[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)]
[Notices]
[Pages 35941-35948]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17074]
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DEPARTMENT OF LABOR
[Application No. D-09824, et al.]
Proposed Exemptions; PMS Profit Sharing and Retirement Savings
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 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.
PMS Profit Sharing and Retirement Savings Plan and Trust (the Plan),
Located in Cleveland, Ohio
[Exemption Application No. D-09824]
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 32826, 32847, August 10, 1990). If the exemption
is granted, the
[[Page 35942]]
restrictions of sections 406(a), 406(b) (1) and (2) and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (E) of the Code shall not apply to
the proposed sale (the Sale) of a certain parcel of improved real
property (the Property) from the Plan to M. A. Hanna Company (Hanna), a
party in interest with respect to the Plan provided that the following
conditions are met:
(1) The fair market value of the Property is established by a
qualified and independent real estate appraiser;
(2) Hanna pays the greater of $990,800 or the current fair market
value of the Property;
(3) The Sale is a one time transaction for cash;
(4) The Plan pays no fees or commissions related to the Sale; and
(5) Hanna pays any excise taxes to the Internal Revenue Service
owed pursuant to section 4975(a) of the Code resulting from Hanna's
lease of the Property from the Plan through the date of publication in
the Federal Register of the final grant of the exemption within 90 days
of such date.
Summary of Facts and Representations
1. Hanna is a Delaware Corporation with its principal office and
place of business in Cleveland, Ohio. In November 1987, Hanna acquired
all of the outstanding capital stock of PMS Consolidated, Inc. The
Hanna/PMS Consolidated, Inc. merger was effective April 1, 1993. PMS
Consolidated is the original plan sponsor.
2. The Plan is a defined contribution pension plan. As of April 1,
1995, the Plan had 706 participants and total assets of $14,240,928.
Wells Fargo Bank has served as Plan trustee since January 1, 1992. The
PMS Committee for Employee Benefits Administration is the Plan
fiduciary responsible for selecting the Plan's investments. Currently,
only one individual serves on this committee. He is an employee and
officer of the PMS Division of Hanna.
3. In November of 1968, the Plan acquired the Property as
undeveloped land from PMS Consolidated for $10,050, and subsequently
built the building for $550,887. The Plan has invested a total of
$560,937 in the Property. The Property is located in Coral Springs,
Florida. In July 1969, the Plan leased the Property to PMS
Consolidated. (the Lease). The Lease was last renewed on January 1,
1989 for a five year period, and currently is on a month to month
basis. All property taxes and insurance costs were paid by PMS
Consolidated for the duration of the Lease. PMS Consolidated also has
incurred $509,967 in leasehold improvements over the term of the
lease.1 At the time the Hanna/PMS Consolidated merger became
effective, Hanna became aware of the Lease. Unsuccessful efforts were
made to sell the Property to an unrelated third party. As a result the
Plan proposes to sell the Property to Hanna.2
\1\ The terms of the lease provides that leasehold improvements
revert to the Plan upon the termination of the lease.
\2\ The applicant recognizes that the lease by the Plan of the
Property to Hanna constitutes a prohibited transaction under section
406(a) of the Act and section 4975 of the Code. Accordingly, Hanna
has filed a form 5330 with the Internal Revenue Service and paid the
Internal Revenue Service the excise taxes that are applicable under
section 4975(a) of the Code through the date on which the
application was filed. Further, Hanna represents that it will pay
the additional excise taxes due through the date of the grant of
final exemption within 90 days of its publication in the Federal
Register.
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4. The Property was appraised by two independent qualified
appraisers. Both appraisers utilized the market value approach which is
defined as the most probable price which the appraised property will
bring in a competitive market under all conditions requisite to a fair
sale. On October 24, 1994, C.R. Johnson & Associates, Inc., certified
MAI real estate appraisers determined the value of the Property to be
$706,000. AMH Appraisal Consultants appraised the Property at $850,000
as of November 2, 1994.
The rental rate under the Lease was at fair market rental rates.
The rental rate under the Lease was $5.78 per square foot. In
developing a value for the Property, AMH considered four comparable
properties which had rental rates ranging from $3.50 to $6.00 per
square foot. C.R. Johnson considered six properties, noting that one
property was the ``most comparable.'' The rental rate for this property
was $5.75 per square foot.
5. The Plan proposes to sell the Property for $990,800. This
purchase price, which reflects Hanna's internal valuation of the
Property, is substantially in excess of appraisals referred to above.
