[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Notices]
[Pages 25916-25925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12101]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10504, et al.]
Proposed Exemptions; Aetna Inc.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
-----------------------------------------------------------------------
SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) the name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Attention: Application No. stated in each Notice of Proposed Exemption.
The applications for exemption and the comments received will be
available for public inspection in the Public Documents Room of Pension
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5507, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Aetna Inc. (Aetna), Located In Hartford, Connecticut
Application No. D-10504
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 C.F.R.
Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).1
---------------------------------------------------------------------------
\1\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
I. Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and 406(b) of the Act and
[[Page 25917]]
the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (F) of the Code shall
not apply to the following transactions, if the conditions set forth in
Section II and Section III, below, are satisfied:
(a) The receipt, directly or indirectly, by a sales agent (Sales
Agent or Sales Agents), as defined in Section IV(l) below, of a sales
commission from Aetna in connection with the purchase, with plan assets
of an insurance contract (the Insurance Contract or Insurance
Contracts), as defined in Section IV(h) below;
(b) The receipt of a sales commission by Aetna, as principal
underwriter for a mutual fund registered under the Investment Company
Act of 1940, in connection with the purchase, with plan assets, of
securities issued by such mutual fund (the Aetna Fund or Aetna Funds),
as defined in Section IV(c) below;
(c) The effecting by Aetna, as a principal underwriter, of a
transaction for the purchase, with plan assets, of securities issued by
an Aetna Fund, and the effecting by a Sales Agent of a transaction for
the purchase, with plan assets, of an Insurance Contract; and
(d) The purchase, with plan assets, of an Insurance Contract from
Aetna.
II. General Conditions
(a) The transactions are effected by Aetna in the ordinary course
of Aetna's business as an insurance company, or as a principal
underwriter to an Aetna Fund, or in the case of a Sales Agent, in the
ordinary course of the Sales Agent's business as a Sales Agent.
(b) The transactions are on terms at least as favorable to the plan
as an arm's length transaction with an unrelated party would be.
(c) The combined total of all fees, sales commissions, and other
consideration received by Aetna or a Sales Agent: (1) for the provision
of services to the plan, and (2) in connection with a purchase of an
Insurance Contract or securities issued by an Aetna Fund, is not in
excess of ``reasonable compensation'' within the contemplation of
section 408(b)(2) and (c)(2) of the Act and section 4975(d)(2) and
(d)(10) of the Code. If such total is in excess of ``reasonable
compensation'' the ``amount involved'' for purposes of the civil
penalties of section 502(i) of the Act and excise taxes imposed by
section 4975(a) and (b) of the Code is the amount of compensation in
excess of ``reasonable compensation.''
III. Specific Conditions
(a) Aetna or the Sales Agent is not--
(1) A trustee of the plan (other than a non-discretionary trustee
who does not render investment advice with respect to any assets of the
plan, or a trustee to an investment trust (the Investment Trust), as
defined in Section IV(g) below, which will not purchase Insurance
Contracts or securities issued by an Aetna Fund pursuant to this
proposed exemption);
(2) A plan administrator (within the meaning of section 3(16)(A) of
the Act and section 414(g) of the Code);
(3) A fiduciary who is expressly authorized in writing to manage,
acquire, or dispose of, on a discretionary basis, those assets of the
plan that are or could be invested in Insurance Contracts, securities
issued by an Aetna Fund, or an Investment Trust; or
(4) An employer any of whose employees are covered by the plan.
(b)(1) Prior to the execution of a transaction involving the
receipt of sales commissions by a Sales Agent in connection with the
plan's purchase of an Insurance Contract, Aetna or the Sales Agent
provides to an independent plan fiduciary (the Independent Plan
Fiduciary), as defined in Section IV(f) below, disclosures of the
following information concerning the Insurance Contract in writing and
in a form calculated to be understood by a plan fiduciary who has no
special expertise in insurance or investment matters:
(A) An explanation of: (i) the nature of the affiliation or
relationship between Aetna and the Sales Agent recommending the
Insurance Contract; and, (ii) the nature of any limitations that such
affiliation or relationship, or any agreement between the Sales Agent
and Aetna places on the Sales Agent's ability to recommend Insurance
Contracts;
(B) The sales commission, expressed as a percentage of gross annual
premium payments for the first year and for each of the succeeding
renewal years, that will be paid by Aetna to the Sales Agent in
connection with the purchase of the recommended Insurance Contract,
together with a description of any factors that may affect the
commission; and
(C) A full and detailed description of any charges, fees,
discounts, penalties, or adjustments which may be paid by the plan
under the recommended Insurance Contract in connection with the plan's
purchase, holding, exchange, termination, or sale of the Insurance
Contract, including a description of any factors that may affect the
level of charges, fees, discounts, or penalties paid by the plan.
(2) Following receipt of the information required to be provided to
the Independent Plan Fiduciary, as described in Section III(b)(1)
above, and before the execution of the transaction, the Independent
Plan Fiduciary acknowledges in writing receipt of such information and
approves the transaction on behalf of the plan. The Independent Plan
Fiduciary may be an employer of employees covered by the plan but may
not be a Sales Agent involved in the transaction. The Independent Plan
Fiduciary may not receive, directly or indirectly (e.g. through an
affiliate), any compensation or other consideration for his or her own
personal account from any party dealing with the plan in connection
with the transaction.
(3) With respect to additional purchases of Insurance Contracts,
the written disclosure required under Section III(b)(1) need not be
repeated, unless--
(A) More than three years have passed since such disclosure was
made with respect to the same kind of Insurance Contract, or
(B) The Insurance Contract being recommended for purchase or the
commission with respect thereto is materially different from that for
which the approval described under Section III(b)(2) was obtained.
(c)(1) With respect to purchases with plan assets of securities
issued by an Aetna Fund, or the receipt of sales commissions by Aetna
in connection with such purchases, Aetna provides to an Independent
Plan Fiduciary prior to the execution of the transaction the following
information concerning the Aetna Fund in writing and in a form
calculated to be understood by a plan fiduciary who has no special
expertise in insurance or investment matters:
(A) A description of: (i) the investment objectives and policies of
the Aetna Fund, (ii) the principal investment strategies that the Aetna
Fund may use to obtain its investment objectives, (iii) the principal
risk factors associated with investing in the Aetna Fund, (iv)
historical investment return information for the Aetna Fund, (v) fees
and expenses of the Aetna Fund, including annual operating expenses
(e.g., management fees, distribution fees, service fees, and other
expenses) and fees paid by shareholders (e.g., sales charges and
redemption fees), (vi) the identity of the Aetna Fund adviser, and
(vii) the procedures for purchases of securities issued by the Aetna
Fund (including any applicable minimum investment requirements and
sales charges);
(B) A description of: (i) the expenses of the recommended Aetna
Fund, including investment management,
[[Page 25918]]
investment advisory, or similar services, any fees for secondary
services (e.g., for services other than investment management,
investment advisory, or similar services, including but not limited to
custodial, administrative, or other services), and (ii) any charges,
fees, discounts, penalties, or adjustments that may be paid by the plan
in connection with the purchase, holding, exchange, termination, or
sale of shares of the recommended Aetna Fund securities, together with
a description of any factors that may affect the level of charges,
fees, discounts, or penalties paid by the plan or the Aetna Fund;
(C) An explanation of (i) the nature of the affiliation or
relationship between Aetna and the Aetna Fund, and (ii) the limitation,
if any, that such affiliation, relationship, or any agreement between
Aetna and the Aetna Fund places on Aetna's ability to recommend
securities issued by other investment companies;
(D) The sales commission, if any, that Aetna will receive in
connection with the purchase of securities of the recommended Aetna
Fund, expressed as a percentage of the dollar amount of the plan's
gross payments and the amount actually invested, together with a
description of any factors that may affect the commission; and
(E) A description of the procedure or procedures for redeeming the
Aetna Fund securities.
