[Federal Register Volume 64, Number 242 (Friday, December 17, 1999)]
[Notices]
[Pages 70732-70748]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32753]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10542, et al.]
Proposed Exemptions; Business Men's Assurance Company of America
(BMA)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) The name, address, and telephone number of
the
[[Page 70733]]
person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Business Men's Assurance Company of America (BMA) Located in Kansas
City, MO
[Application No. D-10542]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, August 10, 1990).1
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\1\ For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section I. Covered Transactions
If the proposed 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
sales and transfers of assets of an employee benefit plan (the Plan) to
BMA pursuant to the terms of a benefit-responsive or a non-benefit
responsive synthetic guaranteed investment contract (the Benefit-
Responsive BMA Synthetic GIC or the Non-Benefit Responsive BMA
Synthetic GIC) entered into by the Plan sponsor with BMA; 2
(2) advances (the Advances) made by BMA to a Plan in order to make
unanticipated benefit payments, if applicable, under a Benefit-
Responsive BMA Synthetic GIC; and (3) the sweeping of interest and
other proceeds (the Plan Interest Proceeds) to BMA from a Plan's
Contractholder Custodial Account established under either a Benefit-
Responsive BMA Synthetic GIC or a Non-Benefit Responsive BMA Synthetic
GIC.
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\2\ Unless specifically noted, references to the BMA Synthetic
GIC refer to both types of Synthetic GIC products that are offered
to Plan investors by BMA.
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This proposed exemption is subject to the general conditions set
forth below in Section II.
Section II. General Conditions
(a) The decision to enter into a BMA Synthetic GIC is made on
behalf of a participating Plan in writing by a fiduciary of such Plan
which is independent of BMA.
(b) Only Plans with total assets having an aggregate market value
of at least $50 million are permitted to purchase BMA Synthetic GICs;
provided however that--
(1) In the case of two or more Plans which are maintained by the
same employer, controlled group of corporations or employee
organization (the Related Plans), whose assets are commingled for
investment purposes in a single master trust or any other entity the
assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan
Asset Regulation), which entity has purchased a BMA Synthetic GIC, the
foregoing $50 million requirement is deemed satisfied if such trust or
other entity has aggregate assets which are in excess of $50 million;
provided that, if the fiduciary responsible for making the investment
decision on behalf of such master trust or other entity is not the
employer or an affiliate of the employer, such fiduciary has total
assets under its management and control, exclusive of the $50 million
threshold amount attributable to plan investment in the commingled
entity, which are in excess of $100 million, or
(2) In the case of two or more Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (the Unrelated Plans), whose assets are commingled for
investment purposes in a group trust or any other form of entity the
assets of which are ``plan assets'' under the Plan Asset Regulation,
which entity has purchased a BMA Synthetic GIC, the foregoing $50
million requirement is deemed satisfied if such trust or other entity
has aggregate assets which are in excess of $50 million (excluding the
assets of any Plan with respect to which the fiduciary responsible for
making the investment decision on behalf of such group trust or other
entity or any member of the controlled group of corporations including
such fiduciary is the employer maintaining such Plan or an employee
organization whose members are covered by such Plan). However, the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity--
(i) Has full investment responsibility with respect to Plan assets
invested therein, and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to Plan investment in
the commingled entity, which are in excess of $100 million;
(c) Prior to the execution of a BMA Synthetic GIC, the Plan
fiduciary receives a full and detailed written disclosure of all
material features concerning the BMA Synthetic GIC, including--
(1) A copy of the underlying agreement for the BMA Synthetic GIC
(the BMA Synthetic GIC Contract or Contract) and accompanying
[[Page 70734]]
application, which stipulate the relevant provisions of the Contract,
the applicable fees, if any, and the rights and obligations of the
parties;
(2) Investment Guidelines defining the manner in which BMA will
manage the assets in the Contractholder Custodial Account;
(3) A copy of the Custodial Agreement between BMA, the Plan
fiduciary and the custodian (the Custodian);
(4) If granted, copies of the proposed exemption and grant notice
with respect to the exemptive relief provided herein.
(d) Upon the selection by a Plan fiduciary of a BMA Synthetic GIC,
BMA will supply the Plan fiduciary of a Plan (including a Plan that
provides for participant investment selection (the Section 404(c)
Plan)), a summary of the pertinent features of the documents listed
above in paragraphs (c)(1) through (c)(3) of this Section II which the
Plan fiduciary, in its discretion, deems appropriate for distribution
to such participant, to the extent necessary to satisfy the
requirements of section 404(c) of the Act.
(e) Subsequent to a Plan's investment in a BMA Synthetic GIC, the
Plan fiduciary will receive the following ongoing disclosures regarding
such investment:
(1) A periodic report consisting of a Contract Value Record Report,
which specifies the affected Plan's BMA Synthetic GIC Contract Value
Record balance for the prior period, contributions, withdrawals (i.e.,
Scheduled Withdrawals (the Scheduled Withdrawals) and, if applicable,
Unscheduled Withdrawals (the Unscheduled Withdrawals)), interest
earned, and the current period's ending Contract Value Record balance.
(The time periods covered by the Contract Value Record Report will be
selected in advance by the independent Plan fiduciary and may be sent
monthly, quarterly or annually.);
(2) A periodic Market Value Statement, which is supplied by the
Custodian on a quarterly basis, that specifies the prior period's
ending market value for the assets in the Contractholder Custodial
Account, contributions made by the Plan sponsor to the BMA Synthetic
GIC after the initial deposit, Scheduled Withdrawals and, if
applicable, Unscheduled Withdrawals, any fees paid to BMA, investment
income, realized capital gains and/or losses from sales, changes in
unrealized appreciation of assets, the current period's ending market
value and rate of return, and a summary of transactions; and
(3) Upon request from the Custodian (i.e., not more often than
quarterly), a portfolio listing.
(The reports referred to in paragraphs (e)(1)-(e)(3) of this
Section II will be made available to the Plan fiduciary, which, in
turn, will provide copies to participants in a Section 404(c) Plan upon
request, to the extent the Plan fiduciary deems it necessary.)
(f) Each BMA Synthetic GIC specifically provides an objective
method for determining the fair market value of the securities owned by
the Plan pursuant to such GIC.
(g) Each BMA Synthetic GIC has a predefined, fixed maturity date
selected by the Plan fiduciary and agreed to by BMA.
(h) In the event BMA sells assets from a Plan's Contractholder
Custodial Account to BMA's general account or to an affiliate during
the term of the BMA Synthetic GIC or at such GIC's maturity, the
transaction is--
(1) Effected for cash;
(2) The sales price of the security is equal to the fair market
value of such asset as of the close of business on the date of the
sale, as determined by independent sources; and
(3) The Plan incurs no brokerage or transaction costs in connection
with the transaction.
(i) BMA maintains books and records of each BMA Synthetic GIC
transaction for a period of six years. Such books and records are
subject to annual audit by independent, certified public accountants.
Summary of Facts and Representations
1. The parties involved in the proposed transactions are described
as follows:
(a) BMA is a stock life insurance company organized under Missouri
law. As of December 31, 1998, BMA had total admitted assets of $2.689
billion and $71.6 billion of in force insurance policies. BMA is
currently rated as follows: A.M. Best--A; Standard & Poor's--AA; Duff &
Phelps--AA; and Moody's--A1.
BMA is a wholly owned subsidiary of Generali-Midi Expansion B.V.,
which is a wholly owned subsidiary of Assicurazioni Generali S.p.A. In
addition, BMA owns 100 percent of BMA Financial Services, Inc. and
Jones & Babson, Inc. (J&B). Although a significant portion of BMA's
business consists of writing insurance and annuity contracts and
guaranteed investment contracts for numerous Title I pension plans, BMA
intends to become an investment adviser registered under the Investment
Advisers Act of 1940 (the 1940 Act).
(b) J&B is an investment management company registered as an
investment adviser under the 1940 Act. As of April 30, 1999, J&B had
total assets under management of $4.2 billion. J&B proposes to manage
the underlying assets of BMA Synthetic GICs to the extent any BMA
Synthetic GICs are sold prior to the time BMA becomes a registered
investment adviser.3
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\3\ All references to BMA throughout this proposed exemption are
intended to include J&B where it acts as the investment manager of
the assets held in any BMA Synthetic GIC product.
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(c) The Plans that BMA expects will purchase the BMA Synthetic GIC
will be plans (both defined contribution and defined benefit) that are
qualified under section 401(a) of the Code and/or subject to applicable
provisions of the Act. BMA states that it is possible that Plans which
are subject to section 457 of the Code (i.e., deferred compensation
plans of state and local government and tax exempt organizations) and
section 414(d) of the Code (i.e., governmental plans) may also purchase
the BMA Synthetic GIC as well as commingled investment entities holding
plan assets. The Plans will not consist of any plans that are
maintained or sponsored by BMA. As a precondition to investing, each
Plan or commingled investment vehicle must have total assets of at
least $50 million.
(d) The Custodian of the underlying assets of a BMA Synthetic GIC
will be a bank, trust company or ``other duly licensed provider of
custodial services'' 4 approved by BMA and specified in the
BMA Synthetic GIC application. The Custodian will be selected by the
independent Plan fiduciary that decides to invest in a BMA Synthetic
GIC and will be an entity that is unrelated to BMA.
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\4\ BMA represents that entities that are licensed under state
law to provide custodial services may vary from state to state. So
as not to limit a Plan fiduciary's choice of prospective custodians
to banks or trust companies, BMA has decided to permit appropriately
licensed entities to serve in this capacity.
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2. Since 1992, BMA has been offering a standard guaranteed
investment contract (the Standard GIC) for sale to section 401(k)
plans. A Standard GIC is a type of contract under which an insurance
company, in exchange for a sum of money, which is deposited in the
insurance company's general account, guarantees that it will return
that sum to the contractholder on a specified maturity date with
interest at a specified rate. In anticipation of its obligation to the
contractholder, the insurance company invests the funds received from
the contractholder primarily in fixed-income investments in order to
achieve an investment return
[[Page 70735]]
that will enable the insurance company to meet its guarantee at
maturity, pay its expenses and realize a reasonable profit margin. In
the Standard GIC, the fixed-income investments purchased with the
contractholder's deposit are held in the insurance company's general
account and are available to meet the claims of any of its
policyholders. Because the underlying fixed-income investments are not
plan assets, BMA states that the insurance company is not a fiduciary
of the plan as a result of issuing the Standard GIC.
According to BMA, Standard GICs have proven to be well-suited to
meet the investment and liquidity needs of a pension plan because a
plan achieves a predictable yield and a fixed maturity on its deposits.
The insurance company bears all of the investment and market
fluctuation risk. Therefore, Standard GICs perform an important role in
the investment portfolios of both defined benefit and defined
contribution plans.
Since the early 1990's fiduciaries of plans have become concerned
that Standard GICs might be subject to losses if the insurance company
becomes insolvent. In response to these concerns, ``synthetic'' GICs
were created.
Under a synthetic GIC, instead of paying a premium to the insurance
company on the effective date of the contract, the plan places assets
in a custodial bank account owned by the plan. The assets are held in
that account by the bank custodian and are managed exclusively by the
insurance company, an affiliate, or other money manager until the
contract's maturity. The pension plan bears all of the credit and
market value fluctuation risk of the securities in the account. The
yield achieved is not fixed but varies depending on the skill of the
asset manager and market conditions. Because the underlying assets of
the synthetic GIC are not owned by the insurance company, the plan's
investment is not affected by risks to which the insurer's own general
account assets may be subject.
