[Federal Register Volume 63, Number 227 (Wednesday, November 25, 1998)]
[Notices]
[Pages 65249-65262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31511]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10372, et al.]
Proposed Exemptions; Keystone Financial, Inc.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ____________, stated in each Notice
of Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Keystone Financial, Inc., and Certain of Its Affiliates (Keystone),
Located in Harrisburg, Pennsylvania
[Application Nos. D-10372]
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).
Section I--Proposed Exemption for In-Kind Transfers of CIF Assets
If the exemption is granted, the restrictions of section 406(a) and
406(b) 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
(F) of the Code, shall not apply to the past in-kind transfers of
assets of various employee benefit plans for which Keystone served as a
fiduciary (the Client Plans), that
[[Page 65250]]
were held in certain collective investment funds (CIFs) maintained by
Keystone, in exchange for shares of the KeyPremier Funds (the Funds),
an open-ended investment company registered under the Investment
Company Act of 1940 (the ICA), for which Keystone is an investment
adviser and may provide other services (i.e., Secondary Services, as
defined below in Section II(h)), which occurred on December 2, 1996,
February 3, 1997 and July 1, 1997,1 provided that the
following conditions were met:
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\1\ In this regard, Keystone represents that any further in-kind
transfers of CIF assets to the Funds will comply with the conditions
of Prohibited Transaction Exemption (PTE) 97-41 (62 FR 42830, August
8, 1997.) PTE 97-41 permits the purchase by an employee benefit plan
(i.e. a Client Plan) of shares of one or more open-end management
investment companies (i.e mutual funds) registered under the ICA, in
exchange for assets of the Client Plan transferred in-kind to the
mutual fund from a collective investment fund (i.e. a CIF)
maintained by a bank or a plan adviser, where the bank or plan
adviser is the investment adviser to the mutual fund and also a
fiduciary to the Client Plan, if the conditions of the exemption are
met. However, as noted further below, Keystone distributed written
confirmation to the Client Plans regarding the in-kind transfer of
CIF assets made to the Funds within 120 days, rather than within the
105-day period required by Section I(g) of PTE 97-41. Thus, an
individual exemption to cover these specific CIF conversions is
necessary to provide the appropriate retroactive relief.
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(a) A fiduciary (the Second Fiduciary) who was acting on behalf of
each affected Client Plan and who was independent of and unrelated to
Keystone, as defined in Section II(g) below, received advance written
notice of the in-kind transfer of assets of the CIFs in exchange for
shares of the Fund and the disclosures described in paragraph (c)
below.
(b) On the basis of the information described in paragraph (c)
below, the Second Fiduciary provided prior written authorization for
the in-kind transfer of the Client Plan's CIF assets in exchange for
shares of the Funds, the investment of such assets in corresponding
portfolios of the Funds, and the fees to be received by Keystone in
connection with its services to the Fund. Such authorization by the
Second Fiduciary must have been consistent with the responsibilities,
obligations, and duties imposed on fiduciaries by Part 4 of Title I of
the Act.
(c) The Second Fiduciary who was acting on behalf of a Client Plan
received in advance of the investment by the Plan in any of the Funds,
a full and detailed written disclosure of information concerning the
Funds which included, but was not limited to:
(1) A current prospectus for each portfolio of each of the Funds in
which such Client Plan was considering investing;
(2) A statement describing the fees for investment management,
investment advisory, or other similar services, and any fees for
Secondary Services, as defined in Section II(h) below, including the
nature and extent of any differential between the rates of such fees;
(3) The reasons why Keystone considered such investments to be
appropriate for the Client Plan; and
(4) A statement describing whether there were any limitations
applicable to Keystone with respect to which assets of the Client Plan
may be invested in the Funds, and, if so, the nature of such
limitations.
(d) For each Client Plan, the combined total of all fees received
by Keystone for the provision of services to the Client Plan, and in
connection with the provision of services to any of the Funds in which
the Client Plans invested, was not in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(e) Neither Keystone nor an Affiliate received any fees payable
pursuant to Rule 12b-1 under the ICA (the 12b-1 Fees) in connection
with the transactions.
(f) All dealings between the Client Plans and any of the Funds were
on a basis no less favorable to such Plans than dealings between the
Funds and other shareholders holding the same class of shares as the
Client Plans.
(g) No sales commissions were paid by the Client Plans in
connection with the in-kind transfers of CIF assets in exchange for
shares of the Funds.
(h) The transferred assets constituted the Client Plan's pro rata
portion of all assets that were held by the CIF immediately prior to
the transfer.
(i) Following the termination of each CIF, each Client Plan
received shares of the Funds that had a total net asset value equal to
the Client Plan's pro rata share of the assets of the CIFs that were
exchanged for such Fund shares on the date of transfer.
(j) With respect to each in-kind transfer of CIF assets to a Fund,
each Client Plan received shares of the Fund which had a total net
asset value that was equal to the value of the Plan's pro rata share of
the assets of the corresponding CIF on the date of the transfer, based
on the current market value of the CIF's assets, as determined in a
single valuation performed in the same manner as of the close of the
same business day with respect to all such Plans participating in the
transaction on such day, using independent sources in accordance with
the procedures set forth by the Securities and Exchange Commission
(SEC) Rule 17a-7(b) under the ICA (Rule 17a-7) for the valuation of
such assets. Such procedures must have required that all securities for
which a current market price was not obtained by reference to the last
sale price for transactions reported on a recognized securities
exchange or NASDAQ 2 were to be valued based on an average
of the highest current independent bid and lowest current independent
offer, as of the close of business on the last business day prior to
the in-kind transfers, determined on the basis of reasonable inquiry
from at least three sources that are broker-dealers or pricing services
independent of Keystone.
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\2\ The National Association of Securities Dealers Automated
Quotation Nation Market System.
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(k) Not later than thirty (30) days after completion of each in-
kind transfer of CIF assets in exchange for shares of the Funds which
occurred on December 2, 1996, February 3, 1997, and July 1, 1997,
Keystone sent by regular mail to the Second Fiduciary, a written
confirmation which contained:
(i) The identity of each of the assets that was valued for purposes
of the transaction in accordance with SEC Rule 17a-7(b)(4) under the
ICA;
(ii) The price of each of the assets involved in the transaction;
and
(iii) The identity of each pricing service or market maker
consulted in determining the value of such assets.
(l) For each in-kind transfer of CIF assets, Keystone sent by
regular mail to the Second Fiduciary, no later than one-hundred and
twenty (120) days after completion of the asset transfer made in
exchange for shares of the Funds,3 a written confirmation
which contained:
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\3\ See Footnote 1 above.
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(1) The number of CIF units held by each affected Client Plan
immediately before the in-kind transfer, the related per unit value,
and the aggregate dollar value of the units transferred; and
(2) The number of shares in the Funds that were held by each
affected Client Plan immediately following the in-kind transfer, the
related per share net asset value, and the aggregate dollar value of
the shares received.
(m) Keystone maintains for a period of six (6) years the records
necessary to enable the persons, as described in paragraph (n) below,
to determine whether the conditions of the exemption have been, except
that:
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Keystone, the
records are lost or
[[Page 65251]]
destroyed prior to the end of the six (6) year period, and
(2) No party in interest, other than Keystone, 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 (n) below.
(n)(1) Except as provided in paragraph (n)(2) and notwithstanding
any provisions of Section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (n) above are unconditionally available at
their customary location for examination during normal business hours
by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of each of the Client Plans who has authority to
acquire or dispose of shares of any of the Funds owned by such Plan, or
any duly authorized employee or representative of such fiduciary; and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary; and
(2) None of the persons described in paragraph (n)(1)(ii) and (iii)
of this Section I shall be authorized to examine trade secrets of
Keystone, or commercial or financial information which is privileged or
confidential.
Section II--Definitions
For purposes of this proposed exemption,
(a) The term ``Keystone'' means Keystone Financial, Inc., and
affiliates, as defined in Section II(b)(1).
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' means the KeyPremier Funds for
which Keystone served as investment adviser, and provided certain
``Secondary Services'' (as defined paragraph (h) below), for the Funds
that were involved in the in-kind transfers of CIF assets which
occurred on December 2, 1996, February 3, 1997, and July 1, 1997.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales of Fund Shares, as calculated by
dividing the value of all securities, determined by a method as set
forth in a Fund's prospectus and statement of additional information,
and other assets belonging to each of the portfolios in such Fund, less
the liabilities charged to each portfolio, by the number of outstanding
shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who was independent of and unrelated to Keystone at the time of
the subject transaction. For purposes of this proposed exemption, the
Second Fiduciary will not be deemed to have been independent of and
unrelated to Keystone if:
(1) Such Second Fiduciary was directly or indirectly controlled,
was controlled by, or was under common control with Keystone;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary was an officer,
director, partner, or employee of Keystone (or is a relative of such
persons);
(3) Such Second Fiduciary directly or indirectly received any
compensation or other consideration for his or her own personal account
in connection with any transaction described in this proposed
exemption.
