EBSA (Formerly PWBA) Federal Register Notice Proposed Extension of Information
Collection Request; Comment Request; Prohibited Transaction Class Exemption
77-4 [07/13/2001]
EBSA (Formerly PWBA) Federal Register Notice Proposed Exemptions; Deferred Profit
Sharing Plan of the Penske Corporation (the Plan) et al. [07/10/2001]
Volume 66, Number 132, Page 36002-36017
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10911, et al.]
Proposed Exemptions; Deferred Profit Sharing Plan of the Penske
Corporation (the Plan) 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, 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 the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5638,
[[Page 36003]]
200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Deferred Profit Sharing Plan of the Penske Corporation (the Plan)
Located in Charlotte, North Carolina
[Application No. D-10911]
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). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
and 407(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
(E) of the Code, shall not apply, (1) effective June 15, 2000, to the
acquisition and holding by the Plan of interests (the Interests) in the
Penske Company, LLC (the LLC), a wholly owned subsidiary of the Plan
sponsor, the Penske Corporation (Penske), which were distributed (the
Distribution) as dividends to the Plan as a shareholder of Penske
common stock (Penske Stock); and (2) the proposed redemption, by the
LLC, of the Interests held by the Plan for the greater of $3.37 per-
unit or their fair market value at the date of the redemption, provided
that the following conditions were or will be met:
(a) The Interests were acquired by the Plan pursuant to Plan
provisions for individually-directed investment of participant
accounts;
(b) The Plan's receipt and holding of the Interests occurred in
connection with the Distribution;
(c) The Plan's acquisition of the Interests resulted from an
independent act of Penske as a corporate entity, such that all holders
of the Penske Stock, including the Plan, were treated in the same
manner;
(d) Within 15 business days after the date the notice granting the
final exemption is published in the Federal Register, the LLC will
redeem the Interests held by the Plan for not less than $3.37 per unit;
(e) The price received by the Plan for the Interests is not less
than the fair market value of the Interests on the date that the
redemption occurs; and
(f) The Plan paid no fees or commissions in connection with the
acquisition and holding of the Interests nor will it pay any fees or
commissions in connection with the redemption of the Interests.
Effective Date: If granted, this proposed exemption will be
effective as of June 15, 2000, with respect to the acquisition and
holding by the Plan of the Interests. In addition, this exemption will
be effective as of the date the final exemption is granted with respect
to the LLC's redemption of the Interests held by the Plan.
Summary of Facts and Representations
1. Penske, the sponsor of the Plan, is a Delaware corporation
engaged in the transportation services industry. Penske maintains its
principal place of business in Detroit, Michigan and is more than 50%
owned by RSP (RSP). The Plan is a qualified retirement plan described
under section 401(a) of the Code and features a qualified cash or
deferred compensation arrangement described in section 401(k) of the
Code.
As of December 31, 2000, the Plan had a total of 1,174 participants
and assets with an approximate aggregate fair market value of
$35,477,000. Also as of December 31, 2000, 47.9% (or $16,997,073) of
the fair market value of the total assets of the Plan was invested in
Penske Stock. The shares of Penske Stock are held by 401 Plan
Participants. Before June 15, 2000, the Plan held 5,601 shares of
Penske Corporation Class B Voting Common Stock and 106,166 shares of
Penske Corporation Class C Non-Voting Common Stock. In total, the Plan
owns 111,767 shares (5,601 shares + 106,166 shares) of Penske. This
represented 3.33 percent of the total 3,355,685 shares of Penske Stock
outstanding at that time (treating the convertible preferred stock as
fully converted) (111,767 shares 3,355,685 shares).
2. First Union National Bank (First Union), of Charlotte, North
Carolina, serves as a directed trustee of the Plan. As such, First
Union has no investment discretion over the Plan's assets.
3. A variety of funds have been established under the Plan for the
investment of the Plan assets, including Fund E, the Penske Corporation
Stock Fund. These funds are mutual funds, with the exception of Fund E
and the two subfunds that have been established with Fund E--the Penske
Subfund and the LLC Subfund. Fund E is invested principally in Penske
Stock, and is available for investment only with respect to amounts
attributable to profit-sharing contributions (the Contributions) that
were made under the Plan by participants prior to January 1, 1996.
Participants may periodically reallocate amounts attributable to the
Contributions (including amounts invested in Fund E) among any of the
other funds, but they may not reallocate any amounts to Fund E.
Furthermore, under Section 6.1 of the Plan, as currently drafted, any
income derived or net proceeds received from the sales of assets in
Fund E is invested among the other funds established in accordance with
the participant's investment direction.
4. The LLC is in the business of the management, operation,
acquisition, and disposition of companies engaged in transportation-
related services, such as manufacturers and suppliers to the heavy-duty
truck and automotive industries and on-line electronic commerce
enterprises. The LLC was formed by Penske on April 13, 2000 as a
Delaware limited liability company. Penske contributed $9,900 in cash
and a trust maintained for the benefit of RSP contributed $100 in cash
to the LLC on, in exchange for all of the LLC Interests. On May 1,
2000, Penske purchased the trust's Interests in the LLC for $100 in
cash, so that Penske owned all of the Interests. This resulted in the
LLC being a wholly owned subsidiary of Penske. On June 15, 2000, Penske
made a pro rata distribution of the Interests, which are not publicly-
traded, to all of Penske's shareholders of record as of June 14, 2000.
The Plan, as a
[[Page 36004]]
shareholder of Penske Stock, also received a distribution of the
Interests from Penske in proportion to its ownership interest in Penske
Stock. As a result of the pro rata distribution of the Interests, the
Plan received 5,601 Class B Voting Common Units in the LLC and 106,166
Class C Non-Voting Common Units in the LLC out of the total number of
units issued--3,355,685 (treating the convertible preferred units as
fully converted). Similarly, RSP received Interests in the LLC which
corresponded with those received by the Plan. The Plan paid no fees or
commissions to Penske in connection with the Distribution.
The Interests have been held on behalf of the Plan within Fund E in
the LLC Subfund. Participants with accounts invested in Fund E have
received information from Penske about the nature, risks and potential
rewards of holding the Interests as an investment. This information was
given in the form of an information statement (the Statement) provided
by the employee benefits department of Penske. The Statement was sent
only to participants in the Plan with accounts invested in Fund E.
5. Section 406(a)(1)(A) of the Act prohibits a fiduciary from
causing a plan to engage in a transaction which the fiduciary knows (or
should know) constitutes a sale or exchange of any property between the
plan and a party in interest. Penske, as an employer any of whose
employees are covered by the Plan, is a party in interest with respect
to the Plan under section 3(14)(C) of the Act. The LLC is also a party
in interest with respect to the Plan under section 3(14)(G) of the Act.
Since 100% of this entity was owned directly by Penske and more than
50% of the LLC is currently owned indirectly by RSP, the LLC is a party
in interest under section 3(14)(G) of the Code with respect to the
Plan.
Because Penske believes that the LLC is an affiliate of Penske for
purposes of section 407(d)(7) of the Act,\1\ Penske represents that the
Interests held by the Plan would constitute an ``employer security''
within the meaning of 407(d)(1) of the Act \2\ but not a ``qualifying
employer security'' under section 407(d)(5) of the Act \3\ inasmuch as
the Interests do not fall within any of the covered categories.
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\1\ Section 407(d)(7) of the Act defines a corporation as an
affiliate of an employer if it is a member of any controlled group
of corporations (as defined in sectin 1563(a) of the Code, except
that ``applicable percentage'' shall be substituted for ``80
percent'' wherever the latter percentage appears in such section) of
which the employer maintains the plan is a member. For purposes of
the preceding sentence, the term ``applicable percentage'' means 50
percent, or such lower percentage as the Secretary of Labora may
prescribe by regulation.
\2\ Section 407(d)(1) of the Act defines a ``qualifying employer
security'' as a security issued by an employer of employees covered
by the plan, or by an affiliate of such employer.
\3\ Section 407(d)(5) of the Act defines a ``qualifying employer
security'' as an employer security which is (a) stock; (b) a
marketable obligation; or (c) an interest in a publicly-traded
partnership, but only if such partnership is an existing
partnership.
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Therefore, Penske states that exemptive relief is needed with
respect to the acquisition and continued holding of the Interests by
the Plan to the extent there have been violations of sections 406(a),
406(b)(1) and (b)(2), and section 407(a) of the Act. In addition,
Penske represents that the redemption of the Plan's Interests by the
LLC violates section 406(a)(1)(A) and section 406(b)(1) and (b)(2) of
the Act. Accordingly, Penske requests an administrative exemption from
the Department.
If granted, the exemption will be effective as of June 15, 2000
with respect to the acquisition and holding by the Plan of the
Interests. In addition, this exemption will be effective as of the date
the notice granting the exemption is published in the Federal Register
with respect to the redemption of the Plan's Interests by the LLC.
6. McDonald Investments Inc. (McDonald), a company which is
customarily engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and
other purposes, valued all of the Interests as of June 15, 2000.
McDonald represents that it is independent of Penske, the LLC and RSP.
In connection with rendering this valuation, McDonald reviewed and
analyzed, among other things, the following: (i) The historical
financial information concerning the LLC's investments; (ii) certain
other internal information, primarily financial in nature including
projections concerning the business and operation of the LLC's
investments furnished to it by the LLC's management for the purposes of
the analysis; (iii) certain publicly-available information with respect
to other companies that McDonald believed to be comparable to the LLC's
investments and the trading markets for other comparable companies'
securities; and (iv) certain publicly-available information concerning
the nature and terms of other transactions that McDonald considered
relevant to its inquiry. McDonald also met with certain officers and
employees of Penske and the LLC to discuss the respective businesses
and prospects of the LLC's investments, as well as other matters
McDonald believed relevant to the valuation. McDonald concluded that
the fair market value of the LLC, on an equity basis, was in a range of
$7.3 million to $15.3 million, with a mid-point of $11.3 million. For
purposes of determining the redemption price for the Interests,
McDonald represented that the midpoint price of $11.3 million was
acceptable as the fair market value of the LLC as of June 15, 2000. As
a result of the appraisal the per-unit of the Interest was valued at
$3.37 ($11.3 million 3,355,685 units). Based upon this
valuation, the Plan will receive a minimum of $376,654.79 (111,767
units x $3.37) as a result of the redemption.