3. BMA requests an administrative exemption from the Department in
order to offer a ``buy & hold'' synthetic GIC to Plan investors. The
aspects of the BMA Synthetic GIC for which BMA believes prohibited
transaction relief may be necessary are (a) BMA's implementation of its
Guarantee on Scheduled Withdrawal dates and the maturity date (the
Maturity Date) by (i) sales of assets in the Contractholder's Custodial
Account to BMA and the subsequent transfer of such assets to BMA, and
(ii) transfers of assets remaining in the Contractholder Custodial
Account to BMA at the Maturity Date of the BMA Synthetic GIC when BMA
pays the Plan the value of the Contract Value Record; (b) BMA's
Advances to a Plan in order to make unanticipated benefit payments; and
(c) the sweeping of interest and other proceeds (i.e., the Plan
Interest Proceeds) from a Plan's Contractholder Custodial Account to
BMA. BMA represents that it would be a service provider to a Plan and,
therefore, a party in interest with respect to such plan within the
meaning of section 3(14)(B) of the Act. On the assumption that the
assets in each Plan's Contractholder Custodial Account are ``plan
assets'' within the meaning of 29 CFR 2510.3-101, BMA states that
transfers or sales of securities held in a Contractholder Custodial
Account under the terms of the BMA Synthetic GIC on Scheduled
Withdrawal Dates and the Maturity Date could be viewed as a sale of
property between a plan and a party in interest in violation of section
406(a)(1)(A) of the Act or a transfer to a party in interest in
violation of section 406(a)(1)(D) of the Act. Similarly, BMA represents
that its guarantee as to principal and interest as well as its making
of Advances to a Plan in the case of a benefit-responsive BMA Synthetic
GIC, could be construed as the execution of loans between a Plan and a
party in interest in violation of section 406(a)(1)(B) and possibly,
section 406(b)(1) and (b)(2) of the Act. BMA further represents that
the sweeping of Plan Interest Proceeds from a Plan's Contractholder
Custodial Account to its general account during the term of a BMA
Synthetic GIC could be viewed as a transfer of plan assets to a party
in interest in violation of section 406(a)(1)(D) of the Act and
possibly, section 406(b)(1) and (b)(2) of the Act.
BMA notes that as a fiduciary with respect to the assets in a
Plan's Contractholder Custodial Account, it would have discretion as to
which assets in such Account to transfer or sell to BMA. Under such
circumstances, BMA represents that it could be viewed as acting in its
own interest or for its own account in selecting assets to sell or
transfer to BMA on Scheduled Withdrawal Dates or the Maturity Date in
violation of section 406(b)(1) and (b)(2) of the Act.
4. The BMA Synthetic GIC will offer the Plan a guaranteed fixed
rate of return, a final, fixed maturity date ranging between 3-7 years
and a liquidity provision. The fixed interest rate, which will
approximate what is available for traditional GICs being offered in the
marketplace at the time the BMA Synthetic GIC is purchased by the Plan,
will apply at all times until the final Maturity Date of such BMA
Synthetic GIC.5 In other words, at no time throughout the
duration of the BMA Synthetic GIC will the fixed interest rate float or
be reset. However, the fixed interest rate on BMA Synthetic GICs that
are issued at different times may vary from one another.
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\5\ In determining the interest rate that it will offer, BMA
will consider the yields available to it in the market on securities
suitable for the Contractholder Custodial Account, its likely
expenses, and a reasonable premium for the risks that are being
assumed by BMA in making its rate guarantee. Ultimately, the fixed
interest rate for a BMA Synthetic GIC will be determined by market
forces.
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To provide additional security to the Plan against the risk of
BMA's insolvency, the cash deposited by the Plan will be placed in a
separate Contractholder Custodial Account that will be registered in
the name of the Plan trustees. Only high quality securities will be
purchased by BMA to minimize the risk of loss. During the term of the
contract, BMA will use funds in its general account to make interest
payments to the Plan and to fund unanticipated payments. At maturity,
the securities in the Contractholder Custodial Account will be
delivered to BMA in exchange for a cash payment of principal and all
accrued but unpaid interest to the Plan.
BMA notes that, under certain circumstances, a Plan fiduciary, such
as the fiduciary of a defined benefit plan, may not desire the features
of the Benefit-Responsive BMA Synthetic GIC that is described herein in
order to utilize book value accounting methodology. Instead, BMA
represents that a Plan fiduciary may prefer to invest in a BMA
Synthetic GIC having a higher interest rate because BMA would not be
taking the benefit-responsive risk. Therefore, BMA proposes to offer a
Non-Benefit Responsive BMA Synthetic GIC to Plan investors in addition
to the Benefit-Responsive BMA Synthetic GIC. Because there are very few
differences between both types of investment vehicles, as previously
stated, the Non-Benefit Responsive BMA Synthetic GIC and the Benefit-
Responsive BMA Synthetic are both referred to as ``the BMA Synthetic
GIC.''
5. The BMA Synthetic GIC will consist of a Contract under which BMA
will manage Plan assets which have been placed with a Custodian
selected by the Plan and which is subject to BMA's approval. BMA will
guarantee that amounts placed in the Contractholder Custodial Account
for management by BMA will be repaid to the Plan with interest at a
specified rate
[[Page 70736]]
on certain specified dates.6 BMA will bear investment risk-
related to assets in the Contractholder Custodial Account except in
certain limited circumstances that are described below. At all times,
the Plan will remain the legal owner of the Contractholder Custodial
Account.
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\6\ While there is no minimum interest rate that can be
specified, BMA represents that the actual guaranteed fixed interest
rate is unlikely ever to deviate significantly from yields available
on comparable U.S. Treasury securities.
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6. BMA will acknowledge its fiduciary status to the independent
Plan fiduciary. The general investment objectives of the Contractholder
Custodial Account will be current income with stability of principal.
The Contract governing each BMA Synthetic GIC will instruct BMA to
manage the Contractholder Custodial Account to achieve a total return
over the holding period to maturity which will be sufficient to provide
the BMA Synthetic GIC's guaranteed rate of interest. In other words,
BMA will not be required to maximize the Contractholder Custodial
Account's return. Rather, it will manage the assets in a manner
calculated to reach the guaranteed rate of interest and an interest
spread over this rate. Thus, BMA will not be required to consider or
acquire investments with a greater level of risk than would be normally
associated with a BMA Synthetic GIC and it will be restricted to
considering only fixed income securities of very high quality.
7. BMA's duties and obligations with respect to the BMA Synthetic
GIC will be governed by the terms of an insurance contract between the
Plan and BMA. The BMA Synthetic GIC will be submitted to the Missouri
Department of Insurance, as well as the state departments of insurance
in all other states BMA does business and it must be approved by these
state agencies prior to BMA's selling this contract to investors. Once
the BMA Synthetic GIC is executed, BMA will have no discretion over any
of its terms.
8. BMA Synthetic GICs will be offered only to trustees of large
pension plans that are sponsored by Fortune 500 companies (or companies
of comparable size) or to fiduciaries of pooled investment vehicles
having assets of $50 million or more. However, as stated above, the BMA
Synthetic GIC will not be offered to Plans that are sponsored by BMA or
its affiliates. In the case of two or more Plans which are maintained
by the same employer, controlled group of corporations or employee
organization (i.e., the Related Plans), whose assets are commingled for
investment purposes in a single master trust or any other entity the
assets of which are ``plan assets'' under the Plan Asset Regulation,
which entity has purchased a BMA Synthetic GIC, the foregoing $50
million requirement will be considered satisfied if such trust or other
entity has aggregate assets which are in excess of $50 million.
However, if the fiduciary responsible for making the investment
decision on behalf of such master trust or other entity is not the
employer or an affiliate of the employer, such fiduciary will be
required to have total assets under its management and control,
exclusive of the $50 million threshold amount attributable to Plan
investment in the commingled entity, which are in excess of $100
million.
In the case of two or more Plans which are not maintained by the
same employer, controlled group of corporations or employee
organization (i.e., the Unrelated Plans), whose assets are commingled
for investment purposes in a group trust or any other form of entity
the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity has purchased a BMA Synthetic GIC, the
foregoing $50 million requirement will be considered satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million (excluding the assets of any Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of corporations including such fiduciary is the employer maintaining
such Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity must have (a)
full investment responsibility with respect to Plan assets invested
therein; and (b) total assets under its management and control,
exclusive of the $50 million threshold amount attributable to Plan
investment in the commingled entity, which are in excess of $100
million.
9. The decision by a Plan to enter into a BMA Synthetic GIC will be
made by a Plan fiduciary which is independent of BMA. Such Plan
fiduciary will receive full and detailed disclosure of all features
regarding the BMA Synthetic GIC, including all applicable fees and
charges. In this regard, prior to the execution of a BMA Synthetic GIC,
each Plan fiduciary will receive (a) a copy of the BMA Synthetic GIC
Contract and accompanying application, which stipulate the relevant
provisions of the BMA Synthetic GIC Contract, the applicable fees, if
any, and the rights and obligations of the parties;
(b) Investment Guidelines defining the manner in which BMA will
manage the assets in the Contractholder Custodial Account; (c) a copy
of the Custodial Agreement between BMA, the Plan fiduciary and the
Custodian; and (d) if granted, copies of the proposed exemption and
grant notice with respect to the exemptive relief provided herein.
10. Upon the selection by a Plan fiduciary of a BMA Synthetic GIC,
BMA will supply the fiduciary of a Plan (including a Section 404(c)
Plan), certain information, which the Plan fiduciary, in its
discretion, may pass on to Plan participants, to the extent required to
satisfy the requirements of section 404(c) of the Act. This information
will consist of a summary of the pertinent features of the BMA
Synthetic GIC Contract, the Investment Guidelines and a copy of the
Custodial Agreement.
Subsequent to a Plan's investment in a BMA Synthetic GIC, the Plan
fiduciary will receive the following ongoing disclosures regarding such
investment: (a) A periodic report consisting of a Contract Value Record
Report, which specifies the affected Plan's BMA Synthetic GIC Contract
Value Record balance for the prior period, contributions, Scheduled
Withdrawals and, if applicable, Unscheduled Withdrawals, interest
earned, the current period's ending Contract Value Record balance. (The
time periods covered by the Contract Value Record Report will be
selected by the independent Plan fiduciary and may be sent monthly,
quarterly or annually.); (b) a periodic Market Value Statement, which
is supplied by the Custodian to the Plan fiduciary on a quarterly
basis, that specifies the prior period's ending market value for the
assets in the Contractholder Custodian Account, contributions,
Scheduled Withdrawals, and if applicable, Unscheduled Withdrawals, any
fees paid to BMA, investment income, realized capital gains and/or
losses from sales, changes in unrealized appreciation of assets, the
current period's ending market value and rate of return, and a summary
of transactions; and (c) upon request from the Custodian (i.e., not
more often than quarterly), a portfolio listing. The foregoing reports
will be made available to the Plan fiduciary, which, in turn, will
provide copies to participants upon their request, to the extent the
Plan fiduciary deems such information is necessary for participants of
a Section 404(c) Plan.