Hanna has agreed to pay $990,800 in order to ensure that Plan
participants and beneficiaries are not disadvantaged by reason of the
Plan's previous holding of the Property or the Sale of the Property.
The Sale will be for cash, and the Plan will pay no fees or commissions
with regard to the transaction.
6. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (1) the Sale is a one-time transaction for cash, and no
commissions will be paid upon the Sale; (2) the Plan will be receiving
at least fair market value for the Property as determined by an
independent qualified real estate appraiser; and (3) Hanna will pay all
applicable excise taxes which are due by reason of the Lease within 90
days of the publication in the Federal Register of the exemption
proposed herein.
Tax Consequences of Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and therefore
must be examined under applicable provisions of the Code including
sections 401(a)(4), 404 and 415.
For Further Information Contact: Allison Padams of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Apartment Laundries, Inc., Profit Sharing Plan (the Plan), Located in
Tulsa, Oklahoma; Proposed Exemption
[Application No.: D-09835]
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 CAR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply to the lease (the Lease) of improved property (the
Property) by the individual account of James L. Sharp (the Account) in
the Plan to Apartment Laundries, a party in interest with respect to
the Plan provided that the following conditions are met: (1) the terms
of the Lease are and will remain at least as favorable as the Plan
could obtain in an arm's length transaction with an unrelated party;
(2) the fair market rental value has been and will continue to be
determined on an annual basis by a qualified, independent appraiser;
and (3) the fair market value of the Property, as determined by a
qualified, independent appraiser, represents no more than 25% of value
of the assets in the Account.
Summary of Facts of Representations
1. Apartment Laundries (the Employer) is an Oklahoma corporation
[[Page 35943]]
engaged in the business of furnishing coin-operated laundry machines to
apartment complexes. James L. Sharp is the sole shareholder of the
Employer. The Plan is a profit sharing plan having 49 participants and
assets valued at $658,839 as of October 31, 1994. The Plan's trustee is
Mr. Sharp. As of October 31, 1994, the Account's balance equaled
$251,243, but Mr. Sharp represents that he will roll over from his
individual retirement account into the Account an amount so that the
fair market value of the Property will not exceed 25% of the value of
the Account's assets.
2. On July 1, 1991, the Account purchased the Property from an
unrelated third party for $131,221. The Property consists of a
warehouse building situated on .71 acres. The Property is contiguous to
property which Mr. Sharp personally owns and presently leases to the
Employer.\3\ The Account proposes to lease the Property to the
Employer. The proposed lease will be for one year with annual renewals.
The Employer will pay monthly rent in the amount of $1310, and the
Account shall have the right to terminate the Lease at any time on
thirty days notice.
\3\ The Department is expressing no opinion as to whether or not
the acquisition of the Property violated section 404 of the Act.
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3. The Property was appraised by Gene Meazell, a certified general
appraiser, of Appraisers Unlimited on October 2, 1993. Mr. Meazell
determined that the fair market value of the Property was $140,000, and
the fair market rental value of the Property is $1,070 per month. Mr.
Meazell updated his appraisal on August 14, 1994 and determined that
fair market value and fair market rental value remained unchanged.
Naifef, Weikel and Rouse, independent certified public accountants
calculated that the value of the Property to the Employer is enhanced
by 20 to 25% because it is adjacent to the Employer's warehouse. Using
this assumption, the fair market monthly rental rate for the Employer
would be between $1,284 and $1,337. Thus, the proposed rental rate of
$1,310 would be at fair market value.
4. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (1) the terms of the Lease are and will remain at least as
favorable as the Plan could obtain in an arm's length transaction with
an unrelated party; (2) the fair market rental value has been and will
continue to be determined on an annual basis by a qualified,
independent appraiser; and (3) the fair market value of the Property,
as determined by a qualified, independent appraiser, will represent no
more than 25% of value of the assets in the Account.
Notice to Interested Persons: Because Mr. Sharp is the only
participant in the Plan whose individual account will be affected by
the proposed transaction, it has been determined that there is no need
to distribute the notice of proposed exemption to interested persons.
Therefore, written comments and requests for a public hearing are due
30 days from the date of publication of this notice of proposed
exemption in the Federal Register.
