[Federal Register Volume 61, Number 167 (Tuesday, August 27, 1996)]
[Notices]
[Pages 44085-44091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21839]
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DEPARTMENT OF LABOR
[Application No. D-10224, et al.]
Proposed Exemptions; Zerhusen and Ghazi, M.D. Inc. Profit Sharing
Plan, et al.
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. 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
[[Page 44086]]
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.
Zerhusen and Ghazi, M.D. Inc. Profit Sharing Plan (the Plan)
Located in Cincinnati, Ohio
[Application No. D-10224]
Proposed Exemption
The Department of Labor (the Department) is considering granting an
exemption under the authority of section 408(a) of the Act and section
4975(c)(2) of the Code and in accordance with the procedures set forth
in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
If the exemption is granted, the restrictions of sections 406(a),
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)((A) through (E) of the Code, shall not apply to the proposed
sale (the Sale) by Dr. J. Robert Zerhusen's individual, self-directed
account within the Plan (the Account) of a parcel of real property (the
Property) to his spouse, Marilyn E. Zerhusen (Mrs. Zerhusen), a
participant in the Plan and a party in interest with respect to the
Plan, provided that the following conditions are satisfied: (a) the
Sale is a one time transaction for a lump sum cash payment; (b) the
purchase price is the fair market value of the Property as of the date
of the Sale; (c) the Property has been appraised by a qualified,
independent real estate appraiser; and (d) the Account will pay no
commissions or other expenses relating to the Sale.
Summary of Facts and Representations
1. The Plan is a defined contribution plan and has four
participants as of the date of the application. The Plan participants
have individual, self-directed investment accounts within the Plan. Dr.
J. Robert Zerhusen (Dr. Zerhusen) has a non-self-directed account in
addition to a self-directed account within the Plan. The real property
involved in the Sale is in Dr. Zerhusen's self-directed account and Dr.
Zerhusen has investment discretion over this real property. As of
December 31, 1995, the fair market value of the total assets of the
Plan was $911,015.68. As of that date, the Account had assets of
$106,546.00 and Dr. Zerhusen's non-self-directed account had assets of
$713,740.45. The $49,100.00 appraised value of the Property represents
forty-six (46) percent of the total Account balance as of December 31,
1995.
2. The Plan was sponsored by Zerhusen & Ghazi, M.D. Inc. (Z & G)
which was an Ohio corporation maintained by physicians for the practice
of medicine. Dr. Zerhusen is the trustee of the Plan. Currently, there
is no active trade or business being conducted in the name of Z & G.
The operations of the corporation have been transferred to a newly
formed corporation named Westside Cardiology, Inc. Dr. Zerhusen
maintains the position of president and director of Westside
Cardiology, Inc.
3. The Property consists of 5.112 acres of unimproved land located
on Rear Owl Creek Road in Cincinnati, Ohio. The specific zoning
classification is residential. The Property was originally purchased by
the Account on December 23, 1986 for $40,000.00. The 20 acres of
property adjacent to the Property is owned by Mrs. Zerhusen. Mrs.
Zerhusen purchased the adjacent property from the same seller and on
the same date that the Account purchased the Property.1 The
adjacent Property was purchased by Mrs. Zerhusen for $8,000 per acre or
$160,000.00.
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1 The Department expresses no opinion herein on whether
the acquisition and holding of the Property by the Account in the
Plan violated any of the provisions of Part 4 of Title I of the Act.
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4. The Property has been held in the Account since the purchase
date and has not been used by or leased to any person since its
acquisition by the Account. On February 9, 1996, the Property was
appraised by Joseph L. Schaffer, a Certified Real Estate Appraiser
located in Cincinnati, Ohio. Relying on the market data approach, Mr.
Schaffer estimated that the fair market value of the Property was
$49,100.00. In his appraisal of the Property, Mr. Schaffer found that
there will be no special benefit to be derived by Mrs. Zerhusen by
virtue of purchasing the Property due to the fact that she owns the
adjacent parcel.
