[Federal Register Volume 63, Number 25 (Friday, February 6, 1998)]
[Notices]
[Pages 6217-6230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3050]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10396]
Notice of Proposed Exemption for Certain Transactions Involving
the Massachusetts Mutual Life Insurance Company (MM), Located in
Springfield, MA
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of proposed exemption.
-----------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed exemption from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and the Internal
Revenue Code of 1986 (the Code). The proposed exemption would exempt
certain transactions that may occur as a result of the sharing of real
estate investments among various Accounts maintained by MM, including
the MM general account and the general accounts of MM's affiliates
which are licensed to do business in at least one state (collectively,
the General Account), and the ERISA-Covered Accounts with respect to
which MM is a fiduciary. As an acknowledged investment manager and
fiduciary, MM is primarily responsible for the acquisition, management
and disposition of the assets allocated to the ERISA-Covered Accounts.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before April 7, 1998.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent of the Office of Exemption Determinations,
Pension and
[[Page 6218]]
Welfare Benefits Administration, Room N-5649, U.S. Department of Labor,
200 Constitution Avenue, N.W., Washington, D.C. 20210, Attention:
Application No. D-10396. The application for exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of an application for exemption from the
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of the Act and
from 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.
The proposed exemption was requested in an application filed by MM
pursuant to 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).
Summary of Facts and Representations
1. MM is a mutual life insurance company organized under the laws
of the Commonwealth of Massachusetts and subject to supervision and
examination by the Insurance Commissioner of the Commonwealth of
Massachusetts. MM operates in all 50 states, as well as the District of
Columbia and Puerto Rico, and presently has approximately 3 million
individual and group policyholders and $242 billion of life insurance
in force. MM, either directly or through its affiliates, offers a
complete portfolio of life insurance, health insurance, asset
accumulation products, health and pension employee benefits, plan
administration and investment management services.1 It also
provides health and pension benefits to its employees, including former
employees of Connecticut Mutual Life Insurance Company (Connecticut
Mutual).2 The assets of MM as of December 31, 1996 are
estimated to be $55.7 billion and its assets under management as of
that date are approximately $130.8 billion.
---------------------------------------------------------------------------
\1\ On March 31, 1996, MM sold its group life and health
subsidiary, and will no longer offer group life and health insurance
after the completion of a transition period under the purchase and
sale agreement.
\2\ On February 29, 1996, Connecticut Mutual, a mutual life
insurance company organized under the laws of the State of
Connecticut, was merged with and into MM. As a result of the merger,
MM succeeded to all rights, benefits, obligations and liabilities of
Connecticut Mutual. In addition, certain of the retirement plans of
Connecticut Mutual and its affiliates were merged with and into the
retirement plans of MM and its affiliates (collectively, the
Affiliate Plans) as of January 1, 1997.
---------------------------------------------------------------------------
MM maintains several pooled separate accounts in which pension,
profit-sharing and thrift plans participate, and also manages all or a
portion of the assets of a number of large plans pursuant to various
single customer separate accounts and advisory accounts (the ERISA-
Covered Accounts). A number of ERISA-Covered Accounts invest in equity
interests in real estate or in mortgage loans. The ERISA-Covered
Accounts, MM's general account (which includes all of MM's assets
invested on behalf of its policyholders not participating in separate
accounts), the general accounts of one or more of MM's affiliates which
are insurance companies licensed to do business in at least one of the
fifty states, accounts maintained by MM for foreign pension plans and
other ``non-ERISA'' investors, and accounts which MM may establish in
the future (collectively, the Accounts) may participate in the
transactions which are the subject of this proposed exemption.
2. The applicant represents that in recent years real estate has
gained increasing popularity among plan sponsors. Various high quality
commercial real estate investments from time to time become available
which offer the potential for a higher rate of return than do other
real estate investments. Because there are relatively few potential
investors for large scale investments such as office buildings,
shopping centers, and industrial parks, the owner or developer of such
real estate investments must offer a higher return in order to attract
investors. In many cases, MM's real estate accounts would be precluded
from acquiring these investments on an individual basis because such
investments would require the commitment of a disproportionately large
percentage of account assets to one or a few investments. The sharing
of large or uniquely desirable real estate investments would permit the
ERISA-Covered Accounts to participate in more attractive and profitable
real estate investments while maintaining portfolio diversification.
3. The real estate investments which MM proposes to share may
either take the form of a direct investment in real property or an
interest in a joint venture partnership which holds title to, manages,
and/or develops real property. MM's investments in joint venture
partnerships may include an equity interest in the joint venture and a
debt interest in mortgages to which the joint venture property is
subject. Development joint venture arrangements could be ``leveraged'';
that is, acquisition and development costs are met by the equity
contribution of the joint venture partners and by loans to the
partnership which are secured by the joint venture's interest in its
real property. MM, on behalf of its Accounts, could own 50 percent of
the joint venture partnership and provide 100 percent of the debt
financing.
4. MM anticipates that real estate investments will be allocated to
each Account maintained by MM in the same proportions of debt and
equity. No ERISA-Covered Account will participate in an investment for
the purpose of enabling another Account to make an investment.
5. General investment criteria for each ERISA-Covered Account are
set forth in the separate account contract between MM and the plan
contractholder. MM's allocation procedures provide for the allocation
of each real estate investment opportunity to one or more Accounts for
which the opportunity is suitable, taking into consideration each
Account's investment criteria and strategy, as well as each Account's
acquisition budget for the year. These procedures are periodically
reviewed by MM to ensure that each Account receives equitable
treatment.
6. During the course of MM's holding of a real estate investment,
certain situations may arise which require a decision to be made with
regard to the management or disposition of the investment. For example,
there may be a need for additional contributions of operating capital,
or there may be an offer to purchase the investment by a third party or
a joint venture partner. When MM shares these investments among more
than one Account, a potential for conflict may arise since the same
decision may not be in the best interest of each Account. Therefore,
the applicant has submitted a request for exemption, with certain
proposed safeguards designed to protect the interests of any
participating ERISA-Covered Account in the resolution of potential or
actual conflicts.
7. Each plan contractholder currently participating in an ERISA-
Covered Account that proposes to share real estate investments which
are structured as shared investments under this proposed exemption must
be furnished with a written description of the transactions that may
occur involving such investments which might raise questions under the
conflict of interest prohibitions of the Act with respect to MM's
involvement in such transactions and which are the subject of this
proposed exemption. This description
[[Page 6219]]
must discuss the reasons why such conflicts of interest may be present
(i.e., because the General Account participates in the investment and
may benefit from the transaction or because the interests of the
various Accounts participating in the investment may be adverse with
respect to the transaction). The description must also disclose the
principles and procedures to be used to resolve any anticipated
impasses, as will be outlined below. In addition, each current
contractholder in an ERISA-Covered Account that proposes to share
investments must receive a copy of this notice of pendency within
thirty days of its publication, and a copy of the exemption when
granted before the Account begins to participate in the sharing of
investments.
8. With respect to new contractholders in an ERISA-Covered Account
that participates in the sharing of investments, each prospective
contractholder must be provided with the above mentioned written
description, a copy of the notice of pendency and a copy of the
exemption as granted before the contractholder begins to participate in
the Account. A plan contractholder may withdraw from a single customer
or open-end pooled ERISA-Covered Account by providing written notice to
MM. Where a plan contractholder is in a closed-end pooled ERISA-Covered
Account, it may not have a right to have its interest redeemed prior to
the predetermined termination date, but it may sell its interest to a
third party.
9. An independent fiduciary or independent fiduciary committee must
be appointed on behalf of each ERISA-Covered Account participating in
the sharing of investments. The independent fiduciary, acting on behalf
of the ERISA-Covered Account, shall have the responsibility and
authority to approve or reject recommendations made by MM or its
affiliates regarding the allocation of shared real estate investments
to the ERISA-Covered Account and recommendations concerning those
transactions occurring subsequent to the allocations which are the
subject of this proposed exemption. The independent fiduciary is
informed of the procedures set forth in the proposed exemption for the
resolution of anticipated impasses prior to his or its acceptance of
the appointments. MM and its affiliates shall provide the independent
fiduciary with the information and materials necessary for the
independent fiduciary to make an informed decision on behalf of the
ERISA-Covered Account. No allocation or transaction which is the
subject of the proposed exemption will be undertaken prior to the
rendering of such informed decision by the independent fiduciary.
However, the independent fiduciary need only have the authority to make
decisions regarding allocations among, or any other subject transaction
involving an ERISA-Covered Account and any other Account that occur
after the plan(s) invest(s) in the ERISA-Covered Account. In the case
of transactions involving the possible transfer of an interest in a
real estate investment between the General Account and an ERISA-Covered
Account, the independent fiduciary will not be limited to approving or
rejecting the recommendations of MM, but will have full authority to
negotiate the terms of the transfer (in accordance with the independent
appraisal procedure described below) on behalf of the ERISA-Covered
Account. The independent fiduciary shall also review on an as-needed
basis, but not less than twice annually, the shared real estate
investments in the ERISA-Covered Account's portfolio to determine
whether the shared real estate investments are held in the best
interest of the ERISA-Covered Account.
