[Federal Register Volume 59, Number 180 (Monday, September 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23121]
[[Page Unknown]]
[Federal Register: September 19, 1994]
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DEPARTMENT OF LABOR
[Application No. D-9178, et al.]
Proposed Exemptions; Banque Paribas (the Bank) and Paribas Asset
Management, Inc. (the Manager; collectively the Applicants)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) the name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESS: 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.
Banque Paribas (the Bank) and Paribas Asset Management, Inc., (the
Manager; collectively, the Applicants), Located, respectively, in
Paris, France and New York, New York
[Application Nos. D-9178 and D-9179]
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) 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 proposed guarantee by the Bank to an employee benefit plan
that retains the Manager as investment manager for such plan (the Plan)
of the value of the Plan's principal investment with the Manager,
provided that each of the following conditions is satisfied: (1) the
fiduciaries of the Plan who are responsible for the selection and
retention of the Manager as investment manager for the Plan, and for
the selection of the guarantee from the Bank, are independent of the
Manager, the Bank, and their affiliates; (2) no separate fee or
remuneration is payable by the Plan or any other person to the Manager,
the Bank, or any of their affiliates for the guarantee; (3) the Plan is
entitled to cancel the investment management agreement with the
Manager, and/or the guarantee provided by the Bank, at any time upon
reasonable notice; (4) the Agreement between each Plan and the Manager
and the Bank will be amended to provide that, for purposes of enforcing
the Bank's guarantee, the determination of the value of a Plan's assets
under the Manager's investment management at any relevant time shall be
made pursuant to objective standards determined jointly by the Manager
and the Plan's custodian, which is the bank or other entity holding the
assets of the Plan or other Plan fiduciary responsible for causing the
Plan to enter into the Agreement; (5) however, if the Manager and the
Plan's custodian are unable to agree as to the value of the Plan's
account, they will jointly select a qualified appraiser to make this
determination; if they are unable to agree on an appraiser, the Manager
and the Plan's custodian will each select a qualified appraiser and the
value will be determined by mutual agreement of such appraisers or, if
they cannot agree, by a third qualified appraiser designated by the two
appraisers, and all such appraisers will be independent of the Manager;
and (6) the investment management agreement between each Plan and the
Manager and the Bank will provide (a) that income from any lending from
a Plan's account will be credited to the Plan's account and not to the
Manager's account, and (b) that no lending of this type will occur
under circumstances where the borrower is a party in interest or
disqualified person with respect to the Plan unless the conditions of
Prohibited Transaction Exemptions 81-6 (52 FR 18754, May 19, 1987) and
82-63 (47 FR 14084, April 6, 1982, as corrected by 47 FR 16437, April
16, 1982)] are satisfied.
For purposes of this proposed exemption, the term ``affiliate'' of
another person means any person directly or indirectly, through one or
more intermediaries, controlling, controlled by, or under common
control with such person, provided that the Manager shall not be deemed
an affiliate of another person solely because the Manager has
investment management authority or discretion over the assets of the
other person. For purposes of the foregoing, the term ``control'' means
the power to exercise a controlling influence over the management or
policies of a person other than an individual. Further, for purposes of
this proposed exemption, a Plan fiduciary shall be deemed
``independent'' of a person only if: (1) the fiduciary is not an
affiliate, as defined above, of such person; and (2) the fiduciary has
no other relationship to or interest in such persons that might affect
the exercise of such fiduciary's best judgment as a fiduciary.
Summary of Facts and Representations
1. The Bank is a bank organized under the laws of the Republic of
France and is a subsidiary of Compagnie Financiere de Paribas,
represented to be one of the world's leading banking and financial
groups. The Bank, through its subsidiaries, branches and offices,
operates in over 60 countries, including the United States, spanning
the whole range of banking activities. The Bank's operations are
structured in four principal groups: corporate banking, capital
markets, corporate advisory services, and investment management. As of
December 31, 1990, the Bank's consolidated assets totalled
approximately FF 568 billion (US $111 billion), with consumer loans
totalling approximately FF 176 billion (US $34 billion) and customer
deposits totalling approximately FF 228 billion (US $44 billion).