7. The LLC was also valued by McDonald as of October 31, 2000. The
second appraisal was based on the same criteria utilized in the first
appraisal. McDonald concluded that the fair market value of the LLC, on
an equity basis, was in a range of $2.9 million to $6.4 million, with a
mid-point of $4.7 million.Therefore, for purposes of determining the
redemption price for the Interests, McDonald represented that the
midpoint price of $4.7 million was acceptable as the fair market value
of the LLC as of October 31, 2000. As a result of the appraisal the
per-unit of the Interest was valued at $1.40 ($4.7 million
3,355,685 units).
8. The LLC was valued for a third time by McDonald as of December
31, 2000. This appraisal was based on the same criteria utilized in the
two prior appraisals. McDonald concluded that the fair market value of
the LLC, on an equity basis, was in a range of $5.8 million to $10.1
million, with a mid-point of $8 million. Therefore, for purposes of
determining the redemption price for the Interests, McDonald
represented that the midpoint price of $8 million was acceptable as the
fair market value of the LLC as of December 31, 2000. As a result of
the appraisal the per-unit of the Interest was valued at $2.38 ($8
million 3,355,685 units).
10. On the basis of the foregoing, within 15 business days after
the date the notice granting the final exemption is published in the
Federal Register, the LLC will redeem the Interests held by the Plan
for the greater of $3.37 per-unit (which represents the highest of the
independent appraisals of the LLC) or the fair market value of the
Interests on the date that the redemption occurs. The proceeds of the
redemption will be reallocated among the other funds
[[Page 36005]]
available for investment under the Plan pursuant to the participants'
current investment elections for new Plan contributions. Penske states
that the proposed redemption is in the interests of the Plan and its
participants and beneficiaries because the redemption will be a one-
time cash transaction allowing the Plan to divest itself of the
Interests and reinvest the proceeds of the redemption in assets that
will be diversified and generate higher rates of return.
11. In summary, the applicant represents that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The Interests were acquired by the Plan pursuant to Plan
provisions for individually-directed investment of participant
accounts;
(b) The Plan's receipt and holding of the Interests occurred in
connection with the Distribution;
(c) The Plan's acquisition of the Interests resulted from an
independent act of Penske as a corporate entity, such that all holders
of the Penske Stock, including the Plan, were treated in the same
manner;
(d) Within 15 business days after the date the notice granting the
final exemption is published in the Federal Register, the LLC will
redeem the Interests held by the Plan for not less than $3.37 per-unit;
(e) The price received by the Plan for the Interests will not be
less than the fair market value of the Interests on the date that the
redemption occurs; and
(f) The Plan paid no fees or commission in connection with the
acquisition and holding of the Interests nor will the Plan pay any fees
or commissions in connection with the redemption of the Interests.
For Further Information Contact: Khalif Ford of the Department,
telephone (202) 219-8883. (This is not a toll-free number).
Development Company Funding Corporation Located in the District of
Columbia
[Application No. D-10926]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990).
Section I. Transactions
A. If the proposed exemption is granted, effective August 25, 2000,
the restrictions of sections 406(a) and 407(a) of the Act, and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not
apply to the following transactions involving Trusts and Certificates
evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the
Underwriter of the Certificates and an employee benefit plan when the
SBA, the Fiscal Agent, the Selling Agent, the Central Servicing Agent,
the Trustee, the Underwriter, or an Obligor is a party in interest with
respect to such plan;
(2) The direct or indirect acquisition or disposition of
Certificates by a plan in the secondary market for such Certificates;
and
(3) The continued holding of Certificates acquired by a plan
pursuant to subsection I.A.(1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 of the Act for the acquisition or holding of a Certificate on
behalf of an Excluded Plan, by any person who has discretionary
authority or renders investment advice with respect to the assets of
that Excluded Plan.\4\
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\4\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 of the Act for any person rendering investment
advice to an Excluded Plan within the meaning of section
3(21)(A)(ii) of the Act and regulation 29 CFR section 2510.3-21(c).
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B. If the proposed exemption is granted, effective August 25, 2000,
the restrictions of section 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)(E) of the Code, shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the
Underwriter and a plan, when the person who has discretionary authority
or renders investment advice with respect to the investment of plan
assets in the Certificates is (a) an Obligor with respect to 5 percent
or less of the fair market value of the 504 Program Loans underlying
the Debentures related to that Series of Certificates, or (b) an
affiliate of a person described in (a); if
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of Certificates in
connection with the initial issuance of the Certificates, at least 50
percent of each Series of Certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group,
and at least 50 percent of the aggregate interest in the Series is
acquired by persons independent of the Restricted Group.
(iii) A plan's investment in each Series of Certificates does not
exceed 25 percent of all of the Certificates of that Series outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the Certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in Certificates representing an interest in a Trust containing
assets sold or serviced by the same entity.\5\ For purposes of this
subparagraph (iv) only, an entity will not be considered to service
assets contained in a Trust if it is merely a subservicer of that
Trust.
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\5\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
Certificates by a plan described in paragraph B.(1) in the secondary
market for such Certificates, provided that conditions set forth in
paragraphs B.(1)(i), (iii) and (iv) are met; and
(3) The continued holding of Certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. If the proposed exemption is granted, effective August 25, 2000,
the restrictions of sections 406(a), 406(b) and 407(a) of the Act, and
the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c) of the Code, shall not apply to
transactions in connection with the servicing, management and operation
of a Trust, provided:
(1) Such transactions are carried out in accordance with the terms
of a binding Trust Agreement; and
(2) The Trust Agreement is provided to, or described in all
material respects in the offering circular or other disclosure document
provided to the investing plans before they purchase Certificates
issued by the Trust.\6\
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\6\ The offering circular or other disclosure document must
contain substantially the same information that would be disclosed
in a prospectus if the offering of the Certificates were made in a
registered public offering under the Securities Act of 1933. In the
Department's view, the offering circular or other disclosure
document must contain sufficient information to permit plan
fiduciaries to make informed investment decisions.
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[[Page 36006]]
D. If the proposed exemption is granted, effective August 25, 2000,
the restrictions of sections 406(a) and 407(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 any transaction to which those restrictions or sanctions would
otherwise apply merely because a person is deemed to be a party in
interest or disqualified person (including a fiduciary) with respect to
a plan by virtue of providing services to the plan (or by virtue of
having a relationship to such service provider described in section
3(14)(F), (G), (H), or (I) of the Act or section 4975(e)(2)(F), (G),
(H), (I) of the Code), solely because of the plan's ownership of
Certificates.
Section II. Conditions
The relief provided under Section I is available only if the
following conditions are met:
A. The acquisition of Certificates by a plan is on terms (including
the Certificate price) that are at least as favorable to the plan as
such terms would be in an arm's-length transaction with an unrelated
party;
B. The rights and interests evidenced by the Certificates are not
subordinated to the rights and interests evidenced by other
Certificates in the same Series;
C. The Certificates and Debentures are guaranteed as to the timely
payment of principal and interest by the SBA, and are therefore backed
by the full faith and credit of the United States;
D. The Trustee is not an affiliate of any other member of the
Restricted Group.
Section III. Definitions
For purposes of this exemption:
A. ``Certificate'' means a certificate:
(1) That represents a beneficial ownership interest in a discrete
pool of Debentures and all payments thereon, held in Trust by the
Trustee pursuant to the Trust Agreement;
(2) That entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the discrete pool
of Debentures held as part of such Trust; and
(3) That is issued by the Trustee as agent for the SBA and
guaranteed by the SBA as to timely payment of principal and interest
pursuant to section 505 of the Small Business Investment Act of 1958,
as amended (the Small Business Investment Act).
B. ``Trust'' means the trust created pursuant to the Trust
Agreement, under which, with respect to each Series of Certificates,
the Trustee holds in Trust for the benefit of the certificate holders
of the Series the following property:
(1) The discrete pool of Debentures related to the Series;
(2) A debenture guarantee agreement executed by the SBA pursuant to
section 503 of the Small Business Investment Act pursuant to which the
SBA guarantees timely payment of principal and interest on the
Debentures related to the Series; and
(3) The certificate account maintained by the Central Servicing
Agent for such Series into which the Central Servicing Agent deposits
payments due in respect of the Debentures on each semiannual debenture
payment date.
C. ``Debentures'' means debentures issued by a certified
development company and guaranteed as to timely payment of principal
and interest by the SBA pursuant to section 503 of the Small Business
Investment Act.
D. ``504 Program Loans'' means loans made by a certified
development company to a small business concern and funded with the
proceeds of a Debenture pursuant to section 503 of the Small Business
Investment Act.
E. ``SBA'' refers to the U.S. Small Business Administration.
F. ``Underwriter'' means an entity which has received an individual
prohibited transaction exemption from the Department that provides
relief for the operation of asset pool investment trusts that issue
``asset-backed'' pass-through securities to plans, that is similar in
format and structure to this exemption (the Underwriter Exemptions);
\7\ any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such entity; and any member of an underwriting syndicate or selling
group of which such firm or person described above is a manager or co-
manager with respect to the Certificates.
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\7\ For a listing of the Underwriter Exemptions, see the
description provided in footnote 1 of Prohibited Transaction
Exemption 2000-58 (65 FR 67765, November 13, 2000).
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G. ``Fiscal Agent'' means the entity that has contracted with the
SBA to assess the financial markets, arrange for the production of
required documents, and monitor the performance of the Trustee and the
Underwriter.
H. ``Selling Agent'' means the entity appointed by a certified
development company to select Underwriters, negotiate the terms and
conditions of Debenture offerings with the Underwriters, and direct and
coordinate Debenture sales.
I. ``Central Servicing Agent'' means the entity that has entered
into a master servicing agreement with the SBA to support the orderly
flow of funds among borrowers, certified development companies and the
SBA.
J. ``Trustee'' means an entity that is the trustee of the Trust.
K. ``Obligor'' means any person that is obligated to make payments
under a Section 504 Loan related to a Debenture contained in the Trust.
L. ``Excluded Plan'' means any employee benefit plan with respect
to which any member of the Restricted Group is a ``plan sponsor''
within the meaning of section 3(16)(B) of the Act.
M. ``Restricted Group'' with respect to a class of Certificates
means:
(1) Each Underwriter;
(2) The Fiscal Agent;
(3) The Selling Agent;
(4) The Trustee;
(5) The Central Servicing Agent;
(6) Any Obligor with respect to loans relating to Debentures
included in the Trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the Trust, determined on
the date of the initial issuance of Certificates by the Trust;
(7) The SBA; or
(8) Any affiliate of a person described in (1)-(7) above.