With respect to the Client Plans, if an officer, director, partner,
or employee of Keystone (or a relative of such persons), was a director
of such Second Fiduciary, and if he or she abstained from participation
in (i) the choice of the Plan's investment manager/advisor, (ii) the
approval of any purchase or sale by the Plan of shares of the Funds,
and (iii) the approval of any fees charged to or paid by the Plan, in
connection with any of the transactions described in Section I above,
then Section II(g)(2) above shall not apply.
(h) The term ``Secondary Service'' means a service, other than an
investment management, investment advisory, or similar service, which
was provided by Keystone to the Funds involved in the subject
transaction, including but not limited to custodial, accounting,
administrative, brokerage or any other service.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of December 2, 1996, February 3, 1997 and July 1, 1997, for
transactions described in Section I.
Summary of Facts and Representations
1. Keystone. Keystone Financial, Inc., is a bank holding company
with its principal offices in Harrisburg, Pennsylvania. Keystone's
subsidiaries include Mid-State Bank and Trust Company, Northern Central
Bank and Trust Company, and Martindale Andres & Company, Inc.
(collectively, Keystone). Keystone provides trust and banking services
to individuals, corporations, and institutions, both nationally and
internationally. Keystone serves as trustee, investment manager, and/or
custodian to the Plans described below and as an investment adviser to
certain of the Funds. As of August 31, 1996, Keystone had total assets
under management of approximately $754 million.
Other Affiliates of Keystone including Mid-State Bank and Trust
Company, and Pennsylvania National Bank and Trust Company, Inc., may
offer shares of the Funds to their fiduciary customers. However, these
Affiliates did not have Client Plan assets or any other customer assets
invested in the CIFs that were involved in the subject in-kind transfer
of assets to the Funds which occurred on December 2, 1996, February 3,
1997 and July 1, 1997.
2. The Client Plans. The Client Plans were retirement plans
qualified under section 401(a) of the Code for which Keystone served as
a trustee or investment manager. The Client Plans were considered
``pension plans'' under section 3(2) of the Act. The Client Plans
covered by this proposed exemption were those Plans invested in the
subject CIFs at the time of each in-kind transfer of CIF assets to the
Funds. The Client Plans participated in the conversion of the CIFs to
the Funds based solely upon the decisions made in each case by a Plan
fiduciary independent of Keystone (collectively, the Second
Fiduciaries). In addition to the Client Plans, the CIFs also held
assets of two qualified retirement plans sponsored by Keystone
(collectively, the Bank Plans), which participated in the subject CIF
asset transfer to the Funds. The Bank Plans were:
(i) The Keystone Financial Pension Plan (the Keystone DB Plan); and
(ii) The Keystone Financial 401(k) Plan (the Keystone DC Plan).
However, as discussed further below, the Bank Plans are not
included in the relief that would be provided by this proposed
exemption.
[[Page 65252]]
3. The CIFs. The CIFs comprised certain individual portfolios of
the Client Plans and the Bank Plans.
Specifically, the CIFs were: (i) the Employee Benefit Intermediate
Term Income Fund (Intermediate Term Income Fund); (ii) the Employee
Benefit Core Equity Fund (Core Equity Fund); (iii) the Employee Benefit
Growth Equity Fund (Growth Equity Fund); and (iv) the Short-Term Income
Fund (Short Term Fund).
As a result of the transfer of CIF assets to the Funds, each of
these CIFs have been terminated and the assets are now held in one of
the corresponding Funds described below. These Funds are: (i) the
KeyPremier Intermediate Term Income Fund (``Intermediate Income'');
(ii) the KeyPremier Established Growth Fund (``Growth Fund''); and
(iii) the KeyPremier Aggressive Growth Fund (``Aggressive Growth'');
(iv) the KeyPremier Limited Duration Fund (``Limited Duration Fund'').
The applicant states that each CIF's assets were transferred to a new
Fund that had investment objectives corresponding directly to the
investment objectives of the terminating CIF.
The following table shows which particular CIF assets were
transferred to which particular Fund.
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CIF Corresponding fund portfolio
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Intermediate Term................... KeyPremier.
Intermediate Term.
Income Fund.
Core Equity Fund.................... KeyPremier.
Established Growth.
Fund.
Growth Equity Fund.................. KeyPremier.
Aggressive Growth.
Fund.
Short Term Income................... KeyPremier Limited.
Duration Government.
Bond Fund.
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4. The Funds. The Funds are all part of the KeyPremier Funds of the
Session Group (collectively referred to as the ``Trust''), an open-end
investment company registered under the ICA. The Trust is comprised of
a series of Funds (each a ``Fund''). Each Fund is a separate investment
portfolio available to the Client Plans, as well as certain other
investors. Keystone also performs certain Secondary Services for the
Funds, including co-administration and shareholder services, for which
it receives fees.
Martindale Andres & Company, Inc. (Martindale), a wholly-owned
subsidiary of Keystone, serves as investment advisor to the Funds.
Various parties unrelated to Keystone also provide Secondary
Services to the Funds, including custodial, transfer agent,
recordkeeping, and other non-advisory services.
Description of the Transactions
5. Keystone represents that the CIFs in which the Client Plans
invested were maintained in accordance with the laws that apply to
collective investment trusts. Keystone decided to terminate the CIFs
and offer to the Client Plans participating therein shares of the
corresponding Funds as alternative investments. Because interests in a
CIF generally must be liquidated or withdrawn to effect distributions,
Keystone believed that the interests of the Client Plans invested in
the CIFs would be better served by investment in shares of the Funds
which could be distributed in-kind. Keystone also believed that the
Funds offered the Client Plans advantages over the CIFs as pooled
investment vehicles. For example, as shareholders of the Funds, the
Client Plans have opportunities to exercise voting and other
shareholder rights. In addition, Client Plans can benefit from lower
fees, daily valuation available with the Funds as well as more
investment information.
The Plans, as Fund shareholders, periodically receive certain
disclosures concerning the Funds. Such information includes: (i) a copy
of the Fund prospectus, which is updated at least annually; (ii) an
annual report containing audited financial statements of the Funds and
information regarding such Funds' investment performance; and (iii) a
semi-annual report containing unaudited financial statements. With
respect to the Client Plans, Keystone reports all transactions in
shares of the Funds in periodic account statements provided to each
Client Plan. Further, Keystone maintains that the net asset value of
the portfolios of the Funds can be monitored daily from information
available in newspapers of general circulation.
Keystone states that the transfers in-kind of the CIF assets in
exchange for Fund shares were ministerial transactions which were
performed in accordance with pre-established objective procedures which
were approved by the Board of Trustees of each Fund. Such procedures
required that assets transferred to a Fund: (i) must be consistent with
the investment objectives, policies, and restrictions of the Fund; (ii)
must be marketable securities; (iii) must satisfy the applicable
requirements of the ICA and the Code; and (iv) must have a readily
ascertainable market value. Prior to entering into an in-kind transfer,
a Second Fiduciary of each affected Client Plan received certain
disclosures from Keystone and approved the transaction in writing.
6. The Conversion Transactions. Keystone specifically requests a
retroactive exemption for the in-kind transfers of CIF assets to
certain corresponding Funds which have already occurred with respect to
Client Plans. With respect to the Bank Plans, Keystone states that the
in-kind transfer of CIF assets to the Funds representing the interest
held by the Bank Plans in such CIFs met the conditions of Prohibited
Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977). \4\
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\4\ The Department is expressing no opinion as to whether the
terms and conditions of PTE 77-3 were met with respect to the
conversion of the Bank Plans' pro rata share of CIF assets to the
Funds.
In this regard, Keystone filed a request for exemptive relief on
October 23, 1996, which included the in-kind transfer of assets of
the Bank Plans held in CIFs that were exchanged for shares of the
Funds. However, on July 30, 1998, the Department issued Advisory
Opinion 98-06 (A.O. 98-6). A.O. 98-06 states that PTE 77-3 provides
relief for the acquisition of a proprietary mutual fund's shares by
an in-house plan (i.e. an employee benefit plan sponsored by the
mutual fund's investment adviser or an affiliate of such adviser) in
exchange for assets that are transferred from a CIF, if the
conditions of that exemption are met. As a result, Keystone withdrew
its request for an individual exemption to cover the in-kind
transfer of CIF assets by the Bank Plans.
The Department notes that prior to Keystone's withdrawal of its
request for relief to cover the Bank Plans, Keystone retained
Wilmington Trust Company (WTC) as a Second Fiduciary for the Bank
Plans in connection with the in-kind transfer of CIF assets to the
Funds. WTC is a banking corporation with trust powers, organized
under the laws of the State of Delaware. As of December 31, 1995,
WTC exercised discretionary authority over approximately $29.8
billion of fiduciary assets, including approximately $15.5 billion
of benefit plan investors. WTC made the same determination and
approval for the Bank Plans' participation in the CIF asset
transfers, prior to each transaction, as were made by the Second
Fiduciary of each Client Plan. Accordingly, Keystone states that a
proportionate share of each CIF's assets representing the interests
of the Bank Plans therein was transferred to the corresponding Fund.