2. The Manager, a corporation organized under the laws of the State
of Delaware and an indirect wholly owned subsidiary of the Bank, is
responsible for defining the Bank's overall investment objectives and
managing its pooled investment products (including specialized country
or regional funds, diversified growth and income funds, and fixed
income funds). Worldwide, the Manager and the Bank's institutional
management team had total assets under management of almost FF 55
billion (US $11 billion) at the 1990 year end. The Manager is a
registered investment adviser under the Investment Advisers Act of 1940
(the Advisers Act) and, according to the Applicants, qualifies as an
investment manager under section 3(38) of the Act.1 The Manager's
principal business activity in the United States is the provision of
investment management services for various clients, including the
trustees or other fiduciaries of plans governed by the Act. The Manager
currently serves in such capacity with respect to five U.S.-based
clients, including three Plans, involving approximately US $190 million
in assets under management (including approximately US $85 million of
Plan assets). The investment media in which the Manager will invest a
Plan's assets is generally subject to specific investment guidelines
and restrictions prescribed by the Plan fiduciaries, but may include
fixed income instruments (such as bonds, mortgage-backed securities,
Treasury bills, and commercial paper), options on fixed income
securities, forward rate agreements, floating rate notes, and currency
hedging instruments. According to the applicant fixed income related
instruments are intended to be used as a hedge or as an alternative to
bonds.
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\1\The Department expresses no opinion herein as to whether or
not the Manager qualifies as an investment manager under section
3(38) of the Act.
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3. The Manager and the Bank have entered into investment management
agreements with certain non-Plan clients which provide that the Bank
will guarantee the value of the client's initial principal investment,
if the client does not cancel the agreement before the first
anniversary of its effective date and not over 50 percent of such
investment has been withdrawn by that date. Mechanically, the Bank
would contribute its own funds to the client's account with the
Manager, for distribution to the client, in the event the client
elected to cancel the agreement or to withdraw funds from the account
at a time when the value of such account was less than the amount of
the client's principal investment therein. Such agreements terminate
after one year, subject to renewal by written agreement of the parties
thereto.
4. The Manager and the Bank would like to offer a similar guarantee
to the Manager's Plan clients. The parties to the investment management
agreement (the Agreement) would be the Bank, the Manager, and the Plan
client. Section 6.1 of the prototype Agreement provides that the Bank
unconditionally guarantees the return to the client at the termination
of the Agreement of an amount equal to the amount invested by the
client (the Qualifying Deposit) under the Agreement (either initially
or after the date of any renewal of the Agreement). Qualifying Deposit
means any amount invested by the client not more than half of which is
withdrawn before the first anniversary of the date of the Agreement
(or, in the case of a renewal of the Agreement, not more than half of
which is withdrawn before the first anniversary of the date of such
renewal). However, pursuant to section 6.2 of the Agreement, the above
mentioned guarantee (the Guarantee) does not apply if the client
terminates the Agreement before such first anniversary. The Guarantee
does apply, however, to any principal withdrawn by the client if (and
after): (i) the credit rating assigned to the Bank's unsecured
unsubordinated debt securities by either Standard and Poor's
Corporation or Moody's Investors Service, Inc. is reduced below AA- or
Aa3, respectively; or (ii) the Manager or the Bank notifies the client
that the Agreement will terminate prior to its agreed upon term. There
is no time period limiting the application of the Guarantee with
respect to the circumstances described in (i) and (ii), above.
The applicant states that if a client were to deposit additional
amounts under the Agreement after the date of the initial Qualifying
Deposit but before the first anniversary of the date of the Agreement
(or before the first anniversary of any renewal of the Agreement), such
additional deposits would also be guaranteed by the Bank, but such
additional deposits would be subject to the same one-year holding
period requirement (measured from the date of such additional deposit)
for the Guarantee to apply.
