Proposed Exemptions; RREEF America L.L.C. (RREEF) [Notices] [06/03/1999]
Proposed Exemptions; RREEF America L.L.C. (RREEF) [06/03/1999]
Volume 64, Number 106, Page 29895-29920-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D09708, et al.]
Proposed Exemptions; RREEF America L.L.C. (RREEF)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing 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 request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, 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.
The applications for exemption and the comments received will be
available for public inspection in the Public Documents Room of Pension
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5507, 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 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
[[Page 29896]]
RREEF America L.L.C. (RREEF), Located in San Francisco, California
[Application No. D-9708]
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.)
Part I--Exemption for Payment of Certain Fees to RREEF
The restrictions of sections 406(b)(1) and (b)(2) of the Act and
the taxes imposed by section 4975 of the Code, by reason of section
4975(c)(1)(E) of the Code, shall not apply, effective as of (i) May 16,
1994, with respect to a single client, separate account established on
behalf of the Shell Pension Trust (the Shell Account), and (ii) the
date the final exemption is published in the Federal Register, with
respect to any single client, separate account (Single Client Account)
or any multiple client account (Multiple Client Account) formed on, or
after, such a date, to the payment of certain initial investment fees
(the Investment Fee), annual management fees based upon net operating
income (the Asset Management Fee), and performance fees (the
Performance Fee) to RREEF by employee benefit plans for which RREEF
provides investment management services (the Client Plans) <SUP>1</SUP>
pursuant to an investment management agreement (the Agreement) entered
into between RREEF and the Client Plans either individually, through an
establishment (or amendment) of a Single Client Account, or
collectively as participants in a newly established Multiple Client
Account (collectively, the Accounts), provided that the conditions set
forth below in Part III are satisfied.
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\1\ The Client Plans (including employee benefit plans that may
become Client Plans in the future) consist of various pension plans
as defined in section 3(2) of the Act and other plans as defined in
section 4975(e)(1) of the Code with respect to which RREEF serves as
a trustee or an investment manager.
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Part II--Exemption for Investments in a Multiple Client Account
The restrictions of section 406(a)(1)(A) through (D) of the Act and
the taxes imposed by section 4975(c)(1)(A) through (D) of the Code,
shall not apply to any investment by a Client Plan in a Multiple Client
Account managed by RREEF formed on, or after, the date the final
exemption is published in the Federal Register, provided that the
conditions set forth below in Part III are satisfied.
Part III--General Conditions
(a)(1) The investment of plan assets in a Single or Multiple Client
Account, including the terms and payment of any Investment Fee, Asset
Management Fee and Performance Fee (collectively; the Fees), shall be
approved in writing by a fiduciary of a Client Plan which is
independent of RREEF and its affiliates (the Independent Fiduciary).
(2) For purposes of the Fees, the fair market value of the
Accounts' real property assets (other than in the case of actual sales)
will be based on appraisals prepared by independent qualified
appraisers that are Members of the Appraisal Institute (MAI
Appraisers). In this regard, every agreement by which an appraiser is
retained will include the appraiser's representation that: (1) Its
ultimate client is the Account and its underlying Client Plan (and non-
Plan) investors, and (2) it will perform its duties in the interest of
such Account (and investors). In addition, following the date this
proposed exemption is granted, every agreement shall advise the
appraiser that it owes a professional obligation to the Account when
making an appraisal for properties held by the Account.
(b) The terms of any investment in an Account and of the Fees,
shall be at least as favorable to the Client Plans as those obtainable
in arm's-length transactions between unrelated parties.
(c) At the time any Account is established (or amended) and at the
time of any subsequent investment of assets (including the reinvestment
of assets) in such Account:
(1) Each Client Plan in a Single Client Account shall have total
net assets with a value in excess of $100 million, and each Client Plan
that is an investor in a Multiple Client Account shall have total net
assets with a value in excess of $50 million; and provided that
seventy-five percent (75%) or more of the units of beneficial interests
in a Multiple Client Account are held by Client Plans or other
investors having total assets of at least $100 million. In addition, 50
percent (50%) or more of the Client Plans investing in a Multiple
Client Account shall have assets of at least $100 million. A group of
Client Plans maintained by a single employer or controlled group of
employers, any of which individually has assets of less than $100
million, will be counted as a single Client Plan if the decision to
invest in the Account (or the decision to make investments in the
Account available as an option for an individually directed account) is
made by a fiduciary other than RREEF, who exercises such discretion
with respect to Client Plan assets in excess of $100 million.
(2) No Client Plan shall invest, in the aggregate, more than 5% of
its total assets in any Account or more than 10% of its total assets in
all Accounts established by RREEF.
(d) Prior to making an investment in any Account (or amending an
existing Account), the Independent Fiduciary of each Client Plan
investing in an Account shall have received offering materials from
RREEF which disclose all material facts concerning the purpose,
structure, and operation of the Account, including any Fee arrangements
(provided that, in the case of an amendment to the Fee arrangements,
such materials need address only the amended fees and any other
material change to the Account's original offering materials).
(e) With respect to its ongoing participation in an Account, each
Client Plan shall receive the following written information from RREEF:
(1) Audited financial statements of the Account prepared by
independent public accountants selected by RREEF no later than 90 days
after the end of the fiscal year of the Account;
(2) Quarterly and annual reports prepared by RREEF relating to the
overall financial position and operating results of the Account and, in
the case of a Multiple Client Account, the value of each Client Plan's
interest in the Account. Each such report shall include a statement
regarding the amount of fees paid to RREEF during the period covered by
such report;
(3) Periodic appraisals (as agreed upon with the Client Plans)
indicating the fair market value of the Account's assets as established
by an MAI appraiser independent of RREEF and its affiliates. In the
case of any appraisal that will serve as the basis for any ``deemed
sale'' of such property for purposes of calculating the Performance Fee
payable to RREEF (as discussed in paragraph (j) below), then:
(i) In the case of any Single Client Account, such MAI appraiser
shall be either (A) Selected by the Independent Fiduciary of the Client
Plan subject to the affirmative approval of RREEF, or (B) selected by
RREEF subject to approval by the Independent Fiduciary of the Client
Plan;
(ii) In the case of any Multiple Client Account, such MAI appraiser
shall be approved in advance by the Responsible Independent Fiduciaries
(as defined in Part IV(e) below) owning a majority of the interests in
the Accounts, determined according to the latest
[[Page 29897]]
valuation of the Account's assets performed no more than 12 months
prior to such appraisal, which approval may be by written notice and
deemed consent by such Fiduciaries' failure to object to the appraiser
within 30 days of such notice; and
(iii) In either case, the selected MAI appraiser shall acknowledge
in writing that the Client Plan(s) and other investors (in the case of
a Multiple Client Account), rather than RREEF, is (are) its clients,
and that in performing its services for the Account it shall act in the
sole interest of such Client Plan(s) and other investors. In addition,
following the date this proposed exemption is granted, every appraiser
selected shall acknowledge that it owes a professional obligation to
the Client Plan(s) and other investors in the Account in performing its
services as an appraiser for properties in the Account. If an MAI
appraiser selected by RREEF, or an appraisal performed by a previously
approved appraiser, is rejected by the Independent Fiduciary for a
Single Client Account or the Responsible Independent Fiduciaries for
the Multiple Client Account, determined according to the latest
valuation of the Account's assets performed no more than 12 months
prior to such appraisal, the fair market value of the assets for any
``deemed sale'', relating to the payment of a Performance Fee (as
described in paragraphs (i) and (j) below) shall be determined as
follows: (A) the Client Plans shall appoint a second appraiser and, if
the value established for the property does not deviate by more than
10% (or such lesser amount as may be agreed upon between RREEF and the
Client Plan(s)), then the two appraisals shall be averaged; (B) if the
values differ by more than 10%, then the two appraisers shall select a
third appraiser, that is independent of RREEF and its affiliates, who
will attempt to mediate the difference; (C) if the third appraiser can
cause the first two to reach an agreement on a value, that figure shall
be used; however, (D) if no agreement can be reached, the third
appraiser shall determine the value based on procedures set out in the
governing agreements of the Account or, if no such procedures are
established, shall conduct its own appraisal and the two closest of the
three shall be averaged;
(4) In the case of any Multiple Client Account, a list of all other
investors in the Account;
(5) Annual operating and capital budgets with respect to the
Account, to be distributed to a Client Plan within 60 days prior to the
beginning of the fiscal year to which such budgets relate; and
(6) An explanation of any material deviation from the budgets
previously provided to such Client Plan for the prior year.
(f) The total fees paid to RREEF shall constitute no more than
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(g) The Investment Fee shall be equal to a specified percentage of
the net value of the Client Plan assets allocated to the Account which
shall be payable either:
(1) At the time assets are deposited (or deemed deposited in the
case of reinvestment of assets) in the Account; or
(2) In periodic installments, the amount (as a percentage of the
aggregate Investment Fee) and timing of which have been specified in
advance based on the percentage of the Client Plan's assets invested in
real property as of the payment date; provided that (i) The installment
period is no less than three months, and (ii) if the percentage of the
Client Plan assets which have actually been invested by a payment date
is less than the percentage required for the aggregate Investment Fee
to be paid in full through that date (both determined on a cumulative
basis), the Investment Fee paid on such a date shall be reduced by the
amount necessary to cause the percentage of the aggregate Investment
Fee paid to equal only the percentage of the Client Plan assets
actually invested by that date. The unpaid portion of such Investment
Fee shall be deferred to and payable on a cumulative basis on the next
scheduled payment date (subject to the percentage limitation described
in the preceding sentence).
(h) The Asset Management Fee shall be payable for each quarter from
the net operating income (NOI) of the Account. The amount of the Asset
Management Fee, expressed as a percentage of the NOI of the Account,
shall be established by the Agreement and agreed to by the Independent
Fiduciaries of the Client Plans:
(1) The Asset Management Fee for any Account will be calculated as
follows. The Asset Management Fee for a specific Account real property
will be based solely on items of operating income and expense that are
identified as line items on an operating budget for such property
disclosed to each Client Plan that participates in the Account. The
disclosures have to be made at least 30 days in advance of the fiscal
year to which the budget relates, and approved in the manner described
in (2) below;
(2) Each Client Plan must provide affirmative approval of the
operating budget. Specifically, when the proposed budget (or any
material deviation therefrom) is sent to a Client Plan, it will be
accompanied by a written notice that the Client Plan may object to the
budget or any specific line item therein, for purposes of calculating
the Asset Management Fees for the next fiscal year. The written notice
will contain a statement that affirmative approval of the budget is
required prior to the end of the 30-day period following such
disclosure. In the case of a Multiple Client Account, affirmative
approval by a majority of investors (by interest) will constitute
approval of the proposed budget (or deviation); and
(3) In the event of any subsequent decrease in previously approved
budgeted operating expenses for the fiscal year in excess of the limits
previously described (15% for any line item, 5% overall), then the
resulting increase in NOI (i.e., over and above the allowable
deviation) will not be taken into account in calculating RREEF's
management fee unless affirmative approval for the payment of such fee
is obtained in writing from the Independent Fiduciary for the Client
Plan in the Single Client Account or the Responsible Independent
Fiduciaries for the Multiple Client Account.
(i) In the case of any Multiple Client Account, the Performance Fee
shall be payable after the Client Plan has received distributions from
the Account in excess of an amount equal to 100% of its invested
capital plus a pre-specified annual compounded cumulative rate of
return (the Threshold Amount or Hurdle Rate). However, in the case of
RREEF's removal or resignation, RREEF shall be entitled to receive a
Performance Fee payable either at the time of removal or, in the event
of RREEF's resignation, upon sale of the assets to which the
Performance Fee is allocable or upon termination of the Account as the
case may be, subject to the requirements of paragraph (l) below, as
determined by a deemed distribution of the assets of the Account based
on an assumed sale of such assets at their fair market value (in
accordance with independent appraisals), only to the extent that the
Client Plan would receive distributions from the Account in excess of
an amount equal to the Threshold Amount at the time of RREEF's removal
or resignation. Both the Threshold Amount and the amount of the
Performance Fee, expressed as a percentage of the net proceeds from a
capital event distributed (or deemed distributed) from the Account in
excess of the Threshold Amount, shall be established by the Agreement
and agreed to by the Independent Fiduciaries of the Client Plans.
[[Page 29898]]
(j) In the case of any Single Client Account, the Performance Fee
shall be determined and paid either: (1) In the same manner as in the
case of a Multiple Client Account, as described in paragraph (i) above;
or (2) at the end of any pre-specified period of not less than one
year, provided that such Fee is based upon the sum of all actual
distributions from the Account during such period, plus deemed
distributions of the assets of the Account based on an assumed sale of
all such assets at their fair market value as of the end of such period
(in accordance with independent appraisals performed within 12 months
of the calculation) which are calculated to be in excess of the
Threshold Amount or the Hurdle Rate through the end of such period. For
this purpose, the Performance Fee measuring period shall be established
by the Agreement and agreed to by the Independent Fiduciary of the
Client Plan, provided that such period is not less than one year. In
addition, RREEF shall provide notice to the Client Plan within 60 days
of each Performance Fee calculation for a Single Client Account that
the Independent Fiduciary of the Client Plan has the right to request
updated appraisals of the properties held by the Account if such
Fiduciary determines that the existing independent appraisals
(performed within 12 months of the calculation) are no longer
sufficient.
(k) The Threshold Amount for any Performance Fee shall include at
least a minimum rate of return to the Client Plan, as defined below in
Part IV, paragraph (f).
(l) In the event RREEF resigns as investment manager for an
Account, the Performance Fee shall be calculated at the time of
resignation as described above in paragraph (i) above and allocated
among each property, based on the appraised value of such property in
relationship to the total appraised value of the Account. Each amount
arrived at through this calculation shall be multiplied by a fraction,
the numerator of which will be the actual sales price received by the
Account on subsequent disposition of the property (or in the case of a
property which has not been sold prior to the termination of a Multiple
Client Account, the appraised value of the property as of the
termination date), and the denominator of which will be the appraised
value of the property which was used in connection with determining the
Performance Fee at the time of resignation, provided that this fraction
shall never exceed 1.0. The resulting amount for each property shall be
the Performance Fee payable to RREEF upon the sale of such property or
termination of the Multiple Client Account, as the case may be.
(m) In cases where RREEF does have discretion to reinvest proceeds
from capital events, the reinvested amount shall not be treated as a
new contribution of capital by the Client Plan for purposes of the
Investment Fee, as described above in paragraph (g), or having been
distributed for purposes of the payment of Performance Fee as described
above in paragraphs (i) and (j);
(n) RREEF or its affiliates shall maintain, for a period of six
years, the records necessary to enable the persons described in
paragraph (o) of this Part III to determine whether the conditions of
this exemption have been met, except that:
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of RREEF or its
affiliates, the records are lost or destroyed prior to the end of the
six year period; and (2) no party in interest, other than RREEF, shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act or the taxes imposed by section 4975(a) and (b) of
the Code if the records are not maintained or are not available for
examination as required by paragraph (o) below.
(o)(1) Except as provided in paragraph (o)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (n) of this Part III shall be unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of a Client Plan or any duly authorized employee
or representative of such fiduciary;
(iii) Any contributing employer to a Client Plan or any duly
authorized employee or representative of such employer; and
(iv) Any participant or beneficiary of a Client Plan or any duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described above in paragraph (o)(1)(ii)-
(iv) shall be authorized to examine the trade secrets of RREEF and its
affiliates or any commercial or financial information which is
privileged or confidential.
(p) RREEF shall provide a copy of the proposed exemption and a copy
of the final exemption to all Client Plans that invest in any Single
Client Account or any Multiple Client Account formed on, or after, the
date the final exemption is published in the Federal Register.
Part IV--Definitions
(a) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative of, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term ``management services'' means:
(1) Development of an investment strategy for the Account and
identification of suitable real estate-related investments;
(2) Directing the investments of the assets of the Account,
including the determination of the structure of each investment, the
negotiation of its terms and conditions and the performance of all
requisite due diligence;
(3) Determination of the timing of, and directing, the disposition
of assets of the Account and directing the liquidation of the Account
upon termination;
(4) Administration of the overall operation of the investments of
the Account, including all applicable leasing, management, financing
and capital improvement decisions;
(5) Establishing and maintaining accounting records of the Account
and distributing reports to Client Plans as described in Part III; and
(6) Selecting and directing all service providers of ancillary
services as defined in this Part IV; provided, however, that some or
all of the foregoing management services may be subject to the final
discretion of the Independent Fiduciary(ies) for the Client Plan(s).
(d) The term ``ancillary services'' means:
(1) Legal services;
(2) Services of architects, designers, engineers, construction
managers, hazardous materials consultants, contractors, leasing agents,
real estate brokers, and others in connection with the acquisition,
construction, improvement, management and disposition of investments in
real property;
(3) Insurance brokerage and consultation services;
(4) Services of independent auditors and accountants in connection
with auditing the books and records of the Accounts and preparing tax
returns;
[[Page 29899]]
(5) Appraisal and mortgage brokerage services; and
(6) Services for the development of income-producing real property.
(e) The term ``Independent Fiduciary'' with respect to any Client
Plan means a fiduciary (including an in-house fiduciary) independent of
RREEF and its affiliates. With respect to a Multiple Client Account,
the terms ``Independent Fiduciary'' or ``Responsible Independent
Fiduciaries'' mean the Independent Fiduciaries of the Client Plans
invested in the Account and other authorized persons acting for
investors in the Account which are not employee benefit plans as
defined under section 3(3) of ERISA (such as governmental plans,
university endowment funds, etc.) that are independent of RREEF and its
affiliates, and that collectively hold more than 50% of the interests
in the Account.
(f) The terms ``Threshold Amount'' or ``Hurdle Rate'' mean, with
respect to any Performance Fee, an amount which equals all of a Client
Plan's capital invested in an Account plus a pre-specified annual
compounded cumulative rate of return that is at least a minimum rate of
return determined as follows:
(1) A ``floating'' or non-fixed rate which is at least equal to the
lesser of seven percent, or the rate of change in the consumer price
index (CPI), during the period from the deposit of the Client Plan's
assets into the Account until the determination date; or
(2) A fixed rate which is at least equal to the lesser of seven
percent or the average rate of change in the CPI over some period of
time specified in the Agreement, which shall not exceed 10 years.
