[Federal Register Volume 62, Number 68 (Wednesday, April 9, 1997)]
[Notices]
[Pages 17209-17214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8973]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10345, et al.]
Proposed Exemptions; Washington National Retirement Plan et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) number of the person
making the comment or request, and (3) the nature of the person's
interest in the exemption and the manner in which the person would be
adversely affected by the exemption. A request for a hearing must also
state the issues to be addressed and include a general description of
the evidence to be presented at the hearing. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of
[[Page 17210]]
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Washington National Retirement Plan (the Plan), Located in
Lincolnshire, IL
[Application No. D-10345]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the cash sale by the Plan of five venture
capital limited partnership interests (the Venture Capital Funds) and a
private placement bond issue (the Private Placement Bond Issue) 1
to Washington National Insurance Company (the Employer), a party in
interest with respect to the Plan.
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\1\ The interests in the Venture Capital Funds and the Private
Placement Bond Issue are collectively referred to herein as the
Interests.
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This proposed exemption is subject to the following conditions:
(a) All terms and conditions of the sale are at least as
favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated party.
(b) The sale is a one-time transaction for cash.
(c) The fair market value of the Interests is determined by a
qualified, independent appraiser.
(d) The Plan does not pay any commissions, costs or other
expenses in connection with the sale.
(e) With respect to each Venture Capital Fund Interest, the Plan
receives as consideration an amount that is no less than the greater
of (1) its investment basis in such Interest or (2) the fair market
value of the Interest on the date of the sale.
(f) With respect to the Private Placement Bond Issue, the Plan
receives as consideration an amount that is no less than the greater
of (1) the remaining principal balance of such Interest or (2) the
fair market value of the Interest on the date of the sale.
Summary of Facts and Representations
1. The Plan is a defined benefit plan having total assets with an
aggregate fair market value of $22,925,300 as of June 30, 1996. As of
September 11, 1996, the Plan had 964 participants. The trustees of the
Plan (the Trustees) are Robert W. Patin, Thomas C. Scott and Thomas
Pontarelli. The Trustees are charged with overseeing the investments
and investment philosophy of the Plan. The Employer, an insurance
company, maintains its principal place of business in Lincolnshire,
Illinois.
2. Included among the assets of the Plan are Interests in five
Venture Capital Funds and one Private Placement Bond Issue. The
Interests, which represent approximately 6.2 percent of the Plan's
total assets, were all purchased on behalf of the Plan by the then-
existing Trustees during the 1970's and 1980's. In this regard, the
Interests in the Venture Capital Funds were acquired by the Plan at the
inception of the respective limited partnerships whereas the Interest
in the Private Placement Bond Issue was acquired by the Plan directly
from Merrill Lynch, Hubbard Inc., as underwriter. With the exception of
the Employer (see Representation 4 below), it is represented that none
of the general partners, limited partners or holders, in the case of
the Private Placement Bond Issue, is a party in interest with respect
to the Plan.
The Interests are further described as follows:
(a) The Narragansett First Fund (NFF), a Venture Capital Fund, is a
Rhode Island limited partnership that was formed on December 17, 1982
primarily for the purpose of making investments in leveraged buyout
transactions with the objective of capital appreciation. NFF has one
general partner, Narraganset Management Partners (NMP), also a Rhode
Island limited partnership and 35 limited partners consisting of
corporations, partnerships and trusts. The total funding commitment for
NFF was $75.2 million. Of this amount, $66.7 million was actually
funded. Although NFF was scheduled to terminate on December 17, 1995,
NMP temporarily deferred the liquidation of the assets of NFF. The
partnership is now fully invested and is presently in a liquidation
mode.
On December 15, 1982, the Plan entered into a subscription
agreement to invest $500,000 in NFF. As of March 31, 1996, the Plan had
funded $446,885 of the capital commitment representing a 0.67 percent
interest in NFF. Since the inception of its investment in NFF, the Plan
has received cash disbursements totaling $1,369,523 leaving an
investment basis of $0.
(b) TCW Special Placements Fund I (TCW I), a Venture Capital Fund,
is a California limited partnership that was formed on March 12, 1985
for the purpose of allowing investors to pool their assets in order to
provide financing to highly-leveraged companies for expansions,
acquisitions, management buyouts and capital restructurings. TCW
Capital, a California partnership serves as the general partner of TCW
I. As general partner, TCW Capital makes all investment decisions and
has exclusive responsibility for the management of TCW I. TCW I is
fully invested and is expected to terminate in 1997.