5. Mrs. Zerhusen proposes to purchase the Property from the Account
for a lump sum payment of cash representing the fair market value of
the Property on the date of sale. There will be no other type of
financing involved. The applicant represents that the Sale will result
in a conversion of Plan assets from real property to a liquid
investment. The Plan will be terminating due to dissolution of the Plan
sponsor, Z & G, and liquid assets will be easier to transfer from the
Plan.
6. In summary, the applicant represents that the requested
exemption will satisfy the criteria of section 408(a) of the Act for
the following reasons: (a) The Sale is a one time transaction for a
lump sum cash payment; (b) the Plan will receive the fair market value
of the Property at the time of the transaction; (c) the fair market
value of the Property has been determined by an independent, qualified
real estate appraiser; (d) the Plan will pay no fees or commissions
associated with the Sale; and (e) no other participant in the Plan will
be affected by the transaction.
Notice to Interested Persons
Because the only Plan assets involved in the proposed transaction
are those in the Account of Dr. Zerhusen and he is the only participant
affected by the proposed transaction, it has been determined that there
is no need to distribute the notice of proposed exemption to interested
persons. Comments and requests for a hearing are due 30 days from the
date of publication of this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Wendy McColough of the Department,
[[Page 44087]]
telephone (202) 219-8971. (This is not a toll-free number.)
Lehman Brothers, Inc. (Lehman) Located in New York, New York
[Application No. D-10255]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a) 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 to the sales of collateralized guaranteed investment contracts
(CGICs) by Lehman to employee benefit plans (the Plans), provided the
following conditions are satisfied: (a) The decision to purchase a CGIC
will be made by a fiduciary of a Plan who is independent of Lehman; (b)
Lehman will provide the independent fiduciary with audited and
unaudited statements of its financial condition at the time of the
purchase of the CGIC and subsequently as issued; (c) Lehman will
transfer to a tri-party custodial account, under the exclusive
direction of a Plan's trustees, securities selected by the Plan with a
market value equal to at least 102% of the CGIC's purchase price; (d)
such securities will be marked to market on a daily basis, and Lehman
will be required to maintain the market value of the securities at the
agreed-upon level of at least 102% of the CGIC's purchase price; (e) a
Plan will receive daily reports describing the securities on deposit
and their market value, and monthly reports describing all activity
with respect to the CGIC, including accrued interest; (f) a Plan will
have full recourse against Lehman for all obligations and expenses owed
to it by Lehman,; (g) Lehman will be responsible for all legal fees and
expenses associated with any failure to fulfill its obligations under a
CGIC; (h) a Plan will have an unqualified right to the return of its
principal and accrued interest no later than the conclusion of the
stated term of the CGIC; (i) if a Plan requires a termination of a CGIC
prior to maturity to pay benefit responsive payments, no market value
adjustment will be imposed; and (j) Lehman will market CGICs only to
Plans with assets having an aggregate market value of at least $50
million.
Summary of Facts and Representations
1. Lehman, a Delaware corporation, is a wholly-owned subsidiary of
Lehman Brothers Holdings Inc. (Holdings), also a Delaware corporation.
Lehman, one of the largest full-line investment services firms in the
United States, is a broker/dealer registered with and regulated by the
Securities and Exchange Commission. Lehman is a member of the New York
Stock Exchange and other principal securities exchanges in the U.S., is
a primary government securities dealer, and is also a member of the
National Association of Securities Dealers, Inc. As of November 30,
1995, Lehman had $82.6 billion in assets, $2 billion in shareholders'
equity, and $3 billion in subordinated debt.
2. On August 31, 1995, Lehman Government Securities, Inc. (LGSI),
another wholly-owned subsidiary of Holdings, merged into Lehman. LGSI
had been an issuer of a variety of different types of guaranteed
investment contracts (GICs) since 1986. Lehman has issued over $19.5
billion of GICs (including the activities of LGSI) and maintains an
active portfolio of between $6.5 and $8.5 billion.