For Further Information Contact: Allison Padams, of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Adel E. Zaki Money Purchase Pension Plan (the Plan) Located in Los
Angeles, California
[Exemption Application No. D-09883]
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 section 406(a), 406(b)(1), and 406(b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code \4\ shall not apply to the proposed cash sale of a parcel of
improved real property (the Property) by the Plan to Adel E. Zaki, M.D.
(Dr. Zaki), a party in interest with respect to the Plan; provided that
(1) the sale will be a one-time transaction for cash; (2) as a result
of the sale, the Plan receives in cash the greater of $710,000 or the
fair market value of the Property, as determined by an independent,
qualified appraiser, as of the date of the sale; (3) the Plan pays no
commissions, fees, or other expenses as a result of the transaction;
and (4) the terms of the sale are no less favorable to the Plan than
those it would have received in similar circumstances when negotiated
at arm's length with unrelated third parties.
\4\ 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.
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Summary of Facts and Representations
1. The Plan is a tax-qualified defined contribution profit sharing
plan sponsored by Adel E. Zaki M.D., A Professional Corporation (the
Employer). As of October 24, 1994, there were four (4) participants and
beneficiaries in the Plan, including Dr. Zaki. As of the same date, the
assets of the Plan totaled approximately $1,745,500. It is represented
that Dr. Zaki's account in the Plan consists of approximately 99
percent (99%) of the assets of the Plan with the remaining one percent
(1%) allocated among the other three participants. The Plan's assets
are invested in the Property and cash or cash equivalents, such as bank
certificates of deposit. It is represented that, as of October 24,
1994, the Property constituted approximately 41 percent (41%) of the
assets of the Plan. Dennis Mehringer serves as contract administrator
for the Plan. Dr. Zaki serves as trustee and fiduciary for the Plan
with discretion over the assets of the Plan affected by the proposed
transaction and is an officer and the sole shareholder of the Employer.
The Employer engages in the private medical practice in general surgery
from an office located at 1233 North Vermont Avenue in Los Angeles,
California.
2. On June 26, 1985, Dr. Zaki, acting as trustee, purchased the
Property as an investment for the Plan from A.M.S. Partnership, an
unrelated third party, at a purchase price of $1,200,000, plus escrow
closing costs of $2,183. It is represented that most of the assets of
the Plan, plus some or all of the rollover assets from a Keogh plan and
a terminated defined benefit plan, were used to acquire the Property.
Further, in 1995 through 1996, the Plan made additional improvements to
the Property at a cost of $28,228. Since the acquisition of the
Property by the Plan, Dr. Zaki has managed the Property and leased it
to unrelated third party tenants. It is represented that the capital
investment in the Property has been returned to the Plan. It is further
represented that the value of the Property, as reported yearly on forms
5500-C/R, steadily increased to a high of $1,496,676 in 1991. However,
in April of 1992, the riots in Los Angeles caused property damage in
the neighborhood around the Property. While the Property did not suffer
extensive damage, it is represented that the riots caused many
merchants to leave the area, the rental rates to decrease, and the
property values to decline. Consequently, the value of the Property
dropped to $1,250,000 in 1992. In 1993, Los Angeles County Tax Assessor
estimated the value of the Property to be $932,410. As of the end of
1993, the Plan had total assets of $1,937,410 of which the value of the
[[Page 35944]]
Property constituted approximately 48 percent (48%).\5\
\5\ The Department notes that the decision of Dr. Zaki, acting
as fiduciary on behalf of the Plan, in connection with the
acquisition and holding of the Property are governed by the
fiduciary responsibility requirements of part 4, subpart B, of Title
I. 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 the Plan's investment in and subsequent holding
of the Property, and no exemption from such provisions is proposed
herein.
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3. The Property is described as one story L-shaped strip shopping
center on a corner lot at the intersection of Vermont and Lexington
Avenues in Los Angeles, California. The Property consists of 14,300
square feet of land improved by a retail center that contains 7,747
square feet of rentable space divided into seven units. The Property
has fifteen (15) parking spaces which is represented to be an existing
legal non-conforming use. The Property is located at 1183-1193 North
Vermont Avenue and is situated across Lexington Avenue one half block
from the Employer's office. Dr. Zaki represents that the Property is
not contiguous with his medical office as the two are separated by
Lexington Avenue and has no bearing on his practice. For this reason,
Dr. Zaki maintains that no premium value is created by the proximity of
the Property to his medical office.
4. This exemption is requested to permit the Plan to sell the
Property to Dr. Zaki for the greater of $710,000 or the appraised fair
market value of the Property on the date of sale.