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The in-kind transfers of assets with respect to the CIFs occurred
on December 2, 1996, February 3, 1998, and July 1, 1997, respectively
(the CIF Conversions). Each was a complete termination of the assets
held in the CIFs by the Client Plans that elected to participate in the
CIF Conversions. No brokerage commissions, fees or expenses (other than
customary transfer charges paid to parties other than Keystone) were
charged to the Plans or the CIFs in connection with the in-kind
transfers of CIF assets to the Funds in exchange for shares of the
Funds.
Each in-kind transfer of the assets of each of the CIFs was
completed in a single transaction on a single day. In each case, the
in-kind transfer transactions were accomplished by
[[Page 65253]]
transferring from the converting CIF a Client Plan's proportionate
share of all of the assets then held by the CIF to the corresponding
Fund in exchange for an appropriate number of Fund shares. Once all of
a CIF's assets were transferred to a Fund, the CIF was terminated and
its assets, then consisting of Fund shares, were distributed in-kind to
the Plans participating in the CIFs based on each Plan's pro rata share
of the assets of the CIFs on the date of the transaction.
7. Advance Disclosure/Approval for Client Plans. Keystone
represents that it provided disclosures to each affected Plan in
connection with the termination of the particular CIF, summarized the
transaction, and complied with all of the provisions of Section I of
this proposed exemption. Based on these disclosures, the Second
Fiduciary for each affected Client Plan approved in writing the Plan's
participation in the CIF Conversion, including the fees that were to be
paid by the Funds to Keystone as a result of the CIF Conversion.
8. Valuation Procedures. The assets transferred by a CIF to its
corresponding Fund consisted entirely of cash and marketable
securities. For purposes of a transfer in-kind, the value of the
securities in the CIFs were determined based on their market value as
of the close of business on the last business date prior to the
transfer (the CIF Valuation Date). The values on the CIF Valuation Date
were determined using the valuation procedures described in SEC Rule
17a-7 under the ICA. In this regard, the ``current market price'' for
specific types of CIF securities involved in the transaction was
determined as follows:
a. If the security was a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934
(the '34 Act), the last sale price with respect to such security
reported in the consolidated transaction reporting system (the
Consolidated System) for the CIF Valuation Date; or, if there were
no reported transactions in the Consolidated System that day, the
average of the highest current independent bid and the lowest
current independent offer for such security (reported pursuant to
Rule 11Ac1-1 under the '34 Act), as of the close of business on the
CIF Valuation Date.
b. If the security was not a reported security, and the
principal market for such security was an exchange, then the last
sale on such exchange on the CIF Valuation Date or, if there were no
reported transactions on such exchange that day, the average of the
highest current independent bid and lowest current independent offer
on the exchange as of the close of business on the CIF Valuation
Date.
c. If the security was not a reported security and was quoted in
the NASDAQ system, then the average of the highest current
independent bid and lowest current independent offer reported on
NASDAQ as of the close of business on the CIF Valuation Date.
d. For all other securities, the average of the highest current
independent bid and lowest current independent offer, as of the
close of business on the CIF valuation date, determined on the basis
of reasonable inquiry. For securities in this category, Keystone
obtained quotations from at least three sources that were either
broker-dealers or pricing services independent of and unrelated to
Keystone and, when more than one valid quotation was available, used
the average of the quotations to value the securities, in
conformance with interpretations by the SEC and practices under SEC
Rule 17a-7.
The securities received by a transferee Fund portfolio were valued
by such portfolio for purposes of the transfer in the same manner and
as of the same day as such securities were valued by the corresponding
transferor CIF. The per share value of the shares of each Fund
portfolio issued to the CIFs was based on the corresponding portfolio's
then-current net asset value. Thus, the value of a Plan's investment in
shares of each Fund was, as of the opening of business on the first
business day after the CIF Conversion, equal to the value of such
Plan's investment in the CIFs as of the close of business on the last
business day prior to the CIF Conversion.
Not later than thirty (30) business days after completion of each
in-kind transfer transaction, Keystone sent by regular mail to each
affected Client Plan a written statement that included a confirmation
of the transaction. Such confirmation contained: (i) the identity of
each security that was valued in accordance with SEC Rule 17a-7(b)(4),
as described above; (ii) the price of each such security for purposes
of the transaction; and (iii) the identity of each pricing service or
market-maker consulted in determining the value of such securities.
Not later than one-hundred and twenty (120) days after completion
of each in-kind transfer of CIF assets in exchange for shares of the
Funds, Keystone mailed to the Client Plans a written confirmation of
the number of CIF units held by each affected Client Plan immediately
before the CIF Conversion (and the related per unit value and the
aggregate dollar value of the units transferred), and the number of
shares in the Funds that were held by each affected Plan following the
CIF Conversion (and the related per share net asset value and the
aggregate dollar value of the shares received). In this regard,
Keystone represents that with respect to the CIF Conversions described
herein, it was unable to distribute such confirmation to the Client
Plans within 105 days, as required by Section I(g) of PTE 97-41.
However, for purposes of future CIF Conversions, Keystone represents
that it will meet this condition (as required by Section II(g) for
transactions which occur after August 8, 1997), as well as the other
conditions of PTE 97-41.
Receipt of Fees by Keystone From the Funds
9. Keystone represents that PTE 77-4 (42 FR 18732, April 8, 1977)
5 permits it to receive fees from the Funds which result
from investments made by the Client Plans in the Funds, if the
conditions of that exemption are met. Section II(c) of PTE 77-4
requires that either: (i) the Client Plan may not pay any investment
management, investment advisory, or similar fees for the assets of such
Plan invested in shares of a Fund for the entire period of such
investment; or (ii) the Client Plan may pay investment management,
investment advisory, or similar fees to Keystone based on the total
assets of such Plans invested in shares of a Fund from which a credit
has been subtracted representing such Plan's pro rata share of such
investment advisory fees paid to Keystone by the Fund. Further, Section
II(f) of PTE 77-4 requires that the second fiduciary be notified of any
change in the rates of fees charged by the Fund and approve in writing
the continued holding of shares acquired by the plan prior to such
change.
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\5\ PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that the
conditions of the exemption are met.
In addition, PTE 77-3 permits the acquisition or sale of shares
of a registered, open-end investment company by an employee benefit
plan covering only employees of such investment company, employees
of the investment adviser or principal underwriter for such
investment company, or employees of any affiliated person (as
defined therein) of such investment adviser or principal
underwriter, provided certain conditions are met.
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Keystone represents that its fee structure and any future approval
of fee increases with respect to investments by the Client Plans in the
Funds will comply with PTE 77-4.6 Accordingly, the Applicant
has not requested an individual exemption for the receipt of fees by
Keystone from the Funds for
[[Page 65254]]
investment management, investment advisory, or similar services
provided to the Funds, or for the receipt of fees for any Secondary
Services provided by Keystone. Thus, the Department is not providing
relief for the receipt of such fees attributable to investment in the
Funds by the Client Plans in this proposed exemption.
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\6\ In this regard, the Department is expressing no opinion in
this proposed exemption regarding whether any of the transactions
with the Funds by Keystone involving either the Bank Plans or the
Client Plans met the conditions of PTE 77-3 or PTE 77-4,
respectively.
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10. In summary, Keystone represents that the transactions described
herein satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Funds provide the Client Plans with a more effective
investment vehicle than the CIFs that were maintained by Keystone.
(b) With respect to each in-kind transfer of a Client Plan's CIF
assets into a Fund in exchange for Fund shares, a Second Fiduciary for
the Client Plan authorized, in writing, such transfer prior to the
transaction only after receiving full written disclosure of information
concerning the Fund.
(c) Each Client Plan received shares of the Funds, in connection
with the in-kind transfer of CIF assets, which had a total net asset
value that was equal to the value of the Client Plan's pro rata share
of the CIF on the date of the transfer, as determined in a single
valuation performed in the same manner and at the close of the business
day, using independent sources in accordance with procedures
established by the Funds which comply with SEC Rule 17a-7 of the ICA,
as amended, for the valuation of such assets.
(d) For all in-kind transfers of CIF assets to a Fund covered by
the proposed exemption, Keystone sent to each affected Client Plan
written confirmation by regular mail, not later than 30 days after the
completion of the transaction, that contained the following
information: (1) the identity of each security that was valued for
purposes of the transaction in accordance with SEC Rule 17a-7(b)(4) of
the ICA; (2) the price of each such security involved in the
transaction; and (3) the identity of each pricing service or market
maker consulted in determining the value of such securities.
(e) For all in-kind transfers of CIF assets to a Fund, made on
behalf of Client Plans, Keystone sent by regular mail, no later than
120 days after completion of each CIF asset transfer, a written
confirmation that contained the following information: (1) the number
of CIF units held by the Client Plan immediately before the transfer,
the related per unit value and the total dollar amount of such CIF
units; and (2) the number of shares in the Funds that were held by the
Client Plan following the Conversion, the related per share net asset
value and the total dollar amount of such shares.