3. Lehman requests an exemption for the sale of CGICs to Plans. The
applicant represents that a CGIC is a secured, stable GIC. A CGIC
offers all of the return characteristics and ease of use found in a
traditional insurance company general account GIC, such as a fixed,
floating or indexed rate of return, benefit responsiveness and book
value accounting. However, unlike a general or separate account GIC, a
CGIC offers additional protection by allowing a Plan sponsor to
maintain legal title to the assets which Lehman deposits to secure the
CGIC's principal for the term of the CGIC. In addition, the Plan's
sponsor will stipulate the quality and type of assets (the Purchased
Securities) selected to secure its CGIC contract, and such assets will
be held by a third party custodian.2
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2 If and when Lehman substitutes securities for the Purchased
Securities that were selected by a Plan, the substituted securities
will have a statistical credit rating from an independent rating
agency that is, at a minimum, equal to the credit rating of the
lowest rated Purchased Securities that had been selected by the Plan
as acceptable collateral at the time of the purchase of the CGIC.
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4. The purchase of a CGIC by a Plan will be effected through the
execution by an independent Plan fiduciary of a Master Repurchase
Agreement With Respect to CGIC Investments (the Master Agreement), a
confirmation (the Confirmation), and a custody agreement (the Custody
Agreement). Lehman represents that it will market CGICs only to Plans
with assets having an aggregate market value of at least $50 million.
This restriction is intended to assure that the decision to purchase a
CGIC will be made by an independent fiduciary of above average
experience and sophistication in matters of this kind.
5. Lehman will provide an independent fiduciary of the Plan with
its most recent audited statement of financial condition and its most
recent unaudited statement of financial condition at the time Lehman
issues a Confirmation to the Plan. In addition, Lehman will represent
to the Plan that, since the date of the latest such financial
statement, there has been no material adverse change in its financial
condition that has not been disclosed to the Plan. Finally, during the
term of the CGIC, Lehman will provide the Plan with future audited and
unaudited statements of its financial condition as these are issued.
6. By the close of business on the initial day of a Plan's purchase
of a CGIC, assets will be transferred to a custodial account in the
name of the Plan's trustee, pursuant to the terms of the Custody
Agreement. The assets will be in the form of Purchased Securities
selected by the Plan, and the margin value of the securities (the
Margin Value) will be equivalent to the market value of the Purchased
Securities divided by an applicable margin percentage (the Margin
Percentage). The Margin Percentage for Purchased Securities (other than
for cash) 3 will be no less than 102 percent, depending on the
type of Purchased Securities. The Margin Value of the Purchased
Securities based upon such Margin Percentage shall equal or exceed the
purchase price of the CGIC (the Purchase Price).
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\3\ Cash may be substituted for Purchased Securities during the
course of a business day or be delivered to the Plan's account to
cure a margin deficit in accordance with the terms of the Custody
Agreement. The Margin Percentage with respect to such cash shall be
100%.
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7. Under the terms of the Custody Agreement, a tri-party custodial
arrangement, an independent bank will act as the non-exclusive
custodian (Custodian) with respect to the CGIC an all transactions
thereunder.4 Lehman will pay all costs associated with the
establishment and operation of the custodial account, and such account
by its terms will not be subject to any security interest, lien or
right of setoff by the Custodian, or any third party claiming through
the Custodian.
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4 Although it is anticipated that most Plans will choose
the tri-party custodial arrangement, a Plan may, at its discretion,
hold the assets related to a CGIC.
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[[Page 44088]]
8. The Custodian will be responsible for daily mark-to-market
valuations of the Purchased Securities to ensure that the Margin Value
of the Purchased Securities will be maintained at the agreed-upon level
throughout the life of the CGIC. The Custodian will provide daily
reports to the Plan and to Lehman describing the Purchased Securities
on deposit in the Custodial Account and the market value of such
securities. If a decline in the market value of the Purchased
Securities causes the Margin Value to fall below the Purchase Price,
the Custodian will require Lehman to transfer sufficient securities (or
cash) to the Plan's account to restore the value of the Purchased
Securities to the appropriate Margin Value. Conversely, if an increase
in the market value of the Purchased Securities causes the Margin Value
to exceed the Purchase Price, Lehman may request the Custodian to
transfer to it sufficient cash or securities such that the Margin Value
in the Plan's account does not exceed the Purchase Price.