10. The independent fiduciary must be unrelated to MM or its
affiliates. The independent fiduciary may not be, or consist of, any
officer, director or employee of MM, or be affiliated in any way with
MM or any of its affiliates. (See definition of ``affiliate'' in
Section V(a), below.) The independent fiduciary must be either (1) A
business organization which has (or whose principals have) at least
five years of experience with respect to commercial real estate
investments, (2) a committee comprised of three to five individuals who
each have at least five years of experience with respect to commercial
real estate investments, or (3) the plan sponsor (or its designee) of a
plan or plans that is the sole participant in an ERISA-Covered Account.
An organization or individual may not serve as an independent fiduciary
for an ERISA-Covered Account for any fiscal year if the gross income
(excluding retirement income) received by such organization or
individual (or any partnership or corporation of which such
organization or individual is an officer, director, or ten percent or
more partner or shareholder) from MM and its affiliates for that fiscal
year exceeds five percent of its or his annual gross income from all
sources for the prior fiscal year. If such organization or individual
had no income for the prior fiscal year, the five percent limitation
shall be applied with reference to the fiscal year in which such
organization or individual serves as an independent fiduciary. The
income limitation will exclude compensation for services of an
independent fiduciary who is initially selected by a plan sponsor for a
single customer ERISA-Covered Account, because this situation would not
give rise to the possibility of divided loyalty on the part of the
independent fiduciary. The income limitation will include services
rendered to the Accounts under any prohibited transaction exemptions
granted by the Department. In addition, no organization or individual
who is an independent fiduciary, and no partnership or corporation of
which such organization or individual is an officer, director or ten
percent or more partner or shareholder, may (i) Acquire any property
from, sell any property to, or borrow any funds from, MM or its
affiliates, during the period that such organization or individual
serves as an independent fiduciary and a period of six months after
such organization or individual ceases to be an independent fiduciary,
or (ii) negotiate any such transaction during the period that such
organization or individual serves as independent fiduciary. The
independent fiduciary of a pooled ERISA-Covered Account may be a
committee of three to five investors or investor representatives
approved by the plans participating in the pooled ERISA-Covered
Account.3 A business organization or committee member may
not serve as an independent fiduciary of more than one ERISA-Covered
Account.
---------------------------------------------------------------------------
\3\ The Department notes that where the independent fiduciary
consists of such a committee, the committee members would each need
to have the requisite minimum of five years' experience with respect
to commercial real estate investments.
---------------------------------------------------------------------------
11. In the case of a single customer ERISA-Covered Account, if the
plan sponsor or its designee decides not to act as the independent
fiduciary, the independent fiduciary or independent fiduciary committee
will be selected initially by MM. In that event, the independent
fiduciary must be approved by the plan sponsor or another plan
fiduciary prior to the commencement of its fiduciary responsibilities
on behalf of the ERISA-Covered Account. The applicant represents that
because pooled ERISA-Covered Accounts often include several hundred
plan contractholders, the independent fiduciary will be selected
initially by MM. Prior to the commencement of the independent
fiduciary's responsibilities on behalf of an Account, the selection of
the independent fiduciary, however, must be approved by a majority of
the
[[Page 6220]]
contractholders in such an Account by vote proportionate to their
interests in the Account.
12. For both single customer and pooled ERISA-Covered Accounts,
prior to the making of any decision to approve the selection of an
independent fiduciary, plan contractholders must be furnished
appropriate biographical information pertaining to the independent
fiduciary or members of the independent fiduciary committee. This
biography must set forth the background and qualifications of the
fiduciary (or fiduciaries) to serve in that capacity. The information
must also disclose the total amount of compensation received by the
fiduciary (or each member of a fiduciary committee) from MM or an MM
affiliate during the preceding year, including compensation for any
business services performed by the fiduciary or any affiliate for MM or
its affiliates. The disclosure relating to compensation must be updated
annually thereafter. Subsequent disclosures must also include the
amount of fees and expenses paid for independent fiduciary services.
The plans will be able to use this information to determine whether to
approve MM's initial selection of the fiduciary or fiduciary committee
and whether to continue such approval each year thereafter.4
---------------------------------------------------------------------------
\4\ MM represents that the contractholders in its single
customer and pooled closed-end real estate Accounts are
knowledgeable and sophisticated investors who fully understand the
operation of the ERISA-Covered Accounts.
---------------------------------------------------------------------------
13. Once an independent fiduciary committee or organization is
appointed, the members of the committee or the organization will
continue to serve subject to an annual vote by each of the plans
participating in the ERISA-Covered Account. An independent fiduciary or
committee member may be removed by a majority vote of the Account's
contractholders or, in the case of a committee member, ``for cause'' by
a majority vote of the other members of the committee. The term ``for
cause'' means that there must be sufficient and reasonable grounds for
removal and the reasons for removal must be related to the ability and
fitness of an individual to perform his or her required duties. MM will
not have the authority to remove an independent fiduciary or a member
of an independent fiduciary committee. If a vacancy occurs by virtue of
the death, resignation or removal of a member of an independent
fiduciary committee, replacement members of the committee will be
appointed by a majority vote of remaining members of the committee.
Possible replacements may be suggested by members of the committee, MM
or plan contractholders. If an organization acting as independent
fiduciary is removed by majority vote of the Account's contractholders,
the procedure described above for the initial selection of an
independent fiduciary will apply to the replacement.
14. The independent fiduciary will be compensated by the ERISA-
Covered Account. MM may indemnify any independent fiduciary or members
of an independent fiduciary committee with respect to any action or
threatened action to which such person is made a party by reason of his
or her service as an independent fiduciary. Indemnification will be
provided as permitted under the laws of the Commonwealth of
Massachusetts and subject to the requirement that such person acted in
good faith and in a manner he or she reasonably believed to be solely
in the interests of the participants and beneficiaries of the plans
participating in the Account.
15. Written minutes must be taken and maintained in connection with
all meetings involving independent fiduciary committees of ERISA-
Covered Accounts. Such minutes must include a rationale as to why
decisions were made. Where the independent fiduciary is a committee,
decisions will be made on the basis of a majority vote. Any dissenting
committee member will provide a written rationale for his dissent.
Where the independent fiduciary is a single entity (e.g., a business
organization) for which no minutes of meetings would be maintained, all
decisions of such independent fiduciary and rationale thereof must be
set forth in writing and maintained by MM pursuant to the recordkeeping
requirements outlined in the General Conditions below.
16. In connection with the management of real estate shared
investments, it is possible that MM, on behalf of the General or Non-
ERISA Accounts, or the independent fiduciaries for ERISA-Covered
Accounts participating in a shared investment, may develop different
approaches as to whether or how long an investment should be held by an
Account. Certain situations may also arise during the course of MM's
holding of a shared real estate investment in which decisions will need
to be made where it is not possible to obtain the agreement of MM and
all of the independent fiduciaries involved. These situations may arise
as a result of an action taken by a third party, or they may arise in
connection with an action proposed by MM or the independent fiduciary
for an ERISA-Covered Account. In such cases, MM will make
recommendations to the independent fiduciaries regarding a proposed
transaction. If a course of action cannot be found that is acceptable
to each independent fiduciary, a stalemate procedure will be followed
to ensure that a decision can be made. The applicant represents that
the stalemate procedure is similar to procedures typically used to
resolve disputes between co-venturers under real estate joint venture
agreements and is therefore familiar to most real estate investors.
17. With respect to stalemates between two or more ERISA-Covered
Accounts which share an investment, the stalemate procedure is designed
to provide a result that is similar to what would occur in comparable
situations where unrelated parties to a transaction were dealing at
arm's length. This means that the action which will be taken in such
cases is the one that does not require an Account: 1) to invest new
money; 2) to change the terms of an existing agreement; or 3) to change
the existing relationship between the Accounts.
18. However, one additional option will be provided in the event of
such stalemates. Where investments are shared by two or more Accounts
(other than the General Account), MM will make recommendations to the
independent fiduciaries of each participating ERISA-Covered Account
regarding investment management decisions that must be made for a real
estate shared investment. For example, if the independent fiduciaries
cannot agree on a MM recommendation, MM may offer alternate
recommendations (possibly including partition and sale of undivided
interests) in an attempt to facilitate agreement. If the independent
fiduciaries still cannot agree, each ERISA-Covered Account will be
offered the opportunity to buy out the other ERISA-Covered Account's
interest on the basis of a specified price. The specified price may be
based on the price offered by a third party, or, if no third party
offer is received (or if the third party offer is unacceptable to
either ERISA-Covered Account), the specified price will be the price
established under the independent appraisal procedure described below.