(f) The price paid or received by a Client Plan for shares of the
Funds was the net asset value per share at the time of the transaction
and was the same price for the Fund shares which was paid or received
by any other investor at that time.
(g) The transferred assets constituted the Client Plan's pro rata
portion of all assets that were held by the CIF immediately prior to
the transfer.
(h) No sales commissions were paid by a Client Plan in connection
with the in-kind transfers of CIF assets in exchange for shares of the
Funds.
(i) Keystone did not receive any 12b-1 fees in connection with the
transactions.
(j) All dealings between the Client Plans and any of the Funds were
on a basis no less favorable to such Plans than dealings between the
Funds and other shareholders holding the same class of shares as the
Client Plans.
Notice to Interested Persons
Notice of the proposed exemption should be given to Client Plans
that had investments in the terminating CIFs, including the Second
Fiduciaries from whom approval was sought for the in-kind transfer of
Client Plan assets to the Funds. Notice will be provided to each Second
Fiduciary by first class mail within 30 days following the publication
of this notice of pendency of the proposed exemption in the Federal
Register. The notice should include a copy of this notice of proposed
exemption, as published herein, and make interested persons aware of
their right to comment or request a hearing on the proposed exemption.
Comments and requests for a public hearing must be received by the
Department within 60 days of the publication date for this proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Janet L. Schmidt of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
Bankers Trust Company (BTC), Located in New York, New York
[Application Nos. D-10592 through D-10594]
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 section 406(a) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not
apply to (1) the proposed granting to BTC by certain employee benefit
plans (the Plans) investing in Hometown America L.L.C. (the LLC) of
security interests in the capital commitments of the Plans to the LLC,
where BTC is the representative of certain lenders (the Lenders) that
will fund a so-called ``credit facility'' providing loans to the LLC,
and the Lenders are parties in interest with respect to the Plans; and
(2) the proposed agreements by the Plans to honor capital calls made to
the Plans by BTC, in lieu of the LLC's sole managing member, in
connection with the Plan's capital commitments to the LLC where such
capital calls relate to the security interests in the capital
commitments previously granted to BTC; provided that (a) the proposed
grants and agreements are on terms no less favorable to the Plans than
those which the Plans could obtain in arm's-length transactions with
unrelated parties; (b) the decisions on behalf of each Plan to invest
in the LLC and to execute such grants and agreements in favor of BTC
are made by a fiduciary which is not included among, and is independent
of and unaffiliated with, the Lenders and BTC; and (c) with respect to
Plans that may invest in the LLC in the future, such Plans will have
assets of not less than $100 million and not more than 5% of the assets
of such Plan will be invested in the LLC.
Summary of Facts and Representations
1. The LLC is a Delaware limited liability company, the sole
managing member of which is Hometown America Communities, Inc. (the
Manager), a Delaware corporation. The Manager is a separate affiliate
of Transwestern Investment Company, L.L.C. (TWIC), a Delaware limited
liability company, which is the sponsor of the LLC. The LLC shall have
a perpetual existence until it is dissolved, wound up or liquidated in
accordance with the agreement dated December 10, 1997 which established
its organization and functions (the Agreement). The LLC was formed by
the Manager (as sole managing member) and Transwestern Hometown
America, L.L.C. (TWHA), an affiliate of TWIC (as non-managing member),
with the intent of seeking capital commitments from a limited number of
prospective investors who would become members (the Members) of the
LLC. There are six current and prospective Members having, in the
[[Page 65255]]
aggregate, irrevocable, unconditional capital commitments of at least
$100,000,000; and there are four other Members who have contributed
property to the LLC.
2. The LLC has been organized to establish an integrated, self-
administered and self-managed real estate operating company (see rep.
11, below) to acquire manufactured housing communities. The LLC will
make acquisitions and provide property management services. As
described in the Private Placement Memorandum, the LLC believes that
significant opportunities exist to achieve superior risk-adjusted
returns on its investments in excess of 15% over a five-year period.
The LLC will identify and commit to all investments within five years
of closing (the Investment Period). Strategies to maximize proceeds and
create liquidity for the LLC include single asset sales, portfolio
transactions, formation and exchange of assets for equity and a public
offering for shares of the Manager in which Members will be granted the
right to convert their membership interests into shares of the Manager.
3. The LLC may issue a variety of securities in connection with its
investment activities, including operating company units, preferred
operating company units, convertible preferred operating company units,
warrants, options, debt, participating debt, convertible debt and other
securities; the LLC may also purchase real estate manufactured housing-
related securities, including publicly-traded or private debt or equity
instruments. The LLC will distribute to the Members 100% of the LLC's
taxable income from operations, dispositions, financing of investments
and other events giving rise to distributable proceeds. Until a public
offering occurs, Members will have the right (but not an obligation) to
reinvest all or any part of any such distributions for an increased
interest in the LLC.
4. The Agreement requires each Member to execute a subscription
agreement that obligates the Member to make contributions of capital up
to a specified maximum. The Agreement requires Members to make capital
contributions to fulfill this obligation upon receipt of notice from
the Manager. Under the Agreement, the Manager may make calls for cash
contributions (Capital Calls) up to the total amount of a Member's
capital commitment upon 10 business days' notice, subject to certain
limitations. The Members' capital commitments are structured as
unconditional, binding commitments to contribute equity when Capital
Calls are made by the Manager. In the event of a default by a Member,
the LLC may exercise any of a number of specific remedies.
The Members constituting over 90% of the equity interests and their
investments in the LLC are:
------------------------------------------------------------------------
Capital
commitment
Name of member (in
millions)
------------------------------------------------------------------------
Northwestern Mutual Life Ins. Co............................ $20
Public Employees' Ret. Assn. of CO.......................... 25
Allstate Life Ins. Co....................................... 25
Ameritech Pension Trust..................................... 25
The Manager................................................. 1
TWHA........................................................ 4
------------------------------------------------------------------------
5. The applicant states that the LLC will incur indebtedness in
connection with many of its investments. In addition to mortgage
indebtedness, the LLC will incur short-term indebtedness for the
acquisition of particular investments. This indebtedness will take the
form of a credit facility (the Credit Facility) secured by, among other
things, a pledge and assignment of each Member's capital commitment.
This type of facility will allow the LLC to consummate investments
quickly without having to finalize the debt/equity structure for an
investment or having to arrange for interim or permanent financing
prior to making an investment, and will have additional advantages to
the Members and the LLC. Under the Agreement, the Manager may encumber
Member's capital commitments, including the right to call for capital
contributions, to one or more financial institutions as security for
the Credit Facility. Each of the Members has appointed the Manager as
its attorney-in-fact to execute all documents and instruments of
transfer necessary to implement the provisions of the Agreement. In
connection with this Credit Facility, each of the Members is required
to execute documents customarily required in secured financings,
including an agreement to unconditionally honor Capital Calls.
6. BTC will become agent for a group of Lenders providing a $63
million revolving Credit Facility to the LLC. BTC will also be a
participating Lender. Some of the Lenders may be parties in interest
with respect to some of the Plans that invest in the LLC by virtue of
such Lenders' (or their affiliates') provisions of fiduciary services
to such Plans for assets other than the Plans' interests in the LLC.
BTC is requesting an exemption to permit the Plans to enter into
security agreements with BTC, as the representative of the Lenders,
whereby such Plans' capital commitments to the LLC will be used as
collateral for loans made by the Credit Facility to the LLC, when such
loans are funded by Lenders who are parties in interest to one or more
of the Plans.
The Credit Facility will be used to provide immediate funds for
real estate acquisitions made by the LLC, as well as for the payment of
LLC expenses. Repayments will be secured generally by the LLC from the
Members' capital contributions, and Capital Calls on the Members'
capital commitments. The Credit Facility is intended to be available
until December 11, 2000. The LLC can use its credit under the Credit
Facility either by direct or indirect borrowings or by requesting that
letters of credit be issued. All Lenders will participate on a pro rata
basis with respect to all cash loans and letters of credit up to the
maximum of the Lenders' respective commitments. All such loans and
letters of credit will be issued to the LLC or an entity in which the
LLC owns a direct or indirect interest (a Qualified Borrower), and not
to any individual Member. All payments of principal and interest made
by the LLC or a Qualified Borrower will be allocated pro rata among all
Lenders. The applicant represents that the aggregate capital
commitments to be pledged will be at least 1.5 times the maximum amount
of the credit available under the Credit Facility.
7. The Credit Facility will be a recourse obligation of the LLC,
the repayment of which is secured primarily by the grant of a security
interest to BTC, as agent under the Credit Facility for the benefit of
the Lenders, from the LLC, in both: (a) the Members' capital
commitments and (b) a collateral account (the Borrower Collateral
Account) under which the LLC must deposit all Members' capital
contributions when paid. In addition, the LLC and the Manager will
grant BTC, as agent under the Credit Facility for the benefit of the
Lenders, a security interest in: (a) the right to call capital under
the Agreement; (b) Capital Call notices; and (c) the Members' capital
commitments. The Borrower Collateral Account will be assigned to BTC to
secure repayment of the indebtedness incurred under the Credit
Facility. BTC has the right to apply any or all funds in the Borrower
Collateral Account toward payment of the indebtedness in any manner it
may elect. The capital commitments are fully recourse to all the
Members and to the Manager. In the event of default under the Credit
Facility, the agent (i.e., BTC) has the right to unilaterally make
capital calls on the Members to pay their unfunded
[[Page 65256]]
capital commitments, and will apply cash received from such capital
calls to any outstanding debt.
