[Federal Register Volume 63, Number 138 (Monday, July 20, 1998)]
[Notices]
[Pages 38854-38860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19234]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10324, et al.]
Proposed Exemptions; Pacific Income Advisers, Inc.
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 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
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, 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
[[Page 38855]]
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, N.W., Washington, D.C.
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, 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.
Pacific Income Advisers, Inc. (PIA), Located in Santa Monica, CA
[Application No. D-10324]
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 32847, August 10, 1990).
Section I--Proposed Exemption Involving Plans Where PIA Is Both a
Fiduciary or Other Party in Interest With Respect to the Plan and
Investment Adviser of Certain Trusts in Which the Plans Invest
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) 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
(F) of the Code, shall not apply to: (1) The acquisition, sale or
redemption of trust units (the Units) in the Pacific Income Advisers
Fixed-Income Group Investment Trust (Fixed Income Trust), the Pacific
Income Advisers Short-Term Group Investment Trust (Short-Term Trust),
the Pacific Income Advisers Equity Group Investment Trust (Equity
Trust), and the Pacific Income Advisers International Group Investment
Trust (International Trust; each a Trust and collectively, the Trusts),
by employee plans, and Individual Retirement Accounts (IRA's;
collectively, the Plan(s)); and (2) the payment of fees by a Trust to
Pacific Income Advisers (PIA) where PIA is a fiduciary or other party
in interest with respect to a Plan investing in a Trust and the
investment adviser to each of the Trusts, provided the conditions of
Section II are satisfied.
Section II--Conditions
(1)(a) The investment of a Plan's assets in each of the Trusts and
the fees to be paid by a Trust to PIA are authorized in writing by a
Plan fiduciary who is independent of PIA (Independent
Fiduciary).1 Such authorization shall be consistent with the
responsibilities, obligations and duties imposed on fiduciaries by Part
4 of Title I of the Act. In addition, such authorization shall be
either: (1) Set forth in the investment management agreement between
the Plan and PIA; (2) indicated in writing prior to each purchase or
sale; or (3) indicated in writing prior to the commencement of a
specified purchase or sale program in the Units of the Trusts.
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\1\ A fiduciary will not be deemed independent of PIA if: (1)
Such fiduciary is directly or indirectly controlled by PIA or an
affiliate thereof; (2) such fiduciary or any officer, director,
partner, highly compensated employee, or the relative of such
fiduciary is an officer, director, partner, or highly compensated
employee, of PIA or an affiliate of PIA; and (3) such fiduciary
directly or indirectly receives any compensation or other
consideration for that fiduciary's own personal account in
connection with any transaction described in this proposed
exemption.
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(b) PIA does not provide investment advice to a Plan's Independent
Fiduciary within the meaning of 29 CFR 2510.3-21(c)(1)(ii) with respect
to a Plan's acquisition of Units of a Trust.
(2) Prior to making an initial investment in the Units, each Plan's
Independent Fiduciary shall receive the following written disclosures
from PIA:
(a) The proposed exemption and grant notice describing the
exemptive relief provided herein;
(b) The applicable Trust's Offering Memorandum, outlining the
investment objective(s) of the Trust and the policies employed to
achieve these objectives and a description of all fees associated with
investment in the Trust; and
(c) The applicable Trust's Agreement and Declaration of Trust,
disclosing the structure and manner of operation of the Trust.
(d) A statement describing the relationship between PIA and the
Trusts.
(3) The Independent Fiduciary shall acknowledge in writing that the
Plan is an ``accredited investor'' as defined in Rule 501 of Regulation
D of the Securities Act of 1933 (1933 Act). In addition, the
Independent Fiduciary shall acknowledge in writing that it has not
relied upon the advice of PIA with respect to the acquisition, sale or
redemption of the Units.
(4) No Plan shall pay a sales commission or redemption fee, in
connection with the acquisition, sale or redemption of the Units of the
Trusts.
(5)(a) No participating Plan may invest more than 25% of its total
assets in the International Trust.