Section 6.1 of the Agreement further provides that if, at the
termination of the Agreement, the client has not received an amount
equal to its Qualifying Deposit, the Bank shall, upon written demand by
the client, pay to the client the entire unpaid principal balance of
such Qualifying Deposit. This section permits the client to withdraw up
to half of the Qualifying Deposit at any time subject to two weeks
advance written notice. However, if at the time of such partial
withdrawal the net asset value of the portfolio is lower than the
Qualifying Deposit, section 6.1 of the Agreement provides that the
Guarantee shall be reduced by a proportion equal to the amount of such
withdrawal divided by the net asset value of the portfolio at that
time. If at the time of the withdrawal the net asset value of the
portfolio is higher than the Qualifying Deposit, the Guarantee shall be
reduced by a proportion equal to the amount of such withdrawal divided
by the Qualifying Deposit.
The applicant has provided three examples illustrating how the
Guarantee operates in the case of partial withdrawals when the net
asset value of the portfolio has (1) decreased, (2) not changed, and
(3) increased. All three examples assume a Qualifying Deposit of $20
million and a withdrawal of $10 million after the one-year period
mentioned above. In the first example, the net asset value of the
Qualifying Deposit had fallen to $15 million at the withdrawal date,
leaving only $5 million (in net asset value) after the withdrawal. In
this example, the Guarantee would be reduced by 67% (i.e., $10 million
withdrawn divided by $15 million pre-withdrawal net asset value at time
of withdrawal). Therefore, although $5 million would be the total net
asset value remaining in the client's account under the Agreement after
the $10 million withdrawal, the Guarantee would apply to $6,666,667 of
the Qualifying Deposit (i.e., 33% of the $20 million Qualifying
Deposit).
In the second example, the net asset value of the Qualifying
Deposit remained at $20 million at the withdrawal date, leaving $10
million (in net asset value) after the withdrawal. In this example, the
Guarantee would be reduced by 50% (i.e., $10 million withdrawn divided
by $20 million pre-withdrawal net asset value at time of withdrawal).
Therefore, $10 million would be the total net asset value remaining in
the client's account under the Agreement after the $10 million
withdrawal, and the Guarantee would apply to $10 million of the
Qualifying Deposit (i.e., 50% of the $20 million Qualifying Deposit).
In the third example, the net asset value of the Qualifying Deposit
had risen to $25 million at the withdrawal date, leaving $15 million
(in net asset value) after the withdrawal. In this example, the
Guarantee would be reduced by 50% (i.e., $10 million withdrawn divided
by the $20 million Qualifying Deposit). Thus, although $15 million
would be the total net asset value remaining in the client's account
under the Agreement after the $10 million withdrawal, the Guarantee
would apply to $10 million of the Qualifying Deposit.
Income on the account would not be currently distributed to the
client. Rather, income would be held in the account until termination
of the Agreement and may become part of a new Qualifying Deposit upon
renewal of the Agreement. As discussed above, it is anticipated most
Agreements would have a renewable term of one year.
5. The applicant states that the investment management fee
negotiated by the Manager with each of its clients does not change by
reason of the Bank's Guarantee. The applicant represents that the
Manager offers the client two management fees: a combined arrangement
or a base fee only. The combined arrangement includes (a) a fixed fee
of 0.30% per annum of the net asset value of the client's portfolio,
payable quarterly in arrears based on the net asset value of the
client's portfolio as of the end of the quarter (adjusted for
additional withdrawals) and (b) a performance schedule fee equal to 25%
of an amount equal to the aggregate net realized and unrealized
appreciation in the value of the assets in the client's portfolio
(including net investment income) in excess of a benchmark (the
Benchmark) equal to the U.S. 3-month Treasury bill rate plus 100 basis
points.2
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\2\The applicant represents that the performance schedule fee
component of the combined arrangement will be substantially the same
in all material respects as the performance fee arrangement
described in advisory opinion letter 86-21A issued by the Department
on August 29, 1986. That letter concerns the payment of incentive
compensation to Batterymarch Financial Management by employee
benefit plans.
The Department expressed its view that, based on the
representations contained in the Batterymarch submissions, the
payment of an incentive fee to Batterymarch pursuant to the
arrangement described therein would not, in itself, constitute
violations of sections 406(b)(1) or 406(b)(2) of the Act. The
Department noted, however, that, because violations of sections
406(b)(1) and 406(b)(2) could occur in the course of the provision
of services by Batterymarch, the Department was not prepared to rule
that the described arrangement, in operation, would not violate
those sections. In any event, the relief provided by this exemption
does not extend to the receipt of fees by the Manager pursuant to
the above performance schedule.