N. ``Affiliate'' of another person includes:
(1) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), brother, sister, or spouse of a brother
or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
O. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
P. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
that has investment management authority or renders investment advice
with respect to assets of such person.
Q. ``Sale'' includes the entrance into a Forward Delivery
Commitment, provided:
(1) The terms of the Forward Delivery Commitment (including any fee
paid to
[[Page 36007]]
the investing plan) are no less favorable to the plan than they would
be in an arm's-length transaction with an unrelated party;
(2) The offering circular or other disclosure document is provided
to an investing plan prior to the time the plan enters into the Forward
Delivery Commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to Sales are met.
R. ``Forward Delivery Commitment'' means a contract for the
purchase or sale of one or more Certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
Certificates) and optional contracts (which give one party the right
but not the obligation to deliver Certificates to, or demand delivery
of Certificates from, the other party).
S. ``Trust Agreement'' means that trust agreement by and among the
SBA, the Fiscal Agent and the Trustee, as amended, establishing the
Trust and, with respect to each Series of Certificates, the supplement
to the trust agreement pertaining to such Series.
T. ``Series'' means any particular series of Certificates issued
pursuant to the Trust Agreement that, in the aggregate, represent the
entire beneficial interest in a discrete pool of Debentures held by the
Trustee pursuant to the Trust Agreement.
Summary of Facts and Representations
1. The Small Business Administration (the SBA) is an agency
established on July 30, 1953, pursuant to the Small Business Act. It is
under the general direction and supervision of the President of the
United States, and is not within or affiliated with any other agency or
department of the federal government. The SBA was created to further
Congressional policy that the government should aid, counsel, assist
and protect the interests of small businesses to preserve free
competitive enterprise and strengthen the country's economy.
The SBA was authorized by the Small Business Investment Act to
establish a program (the 504 program) to provide financing to small
businesses for projects that further one or more economic development
objectives and meet certain eligibility criteria specified in the 504
program regulations. The 504 program is intended to foster economic
development, create or preserve job opportunities, and stimulate growth
of small businesses.
2. Under the 504 program, financing is provided to small businesses
by certified development companies (CDCs). A CDC is generally a not-
for-profit corporation or limited liability company that has been
certified by the SBA, although a CDC certified by the SBA before
January 1, 1987 may be a for-profit corporation. Each CDC must serve a
designated area of operations identified by the CDC and approved by the
SBA; there also may be one statewide CDC in a state, responsible for
fostering economic development throughout the state and for providing
loans under the 504 program in areas not adequately served by other
CDCs. SBA regulations prescribe the number of members and the interests
that must be represented by the members, the composition and activities
of the board of directors and the staffing requirements of the CDC.
They also impose an application process for certification as a CDC,
including a public notice and comment period, and a probationary
period.
In addition to marketing the 504 program, a CDC may furnish other
financial and technical assistance to small businesses, or may assist
them in obtaining such assistance. A CDC must generate at least two 504
program loan approvals every fiscal year, and its loan portfolio must
meet certain standards of job creation or job preservation prescribed
in regulations. CDCs submit annual and interim reports, as well as
other information, to the SBA.
3. A small business applies for 504 program assistance to the CDC
serving the area in which the project is located. If the SBA approves
the project, permanent financing is arranged generally consisting of at
least a 10% contribution from the small business; a loan from the CDC
for up to 40% of the project costs and certain administrative costs,
collateralized by a second lien on the project property; and a private
sector loan for the balance, collateralized by a first lien on the
project property. The minimum contribution from the small business is
15% if the borrower has operated for two years or less or if the
project involves a limited or single purpose building or structure and
is 20% if both conditions are met. Interim financing for everything
except the borrower's contribution is often obtained from the private
sector lender that will participate in the permanent financing.
The CDC's contribution to the project financing is raised by the
CDC's issuance of a debenture. Under authority granted in 15 U.S.C.
697(a), the SBA guarantees the timely payment of all principal and
interest as scheduled on this debenture; the full faith and credit of
the United States is pledged to the payment of these guaranteed
amounts.\8\
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\8\ A small percentage of debentures are issued to fund the
acquisition of property by a CDC that the CDC then leases to a small
business concern. The lease payments are structured so as to be
sufficient to service and retire the debenture. In the event of an
automatic event of default on a lease, the lease may be terminated,
but the SBA is not required to accelerate the related debenture so
long as the CDC or the SBA continues to pay principal and interest
when due on the debenture.
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4. The term of both the underlying loan and the debenture is either
10 or 20 years. The interest rate of the loan and of the debenture are
set by the SBA and approved by the Secretary of the Treasury. The loan
underlying the debenture is generally for a minimum of $50,000,
although it may, for good cause shown, be as small as $25,000. The
total 504 program assistance to a borrower and its affiliates may not
exceed $750,000 (or $1,000,000 in the case of projects meeting certain
public policy goals). The amount of the underlying note and of the
debenture equals the amount of the underlying loan plus administrative
costs, including the SBA guarantee fee, a funding fee to cover the cost
of the public issuance of securities and the trustee, the CDC
processing fee, closing costs, and the underwriter's fee.
The underlying loan is secured by a junior lien on project
property, which is comprised of one or more long term fixed assets,
such as land, buildings, machinery, and equipment, acquired or improved
with 504 program financing for use in business operations. The
debentures are not secured. In its discretion, the SBA may permit a
debenture to be subordinated to other obligations of the CDC, but not
to debt incurred by the CDC to obtain funds to loan to the borrower to
be used as the borrower's contribution to the project financing.
An event of default under the 504 program note may require
automatic acceleration or may permit forbearance of acceleration while
a cure is attempted, depending upon the terms of the note. Automatic
acceleration may be required upon the appointment of a receiver or
liquidator for the borrower, the filing of a petition by or against the
borrower under federal or state bankruptcy or insolvency law, the
making of an assignment for the benefit of the borrower's creditors, or
the failure by the borrower to comply with certain SBA regulations;
however, the SBA may postpone acceleration if the SBA determines that
timely payment is likely in the future. In the case of discretionary
defaults, the SBA's policy is to seek to resolve the default, while
making scheduled payments on the related debenture pursuant to its
guarantee. If
[[Page 36008]]
the note is accelerated, the debenture that funded it is automatically
accelerated, and the SBA pays 100% of the principal balance, plus
interest to the payment date, pursuant to its guarantee. The SBA
generally recovers its guarantee payments from the CDC, although,
except in the case of fraud, negligence, or misrepresentation by the
CDC, its recovery is limited to the amount the CDC has received on the
loan and to the collateral.
If the 504 program loan is prepaid, the corresponding debenture is
prepaid with interest and any applicable premium. If the debenture is
in a pool, as discussed below, the investors in the pool are paid pro
rata, and the SBA's guarantee of the pool is proportionately reduced.
If the entire pool is prepaid, the SBA may redeem the certificates
backed by the pool. The payment of any prepayment premium to the
trustee is not subject to the SBA guarantee, although the distribution
of any prepayment premium is guaranteed. Recovery of any acquisition
premium paid by an investor to acquire a participation certificate in
the secondary market also is not guaranteed.
5. The debentures are issued under section 503 of the Small
Business Investment Act, added in 1980 by P.L. 96-302. Until June 1989,
the debentures were usually sold to the Federal Financing Bank, an
instrumentality of the United States under the general supervision of
the Secretary of the Treasury. However, in 1986, section 505,
authorizing the creation of trusts that consist solely of guaranteed
debentures and that issue certificates guaranteed by the SBA as to
timely payment of principal and interest, was added to the Small
Business Investment Act by Public Law 99-272.
Each debenture bears interest at a stated fixed rate per annum, and
is a self-amortizing debt instrument calling for level payments of
principal and interest at semiannual intervals over its term to
maturity. A debenture may be prepaid in whole, but not in part, on any
semiannual payment date for a specified prepayment price. The
prepayment price may include a premium over the outstanding principal
amount of the debenture. The premium declines with the passage of time
and is eliminated after one-half of the stated term to maturity for the
debenture has elapsed.
A selling agent for the CDCs agrees to sell a specified amount of
SBA-guaranteed debentures (the debenture pool) to the underwriters
under a Debenture Purchase, Pooling and Exchange Agreement. All
debentures within a debenture pool have identical stated interest
rates, payment dates, and terms to maturity. The underwriters assign
the debenture pool to the trustee in exchange for participation
certificates.
The trustee issues the participation certificates as a series of
the trust established by the 1986 trust agreement, as amended, pursuant
to a supplement to the trust agreement. The supplement sets out the
payment terms for the debentures and certificates. Each series of
certificates relates to a discrete debenture pool and is issued
pursuant to a discrete supplement to the trust agreement.
Each certificate represents an undivided beneficial ownership
interest in each debenture in the related debenture pool and is
entitled to a ratable share of all payments made on each debenture in
that debenture pool. Thus, the interest rate, payment terms, and
maturity date of a certificate will correspond to those of the
debentures in the related pool.
With respect to each series of certificates, the certificates and
the debentures in the related debenture pool are issued simultaneously.
Each debenture pool is closed upon the simultaneous issuance of the
series of certificates and the related debentures. The trust does not
hold any assets that are not associated with a particular series.
Certificates issued under this program have a term of 10 or 20
years, must have a face value of at least $25,000, and are issued in
registered form and transferred only by entry on the central registry
maintained by the trustee. The statute and regulations governing the
504 program do not provide for issuance of subordinated certificates.
The SBA agrees to issue its guarantee on the certificates. The
Department of the Treasury approves the negotiated sale price and
coupon on the certificates. The underwriters sell the certificates to
investors and the proceeds, less an underwriting commission, are
distributed to the CDC's selling agent, acting through a servicing
agent, which transfers the funds to the CDC to fund the 504 program
loans.
The certificates are not rated by a rating agency because of the
SBA guarantee, which applies to both the certificates and the
debentures that serve as collateral for the certificates, and which is
backed by the full faith and credit of the United States. Because of
this guarantee, the Applicant represents that the only risks to an
investor in the participation certificates are the risk that prepayment
of the certificate may affect its yield, and the de minimis risk that
the United States, acting through the SBA, may default on its
obligation.