(g) The terms ``Net Operating Income'' or ``NOI'' means all
operating income of the Account (i.e., rents, interest, and other
income from day-to-day investment activities of the Account) less
operating expenses, determined on an accrual basis in accordance with
generally accepted accounting principles, but without regard to
depreciation (or other non-cash) expense and capital expenditures and
without regard to payments of interest and principal with respect to
any acquisition indebtedness relating to the property.
(h) The term ``Net Proceeds of a Capital Event'' means all proceeds
from capital events of an Account (i.e., sales or non-recourse
refinances of real property investments owned by the Account) less
repayment of debt with respect to such property, closing expenses paid,
and reasonable reserves established in connection therewith, whether
such reserves are for repayment of existing or anticipated obligations
or for contingent liabilities.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of (i) May 16, 1994, with respect to the Shell Account, and (ii) the
date the final exemption is published in the Federal Register, with
respect to any Single Client Account and any Multiple Client Account
formed on, or after, such date.
Summary of Facts and Representations
1. RREEF America L.L.C. and its affiliate, RREEF Management
Company, provide investment and property management services to
institutional investors, including employee benefit plans and other
tax-exempt entities, through various separate accounts and commingled
accounts.
On January 27, 1998, RREEF America L.L.C. and its affiliate, RREEF
Corporation (collectively, RREEF), were acquired by RoProperty
Services, B.V. (RoProperty), a major Dutch investment advisory firm. As
a result, the RREEF entities were combined into a newly created
Delaware limited liability company which continues to use the name
``RREEF America L.L.C.'' RREEF operates as an autonomous entity which
continues to provide investment management services, and its affiliate,
RREEF Management Company, continues to provide property management
services.
2. RREEF is generally appointed as an investment manager (the
Manager) as defined in section 3(38) of the Act with respect to each
Client Plan that invests in a Single Client Account or a Multiple
Client Account. Although RREEF has discretion with respect to the day-
to-day operation of each Account and, in many cases, RREEF has full
discretion over Account acquisition and/or disposition decisions, in
certain cases final investment authority may remain with the Client
Plans.
3. A Client Plan may enter into one or more separate account
relationships with RREEF (each, a Single Client Account) pursuant to
one or more individually negotiated investment management agreements
with RREEF, or by investing in a commingled investment fund (Multiple
Client Account, collectively; the Accounts) managed by
RREEF.<SUP>2</SUP> The Accounts to date have been blind investment
relationships established for the purpose of identifying and acquiring
real property investments that meet certain investment criteria.
However, specified-property investment relationships may be established
to invest in pre-identified real property investments. The
responsibilities of RREEF in a typical blind discretionary Account
would include:
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\2\ The applicant represents that in some instances a Client
Plan's investment in a Multiple Client Account that is a common or
collective trust fund maintained by a bank would be exempt from the
restrictions of section 406(a) of the Act by reason of section
408(b)(8). The Department expresses no opinion herein whether all
the conditions of section 408(b)(8) will be satisfied in such
transactions.
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(a) Development of an investment strategy for the Account and
identification of suitable real estate investments.
(b) Directing the investment of the assets of the Account,
including the determination of the structure of each investment, the
negotiation of its terms and conditions, and the performance of
requisite due diligence.
(c) Determining the timing of, and directing, the disposition of
assets of the Account and directing the liquidation of the Account upon
termination.
(d) Administering the overall operation of the investments of the
Account, including all applicable leasing, management, financing, and
capital improvement decisions.
(e) Establishing and maintaining accounting records of the Account,
and distributing reports to Client Plans.
(f) RREEF also has complete discretion in the selection and
direction of the ancillary services (Ancillary Services) defined in
Part IV, paragraph (d) above.<SUP>3</SUP>
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\3\ RREEF or its affiliates may, from time-to-time, provide
certain Ancillary Services to the Accounts, such as in connection
with the development or redevelopment of real property, preparation
of tax returns, environmental consulting, or other services.
Occasionally, RREEF has provided construction management and
development services with respect to non-ERISA governmental plan
accounts. However, upon special request from a client, RREEF may
agree to provide ancillary services, such as construction management
or development services based upon its knowledge of the Client
Plan's investments and its particular expertise. It represented that
the Ancillary Services are provided in accordance with section
408(b)(2) and the regulations thereunder (see 29 CFR 2550.408b-2).
However, the Department expresses no opinion as to whether the
selection of RREEF to provide Ancillary Services or the payment of
fees for such Ancillary Services, as described herein, would meet
the conditions of section 408(b)(2) of the Act.
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RREEF's primary investment objective is to acquire income-producing
real property which will generate current return through cash
distributions and will offer a potential for profit through gain on
resale.
Currently, Multiple Client Accounts consist primarily of tax-exempt
group trusts organized pursuant to IRS Revenue Ruling 81-100 and
limited partnerships. However, other Multiple Client Accounts may be
organized in the
[[Page 29900]]
future, including, but not limited to, title-holding corporations, real
estate investment trusts, or limited liability corporations. In the
case of Multiple Client Accounts that are group trusts, individual
principals and officers of RREEF generally serve as trustees thereof.
Similarly, RREEF principals and officers may serve as directors and/or
officers of other vehicles. RREEF currently does not serve as general
partner with respect to any of its limited partnership accounts that
are subject to ERISA. Typically, the general partner is a corporation
owned by one or more of the limited partners. However, in each case,
the primary investment discretion is delegated to RREEF pursuant to an
investment management agreement between RREEF and the Account (the
Agreement).
4. RREEF proposes to have the Client Plans pay for investment
management services it renders to the Accounts based upon a multi-fee
structure which will be approved in advance by the Independent
Fiduciaries of the Client Plans.<SUP>4</SUP> Each Client Plan in a
Single Client Account shall have total net assets with a value in
excess of $100 million, and each Client Plan that is an investor in a
Multiple Client Account shall have total net assets with a value in
excess of $50 million. In addition, seventy-five percent (75%) or more
of the units of beneficial interests in a Multiple Client Account must
be held by Client Plans or other investors having total assets of at
least $100 million, and 50 percent (50%) or more of the Client Plans
investing in a Multiple Client Account must have assets of at least
$100 million. A group of Client Plans maintained by a single employer
or controlled group of employers, any of which individually has assets
of less than $100 million, will be counted as a single Client Plan if
the decision to invest in the Account (or the decision to make
investments in the Account available as an option for an individually
directed account) is made by a fiduciary other than RREEF, who
exercises such discretion with respect to Client Plan assets in excess
of $100 million. No Client Plan shall invest, in the aggregate, more
than 5% of its total assets in any Account or more than 10% of its
total assets in all Accounts established by RREEF.
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\4\ Section 404 of the Act requires, among other things, that a
plan fiduciary act prudently and solely in the interest of the
plan's participants and beneficiaries. Thus, the Department expects
a plan fiduciary, prior to entering into any performance based
compensation arrangement with an investment manager, to fully
understand the risks and benefits associated with a compensation
formula following disclosure by the investment manager of all
relevant information pertaining to the proposed arrangement. In
addition, a plan fiduciary must be capable of periodically
monitoring the actions taken by the investment manager in the
performance of its duties. The plan fiduciary must consider prior to
entering into any such arrangement, whether it is able to provide
adequate oversight of the investment manager during the course of
the arrangement.
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The relief provided by this proposed exemption for the multi-fee
structures described herein will apply prospectively to any newly
formed Multiple Client Account, if such arrangement is approved in
advance by the appropriate Independent Fiduciaries of the Client Plans
and other investors that invest in the Account. In addition, the relief
provided by this proposed exemption will apply retroactively to the
Shell Pension Trust for its existing Single Client Account (i.e., the
Shell Account), as of May 16, 1994, and prospectively for other Single
Client Accounts if the conditions of the exemption are met. Therefore,
with regard to any Account, the Independent Fiduciary(ies) of the
Client Plan(s) will have final approval as to whether the Agreement
between the Client Plan(s) and RREEF will provide for any Investment
Fees, Asset Management Fees, or Performance Fees. Similarly, in the
case of any Account, the final decision to invest the assets of any
Client Plan in such Account will be made by an Independent Fiduciary.
RREEF will not exercise its discretion with respect to any Single
Client Account to invest those assets in any Multiple Client Account.
With respect to the Shell Account, RREEF represents that this Single
Client Account has complied with all the applicable conditions
contained herein for, among other things, approval by an Independent
Fiduciary for investment in such an Account, the payment of any Fees to
RREEF, the retention of any appraiser (as discussed further below) for
the valuation of properties held in the Account,<SUP>5</SUP> and the
minimum plan asset size required for participation in such
Accounts.<SUP>6</SUP>
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\5\ RREEF's Quarterly Report for the Shell Account, dated
December 31, 1998, describes a portfolio consisting of the following
six properties: (1) the Bellaire Place Apartments, a residential
property located in Redmond, Washington, with a fair market value of
approximately $18.6 million; (2) the San Diego Business Center, an
industrial property located in San Diego, California, with a fair
market value of approximately $17.7 million; (3) the West Sacramento
Industrial Center, an industrial property located in Sacramento,
California, which was sold on December 23, 1998 for $6.4 million;
(4) the Broadway Business Park, an industrial property located in
Phoenix, Arizona, with a fair market value of $26.5 million; (5)
1627 K Street, N.W., an office building located in Washington, D.C.,
with a fair market value of approximately $9.4 million; and (6)
Wendemere at the Ranch Apartments, a residential property located in
Westminster, Colorado, with a fair market value of approximately $16
million. The fair market value of the properties still held in the
Shell Account, as of December 31, 1998, was approximately
$88,268,000.
\6\ The Shell Pension Trust contained approximately $5.7 billion
in total assets, of which approximately 2% were invested in real
estate, as of January, 1999. These real estate assets are managed by
three primary investment managers, one of which is RREEF.
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5. The multi-fee structure will include: (i) The Investment Fee, a
one-time initial fee paid either at the time the Client Plan invests
in, or allocates additional assets to, the Account, or in periodic
installments while such assets are invested by the Account, as
described below; (ii) the Asset Management Fee, an annual fee for asset
management charged as a percentage of the net operating income produced
by properties held in the Account (defined below), which will be
payable to RREEF without regard to the return to the Client Plans of
their invested capital; and (iii) the Performance Fee, a fee charged
upon actual or deemed distributions of capital proceeds from the
Account in excess of a Client Plan's invested capital, plus a
negotiated cumulative, compounded annual hurdle rate of return on such
invested capital (i.e., the Threshold Amount or Hurdle Rate). In a
Single Client Account, an Independent Fiduciary may agree to allow
RREEF to receive a periodic Performance Fee based on the Account's
performance prior to the Client Plan receiving actual distribution of
capital back from the Account in amounts which exceed the prescribed
Threshold Amounts. Such Fees will be based on deemed distributions of
the assets in such Accounts at periodic intervals, with all property
valuations determined by qualified real estate appraisers independent
of RREEF and its affiliates. Any property valuation used in the
calculation of the Performance Fee will be performed within 12 months
of that calculation.
6. RREEF requests an individual exemption for Client Plans that
invest in an Account to pay an Investment Fee, Asset Management Fee,
and a Performance Fee to RREEF under circumstances described below.
RREEF represents that Fee rates and Threshold Amounts will be
negotiated on an Account-by-Account basis.
The Investment Fee will be a one-time fee intended to cover the
expense of organizing the Account, identifying suitable investments,
and completing the initial purchases of real properties for the
Account, based on the assets invested by the Client Plan in the
Account. The Investment Fee may be paid either (i) At the time the
Client
[[Page 29901]]
Plan invests assets in the Account, or (ii) in installments at the end
of pre-specified periods of not less than three months (over a
specified period of years). However, if the pre-specified percentage of
the Account's assets has not been invested by the payment date for the
Investment Fee, the amount of such fee payable on that date will be
reduced to reflect the percentage of assets which have been invested by
that date. In such instances, the remainder of the Investment Fee will
be deferred until the next pre-specified installment date. At that
time, the Investment Fee for the current and past installment dates
will be paid (subject to further deferral if the relevant assets in the
Account have not been invested at that time). The Investment Fees will
generally range from 0% to 2% of the capital committed for investment
by the Client Plans. However, the exact percentage for any Investment
Fee will be negotiated between RREEF and the relevant Client Plans in
the Account.
7. The Asset Management Fee will be paid quarterly throughout the
term of the Account. As with the Investment Fee, the exact terms of the
Asset Management Fee will be negotiated between RREEF and the Client
Plan(s) prior to the initial investment of any Client Plan(s)' assets
in the Account. The Asset Management Fee will be calculated with
respect to the net operating income (NOI) from properties owned by the
Account. In this regard, NOI will not include gains made on properties
from capital events. The Asset Management Fee will be paid without
regard to the return of the Client Plan's invested capital.
The Asset Management Fee will compensate the Investment Manager for
the following services: (i) Selection of properties and other assets
for acquisition or disposition in an Account, (ii) day-to-day
investment and administrative operations of an Account, (iii)
performance of property management and leasing services for the
properties held by the Account, (iv) obtaining and maintaining
insurance for the properties and other assets in the Account, (v)
establishing tax-exempt title-holding corporations under section 501(a)
of the Code for the properties, (vi) obtaining independent MAI
appraisals of the properties every three years, and performing annual
internal valuations of the properties, as necessary; and (vii)
preparing quarterly and annual written reports concerning assets,
receipts, and disbursements of the Account.
As stated above, the Asset Management Fee will be charged as a
percentage of the NOI on the properties held by the Account for each
quarter. The Asset Management Fees are determined by negotiation for
each Account, but generally will be between 5% to 8% of the NOI per
quarterly payment period for properties in the Account. NOI for an
Account will be determined on the basis of recurring operating (non-
capital) income (i.e., rents, interest, and other income from the day-
to-day investments of the Account) less recurring operating expenses
(i.e., utilities, taxes, insurance and maintenance) determined on an
accrual basis in accordance with generally accepted accounting
principles. RREEF states that these recurring revenue items and
operating expenses will be set forth in annual budgets that are
reviewed and approved in advance by the Client Plans and other
investors.
The NOI for an Account will be determined without regard to capital
expenditures and non-cash expenditures for the Account, such as
depreciation on properties held by the Account or amortization of
capital expenditures. In addition, NOI will not be reduced by debt
service. Therefore, capital items, such as debt service and non-cash
expense items, will have no effect on RREEF's Asset Management Fees.
Instead, as discussed more fully below, these items will be reflected
in the Performance Fee because any capital expenditure will increase
the Threshold Amount for purposes of any subsequent Performance Fee
calculation, and any capital distribution will reduce the Threshold
Amount.<SUP>7</SUP>
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\7\ As noted above, the determinations of which items are
``operating'' and which are ``capital'' will be determined by
generally accepted accounting principles. Such determinations are
subject to annual review and confirmation by independent Certified
Public Accountants retained to audit RREEF's annual financial
statements.
---------------------------------------------------------------------------
With respect to each Account, RREEF will prepare annual operating
and capital budgets for each of the Account's properties, which will be
distributed to each Client Plan invested in the Account, within 60 days
prior to the beginning of the fiscal year to which such budgets apply.
At the end of each year, RREEF will also distribute to each Client Plan
an explanation of any material deviation from the budgets previously
provided to the Client Plan for such year.
8. RREEF agrees that in calculating its Asset Management Fee for
any Account, the Fee for any individual real property in the Account
will be determined solely on the basis of those items of operating
income and expense that are identified as line items in the operating
budget for such property, which shall be disclosed to each Client Plan
that participates in the Account. Such disclosures have to be made at
least 30 days in advance of the fiscal year to which the budget
relates, and approved by the Client Plans in the manner described
below.
If, during such year for any previously disclosed line item of
operating expense in the budget for a property, there is any material
deviation between such line item and the actual amount of such expense
for the current year, such deviation will not be taken into account in
calculating the Asset Management Fee unless it is first disclosed to,
and approved by, the Client Plan(s) in the same manner as the original
budgeted line item. For this purpose, a determination of what is
considered a ``material'' deviation will be established by the
investment or property management agreement between RREEF and the
Client Plan(s) for any real property held by the Account. Property
management agreements used by RREEF permit no more than a 15% variance
between any individual line item expense in the operating budget from
year to year. In addition, overall budgeted expenses may vary no more
than 5% from year to year.
If the requisite percentage of investors in an Account fails to
approve the proposed budget or any line item therein, then RREEF will
continue to utilize the prior year's budget figures (generally with a
permitted deviation of 5%). In the event of any subsequent material
deviation from a line item expense in a previously approved budget, or
the addition of a new line item, RREEF would use the expense figures as
budgeted for purposes of its fee calculation, and the variance would
have no effect on its current Asset Management Fee calculation, unless
a revised budget reflecting the deviation (or new line item) is
approved. Any such variance would be reflected only in the subsequent
Performance Fee calculation (by increasing or decreasing the Threshold
Amount).<SUP>8</SUP>
---------------------------------------------------------------------------
\8\ For example, if RREEF were to budget landscaping expenses at
$100 for an Account, but the actual figure turns out to be $80,
unless RREEF obtains the approval of its Client Plans, the amount it
uses for calculating its Asset Management Fee would be limited to
$85 (applying the 15% deviation, as described above). Although the
additional $5 cost savings directly benefits the Client Plans, it
would not be reflected in the Asset Management Fee. Rather, to the
extent that this cost savings increases the amount available for
distribution to the Client Plans, it would be reflected in the
Threshold Amount for purposes of calculating RREEF's future
Performance Fee.
---------------------------------------------------------------------------
The Client Plan approval for these purposes will be by an
affirmative approval in advance by the Independent Fiduciary of a
Single Client Account or
[[Page 29902]]
the Responsible Independent Fiduciaries for a Multiple Client Account
representing at least a majority of the interests in such
Account.<SUP>9</SUP> Specifically, when the proposed budget (or any
material deviation therefrom) is sent to a Client Plan, it will be
accompanied by a written notice that the Client Plan must approve the
budget, and any specific line item therein, for purposes of calculating
the Asset Management Fees for the next fiscal year. The written notice
will contain a statement that affirmative approval of the current
budget is required prior to the end of the 30-day period following such
disclosure. In the case of a Multiple Client Account, affirmative
approval by a majority of investors (by interest) will constitute
approval of the proposed budget (or deviation). In the event of any
subsequent decrease in previously approved budgeted operating expenses
for the fiscal year in excess of the limits previously described (15%
for any line item, 5% overall), then the resulting increase in NOI
(i.e., over and above the allowable deviation) will not be taken into
account in calculating RREEF's management fee unless affirmative
approval for the payment of such fee is obtained in writing from
Independent Fiduciary for the Client Plan in the Single Client Account
or the Responsible Independent Fiduciaries for the Client Plans and
other investors in the Multiple Client Account.