The disclosures required under Section III(c)(1) above shall be
deemed to be completed only if, with respect to fees and expenses of an
Aetna Fund, the type of each fee or expense (e.g. management fees,
administrative fees, fund operating expenses, and other fees, including
but not limited to fees payable for marketing and distribution services
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
12b-1 Fees)) and the rate or amount charged for a specified period
(e.g. annually) is provided in a written document separate from the
prospectus of such Aetna Fund.
(2) Following receipt of the information required to be provided to
the Independent Plan Fiduciary, as described in Section III(c)(1)
above, and before execution of the transaction, the Independent Plan
Fiduciary approves the specific transaction on behalf of the plan.
Unless facts and circumstances would indicate the contrary, such
approval may be presumed if the Independent Plan Fiduciary directs the
transaction to proceed after Aetna has delivered the written
disclosures to the Independent Plan Fiduciary. The Independent Plan
Fiduciary may be an employer of employees covered by the plan but may
not be Aetna. The Independent Plan Fiduciary may not receive, directly
or indirectly (e.g. through an affiliate), any compensation or other
consideration for his or her own personal account from any party
dealing with the plan in connection with the transaction.
(3) With respect to additional purchases of Aetna Fund securities,
Aetna: (A) provides reasonable advance notice of any material change
with respect to the Aetna Fund securities being purchased or the
commission with respect thereto, and (B) repeats the written disclosure
required under Section III(c)(1) (A), (C), (D) and (E) once every three
years.
(d)(1) Aetna shall retain or cause to be retained for a period of
six (6) years from the date of any transaction covered by this
exemption the following:
(A) The information disclosed with respect to such transaction
pursuant to Sections III (b), and (c);
(B) Any additional information or documents provided to the
Independent Plan Fiduciary with respect to the transaction; and
(C) Written acknowledgments, as described in Section III(b)(2)
above.
(2) A prohibited transaction shall not be deemed to have occurred
if, due to circumstances beyond the control of Aetna, such records are
lost or destroyed before the end of such six-year period.
(3) Notwithstanding anything to the contrary in sections 504(a)(2)
and (b) of the Act, such records shall be unconditionally available for
examination during normal business hours by duly authorized employees
or representatives of the Department of Labor, the Internal Revenue
Service, plan participants and beneficiaries, any employer of plan
participants and beneficiaries, and any employee organization any of
whose members are covered by the plan.
IV. Definitions
For purposes of this exemption--
(a) Aeltus means the Aeltus Trust Company.
(b) Aetna means the Aetna Life Insurance Company, the Aetna Life
Insurance and Annuity Company, and any of their affiliates, including
but not limited to Aeltus;
(c) Aetna Fund means any investment company registered under the
Investment Company Act of 1940 for which Aetna serves as investment
adviser and as principal underwriter (as that term is defined in
section 2(a)(29) of the Investment Company Act of 1940, 15 U.S.C.
Sec. 80a-2(a)(29)).
(d) an affiliate of a person means (1) any person directly or
indirectly controlling, controlled by, or under common control with
such person, (2) any officer, director, employee, or relative of any
such person, or any partner in such person, and (3) any corporation or
partnership of which such person is an officer, director, or employee,
or in which such person is a partner. For purposes of this definition,
an ``employee'' includes (A) any registered representative of Aetna,
where Aetna or an affiliate is principal underwriter, and (B) any
insurance agent or broker or pension consultant acting under a written
agreement as Aetna's agent in connection with the sale of an Insurance
Contract, whether or not such registered representative or insurance
agent or broker or pension consultant is a common law employee of
Aetna.
(e) The term, control, means the power to exercise a controlling
influence over the management or policies of a person other than an
individual;
(f) Independent Plan Fiduciary means a fiduciary with respect to a
plan, which fiduciary has no relationship to, or interest in, Aetna
that might affect the exercise of such fiduciary's best judgment as a
fiduciary.
(g) Investment Trust means (1) any collective investment fund or
group trust qualifying for tax-exempt status under the provisions of
the Internal Revenue Code of 1986 and regulations and rulings
thereunder, of which Aeltus, as defined in Section IV(a) above, or its
successor or affiliate serves as trustee, or (2) any single-customer
trust account for which Aeltus serves as trustee, provided that Aeltus
has no discretionary authority or responsibility with respect to the
management or administration of, and does not provide any investment
advice with respect to, any plan assets not invested in such single-
customer trust account or another Investment Trust.
(h) Insurance Contract or Insurance Contacts means an insurance or
annuity contract issued by Aetna.2
---------------------------------------------------------------------------
\2\ The Department expresses no opinion as to whether any so
called ``synthetic guaranteed insurance contracts'' offered by Aetna
constitutes an Insurance Contract within the meaning of this
proposed exemption. The Department further notes that Prohibited
Transaction Class Exemption 84-24, upon which this individual
proposal is modeled, provides relief from the self-dealing and
conflict of interest provisions of the Act in connection with the
sale of insurance contracts to plans by fiduciaries. It does not
provide relief from any acts of self-dealing that do not arise
directly in connection with the purchase of specific insurance
products. Thus, for example, no relief is provided under this
proposal for any act of self-dealing that may arise in connection
with the ongoing operation or administration of the insurance
contract.
---------------------------------------------------------------------------
[[Page 25919]]
(i) A nondiscretionary trustee of a plan is a trustee whose powers
and duties with respect to any assets of the plan are limited to: (1)
the provision of nondiscretionary trust services, as defined in Section
IV(j) below, to such plan, and (2) the duties imposed on the trustee by
any provision or provisions of the Act or the Code.
(j) Nondiscretionary trust services means custodial services and
services ancillary to custodial services, none of which services are
discretionary.