(b) No Plan, other than a multiple employer welfare arrangement
(MEWA), a multiple employer trust (MET), or voluntary employee benefit
association (VEBA), may acquire or hold Units representing more than
20% of the assets of a Trust.2 A MEWA, MET, or VEBA may
acquire and hold Units representing up to 35% of the assets of either
the Short-Term Trust or Fixed Income Trust only. As to investment in
any other Trust, a MEWA, MET, or
[[Page 38856]]
VEBA may not acquire or hold Units representing more than 20% of the
assets of such Trust.
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\2\ A MEWA is defined in section 3(40)(A) of the Act and
provides benefits described in section 3(1) of the Act for employees
of two or more employers. Although the term ``MET'' is not used or
defined in title I of the Act, a MET may be covered by title I of
the Act, to the extent that it provides benefits described in
section 3(1) of the Act and it is established or maintained by an
employer, an employee organization, or both. A VEBA is defined in
section 501(c)(9) of the Code and is subject to title I to the
extent that it provides benefits described in section 3(1) of the
Act and it is established or maintained by an employer, an employee
organization, or both.
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(c) For purposes of determining the percentage of the assets of a
Trust being held by a single Plan, PIA shall first make the calculation
90 days after the first Unit of a Trust is sold to such Plan.
(6)(a) At the time the transactions are entered into, the terms of
the transactions shall be at least as favorable to the Plans as those
obtainable in arm's length transactions between unrelated parties.
(b) PIA, including any officer or director of PIA, does not
purchase or sell shares of the Trusts from or to any Plan Client.
(c) The price paid or received by a Plan Client for Units of a
Trust is the net asset value per Unit at the time of the transaction
and it is the same price which would have been paid or received for the
Units of a Trust by any other investor at that time. For purposes of
this paragraph, the term net asset value means the amount for purposes
of pricing all purchases and sales calculated by dividing the value of
all securities, determined by an objective method as set forth in each
Trust's relevant Trust documents and Trust Offering Memorandum, and
other assets belonging the Trust, less the liabilities charged to such
Trust, by the total number of Units of the Trust.
(7) The combined total of all fees paid by a participating Plan
shall constitute no more than reasonable compensation within the
meaning of section 408(b)(2)of the Act.
(8) The Plan does not pay any Plan-level investment management
fees, investment advisory fees or similar fees to PIA with respect to
any of the assets of such Plan which are invested in Units of a Trust.
This condition does not preclude the payment of investment advisory or
similar fees by the Trusts to PIA under the terms of investment
management agreements between PIA and each of the Trusts.
(9) All authorizations and approvals made by the Independent
Fiduciary regarding investment in a Trust and the fees paid to PIA are
subject to an annual reauthorization wherein any such prior
authorization shall be terminable at will by the Plan, without penalty
to the Plan, upon written notice of termination. A form expressly
providing an election to terminate the authorization (the Termination
Form) with instructions on the use of the form must be supplied to the
Independent Fiduciary no less than annually; provided that the
Termination Form need not be supplied sooner pursuant to paragraph (10)
below. The Termination Form must include the following information:
(a) The authorization is terminable at will by the Plan, without
penalty to the Plan, upon receipt by PIA of written notice from the
Independent Fiduciary; and
(b) Failure of the Independent Fiduciary to return the Termination
Form will result in continued authorization of PIA to continue to
engage in the transactions described in Sections I.
(10) PIA will provide, at least 30 days in advance of the
implementation of an additional service to a Trust by PIA or a fee
increase for investment management, investment advisory or similar
services, a written notice to the Independent Fiduciary of the Plan
Client explaining the nature and amount of the additional service for
which a fee is charged or the increase in fees.
(11) Each Plan shall receive the following:
(a) A monthly report disclosing the performance and the value of
the Plan's investment in each of the Trusts. Such monthly report shall
disclose the extent to which assets of a Plan have been shifted between
the Trusts by PIA and any fee differential resulting from such shifting
between the Trusts;
(b) An audited financial statement of each of the Trusts in which a
Plan is invested, prepared annually by a independent, certified public
accountant, including a list of investments of each Trust and their
valuations, provided to the Plan not later than 45 days after the end
of the period to which the report relates; and
(b) An annual statement of a Plan's percentage interest in each
Trust and the value of the Plan's Units, provided to the Plan not later
than 45 days after the end of the period to which the report relates.