As in a buy-sell provision in a typical joint venture, the ERISA-
Covered Account to which the offer is made will have the option to sell
to the offering ERISA-Covered Account at the specified price, or to buy
out the offering ERISA-Covered Account's interest at that price.
19. If the independent fiduciary for the ERISA-Covered Account
which disagrees with MM's recommendation
[[Page 6221]]
does not wish to make a buy-sell offer to the other ERISA-Covered
Account, the other Account(s) (except for the General Account) may do
so. If no ERISA-Covered Account chooses to exercise the buy-sell
option, MM will take the action designed to preserve the status quo,
i.e., the action designed to avoid expenditure of additional funds by
the Accounts and avoid any change in existing arrangements or
contractual relationships.
20. Where a real estate investment is shared by the General Account
and one or more ERISA-Covered Accounts and a stalemate occurs between
the General Account and an ERISA-Covered Account, MM may offer
alternate recommendations to facilitate an agreement. If the Accounts
still cannot reach agreement, each Account will be offered the
opportunity to buy out the other Account's interest on the basis of a
specified price, which will be established in accordance with the
independent appraisal procedure described below, or will be the price
offered by a third party. If none of the Accounts elects to make a buy-
sell offer to the other Account, MM would be required to take the
action selected by the independent fiduciary of the ERISA-Covered
Account. Where the General Account wishes, e.g., to hold its interest
and the independent fiduciary for the ERISA-Covered Account determines
to sell its interest, the General Account will buy out the interest of
the ERISA-Covered Account at the price offered by the third party, or,
at the ERISA-Covered Account's option, at an independently determined
price. Conversely, where the independent fiduciary for the ERISA-
Covered Account determines to retain its interest while the General
Account wants to sell its interest, the ERISA-Covered Account has the
option of buying out the General Account, or, if the independent
fiduciary chooses not to, the status quo will be maintained.
Specific Transactions
I. Direct Real Estate Investments
(a) Transfers Between Accounts
21. Following the initial sharing of investments, it may be in the
best interests of the Accounts participating in the investment for one
Account to sell its interest to the other(s). Such a situation may
arise, for example, when one Account experiences a need for liquidity
in order to satisfy the cash needs of the plans participating in the
Account, while for the other Account(s) the investment remains
appropriate. One possible means of reconciling this situation is for
the ``selling'' Account to sell its interest in the shared investment
to the remaining participating Account(s) or to another Account(s) at
current fair market value. Such sales may not, however, be appropriate
in all circumstances. An inter-Account transfer will only be permitted
when it is determined to be in the best interests of each Account that
would be involved in the transaction. The transfer may also be subject
to the approval of the Insurance Departments of a number of states,
including Massachusetts and/or New York. Because MM would be acting on
behalf of both the ``buying'' and ``selling'' Accounts (but not the
General Account) in such an inter-Account transfer, the transfer might
be deemed to constitute a prohibited transaction under section
406(b)(2) of the Act. Accordingly, exemptive relief is requested herein
for the sale or transfer of an interest in a shared real estate
investment by one ERISA-Covered Account to another Account of which MM
is a fiduciary. Such transfers would have to be at fair market value
and approved by the independent fiduciary for each ERISA-Covered
Account involved in the transfer.
Ordinarily, no transfer of an interest in a shared investment will
be permitted between the General Account and an ERISA-Covered Account.
The transfer of an interest in a shared investment between the General
Account and an ERISA-Covered Account may be deemed to constitute a
violation of sections 406(a)(1) (A) and (D) as well as sections 406(b)
(1) and (2) of ERISA. As noted above, however, where a stalemate arises
between the General Account and an ERISA-Covered Account, the transfer
of such an interest would be permitted to resolve the conflict.
Specific stalemate procedures have been developed for these situations.
If, for example, a third party makes an offer to purchase the entire
investment held by MM on behalf of the General Account and an ERISA-
Covered Account, it is possible that the General Account would like to
accept the offer and the independent fiduciary on behalf of the ERISA-
Covered Account would like to reject the offer. In that event, MM may
offer alternative recommendations to the independent fiduciary. If
there is still no agreement, the independent fiduciary (as the party
wishing to reject the offer) would be given the opportunity to buy-out
the General Account's interest at a specified price. This price may be
a proportionate share of the third party offer; or, if such price is
unacceptable to the ERISA-Covered Account, a proportionate share of the
price determined through the independent appraisal procedure described
below. This procedure would give the ERISA-Covered Account an
opportunity to retain its interest in the shared investment. If the
ERISA-Covered Account does not choose to buy-out the General Account's
interest, the General Account would be required to accede to the
direction of the ERISA-Covered Account and would, therefore, reject the
third party offer.
If, in the event of a third party purchase offer, the General
Account wants to reject the offer but the independent fiduciary on
behalf of the ERISA-Covered Account wants to accept the offer, the
procedures described above would apply, except that the General Account
(as the party wishing to reject the offer) would have the opportunity
to buy-out the ERISA-Covered Account's interest at a proportionate
share of the third party purchase offer, or, at the option of the
independent fiduciary for the ERISA-Covered Account, at an
independently determined price. This will permit the ERISA-Covered
Account to sell its interest in a real estate investment, if it chooses
to do so, at no less than the same price it would have received from a
third party.
Even in the absence of a third party offer, MM may recommend the
sale of a shared investment. If the independent fiduciary approves the
recommendation, MM will arrange for the sale. If the independent
fiduciary does not approve MM's recommendation, MM may offer
alternative recommendations, possibly including partition and sale of
divided interests. If, however, no agreement is reached, the
independent fiduciary (as the party wishing to reject the
recommendation) would be given the opportunity to buy-out the General
Account's interest in accordance with the independent appraisal
procedure described below. If there is no buy-out, MM would take the
course of action consistent with the ERISA-Covered Account's
determination and would, therefore, not sell the investment.
The independent fiduciary may also determine independently that a
shared investment in an ERISA-Covered Account should be sold. If MM
agrees with this recommendation, MM will arrange the sale. If MM, on
behalf of the General Account, disagrees with the recommendation, MM
will first attempt to sell the ERISA-Covered Account's interest to
another Account other than the General Account. In this case, the sale
price and other terms would have to be approved by the independent
fiduciary for each ERISA-Covered Account. If the ERISA-Covered
Account's interest cannot be sold to another Account, MM may offer
[[Page 6222]]
alternative recommendations, possibly including partition and sale of
the ERISA-Covered Account's interest to a third party. If no agreement
is reached with respect to these options, the General Account (as the
party opposed to the sale) would have the opportunity of buying out the
ERISA-Covered Account's interest at a price established under
independent appraisal procedures described below. If there is no buy-
out and no agreement, MM will be required to take the course of action
consistent with the ERISA-Covered Account's determination and will sell
the entire investment.
Where an independent price for the transfer of an interest in a
shared investment between the General Account and an ERISA-Covered
Account is not established by an offer from an unrelated third party
(or where the third party price is unacceptable to the ERISA-Covered
Account), the stalemate procedure provides for the appointment of an
independent appraiser. Under this procedure, MM and the independent
fiduciary will each appoint an independent appraiser. These two
appraisers will then choose a third appraiser. The panel of appraisers
will each evaluate the entire investment, and the average of the three
appraisals will be used to determine the proportional value of each
shared investment interest. However, the General Account and the ERISA-
Covered Account may agree that, if one valuation is more than a
specified percentage outside the range of the other two valuations,
that valuation may be disregarded and the transfer price will be the
average of the remaining two valuations. The applicant represents that
this procedure, which is of the variety typically used in real estate
joint venture agreements, provides adequate protection for the ERISA-
Covered Account because the independent fiduciary is an equal
participant in the appraisal process. See Section I(a).
(b) Joint Sales of Property
22. In situations involving shared real estate investments, an
opportunity may arise to sell the entire investment to a third party,
and it may be determined for all of the participating Accounts that the
sale is desirable. When the General Account is participating in the
investment, and the sale is therefore determined to be in the best
interests of the General Account (in addition to being in the interests
of the other Account(s)), the sale might be deemed to constitute a
prohibited transaction under section 406 of the Act and section 4975 of
the Code.5 Similarly, MM may be acting on behalf of two
ERISA-Covered Accounts or an ERISA-Covered Account and a non-ERISA-
Covered Account other than the General Account. Accordingly, exemptive
relief is requested for these joint sales. The sales would have to be
approved by the independent fiduciary for each ERISA-Covered Account
involved in the sale. In accordance with MM's stalemate procedures, if
the independent fiduciary for one ERISA-Covered Account wishes to sell
its interest in a shared investment and the independent fiduciary for
another ERISA-Covered Account does not want to sell, MM will attempt to
negotiate a compromise, including the transfer of interests from one
Account to the other. If no agreement can be reached, the status quo
will be maintained and no sale will be made. See Section I(b).
