Notice of Proposed Exemptions. [Notices] [03/21/2001]
Notice of Proposed Exemptions. [03/21/2001]
Volume 66, Number 55, Page 15897-15907
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10942, et al.]
Proposed Exemptions; Bank of America, et al.
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
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and 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, N.W., Washington, D.C.
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
the Pension and Welfare Benefits Administration, U.S. Department of
Labor, Room N-1513, 200 Constitution Avenue, N.W., Washington, D.C.
20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Bank of America (BofA), Located in Bethesda, Maryland
[Application No. D-10942]
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 32,836, 32,847, August 10, 1990). If the
exemption is granted, the restrictions of section 406(a) of the Act and
the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply to (1) the proposed granting to BofA by the Westbrook Real
Estate Fund IV, L.P. (LP), a Delaware Limited Partnership, of a first,
exclusive, and prior security interest in the capital commitments
(Capital Commitments), reserve amounts (Reserve Amounts) and capital
contributions (Capital Contributions), whether now owned or after-
acquired, of certain employee benefit plans (Plans) investing in the
LP; (2) the proposed collateral assignment and pledge by the LP to BofA
of its security interest in each Plan's limited partnership interest,
whether now owned or after-acquired; (3) the proposed granting by the
LP of a first, exclusive, and prior security interest in a borrower
collateral account to which all Capital Contributions will be deposited
when paid (Borrower Collateral Account); (4) the proposed granting to
BofA by Westbrook Real Estate Partners Management IV, L.L.C., a
Delaware limited liability company and the general partner of the LP
(the General Partner), of its right to make calls for cash
contributions (Drawdowns) under the Amended and Restated Agreement of
Limited Partnership of Westbrook Real Estate Fund IV, L.P., dated as of
September 15, 2000 (Agreement), where BofA is the representative of
certain lenders (the Lenders) that will fund a so-called ``credit
facility'' (Credit Facility) providing credit to the LP, and the
Lenders are parties in interest with respect to the Plans; and (5) the
execution of a partner agreement and estoppel (Estoppel) under which
the Plans agree to honor the Drawdowns; provided that (i) the proposed
grants, assignments, and Estoppels are on terms no less favorable to
the Plans than those which the Plans could obtain in arm's-length
transactions with unrelated parties; (ii) the decisions on behalf of
each Plan to invest in the LP and to execute such Estoppels in favor of
BofA, for the benefit of each Lender, are made by a fiduciary which is
not included among, and is independent of and unaffiliated with, the
Lenders and BofA; (iii) with respect to Plans that may invest in the LP
in the future, such Plans will have assets of not less than $100
million \1\ and not more than 5% of the
[[Page 15898]]
assets of such Plan will be invested in the LP; and (iv) the General
Partner is unrelated to any Plan and any Lender.
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\1\ In the case of multiple plans maintained by a single
employer or a single group of employers treated as a single employer
under Sections 414(b), 414(c), 414(m), and 414(o) of the Code, the
assets of which are invested on a commingled basis (e.g., through a
master trust), this $100 million threshold will be applied to the
aggregate assets of all such plans.
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Summary of Facts and Representations
1. The LP was formed by the General Partner (as sponsor and sole
general partner) with the intent of seeking capital commitments from a
limited number of prospective investors who would become partners
(Limited Partner) of the LP. There are thirteen current and prospective
Limited Partners having, in the aggregate, irrevocable, unconditional
capital commitments of approximately $600 million.
2. The LP will target investments in a broad range of real-estate
related assets, portfolios, and companies where the General Partner
believes superior risk-adjusted returns are attainable. The LP
generally will seek compounded annual returns on its investments in
excess of 18%, a portion of which is expected to be comprised of
current income.
3. Proceeds from investments may be reinvested to the extent they
do not exceed the aggregate Capital Contributions with respect to such
investment. To the extent they are not reinvested, net proceeds will be
distributed to the Partners on at least a quarterly basis. Under the
terms of the Agreement, the LP is expected to dissolve in the year
2008.
4. The Agreement requires each Limited Partner to execute a
subscription agreement that obligates the Limited Partner to make
contributions of capital up to a specified maximum. The Agreement
requires Limited Partners to make Capital Contributions to fulfill this
obligation upon receipt of notice from the General Partner. Under the
Agreement, the General Partner may make Drawdowns up to the total
amount of a Limited Partner's Capital Commitment upon 10 business days'
notice. The Limited Partners' Capital Commitments are structured as
unconditional, binding commitments to contribute equity when Drawdowns
are made by the General Partner. In the event of a default by a Limited
Partner, the LP may exercise any of a number of specific remedies.
The Limited Partners constituting over 90% of the equity interest
and their investments in the LP are:
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Capital
Name of partner commitment
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Allstate Insurance Company.............................. $15,000,000
The BellSouth Corporation Health Care Trust--Retirees... 5,000,000
The BellSouth Corporation Representable Employees' $10,000,000
Health Care Trust--Retirees............................
The BellSouth Corporation RFA VEBA Trust................ $10,000,000
The BellSouth Corporation RFA VEBA Trust for Non- $3,000,000
Representable Employees................................
BellSouth Master Pension Trust.......................... $92,000,000
IBM Personal Pension Plan Trust......................... $50,000,000
NC/TREIT................................................ $100,000,000
New York State Common Retirement Fund................... $100,000,000
Teachers' Retirement System of Louisiana................ $100,000,000
State of Wisconsin Investment Board..................... $100,000,000
Bankers Trust Company, as Trustee for the Walt Disney $10,000,000
Company Retirement Plan Master Trust...................
Westbrook Real Estate Partners Management IV, L.L.C..... $9,060,914
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5. The applicant states that the LP will incur indebtedness in
connection with many of its investments. In addition to mortgage
indebtedness, the LP will incur short-term indebtedness for the
acquisition of particular investments. This indebtedness will take the
form of the Credit Facility secured by, among other things, a pledge
and assignment of each Limited Partner's Capital Commitment. This type
of facility will allow the LP to consummate investments quickly without
having to finalize the debt/equity structure for an investment or
having to arrange for interim or permanent financing prior to making an
investment, and will have additional advantages to the Limited Partners
and the LP. Under the Agreement, the General Partner may encumber each
Limited Partner's Capital Commitments, Reserve Amounts, and Capital
Contributions, including the right to make Drawdowns, to one or more
financial institutions as security for the Credit Facility. Each of the
Limited Partners has appointed the General Partner as its attorney-in-
fact to execute all documents and instruments of transfer necessary to
implement the provisions of the Agreement. In connection with this
Credit Facility, each of the Limited Partners is required to execute
documents customarily required in secured financings, including an
agreement to honor Drawdowns unconditionally.
6. BofA will become agent for a group of Lenders providing a $450
million revolving Credit Facility to the LP. BofA will also be a
participating Lender. Some of the Lenders may be parties in interest
with respect to some of the Plans that invest in the LP by virtue of
such Lenders' (or their affiliates') provisions of fiduciary services
to such Plans for assets other than the Plans' interests in the LP.