Such report shall also include the total fees paid to PIA by each
Trust. Further, such report shall also include the brokerage fees paid
by each Trust to unrelated broker-dealers, as well as the total of all
fees and expenses paid by PIA to third parties.
(12) Brokerage transactions for the Trusts are performed by
entities unrelated to PIA for no more than reasonable compensation
within the meaning of section 408(b)(2) of the Act.
(13) PIA shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (14) of this
section to determine whether the conditions of this exemption have been
satisfied, except that (a) prohibited transaction will not be
considered to have occurred if, due to circumstances beyond the control
of PIA, the records are lost or destroyed prior to the end of the six
year period, and (b) no party in interest other than PIA 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 (13) below.
(14)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsection (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (13) of this
section shall be unconditionally available at their customary location
during normal business hours by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(2) Any Independent Fiduciary of a Plan investing in a Trust, or
any duly authorized representative of such fiduciary;
(3) Any contributing employer to any Plan investing in a Trust, or
any duly authorized employee representative of such employer;
(4) Any participant or beneficiary of any participating Plan
investing in a Trust, or any duly authorized representative of such
participant or beneficiary; and
(5) Any other person or entity investing in a Trust.
(b) None of the persons described above in subparagraphs (2)-(5) of
this paragraph (14) shall be authorized to examine the trade secrets of
PIA or commercial or financial information which is privileged.
Effective Date: If granted, this proposed exemption will be
effective August 29, 1997.
Summary of Facts and Representations
1. PIA, which maintains its headquarters in Santa Monica,
California, is an investment adviser registered under the Investment
Advisers Act of 1940, as amended. As of January 1, 1997, PIA rendered
investment advisory services with respect to $3.1 billion in client's
assets.
2. It is represented that in order to offer both lower fees
relative to the fees charged by PIA for separate account management,
and to provide an investment vehicle that will facilitate effective
diversification and management of investor assets, PIA organized each
Trust as a business trust under the laws of the Commonwealth of
Massachusetts. The Trusts were organized on August 29, 1997. PIA is the
investment adviser for each Trust and Imperial Trust Company (Imperial)
[[Page 38857]]
serves as trustee and custodian of each Trust. Imperial is a wholly
owned subsidiary of Imperial Bank, N.A., and is not affiliated with
PIA.
3. With regard to some Plan clients (Plan Clients) who invest in
the Trusts, PIA has no pre-existing fiduciary relationship. Investments
in a Trust will only occur with the express written consent of an
Independent Fiduciary. PIA notes that in the situation where Units of a
Trust are sold to a Plan Client with which PIA does not have a pre-
existing relationship prior to the Plan Client's initial purchase, a
prohibited transaction could arise under section 406(a) of the Act upon
a subsequent purchase or redemption of Units of a Trust. This is
because a party in interest relationship would have been established by
virtue of PIA serving as investment adviser and fiduciary with respect
to the Plan assets invested in the Trusts.3
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\3\ PIA represents that the equity participation by all Plans
investing in Units of a Trust is expected to exceed 25% of the value
of all Units of each of the Trusts and it has not been established
that the Trusts are operating companies. Accordingly, it is
anticipated that the underlying assets of the Trusts will constitute
``plan assets'' within the meaning of 29 CFR 2510.3-101.
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4. Also, in some instances, PIA explains that a prohibited
transaction may arise under section 406(a) of the Act if the Plan
acquires Units of a Trust where the Plan Client has previously entered
into a separate account investment management agreement with PIA and
the Plan Client subsequently wishes to change the nature of its
relationship with PIA from a separate account investment to an
investment in a Trust. In such a situation, the Plan will terminate its
separate account relationship with PIA and invest in the Trusts. The
initial investment in a Trust may give rise to a prohibited transaction
because of the pre-existing relationship between PIA and the Plan
Client.