On February 28, 1985, the Plan entered into a subscription
agreement to fund $500,000 to TCW I. As of March 31, 1996, the Plan had
funded $500,000 of this commitment. The total funding commitment for
TCW I was $105.6 million of which the full amount was funded.
Therefore, the Plan's interest in TCW I is 0.47 percent. Since its
investment in TCW I, the Plan has received cash disbursements totaling
$414,870 leaving an investment basis of $85,130.
(c) Narragansett Capital Partners--B (NCP-B), a Venture Capital
Fund, was formed as a limited partnership in Providence, Rhode Island
on January 14, 1987 for the purpose of investing in
[[Page 17211]]
equity and equity-related securities in leveraged buyout transactions.
The general partner of NCP-B is Narraganset Capital Associates, L.P.
(NCA), a Rhode Island limited partnership. The total funding commitment
for NCP-B was $63.6 million of which $50.5 million was actually funded.
NCP-B is fully invested and is currently in an investment liquidation
mode.
On December 16, 1986, the Plan entered into a subscription
agreement to fund $500,000 of NCP-B. As of March 31, 1996 the Plan had
funded $397,306 of this commitment. Therefore, the Plan's interest in
NCP-B is 0.01 percent. Since its investment in NCP-B, the Plan has paid
management fees totaling $58,057 and has received cash disbursements
totaling $161,065. Therefore, the Plan's investment basis in NCP-B is
$294,298.
(d) TCW Special Placement Fund II (TCW II), a Venture Capital Fund,
is a California limited partnership that was formed on February 12,
1987 for the purpose of allowing investors to pool their assets in
order to provide financing to highly-leveraged companies. TCW Capital
serves as the general partner of TCW II. The total funding commitment
for TCW II was $335.3 million of which all such amount was actually
funded. TCW II is fully invested and is expected to terminate in 1999.
On February 10, 1986, the Plan entered into a subscription
agreement to fund $500,000 of TCW II. As of March 31, 1996 the Plan had
funded $500,000 of this commitment. Therefore, the Plan's interest in
TCW II is 0.15 percent. Since its investment in TCW II, the Plan has
received disbursements totaling $446,864 leaving an investment basis of
$53,136.
(e) The Shansby Group (Shansby), a Venture Capital Fund, is a
California limited partnership that was formed on November 3, 1987 for
the purpose of making equity investments in established businesses in
consumer industries. The general partner of Shansby is TSG Partners, a
California limited partnership which has sole responsibility for the
investment, management and custody of Shansby's assets. Shansby has a
stated life of ten years and is currently in a liquidation mode. The
total funding commitment for Shansby was $31.3 million of which all
$31.3 million was actually funded. The partnership is fully funded and
is presently in an investment liquidation mode.
On October 27, 1987, the Plan entered into a subscription agreement
to fund $500,000 of Shansby. As of March 31, 1996, the Plan had funded
$500,000 of this commitment. Therefore, the Plan's interest in Shansby
is 0.16 percent. Since its investment in Shansby, the Plan has received
disbursements totaling $476,643 leaving an investment basis of $23,357.
(f) Pennsylvania Mart Properties Secured Notes constitute the
Private Placement Bond Issue in which the Plan has invested. The
issuer, Pennsylvania Mart Properties Corp. (PMP) is a special purpose
corporation. PMP was formed in the mid-1970's to finance up to 100
percent of the cost of acquiring and constructing a distribution center
near Morrisville, Pennsylvania. It was intended that the facility would
be leased to the S.S. Kresge Company (Kresge) or a subsidiary for a 30
year term.2
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2 It is represented that K-Mart Corporation, an affiliate of
Kresge is the actual lessee of the distribution center.
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To obtain funds necessary to acquire the property from Kresge and
to complete construction, PMP sold secured notes to institutional
investors. The Private Placement Bond Issue was issued in the aggregate
principal amount of $22 million and has a maturity date of 30 years or
January 17, 2007. The Private Placement Bond Issue carries interest at
the rate of 10.25 percent per annum and is secured by a first mortgage
on the property and by an assignment of the lease.
The Plan initially purchased its Interest in the Private Placement
Bond Issue for $500,000 on December 2, 1976 from Merrill Lynch. At the
time of the investment, the cost to complete the warehouse facility
securing the Issue was $18,900,000 or 21.25 percent less than the
original cost estimate of $24 million. Because the indenture for the
Private Placement Bond Issue did not permit outstanding debt to exceed
the final cost of the facility, PMP refunded 21.25 percent of the
Issue, pro rata, to each investor on January 17, 1977. A total of
$106,250 in principal was returned to the Plan. On that same date, a
revised secured note, having a face value of $393,750, was given to the
Plan. The applicant assumes that the Plan also received an accrued
interest payment on January 17, 1977 in the amount of $6,406. This
accrued interest would represent 45 days of interest on the initial
$500,000 investment from December 2, 1976 to January 1, 1977.