BofA is requesting an exemption to permit the Plans to enter into
security agreements with BofA, as the representative of the Lenders,
whereby such Plans' Capital Commitments, Reserve Amounts, and Capital
Contributions to the LP, as well as the Plans' limited partnership
interests, will be used as collateral for loans made by the Credit
Facility to the LP, when such loans are funded by Lenders who are
parties in interest to one or more of the Plans.
The Credit Facility will be used to provide immediate funds for
real estate acquisitions made by the LP, as well as for the payment of
LP expenses. Repayments will be secured generally by the LP from the
Limited Partners' Capital Contributions, Reserve Amounts, Drawdowns on
the Limited Partners' Capital Commitments, and the Limited Partners'
limited partnership interests. The stated maturity date of the Credit
Facility is August 15, 2003. The LP can use its credit under the Credit
Facility by direct or indirect borrowings or by requesting that letters
of credit be issued. All Lenders will participate on a pro rata basis
with respect to all cash loans and letters of credit up to the maximum
of the Lenders' respective commitments. All such loans and letters of
credit will be issued to or for the benefit of the LP or an entity in
which the LP owns a direct or indirect interest (a Qualified Borrower),
and not to any individual Limited Partner. All payments of principal
and interest made by the LP or a Qualified Borrower will be allocated
pro rata among all Lenders.
7. The Credit Facility will be a recourse obligation of the
Partnership. To secure the Credit Facility, the LP will grant to BofA,
for the benefit of each Lender, a first, exclusive, and prior: (1)
security interest and lien in and to the Capital Commitments, Reserve
Amounts, and Capital Contributions of the Limited Partners; (2)
collateral assignment and pledge of the LP's security interest in each
Limited Partner's limited partnership interest; and (3) security
interest and lien in the Borrower Collateral Account. Additionally, to
secure the Credit Facility, the General Partner shall: (1) Pledge,
through a partner agreement and estoppel, its partnership interest to
BofA
[[Page 15899]]
for the benefit of each Lender; and (2) grant to BofA, for the benefit
of each Lender, its right to make Drawdowns of the Capital Commitments
and Reserve Amounts, and all other rights, titles, powers and
privileges related to, appurtenant to or arising out of General
Partner's right under the Agreement to require or demand that Limited
Partners make Capital Contributions and fund Drawdowns.
8. It is contemplated each Limited Partner will execute an
agreement pursuant to which it acknowledges that the LP and the General
Partner have pledged and assigned to BofA, for the benefit of each
Lender, all of their rights under the Agreement relating to Capital
Commitments, Reserve Amounts, Drawdown notices, and Capital
Contributions. Such agreement will include an acknowledgment and
covenant by the Limited Partner that, if an event of default exists,
such Limited Partner will, consistent with its obligations under the
Partnership Agreement, honor any Drawdown made by BofA in accordance
with the Agreement. Such an agreement and covenant by a Limited Partner
effectively limits the assertion of any defense which the Partner might
have against the LP or the General Partner with respect to the funding
of any Drawdown made by BofA.
9. The applicant represents that at the present time the following
Plans are Partners in the LP:
(a) The BellSouth Master Pension Trust (BellSouth Pension Trust)
holds the assets of two defined benefit plans (BellSouth Pension Plans)
which own interests in the LP. The BellSouth Pension Trust has made a
Capital Commitment of approximately $92 million to the LP. The
applicant states that some of the Lenders may be parties in interest
with respect to some of the BellSouth Pension Plans in the BellSouth
Pension Trust by virtue of such Lenders' (or their affiliates')
provisions of fiduciary services to such BellSouth Pension Plans with
respect to BellSouth Pension Trust assets other than their limited
partnership interests in the LP. Thus, BofA states that there is an
immediate need for the BellSouth Pension Trust to enter into the
Estoppel under the terms and conditions described herein. The total
number of participants in the two BellSouth Pension Plans is
approximately 137,703, and the approximate fair market value of the
total assets of the BellSouth Pension Plans held in the BellSouth
Pension Trust as of December 31, 1998 is $17.9 billion.
The applicant represents that the fiduciary generally responsible
for investment decisions in real estate matters on behalf of both
BellSouth Pension Plans is the BellSouth Corporation Treasurer. The
fiduciary responsible for reviewing and authorizing the investment in
the LP is the BellSouth Corporation Treasurer.
(b) The BellSouth Corporation Representable Employees Health Care
Trust--Retirees (BellSouth Health Care Trust) holds the assets of two
welfare benefit plans (BellSouth Health Care Plans) which own interests
in the LP. The BellSouth Health Care Trust has made a Capital
Commitment of approximately $10 million to the LP. The applicant states
that some of the Lenders may be parties in interest with respect to
some of the BellSouth Health Care Plans in the BellSouth Health Care
Trust by virtue of such Lenders' (or their affiliates') provisions of
fiduciary services to such BellSouth Health Care Plans with respect to
BellSouth Health Care Trust assets other than their limited partnership
interests in the LP. Thus, BofA states that there is an immediate need
for the BellSouth Health Care Trust to enter into the Estoppel under
the terms and conditions described herein. The total number of
participants in the two BellSouth Health Care Plans is approximately
130,795. The approximate fair market value of the total assets of the
BellSouth Health Care Plans held in the BellSouth Health Care Trust as
of December 31, 1998 was $1.2 billion. The approximate fair market
value of the assets in the BellSouth Health Care Plans was $1.8
billion.
The applicant represents that the fiduciary generally responsible
for investment decisions in real estate matters on behalf of both
BellSouth Health Care Plans is the BellSouth Corporation Treasurer. The
fiduciary responsible for reviewing and authorizing the investment in
the LP is the BellSouth Corporation Treasurer.
(c) The IBM Personal Pension Plan Trust (the IBM Trust) holds the
assets of one defined benefit plan (the IBM Plan) which owns interests
in the LP. The IBM Trust has made a Capital Commitment of $50 million
to the LP. The applicant states that some of the Lenders may be parties
in interest with respect to the IBM Plan by virtue of such Lenders' (or
their affiliates') provisions of fiduciary services to the IBM Plan
with respect to the IBM Trust assets other than its limited partnership
interests in the LP. Thus, BofA states that there is an immediate need
for the IBM Trust to enter into the Estoppel under the terms and
conditions described herein. The total number of participants in the
IBM Plan is approximately 333,295, and the approximate fair market
value of the total assets of the IBM Plan as of December 31, 1999 was
$45.6 billion.
The applicant represents that the fiduciary generally responsible
for investment decisions in real estate matters on behalf of the IBM
Plan is the Retirement Plans Committee, IBM Corporation. The fiduciary
responsible for reviewing and authorizing the investment in the LP is
the Retirement Plan Committee, IBM Corporation.
(d) The Walt Disney Company Retirement Plan Master Trust (Walt
Disney Master Trust) holds the assets of five defined benefit plans
(Walt Disney Pension Plans) which own interests in the LP. The Walt
Disney Master Trust has made a Capital Commitment of $10 million to the
LP. The applicant states that some of the Lenders may be parties in
interest with respect to some of the Walt Disney Pension Plans in the
Walt Disney Master Trust by virtue of such Lenders' (or their
affiliates') provisions of fiduciary services to such Walt Disney
Pension Plans with respect to Walt Disney Master Trust assets other
than their limited partnership interests in the LP. Thus, BofA states
that there is an immediate need for the Walt Disney Master Trust to
enter into the Estoppel under the terms and conditions described
herein. The total number of participants in the five Walt Disney
Pension Plans is approximately 67,188 and the approximate fair market
value of the total assets of the Walt Disney Pension Plans held in the
Walt Disney Master Trust as of December 31, 1998 was $1.37 billion.