8. Under the Credit Facility, each Member that is a Plan will
execute an acknowledgment (the Estoppel) pursuant to which it
acknowledges that the LLC and the Manager have pledged and assigned to
BTC, for the benefit of each Lender which may be a party in interest
(as defined in Act section 3(14)) of such Member, all of their rights
under the Agreement relating to capital commitments and Capital Call
notices. The Estoppel will include an acknowledgment and covenant by
the Plan that, if an event of default exists, such Plan will
unconditionally honor any capital call made by BTC in accordance with
the Agreement up to the unfunded capital commitment of such Plan to the
LLC.
9. The applicant represents that at the present time the Ameritech
Pension Trust (the Ameritech Trust) holds the assets of three defined
benefit plans (the Ameritech Plans), which own interests in the LLC.
The Ameritech Trust has made a capital commitment of $25 million to the
LLC. The applicant states that some of the Lenders may be parties in
interest with respect to some of the Ameritech Plans in the Ameritech
Trust by virtue of such Lenders' (or their affiliates') provisions of
fiduciary services to such Ameritech Plans with respect to Ameritech
Trust assets other than their membership interests in the LLC. Thus,
BTC states that there is an immediate need for the Ameritech Trust to
enter into the Estoppel under the terms and conditions described
herein. The total number of participants in the three Ameritech Plans
is approximately 108,000, and the approximate fair market value of the
total assets of the Ameritech Plans held in the Ameritech Trust as of
December 31, 1996 is $12.15 billion.
The applicant represents that the fiduciary of the Ameritech Plans
generally responsible for investment decisions in real estate assets
which are managed internally could be, depending on the size and type
of the investment, the Ameritech Corporation Asset Management
Committee, the Chief Investment Officer of Ameritech Corporation, or
the Ameritech Corporation Investment Management Department's Real
Estate Committee (comprised of the staff real estate professionals and
another Investment Management Department director). The fiduciaries
responsible for reviewing and authorizing the investments in the LLC
under this proposed exemption currently are William M. Stephens, Chief
Investment Officer of Ameritech Corporation, and the Ameritech
Corporation Investment Management Department's Real Estate Committee.
10. The applicant represents that the Ameritech Plans are currently
the only employee benefit plans subject to the Act that are Members of
the LLC. However, the applicant states that it is possible that one or
more other Plans will become Members of the LLC in the future. Thus,
the applicant requests relief for any such Plan under this proposed
exemption, provided the Plan meets the standards and conditions set
forth herein. In this regard, such Plan must be represented by an
independent fiduciary, and the Manager must receive from the Plan one
of the following:
(1) A representation letter from the applicable fiduciary with
respect to such Plan substantially identical to the representation
letter submitted by the fiduciaries of the Ameritech Trust, in which
case this proposed exemption, if granted, will apply to the investments
made by such Plan if the conditions required herein are met; or
(2) Evidence that such Plan and its responsible fiduciaries are
eligible for relief under Prohibited Transaction Exemption 96-23 (PTE
96-23, 61 FR 15975, April 10, 1996), the class exemption for
transactions by a plan with certain parties in interest where such
plan's assets are managed by an in-house asset manager (INHAM) that has
total assets under its management, attributable to plans maintained by
its affiliates, in excess of $50 million (see Part IV(a) of PTE 96-23);
or
(3) Evidence that such Plan is eligible for another class exemption
or has obtained an individual exemption from the Department covering
the potential prohibited transactions which are the subject of this
proposed exemption.
11. BTC represents that the LLC will obtain an opinion of counsel
that the LLC will constitute an ``operating company'' under the
Department's plan asset regulations [see 29 CFR 2510.3-101(c)] if the
LLC is operated in accordance with the Agreement and the private
placement memorandum distributed in connection with the private
placement of the LLC membership interests.7
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\7\ The Department notes that the term ``operating company'' as
used in the Department's plan asset regulation cited above includes
an entity that is considered a ``real estate operating company'' as
described therein (see 29 CFR 2510.3-101(e)). However, the
Department expresses no opinion in this proposed exemption regarding
whether the LLC would be considered either an operating company or a
real estate operating company under such regulations. In this
regard, the Department notes that it is providing no relief for
either internal transactions involving the operation of the LLC or
for transactions involving third parties other than the specific
relief proposed herein. In addition, the Department encourages
potential Plan investors and their independent fiduciaries to
carefully examine all aspects of the LLC's proposed real estate
investment program in order to determine whether the requirements of
the Department's regulations will be met.
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12. BTC represents that the Estoppel constitutes a form of credit
security which is customary among financing arrangements for real
estate limited partnerships or limited liability companies, wherein the
financing institutions do not obtain security interests in the real
property assets of the partnership or limited liability companies. BTC
also represents that the obligatory execution of the Estoppel by the
Members for the benefit of the Lenders was fully disclosed in the
Private Placement Memorandum as a requisite condition of investment in
the LLC during the private placement of the membership interests. BTC
represents that the only direct relationship between any of the Members
and any of the Lenders is the execution of the Estoppel. All other
aspects of the transaction, including the negotiation of all terms of
the Credit Facility, are exclusively between the Lenders and the LLC.
BTC represents that the proposed execution of the Estoppel will not
affect the abilities of the Trust to withdraw from investment and
participation in the LLC. The only Plan assets to be affected by the
proposed transactions are any funds which must be contributed to the
LLC in accordance with requirements under the Agreement to make Capital
Calls to honor a Member's capital commitments.
13. BTC represents that neither it nor any Lender acts or has acted
in any fiduciary capacity with respect to the Ameritech Trust's
investment in the LLC and that BTC is independent of and unrelated to
those fiduciaries (the Ameritech Trust Fiduciaries) responsible for
authorizing and overseeing the Ameritech Trust's investments in the
LLC. Each Ameritech Trust Fiduciary represents independently that its
authorization of Trust investments in the LLC was free of any
influence, authority or control by the Lenders. The Ameritech Trust
Fiduciaries represent that the Ameritech Trust's investments in and
capital commitments to the LLC were made with the knowledge that each
Member would be required subsequently to grant a security interest in
Capital Calls and capital commitments to the Lenders and to honor
requests for cash contributions, also known as ``drawdowns'', made on
behalf of the Lenders without recourse to any defenses against the
Manager. Each Ameritech Trust Fiduciary
[[Page 65257]]
individually represents that it is independent of and unrelated to BTC
and the Lenders and that the investment by the Ameritech Trust for
which that Ameritech Trust Fiduciary is responsible continues to
constitute a favorable investment for the Ameritech Plans participating
in that Trust and that the execution of the Estoppel is in the best
interests and protective of the participants and beneficiaries of such
Ameritech Plans. In the event another Plan proposes to become a Member,
the applicant represents that it will require similar representations
to be made by such Plan's independent fiduciary. Any Plan proposing to
become a Member in the future and needing to avail itself of the
exemption proposed herein will have assets of not less than $100
million, and not more than 5% of the assets of such Plan will be
invested in the LLC.
14. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) The Ameritech Plans' investments in the LLC were
authorized and are overseen by the Ameritech Trust Fiduciaries, which
are independent of the Lenders, and other Plan investments in the LLC
from other employee benefit plans subject to the Act will be authorized
and monitored by independent Plan fiduciaries; (2) None of the Lenders
have any influence, authority or control with respect to the Ameritech
Trust's investment in the LLC or the Ameritech Trust's execution of the
Estoppel; (3) The Ameritech Trust Fiduciaries invested in the LLC on
behalf of the Ameritech Plans with the knowledge that the Estoppel is
required of all Members investing in the LLC, and all other Plan
fiduciaries that invest their Plan's assets in the LLC will be treated
the same as other Members are currently treated with regard to the
Estoppel; and (4) Any Plan which may invest in the LLC in the future,
which needs to avail itself of the exemption proposed herein, will have
assets of not less than $100 million, and not more than 5% of the
assets of any such Plan will be invested in the LLC.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Toledo Clinic, Inc. Employees 401(k) and Profit Sharing Plan (the
T/C Plan); Hart Associates, Inc.; Profit Sharing Plan (the H/A
Plan); and Midwest Fluid Power Company, Inc. Savings and Profit
Sharing Plan and Trust (the M/F Plan, collectively; the Plans),
Located in Toledo, Ohio
[Application Nos. D-10633, D-10634 and D-10635, respectively]
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)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (1) the cash sale of certain shares of
preferred stock (the Preferred Stock) issued by TTC Holdings Inc.