5. Further, some Plan Clients may decide to continue the individual
investment management relationship with PIA or permit PIA, at its
discretion, to move Plan assets between one or more Trusts, subsequent
to a Plan's investment in a Trust. In these instances, possible
violations of sections 406(a) and 406(b) of the Act may occur with
respect to PIA's sale of Units of a Trust to such Plans. Also, PIA
represents that the purchase of Units of a Trust by a Plan Client may
give rise to a prohibited transaction because of the receipt of fees by
PIA from the Trusts as a result of the investment of Plan assets in a
Trust. In situations where the Plan Clients decide to continue the
individual investment management relationships with PIA following the
investment in the Trusts, PIA represents that it will not receive
duplicate fees (i.e., a Plan-level investment management fee and a
Trust-level investment management fee) with respect to the assets of a
Plan that are invested in a Trust. Specifically, PIA represents that it
will forego that portion of the plan-level investment management fee to
which it would be entitled to receive under the investment management
agreement with the Plans where assets subject to that agreement are
also invested in a Trust.
6. PIA represents that it will not act as an investment adviser,
within the meaning of section 3(21)(A)(ii) of the Act, to such Plan
Clients which propose to invest in one or more Trusts. PIA represents
that the decision to invest in a Trust will be made by an Independent
fiduciary on the basis of his or her own investigation into the
advisability of investing in one or more Trusts.4 PIA
represents that under no circumstances will it have discretionary
authority or control with respect to an Independent Fiduciary's initial
authorization or approval to acquire Units.
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\4\ To the extent that in the ordinary course of business, PIA
provides investment advice to a Plan within the meaning of
regulation 29 CFR 2510.3-21(c)(1)(ii)(B) and recommends an
investment of the Plan's assets in a Trust, the presence of an
independent fiduciary acting on the investment adviser's
recommendations on behalf of the Plan is not sufficient to insulate
the adviser from fiduciary liability under section 406(b) of the
Act. (See Advisory Opinions 84-03A and 84-04A, issued by the
Department on January 4, 1984.) No relief is being provided herein
for the provisions of investment advice in connection with the
Plan's investment in the Trusts.
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7. With respect to subsequent shifting of assets between the
various trusts, PIA may have the discretionary authority to effect such
transactions. However, PIA will obtain authorization or approval from
the Plan Client prior to shifting assets between the various Trusts.
Such authorization or approval by an Independent Fiduciary shall be
either: (1) Set forth in the investment management agreement between
the Plan Client and the PIA; (2) indicated in writing prior to each
purchase or sale; or (3) indicated in writing prior to the commencement
of a specified purchase or sale program in the Trusts.
8. Each Trust will maintain and pursue a separate investment
objective by investing in equity and debt securities. For example, the
objective of the Equity Trust is to provide long-term growth of capital
by investing primarily in equity securities. PIA represents that the
Equity Trust is expected to invest a majority of its assets in U.S.
securities. In addition to investing in equity securities, the Equity
Trust may as well invest in high-grade debt securities. PIA further
represents that the Equity Trust will not: (1) Invest more than 10% of
its assets in the securities of any one issuer, excluding obligations
of the U.S. Government and its instrumentalities; and (2) invest more
than 25% of its assets in any one industry.
The Short-Term Trust's investment profile is similar to that of a
money market fund. PIA represents that the Short-Term Trust will invest
its assets only in investment grade debt securities the average
maturity of which will not exceed three years, including U.S. Treasury
obligations, U.S. government agency obligations, collateralized
mortgage obligations (excluding swaps), corporate bonds, commercial
paper and repurchase agreements. The primary investment objectives of
the Short-Term Trust are, in order of preference: (1) To preserve
principal; (2) maintain liquidity; and (3) to maximize the rate of
return available from investments consistent with these objectives. The
rate of return objective of the Short-Term Trust is to attain a total
rate of return that exceeds that available for a Certificate of Deposit
and other similar short-term investment strategies.
The investment objective of the Fixed Trust is to maximize its
total rate of return on its investment portfolio, including realized
and unrealized appreciation, and to minimize risk. In accordance with
these investment objectives, the Fixed Trust will invest primarily in
high quality debt securities which are rated as investment grade by at
least one of the major credit rating agencies, or judged to be of
comparable quality, by PIA. It is represented that the Fixed Trust's
portfolio of securities will be diversified. Specifically, the Fixed
Trust will not: (1) Invest more than 10% of its total assets in the
securities of one issuer, excluding obligations of the U.S. government,
its agencies, and instrumentalities; and (2) invest more than 25% of
its assets in issuers whose principal business activities are in the
same industry, excluding obligations of the U.S. Government, its
agencies, and instrumentalities.