The applicant represents that the fiduciary generally responsible
for investment decisions in real estate matters on behalf of the Walt
Disney Pension Plans is the Retirement Plans Committee, Walt Disney
Company. The fiduciary responsible for reviewing and authorizing the
investment in the LP is the Retirement Plans Committee, Walt Disney
Company.
10. The applicant represents that the Plans in the trusts (the
Trusts) listed in Rep. 9 are currently the only employee benefit plans
subject to the Act that are Limited Partners of the LP and will be
included in this exemption. However, the applicant states that it is
possible that one or more other Plans will become Limited Partners of
the LP in the future. Thus, the applicant requests relief for any such
Plan under this proposed exemption, provided the Plan meets the
standards and conditions set forth herein. In this regard, such Plan
must be represented by an independent fiduciary and the General Partner
must
[[Page 15900]]
receive from the Plan one of the following:
(1) a representation letter from the applicable fiduciary with
respect to such Plan substantially identical to the representation
letter submitted by the fiduciaries of the other Plans, in which case
this proposed exemption, if granted, will apply to the investments made
by such Plan if the conditions required herein are met; or
(2) evidence that such Plan is eligible for a class exemption or
has obtained an individual exemption from the Department covering the
potential prohibited transactions which are the subject of this
proposed exemption.
11. BofA represents that the LP will obtain an opinion of counsel
that the LP constitutes an ``operating company'' under the Department's
plan asset regulations (see 29 C.F.R. 2510.3--101(c)).\2\
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\2\ The Department notes that the term ``operating company'' as
used in the Department's plan asset regulation cited above includes
an entity that is considered a ``real estate operating company'' as
described therein (see 29 CFR 2510.3-101(e)). However, the
Department expresses no opinion in this proposed exemption regarding
whether the LP would be considered either an operating company or a
real estate operating company under such regulations. In this
regard, the Department notes that it is providing no relief for
either internal transactions involving the operation of the LP or
for transactions involving third parties other than the specific
relief proposed herein. In addition, the Department encourages
potential Plan investors and their independent fiduciaries to
carefully examine all aspects of the LP's proposed real estate
investment program in order to determine whether the requirements of
the Department's regulations will be met.
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12. BofA represents that the security and Estoppel constitutes a
form of credit security which is customary among financing arrangements
for real estate limited partnerships or limited liability companies,
wherein the financing institutions do not obtain security interests in
the real property assets of the partnership or limited liability
companies. BofA also represents that the obligatory execution of the
Estoppel by the Limited Partners for the benefit of the Lenders was
fully disclosed in the LP's Private Placement Memorandum as a requisite
condition of investment in the LP during the private placement of the
limited partnership interests. BofA represents that the only direct
relationship between any of the Limited Partners and any of the Lenders
is the execution of the Estoppel. All other aspects of the transaction,
including the negotiation of all terms of the Credit Facility, are
exclusively between the Lenders and the LP. BofA represents that the
proposed execution of the Estoppel will not affect the abilities of the
Trusts to withdraw from investment and participation in the LP. The
only Plan assets to be affected by the proposed transactions are any
funds which must be contributed to the LP in accordance with
requirements under the Agreement to make Drawdowns to honor a Limited
Partner's Capital Commitments.
13. BofA represents that neither it nor any Lender acts or has
acted in any fiduciary capacity with respect to the Plans' investment
in the LP and that BofA is independent of and unrelated to the
fiduciaries (the Trust Fiduciaries) responsible for authorizing and
overseeing the Trusts' investments in the LP. The Trust Fiduciaries
represent independently that their authorization of the Trusts'
investments in the LP was free of any influence, authority or control
by the Lenders. The Trust Fiduciaries represent that the Trusts'
investments in and Capital Commitments to the LP were made with the
knowledge that each Limited Partner would be required subsequently to
grant a security interest in Drawdowns and Capital Commitments to the
Lenders and to honor unconditionally Drawdowns made on behalf of the
Lenders without recourse to any defenses against the General Partner.
The Trust Fiduciaries individually represent that they are independent
of and unrelated to BofA and the Lenders and that the investment by the
Trusts for which the Trust Fiduciaries are responsible continues to
constitute a favorable investment for the Plans participating in that
Trust and that the execution of the Estoppel is in the best interests
and protective of the participants and beneficiaries of such Plans. In
the event another Plan proposes to become a Limited Partner, the
applicant represents that it will require similar representations to be
made by such Plan's independent fiduciary. Any Plan proposing to become
a Limited Partner in the future and needing to avail itself of the
exemption proposed herein will have assets of not less than $100
million,\3\ and not more than 5% of the assets of such Plan will be
invested in the LP.
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\3\ See supra note 1.
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14. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) the Plans' investments in the LP were authorized
and are overseen by the Trust Fiduciaries, which are independent of the
Lenders, and other Plan investments in the LP from other employee
benefit plans subject to the Act will be authorized and monitored by
independent Plan fiduciaries; (2) none of the Lenders have any
influence, authority or control with respect to the Trusts' investment
in the LP or the Trusts' execution of the Estoppel; (3) the Trust
Fiduciaries invested in the LP on behalf of the Plans with the
knowledge that the Estoppel is required of all Limited Partners
investing in the LP, and all other Plan fiduciaries that invest their
Plan's assets in the LP will be treated the same as other Limited
Partners are currently treated with regard to the Estoppel; (4) any
Plan which may invest in the LP in the future, which needs to avail
itself of the exemption proposed herein, will have assets of not less
than $100 million,\4\ and not more than 5% of the assets of any such
Plan will be invested in the LP, and (5) the General Partner is
unrelated to any Plan and any Lender.
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\4\ Id.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Independent Fiduciary Services, Inc. (IFS)
Located in Washington, DC
[Exemption Application Nos: D-10960 and D-10971]
Proposed Exemption
The Department of Labor 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 29 C.F.R. Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\5\
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\5\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer to the corresponding provisions of the Code.
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I. General Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and the sanctions resulting from the
application of section 4975 of the Code by reason of section
4975(c)(1)(A) through (D), shall not apply, effective from November 3,
2000, until November 3, 2005, to a transaction between a party in
interest with respect to the Plumbers and Pipe Fitters National Pension
Fund (the Fund) and an account (the Diplomat Account) that holds
certain assets of the Fund managed by IFS while serving as independent
named fiduciary (the Named Fiduciary) in connection with Prohibited
Transaction Exemption 99-46 (PTE 99-46) \6\; provided that the
following conditions are satisfied:
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\6\ 64 FR 61944, November 15, 1999.