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The performance schedule fee is assessed and billed on the one-year
anniversary of the date of the Agreement and at the end of each
calendar quarter thereafter during the term of the Agreement, which may
be renewed by written agreement of the parties. Each assessment of the
performance fee is based on the performance of the client's portfolio
over the 12 months ending on the last day of the period for which the
fee is being paid. If the Agreement terminates at a time other than at
the end of a calendar quarter, the performance fee for such quarter is
payable upon termination, based on the performance of the client's
portfolio over the 12 months ending on the termination date.
The Benchmark is calculated using the average of the U.S. 3-month
Treasury bill rate on the first and last day of each quarter within the
12-month period in question. In calculating the performance fee, the
basis for determining the amount of appreciation is the starting value
of the assets in the client's portfolio at the beginning of the 12-
month period. Every time a performance fee is paid out, the basis for
assessing the performance is adjusted to reflect the net asset value
after such fee payment. According to section 4.4 of the Agreement, any
underperformance in a given quarter must be made up before any new
performance fees are payable.
Section 4.4 of the Agreements currently in effect with non-Plan
clients states that the valuation of the performance of the account
will be provided by the Manager; however, the applicant represents that
this section will be amended to provide that the valuation of the
performance of the account will be jointly determined by the Manager
and the Plan's custodian, which is the bank or other entity holding the
assets of the Plan or other Plan fiduciary responsible for causing the
Plan to enter into the Agreement. The applicant further represents
that, if the Manager and the Plan's custodian are unable to agree as to
the value of the Plan's account, they will jointly select a qualified
appraiser to make this determination. If they are unable to agree on an
appraiser, the Manager and the Plan's custodian will each select a
qualified appraiser and the value will be determined by mutual
agreement of such appraisers or, if they cannot agree, by a third
qualified appraiser designated by the two appraisers. All such
appraisers will be independent of the Manager.
Under the alternative arrangement, the client pays only a fixed fee
equal to 0.40% per annum of the net asset value of the portfolio,
payable quarterly in arrears based on the net asset value of the
portfolio as of the end of the quarter, adjusted for additional
withdrawals.
The applicant represents that the fees are disclosed in information
materials furnished to the client, including the presentation flip book
and the distributors' product overview letter. The applicant represents
that the Manager's fees under the Agreement are competitive with the
fees charged by competitors offering no guarantee.
6. As stated, the Manager and the Bank would like to offer the same
Guarantee to the Manager's Plan clients which are not investing in
pooled funds. The Plan fiduciaries would not be required to select the
Guarantee, or if selected such fiduciaries would still retain the right
to cancel the investment management agreement or the Guarantee feature
at any time upon reasonable prior notice. A Plan will be permitted to
cancel the investment management agreement with the Manager on 30 days'
prior notice. In addition, a Plan will be permitted to cancel the
Guarantee immediately upon notice of cancellation being given; that is,
no period of advance notice will be required for cancellation of the
Guarantee. No separate fee or remuneration would be paid by the Plan or
any other person to the Manager, the Bank, or any of their affiliates
for the Guarantee. The same negotiated investment management fees would
be charged by the Manager whether or not the Plan fiduciaries accept
the Bank's Guarantee.