Since the time of its original investment, the Plan has received
interest income totaling $723,831. As of January 17, 1997, the
outstanding principal balance of the Plan's Interest in the Private
Placement Bond Issue was $267,035. Thus, the Plan's investment basis in
the Private Placement Bond Issue is $0.
3. With the exception of NCP-B (as noted in Representation 2), the
Plan has not been required to pay any management fees in connection
with its ownership of the other Venture Capital Fund Interests. In this
regard, all management fees paid by the Plan have been derived from
capital contributions or have been withheld from distributions. The
Plan has not paid any fees with respect to its Interest in the Private
Placement Bond Issue. Other than management fees, the Plan has not been
required to pay any servicing fees to any outside party to monitor or
administer the Interests.
4. The Employer has also invested in four of the Venture Capital
Funds. It is represented that the Employer acquired its Interests in
these Funds contemporaneously with the Plan. In this regard, the
Employer invested $1,494,255 in NFF in return for a 0.02 percent
interest, $2 million in TCW I in return for a 0.02 percent interest, $2
million in TCW II for a 0.01 percent interest and $3 million in Shansby
for a 0.10 percent interest. It is represented that the Employer has
never invested in the Private Placement Bond Issue. In addition, the
Employer also has invested $1,587,397 in Narragansett Capital
Partners--A, a parallel Fund of NCP-B.3
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3 In this proposed exemption, the Department expresses no
opinion on whether the acquisition and holding by the Plan and the
Employer of their respective Interests in the Venture Capital Funds
violated any provision of Part 4 of Title I of the Act.
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5. Each of the Venture Capital Funds is valued quarterly by an
advisory committee which is comprised of representative limited
partners from the respective Funds. It is represented that such
committee members do not include the Employer or its principals. The
Plan receives a quarterly statement from each committee summarizing the
value of the Venture Capital Fund and the value of the Plan's Interest
in a Venture Capital Fund. In this regard, as of March 31, 1996, the
fair market values of the Plan's Interests in the Venture Capital Funds
were reported as follows: $49,094 in NFF; $267,000 in TCW I; $416,665
in NCP-B; $123,000 in TCW II; and $272,653 in Shansby. By letter dated
January 27, 1997, Mr. Gregory Barber, who undertakes the specific
duties of the general partner for NFF and NCP-B, stated that the
quarterly valuations for these Venture Capital Funds represent the best
estimate of the fair market value of the portfolio companies. Mr.
Barber also noted that there were no sales or transfers of Interests in
the Venture
[[Page 17212]]
Capital Funds resulting from arm's length transactions between
unrelated parties during 1995 or 1996.
By letter dated February 7, 1997, Mr. Raymond Henze, Group Managing
Director of TCW Capital, the general partner of TCW I and TCW II,
outlined the principals and methods of valuation utilized by TCW
Capital in valuing the net assets of these Venture Capital Funds. In
this regard, Mr. Henze stated that--
(a) Non-publicly traded securities are initially valued at cost
unless a change in the financial condition or operating results of
the issuer or guarantor of such securities indicates that there has
been a permanent impairment in the value of the investment. Such
investments will not be valued in excess of cost. No change in
valuation of debt securities is made for fluctuations in market
interest rates.
(b) Marketable securities listed on a national securities
exchange or marketable securities traded in the over-the-counter
market for which there is a last sales price available are valued at
the last sales price on the date of valuation. Other marketable
securities traded in the over-the-counter market are valued at the
closing bid price as reported by the National Quotations Bureau,
Inc. or at a discount from the bid price if marketability is limited
by the size of the holdings relative to trading volume. Securities
not marketable due to investment letter restrictions but
constituting part of the class of publicly-traded securities are
valued at an appropriate discount from the public market price.
(c) The carrying value of investments in non-publicly traded
securities and restricted marketable securities is based upon the
written valuation by a nationally-recognized independent appraiser
or investment banker. Historically, this has been Deloitte & Touche
LLP.
In addition, Mr. Henze stated that during calendar year 1996, there
were no transfers in TCW I.
