[Federal Register Volume 62, Number 148 (Friday, August 1, 1997)]
[Notices]
[Pages 41431-41453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20243]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10261, et al.]
Proposed Exemptions; McCrosky, Feldman, Cochrane & Brock, P.C.
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
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
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.
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.
McCroskey, Feldman, Cochrane & Brock, P.C. Profit Sharing Plan and
Trust (the Plan), Located in Muskegon, Michigan
[Application No. D-10261].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 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 sections 4975(c)(1) (A) through
(E) of the Code, shall not apply to the proposed cash sale (the Sale)
by the Plan of certain improved real property located at 1440 and 1442
Peck Street in Muskegon, Michigan (the Muskegon Property) to the
McCroskey Development Partnership (the Partnership), a party in
interest with respect to the Plan; provided that the following
conditions are satisfied:
(A) All terms and conditions of the Sale are no less favorable to
the Plan than those which the Plan could obtain in an arm's-length
transaction with an unrelated party;
(B) The Sale is a one-time transaction for cash in which the Plan
incurs no expenses;
[[Page 41432]]
(C) The Plan receives a purchase price for the Muskegon Property
which is no less than the greater of (1) the fair market value of the
Muskegon Property established at the time of the sale by an independent
qualified appraiser, or (2) $350,000;
(D) Within sixty days of the publication in the Federal Register of
a notice granting this proposed exemption, if granted, McCroskey,
Feldman, Cochrane & Brock, P.C. (the Employer) files Form 5330 with the
Internal Revenue Service and pays the applicable excise taxes which are
due with respect to the continuation of a lease of the Muskegon
Property by the Plan to the Employer after September 27, 1989; and
(E) Within sixty days of the publication in the Federal Register of
a notice granting this proposed exemption, if granted, the Employer's
payment of rent to the Plan for the Muskegon Property from September
27, 1989 through the date of the Partnership's purchase of the Property
from the Plan is reviewed by an independent fiduciary to determine
whether such rent was at all times no less than the fair market rental
value of the Muskegon Property, and, to the extent such rent is
determined to have been less than the fair market rental value, the
Employer pays the Plan the amount of such deficiency together with
interest thereon at a rate determined by the independent fiduciary to
be appropriate to compensate the Plan for lost income on such
deficiency amount.
Summary of Facts and Representations
1. The Plan is a defined contribution profit sharing plan with
individual accounts for each of its participants. The Plan is sponsored
by McCroskey, Feldman, Cochrane & Brock, P.C. (the Employer), a
Michigan professional corporation operating a law firm located in
Muskegon, Michigan. The Plan had approximately 38 participants and
beneficiaries and total assets of approximately $6,209,646 as of
December 31, 1996. The trustees of the Plan are J. Walter Brock and
Gary T. Neal (the Trustees), each of whom is an employee and an 11.11
percent shareholder of the Employer.
2. On September 23, 1975, the Plan purchased three lots of real
property (the Original Property) from a partnership called the
Advocates, whose partners were the shareholders of the Employer. Two
lots of the Original Property are adjacent lots located in Muskegon
County, Michigan (the Muskegon Property) at 1440 Peck Street and 1442
Peck Street in Muskegon, MI. The Plan paid a purchase price of $250,000
for the lot at 1440 Peck Street and a purchase price of $25,000 for the
adjacent lot at 1442 Peck Street. The remainder of the Original
Property was a third lot, located in Calhoun County (the Calhoun
Property) at 5906 Morgan Road in Battle Creek, Michigan, and the
purchase price for this lot was $42,500. The Employer represents that
the Plan's purchase of the Original Property from the Advocates met the
requirements of section 408(e) of the Act, pertaining to the purchase
of qualifying employer real property, and was therefore exempt from the
prohibited transactions provisions of section 406 of the
Act.1
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\1\ The Department expresses no opinion as to whether the Plan's
purchase of the Original Property satisfied the conditions of
section 408(e) of the Act.
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3. Upon acquisition of the Original Property by the Plan, the
Employer commenced to lease all three lots of the Original Property
from the Plan for use as office locations for the Employer's law
practice. The Employer represents that the Plan's leases of the
Original Property to the Employer (the Original Leases) constituted
leases of qualifying employer real property in satisfaction of the
requirements of section 408(e) of the Act and were therefore exempt
from the prohibitions of section 406 of the Act.2
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\2\ The Department expresses no opinion as to whether the
Original Lease satisfied the conditions of section 408(e) of the
Act.
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The initial Original Lease was for a ten-year term and provided for
rent at appraised rental values. Rent was set at $3,600 per month, as
determined by the August 1975 appraisal, for a total of $43,228 per
year. The lease was triple net, and also specified that rent was to be
a fixed sum for the first five years, and that for the second five
years, annual rent would be determined by appraisal, and would reflect
any change in the rental value of the property. The Employer represents
that its continued lease of the Original Property from the Plan
subsequent to the second term of the Original Lease was pursuant to
extensions of the Original Lease and that rentals of no less than the
subject property's fair market rental value were paid to the Plan in
accordance with appraisals conducted in 1988, 1993 and 1995.
On September 27, 1989, the Plan sold the Calhoun Property to an
unrelated party, the United Association of Plumbers and Pipefitters
Union Local 335 (the Union). The Employer represents that it was
relocating its business to the Muskegon Property and was forced to
abandon the Calhoun Property. The Employer represents that the Union is
independent of and unrelated to the Employer and the Plan. Since the
Plan sold the Calhoun Property to the Union, the Employer has continued
to occupy the Muskegon Property and lease it from the Plan pursuant to
extensions of the Original Lease. The Employer states that the two lots
constituting the Muskegon Property are treated as one parcel for
address and appraisal purposes, referred to as 1440 Peck Street,
because the structural improvements on each lot are components of a
single commercial structure which lies on parts of both lots.
Hereinafter, references to the Muskegon Property are intended to
include both 1440 and 1442 Peck Street.
4. In anticipation of upcoming increased Plan liquidity needs, and
in recognition that the continuation of the Employer's use and lease of
the Muskegon Property since the Plan's sale of the Calhoun Property has
constituted a prohibited transaction under section 406 of the Act, the
Trustees have determined to terminate the Plan's lease of the Muskegon
Property to the Employer by causing the Plan to sell the Muskegon
Property. A partnership comprised of shareholders of the Employer, the
McCroskey Development Partnership (the Partnership), has expressed to
the Trustees a willingness to purchase the Muskegon Property at its
full fair market value, and the Trustees are now proposing to cause the
Plan to sell the Muskegon Property to the Partnership for cash. The
Trustees and the Employer are requesting an exemption to enable this
sale transaction under the terms and conditions described herein.
5. If the exemption is granted, the Partnership will pay the Plan a
cash purchase price for the Muskegon Property of no less than the fair
market value of the Muskegon Property as of the date of the sale and in
no event less than $350,000. The Muskegon Property was appraised as of
April 11, 1995 by Stephen P. Nedeau, MAI, SRA (Nedeau), who determined
that as of that date the Muskegon Property had a fair market value of
$350,000. Commensurate with the sale transaction, the Trustees will
cause the appraisal by Nedeau to be updated as of the sale date, and
the purchase price will be cash in the amount of (a) the Muskegon
Property's fair market value according to such updated appraisal, or
(b) $350,000, whichever is greater. The Plan will pay no expenses
related to the transaction.
6. The Department is not proposing exemptive relief for the
continuation of the lease by the Employer of the Muskegon Property from
the Plan (the Continued Lease) after September 27, 1989, the date on
which the Plan sold the Calhoun Property. The Employer
[[Page 41433]]
recognizes that the Continued Lease has constituted a prohibited
transaction under the Act and the Code for which no exemptive relief is
proposed herein. Accordingly, the Employer represents that it will pay
the excise taxes which are applicable under section 4975(a) of the Code
by reason of such Continued Lease within sixty (60) days of the
publication in the Federal Register of a notice granting the exemption
proposed herein.
7. The Employer represents that the rentals paid to the Plan during
the Continued Lease have provided the Plan with appropriate amounts of
rent in accordance with updated appraisals of the Muskegon Property.
However, because the amount of annual rent has remained constant under
the Continued Lease, as an additional condition of this exemption, if
granted, the Employer will cause a review of the rentals paid to the
Plan and the Muskegon Property's fair market rental values during the
Continued Lease by an independent Plan fiduciary in order to determine
whether the Plan received rentals of no less than the fair market
rental values of the Muskegon Property during the Continued Lease. The
Employer represents that the independent fiduciary for this purpose
will be either Nedeau, who performed the most recent appraisal of the
Muskegon Property, or the trust department of FMB Lumberman's Bank in
Muskegon, Michigan, which represents itself to be independent of the
Employer. In the event such independent fiduciary determines that rent
payments received by the Plan were less than the Muskegon Property's
fair market rental value for any period during the Continued Lease, the
Employer will pay the Plan the amount of any such deficiency with
interest on such amount at a rate determined by the independent
fiduciary to compensate the Plan appropriately for lost income.
8. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because: (1) The proposed sale will be a
one-time cash transaction; (2) The Plan will experience no losses nor
incur any expenses from the transaction; (3) The Plan will receive cash
for the Muskegon Property in the amount of no less than the Muskegon
Property's updated fair market value as of the sale date and in no
event less than $350,000; and (4) The transaction will enable the
termination of the ongoing Continued Lease of the Muskegon Property by
the Plan to the Employer, which constitutes a prohibited transaction.
FOR FURTHER INFORMATION CONTACT: Mr. Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
TCW Group, Inc., Trust Company of the West, TCW Funds Management, Inc.,
TCW Galileo Funds, Inc. (collectively; TCW), Located in Los Angeles,
California
[Application No. D-10319]
Proposed Exemption
Section I. Covered Transactions
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).3 If
the exemption is granted, the restrictions of section 406(a) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(l) (A) through (D) of the Code,
shall not apply to the acquisition or redemption of units (the Units)
in the TCW Life Cycle Trusts (the Trusts, as defined in Section III)
established in connection with such Plans' participation in the TCW
Portfolio Solutions Program (the Program) by individual account plans
described in section 3(34) of the Act (the Plans), including Plans
sponsored by TCW, and the acquisition or redemption of shares (the
Shares) in the TCW Galileo Funds (the Funds, as defined in Section III)
by the Trusts.
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\3\ For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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In addition, the restrictions of section 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) (E) and (F) of the Code, shall not
apply to the provision of advice, and to the receipt of fees as a
result thereof, in connection with the investment by the Plans in the
Trusts under the Program.
This proposed exemption is subject to the following conditions set
forth below in Section II.
Section II. General Conditions
A. The terms of each purchase or redemption of the Units in the
Trusts are at least as favorable to an investing Plan as those
obtainable in an arm's length transaction with an unrelated party.
B. The participation of a Plan in the Program will be expressly
authorized in writing by a fiduciary of the Plan who is independent of
TCW.4 With respect to the Plans sponsored by TCW, this
condition will be deemed satisfied for purposes of the purchase or
redemption of Units in the Trusts, if the purchase and redemption of
Shares in the Funds by the Trusts meets the conditions of Prohibited
Transaction Exemption (PTE) 77-3 (42 FR 18743, April 8, 1977).
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\4\ In the case of a Plan sponsored by TCW, such fiduciary need
not be independent of TCW.
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C. Participation in the Program will be limited to Plans which have
a minimum of $5,000,000 in plan assets as of the most recent year.
D. No Plan will pay a fee or commission by reason of the
acquisition or redemption of Units in the Trusts or Shares in the
Funds.
E. The price paid or received by the Plans for the Units in the
Trusts is the ``net asset value'' per Unit, at the time of the
transaction. The Trusts will buy and sell shares in the Funds on the
same basis as other shareholders.
F. The total fees paid to TCW and its affiliates by each Plan for
the provision of services in connection with its investment in the
Units of the Trusts under the Program does not exceed ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act. In
this regard, the total amount paid by a Trust to TCW or unaffiliated
third persons for services necessary to operate the Trusts, and for TCW
to provide what may be considered investment advice, will not exceed 1%
per annum of the average daily ``net asset value'' of the shares of the
Funds and cash held by such Trust.
G. TCW will not receive any fees from the Plans whose participants
(the Participants) receive recommendations concerning investment in a
Trust, nor from the Trusts in which the Plans invest. Notwithstanding
the foregoing, TCW will not be precluded from receiving: (i) fees from
the Funds which are paid by other investors in the Funds, and which are
permissible under the Investment Company Act of 1940, as amended (the
1940 Act); (ii) reimbursement for ``direct expenses'' within the
meaning of 29 CFR 2550.408c-2 in connection with the operation of the
Program; or (iii) reimbursement for direct expenses which TCW pays to
unaffiliated third persons for goods and services provided to the
Trusts and/or Plans under the Program.
H. Any investment advice given to the Participants by TCW under the
Program will be based on the responses provided by the Participants to
worksheet questions which are developed and designed by an independent
financial
[[Page 41434]]
expert (the Financial Expert, as defined in Section III (F)) and the
independent behavioral expert (the Behavioral Expert as defined in
Section III (G), collectively; the Experts).
I. Any investment advice given to the Participant will be
implemented only at the express direction of the Participant.
J. Under the Program, TCW will give investment advice to the
Participants that is limited to the Trusts, a Money Market Fund, a
Guaranteed Investment Contact (GIC) or a similar investment vehicle
that may or may not be affiliated with TCW.5
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\5\ TCW will not receive any fees or other compensation with
respect to recommendations regarding investments in an unrelated
Money Market Fund, GIC or similar investment vehicle.
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K. The compensation of neither Expert is affected by the decisions
made by the participants and beneficiaries regarding investment of the
assets of their accounts among the Trusts.
L. To the extent any assistance is provided by TCW, or unaffiliated
third persons, to the Participants in completing the worksheets and
questions designed by the Experts, such assistance is provided by
individuals whose compensation is not affected by the investment by the
participants and beneficiaries of the assets of their accounts among
the Trusts.
M. With respect to its participation in the Program, an independent
Plan fiduciary must receive, prior to the Plan's investment in any of
the Trusts, complete and detailed written information regarding the
Trusts and the Funds which will include, but may not be limited to:
(1) A description of the Program;
(2) The allocation of the Funds in each Trust specified by the
Financial Expert, and the basis upon which the Funds in each Trust will
be rebalanced so that the Funds' proportionate value in each Trust
equals that specified by the Financial Expert;
(3) Upon request by the Plan Fiduciary, the current basis upon
which the asset allocation of the Trusts was derived;
(4) Full disclosure of all the expenses charged to the Trusts, and
how such expenses are allocated;
(5) Full disclosure of all the fees charged by the Funds, which may
be accomplished by providing the current prospectus for each of the
Funds comprising a Trust; and
(6) A copy of the proposed exemption and, if granted, the final
exemption, as published in the Federal Register.