11. When a Plan enters into a BMA Synthetic GIC Contract with BMA,
a Contractholder Custodial Account will be established on behalf of the
Plan.
[[Page 70737]]
Contributions made by the Plan on the effective date of the BMA
Synthetic GIC, as well as on any subsequent dates, will be delivered to
the Custodian and credited to the Contractholder Custodial Account.
These contributions will be credited by BMA to the Contract Value
Record. The assets in the Contractholder Custodial Account will be
subject to BMA's management and the assets will be maintained by the
Custodian in the name of the Plan.
12. Under the Investment Guidelines established for the BMA
Synthetic GIC, the Contractholder Custodial Account will be required to
invest in fixed income and money market securities that have been
purchased by the Custodian as directed by BMA. Only high credit quality
securities will be purchased for a Contractholder Custodial Account. In
this regard, covered puts and calls will not be used in the
Contractholder Custodial Account. Treasury futures contracts will be
used only for hedging and risk management purposes but will not be used
for leveraging. Currently, BMA's minimum quality rating at the time of
purchase is ``Aa3/AA-.''
The Investment Guidelines will be specifically disclosed to,
negotiated with and agreed to by the independent Plan fiduciary. BMA
notes that it is possible that other classes of securities may be
included in the Investment Guidelines based on a Plan's needs. However,
in the event the Plan fiduciary requests that other classes of
securities be included in the Investment Guidelines, BMA will require
that such securities be ``investment grade'' or better.
13. BMA's guarantee of principal and interest under the BMA
Synthetic GIC will come into play on certain specified ``Maturity
Dates,'' any ``Interest Payment Dates'' specified in the BMA Synthetic
GIC Contract prior to a Maturity Date and, with the exception of the
non-benefit responsive BMA Synthetic GIC, on any dates on which BMA is
required to provide funds for unanticipated benefit payments. On the
Maturity Date, the Plan will be entitled to a distribution in cash, by
BMA, of the Contract Value Record. In addition, Scheduled Withdrawals
and Unscheduled Withdrawals will be made by BMA with corresponding book
value adjustments to the Contract Value Record. (In the case of the
non-benefit responsive BMA Synthetic GIC, no Unscheduled Withdrawals
will be permitted.) The Contract Value Record will be equal to the
amount of cash deposited by the Plan in the Contractholder Custodial
Account on the effective date of the BMA Synthetic GIC Contract.
Subsequent to the effective date (i.e., the date of execution of the
BMA Synthetic GIC Contract), the Contract Value Record will be
increased by any accrued but unpaid interest owed by BMA to the Plan
and will be further adjusted by subtracting the following: (a) All
payments made by BMA to provide for Scheduled Withdrawals and/or if
applicable, Unscheduled Withdrawals; (b) all contract expense charges,
if any, if these have not been paid to BMA directly by the Plan; (c) a
Market Value Adjustment Charge due to a Plan's discontinuance of a BMA
Synthetic GIC before the Maturity Date under certain circumstances; (d)
any prepayments on securities which have been made to the Plan; and (e)
the difference between the proceeds from the sale of an impaired asset
and its book value.7 In other words, BMA will guarantee that
on the Maturity Date, distributions will be made to the Plan in amounts
at least equal to contributions previously made to the Account plus
interest at the guaranteed rate of interest (with appropriate
adjustments for Scheduled and Unscheduled Withdrawals).8 Any
appreciation on securities that are liquidated will be retained by the
Contractholder Custodial Account to the extent the appreciation is not
used to meet withdrawal requests or to repay Advances.
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\7\ Section 1.19 of the BMA's sample Synthetic GIC Contract
defines the term ``impaired security'' (except where bonds are
called or assets or mortgage-backed securities are prepaid according
to their terms) as: (a) any security, which since purchase, has been
downgraded by Standard & Poor's, Moody's, or Duff & Phelps two or
more levels; (b) any security for which the occurrence or existence
of an event or condition results in an acceleration of payment; (c)
any security for which the issuer fails to make one or more payments
of principal or interest when due, after giving effect to any grace
period; or (d) any security upon which interest is accruing on a
principal balance less than the original par or face amount of such
security, or upon which the rate of interest has been reset other
than pursuant to the security's original terms.
If a security becomes ``impaired,'' BMA will notify the Plan and
give the Plan fiduciary the option of removing the security from the
Contractholder Custodial Account or having BMA replace the impaired
security. If the security is removed, the Contract Value Record will
be reduced by the book value of the security. However, if the Plan
fiduciary requests a replacement security, BMA will sell the
security and purchase another one meeting the criteria of the BMA
Synthetic GIC. The Contract Value Record will then be reduced by the
difference between the sale price of the impaired security and the
book value of the impaired security.
The Plan fiduciary may opt to retain an impaired security based
on his or her assessment of the recovery potential of the security's
market value. If the Plan fiduciary retains the impaired security,
it will be removed from the Contractholder Custodial Account and the
Contract Value Record will be debited by the book value of the
impaired security.
Section 2.05 of the BMA Synthetic GIC Contract provides that if
a security is downgraded one level by a credit rating agency, BMA
will notify the Plan fiduciary and attempt to effect the sale of the
security as soon as reasonably possible. The sale proceeds will then
be used to purchase another security that meets the investment
criteria of the BMA Synthetic GIC. In addition, BMA will bear any
risk of loss from the sale of a downgraded security.
\8\ Again, in the case of the non-benefit responsive BMA
Synthetic GIC, there will be no adjustments for Unscheduled
Withdrawals since such withdrawals are not permitted.
---------------------------------------------------------------------------
14. Scheduled Withdrawals (i.e., distributions prior to the
Maturity Date which are subject to BMA's guarantee as to principal and
interest, will occur on dates (i.e., Principal Distribution Dates) and
in amounts that will be agreed upon between the Plan and BMA prior to
execution of a BMA Synthetic GIC. In addition, Scheduled Withdrawals
will be specified in writing. On each Principal Distribution Date, BMA
will make a withdrawal from the Contractholder Custodial Account in an
amount sufficient to fund such withdrawal. In this regard, BMA will pay
the withdrawal amount to the Plan from BMA's own assets prior to any
assets being transferred from the Contractholder Custodial Account to
BMA. If sufficient cash is not available, BMA will direct the Custodian
to sell securities designated by BMA that are held in the
Contractholder Custodial Account 9 for a price reflecting
the fair market value of the securities.10 The cash proceeds
from such sales will be added to the available cash in the
Contractholder Custodial Account sufficient to make a payment to BMA of
an amount equal to the Scheduled Withdrawal. However prior to receiving
any transfer of assets from the Contractholder Custodial Account, BMA
will first make a payment to the Plan in amount of the Scheduled
Withdrawal. Any capital loss from such liquidation will be borne by BMA
and not by the Plan.
---------------------------------------------------------------------------
\9\ BMA will determine the appropriate security to be sold based
upon such factors as (a) the amount of cash needed by the Plan
fiduciary; (b) the relative investment returns of the securities
available; and (c) market factors affecting the price of the
security.
\10\ If the purchaser of the securities is BMA, fair market
value will be determined in the manner described in Representation
21 under the discussion of illiquid assets. If the purchaser is an
unrelated party, the fair market value will be the price established
by the marketplace in an arm's length transaction between the buyer
and the seller (i.e., the Contractholder Custodial account).
---------------------------------------------------------------------------
The Contract Value Record of the Account will be reduced by the
amount of such Scheduled Withdrawal. In addition, BMA will pay interest
to the Plan equal to the unpaid accrual of the guaranteed rate of
interest on the amount of the Scheduled Withdrawal.
15. Under certain limited circumstances, a Plan holding a Benefit-
[[Page 70738]]
Responsive BMA Synthetic GIC will be permitted to make an Unscheduled
Withdrawal from its Contractholder Custodial Account in order to make
benefit payments and annuity purchases prior to the Maturity Date of
such BMA Synthetic GIC.11 To make an Unscheduled Withdrawal,
an independent Plan fiduciary will be required to certify that the
benefit payment is in accordance with the terms of the Plan. However,
as with Scheduled Withdrawals, BMA will fund the Plan's withdrawal
amount from its own assets prior to receiving cash in the
Contractholder Custodial Account equal to the premium for the annuity.
If sufficient cash is not available in the Contractholder Custodial
Account, BMA will have the right to direct the Custodian to liquidate
securities held in the Contractholder Custodial Account at their fair
market value.12 The proceeds of such sale will be added to
the cash available in the Contractholder Custodial Account to make a
payment to BMA of an amount equal to the premium for the annuity.
Similarly, the amount of cash withdrawn will be subtracted from the
Contract Value Record. Assuming there are capital losses associated
with the securities liquidated, BMA will bear the risk of loss.
---------------------------------------------------------------------------
\11\ Under the BMA Synthetic GIC, withdrawals cannot be
permitted on an unrestricted basis. Otherwise, BMA would be required
to liquidate securities, from time to time, at prices that fluctuate
unpredictably, thereby undermining the insurer's ability to meet its
guarantees.
\12\ See Representations 14 and 21 for a discussion of fair
market value.
---------------------------------------------------------------------------
16. At its discretion, BMA may advance the requested amount for
benefit payments to Plan participants under a benefit-responsive BMA
Synthetic GIC. However, cumulative Advances must not exceed 5 percent
of the fair market value of the Contractholder Custodial Account and no
single Advance may be outstanding for more than 90 days. An Advance is
intended to cover a Plan participant's request for a small withdrawal,
which because of its timing, might require market-inefficient
transactions by the Contractholder Custodial Account.13 BMA
will not charge the Contractholder Custodial Account any interest in
connection with an Advance.
---------------------------------------------------------------------------
\13\ For example, a Contractholder Custodial Account having a
portfolio fully invested in asset-backed and mortgage-backed
securities could receive a request for $100,000 in benefit
withdrawals. To meet such a request, some securities would have to
be sold from the Contractholder Custodial Account. However, asset-
backed and mortgage-backed securities generally trade only in
multiples of $1 million or more and such sale would be highly
inefficient to meet a small cash requirement. Therefore, as an
alternative, BMA may decide to advance the required cash to the
Plan. Subsequently, when the Contractholder Custodial Account
receives a regular coupon payment on a security held in its
portfolio or possibly a prepayment on an asset-backed or mortgage-
backed security, it would use some of this cash flow to repay the
Advance to BMA.
---------------------------------------------------------------------------
According to BMA, the Advance and the repayment of the Advance can
be viewed as distinct transactions between BMA and the Contractholder
Custodial Account which do not affect the Contract Value Record or
BMA's guarantees to the Plan. It is only the payment of the actual
benefit to the Plan that reduces the Contract Value Record. Had no
Advance been made, the Contractholder Custodial Account would have been
required to liquidate collateral to meet the Plan's benefit
obligations. Until the Advance is repaid to BMA, the Contractholder
Custodial Account will hold assets that are in excess of BMA's
obligations owed to the Plan. Repaying the Advance will restore the
balance between collateral assets and BMA's obligations to the Plan
that existed when the BMA Synthetic GIC was initiated.
17. On the Maturity Date, the Custodian will distribute to BMA all
of the assets in the Contractholder Custodial Account. Thereafter, BMA
will distribute to the Plan an amount equal to the aggregate Contract
Value Record plus the applicable guaranteed rate of interest
established by agreement between BMA and the Plan, less adjustments for
previous Scheduled and Unscheduled Withdrawals.)14 If the
aggregate market value of the assets in the Contractholder Custodial
Account is less than the Contract Value Record on the Maturity Date,
BMA will pay from its general account any such deficiency. Conversely,
BMA will retain any excess.