9. The general terms of a CGIC, including the terms and conditions
under which Lehman will repurchase Purchased Securities from a Plan,
will be set forth in the Master Agreement, while the specific and
negotiable terms of a CGIC, such as the principal amount, the interest
rate, the maturity date, and the Margin Percentage will be set forth in
a Confirmation.
10. The type of Purchased Securities will be a component in
determining the interest rate of a CGIC. For example, direct
obligations of the U.S. Government, such as Treasury bills, notes,
bonds and GNMAs, will provide a lower rate of return to Lehman than
less liquid U.S. Government agency securities. Accordingly, a CGIC's
interest rate with the former as Purchased Securities will be lower
than with the latter as Purchased Securities. Alternatively, a higher
interest rate may be obtained from a CGIC if a Plan selects Purchased
Securities that offer lower credit quality and/or increased pricing
volatility, such as AAA private label mortgage-backed securities, AA
corporate bonds or asset-backed securities (e.g., automobile
receivables), because such securities would generate a higher return to
Lehman. In any case, however, a Plan will not be at risk for either
credit or market value exposure of the Purchased Securities, and the
interest on a CGIC will not vary with the investment performance of the
Purchased Securities.
11. Accrued interest will be paid or compounded monthly, quarterly,
semi-annually, annually or compounded until maturity, in accordance
with the needs of the Plan. A Plan will receive from Lehman monthly
reports detailing all activity with respect to the Plan's CGIC,
including accrued interest, as well as the previously discussed daily
reports from the Custodian regarding the market value of the Purchased
Securities.
12. In order to provide a Plan with the ability to withdraw all or
part of its investment prior to the maturity date of a CGIC, the Master
Agreement provides that the Plan, in its sole discretion may require
Lehman to repurchase Purchased Securities held in the custodial account
prior to the maturity date of the CGIC (a Transaction Reduction) under
the following circumstances and conditions.
The Master Agreement will provide that, prior to requesting a
Transaction Reduction, a Plan must satisfy its benefit responsive
payments, to the extent possible, from its normal sources of liquidity
which shall be set forth in the Master Agreement or the Confirmation.
Such sources, which are Plan assets separate and apart from the CGIC,
may include, but are not limited to, the following:
(a) cash reserves;
(b) funds received from new deposits;
(c) liquidation of short-term securities;
(d) proceeds from interest payments received;
(e) proceeds from the maturity of contracts.
However, to the extent that these normal sources of a Plan's
liquidity have been exhausted and additional funds are required by the
Plan to satisfy its benefit responsive payments, the Plan may request a
Transaction Reduction under the CGIC, as well as withdrawals from other
investment providers, using a methodology agreed upon in the Master
Agreement or the Confirmation. Such a benefit responsive Transaction
Reduction would be effected without penalty upon two days' written
notice to Lehman (or such other period that is otherwise agreed to by a
Plan and Lehman). At any time, however, Lehman may demand reasonable
proof, including written documentation to verify or establish the need
for such a benefit responsive Transaction Reduction.
A Plan may effect a whole or partial Transaction Reduction at any
time and for any purpose, other than a benefit responsive payment, upon
ten days' written notice to Lehman (or such other period that is agreed
to by a Plan and Lehman). On the date of such notice, Lehman, as
calculation agent, would determine the market value adjustment
(Termination Cost), if any, applicable to such a Transaction Reduction.