---------------------------------------------------------------------------
\9\ In this regard, the Department notes that an Independent
Fiduciary for a Single Client Account should closely scrutinize
budget estimates for both the NOI of the Account and the Asset
Management Fees payable to RREEF each year based on the actual NOI.
With respect to a Multiple Client Account, the Responsible
Independent Fiduciaries should collectively scrutinize such budgets
and NOI-based Fees, and raise appropriate objections to those Fees
which result from actual operating expenses that materially deviate
from previously approved budgets for such expenses. Thus, the
Department emphasizes that an Independent Fiduciary for a Client
Plan investing in either a Single or Multiple Client Account must
adequately monitor the payment of any Asset Management Fees to RREEF
by closely reviewing how the NOI that results from each property
held by the Account may be affected by any actions taken by RREEF
for such property.
---------------------------------------------------------------------------
With respect to the Shell Account, RREEF represents that annual
budgets have been presented to an Independent Fiduciary for the Shell
Pension Trust for review and approval each year since May 16, 1994. In
this regard, RREEF states that although the annual budget approvals for
properties held in the Shell Account may not have been in writing in
all cases, both parties (i.e., RREEF and the Independent Fiduciary for
the Shell Account) have made contemporaneous written confirmations of
their discussions regarding the annual budgets.
9. The applicant states that in lieu of the Investment Fee and/or
the Asset Management Fee, RREEF and the Client Plans may agree to an
alternative fee arrangement for an Account (the Alternative Fee) which
is based either upon a fixed amount or amounts, or an objective formula
to be negotiated (in either case) between RREEF and the Client Plan
prior to the initial investment of any Client Plan assets in an
Account. RREEF represents that any Alternative Fee will be covered by
section 408(b)(2) and the regulations thereunder (29 CFR 2550.408b-2).
Accordingly, no exemption is being requested by RREEF for any
Alternative Fees.
10. In a Single Client Account, the Performance Fee will be
determined and paid either (i) In the same manner as in the case of a
Multiple Client Account, or (ii) at the end of any pre-specified period
of not less than one-year, provided that the Fee is based upon the sum
of all actual distributions from the Account during such period, plus
deemed distributions of the assets of the Account based on an assumed
sale of all such assets at their fair market value as of the end of
such period (in accordance with independent appraisals performed within
12 months of the calculation) which are calculated to be in excess of
the Threshold Amount through the end of such period.
In the case of a Multiple Client Account, the Performance Fee will
be charged against all distributions of net proceeds from capital
events, as defined in Part IV(h), only after the Client Plans and other
investors have received distributions (from all sources) from the
Account in excess of the Threshold Amount agreed to by the Responsible
Independent Fiduciaries.
Most of RREEF's Single Client Accounts are long-term open-ended
relationships under which the Client Plans may continue to invest new
funds on an ongoing basis. For this reason, RREEF states that certain
Client Plans that invest in Single Client Accounts will negotiate for
the payment of a Performance Fee that would be calculated and payable
periodically, not less frequently than once a year (generally, every
three years, commencing on the third anniversary of the first
acquisitions of properties made by the Account). As noted above, this
periodic Performance Fee would be based on all actual sales of
properties by the Account and distributions made back to the investors
during such period, as well as deemed or constructive sales of all
properties held in the Account at their most recent appraised values,
and the deemed distributions of the net proceeds from such constructive
sales plus earnings which are considered to be at or above the
Threshold Amount.<SUP>10</SUP> In such instances, the periodic
Performance Fee will take into account both realized and unrealized net
gains on properties held in a Single Client Account, and would be
payable to RREEF for deemed distributions of unrealized net gains on
properties held by the Account for a pre-specified period. Therefore,
if agreed to by the Independent Fiduciary for the Client Plan, RREEF
would earn a Performance Fee based on the Single Client Account's
performance which occurs prior to a return to the Client Plan of its
invested capital plus earnings at or above the designated Threshold
Amount or Hurdle Rate.
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\10\ In this regard, RREEF represents that while it anticipates
that most Client Plans establishing a Single Client Account will
elect to pay a periodic Performance Fee based on deemed
distributions, RREEF will not preclude any such Client Plan from
paying a Performance Fee only after the Client Plan has received
actual distributions from an Account equal to its initial invested
capital plus earnings at the Threshold Amount. However, a periodic
Performance Fee arrangement will not be available for Multiple
Client Accounts.
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11. For purposes of the Fees, the fair market value of the
Accounts' real property assets (other than in the case of actual sales)
will be based on appraisals prepared by independent MAI appraisers. In
this regard, every agreement by which an appraiser is retained will
include the appraiser's representation that: (1) Its ultimate client is
the Account and its underlying Plan (and non-Plan) investors, and (2)
it will perform its duties in the interest of such Account (and
investors). The applicant states that in the case of any appraisal that
will serve as the basis for any ``deemed sale'' of such property for
purposes of calculating the periodic Performance Fee payable to RREEF,
then the following procedure shall be utilized:
(a) In the case of any Single Client Account, such MAI appraiser
shall be either (i) Selected by the Independent Fiduciary of the Client
Plan subject to the approval of RREEF, or (ii) selected by RREEF
subject to the affirmative approval by the Independent Fiduciary of the
Client Plan;
(b) In the case of any Multiple Client Account, such MAI appraiser
shall be approved in advance by the Responsible Independent Fiduciaries
(as defined in Part IV(e) above) owning a majority of the interests in
the Account according to the latest valuation of the Account's assets
performed no more than 12 months prior to such appraisal, which
[[Page 29903]]
approval may be by written notice and deemed consent by such
Fiduciaries' failure to object to the appraiser within 30 days of such
notice; and
(c) In either case, the selected MAI appraiser shall acknowledge in
writing that the Client Plan(s) and other investors (in the case of a
Multiple Client Account), rather than RREEF, is (are) its clients, and
that in performing its services for the Account it shall act in the
sole interest of such Client Plan(s) and other investors. In addition,
following the date this proposed exemption is granted, every appraiser
selected shall acknowledge that it owes a professional obligation to
the Client Plans and other investors in the Account in performing its
services as an appraiser for properties in the Account.
If an MAI appraiser selected by RREEF, or an appraisal performed by
a previously approved appraiser, is rejected by the Independent
Fiduciary for a Single Client Account or the Responsible Independent
Fiduciaries for the Client Plans owning the majority of the interests
in the Multiple Client Account according to the latest valuation of the
Account's assets performed no more than 12 months prior to such
appraisal, the fair market value of the assets for any ``deemed sale''
relating to the payment of a Performance Fee will be determined as
follows: (i) The Client Plans shall appoint a second appraiser and, if
the value established for the property does not deviate by more than
10% (or such lesser amount as may be agreed upon between RREEF and the
Client Plan(s)), then the two appraisals shall be averaged; (ii) if the
values differ by more than 10%, then the two appraisers shall select a
third appraiser, that is independent of RREEF and its affiliates, who
will attempt to mediate the difference; (iii) if the third appraiser
can cause the first two to reach an agreement on a value, that figure
shall be used; however, (iv) if no agreement can be reached, the third
appraiser shall determine the value based on procedures set out in the
governing agreements of the Account or, if no such procedures are
established, shall conduct its own appraisal and the two closest of the
three shall be averaged.
In all cases, the Client Plan will retain the right to challenge
any appraiser or appraisal. In the case of a Single Client Account, the
frequency and timing of the required appraisals will be determined by
the Independent Fiduciary of the Client Plan at the time it enters into
an Account relationship with RREEF. However, all Performance Fee
calculations will be based on contemporaneous appraisals of properties
held by the Account, which will be performed within 12 months of the
calculation. Thus, for example, RREEF maintains that a three year
appraisal cycle will correspond to a three year periodic Performance
Fee measuring period for an Account. In addition, RREEF will provide
notice to the Client Plan within 60 days of each Performance Fee
calculation for a Single Client Account that the Independent Fiduciary
of the Client Plan has the right to request updated appraisals of the
properties held by the Account if such Fiduciary determines that the
existing independent appraisals (performed within 12 months of the
calculation) are no longer sufficient.
12. With respect to the calculation of any Threshold Amount for the
payment of a Performance Fee, RREEF states that a bookkeeping account
will be maintained for each Client Plan which will show at all times
the amount that has to be distributed to satisfy the Threshold Amount.
When a certain amount is invested in the Account on a particular date,
this bookkeeping account will initially equal the invested amount and
will thereafter be increased to reflect the hurdle/threshold rate of
return for the Account compounded on an annual basis. Whenever a
distribution (from any source) is made from the Account to the Client
Plan, the amount of this bookkeeping account will be reduced by the
full amount of the distribution. Thereafter, the Threshold Amount will
be calculated with respect to and added to this reduced amount. Only
when the bookkeeping account is reduced to zero will the Threshold
Amount be satisfied. With all Multiple Client Accounts, and those
Single Client Accounts that elect to have a Performance Fee paid only
after actual distributions are paid from the Account, once the
Threshold Amount has been satisfied, the Performance Fee will be
payable to RREEF with respect to all further distributions of net
proceeds from capital events from the Account. With respect to any
Single Client Accounts which elect to pay periodic Performance Fees
based upon deemed distributions of the proceeds from an assumed sale of
the properties by the Account, any such deemed distribution would
reduce the Threshold Amount only for purposes of such Fee payment.
Thus, immediately after such calculation, the Threshold Amount would be
increased by the full amount of the deemed distribution for purposes of
determining any later Performance Fee based on either deemed or actual
distributions to the Client Plans.
13. The applicant submitted hypothetical examples of how the
Performance Fee would work in a Multiple Client Account and a Single
Client Account context.
In the first example, RREEF establishes a Multiple Client Account
to which the Client Plans contribute $100 million (Initial
Contribution) and agree to pay RREEF a Performance Fee equal to 15% of
all amounts distributable from the Account after the investors have
received distributions equal to their initial invested capital plus a
real (CPI-adjusted) annual Threshold Amount of return of 4%. Assuming
that CPI remains constant at 4% annually, the nominal annual Threshold
Amount is 8% (the Threshold Amount). The Multiple Client Account
acquires two real properties at a cost of $90 million (Property I) and
$10 million (Property II, collectively; the Properties). Annual cash
flow from operations is 7% of the Initial Contribution of $100 million,
or 7% million (Annual Cash Flow).
For a Multiple Client Account, the Threshold Amount is calculated
as follows: <SUP>11</SUP>
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\11\ This example has been simplified. In reality, distributions
would be made periodically throughout the year, reducing the amount
on which the hurdle is calculated.
----------------------------------------------------------------------------------------------------------------
Threshold
amount (in
Calculation millions of
$)
----------------------------------------------------------------------------------------------------------------
Year 1................................... 100.00+(.08 x 100.00)-7 = $101.00
Year 2................................... 101.00+(.08 x 101.00)-7 = 102.08
Year 3................................... 102.08+(.08 x 102.08)-7 = 103.25
Year 4................................... 103.25+(.08 x 103.25)-7 = 104.51
Year 5................................... 104.51+(.08 x 104.51)-7 = 105.87
[[Page 29904]]
Year 6................................... 0
----------------------------------------------------------------------------------------------------------------
At the end of year 5, Property I is sold for $110 million, and
there is an actual distribution of $110 million. Accordingly, RREEF
will receive a Performance Fee of 15% times $110 million less $106
million (i.e., the approximate Threshold Amount at year 5), or
$600,000. Numerically, this is as follows: ($110 million-$106 million)
x 15% = $600,000. Because the Threshold Amount has been reduced to $0
at year 6, an additional Performance Fee will be payable with respect
to any subsequent distribution of cash from a capital event, i.e., any
sale or refinancing of the remaining property. Accordingly, if Property
II is sold in year 10 for $15 million, RREEF will receive an additional
Performance Fee of 15% times $15 million, or $2.25 million.
Numerically, as follows: $15 million x 15% = $2.25 million.
Therefore, the total Performance Fee received by RREEF in this example
is $2,850,000.
In the second example, a large Client Plan establishes a Single
Client Account with RREEF to which it contributes $100 million (Initial
Contribution), and agrees to pay RREEF a Performance Fee every five
years equal to 15% of all amounts distributed or deemed distributed
from the Account after the Client Plan has received actual or deemed
distributions equal to its invested capital plus a real (CPI-adjusted)
annual Threshold Amount of return of 4%. If CPI remains constant at 4%
annually, the nominal annual rate is 8% (the Threshold Amount). The
Account acquires two real property assets at a cost of $90 million
(Property I) and $10 million (Property II). Annual cash flow from
operations is 7% of the Initial Contribution of $100 million, or 7%
million (Annual Cash Flow).
For a Single Client Account, the Threshold Amount is calculated as
follows:
----------------------------------------------------------------------------------------------------------------
Threshold
amount (in
Calculation millions of
$)
----------------------------------------------------------------------------------------------------------------
Year 1................................... 100.00+(.08 x 100.00)-7 = $101.00
Year 2................................... 101.00+(.08 x 101.00)-7 = 102.08
Year 3................................... 102.08+(.08 x 102.08)-7 = 103.25
Year 4................................... 103.25+(.08 x 103.25)-7 = 104.51
Year 5................................... 104.51+(.08 x 104.51)-7 = 105.87
Year 6................................... 120.00 <SUP>12</SUP> +(.08 x 120.00)-7 = 122.60
Year 7................................... 122.60+(.08 x 122.60)-7 = 125.41
Year 8................................... 125.41+(.08 x 125.41)-7 = 128.44
Year 9................................... 128.44+(.08 x 128.44)-7 = 131.72
Year 10.................................. 131.72+(.08 x 131.72)-7 = 135.25
----------------------------------------------------------------------------------------------------------------
After five years, the Threshold Amount will increase to
approximately $106 million. At this time, if the two Properties are
appraised for $110 million and $10 million, respectively, the deemed
distributions are $120 million. Accordingly, at this time RREEF will
receive a Performance Fee of: 15% x ($120 million--$106 million) =
$2.1 million.
---------------------------------------------------------------------------
\12\ $120.00 is the amount of deemed distributions.
---------------------------------------------------------------------------
After the first periodic Performance Fee is paid out, the Threshold
Amount is calculated as follows: First, the Threshold Amount is
restored by the full amount of the deemed distribution, i.e., to $120
million, for purposes of the next five-year Performance Fee
calculation. At the end of 10 years, the Threshold Amount will be
approximately $135 million, and no additional Performance Fee will be
payable unless the combined appraised value of the two Properties
exceeds that amount.
14. All proceeds from capital events of an Account (i.e., sales or
refinancings of real property investments owned by the Account) will be
first applied to pay expenses of the Account. These expenses will
include repayment of debt, payment of closing expenses, and
establishment of reasonable reserves in connection with the Account's
assets, whether such reserves are for repayment of existing or
anticipated obligations or for contingent liabilities, other than the
Performance Fee. Such proceeds, net of these expenses and reserves,
generally will be the distributable net proceeds of capital events upon
which the Performance Fee may be payable.
15. With respect to its Single Client Accounts, RREEF generally
does not have discretion to reinvest proceeds from capital events, and
any such reinvestment will occur at the direction of the Client Plan's
Independent Fiduciary. The amount reinvested will be treated as having
been recontributed by the Client Plan for purposes of the Investment
Fee and the Performance Fee. Thus, RREEF represents that where capital
proceeds are reinvested they will be treated as new invested capital
for the purpose of the Threshold Amount and the payment of any future
Performance Fee. RREEF also states that where it does not have
reinvestment discretion, capital proceeds will be distributed to the
Client Plan, unless such Client Plan affirmatively consents to the
reinvestment. In cases where RREEF does have discretion to reinvest
proceeds from capital events, the reinvested amount would not be
treated as a new contribution of capital by the Client Plan for
purposes of the Investment Fee, or having been distributed for purposes
of the payment of Performance Fee. Therefore, such reinvested amounts
will not be considered distributions under the bookkeeping account
maintained for the Client Plan for purposes of calculating whether the
Threshold Amount has been reached.
16. RREEF may be removed as the investment Manager for an Account
at any time (generally upon 30 days notice), without cause, upon
delivery of a notice of removal to RREEF by the Client Plan in the case
of a Single Client
[[Page 29905]]
Account, or by the Client Plans owning at least a majority of the
interests in a Multiple Client Account. In addition, a Multiple Client
Account may terminate upon failure to appoint a replacement investment
manager following the removal or resignation of RREEF. The details and
mechanics of the removal or resignation process will vary from Account
to Account. In the case of an Account procedure for removal for cause
(e.g., breach of contract), removal generally will be immediate. In
most cases, however, removal will result from a desire to appoint a
replacement manager and RREEF may be asked or required to stay on for a
period of time (e.g., up to 120 days) until a replacement is in place.
Similarly, if RREEF resigns, it may be asked to stay on until a
replacement is appointed.
Upon removal of RREEF as investment Manager, RREEF will be entitled
to receive the Performance Fee as if: (a) The assets of an Account had
been sold at a price which is then-agreed to by RREEF and the Client
Plan (or, with respect to a Multiple Client Account, Client Plans and
other investors owning at least a majority of the interests in the
Multiple Client Account); and (b) the deemed proceeds from the deemed
sale were to be distributed from the Account. If RREEF and the Client
Plan(s) cannot agree on a price, then the price shall be determined by
an independent MAI appraiser mutually agreed to by RREEF and the Client
Plan(s). If RREEF and the Client Plan(s) cannot agree on an appraiser,
then the governing documents of the Account will provide for a means of
selecting one or more appraisers or for seeking binding arbitration, as
discussed more fully in paragraph 11 above.