(TTC), by the individually-directed account of Dr. Edward Orrechio in
the T/C Plan (the Orrechio Account), by the individually-directed
account of Michael Hart in the H/A Plan (the Hart Account), and by the
individually-directed account of Larry Peterson in the M/F Plan (the
Peterson Account; collectively, the Accounts) to TTC, a party in
interest with respect to the H/A Plan and M/F Plan; and (2) the
arrangement for the subsequent purchase of certain shares of Common
Stock (the Common Stock) issued by TTC by Messrs. Orecchio, Hart and
Peterson (collectively; the Participants), in their own name, from TTC
pursuant to an agreement with TTC that the purchase will occur
immediately after the sale of the Preferred Stock by the Plans to TTC;
provided that the following conditions are met:
1. The sale of the Preferred Stock to TTC by the Accounts and the
purchase of the Common Stock from TTC by the Participants, in their
individual capacity, are one-time transactions for cash;
2. The transactions described in (1) above take place on the same
business day;
3. The amount paid to the Accounts by TTC is the fair market value
of the Preferred Stock, as determined by a qualified independent
appraiser at the time of the sale;
4. The Participants, in their individual capacity, purchase from
TTC shares of the Common Stock which are equal in number to the shares
of Preferred Stock sold by the Accounts to TTC;
5. A qualified independent fiduciary (the Independent Fiduciary)
determines that the transactions described herein are in the best
interest and protective of the Accounts at the time of the
transactions; and
6. The Independent Fiduciary supervises the transactions; assures
that the conditions of this proposed exemption are met; and takes
whatever actions are necessary to protect the interests of the
Accounts, including reviewing amounts paid by TTC for the Preferred
Stock.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
December 1, 1998.
Summary of Facts and Representations
1. The Plans are profit sharing, defined contribution plans that
provide for individually directed accounts.
The T/C Plan is sponsored by the Toledo Clinic, Inc. (the Toledo
Clinic), an Ohio corporation with its principal place of business in
Toledo, Ohio. The Toledo Clinic is a large consortium of physicians and
medical specialists which provide a broad range of health and medical
services. Dr. Edward Orrechio (Dr. Orrechio) is a physician employed by
the Toledo Clinic.
United Missouri Bank of Kansas City, N.A. is the trustee of the T/C
Plan. As of July 1998, the T/C Plan had 490 participants and
approximately $79,000,000 in assets. Dr. Orrechio is a participant in
the T/C Plan. The Orrechio Account referred to herein is his
individually-directed account in the T/C Plan.
2. TTC, the issuer of the Preferred Stock, is an Ohio corporation
that was incorporated in April 1990. The Trust Company of Toledo
(TTCOT) is a wholly-owned subsidiary of TTC. The applicant represents
that TTCOT is a ``bank'' as that term is defined in Section 202(a)(2)
of the Investment Advisers Act of 1940.8
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\8\ The applicant represents that under Section 202(a)(2) of the
Investment Advisers Act of 1940, a ``Bank'' means (A) banking
institution organized under the laws of the United States, (B) a
member bank of the Federal Reserve System, (C) any other institution
or trust company, whether incorporated or not, doing business under
the laws of any State of the United States, a substantial portion of
the business of which consists of receiving deposits or exercising
fiduciary powers similar to those permitted to national banks under
the authority of the U.S. Comptroller of the Currency, and which is
supervised and examined by State or Federal authority having
supervision over banks, and which is not operated for the purpose of
evading the provisions of this subchapter, and (D) a receiver,
conservator, or other liquidating agent of any institution or firm
included in clauses (A), (B), or (C) of this paragraph.
---------------------------------------------------------------------------
[[Page 65258]]
3. The H/A Plan is sponsored by Hart Associates, Inc. (the Hart
Associates), an Ohio corporation in the business of marketing and
public relations. Michael Hart (Mr. Hart) is the president and chief
executive officer of Hart Associates.
TTCOT became the directed trustee for the H/A Plan effective March
31, 1991. As of July 1998, the H/A Plan had 30 participants and
approximately $2,000,000 in assets. Mr. Hart is a participant in the H/
A Plan. The Hart Account referred to herein is his individually-
directed account in the H/A Plan.
4. The M/F Plan is sponsored by Midwest Fluid Power Company, Inc.
(the MFP Company), an Ohio corporation which is a distributor of
industrial materials and parts used in fluid power applications in
certain industries. Larry Peterson (Mr. Peterson) is the president and
chief executive officer of the MFP Company.
As of July 1998, the M/F Plan had 70 participants and approximately
$4,800,000 in assets. TTCOT became the directed trustee for the M/F
Plan effective July 1, 1993. Mr. Peterson is a participant in the M/F
Plan. The Peterson Account referred to herein is his individually-
directed account in the M/F Plan.
5. The following table illustrates the percentage of assets of each
Account which was represented by the shares of Preferred Stock at the
time of original acquisition by the Accounts, and at the time of the
sale of such Preferred Stock by the Accounts to TTC. In addition, this
table shows the percentage of each Account's assets which was
represented by the related debentures (the Debentures, as discussed
below) at the time of original acquisition and prior to the sale of the
Preferred Stock.
----------------------------------------------------------------------------------------------------------------
Shares of % assets at
Accounts in the plans preferred Cost Debenture orig. % assets at
stock purchase sale
----------------------------------------------------------------------------------------------------------------
Orrechio....................................... 200 $20,000 $10,000 9.0 6.4
Hart........................................... 200 $20,000 10,000 55.5 18.1
Peterson....................................... 200 $20,000 10,000 16.5 10.6
----------------------------------------------------------------------------------------------------------------
6. It is represented that the Participants did not own shares of
Preferred Stock as individuals prior to the subject transactions. In
addition, the purchasing of shares of the Common Stock by the
Participants from TTC did not cause any of the Participants to become
majority shareholders of TTC. None of the Participants was or is
currently an officer, director, principal or employee of TTC or TTCOT.
At the time of original acquisition of the Preferred Stock by the
Accounts, neither TTC nor TTCOT was a fiduciary or other party in
interest under the Act with respect to the Plans.
Further, it is represented that TTCOT does not have the authority
to make investment decisions for any of the Plans to which it acts as
directed trustee (i.e., the H/A Plan and the M/F Plan) without written
directions from the Participants.
7. TTC had two classes of Stock--the Preferred Stock and the Common
Stock. There were 3,531 shares of the Common Stock outstanding prior to
the subject transactions, which were owned in equal amounts by Theodore
T. Hahn, Julie B. Higgins and David A. Snavely. These individuals are
the three founders, principals and partners of TTC.
In addition, there were 20,000 shares of Preferred Stock
outstanding prior to the subject transactions, which were held by 65
different shareholders. Among the shareholders of the Preferred Stock
were the Orrechio Account in the T/C Plan, the Hart Account in the H/A
Plan, and the Peterson Account in the M/F Plan.
8. The Preferred Stock was issued by TTC through a private offering
that was made in 1990. The Initial Offering Memorandum (the Memorandum)
was prepared on May 31, 1990. The offering allowed an investor to
acquire 200 shares of Preferred Stock and a $10,000 subordinated
debenture (the Debenture). The Debenture was issued in October 1990,
with a due date of December 31, 2000. The Debenture accrued a nine
percent (9%) per annum coupon rate, which was payable, along with
installments of principal, on a semiannual basis. The Stock and the
Debenture were offered to investors as constituent parts of a single
offering unit which could not be severed by the investor. The price for
each unit was $30,000, of which $20,000 was allocated to the Preferred
Stock and $10,000 was allocated to the Debenture. Thus, each of the
Accounts paid TTC $30,000 in cash and purchased one unit which
consisted of 200 shares of the Preferred Stock and the Debenture, as
described above.
Under the information described in the Memorandum, dividends were
not expected to be paid on the Preferred Stock, and no dividends were
paid on such shares.
It is represented that the Participants were aware of the identity
of TTC as the issuer of the Preferred Stock and the Debentures. As a
result of the acquisitions of the Preferred Stock, each of the Accounts
became a minority shareholder in TTC. No fees or commissions were
incurred or paid in connection with the acquisition of the Preferred
Stock or the Debenture. No subsequent acquisitions of Preferred Stock
or other Debentures were made by the Accounts.
The outstanding principal amount of the Debentures held by the
Accounts and other investors will be prepaid by TTC in December 1998,
prior to the subject transactions, in accordance with terms of the
Debentures. 9
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\9\ The Department notes that the holding of the Debentures by
the Plans at any time during which TTCOT was a directed trustee to
the Plans would have resulted in a prohibited transaction under
section 406(a)(1)(B) of the Act because TTC, the parent corporation
of TTCOT, was the issuer of the Debentures. TTCOT, as the directed
trustee of the H/A Plan and the M/F Plan, was a party in interest
with respect to these Plans under section 3(14)(B) of the Act. Thus,
TTC was a party in interest under section 3(14)(H) of the Act as a
10 percent or more shareholder of a person described in section
3(14)(B). However, TTC was not a ``disqualified person'' under
section 4975(e)(2)(H) of the Code because that provision of the Code
does not include the parent corporation of a service provider within
the definition of that term. As a result, the holding of the
Debentures would not constitute a prohibited transaction under
section 4975(c)(1)(B) of the Code. In addition, the Department notes
that under section 502(i) of the Act, no civil penalty shall apply
to a transaction with respect to a plan described under section
4975(e)(1) of the Code. In any event, no relief is being provided
herein for the past acquisition and holding of the Debentures.