Such Termination Cost would be determined in accordance with one of two
methodologies mutually agreed upon in the Confirmation and described in
the Master Agreement. One such methodology would employ an objective
mathematical computation that would result in a Termination Cost if the
prevailing interest rate on the date of notice for a comparable GIC
with terms similar to the unexpired term of the CGIC were greater than
that of the CGIC. Under an alternative methodology, the Termination
Cost would be based upon quotations obtained by Lehman from not less
than three leading independent dealers of the amount, if any, that
Lehman would be required to pay such a dealer to enter into an
agreement with Lehman that would have the effect of preserving for
Lehman the economic equivalent of its rights under the CGIC. The lowest
of such dealer quotations (i.e., the quotation most favorable to the
Plan) would be the Termination Cost of the CGIC. Such quotes would
result in a Termination Cost to a Plan only if the quote most favorable
to the Plan represented an amount that Lehman would be required to pay
to the independent dealer for such a replacement transaction. In either
case, the Termination Cost would not be based on the investment
performance of the Purchased Securities or investments purchased by
Lehman with the CGIC principal. Lehman represents that it will not have
the discretion to increase the market value adjustment to a CGIC
regardless of which methodology is utilized.
13. If Lehman fails to repurchase the Purchased Securities upon the
maturity date of the CGIC or fails to maintain the Margin Value in
accordance with the Custody Agreement, a Plan will have the right under
the Master Agreement (i) to sell any or all of the Purchased Securities
and to apply the proceeds to the aggregate unpaid purchase price and
any other amounts owing by Lehman or (ii) to take possession of the
Purchased Securities and credit the market value of the Purchased
Securities (as determined by a generally recognized source or by the
most recent closing bid quotation from such a source) against the
aggregate unpaid CGIC purchase price and any other amounts owing by
Lehman. After an event of default, any income on the Purchased
Securities will be retained by the Plan and applied to the aggregate
unpaid CGIC purchase price. In addition, in the case of such a default
by Lehman, Lehman will be obligated to pay the amount of any
[[Page 44089]]
obligations to, and the expenses of, a Plan that are not otherwise
covered by the Purchased Securities, including all reasonable legal or
other expenses incurred by the Plan in connection with, or as a
consequence of, such default, together with interest thereon at a rate
equal to the CGIC interest rate.
14. A CGIC will terminate (Final Repurchase Date) upon the earlier
of (i) the maturity date of the CGIC, (ii) the date on which a
Transaction Reduction causes a return to a Plan of the CGIC's remaining
principal and interest, or (iii) the date on which Lehman terminates a
CGIC as a result of its determination that a modification to the Plan's
operative documents or the Plan's administration (a Plan Amendment)
would materially reduce Lehman's expected benefits or increase its
exposure or obligations under the CGIC.5 On the Final Repurchase
Date, Lehman will pay the applicable repurchase price of the CGIC (and
any accrued but unpaid interest) to the Plan, and the Purchased
Securities remaining in the custodial account will be returned to
Lehman.
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5 Lehman represents that in the unlikely event of a Plan
Amendment, the Master Agreement provides that such a termination
would be subject to a market value adjustment, if any.
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15. The applicant represents that the terms and conditions of the
CGIC are essentially the same as the conditions imposed by the
Department in Prohibited Transaction Exemption 81-8 (PTE 81- 8, 46 FR
7511, January 23, 1981, as amended at 50 FR 14043, April 9, 1985),
other than the condition that the term of a repurchase agreement be
limited to one year or less:
(a) PTE 81-8 does not provide relief for fiduciaries of a plan. The
exemption proposed herein does not provide relief when Lehman is a
fiduciary to a Plan with respect to the investment of Plan assets in a
CGIC.
(b) PTE 81-8 requires that the seller transfer to a Plan securities
(or banker's acceptances, commercial paper or certificates of deposit)
with a market value of at least 100% of the purchase price paid by the
Plan. The exemption proposed herein requires that Lehman transfer to a
custodial account, under the exclusive direction of a Plan's trustees,
Purchased Securities with a market value of at least 102% of the CGIC's
purchase price.