In addition, RREEF may generally resign as investment Manager with
respect to any Account at any time, without cause, by providing written
notice to the Client Plan(s) with an interest in the Account. In this
event, the Performance Fee will be tentatively calculated in the same
manner as if RREEF were removed as investment manager, and allocated
among each real property investment of the Account in proportion to the
respective differences in their appraised values from their original
cost (i.e., deemed unrealized appreciation, if any, for each property).
The amount of the Performance Fee tentatively allocated to each
property will be multiplied by a fraction, the numerator of which will
be the actual sales price of the property received by the Account upon
the disposition/sale of the property, and the denominator of which will
be the appraised value of the property which was used in connection
with determining the Performance Fee at the time of resignation,
provided that this fraction will never exceed 1.0 (that is, the
Performance Fee may be decreased to reflect any subsequent decline in
the value of a property, but not increased to reflect any subsequent
increase in value).<SUP>13</SUP> No Performance Fee will be payable
until distributions (deemed or actual) from the Account exceed the
Threshold Amount.
---------------------------------------------------------------------------
\13\ If a Multiple Client Account is terminated prior to the
sale of all the Account's assets (i.e., each Client Plan is
distributed an undivided interest in each such asset), each
remaining asset in the Account at the time of termination will be
treated as having been sold at its then-appraised value.
---------------------------------------------------------------------------
The Performance Fee will be calculated with respect to each
property held by an Account at the time of resignation. However, the
Performance Fee will not be paid for any property until the earlier of:
(i) The sale of the property from the Account, or (ii) with respect to
a Multiple Client Account, the termination of the Account. The
Performance Fee will be paid only after the Client Plans have received
their initial invested capital plus earnings at the Threshold Amounts.
The replacement investment manager of the Account (unrelated to RREEF)
will have discretion as to when the property is sold or when the
Account is terminated.
17. A Single Client Account generally may be terminated at any time
by the Client Plan upon not more than 30 days written notice to RREEF,
by RREEF's resignation, or by expiration of the period of years
specified in the investment management agreement governing the Account
(unless extended at the request of the Client Plan). In the case of a
Single Client Account termination, the assets of the Account may be
liquidated for cash or distributed in-kind to the Client Plan.
A Multiple Client Account generally may be terminated upon: (a) The
affirmative decision of the Client Plans and other investors owning at
least a majority of the interests in the Multiple Client Account, or
(b) expiration of the period of years specified in the Account's
organizational documents. In addition, a Multiple Client Account may
terminate upon failure to appoint a replacement investment manager
following the removal or resignation of RREEF. Upon termination of a
Multiple Client Account, RREEF is generally obligated to dispose of its
assets and distribute net sales proceeds in an orderly fashion.
In the case of the Multiple Client or Single Client Account
termination, RREEF's Performance Fee would be calculated in the same
manner as discussed above with respect to the removal of RREEF.
18. Each Client Plan will receive throughout the term of the
Account the following information:
(a) Quarterly and annual reports prepared by RREEF relating to the
overall financial position and operating results of the Account (annual
reports are audited by independent certified public accountants as
required by the terms of the Account's governing documents), a
statement regarding the total amount of fees paid by the Account to
RREEF for the period, and, in the case of a Multiple Client Account,
the value of the Client Plan's interest in the Account;
(b) An annual statement of the current fair market value of all
properties owned by the Account based most recent MAI appraisals of
such properties;
(c) In the case of a Multiple Client Account, a list of investors
in the Account and, when applicable, a notice of any change thereto;
and
(d) Operating and capital budgets for the subsequent year, plus
(where applicable) an explanation of any material deviation from the
prior year's budgets.
Any fiduciary for the Client Plan, as well as other authorized
persons described above in paragraph (o)(1) of Part III, will have
access during normal business hours to RREEF's records concerning the
Accounts in which such persons have an interest, subject to the
condition that each such person agree in writing that the information
contained in such records shall be kept confidential except to the
extent disclosure is authorized in writing by RREEF or is necessary to
preserve or protect the assets of an Account or the interests of the
Client Plans. The Department and the Internal Revenue Service will have
access to all RREEF records concerning the Accounts. The Client Plan(s)
having an interest in an Account will also, upon request, be provided
with a report of all compensation paid to RREEF by the Account.
19. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) The investment of plan assets in a Single or Multiple Client
Account, including the terms and payment of any Investment Fee, Asset
Management Fee and Performance Fee, shall be approved in writing by an
Independent Fiduciary of a Client Plan which is independent of RREEF
and its affiliates.
[[Page 29906]]
(b) At the time any Account is established (or amended) and at the
time of any subsequent investment of assets (including the reinvestment
of assets) in such Account:
(1) Each Client Plan in a Single Client Account shall have total
net assets with a value in excess of $100 million, and each Client Plan
that is an investor in a Multiple Client Account shall have total net
assets with a value in excess of $50 million, subject to certain
additional requirements as stated in paragraph (1) of Part III(c)
above; and
(2) No Client Plan shall invest, in the aggregate, more than 5% of
its total assets in any Account or more than 10% of its total assets in
all Accounts established by RREEF.
(d) Prior to making an investment in any Account (or amending an
existing Account), the Independent Fiduciary of each Client Plan
investing in an Account shall have received offering materials from
RREEF which disclose all material facts concerning the purpose,
structure, and operation of the Account, including any Fee arrangements
(provided that, in the case of an amendment to the Fee arrangements,
such materials need address only the amended fees and any other
material change to the Account's original offering materials).
(e) With respect to its ongoing participation in an Account, each
Client Plan shall receive the following written information from RREEF:
(1) Audited financial statements of the Account prepared by
independent public accountants selected by RREEF no later than 90 days
after the end of the fiscal year of the Account;
(2) Quarterly and annual reports prepared by RREEF relating to the
overall financial position and operating results of the Account and, in
the case of a Multiple Client Account, the value of each Client Plan's
interest in the Account. Each such report shall include a statement
regarding the amount of the Fees paid to RREEF during the period
covered by such report;
(3) Periodic appraisals (as agreed upon with the Client Plans)
indicating the fair market value of the Account's assets as established
by an MAI licensed real estate appraiser independent of RREEF and its
affiliates, under the procedures described herein;
(4) In the case of any Multiple Client Account, a list of all other
investors in the Account;
(5) Annual operating and capital budgets with respect to the
Account, to be distributed to a Client Plan within 60 days prior to the
beginning of the fiscal year to which such budgets relate; and
(6) An explanation of any material deviation from the budgets
previously provided to such Client Plan for the prior year;
(f) The total fees paid to RREEF shall constitute no more than
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(g) RREEF shall provide a copy of the proposed exemption and a copy
of the final exemption to all Client Plans that invest in any Single
Client Account or any Multiple Client Account formed, on or after, the
date the final exemption is published in the Federal Register.
Notice to Interested Persons
Those persons who may be interested in the pendency of this
exemption include the independent fiduciaries of each Client Plan that
maintains a Single Client Account with RREEF. Thus, RREEF will provide
notice of the proposed exemption to each such affected Client Plan, by
first class mail, within thirty (30) days following the publication of
the proposed exemption in the Federal Register. The notice will include
a copy of the notice of proposed exemption as published in the Federal
Register and as a supplemental statement, as required, pursuant to 29
CFR 2570.43(b)(2). This supplemental statement will inform such
interested persons of their right to comment on the proposed exemption
and/or to request a hearing. All written comments and/or requests for a
hearing are due within sixty (60) days of the publication of this
notice of proposed exemption in the Federal Register.
In addition, RREEF shall provide a copy of the proposed exemption
and a copy of the final exemption to all Client Plans that invest in
any Single Client Account or any Multiple Client Account formed on, or
after, the date the final exemption is published in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Premier Funding Group, Inc. Employees Profit Sharing Plan (the P/S
Plan) and the Money Purchase Pension Plan for Employees of Premier
Funding Group, Inc. (the M/P Plan, collectively; the Plans),
Located in Arlington, Texas
[Application Nos. D-10669 and D-10670]
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 C.F.R. part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). 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 as of February 1, 1999, to a lease (the Lease) of
certain second-floor space (the Leased Premises) in a building by the
Plans to LM Holdings, Inc., a party in interest with respect to the
Plans; provided that the following conditions are satisfied:
(a) All terms and conditions of the Lease are at least as favorable
to the Plans as those which the Plans could obtain in an arm's-length
transaction with an unrelated party;
(b) The fair market rental amount for the Lease has been determined
by an independent qualified appraiser;
(c) Each Plan's allocable portion of the fair market value of both
the Leased Premises and the building where the Leased Premises are
located (the Building) represents no more than 20 percent (20%) of the
total assets of each Plan throughout the duration of the Lease;
(d) The interests of the Plans under the Lease are represented by
an independent, qualified fiduciary (the Independent Fiduciary);
(e) The fees received by the Independent Fiduciary, combined with
any other fees derived from any related parties, will not exceed 1% of
that person's annual income for each fiscal year that such person
continues to serve in the independent fiduciary capacity with respect
to the Lease;
(f) The Independent Fiduciary evaluated the Lease and deemed it to
be administratively feasible, protective and in the best interest of
the Plans;
(g) The Independent Fiduciary monitors the terms and the conditions
of the exemption (if granted) and the Lease throughout its duration,
and takes whatever action is necessary to protect the Plans' rights;
(h) At the discretion of the Independent Fiduciary, the Lease can
be extended for two additional five-year terms, provided that the
Independent Fiduciary requires independent appraisals of the Leased
Premises to be performed at the time of each extension of the Lease so
as to ensure that LM Holdings continues to pay fair market rent, and
such rent is not less that either the initial base rent or the amount
paid during the most recent annual term; and
(i) Within 90 days of publication in the Federal Register of a
notice granting this proposed exemption, LM Holdings files with the
Internal Revenue Service (IRS) Form 5330 (Return of Initial Excise
[[Page 29907]]
Taxes for Pension and Profit Sharing Plans) and pays all excise taxes
applicable under section 4975(a) of the Code that are due by reason of
the existence of the Lease as a prohibited transaction prior to
February 1, 1999.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
February 1, 1999.
Summary of Facts and Representations
1. The Plans are a profit sharing plan and a money purchase plan
which were established in February, 1994. As of July 15, 1998, the
Plans had two participants, Mr. Michael Leighty and Mr. Patrick McCarty
(Mr. Leighty and Mr. McCarty, respectively). Mr. Leighty and Mr.
McCarty are also the Plans' trustees. As of December 31, 1997, the P/S
Plan and the M/P Plan had $924,350 and $616,234 in total net assets,
respectively. Messrs. Leighty and McCarty are the only participants of
the Plans, the only trustees of the Plans and the sole employees and
shareholders of LM Holdings, Inc. (LM Holdings) and Premier Funding
Group, Inc (Premier Funding).
Premier Funding is the sponsor of the Plans. Premier Funding and LM
Holdings are both incorporated in the State of Texas and are located in
Arlington, Texas. Both corporations are jointly owned on a 50%-50%
basis by Messrs. Leighty and McCarty. Premier Funding and LM Holdings
are in the business of acquiring financial instruments, real estate and
other assets.
2. The Leased Premises and the Building are located at 2400 Garden
Park Court, Arlington, Texas. The Building was owned by Ed Thulin (Mr.
Thulin), an unrelated third party, until December 16, 1997. LM Holdings
had leased approximately 700 square feet in the Building from Mr.
Thulin under the terms and conditions of the subject Lease, as
originally agreed to by the parties.
However, on December 16, 1997, the Plans purchased the Building
from Mr. Thulin, for $210,000. Therefore, as of December 16, 1997, the
Lease was between the Plans and LM Holdings, which made the Lease a
prohibited transaction under the Act.<SUP>14</SUP> In this regard, the
applicant represents that within 90 days of publication in the Federal
Register of a notice granting this proposed exemption, LM Holdings will
file Form 5330 (Return of Initial Excise Taxes for Pension and Profit
Sharing Plans) with the IRS and pay all excise taxes applicable under
section 4975(a) of the Code that are due by reason of the existence of
the Lease prior to February 1, 1999, the effective date of this
exemption.
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\14\ Section 406(a)(1)(A) of the Act prohibits, in pertinent
part, a plan fiduciary from causing a plan to engage in a
transaction which constitutes a leasing of property between the plan
and a party in interest.
---------------------------------------------------------------------------
3. After purchasing the Building, the Plans commissioned an
appraisal (the Appraisal) of the Leased Premises by an independent,
qualified appraiser (see paragraph 5 below). The Appraisal determined
the fair market rental value of the Leased Premises to be approximately
$7 per rentable square foot, or $782.25 monthly. The Lease was amended
on May 5, 1998, whereby the original terms were modified to reflect the
fair market rental amount as determined by the Appraisal.<SUP>15</SUP>
---------------------------------------------------------------------------
\15\ However, under the Lease as amended by the parties pursuant
to the Appraisal, the Landlord and the Tenant have agreed to round
off this number to $785 per month.
---------------------------------------------------------------------------
Furthermore, to comply with the fair market rental amount
determined by the Appraisal, LM Holdings has made an additional rental
payment of $530 to the Plans. The applicant represents that this amount
is equal to the difference between the fair market rental value of the
Leased Premises and the actual rent that was paid for the Leased
Premises by LM Holdings since the beginning of the Lease. This amount
was computed by the applicant's attorney and was based on fair market
rental amount set forth in the Appraisal.
4. The applicant is now requesting an individual exemption,
effective as of February 1, 1999, which is the date that an
independent, qualified fiduciary was appointed to represent the Plans
for purposes of the Lease (as discussed further below). The parties to
the Lease will be the Plans (doing business as PFGI Realty) and LM
Holdings. Under the Lease as it now exists between the parties, the
Leased Premises include approximately 1,341 square feet of the total
rentable 5,196 square feet in the Building.<SUP>16</SUP> LM Holdings
(i.e., the Tenant) will pay $785 per month during the first year of the
Lease. Thereafter, on each annual anniversary of the Lease during the
initial term and any subsequent renewal periods (discussed more fully
below), the rent will be adjusted by the Independent Fiduciary based on
the percent change in the annual Consumer Price Index (CPI) as
published in the Wall Street Journal for the previous year. This annual
adjustment may not fall below the higher of the base rate of $785 per
month or the amount paid on a monthly basis during the most recent
annual term.
---------------------------------------------------------------------------
\16\ There are three other tenants in the Building, who
separately lease the remaining rentable space. Thus, the Leased
Premises represent approximately 25.8% of the Building's rentable
space.
---------------------------------------------------------------------------
Under the terms of the Lease, LM Holdings will be responsible for
electricity, with all other expenses being paid by the owner of the
Building (i.e., the Plans).<SUP>17</SUP> The initial term of the Lease
is scheduled to end on May 5, 2003. At the discretion of the
Independent Fiduciary, the Lease can be extended for two additional
five year terms. The Independent Fiduciary will require independent
appraisals to be performed at the time of each extension of the Lease
so as to ensure that LM Holdings continues to pay fair market rent.
However, the new rents for the Leased Premises set at the time of any
extensions of the Lease will not be less than the rent received by the
Plans during the prior leasing period.
---------------------------------------------------------------------------
\17\ The applicant states that the terms of the Lease are
identical to the other current leases in the Building. Furthermore,
the applicant maintains that the remaining monthly bills for the
Building are gas, water and lawn care. These items are not
separately metered and are paid by the owner of the Building. The
applicant represents that this is consistent with the comparable
buildings analyzed in the Appraisal.
---------------------------------------------------------------------------
Furthermore, the Lease requires that LM Holdings, as the tenant,
provide public liability and property damage insurance for its business
operations on the Leased Premises in the amount of $500,000. This
insurance policy names the Plans as the insured.
5. As stated above, the fair market rent of the Leased Premises was
established by the Appraisal dated April 20, 1998. The Appraisal was
prepared by Thomas S. Haines, MAI and Wayne Burgdorf, MAI of Hanes,
Jorgensen & Burgdorf, Ltd., Diversified Real Estate Services located in
Arlington, Texas. The Appraisal relied on eight comparable rentals in
the surrounding area to determine the fair market rental value of the
Leased Premises. The addendums to the Appraisal (the Addendums), dated
May 12, 1998 and May 22, 1998, respectively, state that the fair market
rent for the Leased Premises is $7.00/square foot fixed, which equates
to $782.25 a month, or $9,387 a year, for a five-year lease.
6. The Lease will be monitored by Gary J. Manny (Mr. Manny), who
will serve as the Independent Fiduciary on behalf of the Plans for
purposes of the Lease. Mr. Manny was appointed as the Independent
Fiduciary on February 1, 1999, and has served in that capacity for the
Plans since that date. Mr. Manny represents that he is an attorney who
has general knowledge of ERISA, and the regulations thereunder. Mr.
Manny also represents that he has acted before in a fiduciary capacity
as a executor,
[[Page 29908]]
guardian and trustee for various clients. Thus, Mr. Manny states that
he has experience in protecting the rights of the parties involved in
such transactions. Mr. Manny states that he understands the duties,
responsibilities and liabilities of acting in a fiduciary capacity for
the Plans.
7. Mr. Manny represents that he is independent of LM Holdings,
Premier Funding, Mr. Leighty and Mr. McCarty (the Related Parties), and
has no interest in any of their business activities. In this regard,
Mr. Manny states that he has done work in the past for the Related
Parties. However, Mr. Manny's fees from the Related Parties represented
less than one percent (1%) of his total annual billings. Mr. Manny
further represents that for each year that he serves as the Independent
Fiduciary for the Plans, his fees for serving in this capacity,
combined with any other fees from the Related Parties, will not exceed
1% of his annual billings.
8. Mr. Manny states that he has reviewed the Lease and the Plans'
investment portfolios. Mr. Manny concludes that the Lease will be
protective of the Plans and consistent with the Plans' investment needs
and objectives. In this regard, Mr. Manny notes that the fair market
value of the Building, and the Leased Premises, represent less than
twenty percent (20%) of each Plan's total assets, and also of the
combined assets of the Plans.<SUP>18</SUP>
---------------------------------------------------------------------------
\18\ The applicant states that the approximate value of the
Building is $210,495, which represents 11.5% of the P/S Plan and
11.5% of the M/P Plan. This is because the ownership of the building
is allocated, as all other assets in the Plans, 60% to the P/S Plan
and 40% to the M/P Plan. The applicants represent that all rents for
office space in the Building are allocated in the same manner.