The applicant believes that the investment in Units of the Short-
Term Trust and Fixed Trust by a MEWA , MET, or VEBA would be an
effective way for such Plans to manage its assets to meet its regular
needs for cash to pay benefit claims. In this regard, the applicant
believes that it would be in the interest of a MEWA, MET, or VEBA to
own as much as 35% of the Units of each of the Short-Term Trust and
Fixed Trust.
[[Page 38858]]
The objective of the International Trust is to achieve growth of
capital and to earn income. The International Trust will seek to
achieve these objectives by investing, under normal circumstances, in
debt securities issued in emerging and developed markets located
throughout the world including: (1) Debt securities issued or
guaranteed by U.S. or foreign governments, their agencies,
instrumentalities or political subdivisions, or by government owned,
controlled or sponsored entities, including central banks
(collectively, ``Sovereign Debt''), including Brady Bonds; 5
(2) interests in issuers organized and operated for the purpose of
restructuring Sovereign Debt; (3) debt securities issued by foreign
banks and other foreign business entities; and (4) debt securities
denominated in or indexed to the currencies of emerging and developed
markets. PIA represents that under normal circumstances, 75% or more of
the International Trust's portfolio will be comprised of debt
instruments of issuers located in global developed markets, including
the United States. Further, no more than 25% of the International
Trust's assets will be invested in debt securities of issuers in
emerging markets. While the International Trust is not restricted in
the portion of its assets that may be invested in securities of issuers
located in a single region, under normal conditions the International
Trust's assets will be invested in the securities of issuers located in
at least three countries, and the International Trust's investments in
the securities issued in any one country, other than the United States,
will not exceed 25% of the International Trust's assets.
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\5\ Brady Bonds are the most liquid asset class in fixed income
emerging market securities. These bonds have been issued in exchange
for outstanding sovereign bank loans in a number of developing
countries as part of debt reduction/restructuring plans named after
former Treasury Secretary Nicholas Brady. Brady Bonds have been
implemented as a method of restructuring debt in emerging markets
since 1989. All Brady Bonds carry principal and interest collateral
guarantees in the form of U.S. Treasury securities.
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9. The Trusts will be treated as partnerships within the meaning of
Part I of Subchapter K of the Code, and PIA will serve as the sole
general partner of each Trust with full discretion over management and
control of the business of each Trust. It is represented that PIA will
not beneficially own more than 1% of the assets of any Trust. PIA will
serve as investment adviser for each Trust. Under the investment
advisory agreements with each Trust, PIA will provide certain
investment advisory and management services that will primarily involve
the exercise of investment discretion with respect to each Trust's
assets. Beneficial owners of the Units (Unitholders) are anticipated to
include individuals, corporations, Plans and other tax-exempt
organizations. For its investment advisory services to the Equity
Trust, Fixed-Income Trusts, Short-Term Trust, and International Trust,
PIA will be paid an annual fee of .65%, .45%, .35% and .40%
respectively, of the assets held by each Trust, payable in quarterly
installments. The fee is a percentage of the value of each Trust. Such
fee is accrued monthly and is paid to PIA quarterly in arrears. Each
Plan bears a proportionate share of the fee based upon the value of its
Units in each Trust. Brokerage and custodial services will be performed
by unrelated third parties and the fees for such services will be
charged in addition to PIA's fees. It is represented that the fees paid
by the Plans will constitute no more than reasonable
compensation.6
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\6\ The Department expresses no opinion herein on whether the
fees charged by PIA satisfies the terms of section 408(b)(2) of the
Act.
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10. Units in the Trusts will be offered to Plans pursuant to a
Trust Offering Memorandum (the Memorandum). This document describes the
Trust, the parties involved and their rights, the investment
objectives, and the fees charged for investment in each of the
Trusts.7 PIA represents that to the extent that a Plan
acquires Units of one or more Trusts, that portion of a Plan's assets
will be diversified because each Trust constitutes a diversified pool
of securities.