(c) PTE 81-8 requires that a Plan must receive certain audited and
unaudited statements of the seller's financial condition, as well as a
representation regarding changed financial condition. The exemption
proposed herein requires Lehman to provide the same information and
representation to a Plan at the time Lehman issues a confirmation to
the Plan. In addition, Lehman is under a continuing obligation to
provide audited and unaudited statements of its financial condition as
issued.
(d) PTE 81-8 requires a written repurchase agreement the terms of
which would satisfy an ``arm's-length'' standard. The use of master
agreements covering a series of transactions is expressly approved.
Under the exemption proposed herein, the Master Agreement, the
Confirmation, and the Custody Agreement will be in written form. The
terms of the CGIC, as reflected in Confirmation, are subject to
negotiation, based on the needs of a Plan as determined by its
independent fiduciary in arm's-length negotiations with Lehman.
(e) PTE 81-8 requires that the interest paid to a Plan must be no
less than it would receive in a comparable transaction with an
unrelated party. Under the exemption proposed herein, the Plan will
receive interest at a rate agreed upon by the Plan and Lehman based
upon the economic characteristics of the transaction.
(f) PTE 81-8 requires that the collateral be marked to market on a
daily basis to maintain a 100% market value level. The exemption
proposed herein similarly requires that the Purchased Securities be
marked to market on a daily basis to maintain at least a 102% Margin
Value.
(g) PTE 81-8 requires that the seller must transfer an amount equal
to the purchase price of the securities plus interest to a Plan upon
the expiration of a repurchase agreement. Under the exemption proposed
herein, a Plan will have an unqualified right to the return of its
principal and accrued interest no later than the conclusion of the
stated term of the CGIC.
(h) PTE 81-8 requires that a Plan must have certain rights in event
of a seller's default. The exemption proposed herein provides that a
Plan has full recourse against Lehman and the Purchased Securities for
all obligations and expenses owed to it by Lehman. In addition, Lehman
would be responsible for all legal fees and expenses associated with
any such failure to fulfill its obligations under a CGIC.
16. In summary, the applicant represents that the proposed
transaction will satisfy the criteria contained in section 408(a) of
the Act for the following reasons: (a) the decision to purchase a CGIC
will be made by a fiduciary of a Plan who is independent of Lehman; (b)
Lehman will provide the independent Plan fiduciary with audited and
unaudited statements of its financial condition at the time Lehman
issues a Confirmation to the Plan, and Lehman will be under a
continuing obligation to provide audited and unaudited statements of
financial condition as issued; (c) upon the purchase of a CGIC by a
Plan, Lehman will transfer to a tri-party custodial account, under the
exclusive direction of a plan's trustees, securities selected by the
Plan with a market value equal to at least 102% of the CGIC's purchase
price; (d) the Purchased Securities will be marked to market on a daily
basis, and Lehman will be required to maintain the market value of the
Purchased Securities at the agreed-upon level of at least 102% of the
CGIC's purchase price; (e) a Plan will receive daily reports describing
the securities on deposit in the custodial account and their market
value, as well as monthly reports describing all activity with respect
to the CGIC, including accrued interest; (f) interest will be paid on a
CGIC at intervals determined by the Plan; (g) a Plan will have full
recourse against Lehman and the purchased Securities for all
obligations and expenses owed to it by Lehman; (h) Lehman will be
responsible for all legal fees and expenses associated with any failure
to fulfill its obligations under a CGIC; (i) a Plan will have an
unqualified right to the return of its principal and accrued interest
no later than the conclusion of the stated term of the CGIC; (j) if a
Plan requires a termination of a CGIC prior to maturity to pay benefit
responsive payments, no market value adjustment will be imposed on such
an early termination; and (k) the CGICs will be marketed only to Plans
with assets having an aggregate market value of least $50 million.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Rexam Retirement Savings Plan (the Plan) Located in Charlotte, North
Carolina
[Application No. D-10294]
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 section 4975(c)(1)(A) through
(E) of
[[Page 44090]]