(k) A relative means a relative as that term is defined in section
3(15) of the Act (or a ``member of the family'' as that term is defined
in Code section 4975(e)(6)), or a brother, a sister, or a spouse of a
brother or a sister;
(l) Sales Agent means any insurance agent, broker, or pension
consultant or any affiliate thereof that is affiliated with Aetna
either through ownership or by contractual arrangement.
(m) Principal underwriter is defined in the same manner as that
term is defined in section 2(a)(29) of the Investment Company Act of
1940 (15 U.S.C. 8a-2(a)(29)).
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of August 28, 1997, the date of the filing of the application for
exemption.
Summary of Facts and Representations
1. It is anticipated that the plans which participate in the
transactions which are the subject of this proposed exemption are
employee benefit plans subject to the Act, including defined benefit
and defined contribution retirement plans (the Plan or Plans). Due to
the nature of the requested exemption, the applicants, Aetna and its
affiliates, maintain that they are unable to provide any of the
following specific identifying information about the Plans that may
engage in the proposed transactions: (A) the number of participants;
(B) an estimate of the percentage of assets of each Plan affected by
the requested exemption or transactions; or (C) the approximate
aggregate fair market value of the total assets of each affected Plan.
However, the applicants generally do not anticipate that Plans covered
by the requested exemption will be participant-directed plans, pursuant
to section 404(c) of the Act. In addition, the applicants have not
requested an exemption, and no relief is provided, herein, for any plan
covering employees of Aetna or its affiliates.
2. Aetna, is a publicly-traded Connecticut company with its
principal place of business in Hartford, Connecticut. Aetna indirectly
owns all of the outstanding shares of Aetna Life Insurance and Annuity
Company (ALIAC) and the Aetna Life Insurance Company (ALIC). ALIC and
ALIAC are Connecticut stock life insurance companies licensed to
transact life, accident, and health insurance business in all fifty
states of the United States and the District of Columbia. ALIAC is also
registered as an investment adviser and a broker-dealer with the
Securities and Exchange Commission (SEC). As of December 31, 1996, the
total consolidated assets of ALIC was approximately $43.9 billion, and
the total consolidated assets of ALIAC was approximately $28.8 billion.
3. ALIC and ALIAC offer a variety of insurance and annuity products
to Plans some of which may serve as funding vehicles for retirement
plan benefits. It is represented that all such insurance contracts are
reviewed and approved under the laws of one or more states. In addition
to providing insurance products, ALIC and ALIAC offer other services to
Plans, including actuarial, record-keeping, and other plan
administration services.
4. It is represented that the Insurance Contracts which are the
subject of this proposed exemption are sold by Sales Agents. Sales
Agents include insurance agents, brokers, or pension consultants or any
affiliate thereof that is affiliated with Aetna either through
ownership or by contractual arrangement. In connection with sales of
Insurance Contracts, Sales Agents may receive commissions or other
compensation.
5. The Aetna Funds referred to in this proposed exemption include
the Aetna Variable Funds, the Aetna Series Funds, and Portfolio
Partners, Inc. It is represented that all such funds are open-end
investment companies registered with the SEC under the Investment
Company Act of 1940. Each such investment company offers a number of
different investment portfolios with different investment objectives
and guidelines. The Aetna Funds are offered to Plans directly and
through variable annuity contracts issued in connection with ALIAC's
separate accounts.
6. Aetna Investment Services, Inc. (AISI), Aetna Financial
Services, Inc. (AFSI), Aeltus Capital, Inc. (Aeltus Capital), and
Financial Network Investment Corporation (FNIC) are each registered
broker-dealers with the SEC and are wholly-owned affiliates of ALIC and
ALIAC. ALIC, ALIAC, AISI, AFSI, Aeltus Capital, and FNIC and their
successors (the Aetna Companies) have provided and will provide a
variety of services to the Aetna Funds.
7. In this regard, as disclosed in the prospectus materials for
each of the Aetna Funds, ALIAC is the investment adviser to all of the
Aetna Funds. In addition, ALIAC provides other services (the Secondary
Services) to Aetna Funds, including accounting, shareholder
administration, sub-accounting, and other administrative services.
Further ALIAC is the principal underwriter to the Aetna Variable Funds
and Portfolio Partners, Inc., and AISI is the principal underwriter to
the Aetna Series Funds. In this regard, it is represented that as
principal underwriters, ALIAC and AISI distribute Aetna Fund shares on
an agency basis.3 It is further represented that ALIAC may
engage affiliated or unaffiliated sub-advisers to the Aetna Funds from
time to time.
---------------------------------------------------------------------------
\3\ As it is represented that ALIAC and AISI distribute shares
in Aetna Funds on an agency basis, and as generally an Aetna Fund
would not be a party in interest to a Plan, the applicant maintains
that a Plan's purchase of shares in an Aetna Fund, in and of itself,
should not involve any prohibitions under section 406(a) of the Act.
---------------------------------------------------------------------------
Under the terms of services agreements between ALIAC and an Aetna
Fund, ALIAC may receive management fees and fees for Secondary
Services. In addition, ALIAC or AISI may receive sales commissions and
distribution fees, including for some classes of shares issued by
certain Aetna Funds 12b-1 Fees.4 It is represented that the
prospectus materials for each of the Aetna Funds disclose whether such
fees are paid and the basis under which such fees are paid.
---------------------------------------------------------------------------
\4\ The Department notes that the relief provided by this
exemption does not preclude the receipt of 12b-1 Fees by Aetna or
its affiliates to the extent that the payment of such 12b-1 Fees
cannot be functionally distinguished from the payment of a sales
commission in connection with the purchase, with plan assets, of
securities issued by an Aetna Fund.
---------------------------------------------------------------------------
8. Aeltus is a wholly-owned subsidiary of Aeltus Investment
Management, Inc., an affiliate of the Aetna Companies. Aeltus is a
limited purpose trust company chartered in the state of Connecticut and
subject to the regulation and control of the Connecticut Commissioner
of Banking. Aeltus may from time to time serve as a nondiscretionary
trustee to Plans.
As of August 1, 1997, Aeltus maintains one or more collective
investment funds that qualify for tax-exempt status under the
provisions of the Code which are offered to Plans.5 In
[[Page 25920]]
addition, Aeltus may maintain custody of, and provide investment
management services for, a portion of the assets of a Plan in a single
customer investment trust. As trustee to an Investment Trust (either a
collective investment fund or a single-customer investment fund),
Aeltus has discretionary authority to manage and invest the assets of
the Plan invested in the Investment Trust.6 However, it is
represented that Aeltus does not provide and will not provide
investment advice (as described by section 3(21)(A)(ii) of the Act and
the regulations thereunder) or otherwise have any discretionary
authority, responsibility, or control with respect to any plan assets
not invested in an Investment Trust, or in connection with the decision
by a Plan to invest plan assets in an Investment Trust, in an Insurance
Contract, or in shares of an Aetna Fund.