N. (1) Prior to investing in a Trust, each Participant will receive
full disclosures which will include, but may not be limited to:
(a) Disclosure regarding composition of the Trusts, and a
description of the underlying Funds;
(b) Upon request, a Participant will also receive a copy of the
Funds' prospectus;6 and
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\6\ TCW anticipates that most Plans which participate in the
Program will comply with section 404(c) of the Act. Section 404(c)
of the Act requires, in part, that specific disclosures be provided
by the Plans to the participants and beneficiaries. See 29 CFR
2550.404c-1 (b)(2)(i)(A) and (b)(2)(i)(B)(2) (iv) and (v).
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(c) The Participant can meet with a facilitator familiar with the
Program, or contact such a facilitator using a toll-free number.
(2) Subsequent to his participation in the Program, each
Participant will receive the following disclosures which will include,
but may not be limited to:
(a) Written confirmations of purchase and redemption transactions
for each Participant within 10 days of each such transaction;
(b) Telephone access to the quotations of the Participant's account
balance; and
(c) A periodic newsletter describing the Trusts' performance during
the preceding period, market conditions and economic outlook and, if
applicable, prospective changes in the asset allocation model and the
reasons for the change.
O. Each Plan Fiduciary will receive the following written
disclosures with respect to its ongoing participation in the Program
which will include, but may not be limited to:
(1) A quantitative annual report which will include--
(a) Performance Summary for each Fund;
(b) Schedule of Investments for each Fund;
(c) Statements of Assets and Liabilities for each Fund;
(d) Statements of Operations for each Fund;
(e) Statements of Changes in Net Assets for each Fund;
(f) Notes to Financial Statements, which include but are not
limited to, primary investment objective of each Fund;
(g) The performance and rate of return achieved for each Trust and
the Funds in which the Trust is invested; and
(h) A breakdown of all expenses and fees at the Fund and Trust
levels.
P. (1) Except as provided in Section II(P)(2) below, the
independent Plan Fiduciary will receive, at least 30 days advance
notice of any material change in the information described in Section
II(M) (2) or (3) regarding the composition of the Trusts or the basis
on which the Trusts' assets are rebalanced, and will receive at least
30 days advance notice of any material increase in expenses at the
Trust level described in Section II(M)(4);
(2) The Financial Expert will have the sole responsibility for
determining the materiality of any changes in the information in
Section II(M) (2) or (3). TCW will determine the materiality of any
changes described in Section II(M)(4) regarding the expenses charged to
the Trusts. For any changes in the information in Section II(M) (2) or
(3) which are not material, the independent Plan Fiduciaries will be
notified within 10 days of such change. For any changes in the
information in Section II(M)(4) which are not material the independent
Plan Fiduciary will be notified at least quarterly. Independent Plan
Fiduciaries will be afforded, at all times, a reasonable opportunity to
terminate their Plans' participation in the Program as described in
Section II(Q)(2) below; and
(3) Under extraordinary circumstances outside the control of TCW,
the independent Plan Fiduciary may not be provided advance notice by
TCW of material changes in the information listed in Section II(M) (2)
or (3) regarding the composition of the Trusts or the basis on which
the Trusts' assets are rebalanced. Under such circumstances, the Plan
Fiduciaries will be notified within 10 days of any such change. The
Financial Expert will determine whether the circumstance is
extraordinary and if the change in the composition of the Trusts or in
the basis for rebalancing is material.
Q. (1) The Units in the Trusts will be redeemed by TCW, at no
charge. Redemption requests received in proper form prior to the close
of trading on the New York Stock Exchange (NYSE) will be affected at
the net asset value per Unit determined on that day. Redemption
requests received after the close of regular trading on the NYSE will
be effected at the net asset value at the close of business of the next
day, except on weekends or holidays when the NYSE is closed; and
(2) The Plans can redeem their Units in the Trusts on five business
days (or less) notice.
R. The Trusts permit participants and beneficiaries to purchase or
redeem an interest in the Trust on any day that the shares of the Funds
contained within the Trust can be purchased or redeemed. This paragraph
(R) does not preclude any Plan from restricting such purchases and
redemptions to a less frequent basis.
S. All transactions involving securities owned by the Funds will be
executed through brokers in which TCW has no interest and who are
unrelated to
[[Page 41435]]
TCW. TCW will not receive any consideration from such brokers in
connection with their selection, or for effecting or executing such
transactions other than research which will benefit the shareholders of
the Funds, including the Trusts. TCW brokerage practices will
reasonably comply with the requirements of section 28(e) of the
Securities and Exchange Act of 1934.
T. (1) The independent Fiduciaries of Plans participating in the
Program will receive full written disclosure, in a statement separate
from a Fund prospectus, of any proposed increases in the rates of
advisory or other fees charged by TCW to the Funds for services (or of
any material increase in expenses charged by TCW to the Funds or fees
charged by TCW for internal accounting services for the Funds) at least
30 days prior to the effective date of such increase, accompanied by a
termination form (the Termination Form, as described in (2) below) and
shall receive full written disclosure in a Fund prospectus, or
otherwise, of any such increases in the rate of fees charged by TCW to
the Funds; and
(2) The Termination Form shall provide an election to terminate
participation in the Program and shall contain instructions on the use
of the form that includes the following information: (a) the
authorization to participate in the Program is terminable at will by
the Plan, without penalty to the Plan, upon receipt by TCW of written
notice from the Plan; and (b) failure to return the Termination Form
will result in the continued authorization of the Plan's participation
in the Program, including investment in the Trusts.
U. TCW maintains, for a period of six years, the records necessary
to enable the persons described in paragraph (V) of this Section II to
determine whether the conditions of this exemption have been met,
including a record of each recommendation made to the participants and
beneficiaries, and their subsequent investment choices, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to the circumstances beyond the control of TCW and/or
its affiliates, the records are lost or destroyed prior to the end of
the six-year period; and
(2) No party in interest, other than TCW, 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 not available for examination as required
by paragraph (V)(1) of this Section II below.
V. (1) Except as provided in subparagraph (2) of this paragraph (V)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (U) of
this Section II are unconditionally available at their customary
location for examination during normal business hours by--
(a) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission,
(b) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary,
(c) Any contributing employer to any participating Plan, or any
duly authorized employee or representative of such employer, and
(d) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described in paragraphs (1) (b)-(d) of this
paragraph (v) shall be authorized to examine trade secrets of TCW, or
commercial or financial information which is privileged or
confidential.
Section III. Definitions
A. The term Trust or Trusts means a commingled trust or trusts
which satisfy the requirements of IRS Revenue Ruling 81-100, 1981-1
C.B. 326 which invest exclusively in one or more of the portfolios of
TCW Galileo Funds, Inc., cash or cash equivalents.
B. The term Fund or Funds means one or more of the portfolios of
TCW Galileo Funds, Inc., an open-end investment company registered
under the Investment Company Act of 1940, as amended (the 1940 Act).
C. The term TCW means the TCW Group, Inc., and any affiliates
thereof as defined below in paragraph (D) of this Section III.
D. The term affiliate of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
E. The term control means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
F. The term Financial Expert means Professor Jeffrey F. Jaffe,
Ph.D., or a successor Financial Expert. Less than 5 percent (5%) of
Professor Jaffe's gross income, for federal income tax purposes, in his
prior tax year, will be paid by TCW in the immediately subsequent tax
year. If the Financial Expert has any income which is not included in
the gross income (e.g., interest income which is exempt from federal
income taxes), such income may be added to his gross income for his
purpose. In the event TCW determines to replace Professor Jaffee or any
of his successors, TCW will send a letter to the Department 60 days
prior to such replacement. The letter will specify that the successor
Financial Expert has responsibilities, experience and independence
similar to those of Professor Jaffee. If the Department does not object
to the successor, the new appointment will become effective on the 60th
day after the Department receives such letter.
G. The term Behavioral Expert means Professor Shlomo Benartzi, or a
successor Behavioral Expert. In the event TCW determines to replace
Professor Benartzi or any of his successors, TCW will send a letter to
the Department 60 days prior to such replacement. The letter will
specify that the successor has responsibilities, experience and
independence similar to that of Professor Benartzi. If the Department
does not object to the successor, the new appointment will become
effective on the 60th day after the Department receives such letter.
H. The term net asset value of a Trust is defined to mean the fair
market value of shares in the Funds and cash, minus the accrued
expenses of a Trust.
EFFECTIVE DATES: If granted, this exemption will be effective as of the
date this notice of proposed exemption is published in the Federal
Register.
Summary of the Facts and Representations
1. The TCW Group, Inc., is the holding company for a group of
wholly-owned subsidiaries that provide a broad range of investment
management services. Trust Company of the West is a trust company
chartered by the State of California, and is one of the largest trust
companies in the United States. TCW Funds Management, Inc., TCW Asset
Management Company, and Continental Asset Management Corp., are
investment advisors registered with the Securities and Exchange
Commission under the Investment Advisors Act of 1940. TCW Group Inc.
also contains other registered investment advisor entities. As of
September 30, 1996, TCW Group, Inc. was owned 90% by employees and 10%
by directors.
[[Page 41436]]
TCW is primarily in the business of providing investment management
services. TCW manages pools of tax-exempt capital for pension and
profit sharing funds, jointly trusteed retirement, health and welfare
funds, public employee retirement funds, endowments and foundations.
TCW also manages a number of mutual funds for retail investors, and
manages assets for insurance companies, foreign investors, and high net
worth individuals.
As of September 30, 1996, TCW had more than $50 billion in assets
under management, representing over 1,200 institutional and private
clients. As of the same date, TCW had a staff of more than 500
individuals, including over 200 investment and administrative
professionals. This investment staff includes more than 50 portfolio
managers/analysts, approximately 60 research personnel and 14 traders.
TCW also employs more than 40 client relations professionals and more
than 60 administrative professionals.
2. TCW intends to offer the Program entitled ``TCW Portfolio
Solutions'' under which TCW will render investment advice to the
Participants 7 in the Plans. Participation by Plans in the
Program will be approved by Plan Fiduciaries who are independent of
TCW. It is represented that virtually all of the Plans participating in
the Program will be designed to comply with the provisions of section
404(c) of the Act. The Plans will be individual account plans described
in section 3(34) of the Act. Once the Program is approved by the Plan
Fiduciary, TCW will provide each Participant, who wants to receive a
recommendation regarding investments, with a worksheet (Worksheet), in
writing or electronically, as described below. The Worksheets consist
of a series of questions, designed to assess the Participants'
retirement needs and levels of risk tolerance. Upon completion of the
Worksheets, a Participant's responses will be analyzed and each
Participant will receive a written recommendation by TCW of an
appropriate Life Cycle Trust (i.e. Trust) for investment. Initially,
the Program will offer four separate commingled Trusts (more may be
added in the future), and, if not otherwise available under a Plan, a
separate Money Market Fund and a Guaranteed Investment Contract (GIC).
At the request of the Plan, the Money Market Fund, the GIC, or a
similar investment vehicle may or may not be affiliated with
TCW.8
---------------------------------------------------------------------------
\7\ For purposes of this proposed exemption, the term
Participants includes participants and beneficiaries who have the
power to direct the investments of their account balances.
\8\ See Footnote 3, supra.
---------------------------------------------------------------------------
Each Trust is a group trust established pursuant to IRS Revenue
Ruling 81-100, 1981-1 C.B. 326. Application will be made to the
Internal Revenue Service (IRS) for a favorable determination as to the
tax-exempt status of each Trust. TCW is the trustee of each Trust. Each
Trust will invest exclusively, but in varying proportions, in the Funds
which are the thirteen mutual funds (more funds may be added in the
future) offered by TCW Galileo Funds, Inc., an open-end investment
company.9
---------------------------------------------------------------------------
\9\ Upon the request of a very large plan, TCW may construct an
individual arrangement utilizing separate Trusts complying with the
safeguards discussed herein.
---------------------------------------------------------------------------
3. An independent Financial Expert will develop a methodology for
assessing the Participants' retirement funding needs. An independent
Behavioral Expert will develop a methodology for assessing the
Participants' levels of loss aversion. A computer program will be
designed by programmers unaffiliated with TCW which will incorporate
the methodologies designed by the two Experts. Information from the
Participant's Worksheet will be input into the computer program and
will produce an investment recommendation presented by TCW to the
Participant. This recommendation will result solely from the output of
the computer program, and neither TCW nor any of its affiliates will be
able to change or affect the output. The recommendation will reflect
the methodology developed by the Financial Expert, except that the
methodology developed by the Behavioral Expert may result in a more
conservative recommendation for a Participant whose Worksheet responses
reflect a high risk aversion level. The more conservative
recommendation may result from the Participant's risk profile, which is
developed through the responses to questions on the Worksheet regarding
risk tolerance and will only be used to recommend the same or a more
conservative Trust than would have been recommended if only questions
regarding the financial requirements of the Participant were contained
in the Worksheets. Under the Program, the Participant retains
discretion and may disregard the recommendation of TCW and invest in
another Trust or in the separate Money Market Fund or GIC offered under
the Program.
The mix of the Funds in the Trusts will accommodate different
investment strategies and risk tolerances. Each Trust will be designed
to provide an asset allocation model (Asset Allocation Model) for four
different profiles of Participants. The four profiles will be based on
the Participants' financial objectives, time horizon, other savings
(including amounts held in other plans), and risk tolerance. The
independent Financial Expert will periodically adjust the Asset
Allocation Models based on investment goals and risk tolerances
assigned to each Asset Allocation Model, as well as any changes in the
economy and market conditions. The Trusts range from aggressive
(portfolios invest in equities) to conservative (portfolios invest in
fixed income instruments). The Trusts may comprise some or all of the
Plan's investment alternatives. As described in paragraph 19 below, TCW
will incur expenses for operating the Program at the Trust level, such
as, for example, expenses paid to third parties. TCW will receive only
reimbursement of direct expenses for operating the Program. The
structure of the Program is described in more detail below.
4. TCW Galileo Funds, Inc. (Galileo) is an open-end management
investment company registered under the Investment Company Act of 1940,
as amended (the 1940 Act).10 Galileo currently offers shares
in thirteen Funds. Galileo may create additional Funds, and such
additional Funds may be considered for investment by the Trusts under
the rebalancing of the Trusts to be performed periodically by the
Financial Expert.11 The Funds have a Registration Statement
under the Securities Act of 1933, as amended (the 1933 Act) and the
1940 Act. The Registration Statement has been declared effective by the
Securities and Exchange Commission (SEC) and is updated at least
annually to assure
[[Page 41437]]
compliance with the securities laws. The Funds are no-load mutual funds
which trade at their respective net asset value. The Trusts trade at
the net asset value of the amalgam of the Funds in which they are
invested, plus any cash they hold. The Funds are available to
institutional investors and individuals with a high net worth, and
require a minimum initial investment of $250,000 and a minimum of
$25,000 for additional investments.
---------------------------------------------------------------------------
\10\ The applicant represents that Galileo is strictly regulated
and its fees have to be approved by an independent Board of
Directors. Specifically, section 15 of the 1940 Act contains certain
procedures for the adoption and renewal of investment advisory
contracts. This section 15 requires, among other things, that the
terms of investment advisory agreements must be approved by a
majority of directors, including a majority of the independent
directors, cast in person at a meeting called for purpose of voting
on such approval. Section 15(c) of the 1940 Act imposes a duty on
the directors to request and evaluate, and the investment advisor to
furnish, whatever information is necessary to evaluate the
investment advisory agreement.