the Code shall not apply to the loan of $1,620,246.56 (the Loan) to the
Plan from Rexam, Inc. (the Employer) with respect to the Guaranteed
Investment Contract No. 62317 (the GIC) issued by Confederation Life
Insurance Company (Confederation) and the Plan's potential repayment of
the Loan upon the receipt by the Plan of payments under the GIC;
provided the following conditions are satisfied:
(A) All terms and conditions of the transactions are no less
favorable to the Plan than those that the Plan could obtain in arm's-
length transactions with unrelated parties;
(B) No interest payments or other expenses are paid by the Plan in
connection with the Loan and its repayment;
(C) The Loan will be repaid only from proceeds paid to the Plan by
Confederation, its successors, or by any other third-party;
(D) Repayment of the Loan will be waived to the extent that the
Loan exceeds the proceeds from the GIC;
(E) If total proceeds received by the Plan with respect to the GIC
exceed the amount of the Loan, the excess will be credited to the
respective accounts of the participants in proportion to the relative
investment of each account in the GIC on June 25, 1996; and
(F) A qualified, independent fiduciary represented the Plan at the
execution of the Loan and will continue to represent the interests of
the Plan throughout the duration and repayment of the Loan.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective as of June 25, 1996.
Summary of Facts and Representations
1. The Employer, a Delaware corporation with its principal office
located in Charlotte, North Carolina, is a wholly-owned subsidiary of
Rexam plc, a publicly traded holding company based in London, England.
The Employer is primarily in the business of manufacturing and
marketing specialty packaging and coated products. The specialty
packaging includes (A) healthcare packaging such as pharmaceutical
blister foil packaging and sterilizable packaging for medical
instruments and surgical gloves, (B) cosmetic packaging that includes
perfume atomizers and lipstick tubes and cases, and (C) plastic bottles
and containers and child-resistant screw tops. The coated products by
the Employer include graphic printed cartons and containers and
metallized films and papers that are used for labels and food and
cigarette package liners.
2. The Plan is a defined contribution plan that maintains
individual accounts for its participants and is intended to satisfy the
qualification requirements of sections 401(a) and 401(k) of the Code.
The total assets of the Plan had a fair market value of $74,767,875.86,
as of March 31, 1996. There are currently approximately 5,800
participants in the Plan.
The applicant represents that the Plan is administered by an
investment committee (the Committee) which is appointed by the
Employer. The Committee consists of the Employer's Chief Executive
Officer, Chief Financial Officer, Corporate Treasurer, and Vice
President--Human Resources. The applicant represents that the Committee
selects for the Plan the different types of investment funds or
vehicles that are maintained by the Plan trustee and offered to
participants for self-directing investments of assets in their
respective individual accounts in the Plan. The Committee also reviews
the performance of the Plan trustee which has discretion for selecting
the various specific securities of the different investment funds or
vehicles offered to the Plan. The Charlotte, North Carolina office of
Towers Perrin is represented by the applicant to have been the previous
recordkeeper for the Plan.
After reviewing various investment funds available for tax-
qualified plans, the applicant represents that it amended the Plan,
effective July 1, 1996, in order to enhance the investment options
available to Plan participants. The new investment options or funds
consist of six mutual funds managed by the Vanguard Group of Investment
Companies. After the execution of the Loan on June 25, 1996, a transfer
of assets of the Plan, other than the GIC issued by Confederation, was
made from Wachovia Bank of North Carolina, N.A., located in Winston-
Salem, North Carolina (Wachovia) to the new trustee of the Plan,
Vanguard Fiduciary Trust Company, located in Valley Forge, Pennsylvania
(Vanguard), an affiliate of The Vanguard Group of Investment Companies.
At the time of the transfer, Vanguard also assumed from Towers Perrin
the function of recordkeeper for the new assets of the Plan.
Wachovia continues as trustee for the Plan with respect to the GIC
issued by Confederation until the final settlement of the GIC and the
repayment of the Loan and will represent and enforce the interests of
the Plan and its participants.