Dr. Zaki represents that since 1992 he has attempted to sell the
Property to unrelated third parties but has received no offers, because
banks are reluctant to finance commercial properties in neighborhoods
subject to crime and riots. Further, it is represented that the
Property is in need of substantial improvements, especially in the area
of tenant security. In Dr. Zaki's opinion it would be inappropriate for
the Plan to expend additional capital for such improvements.
It is represented that the proposed transaction is feasible in that
it involves a one-time sale of the Property for cash. In addition, the
proposed transaction is in the interest of the Plan in that the price
offered by Dr. Zaki could not be obtained otherwise. In this regard,
Dr. Zaki maintains that his offer is a highly advantageous one for the
Plan, as the Property continues to decline in value. Further, the Plan
will be able to sell the Property without incurring the expense of
searching for a buyer and without paying brokerage commission, fees, or
other expenses as a result of the transfer. It is represented that the
proportionate share of the proceeds from the sale of the Property will
be allocated to the accounts of each of the participants in the Plan.
Then once the Property is sold, it is represented that the Plan can
invest such cash proceeds in a more conservative investment mix in the
future.
In the opinion of Dr. Zaki, the proposed transaction is necessary
to protect the participants and beneficiaries of the Plan from the
deteriorating real estate market. It is represented that selling the
Property to Dr. Zaki will put an end to the continued loss of benefits
to participants in the Plan that result from the continuing decline in
the value of the Property.
Further, in addition to purchasing the Property from the Plan, Dr.
Zaki proposes to personally indemnify the accounts of the other
participants of the Plan against past losses. Specifically,
simultaneous with his purchase of the Property from the Plan, Dr. Zaki
will make a one-time non-tax deductible personal payment to the
Plan.\6\ It is represented that a proportionate amount of such payment
(approximately $4,086 in the aggregate) will be allocated to the
accounts of each of the participants, other than Dr. Zaki, in order to
restore the cumulative loss through December 31, 1994, of such
participants' accounts in the Plan to their share of the highest
appraised value of $1,496,676 for the Property, as reported on the
forms 5500-C/R for the calendar year 1991, and to credit such
participants' accounts with interest on such highest appraised value
through December 31, 1994, at the average certificate of deposit rates
of the Bank of America during the period from the highest appraisal
date to December 31, 1994. It is further represented that such interest
on the balance due to participants, other than Dr. Zaki, will continue
to accrue at the same rate from December 31, 1994, through the actual
date of the closing on the transactions. In this way only Dr. Zaki's
account in the Plan will suffer the loss that results from the proposed
transaction.
\6\ It is represented that note of the transactions will cause
the participants to exceed their section 415 limitations. It is
represented that the restoration of value will be done
proportionately without discrimination and will not exceed the
limits of contribution under section 415 of the Code.
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6. An appraisal of the Property was prepared by Donald P. Condit,
Jr. (Mr. Condit) SRPA, SRA and Stuart D. Holtzmann of The Condit
Appraisal Company, located in Santa Monica, California. It is
represented that the appraisers have the appropriate knowledge and
experience to complete the appraisal assignment competently, in that
they are both California State certified general real estate
appraisers, and in that Mr. Condit is a member of professional
organizations. It is represented that the appraisers are independent in
that they have no present or prospective interest in the Property and
have no personal interest or bias with respect to the participants in
the transaction. The appraisers represent that neither their employment
nor compensation was conditioned upon the appraisal producing a
specific value or a value within a given range. After physically
inspecting the Property, and reconciling values for the Property
established by the cost approach, income approach, and sales comparison
approach, the appraisers determined that the fair market value of the
leased fee interest in Property was $710,000, as of September 8, 1994.
7. In summary, Dr. Zaki represents that the proposed transaction
meets the statutory criteria for an exemption under section 408(a) of
the Act because:
(a) the sale of the Property will be a one-time transaction for
cash; (b) as a result of the sale, the Plan will receive in cash the
greater of $710,000 or the fair market value of the Property, as
determined by an independent, qualified appraiser, as of the date of
the sale; (c) the Plan will pay no commissions, fees, or other expenses
as a result of the transaction; (d) the terms of the sale will be no
less favorable to the Plan than those it would have received in similar
circumstances when negotiated at arm's length with unrelated third
parties; (e) the Plan will be able to invest the proceeds from the sale
of the Property in more profitable assets; (f) the Plan will be able to
dispose of the Property which continues to decline in value; and (g)
with the exception of Dr. Zaki, the accounts of the participants in the
Plan will be compensated for any losses which resulted from the decline
in value of the Property.