---------------------------------------------------------------------------
Mr. Manny states that the Lease will be in the best interest of the
Plans and its participants. Mr. Manny believes that the Lease will be
an appropriate investment for the Plans with adequate safeguards and
protections.
9. Mr. Manny will monitor the terms and conditions of the Lease
throughout its initial term and any renewal periods. Mr. Manny
represents that he will have access to the books and records of the
Plans, and will make sure that rental payments under the Lease are paid
on time. Mr. Manny will review the Lease annually to ensure that all
annual automatic adjustments to the rent are made based on the percent
change in the CPI Index from the previous year. Mr. Manny will ensure
that monthly rental payments are adjusted annually, as appropriate. Mr.
Manny will also ensure that the adjusted rental payments never fall
below the amount paid for the Leased Premises during the most recent
annual period. Mr. Manny will monitor the value of the Building to
ensure that each Plan's allocable portion of the Building and the
Leased Premises represent no more than 20% of the total assets of each
Plan throughout duration of the Lease.
Mr. Manny believes that the Lease is administratively feasible, in
the best interest and protective of the Plans. As the Independent
Fiduciary, Mr. Manny will represent the interests of the Plans at all
times. Mr. Manny will monitor compliance by the LM Holdings, as the
tenant, with the terms and conditions of the Lease, and will take
whatever action is necessary to safeguard the interests of the Plans
and its participants.<SUP>19</SUP>
---------------------------------------------------------------------------
\19\ In this regard, the applicant makes a request regarding a
successor independent fiduciary. Specifically, if it becomes
necessary in the future to appoint a successor independent fiduciary
(the Successor) to replace Mr. Manny, the applicant will notify the
Department sixty (60) days in advance of the appointment of the
Successor. Any Successor will have the responsibilities, experience
and independence similar to those of Mr. Manny.
---------------------------------------------------------------------------
10. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) All terms and conditions of the Lease are at least as favorable
to the Plans as those which the Plans could obtain in an arm's-length
transaction with an unrelated party;
(b) The fair market rental value of the Leased Premises has been
determined by an independent qualified appraiser;
(c) Each Plan's allocable portion of the fair market value of both
the Leased Premises and the Building will represent no more than 20% of
the total assets of each Plan throughout the duration of the Lease;
(d) The interests of the Plans under the Lease are represented by
the Independent Fiduciary;
(e) The fees received by the Independent Fiduciary, combined with
any other fees derived from any related parties, will not exceed 1% of
that person's annual income for each fiscal year that such person
continues to serve in the independent fiduciary capacity with respect
to the Lease;
(f) The Independent Fiduciary evaluated the Lease and deemed it to
be administratively feasible, protective and in the best interest of
the Plans;
(g) The Independent Fiduciary will monitor the terms and the
conditions of the exemption (if granted) and the Lease throughout its
duration, and will take whatever action is necessary to protect the
Plans' rights;
(h) At the discretion of the Independent Fiduciary, the Lease can
be extended for two additional five-year terms, provided that the
Independent Fiduciary requires independent appraisals of the Leased
Premises to be performed at the time of each extension of the Lease so
as to ensure that LM Holdings continues to pay fair market rent, and
such rent will not be less than the current base rate of $785 per
month, or the amount paid on a monthly basis during the most recent
annual term; and
(i) Within 90 days of publication in the Federal Register of a
notice granting this proposed exemption, LM Holdings will file with the
IRS Form 5330 (Return of Initial Excise Taxes for Pension and Profit
Sharing Plans) and pay all excise taxes applicable under section
4975(a) of the Code that are due by reason of the existence of the
Lease as a prohibited transaction prior to February 1, 1999.
Notice to Interested Persons
The applicant represents that, within five (5) business days of the
publication of the notice of proposed exemption (the Notice) in the
Federal Register, all interested persons will receive a copy of the
Notice, and a copy of the supplemental statement, as required by 29 CFR
2570.43(b)(2). Comments and hearing requests on the proposed exemption
are due thirty-five (35) days after the date of publication of the
Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
The Unaka Company, Incorporated Employees' Profit Sharing Plan and
Trust (the Plan) Located in Greenville, Tennessee
[Application No. D-10722]
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 C.F.R. part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
If the exemption is granted the restrictions of sections
406(a)(1)(A) through (D), 406(b)(1), and 406(b)(2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (E) of the Code shall not
apply to: <SUP>20</SUP>
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\20\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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(a) The assignment (the Assignment) by the Plan to the Unaka
Company,
[[Page 29909]]
Incorporated (Unaka), the sponsoring employer and a party in interest
with respect to the Plan, of any and all claims, demands, and/or causes
of action which the Plan may have against certain members of the Plan
Administrative Committee (the PAC) and other involved parties
(collectively, the Responsible Fiduciaries) for breach of fiduciary
duty under the Act, during the period from July 1, 1996 to July 31,
1998;
(b) In exchange for the Assignment, described in paragraph (a),
above, the interest-free, non-recourse loan (the Loan) by Unaka to the
Plan in an amount equal to the difference between $413 and the fair
market value per share for the common stock of Unaka (the Stock) held
by the Plan, in connection with the sale of such Stock by the Plan to
Unaka, pursuant to the statutory exemption, as set forth in section
408(e) of the Act; <SUP>21</SUP>
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\21\ The Department, herein, expresses no opinion as to the
applicability of the statutory exemption provided by section 408(e)
of the Act to the sale by the Plan of its Unaka Stock to Unaka or as
to whether the conditions set forth in such statutory exemption are
satisfied in the execution of such transaction. Further, the
Department, herein, is offering no relief for transactions other
than those proposed.
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(c) The possible repayment of such Loan to Unaka from the cash
proceeds of the recovery, if any, from a judgment or settlement of the
litigation against the Responsible Fiduciaries;
(d) The interest-free, non-recourse extension of credit (the
Extension of Credit) by Unaka to the Plan of certain expenses arising
out of the litigation against the Responsible Fiduciaries, effective as
of, May 1, 1999, the date when expenses incurred by the Plan in
bringing such litigation were first paid by Unaka; and
(e) The possible receipt by Unaka of reimbursement of such
litigation expenses from the cash proceeds of the recovery, if any,
from a judgment or settlement of the litigation against the Responsible
Fiduciaries; provided that the following conditions are satisfied:
(1) The Plan will pay no interest in connection with the Loan or
the Extension of Credit;
(2) None of the assets of the Plan will be pledged to secure either
the amount of the Loan or the amount of the Extension of Credit;
(3) Repayment to Unaka of the amount of the Loan and reimbursement
to Unaka of the amount of the Extension of Credit shall be restricted
solely to the cash proceeds of the recovery, if any, from a judgment or
settlement of the litigation against the Responsible Fiduciaries;
(4) To the extent the amount of the cash proceeds, if any, from any
judgment or settlement of the litigation against the Responsible
Fiduciaries is equal to or less than the amount due to Unaka as
repayment for the Loan and reimbursement of the Extension of Credit,
the Plan shall not be liable to Unaka for any amount;
(5) To the extent the cash proceeds, if any, from any judgment or
settlement of the litigation against the Responsible Fiduciaries
exceeds the total amount of the Loan, plus the amount of the Extension
of Credit, such excess amount will be allocated to the accounts of the
participants of the Plan; with the exception that no such allocation
will be made to the account of Robert Austin, Jr. in the Plan;
(6) The transactions which are the subject of this exemption do not
involve any risk of loss either to the Plan or to any of the
participants and beneficiaries of the Plan;
(7) The Plan will not incur any expenses as a result of the
transactions which are the subject of this exemption;
(8) Notwithstanding the Assignment by the Plan of its rights
against the Responsible Fiduciaries, the Plan does not release any
claims, demands, and/or causes of action which it may have against
Unaka and/or its affiliates;
(9) All of the 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;
(10) The Plan receives no less than the fair market value for the
Assignment, as of the date of the closing on the transfer of the
Assignment;
(11) Prior to the Plan's entering the transactions, an independent,
qualified fiduciary (the I/F), who is acting on behalf of the Plan and
who is independent of Unaka and its affiliates, reviews, negotiates,
and approves the terms and conditions of the Loan, the Assignment, and
the Extension of Credit and determines that 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;
(12) Throughout the duration of the transactions, the I/F monitors
the prosecution of the lawsuit against the Responsible Fiduciaries,
including but not limited to monitoring all costs and fees incurred in
connection with any litigation related to the proposed transactions,
monitors the division of the recovery, if any, from any judgment or
settlement of the litigation against the Responsible Fiduciaries to
ensure that the Plan receives the portion to which it is entitled and
that the Plan's interests are served, and monitors the terms and
conditions of the proposed transactions to ensure that such terms and
conditions are at all times satisfied;
(13) The I/F, acting on behalf of the Plan, shall have final
approval authority over any proposed settlement of any legal
proceedings against the Responsible Fiduciaries brought pursuant to the
terms of the Assignment; and
(14) 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 such I/F, or if at any time such I/F does not remain independent of
Unaka and its affiliates, such I/F will be replaced by a successor: (i)
Who is appointed immediately upon the occurrence of such event; (ii)
who is independent of Unaka and its affiliates; (iii) who is qualified
to serve as the I/F; and (iv) who assumes all the duties and
responsibilities of the predecessor
I/F.
Summary of Facts and Representations
1. The Plan, established on February 1, 1967, but amended and
restated on June 29, 1995, is a defined contribution profit sharing
plan which is designed to qualify under section 401(a) of the Code.
Contributions to the Plan are made by Unaka and by the participants in
the Plan. The Plan is an individual account plan which does not provide
for participant-directed investments. All contributions to the Plan are
invested by the trustee of the Plan, pursuant to the funding policy and
method, as determined by Unaka and by the Plan's investment manager.
Employees of Unaka and/or its subsidiaries are participants in the
Plan. As of January 1, 1997, the Plan had approximately 1,142
participants. From January 1, 1997 to February 11, 1999, distributions
of account balances were made to 209 participants, and 104 participants
were added to the Plan. Accordingly, as of March 1, 1999, there were
1,037 participants in the Plan.
As of June 30, 1998, the Plan had approximately $16.8 million in
assets on an unaudited basis, consisting of cash, mutual fund
interests, government and corporate bonds, and shares of stock. It is
represented that each participant's account shares a pro-rata portion
of the overall value of the general assets of the Plan.
In the past, Unaka, as Plan administrator, has delegated to certain
individuals, including, but not limited to certain officers and
employees of Unaka, the responsibilities of administering the Plan. In
this regard, until October 1997, the PAC
[[Page 29910]]
administered the Plan. It is represented that from June 1996 to October
1997, the PAC was comprised of Gordon H. Newman, Jerald K. Jaynes,
Lonnie F. Thompson, and Gary Landes. From May 1995 to June 1996, the
PAC was comprised of Gordon H. Newman, Robert Austin, Jr., and Gordon
Chalmers. Prior to that time the PAC members were Gordon H. Newman,
Terry O'Donovan, Powell Johnson, Dominick Jackson, and Ray Adams.
As discussed more fully below, in an agreement dated July 31, 1998,
as amended March 25, 1999, and April 7, 1999, an independent, qualified
individual was hired to serve as the trustee (the Trustee) of the Plan,
and an institutional investment manager was engaged to manage the
assets of the Plan and to serve as the I/F with respect to the
transactions which are the subject of this proposed exemption.
2. Established in 1950 in Greeneville, Tennessee, Unaka is a
holding corporation for the diverse industries of its wholly-owned
subsidiaries. These subsidiaries consist primarily of the MECO
Corporation, a manufacturer of barbecue grills and folding metal
furniture, SOPAKCO, a warehouse operator and manufacturer of packaged
foods, and Crown Point, an international food supply company
specializing in the buying and selling of food commodities.
Unaka is a privately held corporation whose stock is not traded on
any registered securities exchange. Another holding company, the Rolich
Corporation (Rolich), owns approximately 61 percent (61%) of the 54,000
issued and outstanding shares of the Stock of Unaka which has a $10 par
value. The Plan owns an additional 26 percent (26%) of the issued and
outstanding shares of Stock of Unaka. Members of the Austin family, as
discussed below, and various other individuals own the remaining 13
percent (13%) of the Unaka Stock.
3. In August of 1987, Robert Austin, Sr. purchased, through Rolich,
a controlling interest in Unaka. It is represented that at that time,
Rolich was owned by the members of the immediate family of Robert
Austin, Sr. In connection with Robert Austin, Sr.'s obtaining control
of Unaka, the Plan, on December 27 and 28, 1987, acquired 2,500 and
6,500 shares, respectively, of Unaka Stock directly from Unaka at a
price of $220 per share. Subsequently, on October 1, 1989, the Plan
purchased an additional 5,000 shares of Unaka Stock from Unaka at a
price of $250 per share.<SUP>22</SUP>
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\22\ Unaka represents that the acquisition by the Plan of Unaka
Stock both in December 1987, and October 1989, satisfied the
criteria of section 408(e) of the Act. The Department, herein,
expresses no opinion as to the applicability of the statutory
exemption provided by section 408(e) of the Act to the acquisition
in 1987 and 1989 of the Unaka Stock by the Plan or as to whether the
conditions set forth in such statutory exemption were satisfied in
the execution of such transactions. Further, the Department, herein,
is offering no relief for transactions other than those proposed.
---------------------------------------------------------------------------
With the deaths in 1990, of Robert Austin, and his wife, Mary T.
Austin, a struggle for control of Rolich and Unaka ensued among their
three children who are the heirs to their parents' estates. In this
regard, most of the litigation involves the struggle for control of
Unaka and Rolich among, Robert Austin, Jr., Lisa Austin, and Christy
Austin. Additional litigation is associated with the members of Unaka's
former management and with other shareholder derivative and non-
derivative suits. It is anticipated that these various legal disputes
may continue in the foreseeable future. However, it is represented that
as of April 1997, Robert Austin, Jr. obtained majority ownership of
Rolich and is currently serving as Chairman of the Board of Directors
of Unaka.
4. In October of 1996, the Plan entered into an agreement to sell
its Unaka Stock to Nothung, Inc. (Nothung), an entity owned by Robert
Austin, Jr., for a minimum price of $413 per share. It is represented
that certain Responsible Fiduciaries who were members of the PAC did
not complete the sale of the Plan's Unaka Stock, pursuant to the
agreement with Nothung. As a result, the PAC, acting on behalf of the
Plan, failed to sell the Plan's Unaka Stock to Nothung in October of
1996. Subsequently, the offer to purchase the Plan's Unaka Stock,
pursuant to the agreement with Nothung, lapsed on January 27, 1997.
5. With regard to the $413 per share price offered, pursuant to the
agreement with Nothung, it is represented that Mercer Capital
Management, Inc. (Mercer), an independent, qualified appraisal, valued
the Plan's Unaka Stock, as of May 31, 1996, on a marketable, minority
interest basis, at $413 per share. Of the three valuation
methodologies, Mercer employed the income approach and the asset-based
approach, but did not consider the market approach appropriate, because
at the time of the appraisal there had been too few arm's length
transactions in the Unaka Stock. Further, the Mercer appraisal did not
discount the value of the Plan's Unaka Stock for lack of marketability,
because: (1) Mercer believed it reasonable to assume that ongoing
negotiations with Unaka would result in an option for Plan participants
to put the shares to Unaka or to the Plan at the appraised fair market
value; (2) Mercer accepted that the original investment by the Plan in
Unaka Stock was based on assurances of reasonable treatment by the
remaining shareholders; and (3) Mercer accepted representations from
the Plan's legal counsel that there had been an intent and practice not
to consider marketability discounts in the valuation estimates used in
prior years.
6. The Plan currently holds 14,000 shares of Unaka Stock which
Unaka has offered to purchase at a price equal to the fair market value
of such Stock on the date the transaction is closed. It is represented
that the proposed sale by the Plan to Unaka of the Plan's Unaka Stock
will satisfy the criteria of section 408(e) of the Act.<SUP>23</SUP>
---------------------------------------------------------------------------
\23\ See, footnote number 22, above.
---------------------------------------------------------------------------
In anticipation of the sale of the Plan's Unaka Stock to Unaka and
in anticipation of the transactions which are the subject of this
proposed exemption, it is represented that an appraisal, as of June 30,
1998, of the fair market value of the Unaka Stock was prepared by
Bernstein, Phalon & Conklin (BP&C), an independent, qualified
appraiser, with offices in Dallas, Texas. In determining the value of
the Unaka Stock, BP&C considered all three approaches to value, the
income approach, the asset-based approach, and the market approach. The
results of these valuation techniques applied to a minority interest of
the Plan's Unaka Stock on a closely held basis were as follows:
Income approach
$283 per share
Asset-based approach
$334 per share
Market approach
$292 per share.
After giving slightly greater weight to the income approach, because
that valuation method took into consideration the current and projected
business operations of Unaka, BP&C determined that the fair market
value of the equity of Unaka on a closely held, minority basis was $301
per share, as of June 30, 1998. Based on an appraised value of $301 per
share, approximately $4.2 million of the Plan's assets are currently
invested in Unaka Stock which constitutes approximately 25 percent
(25%) of the total assets held by the Plan.
The applicant has represented that an updated appraisal of the
Unaka Stock
[[Page 29911]]
will be obtained at the time of the closing of the sale of the Plan's
Unaka Stock. In this regard, in the engagement letter, dated September
11, 1998, BP&C acknowledges its responsibility for providing the fair
market value of the Plan's Unaka Stock, as of the date of the sale of
such shares, and for issuing a fairness opinion regarding such sale, if
appropriate.
7. In addition to the sale to Unaka of the Plan's Unaka Stock, it
is represented that the Plan intends to sell, assign, transfer, and
convey to Unaka any and all of the Plan's claims, demands, and causes
of action (including reimbursement of reasonable legal fees, expenses,
and costs) which the Plan may have against the Responsible Fiduciaries
for breach of fiduciary duties during the period between July 1, 1996
to July 31, 1998. It is represented that this time span was chosen to
cover the period during which the Responsible Fiduciaries were in
control of the Plan and its assets and in order to cover any and all
potential claims or causes of action that may arise out of any acts on
the part of the Responsible Fiduciaries. In this regard, July 1, 1996,
is the date Robert Austin, Jr. was removed from the PAC, and July 31,
1998, is the last date before the Trustee, who is the successor to the
PAC, was appointed.