3. The GIC was acquired by the Plan effective September 27, 1990,
from Confederation pursuant to the Plan tendering $1 million to
Confederation on October 25, 1990.6 Under the terms of the GIC the
maturity date is September 28, 1995, and the interest yield is
guaranteed at 9.25 percent compounded annually with both interest and
principal to be paid on September 29, 1995. The applicant represents
that no additional deposits or withdrawals of the principal have been
made.
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\6\ The Department notes that decisions to acquire and hold the
GIC are governed by the fiduciary responsibility provisions of Part
4 Title I of the Act. In this regard the Department is not proposing
relief for any violations of Part 4 which may have arisen as a
result of the acquisition and holding of the GIC.
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On August 12, 1994, the Ingham County Circuit Court in Lansing,
Michigan placed Confederation in conservatorship and rehabilitation,
causing Confederation to suspend all payments on its contracts,
including the GIC. The Employer represents that it does not know
whether, when, or under what circumstances Confederation will be able
to pay the principal and interest that is due under the GIC.
4. In order to eliminate the expenses and risks associated with the
continued investment of participant's respective accounts in the GIC,
and to permit participant's accounts so invested to direct equivalent
amounts invested in the GIC into the investment options offered by
Vanguard, the Employer made the Loan on June 25, 1996, as a one-time,
unsecured, and interest free loan. No expenses or commissions were
incurred, or are to be incurred, by the Plan from the transactions.
The Loan was computed to equal the $1 million principal amount of
the GIC and the 9.25 contract rate compounded annually through the
maturity date of September 28, 1995, plus an additional yield of 5.5
percent compounded for the period after September 28, 1995, through
June 25, 1996.7
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7 The 5.5 percent rate of return was selected because of the
short period of time involved and because the rate was comparable to
the short-term investment fund yield offered by the Plan to the
participants through Wachovia.
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The terms of the Loan also provide that repayment to the Employer
is to be made by the Plan solely from the proceeds received from the
GIC.
As provided by the Loan, if the proceeds received by Wachovia, as
trustee for the Plan, from the GIC are less than the amount of the
Loan, Wachovia will ensure the remaining outstanding balance owed by
the Plan on the Loan will be waived by the Employer. In addition,
Wachovia will enforce the terms of the Loan which provide, inter alia,
that if the proceeds from the GIC exceed the amount of the Loan, the
excess will be shared by the respective accounts of the participants
[[Page 44091]]
in proportion to the amounts the respective accounts were invested in
the GIC on June 25, 1996. The applicant further represents that the
transactions are administratively feasible because of the documentation
of the Loan and its repayment terms can be monitored. Also, the
applicant represents that the transactions are in the best interests of
the Plan and its participants and beneficiaries because they enable the
Plan to avoid having a portion of the participants accounts invested in
an illiquid asset that has significant investment risk. Further, the
transactions are represented by the applicant to serve the interests of
the participants and beneficiaries by permitting the participants to
direct the entire value of their respective accounts into the
investment options offered by Vanguard.
5. In summary, the applicant represents that the transactions will
satisfy the criteria for an exemption under section 408(a) of the Act
because (a) the transactions will preserve the ability of the Plan to
timely fund and preserve benefits for the participants and their
beneficiaries; (b) the Plan will not incur any expenses or commissions
with respect to the transactions; (c) repayment of the Loan will be
made only from the proceeds realized from the GIC; (d) if the proceeds
realized from the GIC as paid by Confederation, its successors, or any
other third party are not sufficient to repay the Loan the Employer
will waive the unpaid balance of the Loan; and (e) if the proceeds from
the GIC exceed the Loan, the excess will be paid to the accounts of the
participants in proportion to their respective accounts investment in
the GIC.
FOR FURTHER INFORMATION CONTACT: Mr. C. E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 22nd day of August, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 96-21839 Filed 8-26-96; 8:45 am]
BILLING CODE 4510-29-P