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(a) IFS, as Named Fiduciary of the Diplomat Account, is an
investment
[[Page 15901]]
adviser registered under the Investment Advisers Act of 1940, as
amended, (the Advisers Act) that has, as of the last day of its most
recent fiscal year, shareholders' equity or partners' equity, as
defined in Section III(h), below, in excess of $750,000;
(b) At the time of the transaction, as defined in Section III(i),
below, the party in interest or its affiliate, as defined in Section
III(a), below, does not have, and during the immediately preceding one
(1) year has not exercised, the authority to--
(1) appoint or terminate the Named Fiduciary as a manager of the
Diplomat Account, or
(2) negotiate the terms of the management agreement with the Named
Fiduciary (including renewals or modifications thereof) on behalf of
the Fund;
(c) The transaction is not described in--
(1) Prohibited Transaction Class Exemption 81-6 (PTCE 81-6) \7\
(relating to securities lending arrangements);
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\7\ 46 FR 7527, January 23, 1981.
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(2) Prohibited Transaction Class Exemption 83-1 (PTCE 83-1) \8\
(relating to acquisitions by plans of interests in mortgage pools), or
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\8\ 48 FR 895, January 7, 1983.
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(3) Prohibited Transaction Class Exemption 82-87 (PTCE 82-87) \9\
(relating to certain mortgage financing arrangements);
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\9\ 47 FR 21331, May 18, 1982.
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(d) The terms of the transaction are negotiated on behalf of the
Diplomat Account under the authority and general direction of the Named
Fiduciary, and either the Named Fiduciary, or (so long as the Named
Fiduciary retains full fiduciary responsibility with respect to the
transaction) a property manager acting in accordance with written
guidelines established and administered by the Named Fiduciary, makes
the decision on behalf of the Diplomat Account to enter into the
transaction, provided that the transaction is not part of an agreement,
arrangement, or understanding designed to benefit a party in interest;
(e) The party in interest dealing with the Diplomat Account is
neither the Named Fiduciary nor a person related to the Named
Fiduciary, as defined in Section III(f), below;
(f) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the Named Fiduciary, the terms of the transaction are at
least as favorable to the Diplomat Account as the terms generally
available in arm's length transactions between unrelated parties;
(g) Neither the Named Fiduciary nor any affiliate thereof, as
defined in Section III(b), below, nor any owner, direct or indirect, of
a 5 percent (5%) or more interest in the Named Fiduciary is a person
who, within the ten (10) years immediately preceding the transaction,
has been either convicted or released from imprisonment, whichever is
later, as a result of:
(1) any felony involving abuse or misuse of such person's employee
benefit plan position or employment, or position or employment with a
labor organization;
(2) any felony arising out of the conduct of the business of a
broker, dealer, investment adviser, bank, insurance company, or
fiduciary;
(3) income tax evasion;
(4) any felony involving the larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, or misappropriation of funds or securities;
conspiracy or attempt to commit any such crimes or a crime in which any
of the foregoing crimes is an element; or
(5) any other crimes described in section 411 of the Act.
For purposes of this Section I(g), a person shall be deemed to have
been ``convicted'' from the date of the judgment of the trial court,
regardless of whether the judgment remains under appeal.
II. Specific Exemption Involving Places of Public Accommodation.
If the exemption is granted, the restrictions of sections
406(a)(1)(A) through (D) and 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, effective from November 3, 2000, until November 3, 2005, to the
furnishing of services, facilities, and any goods incidental thereto by
a place of public accommodation owned by the Diplomat Account managed
by IFS, acting as the Named Fiduciary, to a party in interest with
respect to the Fund, if the services, facilities, and incidental goods
are furnished on a comparable basis to the general public.
III. Definitions
(a) For purposes of Section I(b), above, of this proposed
exemption, an ``affiliate'' of a person means--
(1) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, 5 percent (5%)
or more partner, or employee (but only if the employer of such employee
is the plan sponsor), and
(3) any director of the person or any employee of the person who is
a highly compensated employee, as described in section 4975(e)(2)(H) of
the Code, or who has direct or indirect authority, responsibility, or
control regarding the custody, management, or disposition of plan
assets. A named fiduciary (within the meaning of section 402(a)(2) of
the Act) of a plan, and an employer any of whose employees are covered
by the plan will also be considered affiliates with respect to each
other for purposes of Section I(b) if such employer or an affiliate of
such employer has the authority, alone or shared with others, to
appoint or terminate the named fiduciary or otherwise negotiate the
terms of the named fiduciary's employment agreement.
(b) For purposes of Section I(g), above, of this proposed
exemption, an ``affiliate'' of a person means--
(1) any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) any director of, relative of, or partner in, any such person,
(3) any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
(5%) or more partner or owner, and
(4) any employee or officer of the person who--
(A) Is a highly compensated employee (as described in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent (10%) or more
of the yearly wages of such person) or
(B) Has direct or indirect authority, responsibility or control
regarding the custody, management, or disposition of Fund assets.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``goods'' includes all things which are movable or
which are fixtures used by the Diplomat Account but does not include
securities, commodities, commodities futures, money, documents,
instruments, accounts, chattel paper, contract rights, and any other
property, tangible or intangible, which, under the relevant facts and
circumstances, is held primarily for investment.
[[Page 15902]]
(e) The term ``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.
(f) The Named Fiduciary is ``related'' to a party in interest for
purposes of Section I(e), above, of this proposed exemption, if the
party in interest (or a person controlling, or controlled by, the party
in interest) owns a 5 percent (5%) or more interest in the Named
Fiduciary, or if the Named Fiduciary (or a person controlling, or
controlled by, the Named Fiduciary) owns a 5 percent (5%) or more
interest in the party in interest. For purposes of this definition:
(1) The term ``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,
(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; and
(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.
(g) The term ``relative'' means a relative as that term is defined
in section 3(15) of the Act, or a brother, sister, or a spouse of a
brother or sister.
(h) For purposes of Section I(a) of this proposed exemption, the
term ``shareholders' equity'' or ``partners' equity'' means the equity
shown in the most recent balance sheet prepared within the two (2)
years immediately preceding a transaction undertaken pursuant to this
proposed exemption, in accordance with generally accepted accounting
principles.
(i) The ``time'' as of which any transaction occurs is the date
upon which the transaction is entered into. In addition, in the case of
a transaction that is continuing, the transaction shall be deemed to
occur until it is terminated. If any transaction is entered into during
the period from November 3, 2000, until November 3, 2005, or if a
renewal that requires the consent of the Named Fiduciary occurs during
the period from November 3, 2000, until November 3, 2005, and the
requirements of this proposed exemption are satisfied at the time the
transaction is entered into or renewed, then the requirements will be
deemed to continue to be satisfied thereafter with respect to the
transaction. Nothing in this subsection shall be construed as exempting
a transaction which becomes a transaction described in section 406 of
the Act or section 4975 of the Code while the transaction is
continuing, unless the conditions of this proposed exemption were met
either at the time the transaction was entered into or at the time the
transaction would have become prohibited but for this proposed
exemption.
Temporary Nature of Exemption
The Department has determined that the relief provided to IFS by
this proposed exemption will be temporary in nature. The exemption, if
granted, will be effective for a period of five (5) years, beginning on
November 3, 2000, and ending on November 3, 2005, so long as IFS
retains full fiduciary responsibility with respect to the transactions
which are the subject of this exemption. Accordingly, the relief
provided by this proposed exemption will not be available upon
expiration of such five-year period for any transactions (or renewal
that requires the consent of IFS, acting as the Named Fiduciary) first
entered into after November 3, 2005. Should IFS wish to extend, beyond
the five-year period, the relief provided by this proposed exemption,
it may submit another application for exemption.