For Further Information Contact: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (This is not a toll-free number.)
The Bank of New York (the Bank) Located in New York, New York
[Application No. D-10030]
Proposed Exemption
Section I--Exemption for the Acquisition, Holding and Disposition of
BNY Stock
The restrictions of sections 406(a)(1)(D), 406 (b)(1) and (b)(2) of
the Act, and the sanctions resulting from the application of section
4975 of the
[[Page 35945]]
Code by reason of section 4975(c)(1) (D) and (E) of the Code, shall not
apply to the acquisition, holding or disposition of the common stock of
the Bank's parent corporation, The Bank of New York Company, Inc. (BNY
Stock), by Index or Model-Driven Funds, if the following conditions and
the General Conditions of Section II are met:
(a) The Index or Model-Driven Fund is based on an index which
represents the investment performance of a specific segment of the
public market for equity securities in the United States and/or foreign
countries. The organization creating and maintaining the index must be
(1) engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients, (2) a publisher of financial news or information, or (3) a
public stock exchange or association of securities dealers. The index
must be created and maintained by an organization independent of the
Bank and its affiliates. The index must be a generally accepted
standardized index of securities which is not specifically tailored for
the use of the Bank or its affiliates.
(b) The acquisition or disposition of the BNY Stock is for the sole
purpose of maintaining strict quantitative conformity with the relevant
index upon which the Index or Model-Driven Fund is based.
(c) All acquisitions comply with Rule 10b-18 of the Securities and
Exchange Commission, including the limitations regarding the price paid
or received for such stock.
(d) Aggregate daily purchases of BNY Stock constitute no more than
the greater of: (1) 10 percent of the stock's average daily trading
volume for the previous five days; or (2) 10 percent of the stock's
trading volume on the date of the transaction.
(e) If the necessary number of shares of BNY Stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Index or Model-Driven Funds to require BNY Stock,
the Bank appoints a fiduciary which is independent of the Bank and its
affiliates to design acquisition procedures and monitor the Bank's
compliance with such procedures.
(f) All purchases and sales of BNY Stock are executed on the
national exchange on which BNY Stock is primarily traded.
(g) No transactions involve purchases from, or sales to, the Bank
or any affiliate (including officers, directors and employees of the
Bank, as defined in Section III(c) below), or any party in interest
with respect to a plan which has invested in an Index or Model-Driven
Fund.
(h) No more than five (5) percent of the total amount of BNY Stock
issued and outstanding at any time is held in the aggregate by the
Index and Model-Driven Funds.
(i) BNY Stock constitutes no more than two (2) percent of the value
of any independent third-party index on which the investments of an
Index or Model-Driven Fund are based.
(j) A plan fiduciary independent of the Bank and its affiliates
authorizes the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds BNY Stock.
(k) A fiduciary independent of the Bank and its affiliates directs
the voting of the BNY Stock held by an Index or Model-Driven Fund on
any matter in which shareholders of BNY Stock are required or permitted
to vote.
Section II--General Conditions
(a) The Bank maintains or causes to be maintained for a period of
six years from the date of the transaction the records necessary to
enable the persons described in paragraph (b) of this Section to
determine whether the conditions of the exemption have been met, except
that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Bank, the
records are lost or destroyed prior to the end of the six-year period,
and (2) no party in interest other than the Bank shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act
or to the taxes imposed by section 4975 (a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504 (a)(2) and (b) of the Act, the records
referred to in paragraph (a) of this Section are available at their
customary location for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of
the plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer with respect to any plan
participating in an Index or Model-Driven Fund or any duly authorized
employee or representative of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Index or Model-Driven Fund, or any duly authorized employee or
representative of such participant or beneficiary.
(2) None of the persons described in paragraph (b)(1) (B) through
(D) shall be authorized to examine trade secrets of the Bank, any of
its affiliates, or commercial or financial information which is
privileged or confidential.
Section III--Definitions
(a) Index Fund--Any investment fund, account or portfolio
sponsored, maintained and/or trusteed by the Bank, or an affiliate of
the Bank, in which one or more investors invest which is designed to
replicate the capitalization-weighted composition of a stock index
which satisfies the conditions of Section I (a) and (i).