Finally, in a letter dated January 28, 1997, Mr. Charles Esserman,
General Partner of the Shansby Group stated that the value of the
assets of the Shansby Group as shown in the quarterly financial
statement is, in the opinion of the general partners a fair
representation of the fair market value of such assets as of such
dates. In addition, Mr. Esserman stated that there have been no sales
of Interests in the Shansby Group during the last two years.
6. The Employer proposes to terminate the Plan and wishes to ensure
that all of the Plan's assets can be efficiently liquidated at their
fair market value. Because there is no ready market for any the of
Venture Capital Funds, it is represented that the general partners of
each Fund are under no obligation to assist in the sale or repurchase
of the Interests. Since each of the Venture Capital Funds is in a
liquidation mode, it is represented that even if a purchaser could be
found, it is unlikely that the purchaser would be willing to pay fair
market value for the Plan's Venture Capital Fund Interests.
7. Therefore, the Employer requests an administrative exemption
from the Department in order to purchase the Plan's Interests in the
Venture Capital Funds for the greater of: (a) the funded amount of the
Plan's Interest in the Venture Capital Fund (i.e., the Plan's
investment basis); or (b) the fair market value of the Venture Capital
Fund Interests, on the quarterly statement for the most current
statement available at the time of purchase. In each instance, the
value attributed to the Venture Capital Interests will be reduced by
any distributions received prior to such purchase. No fees or
commissions will be paid by the Plan in connection with its sale of the
Interests in the Venture Capital Funds. Any costs associated with
determining the fair market value for these investments will be borne
by the Employer.
8. In addition to acquiring the Interests in the Venture Capital
Funds, the Employer requests administrative exemptive relief in order
to purchase the Plan's Interest in the Private Placement Bond Issue.
The proposed sales price for the Interest will be the greater of: (a)
the independently-appraised fair market value; or (b) the remaining
principal balance of such Interest. No fees or commissions will be paid
by the Plan in connection with the sale. Any cost associated with
determining the fair market value of the Interest in the Private
Placement Bond Issue will be borne by the Employer.
9. Because the Private Placement Bond Issue is not valued on a
continuing basis, the Employer has retained the Allison-Williams
Company of Minneapolis, Minnesota (Allison-Williams), an independent
investment banking firm, to value this investment. Specifically, Mr.
Michael A. Lingvall, Vice President of Allison-Williams, has determined
the fair market value of the investment. Mr. Lingvall represents that
he is completely unrelated to the Employer and its principals. He also
states that he has three years experience in effecting private
placement sales, valuation and trading and has over eight years
experience in finance.
In an appraisal report dated August 20, 1996 and an addendum dated
November 8, 1996, Mr. Lingvall has placed the market position for the
Plan's Interest in the Private Placement Bond Issue at 92.06 (or
$249,203 based upon a principal balance of $267,035). He indicates that
this represents a spread of approximately 600 points over comparable
Treasury bonds which he believes is an appropriate benchmark for
pricing corporate private placements similar to the Interest. In
determining the fair market value of the Interest, Mr. Lingvall
represents that he considered such factors as the current Treasury bond
yield environment, yield spread premiums on similar-term bond issues,
current credit ratings, security, the size of the Plan's Interest and
economic factors. In addition, Mr. Lingvall will update his appraisal
of the Interest prior to the proposed sale.
10. Thus, based upon the appraisals, the Plan will sell the
Interests in the Venture Capital Funds for their fair market values
because, as the following table shows, these amounts exceed the Plan's
investment basis for each Fund.
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VC Fund Cost Distrib. Adjusted basis FMV
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NFF............................................. $500,000 $1,369,523 $0 $49,094
TCW I........................................... 500,000 414,870 85,130 267,000
NCP-B........................................... *455,363 161,065 294,298 416,665
TCW II.......................................... 500,000 446,864 53,136 123,000
Shansby......................................... 500,000 476,643 23,357 272,653
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Totals.................................... $2,455,363 $2,868,965 $455,921 $1,128,412
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*Includes management fees totaling $58,057.
Accordingly, the total sales price for the Interests in the Venture
Capital Funds will be $1,128,412.
With respect to the Private Placement Bond Issue, the Plan will
sell its interest to the Employer for $267,035. As noted in
Representation 9, this amount denotes the outstanding principal balance
of such Interest and it exceeds
[[Page 17213]]
the Interest's fair market value of $249,203.
Therefore, the aggregate sales price for the Venture Capital Fund
Interests and the Interest in the Private Placement Bond Issue will be
$1,395,447 ($1,128,412 + $267,035).