The standards regarding the approval of an investment advisory
agreement are governed by section 36(b) of the 1940 Act, which
provides that an investment advisor to a registered investment
company has a fiduciary duty with respect to its receipt of
compensation for services and other payments.
\11\ It is the sole responsibility of the Financial Expert to
determine whether to include an additional Fund as an investment
under one or more of the Trusts.
---------------------------------------------------------------------------
5. Galileo has entered into a contract with TCW Funds Management,
Inc. (the Adviser), pursuant to which Galileo has employed the Adviser
to: manage the investment of its assets; administer its day-to-day
operations; place purchase and sale orders of the Funds' securities;
and manage Galileo's business affairs (subject to control by the Board
of Directors of Galileo). Under the advisory agreement (the Advisory
Agreement), the Funds pay the Adviser certain fees for the services
rendered, facilities furnished, and the Funds' expenses paid by the
Adviser. (See Table I). The Funds are entirely no-load, and do not
charge fees to purchase or exchange shares. Also, the Funds do not
charge any ongoing marketing expenses (i.e. fees pursuant to Rule 12b-1
under the 1940 Act).
6. The following Table I illustrates the expenses and fees incurred
by the Funds' shareholders for the fiscal year ending October 31, 1996.
The applicant represents that these fees and expenses are subject to
change. Expenses are expressed as a percentage of each Fund's average
net asset value.12
---------------------------------------------------------------------------
\12\ For the Convertible Securities Fund and Money Market Funds
offered inside the Trusts, the Adviser has agreed to reduce its
investment management fee. Alternatively, the Adviser will pay these
Funds' operating expenses, so as to limit each respective Fund's
total expenses to 0.95% and 0.40%, of its average net asset value
until December 31, 1997.
Table I.--Shareholder Transaction Expenses For All Portfolios
------------------------------------------------------------------------
------------------------------------------------------------------------
Sales Load Imposed on Purchases.............. None.
Sales Load Imposed on Reinvested Dividends... None.
Contingent Deferred Sales Load............... None.
Redemption Fees.............................. None.
Exchange Fees................................ None.
------------------------------------------------------------------------
Fund Name
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Core Long term
Annual fund operating expenses Money High fixed mortgage Mortgage Mid-cap Convertible Core Small Earnings Asia Emerging Latin
market yield income backed backed growth securities equity cap momentum Pacific markets America
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Management fees................................ .21% .75% .40% .50% .50% .93% .62% .75% 1.00% 1.00% 1.00% 1.00% 1.00%
Rule 12b-1 fees................................ (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)
Other expenses................................. .19% .15% .36% .18% .19% .27% .33% .07% .14% .43% .44% .41% .44%
Total fund operating expenses.................. .40% .90% .76% .68% .69% 1.20% .95% .82% 1.14% 1.43% 1.44% 1.41% 1.44%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
None.
The independent Fiduciaries of Plans participating in the Program
will receive full written disclosure, in a statement separate from a
Fund prospectus, of any proposed increases in the rates of advisory or
other fees charged by TCW to the Funds for services (or of any material
increase in expenses charged by TCW to the Funds or fees charged by TCW
for internal accounting services for the Funds) at least 30 days prior
to the effective date of such increase, accompanied by a termination
form (the Termination Form, as described below) and shall receive full
written disclosure in a Fund prospectus, or otherwise, of any such
increases in the rate of fees charged by TCW to the Funds.
The Termination Form shall provide an election to terminate
participation in the Program and shall contain instructions on the use
of the form that includes the following information: (a) The
authorization to participate in the Program is terminable at will by
the Plan, without penalty to the Plan, upon receipt by TCW of written
notice from the Plan; and (b) failure to return the Termination Form
will result in the continued authorization of the Plan's participation
in the Program, including investment in the Trusts.
7. TCW will engage the Financial Expert to construct Asset
Allocation Models for the Trusts, using generally accepted principles
of modern portfolio theory. The Program also permits the creation of
individualized Trusts whose asset class composition may be modified by
the Plan's Independent Fiduciary. However, the Financial Expert has to
approve such modification as being appropriate for that particular
Trust. TCW represents that investment in such individualized Trusts
will be limited to the Plan for which such a Trust was created.
Initially, the Financial Expert will be Professor Jeffrey Jaffe,
Ph.D., who is currently on the faculty of the Wharton School. Mr. Jaffe
received a Ph.D. in finance in 1973 from the University of Chicago's
Graduate School of Business. He has been a frequent contributor to the
Quarterly Economic Journal, the Journal of Finance, the Journal of
Financial and Quantitative Analysis, and the Financial Analysts
Journal. Mr. Jaffe is the Academic Director of several Wharton
Executive Education Programs, which he also teaches. In the event that
TCW determines to replace Professor Jaffe or any of his successors, TCW
will send a letter to the Department 60 days prior to such replacement.
The letter will specify that the successor Financial Expert has the
responsibilities, experience and independence similar to those of
Professor Jaffe. If the Department does not object to the Successor
Financial Expert, the new appointment will become effective on the 60th
day after the Department receives such letter.
Mr. Jaffe, as the Financial Expert, has no pre-existing
relationship with TCW and its affiliates. Mr. Jaffe is independent from
and is not under the control of TCW and its affiliates. The investment
decisions made by the Participants will not affect the fees paid to the
Financial Expert. Mr. Jaffe will receive compensation from TCW for
serving as the Financial Expert. Less than 5% of Professor Jaffe's
gross income, for federal income tax purposes, in his prior tax year,
will be paid by TCW in the immediately subsequent tax year. If
Professor Jaffe, as the Financial Expert, has any income which is not
included in the gross income (e.g., interest income which is exempt
from federal income taxes), such income may be added to his gross
income for this purpose.
8. As stated above, the Asset Allocation Models will be developed
and maintained by the Financial Expert and will be assigned specific
investment goals and risk tolerances. Under each Asset Allocation
Model, the Trusts will invest in specific Funds and will hold certain
amounts of these Funds so as to be in compliance with the prescribed
Asset Allocation Model. TCW may assist the Financial Expert by
providing certain background information for the
[[Page 41438]]
development of the Asset Allocation Models. In this regard, TCW may
supply the Financial Expert with algorithms, studies, analytics,
research, models, papers and any other relevant materials. The
Financial Expert may also seek the assistance of other entities in
formulating the Asset Allocation Models. In all cases, however, the
Financial Expert retains the sole control and discretion for the
development and maintenance of the Asset Allocation Models.
The Trusts' holdings of the Funds will be periodically rebalanced
by TCW to maintain compliance with specific Asset Allocation Models.
However, the rebalancing procedures will not involve any discretion on
the part of TCW or its affiliates. In this connection, the Financial
Expert will develop a mechanical formula to rebalance the relative
value of the Funds in each Trust on a pre-determined basis. The
Financial Expert also will determine the timing of the rebalancing and
may also periodically adjust the Asset Allocation Model.
9. TCW will also retain a behavioral expert (the Behavioral Expert)
to formulate a risk profile for each Participant based on each
Participant's risk tolerance. As described below, the Behavioral Expert
is Schlomo Benartzi, a professor at UCLA's Anderson School of
Management. Professor Benartzi received his Ph.D. in Behavioral Finance
and Mental Accounting from Cornell University's Johnson School of
Management. The Behavioral Expert is independent of and is not under
common control of TCW and its affiliates. The fees paid to the
Behavioral Expert by TCW for serving as the Behavioral Expert will not
be affected by the investment decisions made by the Participants.
10. The Program will be made available to Plans which have a
minimum of $5 million in assets. The Plan Fiduciaries will determine
whether the Program is appropriate for their Plans. To assist the Plan
Fiduciaries in making this determination, TCW will provide: a brochure
describing the Program; a contract containing the terms and conditions
of the Program which must be executed by the Plan Fiduciary before the
Program is offered to the relevant Plan Participants; full disclosure
concerning the composition of the Trusts and, upon request, the basis
by which the Asset Allocation Model for each Trust was derived (TCW may
require Plan Fiduciaries to keep such basis confidential, except as
required by law); a reference guide/disclosure document providing
detailed information as to how the Program works; the fees charged to
the Funds; the expenses charged at the Trust level; and related
information.
TCW will also provide the Plan Fiduciaries with a quantitative
annual report, based on raw data supplied by the Plans. The annual
report will enable the Plan Fiduciaries to determine whether the
Program has increased or maintained Plan participation, or has achieved
more appropriate asset allocation for the investment of the Plan
Participants' accounts. Such report will disclose the extent to which
the Plan Participants followed TCW's recommendations. The annual report
will also include the performance and rate of return achieved for each
Trust and the Funds in which it is invested, and will contain a
breakdown of all expenses and fees at the Fund and Trust levels.
11. The applicants represent that the Program will assist Plan
Fiduciaries in achieving increased Plan participation, and assisting
Participants in attaining appropriate asset allocation for their
individual accounts. In accordance with their responsibilities under
Title I of the Act, the Plan Fiduciaries will review the Program before
offering it under their Plans.13
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\13\ In this regard, the general standards of fiduciary conduct
promulgated under the Act apply to the Plan Fiduciaries
participation in the Program. Section 404 of the Act requires, among
other things, that a fiduciary discharge his or her duties solely in
the interest of the participants and beneficiaries and in a prudent
fashion. Accordingly, the Plan Fiduciary must act prudently when
deciding to enter the Program, and in considering the fees to be
paid to TCW or third parties thereunder. The Department expects the
Plan Fiduciary, prior to entering into the Program, to fully
understand the operation of the Program and the compensation paid
thereunder, following disclosure by TCW of all relevant information
pertaining to the Program.
---------------------------------------------------------------------------
12. Under the Program, TCW will provide each Plan Participant, in
writing or otherwise, with Worksheets to elicit from the Participants
their retirement funding needs and level of loss aversion. The
Worksheets will consider each Participant's savings, liquidity needs,
present and future marginal income tax brackets, other financial assets
(e.g., amounts in other plans), personal assets, other funding sources
(e.g., inheritance), and investment time horizon. The Worksheets will
be developed by the Behavioral Expert and the Financial Expert. The
risk profile, developed through the use of the Worksheets, will be used
by TCW only to recommend to the Participants the same or a less
aggressive Trust than it would have recommended if the risk profile had
not been developed and was not considered. TCW will disclose to the
Participants the reason for, and the effects of, the risk profile.
The Worksheets will be provided in different formats to accommodate
all Participants. It is anticipated that the Worksheets will be
provided in hard-copy with written instructions at employee meetings
and general information meetings, through the Intranet (a secured
access subset of the Internet), on computer terminals at the office of
the Plan Fiduciary, on the Plan Fiduciary's page on the world-wide web,
etc. If a computer-proficient Participant does not understand a
question, he will be able to receive a detailed answer via the
computer. The Participant can also meet with a facilitator familiar
with the Program, or contact the facilitator by telephone using an 800
toll-free number. The facilitator may, if the Participant chooses,
complete the Worksheets based on information furnished by or on behalf
of the Participant. The compensation of such personnel will not be
affected by particular Trust recommendations or the allocation of
investments in the Trusts and/or Money Market Fund, Guaranteed
Investment Contract or similar vehicle. However, such personnel may
receive enhanced compensation based on the amount invested in the
entire Program by all Participants, or by the Participants which they
or their teams assist.
13. All the recommendations made by TCW to the Participants
regarding specific Trusts, will be based solely from inputting the
Participant information into the computer program which is designed
using parameters provided by the Financial Expert and the Behavioral
Expert. Any computer programmers who are retained to formulate such
programs will have no affiliation with TCW. Neither TCW nor any of its
affiliates will have any discretion regarding the output of the
Program. Under the Program, the Participant retains discretion and may
disregard the recommendation of TCW and invest in another Trust.
Further, if the Participant does not complete the Worksheet, the
Participant may elect which Trust to invest in. The Program imposes no
limit on the frequency with which a Participant may change his
investment election. However, Plan sponsors may impose other limits
concerning frequency. The Program is designed to recommend a single
Trust to the Plan Participants. However, if a Plan wishes to permit its
Participants to invest in more than one Trust, TCW will modify the
Program to permit such investments. However, only one Trust will be
recommended by TCW.
[[Page 41439]]
14. The applicant believes that short-term market volatility has
influenced investors to ``buy high and sell low''. In this regard,
DALBAR Financial Services, Inc., (DALBAR) prepared a study titled
Quantitative Analysis of Investor Behavior which tracked investor cash
flows in and out of mutual funds during the period January 1984 through
September 1993. 14 The study concluded that the investors'
tendency to bail out of equity and bond funds during dips in the
market, and buy back during recoveries, hurt overall performance. Over
the 10 year period studied, investors in equity funds which were
advised by sales force personnel outperformed direct market investors
by more than 20%.
---------------------------------------------------------------------------
\14\ An updated DALBAR study for the period September 1993
through June 1996, reached the same conclusion.
---------------------------------------------------------------------------
The applicants represent that the Plans' Participants also fall
prey to market volatility because they, as a group, are less
sophisticated than individuals who invest on their own in mutual funds.
15. The Program is designed to correct this tendency of ``buying
high, selling low''. First, Worksheets will analyze investor behavior
of each Participant and determine the appropriate Trust for investment.
Since each Trust is a portfolio containing varying percentages of
different asset classes represented by its investments in the Funds,
this design accounts for the fact that investment performance of
different asset classes is imperfectly correlated, and should buffer
short-term fluctuations in the portfolio's overall value.
16. The applicants request exemptive relief for the provision of
investment advice to the Plans' Participants which may result in an
investment by a Participant in a particular Trust.15 In this
regard, TCW generally receives higher net fees (and, potentially,
higher net profits) if a Participant invests in the more aggressive
Trusts. It is represented that the Program offers the following
safeguards for the Plans and their Participants to address this
potential conflict of interest. (a) An independent Financial Expert
will construct, maintain and modify Asset Allocation Models of the
Trusts. (b) A separate trust (Separate Trust) may be constructed by the
Plan Fiduciary based on different weightings of the Funds. A Separate
Trust may be utilized if the Financial Expert approves such
modification. (c) The Financial Expert will develop, maintain, and if
necessary, modify a basis for rebalancing each Trust. The rebalancing
will maintain the prescribed asset allocation for each Trust also
developed by the Financial Expert. Rebalancing will not involve any
investment discretion by TCW or its affiliates. (d) The Funds are
independently viable in the institutional market where the minimum
investment is generally $250,000. (e) TCW will not receive any fees
other than those charged by the Funds. However, TCW may receive
reimbursement for direct expenses associated with operating the
Program, including expenses it pays to third parties. (f) The Program
only will be available to Plans which have a minimum of $5 million in
plan assets. (g) TCW will provide a Plan Fiduciary with full written
disclosure regarding the composition of the Trusts. Upon request, TCW
will also provide the basis from which the asset allocations for each
Trust were derived. The basis on which the Trusts' assets are
rebalanced is developed, maintained, and if necessary, modified by the
Financial Expert. TCW will fully disclose all amounts charged at the
Fund levels by providing the Plan Fiduciaries with a copy of the Funds'
prospectus. (h) TCW will also disclose to the Plan Fiduciary all the
expenses charged to the Trusts prior to the Plan's investment in any of
the Trusts. Such disclosures may be provided in a brochure, a contract
executed by the Plan Fiduciary, or otherwise. (i) TCW will provide the
Plan Fiduciary with a quantitative annual report which will enable the
Plan Fiduciary to determine if the Program has attained its objectives.