---------------------------------------------------------------------------
\14\ The reference to Unscheduled Withdrawals is inapplicable to
the non-benefit responsive BMA Synthetic GIC.
---------------------------------------------------------------------------
18. BMA's guarantee at the Maturity Date will be implemented in the
two steps. First, the Plan fiduciary will preinstruct the Custodian to
transfer the balance of all assets in the Contractholder Custodial
Account to BMA as of the date of discontinuance, regardless of whether
such assets are in the form of securities or otherwise, and without the
sale of such securities. Second, simultaneously with the transfer of
assets, BMA will pay the Plan, by wire transfer, an amount equal to the
adjusted Contract Value Record at the time of the discontinuance. As a
result, the underlying investments in the Plan's Contractholder
Custodial Account will end up in BMA's general account.
BMA notes that if assets trading at a discount from their face
amount on the Maturity Date had to be disposed of or distributed to the
Plan on the Maturity Date, BMA would be compelled to realize an
immediate loss with respect to those assets in meeting its contractual
guarantee. By allowing those assets to be transferred to BMA on the
Maturity Date, BMA states that the procedures for implementing the
contractual guarantees will make it possible for it to hold such assets
to maturity or at least until market conditions warrant disposing of
them. BMA states that the transfer of assets will enable it to
guarantee a higher rate of return than it would otherwise be able to
guarantee.
19. In liquidating assets to meet contractual obligations on
Scheduled Withdrawal Dates and the Maturity Date, the BMA Synthetic GIC
will entitle BMA to sell assets from a Plan's Contractholder Custodial
Account to BMA's general account or to an affiliate for a cash price
equal to the fair market value of the assets as of the close of
business on the date of the sale.15 BMA represents that no
brokerage or transactions costs will be imposed.
---------------------------------------------------------------------------
\15\ BMA does not believe the purchase of securities by it or an
affiliate from a Plan's Contractholder Custodial Account will lead
to ``cherry-picking'' of the best securities and leaving the worst
ones in the Contractholder Custodial Account because any potential
abuse will be offset by BMA's interest in meeting its guarantee on
the maturity of the BMA Synthetic GIC. In this regard, BMA states
that it bears the risk that the assets in the Contractholder
Custodial Account will be inadequate to provide the amount
guaranteed on maturity. According to BMA, to systematically pick and
choose those assets with the view of purchasing desirable assets
from a Plan's Contractholder Custodial Account would seriously
affect the predictability of the cash flows available to meet
subsequent guarantees. BMA further states that the risk is minimized
if the Contractholder Custodial Account retains assets that are
expected to appreciate. Because all assets purchased with the
initial deposit and held in the Contractholder Custodial Account
will be highly-rated and liquid, so long as transactions between BMA
and the Contractholder Custodial Account are effected at market
prices, BMA does not believe cherry-picking would be possible.
BMA also represents that the Contractholder Custodial Account's
need to sell securities to BMA may not involve large sums of money
and the market for such securities may not be efficient. Therefore,
transactions between the Contractholder Custodial Account and BMA
will permit such Account to effect needed transactions in small
portions at the market price generally available only for
transactions involving larger amounts. At contract maturity, all
securities held by the Contractholder Custodial Account will be
transferred to BMA. BMA will then have the opportunity to recombine
the small portions of securities held in various portfolios into
larger amounts.
Finally, BMA states that the Plan will have complete records of
the Contractholder Custodial Account. If the independent Plan
fiduciary discovers that BMA has engaged in abusive conduct, the BMA
Synthetic GIC may be discontinued.
---------------------------------------------------------------------------
20. BMA represents that most of the securities in a Contractholder
Custodial
[[Page 70739]]
Account will have a recognized market value. Although certain
securities may be regularly traded on an exchange, other investments
will be securities for which an active secondary market exists and for
which market quotations are readily available. BMA expects that a
significant portion of the assets in a Contractholder Custodial Account
will consist of high-quality, mortgage-backed securities and similar
securities for which market quotations are readily available.
21. With BMA's Synthetic GIC, the only instances that a market
value determination needs to be made with respect to a Contractholder
Custodial Account are (a) for periodic (i.e., not more than quarterly)
reports prepared by the Custodian, in which case the Custodian makes
the market value determination; (b) whenever BMA purchases a security
from the Contractholder Custodial Account prior to the maturity date;
and (c) if there are illiquid assets to honor benefit payments, in the
event of an Advance, a Scheduled Withdrawal or, with the exception of
the non-benefit responsive BMA Synthetic GIC, an Unscheduled
Withdrawal. However, in no event, will BMA or its affiliates value any
of the securities held in a Plan's Contractholder Custodial Account.
For the preparation of custodial reports, the Custodian will
determine fair market value by using well-established independent
pricing services such as Merrill Lynch or similar organizations
acceptable to BMA that have resources to provide fair, reasonable and
defensible market values for securities in the Contractholder Custodial
Accounts. For purposes of determining the fair market value of a
security that is acquired by BMA from the Contractholder Custodial
Account prior to the Maturity Date or in the event there are illiquid
assets, BMA will base the fair market value of the security on the most
recent sales price on the date of valuation (the Valuation Date) or, if
no sales took place on the Valuation Date, a price that reflects the
average of the bids of at least two major independent dealers for
publicly-traded securities. For debt instruments that are not publicly-
traded, BMA will base the fair market value of such securities on the
average of the bids of at least two major dealers, or, if two bids
cannot be obtained, then the fair market value will be determined by an
independent appraisal made by an independent appraiser selected by
either the Custodian or a Plan sponsor or fiduciary that is not
affiliated with BMA or any of its affiliates. Where bids are required
for either securities or debt instruments, if the bids of two major
dealers vary by more than ``one point'' (i.e., one percent of par
value), a third dealer's bid will be obtained by BMA and the fair
market value will be the average of the three bids.
22. A Plan may discontinue its BMA Synthetic GIC Contract at any
time, provided 30 days' advance written notice is given to BMA.
However, BMA may discontinue a BMA Synthetic GIC arrangement with a
Plan only if certain events enumerated in the BMA Synthetic GIC
Contract occur and as long as BMA gives the Plan 30 day's prior written
notice. For example, Section 8.03 of BMA's sample Synthetic GIC
Contract states, in part, that BMA may discontinue a BMA Synthetic GIC
Contract if--
(a) The Plan fails to give BMA written notice of any change or
amendment to the Plan within 30 days of the date such change or
amendment is adopted and such change materially and adversely impacts
on BMA's financial experience under the BMA Synthetic GIC Contract.
(b) In the judgment of BMA, any change or amendment to the Plan
necessitates the amendment of the BMA Synthetic GIC Contract, and, upon
the written request of BMA, the Plan fails to consent to such amendment
within 30 days of such request.
(c) The Plan is partially or completely terminated.
(d) The Plan fails to be tax-qualified in accordance with the Code.
(e) The Plan requests BMA to purchase annuities which would exceed
the balance in the Contractholder Custodial Account.
23. If a BMA Synthetic GIC Contract is discontinued prior to the
Maturity Date, BMA will be entitled to receive a Market Value
Adjustment Charge which will be deducted from the Contract Value
Record. The Market Value Adjustment Charge is intended to allow BMA to
recover its direct costs and unreimbursable expenses incurred in
managing the BMA Synthetic GIC over a maximum three year period. The
Market Value Adjustment Charge will equal the sum of (1)+ (2), where--
(1) Is the excess, if any, of the Contract Value Record over the
fair market value of the assets in the Contractholder Custodial Account
at the determination date (i.e., the distribution date), but not less
than 0; and
(2) Is (a) + (b), where--
(a) Is the amount of any outstanding Advances to make benefit
payments, and
(b) Is the amount equal to [(F * CVR)] * N, where--
F = The Market Value Expense Charge, expressed as an annual percentage
rate, payable to BMA as agreed upon by BMA and the Plan and specified
in the BMA Synthetic GIC Contract;
CVR = The amount of the Contract Value Record on the determination
date; and
N = The number of days in the period from the determination date
through the third anniversary of the effective date of the Contract, or
the Maturity Date, if earlier, divided by 365. This variable also
reflects the recovery of BMA's unreimbursable expenses over a maximum
three year period and does not represent a penalty.
Whenever a withdrawal from the Contract is less than the value of the
Contract Value Record and is subject to the Market Value Adjustment
Charge, such Charge will be based upon the aforementioned formula.
However, the Charge will be multiplied by a ratio, the numerator of
which will reflect the amount of the withdrawal and the denominator,
the amount of the Contract Value Record at the determination date.
The Plan will preinstruct the Custodian to transfer, to BMA, the
balance of all assets that are held in the Contractholder Custodial
Account as of the date of the discontinuance, whether in the form of
securities or otherwise, and without the sale of such securities.
Simultaneously with such transfer of assets, BMA will pay the Plan, by
wire transfer, an amount equal to the adjusted Contract Value Record at
the time of such discontinuance.
24. Interest and other income payments made by issuers of
securities (i.e., Plan Interest Proceeds) held in the Contractholder
Custodial Account will be transferred to BMA as they are paid to the
Custodian during the term of the BMA Synthetic GIC. BMA represents that
Plan Interest Proceeds are generally too small to be reinvested
efficiently in any one Contactholder Custodial Account. Therefore, BMA
explains that it will be able to invest the stream of income derived
from the Plan Interest Proceeds in its general account. BMA further
represents that in exchange for its guarantees to pay benefits and
interest on the Interest Payment Dates, the Plan fiduciary is
acknowledging that the Plan Interest Proceeds cease to be plan assets
upon their transfer to BMA and, thus, become the sole and exclusive
property of BMA.
25. Because it is anticipated that a large portion of the
securities held in the Contractholder Custodial Account will be high
credit quality mortgage-backed and asset-backed securities,
[[Page 70740]]
BMA notes that such securities generally experience partial principal
repayment on a regular basis. Therefore, BMA's Synthetic GIC will offer
a Plan either of two investment options--(a) the opportunity to require
that BMA reinvest all of the prepayments received by the Custodian and
bear the reinvestment risks on such cashflows; or (b) the opportunity
to allow BMA to negotiate with the Plan a BMA Synthetic GIC that will
pay a higher guaranteed interest rate to such Plan, but which requires
that the Plan receive some of the prepayments as they are paid to the
Custodian.16 In other words, some of the reinvestment risks
from the prepayment of cashflows will not be borne by BMA. These
options will be available to the Plan fiduciary prior to the inception
of the BMA Synthetic GIC Contract.
---------------------------------------------------------------------------
\16\ Under this option, if prepayments are paid to the Plan, the
Contract Value Record will be reduced by the amount of the payment.
However, the amount of prepayments will be limited to a maximum
percentage of the principal balance of the security.
---------------------------------------------------------------------------
26. Other than the Market Value Adjustment Charge described above,
BMA does not anticipate charging any fees under the BMA Synthetic GIC
inasmuch as its ``compensation'' will be based upon the anticipated
difference between the market value of securities in the Contractholder
Custodial Account and its guarantee of principal. However, the BMA
Synthetic GIC Contract provides that a Contract Expense Charge may be
imposed if it is individually negotiated with the Plan fiduciary. BMA
states that the purpose of this provision is to allow the Plan to net a
higher interest rate by paying a portion of BMA's
expenses.17 According to BMA, the Contract Expense Charge
will not be in excess of ``reasonable compensation'' within the meaning
of section 408(b)(2) of the Act.