---------------------------------------------------------------------------
\5\ The Department notes that all future references to the
provisions of the Act shall be deemed to include the parallel
provisions of the Code.
---------------------------------------------------------------------------
(c) Additional Capital Contributions
23. On occasion, commercial real estate investments require
infusions of additional capital in order to fulfill the investment
expectations of the property. For example, developmental real estate
investments sometimes require additional capital in order to complete
the construction of the property. In addition, the cash flow needed to
improve or operate completed buildings may also result in the need for
additional capital. Such additional capital is frequently provided by
the owners of the property. In the case of a property that is owned
entirely by MM on behalf of the Accounts, it is contemplated that
needed additional capital will ordinarily be contributed in connection
with the investment in the form of an equity capital contribution made
by each participating Account in an amount equal to such Account's
existing percentage equity interest in the shared investment;
6 that is, in the first instance, each Account would be
afforded the opportunity to contribute additional capital on a fully
proportionate basis. In the case of ERISA-Covered Accounts, all
decisions regarding the making of additional capital contributions must
be approved by the independent fiduciary for the Account. The making of
an additional capital contribution could be deemed to involve a
prohibited transaction under section 406 of the Act. If one or more
participating Accounts in a shared investment is unable to provide its
share of the needed additional capital, various alternatives may be
appropriate, including having the other Account(s) make a
disproportionate contribution. For example, where the General Account
and an ERISA-Covered Account participate in a shared investment and the
need for additional capital arises, it might be determined for
liquidity reasons or other factors involving the ERISA-Covered Account
that the additional contribution should not be made by that Account. As
a result, the additional equity capital may be provided entirely by the
General Account with the further consequence that the General Account
would thereafter have a larger interest in the investment and,
therefore, a larger share in the appreciation and income to be derived
from the property.7 Such an adjustment in ownership
interests might be deemed to constitute a prohibited (indirect sales)
transaction under section 406 of the Act. In addition, these situations
could also occur where two ERISA-Covered Accounts are involved or an
ERISA-Covered Account and a non-ERISA-Covered Account are involved.
Accordingly, the applicant is requesting exemptive relief that would
permit the contribution of additional equity capital for a shared
investment by Accounts participating in the investment (including the
General Account). Any decision made or action taken by an ERISA-Covered
Account (i.e., the contribution of either no additional capital, the
Account's pro rata share of additional capital, less than or more than
the Account's pro rata share, etc.) must be approved by such
independent fiduciary. See Section I(c).
---------------------------------------------------------------------------
\6\ In any case where the General Account participates in a
shared investment with one or more ERISA-Covered Accounts and a call
for additional capital is made, the General Account will always make
a capital contribution that is at least equivalent proportionately
to the highest capital contribution made by an ERISA-Covered
Account.
\7\ In the case of shared real estate investments owned entirely
by MM accounts, if an Account contributes capital equaling less than
its pro rata interest in the investment (or makes no contribution at
all), that Account's equity interest will be re-adjusted and reduced
based on the change in the fair market value of the property caused
by the infusion of new capital.
---------------------------------------------------------------------------
(d) Lending of Funds To Meet Additional Capital Requirements
24. If the General Account and an ERISA-Covered Account participate
in a shared investment that experiences the need for additional
capital, and it is determined that the ERISA-Covered Account does not
have sufficient funds available to meet the call for additional
capital, the General Account might be willing and able to loan the
required funds to the ERISA-Covered Account. Prior to any loan being
made, it must be
[[Page 6223]]
approved by the independent fiduciary for the ERISA-Covered Account.
Such loan will be unsecured and non-recourse, will bear interest at a
rate that will not exceed the higher of the prime rate plus two
percentage points or the prevailing interest rate on 90-day Treasury
Bills, will not be callable at any time by the General Account, and
will be prepayable at any time without penalty at the discretion of the
independent fiduciary of the ERISA-Covered Account. See Section I(d).
(e) Shared Debt Investments
25. MM occasionally makes real estate investments consisting of
interim construction loans or medium or long-term loans on a property.
In some instances, MM may have the opportunity to obtain an equity
ownership interest in the underlying real property upon maturity of the
debt or at the election of MM. It is possible that shared real estate
debt investments might raise questions under section 406 of the Act in
essentially two situations: (1) a material modification in the terms of
a loan agreement, or (2) a default on a loan. From time to time, the
terms of outstanding real estate loans need to be modified to take into
account new developments. Such modifications may commonly include
extensions of the term of the loan, revised interest rates, revised
repayment schedules, changes in covenants or warranties to permit, for
example, additional financing to be provided. These situations require
a decision on behalf of the lender whether it would be in its own
interest to make the modifications in question. Similarly, when a
borrower commits an act of default under a loan agreement, the lender
must determine, in its own interest, what action, if any, it wishes to
take. Such action might involve foreclosure on the loan, a
restructuring of the loan arrangement, or, in some cases as
appropriate, no action at all. When a debt investment is shared among
Accounts, a decision must be made on behalf of each Account with
respect to the action to be taken when a loan modification or loan
default situation occurs. These situations may also occur where two or
more Accounts hold interests in debt investments in respect of the same
property, and one interest is subordinate to the other in the event of
insolvency. In some cases, moreover, it is conceivable that different
actions might be desired by different Accounts. Normally, however, only
one unified course of action is possible in the situation. Since MM
maintains each of these Accounts, the action it decides to take for the
participating Accounts may raise questions under section 406 of the
Act. Accordingly, exemptive relief is being requested that will permit
MM on behalf of the Accounts to take appropriate action with respect to
the modification of the material terms of a loan or with respect to a
default situation when the loan is a shared investment involving one or
more ERISA-Covered Accounts. Each such action would require approval of
the independent fiduciary for each ERISA-Covered Account. If there is
an agreement among the independent fiduciaries as to the course of
action to follow with regard to a proposed loan modification, or an
adjustment in the rights upon default, such modification or adjustment
will be implemented. If, upon full discussion of the matter, no course
of action can be agreed upon by the independent fiduciaries, no
modification of the terms of the loan or adjustment in the rights upon
default would be made. The terms of the loan agreement as originally
stated would be carried out. See Section I(e).
II. Joint Venture Investments
26. Many real estate investments are structured as joint venture
arrangements (rather than 100 percent ownership interest in property)
in which MM and another party, such as a real estate developer or
manager, participate as joint venturer partners (or co-venturers).
Either MM or MM's co-venturer may act as managing partner of the joint
venture. Joint venture investments typically involve several particular
features by virtue of the terms and conditions of the joint venture
agreements that may, when MM's joint venture interest is shared, result
in possible violations of section 406 of the Act.
(a) Additional Capital Contributions to Joint Ventures
27. As in the case of investments made entirely by MM, joint
venture real estate investments sometimes require additional operating
capital. Typically, a joint venture agreement will provide for a
capital call by the general partner of the joint venture to be made to
each joint venturer and that each venturer provide the needed capital
on a pro rata basis either in the form of an equity contribution or a
loan to the joint venture. If one joint venturer refuses to contribute
its pro rata equity share of the capital call, the other joint
venturer(s) may contribute additional capital to cover the short-fall
and thereby ``squeeze down'' the interest in the venture of the non-
contributing joint venturer.8 Alternatively, if sufficient
additional capital is not provided by the joint venturers, other
financing may be sought, or the joint venture may be liquidated. In the
case of a capital call where MM's joint venture interest is shared by
two or more Accounts, a determination must be made on behalf of each
Account participating in the shared investment with respect to whether
it is appropriate for the Account to provide its proportionate share of
additional capital requested by the joint venture. The general rule
that MM will follow is that each Account will be given the opportunity
to provide its pro rata share of the capital call, but for some
Accounts it may be determined to be appropriate to provide less than a
full share or no additional capital at all. In such cases, the interest
of the Account would be reduced proportionately on a fair market basis.
In the case of ERISA-Covered Accounts, all decisions regarding the
making of additional capital contributions must be approved by the
independent fiduciary for the Account. In addition to situations where
some Accounts participating in the ownership of MM's joint venture
interest may not be in a position to provide their share of a capital
call, other situations may arise where the co-venturer is unable to
make its additional capital contributions. Both of these situations may
result in prohibited transactions under section 406 of the Act.
---------------------------------------------------------------------------
\8\ In the case of a call for additional capital involving a
typical joint venture arrangement entered into between parties
dealing at arm's length, the joint venture agreement may commonly
provide that the equity interest of any non-contributing venturer be
re-adjusted, or ``squeezed down'', on a capital interest basis. This
involves re-adjusting the equity interests of the venturers solely
on the basis of the percentage of total capital contributed without
taking into account any appreciation on the underlying property.
This ``capital interest'' adjustment can substantially diminish the
equity interest of the non-contributing venturer in the actual
current market value of the underlying property. Thus, this type of
re-adjustment is intended to provide an incentive to all venturers
to make their proportionate capital contributions so that
improvements can be made and the operation of a property continued
without burdening the other venturers.