Participation certificates issued under the 504 program will prepay
if any debenture included in the related pool (1) is accelerated or
terminated in connection with an event of default under the related 504
program note or notes or (2) is prepaid at the option of the related
CDC, usually in connection with the prepayment of the related 504
program note or notes. Each offering circular for the participation
certificates contains tables which disclose prepayment experience for
the debentures in connection with accelerations and prepayments since
the second half of 1986.
The acquisition of certificates by employee benefit plans will be
on terms (including the certificate price) that are at least as
favorable to the plan as such terms would be in an arm's-length
transaction with an unrelated party.
7. As of February 16, 2000, there had been 161 issues of 20-year
certificates and 65 issues of 10-year certificates. Offerings of 20-
year certificates have been made monthly since November 1986, and the
aggregate amount of such certificates sold as of February 16, 2000 was
$10,453,821,000. Ten-year certificates were first offered in December
1986; they were offered quarterly from January 1987 until January 1995,
and have been offered bi-monthly since January 1995; the aggregate
amount of such certificates sold as of February 16, 2000 was
$558,669,000.
8. Regulations issued under the Small Business Investment Act
require the SBA and CDC to appoint a selling agent to select
underwriters, negotiate the terms of debenture offerings with the
underwriters, and direct and coordinate debenture sales; regulations
likewise require the appointment of a fiscal agent to assess the
financial markets, arrange for the production of documents required for
offering certificates, and monitor the performance of the trustee and
the underwriters. Development Company Funding Corporation (DCFC) has
been appointed as fiscal agent for the SBA under a Fiscal Agency
Agreement with the SBA dated as of August 12, 1999 (superseding
agreements dated as of December 1, 1986 and September 30, 1988) and as
selling agent for CDCs that issue debentures which DCFC sells to
underwriters pursuant to a Selling Agency Agreement with the SBA dated
as of August 12, 1999 (superseding agreements dated as of December 1,
1986 and September 30, 1988). DCFC is a District of Columbia not-for-
profit
[[Page 36009]]
corporation that was created to facilitate 504 program transactions.
DCFC shares some of its facilities and staff with the National
Association of Development Companies, a not-for-profit trade
organization. It is paid by the SBA for its services as fiscal agent,
and is paid its necessary expenses for staff and overhead, net of other
income, by the SBA for its services as selling agent. Payments to DCFC
of its fees as fiscal agent and selling agent are made from the master
reserve account, described below.
9. The regulations provide for the designation by the SBA of a
central servicing agent to support the orderly flow of funds among the
borrowers, CDCs and SBA. SBA has engaged Colson Services Corp. (Colson)
to act as central servicing agent, receiving and disbursing funds wired
by the underwriters, and servicing payments on the debentures. Colson
collects a monthly servicing fee from the borrower of each 504 program
loan.
Colson was awarded the contract to act as central servicing agent
through a competitive bidding process. Colson is required by regulation
to provide a fidelity bond or insurance in an amount that fully
protects the government, and the master servicing agreement between
Colson and the SBA requires that Colson carry a fidelity bond or
similar insurance in an amount commensurate with the level of funds in
its possession, but not less than $10 million. In addition, the master
servicing agreement requires Colson to maintain a standard Banker's
Blanket Bond insurance policy in an amount ``customary and sufficient''
to protect against loss caused by actions of Colson, its employees or
agents.
10. The master servicing agreement requires Colson to maintain
certain accounts to hold funds that are in Colson's custody in
connection with the 504 program. The master servicing agreement
specifies the accounts to be maintained and the payments to be made,
and imposes timing and other performance requirements. Colson maintains
accounts required under the master servicing agreement at J.P. Morgan
Chase & Co., which recently purchased Colson. The master servicing
agreement limits the investment of funds in these accounts to debt
obligations issued or guaranteed by the U.S. government and money
market funds that hold these types of investments. Investment earnings
are sufficient to pay the trustee and investment management fees
charged in connection with the account, and a fee to Colson for record-
keeping services that Colson provides for the accounts. Investment
earnings in excess of these fees are disbursed semiannually to the
CDCs.
Colson maintains a master reserve account through which all funds
related to the 504 program loans and the debentures flow. The master
reserve account is funded by the guarantee fee and a funding fee
collected from the borrower of a 504 program loan, and by principal and
interest payments on 504 program loans. Interest on loan payments that
accrues in the account between the date of receipt of each monthly
payment and its disbursement by the trustee to certificateholders must
be paid by Colson to the CDC servicing the loan, at the direction of
the SBA.
The master servicing agreement requires Colson to deliver periodic
status reports to the SBA, and requires independent audits of Colson's
financial statements and operations each year. It also provides for a
contracting officer to administer the contract on behalf of SBA and for
a contracting officer's technical representative to monitor all
technical aspects of and to assist in administering the contract. SBA
and its authorized representatives have the right of access and
inspection of Colson's facilities and records relating to the
operations of the 504 program. Colson may forfeit its right to its fees
if, in the determination of the SBA, it has not submitted required
reports or performed required services, unless the failure is beyond
its control and without its fault. In addition, SBA may terminate the
contract for default by Colson, including Colson's failure to perform
its obligations in a timely manner, as well as Colson's insolvency or
the filing of a petition in bankruptcy by or against Colson if the
petition is not dismissed or withdrawn within 90 days.
11. The regulations also require appointment of a trustee to issue
and transfer the certificates, maintain registries of the debentures
and the certificates, hold the debentures for the benefit of the SBA
and the certificateholders, receive payments on the debentures and
disburse payments on the certificates. None of the administrative fees
paid by the borrower (including the SBA guarantee fee, funding fee, the
CDC processing fee, closing costs and the underwriter's fee) are paid
out of the trust. The trustee, as holder of a debenture guarantee
agreement with the SBA with respect to any pool of debentures, has the
right to enforce the SBA's guarantee for the benefit of the holders of
the certificates in the related series. Harris Trust Company of New
York (Harris Trust) was appointed as trustee and entered into a trust
agreement dated as of December 1, 1986 with the SBA and with DCFC as
fiscal agent. Effective May 8, 2000, The Bank of New York succeeded
Harris Trust as trustee. Under the trust agreement, as amended, the
trustee is compensated by the SBA from time to time as shall be agreed.
As a condition of the exemption, the trustee may not be an
affiliate of the underwriter, fiscal agent, selling agent, central
servicing agent, any obligor with respect to loans relating to
debentures included in the trust constituting more than 5 percent of
the aggregate unamortized principal balance of the assets in the trust
(determined on the date of the initial issuance of certificates by the
trust), the SBA, or any of their affiliates.
12. Each agent must provide a fidelity bond or insurance sufficient
to fully protect the interest of the government, and must furnish the
SBA with access to all books, records and other documents relating to
SBA-guaranteed debentures.
13. In connection with the original issuance of participation
certificates, an offering circular is furnished to all investors,
including investing plans. The participation certificates are exempt
from the requirements of the Securities Act of 1933 and the Securities
Exchange Act of 1934. However, the SBA, like most other government
agencies that issue certificates or debt securities, seeks to conform
to market convention, and therefore complies, to the extent possible,
with the disclosure requirements generally applicable to offerings of
participation certificates. Therefore, the participation certificates
are issued pursuant to offering circulars that, in general, contain:
(a) Information concerning the payment terms of the participation
certificates, and any material risk factors with respect to the
participation certificates;
(b) a description of the SBA guarantee;
(c) identification of the trustee;
(d) a description of the SBA 504 program and the debentures held by
the trust;
(e) a description of the servicing arrangements set forth in the
trust agreement, including a description of periodic statements that
are provided to or made available to investors by the trustee;
(f) a description of the events that constitute events of default
under the governing agreements and a description of the trustee's and
the investors' remedies incident thereto;
(g) a general discussion of the principal Federal income tax
consequences of the purchase,
[[Page 36010]]
ownership and disposition of the participation certificates by a
typical investor;
(h) a description of the underwriters' or placement agents' plan
for distributing the participation certificates to investors; and
(i) information about the scope and nature of the secondary market,
if any, for the participation certificates. Reports indicating the
amount of payments of principal and interest are provided to investors
as frequently as distributions are made to investors.
No information about the characteristics of the borrowers of the
underlying collateral is included; investors generally evaluate the
credit quality of the collateral solely on the basis of the SBA's full
faith and credit guarantee.
Under the authorizing legislation, the SBA must require disclosure
by a seller, prior to any sale, of ``information on the terms,
conditions, and yield'' of the participation certificates; regulations
add the requirement to provide information on the premium and any other
characteristics not guaranteed by the SBA. (15 U.S.C. 697b(f)(1)(C), 13
CFR 120.941.) Thus, each seller, whether in the initial offering or the
secondary market, must inform its purchaser of the economic terms and
risks of the investment, as modified by the price at which each sale is
made.
14. The underwriters are permitted, but not required, to engage in
certain transactions that may stabilize the price of the participation
certificates. In general, it is the policy of many underwriters to
attempt to make a market for securities for which they are the lead or
co-managing underwriter.
15. The participation certificates are generally priced at a spread
above the interest rate on Treasury notes of comparable maturity. The
spread reflects the risk of prepayment. Historically, the spread has
been similar to that of certain comparable guaranteed governmental
mortgage-backed securities.
16. The Applicant represents that the participation certificates
are an extremely high-quality investment, benefitting from an SBA
guarantee, backed by the full faith and credit of the United States, on
both the certificates and on the debentures that constitute the
collateral for the certificates. The certificates are acceptable as
security for the deposit of public moneys subject to the control of the
United States, and as collateral for Treasury Tax and Loan Accounts.
National banks, and, if permitted by state law, state banks that are
members of the Federal Reserve System may deal in, underwrite and
purchase the certificates for their own account without limitation. The
certificates are legal investments for federal savings and loan
associations, federal savings banks, and federal credit unions. They
are legal investments for surplus and reserve funds of Federal Home
Loan Banks to the same extent as they are legal investments for
fiduciary and trust funds under the laws of the state in which the
Federal Home Loan Bank is located. In the discretion of each Federal
Reserve Bank, they may be used as security for advances to depositary
institutions by Federal Reserve Banks. Under the laws of many states,
they are legal for investment by savings banks, savings and loan
associations, credit unions, insurance companies, trustees and other
fiduciaries.
17. In summary, the Applicant represents that the proposed
transactions will satisfy the statutory criteria of section 408(a) of
the Act because:
(a) The decision to acquire certificates will be made by a plan
fiduciary after receipt of full and detailed disclosure of all material
features of the trust and the certificates, including all applicable
fees and charges.