(j) Recommendation to a Participant will be based solely on that
Participant's response in the Worksheets. TCW has no discretion to vary
the recommendations which were based on the Participant's funding needs
and behavioral profile as it relates to loss aversion. However,
Participants may elect not to follow the recommendations rendered by
TCW. (k) TCW will hire an independent Behavioral Expert to develop and
formulate the risk profile. Such a risk profile will gauge whether a
Participant will maintain the optimal Trust position if a large loss
occurs. If the Participant is not likely to maintain the optimal
position in the event of such a loss, a more conservative Trust will be
recommended.
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\15\ The Department recently issued Interpretive Bulletin 96-1,
29 CFR 2509.96-1 (the IB), which encourages and facilitates the
provision of investment education to participants and beneficiaries.
The IB describes information which will not constitute investment
advice. Therefore, a person will not become a fiduciary by providing
such information. However, the applicants represent that their
assistance to Plan Participants pursuant to the Program may be
considered to be investment advice.
---------------------------------------------------------------------------
Prior to investing in a Trust, each Participant will receive full
disclosure concerning the composition of the Trusts, and a description
of the underlying Funds. Upon request, a Participant will also receive
a copy of the Funds' prospectus.16
---------------------------------------------------------------------------
\16\ See Footnote 4, supra.
---------------------------------------------------------------------------
Subsequent to their participation in the Program, the Participants
will be provided with written confirmations of the Participant's
purchase and redemption transactions within 10 days of each such
transaction. Also, quotations of the Participants' account balances
will be available by telephone. Both the Participants and Plan
Fiduciaries will receive a periodic newsletter describing the Trusts'
performance during the preceding period, market conditions and economic
outlook and, if applicable, prospective changes in the Asset Allocation
Model and the reasons for change.
17. Furthermore, the Program provides the following safeguards with
respect to the purchase and sale of Units in the Trusts. (a) The Plan
Fiduciaries have the discretion to select and retain the Program for
their Plans. (b) The Plans pay no more or receive no less for a Unit in
the Trusts than the Plans would have paid or received in an arm's-
length transaction with an unrelated party. (c) The Plans can redeem
their Units in the Trusts on five business days (or less) notice.
Redemption requests received in proper form prior to the close of
trading on the NYSE will be affected at the net asset value per Unit
determined on that day. Redemption requests received after the close of
regular trading on the NYSE will be effected at the net asset value at
the close of business of the next day, except on weekends or holidays
when the NYSE is closed. (d) Except as provided below, the independent
Plan Fiduciary will receive, at least 30 days advance notice of any
material change in the information regarding the composition of the
Trusts or the basis on which the Trusts' assets are rebalanced, and
will receive at least 30 days advance notice of any material increase
in expenses at the Trust level. The Financial Expert will have the sole
responsibility for determining the materiality of any changes in the
information regarding the composition of the Trusts or the basis on
which the Trusts' assets are rebalanced. TCW will determine the
materiality of any changes in expenses charged to the Trusts. For any
immaterial changes in the information regarding the composition of the
Trusts or the basis on which the Trusts' assets are
[[Page 41440]]
rebalanced, the independent Plan Fiduciary will be notified within 10
days of such change. For any immaterial changes in the expenses charged
to the Trusts, the independent Plan Fiduciary will be notified at least
quarterly. Independent Plan Fiduciaries will be afforded, at all times,
a reasonable opportunity to terminate their Plans' participation in the
Program, as described in item (c) above. Under extraordinary
circumstances outside the control of TCW, the independent Plan
Fiduciary may not be provided advance notice by TCW of material changes
regarding the composition of the Trusts or the basis on which the
Trusts' assets are rebalanced. Under such circumstances, the Plan
Fiduciaries will be notified within 10 days of any such change. The
Financial Expert will determine whether the circumstance is
extraordinary and if the change in the composition of the Trusts or in
the basis for rebalancing is material. (e) The broker-dealers who
effectuate and execute trades for the Funds, are engaged on a ``best
execution'' 17 basis and are independent of TCW and its
affiliates (Third Party Brokers). (f) The Plan pays no fee or
commission by reason of the acquisition or redemption of Units in the
Trusts.18
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\ 17\ Best execution takes into account such factors as price
(including the applicable dealer spread or commission, if any), size
of the order, difficulty of execution and operating facilities of
the firm involved. The applicants state that research, which will
benefit all the shareholders in the Funds, including the Plans, may
be provided by the Third Party Brokers.
\18\ Pursuant to this condition, the applicants cannot pay or
receive any sales fee or commission. However, this does not prevent
third parties from paying or receiving fees or commissions.
---------------------------------------------------------------------------
18. TCW will also offer the Program to Participants in the Plans
sponsored by TCW. In this regard, TCW represents that the Plans
sponsored by TCW will purchase or redeem Units in the Trusts which
acquire Shares in the Funds.
The applicants represent that the purchase or redemption of Units
in the Trusts may be prohibited. Therefore, the applicants request
relief for the purchase or redemption of Units in the Trusts by Plans
sponsored by TCW. Such request for relief, however, does not extend to
the selection, acquisition or sale of shares in the Funds by the Trusts
since the applicant represents that such transactions are afforded
relief by Prohibited Transaction Class Exemption 77-3, 42 FR 18734
(April 8, 1977) (PTE 77-3).19
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\19\ PTE 77-3 provides relief for the acquisition or sale of
shares of a registered open-end investment company by an ``in-
house'' employee benefit plan, that is, a plan covering only
employees of the mutual fund, the fund's investment adviser, or
principal underwriter or an affiliate of such persons.
The plan may not pay any investment management, investment
advisory or similar fee to the fund adviser, underwriter or
affiliate, except in the form of investment advisory fees paid by
the fund under an investment advisory agreement. The plan also may
not pay a sales commission in acquiring or selling the fund shares,
and may only be charged a redemption fee under certain conditions.
Any other dealings with the plan, must be on a basis no less
favorable to the plan than such dealings with other fund
shareholders. The Department expresses no opinion herein as to
whether the conditions of PTE 77-3 will be met under the proposed
transactions.
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In this connection, neither the applicants nor any person in which
they have an interest will provide services to the Trusts other than
for reimbursement of ``direct expenses'' within the meaning of 29 CFR
2550.408c-2.
19. The applicants represent that the combined total amounts
received by TCW and its affiliates for services performed for the
Trusts under the Program will constitute no more than reasonable
compensation within the meaning of 29 CFR 2550.408b-2(d) and 2250.408c-
2. The only fees, other than direct expenses, that TCW will receive for
such services are the fees charged by the Funds to all investors. There
will be no separate fee at the Trust level for asset allocation
services.
The Plans' Fiduciaries will receive full disclosure of the services
that will be provided by or for the Trusts, and of the Trusts'
expenses. These expenses will include, but will not be limited to,
expenses for the Financial and Behavioral Experts and the development
of the analytical and risk tolerance components of the Worksheets,
expenses for printing and mailing reports, expenses for publishing a
quarterly newsletter, expenses for computer programmers, and any other
expense incurred by each Trust in the ordinary course of business.
20
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\20\ The Department expresses no opinion as to whether the
requirements of 29 CFR sections 2550.408b-2 and 2550.408c-2 would be
met with respect to the reimbursement of TCW for the provision of
the above-described services. The Department notes, however, that an
expense would not be properly reimbursable to the extent it was
incurred in connection with a service that was not otherwise exempt
under sections 408(b)(2) and 408(c) of the Act and corresponding
regulations. Thus, TCW must review each service to be provided to
the Trust to determine whether such service is a ``necessary
service'' for which reimbursement is lawful. See Department of Labor
Advisory Opinion No. 93-06A, March 11, 1993.
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TCW represents that the combined total amount payable by a Trust
for services necessary to operate the Program and for TCW to provide
what may be considered investment advice, will not exceed 1% of the
Trusts' net asset value per annum, calculated on the average daily
value of a Plan's investment in the Trust. Additional services, which
are not necessary for the operation of the Program (e.g., recordkeeping
of amounts or units in the participants' individual accounts,
preparation of account statements for participants, review of whether a
Plan complies with section 404(c) of the Act) may be provided. However,
these expenses will not be considered in determining whether the 1%
limit is exceeded. Except for these additional services, all services
provided will be necessary to operate the Program (i.e., the Program
Services). All the Trusts will share the cost of the Program Services
on a pro-rata basis, based on the amount of assets in each Trust. For
example, a Trust with $10 million in assets will pay twice as much for
Program Services as a Trust with $5 million in assets. Fees at the Fund
level are separately determined and are not affected by the fees paid
at the Trust level.
20. TCW will generally pay for direct expenses for services
performed for the Trusts and seek reimbursement from the Plans. The
applicants state that this could be a prohibited extension of credit
between a plan and a party-in-interest pursuant to sections
406(a)(1)(B), 406(a)(1)(D) and 406(b)(2) of the Act. However, the
applicants represent that these transactions are covered under
Prohibited Transaction Class Exemption 80-26, 45 FR 28545 (April 29,
1980) (PTE 80-26) 21. The applicants also represent that
they will fully comply with the applicable conditions of PTE 80-26 when
they pay such expenses on behalf of the Plans.
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\21\ PTE 80-26 permits a party in interest to make interest free
loans to a plan. The proceeds of the loan may be used only for (1)
the payment of ordinary operating expenses of the plan, including
the payment of benefits, in accordance with the terms of the plan,
and periodic premiums under an insurance or annuity contract; or (2)
a three day period, for a purpose incidental to the ordinary
operation of the plan. In addition, the loan must be unsecured and
not made by an employee benefit plan. The Department expresses no
opinion as to the applicability of PTE 80-26 or whether the
conditions of that exemption would be satisfied by the proposed
transactions.
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21. In summary, the applicant represents that the transactions
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
A. The decision to participate in the Program will be made by a
Plan Fiduciary of a Plan which has a minimum of $5,000,000 in plan
assets;
B. Prior to making the decision to participate in the Program, the
Plan Fiduciary will receive offering materials and disclosures
concerning the Program's purpose, fees, structure, operation, and
risks;
[[Page 41441]]
C. The Plan Fiduciary will receive an annual report which will
enable him to monitor the Program's effectiveness;
D. The Asset Allocation Models of the Trusts and the rebalancing
formula will be constructed by an independent Financial Expert;
E. A risk profile for each Participant will be formulated by an
independent Behavioral Expert;
F. Investment recommendations made by TCW to the Participants will
be based solely on their responses to the Worksheets (and data which
may be supplied by the Plan or the Plan Fiduciary), and the independent
Experts are responsible for formulating the questions for the
Worksheets;
G. TCW will maintain a record of the recommendations made to the
Participants, including the investment decisions made by the
Participants;
H. Except for reimbursement of expenses for services provided to
the Trusts, TCW will not receive any fees from the operation of the
Program other than those attributable to the Funds;
I. (1) Prior to investing in a Trust, each Participant will receive
full disclosures which will include, but will not be limited to:
(a) Disclosure regarding composition of the Trusts, and a
description of the underlying Funds;
(b) Upon request, a Participant will also receive a copy of the
Funds' prospectus;
(c) The Participant can meet with a facilitator familiar with the
Program, or contact such a facilitator using a toll-free number.
(2) Subsequent to his participation in the Program, each
Participant will receive the following disclosures which will include,
but will not be limited to:
(a) Written confirmations of purchase and redemption transactions
for each Participant within 10 days of each such transaction;
(b) Telephone access to the quotations of the Participant's account
balance; and
(c) A periodic newsletter describing the Trusts' performance during
the preceding period, market conditions and economic outlook and, if
applicable, prospective changes in the asset allocation model and the
reasons for the change; and
J. The Plans can redeem their Units in the Trusts on five business
days (or less) notice.
Notice to Interested Persons
The applicant represents that because potentially interested
participants and beneficiaries cannot be identified at this time, the
only practical means of notifying such participants and beneficiaries
of this proposed exemption is by publication in the Federal Register.
Therefore, comments and requests for a hearing must be received by the
Department not later than 30 days from the date of publication of this
notice of proposed exemption in the Federal Register.
However, because the applicants have requested an effective date of
the publication of the notice of proposed exemption in the Federal
Register, the applicants represent that if a Plan invests in the
Program within thirty (30) days of the publication of the proposed
exemption in the Federal Register, the Plan Fiduciary of that Plan will
be given a copy of the notice of proposed exemption as published in the
Federal Register and a statement advising interested persons of their
right to comment and request a hearing on the proposed exemption.
Accordingly, that Plan Fiduciary and all interested persons will be
entitled to comment or request a hearing on the proposed exemption
within thirty (30) days of the Plan Fiduciary's receipt of the above
materials.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, U.S. Department
of Labor, telephone (202) 219-8883. (This is not a toll-free number.)
Pension and Welfare Benefits Administration, Notice of Proposed
Exemption for Certain Transactions Involving the UNUM Life Insurance
Company of America (UNUM), Located in Portland, Maine
[Application No. D-10437]
AGENCY: Department of Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed exemption from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and the Internal
Revenue Code of 1986 (the Code). The proposed exemption would exempt
certain transactions that may occur as a result of the sharing of real
estate investments among various Accounts maintained by UNUM, including
the UNUM general account and the general accounts of UNUM's affiliates
which are licensed to do business in at least one state (collectively,
the General Account), and one or more separate accounts or investment
advisory accounts in which one or more employee benefit plans sponsored
by UNUM or its affiliates participate, or any combination thereof (the
ERISA-Covered Accounts) with respect to which UNUM is a fiduciary. As
an acknowledged investment manager and fiduciary, UNUM is primarily
responsible for the acquisition, management and disposition of the
assets allocated to the ERISA-Covered Accounts.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before September 30, 1997.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent of the Office of Exemption Determinations,
Pension and Welfare Benefits Administration, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210, Attention: Application No. D-10437. The application for
exemption and the comments received will be available for public
inspection in the Public Documents Room of the Pension and Welfare
Benefits Administration, U.S. Department of Labor, Room N-5638, 200
Constitution Avenue, NW., Washington, DC 20210.
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of an application for exemption from the
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of the Act and
from 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.
The proposed exemption was requested in an application filed by UNUM
pursuant to 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).
Summary of Facts and Representations
1. UNUM is a stock life insurance company organized under the laws
of the State of Maine and subject to supervision and examination by the
Insurance Commissioner of Maine. Among the variety of insurance
products and services it offers, UNUM has long provided funding,
deposit administration, asset management and other services for pension
and profit sharing plans subject to the provisions of Title I of the
Act. UNUM has substantial experience in managing real estate
investments. Of the approximately $11.8 billion in total assets held by
UNUM and its affiliates at the close of 1995, General Account assets
included more than $261 million in equity interests in real property
and more than $1.2 billion in mortgage loans.