---------------------------------------------------------------------------
28. MM Shortfall. The General Account and an ERISA-Covered Account
may experience a capital call from the general partner of the joint
venture for either an additional equity or debt contribution. If it is
determined that the ERISA-Covered Account does not have sufficient
funds available to meet its contribution requirement, 9 the
[[Page 6224]]
General Account may make a loan to the ERISA-Covered Account to enable
the ERISA-Covered Account to make its required pro rata capital
contribution. Accordingly, subject to the conditions of the proposed
exemption, Section II(a)(2) would provide relief for loans of this
type. Prior to any loan being made, it would have to be approved by the
independent fiduciary for the ERISA-Covered Account. Such loan will be
unsecured and non-recourse, will bear interest at a rate that will not
exceed the greater of the prime rate plus two percentage points or the
prevailing interest rate on 90-day Treasury Bills, will not be callable
at any time by the General Account, and will be prepayable at any time
without penalty at the discretion of the independent fiduciary of the
ERISA-Covered Account. In addition, the General Account may make an
additional equity contribution to the joint venture to cover the ERISA-
Covered Account's shortfall. In that event, the equity interest of the
ERISA-Covered Account will be ``squeezed down'' (relative to the equity
interest of the General Account) on a fair market value basis. This
option would avoid the capital basis squeeze-down of the ERISA-Covered
Account's interest by the co-venturer. Such contribution would be made
by the General Account only after the independent fiduciary for the
ERISA-Covered Account is given an opportunity to make an additional
contribution. See Section II(a)(3).
---------------------------------------------------------------------------
\9\ In any case where the General Account and one or more ERISA-
Covered Accounts share MM's interest in a joint venture, the General
Account will always make a capital contribution that is at least
equivalent proportionately to the highest capital contribution made
by an ERISA-Covered Account, up to its pro rata share of the
additional capital call. Thus, the General Account will never be the
cause as between the Accounts of a capital contribution shortfall by
MM that would result in a capital basis squeeze down by a co-
venturer.
---------------------------------------------------------------------------
A similar situation may arise where two ERISA-Covered Accounts, or
an ERISA-Covered and a non-ERISA-Covered Account, participate in a
joint venture investment. If one Account is unable or unwilling to
provide its proportionate share of a capital call, the other Account
may be interested in making up the shortfall. This might be
accomplished by means of an equity contribution with a resulting re-
adjustment on a current fair market value basis in the equity ownership
interests of the participating Accounts. Thus, any of these
disproportionate contribution situations between Accounts might result
in a violation of section 406 of the Act. Subject to the generally
applicable conditions of this proposed exemption, Section II(a)(3)
provides relief for these disproportionate contributions.
29. Co-Venturer Shortfall. In some cases, MM's co-venturer in a
joint venture investment may be unable to meet its additional capital
obligation, and MM may deem it advisable for some or all of the
participating Accounts to contribute capital in excess of the pro rata
share of MM's Accounts in the joint venture in order to finance the
operation of the property (and thereby squeeze down the equity interest
of the co-venturer).10 The applicant is requesting exemptive
relief that would permit additional capital contributions to be made by
participating Accounts (including the General Account) on a
disproportionate basis if the need arises. Any instance involving the
infusion of additional capital to a joint venture will be considered by
the independent fiduciary for each ERISA-Covered Account participating
in the investment and any action to be taken by the Account must be
approved by the independent fiduciary. These actions might include
contributing a pro rata share of additional equity capital (including a
capital contribution that squeezes down the interest of a co-venturer
on the basis provided in the joint venture agreement), contributing
more or less than a pro rata share, or contributing no additional
capital. See Section II(a)(4).
---------------------------------------------------------------------------
\10\ In any case involving a shared joint venture interest held
by the General Account and an ERISA-Covered Account, if it is
determined that the ERISA-Covered Account will contribute its pro
rata share of extra capital, the General Account would also
contribute at least its pro rata share of such capital.
---------------------------------------------------------------------------
(b) Third Party Purchases of Joint Venture Properties
30. Under the terms of typical joint venture agreements, if an
offer is received from a third party to purchase the assets of the
joint venture, and one joint venture partner (irrespective of the
percentage ownership interest of the joint venture partner) wishes to
accept the offer, the other joint venture partner must either (1) also
accept the offer, or (2) buy out the first partner's interest at the
portion of the offer price that is proportionate to the first partner's
share of the venture. For example, if MM on behalf of the Accounts and
a real estate developer are joint venture partners in a property and an
offer is received from another person to acquire the entire property
that the developer wants to accept, MM on behalf of the Accounts would
be obligated either to sell its interest also to the third party or to
buy out the interest of the developer at the portion of the price
offered by the third party proportionate to the developer's share of
the venture. When MM's interest in a real estate joint venture is
shared by two or more Accounts, it is likely that the same decision
will be appropriate for each Account in any third-party purchase
situation. See Sections I(b) and II(b)(1). It is also possible,
however, that it might be in the interests of some Accounts to reject
the offer and buy-out the developer, while other Accounts might not
have the funds to do so or, for some other reason, would elect to sell
to the third party. The joint venture agreements typically require,
however, that MM on behalf of the Accounts provide the co-venturer with
a unified buy or sell reply. Thus, in making a buy or sell decision in
any of these cases involving an ERISA-Covered Account, MM might be
deemed to be acting in violation of section 406 of the Act. Further, in
order to resolve situations where the same reply is not appropriate for
all participating Accounts, various alternatives may be adopted. For
example, the Account(s) that wishes to continue owning the property may
be willing and able to buy out not only the co-venturer, but also the
other participating Account(s) that wishes to accept the third party
offer to sell. Or, one Account may itself be willing and able to buy-
out the co-venturer while the other Account chooses to continue holding
its original interest in the property. Alternatively, all of the
Accounts may choose to participate in the buy-out, but on a basis that
is not in proportion to their existing ownership interests. Such
alternatives, when an ERISA-Covered Account is involved, while all
possibly desirable from case to case, may also raise questions under
section 406 of the Act, whether or not the General Account is a
participant in the investment. Accordingly, the applicant is requesting
exemptive relief that would permit MM to respond to third-party
purchase offers as appropriate under the circumstances. Such a response
might involve acceptance of the offer on behalf of all participating
Accounts, a buy-out of a co-venturer by some or all of the
participating Accounts on a pro rata or non-pro rata basis, or a buy-
out of the interest of one participating Account (and of the co-
venturer) by other participating Accounts. Any action by any ERISA-
Covered Account in these situations will be required to be approved by
the independent fiduciary for the Account in accordance with the
stalemate procedure, as described below (see rep. 31, below).
31. In a case involving the sharing of a joint venture interest
between two ERISA-Covered Accounts, if one ERISA-Covered Account wishes
to buy out the co-venturer and the other ERISA-Covered Account is
unable or unwilling to do so, the ERISA-Covered Account wishing to buy
out the co-venturer
[[Page 6225]]
would have the opportunity to do so if the other ERISA-Covered
Account's interests can also be accommodated. This could be
accomplished if, for example (1) the second ERISA-Covered Account
wishes to sell its interest to the first ERISA-Covered Account (at a
proportionate share of the price offered by the third party offeror)
and the first ERISA-Covered Account agrees; or (2) the second ERISA-
Covered Account wishes to continue holding its original interest. If,
however, the second ERISA-Covered Account wishes to sell its interest
and the first ERISA-Covered Account is unwilling or unable to buy it,
both Accounts would be required to sell to the third party offeror in
order to avoid the expenditure of additional funds by an unwilling
Account.
If the General Account participates in a joint venture interest
subject to a third party purchase offer, the stalemate procedure would
provide the same alternatives, except that if the General Account
wishes to accept the third party purchase offer and the ERISA-Covered
Account wishes to buy out the co-venturer (and is unwilling or unable
to buy out the General Account's interest), the General Account would
be required to buy out the co-venturer with the ERISA-Covered Account.
See Section II(b).