(b) Model-Driven Fund--Any investment fund, account or portfolio
sponsored, maintained and/or trusteed by the Bank, or an affiliate of
the Bank, in which one or more investors invest which is based on
computer models using prescribed objective criteria to transform an
independent third-party stock index which satisfies the conditions of
Section I(a) and (i).
(c) Affiliate--Any person directly or indirectly, through one or
more intermediaries, controlling, controlled by, or under common
control with such person; any officer, director, partner, employee,
relative (as defined in section 3(15) of the Act), a brother, a sister,
or a spouse of a brother or a sister of such person; and any
corporation or partnership of which such person is an officer,
director, or partner.
Summary of Facts and Representations
1. The Bank is the principal subsidiary of The Bank of New York
Company, Inc., the 16th largest bank holding company in the United
States, with total assets of approximately $49 billion at the end of
1994. The Bank is one of the largest commercial banks in the country,
and with its sister bank and trust company subsidiaries is one of the
largest providers of securities processing, money management and other
administrative and management services to institutional investors,
including employee benefit plans subject to the Act.
2. In furnishing investment management services, the Bank acts as a
fiduciary to its employee benefit plan customers. A principal vehicle
employed by the Bank in furnishing investment management services is
its Collective Trust. The Collective Trust accepts investment from
employee benefit plans subject to the Act as well
[[Page 35946]]
as governmental plans and governmental units not subject to the Act.
The Collective Trust is exempt from federal income taxation pursuant to
IRS Rev. Rul. 81-100.
The Collective Trust consists of a series of separate investment
funds, each with a separate investment objective and portfolio of
assets. It is possible for a plan to invest solely in one, or in
several but less than all, of the investment funds, as selected and in
such amounts as determined by the plan's named fiduciary. The value of
a plan's investment in any given fund depends solely on the investment
performance of that fund, unrelated to the investment performance of
the other funds within the Collective Trust.
3. Among the new funds established within the Collective Trust
early in 1994 is the Bank's Mid Cap Index Fund, whose objective is to
replicate as closely as may be practicable the performance of the
Standard & Poor's (S&P) MidCap 400 Index. The Bank initially requested
an exemption to permit the acquisition, holding and disposition of BNY
Stock by the Bank's Mid Cap Index Fund because the BNY Stock was
included in the S&P MidCap 400 Index. However, effective March 30,
1995, the BNY Stock was added to the S&P 500 Index. Since the Bank also
maintains within the Collective Trust a large S&P 500 Index Fund, the
Bank now requests an exemption to permit the acquisition, holding and
disposition of BNY Stock by the Bank's S&P 500 Index Fund.
4. The S&P 500 Index is an index of 500 stocks that are traded on
the New York Stock Exchange (NYSE), the American Stock Exchange, and
the NASDAQ National Market System. It is a market value-weighted index,
multiplying shares outstanding times stock price, in which each
company's influence on index performance is directly proportional to
its market value. The 500 companies chosen by the S&P Index Committee
for the index are not the 500 largest companies but, instead, are the
companies that tend to be leaders in key industries within the U.S.
economy, as determined by the Committee.
The Bank's S&P 500 Index Fund was established in 1989. Its
objective is to track as closely as possible the total return of the
S&P 500 Index. The Fund currently has total assets of approximately
$554 million as of May 9, 1995 and approximately 16 employee benefit
plan investors.
5. The Bank requests that the exemption cover the acquisition,
holding and disposition of BNY Stock by any Index or Model-Driven Fund
sponsored, maintained and/or trusteed by the Bank or an affiliate. The
Bank represents that such Index Funds will include any investment fund,
account or portfolio in which one or more investors invest which is
designed to replicate the capitalization-weighted composition of an
independent third-party stock index. In addition, the Bank represents
that such Model-Driven Funds will include any investment fund, account
or portfolio in which one or more investors invest which is based on
computer models using prescribed objective criteria to transform an
independent third-party stock index. All independent third-party stock
indexes used by the Bank for an Index or Model-Driven Fund will
represent the investment performance of a specific segment of the
public market for equity securities in the United States and/or foreign
countries. The organization creating and maintaining the index will be:
(a) engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients; (b) a publisher of financial news or information; or (c) a
public stock exchange or association of securities dealers. The index
will be created and maintained by an organization independent of the
Bank and its affiliates. The index will be a generally accepted
standardized index of securities which is not specifically tailored for
the use of the Bank or its affiliates.