Preamble
In October 1997, the Department received an exemption application
(D-10514) from the Fund requesting relief from the prohibited
transaction provisions of section 406(a) and (b) of the Act and 4975 of
the Code. The Department published a notice of proposed exemption in
the Federal Register on May 29, 1998.\10\ The final exemption,
Prohibited Transaction Exemption 99-46 (PTE 99-46), was published in
the Federal Register on November 15, 1999.\11\
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\10\ 63 FR 29453.
\11\ 64 FR 61944.
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PTE 99-46 provides an exemption, effective October 9, 1997, for the
transfer to the Fund by the United Association of Journeymen and
Apprentices of the Plumbing and Pipe Fitting Industry of the United
States and Canada, AFL-CIO (the Union), a party in interest with
respect to the Fund, of the Union's limited partnership interests in
the Diplomat Properties, Limited Partnership (the Partnership), the
sole asset of which is commonly known as the Diplomat Resort and
Country Club (the Property), and the transfer to the Fund of the
Union's stock in Diplomat Properties, Inc., the corporate general
partner of the Partnership (the General Partner), provided certain
conditions are satisfied.
In addition to the conditions contained in PTE 99-46, the Fund
agreed by way of a Term Sheet (the Term Sheet), dated October 13, 1999,
to several additional undertakings, including the appointment of
Actuarial Sciences Associates, Inc. (ASA), to oversee the Fund's
investment in the Partnership and the continuing development of the
Property. Further, pursuant to the Term Sheet, the Board of Trustees of
the Fund (the Trustees) agreed to a percentage limitation on the total
Fund investment in the development of the Property. Effective November
8, 1999, the Trustees appointed ASA to serve as the Named Fiduciary of
the Diplomat Account which holds the Fund's interest in the
Partnership, the General Partner, and other Fund assets invested in or
awaiting investment in the Property.
Pursuant to the provisions of the Term Sheet, ASA could be replaced
by the Trustees only upon the concurrence of the Department or pursuant
to a court order for cause. Accordingly, when ASA established a wholly-
owned subsidiary, ASA Fiduciary Counselors, Inc. (ASA Counselors), to
provide investment advisory services, ASA sought approval from the
Trustees and the Department prior to assigning ASA Counselors the
investment advisory services that ASA had previously performed. After
ASA Counselors became a registered investment adviser, ASA assigned its
responsibilities to ASA Counselors, with the consent of the Trustees of
the Fund and the Department.
On March 15, 2000, the Department received an exemption application
(D-10879) from ASA and ASA Counselors requesting relief from the
prohibited transaction provisions of section 406(a) and (b) of the Act
and 4975 of the Code. The Department published a notice of proposed
exemption in the Federal Register on June 26, 2000.\12\ The final
exemption, Prohibited Transaction Exemption 2000-49 (PTE 2000-49), was
published in the Federal Register on October 11, 2000.\13\
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\12\ 65 FR 39435.
\13\ 65 FR 60454.
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PTE 2000-49 permitted ASA, effective from November 8, 1999, to
December 20, 1999, and thereafter ASA Counselors, while serving as the
Named Fiduciary of the Diplomat Account, to engage on behalf of the
Diplomat
[[Page 15903]]
Account in certain transactions with parties in interest with respect
to the Fund. In the case of transactions involving places of public
accommodation, the exemption permitted, effective November 8, 1999, the
furnishing of services, facilities, and any goods incidental thereto by
a place of public accommodation owned by the Diplomat Account that is
managed by ASA or ASA Counselors, when acting as the Named Fiduciary,
to parties in interest with respect to the Fund, if such services,
facilities, and incidental goods are furnished on a comparable basis to
the general public.
Subsequently, ASA Counselors resigned its appointment as Named
Fiduciary with respect to the Fund and the Diplomat Account, effective
as of November 3, 2000. Prior to that date, the Trustees entered into
an agreement with IFS, dated September 12, 2000, the terms of which
were reviewed and found acceptable by the Department prior to
execution. Pursuant to the terms of such agreement IFS was appointed,
effective November 3, 2000, as successor Named Fiduciary of the Fund
with respect to the Diplomat Account.
On December 21, 2000, the Department received an exemption
application (D-10960) in which IFS requested relief from the prohibited
transaction provisions of section 406(a) and (b) of the Act and section
4975 of the Code which is identical to that provided to ASA and ASA
Counselors, pursuant to PTE 2000-49.
On February 23, 2001, the Department received another exemption
application (D-10971) from IFS, acting as Named Fiduciary on behalf of
the Fund. IFS requested a modification to a provision of the Term Sheet
which the Trustees had agreed to in connection with PTE 99-46. The
relevant provision provides that:
[t]he Trustees will instruct the custodian of the Fund to
transfer to the Diplomat Account any additional amounts requested by
ASA for the operations or expenses of the Diplomat Account or the
Partnership, so long as the total amount of the Fund assets at risk
(i.e., the Fund's investment in the Partnership plus any recourse
debt in excess of the value of the assets in the Partnership) does
not exceed 13 percent of the Fund assets at the time of the
transfer.
The requested change to PTE 99-46 would modify the 13 percent
allocation limit (the 13% Limitation). Because both applications were
filed by IFS and involve the assets of the Fund in the Diplomat
Account, the Department has determined to consider the relief requested
in both applications at the same time.
Summary of Facts and Representations
1. The Fund is a Taft-Hartley multi-employer defined benefit
pension fund. The Fund has approximately 123,000 participants and
beneficiaries, as of December 28, 2000. As of December 31, 2000, and
February 17, 2001, the approximate aggregate fair market value of the
total assets of the Fund was $4.3 billion and $4.2 billion,
respectively. The assets of the Fund include interests in the
Partnership and its corporate General Partner which the Fund acquired
pursuant to PTE 99-46.
The sole asset of the Partnership consists of the Property located
in Hollywood and Hallandale, Florida. The Property, among other things,
consists of several improved parcels, including an oceanfront hotel
complex, a convention center, a golf course, a country club, a marina,
a parcel of oceanfront real estate zoned for development as
condominiums units, another parcel currently unentitled and being used
for construction trailers, and certain other related assets.
The Fund currently owns 100 percent (100%) of the equity interest
in the Partnership. Such interest in the Partnership is not a publicly
offered security. Pursuant to regulations issued by the Department, 29
CFR Sec. 2510.3-101 (the Plan Assets Regulation), when a plan acquires
an equity interest in an entity, which interest is not a publicly
offered security or a security issued by an investment company
registered under the Investment Company Act of 1940, the underlying
assets of the entity will be deemed to include plan assets, unless
certain exceptions apply. However, when 100 percent (100%) of the
outstanding equity interests in such entity are owned by a plan or a
related group of plans, such exceptions do not apply (see 29 CFR
Sec. 2510.3-101(h)(3) of the Plan Asset Regulation). Accordingly, in
the situation described herein the applicant represents that the
Property, which is the sole asset of the Partnership, would be deemed
to be an asset of the Fund; and any transaction involving the Property
is treated as a transaction involving Fund assets for purposes of the
Act.