---------------------------------------------------------------------------
\5\ It is represented that no relief is requested or required
for the investment by Plans in the Investment Trust. The applicants
represent that in all cases, the decision to invest in the
Investment Trust and, thereby, to engage Aeltus to provide
investment management services to the Plan would be made by an
independent plan fiduciary. Further, the applicants maintain that
where the Investment Trust is a collective investment fund (a
Collective Trust), any potential violations of section 406(a) or (b)
of the Act in connection with a plan's investment in such Collective
Trust would be exempt provided that certain conditions are
satisfied, pursuant to section 408(b)(8) of the Act. In this regard,
the applicants represent that any investments in the Collective
Trust by Plans will comply with the conditions of section 408(b)(8)
of the Act. The Department expresses no opinion, herein, as to
whether any of the relevant provisions of part 4, subpart B, of
Title I have been violated, regarding investment by Plans in the
Investment Trust, nor as to whether the conditions of section
408(b)(8) have been or will be satisfied.
\6\ The Department notes that, pursuant to Section III(a)(1) of
this proposed exemption, relief would not be available for the
purchase by Aeltus for such Investment Trust of Insurance Contracts,
as defined in Section IV(h) below; or of securities issued by an
Aetna Fund.
---------------------------------------------------------------------------
9. With respect to any Plan that participates in an Investment
Trust, Aeltus will be a service provider and a fiduciary, pursuant to
section 3(14)(A) and (B) of the Act. The Aetna Companies, as service
providers to Plans, may also be parties in interest with respect to
such Plans, pursuant to section 3(14)(B) of the Act. In addition, in
some cases, one or more of the Aetna Companies could be deemed to be a
party in interest with respect to a Plan by virtue of an ownership
relationship of such Aetna Companies to Aeltus, pursuant to section
3(14)(G), (H), and (I) of the Act. Further, under circumstances where a
Sales Agent could be deemed to provide investment advice, as described
in section 3(21)(A)(ii) of the Act, to a Plan in connection with the
purchase by such Plan of an Insurance Contract or the purchase of
shares of an Aetna Fund, the Sales Agent may be deemed to be a
fiduciary to such Plan, pursuant to section 3(14)(A) of the Act.
Where one of the Aetna Companies is a party in interest to a Plan,
then purchases by such Plan of Insurance Contracts or purchases by such
Plan of shares of Aetna Funds may be prohibited under section 406(a) of
the Act. In addition in the event that a Sales Agent is deemed to be
providing investment advice (as described in section 3(21)(A)(ii) of
the Act and the regulations thereunder) to a Plan in connection with
such Plan's purchases of Insurance Contracts or purchases of shares of
Aetna Funds, the receipt of commissions by such Sales Agents may be
prohibited under section 406(b) of the Act.
10. The applicants request relief from these transactions because
of the uncertainty of the applicability of Class Exemption 84-24 (PTCE
84-24) to the transactions. In this regard, PTCE 84-24 provides relief
from the prohibitions of sections 406(a)(1)(A) through (D) and 406(b)
of the Act, and from the taxes imposed by section 4975 of the Code for
certain classes of transactions involving purchases by plans of
insurance or annuity contracts and purchases by plans of securities
issued by registered investment companies, and the receipt of sales
commissions in connection therewith by an insurance agent, broker,
pension consultant, or investment company principal underwriter.
However, no relief is available under PTCE 84-24, if the insurance
agent, broker, pension consultant, or the investment company principal
underwriter or its affiliate is a plan trustee, other than a non-
discretionary trustee who does not render investment advice with
respect to any assets of the plan. Even though, Aeltus has represented,
that it does not and will not provide investment advice or exercise or
have any discretionary authority over whether a Plan purchases
Insurance Contracts or shares of an Aetna Fund, the exemption provided
under PTCE 84-24 may not be available for such purchases where the
assets of such Plan are under management with Aeltus, as trustee of an
Investment Trust.
Aeltus has represented that as of the date the application for
exemption was filed with the Department, that the transactions that are
the subject of this proposed exemption had not occurred. However, it is
anticipated that Plans participating in the Investment Trust may begin
to purchase Insurance Contracts or to purchase shares of Aetna Funds at
any time. Because the applicant believes that PTCE 84-24 may not cover
a transaction between a plan and a party in interest whose affiliate
provides trustee services, other than nondiscretionary trustee services
to the Plan, Aetna has requested an exemption from section 406(a) and
(b) of the Act with respect to the proposed transactions and the
corresponding provisions of section 4975(c)(1) of the Code
retroactively to August 28, 1997, the date of the filing of the
application for exemption.
11. In support of their request for individual exemption, Aetna
represents that the transactions are on terms which are at least as
favorable to the Plan as those negotiated at arm's length with an
unrelated party, and such transactions are effected by Aetna or a Sales
Agent in the ordinary course of the respective business of such
parties. With respect to the receipt of sales commissions by Aetna or a
Sales Agent for the provision of services to a Plan, and in connection
with a purchase of an Insurance Contract or securities issued by an
Aetna Fund, the combined total of all fees, sales commissions, and
other consideration received by Aetna or a Sales Agent will not be in
excess of ``reasonable compensation'' within the contemplation of
section 408(b)(2) and (c)(2) of the Act and section 4975(d)(2) and
(d)(10) of the Code.
12. The applicants maintain that the requested exemption is
administratively feasible. In this regard, compliance with the terms of
the exemption is monitored by an Independent Plan Fiduciary, so that
the level of oversight required by the Department is minimal. In this
regard, an Independent Plan Fiduciary of each Plan that participates in
the Investment Trust will receive notice regarding this proposed
exemption. Further, the Aetna Companies will maintain records necessary
to verify compliance with the conditions of this exemption.
13. The applicants maintain that the proposed exemption is in the
interest of the Plans which participate in the subject transactions,
because Plans will be able to take advantage of the full range of
insurance and investment products offered by the Aetna Companies. For
example, an Independent Plan Fiduciary of a defined benefit plan
investing some or all of the assets of such Plan in an Investment Trust
will also be able to purchase annuities or other insurance products for
the Plan from Aetna.
14. The applicants maintain that the proposed exemption is designed
to protect the rights and interests of the participants and
beneficiaries of the Plans. In this regard, Aetna is required to make
certain disclosures in writing and in a form calculated to be
understood by a plan fiduciary who has no special expertise in
insurance or in
[[Page 25921]]
investment matters. Specifically, before a Plan purchases an Insurance
Contract, the Independent Plan Fiduciary must receive and acknowledge
the written disclosures, described in Section III(b) above and must
approve the transaction on behalf of the Plan. Similarly, before a Plan
purchases shares of an Aetna Fund, the Independent Plan Fiduciary must
receive the disclosures, described in Section III(c) above. Approval
with respect to a Plan's purchase of shares of an Aetna Fund will be
presumed, unless facts and circumstances indicate the contrary, if the
Independent Plan Fiduciary directs the transaction to proceed after
receiving the written disclosures from Aetna. Further, prior to a
purchase of shares of an Aetna Fund, Aetna must disclosure in a written
document separate from the prospectus information with respect to
specific types of fees or expenses paid from the assets of an Aetna
Fund, including information about the rate or amount of each fee or
expense charged for a specified period,.