(b) The transactions may easily be audited by a plan fiduciary and
all the records necessary to review the transactions will be kept for
six years. No further review by the Department is required.
(c) The debentures and the certificates are guaranteed as to
principal and interest by the United States of America.
(d) Each series of certificates relates to a discrete debenture
pool, which pool is closed upon the simultaneous issuance of the series
of certificates and the related debentures. The trust does not hold any
assets that are not associated with a particular series.
(e) All actions by the SBA, the fiscal agent and the trustee with
respect to the trust, the assets of the trust, the certificates and
certificateholders will be governed by the trust agreement, which will
be available to plan fiduciaries for their review prior the plan's
investment in certificates.
Notice to Interested Persons
The Applicant represents that because those potentially interested
participants and beneficiaries cannot all be identified, the only
practical means of notifying such participants and beneficiaries of
this proposed exemption is by the publication of this notice in the
Federal Register. Comments and requests for a hearing must be received
by the Department not later than 45 days from the date of publication
of this notice of proposed exemption in the Federal Register.
For Further Information Contact: Karen Lloyd of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
J.P. Morgan Chase & Co. (Morgan Chase) and its Affiliates
(Collectively, the Applicants) Located in New York, New York
[Application Number D-10998]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act 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).\9\
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\9\ For purposes of this exemption, references to Title I of the
Act, unless otherwise noted herein, refer also to corresponding
provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) 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 purchase or sale by employee benefit plans (the Plans), other
than Plans sponsored and maintained by the Applicants, of publicly-
traded debt securities (the Debt Securities) issued by the Applicants;
and (2) the extension of credit by the Plans to the Applicants in
connection with the holding of the Debt Securities.
This proposed exemption is subject to the general conditions that
are set forth below in Section II.
Section II. General Conditions
(a) The Debt Securities are made available by the Applicants in the
ordinary course of their business to Plans as well as to customers
which are not Plans.
(b) The decision to invest in the Debt Securities is made by a Plan
fiduciary (the Independent Plan Fiduciary) or a participant in a Plan
that provides for participant-directed investments (the Plan
Participant), which is independent of the Applicants.
(c) The Applicants do not have any discretionary authority or
control or provide any investment advice, within the meaning of 29 CFR
2510.3-21(c), with respect to the Plan assets involved in the
transactions.
(d) The Plans pay no fees or commissions to the Applicants in
[[Page 36011]]
connection with the transactions covered by the requested exemption,
other than the mark-up for a principal transaction permissible under
Part II of Prohibited Transaction Class Exemption (PTCE) 75-1 (40 FR
50845, October 31, 1975).\10\
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\10\ The Department is providing no opinion herein as to whether
any principal transactions involving debt securities would be
covered by PTCE 75-1, or whether any particular mark-up by a broker-
dealer for such transaction would be permissible under Part II of
PTCE 75-1.
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(e) The Applicants agree to notify Plan investors in the prospectus
(the Prospectus) for the Debt Securities that, at the time of
acquisition, no more than 15 percent of a Plan's assets should be
invested in any of the Debt Securities.
(f) The Debt Securities do not have a duration which exceeds 9
years from the date of issuance.
(g) Prior to a Plan's acquisition of any of the Debt Securities,
the Applicants fully disclose, in the Prospectus, to the Independent
Plan Fiduciary or Plan Participant, all of the terms and conditions of
such Debt Securities, including, but not limited to, the following:
(1) A statement to the effect that the return calculated for the
Debt Securities will be denominated in U.S. dollars;
(2) The specified index (the Index) or Indexes on which the rate of
return on the Debt Securities is based;
(3) A numerical example, designed to be understood by the average
investor, which explains the calculation of the return on the Debt
Securities at maturity and reflects, among other things, (i) a
hypothetical initial value and closing value of the applicable Index,
and (ii) the effect of any adjustment factor on the percentage change
in the applicable Index;
(4) The date on which the Debt Securities are issued;
(5) The date on which the Debt Securities will mature and the
conditions of such maturity;
(6) The initial date on which the value of the Index is calculated;
(7) Any adjustment factor or other numerical methodology that would
affect the rate of return, if applicable;
(8) The ending date on which interest is determined, calculated and
paid;
(9) Information relating to the calculation of payments of
principal and interest, including a representation to the effect that,
at maturity, the beneficial owner of the Debt Securities is entitled to
receive the entire principal amount, plus an amount derived directly
from the growth in the Index (but in no event less than zero);
(10) All details regarding the methodology for measuring
performance;
(11) The terms under which the Debt Securities may be redeemed;
(12) The exchange or market where the Debt Securities are traded or
maintained; and
(13) Copies of the proposed and final exemptions relating to the
exemptive relief provided herein, upon request.
(h) The terms of a Plan's investment in the Debt Securities are at
least as favorable to the Plan as those available to an unrelated non-
Plan investor in a comparable arm's length transaction at the time of
such acquisition.
(i) In the event the Debt Securities are delisted from any
nationally-recognized securities exchange, the Applicants will apply
for trading through the National Association of Securities Dealers
Automated Quotations System (NASDAQ), which requires that there be
independent market-makers establishing a market for such securities in
addition to the Applicants. If there are no independent market-makers,
the exemption will no longer be considered effective.
(j) The Debt Securities are rated in one of the three highest
generic rating categories by at least one nationally-recognized
statistical rating service at the time of their acquisition.
(k) The rate of return for the Debt Securities is objectively
determined and, following issuance, the Applicants retain no authority
to affect the determination of the return for such security, other than
in connection with a ``market disruption event'' (the Market Disruption
Event) that is described in the Prospectus for the Debt Securities.
(l) The Debt Securities are based on an Index that is--
(1) Created and maintained \11\ by an entity that is unrelated to
the Applicants and is a standardized and generally-accepted Index of
securities; or
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\11\ For purposes of this exemption, the term ``maintain'' means
that all calculations relating to the securities in the Index, as
well as the rate of return of the Index, are made by an entity that
is unrelated to the Applicants.
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(2) Created by the Applicants, but maintained by an entity that is
unrelated to the Applicants,
(i) Consists either of standardized and generally-accepted Indexes
or an Index comprised of publicly-traded securities that are not issued
by the Applicants, are designated in advance and listed in the
Prospectus for the Debt Securities (Under either circumstance, the
Applicants may not unilaterally modify the composition of the Index,
including the methodology comprising the rate of return.),
(ii) Meets the requirements for an Index in Rule 19b-4 (Rule 19b-4)
under the Securities Exchange Act of 1934 (the 1934 Securities Act),
and
(iii) The index value (the Index Value) for the Index is publicly-
disseminated through an independent pricing service, such as Reuters
Group, PLC (Reuters) or Bloomberg L.P. (Bloomberg), or through a
national securities exchange.
(m) The Applicants do not trade in any way intended to affect the
value of the Debt Securities through holding or trading in the
securities which comprise an Index.
(n) The Applicants maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (o) of this
section to determine whether the conditions of this proposed exemption
have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Applicants,
the records are lost or destroyed prior to the end of the six year
period; and
(2) No party in interest other than the Applicants shall be subject
to the civil penalty that may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if
the records are not maintained, or are not available for examination as
required by paragraph (o) below.
(o)(1) Except as provided in section (o)(2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (n) are
unconditionally available at their customary location during normal
business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC);
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any Plan Participant or beneficiary of any participating Plan,
or any duly authorized representative of such Plan Participant or
beneficiary.
(o)(2) None of the persons described above in subparagraphs(B)-(D)
of paragraph (o)(1) are authorized to examine the trade secrets of the
Applicants or commercial or financial information which is privileged
or confidential.
[[Page 36012]]
Summary of Facts and Representations
1. Morgan Chase is a financial holding company incorporated under
Delaware law in 1968 and headquartered in New York City. As of December
31, 2000, after giving effect to the merger described below, Morgan
Chase was the second largest banking institution in the United States,
with approximately $715 billion in assets and approximately $42 billion
in stockholders' equity. On December 31, 2000, J.P. Morgan & Co.
Incorporated merged with and into The Chase Manhattan Corporation. Upon
completion of the merger, its name was changed to ``J.P. Morgan Chase &
Co.'' (i.e., Morgan Chase). The merger was accounted for as a pooling
of interests. Morgan Chase is a global financial services firm with
operations in over 60 countries, and has as its principal bank
subsidiaries: The Chase Manhattan Bank (Chase Bank) and Morgan Guaranty
Trust Company of New York (Morgan Guaranty), each of which is a New
York banking corporation headquartered in New York City; and Chase
Manhattan Bank USA, National Association, headquartered in Delaware.
The principal non-bank subsidiary of Morgan Chase is its investment
bank subsidiary, J.P. Morgan Securities Inc. (J.P. Morgan Securities).
Chase Bank is expected to merge with Morgan Guaranty in late 2001.
2. The activities of Morgan Chase will be internally organized, for
management reporting purposes, into five major businesses:
Investment Banking, which includes securities underwriting
financial advisory, trading, mergers and acquisitions advisory, and
corporate lending and syndication businesses;
Investment Management and Private Banking, which includes
an asset management business, including mutual funds; institutional
money management and cash management businesses; and a private bank,
which provides wealth management solutions for a global client base of
high net worth individuals and families;
Treasury and Securities Services, which provides
information and transaction processing services, and moves trillions of
dollars daily in securities and cash for its wholesale clients.
Treasury and Securities Services includes custody, cash management,
trust and other fiduciary service businesses;
J.P. Morgan Partners, which is one of the world's largest
and most diversified private equity investment firms, with total funds
under management in excess of $20 billion; and
Retail and Middle Market Banking, which serves over 30
million consumers, small business and middle-market customers
nationwide. Retail and Middle Market Banking offers a wide variety of
financial products and services, including customer banking, credit
cards, mortgage services and consumer finance services, through a
diverse array of distribution channels, including the internet and
branch and ATM networks.
3. The Plans will consist of employee benefit plans that are
covered under the provisions of Title I of the Act, as amended, and/or
subject to section 4975 of the Code. For purposes of this proposed
exemption, the Plans will not consist of plans that are sponsored and
maintained by the Applicants for their own employees. In the case of
the Applicants' in-house plans, Morgan Chase represents that the
acquisition and holding of the Debt Securities by such plans would be
covered under the statutory exemption that is provided under section
408(e) of the Act.\12\
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\12\ The Department expresses no opinion herein on whether the
acquisition and holding of the Debt Securities by the Applicants'
in-house plans are covered under the provisions of section 408(e) of
the Act. In this regard, interested persons should refer to the
conditions contained in section 408(e), as well as the definitions
of the terms ``qualifying employer security'' (see section 407(d)(5)
of the Act) and ``marketable obligations'' (see section 407(e) of
the Act).