For purposes of determining when the Guarantee would be enforced,
and in what amount, records will be kept by both the Manager and the
Plan's custodian. The applicant represents that the Plan's custodian
has no relationship to the Bank, the Manager, and its affiliates. The
records of these two parties will be reconciled monthly. The applicant
represents that in determining the value of the Plan's account, the
value of a security will initially be determined by the Plan's
custodian. The value will then be checked by the Manager using the
following sources depending on the sector and the markets in which the
security is trading: the closing price shown on the Reuters and/or
Bloomberg screens; or if the security is not so displayed, mid-market
prices obtained from at least two brokers with these prices then being
averaged. If the value as so determined by the Manager is not
significantly different from the value determined by the Plan's
custodian, the latter value will be used. If there is a significant
difference, the Manager will consult with the Plan's custodian in order
to reach a mutually agreeable valuation. Thus, the final value of the
Plan's account is determined jointly by the Manager and the Plan's
custodian. However, it is represented that, if the Manager and the
Plan's custodian are unable to agree as to the value of the Plan's
account, they will jointly select a qualified appraiser to make this
determination. If they are unable to agree on an appraiser, the Manager
and the Plan's custodian will each select a qualified appraiser and the
value will be determined by mutual agreement of such appraisers or, if
they cannot agree, by a third qualified appraiser designated by the two
appraisers. All such appraisers will be independent of the Manager.
7. Section 7 of the Agreement currently in effect with non-Plan
clients permits the Manager to lend the securities held in the
portfolio and to receive income from this process for its own account.
However, this section also provides that any such lending by the
Manager shall be entirely at the Manager's own risk and that the
Manager shall indemnify the client for any loss sustained by the
portfolio as a result of such activities. The applicant represents that
this section of the Agreement will be amended to provide (a) that
income from any such lending from a Plan's account will be credited to
the Plan's account and not to the Manager's account, and (b) that no
lending of this type will occur under circumstances where the borrower
is a party in interest or disqualified person with respect to the Plan
unless the conditions of Prohibited Transaction Exemptions 81-6 (52 FR
18754, May 19, 1987) and 82-63 (47 FR 14084, April 6, 1982, as
corrected by 47 FR 16437, April 16, 1982) are satisfied.
8. The Applicants assert that by entering into an arrangement with
the Manager and the Bank containing the proposed Guarantee, a Plan
would receive protection against the risk of any loss in the value of
its investment, provided by the proposed Guarantee, while also enjoying
the benefit of potential income and gains realized by the Manager's
individually tailored, active management of the Plan assets covered by
the investment management agreement. They represent that these
advantages are substantially similar to the benefits that may be
achieved by so-called ``managed guaranteed investment contracts'' and
similar investment products currently offered by certain insurance
companies and banks. The Applicants state that since the terms and
conditions of the investment management services provided by the
Manager to its clients are subject to regulation by the Securities and
Exchange Commission under the Advisers Act, and since the Bank must
account for the Guarantee on its books and records in the same manner
as any other Guarantee issued in the course of its banking business
subject to the regulation of the French banking authorities (as well as
the regulation of banking authorities in other countries, including the
United States, in which the Bank maintains banking operations through
its subsidiaries, branches, and offices), substantial regulatory
oversight exists to ensure protection of the rights of Plans and their
participants and beneficiaries with respect to the Guarantee.
By letter dated March 23, 1992, Jean-Pierre Mattout, Head of the
Bank's Legal Department, stated his opinion that the Guarantee
constitutes a valid and legally binding obligation of the Bank. The
applicant points out that as the Bank has a branch doing business in
the United States, the Bank is subject to the jurisdiction of the
courts of the United States and a Plan could bring an action against
the Bank in the courts of the United States to enforce the Guarantee.
By letter dated September 15, 1993, the attorney representing the
applicant with respect to the exemption application, explains that the
Guarantee, a contract right created pursuant to the Agreement, would be
a client Plan asset. He states that the Bank is subject to the
jurisdiction of the courts of the United States and that a plan could
bring an action against the Bank in the district courts of the United
States to enforce the Guarantee. He expresses the opinion that for
these reasons, the indicia of ownership of this contract right (the
Guarantee) would be maintained within the jurisdiction of the district
courts of the United States, consistent with the requirements of 29 CFR
2550.404b-1.\3\
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\3\29 CFR 2550.404b-1 provides, in pertinent part, that no
fiduciary may maintain the indicia of ownership of any assets of a
plan outside the jurisdiction of the district courts of the United
States, unless specified conditions are satisfied. The Department is
expressing no opinion herein as to whether or not the Agreement
complies with the requirements of this section of the regulations.