6. With respect to Model-Driven Funds, the Bank represents that the
portfolio of such a Fund would be determined by the details of a
computer model, which would examine structural aspects of the stock
market, rather than the underlying stock values. An example of a Model-
Driven would include a fund which ``transforms'' the S&P 500 Index,
making investments according to a computer model which uses such data
as the following: (a) earnings, dividends and price-earnings ratios for
common stocks in the S&P 500 Index; (b) current yields on corporate
bonds and money market instruments; and (c) historical standard
deviations and correlations of and between asset classes. However, like
Index Funds, the Model-Driven Funds would be passively managed, in that
decisions of which stocks to buy or sell would not be the result of
active evaluation of the investments by an investment manager, but
would be determined in accordance with a predetermined computer model.
The Bank states that it does not currently maintain any Model-
Driven Funds of the type described above, but is considering
establishing such funds in the future. Prior to May 1, 1995, the Bank
maintained a South Africa Constrained Index Fund, whose objective was
to track the S&P 500 Index by excluding certain stocks of companies
that had direct equity investment in the Republic of South Africa and
were not signatories to a Statement of Principles for South Africa as
of April 28, 1994. However, the South Africa Constrained Index Fund was
discontinued by the Bank as of April 28, 1995.
7. With respect to the proposed purchase of BNY Stock by the Funds,
the Bank states that all such acquisitions will comply with Rule 10b-18
of the Securities and Exchange Commission (SEC), including the
limitations regarding the price paid or received for such stock. SEC
Rule 10b-18 provides a ``safe harbor'' for issuers of securities from
section 9(a)(2) of the Securities Exchange Act of 1934 and SEC Rule
10b-5 (which generally prohibits persons from manipulating the price of
a security and engaging in fraud in connection with the purchase or
sale of a security).
The Bank states that the conditions imposed by Rule 10b-18 for
purchases of BNY Stock would be as follows: (a) all purchases would be
made from or through only one broker on any single day; (b) no
purchases would constitute the opening transaction in BNY Stock; (c)
purchases would not occur within one-half hour before the scheduled
close of trading on the NYSE; (d) the price would not be higher than
the current independent bid quotation or the last independent sale
price on the exchange, whichever is higher; and (e) if the purchases of
BNY Stock are not block purchases as defined by Rule 10b-18(b)(4), the
total amount of purchases on any one day would not exceed the higher of
one round lot or the number of round lots closest to 25 percent of the
trading volume for BNY Stock on that day.
However, notwithstanding the restrictions of Rule 10b-18, the Bank
states that aggregate daily purchases of BNY Stock will constitute no
more than the greater of: (a) 10 percent of the stock's average daily
trading volume for the previous five days; or (b) 10 percent of the
stock's trading volume on the date of the transaction.
8. The Bank states that all purchases and sales of BNY Stock will
be executed on the national exchange on which BNY Stock is primarily
traded. In addition, no transactions will involve purchases from, or
sales to, the Bank or any affiliate (including officers, directors and
employees of the Bank, as defined in Section III(c) above), or any
party in interest with respect to a plan which has invested in an Index
or Model-Driven
[[Page 35947]]
Fund. The Bank states further that no more than five (5) percent of the
total amount of BNY Stock issued and outstanding at any time will be
held in the aggregate by the Index and Model-Driven Funds. Finally, the
Bank represents that it will ensure that BNY Stock does not constitute
more than two (2) percent of the value of any independent third-party
index on which the investments of an Index or Model-Driven Fund are
based. In this regard, the weight currently assigned to BNY Stock in
the S&P 500 Index is approximately 0.169 percent. Prior to the addition
of the BNY Stock to the S&P 500 Index, the Bank states that the BNY
Stock comprised approximately 1.27 percent of the S&P MidCap 400 Index.
9. The Bank states that if the necessary number of shares of BNY
Stock cannot be acquired within 10 business days from the date of the
event which causes the particular Index or Model-Driven Funds to
require BNY Stock, the Bank will appoint a fiduciary which is
independent of the Bank and its affiliates to design acquisition
procedures and monitor the Bank's compliance with such procedures. In
addition, the Bank states a fiduciary independent of the Bank and its
affiliates will direct the voting of the BNY Stock held by an Index or
Model-Driven Fund on any matter in which shareholders of BNY Stock are
required or permitted to vote. Finally, the Bank represents that a plan
fiduciary independent of the Bank and its affiliates will authorize the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds BNY Stock.