Included without limitation in the Assignment are all claims as to:
(i) The value of the Unaka Stock held by the Plan, including its
purchase, sale, transfer, voting, valuation, and appraisal; (ii) any
offers, attempts, or agreements to purchase, transfer, assign, vote,
pledge, or hypothecate such Stock, including but not limited to the
offer/agreement to purchase the Stock made by Nothung in October 1996;
and (iii) any third party claims, demands, and causes of action arising
therefrom. Notwithstanding the Assignment by the Plan of its rights
against the Responsible Fiduciaries, it is represented that the
Trustee, on behalf of the Plan, will not release any claims, demands,
and/or causes of action which the Plan may have against Unaka and/or
its affiliates.
Due to the uncertainty of the outcome of the litigation between the
Plan and the Responsible Fiduciaries, it is represented that it is
difficult to calculate a precise value of the rights against the
Responsible Fiduciaries which the Plan proposes to assign to Unaka. In
this regard at the request of the I/F who is also the Plan's investment
manager, BP&C were engaged on March 25, 1999, to express an opinion
concerning the approximate fair market value of the Assignment. As part
of the analysis, BP&C took into consideration: (i) The likelihood of
the Plan prevailing successfully in the lawsuit against the Responsible
Fiduciaries; (ii) the likelihood of collecting on any judgment awarded
by the court; and (iii) the ability of the Plan to sell the Assignment
to a willing buyer. Based on its analysis, BP&C concluded that the fair
market value of the Assignment is negligible.
8. In exchange for the Assignment, Unaka proposes to lend to the
Plan the difference between the value of $413 per share for the Unaka
Stock (as set forth in the agreement with Nothung and as set forth in
the 1966 Mercer appraisal) and the fair market value, as of the date
the proposed transactions are closed, of the Plan's Unaka Stock, as
determined by the I/F after considering the appraised value of such
Stock at closing. Because the offer price for the Plan's Unaka Stock
evidenced by the agreement with Nothung was based upon the Mercer
appraisal which did not consider a discount for lack of marketability,
it is the position of the applicant that the $413 per share appraised
value of the Plan's Unaka Stock includes a ``premium.'' Although at the
time of the agreement with Nothung, the applicant maintains that the
Plan could have obtained a control premium for the sale of its Unaka
Stock, it is represented that the Plan has no current or foreseeable
ability to attract such a premium in the future. Furthermore, in the
opinion of the applicant the proposed transaction will restore this
``premium,'' because there is no known market for the minority block of
Unaka Stock held by the Plan.
9. In addition to the transactions described above, involving the
Assignment and the Loan, relief has been requested for an Extension of
Credit between Unaka and the Plan of the expenses arising out of the
litigation against the Responsible Fiduciaries. In this regard, Unaka
proposes to extend credit to the Plan of an amount equal to the cost
incurred in bringing suit against such Responsible Fiduciaries. It is
represented that due to constraints imposed by the statute of
limitations, it will be necessary for the Plan to begin legal
proceedings against the Responsible Fiduciaries, prior to the date when
a final exemption can be granted for the proposed transactions. In this
regard, Unaka has agreed (in anticipation of the subject transactions)
to pay on behalf of the Plan, beginning May 1, 1999, all expenses
incurred by the Plan in filing and pursuing the litigation against the
Responsible Fiduciaries. Accordingly, relief, if granted, for the
Extension of Credit, as described in paragraph (d) above, has been made
effective, as of May 1, 1999. In the event a final exemption is issued,
it is represented that all amounts paid by Unaka, prior to the
Assignment, to cover the expenses incurred by the Plan in filing and
pursuing the litigation against the Responsible Fiduciaries shall be
added to such additional amounts expended by Unaka after the Assignment
in connection with the legal proceedings against the Responsible
Fiduciaries. In the event a final exemption is not granted by November
30, 1999, the Plan will have the option of continuing the litigation
against the Responsible Fiduciaries, in its own right and at its own
expense; but, Unaka shall not have the right to reimbursement for any
payments made during the seven (7) months period from May 1, 1999, to
November 30, 1999, of the Plan's expenses in connection with the
litigation against the Responsible Fiduciaries.
It is represented that both the Loan and the Extension of Credit
will be without interest and without recourse against the Plan. In this
regard, repayment to Unaka of the amount of the Loan and reimbursement
to Unaka of the amount of the Extension of Credit shall be restricted
solely to the cash proceeds of the recovery, if any, from a judgment or
settlement of the litigation against the Responsible Fiduciaries. It is
represented that to the extent the cash proceeds of any judgment or
settlement of the litigation against the Responsible Fiduciaries
exceeds the total amount of the Loan, plus the amount of the Extension
of Credit, such amount will be allocated to the accounts of the
participants of such Plan, with the exception that no such allocation
will be made to the account of Robert Austin, Jr. in the Plan. It is
represented that to the extent the cash proceeds of the recovery, if
any, from such litigation is equal to or less than the aggregate amount
of the Loan and the Extension of Credit, the Plan will not be
responsible for any amount. In this regard, it is represented that
Unaka will waive the repayment of any outstanding balance on the Loan
and any balance on the Extension of Credit.<SUP>24</SUP>
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\24\ It is represented that to the extent Unaka waives repayment
of the outstanding balance of the Loan and the Extension of Credit,
or to the extent that the Plan receives any excess recovery over the
aggregate amount of the Loan and the Extension of Credit, Unaka will
amend the Plan to specify the allocation of such amounts in a manner
so as to ensure that the Plan will not violate either section
401(a)(4) or section 415 of the Code. Further, Unaka represents that
it will submit an amendment to the Internal Revenue Service (the
IRS) for a favorable determination letter for the Plan, as amended,
by such amendment. Unaka represents that it will make any changes
required by the IRS regarding such allocations.
To the extent that waiving the outstanding balance of the Loan
and the Extension of Credit is deemed to be a contribution to the
Plan, Unaka represents that such amounts will not be treated as a
contribution prior to the date when such amounts are either repaid
or waived. However, Unaka represents that it intends to deduct all
such amounts deemed to be contributions to the Plan, as of the date
they are so deemed.
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[[Page 29912]]
10. As a fiduciary of the Plan and as an employer any of whose
employees are covered by the Plan, Unaka is a party in interest with
respect to the Plan, pursuant to section 3(14)(A) and 3(14)(C) of the
Act. The proposed transactions will violate section 406(a)(1)(B) of the
Act, because the execution of the Loan between Unaka and the Plan and
the Extension of Credit by Unaka to the Plan each constitutes a lending
of money between a plan and party in interest which is prohibited by
the Act. In addition, the Assignment between the Plan and Unaka
constitutes a transfer to, or use by or for the benefit of a party in
interest of the income or assets of the Plan for which relief from
section 406(a)(1)(D) of the Act would be necessary.
Further, the applicant has requested relief for violations of
section 406(b)(1) and (b)(2) of the Act that may arise from Unaka's
status as a sponsor and administrator of the Plan. In this regard, the
proposed transactions could involve a fiduciary dealing with the assets
of the plan in his own interest and/or acting in his individual
capacity on behalf of a party whose interests are adverse to the
interests of the plan or it participants and beneficiaries.
11. With respect to the proposed transactions, Unaka notes that a
class exemption, Prohibited Transaction Class Exemption 80-26 (PTCE 80-
26), provides an exemption for interest-free loans by parties in
interest to plans. However, PTCE 80-26 is applicable where loan
proceeds are used for payment of ordinary operating expenses of a plan
or for a period of no more than three (3) days for a purpose incidental
to the ordinary operation of a plan. It is represented that Unaka is
uncertain whether the proposed transactions are of the type
contemplated by class exemption PTCE 80-26.
However, Unaka points out that individual exemptions have been
granted in cases involving an extension of credit from a plan sponsor
to a plan and an assignment back from the plan to the plan sponsor of
the plan's litigation rights and interests. In the opinion of Unaka,
the fact that individual exemptions have been granted in similar
circumstances indicates that the proposed transactions are in line with
current administrative practices. Accordingly, Unaka believes that the
request for an individual exemption is appropriate.
12. Unaka represents that the proposed transactions are
administratively feasible in that the nature of the transactions does
not require ongoing supervision by the Department. In this regard, the
Plan has engaged the Trustee and the I/F, who is also the investment
manager of the Plan. In addition, it is represented that all necessary
safeguards are incorporated into the documents evidencing the
Assignment, the Loan, and the Extension of Credit between the Plan and
Unaka.
13. Unaka represents that the proposed transactions will preserve
the value of retirement accounts of participants in the Plan and will
ensure that such participants do not suffer from the failure by the
Responsible Fiduciaries to sell the Unaka Stock, pursuant to the terms
of the agreement with Nothung. In this regard, it is represented that
denial of the proposed exemption would cause the participants of the
Plan to shoulder the decline in the value of the Unaka Stock caused by
events wholly outside their control. Further, the Plan would avoid an
expensive and time-consuming litigation against the Responsible
Fiduciaries the outcome of which is not assured. In addition, it is
uncertain whether the Responsible Fiduciaries will have sufficient
assets to satisfy a judgment, if one were to be awarded to the Plan.
14. Unaka represents that the proposed transactions are in the
interest of the Plan in that such transactions will reinforce the
participants' confidence in the security of their retirement funds and
allow for diversification of assets. In this regard, the Plan will
immediately receive the proceeds from the Loan and can, upon receipt,
invest such proceeds in other assets to produce additional earnings for
the participants in the Plan. Further, the Plan will benefit in that it
will not incur any expenses as a result of the transactions.
15. Unaka represents that the terms of the proposed exemption
adequately protect the rights of the participants and beneficiaries of
the Plan. Neither the Loan nor the Extension of Credit will bear any
interest. The assets of the Plan will not be pledged as collateral to
secure the Loan or the Extension of Credit, nor will the assets of the
Plan be used to repay the Loan or the Extension of Credit, other than
solely from the cash proceeds of the recovery, if any, from a judgment
or settlement of the litigation against the Responsible Fiduciaries. To
the extent the amount of the cash proceeds from such recovery, if any,
is equal to or less than the amount of the Loan and the amount of the
Extension of Credit, it is represented that Unaka will waive the
repayment of any outstanding balance on the Loan and any balance on the
Extension of Credit. In short, it is represented that as a result of
the proposed transactions, neither the Plan nor the participants will
experience a risk of loss.
16. As an additional safeguard, pursuant to the terms of an
agreement signed, July 31, 1998, as amended March 25, 1999, and April
7, 1999, the Strategic Investment Counsel Corporation (STRINCO) of
Dallas, Texas, has agreed to serve as the I/F with respect to the
proposed transactions and also to serve as the investment manager with
respect to the investment and reinvestment of the assets of the Plan.
Pursuant to the same agreement, Colin M. Henderson (Mr. Henderson), the
President and chief investment officer of STRINCO, has accepted the
appointment to serve, in his individual capacity, as the Trustee of the
Plan.
It is represented that STRINCO, as the I/F and the investment
manager for the Plan, has agreed to serve throughout the duration of
the proposed transactions. The Department notes that the proposed
exemption is conditioned upon the I/F, throughout the duration of the
transactions, monitoring the prosecution of the lawsuit against the
Responsible Fiduciaries, including but not limited to monitoring all
costs and fees incurred in connection with any litigation related to
the proposed transactions, monitoring the division of the recovery, if
any, from any judgment or settlement of the litigation against the
Responsible Fiduciaries to ensure that the Plan receives the portion to
which it is entitled and that its interests are served, and monitoring
the terms and conditions of the proposed transactions to ensure that
such terms and conditions are at all times satisfied. The exemption
contains a further condition that specifies that 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 such I/F, or if at any
time such I/F does not remain independent of Unaka and its affiliates,
such I/F will be replaced by a successor: (i) Who is appointed
immediately upon the occurrence of such event; (ii) who is independent
of Unaka and its affiliates; (iii) who is qualified to serve as the I/
F; and (iv) who assumes all the duties and responsibilities of the
predecessor I/F.
STRINCO has represented that it has extensive experience as a
service
[[Page 29913]]
provider to employee benefit plans. Further, STRINCO represents that it
is independent of all of the parties to the proposed exemption. In this
regard, the projected income from Unaka represent a small percentage of
the projected revenues of STRINCO. Specifically, it is represented that
STRINCO's revenues from fees paid by Unaka will constitute less than 3
percent (3%) of STRINCO's projected total revenues for 1999.
STRINCO has acknowledged its status as an independent fiduciary
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 transactions, STRINCO is responsible for reviewing,
negotiating, and approving the terms and conditions of the Loan, the
Assignment, and the Extension of Credit 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. It is represented that
STRINCO has been involved since its engagement in 1998, in the
evaluation, analysis, and design of the proposed transactions. In this
regard, STRINCO represents that it has at all times retained complete
discretion as to the Plan's participation in the proposed transactions
and has been actively involved in the negotiation of the terms of
conditions of such transactions. Further, STRINCO represents that
throughout the duration of the transactions, it will monitor the
prosecution of the lawsuit against the Responsible Fiduciaries,
including but not limited to monitoring all costs and fees incurred in
connection with any litigation related to the proposed transactions;
monitor the division of the recovery, if any, from any judgment or
settlement of the litigation against the Responsible Fiduciaries to
ensure that the Plan receives the portion to which it is entitled and
that its interests are served; and monitor the terms and conditions of
the proposed transactions to ensure that such terms and conditions are
at all times satisfied. In addition, STRINCO, the I/F acting on behalf
of the Plan, shall have final approval authority over any proposed
settlement of any legal proceedings against the Responsible Fiduciaries
brought pursuant to the terms of the Assignment. In this regard, it is
represented that such final approval authority is not intended to and
does not confer upon STRINCO, as I/F to the Plan, any authority to
initiate settlement negotiations nor any right to negotiate any
specific terms of settlement.
STRINCO has analyzed each of the three proposed transactions and
has made independent investigation of the representations made as to
each of the transactions, including significant due diligence into the
background surrounding the failure of the Responsible Fiduciaries to
sell the Plan's Unaka Stock, pursuant to the agreement with Nothung. It
is represented that Mr. Henderson, as President of STRINCO, his
counsel, and BP&C have visited the Unaka facilities, interviewed its
officers and reviewed documentation involving the Plan, including
minutes of the PAC meetings and certain minutes of the meetings of the
Board of Directors of Unaka.
With respect to its analysis of the Loan, Assignment, and Extension
of Credit, STRINCO states that the proposed transactions do not bind
any of the Plan's assets as collateral. Furthermore, the proposed
transactions, in the worst case, obtain a premium for the Plan in
excess of any loss actually suffered by the Plan or its participants
and beneficiaries. In this regard, STRINCO affirms that in the event no
recovery is made in the suit against the Responsible Fiduciaries, the
amount of Loan will be automatically forgiven, and the Plan will have
gained a premium (i.e. cash equal to the difference between the price
of the Plan's Unaka Stock, pursuant to the agreement with Nothung and
the current fair market value of such shares). In the event a
substantial amount is recovered in the suit against the Responsible
Fiduciaries, the Plan will still gain a premium in recovering
everything in excess of the amount of the Loan (less the expenses of
litigation). In the opinion of STRINCO, regardless of the outcome of
the litigation, the Loan puts the Plan and its participants and
beneficiaries in the position they would have been in if the Unaka
Stock had been sold to Nothung.
In order to receive the Loan, the Plan is required to enter into
the Assignment. In the opinion of STRINCO, the Assignment allows a suit
to be brought against the Responsible Fiduciaries without the Plan
assuming any risks associated with such suit and without having to
spend any of its own funds to do so. In light of Unaka's inability to
retain any of the proceeds of such suit, other than recoupment of the
outstanding balance of the Loan and any expenses of such litigation, in
the opinion of STRINCO the Assignment has minimal, if any, value in the
hands of the assignee. Based on this reasoning, STRINCO has concluded
the proposed transactions are at least as favorable to the Plan as any
transaction between the Plan and a third party.
With respect to the Extension of Credit by Unaka of the litigation
expenses, STRINCO points out that, if the Plan were not to participate
in the proposed transactions and instead bring suit in its own right
against the Responsible Fiduciaries, the Plan would be required to pay
the litigation expenses prior to any potential recovery and regardless
of such recovery. Accordingly, STRINCO has concluded, based upon its
analysis described above, that each of the proposed transactions
represents a prudent and conservative course of action which is
feasible and fair; in the best interests of the participants and
beneficiaries; and protective of the assets of the Plan which are held
for the exclusive benefit of the participants and beneficiaries.