11. In summary, it is represented that the proposed transaction
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because: (a) All terms and conditions of the sale
will be at least as favorable to the Plan as those obtainable in an
arm's length transaction with an unrelated party; (b) the sale will be
a one-time transaction for cash; (c) the fair market value of the
Interests has been determined by qualified, independent appraisers; (d)
the Plan will not pay any commissions, costs or other expenses in
connection with the sale; (e) with respect to each Venture Capital Fund
Interest, the Plan will receive as consideration an amount that is no
less than the greater of (1) its investment basis in such Interest or
(2) the fair market value of the Interest on the date of the sale; and
(f) with respect to the Private Placement Bond Issue, the Plan will
receive as consideration an amount that is no less than the greater of
(1) the remaining principal balance of such Interest or (2) the fair
market value of the Interest on the date of the sale.
Notice to Interested Persons
Notice of the proposed exemption will be provided to interested
persons within 10 days as of the date of publication of the notice of
pendency in the Federal Register. Such notice will be provided to
interested persons by first class or interoffice mail. The notice will
include a copy of the notice of proposed exemption, as published in the
Federal Register, as well as a supplemental statement, as required
pursuant to 29 CFR 2570.43(b)(2), which shall inform interested persons
of their right to comment on and/or to request a hearing. Comments and
hearing requests with respect to the proposed exemption are due 40 days
after the date of publication of the proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
The Kenzer Corporation Thrift Savings Plan and Trust (the Plan),
Located in New York, New York
[Application No. D-10391]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to (1) the proposed ``restoration payment''
(the Restoration Payment) to the Plan by The Kenzer Corporation (the
Employer), in respect of certain defaulted notes (the Notes), and (2)
the potential future receipt by the Employer of ``recapture payments''
(the Recapture Payments) from the Plan.
This proposed exemption is subject to the following conditions:
(1) The Restoration Payment covers the face amount of the Notes and
accrued interest as of the date of default, plus lost opportunity costs
attributable to the Notes since the date of default;
(2) Any Recapture Payments are restricted solely to the amounts, if
any, recovered by the Plan with respect to the Notes in litigation or
otherwise; and
(3) The Employer receives a favorable ruling from the Internal
Revenue Service that the Restoration Payment does not constitute a
``contribution'' or other payment that will disqualify the Plan.
Summary of Facts and Representations
1. The Plan is a 401(k) plan sponsored by the Employer. The
Employer, a New York corporation, provides executive search services to
client businesses seeking to fill executive or management level
positions and is headquartered in New York City. As of June 30, 1996,
the Plan had total assets of approximately $851,472.4 As of
December 3, 1996, the Plan had approximately 50 participants and
beneficiaries. The trustees of the Plan (the Trustees) are Robert
Kenzer, Chairman of the Employer, and Eric Segal, President of the
Employer.
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\4\ This figure reflects the fair market value of the Plan's
assets, valuing the Notes (plus accrued interest) at zero.
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2. Among the assets of the Plan are the Notes, which are promissory
notes issued by Bennett Funding, Inc. or an affiliate thereof
(collectively, Bennett). The Plan acquired the Notes beginning in
approximately 1991. The Notes consist of four separately issued notes
in the amounts of $100,000, $100,000, $245,000, and $200,000,
respectively, for an aggregate face amount of $645,000.
The applicant represents that the Trustees believed the Notes to be
secure, safe investments. Documentation issued to the Plan indicated
that each Note was secured by (a) equipment owned by Bennett which
Bennett was leasing to unrelated third parties; (b) an assignment of
the income stream generated by such leases; and (c) a master insurance
policy issued by one of two insurance companies, which guaranteed the
income stream from the leases.
In view of the relatively high interest rates being offered on
investments which the Trustees considered to be low-risk, the Notes,
when due, would generally be ``rolled over,'' with both the principal
and accrued interest being reinvested in new Notes. As represented by
Bennett, interest paid on each Note was deposited in a so-called
``Insured Prime Conversion Account'' (IPCA) until the maturity date, at
which time the interest was added to the principal amount of the Note
and reinvested in a new Note.
3. In February, 1996, Bennett announced that it was deferring
interest payments then coming due on the Notes, which was in fact an
act of default on the Notes. On April 2, 1996, Bennett filed a petition
in the United States Bankruptcy Court for the Northern District of New
York (Cases Nos. 96-61376 et seq), seeking reorganization under Chapter
11 of the Federal Bankruptcy Code.5 Richard M. Breeden, formerly
Chairman of the Securities and Exchange Commission (S.E.C.), was
appointed as bankruptcy trustee. Contemporaneously, the S.E.C. filed a
suit against Bennett in the United States District Court for the
Southern District of New York, charging numerous acts of fraud and
violations of the Securities Act of 1933 and the Securities and
Exchange Act of 1934.