---------------------------------------------------------------------------
\17\ For example, BMA states that the interest rate it is able
to offer under the BMA Synthetic GIC will be affected by its
investments. At the Plan's request, BMA explains that it would be
willing to pass on some of these expenses to the Plan, and in
exchange, it would offer a higher rate of interest. BMA further
states that it would only charge such fees if the Plan fiduciary
negotiating the BMA Synthetic GIC requests this provision in order
to obtain a higher interest rate.
---------------------------------------------------------------------------
27. BMA will keep full and complete records and books of account
reflecting all transactions of each Contractholder Custodial Account
and will make them available on an annual basis for audit by
independent certified public accountants selected by and responsible to
the Plan. In addition, BMA will furnish annual reports of the
operations of the Contractholder Custodial Account containing a list of
the investments of such Account to an independent Plan fiduciary.
28. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The decision to enter into a BMA Synthetic GIC will be made on
behalf of a participating Plan, in writing, by a fiduciary of such Plan
who is independent of BMA.
(b) Each Plan or plan asset look-through vehicle investing in a BMA
Synthetic GIC will have assets that are in excess of $50 million.
(c) Prior to and subsequent to the execution of a BMA Synthetic
GIC, the Plan fiduciary, and if applicable, the Plan participant, will
receive written disclosures concerning the BMA Synthetic GIC, including
a description of all applicable fees and charges, as well as ongoing
disclosures with respect to such investment.
(d) BMA will maintain, for a period of six years from the date of
each BMA Synthetic GIC transaction, books and records of such
transactions that will be subject to annual audit by independent,
certified public accountants who are selected by and responsible solely
to the relevant Plan.
Notice to Interested Persons
BMA represents that because those potentially interested
participants and beneficiaries cannot be identified at this time, the
only practical means of notifying such participants and beneficiaries
of this proposed exemption is by the publication of this notice in the
Federal Register. Therefore, comments and requests for a hearing must
be received no later than 30 days from the date of publication of this
notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
South Central New York District Council of Carpenters Pension Fund
(the Fund) Johnson City, New York
[Application No. D-10755]
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 (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: The sale (the Sale) of improved real property
(the Property) to the Fund by the Local 281 Carpenters Property
Corporation (the Corporation), a party in interest with respect to the
Fund, provided the following conditions are met:
(a) The terms and conditions of the Sale are at least as favorable
to the Fund as those obtainable in an arm's length transaction with an
unrelated party;
(b) The Fund purchases the Property for cash from the Corporation
for the lesser of $250,000 or the fair market value of the Property as
of the date of the Sale;
(c) The Sale is monitored and approved by an independent fiduciary
acting on behalf of the Fund;
(d) The Sale is a one-time transaction for cash; and
(e) The Fund pays no fees or commissions in connection with the
Sale.
Summary of Facts and Representations
1. The United Brotherhood of Carpenters and Joiners of America,
Local 281 and Local 532 (the Union) is a union located in the Village
of Johnson City, Broome County, New York. The Union represents
carpenters who are employed throughout the state of New York. The Fund
is a defined benefit pension plan established by the Union for the
provision of retirement benefits to Union members. The Fund had 847
participants and approximately $29,600,175 in assets as of January 1,
1998.
2. The Corporation is a holding company established by the Union on
April 18, 1974 for the holding and management of investment property.
The Corporation purchased the Property on April 29, 1974 for $95,000
from the Baptist Bible Seminary, an unrelated party. The Property is
located at 335 Main Street, in the Village of Johnson City, Broome
County, New York. The Property is comprised of a two-story building
having approximately 4,800 square feet in rentable space and is
situated on approximately 2.3 acres. The applicant represents that the
Fund currently rents office space, occupying 300 square feet, in the
Property, on a month-to-month basis pursuant to Section 228 of New York
State's Real Property Law.18 The lease has been in force in
excess of twenty-five years and the rental rate has not increased for
the last thirteen years. The applicant further
[[Page 70741]]
represents that the rental rate was determined by D'Arcangelo & Co.,
LLP Certified Public Accountants, in excess of thirteen years ago, by
allocating the Property's operating expenses in proportion to the
square footage utilized by each tenant. This resulted in a monthly
rental rate of $1 per square foot. Accordingly, the Fund has been
charged a monthly rate of $300 for at least the past thirteen years.
---------------------------------------------------------------------------
\18\ In this regard, the applicant represents that a month-to-
month tenancy may be terminated by providing written notice of at
least 30 days.
---------------------------------------------------------------------------
In addition, the applicant represents that the Fund is represented
by both employer and union trustees. In the latter part of 1997 through
the present, George Hamarich was a union trustee of the Fund and a
trustee of the Corporation.19
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\19\ The Corporation is a party in interest with respect to the
Fund under section 3(14)(G) of the Act as * * * ``a corporation * *
* of which (or in which) 50% or more of * * * is owned directly or
indirectly, or held by * * *'' an employee organization any of whose
members are covered by the (Fund). As a result, the lease is
prohibited by section 406(a)(1)(A) of the Act which prohibits the
``* * * leasing * * * of any property between the (Fund) and a party
in interest * * *'' However, section 408(b)(2) of the Act provides a
statutory exemption, so long as the conditions therein are met, for
* * * ``reasonable arrangements with a party in interest for office
space * * * necessary for the * * * operation of the (Fund), if no
more than reasonable compensation is paid therefor.'' Under
regulation 29 CFR 2550.408(b)(2)(e)(1), an act described under
section 406(b) of the Act constitutes a separate transaction which
is not exempt under 408(b)(2) of the Act. Specifically section
406(b)(2) of the Act states that ``(a) fiduciary with respect to a
(Fund) shall not * * * (2)(i)n his individual or in any other
capacity act in any transaction involving the plan on behalf of a
party (or represent a party) whose interest are adverse to the
interest of the plan or the interests of its participants or
beneficiaries * * *'' As a result, the representation of the Fund
and the Corporation by Mr. Hamarich, during the leasing, would
constitute a violation of section 406(b)(2) of the Act. The
Department is not proposing exemptive relief herein for the above
described violation of the Act.
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3. The Property was appraised (the Appraisal) on June 18, 1998 by
Mr. John Miller (Mr. Miller) of the Central New York Appraisal Group
(the Appraisal Group). The applicants represent that Mr. Miller and the
Appraisal Group are independent of the Fund and the Union. Mr. Miller,
an appraiser certified in the State of New York, used the sales
comparison approach and compared the Property to five properties which
were similar to the Property and which were also the subject of recent
sales. Based on these comparisons, Mr. Miller concluded the value of
the Property to be $250,000, as of June 2, 1998, as if the site was
vacant and ready for redevelopment (the Appraised Value).
4. The applicant proposes the sale of the Property from the Union
to the Fund for $250,000 (i.e., the Sale). The applicant represents
that proposed Sale was analyzed by Mr. John P. Jeanneret (Mr.
Jeanneret) of J. P. Jeanneret Associates, an investment and consulting
company located in Syracuse, New York. Mr. Jeanneret represents that he
is an investment adviser registered with the Securities and Exchange
Commission and is knowledgeable in matters concerning real estate and
qualified employee benefit plans. Mr. Jeanneret additionally represents
that he is the Fund's investment consultant and fiduciary and is
knowledgeable in matters concerning the Fund's investment objectives
and guidelines. Mr. Jeanneret represents that he has analyzed the
proposed Sale and has determined that the proposed Sale is appropriate
for the Fund and is in the best interest of the Fund's participants and
beneficiaries.
The applicant additionally represents that the Fund has engaged the
services of Mr. Thomas M. Barnell (Mr. Barnell) of Farrell, Martin, &
Barnell LLP, located in Baldwinsville, New York, to act as independent
fiduciary on behalf of the Fund for purposes of the proposed Sale. Mr.
Barnell represents that he is independent of the Union and the Fund and
has over 25 years of experience in matters concerning real estate
transactions. Mr. Barnell additionally represents that he acknowledges
his duties to the Fund and its participants and beneficiaries.
Mr. Barnell represents that he has personally inspected the
Property and has analyzed the Appraisal and the terms of the Sale. Mr.
Barnell represents that, based on his analysis, the Appraised Value of
the Property is accurate. Mr. Barnell additionally represents that the
terms of the Sale fully protect the interests of the Fund. The
applicant represents that Mr. Barnell will represent the Fund to ensure
that the Sale is in the best interests of the Fund and its participants
and beneficiaries.
5. The applicant represents that the Sale, if granted, is
administratively feasible in that it will be a one-time transaction for
cash in which the Fund will pay no fees or commissions. The applicant
also represents that the proposed Sale is in the best interest of the
Fund since the Fund currently rents space in the Property and intends
to continue utilizing the Property as its offices for the foreseeable
future. The applicant further represents that the Fund presently has no
intention of demolishing the structure which exists on the Property and
re-selling the unimproved Property.20 In addition, the
applicants represent that a sale of the Property to a third-party may
disrupt the Fund's operations. Finally, the applicants represent that
the proposed Sale is protective of the Fund since the Property will
comprise approximately one percent (1%) of the Fund's assets and an
independent fiduciary acting on behalf of the Fund has represented that
the proposed Sale meets the Fund's investment objectives.
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\20\ In this regard, the Department notes that the Act's
standards of fiduciary conduct will apply to the purchase and any
possible future development of the Property. Section 404(a)(1) of
the Act requires that a fiduciary discharge his or her duties with
respect to a plan solely in the interest of the participants and
beneficiaries and with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in a
like capacity and familiar with such matters would use in the
conduct of a enterprise of a like character and with like aims.
Accordingly, the fiduciaries of the Fund must act ``prudently'' with
respect to the decision to purchase the Property, as well as to any
possible future development of the Property (including where
relevant, the determination as to whether to develop the Property,
the types of improvements that are appropriate and the Plan's
ability to finance any such improvements). The granting of this
exemption should not be viewed as an endorsement by the Department
of the Fund's subsequent use of such Property. Finally, we note
that, if the decision by the fiduciaries to purchase and
subsequently develop the Property is not prudent, the fiduciaries
would be liable for any loss resulting from such breach even though
the purchase of the Property was the subject of an administrative
exemption.
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6. In summary, the applicant represents that the subject
transactions satisfy the statutory criteria contained in section 408(a)
of the Act for the following reasons:
(a) The terms and conditions of the Sale are at least as favorable
to the Fund as those obtainable in an arm's length transaction with an
unrelated party;
(b) The Fund purchases the Property from the Corporation for the
lesser of $250,000 or the fair market value of the Property as of the
date of the Sale;
(c) The Sale is monitored and approved by an independent fiduciary
acting on behalf of the Fund;
(d) The Sale is a one-time transaction for cash; and
(e) The Fund pays no fees or commissions in connection with the
Sale.
NOTICE TO INTERESTED PERSONS: Notice of the proposed exemption shall be
given to all interested persons in the manner agreed upon by the
applicant and the Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
thirty (30) days after publication of the Notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: J. Martin Jara of the Department,
telephone (202) 219-8883 (this is not a toll free number).