17. In summary, the applicant represents that the proposed
transactions meet the statutory criteria for an exemption under section
408(a) of the Act and 4975(c)(2) of the Code because:
(1) The Plan will pay no interest in connection with the Loan or
the Extension of Credit;
(2) None of the assets of the Plan will be pledged to secure either
the amount of the Loan or the amount of the Extension of Credit;
(3) Repayment to Unaka of the amount of the Loan and reimbursement
to Unaka of the amount of the Extension of Credit shall be restricted
solely to the cash proceeds of the recovery, if any, from a judgment or
settlement of the litigation against the Responsible Fiduciaries;
(4) To the extent the amount of the cash proceeds, if any, from any
judgment or settlement of the litigation against the Responsible
Fiduciaries is equal to or less than the amount due to Unaka as
repayment for the Loan and reimbursement of the Extension of Credit,
the Plan shall not be liable to Unaka for any amount;
(5) To the extent the cash proceeds, if any, from any judgment or
settlement of the litigation against the Responsible Fiduciaries
exceeds the total amount of the Loan and the amount of the Extension of
Credit, such amount will be allocated to the accounts of the
participants of the Plan; with the exception that no such allocation
will be made to the account of Robert Austin, Jr. in the Plan;
(6) The transactions which are the subject of this exemption do not
involve any risk of loss either to the Plan or to any of the
participants and beneficiaries of the Plan;
(7) The Plan will not incur any expenses as a result of the
transactions which are the subject of this exemption;
[[Page 29914]]
(8) Notwithstanding the Assignment by the Plan of its rights
against the Responsible Fiduciaries, the Plan, will not release any
claims, demands, and/or causes of action which it may have against
Unaka and/or its affiliates;
(9) All of the 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;
(10) The Plan receives no less than the fair market value for the
Assignment, as of the date of the closing on the transaction;
(11) Prior to the Plan's entering the transactions, STRINCO, who is
acting as I/F on behalf of the Plan and who is independent of Unaka and
its affiliates, will review, negotiate, and approve the terms and
conditions of the Loan, the Assignment, and the Extension of Credit and
will determine that such transactions are prudent, administratively
feasible, in the interest of the Plan and its participants and
beneficiaries, and protective of the participants and beneficiaries;
(12) Throughout the duration of the transactions, STRINCO, as the
I/F, will monitor the prosecution of the lawsuit against the
Responsible Fiduciaries, including but not limited to monitoring all
costs and fees incurred in connection with any litigation related to
the proposed transactions; will monitor the division of the recovery,
if any, from any judgment or settlement of the litigation against the
Responsible Fiduciaries to ensure that the Plan receives the portion to
which it is entitled and that its interests are served; and will
monitor the terms and conditions of the proposed transactions to ensure
that such terms and conditions are at all times satisfied;
(13) STRINCO, the I/F acting on behalf of the Plan, shall have
final approval authority over any proposed settlement of any legal
proceedings against the Responsible Fiduciaries brought pursuant to the
terms of the Assignment; and
(14) In the event STRINCO resigns, is removed, or for any reason is
unable to serve, or if at any time STRINCO does not remain independent
of Unaka and its affiliates, STRINCO will be replaced by a successor:
(i) Who is appointed immediately upon the occurrence of such event;
(ii) who is independent of Unaka and its affiliates; (iii) who is
qualified to serve as the I/F; and (iv) who assumes all the duties and
responsibilities of STRINCO.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include any person who presently is a participant
in the Plan or any other person who is entitled to receive benefits
under the Plan. It is represented that these two classes of interested
persons will be notified through different methods.
In this regard, it is represented that notification will be
provided to all participants of the Plan who are present in the work
environment of Unaka or its affiliates, within fifteen (15) calendar
days of the date of publication of the Notice of Proposed Exemption
(the Notice) in the Federal Register by posting on employee bulletin
boards at those locations within the principal places of employment of
Unaka and its affiliates which are customarily used for notices
regarding labor-management matters for review. Such posting will
contain a copy of the Notice, as it appears in the Federal Register on
the date of publication, plus a copy of the supplemental statement (the
Supplemental Statement), as required, pursuant to 29 C.F.R.
Sec. 2570.43(b)(2), which will advise such interested persons of their
right to comment and to request a hearing.
It is represented that notification will be provided to any
interested person who is entitled to benefits but who is not present in
the work environment of Unaka or its affiliates by mailing first class
within fifteen (15) calendar days of the date of publication of the
Notice, a copy of the Notice, as it appears in the Federal Register on
the date of publication, plus a copy of the Supplemental Statement, as
required, pursuant to 29 C.F.R. Sec. 2570.43(b)(2), which will advise
such interested persons of their right to comment and to request a
hearing.
All written comments and requests for a hearing must be received by
the Department no later than thirty (30) days from the date such
interested persons receive, through posting or mailing, a copy of the
Notice and the Supplemental Statement.
FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the Department,
telephone (202) 219-8883 (This is not a toll-free number.)
General Motors Hourly Rate Employes Pension Plan, General Motors
Retirement Program for Salaried Employes, Saturn Individual
Retirement Plan for Represented Team Members, Saturn Personal
Choices Retirement Plan for Non-Represented Team Members,
Employees' Retirement Plan for GMAC Mortgage Corporation
(collectively, the Plans), Located in New York, New York
[Application Nos. D-10473 through D-10476]
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).
Part I--Covered Transactions
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) through (D) of the Act and the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through
(D) of the Code, shall not apply effective December 11, 1998, to a
transaction between AEW Industrial, L.L.C. (the LLC), an entity which
currently holds ``plan assets'' of the Plans, or any subsidiary of the
LLC (as defined in Part IV(d) below) which may hold ``plan assets'' of
the Plans in the future, as a result of investments made by the Plans
in the LLC or any subsidiary through the First Plaza Group Trust (the
Trust), and a party in interest with respect to any of the Plans,
provided that the Specific Conditions set forth below in Part II and
the General Conditions set forth in Part III are met:
Part II--Specific Conditions
(a) In the case of a transaction by the LLC that involves the
acquisition, financing, or disposition of any real property asset, the
terms of the transaction are negotiated on behalf of the Plan by AEW
Capital Management, L.P. or a successor thereto (AEW), under the
authority and general direction of General Motors Investment Management
Corporation (GMIMCo), a wholly-owned subsidiary of General Motors
Corporation (GM), and GMIMCo makes the decision on behalf of the Plan
to enter into the transaction.
Notwithstanding the foregoing, a transaction involving an amount of
$5 million or more, which has been negotiated on behalf of the Plans by
AEW and approved by GMIMCo in the manner described above, will not fail
to meet the requirements of this Part II(a) solely because GM or its
designee
[[Page 29915]]
retains the right to veto or approve such transaction;
(b) In the case of any transaction by the LLC that does not involve
acquisitions, financings or dispositions of real property assets, the
terms of the transaction are negotiated on behalf of the Plans by AEW,
under the authority and general direction of GMIMCo, and either AEW or
a property manager acting in accordance with written guidelines or
business plans (including budgets), adopted with the approval of
GMIMCo, makes the decision on behalf of the Plans to enter into the
transaction. Notwithstanding the foregoing, a transaction involving an
amount of $5 million or more, which has been negotiated on behalf of
the Plans in accordance with the foregoing, will not fail to meet the
requirements of this Part II(b) solely because GM or its designee
retains the right to veto or approve such transaction;
(c) The transaction is not described in--
(1) Prohibited Transaction Exemption 81-6 (46 FR 7527, January 23,
1981), relating to securities lending arrangements,
(2) Prohibited Transaction Exemption 83-1 (48 FR 895, January 7,
1983), relating to acquisitions by plans of interests in mortgage
pools, or
(3) Prohibited Transaction Exemption 88-59 (53 FR 24811; June 30,
1988), relating to certain mortgage financing arrangements;
(d) The transaction is not part of an agreement, arrangement or
understanding designed to benefit a party in interest with respect to
any of the Plans;
(e) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of GMIMCo, GM, or AEW the terms of the transaction are at least
as favorable to the Plans as the terms generally available in arm's-
length transactions between unrelated parties;
(f) The party in interest dealing with the LLC: (1) is a party in
interest with respect to a Plan (including a fiduciary) solely by
reason of providing services to the Plan, or solely by reason of a
relationship to a service provider described in section 3(14)(F), (G),
(H) or (I) of the Act; and (2) does not have discretionary authority or
control with respect to the investment of the Plan's assets in the
Trust or the LLC, and does not render investment advice, within the
meaning of 29 CFR 2510.3-21(c), with respect to the investment of those
assets in the Trust or the LLC;
(g) The party in interest dealing with the LLC is neither GMIMCo or
AEW nor a person ``related'' to GMIMCo or AEW within the meaning of
Part IV(c) below;
(h) GMIMCo adopts written policies and procedures that are designed
to assure compliance with the conditions of this proposed exemption;
and
(i) An independent auditor, who has appropriate technical training
or experience and proficiency with the fiduciary responsibility
provisions of the Act, and who so represents in writing, conducts an
exemption audit, as defined in Part IV(f) below, on an annual basis.
Following completion of the exemption audit, the auditor issues a
written report to each Plan representing its specific findings
regarding the level of compliance with the policies and procedure
adopted by GMIMCo in accordance with Part II(h) above.
Part III--General Conditions
(a) At all times during the term of this exemption (if granted),
GMIMCo shall be--
(1) A direct or indirect wholly owned subsidiary of GM, and
(2) An investment adviser registered under the Investment Advisers
Act of 1940 that, as of the last day of its most recent fiscal year,
has under its management and control total assets attributable to Plans
maintained by GM or its affiliates (as defined in Part IV(a) of this
exemption) in excess of $50 million. In addition, Plans maintained by
affiliates of GMIMCo must have, as of the last day of each plan's
reporting year, aggregate assets of at least $250 million;
(b) AEW or any successor, as investment manager for assets held by
the LLC, meets the conditions for a ``qualified professional asset
manager'' (QPAM) as set forth in section V(a) of Prohibited Transaction
Class Exemption 84-14 (49 FR 9494, March 13, 1984);
(c) AEW and GMIMCo, or their affiliates, shall maintain, for a
period of six years from the date of each transaction described above,
the records necessary to enable the persons described below in part
III(d)(1) to determine whether the conditions of this exemption (if
granted) have been met, except that (1) a prohibited transaction will
not be deemed to have occurred if, due to circumstances beyond the
control of AEW or GMIMCo, or their affiliates, the records are lost or
destroyed prior to the end of the six-year period, and (2) no party in
interest, other than AEW or GMIMCo, shall be subject to the civil
penalty which may be assessed under section 502(i) of the Act or to the
taxes imposed by sections 4975 (a) and (b) of the Code, if the records
are not available for examination as required by section (d) below; and
(d)(1) Except as provided in subsection (2) of this section (d),
and notwithstanding any provisions of subsection (a)(2) and (b) of
section 504 of the Act, the records referred to in section (c) of this
Part III shall be made unconditionally available by GMIMCo or AEW, at
the customary location for the maintenance and/or retention of such
records, for examination during normal business hours by:
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service;
(B) The persons described in Part II(i) of this exemption (relating
to an independent audit of covered transactions as discussed therein);
and
(C) Any fiduciary of the Plans or the Trust;
(2) None of the persons described in subsections (1)(B) and (C) of
this section (d) shall be authorized to examine trade secrets of AEW or
GMIMCo, or commercial or financial information which is privileged or
confidential in nature.
Part IV--Definitions
For purposes of this proposed exemption:
(a) ``Affiliate'' of GM means a member of either (1) a controlled
group of corporations (as defined in section 414(b) of the Code) of
which GM is a member, or (2) a group of trades or businesses under
common control (as defined in section 414(c) of the Code) of which GM
is a member; provided that ``50 percent'' shall be substituted for ``80
percent'' wherever ``80 percent'' appears in Code section 414(b) or
414(c) or the regulations thereunder.
(b) ``Party in interest'' means a person described in section 3(14)
of the Act and includes a ``disqualified person'' as defined in section
4975(e)(2) of the Code.
(c) GMIMCo or AEW are ``related'' to a party in interest with
respect to a Plan for purposes of this proposed exemption if the party
in interest (or a person controlling or controlled by the party in
interest) owns a five percent (5%) or more interest in GMIMCo or AEW,
or if GMIMCo or AEW (or a person controlling or controlled by GMIMCo or
AEW) owns a five percent (5%) or more interest in the party in
interest. For purposes of this definition:
(1) ``Interest'' means with respect to ownership of an entity:
(A) The combined voting power of all classes of stock entitled to
vote, or the total value of the shares of all classes of stock of the
entity, if the entity is a corporation;
[[Page 29916]]
(B) The capital interest, or the profits interest of the entity, if
the entity is a partnership; or
(C) The beneficial interest of the entity, if the entity is a trust
or unincorporated enterprise;
(2) A person is considered to own an interest held in any capacity
if the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest; and
(3) ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
(d) ``Subsidiary'' means any limited liability company or other
entity organized by the LLC, through which it acquires and holds title
to its real property investments.
(e) An ``exemption audit'' of each Plan's interest in the LLC must
consist of the following:
(1) A review of the written policies and procedures adopted by
GMIMCo pursuant to Part II(h) for consistency with each of the
objective requirements of this proposed exemption (as described
herein);
(2) A test of a representative sample of the Plan's transactions
through investments made by the LLC, as described in Part I, in order
to make findings regarding whether GMIMCo is in compliance with both:
(i) The written policies and procedures adopted by GMIMCo pursuant to
Part II(i) of this proposed exemption; and (ii) the objective
requirements of this proposed exemption; and
(3) Issuance of a written report describing the steps performed by
the independent auditor during the course of its review and the
independent auditor's findings regarding the Plan's interest in the
LLC.
(f) For purposes of Part IV(e), the written policies and procedures
must describe the following objective requirements of Part II of the
proposed exemption and the steps adopted by GMIMCo to assure compliance
with each of these requirements:
(1) The requirements of Part III;
(2) The requirements of sections (a) and (b) of Part II regarding
the discretionary authority or control of GMIMCo with respect to the
Plan assets involved in each transaction, in negotiating the terms of
the transaction, and with regard to the decision made on behalf of the
Plan, as an investor in the LLC, to enter into the transaction;
(3) The requirements of sections (a) and (b) of Part II with
respect to any procedure for approval or veto of the transaction;
(4) That:
(A) The transaction is not entered into with any person who is
excluded from relief under sections (f) or (g) of Part II; and
(B) The transaction is not described in any of the class exemptions
listed in section (c) of Part II.
(g) ``Plan'' means an employee benefit plan established and
maintained by GM or an Affiliate.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of December 11, 1998.
Summary of Facts and Representations
1. General Motors Corporation (GM) and its Affiliates currently
maintain the following employee benefit plans (i.e., the Plans): The
General Motors Hourly-Rate Employees Pension Plan (the GM Hourly Plan);
(ii) the General Motors Retirement Program for Salaried Employees (the
GM Salaried Plan); (iii) the Saturn Individual Retirement Plan for
Represented Team Members; (iv) the Saturn Personal Choices Retirement
Plan for Non-Represented Team Members (together, the Saturn Plans); and
(v) the Employees' Retirement Plan for GMAC Mortgage Corporation (the
GMAC Plan). As of December 31, 1998, the Plans had total assets of
approximately $73.2 billion, of which approximately $4.39 million were
invested in private real estate assets.
2. For a portion of their assets, the Plans make investments
through an entity known as the First Plaza Group Trust (i.e., the
Trust), which is a group trust established pursuant to IRS Revenue
Ruling 81-100. The trustee of the Trust, which acts as a directed
trustee, is Chase Manhattan Bank (the Trustee). All beneficial
interests in the Trust are held by two other trusts that hold the
assets of the Plans. As of March 31, 1997, the Trust had total assets
of approximately $4.1 billion. The General Motors Investment Management
Company (i.e., GMIMCo) acts as an investment manager for the assets of
the Plans held in the Trust (as discussed further below in paragraphs 9
and 10).
3. On September 13, 1996, CREA Western Investors II, L.L.C. (i.e.,
CREA II) and the Trust formed Copley West Coast Industrial, L.L.C. (now
known as AEW Industrial, L.L.C.), a limited liability company (i.e.,
the LLC) for the purpose of jointly investing <SUP>25</SUP> in
industrial real properties, under the terms of a Limited Liability
Company Agreement (the LLC Agreement). The investment objective of the
LLC is to acquire develop, lease, manage and dispose of institutional-
grade real properties, including stabilized and opportunistic
acquisitions, build-to-suit opportunities, and developments in certain
West Coast markets. AEW acts as an investment manager for the assets
held by the LLC, including the disposition and sale of LLC properties,
subject to the review and approval of GMIMCo (as discussed further
below).
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\25\ The Department is expressing no opinion in this proposed
exemption as to whether the joint investments by the Trust and CREA
II to form the LLC, or the ongoing operation of the LLC during such
joint investment, violated any of the fiduciary responsibility
provisions under Part 4 of Title I of the Act.
---------------------------------------------------------------------------
4. The LLC was initially structured to qualify as a ``real estate
operating company'' (REOC) pursuant to the Department's regulations at
29 CFR 2510.3-101 (the Plan Asset Regulation).<SUP>26</SUP> Effective
December 11, 1998 (the Effective Date), the Trust acquired CREA II's
interest in the LLC. The acquisition of CREA II's interest was
negotiated by GMIMCo in reliance upon the Prohibited Transaction Class
Exemption (PTCE) 96-23, (61 FR 15975, April 10, 1996).<SUP>27</SUP> By
reason of the Trust's acquisition of CREA II's interest in the LLC, GM
represents that the assets of the LLC became ``plan assets'' (within
the meaning of the Plan Asset Regulation) as of the Effective Date, and
the LLC and is no longer a REOC. Thus, all transactions engaged in by
the LLC with any persons that are parties in interest with respect to
any of the Plans invested therein became subject to the prohibited
transaction restrictions of the Act. As a result, these transactions
and future party in interest transactions require relief under this
proposed exemption, pursuant to the terms and conditions described
herein, as of the Effective Date.
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\26\ The Department expresses no opinion herein as to whether
the LLC met the definition of a REOC under the Plan Asset Regulation
at any time.
\27\ PTCE 96-23 (a/k/a the INHAM Class Exemption) permits
various transactions involving employee benefit plans whose assets
are managed by an in-house asset manager, or ``INHAM'', provided
that the conditions of the exemption are met. An INHAM is a
registered investment adviser which is either (a) a direct or
indirect wholly-owned subsidiary of an employer or parent of an
employer, or (b) a membership nonprofit corporation a majority of
whose members are officers or directors of such an employer or
parent organization.
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5. CREA II is an affiliate of AEW Investment Group, Inc., a wholly-
owned subsidiary of AEW Capital Management, L.P. (AEW Capital). AEW
Capital is an indirect, wholly-owned subsidiary of New England
Investment Companies, L.P. (NEIC), and is the successor to the business
operations of Aldrich, Eastman & Waltch, L.P. and Copley Real Estate
[[Page 29917]]
Advisors. AEW Capital manages in excess of $9 billion in real estate
assets. In addition, NEIC is a publicly-traded holding company with
approximately $90 million in assets under management through its
subsidiaries and affiliates. Pursuant to a 1996 merger between
Metropolitan Life Insurance Company (Metropolitan) and the New England
Life Insurance Company, NEIC is now owned approximately 50% by
Metropolitan.