10. With respect to acquisitions of BNY Stock by the Funds, the
independent fiduciary and its principals will be completely independent
from the Bank and its affiliates and will be experienced in developing
and operating investment strategies, including index funds. The
independent fiduciary will be responsible for accurately representing
that during the operation of any trading program based upon acquisition
procedures developed by the fiduciary, no principal employee of the
fiduciary nor the fiduciary itself will engage in any trading of any
kind in BNY Stock. Furthermore, the independent fiduciary will not act
as the broker for any purchases or sales of BNY Stock and will not
receive any commissions as a result of the trading program.
In connection with the initial acquisition of BNY Stock by the
Bank's S&P 500 Index Fund, the Bank calculates that the number of
shares that would have to be bought by such Fund would not exceed
28,000. This estimate is based on the figures for the size of the
Bank's S&P 500 Index Fund and the weight assigned to BNY Stock in the
S&P 500 Index.
The Bank states that based on recent figures for the high, low and
average daily trading volume for the BNY Stock on the NYSE, the initial
requirements of the Bank's S&P 500 Index Fund could be met by the Bank
placing a market-on-close order on the NYSE on a single business day--
or at the most two successive business days. Under the established
rules of the NYSE, the price on such an order would be set
automatically, permitting no discretion on the part of the order
placing party. The Bank represents that the impact of such purchases on
the market for BNY Stock would be minimal, and that under such
circumstances the full and proper protection of the interests of plan
investors would not require or warrant the retention of an independent
fiduciary to develop a trading program for the initial acquisitions of
BNY Stock.
11. With respect to the voting of BNY Stock, the independent
fiduciary chosen by the Bank will be a firm knowledgeable and
experienced in corporate governance issues and proxy voting on behalf
of public and private pension funds, banks, trust companies, money
managers, insurance companies and other institutional investors with
large equity portfolios. The independent fiduciary will develop, and
supply to the Bank, written material dealing with corporate ownership,
which will act as a guideline to the voting of proxies by institutional
fiduciaries, and their current voting guidelines. The Bank will provide
the independent fiduciary with all necessary information regarding the
Funds that hold BNY Stock, the amount of BNY Stock held by such funds
on the record date for shareholder meetings of The Bank of New York
Company, Inc., and all proxy and consent materials for BNY Stock. The
independent fiduciary will maintain records of its activities as an
independent fiduciary on behalf of the Funds, including the number of
shares of BNY Stock voted, the manner in which they were voted, and the
rationale for the vote if it was not consistent with the independent
fiduciary's corporate ownership material and current voting guidelines
in effect at the time of the vote. The independent fiduciary will
supply the Bank with the information after each shareholder meeting and
will acknowledge that it will be acting as a fiduciary with respect to
the plans that invest in the Funds which own BNY Stock, when voting
such stock.
12. In summary, the applicant represents that the proposed
transactions will satisfy the criteria of section 408(a) of the Act for
the following reasons: (a) the acquisition, holding and disposition of
BNY Stock will occur solely to maintain strict quantitative conformance
by an Index or Model-Driven Fund to its underlying index or model; (b)
all acquisitions and dispositions of BNY Stock will occur in the open
market and will comply with SEC Rule 10b-18; (c) aggregate daily
purchases of BNY Stock will constitute no more than the greater of
either 10 percent of the stock's average daily trading volume for the
previous five days, or 10 percent of the stock's trading volume on the
date of the transaction; (d) no more than 5 percent of the total
outstanding shares of BNY Stock will be held in the aggregate by the
Funds; (e) BNY Stock will constitute no more than 2 percent of the
value of any independent third-party index on which the investments of
an Index or Model-Driven Fund are based; (f) if the necessary number of
shares of BNY Stock cannot be acquired within 10 business days from the
date of the event which causes the particular Index or Model-Driven
Funds to require BNY Stock, the Bank will appoint a fiduciary which is
independent of the Bank and its affiliates to design acquisition
procedures and monitor the Bank's compliance with such procedures; (g)
a fiduciary independent of the Bank and its affiliates will direct the
voting of any BNY Stock held by the Funds; and (h) a plan fiduciary
independent of the Bank and its affiliates will authorize the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds BNY Stock.
For Further Information Contact: Mr. E.F. Williams of the
Department, telephone (202) 219-8194. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a
[[Page 35948]]
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 July, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-17074 Filed 7-11-95; 8:45 am]
BILLING CODE 4510-29-P