[[Page 70742]]
S & S Partnership, Inc. Profit Sharing Plan (the Plan) Located in
Stony Brook, New York
[Application No. D-10807]
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 sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed loan (the Loan) totaling $200,000
by the Plan to Hiramco Realty Corporation (Hiramco), a disqualified
person with respect to the Plan, provided that the following conditions
are met:
(a) The terms of Loan by the Plan are at least as favorable to the
Plan as those obtainable in an arm's length transaction with an
unrelated party;
(b) The Loan does not exceed 20% of the assets of the Plan,
throughout the duration of the Loan;
(c) The Loan is secured by a first mortgage on certain real
property (the Property) which has been appraised by a qualified
independent appraiser to have a fair market value not less than 150% of
the principal amount of the Loan;
(d) The fair market value of the collateral remains at least equal
to 150% of the outstanding principal balance plus accrued but not
unpaid interest, throughout the duration of the Loan;
(e) Mr. Steven C. Fuchs and his wife, Margaret Fuchs (the Fuchs)
are the only Plan participants to be affected by the Loan transaction;
21 and
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\21\ Since the Fuchs are the sole owners of the Plan sponsor and
the only participants in the Plan, there is no jurisdiction under
Title I of the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
---------------------------------------------------------------------------
(f) should any employee of the Plan Sponsor become eligible for
plan participation, the new plan participant will be enrolled in
another qualified retirement plan or Hiramco may elect to pay the
entire balance on the Loan.
Summary of Facts and Representations
1. S & S Partnership, Inc. (the Partnership), the Plan's sponsor,
is a partnership located in Stony Brook, New York. The Plan is a
defined contribution profit sharing plan, with Mr. Steven C. Fuchs and
his wife, Margaret Fuchs (the Fuchs) as its sole participants and
trustees. As of December 31, 1998, the Plan had total assets of
approximately $1,230,238.
2. Hiramco is a corporation in the real estate management business,
of which 50% ownership interests remain with Mr. Fuchs and J.A. Green
Development Corporation, respectively. Hiramco wishes to borrow
$200,000 from the Plan, which represents approximately 16% of the
current fair market value of the assets of the Plan. The Loan will be
amortized over a 10 year period, with equal monthly payments of
principal and interest over the 10 year term. The interest rate for the
Loan will be 10% per annum. The total monthly payments for the Loan
will be $2,643.02 per month. Mr. Daniel J. Liberty, Senior Vice
President of KeyBank (the Bank) of Melville, New York, has represented
in a letter dated October 8, 1999, that the terms and conditions of the
mortgage are within the current conditions for commercial mortgages
provided by the financial services industry. The Bank is independent of
the Plan and Plan Sponsor.
3. The applicant represents that Hiramco has a sufficient cash flow
stream to meet the monthly payments under the terms of the Loan. The
applicant further represents that Hiramco currently leases the Property
to a prime tenant, the United Stated Post Office.
4. The Loan will be secured by a first mortgage on the Property,
which is located at 117 North Paul's Path, Coram, New York. The
Property has been appraised by Mr. Richard C. Clarke, a real estate
appraiser in Stony Brook, New York, to have a fair market value of
$650,000 as of July 28, 1999. The applicant represents that the Plan's
security interest will be perfected in the manner required by
applicable law in New York by recording with the appropriate government
officials. Furthermore, the applicant represents that the Property
securing the Loan will be insured against casualty loss in an amount
not less than the amount of the outstanding principal of the Loan (plus
accrued but unpaid interest), and the Plan will be named beneficiary of
the policy.
5. The applicant represents that should the fair market value of
the Property decline below 150% of the balance of the Loan, the Plan
Sponsor will provide additional collateral to maintain the 150%
threshold or pay the entire balance on the Loan.
6. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria of section 4975(c)(2) of
the Code because: (a) The Loan represents approximately 16% of the
assets of the Plan; (b) the terms of the Loan will be at least as
favorable the Plan as those obtainable in an arm's length transaction
with an unrelated party, as demonstrated by the letter from the Bank;
(c) the Loan will be secured by a first mortgage on the Property, which
has been determined by a qualified, independent appraiser to have a
fair market value of not less than 150% of the total principal amount
of the Loan that it will secure; (d) the Fuchs are the only
participants in the Plan to be affected by the transaction, and they
desire that the transaction be consummated.
NOTICE TO INTERESTED PERSONS: Because the applicants are the only
participants in the Plan, it has been determined that there is no need
to distribute the notice of proposed exemption (the Notice) to
interested persons. Comments and requests for a hearing are due thirty
(30) days after publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: J. Martin Jara of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
First American Capital Management, Inc. (FACM) Located in Newport
Beach, California
(Exemption Application No. D-10819)
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--Definitions and Special Rules
The following definitions and special rules will apply to this
proposed exemption:
(a) The term ``person'' includes the person and affiliates of the
person.
(b) An ``affiliate'' of a person includes the following:
(1) Any person directly or indirectly controlling, controlled by,
or under common control with, the person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), brother, sister, or spouse of a brother
or sister, of the person; and
(3) Any corporation or partnership of which the person is an
officer, director or partner.
A person is not an affiliate of another person solely because one
of them has investment discretion over the other's assets. The term
``control'' means the power to exercise a controlling influence over
the management or
[[Page 70743]]
policies of a person other than an individual.
(c) An ``affiliate of FACM'' includes Pacific American Securities,
LLC, (PAS) and any other broker-dealer registered under the Securities
Exchange Act of 1934 with respect to which FACM has at least a 40
percent minority ownership interest and which is subject to regulations
similar to those to which PAS is subject (such entities referred to
collectively herein as ``FACM'').
(d) An ``agency cross transaction'' is a securities transaction in
which the same person acts as agent for both any seller and any buyer
for the purchase or sale of a security.
(e) The term ``covered transaction'' means an action described in
section II(a), (b), or (c) of this proposed exemption.
(f) The phrase ``effecting or executing a securities transaction''
means the execution of a securities transaction as agent for another
person and/or the performance of clearance, settlement, custodial or
other functions ancillary thereto.
(g) A Plan fiduciary is independent of a person only if the
fiduciary has no relationship to or interest in such person that might
affect the exercise of such fiduciary's best judgment as a fiduciary.
(h) The term ``profit'' includes all charges relating to effecting
or executing securities transactions, less reasonable and necessary
expenses including reasonable indirect expenses (such as overhead
costs) properly allocated to the performance of these transactions
under generally accepted accounting principles.
(i) The term ``securities transaction'' means the purchase or sale
of securities.
(j) The term ``nondiscretionary trustee'' of a Plan means a trustee
or custodian whose power and duties with respect to any assets of the
Plan are limited to (1) the provision of nondiscretionary trust
services to the Plan, and (2) duties imposed on the trustee by any
provision or provisions of the Act or the Code. The term
``nondiscretionary trust services'' means custodial services and
services ancillary to custodial services, none of which services are
discretionary. For purposes of this proposed exemption, a person does
not fail to be a nondiscretionary trustee solely by reason of having
been delegated, by the sponsor of a master or prototype Plan, the power
to amend such Plan.
Section II--Covered Transactions
If each condition of Section III of this proposed exemption is
either satisfied or non-applicable under Section IV, the restrictions
of section 406(b) of the Act and the sanctions resulting from the
application of sections 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(E) or (F) of the Code, shall not apply to--
(a) First American Capital Management (FACM) using its authority to
cause an employee benefit plan (a ``Plan'') to pay a fee to PAS, or
another affiliate of FACM, for effecting or executing securities
transactions as an agent for the Plan, but only to the extent that such
transactions are not excessive under the circumstances, in either
amount or frequency;
(b) FACM acting through PAS, or another affiliate of FACM, as an
agent in an agency cross transaction for both a Plan with respect to
which FACM is a fiduciary and one or more other parties to the
transaction; or
(c) The receipt by FACM, through its affiliates, of reasonable
compensation for effecting or executing an agency cross transaction in
which a Plan is a party from one or more other parties to the
transaction.
Section III--Conditions
Except to the extent otherwise provided in Section IV of this
proposed exemption, Section II of this proposed exemption applies only
if the following conditions are satisfied:
(a) The person engaging in the covered transaction is not a trustee
(other than a nondiscretionary trustee) or an administrator of the
Plan, or an employer any of whose employees are covered by the Plan.
(b) The covered transaction is performed under a written
authorization executed in advance by a fiduciary of each Plan whose
assets are involved in the transaction, which Plan fiduciary is
independent of FACM.
(c) The authorization referred to in paragraph (b) of this section
is terminable at will by the Plan, without penalty to the Plan, upon
receipt by FACM of written notice of termination. A form expressly
providing an election to terminate the authorization described in
paragraph (b) of this section with instructions on the use of the form
must be supplied to the authorizing fiduciary no less than annually.
The instructions for such form must include the following information:
(1) the authorization is terminable at will by the Plan, without
penalty to the Plan, upon receipt by FACM of written notice from the
authorizing fiduciary or other Plan official having authority to
terminate the authorization; and
(2) failure to return the form will result in the continued
authorization of FACM to engage in the covered transactions on behalf
of the Plan.
(d) Within three (3) months before an authorization is made, the
authorizing fiduciary is furnished with any reasonably available
information that FACM reasonably believes to be necessary for the
authorizing fiduciary to determine whether the authorization should be
made, including (but not limited to) a copy of this exemption (if
granted), the form for termination of authorization described in
Section II(c), a description of FACM's brokerage placement practices,
and any other reasonably available information regarding the matter
that the authorizing fiduciary requests.
(e) FACM furnishes the authorizing fiduciary with either:
(1) A confirmation slip for each securities transaction underlying
a covered transaction within ten (10) business days of the securities
transaction containing the information described in Rule 10b-10(a)(1-7)
under the Securities Exchange Act of 1934, 17 CFR 240.10b-10; or
(2) At least once every three (3) months, and not later than 45
days following the period to which it relates, a report disclosing:
(A) A compilation of the information that would be provided to the
Plan pursuant to subparagraph (e)(1) of this Section during the three-
month period covered by the report;
(B) the total of all securities transaction-related charges
incurred by the Plan during such period in connection with such covered
transactions; and
(C) the amount of the securities transaction-related charges
retained by FACM and the amount of such charges paid to other persons
for execution or other services.
For purposes of this paragraph (e), the words ``incurred by the
Plan'' shall be construed to mean ``incurred by the pooled fund'' when
FACM engages in covered transactions on behalf of a pooled fund in
which the Plan participates.
(f) The authorizing fiduciary is furnished with a summary of the
information required under paragraph (e)(1) at least once per year. The
summary must be furnished within 45 days after the end of the period to
which it relates, and must contain the following:
(1) The total of all securities transaction-related charges
incurred by the Plan during the period in connection with covered
securities transactions;
(2) The amount of the securities transaction-related charges
retained by
[[Page 70744]]
FACM and the amount of these charges paid to other persons for
execution or other services;
(3) A description of FACM's brokerage placement practices, if such
practices have materially changed during the period covered by the
summary;
(4) (i) A portfolio turnover ratio, calculated in a manner which is
reasonably designed to provide the authorizing fiduciary with the
information needed to assist in discharging its duty of prudence. The
requirements of this subparagraph (f)(4)(i) will be met if the
``annualized portfolio turnover ratio,'' calculated in the manner
described in subparagraph (f)(4)(ii), is contained in the summary;
(ii) The ``annualized portfolio turnover ratio'' shall be
calculated as a percentage of the Plan assets consisting of securities
or cash over which FACM had discretionary investment authority, or with
respect to which FACM rendered, or had any responsibility to render,
investment advice (the ``portfolio'') at any time or times
(``management period(s)'') during the period covered by the report.