6. Pursuant to an agreement among AEW Capital, the Trust, and the
LLC (the Investment Agreement), AEW Capital is required, during an
exclusivity period specified therein, to utilize its reasonable best
efforts to identify, for the benefit of the LLC, investments which meet
the LLC's investment objectives. For each potential investment which is
presented to the LLC for consideration, AEW Capital prepares a
preliminary written proposal in accordance with the terms of the
Investment Agreement. GMIMCo, on behalf of the Trust, then evaluates
the potential investment for the LLC and determines whether the LLC
should pursue the investment. If the Trust determines that the
investment should be pursued for the benefit of the LLC, AEW Capital
initiates a due diligence investigation of the investment. Due
diligence and acquisition expenses can be incurred on behalf of the LLC
only with the written consent of the Trust. If, after completion of due
diligence, AEW Capital decides to present the potential investment to
the LLC for acquisition, it prepares a report which includes a budget
for all acquisition and development costs.
7. If GMIMCo, on behalf of the Trust, determines to proceed with
the investment, AEW Capital has the primary responsibility for
negotiating, finalizing and closing the investment, subject to the
approved terms and conditions for the investment, including any related
financings. However, AEW Capital does not have the authority to bind
the LLC to any material definitive terms with respect to any
investment, including price, without the prior review and written
consent of GMIMCo on behalf of the Trust.
8. The Trust generally is not involved in the day-to-day
management, development, or operation of LLC assets. Pursuant to the
Advisory Agreement between AEW Capital and the LLC, AEW Capital has
been retained by the LLC to provide certain services in connection with
the ongoing management of the LLC, and to advise the LLC with respect
to, and manage the disposition and sale of, LLC properties. GMIMCo,
acting on behalf of the Trust, exercises sole discretion with respect
to any final decisions regarding the disposition of LLC assets. Under
the Advisory Agreement, AEW Capital is further obligated to provide
certain services in connection with the development, operation,
management, and leasing of LLC properties. AEW Capital is not
responsible for directly providing management and development services
but, rather, is responsible for engaging other parties to perform such
services pursuant to development and property management agreements
approved by the LLC investors.
9. GMIMCo is a separately-incorporated, wholly-owned subsidiary of
GM and is a registered investment adviser under the Investment Advisers
Act of 1940, as amended. GMIMCo is the named fiduciary, within the
meaning of section 402(a)(2) of the Act, for purposes of investment of
``Plan assets'' for the GM Hourly Plan, the GM Salaried Plan, and the
Saturn Plans. The named fiduciary of these four Plans for all other
purposes is the Investment Funds Committee of the Board of Directors of
GM (the GM I.F. Committee). With respect to the other Plans, GMIMCo
currently operates as an investment manager with respect to the Plan
assets to be invested in the LLC through the Trust under delegated
authority of the named fiduciary of each Plan. The GMAC Mortgage
Pension Committee (which is a committee of executives of the plan
sponsor, not a board committee) is the named fiduciary of the GMAC
Plan.
10. GMIMCo is involved in all aspects of the management of the
assets of the Plans. In this regard, GMIMCo is organized into several
distinct functions, as follows: North American Equities (U.S. and
Canada); North American Fixed Income (U.S. and Canada); International
Investments; Real Estate and Alternative Investments; Investment
Strategy and Asset Allocation; Motors Insurance Corporation; Investment
Research; Business Risk Management; Information Systems; Financial
Accounting and Controls; Human Resources; and Legal. As of December 31,
1996, the Real Estate and Alternative Investments group (REAI) has
approved aggregate current investments with a total value of
approximately $4.1 billion and directly manages investments with a
total value of approximately $1.3 billion, all of which are
attributable to the Plans. REAI also exercises varying degrees of
supervision over assets being managed by third party investment
managers or invested in partnerships or other pooled funds. In
addition, REAI selects, monitors, reviews and evaluates third party
investment managers.
11. On and after the Effective Date, the Advisory Agreement
provides for the retention by the Trust, and the exercise by GMIMCo on
behalf of the Trust, of certain powers from which AEW is completely
excluded. These retained powers (the Retained Powers), include the
power:
(a) To determine whether the LLC or any subsidiary entity shall
pursue any investment, acquisition or development;
(b) To cause any sale, transfer, assignment, conveyance, exchange
or other disposition of all or any substantial part of any assets of
the LLC or of any subsidiary entity;
(c) To cause the LLC or any subsidiary entity to borrow money,
refinance, recast, extend, compromise or otherwise deal with any loans
(including securing such loans) of the LLC or any subsidiary entity;
(d) To approve the annual business plans for the LLC; and
(e) To exercise all the powers that a member may exercise under the
terms of the LLC operating agreement.
12. Although GMIMCo qualifies as an in-house asset manager (i.e.,
an INHAM) for the Plans within the meaning of PTCE 96-23 (the INHAM
Class Exemption), that exemption might not apply to transactions
engaged in by the LLC. The applicant states that the discussion of the
comments relating to the INHAM Class Exemption contained in section A1
of the preamble to PTCE 96-23,<SUP>28</SUP> suggests that the exemption
does not apply to a transaction where an INHAM retains a QPAM (i.e., a
qualified professional asset manager)<SUP>29</SUP> to locate and
negotiate the terms of a possible transaction. These comments state
that the INHAM Class Exemption does not apply in such instances even
though the INHAM performs its own due diligence review of each
investment opportunity presented, and evaluates the appropriateness of
the investment for the plan's particular investment needs. Thus, GMIMCo
represents that there is an immediate need for this proposed exemption
to permit transactions by the LLC.
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\28\ See PTCE 96-23, 61 FR at 15976.
\29\ In this regard, see PTCE 84-14, 49 FR 9497 (March 13,
1984). PTCE 84-14, a/k/a the QPAM Class Exemption, permits, under
certain conditions, parties in interest to engage in various
transactions with plans whose assets are managed by persons, defined
for purposes of the exemption as QPAMs, which are independent of the
parties in interest (with certain limited exceptions) and which meet
specified financial standards.
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13. GM represents that GMIMCo has not committed at this time a
specified amount of Plan assets to be invested in
[[Page 29918]]
the LLC. Rather, GM states that each approved investment by the Plans,
through the Trust, constitutes a separate ``commitment'' of funds to
the LLC and the fees to AEW Capital will be paid on the basis of each
commitment, rather than on the total capital actually invested at any
particular time. The applicant states further that all fees payable to
AEW Capital will be reasonable and in compliance with section 408(b)(2)
of the Act and the regulations thereunder.<SUP>30</SUP>
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\30\ The Department is not providing any opinion herein as to
whether the fee arrangements involving AEW Capital and the LLC meet
the requirements for relief under section 408(b)(2) of the Act.
The Department notes that section 408(b)(2) of the Act does not
exempt the payment of fees by a plan fiduciary which would
constitute a violation of section 406(b) of the Act, even if such
fees would otherwise constitute reasonable compensation for the
services performed by the fiduciary (see 29 CFR 2550.408b-2(e)).
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14. Investment opportunities in real property assets presented by
AEW Capital to the Trust for consideration as possible acquisitions for
the LLC are submitted to REAI (the responsible group within GMIMCo) for
review and approval. REAI will perform a preliminary review of the
investment opportunity for suitability, which includes verification
that the proposed investment satisfies the broad investment guidelines
relating to the Plans' investments in the Trust and specific investment
objectives of the REAI portfolio.
15. Once AEW Capital has completed its initial due diligence review
for the suitability of the investment and prepared its report with
respect to a proposed acquisition of a property by the LLC, the REAI
portfolio manager with responsibility for the LLC's investment
portfolio (the Manager), assisted by an investment analyst, will
conduct a quantitative and qualitative analysis of the investment
opportunity. This analysis will form the basis for a recommendation of
the investment to upper level officials within GMIMCo. The Manager and
the Managing Director of REAI routinely discuss proposed investments,
and any decision to recommend approval or to reject an investment is
made jointly. Any rejection of an investment opportunity is recorded,
and the reasons for such rejection are kept in a file containing the
written materials relating to the investment. If the Manager and the
Managing Director of REAI decide to recommend an investment to upper
level GMIMCo officials, a written report is prepared summarizing the
investment and briefly setting forth the reasons for such
recommendation and the financial expectations for the investment.
16. After a proposed investment has been reviewed, analyzed and
favorably approved by the Manager and the Managing Director of REAI,
the additional levels of approval required in order for the investment
to be finally authorized depend directly upon the amount of the
investment. If the investment is not in excess of a threshold level,
currently $30 million, it need only be approved by the REAI Investment
Approval Committee. However, if the investment is greater than that
amount, it must be approved by GMIMCo's president upon the
recommendation of the REAI Investment Approval Committee. The REAI
Investment Approval Committee consists of the Managing Director of REAI
(who is Committee chairman) and the four REAI portfolio managers.
Approval by the REAI Investment Approval Committee requires the
affirmative vote of a majority of a quorum of the Committee members,
including the affirmative vote of the Committee chairman. Final
approval is based on the written report described above together with
oral discussions regarding the proposed investment. Approval may take a
variety of forms from a simple approval to an approval conditioned upon
the resolution of certain issues. In all cases, a written record is
maintained with respect to the action taken at each level of approval.
Notwithstanding the procedure for the approval of any investment for
the LLC by GMIMCo, GM or its designee may retain the right to veto or
approve such transaction if the amount involved exceeds $5 million.
17. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (a) The exemption, if granted, will enable the
Plans, through investments made in the LLC by the Trust, to transact
business with a greater number of potential parties in interest with
respect to such Plans; (b) The Plans will save significant costs
relating to due diligence reviews and procedures that otherwise would
be necessary for the LLC to avoid party-in-interest transactions; and
(c) GMIMCo will be afforded maximum flexibility in overseeing the
activities of the LLC, and will exercise sole authority on behalf of
the LLC with respect to the Retained Powers to ensure that the Plans'
interests are protected.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Gaetano Lombardo Individual Retirement Account (the IRA), Located
in St. Louis, Missouri
[Application No. D-10749]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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). If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to
the proposed sale by the IRA of 26,306 shares of stock (the Stock) of
Courtesy Manufacturing Company (Courtesy) to Courtesy, a disqualified
person with respect to the IRA, provided that the following conditions
are satisfied: (1) The sale of Stock by the IRA is a one-time
transaction for cash; (2) no commissions or other expenses are paid by
the IRA in connection with the sale; and (3) the IRA receives the
greater of: (a) the fair market value of the Stock as determined by a
qualified independent appraiser as of October 31, 1998, or (b) the fair
market value of the Stock as of the time of the sale.<SUP>31</SUP>
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\31\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not within the
jurisdiction of Title I of the Act. However, there is jurisdiction
under Title II of the Act pursuant to section 4975 of the Code.
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Summary of Facts and Representations
1. The IRA and Dr. Gaetano (Guy) Lombardo (Lombardo) currently own
100% of the outstanding common stock of Courtesy. Courtesy is an
Illinois corporation, located at 1300 Pratt Boulevard in Elk Grove,
Illinois, of which Lombardo is the sole director. The IRA had total
assets of $838,039 as of January 31, 1999. The IRA's custodian is
Stifel, Nicolaus & Company, Inc. of St. Louis, Missouri.
With respect to the current ownership of the outstanding shares of
Courtesy, the IRA owns 26,306 Class A shares (i.e., the Stock) and
Lombardo owns 2,194 Class A shares. Prior to December 29, 1998, the
only other shareholders of Courtesy were Citicorp Venture Capital, Ltd.
(Citicorp), which owned 12,450 shares of Class B common stock, and
Goldman Sachs Credit Partners, LP (Goldman), which owned 7,550 shares
of Class B common stock. The Class B shares owned by Citicorp and
Goldman were redeemed by Courtesy on December 29, 1998. Citicorp
received $900,000 for its shares, and Goldman received $200,000 for its
shares.
[[Page 29919]]
2. Lombardo and his then wife, Nancy (Nancy) were residents of
Bloomfield Hills, Michigan in the 1980's. Lombardo was the sole
shareholder of two Michigan consulting corporations, the Nelmar
Corporation (Nelmar) and the Edens Corporation (Edens). Lombardo and
Nancy were the only employees of Nelmar and Edens. Nelmar and Edens
established the Nelmar-Edens Employees' Pension Plan (the Plan), a
defined benefit pension plan for the employees of the two corporations
in 1985. Nelmar and Edens merged in 1986, with Nelmar the surviving
corporation. In February, 1988, the Plan acquired 30,000 shares of
Class A common stock of Courtesy for $750,000 (i.e., $25 per share).
The applicant represents that Courtesy was not a disqualified person
with respect to the Plan.<SUP>32</SUP>
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\32\ The Department is taking no position in this proposed
exemption as to whether the Plan's acquisition and holding of
Courtesy stock resulted in any violations of Part 4 of Title I of
the Act.
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3. In December of 1988, the Plan transferred 1,500 of its Class A
shares to Bruce Fisher (Fisher), an officer and employee of Courtesy.
The price Fisher paid for the shares was the same price per share
(i.e., $25 per share) that the Plan paid for the shares in February,
1988. Fisher subsequently tendered his shares in November, 1996, to
Courtesy, for an agreed upon price of $44,723 ($29.82 per share). These
shares have been redeemed by Courtesy and are currently held as
treasury shares.
4. The Plan became overfunded and was terminated in 1989. Upon
termination of the Plan, 2,194 shares of Courtesy reverted to Nelmar
because of the overfunding. When distributions to the participants were
made pursuant to the termination of the Plan, 7,022 shares of Courtesy
were transferred to Nancy, which were rolled over into an individual
retirement account established by her (Nancy's IRA), and 19,284 shares
of Courtesy were transferred to Lombardo, where were rolled over into
the IRA.
5. Nelmar was liquidated in 1991, following Lombardo's move from
Bloomfield Hills, Michigan to Concord, Massachusetts in 1989. The 2,194
shares of Courtesy which had been owned by Nelmar were transferred by
the corporation upon liquidation to Lombardo. This transfer was
independent of the transfer of Courtesy Stock to either the IRA or
Nancy's IRA. Lombardo and Nancy subsequently divorced, and the shares
of Courtesy in Nancy's IRA were transferred to the IRA pursuant to a
Qualified Domestic Relations Order.
6. Lombardo wants to make an election for Courtesy to be taxed as a
``Subchapter S'' Corporation under section 1362(a) of the Code.
However, the IRA cannot be a shareholder of an ``S'' corporation.
Accordingly, the applicant has requested an exemption to permit the IRA
to sell all of the Stock (26,306 shares) to Courtesy for the fair
market value of the Stock, as determined by an independent, qualified
appraiser. This transaction would also permit the IRA to diversify its
investment portfolio by reinvesting the proceeds of the sale of the
Stock in a wider array of securities. The Stock currently represents
approximately 94% of the fair market value of the assets in the
IRA.<SUP>33</SUP>
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\33\ The Department notes that the Internal Revenue Service has
taken the position that a lack of diversification of investments may
raise questions in regard to the exclusive benefit rule under
section 401(a) of the Code. See, e.g., Rev. Rul. 73-532, 1973-2 C.B.
128. The Department further notes that section 408(a) of the Code,
which describes the tax qualification provisions for IRAs, mandates
that the trust be created for the exclusive benefit of an individual
or his beneficiaries. However, the Department is expressing no
opinion in this proposed exemption regarding whether violations of
the Code have taken place with respect to the acquisition and
holding of the Stock by the IRA.
In this regard, the acquisition and holding of the Stock by the
IRA raises questions under section 4975(c)(1)(D) and (E) depending
on the degree of Lombardo's interest in the transaction. That
section prohibits the use by a disqualified person of the income or
assets of an IRA or dealing by a fiduciary (i.e., Lombardo) with the
income or assets of an IRA for his own interest or for his own
account. An IRA participant who is the sole director and a
shareholder of a company may have interests in the acquisition and
holding of stock issued by such company which may affect his best
judgment as a fiduciary of his IRA. In such circumstances, the
holding of the stock may violate section 4975(c)(1)(D) and (E) of
the Code. See Advisory Opinion 90-20A (June 15, 1990). Accordingly,
to the extent there were violations of section 4975(c)(1)(D) and (E)
of the Code with respect to the acquisition and holding of the Stock
by the IRA, the Department is extending no relief for those
transactions herein.
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7. The applicant has obtained an appraisal of the Stock as of
October 31, 1998 from Michael A. Dorman (Mr. Dorman) of the firm of
Blackman Kallick Bartenstein, LLP (BKB), independent certified public
accountants and business consultants located in Chicago, Illinois. Mr.
Dorman states that he is a qualified appraiser for the Stock with over
9 years of experience in the valuation of closely-held corporations and
other business entities. Mr. Dorman also states that he is independent
of Lombardo and Courtesy. While BKB does provide accounting services to
Lombardo and Courtesy, BKB derives less than 1% of its annual revenue
from the provision of such services. Mr. Dorman represents that as
October 31, 1998, the Stock had a fair market value per share of $30.
Thus, the total value for all the shares of Stock held by the IRA would
be $789,180. Mr. Dorman will update his appraisal as of the date of the
proposed sale.
8. The applicant has requested the exemption proposed herein to
permit Courtesy to purchase all of the Stock held in the IRA. Courtesy
will pay the greater of (i) the fair market value of the Stock as of
October 31, 1998, as established by Mr. Dorman's appraisal, or (ii) the
fair market value of the Stock, based on an updated independent
appraisal as of the date of the sale. The IRA will pay no fees,
commissions or other expenses in connection with the transaction.
9. In summary, the applicant represent that the proposed
transaction satisfies the criteria contained in section 4975(c)(2) of
the Code because: (a) The proposed sale will be a one-time transaction
for cash; (b) no commissions or other expenses will be paid by the IRA
in connection with the sale; (c) the IRA will be receiving not less
than the fair market value of the Stock, as determined by a qualified,
independent appraiser; and (d) Guy Lombardo is the only participant in
his IRA, and he has determined that the proposed transaction is
appropriate for and in the best interest of his IRA and desires that
the transaction be consummated with respect to his IRA.
NOTICE TO INTERESTED PERSONS: Because Lombardo is the only participant
in the IRA, it has been determined that there is no need to distribute
the notice of proposed exemption to interested persons. Comments and
requests for a hearing are due 30 days after publication of this notice
in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (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 of 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
[[Page 29920]]
beneficiaries of the plan and in a prudent fashion in accordance with
section 404(a)(1)(b) of the act; nor does it affect the requirement of
section 401(a) of the Code that the plan must operate for the exclusive
benefit of the employees of the employer maintaining the plan and their
beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 27th day of May, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 99-13887 Filed 6-2-99; 8:45 am]
BILLING CODE 4510-29-P
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