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\7\ The Department wishes to note that the Act's general
standards of fiduciary conduct would apply to the investments
described in this proposed exemption, and that satisfaction of the
conditions of this proposal should not be viewed as an endorsement
of the investments by the Department. Section 404 of the Act
requires, among other things, that a fiduciary discharge his duties
with respect to a plan solely in the interest of the plan's
participants and beneficiaries and in a prudent fashion.
Accordingly, the plan fiduciary must act prudently with respect to
the decision to enter into an investment transaction. The Department
further emphasizes that it expects the plan fiduciary to fully
understand the benefits and risks associated with engaging in a
specific type of investment, including any changes in the value of
the investment. Thus, in considering whether to enter into a
transaction, a fiduciary should take into account its ability to
provide adequate oversight over the particular investment.
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11. A Plan fiduciary will determine how much to invest in a Trust
and such Plan will receive a pro rata interest in the Trust based upon
its capital account balance as compared to the capital account balances
of other investors. All investments in the Trust will be paid in cash.
12. It is represented that prior to accepting a subscription for
Units from a prospective Plan investor, PIA will furnish to an
Independent Fiduciary with (a) a copy of the applicable Trust's
offering Memorandum, which discusses the investment objective(s) of the
Trust, the policies employed to achieve these objectives, and the
compensation paid by each Trust to PIA, and fees paid by PIA and the
Trust to third parties; (b) the fees charged to a Plan by each Trust;
(c) a Subscription Agreement, which is designed to elicit information
about the Independent Fiduciary and the Plan to determine whether the
Plan qualifies as an ``accredited'' investor as set forth in Rule 501
of Regulation D of the 1933 Act; (d) a copy of the applicable Trust's
Declaration of Trust; and (e) copies of the notice of proposed
exemption and notice granting this exemption.
If a Plan is accepted as an investor in a Trust, the Independent
Fiduciary will be required to acknowledge in connection with the
execution of the Subscription Agreement that such fiduciary has
received copies of the above-noted documents. In addition, the
Independent Fiduciary will also be required to represent to PIA that
such fiduciary is (a) independent of PIA, (b) knowledgeable with
respect to the Plan in administrative matters and funding matters
related thereto, and (c) capable of making, and in fact has made, an
independent decision regarding the investment of Plan assets in the
Trust.
PIA represents that no officer, director or employee of PIA who
owns or controls, directly, or indirectly, five percent or more of the
beneficial ownership or voting power of PIA will be accepted as an
investor in a Trust. In addition, PIA will not be a sponsor of a Plan
that invests in Units of a Trust.
13. It is represented that after a Plan is accepted as a
Unitholder, PIA will provide each Unitholder with a monthly statement,
reflecting the performance of the Plan's investment in the Trust, and a
copy of the Trust's annual audited report.
14. Each Trust's Declaration of Trust provides that Units may not
be sold or transferred to a third party without PIA's consent. Because
Units will not be registered under the 1933 Act, they will be subject
to the restrictions on transfers imposed thereby under applicable state
securities laws. In Each Trust's Declaration of Trust, PIA has retained
the right to dissolve a Trust at anytime.
15. Although each Trust's Declaration of Trust restricts each
Unitholder's ability to assign its Units, Unitholders are allowed to
redeem their Units. To effect a redemption of Units, a Plan must
instruct PIA in writing at least seven (7) calender days prior to the
last business day of the month, which is the day on which each Trust's
assets are
[[Page 38859]]
valued (Valuation Date).8 Redemption requests received by
PIA in proper form at least seven (7) calendar days prior to the
month's Valuation Date will result in the Units being redeemed at the
net asset value per Unit determined on that month's Valuation Date,
with the cash redemption proceeds transferred to or for the benefit of
the redeeming Unitholder within seven (7) days thereafter. Redemption
requests received by PIA fewer than seven (7) days prior to the
Valuation Date will be effected at the per Unit price at the close of
business on the next month's Valuation Date, with cash proceeds
transferred to or for the benefit of the redeeming Plan within seven
(7) days after that Valuation Date.