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4. The Applicants represent that broker-dealers routinely need
additional capital in order to maintain inventories of securities for
their market-making and other business activities. As a result, the
Applicants maintain a continuous need to borrow funds from various
institutional and individual investors for use in their business
operations. In response to this need, certain of the Applicants may
from time to time issue (the Issuers) various high-quality, publicly-
offered debt securities (i.e., the Debt Securities), rated in one of
the three highest generic rating categories by nationally recognized
rating firms, offering varying levels of risk and potential return.
Among the debt securities offered by the Applicants are publicly-
offered, unsecured, SEC-registered Debt Securities, with terms that are
no longer in duration than nine (9) years. The Debt Securities will be
U.S. dollar-denominated so that no foreign currency conversions will be
required in the calculation of the rate of return. Further, the Debt
Securities will offer varying levels of risk and rates of return. The
Debt Securities would be listed on at least one major stock exchange,
and they would be issued in denominations of $10 per principal unit,
with the minimum purchase being one unit.
The Debt Securities may be offered on a variety of terms and
formulas under which rates of return are objectively determined in
accordance with certain Indexes by the calculation agent. A registered
broker-dealer Applicant would act as calculation agent. The Applicants
represent that since small Plans will likely invest in the Debt
Securities, the formulas used to calculate the rates of return will be
designed to be understood by the average investor and clearly described
in the ``plain English'' summary of the Debt Securities in the
Applicants' prospectus.
5. The Applicants represent that their activities are subject to
various levels of oversight and regulation by the Securities and
Exchange Commission (SEC), the Commodities Futures Trading Commission,
and other federal and state regulatory agencies. The Applicants also
represent that their activities are subject to the oversight of self-
regulatory organizations such as the NYSE and the AMEX. The Applicants
further represent that J.P. Morgan Securities, as a registered broker-
dealer and member of the NYSE, is subject to the Net CapitalRule 15c3-1
of the 1934 Act, which specifies the minimum net capital requirement of
a broker-dealer.
6. Due to the affiliation between an Issuer and J.P. Morgan
Securities or its Affiliates, as a service provider to the Plans, the
Applicants represent that they are likely to be parties in interest, as
defined in section 3(14)(B) or (H) of the Act, with respect to a high
percentage of Plans that purchase, sell, or hold these Debt Securities
regardless of whether the Debt Securities are purchased directly from
the Applicants.\13\ Thus, the Applicants represent that an Issuer may
be a party in interest to a Plan solely because of its affiliation with
a service provider to the Plan, and as the counterparty to the Plan in
a transaction where the Plan holds a Debt Security issued by an
Affiliate. Further, other Affiliates may be service providers to Plans
on account of their roles as trustees, custodians, investment advisors,
or broker-dealers for such Plans. These relationships would make an
Issuer a party in interest to those Plans and would create potential
prohibited transactions in the event
[[Page 36013]]
such Plans acquire and hold the Debt Securities.\14\
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\13\ In this regard, the Applicants represent that PTCE 75-1
does not directly address transactions where, as here, there is a
continuing extension of credit as a result of a sale to a plan by a
broker-dealer of debt securities issued by the broker-dealer's
affiliates.
\14\ In ERISA Advisory Opinion 88-09A (April 15, 1988), a bank
that sponsored self-directed master and prototype IRAs requested an
opinion from the Department as to whether purchases of stock issued
by the parent corporation of the bank directly from such parent by
the self-directed IRAs would violate section 4975 of the Code.
Section 4975 of the Code prohibits, in part, the sale or
exchange of property between a plan and a disqualified person
(4975(c)(1)(A)) and the use by or for the benefit of a disqualified
person of the income or assets of a plan (4975(c)(1)(D)). Section
4975(e)(2) of the Code defines the term ``disqualified person'' to
include a plan fiduciary and a person providing services to a plan.
ERISA Advisory Opinion 88-09A concluded that, although the bank
is a disqualified person with respect to the IRAs by reason of the
provision of services, the corporate parent of the bank is not a
disqualified person with respect to the IRAs solely by reason of its
ownership of the bank. In this regard, interested persons should
contrast section 3(14)(H) of the Act with section 4975(e)(2)(H) of
the Code. The question of whether the corporate parent is a
disqualified person under any other provision of section 4975(e)(2)
of the Code would require an examination of the particular facts and
circumstances. The Advisory Opinion further concluded that, to the
extent that the corporate parent is not a disqualified person with
respect to the IRAs, purchases of stock from the parent by the bank
on behalf of the IRAs, at the direction of the IRA participant,
would not involve transactions described in section 4975(c)(1)(A) of
the Code. However, while the corporate parent of such bank may not
be a disqualified person with respect to the IRAs, purchases of
parent stock by the IRAs would raise issues under section
4975(c)(1)(D) of the Code if a transaction was part of a broader
overall agreement, arrangement or understanding designed to benefit
disqualified persons.
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The Applicants are requesting an administrative exemption to enable
Plans to invest in the Debt Securities, under the terms and conditions
described herein, and to avoid liability for prohibited transactions
resulting from investment by Plans in the Debt Securities.
7. The Applicants believe that while Part II of PTCE 75-1 provides
relief for principal transactions between a broker-dealer and a Plan,
and would cover a purchase of the broker-dealer affiliates' securities
by such Plans (if the conditions required therein were met), it is
questionable whether that class exemption would cover the continuing
extension of credit related to the holding of any Debt Securities by a
Plan.\15\
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\15\ The Department is providing no opinion herein as to whether
any principal transaction involving Debt Securities would be covered
by PTCE 75-1, or whether any particular mark-up by a broker-dealer
for such transaction would be permissible under Part II of PTCE 75-
1.
---------------------------------------------------------------------------
The Applicants note that some independent Plan fiduciaries have
expressed concern regarding the application of PTCE 75-1 to broker-
dealer sales of broker-affiliated debt to Plans either as a part of an
original issue of the securities or in the secondary market. Moreover,
the Applicants represent that PTCE 96-23 (61 FR 15975, April 10, 1996)
\16\ is unavailable to participant-directed, defined contribution Plans
and other small Plans because these Plans, due to their size, are
unlikely to have INHAMs responsible for making investment decisions
relating to the acquisition, holding and disposition of securities in
which the Plans invest.
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\16\ PTCE 96-23 permits various transactions involving employee
benefit plans whose assets are managed by an in-house asset manager
(the INHAM). An INHAM is an entity which is generally a subsidiary
of an employer sponsoring the plan. It is also a registered
investment adviser with management and control of total assets
attributable to plans maintained by the employer and its affiliates
which are in excess of $50 million.
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Similarly, the Applicants note that while PTCE 84-14 \17\ minimizes
the risk of inadvertent prohibited transactions for Plans whose assets
are managed by a QPAM, they believe it is unlikely that participant-
directed, defined contribution Plans or small Plans would incur the
expense of a QPAM for the purchase and continued holding of the Debt
Securities. The Applicants also believe that the additional cost of a
QPAM for a small Plan with a small investment would not be cost-
effective. The Applicants further explain that this cost would be
uneconomical here because the QPAM would be required to continue its
services for the entire period during which the Debt Securities are
held by the Plan since the potential prohibited transaction is not just
a sale or exchange under section 406(a)(1)(A) of the Act, but is also
an extension of credit under section 406(a)(1)(B) of the Act.
Accordingly, the Applicants state that the absence of a QPAM would
preclude small Plans from being able to purchase the Debt Securities
without creating the risk of a prohibited transaction.
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\17\ PTCE 84-14 provides a class exemption for transactions
between a party in interest with respect to an employee benefit plan
and an investment fund (including either a single customer or pooled
separate account) in which the plan has an interest, and which is
managed by a qualified professional asset manager (the QPAM),
provided certain conditions are met. QPAMs (e.g., banks, insurance
companies, registered investment advisers with total client assets
under management in excess of $50 million) are considered to be
experienced investment managers for plan investors that are aware of
their fiduciary duties under the Act.
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8. The Applicants propose to continue offering the Debt Securities
to non-Plan investors and maintain that these investors will continue
to constitute a substantial market for such securities. However, for
each Plan investor, the Applicants represent that the terms of the
Plan's investment in the Debt Securities will be at least as favorable
to the Plan as those available to an unrelated non-Plan investor in a
comparable arm's-length transaction at the time the Debt Securities are
acquired by the Plan. Additionally, the Applicants represent that no
Plan will pay the Applicants any fees or commissions in connection with
transactions involving the Debt Securities, except for the mark-up for
a principal transaction permitted under PTCE 75-1.
In addition to the aforementioned requirements, the Applicants
represent that a Plan's investment in the Debt Securities will be
restricted to those Plans for which the Applicants have no
discretionary authority and do not provide investment advice with
respect to the investment in the Debt Securities. In this regard, the
decision to invest in the Debt Securities will be made by an
Independent Plan Fiduciary or a Plan Participant, which is independent
of the Applicants. Moreover, the Applicants represent that the
Prospectus for each of the Debt Securities that are offered to the
Plans will contain a recommendation that no more than 15 percent of a
Plan's assets should be invested in the Debt Securities at the time
such security is acquired by a Plan.\18\
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\18\ In this regard, the Applicants propose to include
substantially the following statement in the Prospectus for each of
the Debt Securities, under a heading entitled ``Employer-Sponsored
Plan Considerations'':
These [Debt Securities] Securities are being sold to Plans
pursuant to an exemption issued by the Department of Labor. In
accordance with the terms of that exemption, the Issuer is required
to inform such Plans that no more than 15 percent of plan (or
individual participant) assets, at the time of acquisition, should
be invested in the Debt Securities. Please note, however, that it is
the responsibility of the person making the investment decision to
determine whether the purchase is a prudent investment for the plan
(or participant-directed account).