If a Plan purchases additional Insurance Contracts, Aetna does not
have to repeat the written disclosure required under Section III(b)(1),
unless more than three years have passed since such disclosure was made
with respect to the same kind of Insurance Contract, or unless the
Insurance Contract being recommended for purchase or the commission
thereto is materially different from that for which the approval was
obtained. With respect to additional purchases of Aetna Fund
securities, Aetna has represented that it will provide reasonable
advance notice of any material change to the Aetna Fund securities
being purchased or the commission thereto, and will repeat the written
disclosure required under Section III(c)(1)(A), (C), (D), and (E) at
least once every three (3) years.
Where Aeltus is a trustee other than a nondiscretionary trustee to
a Plan, solely because it serves as a trustee to an Investment Trust in
which such Plan participates, the applicants maintain that the proposed
transactions do not appear to involve the types of abuse that the
Department intended to address by limiting the availability of PTCE 84-
24 where a party in interest or its affiliate is a trustee to a plan.
Specifically, notwithstanding the fact that Aeltus is trustee to an
Investment Trust, Aeltus is not acting as a fiduciary with discretion
over whether a Plan purchases Insurance Contracts or shares of Aetna
Funds, nor is Aeltus in a position to improperly influence or control
such decision made by the Independent Plan Fiduciaries.
15. In summary, the applicant represents that the proposed
transactions meet the statutory criteria for an exemption under section
408(a) of the Act and 4975(c)(2) of the Code because:
(a) Plans can take advantage of the full range of insurance and
investment products offered by the Aetna Companies;
(b) The transactions are effected by Aetna or by a Sales Agent in
the ordinary course of business;
(c) The transactions are on terms at least as favorable to the Plan
as an arm's length transaction with an unrelated party would be;
(d) The combined total of all fees, sales commissions, and other
consideration received by Aetna or a Sales Agent for the provision of
services to a Plan, and in connection with the proposed transactions is
not in excess of ``reasonable compensation'' within the contemplation
of section 408(b)(2) and (c)(2) of the Act and section 4975(d)(2) and
(d)(10) of the Code;
(e) Neither Aetna nor the Sales Agent is a trustee of the Plan
(other than a non-discretionary trustee who does not render investment
advice with respect to any assets of the Plan or a trustee to an
Investment Trust which will not purchase Insurance Contracts or
securities issued by an Aetna Fund); a plan administrator; a fiduciary
who is expressly authorized in writing to manage, acquire, or dispose
of, on a discretionary basis, those assets of the Plan that are or
could be invested in Insurance Contracts, securities issued by an Aetna
Fund, or an Investment Trust; or an employer any of whose employees are
covered by the Plan;
(f) With respect to the proposed transactions, Aetna provides the
Independent Plan Fiduciary with certain disclosures in writing and in a
form calculated to be understood by a plan fiduciary who has no special
expertise in insurance or investment matters; and provides disclosure
in a written document separate from the prospectus of information
regarding specific types of fees or expenses paid from the assets of an
Aetna Fund and the rate or amount of each fee or expense charged for a
specified period;
(g) Following receipt of the required disclosures and prior to
entering the transaction, the Independent Plan Fiduciary approves the
transaction on behalf of the Plan; and
(h) Aetna shall retain or cause to be retained certain records for
a period of six (6) years from the date of any transaction covered by
this exemption.
Notice to Interested Persons
Because of the large number of potentially interested persons, the
applicants maintain that it is not possible to provide a separate copy
of the Notice of Proposed Exemption (the Notice) to each Plan eligible
to engage in the transactions covered by the requested exemption. In
this regard however, Aetna intends to provide in writing by first-class
mail to the Independent Plan Fiduciary of each Plan that participates
in an Investment Trust within fifteen (15) days of the date of
publication of the Notice in the Federal Register, a copy of the
Notice, as published in the Federal Register, and a copy of the
supplemental statement, as required, pursuant to 29 CFR 2570.43(b)(2).
The notification will inform such interested persons of their right to
comment and/or request a hearing within thirty (30) days of receipt of
a copy of the Notice.
Apart from the notification described in the paragraph above, the
applicants represent that the only practical form of providing notice
to interested persons is by means of publication of the Notice in the
Federal Register.
FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the Department,
telephone (202) 219-8883 (This is not a toll-free number.)
UNOVA, Inc. (UNOVA), Located in Beverly Hills, California
(Application Nos. D-10663 and D-10664)
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply, as of December 17, 1998, to: (1) the acquisition
by the UNOVA, Inc. Pension Plan and the Landis Tool Pension Plan
(collectively, the Plans) of certain improved real property (the
Property) from an unrelated party for a sales price of $15,250,000 (the
Purchase); and (2) the leasing of a portion of the Property (the Lease)
by the Plans to UNOVA, a party in interest with respect to the Plans,
provided that the following conditions are satisfied:
(a) The Plans paid an amount for the Property which was no more
than the
[[Page 25922]]
fair market value of the Property at the time of the transaction;
(b) The interest in the Property owned by each Plan represented no
more than 15% of the value of either Plan's total assets at the time of
the Purchase;
(c) The Property, and the amount of space in the Property leased to
UNOVA under the Lease (the Leased Space), represents no more than 15%
of the value of either Plan's total assets throughout the duration of
the Lease;
(d) The terms and conditions of the Lease are at least as favorable
to the Plans as those obtainable in an arm's-length transaction with an
unrelated party;
(e) The fair market rental value of the Leased Space has been, and
every three years during the Lease will continue to be, determined by a
qualified, independent appraiser;
(f) The amount of rent paid by UNOVA to the Plans for the Leased
Space throughout the duration of the Lease will be no less than the
greater of the initial rent paid by UNOVA or the current fair market
rental value of the Leased Space as determined every three years by a
qualified independent appraiser;
(g) The Plans' independent fiduciary has determined that the
Purchase and Lease are appropriate for the Plans and in the best
interests of the Plans' participants and beneficiaries; and
(h) The Plans' independent fiduciary will monitor the Lease, as
well as the conditions of this proposed exemption (if granted), and
will take whatever actions are necessary to safeguard the interests of
the Plans throughout the duration of the Lease.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of December 17, 1998.
Summary of Facts and Representations
1. UNOVA is an industrial automation, automated data collection,
and mobile computing company located in Beverly Hills, California. The
Plans consist of the UNOVA, Inc. Pension Plan and the Landis Tool
Pension Plan. The UNOVA, Inc. Pension Plan is a defined benefit plan
which had 7,425 participants and approximately $263,299,725 in total
assets, as of September 30, 1998. The Landis Tool Pension Plan, which
covers the employees of the Landis Tool and Gardner Machine divisions
of UNOVA, is a defined benefit plan which had 1,328 participants and
approximately $61,067,477 in total assets, as of September 30, 1998.