First, the ``portfolio turnover ratio'' (not annualized) is obtained by
dividing (A) the lesser of the aggregate dollar amounts of purchases or
sales of portfolio securities during the management period(s) by (B)
the monthly average of the market value of the portfolio securities
during all management period(s). Such monthly average is calculated by
totaling the market values of the portfolio securities as of the
beginning and end of each management period and as of the end of each
month that ends within such period(s), and dividing the sum by the
number of valuation dates so used. For purposes of this calculation,
all debt securities whose maturities at the time of acquisition were
one year or less are excluded from both the numerator and the
denominator.
The ``annualized portfolio turnover ratio'' is then derived by
multiplying the ``portfolio turnover ratio'' by an annualizing factor.
The annualizing factor is obtained by dividing (C) the number twelve
(12) by (D) the aggregate duration of the management period(s)
expressed in months (and fractions thereof).
(iii) The information described in this paragraph (f)(4) is not
required to be furnished in any case where FACM has not exercised
discretionary authority over trading in the Plan's account during the
period covered by the report.
For purposes of this paragraph (f), the words ``incurred by the
Plan'' shall be construed to mean ``incurred by the pooled fund'' when
FACM engages in covered transactions on behalf of a pooled fund in
which the Plan participates.
(g) If an agency cross transaction to which Section IV(b) does not
apply is involved, the following conditions must also be satisfied:
(1) The information required under Sections III(d) or IV(d)(1)(B)
of this proposed exemption includes a statement to the effect that,
with respect to agency cross transactions, FACM will have a potentially
conflicting division of loyalties and responsibilities regarding the
parties to the transactions;
(2) The summary required under Section III(f) of this proposed
exemption includes a statement identifying the total number of agency
cross transactions during the period covered by the summary and the
total amount of all commissions or other remuneration received or to be
received from all sources by FACM in connection with those transactions
during the period;
(3) FACM has the discretionary authority to act on behalf of, and/
or provide investment advice to, either (A) one or more sellers or (B)
one or more buyers with respect to the transaction, but not both;
(4) The agency cross transaction is a purchase or sale, for no
consideration other than cash payment against prompt delivery of a
security for which market quotations are readily available; and
(5) The agency cross transaction is executed or effected at a price
that is at or between the independent bid and independent ask prices
for the security prevailing at the time of the transaction.
Section IV--Exceptions From Conditions
(a) Certain plans not covering employees. Section III does not
apply to covered transactions to the extent they are engaged in on
behalf of individual retirement accounts (IRAs) meeting the conditions
of 29 CFR 2510.3-2(d), or Plans, other than training programs, that
cover no employees within the meaning of 29 CFR 2510.3-3.
(b) Certain agency cross transactions. Section III of this proposed
exemption does not apply in the case of an agency cross transaction,
provided that FACM:
(1) does not render investment advice to any Plan for a fee within
the meaning of section 3(21)(A)(ii) of the Act with respect to the
transaction;
(2) is not otherwise a fiduciary who has investment discretion with
respect to any Plan assets involved in the transaction (see 29 CFR
2510.3-21(d)); and
(3) does not have the authority to engage, retain or discharge any
person who is, or is proposed to be, a fiduciary regarding any such
Plan assets.
(c) Recapture of profits. Section III(a) of this proposed exemption
does not apply in any case where FACM returns or credits to the Plan
all profits earned by FACM in connection with the securities
transactions associated with the covered transaction.
(d) Special rule for pooled funds. If FACM engages in a covered
transaction on behalf of an account or fund for the collective
investment of the assets of more than one Plan (a Pooled Fund):
(1) Sections III(b), (c), and (d) do not apply if--
(A) The arrangement under which the covered transaction is
performed is subject to the prior and continuing authorization, in the
manner described in this paragraph (d)(1), of a plan fiduciary with
respect to each Plan whose assets are invested in the Pooled Fund who
is independent of FACM. The requirement that the authorizing fiduciary
be independent of FACM shall not apply in the case of a Plan covering
only employees of FACM, if the requirements of Sections IV(d)(2)(A) and
(B) are met.
(B) The authorizing fiduciary is furnished with any reasonably
available information that FACM believes to be necessary to determine
whether the authorization should be given or continued, not less than
30 days prior to implementation of the arrangement or material change
thereto, including (but not limited to) a description of FACM's
brokerage placement practices, and, where requested, any reasonably
available information regarding the matter upon the reasonable request
of the authorizing fiduciary at any time.
(C) In the event an authorizing fiduciary submits a notice in
writing to FACM objecting to the implementation of, material change in,
or continuation of, the arrangement, the Plan on whose behalf the
objection was tendered is given the opportunity to terminate its
investment in the Pooled Fund, without penalty to the Plan, within such
time as may be necessary to effect the withdrawal in an orderly manner
that is equitable to all withdrawing Plans and to the non-withdrawing
Plans. In the case of a Plan that elects to withdraw under this
subparagraph (d)(1)(C), the withdrawal shall be effected prior to the
implementation of, or material change in, the arrangement; but an
existing arrangement need not be discontinued by reason of a Plan
electing to withdraw.
(D) In the case of a Plan whose assets are proposed to be invested
in the Pooled Fund subsequent to the implementation of the arrangement
and
[[Page 70745]]
that has not authorized the arrangement in the manner described in
subparagraphs (d)(1)(B) and (C) of this section, the Plan's investment
in the Pooled Fund is subject to the prior written authorization of an
authorizing fiduciary who satisfies the requirements of subparagraph
(d)(1)(A).
(2) Section III(a) of this proposed exemption, to the extent that
it prohibits FACM from being the employer of employees covered by a
plan investing in a pool managed by FACM, does not apply if--
(A) FACM is an ``investment manager'' as defined in section 3(38)
of the Act, and
(B) Either (i) FACM returns or credits to the Pooled Fund all
profits earned by FACM in connection with all covered transactions
engaged in by FACM on behalf of the Pooled Fund, or (ii) the Pooled
Fund satisfies the requirements of subparagraph (d)(3) of this section.
(3) A Pooled Fund satisfies the requirements of paragraph (d) of
this section for a fiscal year of the Fund if--
(A) On the first day of such fiscal year, and immediately following
each acquisition of an interest in the Pooled Fund during the fiscal
year by any Plan covering employees of FACM, the aggregate fair market
value of the interests in such Fund of all Plans covering employees of
FACM does not exceed twenty (20) percent of the fair market value of
the total assets of the Fund; and
(B) The aggregate brokerage commissions received by FACM, in
connection with covered transactions engaged in by FACM on behalf of
all Pooled Funds in which a Plan covering employees of FACM
participates, do not exceed five (5) percent of the total brokerage
commissions received by FACM from all sources in such fiscal year.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
for transactions described herein occurring on or after the date this
proposed exemption is published in the Federal Register.
Summary of Facts and Representations
1. The applicant, First American Capital Management (FACM), is
located in Newport Beach, California. FACM is registered as an
investment adviser with the U.S. Securities and Exchange Commission
(SEC), pursuant to the Investment Advisers Act of 1940. As of December
31, 1998, FACM had approximately $1.36 billion in assets under
management and $581,000 in stockholders' equity.
FACM owns forty-two (42) percent of the outstanding equity of
Pacific American Securities, LLC (PAS).22 PAS is registered
with, and regulated by, the SEC as a broker-dealer pursuant to the
requirements of the Securities Exchange Act of 1934. PAS is a member of
the National Association of Securities Dealers (NASD).
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\22\ In this regard, the applicant states that there is a
controlling equity ownership interest in PAS that is held by an
individual who is otherwise unrelated to FACM.
---------------------------------------------------------------------------
All references herein to ``FACM'' will include ``PAS'' and any
other broker-dealer for which FACM may have at least a 40 percent
minority ownership interest and which is subject to regulations similar
to those to which PAS is subject.
FACM requests an individual exemption to permit:
(i) FACM to use its authority to cause an employee benefit plan (a
``Plan'') to pay a fee to PAS, or another affiliate of FACM (as defined
herein), for effecting or executing securities transactions as agent
for that Plan; or
(ii) FACM, through PAS or another affiliate of FACM (as defined
herein), to act as an agent in an agency cross transaction for both a
Plan with respect to which FACM is a fiduciary and one or more other
parties to the transaction; or
(iii) the receipt by FACM, through its affiliates, of reasonable
compensation for effecting and executing an agency cross transaction to
which a Plan is a party from one or more other parties to the
transaction.
Each transaction described above will meet the applicable
requirements of Prohibited Transaction Class Exemption 86-128 (PTCE 86-
128, 51 FR 41686, November 18, 1986), with the principal exception that
the agent for the Plan effecting or executing the securities
transactions (including any agency cross transactions) will not be an
``affiliate'' of FACM within the meaning of that term as it is used in
Part I of PTCE 86-128.
For purposes of this proposed exemption, Section I(c) herein
defines the phrase ``affiliate of FACM'' to include PAS and any other
broker-dealer with respect to which FACM has at least a 40 percent
minority ownership interest and which is subject to regulations similar
to those to which PAS is subject (such entities referred to
collectively as ``FACM''). Thus, this exemption (if granted) would
apply to securities transactions executed by PAS, as a broker-dealer
``affiliated'' with FACM, the investment manager for a Plan which
causes the execution of such transactions to be made by PAS, in
situations where PTCE 86-128 would not apply because that exemption
requires that the plan fiduciary have a controlling interest in the
broker-dealer executing the covered transactions.
2. FACM represents that the use by a Plan fiduciary of its
authority to cause a Plan to pay a fee to an affiliate of such
fiduciary as an agent of such Plan for effecting or executing
securities transactions, and an affiliate acting as agent in agency
cross transactions for both a Plan and one or more other parties to
such transactions and receiving reasonable compensation from one or
more other such parties, are common practices. FACM states that such
arrangements can provide Plans with the opportunity to decrease the
costs of engaging in securities transactions and pose little or no risk
to the Plans. For example, an affiliate of a Plan fiduciary may be able
to better effect or execute securities transactions with a lower
commission charged to the Plan than if such orders were placed with
another brokerage firm. Thus, FACM represents that Plans for which it
acts as a fiduciary will be better able to maximize the returns, and
lower the commission costs, on their portfolios if the requested
exemption is granted.
3. PTCE 86-128 provides an exemption for a Plan fiduciary to cause
a Plan to pay a fee to an ``affiliate'' of that person (as defined
therein) for effecting or executing securities transactions as an agent
to the Plan, and to act as an agent in an agency cross transaction for
both a Plan and one or more other parties to the transaction and to
receive a fee from such other parties, if certain condition are met.
The applicant states that the Department, in granting PTCE 86-128,
recognized the benefits to Plans of permitting Plan fiduciaries to
obtain certain brokerage services from affiliates of such fiduciaries.