UNUM is owned by a parent holding company, UNUM Corporation, a
Delaware corporation, which is publicly
[[Page 41442]]
held and files reports with the Securities and Exchange Commission
under the Securities Exchange Act of 1934.
UNUM Corporation maintains the UNUM Employees Lifecycle Plan (the
UNUM Plan), which is a defined benefit pension plan on behalf of its
employees and those of certain of its subsidiaries. The UNUM Plan
presently has 7,507 participants and holds more than $218 million in
assets. Those assets are managed by UNUM under an Investment Management
Agreement. The UNUM Plan comprises an ERISA-Covered Account which may
share real estate investments under the exemption proposed herein. The
applicant represents that currently the UNUM Plan would be the only
employee benefit plan participating in an ERISA-Covered Account, but
UNUM would like to have the flexibility to share real estate
investments with additional separate accounts or investment advisory
accounts in which other employee benefit plans maintained by UNUM or
its affiliates participate. Accordingly, UNUM has requested that the
exemption proposed herein extend to such other potential ERISA-Covered
Accounts as well. The proposed exemption would apply to real estate
investments shared by two or more ERISA-Covered Accounts, and would
also apply to real estate investments shared by one or more ERISA-
Covered Accounts and the General Account. The only employee benefit
plans which will participate in the ERISA-Covered Accounts are plans
maintained by UNUM and its affiliates.
2. The applicant represents that because there are relatively few
potential investors for large scale investments such as office
buildings, shopping centers, and industrial parks, the owner or
developer of such real estate investments must offer a higher return in
order to attract investors. In many cases, UNUM's real estate accounts
would be precluded from acquiring these investments on an individual
basis because such investments would require the commitment of a
disproportionately large percentage of account assets to one or a few
investments. The sharing of large or uniquely desirable real estate
investments would permit the ERISA-Covered Accounts to participate in
more attractive and profitable real estate investments while
maintaining portfolio diversification.
3. The real estate investments which UNUM proposes to share may
either take the form of a direct investment in real property or an
interest in a joint venture partnership which holds title to, manages,
and/or develops real property. No ERISA-Covered Account will
participate in an investment for the purpose of enabling another
Account to make an investment.
4. Real estate equity investment opportunities for the Accounts are
originated by the Real Estate Equity Group (REEG), a department within
UNUM's Investment Department (the Investment Division). Real estate
equity investments are originated in accordance with general investment
criteria developed by REEG and the senior management of the Investment
Division. The specific investment criteria for each account must be
approved by the board of directors of each affiliated insurance company
participating in real estate investments and updated no less frequently
than annually. With respect to the UNUM Plan (or any other ERISA-
Covered Account), the investment strategy would be developed and
reviewed periodically in consultation with the Plan trustees and the
independent fiduciary (see below).
5. The strategy approved to date by the trustees of the UNUM Plan
(the Trustees) 22 would limit its aggregate participations
in real estate investments to 10% of Plan assets, with no more than
1.5% of Plan assets in any one property. The average amount invested in
each property by the Plan is expected to be approximately $2.5 million.
No leverage would be employed, i.e., no property would be debt
financed. There would eventually be ten or twelve properties in the
Plan's real estate portfolio, diversified among at least five cities or
regions which are geographically dispersed. No more than 30% of the
Plan's portfolio would be invested in any one city or region.
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\22\ The Trustees comprise senior actuarial, financial, human
resources and operating officers of UNUM, its parent holding company
and its affiliates.
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5. Allocations of investment opportunities among Accounts are based
upon, among other things, the extent to which each Account's projected
acquisition needs and investment objectives, established no less
frequently than annually as part of the criteria for investment of the
Account, have not been satisfied by other allocations. Under the
exemption proposed herein, real estate investments meeting an Account's
investment criteria could be shared by that Account and one or more
other Accounts for which a share in the investment meets the criteria
of such other Account(s) necessary to achieve economic, geographical
and property class diversification within the limits on investment
amounts imposed by the overall size and other holdings of the Account.
6. During the course of UNUM's holding of a real estate investment,
certain situations may arise which require a decision to be made with
regard to the management or disposition of the investment. For example,
there may be a need for additional contributions of operating capital,
or there may be an offer to purchase the investment by a third party or
a joint venture partner. When UNUM shares these investments among more
than one Account, a potential for conflict arises since the same
decision may not be in the best interest of each Account. Therefore,
the applicant has submitted a request for exemption, with certain
proposed safeguards designed to protect the interests of any
participating ERISA-Covered Account in the resolution of potential or
actual conflicts. Among the safeguards will be the appointment for each
participating ERISA-Covered Account of a fiduciary independent of UNUM
and its affiliates.
7. The independent fiduciary of any ERISA-Covered Account that
proposes to share real estate investments will be furnished with a
written description of the transactions that may occur involving such
investments which might raise questions under the conflict of interest
prohibitions of the Act with respect to UNUM's involvement in such
transactions and which are the subject of this proposed exemption. This
description must discuss the reasons why such conflicts of interest may
be present (i.e., because the General Account participates in the
investment and may benefit from the transaction or because the
interests of the various Accounts participating in the investment may
be adverse with respect to each other). The description must also
disclose the principles and procedures to be used to resolve any
anticipated impasses, as will be outlined below. In addition, the
independent fiduciary of any new ERISA-Covered Account that proposes to
share investments following the issuance of a final exemption will be
provided with the above-described written description and a copy of the
exemption as granted, before beginning to participate in any shared
investments.
8. The Trustees can request a change in the investment Policies and
Objectives governing investment of its assets under the Investment
Management Agreement which would preclude further shared real estate
investments, and which could call for
[[Page 41443]]
divestiture of existing participations in such investments on its
behalf. Any other plan would be able to withdraw from an ERISA-Covered
Account by providing notice to UNUM in accordance with the relevant
contractual provisions.
9. The UNUM Plan, and any other ERISA-Covered Account, will only
participate in the shared real estate equity investments with the
approval of a fiduciary which is entirely independent of UNUM and its
affiliates.
The independent fiduciary will be chosen by the Trustees, who will
have reviewed information about the nominee's qualifications, and had
an opportunity to meet with and question the nominee or its
representatives prior to confirming the appointment. The nominee may be
a firm, or a committee of individuals, possessing the necessary
qualifications as outlined below.
10. UNUM will not have the authority to remove an independent
fiduciary or a member of an independent fiduciary committee, except for
cause. The term ``for cause'' means that there must be sufficient and
reasonable grounds for removal and the reasons for removal must be
related to the ability and fitness of an individual to perform his or
her required duties under the proposed exemption. The definition of the
term ``for cause'' must be clearly stated in specific terms in the
contract by which the independent fiduciary is retained. If the
organization acting as independent fiduciary is removed for cause by
the Trustees, the procedure described above for the initial selection
of an independent fiduciary shall apply to the replacement.
In the case of an individual member of a committee serving as an
independent fiduciary, the committee member may also be removed for
cause at any time upon the majority vote of the remaining members of
the committee. If a vacancy occurs by virtue of the death, resignation
or removal of a member of an independent fiduciary committee,
replacement members of the committee will be appointed by a majority
vote of remaining members of the committee. Possible replacements may
be suggested by members of the committee, UNUM, the Trustees, or the
appropriate fiduciary of any other participating plan. If an
independent fiduciary is to be replaced, written records regarding the
reason for such replacement as well as a description of the replacement
independent fiduciary must be maintained by UNUM or its affiliate, and
such records must be made available to the Department upon request. If
the independent fiduciary is removed for cause, UNUM will explain the
circumstances in writing to the Department.
11. Prior to the decision to approve the selection of an
independent fiduciary initially selected by UNUM, the Trustees or other
appropriate fiduciary on behalf of any other plan participating in
shared real estate investments will be furnished with appropriate
biographical information pertaining to the organization or committee
members. This biography will set forth the background and
qualifications of the organization or committee member to serve in the
capacity of independent fiduciary. The information provided to the
Trustees or other plan fiduciaries will include the total amount of
compensation received by the organization (or committee member) from
UNUM and its affiliates during the preceding year. This financial
disclosure will be updated annually, and will include the amount of
fees and expenses paid for independent fiduciary services.
12. To ensure that the organizations or committee members so
selected are knowledgeable and qualified to serve as independent
fiduciaries and are, in fact independent of UNUM, the following
qualifications and restrictions will be met. The independent fiduciary
must be unrelated to UNUM and its affiliates. The independent fiduciary
may not be, or consist of, any officer, director or employee of UNUM,
or be affiliated in any way with UNUM or any of its affiliates. (See
definition of ``affiliate'' in Section V(a), below.) The independent
fiduciary must be either (1) a business organization which has (or
whose principals have) at least five years of experience with respect
to commercial real estate investments, or (2) a committee composed of
three to five individuals who each have at least five years of
experience with respect to commercial real estate investments. The
contract with the independent fiduciary must provide for a minimum
initial term of not less than five (5) years.
No organization or committee member will be eligible to serve as an
independent fiduciary for an ERISA-Covered Account for any taxable year
if the gross income (excluding retirement income) received by such
organization or individual (or any partnership or corporation of which
such organization or individual is an officer, director, or ten percent
or more partner or shareholder) from UNUM and its affiliates for that
taxable year exceeds five percent of its or his annual gross income
from all sources for the prior fiscal year. If such organization or
individual had no income for the prior fiscal year, the five percent
limitation shall be applied with reference to the fiscal year in which
such organization or individual serves as an independent fiduciary. In
addition, no organization or individual who is an independent
fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director or ten percent or more partner or
shareholder, may (i) acquire any property from, sell any property to,
or borrow any funds from, UNUM or its affiliates, during the period
that such organization or individual serves as an independent fiduciary
and a period of six months after such organization or individual ceases
to be an independent fiduciary, or (ii) negotiate any such transaction
during the period that such organization or individual serves as
independent fiduciary.
A business organization or committee member may not serve as an
independent fiduciary of more than one ERISA-Covered Account.
13. The independent fiduciary will be compensated by the UNUM Plan
or any other ERISA-Covered Account for which it acts as independent
fiduciary. UNUM may indemnify any independent fiduciary or members of
an independent fiduciary committee with respect to any action or
threatened action to which such person is made a party by reason of his
or her service as an independent fiduciary. Indemnification will be
provided as permitted under the laws of the State of Maine and subject
to the requirement that such person acted in good faith and in a manner
he or she reasonably believed to be solely in the interests of the
participants and beneficiaries of the plans participating in the
Account.
14. The independent fiduciary of each ERISA-Covered Account will
have the responsibility and authority to approve or reject
recommendations made by UNUM for any transaction described in this
notice of proposed exemption. The committee members and/or organization
acting as independent fiduciary will be informed of the procedures set
forth in the requested exemption for the resolution of anticipated
impasses prior to his or its acceptance of the appointment. UNUM will
involve the independent fiduciary in the consideration of contemplated
transactions prior to the making of any decisions, and will provide the
independent fiduciary with whatever information may be necessary in
making its determinations. No transaction which is the subject of this
proposed exemption will be undertaken prior to the rendering of an
informed decision by the independent fiduciary. In addition, the
independent fiduciary will
[[Page 41444]]
approve the initial allocation of a shared investment to an ERISA-
Covered Account. In the case of transactions that involve the possible
transfer of an interest in a real estate investment between the General
Account and an ERISA-Covered Account, the independent fiduciary will
not be limited to approving or rejecting the recommendations of UNUM,
but will have full authority to negotiate the terms of the transfer (in
accordance with the independent appraisal procedure described below) on
behalf of the ERISA-Covered Account. The independent fiduciary of each
ERISA-Covered Account will also review on an as-needed basis, but not
less than twice annually, the entire portfolio of shared real estate
investments in the ERISA-Covered Account to determine whether it is in
the best interests of the ERISA-Covered Account to retain or sell such
investments.
15. The independent fiduciary will prepare written records of its
decisions and the reasons underlying those decisions, which may take
the form of committee meeting minutes or letters to UNUM. UNUM will
maintain these and all other written records required to be maintained
by the Department and will make them available for inspection by
authorized employees of the Department and the Internal Revenue
Service, as well as the fiduciaries, contributing employers, and
participants and beneficiaries of the plans participating in the
proposed transactions.
16. In connection with the management of real estate shared
investments, it is possible that UNUM, on behalf of the General
Account, or the independent fiduciaries for ERISA-Covered Accounts
participating in a shared investment, may develop different approaches
as to whether or how long an investment should be held by an Account.
Certain situations may also arise during the course of UNUM's holding
of a shared real estate investment in which decisions will need to be
made where it is not possible to obtain the agreement of UNUM and all
of the independent fiduciaries involved. These situations may arise as
a result of an action taken by a third party, or they may arise in
connection with an action proposed by UNUM or the independent fiduciary
for an ERISA-Covered Account. In such cases, UNUM will make
recommendations to the independent fiduciaries regarding a proposed
transaction. If a course of action cannot be found that is acceptable
to each independent fiduciary, a stalemate procedure will be followed
to ensure that a decision can be made. The applicant represents that
the stalemate procedure is similar to procedures typically used to
resolve disputes between co-venturers under real estate joint venture
agreements and is therefore familiar to most real estate investors.
17. With respect to stalemates between two or more Accounts which
share an investment, the stalemate procedure is designed to provide a
result that is similar to what would occur in comparable situations
where unrelated parties to a transaction were dealing at arm's length.
This means that the action which will be taken in such cases is the one
that does not require an Account: (1) to invest new money; (2) to
change the terms of an existing agreement; or (3) to change the
existing relationship between the Accounts. Joint venture agreements
typically provide the opportunity for a co-venturer to buy out the
interest of another co-venturer if they reach an impasse. If, for
example, a third party wishes to buy out a joint venturer's interest in
a property and the co-venturers disagree on whether to accept or reject
the buy-out offer, the real estate joint venture agreement will
typically allow one co-venturer to buy out the other at a specified
price.
18. Where investments are shared by two or more ERISA-Covered
Accounts, UNUM will make recommendations to the independent fiduciaries
of each participating ERISA-Covered Account regarding investment
management decisions that must be made for a real estate shared
investment. For example, if the independent fiduciaries cannot agree on
a UNUM recommendation, UNUM may offer alternate recommendations
(possibly including partition and sale of undivided interests) in an
attempt to facilitate agreement. If the independent fiduciaries still
cannot agree, each ERISA-Covered Account will be offered the
opportunity to buy out the other ERISA-Covered Account's interest on
the basis of a specified price. The specified price may be based on the
price offered by a third party, or, if no third party offer is received
(or if the third party offer is unacceptable to either ERISA-Covered
Account), the specified price will be the price established under the
independent appraisal procedure described below. As in a buy-sell
provision in a typical joint venture, the ERISA-Covered Account to
which the offer is made will have the option to sell to the offering
ERISA-Covered Account at the specified price, or to buy out the
offering ERISA-Covered Account's interest at that price.