---------------------------------------------------------------------------
9. The subject transactions were precipitated by TTC's desire to
amend its Articles of Incorporation (the Articles). The amendment of
the Articles enabled TTC to change its tax status to a Subchapter ``S''
corporation in accordance with Section 1362(a) of the Code. The change
in tax status will be effective as of January 1, 1999. The Board of
Directors of TTC determined that by eliminating its ``C'' Corporation
tax status, TTC could increase the return to its shareholders.
Furthermore, the switch by TTC to a Subchapter ``S''
[[Page 65259]]
status under the Code (the Conversion) required the conversion of the
outstanding shares of the Preferred Stock into Common Stock.
The applicant states that the Participants and their respective
Accounts in the Plans would have suffered adverse federal income tax
consequences if they had continued to hold shares of the Preferred
Stock in their Accounts after the Conversion. The Participants were
informed by TTC that if the Plans continued to hold shares of the
Preferred Stock after the Conversion, the Plans would be subject to
unrelated business taxable income on all Subchapter ``S''
distributions, which could have resulted in a loss of each Plan's tax-
free status under section 501(a) of the Code.
Accordingly, the Participants concluded that it was in the best
interest of their Accounts and of the Plans to dispose of the
investment in the Preferred Stock, to avoid the tax liabilities that
would be incurred, once TTC becomes a Subchapter ``S'' corporation.
10. On May 1, 1998, TTC sent certain documents to its shareholders,
including the Participants, as a result of their ownership of Preferred
Stock and the Debentures in the Accounts. The documents stated that TTC
desired to redeem, via cancellation, all shares of the Preferred Stock
which were held by any shareholders that would have adverse tax
consequences from continued ownership of shares in an ``S'' corporation
after the conversion.
TTC has provided a mechanism whereby eligible shareholders and
those who own shares through exempt employee benefit plans (i.e., the
Accounts in the Plans) would designate a related party to purchase
shares of TTC Stock equal to the number of shares sold by the Accounts
in the Plans. Such purchase would be for cash and would be at the same
price per share as that paid by TTC for redemption of the Stock.
11. Therefore, the Participants and TTC are requesting relief for
the following transactions: (1) the proposed cash sale of shares of the
Preferred Stock by the Orrechio Account in the T/C Plan, by the Hart
Account in the H/A Plan, and by the Peterson Account in the M/F Plan to
TTC; and (2) the arrangement for the subsequent purchase under the
above described agreement with TTC of an equal number of shares of the
Common Stock by Messrs. Orecchio, Hart and Peterson (i.e., the
Participants), in their own name, from TTC immediately after the sale
by the Accounts to TTC.
12. The redemption price for the shares of the Preferred Stock was
determined by the parties based upon a written valuation dated May 6,
1998, prepared by Austin Financial Services, Inc. (Austin), a
consulting firm with experience in the financial services industry.
Austin was retained by the Board of Directors of TTC for the purpose of
valuing TTC and its shares of Preferred Stock and Common Stock
(together, the Stock). In determining fair market value of the Stock,
Austin relied on the discounted cash flow method and the capitalization
of earnings method. After weighing these two methods, Austin determined
that the fair market value of all the outstanding shares of the Stock
was approximately $7,263,035. This amount equates to $308.66 per share
for each outstanding share of Preferred and Common Stock. Austin's
valuation of the Stock was updated at the time of the transaction, but
its conclusions for the fair market value of the Stock were unchanged.
Therefore, based on the Austin valuation, each Account received a total
of $61,732 for its shares of Preferred Stock, as of the date of
Conversion.
13. TTC also engaged the law firm of Callister Nebeker & McCullough
of Salt Lake City, Utah (CNM) to serve as the Independent Fiduciary for
the Plans to review the offer of redemption of the Preferred stock, to
render an opinion as to the prudence of the investment decisions
relating thereto, and to direct the sale of shares as appropriate. In a
report dated April 29, 1998 (the Report), CNM acknowledged its
appointment as the Independent Fiduciary for the Plans in connection
with TTC's proposed change from a Subchapter ``C'' corporation to a
Subchapter ``S'' corporation.
As the Independent Fiduciary for the Plans, CNM determined whether
the subject transactions, and the actions taken by the Plans in
connection with the transactions, were in the best interest of such
Plans and the Accounts, in accordance with the requirements of the Act.
In this regard, each of the Participants (i.e., Dr. Orrechio, Mr. Hart
and Mr. Peterson) made separate determinations that the proposed
transactions would be in the best interests of their Accounts. Upon
arriving at this conclusion, a determination was made to retain CNM as
an independent fiduciary for the Plans in order to ensure that the
terms of such transactions, including the appraisal made of the fair
market value of the Stock, would be protective of the Plans and the
Accounts.
In a supplemental statement dated August 25, 1998 (the Statement),
CNM acknowledged its duties as an independent fiduciary for the
transactions described herein. CNM represented that it had experience
in acting as an independent fiduciary for employee benefit plans. CNM
concluded that the subject transactions would be prudent and in the
best interest of each of the Accounts. CNM represented that it would
ensure, among other things, that the fair market value of the Stock, as
determined by Austin, would be updated on the date of the transactions,
and that each Account would receive the correct amount of cash for its
shares of Preferred Stock. Thus, the Independent Fiduciary supervised
the subject transactions to protect the interests of the Plans and the
Accounts.
14. The applicant also obtained an opinion regarding the subject
transactions from Houlihan Valuation Advisors dated June 16, 1998 (the
Fairness Opinion). The Fairness Opinion stated that the Preferred Stock
was essentially equivalent to the Common Stock because the Preferred
Stock: (i) was convertible at the option of the holder into Common
Stock; (ii) had voting privileges identical to the Common Stock; and
(iii) paid no preferred dividends. The differences between the
Preferred Stock and the Common Stock in terms of the liquidation value
of the Preferred Stock was determined to be meaningless because the
fair market value of the Preferred and Common Stock is much higher than
its liquidation value.
The Fairness Opinion concluded that the sale of the Preferred Stock
by the Accounts to TTC would be fair to the Accounts because the
Accounts would receive adequate consideration for their shares of the
Preferred Stock, based on an independent appraisal.
15. In summary, the applicant represents that the subject
transactions satisfied the statutory criteria of section 408(a) of the
Act and section 4975(c)(2) of the Code because:
a. The sale of the Preferred Stock to TTC by the Accounts and the
purchase of the Common Stock from TTC by the Participants were one-time
transactions for cash;
b. The transactions described in (1) above took place on the same
business day;
c. The amount paid to the Accounts by TTC was the fair market value
of the Preferred Stock, as determined by a qualified independent
appraiser at the time of the sale; and
d. The Independent Fiduciary determined that the subject
transactions were in the best interest and protective of the Accounts.
The Independent
[[Page 65260]]
Fiduciary supervised the subject transactions to protect the interests
of the Accounts.
Notice to Interested Persons
Because the only assets of the Plans' involved in the subject
transactions are those held in the Accounts, and no other participants
in the Plans are affected by the transactions, it has been determined
that there is no need to distribute this notice of proposed exemption
to any interested persons other than the Participants. Comments and
requests for a hearing on the proposed exemption are due 30 days after
the date of publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Sprinx Inc. Retirement Plan (the Plan), Located in Grand Prairie,
Texas
[Application No. D-10660]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 C.F.R. Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (1) the proposed loan of $90,000 (the Loan)
by the Plan to Sprinx, Inc. (the Employer), the sponsor of the Plan;
and (2) the guarantee of repayment of the Loan by Harry D. Spring, a
party in interest with respect to the Plan; provided that the following
conditions are satisfied:
1. The Loan does not exceed 25% of the total assets of the Plan at
any time;
2. The terms of the Loan are at least as favorable to the Plan as
those terms which would exist in an arm's-length transaction with an
unrelated party;
3. The Loan is secured by common stock issued by the Employer,
which has a fair market value, as determined by an independent
qualified appraiser, which will remain at least 200% of the outstanding
principal balance of the Loan throughout its duration;
4. The Plan has a first priority perfected security interest in the
Stock, which is properly filed and perfected under applicable state
law;
5. An independent fiduciary reviews the terms and conditions of the
Loan and determines that the Loan is in the best interest and
protective of the Plan and its participants and beneficiaries;
6. An independent fiduciary monitors the Loan throughout its
duration and takes whatever action is necessary to protect the
interests of the Plan; and
7. The independent fiduciary monitors the parties' compliance with
the terms and conditions of this proposed exemption, if granted.