2. The Property is located at 21900 Burbank Boulevard in Los
Angeles, California. The Property consists of a 2.15 acre lot improved
by a three-story multi-tenant office building having 89,203 square feet
of rental space. The Plans purchased the Property from the Variable
Annuity Life Insurance Company, a party unrelated to the Plans, for
$15,250,000 on December 17, 1998.
After the Purchase, a portion of the Property's $15,250,000 total
asset value (the Property's Value) was allocated to each of the Plans
(the Allocation). The Allocation apportioned approximately 81% of the
Property's Value, or approximately $12,378,936, to the UNOVA, Inc.
Pension Plan, and approximately 19% of the Property's Value, or
approximately $2,871,064, to the Landis Tool Pension Plan. The
Allocation was made for the purpose of ensuring that the interest in
the Property owned by each Plan represented the exact same percentage
of each Plan's overall assets at the time of the Allocation. As a
result, at the time the Allocation was made, the Property comprised
approximately 4.7% of the Landis Tool Pension Plan's assets and
approximately 4.7% of the UNOVA, Inc. Pension Plan's assets.
3. After the Purchase, the Plans leased a portion of the Property
to UNOVA, effective as of December 17, 1998 (i.e. the Lease). The
leased portion of the Property comprises the entire third floor of the
Property or 32,314 square feet (i.e. the Leased Space). Thus, the
Leased Space represents approximately 36.2% of the Property's total
square feet of rental space.
According to the terms of the Lease, the base rent paid by UNOVA is
$17.32 per square foot annually. Under the Lease, UNOVA is required to
reimburse the Plans for all of the expenses the Plans incur through
UNOVA's leasing of the Property. The expenses to be paid to the Plans
by UNOVA, as lessee, are $7.88 per square foot annually, subject to
future adjustments each year based on the Plans' actual annual
expenses.7 As a result, the total amount of rental income
that the Plans are entitled to receive from UNOVA in the first year of
the Lease is $814,312.80, or $25.20 per square foot annually. The
applicant states that this amount represents the fair market value for
the Leased Space, in accordance with rents currently being charged for
similar properties in the local real estate market (see discussion in
Paragraphs 7 and 8 below).
---------------------------------------------------------------------------
\7\ In the event that UNOVA incurs an actual annual expense in
excess of $7.88 per square foot, UNOVA will reimburse the Plans the
full amount of the excess expense. After a year in which UNOVA
incurs an excess expense, the following year's annual expense amount
will be adjusted upward to reflect the actual amount paid in the
previous year. This formula will be continued in subsequent years.
---------------------------------------------------------------------------
4. The Lease is for an initial term of ten years. The Lease
requires the Plans to reimburse UNOVA $20.00 per square foot for
UNOVA's expenses relating to UNOVA's installation as a tenant (the
Reimbursement).8 In this regard, the applicant represents
that leases for properties similar to the Leased Space typically
contain reimbursement provisions similar to the Reimbursement. The
duration of the Lease may be extended upon written notice by UNOVA to
the Plans at least three months prior to the expiration of the Lease's
initial term or the Lease's three renewal terms (the Renewals). In each
instance, the Renewal will be for an additional five years and will be
subject to the approval of an independent qualified fiduciary (see
Paragraphs 8, 9, and 10 below). As part of such approval, the
independent fiduciary must determine that the Lease payments will equal
the current fair market rental value of the Leased Space and that all
of the other conditions of the Lease will remain in the best interest
and protective of the Plans.
---------------------------------------------------------------------------
\8\ The Department expresses no opinion in this proposed
exemption as to whether the expenses incurred by the Plans relating
to the tenant improvements made to the Leased Space on behalf of
UNOVA would violate any provision of Part 4 of Title I of the Act.
In this regard, the Department notes that section 404(a) of the Act
requires, among other things, that plan fiduciaries act prudently
and solely in the interest of the plan's participants and
beneficiaries when making investment decisions on behalf of a plan.
In addition, section 404(a) of the Act requires that plan
fiduciaries act for the exclusive purpose of providing benefits to
participants and beneficiaries and defraying the reasonable expenses
of administering the plan.
---------------------------------------------------------------------------
5. The applicant states that an independent qualified real estate
appraiser will determine the fair market rental value of the Leased
Space every three years. If the independent appraiser determines that
the fair market value of the Leased Space is greater than the $25.20
per square foot per year as specified in the Lease, UNOVA will be
required to pay a new rental rate equal to the fair market rental value
of the Leased Space. However, under no circumstances will a new rental
rate be reduced below the initial rental rate. Thus, in accordance with
this procedure, all rents paid by UNOVA will be no less than the
greater of $814,312.80 per year, as provided for in the Lease, or the
fair market rental value of the Leased Space as determined every three
years by the independent qualified appraiser.
Additionally, the amount of rent the Plans receive from UNOVA will
periodically be adjusted (the Adjustments) to reflect increases in the
[[Page 25923]]
Consumer Price Index (CPI). The first Adjustment will occur after the
Lease has been in effect for five years. At that time, the actual
rental rate for the Leased Space will be increased by a percentage
equal to 90% of the percentage increase in the CPI during that period.
Thereafter, additional Adjustments, which will be calculated in the
same manner as the first Adjustment, will occur at five year intervals
upon any Renewal.
6. The Property has been appraised (the Appraisal) by Eric Stucky,
MAI (the Appraiser), a certified appraiser for CB Richard Ellis, Inc.
Appraisal Services, an independent real estate appraisal company
located in Los Angeles, California. The Appraiser considered both the
sales comparison approach and the income capitalization approach to
value the Property. However, the Appraiser's conclusions were based on
the income capitalization approach. The Appraiser concluded that the
Property had a fair market value of $15,600,000, as of August 13, 1998.
The Appraiser additionally analyzed the fair market rental rate of
the Leased Space and the Reimbursement provision of the Lease. The
Appraiser's analysis involved reviewing recent leases in the Property,
analyzing rental rates of recently leased properties similar to the
Leased Space, and interviewing market participants. After this
analysis, the Appraiser concluded that the Leased Space's initial
rental rate of $25.20 per square foot annually represented the current
fair market value of the Leased Space. The Appraiser additionally
concluded that the Reimbursement was within the range of allowances for
tenant reimbursement found in leases involving properties similar to
the Leased Space.