19. If the independent fiduciary for the ERISA-Covered Account
which disagrees with UNUM's recommendation does not wish to make a buy-
sell offer to the other ERISA-Covered Account, the other ERISA-Covered
Account(s) may do so. If no ERISA-Covered Account chooses to exercise
the buy-sell option, UNUM will take the action designed to preserve the
status quo, i.e., the action designed to avoid expenditure of
additional funds by the Accounts and avoid any change in existing
arrangements or contractual relationships.
20. Where a real estate investment is shared by the General Account
and one or more ERISA-Covered Accounts and a stalemate occurs between
the General Account and an ERISA-Covered Account, UNUM may offer
alternate recommendations to facilitate an agreement. If the Accounts
still cannot reach agreement, each Account will be offered the
opportunity to buy out the other Account's interest on the basis of a
specified price, which will be established in accordance with the
independent appraisal procedure described below, or will be the price
offered by a third party. If none of the Accounts elects to make a buy-
sell offer to the other Account, UNUM would be required to take the
action selected by the independent fiduciary of the ERISA-Covered
Account. Where the General Account wishes, e.g., to hold its interest
and the independent fiduciary for the ERISA-Covered Account determines
to sell its interest, the General Account will buy out the interest of
the ERISA-Covered Account at the price offered by the third party, or,
at the ERISA-Covered Account's option, at an independently determined
price. Conversely, where the independent fiduciary for the ERISA-
Covered Account determines to retain its interest while the General
Account wants to sell its interest, the ERISA-Covered Account has the
option of buying out the General Account, or, if the independent
fiduciary chooses not to, the status quo will be maintained.
Specific Transactions
I. Direct Real Estate Investments
(a) Transfers Between Accounts
21. Following the initial sharing of investments, it may be in the
best interests of the Accounts participating in the investment for one
Account to sell its interest to the other(s). Such a situation may
arise, for example, when one Account experiences a need for liquidity
in order to satisfy the cash needs of the plans participating in the
Account, while for the other Account(s) the investment remains
appropriate. One possible means of reconciling this situation is for
the ``selling'' Account to
[[Page 41445]]
sell its interest in the shared investment to the remaining
participating Account(s) or to another Account(s) at current fair
market value. Such sales may not, however, be appropriate in all
circumstances. An inter-Account transfer will only be permitted when it
is determined to be in the best interests of each Account that would be
involved in the transaction. The transfer would also be subject to the
approval of the Insurance Departments of a number of states where UNUM
is domiciled, including Maine, South Carolina and New York. Because
UNUM would be acting on behalf of both the ``buying'' and ``selling''
Accounts (but not the General Account) in such an inter-Account
transfer, the transfer might be deemed to constitute a prohibited
transaction under section 406(b)(2) of the Act. Accordingly, exemptive
relief is requested herein for the sale or transfer of an interest in a
shared real estate investment by one ERISA-Covered Account to another
Account of which UNUM is a fiduciary. Such transfers would have to be
at fair market value and approved by the independent fiduciary for each
ERISA-Covered Account involved in the transfer.
Ordinarily, no transfer of an interest in a shared investment will
be permitted between the General Account and an ERISA-Covered Account.
The transfer of an interest in a shared investment between the General
Account and an ERISA-Covered Account may be deemed to constitute a
violation of sections 406(a)(1) (A) and (D) as well as sections 406(b)
(1) and (2) of ERISA. As noted above, however, where a stalemate arises
between the General Account and an ERISA-Covered Account, the transfer
of such an interest would be permitted to resolve the conflict.
Specific stalemate procedures have been developed for these situations.
If, for example, a third party makes an offer to purchase the entire
investment held by UNUM on behalf of the General Account and an ERISA-
Covered Account, it is possible that the General Account would like to
accept the offer and the independent fiduciary on behalf of the ERISA-
Covered Account would like to reject the offer. In that event, UNUM may
offer alternative recommendations to the independent fiduciary. If
there is still no agreement, the independent fiduciary (as the party
wishing to reject the offer) would be given the opportunity to buy-out
the General Account's interest at a specified price. This price may be
a proportionate share of the third party offer; or, if such price is
unacceptable to the ERISA-Covered Account, a proportionate share of the
price determined through the independent appraisal procedure described
below. This procedure would give the ERISA-Covered Account an
opportunity to retain its interest in the shared investment. If the
ERISA-Covered Account does not choose to buy-out the General Account's
interest, the General Account would be required to accede to the
direction of the ERISA-Covered Account and would, therefore, reject the
third party offer.
If, in the event of a third party purchase offer, the General
Account wants to reject the offer but the independent fiduciary on
behalf of the ERISA-Covered Account wants to accept the offer, the
procedures described above would apply, except that the General Account
(as the party wishing to reject the offer) would have the opportunity
to buy-out the ERISA-Covered Account's interest at a proportionate
share of the third party purchase offer, or, at the option of the
independent fiduciary for the ERISA-Covered Account, at an
independently determined price. This will permit the ERISA-Covered
Account to sell its interest in a real estate investment, if it chooses
to do so, at no less than the same price it would have received from a
third party.
Even in the absence of a third party offer, UNUM may recommend the
sale of a shared investment. If the independent fiduciary approves the
recommendation, UNUM will arrange for the sale. If the independent
fiduciary does not approve UNUM's recommendation, UNUM may offer
alternative recommendations, possibly including partition and sale of
divided interests. If, however, no agreement is reached, the
independent fiduciary (as the party wishing to reject the
recommendation) would be given the opportunity to buy-out the General
Account's interest in accordance with the independent appraisal
procedure described below. If there is no buy-out, UNUM would take the
course of action consistent with the ERISA-Covered Account's
determination and would, therefore, not sell the investment.
The independent fiduciary may also determine independently that a
shared investment in an ERISA-Covered Account should be sold. If UNUM
agrees with this recommendation, UNUM will arrange the sale. If UNUM,
on behalf of the General Account, disagrees with the recommendation,
UNUM will first attempt to sell the ERISA-Covered Account's interest to
another Account other than the General Account. In this case, the sale
price and other terms would have to be approved by the independent
fiduciary for each ERISA-Covered Account. If the ERISA-Covered
Account's interest cannot be sold to another Account, UNUM may offer
alternative recommendations, possibly including partition and sale of
the ERISA-Covered Account's interest to a third party. If no agreement
is reached with respect to these options, the General Account (as the
party opposed to the sale) would have the opportunity of buying out the
ERISA-Covered Account's interest at a price established under
independent appraisal procedures described below. If there is no buy-
out and no agreement, UNUM will be required to take the course of
action consistent with the ERISA-Covered Account's determination and
will sell the entire investment.
Where an independent price for the transfer of an interest in a
shared investment between the General Account and an ERISA-Covered
Account is not established by an offer from an unrelated third party
(or where the third party price is unacceptable to the ERISA-Covered
Account), the stalemate procedure provides for the appointment of an
independent appraiser. Under this procedure, UNUM and the independent
fiduciary will each appoint an independent appraiser. These two
appraisers will then choose a third appraiser. The panel of appraisers
will each evaluate the entire investment, and the average of the three
appraisals will be used to determine the proportional value of each
shared investment interest. However, the General Account and the ERISA-
Covered Account may agree that if one valuation is more than a
specified percentage outside the range of the other two valuations,
that valuation may be disregarded and the transfer price will be the
average of the remaining two valuations. The applicant represents that
this procedure, which is of the variety typically used in real estate
joint venture agreements, provides adequate protection for the ERISA-
Covered Account because the independent fiduciary is an equal
participant in the appraisal process. See Section I(a).
(b) Joint Sales of Property
22. In situations involving shared real estate investments, an
opportunity may arise to sell the entire investment to a third party,
and it may be determined for all of the participating Accounts that the
sale is desirable. When the General Account is participating in the
investment, and the sale is therefore determined to be in the best
interests of the General Account (in addition to being in the interests
of the other Account(s)), the sale might be deemed
[[Page 41446]]
to constitute a prohibited transaction under section 406 of the Act and
section 4975 of the Code.23
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\23\ The Department notes that all future references to the
provisions of the Act shall be deemed to include the parallel
provisions of the Code.
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Similarly, UNUM may be acting on behalf of two ERISA-Covered
Accounts, in which case a prohibited transaction under section
406(b)(2) may be deemed to occur. Accordingly, exemptive relief is
requested for these joint sales. The sales would have to be approved by
the independent fiduciary for each ERISA-Covered Account involved in
the sale. In accordance with UNUM's stalemate procedures, if the
independent fiduciary for one ERISA-Covered Account wishes to sell its
interest in a shared investment and the independent fiduciary for
another ERISA-Covered Account does not want to sell, UNUM will attempt
to negotiate a compromise, including the transfer of interests from one
Account to the other. If no agreement can be reached, the status quo
will be maintained and no sale will be made. See Section I(b).
(c) Additional Capital Contributions
23. On occasion, commercial real estate investments require
infusions of additional capital in order to fulfill the investment
expectations of the property. For example, developmental real estate
investments sometimes require additional capital in order to complete
the construction of the property. In addition, the cash flow needed to
improve or operate completed buildings may also result in the need for
additional capital. Such additional capital is frequently provided by
the owners of the property. In the case of a property that is owned
entirely by UNUM on behalf of the Accounts, it is contemplated that
needed additional capital will ordinarily be contributed in connection
with the investment in the form of an equity capital contribution made
by each participating Account in an amount equal to such Account's
existing percentage equity interest in the shared investment
24; that is, in the first instance, each Account would be
afforded the opportunity to contribute additional capital on a fully
proportionate basis. In the case of ERISA-Covered Accounts, all
decisions regarding the making of additional capital contributions must
be approved by the independent fiduciary for the Account. The making of
an additional capital contribution could be deemed to involve a
prohibited transaction under section 406 of the Act. If one or more
participating Accounts in a shared investment is unable to provide its
share of the needed additional capital, various alternatives may be
appropriate, including having the other Account(s) make a
disproportionate contribution. For example, where the General Account
and an ERISA-Covered Account participate in a shared investment and the
need for additional capital arises, it might be determined for
liquidity reasons or other factors involving the ERISA-Covered Account
that the additional contribution should not be made by that Account. As
a result, the additional equity capital may be provided entirely by the
General Account with the further consequence that the General Account
would thereafter have a larger interest in the investment and,
therefore, a larger share in the appreciation and income to be derived
from the property.25
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\24\ In any case where the General Account participates in a
shared investment with one or more ERISA-Covered Accounts and a call
for additional capital is made, the General Account will always make
a capital contribution that is at least equivalent proportionately
to the highest capital contribution made by an ERISA-Covered
Account.
\25\ In the case of shared real estate investments owned
entirely by UNUM accounts, if an Account contributes capital
equaling less than its pro rata interest in the investment (or makes
no contribution at all), that Account's equity interest will be re-
adjusted and reduced based on the change in the fair market value of
the property caused by the infusion of new capital.
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Such an adjustment in ownership interests might be deemed to
constitute a prohibited (indirect sales) transaction under section 406
of the Act. In addition, these situations could also occur where two
ERISA-Covered Accounts are involved.
Accordingly, the applicant is requesting exemptive relief that
would permit the contribution of additional equity capital for a shared
investment by Accounts participating in the investment (including the
General Account). Any decision made or action taken by an ERISA-Covered
Account (i.e., the contribution of either no additional capital, the
Account's pro rata share of additional capital, less than or more than
the Account's pro rata share, etc.) must be approved by such
independent fiduciary. See Section I(c).
(d) Lending of Funds to Meet Additional Capital Requirements
24. If the General Account and an ERISA-Covered Account participate
in a shared investment that experiences the need for additional
capital, and it is determined that the ERISA-Covered Account does not
have sufficient funds available to meet the call for additional
capital, the General Account might be willing and able to loan the
required funds to the ERISA-Covered Account.
Prior to any loan being made, it must be approved by the
independent fiduciary for the ERISA-Covered Account. Such loan will be
unsecured and non-recourse, will bear interest at a rate that will not
exceed the prevailing interest rate on 90-day Treasury Bills, will not
be callable at any time by the General Account, and will be prepayable
at any time without penalty at the discretion of the independent
fiduciary of the ERISA-Covered Account. Prior to any loan being made,
it would have to be approved by the independent fiduciary for the
ERISA-Covered Account. See Section I(d).
II. Joint Venture Investments
25. Many real estate investments are structured as joint venture
arrangements (rather than 100 percent ownership interest in property)
in which UNUM and another party, such as a real estate developer or
manager, participate as joint venturer partners (or co-venturers).
Joint venture investments typically involve several particular features
by virtue of the terms and conditions of the joint venture agreements
that may, when UNUM's joint venture interest is shared, result in
possible violations of section 406 of the Act.
(a) Additional Capital Contributions to Joint Ventures
26. As in the case of investments made entirely by UNUM, joint
venture real estate investments sometimes require additional operating
capital. Typically, a joint venture agreement will provide for a
capital call by the general partner of the joint venture to be made to
each joint venturer under which each venturer will be requested to
provide the needed capital. Capital contributions are generally
requested on a pro rata basis either in the form of an equity
contribution or a loan to the joint venture. If one joint venturer
refuses to contribute its pro rata equity share of the capital call,
the other joint venturer(s) may contribute additional capital to cover
the short-fall and thereby ``squeeze down'' the interest in the venture
of the non-contributing joint venturer.26
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\26\ In the case of a call for additional capital involving a
typical joint venture arrangement entered into between parties
dealing at arm's length, the joint venture agreement may commonly
provide that the equity interest of any non-contributing venturer be
re-adjusted, or ``squeezed down'', on a capital interest basis. This
involves re-adjusting the equity interests of the venturers solely
on the basis of the percentage of total capital contributed without
taking into account any appreciation on the underlying property.
This ``capital interest'' adjustment can substantially diminish the
equity interest of the non-contributing venturer in the actual
current market value of the underlying property. Thus, this type of
re-adjustment is intended to provide an incentive to all venturers
to make their proportionate capital contributions so that
improvements can be made and the operation of a property continued
without burdening the other venturers.
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[[Page 41447]]
Alternatively, if sufficient additional capital is not provided by
the joint venturers, other financing may be sought, or the joint
venture may be liquidated. In the case of a capital call where UNUM's
joint venture interest is shared by two or more Accounts, a
determination must be made on behalf of each Account participating in
the shared investment with respect to whether it is appropriate for the
Account to provide its proportionate share of additional capital
requested by the joint venture. The general rule that UNUM will follow
is that each Account will be given the opportunity to provide its pro
rata share of the capital call, but for some Accounts it may be
determined to be appropriate to provide less than a full share or no
additional capital at all. In such cases, the interest of the Account
would be reduced proportionately on a fair market basis. In the case of
ERISA-Covered Accounts, all decisions regarding the making of
additional capital contributions must be approved by the independent
fiduciary for the Account. In addition to situations where some
Accounts participating in the ownership of UNUM's joint venture
interest may not be in a position to provide their share of a capital
call, other situations may arise where the co-venturer is unable to
make its additional capital contributions. Both of these situations may
result in prohibited transactions under section 406 of the Act.