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9. The Debt Securities will be rated in one of the three highest
generic rating categories by a nationally-recognized rating firm at the
time of acquisition by a Plan. There will be no triggering events or
early amortization events if the Applicants' credit rating drops below
a certain level established by a rating agency. Throughout the term of
any of the Debt Securities, the Plans will be able to access the latest
bid and asked price quotations for all of the Applicants' Debt
Securities by calling a broker or any electronic service with a
recognized price quotation delivery system. If a Plan wishes to
terminate any Debt Securities investment prior to maturity, such
investor may do so by selling the Debt Security on the open market at
the prevailing market price. However, the Issuer may not unilaterally
terminate the Debt Securities prior to maturity unless the
[[Page 36014]]
Debt Securities are callable at a specific price which will be
disclosed in the Prospectus. Assuming the Debt Securities are callable,
the Applicants represent that there will be no loss of principal.
10. The rate of return for the Debt Securities may be fixed or
variable. The prospectus or prospectus supplement covering the Debt
Securities would set forth the annual interest rate for fixed rate
Securities, and, for variable rate Securities, the formula to be
applied to determine the interest payable at maturity. The formula will
include identification of the specified Index for the Debt Securities.
Such Index may be either (a) created and maintained by an entity that
is unrelated to the Applicants or (b) created by the Applicants, but
maintained by an unrelated entity.
(a) Index Created and Maintained by an Entity Unrelated to the
Applicants. This Index, which will be created by an entity that is
unrelated to the Applicants, will consist of a standardized and
generally-accepted index of securities, such as the Nikkei 225 Index
Tokyo Stock Exchange or the Standard & Poor's 500 Index. In addition,
this Index will be maintained by such unrelated entity. In other words,
all calculations relating to the securities in the Index, as well as
the rate of return of the Index, will be made by an entity other than
the Applicants.
(b) Index Created by the Applicants, but Maintained by an Unrelated
Entity. This Index will be created by the Applicants. However, it must
be maintained by an entity that is unrelated to the Applicants, such as
the stock exchange on which the Debt Security is listed. In addition,
the Index will consist either of standardized and generally-accepted
Indexes or it will be an Index comprised of publicly-traded securities
that are not issued by the Applicants, are designated in advance and
listed in the Prospectus for the Debt Securities. Under either
circumstance, the Applicants will not be permitted to make any
modifications to the composition of the Index, including the
methodology comprising the rate of return, unilaterally.
Further, the Index will meet the requirements for an Index in
accordance with Rule 19b-4 of the 1934 Securities Act, which imposes
regulatory standards on the entity maintaining the Index. Under Rule
19b-4, a self-regulatory organization, such as a securities exchange,
is required to adopt trading rules, procedures and listing standards
for the product classes relating to any security that the exchange
proposes to list. In addition, the self-regulatory organization must
maintain a surveillance program for a class of securities. If the SEC
has not approved the self-regulatory organization's rules, procedures
and standards, the self-regulatory organization must make a filing with
the SEC prior to listing the security. According to the Applicants,
this procedure provides adequate safeguards so that any Debt Securities
that are created by the Applicants will meet the listing and trading
standards approved by the self-regulatory organization.
Finally, the Index Value of the Index will be publicly-disseminated
through an independent pricing service, such as Reuters or Bloomberg,
or through a national securities exchange.
11. Price quotations with respect to the Debt Securities will be
available on a daily basis from market reporting services, such as
Bloomberg or Reuters, and the daily financial press, such as The Wall
Street Journal. In the event the Debt Securities are delisted, the
Issuer(s) will apply for trading through the NASDAQ, which requires
that there be independent market-makers establishing a market for the
securities in addition to the Issuer(s). In the event there are no
independent market-makers, the Applicants represent that the exemption
will no longer be considered effective.
12. The terms of each of the Debt Securities will be set forth with
specificity. Therefore, in addition to the description of the formula
for computing the rate of return, the Prospectus will include, but will
not be limited to, the following information:
A statement to the effect that the return calculated for
the Debt Securities will be denominated in U.S. dollars;
The specified Index or Indexes on which the rate of return
on the Debt Securities is based;
A numerical example, designed to be understood by the
average investor, which explains the calculation of the return on the
Debt Securities at maturity and reflects, among other things, (i) a
hypothetical initial value and closing value of the applicable Index,
and (ii) the effect of any adjustment factor on the percentage change
in the applicable Index;
The date on which the Debt Securities will be issued;
The date on which the Debt Securities will mature and the
conditions of such maturity;
The initial date on which the value of the Index is
calculated;
Any adjustment factor or other numerical methodology that
would affect the rate of return, if applicable;
The ending date on which interest will be determined,
calculated and paid;
Information relating to the calculation of payments of
principal and interest, including a representation to the effect that,
at maturity, the beneficial owner of the Debt Securities will be
entitled to receive the entire principal amount, plus an amount derived
directly from the growth in the Index (but in no event less than zero);
All details regarding the methodology for measuring
performance;
The terms under which the Debt Securities may be redeemed;
The exchange or market where the Debt Securities are
traded or maintained; and
Copies of the proposed and final exemptions relating to
the exemptive relief provided herein, upon request.
Aside from the Prospectus, the Applicants do not contemplate making
any ongoing communications to the investors in the Debt Securities
except to the extent required under applicable securities laws.
13. With respect to variable rate Debt Securities, the Applicants
represent that the interest rate will be objectively determined. Where
any of the Applicants acts as ``Calculation Agent'' for determining
applicable rates of return, such calculation will be made using a
formula fully disclosed in the prospectus or prospectus supplement
relating to the Debt Security. Following the issuance of such Debt
Security, the Applicants will retain no authority to affect the
determination of such interest rate absent a Market Disruption Event.
The determination that a Market Disruption Event may have occurred can
have the effect of eliminating the affected trading day from
calculation of the value of the underlying Index. The Calculation Agent
is responsible for determining whether such Event has, in fact,
occurred. Where the variable rate of a Debt Security is tied to a
basket of equity securities, for example, a ``Market Disruption Event''
is typically defined as any of the following events, with certain
exceptions: \19\
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\19\ For purposes of determining whether a Market Disruption
Event has occurred, a limitation on the hours in a trading day and/
or number of days of trading will not constitute a Market Disruption
Event if it results from an announced change in the regular business
hours of the relevant exchange.
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(a) the suspension or material limitation of trading in 20% or more
of the underlying stocks which then comprise the Index, in each case,
for more than two hours of trading or during the one-half hour period
preceding the close of trading on the NYSE or any other applicable
organized U.S. exchange. For purposes of this definition, limitations
on trading during
[[Page 36015]]
significant market fluctuations imposed pursuant to NYSE Rule 80B (or
any applicable successor or similar rule or regulation promulgated by
any self-regulatory organization or the SEC) shall be considered
``material.''
(b) the suspension or material limitation, in each case, for more
than two hours of trading or during the one-half hour period preceding
the close of trading (whether by reason of movements in price otherwise
exceeding levels permitted by the relevant exchange or otherwise) in
(A) futures contracts related to the Index which are traded on the
Chicago Mercantile Exchange or any other major U.S. exchange, or (B)
options contracts related to the Index which are traded on any major
U.S. exchange.
(c) the unavailability, through a recognized system of public
dissemination of transaction information, for more than two hours of
trading or during the one-half hour period preceding the close of
trading, of accurate price, volume or related information in respect of
20% or more of the underlying stocks which then comprise the Index or
in respect of futures contracts related to the Index, options on such
futures contracts or options contracts related to the Index, in each
case traded on any major U.S. exchange.
14. The Applicants represent that the principal amount of the Debt
Securities that are the subject of this exemption, if granted, will be
protected regardless of the performance of the applicable Index.
Although the return on a Debt Security may go up or down in the same
direction as the performance of the applicable Index, the interest rate
floor is set at zero. Thus, even where the value of the applicable
Index decreases, there will be no invasion of principal if the Debt
Securities are held until maturity.\20\ However, if a Plan must sell
the Debt Securities on the open market prior to their maturity, the
market price will reflect the market's perception of the potential
yield on such securities based on the current yield and interest rates
for other debt securities of the same duration. This market price may
result in a loss of principal value of the investment in the Debt
Securities in the same fashion as would occur for other debt
securities.
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\20\ The Applicants have provided the following example to
illustrate this principle by describing the return at maturity on
each $10 principal investment in the Debt Securities that are the
subject of this proposed exemption:
Where the value of the applicable Index increases by 50
percent, the Plan is entitled to receive $15 at maturity ($10
principal plus $5 interest) because the rate of return moves in the
same direction as the growth in the applicable Index;
Where the value of the applicable Index remains
unchanged during the applicable period, the Plan is entitled to
receive $10 at maturity ($10 principal plus $0 interest) because the
rate of return moves in the same direction as the growth in the
applicable Index; and
Where the value of the applicable Index decrease by 50
percent, the Plan is entitled to receive $10 at maturity ($10
principal and $0 interest) because the rate of return moves in the
same direction as the growth in the applicable Index but in no event
drops below zero.
While the foregoing examples are simplistic, it should be noted
that for some of the Debt Securities, such as those tied to the
Standard & Poor's 500 Index, the interest payments shown above may
be reduced on a daily basis by an adjustment factor (the Adjustment
Factor), equal to a stated percent per year. On the maturity date of
the Debt Securities, the annual application of the Adjustment Factor
will reduce the Plan investor's overall interest payments. This
information will be disclosed prominently in the Prospectus.
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15. The Applicants represent that they will exercise no discretion
with respect to the Indexes. Further, the Applicants represent that
they will not trade in any way intended to affect the value of the Debt
Securities through holding or trading in the securities which comprise
these Indexes. The securities of the Applicants may comprise part of
the Index (e.g., Morgan Chase's common stock is included in the S&P 500
Index, which is one of the Indexes that may be used in the Applicants'
variable rate Debt Securities). In addition, the Applicants may reserve
the right to purchase or sell positions in the Index, or in all or
certain of the assets by reference to which the Index is calculated
(Underlying Assets), or derivatives relating to the Index. The
Applicants do not believe, however, that their hedging activity will
have a material impact on the value of the Index, the Underlying
Assets, or any derivative or synthetic instrument relating to the
Index. The Applicants will maintain written records of all of the Debt
Securities transactions for a period of six years.
16. The Applicants represent that the Debt Securities may be
included among assets acquired by a Plan to comprise the underlying
portfolio of a ``synthetic'' guaranteed investment contract (Synthetic
GIC), whereby the Plan's beneficial interest in one or more debt
instruments is combined with a guarantee of future value. In this
regard, the Applicants represent that they will not be the issuer,
guarantor, or ``wrapper'' provider in connection with a Synthetic GIC.