2. The current requests for relief from the prohibited transaction
provisions of the Act were filed by IFS. IFS is a Delaware corporation
which provides a broad range of benefit consulting services to both
public and private employee benefit plans with assets ranging from
several million to several billion dollars. IFS is a registered
investment adviser under the Advisers Act. Among the individuals
employed by IFS who are primarily responsible for the development of
the Property (the Project) are Samuel W. Halpern, Esq. (Mr. Halpern)
and Francis X. Lilly, Esq. (Mr. Lilly), who are the sole shareholders
of IFS. It is represented that Mr. Lilly has broad expertise in a wide
range of subjects, including developing investment policy and analysis
and regulation of investment activity by pension funds. Mr. Halpern is
experienced in a wide variety of issues related to pension plans,
including the financial and fiduciary aspects of pension fund
investing. It is represented that the fee charged by IFS is paid by the
Fund.
3. IFS has requested a general exemption, rather than an exemption
involving a specific transaction with a particular party in interest.
In this regard, it is represented that due to the size and complexity
of the Fund, the identities of the parties in interest which may be
involved in the subject transactions were not known at the time the
application was filed. With approximately $4.2 billion in assets, it is
represented that the Fund has relationships with a variety of financial
institutions and a multitude of other service providers who are now or
may become parties in interest or disqualified persons, as those terms
are defined respectively, in section 3(14) of the Act or 4975(e)(2) of
the Code. Further, because the Project involves a complex real estate
development, including a variety of commercial spaces and public
accommodation, relief from the prohibited transaction provisions of the
Act has been requested for transactions with parties in interest that
are expected to occur in the ordinary course of operation.
4. The requested exemption would permit IFS for a period of five
(5) years, beginning November 3, 2000, and ending November 3, 2005,
while serving as the Named Fiduciary of the Diplomat Account, to engage
on behalf of the Diplomat Account in certain transactions with parties
in interest with respect to the Fund, without violating section
406(a)(1)(A) through (D) of the Act. Further, in the case of
transactions involving places of public accommodation, the requested
exemption would permit, effective November 3, 2000, through November 3,
2005, the furnishing of services, facilities, and any goods incidental
thereto by a place of public accommodation owned by the Diplomat
Account that is managed by the Named Fiduciary, to a party in interest
with respect to the Fund.
With respect to the furnishing of services, facilities, and any
goods incidental thereto by places of public
[[Page 15904]]
accommodation owned by the Diplomat Account, IFS maintains that, absent
this exemption, it would not be feasible to monitor routine
transactions in the operation of the hotel complex, the golf course,
and the other components of the Property. In this regard, given the
large number of participants and beneficiaries of the Fund, as well as
the large number of contributing employers and service providers to the
Fund, and their affiliates, it is not possible to prevent party in
interest transactions from occurring. Accordingly, if granted, this
exemption will permit the furnishing of services, facilities, and any
goods incidental thereto by places of public accommodation owned by the
Diplomat Account, and managed by IFS, to parties in interest with
respect to the Fund, if such services, facilities and incidental goods
are furnished on a comparable basis to the general public.
With respect to transactions with parties in interest, other than
those involving places of public accommodation, the requested
exemption, if granted, would provide relief to IFS, while serving as
Named Fiduciary of the Diplomat Account, which is similar to the relief
provided to qualified professional asset managers (QPAMs or a QPAM)
under Prohibited Transaction Class Exemption 84-14 (PTCE 84-14).\14\ In
general, PTCE 84-14 permits various parties in interest with respect to
an employee benefit plan to engage, under certain conditions, in
transactions involving plan assets, if the assets are managed by
persons defined under the exemption as QPAMs.
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\14\ 49 FR 9494 (March 13, 1984), as corrected, 50 FR 41430
(October 10, 1985).
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It is represented that until December 14, 2000, the Fund engaged CS
Capital Management Inc. (CSC), as a QPAM to manage the Project.\15\
Subsequently, pursuant to its authority as Named Fiduciary, IFS removed
CSC as the QPAM and appointed LaSalle Investment Management, Inc.
(LaSalle) as replacement QPAM, effective December 14, 2000. It is
represented that LaSalle meets the definition of a QPAM for all
purposes under PTCE 84-14.\16\
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\15\ IFS represents that CSC may not have qualified for the
general exemption under Part I of PTCE 84-14, because the assets of
the Fund managed by CSC may have represented more than 20 percent
(20%) of the total client assets managed by CSC. The Department is
offering no view, herein, as to whether CSC has met the definition
of a QPAM, as set forth in Part V(a) of PTCE 84-14, and has
satisfied all of the conditions, as set forth in Part I of PTCE 84-
14, nor is the Department, herein, providing CSC any relief for
transactions with parties in interest with respect to the Fund while
the assets of the Fund were under the management of CSC.
\16\ The Department is offering no view, herein, as to whether
LaSalle has met the definition of a QPAM, as set forth in Part V(a)
of PTCE 84-14, and has satisfied all of the conditions, as set forth
in Part I of PTCE 84-14, nor is the Department, herein, providing
LaSalle any relief for transactions with parties in interest with
respect to the Fund while assets of the Fund are under the
management of LaSalle.
---------------------------------------------------------------------------
Although, in many cases the Fund will be able to rely on the
ability of LaSalle to qualify as a QPAM under PTCE 84-14, IFS believes
that there may be instances in which it will become necessary or
desirable for IFS to act more directly with respect to a transaction
(if, for example, the transaction is with an entity in some way related
to LaSalle or if IFS determines it is prudent to retain discretion with
respect to certain significant transactions). Accordingly, IFS has
requested relief under conditions which are similar to those required
in Part I of PTCE 84-14.\17\
---------------------------------------------------------------------------
\17\ The Department, herein, is not proposing an exemption for
the type of transactions which are described in Part II and Part III
of PTCE 84-14.
---------------------------------------------------------------------------
In this regard, Part I of PTCE 84-14 provides relief from the
restrictions of section 406(a)(1)(A)-(D) of the Act and 4975(c)(1)(A)-
(D) of the Code for transactions between a party in interest with
respect to an employee benefit plan and an investment fund in which
such plan has an interest which is managed by a QPAM; provided certain
conditions are met. One such condition (the Diverse Clientele Test), as
set forth in Part I(e) of PTCE 84-14, requires that:
The transaction is not entered into with a party in interest
with respect to any plan whose assets managed by the QPAM, when
combined with the assets of other plans established or maintained by
the same employer (or affiliate thereof * * *) or by the same
employee organization, and managed by the QPAM, represent more than
20 percent of the total client assets managed by the QPAM at the
time of the transaction.
In this regard, IFS represents that due to the nature and scope of
its responsibilities as the Named Fiduciary, the assets of the Fund
held by the Diplomat Account managed by IFS exceed 20 percent (20%) of
the total client assets that it has under management. Accordingly, IFS
represents that it is unable to satisfy the Diverse Clientele Test
found in Part I(e) of PTCE 84-14.