27. UNUM Shortfall. The General Account and an ERISA-Covered
Account may experience a capital call from the general partner of the
joint venture for either an additional equity or debt contribution. If
it is determined that the ERISA-Covered Account does not have
sufficient funds available to meet its contribution requirement,
27 the General Account may make a loan to the ERISA-Covered
Account to enable the ERISA-Covered Account to make its required pro
rata capital contribution. Accordingly, subject to the conditions of
the proposed exemption, Section II(a)(2) would provide relief for loans
of this type. Prior to any loan being made, it would have to be
approved by the independent fiduciary for the ERISA-Covered Account.
Such loan will be unsecured and non-recourse, will bear interest at a
rate that will not exceed the prevailing interest rate on 90-day
Treasury Bills, will not be callable at any time by the General
Account, and will be prepayable at any time without penalty at the
discretion of the independent fiduciary of the ERISA-Covered Account.
In addition, the General Account may make an additional equity
contribution to the joint venture to cover the ERISA-Covered Account's
shortfall. In that event, the equity interest of the ERISA-Covered
Account will be ``squeezed down'' (relative to the equity interest of
the General Account) on a fair market value basis. This option would
avoid the capital basis squeeze-down of the ERISA-Covered Account's
interest by the co-venturer. Such contribution would be made by the
General Account only after the independent fiduciary for the ERISA-
Covered Account is given an opportunity to make an additional
contribution. See Section II(a)(3).
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\27\ In any case where the General Account and one or more
ERISA-Covered Accounts share UNUM's interest in a joint venture, the
General Account will always make a capital contribution that is at
least equivalent proportionately to the highest capital contribution
made by an ERISA-Covered Account, up to its pro rata share of the
additional capital call. Thus, the General Account will never be the
cause as between the Accounts of a capital contribution shortfall by
UNUM that would result in a capital basis squeeze down by a co-
venturer.
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A similar situation may arise where two ERISA-Covered Accounts
participate in a joint venture investment. If one Account is unable or
unwilling to provide its proportionate share of a capital call, the
other Account may be interested in making up the shortfall. This might
be accomplished by means of an equity contribution with a resulting re-
adjustment on a current fair market value basis in the equity ownership
interests of the participating Accounts. Thus, any of these
disproportionate contribution situations between Accounts might result
in a violation of section 406 of the Act. Subject to the generally
applicable conditions of this proposed exemption, Section II(a)(3)
provides relief for these disproportionate contributions.
28. Co-Venturer Shortfall. In some cases, UNUM's co-venturer in a
joint venture investment may be unable to meet its additional capital
obligation, and UNUM may deem it advisable for some or all of the
participating Accounts to contribute capital in excess of the pro rata
share of UNUM's Accounts in the joint venture in order to finance the
operation of the property (and thereby squeeze down the equity interest
of the co-venturer).28 The applicant is requesting exemptive
relief that would permit additional capital contributions to be made by
participating Accounts (including the General Account) on a
disproportionate basis if the need arises. Any instance involving the
infusion of additional capital to a joint venture will be considered by
the independent fiduciary for each ERISA-Covered Account participating
in the investment and any action to be taken by the Account must be
approved by the independent fiduciary. These actions might include
contributing a pro rata share of additional equity capital (including a
capital contribution that squeezes down the interest of a co-venturer
on the basis provided in the joint venture agreement), contributing
more or less than a pro rata share, or contributing no additional
capital. See Section II(a)(4).
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\28\ In any case involving a shared joint venture interest held
by the General Account and an ERISA-Covered Account, if it is
determined that the ERISA-Covered Account will contribute its pro
rata share of extra capital, the General Account would also
contribute at least its pro rata share of such capital.
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(b) Third Party Purchases of Joint Venture Properties
29. Under the terms of typical joint venture agreements, if an
offer is received from a third party to purchase the assets of the
joint venture, and one joint venture partner (irrespective of the
percentage ownership interest of the joint venture partner) wishes to
accept the offer, the other joint venture partner must either (1) also
accept the offer, or (2) buy out the first partner's interest at the
portion of the offer price that is proportionate to the first partner's
share of the venture. For example, if UNUM on behalf of the Accounts
and a real estate developer are joint venture partners in a property
and an offer is received from another person to acquire the entire
property that the developer wants to accept, UNUM on behalf of the
Accounts would be obligated either to sell its interest also to the
third-party or to buy out the interest of the developer at the portion
of the price offered by the third party proportionate to the
developer's share of the venture. When UNUM's interest in a real estate
joint venture is shared by two or more Accounts, it is likely that the
same decision will be appropriate for each Account in any third-party
purchase situation. See sections I(b) and II(b)(1). It is also
possible, however, that it might be in the interests of some Accounts
to reject the offer and buy-out the developer, while other Accounts
might not have the funds to do so or, for some other reason, would
elect to sell to the third party. The joint venture agreements
typically require, however, that UNUM on behalf of the Accounts provide
the co-venturer with a unified buy or sell reply. Thus, in making a buy
or sell decision in any of these cases involving an ERISA-Covered
Account,
[[Page 41448]]
UNUM might be deemed to be acting in violation of section 406 of the
Act. Further, in order to resolve situations where the same reply is
not appropriate for all participating Accounts, various alternatives
may be adopted. For example, the Account(s) that wishes to continue
owning the property may be willing and able to buy out not only the co-
venturer, but also the other participating Account(s) that wishes to
accept the third party offer to sell. Or, one Account may be willing
and able to buy-out the co-venturer while the other Account chooses to
continue holding its original interest in the property. Alternatively,
all of the Accounts may choose to participate in the buy-out, but on a
basis that is not in proportion to their existing ownership interests.
Such alternatives, when an ERISA-Covered Account is involved, while all
possibly desirable from case to case, may also raise questions under
section 406 of the Act, whether or not the General Account is a
participant in the investment. Accordingly, the applicant is requesting
exemptive relief that would permit UNUM to respond to third-party
purchase offers as appropriate under the circumstances. Such a response
might involve acceptance of the offer on behalf of all participating
Accounts, a buy-out of a co-venturer by some or all of the
participating Accounts on a pro rata or non-pro rata basis, or a buy-
out of the interest of one participating Account (and of the co-
venturer) by other participating Accounts. Any action by any ERISA-
Covered Account in these situations will be required to be approved by
the independent fiduciary for the Account in accordance with the
stalemate procedure, as described below (see rep. 30, below).
30. In a case involving the sharing of a joint venture interest
between two ERISA-Covered Accounts, if one ERISA-Covered Account wishes
to buy out the co-venturer and the other ERISA-Covered Account is
unable or unwilling to do so, the ERISA-Covered Account wishing to buy
out the co-venturer would have the opportunity to do so if the other
ERISA-Covered Account's interests can also be accommodated. This could
be accomplished if, for example (1) the second ERISA-Covered Account
wishes to sell its interest to the first ERISA-Covered Account (at a
proportionate share of the price offered by the third party offeror)
and the first ERISA-Covered Account agrees; or (2) the second ERISA-
Covered Account wishes to continue holding its original interest. If,
however, the second ERISA-Covered Account wishes to sell its interest
and the first ERISA-Covered Account is unwilling or unable to buy it,
both Accounts would be required to sell to the third party offeror in
order to avoid the expenditure of additional funds by an unwilling
Account.
If the General Account participates in a joint venture interest
subject to a third party purchase offer, the stalemate procedure would
provide the same alternatives, except that if the General Account
wishes to accept the third party purchase offer and the ERISA-Covered
Account wishes to buy out the co-venturer (and is unwilling or unable
to buy out the General Account's interest), the General Account would
be required to buy out the co-venturer with the ERISA-Covered Account.
See Section II(b).
(c) Rights of First Refusal in Joint Venture Agreements
31. Under the terms of typical joint venture agreements, if a joint
venture partner wishes to sell its interest in the venture to a third
party, the other joint venture partner must be given the opportunity to
exercise a right of first refusal to purchase the first partner's
interest at the price offered by the third party. For example, if UNUM
and a real estate developer are joint venture partners and the
developer decided to sell its interest to a third party, UNUM would
have the right to purchase the developer's interest at the price
offered by the third party. In the case of shared real estate joint
ventures, the decision by UNUM on behalf of the Accounts with respect
to whether or not to exercise a right of first refusal might raise
questions under section 406 of the Act since each Account participating
in the investment might be affected differently by such decision.
Because, under the terms of the joint venture agreement, only one
option (exercise or not exercise) may be chosen by UNUM on behalf of
the Accounts, exemptive relief is being requested that would permit
UNUM to exercise or not exercise a right of first refusal as may be
appropriate under the circumstances. Any action taken on behalf of an
ERISA-Covered Account regarding the exercise of such a right would have
to be approved by the independent fiduciary. Further, under the
requested exemption, if the General Account and an ERISA-Covered
Account share a joint venture investment, even though UNUM may
initially decide on behalf of the General Account not to make a
purchase under a right of first refusal option, the General Account
will be required to participate in the purchase of the other joint
venturer's interest if the independent fiduciary determines that it is
appropriate for the ERISA-Covered Account to participate in the
exercise of the right of first refusal on at least a pro rata basis.
If, however, two Accounts other than the General Account participate in
a joint venture and agreement cannot be reached on behalf of the
Accounts on whether to exercise a right of first refusal, the right
will not be exercised and the co-venturer will be permitted to sell its
interest to the third party, unless one Account decides to buy-out the
co-venturer alone. In this regard, it is conceivable that some
participating Accounts may elect to take advantage of a right of first
refusal opportunity and buy-out a co-venturer without other
participating Accounts taking part in the transaction. For example, in
the case of a shared joint venture investment involving the General
Account (or any other Account) and an ERISA-Covered Account, if the co-
venturer wishes to accept an offer to sell its interest and the
independent fiduciary of the ERISA-Covered Account decides not to have
the account participate in purchasing the co-venturer's interest, the
General Account (or other participating Account) would be free to make
the purchase on its own. The exercise of a right of first refusal on
such a disproportionate basis might also raise questions under section
406 of the Act for which exemptive relief may be needed. See Section
II(c).
(d) Buy-Sell Provisions in Joint Venture Agreements
32. Joint venture agreements entered into by UNUM typically provide
that one joint venture partner may demand that the other partner either
sell its interest to the first partner at a price determined by the
terms of the joint venture agreement or buy out the interest of the
first partner at such price. If the other joint venture partner refuses
to exercise either option within a specified period, it must sell its
interest to the first partner at the stated price. These ``buy-sell''
provisions are generally used to resolve serious difficulties or
impasses in the operation of a joint venture, but generally a joint
venture agreement permits the buy-sell provision to be exercised at any
time. As in the situations discussed above, the decision by UNUM on
behalf of the Accounts to make a buy-sell offer, or its reaction to
such an offer made by a co-venturer, may affect various participating
Accounts differently. Accordingly, any decision made by UNUM in these
cases involving ERISA-Covered Accounts might raise questions under
section 406 of the Act. The applicant is requesting exemptive relief
that would permit UNUM to make an appropriate decision under the
[[Page 41449]]
circumstances on behalf of all participating Accounts to make a buy-
sell offer to a co-venturer or to react to a buy-sell offer from a co-
venturer. Any such decision must be approved by the independent
fiduciary for each ERISA-Covered Account participating in the
investment.
33. In the event that UNUM recommends the initiation of the buy-
sell option against the co-venturer, UNUM will exercise the option if
the independent fiduciary on behalf of each participating ERISA-Covered
Account approves the recommendation. If, in the case of a General
Account/ERISA-Covered Account shared joint venture investment, the
independent fiduciary does not agree with UNUM's recommendation, the
independent fiduciary would be given the opportunity to buy out the
General Account's interest at a price to be determined in accordance
with the independent appraisal procedure described above. If the
independent fiduciary declines to buy out the General Account's
interest, the General Account would then have the opportunity to buy
out the ERISA-Covered Account's interest, (provided the independent
fiduciary for the ERISA-Covered Account approves of such sale), also in
accordance with the independent appraisal procedure. If neither the
General Account nor the ERISA-Covered Accounts buys out the other's
interest in the joint venture investment, UNUM would take the course of
action most consistent with the determination of the ERISA-Covered
Account, and would, therefore, not exercise the buy-sell option.
In the event that the co-venturer initiates the buy-sell option
with respect to a shared joint venture investment, UNUM must either
sell its entire interest to the co-venturer or reject the offer and
buy-out the co-venturer's interest at that price. If the participating
Accounts agree upon the course of action to be taken, UNUM will then
take the agreed action. If no agreement is reached, various
alternatives may be considered. For example, in the case of a General
Account/ERISA-Covered Account shared joint venture investment, if UNUM
recommends rejection of the offer (and consequent purchase of the co-
venturer's interest), but the independent fiduciary wants to accept the
offer, the General Account would have the option to purchase the co-
venturer's interest solely on behalf of the General Account. If the
General Account chooses this option, the ERISA-Covered Account (which
wished to accept the co-venturer's offer) would have the opportunity to
sell its interest to the General Account, at a proportionate share of
the price offered by the co-venturer, but would not be required to do
so. However, if the General Account declines to purchase the ERISA-
Covered Account's interest where the ERISA-Covered Account wishes to
accept the buy-sell offer, the entire joint venture interest would be
sold to the co-venturer. If the ERISA-Covered Account wishes to reject
the buy-sell offer (and purchase the co-venturer's interest) and the
General Account wishes to accept the offer, the General Account would
be required to purchase its proportionate share of the co-venturer's
interest, unless the independent fiduciary for the ERISA-Covered
Account elects to purchase more than its proportionate share (including
the entire co-venturer interest).
Where two or more ERISA-Covered Accounts share a joint venture
investment, the stalemate procedure is similar, except that no ERISA-
Covered Account would be required to purchase the interest of a co-
venturer (and thus expend additional funds) against its wishes. See
Section II(d).
(e) Transactions With Joint Venture Party in Interest
34. The applicant represents that when the General Account holds a
50 percent or more interest in a joint venture, the joint venture
itself may be deemed to be a party in interest under section 3(14)(G)
of the Act. Thus, any subsequent transaction involving the joint
venture and an ERISA-Covered Account that is also participating in the
venture (e.g., an additional contribution of capital) may be deemed to
be a transaction between the plans participating in an ERISA-Covered
Account and a party in interest (the joint venture itself) in violation
of section 406. Accordingly, the applicant is requesting exemptive
relief from the restrictions of section 406(a) of the Act, only, which
would permit any additional equity capital contributions to a joint
venture by an ERISA-Covered Account which is participating in an
interest in the joint venture, where the joint venture is a party in
interest solely by reason of the ownership on behalf of the General
Account of a 50 percent or more interest in such joint venture. Such
action would be conditioned upon the approval of the independent
fiduciary for the ERISA-Covered Account. See Section III.
