[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Notices]
[Pages 27625-27629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13179]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10340, et al.]
Proposed Exemptions; McLane Company, Inc. Profit Sharing Plan and
Trust (the Plan)
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) 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, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications
[[Page 27626]]
for exemption and the comments received will be available for public
inspection in the Public Documents Room of Pension and Welfare Benefits
Administration, U.S. Department of Labor, Room N-5507, 200 Constitution
Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
McLane Company, Inc. Profit Sharing Plan and Trust (the Plan) Located
in Temple, Texas
[Application No. D-10340]
Proposed Exemption
The Department of Labor (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).1 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(a) and (b) of the Code,
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not
apply to the past sale (the Sale) by the Plan of two parcels of
unimproved real property located in Temple, Texas and Goodyear, Arizona
(the Properties) to McLane Company, Inc. (McLane), the Plan sponsor and
a party in interest with respect to the Plan, provided that the
following conditions are satisfied: (a) The Sale was a one time
transaction for a lump sum cash payment; (b) the purchase prices were
the fair market values of the Properties as of the date of the Sale;
(c) the Properties have been appraised by qualified, independent real
estate appraisers; (d) a qualified, independent fiduciary determined
that the Sale was in the best interests of the Plan; and (e) the Plan
paid no commissions or other expenses relating to the Sale.
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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally
transferred the authority of the Secretary of the Treasury to issue
exemptions under section 4975(c)(2) of the Code to the Secretary of
Labor. In the discussion of the exemption, references to section 406
and 408 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
EFFECTIVE DATE OF EXEMPTION: The effective date of this exemption is
April 21, 1993.
Summary of Facts and Representations
1. The Applicant is Sarofim Realty Advisors (SRA). SRA was formally
known as F.S. Realty Partners (FSRP) when it acted as an Investment
Manager for the Plan during the subject transaction. SRA is
headquartered in Dallas, Texas. As of December 31, 1995, SRA employed
18 full-time employees and had approximately $772 million in aggregate
market value of employee benefit plan assets under management. SRA
oversees the acquisition, development, leasing, management, financing
and sale of select property types in select regions and major cities
throughout the country for several pension plans and endowment funds.
The Applicant states that under the terms of the April 12, 1993
Investment Management Agreement (the IMA) between McLane, Mr. Lucian L.
Morrison and FSRP, FSRP served as investment manager with exclusive
investment discretion over the Properties. As the investment manager,
FSRP was a fiduciary of the Plan. The Applicant represents that FSRP
was not related to or otherwise affiliated with McLane.
2. The Applicant states that the Plan is a defined contribution
plan whose total participants numbered 6,967 at the end of the 1993
Plan year. Additionally, the Applicant understands that at the time of
consummation of the Sale, the approximate fair market value of the
total assets of the Plan was $44,710,368 and that approximately 5.5% of
the total assets for the 1993 Plan year were involved in the subject
transaction.
At the time of the Sale, the company treasurer of McLane, Mr.
Webster F. Stickney, Jr. (Mr. Stickney), was a Plan trustee. McLane,
located in Temple, Texas, was the Plan sponsor and a party in interest
with respect to the Plan. McLane is a wholesale grocery distribution
company. Wal-Mart, Inc. owned one hundred percent of the issued and
outstanding common stock of McLane at the time of the Sale.
3. The Properties were owned by the Plan at the time of the Sale.
The Temple, Texas property consists of 86.245 acres of unimproved land
bisected by McLane Parkway and located in the City of Temple, Bell
County, Texas. Directly adjacent to the west and southwest are
properties owned by McLane including the McLane corporate headquarters.
Directly adjacent to the east are 212 acres purchased by McLane/Lone
Star, Inc. for a 750,000 square foot warehouse used as a major
distribution center. The Goodyear, Arizona property consists of 32.605
acres of unimproved land located on the south side of McDowell Road,
2,164 feet west of Litchfield Road in Goodyear, Arizona. McLane has a
125,828 square foot industrial distribution center adjacent to the east
side of the Goodyear, Arizona property. This facility is the trucking
hub that distributes grocery products to convenience stores and food
establishments.
The Temple, Texas property was acquired by the Plan in two
segments. The first piece constituted 84.711 acres and was purchased on
December 29, 1986 from Mr. and Mrs. Calvin Emery for a total price of
$621,400. The second segment, comprising 1.534 acres, was acquired from
Mr. and Mrs. Ray Looney on November 30, 1987, for $22,652. Mr. Stokes
represents that Mr. and Mrs. Emery and Mr. and Mrs. Looney were not
parties in interest with respect to the Plan.