Summary of Facts and Representations
1. The Plan is a pension plan that was established on August 18,
1993. The Plan currently has approximately eighteen (18) participants
and beneficiaries. As of June 30, 1998, the Plan had total assets of
$435,368. Harry D. Spring (Mr. Spring) is the trustee of the Plan.
2. The sponsor of the Plan is Sprinx, Inc. (the Employer). The
Employer is a Subchapter ``S'' corporation, incorporated in the State
of Texas. The Employer is in the business of health care consulting and
billing. A primary part of the Employer's business is consulting with
medical service companies to bill the health care services provided by
these companies. Mr. Spring is an officer and director of the Employer,
and is the sole shareholder of the Stock.
3. The Loan will have a principal amount of $90,000 and a ten year
duration. The Loan will bear an interest rate equal to the lesser of
(i) nine and one-half percent (9.5%) per annum, or (ii) the highest
lawful non-usurious rate of interest permitted under Texas law provided
that such rate is never less than 9.5% per annum.\10\ The Loan provides
for equal amortization of principal and interest, and will be payable
in forty (40) quarterly installments. The first thirty-nine (39)
installments, based on an interest rate of 9.5% per annum, will be
equal to $3,510.20. The 40th and final installment on the Loan will be
equal to the total unpaid balance at that time. The applicant
represents that the Loan will at all times represent less than twenty-
five percent (25%) of the Plan's total assets.
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\10\ The Department agreed to this provision at the request of
the applicant in order to comply with Texas usury law. However, for
purposes of this proposed exemption, the Department understands that
the rate on this Loan will in no event be less than 9.5% per annum.
---------------------------------------------------------------------------
The Loan proceeds will be used to purchase additional equipment for
the Employer, and to hire additional employees.
4. The Loan will be secured at all times by the total outstanding
shares of the Stock, all of which is owned by Mr. Spring. The Plan will
have a first priority perfected security interest in the Stock, which
will be properly filed and perfected under applicable state law.
The Stock was appraised by Saville, Dodgen & Company, Professional
Corporation, Cerified Public Accountants (the SDC Appraisal) as of June
30, 1998, as having a fair market value of $3.8 million. The SDC
Appraisal used the capitalization of earnings method to estimate the
fair market value of the Stock, and the Employer's business as
evidenced thereby. The capitalization of earnings method is based on
the future estimated earnings of the Employer. The SDC Appraisal has
been supplemented by a statement from Clint Pugh (Mr. Pugh) of Saville,
Dodgen & Company, P.C. (SDC) which states that the procedures and
analysis utilized in the SDC Appraisal represent a reasonable estimate
of fair market value of the Stock and the Employer's business at the
present time. There are currently 10,800 shares of the Stock with an
estimated value per share of $351.85, based on the SDC Appraisal.
In a further statement dated November 5, 1998, Mr. Pugh represents
that SDC is independent of the Employer and Mr. Spring. In this regard,
SDC performs tax compliance work for the Employer, but the fees
collected from the Employer for these services represent less than one
percent (1%) of the total annual revenue of SDC. Mr. Pugh also states
that he is a qualified appraiser of the Stock and that he has been
performing appraisals for ten (10) years for various corporations. Mr.
Pugh represents that he adheres to the guidelines provided by the
American Institute of Certified Public Accountants for business
valuations.
5. Frost National Bank (the Bank) has examined the terms of the
Loan. By letter dated August 19, 1998, the Bank represents that it
would make the same loan on the same terms to the Employer, based on
its assumptions regarding the creditworthiness of the Employer and Mr.
Spring.
6. The Loan will be monitored by Richard S. Tucker (Mr. Tucker),
who will serve as the independent fiduciary (the Independent Fiduciary)
on behalf of the Plan for purposes of the Loan. Mr. Tucker has
submitted a statement in which he discusses his proposed role as the
Independent Fiduciary. Mr. Tucker states that the Loan will be in the
best interest of the Plan and its participants and beneficiaries. Mr.
Tucker believes that the Loan will be an appropriate investment for the
Plan with adequate safeguards and protections to ensure repayment of
all principal and interest. The Loan will also permit the Employer to
satisfy its needs for additional
[[Page 65261]]
equipment and employees, which will increase its profitability.
Mr. Tucker states that the Loan will be protective of the Plan
because the principal amount of the Loan will be adequately secured and
will represent less than twenty-five percent (25%) of the Plan's total
assets. The Stock, as collateral for the Loan, will have a fair market
value which exceeds the outstanding principal amount of the Loan by at
least two hundred percent (200%) at all times.
With respect to Mr. Tucker's qualifications to act as the
Independent Fiduciary for the Plan for purposes of the Loan, Mr. Tucker
represents that he is attorney with experience in evaluating
transactions, such as the Loan, and ensuring that such transactions
have proper legal documentation. Thus, Mr. Tucker states that he has
experience in protecting the rights of the parties involved in such
transactions.
Mr. Tucker represents that he is independent of the Employer, Mr.
Spring and their affiliates for purposes of his proposed duties as the
Independent Fiduciary. In this regard, Mr. Tucker states that he
performs legal services for the Employer. However, Mr. Tucker's fees
from the Employer for such services are less than one percent (1%) of
his total revenues. In addition, the fees generated from the Employer
represent less than one percent (1%) of the annual revenues received by
Mr. Tucker's firm.
Mr. Tucker represents that he has been apprised of the duties and
responsibilities of a fiduciary under the Act. Mr. Tucker states that
he will obtain, if necessary, appropriate advice from an experienced
ERISA counsel as to what is required to properly execute the duties of
an independent fiduciary for the Plan. Mr. Tucker acknowledges and
accepts his responsibilities and duties as the Independent Fiduciary
for this Loan transaction.
As the Independent Fiduciary, Mr. Tucker will represent the
interests of the Plan at all times. Mr. Tucker will monitor compliance
by the Employer with the terms and conditions of the Loan, and take
whatever action is necessary to safeguard the interests of the Plan and
its participants and beneficiaries.11
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\11\ In this regard, the applicant makes a request regarding a
successor independent fiduciary. Specifically, if it becomes
necessary in the future to appoint a successor independent fiduciary
(the Successor) to replace Mr. Tucker, the applicant will notify the
Department sixty (60) days in advance of the appointment of the
Successor. Any Successor will have the responsibilities, experience
and independence similar to those of Mr. Tucker.
---------------------------------------------------------------------------
7. Mr. Spring also unconditionally guarantees the prompt and full
repayment of the Loan, pursuant to the terms of a written guarantee
agreement (the Guarantee). Mr. Tucker, as the Independent Fiduciary,
has examined the terms of the Guarantee. Mr. Tucker believes that the
Guarantee is in the best interest of the Plan for several reasons: (a)
it is an unconditional Guarantee, which is not conditioned on any other
actions that may occur on the part of the Plan or the Employer; (b) the
Guarantee covers the full amount of the indebtedness, including any
additional costs or expenses associated with the liability; (c) if
there are any changes in the collateral provided by the Employer for
the Loan (i.e., the Stock), such changes will not affect the
obligations of Mr. Spring under the Guarantee; and (d) the Guarantee is
a guarantee of payment, under which the guarantor (i.e., Mr. Spring) is
immediately required to perform by making payments.
Mr. Tucker represents that the Guarantee satisfies the applicable
requirements for such agreements under Texas law and is protective of
the Plan because it creates the maximum enforceable rights against Mr.
Spring, as the Loan guarantor. Mr. Spring represents that he has an
adequate net worth to honor the Guarantee, if necessary. Mr. Tucker
states that Mr. Spring has sufficient personal assets, in addition to
the Stock, to satisfy his obligations under the Guarantee. Mr. Tucker
also states that he will monitor the financial status of Mr. Spring, as
guarantor, and will ensure that the Loan remains adequately secured by
the Stock and the Guarantee.
8. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria of section 408(a) of the
Act and section 4975(c)(2) of the Code because:
a. The Loan will not exceed 25% of the total assets of the Plan at
any time;
b. The terms of the Loan are at least as favorable to the Plan as
those terms which would exist in an arm's-length transaction with an
unrelated party;
c. The Loan will be secured by the Stock, which has a fair market
value, as determined by an independent qualified appraiser, of at least
200% of the outstanding principal balance of the Loan;
d. The Plan has a first priority perfected security interest in the
Stock, which will be properly filed and perfected under applicable
state law;
e. Mr. Tucker, as the Independent Fiduciary, has reviewed the
proposed terms and conditions of the Loan and determined that the Loan
would be in the best interest and protective of the Plan and its
participants and beneficiaries;
f. Mr. Tucker, as the Independent Fiduciary, will monitor the Loan
throughout its duration and take whatever actions are necessary to
safeguard the interests of the Plan and its participants and
beneficiaries; and
g. The Loan is personally and unconditionally guaranteed by Mr.
Spring, who has an adequate net worth to honor the Guarantee, if
necessary.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and 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
[[Page 65262]]
describes all material terms of the transaction which is the subject of
the exemption.
Signed at Washington, DC, this 20th day of November, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-31511 Filed 11-24-98; 8:45 am]
BILLING CODE 4510-29-P