The Applicants represent that they are not requesting any relief for
extensions of credit to such Plans and the Plan Participants, other
than extensions of credit resulting from such Plan's holding of the
Debt Securities. Accordingly, the Applicants are not requesting
specific exemptive relief with respect to any additional prohibited
transactions that may relate to any Synthetic GICs.
17. In summary, the Applicants represent that the proposed
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons:
(a) The Debt Securities will be made available by the Applicants in
the ordinary course of their business to customers which are not Plans.
(b) The Applicants will not have any discretionary authority or
control, or provide any ``investment advice,'' within the meaning of 29
CFR 2510.3-21(c), with respect to the assets of Plans which are
invested in the Debt Securities.
(c) The Plans will pay no fees or commissions to the Applicants in
connection with the transactions covered by the requested exemption,
other than the mark-up for a principal transaction permissible under
PTCE 75-1.
(d) The decision to invest in the Debt Securities will be made by
an Independent Plan Fiduciary or a Plan Participant, which is
independent of the Applicants.
(e) In connection with a Plan's acquisition of any of the Debt
Securities, the Applicants will disclose to the Independent Plan
Fiduciary, or, if applicable, the Plan Participant, in the Prospectus,
all of the material terms and conditions concerning the Debt
Securities.
(f) A Plan will acquire the Debt Securities on terms that are at
least as favorable to the Plan as those available to an unrelated non-
Plan investor in a comparable arm's length transaction.
(g) The Debt Securities will be rated in one of the three highest
generic rating categories by at least one nationally-recognized
statistical rating service at the time of such security's acquisition
by the Plan.
(h) The rate of return for the Debt Securities will be objectively
determined and the Applicants will retain no authority to affect the
determination of such return, other than in connection with a Market
Disruption Event that is described in the Prospectus for the Debt
Securities.
(i) The Index will be: (1) Created and maintained by an entity that
is unrelated to the Applicants and consist of a standardized and
generally-accepted Index; or (2) created by the Applicants, but
maintained by an entity that is unrelated to the Applicants, and (i)
will consist either of standardized and generally-accepted Indexes or
will be an Index comprised of publicly-
[[Page 36016]]
traded securities that are not issued by the Applicants, are designated
in advance, and listed in the Prospectus for the Debt Securities,(ii)
will meet the requirements for an Index as set forth in SEC Rule 19b-4,
and (iii) the Index Value for such Index will be publicly-disseminated
through an independent pricing service or a national securities
exchange.
Notice to Interested Persons
The Applicants represent that because those potentially interested
Plans proposing to engage in the covered transactions cannot all be
identified, the only practical means of notifying Independent Plan
Fiduciaries or Plan Participants of such affected Plans is by
publication of the proposed exemption in the Federal Register.
Therefore, any comments from interested persons must be received by the
Department no later than 30 days from the publication of this notice of
proposed exemption in the Federal Register.
For Further Information Contact: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
Wagner, Doxey and Company Money Purchase Plan (the Plan) Located in
San Francisco, California
[Application No. D-11003]
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 of certain improved real property (the Property) by
the individual account of Warren L. Wagner (the Account) in the Plan,
to Mr. Wagner, who is a disqualified person with respect to the
Plan,\21\ provided that the following conditions are satisfied: (a) The
sale is a one-time transaction for cash; (b) the Account pays no
commissions nor other expenses relating to the sale; (c) the Account
receives an amount that is the greater of $750,000, or the fair market
value of the Property as of the date of the sale, as determined by a
qualified, independent appraiser; (d) within 30 days of publication in
the Federal Register of the notice granting this proposed exemption,
Mr. Wagner reimburses the Account for the fair market rental value of
the Property with respect to his past and present use of such Property,
including a reasonable rate of interest for the period from the date
such amounts were due to the Account to the date of payment; and (e)
within 30 days of publication in the Federal Register of the notice
granting this proposed exemption, Mr. Wagner files Form 5330 with the
Internal Revenue Service (the Service) and pays all applicable excise
taxes due by reason of the above prohibited transactions.
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\21\ Because Warren L. Wagner and Robert J. Doxey, who are
partners, are the only participants in the Plan, the Plan is not
within the jurisdiction of Title I of the Act, pursuant to 29 CFR
2510.3-3(b). 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 Plan, which is a defined contribution money purchase pension
plan sponsored by Wagner, Doxey and Company (the Company), provides for
mandatory employer contributions only. The Company is a partnership
that originally was a registered broker-dealer in the business of
trading government securities. However, in November 1999, the Company
ceased its broker-dealer activities, and Mr. Wagner and his partner
Robert J. Doxey, who are the only Plan participants, limited their
activities to managing their own investments. Mr. Wagner is a trustee
of the Plan. The Plan provides for individually directed accounts. As
of December 31, 2000, the fair market value of all the assets of the
Plan was $1,966,977. As of that date, Mr. Wagner's Account had assets
equal to $1,062,939.03.
2. The Property consists of a three-bedroom condominium located at
30 West Lake Blvd., #112, Tahoe City, California. It is in a suburban
condominium development known as Tahoe Tavern. The Property has 1,552
square feet. The applicant represents that the Property is not adjacent
to, nor close to, any other real property owned by Mr. Wagner.
3. The Property was acquired by the Account on June 22, 1998 from
McClain Johnston and Annabelle D. Johnston, who are unrelated parties,
for investment purposes. The Account paid cash in the amount of
$377,230.72 (including fees and commissions) for the Property. The
applicant represents that all expenses relating to the Property since
its acquisition have been paid by the Account, including taxes,
insurance, association, and property management fees, totalling
$74,056.40. The Property has also been rented out to unrelated parties
for vacations through the property management services of Tahoe Tavern
and has produced income totalling $28,980.00 for the Account.
4. The applicant states that Mr. Wagner made personal use of the
Property in 1998, 1999, and 2000, and that he currently occupies the
Property.\22\ On June 15, 2001, Mr. Wagner made a lump sum payment in
the amount of $46,790.00 to the Account for the fair market rental
value of the Property with respect to his past use of such Property,
through June, 2001. This amount was determined based on the rental
value of similar condominiums in Tahoe Tavern during the relevant time
periods, provided by the property manager. Assuming that rent was to be
paid to the Account in advance on a quarterly basis, Mr. Wagner will
pay an additional $3345.69 in interest, based on the average Federal
Funds Rate, for the period from the date rent was due to the date of
payment, i.e., June 15, 2001. Further, concurrently with filing an
exemption application with the Department, Mr. Wagner also filed Form
5330 with the Service for Plan years 1998, 1999, and 2000 and paid all
applicable excise taxes that were due, a total of $5,404.50, by reason
of the past prohibited transactions. Finally, within 30 days of
publication in the Federal Register of the notice granting this
proposed exemption, Mr. Wagner will reimburse the Account, with
interest, using the same methodology described above, with respect to
his present use of the Property until the date of the proposed sale, as
well as filing Form 5330 with the Service and paying any additional
excise taxes that are due for Plan year 2001.
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\22\ Mr. Wagner used the Property during the following periods
and paid the following rental amounts.
1998: 9/27 to 9/29--three days @ $160.00 per day = $480.00; 10/2
to 10/4--three days @ $160.00 per day = $480.00; 11/5 to 11/7--three
days @ $160.00 per day = $480.00; Total; $1440.00 (as corrected upon
recomputation).
1999: 5/14 to 5/16--three days @ $185.00 per day = $555.00; 5/21
to 5/23--three days @ $185.00 per day = $555.00; 5/27 to 5/28--two
days @ $185.00 per day = $370; 6/12 to 6/26--two weeks @ $2065.00
per week = $4130.00; 8/29 to 12/31--four months and three days @
$7380; Total: $12,990.00.
2000: 1/1 to 12/31 @ $1800.00 per month; Total: $21,600.00.
2001: Mr. Wagner currently uses the Property and has paid rent
for the period from 1/1 to 6/30 @ $1800.00 per month = $10,800.00.
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5. The Property has been appraised by Ossi Korkeila of Korkeila &
Associates, located in Truckee, California, a qualified, independent
appraiser certified in the State of California. Relying on the market
data approach, Mr. Korkeila concluded that the fair market value of the
Property was approximately $750,000, as of
[[Page 36017]]
September 26, 2000. Mr. Korkeila examined three recent sales of
comparable properties in the local real estate area in making his
determination.
6. Mr. Wagner proposes to purchase the Property for cash from his
own Account for an amount that is the greater of $750,000, or the fair
market value of the Property as of the date of the sale, based on an
updated independent appraisal. The Account will pay no commissions nor
other expenses relating to the sale.
The applicant represents that the Property was originally purchased
by the Account solely for investment purposes, in light of the
Property's significant appreciation and income-generating potential.
However, due to an abrupt change in both his career plans and personal
life, namely, the cessation of his broker-dealer securities business
and the need to move from San Francisco to Tahoe City for family
reasons, Mr. Wagner now desires to purchase the Property himself for
use as a personal residence in retirement.
In addition, the applicant represents that the exemption will be in
the best interests of the Account because it will enable the Account to
quickly sell the Property without paying any brokerage commissions or
other transaction costs and to reinvest the sale proceeds in other
investments that will achieve greater diversification.
7. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 4975(c)(2) of the Code for the following reasons: (a) The sale
will be a one-time transaction for cash; (b) the Account will pay no
commissions nor other expenses relating to the sale; (c) the Account
will receive an amount that is the greater of $750,000, or the fair
market value of the Property as of the date of the sale, as determined
by a qualified, independent appraiser; (d) within 30 days of
publication in the Federal Register of the notice granting this
proposed exemption, Mr. Wagner will reimburse the Account for the fair
market rental value of the Property with respect to his past and
present use of such Property, including a reasonable rate of interest
for the period from the date such amounts were due to the Account to
the date of payment; (e) within 30 days of publication in the Federal
Register of the notice granting this proposed exemption, Mr. Wagner
will file Form 5330 with the Service and pay all applicable excise
taxes due by reason of the above prohibited transactions; and (f) the
Account will be divested of an illiquid asset and achieve greater
diversification of assets.
Notice to Interested Persons
Because the only Plan assets involved in the proposed transaction
are those in Mr. Wagner's Account, and he is the only participant to be
affected, 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 with respect to the proposed exemption are due
within 30 days of the date of publication of this notice in the Federal
Register.
For Further Information Contact: Ms. Karin Weng 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 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 5th day of July, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 01-17146 Filed 7-9-01; 8:45 am]
BILLING CODE 4510-29-P
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