However, PTCE 86-128 defines an ``affiliate'' of a person to include,
among others, any person directly or indirectly controlling, controlled
by, or under common control with such person. Therefore, as noted
above, the applicant represents that the securities transactions for
which an individual exemption is requested may fall outside the scope
of relief provided by PTCE 86-128 because FACM holds only a minority
ownership interest in PAS and may not be considered an ``affiliate''
within the meaning of the definition contained in PTCE 86-128. However,
the applicant is concerned that FACM's minority ownership of PAS may
give rise to a prohibited transaction if FACM were to engage in any of
the transactions described in Section II of this proposed exemption.
4. FACM requests this proposed exemption to permit it to engage in
the
[[Page 70746]]
transactions described herein, each of which will meet the applicable
conditions of PTCE 86-128, except that PAS would be an entity to which
FACM holds a non-controlling, minority ownership interest. In this
regard, neither FACM nor PAS will be a trustee (other than a
nondiscretionary trustee) or an administrator of the Plan, or an
employer any of whose employees are covered by the Plan, except in a
case where FACM returns or credits to the Plan all profits earned by
FACM in connection with the securities transactions associated with the
covered transaction.
5. Except in certain limited circumstances, all covered
transactions will be performed under a written authorization executed
in advance by a fiduciary of each Plan whose assets are involved in the
transaction, which Plan fiduciary is independent of FACM, PAS, and
their affiliates.
If FACM engages in a covered transaction on behalf of a Pooled
Fund, the arrangement under which the covered transaction is performed
will be subject to the prior and continuing authorization of a plan
fiduciary, with respect to each Plan whose assets are invested in the
Pooled Fund, who is independent of FACM. However, the requirement that
the authorizing fiduciary be independent of FACM shall not apply in the
case of a Plan covering only employees of FACM (a FACM Plan), if
certain requirements are met. In this regard, FACM must be an
``investment manager,'' as defined in section 3(38) of the Act, for the
FACM Plan, and must either (i) Return or credit to the Pooled Fund all
profits earned by FACM in connection with all covered transactions
engaged in by FACM on behalf of the Pooled Fund, or (ii) satisfy
certain additional requirements with respect to the Fund. Such
additional requirements state that a Pooled Fund with assets of a FACM
Plan may take advantage of the relief provided herein for covered
transactions for a fiscal year of the Fund if:
(A) On the first day of such fiscal year, and immediately following
each acquisition of an interest in the Pooled Fund during the fiscal
year by any FACM Plan, the aggregate fair market value of the interests
in such Fund of all FACM Plans does not exceed twenty (20) percent of
the fair market value of the total assets of the Fund; and
(B) the aggregate brokerage commissions received by FACM, in
connection with covered transactions engaged in by FACM on behalf of
all Pooled Funds in which a FACM Plan participates, do not exceed five
(5) percent of the total brokderage commissions received by FACM from
all sources in such fiscal year.
6. With respect to any Pooled Fund, the authorizing Plan fiduciary
will be furnished with any reasonably available information that FACM
believes to be necessary to determine whether an authorization to
engage in the covered transactions should be given or continued. This
information must be furnished not less than 30 days prior to
implementation of the arrangement, or any material change to such
arrangement. Such information must include (but not be limited to) a
description of FACM's brokerage placement practices, and any reasonably
available information regarding the matter upon the request of the
authorizing Plan fiduciary at any time.
In the event an authorizing Plan fiduciary submits a notice in
writing to FACM objecting to the implementation of, a material change
in, or continuation of, the arrangement, the Plan on whose behalf the
objection was tendered will be given the opportunity to terminate its
investment in the Pooled Fund, without penalty to the Plan, within such
time as may be necessary to effect the withdrawal in an orderly manner
that is equitable to all withdrawing Plans and to the non-withdrawing
Plans. In the case of a Plan that elects to withdraw, the withdrawal
will be effected prior to the implementation of, or material change in,
the arrangement. However, an existing arrangement need not be
discontinued by reason of a Plan electing to withdraw.
In the case of a Plan whose assets are proposed to be invested in
the Pooled Fund subsequent to the implementation of the arrangement,
and such Plan has not previously authorized the arrangement, the Plan's
investment in the Pooled Fund will be subject to the prior written
authorization of an authorizing Plan fiduciary who is independent of
FACM and its affiliates.
7. All authorizations for covered transactions will be terminable
at will by the Plan, without penalty to the Plan, upon receipt by FACM
of written notice of termination. A form expressly providing an
election to terminate the authorization (Termination Form), with
instructions on the use of the form, must be supplied to the
authorizing fiduciary no less than annually. The instructions for the
Termination Form must include the following information:
(1) The authorization is terminable at will by the Plan, without
penalty to the Plan, upon receipt by FACM of written notice from the
authorizing fiduciary or other Plan official having authority to
terminate the authorization; and
(2) failure to return the form will result in the continued
authorization of FACM to engage in the covered transactions on behalf
of the Plan.
Within three (3) months before an authorization is made, the
authorizing Plan fiduciary will be furnished with any reasonably
available information that FACM believes to be necessary for the
authorizing fiduciary to determine whether the authorization should be
made, including (but not limited to) a copy of this exemption (if
granted), the Termination Form, a description of FACM's brokerage
placement practices, and any other reasonably available information
regarding the matter that the authorizing fiduciary requests.
In addition, FACM will furnish the authorizing fiduciary with
either:
(1) A confirmation slip for each securities transaction underlying
a covered transaction within ten (10) business days of the securities
transaction containing the information described in Rule 10b-10(a)(1-7)
under the Securities Exchange Act of 1934, 17 CFR 240.10b-10; or
(2) At least once every three (3) months, and not later than 45
days following the period to which it relates, a report disclosing:
(A) A compilation of the information that would be provided to the
Plan during the three-month period covered by the report;
(B) The total of all securities transaction-related charges
incurred by the Plan during such period in connection with such covered
transactions; and
(C) The amount of the securities transaction-related charges
retained by FACM and the amount of such charges paid to other persons
for execution or other services.
For this purposes, the words ``incurred by the Plan'' shall be
construed to mean ``incurred by the Pooled Fund'' when FACM engages in
covered transactions on behalf of a Pooled Fund in which the Plan
participates.
8. The authorizing Plan fiduciary will be furnished with a summary
of the information described in Paragraph 7 above at least once per
year. This summary must be furnished within 45 days after the end of
the period to which it relates, and must contain the following:
(1) The total of all securities transaction-related charges
incurred by the Plan during the period in connection with covered
securities transactions;
(2) The amount of the securities transaction-related charges
retained by FACM and the amount of these charges
[[Page 70747]]
paid to other persons for execution or other services;
(3) A description of FACM's brokerage placement practices, if such
practices have materially changed during the period covered by the
summary;
(4) (i) A portfolio turnover ratio, calculated in a manner which is
reasonably designed to provide the authorizing fiduciary with the
information needed to assist in discharging its duty of prudence. These
requirements will be met if the ``annualized portfolio turnover
ratio,'' calculated in the manner described below, is contained in the
summary;
(ii) The ``annualized portfolio turnover ratio'' shall be
calculated as a percentage of the Plan assets consisting of securities
or cash over which FACM had discretionary investment authority, or with
respect to which FACM rendered, or had any responsibility to render,
investment advice (the ``portfolio'') at any time or times
(``management period(s)'') during the period covered by the report.
First, the ``portfolio turnover ratio'' (not annualized) must be
obtained by dividing (A) the lesser of the aggregate dollar amounts of
purchases or sales of portfolio securities during the management
period(s) by (B) the monthly average of the market value of the
portfolio securities during all management period(s). Such monthly
average will be calculated by totaling the market values of the
portfolio securities as of the beginning and end of each management
period and as of the end of each month that ends within such period(s),
and dividing the sum by the number of valuation dates so used. For
purposes of this calculation, all debt securities whose maturities at
the time of acquisition were one year or less will be excluded from
both the numerator and the denominator.
The ``annualized portfolio turnover ratio'' will be derived by
multiplying the ``portfolio turnover ratio'' by an annualizing factor.
The annualizing factor will be obtained by dividing (C) the number
twelve (12) by (D) the aggregate duration of the management period(s)
expressed in months (and fractions thereof).
The information described above will not be required in any case
where FACM or an affiliate has not exercised discretionary authority
over trading in the Plan's account during the period covered by the
report.
For purposes of the above description of information to be included
in any summary report, the words ``incurred by the Plan'' shall be
construed to mean ``incurred by the Pooled Fund'' when FACM engages in
covered transactions on behalf of a Pooled Fund in which the Plan
participates.
9. If the covered transaction is an agency cross transaction,
certain additional conditions must also be satisfied, unless the person
effecting or executing the transaction:
(i) Does not render investment advice to any Plan for a fee within
the meaning of section 3(21)(A)(ii) of the Act with respect to the
transaction;
(ii) Is not otherwise a fiduciary who has investment discretion
with respect to any Plan assets involved in the transaction (see 29 CFR
2510.3-21(d)); and
(iii) Does not have the authority to engage, retain or discharge
any person who is, or is proposed to be, a fiduciary regarding any such
Plan assets.
These additional conditions require that the information submitted
to an authorizing Plan fiduciary include a statement to the effect
that, with respect to any agency cross transactions, FACM will have a
potentially conflicting division of loyalties and responsibilities
regarding the parties to the transactions. In addition, the summary
information furnished to authorizing Plan fiduciaries at least once per
year must include a statement identifying the total number of agency
cross transactions during the period covered by the summary, and the
total amount of all commissions or other remuneration received or to be
received from all sources by PAS in connection with those transactions
during the period.
With respect to any agency cross transaction, FACM may have the
discretionary authority to act on behalf of, and/or provide investment
advice to, either (A) one or more sellers or (B) one or more buyers
with respect to a covered transaction, but not both.23 Any
agency cross transaction must be a purchase or sale for no
consideration other than cash payment against prompt delivery of a
security for which market quotations are readily available. The agency
cross transaction must be executed or effected at a price that is at or
between the independent bid and independent ask prices for the security
prevailing at the time of the transaction.
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\23\ The Department notes that no relief is being provided in
this proposed exemption for agency cross transactions beyond that
already provided in PTCE 86-128, under the conditions required
therein.
The Department notes further that cross-trading transactions
could result in violations of one or more provisions of Part 4 of
Title I of the Act. Section 406(b)(2) provides that a fiduciary may
not act in any transaction involving a plan on behalf of a party (or
represent a party) whose interests are adverse to the interests of
the plan or the interests of its participants or beneficiaries.
Where an investment manager has investment discretion with respect
to both sides of a cross-trade of securities and at least one side
is an employee benefit plan account, the Department has previously
taken the position that a violation of section 406(b)(2) of the Act
would occur (see Reich v. Strong Capital Management Inc., No. 96-C-
0669, USDC E.D. Wis. (June 6, 1996).
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10. In summary, the applicant represents that the proposed
transactions will meet the statutory criteria of section 408(a) of the
Act because, among other things:
(a) The Plans will be able to maximize their returns from engaging
in securities transactions by improving the execution of such
transactions, and paying lower brokerage commissions, by using broker-
dealers affiliated with FACM, the Plans' investment manager; and
(b) The Plans will engage in the covered transactions under terms
and conditions which are virtually identical to those required for
transactions covered by PTCE 86-128.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (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
[[Page 70748]]
is subject to an administrative or statutory exemption is not
dispositive of whether the transaction is in fact a prohibited
transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 14th day of December, 1999.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 99-32753 Filed 12-16-99; 8:45 am]
BILLING CODE 4510-29-P