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\8\ Each Trust's Declaration of Trust provides that Imperial,
the unrelated Trustee, shall determine the value of the assets of
the Trust on the basis of the following valuation rules:
(1) Marketable U.S. Government obligations (including guaranteed
obligations) shall be valued at the dealer bid prices appearing on
the Valuation Date. Such prices will be taken from recognized
pricing services.
(2) Securities listed on a securities exchange for which market
quotations are available will be valued at the last quoted sales
price on the Valuation Date or, if there has been no such reported
sale, at the mean between the current bid and ask prices. Price
information on listed securities will generally be taken from a
composite trading tape offered by one of the pricing services.
Unlisted U.S. securities for which market quotations are readily
available will be valued at the official market price as quoted by
the Trustee's pricing vendors.
(3) In those instances where there is no readily ascertainable
market value obtainable from any of the sources specified above,
investments shall be valued on the basis of data obtained from the
best qualified and available independent sources, including bankers,
brokers or dealers who may be employees of the unrelated Trustee,
brokers or dealers who deal in or are familiar with the type of
investment involved or other qualified appraisers, or by reference
to the market value of similar investments for which a market value
is readily ascertainable.
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16. PIA anticipates that each Trust will incur the following
expenses: organizational expenses, investment management and
administration fees, fees for necessary professionals, the costs of
regulatory compliance, and the costs associated with maintaining the
Trust's legal existence. Such expenses will be paid by PIA. Each Trust
will be responsible for paying brokerage commissions of unrelated
brokers. No Trust will impose sales charges, redemption fees or
commissions on the acquisition, sale or redemption of Units.
17. The books of the Trust will be audited annually by independent
certified public accountants selected by PIA. Each Independent
Fiduciary will receive a copy of the audited financial report of a
Trust in which it has invested Plan assets after the close of the
fiscal year of that Trust. The books and financial records of a Trust
will be open for inspection by an Independent Fiduciary of, any
contributing employer to, any participant or beneficiary of, or any
duly authorized representative of such participant or beneficiary of, a
Plan investing in Units of that Trust as well as the Department and the
Internal Revenue Service, during regular business hours.
18. In summary, it is represented that the proposed transactions
will meet the statutory criteria for an exemption under section 408(a)
of the Act because: (a) each Independent Fiduciary will be required to
represent that he or she is both independent of PIA and sufficiently
knowledgeable to make an informed decision regarding the transactions
described herein; (b) the Independent Fiduciary will be solely
responsible for making the decision with respect to that Plan's initial
acquisition of Units; (c) no Plan will pay a fee or commission by
reason of the acquisition, sale or redemption of Units; (d) Unitholders
will receive monthly statements and copies of the annual report for
each Trust in which assets are invested; (e) at the time the
transactions are entered into, the terms of the transactions shall be
at least as favorable to the Plans as those obtainable in arm's length
transactions between unrelated parties; (f) the fees paid by the Plans
shall constitute no more than reasonable compensation; and (g) with
respect to assets invested in a Trust, no Plan will pay an investment
management fee at the Plan level to PIA.
For Further Information Contact: Ms. Janet L. Schmidt of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
R & J Hoffman, Inc. Profit Sharing Plan (the Plan), Located in
Fremont, California
[Application No. D-10572]
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,
32847, 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:
(1) The proposed loan (the Loan) of $53,240 by the Plan to R & J
Hoffmann, Inc. (the Employer), a disqualified person with respect to
the Plan; and (2) the personal guarantee of the Loan by Richard and
Angela Hoffmann (the Hoffmanns), provided the following conditions are
satisfied: (a) The terms of the Loan are at least as favorable to the
Plan as those obtainable in an arm's-length transaction with an
unrelated party; (b) the Loan does not exceed 25% of the assets of the
Plan; (c) the Loan is secured by a second mortgage on certain real
property (the Property) which has been appraised by a qualified
independent appraiser to have a fair market value not less than 150% of
the amount of the Loan plus the balance of the first mortgage which it
secures; (d) the Hoffmanns have also personally guaranteed the Loan;
(e) in the event that the fair market value of the Property is no
longer adequate to secure all outstanding loans, additional property
will be pledged to the Plan to secure the Loan at an amount equal to at
least 150% of the outstanding principal balance of all loans secured by
the Property; and (f) the Hoffmanns are the only Plan participants to
be affected by the Loan.9
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\9\ Since the Hoffmanns are the sole owner of the Employer and
the only participants in the Plan, there is no jurisdiction under
Title I of the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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Summary of Facts and Representations
1. The Hoffmanns are the 100% owners of the Employer, a California
corporation, which is the sponsor of the Plan. The Employer is involved
in the purchasing of lighting fixtures from various countries in the
Pacific Rim and then selling the fixtures to United States retailers.