7. The Appraisal was reviewed by Andrew Minstein and Phil Gottfried
(the Reviewers), each a certified real estate appraiser for AGM and
Associates (AGM), an independent appraisal company. The Reviewers
represent that they have no financial interest in the Property. Upon
their review of the Appraisal, the Reviewers concluded that the
Appraiser's valuation of the Property was reasonable. In addition, the
Reviewers represent that the rental rate to be paid by UNOVA for the
Leased Space during the first year of the Lease is at the high end of
the range of rents currently being paid for similar properties in the
local real estate market.
8. UNOVA represents that Harvey A. Bookstein of Roth Bookstein &
Zaslow, LLP (Roth Bookstein & Zaslow) located in Los Angeles,
California, was appointed on August 21, 1998, to serve as the Plans'
independent fiduciary with respect to the Purchase and Lease. Mr.
Bookstein has been a Certified Public Accountant for over 25 years. Mr.
Bookstein states that he is experienced and knowledgeable in matters
concerning real estate and qualified retirement plans.
Mr. Bookstein states further that he is unrelated to both the Plans
and UNOVA. In this regard, Mr. Bookstein represents that throughout the
duration of the Lease and any of the Renewals thereof, Roth Bookstein
and Zaslow will receive less than one percent of its annual gross
income from any of the parties involved in the proposed transaction.
Mr. Bookstein has acknowledged his duties, liabilities and
responsibilities as a fiduciary for the Plans for purposes of the
subject transactions.
9. In order to ensure that the Purchase and Lease were in the best
interest of the Plans, Mr. Bookstein:
(a) Reviewed the terms of the Purchase and Lease to determine
whether the transactions would be at least as favorable to the Plans as
those terms and conditions which would exist in similar transactions
between unrelated parties;
(b) Confirmed that the Purchase and Lease conformed to the
diversification and investment objectives of the Plans;
(c) Reviewed the terms of the Lease, including the provisions
relating to the initial rental rate, the Reimbursement, the Renewals,
and the Adjustments, to confirm that the terms and conditions of the
Lease would be in the best interests of the Plans and their
participants and beneficiaries;
(d) Compared the terms and conditions of the Lease, including the
provisions relating to the initial rental rate, the Reimbursement, the
Renewals, and the Adjustments, to the terms and conditions of arm's-
length leases involving similar properties, to ensure that the overall
investment return that the Plans will receive from the Lease will be
comparable to the overall investment return for similar leases
involving unrelated parties;
(e) Confirmed that the Lease reflected the current fair market
rental rate for the Leased Space at the time of the transaction, as
determined by an independent qualified appraiser; and
(f) Confirmed that the Purchase and Lease would be in the best
interests of the Plans' participants and beneficiaries.
10. Mr. Bookstein represents that he completed an analysis of the
Purchase and Lease (the Analysis) prior to the date in which the Plans
and UNOVA entered into the transactions.
Mr. Bookstein states that after conducting the Analysis, he
determined that such transactions were in the best interests of the
Plans' participants and beneficiaries. In addition, Mr. Bookstein
determined that the terms and conditions of the Lease would be at least
as favorable to the Plans as those obtainable in an arm's-length
transaction with an unrelated party.
Mr. Bookstein additionally analyzed the overall investment
portfolio of the Plans (the Investment Analysis) prior to the
transactions. Upon completion of the Investment Analysis, Mr. Bookstein
determined that the Purchase and Lease would be consistent with the
Plans' investment objectives and policies.
Mr. Bookstein also prepared a net present value (NPV) analysis (the
NPV Analysis) of the Lease. 9 Mr. Bookstein represents that
his analysis involved comparing the NPV of the Lease to the NPV of
leases that pre-dated the Plan's purchase of the Property. Mr.
Bookstein represents that this comparison included using a discount
rate of 10 percent (which operates as the rate of return objective) and
deducting from the income stream all expenses related to such leases
and their proportionate share of the Property's expenses to the extent
that these expenses exceeded those of their base year. Mr. Bookstein
represents that the results of the NPV Analysis is consistent with his
conclusion that the terms and conditions of the Lease are in the best
interests of the Plan.10
---------------------------------------------------------------------------
\9\ The NPV is the difference between the present value of all
expected investment benefits (or positive cash flows), and the
present value of capital outlays (or negative cash flows), over the
entire period of the investment.
\10\ In this regard, the Mr. Bookstein's conclusions with
respect to the NPV Analysis depends on the fact that the current
rental rate being charged to UNOVA represents the fair market value
of the Leased Space, and that there will be appropriate
readjustments to the rent to reflect any increases in the fair
market rental value of the Leased Space at least once every three
years by an independent appraiser.
---------------------------------------------------------------------------
Mr. Bookstein represents that he will monitor the Lease throughout
its duration, as well as the conditions of this proposed exemption (if
granted), and will take whatever action is necessary to protect the
Plans' rights under the Lease and safeguard the interests of the Plans.
Additionally, Mr. Bookstein represents that he will ensure that the
Plans' rental income from the Lease, or upon any Renewal, reflects the
Leased Space's fair market rental value at the time. Mr. Bookstein
further represents that the Plans will not enter into any Renewals
without his approval.
11. The Applicant represents that in the event of a termination of
Mr.
[[Page 25924]]
Bookstein's appointment as independent fiduciary to the Plans with
respect to the Lease, any successor to Mr. Bookstein will have
responsibilities, independence and experience similar to those
described in Paragraphs 8, 9, and 10 above. In this regard, the
Applicant states that if it becomes necessary to appoint a successor
independent fiduciary (the Successor) to replace Mr. Bookstein, a
letter will be sent to the Department at least thirty (30) days prior
to the appointment. The letter will specify that the Successor has
responsibilities, experience and independence similar to those of Mr.
Bookstein. If the Department does not object to the Successor, the new
appointment will become effective on the 30th day after the Department
receives such letter.
12. In summary, UNOVA represents that the subject transactions
satisfy the statutory criteria contained in section 408(a) of the Act
for the following reasons:
(a) The Plans paid an amount for the Property which was no more
than the fair market value of the Property at the time of the Purchase;
(b) The interest in the Property owned by each Plan represented no
more than 15% of the value of either Plan's total assets at the time of
the Purchase;
(c) The Property and the Leased Space represented no more than 15%
of the value of either Plan's total assets at the time of the
transactions and will remain less than that percentage throughout the
duration of the Lease;
(d) The terms and conditions of the Lease are, and will remain, at
least as favorable to the Plans as those obtainable in an arm's-length
transaction with an unrelated party;
(e) The fair market rental value of the Leased Space has been, and
every three years during the Lease will continue to be, determined by a
qualified, independent appraiser;
(f) The amount of rent paid by UNOVA to the Plans for the Leased
Space throughout the duration of the Lease will be no less than the
greater of the initial rent paid by UNOVA or the fair market rental
value of the Leased Space as determined every three years by a
qualified independent appraiser;
(g) Mr. Bookstein, as the Plans' independent fiduciary, has
determined that the transactions are appropriate for the Plans and in
the best interests of the Plans' participants and beneficiaries; and
(h) Mr. Bookstein, as the Plans' independent fiduciary, will
monitor the Lease, as well as the conditions of this proposed exemption
(if granted), and will take whatever actions are necessary to safeguard
the interests of the Plans under the Lease.