The Goodyear, Arizona property was also acquired at two different
times. The Plan originally acquired a 51 percent interest in the
property from Mr. Thomas Yamashita on June 20, 1984, for $793,800. It
is represented that Mr. Yamashita was unrelated to the Plan. On May 16,
1988, McLane contributed to the Plan the remaining 49 percent interest
in the property. It is represented that the property had been appraised
by an independent appraiser on February 22, 1988 at $2,270,000. Also,
it is represented that McLane's contribution of its interest in the
property in 1988 was a purely discretionary contribution to the Plan
and that McLane was under
[[Page 27627]]
no obligation to make any contribution to the Plan. The Properties have
been held by the Plan since their respective purchase dates and have
not been used by or leased to any person since their acquisition by the
Plan.2
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\2\ The Department expresses no opinion herein on whether the
acquisition and holding of the Temple, Texas property or the
Goodyear, Arizona property by the Plan violated any of the
provisions of Part 4 of Title I of the Act. The Department is
providing no retroactive exemptive relief herein with respect to the
acquisition and holding of the Temple, Texas property or the
Goodyear, Arizona property by the Plan.
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4. The Applicant represents that the motivation for the Plan's 1993
Sale of the Properties to McLane was solely to benefit Plan
participants and beneficiaries and that Plan participants were unhappy
both about the lack of income from the subject Properties and a concern
about declining property values.
5. In order to fulfill what McLane believed to be the requirements
of Prohibited Transaction Exemption 84-14 (49 FR 9494 March 13, 1984)
(PTE 84-14) 3 with respect to the Sale, on or about February
15, 1993, McLane hired Lucian L. Morrison (Mr. Morrison) as an
independent fiduciary for the purpose of appointing a qualified
professional asset manager (QPAM) to sell the Properties owned by the
Plan. On February 15, 1993, legal counsel to McLane informed the McLane
treasurer that Mr. Morrison was willing to act on behalf of McLane in
appointing a QPAM to have investment discretion with respect to the
potential sale of the Properties to McLane. Legal counsel advised
McLane that in order to comply with PTE 84-14, the Sale would proceed
as follows: (1) Mr. Morrison would appoint a QPAM to represent the Plan
with respect to the potential sale of the property to McLane; (2) the
QPAM would hire its own appraiser and attorney to represent it in the
transaction and, if appropriate, to negotiate the terms of the sale
between the Plan and McLane; and (3) after the final terms of any
transaction are negotiated, the sale would close in the same manner
that any real estate sale would close, complete with deeds, title
policies, etc.
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\3\ PTE 84-14 provides relief from the restrictions of section
406(a) of ERISA for transactions between parties in interest and
plans where a QPAM (as defined in the class exemption) is the
decision maker and certain other conditions are met.
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On February 17, 1993, Mr. Morrison was formally hired as an
independent fiduciary of the Plan to select and hire a QPAM to evaluate
the proposed transactions and to negotiate the terms thereof and direct
the trustees to enter into the Sale to McLane. Legal counsel to McLane
gave Mr. Morrison the names of two prospective QPAMs from whom to
solicit bids and told Mr. Morrison that McLane understood, under the
PTE 84-14 requirements, that McLane could not dictate to Mr. Morrison
or ``taint the selection process'', but McLane believed ``it
appropriate'' to give Mr. Morrison the names of two firms McLane
believed to be qualified to serve as a QPAM.
6. On February 26, 1993, the Limited Purpose Independent Fiduciary
Agreement (Limited Agreement) was formally entered into between McLane
and Mr. Morrison. The Limited Agreement provided that the purpose of
the agreement was to facilitate the purchase of the Plan's Properties
and that this purchase would be a prohibited transaction unless an
exemption from the prohibited transaction rules of ERISA was utilized.