(c) Rights of First Refusal in Joint Venture Agreements
32. Under the terms of typical joint venture agreements, if a joint
venture partner wishes to sell its interest in the venture to a third
party, the other joint venture partner must be given the opportunity to
exercise a right of first refusal to purchase the first partner's
interest at the price offered by the third party. For example, if MM
and a real estate developer are joint venture partners and the
developer decided to sell its interest to a third party, MM would have
the right to purchase the developer's interest at the price offered by
the third party. In the case of shared real estate joint ventures, the
decision by MM on behalf of the Accounts with respect to whether or not
to exercise a right of first refusal might raise questions under
section 406 of the Act since each Account participating in the
investment might be affected differently by such decision. Because,
under the terms of the joint venture agreement, only one option
(exercise or not exercise) may be chosen by MM on behalf of the
Accounts, exemptive relief is being requested that would permit MM to
exercise or not exercise a right of first refusal as may be appropriate
under the circumstances. Any action taken on behalf of an ERISA-Covered
Account regarding the exercise of such a right would have to be
approved by the independent fiduciary. Further, under the requested
exemption, if the General Account and an ERISA-Covered Account share a
joint venture investment, even though MM may initially decide on behalf
of the General Account not to make a purchase under a right of first
refusal option, the General Account will be required to participate in
the purchase of the other joint venturer's interest if the independent
fiduciary determines that it is appropriate for the ERISA-Covered
Account to participate in the exercise of the right of first refusal on
at least a pro rata basis. If, however, two Accounts other than the
General Account participate in a joint venture and agreement cannot be
reached on behalf of the Accounts on whether to exercise a right of
first refusal, the right will not be exercised and the co-venturer will
be permitted to sell its interest to the third party, unless one
Account decides to buy-out the co-venturer alone. In this regard, it is
conceivable that some participating Accounts may elect to take
advantage of a right of first refusal opportunity and buy-out a co-
venturer without other participating Accounts taking part in the
transaction. For example, in the case of a shared joint venture
investment involving the General Account (or any other Account) and an
ERISA-Covered Account, if the co-venturer wishes to accept an offer to
sell its interest and the independent fiduciary of the ERISA-Covered
Account decides not to have the account participate in purchasing the
co-venturer's interest, the General Account (or other participating
Account) would be free to make the purchase on its own. The exercise of
a right of first refusal on such a disproportionate basis might also
raise questions under section 406 of the Act for which exemptive relief
may be needed. See Section II(c).
(d) Buy-Sell Provisions in Joint Venture Agreements
33. Joint venture agreements entered into by MM typically provide
that one joint venture partner may demand that the other partner either
sell its interest to the first partner at a price as determined by the
terms of the joint venture agreement or buy out the interest of the
first partner at such price. If the other joint venture partner refuses
to exercise either option within a specified period, it must sell its
interest to the first partner at the stated price. These ``buy-sell''
provisions are generally used to resolve serious difficulties or
impasses in the operation of a joint venture, but generally a joint
venture agreement permits the buy-sell provision to be exercised at any
time. As in the situations discussed above, the decision by MM on
behalf of the Accounts to make a buy-sell offer, or its reaction to
such an offer made by a co-venturer, may affect various participating
Accounts differently. Accordingly, any decision made by MM in these
cases involving ERISA-Covered Accounts might raise questions under
section 406 of the Act. The applicant is requesting exemptive relief
that would permit MM to make an appropriate decision under the
circumstances on behalf of all participating Accounts to make a buy-
sell offer to a co-venturer or to react to a buy-sell offer from a co-
venturer. Any such decision must be approved by the independent
fiduciary for each ERISA-Covered Account participating in the
investment.
34. In the event that MM recommends the initiation of the buy-sell
option against the co-venturer, MM will exercise the option if the
independent fiduciary on behalf of each participating ERISA-Covered
Account approves the recommendation. If, in the case of a General
Account/ERISA-Covered Account shared joint venture investment, the
independent fiduciary does not agree with MM's recommendation, the
independent fiduciary would be given the opportunity to buy out the
General Account's interest at a price to be determined in accordance
with the independent appraisal procedure described above. If the
independent fiduciary declines to buy out the General Account's
interest, the General Account would then have the opportunity to buy
out the ERISA-Covered Account's interest, (provided the independent
fiduciary for the ERISA-Covered Account approves of such sale), also in
accordance with the independent appraisal procedure. If neither the
General Account nor the ERISA-Covered Accounts buys out the other's
interest in the joint venture investment, MM would take the course of
action most consistent with the determination of the ERISA-Covered
Account, and would, therefore, not exercise the buy-sell option.
In the event that the co-venturer initiates the buy-sell option
with respect to a shared joint venture investment, MM must either sell
its entire interest to the co-venturer or reject the offer and buy-out
the co-venturer's interest at that price. If the participating Accounts
agree upon the course of action to be taken, MM will then take the
agreed action. If no agreement is reached, various alternatives may be
considered. For example, in the case of a General
[[Page 6226]]
Account/ERISA-Covered Account shared joint venture investment, if MM
recommends rejection of the offer (and consequent purchase of the co-
venturer's interest), but the independent fiduciary wants to accept the
offer, the General Account would have the option to purchase the co-
venturer's interest solely on behalf of the General Account. If the
General Account chooses this option, the ERISA-Covered Account (which
wished to accept the co-venturer's offer) would have the opportunity to
sell its interest to the General Account, at a proportionate share of
the price offered by the co-venturer, but would not be required to do
so. However, if the General Account declines to purchase the ERISA-
Covered Account's interest where the ERISA-Covered Account wishes to
accept the buy-sell offer, the entire joint venture interest would be
sold to the co-venturer. If the ERISA-Covered Account wishes to reject
the buy-sell offer (and purchase the co-venturer's interest) and the
General Account wishes to accept the offer, the General Account would
be required to purchase its proportionate share of the co-venturer's
interest, unless the independent fiduciary for the ERISA-Covered
Account elects to purchase more than its proportionate share (including
the entire co-venturer interest).
Where two or more ERISA-Covered Accounts share a joint venture
investment, the stalemate procedure is similar, except that no ERISA-
Covered Account would be required to purchase the interest of a co-
venturer (and thus expend additional funds) against its wishes. See
Section II(d).
(e) Transactions With Joint Venture Party in Interest
35. The applicant represents that when the General Account holds a
50 percent or more interest in a joint venture, the joint venture
itself may be deemed to be a party in interest under section 3(14)(G)
of the Act. Thus, any subsequent transaction involving the joint
venture and an ERISA-Covered Account that is also participating in the
venture (e.g., an additional contribution of capital) may be deemed to
be a transaction between the plans participating in an ERISA-Covered
Account and a party in interest (the joint venture itself) in violation
of section 406. Accordingly, the applicant is requesting exemptive
relief from the restrictions of section 406(a) of the Act, only, which
would permit: (1) any additional equity or debt capital contributions
to a joint venture by an ERISA-Covered Account which is participating
in an interest in the joint venture, where the joint venture is a party
in interest solely by reason of the ownership on behalf of the General
Account of a 50 percent or more interest in such joint venture; or (2)
any material modification in the terms of, or action taken upon default
with respect to, a loan to the joint venture in which the ERISA-Covered
Account has an interest as a lender. Either action would be conditioned
upon the approval of the independent fiduciary for the ERISA-Covered
Account. See Section III.
Initial Proportionate Allocations
The applicant, MM, has not requested exemptive relief for the
initial allocation of shared real estate investments by MM among two or
more Accounts, at least one of which is an ERISA-Covered Account, where
each of the Accounts participating in a real estate investment
participates in the debt and equity interests in the same relative
proportions as described in paragraph 3 above. It is the applicant's
position that the initial sharing of a real estate investment pursuant
to the described allocation by two or more Accounts maintained by MM
(which may include both its General Account and one or more ERISA-
Covered Accounts) does not involve a per se violation of sections
406(a)(1)(D) and 406(b)(1) and (b)(2) of the Act.
Regulations under section 408(b)(2) of the Act (29 CFR 2550.408b-
2(e)) provide that the prohibitions of section 406(b) are imposed on
fiduciaries to deter them from exercising the authority, control or
responsibility which makes them fiduciaries when they have interests
which may conflict with the interests of the plans for which they act.
In such cases, the regulation states that the fiduciaries have
interests in the transactions which may affect the exercise of their
best judgment as fiduciaries. It is the Department's view, however,
that a fiduciary does not violate section 406(b)(1) with respect to a
transaction involving the assets of a plan if he does not have an
interest in the transaction that may affect his best judgment as a
fiduciary.
Similarly, a fiduciary does not engage in a violation of section
406(b)(2) in a transaction involving the plan if he represents or acts
on behalf of a party whose interests are not adverse to those of the
plan. Nonetheless, if a fiduciary causes a plan to enter into a
transaction where, by the terms or nature of that transaction, a
conflict of interest between the plan and the fiduciary exists or will
arise in the future, that transaction would violate either section
406(b)(1) or (b)(2) of the Act. Moreover, if, during the course of a
transaction which, at its inception, did not involve a violation of
section 406(b)(1) or 406(b)(2), a divergence of interests develops
between the plan and the fiduciary, the fiduciary must take steps to
eliminate the conflict of interest in order to avoid engaging in a
prohibited transaction.
In the view of the Department, the mere investment of assets of a
plan on identical terms with a fiduciary's investment for its own
account and in the same relative proportions as the fiduciary's
investment would not, in itself, cause the fiduciary to have an
interest in the transaction that may affect its best judgment as a
fiduciary. Therefore, such an investment would not, in itself, violate
section 406(b)(1). In addition, such shared investment, or an
investment by a plan with another account maintained by a common
fiduciary, pursuant to reasonable procedures established by the
fiduciary would not cause the fiduciary to act on behalf of (or
represent) a party whose interests are adverse to those of the plan,
and therefore, would not, in itself, violate section
406(b)(2).11
---------------------------------------------------------------------------
\11\ This analysis does not address any issues which may arise
under section 406(b)(2) where investments are shared solely by two
or more separate accounts maintained by a common fiduciary and the
participation of one account is relied upon to support the initial
investment of the other account.