FOR FURTHER INFORMATION CONTACT: Christopher J. Motta of the
Department, telephone (202) 219-8883 (this is not a toll free number).
Daniel N. Cunningham IRA (the Cunningham IRA); Sidney B. Cox IRA
(the Cox IRA) (collectively, the IRAs), Located in Fresno,
California
[Exemption Application Numbers: D-10723 and D-10724]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the purchase
(the Purchase) by each IRA 11 of certain shares of Clovis
Community Bank common stock (the Stock) from Mr. Daniel N. Cunningham
and Mr. Sidney B. Cox (the Account Holders), disqualified persons with
respect to the IRAs, provided that the following conditions are met:
---------------------------------------------------------------------------
\11\ Because each IRA has only one participant, there is no
jurisdiction under 29 CFR Sec. 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
---------------------------------------------------------------------------
(a) The Purchase of the Stock by each IRA is a one-time transaction
for cash;
(b) Each IRA purchases the Stock for a price not exceeding the fair
market value of the Stock at the time of each Purchase;
(c) The terms and conditions of each Purchase are at least as
favorable as those available in an arm's length transaction with an
unrelated third party;
(d) Each IRA does not pay any commissions or other expenses in
connection with each Purchase;
(e) The IRA assets invested in the Stock do not exceed 25% of the
total assets of each IRA at the time of the transaction; and
(f) Each IRA, at all times, will hold less than one percent (1%) of
the outstanding shares of the Stock.
Effective Date: If this proposed exemption is granted, the
exemption will be effective as of April X, 1999.
Summary of Facts and Representations
1. The applicants describe the Account Holders, their holdings of
the Stock, and the IRAs as follows:
(a) Daniel N. Cunningham currently serves on the Board of Directors
of Clovis Community Bank (Clovis). As of December 31, 1998, he held
96,494 shares (48,851 directly and 47,643 indirectly) in his individual
capacity. The Cunningham IRA is an individual retirement account,
trusteed by Wheat First Union, established under Code section 408(e).
As of September 30, 1998, the IRA held assets valued at $1,483,007.
(b) Sidney B. Cox currently serves on the Board of Directors at
Clovis. As of December 22, 1998, he held 12,522 shares in his
individual capacity. The Cox IRA is an individual retirement account,
trusteed by Smith Barney, established under Code section 408(e). As of
September 30, 1998, the IRA held assets valued at $195,819.37.
2. The Stock consists of shares issued by Clovis. Clovis is a
California state-licensed bank with deposit accounts insured by the
Federal Deposit Insurance Corporation (the FDIC). Clovis is subject to
the regulation, supervision and periodic examination by the California
Department of Financial Institutions and the FDIC. Clovis is not a
member of the Federal Reserve system, but is nevertheless subject to
certain regulations relating thereto.
3. The Stock is common stock with no par value and the only class
authorized in the Clovis articles of incorporation. Currently, there
are 1,069,067 shares outstanding. The Stock is not listed on any
exchange, nor is it listed with NASDAQ. Trading of the Stock is limited
in volume with transactions coordinated between buyers and sellers
utilizing brokers. Bid and asked prices for the Stock are quoted weekly
in ``The Fresno Bee'' and the National Daily Quotation Service's ``pink
sheets.'' 12
---------------------------------------------------------------------------
\12\ As of April 2, 1999, the Bid price was $21\1/2\ and the Ask
price was $23.
---------------------------------------------------------------------------
4. The applicants request an exemption for the Purchase of the
Stock by each individual IRA from its respective participant. Each
Account Holder serves on the Board of Directors of Clovis 13
and has, in the past, been granted options to purchase shares of the
Stock. Each Account Holder has exercised such options and proposes
selling these newly acquired shares to his respective IRA. Sidney Cox
proposes selling to the Cox IRA the lesser of (1) 2,530 shares or (2)
an amount not exceeding 25% of the total assets of the
[[Page 25925]]
Cox IRA. Daniel Cunningham proposes selling 9,000 shares to the
Cunningham IRA.
---------------------------------------------------------------------------
\13\ The applicants state that Mr. Cunningham's and Mr. Cox's
appointments to the Board of Directors of Clovis and their
continuing service thereon is not in any way related to the
acquisition and holding of the Stock by their IRAs. In addition, the
applicants represent that the purchase of the Stock by the IRAs will
not enable Mr. Cunningham or Mr. Cox to achieve any personal
financial objectives unrelated to the interests of the IRAs.
---------------------------------------------------------------------------
5. The applicants represent that each IRA will pay no commissions
or other expenses in connection with the Purchase. The Purchase will
involve a one-time transaction for cash. Each IRA will pay a share
price based on the average of the highest current independent bid and
lowest current independent offer as of the close of the business day
preceding the proposed Purchase, on the basis of a reasonable inquiry
from at least three broker-dealers or pricing services independent of
Clovis. The applicants further represent that the Stock will not exceed
25% of the value of the assets of each IRA at the time of the proposed
transaction. Finally, the applicants state that each IRA at all times
will hold less than one percent (1%) of the outstanding number of
Clovis shares.
6. The applicants represent that the proposed transactions are
feasible in that each transaction will involve a one-time transaction
for cash. Furthermore, the applicants state the proposed transactions
will be in the best interests of each IRA in that the Purchases will
enable each IRA to invest in a promising security at fair market value
without incurring any commissions. Finally, the applicants represent
that the transactions will be protective of the rights of each
participant because, at the time of the transaction, the investment
will not exceed 25% of the assets of each IRA.
7. In summary, the applicants represent that the proposed
transactions satisfy the statutory criteria of section 4975(c)(2) of
the Code because: (a) The Purchase of the Stock by each IRA will be a
one-time transaction for cash; (b) Each IRA will purchase the Stock for
a price not exceeding the fair market value of the Stock at the time of
Purchase; (c) The terms and conditions of each Purchase will be at
least as favorable as those available in an arm's length transaction
with an unrelated third party; (d) Each IRA will not pay any
commissions or other expenses in connection with each Purchase; (e) The
IRA assets invested in the Stock will not exceed 25% of the total
assets of each IRA at the time of the transaction; and (f) Each IRA, at
all times, will hold less than one percent (1%) of the outstanding
shares of the Stock.
NOTICE TO INTERESTED PERSONS: Because the applicants are the only
participants in the IRAs, it has been determined that there is no need
to distribute the notice of proposed exemption (the Notice) to
interested persons. Comments and requests for a hearing are due thirty
(30) days after publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. James Scott Frazier, 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 7th day of May, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-12101 Filed 5-12-99; 8:45 am]
BILLING CODE 4510-22-P