The Limited Agreement further specified that the QPAM exemption was
available for this purchase.4
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\4\ In this regard, section I(a) of PTE 84-14 provides that:
(a) At the time of the transaction (as defined in section V(i))
the party in interest, or its affiliate (as defined in section
V(c)), does not have, and during the immediately preceding one year
has not exercised the authority to--
(1) Appoint or terminate the QPAM as a manager of any of the
plan's assets, or
(2) Negotiate the terms of the management agreement with the
QPAM (including renewals or modifications thereof) on behalf of the
plan; * * *
Section I(c) of PTE 84-14 provides that:
(c) The terms of the transaction are negotiated on behalf of the
investment fund by, or under the authority and general directions of
the QPAM, and either the QPAM or (so long as the QPAM retains full
fiduciary responsibility with respect to the transaction) a property
manager acting in accordance with written guidelines established and
administered by the QPAM, makes the decision on behalf of the
investment fund to enter into the transaction, provided that the
transaction is not part of an agreement, arrangement or
understanding designed to benefit a party in interest; * * *
Section V(c)(3) of PTE 84-14 provides, in relevant part, that a
named fiduciary (within the meaning of section 402(a)(2) of ERISA)
of a plan and an employer any of whose employees are covered by the
plan will also be considered affiliates with respect to each other
for purposes of section I(a) if such an employer * * * has the
authority * * * to appoint or terminate the named fiduciary or
otherwise negotiate the terms of the named fiduciary's employment
agreement.
Section 402(a) of ERISA provides that every employee benefit
plan shall be established and maintained pursuant to a written
instrument. This instrument must provide for one or more named
fiduciaries who have the authority to control and manage the
operation and administration of the plan. Under sections 402(c)(3)
and 403(a) of ERISA, only a named fiduciary has the authority to
appoint an investment manager, and such an appointment may be made
only as specifically provided in the plan instrument.
The preamble to the proposed class exemption, 47 FR 56945 at
56947 (December 21, 1982), explains that the Department is prepared
to grant broad exemptive relief only where an independent asset
manager has, and in fact exercises, discretionary authority to cause
an investment fund to enter into a transaction which is otherwise
prohibited. Party in interest transactions that are negotiated by,
e.g., an employer which sponsors a plan, and are then presented to a
QPAM for approval would not qualify for the class exemption as
proposed.
It is the view of the Department that the retention of a QPAM
solely to approve a specific transaction presented for its
consideration by a plan sponsor at the time of its engagement is
inconsistent with the underlying intent of the exemption, i.e., the
transfer of plan assets to an independent, discretionary manager
free from the undue influence of the sponsor. Such a transaction
also raises issues under section I(c) of the exemption which
requires that the transaction not be a part of an agreement,
arrangement or understanding designed to benefit a party in
interest.
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Mr. Morrison accepted his appointment as a limited purpose
independent fiduciary and agreed to act as provided for in the Limited
Agreement, the Plan Document, and ERISA. Mr. Morrison solicited bids
from the U.S. Trust of California and from FSRP, asking for their fee
for serving as the QPAM to transact the purchase by McLane of the
Plan's Properties.
7. On April 12, 1993, Mr. Morrison, McLane and FSRP entered into an
``Investment Management Agreement''. As independent fiduciary, Mr.
Morrison appointed FSRP as an Investment Manager (IM) of the Plan. In
Section 2 of the IMA, FSRP acknowledged that in acting as an IM under
the IMA, it would be acting as a fiduciary to the Plan as defined in
ERISA. Section 4 of the IMA provides that the IM shall: (1) Evaluate
the proposed transaction and, if appropriate; (2) negotiate the terms
of the Sale; and (3) direct the Plan to sell the Properties to McLane
if, in FSRP's sole discretion, the sales price negotiated by FSRP and
agreed to by McLane represents the fair market value of each parcel of
real estate as determined by FSRP considering one or more appraisals
obtained from qualified, independent appraisers. Section 6 of the IMA
provides that the agreement shall terminate on the closing date of the
proposed sales in the event that FSRP directs the Plan to enter into
the sales of the Properties to McLane.
8. Plan records show that a full appraisal of the Temple, Texas
property was completed for McLane on December 30, 1991 by Elbert
Aldrich, Inc. (Aldrich), a real estate appraiser. Aldrich specified
that only the Sales Comparison Approach was used in the valuation
process of the appraisal due to the absence of any improvements on the
subject property. Aldrich noted that the property was ``essential for
the continued development of the McLane Company, Inc. as the property
is the nucleus of other properties held by McLane'' and concluded the
estimated fair market value of the property to be $763,000. An updated
appraisal by
[[Page 27628]]
Aldrich, dated January 29, 1993, indicated that the Temple, Texas real
estate maintained the same estimated fair market value of $763,000.