---------------------------------------------------------------------------
With respect to section 406(a)(1)(D) of the Act which prohibits the
transfer to, or use by or for the benefit of a party in interest
(including a fiduciary) of the assets of a plan, it is the opinion of
the Department that a party in interest does not violate that section
merely because he derives some incidental benefit from a transaction
involving plan assets. We are assuming, for purposes of this analysis,
that the fiduciary does not rely upon and is not otherwise dependent
upon the participation of plans in order to undertake its share of the
investment.
Thus, with respect to the investment of plan assets in shared
investments which are made simultaneously with investments by a
fiduciary for its own account on identical terms and in the same
relative proportions, it is the view of the Department that any benefit
that the fiduciary might derive from such investment under these
circumstances is incidental and would not violate section 406(a)(1)(D)
of the Act.
Accordingly, since it appears that the method by which the
interests in the real estate investments are allocated to the Accounts
maintained by MM does not result in per se prohibited transactions
under the Act, the Department has not proposed exemptive
[[Page 6227]]
relief with respect to the initial sharing of these investments.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include fiduciaries and participants of plans
investing in ERISA-Covered Accounts which will be engaging in
transactions described in the proposed exemption. Because of the number
of affected persons, the Department has determined that the only
practical form of providing notice to interested persons is the
distribution, by MM, of the notice of proposed exemption as published
in the Federal Register to the appropriate fiduciaries of each plan
described above. The distribution will occur within 30 days of the
publication of the notice of proposed exemption in the Federal
Register.
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 Code does not relieve a fiduciary or other
party in interest or disqualified person from certain other provisions
of the Act and 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) The proposed exemption, if granted, will not extend to
transactions prohibited under section 406(b)(3) of the Act and section
4975(c)(1)(F) of the Code;
(3) 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; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemption to the address above,
within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the pending exemption.
Comments received will be available for public inspection with the
application for exemption at the address set forth above.
Proposed Exemption
Section I--Exemption for Certain Transactions Involving the Management
of Investments Shared by Two or More Accounts Maintained by MM
If the exemption is granted, as indicated below, the restrictions
of certain sections of the Act and the sanctions resulting from the
application of certain parts of section 4975 of the Code shall not
apply to the following transactions if the conditions set forth in
Section IV are met:
(a) Transfers Between Accounts
(1) The restrictions of section 406(b)(2) of the Act shall not
apply to the sale or transfer of an interest in a shared investment
(including a shared joint venture interest) between two or more
Accounts (except the General Account), provided that each ERISA-Covered
Account pays no more, or receives no less, than fair market value for
its interest in a shared investment.
(2) The restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply to the sale or transfer of an interest in a shared
investment (including a shared joint venture interest) between ERISA-
Covered Accounts and the General Account, provided that such transfer
is made pursuant to stalemate procedures, described in this notice of
proposed exemption, adopted by the independent fiduciary for the ERISA-
Covered Account, and provided further that the ERISA-Covered Account
pays no more or receives no less than fair market value for its
interest in a shared investment.
(b) Joint Sales of Property--The restrictions of sections 406(a),
406(b)(1) and 406(b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code by reason of section
4975(c)(1)(A) through (E) of the Code shall not apply to the sale to a
third party of the entire interest in a shared investment (including a
shared joint venture interest) by two or more Accounts, provided that
each ERISA-Covered Account receives no less than fair market value for
its interest in the shared investment.
(c) Additional Capital Contributions--The restrictions of sections
406(a), 406(b)(1) and 406(b)(2) of the Act and the sanctions resulting
from the application of section 4975 of the Code by reason of section
4975(c)(1)(A) through (E) of the Code shall not apply either to the
making of a pro rata equity capital contribution by one or more of the
Accounts to a shared investment; or to the making of a Disproportionate
[as defined in Section V(e)] equity capital contribution by one or more
of such Accounts which results in an adjustment in the equity ownership
interests of the Accounts in the shared investment on the basis of the
fair market value of such interests subsequent to such contribution,
provided that each ERISA-Covered Account is given an opportunity to
make a pro rata contribution.
(d) Lending of Funds--The restrictions of sections 406(a),
406(b)(1) and 406(b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code by reason of section
4975(c)(1)(A) through (E) of the Code shall not apply to the lending of
funds from the General Account to an ERISA-Covered Account to enable
the ERISA-Covered Account to make an additional pro rata contribution,
provided that such loan--
(A) is unsecured and non-recourse with respect to participating
plans,
(B) bears interest at a rate not to exceed the greater of the prime
rate plus two percentage points or the prevailing rate on 90-day
Treasury Bills,
(C) is not callable at any time by the General Account, and
(D) is prepayable at any time without penalty.
(e) Shared Debt Investments--In the case of a debt investment that
is shared between two or more Accounts, including one or more of the
ERISA-Covered Accounts, (1) the restrictions of sections 406(a) and
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 any material
modification in the terms of the loan agreement resulting from a
request by the borrower, any
[[Page 6228]]
decision regarding the action to be taken, if any, on behalf of the
Accounts in the event of a loan default by the borrower, or any
exercise of a right under the loan agreement in the event of such
default, and (2) the restrictions of section 406(b)(2) of the Act shall
not apply to any decision by MM thereof on behalf of two or more ERISA-
Covered Accounts: (A) not to modify a loan agreement as requested by
the borrower; or (B) to exercise any rights provided in the loan
agreement in the event of a loan default by the borrower, even though
the independent fiduciary for one (but not all) of such Accounts has
approved such modification or has not approved the exercise of such
rights.
Section II--Exemption for Certain Transactions Involving the Management
of Joint Venture Interests Shared by Two or More Accounts Maintained by
MM
If the exemption is granted, the restrictions of certain sections
of the Act and the sanctions resulting from the application of certain
parts of section 4975 of the Code shall not apply to the following
transactions resulting from the sharing of an investment in a real
estate joint venture between two or more Accounts, if the conditions
set forth in Section IV are met:
(a) Additional Capital Contributions--(1) The restrictions of
sections 406(a), 406(b)(1) and 406(b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(A) through (E) of the Code shall not apply to the
making of additional pro rata equity capital contributions by one or
more Accounts participating in the joint venture.
(2) The restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply to the lending of funds from the General Account
to an ERISA-Covered Account to enable the ERISA-Covered Account to make
an additional pro rata capital contribution, provided that such loan--
(A) Is unsecured and non-recourse with respect to the participating
plans,
(B) Bears interest at a rate not to exceed the greater of the prime
rate plus two percentage points or the prevailing rate on 90-day
Treasury Bills,
(C) Is not callable at any time by the General Account, and
(D) is prepayable at any time without penalty.
(3) The restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code by reason of section 4975 (c)(1)(A) through (E) of the
Code shall not apply to the making of Disproportionate [as defined in
section V(e)] additional equity capital contributions (or the failure
to make such additional contributions) in the joint venture by one or
more Accounts which result in an adjustment in the equity ownership
interests of the Accounts in the joint venture on the basis of the fair
market value of such joint venture interests subsequent to such
contributions, provided that each ERISA-Covered Account is given an
opportunity to provide its proportionate share of the additional equity
capital contributions; and
(4) In the event a co-venturer fails to provide all or any part of
its pro rata share of an additional equity capital contribution, the
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of the Act and
the sanctions resulting from the application of section 4975 of the
Code by reason of section 4975(c)(1)(A) through (E) of the Code shall
not apply to the making of Disproportionate additional equity capital
contributions to the joint venture by the General Account and an ERISA-
Covered Account up to the amount of such contribution not provided by
the co-venturer which result in an adjustment in the equity ownership
interests of the Accounts in the joint venture on the basis provided in
the joint venture agreement, provided that such ERISA-Covered Account
is given an opportunity to participate in all additional equity capital
contributions on a proportionate basis.
(b) Third Party Purchase Offers--(1) In the case of an offer by a
third party to purchase any property owned by the joint venture, the
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of the Act and
the sanctions resulting from the application of section 4975 of the
Code by reason of section 4975(c)(1)(A) through (E) of the Code shall
not apply to the acquisition by the Accounts, including one or more
ERISA-Covered Account[s], on either a proportionate or Disproportionate
basis of a co-venturer's interest in the joint venture in connection
with a decision on behalf of such Accounts to reject such purchase
offer, provided that each ERISA-Covered Account is first given an
opportunity to participate in the acquisition on a proportionate basis;
and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any acceptance by MM on behalf of two or more Accounts,
including one or more ERISA-Covered Account[s], of an offer by a third
party to purchase a property owned by the joint venture even though the
independent fiduciary for one (but not all) of such ERISA-Covered
Account[s] has not approved the acceptance of the offer, provided that
such declining ERISA-Covered Account[s] are first afforded the
opportunity to buy out both the co-venturer and ``selling'' Account's
interests in the joint venture.