Additionally, pursuant to Part V(a)(4) of PTCE 84-14, in order for
an investment adviser registered under the Advisers Act to qualify as a
QPAM, as of the last day of its most recent fiscal year, total client
assets under its management and control must exceed $50 million (the
Managed Assets Test). Although IFS serves as an investment advisor or
(on rare occasions) investment manager with respect to over $8 billion
of assets, it is represented that the total client assets under its
direct management and control did not exceed $50 million, as of the
last day of its most recent fiscal year.\18\ Accordingly, IFS
represents that it is unable to satisfy the requirements of the Managed
Assets Test, as set forth in Part V(a)(4) of PTCE 84-14.
---------------------------------------------------------------------------
\18\ Although IFS represents that it is a fiduciary with respect
to most of these assets by virtue of providing investment advice for
a fee, IFS does not generally function as an investment manager,
within the meaning of section 3(38) of the Act, with respect to
those assets.
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5. Notwithstanding its inability to meet the requirements of the
Managed Assets Test or to satisfy the Diverse Clientele Test, IFS
maintains that the requested administrative exemption should be granted
where it can be demonstrated that IFS, like a QPAM, acts in the best
interest of plan participants, unencumbered by a relationship with
parties in interest. With regard to independence, it is represented
that IFS had no relationship with the Fund or with the Trustees, prior
to the execution of the agreement appointing IFS as Named Fiduciary. In
the opinion of IFS, the Department's involvement in the appointment
process ensured that when selected to serve as the Named Fiduciary of
the Diplomat Account, IFS was independent and qualified to act in that
capacity. In addition, it is represented that the reporting obligations
of IFS to the Department and the restrictions on the removal of IFS, as
the Named Fiduciary under PTE 99-46, by the Trustees of the Fund
ensures the continued independence of IFS.
6. It is represented that the proposed exemption is in the best
interest of the Fund. In this regard, if granted, the proposed
exemption would facilitate the management of the Project in the manner
most efficient and beneficial to the participants and beneficiaries
that have interests in the Fund. As discussed above, the proposed
exemption would facilitate routine operations of the Project. In the
absence of the exemption, it would be burdensome to examine each
transaction to determine whether such transaction might involve a party
in interest.
7. It is represented that without the exemption, the Diplomat
Account could be prevented from entering into beneficial financial
transactions with parties in interest that would enhance the return to
the Fund. As indicated, above, the Fund has party in interest
[[Page 15905]]
relationships with a variety of financial institutions and other
service providers. In this regard, it is represented that without the
requested exemption, the pool of possible lenders and equity investors
would be unduly restricted, because any financial institution that has
pre-existing relationships with the Fund would be excluded from dealing
with the Diplomat Account.
8. IFS maintains that in granting PTCE 84-14, the Department has
already determined that the requested exemption is administratively
feasible. Accordingly, in the opinion of IFS, the requested exemption
would not impose any administrative burdens on the Department which are
not already imposed by PTCE 84-14 and by PTE 2000-49.
9. IFS maintains that the proposed exemption would be protective of
the rights of participants and beneficiaries of the Fund because of the
on-going oversight of both the Trustees and the Department. In this
regard, it is represented that under the terms of an agreement with the
Trustees, IFS has a continuing responsibility to furnish the Trustees
and the Department with monthly written reports concerning the
operations, assets, receipts, and disbursements with respect to the
Project. Furthermore, it is IFS' responsibility to provide the
Department with certain documents and to meet with Department officials
upon request.
10. The proposed exemption contains conditions which are designed
to ensure the presence of adequate safeguards to protect the interests
of the Fund regarding the subject transactions. Except for the Diverse
Clientele Test, as set forth in Part I(e) of PTCE 84-14, and the
Managed Assets Test, as set forth in Part V(a)(4) of PTCE 84-14, the
proposed exemption contains conditions substantially similar to those
in PTCE 84-14. In this regard, IFS represents that it satisfies the
capitalization requirement for an investment advisor, registered under
the Advisers Act, to qualify as a QPAM, in that it has shareholder's
equity of more than $750,000. Further, it is represented that the
transactions which are the subject of this proposed exemption are not
part of an agreement, arrangement, or understanding designed to benefit
a party in interest. In addition, neither the Named Fiduciary nor a
person related to the Named Fiduciary may engage in transactions with
the Diplomat Account.
11. In the absence of the proposed exemption, IFS may be unable to
exercise the degree of control over the financing and operations of the
Project, as contemplated by the Department and the Trustees. In this
regard, pursuant to the Terms of ASA's services contract, ASA had full
and complete authority, control, and discretion with respect to the
construction, use, and/or sale of the Project and all of its
components, including performing whatever tasks might be necessary to
maximize the financial return to the Fund of its investment in the
Partnership. ASA's overall authority remained subject to the
requirement that the total amount of Fund assets at risk (i.e., the
Fund's investment in the Partnership plus any recourse debt in excess
of the value of the assets in the Partnership) not exceed 13 percent of
the Fund assets at the time of the transfer. After ASA assigned its
responsibilities to ASA Counselors, with the consent of the Trustees
and the Department, ASA Counselors was obligated to comply with the 13%
Limitation. Thereafter, when ASA Counselors resigned, and the Trustees
hired IFS, as successor Named Fiduciary for the Fund with respect to
the Diplomat Account, IFS did not initially anticipate that any
transfers would be made to the Diplomat Account in excess of the 13%
Limitation.
However, shortly after IFS began functioning as the independent
Named Fiduciary, IFS alerted the Department of its concern that the
amount of the Fund's assets invested in the Project, plus recourse
debt, would soon exceed the 13% Limitation. Indeed, exceeding the 13%
Limitation seemed likely to IFS, given the difficulty of placing
sufficient nonrecourse debt on the Project, the projected budget to
complete construction, and the fluctuating value of the Fund's total
investment portfolio.
In this regard, as of February 17, 2001, the Partnership had drawn
down approximately $522 million from the Fund. It is represented that
IFS was advised that the total value of the assets of the Fund, as of
December 31, 2000, was $4.3 billion (13% of which is $559 million), and
as of February 17, 2001, was $4.2 billion (13% of which is $546
million). Based on current budget projections, IFS estimates that the
Fund would likely exceed the 13% Limitation well before the Partnership
could close on any financing.
Absent a modification to the 13% Limitation, completion of the
Project without interruption is not likely, because the Partnership
could not promptly obtain the requisite financing or sell sufficient
assets to remain within that limit. In this regard, LaSalle concluded
that finding alternative debt financing on a best case scenario is
likely to take at least three (3) to four (4) months. Any financing
obtained prior to a certificate of occupancy is likely to be advanced
under onerous terms to the Partnership and would include recourse to
the Fund. Further, LaSalle has concluded that if, because of the 13%
Limitation, the Fund now sought to sell the Property, rather than
complete it, the Fund would suffer substantial losses.
Instead, LaSalle believes that it would be far more advantageous
(assuming it is legally permissible) for the Fund to finance the
Project to completion. In this regard, if construction is completed and
the Project achieves stabilized income, LaSalle projects that the
increased value of the Project, as completed, less the cost of
completion will likely be higher than the value of the Project, if it
were to be sold as a distressed asset. In addition, if construction
were abandoned or interrupted now, there would be significant costs
associated with shutting down the Project (either temporarily or
permanently) until the Property could be sold that would not otherwise
be incurred. LaSalle has concluded that the total expenditures that
would result from the abandonment or interruption of the Project would
cause the Project to significantly exceed the 13% Limitation.