Initial Allocations
The applicant, UNUM, has not requested exemptive relief for the
initial allocation of shared equity real estate investments by UNUM
among two or more Accounts, at least one of which is an ERISA-Covered
Account. UNUM represents that neither the General Account nor any
ERISA-Covered Account will incur any debt in connection with the
initial allocation of the shared investment. In this regard, it is the
view of the Department that the mere investment of assets of a plan on
identical terms with a fiduciary's investment for his or her own
account in the equity interests of a shared real estate investment
would not, in itself, cause the fiduciary to have an interest in the
transaction that may affect his or her best judgment as a fiduciary.
Therefore, such an investment would not, in itself, violate section
406(b)(1) which prohibits a fiduciary from dealing with the assets of a
plan in his or her own interest or for his or her account. In addition,
such shared investment, pursuant to reasonable procedures established
by the fiduciary, would not cause the fiduciary to act (or represent) a
party whose interests are adverse to those of the plan. Therefore, such
an investment would not, in itself, violate section 406(b)(2) which
states that a fiduciary may not act in any capacity in a transaction
involving the plan on behalf of a party whose interests are adverse to
those of the plan.
With respect to section 406(a)(1)(D) of the Act which prohibits the
transfer to, or use by or for the benefit of a party in interest
(including a fiduciary) of the assets of a plan, it is the opinion of
the Department that a party in interest does not violate that section
merely because he or she derives some incidental benefit from a
transaction involving plan assets. We are assuming, for purposes of
this analysis, that the fiduciary does not rely upon and is not
otherwise dependent upon the participation of plans in order to
undertake its share of the investment.
Thus, with respect to the investment of plan assets in shared
equity investments which are made simultaneously with investments by a
fiduciary for its own account on identical terms, it is the view of the
Department that any benefit that the fiduciary might derive from such
investment under these circumstances is incidental and would not
violate section 406(a)(1)(D) of the Act.
Notice to Interested Persons
Within 30 days of publication of this proposed exemption in the
Federal Register, UNUM will provide the notice required under 29 CFR
section 2570.43(b) by posting a copy of all materials to be required in
that notice at business locations maintained by
[[Page 41450]]
UNUM and its affiliates at which participants in the UNUM Plan work. In
addition, if any new ERISA-Covered Account proposes to participate in
shared investments covered by the exemption proposed herein, the
representatives of that Account will be provided with a copy of this
proposed exemption and the final exemption before beginning to
participate in any shared investments.
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 Code does not relieve a fiduciary or other
party in interest or disqualified person from certain other provisions
of the Act and 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) The proposed exemption, if granted, will not extend to
transactions prohibited under section 406(b)(3) of the Act and section
4975(c)(1)(F) of the Code;
(3) 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; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and 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.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemption to the address above,
within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the pending exemption.
Comments received will be available for public inspection with the
application for exemption at the address set forth above.
Proposed Exemption
Section I--Exemption for Certain Transactions Involving the Management
of Investments Shared by Two or More Accounts Maintained by UNUM
If the exemption is granted, as indicated below, the restrictions
of certain sections of the Act and the sanctions resulting from the
application of certain parts of section 4975 of the Code shall not
apply to the following transactions if the conditions set forth in
Section IV are met:
(a) Transfers Between Accounts--(1) The restrictions of section
406(b)(2) of the Act shall not apply to the sale or transfer of an
interest in a shared investment (including a shared joint venture
interest) between two or more Accounts (except the General Account),
provided that each ERISA-Covered Account pays no more, or receives no
less, than fair market value for its interest in a shared investment.
(2) The restrictions of sections 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 shall not apply to the sale or transfer of an interest in a shared
investment (including a shared joint venture interest) between ERISA-
Covered Accounts and the General Account, provided that such transfer
is made pursuant to stalemate procedures, described in this notice of
proposed exemption, adopted by the independent fiduciary for the ERISA-
Covered Account, and provided further that the ERISA-Covered Account
pays no more or receives no less than fair market value for its
interest in a shared investment.
(b) Joint Sales of Property--The restrictions of sections 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 shall not apply to the sale to a third
party of the entire interest in a shared investment (including a shared
joint venture interest) by two or more Accounts, provided that each
ERISA-Covered Account receives no less than fair market value for its
interest in the shared investment.
(c) Additional Capital Contributions--The restrictions of sections
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 shall not apply either to the
making of a pro rata equity capital contribution by one or more of the
Accounts to a shared investment; or to the making of a Disproportionate
[as defined in Section V(e)] equity capital contribution by one or more
of such Accounts which results in an adjustment in the equity ownership
interests of the Accounts in the shared investment on the basis of the
fair market value of such interests subsequent to such contribution,
provided that each ERISA-Covered Account is given an opportunity to
make a pro rata contribution.
(d) Lending of Funds--The restrictions of sections 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 shall not apply to the lending of funds
from the General Account to an ERISA-Covered Account to enable the
ERISA-Covered Account to make an additional pro rata contribution,
provided that such loan--
(A) Is unsecured and non-recourse with respect to participating
plans,
(B) Bears interest at a rate not to exceed the prevailing rate on
90-day Treasury Bills,
(C) Is not callable at any time by the General Account, and
(D) Is prepayable at any time without penalty.
Section II--Exemption for Certain Transactions Involving the Management
of Joint Venture Interests Shared by Two or More Accounts Maintained by
UNUM
If the exemption is granted, the restrictions of certain sections
of the Act and the sanctions resulting from the application of certain
parts of section 4975 of the Code shall not apply to the following
transactions resulting from the sharing of an investment in a real
estate joint venture between two or more Accounts, if the conditions
set forth in Section IV are met:
(a) Additional Capital Contributions--(1) The restrictions of
sections 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 shall not apply to the
making of additional pro rata equity capital contributions by one or
more Accounts participating in the joint venture.
[[Page 41451]]
(2) The restrictions of sections 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 shall not apply to the lending of funds from the General Account
to an ERISA-Covered Account to enable the ERISA-Covered Account to make
an additional pro rata capital contribution, provided that such loan--
(A) Is unsecured and non-recourse with respect to the participating
plans,
(B) Bears interest at a rate not to exceed the prevailing rate on
90-day Treasury Bills,
(C) Is not callable at any time by the General Account, and
(D) Is prepayable at any time without penalty.
(3) The restrictions of sections 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 shall not apply to the making of Disproportionate [as defined
in section V(e)] additional equity capital contributions (or the
failure to make such additional contributions) in the joint venture by
one or more Accounts which result in an adjustment in the equity
ownership interests of the Accounts in the joint venture on the basis
of the fair market value of such joint venture interests subsequent to
such contributions, provided that each ERISA-Covered Account is given
an opportunity to provide its proportionate share of the additional
equity capital contributions; and
(4) In the event a co-venturer fails to provide all or any part of
its pro rata share of an additional equity capital contribution, the
restrictions of sections 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 shall
not apply to the making of Disproportionate additional equity capital
contributions to the joint venture by the General Account and an ERISA-
Covered Account up to the amount of such contribution not provided by
the co-venturer which result in an adjustment in the equity ownership
interests of the Accounts in the joint venture on the basis provided in
the joint venture agreement, provided that such ERISA-Covered Account
is given an opportunity to participate in all additional equity capital
contributions on a proportionate basis.
(b) Third Party Purchase Offers--(1) In the case of an offer by a
third party to purchase any property owned by the joint venture, the
restrictions of sections 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 shall
not apply to the acquisition by the Accounts, including one or more
ERISA-Covered Account[s], on either a proportionate or Disproportionate
basis of a co-venturer's interest in the joint venture in connection
with a decision on behalf of such Accounts to reject such purchase
offer, provided that each ERISA-Covered Account is first given an
opportunity to participate in the acquisition on a proportionate basis;
and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any acceptance by UNUM on behalf of two or more Accounts,
including one or more ERISA-Covered Account[s], of an offer by a third
party to purchase a property owned by the joint venture even though the
independent fiduciary for one (but not all) of such ERISA-Covered
Account[s] has not approved the acceptance of the offer, provided that
such declining ERISA-Covered Account[s] are first afforded the
opportunity to buy out both the co-venturer and ``selling'' Account's
interests in the joint venture.
(c) Rights of First Refusal--(1) In the case of the right to
exercise a right of first refusal described in a joint venture
agreement to purchase a co-venturer's interest in the joint venture at
the price offered for such interest by a third party, the restrictions
of sections 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 shall not
apply to the acquisition by such Accounts, including one or more ERISA-
Covered Account[s], on either a proportionate or Disproportionate basis
of a co-venturer's interest in the joint venture in connection with the
exercise of such a right of first refusal, provided that each ERISA-
Covered Account is first given an opportunity to participate on a
proportionate basis; and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any decision by UNUM on behalf of the Accounts not to exercise
such a right of first refusal even though the independent fiduciary for
one (but not all) of such ERISA-Covered Accounts has approved the
exercise of the right of first refusal, provided that none of the
ERISA-Covered Accounts that approved the exercise of the right of first
refusal decides to buy-out the co-venturer on its own.
(d) Buy-Sell Options--(1) In the case of the exercise of a buy-sell
option set forth in the joint venture agreement, the restrictions of
sections 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 shall not apply to the
acquisition by one or more of the Accounts on either a proportionate or
Disproportionate basis of a co-venturer's interest in the joint venture
in connection with the exercise of such a buy-sell option, provided
that each ERISA-Covered Account is first given the opportunity to
participate on a proportionate basis; and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any decision by UNUM on behalf of two or more Accounts,
including one or more ERISA-Covered Account[s], to sell the interest of
such Accounts in the joint venture to a co-venturer even though the
independent fiduciary for one (but not all) of such ERISA-Covered
Account[s] has not approved such sale, provided that such disapproving
ERISA-Covered Account is first afforded the opportunity to purchase the
entire interest of the co-venturer.
Section III--Exemption for Transactions Involving a Joint Venture or
Persons Related to a Joint Venture
The restrictions of section 406(a) 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 (D) of the Code shall not apply, if the
conditions in Section IV are met, to any additional equity capital
contributions to a joint venture by an ERISA-Covered Account that is
participating in an interest in the joint venture, where the joint
venture is a party in interest solely by reason of the ownership on
behalf of the General Account of a 50 percent or more interest in such
joint venture.
Section IV--General Conditions
(a) Each contractholder or prospective contractholder in an ERISA-
Covered Account which shares or proposes to share real estate
investments is provided with a written description of potential
conflicts of interest that may result from the sharing, a copy of the
notice of pendency, and a copy of the exemption if granted.
(b) An independent fiduciary must be appointed on behalf of each
ERISA-Covered Account participating in the sharing of investments. The
independent fiduciary shall be either--
(1) A business organization which has at least five years of
experience with
[[Page 41452]]
respect to commercial real estate investments, or
(2) A committee composed of three to five individuals who each have
at least five years of experience with respect to commercial real
estate investments.
(c) The independent fiduciary or independent fiduciary committee
member shall not be or consist of UNUM or any of its affiliates.
(d) No organization or individual may serve as an independent
fiduciary for an ERISA-Covered Account for any fiscal year if the gross
income (other than fixed, non-discretionary retirement income) received
by such organization or individual (or any partnership or corporation
of which such organization or individual is an officer, director, or
ten percent or more partner or shareholder) from UNUM, its affiliates
and the ERISA-Covered Accounts for that fiscal year exceeds five
percent of its or his or her annual gross income from all sources for
the prior fiscal year. If such organization or individual had no income
for the prior fiscal year, the five percent limitation shall be applied
with reference to the fiscal year in which such organization or
individual serves as an independent fiduciary.
The income limitation will include income for services rendered to
the Accounts as independent fiduciary under any prohibited transaction
exemption(s) granted by the Department.
In addition, no organization or individual who is an independent
fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director or ten percent or more partner or
shareholder, may acquire any property from, sell any property to, or
borrow any funds from, UNUM, its affiliates, or any Account maintained
by UNUM or its affiliates, during the period that such organization or
individual serves as an independent fiduciary and continuing for a
period of six months after such organization or individual ceases to be
an independent fiduciary, or negotiate any such transaction during the
period that such organization or individual serves as independent
fiduciary.
(e) The independent fiduciary will approve the initial allocation
of a shared investment to an ERISA-Covered Account. In addition, the
independent fiduciary acting on behalf of an ERISA-Covered Account
shall have the responsibility and authority to approve or reject
recommendations made by UNUM or its affiliates for each of the
transactions in this proposed exemption. In the case of a possible
transfer or exchange of any interest in a shared investment between the
General Account and an ERISA-Covered Account, the independent fiduciary
shall also have full authority to negotiate the terms of the transfer.
UNUM shall involve the independent fiduciary in the consideration of
contemplated transactions prior to the making of any decisions, and
shall provide the independent fiduciary with whatever information may
be necessary in making its determinations.
In addition, the independent fiduciary shall review on an as-needed
basis, but not less than twice annually, the shared real estate
investments in the ERISA-Covered Account to determine whether the
shared real estate investments are held in the best interest of the
ERISA-Covered Account.
(f) UNUM maintains for a period of six years from the date of the
transaction the records necessary to enable the persons described in
paragraph (g) of this Section to determine whether the conditions of
this exemption have been met, except that a prohibited transaction will
not be considered to have occurred if, due to circumstances beyond the
control of UNUM or its affiliates, the records are lost or destroyed
prior to the end of the six-year period.
(g)(1) Except as provided in paragraph (2) of this subsection (g)
and notwithstanding any provisions of subsection (a)(2) and (b) of
section 504 of the Act, the records referred to in subsection (f) of
this Section are unconditionally available at their customary location
for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an ERISA-Covered
Account 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 to any plan participating in an
ERISA-Covered Account or any duly authorized employee or representative
of such employer, and
(D) Any participant or beneficiary of any plan participating in an
ERISA-Covered Account, or any duly authorized employee or
representative of such participant or beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this subsection (g) shall be authorized to examine trade secrets of
UNUM, any of its affiliates, or commercial or financial information
which is privileged or confidential.
Section V--Definitions
For the purposes of this exemption:
(a) An affiliate of UNUM includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with UNUM,
(2) Any officer, director or employee of UNUM or person described
in section V(a)(1), and
(3) Any partnership in which UNUM is a partner.
(b) An Account means the General Account (including the general
accounts of UNUM affiliates), any separate account of UNUM or its
affiliate, or any investment advisory account, trust, limited
partnership or other investment account or fund managed by UNUM.
(c) The General Account means the general asset account of UNUM and
any of its affiliates which are insurance companies licensed to do
business in at least one State as defined in section 3(10) of the Act.
(d) An ERISA-Covered Account means any Account (other than the
General Account) which consists solely of the UNUM Plan or other plans
maintained by UNUM or its affiliates.
(e) Disproportionate means not in proportion to an Account's
existing equity ownership interest in an investment, joint venture or
joint venture interest.
The proposed exemption, if granted, will be subject to the express
conditions that the material facts and representations contained in the
application are true and complete, and that the application accurately
describes all material terms of the transactions to be consummated
pursuant to the exemption.
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
[[Page 41453]]
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 25th day of July, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-20243 Filed 7-31-97; 8:45 am]
BILLING CODE 4510-29-P