(c) Rights of First Refusal--(1) In the case of the right to
exercise a right of first refusal described in a joint venture
agreement to purchase a co-venturer's interest in the joint venture at
the price offered for such interest by a third party, the restrictions
of sections 406(a), 406(b)(1) and 406(b)(2) of the Act and the
sanctions resulting from the application of section 4975 of the Code by
reason of section 4975(c)(1)(A) through (E) of the Code shall not apply
to the acquisition by such Accounts, including one or more ERISA-
Covered Account[s], on either a proportionate or Disproportionate basis
of a co-venturer's interest in the joint venture in connection with the
exercise of such a right of first refusal, provided that each ERISA-
Covered Account is first given an opportunity to participate on a
proportionate basis; and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any decision by MM on behalf of the Accounts not to exercise
such a right of first refusal even though the independent fiduciary for
one (but not all) of such ERISA-Covered Accounts has approved the
exercise of the right of first refusal, provided that none of the
ERISA-Covered Accounts that approved the exercise of the right of first
refusal decides to buy-out the co-venturer on its own.
(d) Buy-Sell Options--(1) In the case of the exercise of a buy-sell
option set forth in the joint venture agreement, the restrictions of
sections 406(a), 406(b)(1) and 406(b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(A) through (E) of the Code shall not apply to the
acquisition by one or more of the Accounts on either a proportionate or
Disproportionate basis of a co-venturer's interest in the joint venture
in connection with the exercise of such a buy-sell option, provided
that each ERISA-Covered Account is first given the opportunity to
participate on a proportionate basis; and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any decision by MM on behalf of two or more Accounts,
including one or more ERISA-Covered Account[s], to sell the interest of
such Accounts in the joint venture to a co-venturer even though the
[[Page 6229]]
independent fiduciary for one (but not all) of such ERISA-Covered
Account[s] has not approved such sale, provided that such disapproving
ERISA-Covered Account is first afforded the opportunity to purchase the
entire interest of the co-venturer.
Section III--Exemption for Transactions Involving a Joint Venture or
Persons Related to a Joint Venture
The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply, if the
conditions in Section IV are met, to any additional equity or debt
capital contributions to a joint venture by an ERISA-Covered Account
that is participating in an interest in the joint venture, or to any
material modification in the terms of, or action taken upon default
with respect to, a loan to the joint venture in which the ERISA-Covered
Account has an interest as a lender, where the joint venture is a party
in interest solely by reason of the ownership on behalf of the General
Account of a 50 percent or more interest in such joint venture.
Section IV--General Conditions
(a) The decision to participate in any ERISA-Covered Account that
shares real estate investments must be made by plan fiduciaries who are
totally unrelated to MM and its affiliates. This condition shall not
apply to plans covering employees of MM.
(b) Each contractholder or prospective contractholder in an ERISA-
Covered Account which shares or proposes to share real estate
investments that are structured as shared investments under this
exemption is provided with a written description of potential conflicts
of interest that may result from the sharing, a copy of the notice of
pendency, and a copy of the exemption if granted.
(c) An independent fiduciary must be appointed on behalf of each
ERISA-Covered Account participating in the sharing of investments. The
independent fiduciary shall be either
(1) A business organization which has at least five years of
experience with respect to commercial real estate investments,
(2) A committee composed of three to five individuals (who may be
investors or investor representatives approved by the plans
participating in the ERISA-Covered Account, and) who each have at least
five years of experience with respect to commercial real estate
investments, or
(3) The plan sponsor (or its designee) of a plan (or plans) that is
the sole participant in an ERISA-Covered Account.
(d) The independent fiduciary or independent fiduciary committee
member shall not be or consist of MM or any of its affiliates.
(e) No organization or individual may serve as an independent
fiduciary for an ERISA-Covered Account for any fiscal year if the gross
income (other than fixed, non-discretionary retirement income) received
by such organization or individual (or any partnership or corporation
of which such organization or individual is an officer, director, or
ten percent or more partner or shareholder) from MM, its affiliates and
the ERISA-Covered Accounts for that fiscal year exceeds five percent of
its or his or her annual gross income from all sources for the prior
fiscal year. If such organization or individual had no income for the
prior fiscal year, the five percent limitation shall be applied with
reference to the fiscal year in which such organization or individual
serves as an independent fiduciary. The income limitation shall not
include compensation for services rendered to a single-customer ERISA-
Covered Account by an independent fiduciary who is initially selected
by the Plan sponsor for that ERISA-Covered Account.
The income limitation will include income for services rendered to
the Accounts as independent fiduciary under any prohibited transaction
exemption(s) granted by the Department. Notwithstanding the foregoing,
such income limitation shall not include any income for services
rendered to a single customer ERISA-Covered Account by an independent
fiduciary selected by the Plan sponsor to the extent determined by the
Department in any subsequent prohibited transaction exemption
proceeding.
In addition, no organization or individual who is an independent
fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director or ten percent or more partner or
shareholder, may acquire any property from, sell any property to, or
borrow any funds from, MM, its affiliates, or any Account maintained by
MM or its affiliates, during the period that such organization or
individual serves as an independent fiduciary and continuing for a
period of six months after such organization or individual ceases to be
an independent fiduciary, or negotiate any such transaction during the
period that such organization or individual serves as independent
fiduciary.
(f) The independent fiduciary acting on behalf of an ERISA-Covered
Account shall have the responsibility and authority to approve or
reject recommendations made by MM or its affiliates for each of the
transactions in this proposed exemption. In the case of a possible
transfer or exchange of any interest in a shared investment between the
General Account and an ERISA-Covered Account, the independent fiduciary
shall also have full authority to negotiate the terms of the transfer.
MM and its affiliates shall involve the independent fiduciary in the
consideration of contemplated transactions prior to the making of any
decisions, and shall provide the independent fiduciary with whatever
information may be necessary in making its determinations.
In addition, the independent fiduciary shall review on an as-needed
basis, but not less than twice annually, the shared real estate
investments in the ERISA-Covered Account to determine whether the
shared real estate investments are held in the best interest of the
ERISA-Covered Account.
(g) MM maintains for a period of six years from the date of the
transaction the records necessary to enable the persons described in
paragraph (h) of this Section to determine whether the conditions of
this exemption have been met, except that a prohibited transaction will
not be considered to have occurred if, due to circumstances beyond the
control of MM or its affiliates, the records are lost or destroyed
prior to the end of the six-year period.
(h)(1) Except as provided in paragraph (2) of this subsection (h)
and notwithstanding any provisions of subsection (a)(2) and (b) of
section 504 of the Act, the records referred to in subsection (g) of
this Section are unconditionally available at their customary location
for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an ERISA-Covered
Account engaging in transactions structured as shared investments under
this exemption who has authority to acquire or dispose of the interests
of the plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer to any plan participating in an
ERISA-Covered Account engaging in transactions structured as shared
investments under this exemption or any duly authorized
[[Page 6230]]
employee or representative of such employer, and
(D) Any participant or beneficiary of any plan participating in an
ERISA-Covered Account engaging in transactions structured as shared
investments under this exemption, or any duly authorized employee or
representative of such participant or beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this subsection (h) shall be authorized to examine trade secrets of
MM, any of its affiliates, or commercial or financial information which
is privileged or confidential.
Section V--Definitions
For the purposes of this exemption:
(a) An ``affiliate'' of MM includes --
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with MM,
(2) Any officer, director or employee of MM or person described in
section V(a)(1), and
(3) Any partnership in which MM is a partner.
(b) An ``Account'' means the General Account (including the general
accounts of MM affiliates which are managed by MM), any separate
account managed by MM, or any investment advisory account, trust,
limited partnership or other investment account or fund managed by MM.
(c) The ``General Account'' means the general asset account of MM
and any of its affiliates which are insurance companies licensed to do
business in at least one State as defined in section 3(10) of the Act.
(d) An ``ERISA-Covered Account'' means any Account (other than the
General Account) in which employee benefit plans subject to Title I or
Title II of the Act participate.
(e) ``Disproportionate'' means not in proportion to an Account's
existing equity ownership interest in an investment, joint venture or
joint venture interest.
The proposed exemption, if granted, will be subject to the express
conditions that the material facts and representations contained in the
application are true and complete, and that the application accurately
describes all material terms of the transactions to be consummated
pursuant to the exemption.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Signed at Washington, D.C., this 2nd day of February, 1998.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, Department of Labor.
[FR Doc. 98-3050 Filed 2-5-98; 8:45 am]
BILLING CODE 4510-29-P