FSRP, as the IM, requested an additional appraisal of the Temple,
Texas property from Crosson Dannis, Inc. (Crosson), an independent real
estate appraiser. In an April 7, 1993 report to FSRP (the Crosson
Report), Crosson used the Sales Comparison Approach and estimated the
market value of the Temple, Texas property to be $300,000 as of March
29, 1993. The Crosson Report noted that the estimate was to assist FSRP
in its asset management program and noted that the property ``is not
currently offered for sale nor are there any pending contracts of sale
affecting it.'' The Crosson Report stated that the only construction
activity in the area consisted of the Lone Star distribution center for
McLane and that other than the demand by McLane for its distribution
facility, there was no apparent demand by owner/users for land in this
neighborhood. Further, that an analysis of comparable properties
required that Crosson apply a negative conditions of sale adjustment to
the surrounding McLane properties to account for the ``buyer's
motivation'' since a premium was paid for these sites. The Crosson
report noted that ``[r]eal estate professionals in Temple indicate that
* * * McLane * * * owns substantial acreage in this neighborhood, [and]
as an investor, has, in the past, been willing to pay prices above
market levels to acquire tracts in the neighborhood.''
The Goodyear, Arizona property was evaluated for McLane by
Appraisal Technology, Inc., a real estate appraiser, as of February 9,
1993. Appraisal Technology, Inc. noted that the Goodyear, Arizona
property was adjacent to a McLane distribution facility. The appraisal
adopted the Sales Comparison Approach to obtain a final estimated fair
market value of $1,305,000 for the vacant property. FSRP requested a
second appraisal of the Arizona property from Burke Hansen, Inc.
(Burke), an independent real estate appraiser. The Burke appraisal
specified that it was to be used by FSRP for portfolio management
decisions. Using the Sales Comparison Approach, Burke estimated the
market value of the Goodyear, Arizona property to be $390,000 as of
March 30, 1993. However, the appraisal also provided an estimated use
value of $1,300,000. The use value represents the value the property
has for a specific use by a user with specific criteria, not
necessarily representative of market value. Additionally, the report
noted that the property was currently listed for sale at $2,000,000.
The listing agent reported that there had been no offers.
9. On April 21, 1993, the Plan engaged in the Sale with McLane and
received $2,463,000 from McLane for the Properties. The Plan received
$763,000 for the Temple, Texas real estate and $1,700,000 for the
Goodyear, Arizona real estate. Special Warranty Deeds conveying title
to these parcels from the Plan to McLane were signed on May 12, 1993 by
Webster F. Stickney, Jr., as Trustee of the Plan. The purchase
agreement entered into by the Plan and McLane that agreed to the Sale
for a total of $2,463,000 was also signed by Webster F. Stickney, Jr.,
as Trustee for the Plan and J.S. Harding, Jr., president of McLane, on
May 12, 1993.
McLane represents that all parties involved in the Sale recognized
that McLane was paying the Plan well in excess of the current fair
market value for both properties and that this was clearly done to
avoid having to advise Plan participants that they had incurred losses
in their accounts due to a large decline in the real estate market at
the time. McLane represents that both the Arizona and Texas properties
appeared to be falling rapidly in value during 1992 and that the Sale
prices for both properties reflected their estimated values in early
1992.
McLane also represents that, if McLane had treated the excess of
the purchase price for the properties over their fair market values as
a Plan contribution in 1993, the resulting allocations would not have
violated the limitations of Internal Revenue Code section 415.
10. In summary, the Applicant represents that it now believes that
the conditions of PTE 84-14 may not have been satisfied with respect to
the Sale. As a result, it requests that the Department consider
retroactive individual exemption relief under section 408(a) of ERISA.
The Applicant represents that the requested exemption will satisfy the
criteria of section 408(a) of the Act for the following reasons: (a)
The Sale was a one time transaction for a lump sum cash payment; (b)
the Plan received more than the fair market values of the Properties at
the time of the transaction; (c) the fair market values of the
Properties have been determined by independent, qualified real estate
appraisers; (d) a qualified, independent fiduciary has determined that
the Sale was in the best interests of the Plan; and (e) the Plan paid
no commissions or other expenses relating to the Sale.
FOR FURTHER INFORMATION CONTACT: Wendy McColough of the Department,
telephone (202) 219-8971. (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.
[[Page 27629]]
Signed at Washington, DC, this 14th day of May, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-13179 Filed 5-19-97; 8:45 am]
BILLING CODE 4510-29-P
