are in the best interest of the
Plan and its participants and beneficiaries; (i) The CDC will waive any
right to recover from the Plan in the event that the Bank enforces the
Guarantee against the CDC; (j) If at any time the Plan does not have
sufficient funds to make a payment on the CDC Loan, after meeting
operational expenses and payments on the Bank Loan, then payments on
the CDC Loan will be suspended, without additional interest or penalty,
until such funds are available; and (k) The I/F will take whatever
actions it deems necessary to protect the rights of the Plan with
respect to the Property and the transactions.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. Khalif I. Ford 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;
[[Page 43452]]
(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 15th day of July, 2004.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 04-16418 Filed 7-19-04; 8:45 am]
BILLING CODE 4510-29-P
|