The Hoffmanns are the only participants in the Plan.
2. The Hoffmanns have requested an exemption that would permit the
Employer to borrow $53,240 from the Plan. The Plan had total assets of
$212,963.21 as of June 30, 1997. Therefore, the principal amount of the
Loan would represent less than 25% of the value of the Plan. The term
of the Loan will be for a period of five years at an interest rate
equal to the Prime Rate of Interest of U.S. banks (the Prime Rate) plus
1.5%, based on the published Prime Rate in the Western Edition of the
Wall Street Journal, which currently would be 8.5% per annum. The
interest rate will be adjusted during the term of the Loan whenever
there is a change in the Prime Rate. The new interest rate will be
effective immediately after such adjustment and will remain in effect
until the next time the Prime Rate changes. The Loan will be repaid in
equal monthly installments of principal and interest using a level
amortization schedule until there is a change in the Prime Rate, at
which time a new amortization schedule will be put into
[[Page 38860]]
place. Mr. Jeffrey Good of Wells Fargo Bank, N.A. (the Bank), has
represented in a letter dated February 27, 1998, that the Bank would
require a rate of Prime plus .75% in order to make a similar loan to
the Employer.
3. The Loan will be secured by the Property, which consists of the
Hoffmanns' residence, which is located at 1324 Grosventres Court,
Fremont, California. The Property has been appraised by Karen J. Mann,
SRA of Mann & Associates, an independent real estate appraiser in
Fremont, California, to have a fair market value of $540,000 as of
March 12, 1998. The Property has a first mortgage in the amount of
$133,382. The Loan would be secured by a second mortgage on the
Property. Thus, if the Loan is made, the appraised fair market value of
the Property would represent approximately 289% of the total
outstanding principal amount of debt secured by the Property, including
the Loan. The applicant represents that the mortgage to the Plan will
be duly recorded in the Office of the County Clerk, Alameda County,
California. The applicant states that in the event the fair market
value of the Property is no longer adequate to secure all outstanding
loans, additional property will be pledged to the Plan to secure the
Loan at an amount equal to at least 150% of the outstanding principal
balance of all outstanding loans secured by the Property. As additional
security to the Plan, the Hoffmanns have agreed to personally guarantee
the Loan. The applicant has submitted a personal balance sheet for the
Hoffmanns which demonstrates that they have a total net worth of
$691,804.16 as of March 19, 1998.
4. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 4975(c)(2) of the Code
because: (a) The Loan represents not more than 25% of the assets of the
Plan; (b) the terms of the Loan will be not less favorable to the Plan
than those required by a third party lender, the Bank, if it were to
make a similar loan; (c) the Loan will be secured by the Hoffmanns'
personal guarantee and by a second mortgage on the Property, which has
been determined by a qualified, independent appraiser to have a fair
market value of approximately 289% of the total principal amount of the
loans that it will secure; (d) in the event the fair market value of
the Property is no longer adequate to secure all outstanding loans,
additional property will be pledged to the Plan to secure the Loan at
an amount equal to at least 150% of the outstanding principal balance
of all outstanding loans secured by the Property; and (e) the Hoffmanns
are the only Plan participants to be affected by the Loan, and they
desire that the transaction be consummated.
Notice to Interested Persons: Since the Hoffmanns are the only Plan
participants to be affected by the proposed transaction, the Department
has determined that there is no need to distribute the notice of
proposed exemption to interested persons. Comments and requests for a
hearing are due within 30 days from the date of publication of this
notice of proposed exemption in the Federal Register.
For Further Information Contact: Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 15th day of July, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-19234 Filed 7-17-98; 8:45 am]
BILLING CODE 4510-29-P