Although LaSalle is still completing its review of the budget for
completion of the Project, it has, nevertheless, concluded that the
budget prepared by the Partnership on September 30, 2000, which
estimated the cost of the Project at $614,745,884, does not accurately
reflect the true situation. It is represented that, in part, this is
because the September 30 budget excludes approximately $61 million of
hard cost increases, various other hard costs that have been identified
since that time, and other normal budget scope items (e.g., start-up
operating losses). Instead, based on its preliminary review of the
budget, LaSalle estimates that the total cost of the development of the
Project and the first year operating losses could total approximately,
but not more than, $800 million.
It is the opinion of LaSalle that additional funding by the Fund up
to a flat dollar amount of sufficient magnitude to allow for the
completion of the Project is the best financing solution currently
available to the Partnership. This solution will allow the Partnership
to extract the most value from its investment in the long run, and
avoid the inevitable but unnecessary losses that the Fund would face if
the Project were abandoned now. A flat dollar limitation would also
remove the uncertainty as to how and if the Project will be financed to
completion.
[[Page 15906]]
First, uncertainty will be reduced by setting the limitation at
$800 million because this dollar amount should cover the estimated
completion of the Project with a suitable contingency. In the opinion
of LaSalle, it would be unwise, due to the history and uncertainties of
the Project, not to seek an allocation limit that was in excess of what
it believes to be the required need.
Second, aside from providing a sufficient increase in the 13%
Limitation, a flat limitation, rather than a percentage limitation will
further reduce uncertainty because fluctuations in the total value of
Fund assets will not result in constant changes to the limitation.
Elimination of financing uncertainty will, in turn, allow the
Project team to focus on completing construction, installing the best
hotel operator, opening the hotel, and generating revenues as soon as
possible. It would overcome concerns in booking rooms that there will
not be enough capital to complete the hotel, an issue which the
marketing team must constantly address.
In light of LaSalle's conclusions, as summarized above, IFS has
proposed replacement of the 13% Limitation with the following
requirement:
The Trustees will instruct the custodian of the Fund to transfer
to the Diplomat Account any additional amount requested by the
independent named fiduciary for the operations or expenses of the
Diplomat Account or the Partnership, so long as the total amount of
Fund assets at risk (i.e., the Fund's investment in the Partnership
plus any recourse debt in excess of the value of the assets in the
Partnership) does not exceed $800 million at the time of the
transfer.
As the Department previously noted in PTE 99-46, the additional
undertakings agreed to by the Trustees, including the appointment of an
independent fiduciary and the limitation on the total Fund investment
in the Project, were and are material factors in the Department's
determination to grant that exemption, as well as in considering any
modification thereto.
Based upon the arguments presented by IFS, the Department has
tentatively agreed to the proposed modification requested by IFS and
invites interested persons to comment on such modification.
12. In summary, IFS represents that the transactions satisfy the
statutory criteria for an exemption under section 408(a) of the Act and
section 4975(c)(2) of the Code because, among other things:
(a) IFS, acting as the Named Fiduciary for the Diplomat Account, is
an investment adviser registered under the Advisers Act, with
shareholders' equity in excess of $750,000;
(b) At the time of the transaction, the party in interest or its
affiliate does not have, and during the preceding one (1) year has not
exercised, the authority to appoint or terminate IFS, as the Named
Fiduciary and manager of the Fund's assets in the Diplomat Account, or
to negotiate the terms on behalf of the Fund (including renewals or
modifications) of the management agreement;
(c) The subject transactions are not those which are described in
PTCE 81-6; PTCE 83-1; or PTCE 82-87;
(d) The terms of the transactions were negotiated on behalf of the
Diplomat Account by, or under the authority and general direction of
IFS, effective as of November 3, 2000, and either IFS or (so long as
IFS retains full fiduciary responsibility with respect to the
transaction, a property manager acting in accordance with written
guidelines established and administered by IFS, has made or will make
the decision on behalf of the Diplomat Account to enter into each
transaction;
(e) The transactions are not part of an agreement, arrangement, or
understanding designed to benefit a party in interest;
(f) At the time each transaction is entered into, renewed, or
modified, the terms of the transaction are at least as favorable to the
Diplomat Account as the terms generally available in arm's length
transactions between unrelated parties;
(g) Neither IFS, nor any affiliate thereof, nor any owner, direct
or indirect, of a 5 percent (5%) or more interest in IFS, is a person
who, within the ten (10) years immediately preceding the transaction
has been either convicted or released from imprisonment, whichever is
later, as a result of any felony, as set forth in Section I(g) of this
proposed exemption;
(h) Neither IFS, nor a person related thereto, engages in the
transactions with the Diplomat Account which are the subject of this
proposed exemption;
(i) Services, facilities, and any goods incidental thereto,
provided by a place of public accommodation which is owned by the
Diplomat Account managed by IFS, as the Named Fiduciary, will be
furnished to any party in interest on a basis which is comparable to
the furnishing of such services, facilities and incidental goods to the
general public;
(j) Completion of the Project without interruption, absent a
modification to the 13% Limitation, is not likely, because the
Partnership could not promptly obtain the requisite financing or sell
sufficient assets to remain within that limit;
(k) The Fund would incur significant costs associated with shutting
down the Project (either temporarily or permanently) until the Property
could be sold that would not otherwise be incurred;
(l) A distressed sale of the Property would cause substantial
losses for the Fund; and
(m) The increased value of the Project, as completed, less the cost
of completion will likely be higher than the value of the Project, if
it were to be sold as a distressed asset.
Notice To Interested Persons
IFS will furnish a copy of the Notice of Proposed Exemption (the
Notice) along with the supplemental statement (the Supplemental
Statement), as described at 29 CFR Sec. 2570.43(b)(2), to the Trustees
of the Fund and to interested persons who commented in writing to the
Department in connection with PTE 99-46, to inform such persons of the
pendency of this exemption. In this regard, some of the Trustees of the
Fund are also senior officers of the Union. IFS believes that providing
notice to the Trustees of the Fund and to interested persons who
commented in writing to the Department in connection with PTE 99-46
should be sufficient, because the requested exemption involves the
technical requirements of the Act related to the use of qualified
professional asset managers and it is unlikely that individuals other
than the Trustees and those who commented on PTE 99-46 would be
concerned with such an exemption.
A copy of the Notice, as it appears in the Federal Register, and a
copy of the Supplemental Statement, will be provided, by first class
mailing, within ten (10) days of the publication of the Notice in the
Federal Register. It is represented that the costs of notifying
interested persons will be borne by the Fund. Comments and requests for
a hearing are due on or before 40 days from the date of publication of
the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (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
[[Page 15907]]
a fiduciary or other party in interest or disqualified person from
certain other provisions of the Act and/or the Code, including any
prohibited transaction provisions to which the exemption does not apply
and the general fiduciary responsibility provisions of section 404 of
the Act, which, among other things, require a fiduciary to discharge
his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 15th day of March, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 01-7044 Filed 3-20-01; 8:45 am]
BILLING CODE 4510-29-P
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