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\5\ The Department expresses no opinion herein as to whether the
acquisition and holding of the Notes by the Plan violated any of the
provisions of Part 4 of Title I in the Act.
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It appears, among other things, that Bennett had begun, at one
point, to ``secure'' the Notes with bogus leases of non-existent
equipment on a wholesale basis. In other cases, Bennett pledged actual
equipment as security for loans from institutional lenders and
thereafter pledged the same equipment lease as further security both to
the lenders and to public purchasers of the Notes. The money being
raised with the newly issued Bennett Notes was apparently being used to
pay off the interest due on older Bennett Notes, or being siphoned off
into unrelated business ventures owned by members of the Bennett
management. In addition, it was revealed that the Notes were not in any
manner insured and that the IPCA
[[Page 17214]]
appears to have been a commingled account whose assets were used by
Bennett in an, as yet, unascertained fashion.
The result of these alleged fraudulent activities, finally, was a
build-up of cash obligations which Bennett could no longer pay through
the sale of new Notes. Bennett's liabilities exceed a billion dollars,
and amounts due to unsecured creditors, among which Note holders are
currently included, exceed $800 million. The Employer has filed claims
with the insurers whose certificates of insurance were issued to
investors in the Notes. However, these insurers have taken the position
that such certificates were bogus and that no insurance existed. The
bankruptcy trustee has sued the insurers, alleging, among other things,
complicity in Bennett's fraudulent scheme.
4. Whatever amount, if any, that the Plan is able to recover with
respect to the Notes in litigation or otherwise, it is likely to suffer
enormous losses. The Employer proposes, therefore, to make the Plan
whole with a Restoration Payment covering the face amount of the Notes
and accrued interest as of February 29, 1996, the end of the last month
for which interest was credited in respect of the Notes ($771,715),
plus an amount for lost opportunity costs attributable to the Notes
(approximately $21,473, as of September 30, 1996) for the period from
February 29, 1996 to the date immediately prior to the date that the
Restoration Payment is deposited in the Plan.6 The Plan will
refund the Restoration Payment to the Employer only to the extent of
any amount that the Plan is able to recover from Bennett. The Employer
is bearing all expenses of prosecuting the Plan's claims in respect of
the Notes, including those relating to Bennett's bankruptcy
proceedings, as well as the costs of this exemption application.
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\6\ The Department notes the applicant's representation that the
Plan's lost opportunity costs with respect to the $771,715 will be
calculated based upon an assumed rate of return equal to the
interest rate paid on the Plan's money market investments for the
period from February 29, 1996 to December 31, 1996, and thereafter,
the interest rate paid on money market funds offered by the Plan to
participants. (Effective as of January 1, 1997, the Plan permitted
participants to direct the investment of their respective individual
accounts).
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Effective as of January 1, 1997, the Plan was converted to a self-
directed, individual account plan, administered by The Chase Manhattan
Bank. Therefore, the Restoration Payment will be allocated to each
participant account in proportion to its allocated share of the net
asset value of the entire Plan portfolio. The Employer has requested a
ruling from the Internal Revenue Service that the Restoration Payment
does not constitute a ``contribution'' or other payment that will
disqualify the Plan.
5. In summary, the applicant represents that the proposed
transactions satisfy the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons:
(1) The Restoration Payment will enable the Plan to immediately
recover the face amount of the Notes and accrued interest as of the
date of default, plus lost opportunity costs attributable to the Notes
since that date; (2) any Recapture Payments will be restricted solely
to the amounts, if any, recovered by the Plan with respect to the Notes
in litigation or otherwise; and (3) the Employer must receive a
favorable ruling from the Internal Revenue Service that the Restoration
Payment does not constitute a ``contribution'' or other payment that
will disqualify the Plan.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons by personal delivery or by first-class mail within 15 days of
the date of publication of this notice of pendency in the Federal
Register. Such notice shall include a copy of this notice of pendency
as published in the Federal Register and shall inform interested
persons of their right to comment and/or request a hearing with respect
to the proposed exemption. Comments and requests for a hearing are due
within 45 days of the date of publication of this notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 3rd day of April, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 97-8973 Filed 4-8-97; 8:45 am]
BILLING CODE 4510-29-P