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9. Although the Applicants anticipate that the proposed Guarantee
would be provided principally to plans sponsored by major corporations,
generally with assets of at least US $200 million for each such plan,
the Bank and the Manager wish to be able to offer the proposed
Guarantee to any plan investing its assets with the Manager (but not
investing in pooled funds) pursuant to an investment management
agreement providing for such Guarantee, but only if the plan
fiduciaries responsible for making the decisions (1) to select and
retain the Manager as investment Manager, and (2) to select the
Guarantee, are independent of the Bank, the Manager, and their
affiliates. The Applicants represent that they do not presently know
the identity of any plan that may select the Manager as investment
manager and thereby may receive the Guarantee from the Bank under the
applicable investment management agreement. The Applicants will bear
all costs in connection with the filing of this exemption application.
10. In summary, the Applicants represent that the proposed
transaction satisfies the exemption criteria set forth in section
408(a) of the Act because: (a) the proposed transaction will enable a
Plan to receive protection against the risk of any loss in the value of
its investment in the Portfolio while also enjoying the benefit of
potential income and gains realized by the Manager's individually
tailored, active management of the Plan assets covered by the
Agreement; (b) fiduciaries of the Plan who are independent of the
Manager, the Bank, and their affiliates are responsible for the
selection and retention of the Manager as investment manager for the
Plan, and for the decision to acquire the Guarantee from the Bank; (c)
no separate fee or remuneration is payable by the Plan or any other
person to the Manager, the Bank, or any of their affiliates for the
Guarantee; (d) the Plan is entitled to cancel the investment management
agreement with the Manager, and/or the Guarantee provided by the Bank,
at any time upon reasonable notice; and (e) the determination of the
value of a Plan's assets under the Manager's investment management at
any relevant time shall be made pursuant to objective standards jointly
by the Manager and the Plan's custodian; however, if the Manager and
the Plan's custodian are unable to agree as to the value of the Plan's
account, they will jointly select a qualified appraiser to make this
determination; if they are unable to agree on an appraiser, the Manager
and the Plan's custodian will each select a qualified appraiser and the
value will be determined by mutual agreement of such appraisers or, if
they cannot agree, by a third qualified appraiser designated by the two
appraisers, and all such appraisers will be independent of the Manager.
NOTICE TO INTERESTED PERSONS: Since the identities of Plans that might
select the Manager as investment manager, and thereby receive the
proposed Guarantee pursuant to the Agreement, are presently unknown,
the only practicable means of notifying potential interested persons is
the publication of this notice of proposed exemption in the Federal
Register and presentation of the notice to plan fiduciaries who enter
into the investment management agreement. However, the Manager
represents that notice of the proposed exemption will be furnished by
first class mail to all known prospective plan clients.
FOR FURTHER INFORMATION CONTACT: Louis Campagna of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
L.H. Chapman Investment Company, Pension Plan (the Plan), Located
in Columbus, Ohio
[Exemption Application No. D-9676]
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), 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 purchase (the Purchase) by Margaret
Chapman, Loyal Chapman, and Lou Chapman Koester's individually-directed
accounts (the Accounts) in the Plan from Indianapolis Life Insurance
Company and Columbus Mutual Life Insurance Company of certain undivided
interests (the Interests) in certain promissory notes (the Notes) of
which the obligor is L.H. Chapman Investment Company, a party in
interest with respect to the Plan.
This proposed exemption is conditioned on the following
requirements: (1) the terms of the Purchase are at least as favorable
to the Accounts as those obtainable in an arm's-length transaction with
an unrelated party; (2) the Purchase price is equal to the Accounts'
pro rata share of the aggregate outstanding principal balances of the
Notes on the day of the Purchase; (3) the Purchase occurs only if such
outstanding principal balances are not greater than the fair market
values of the Interests on the day of the Purchase as determined by a
qualified, independent appraiser; (4) the Purchase does not involve
more than twenty-five percent of the assets in each of the Accounts;
and (5) the Accounts are not required to pay any fees, commissions or
expenses in connection with the Purchase.
Summary of Facts and Representations
1. The Plan is a money purchase pension plan with three
participants and total assets of $1,647,147 as of August 31, 1993. The
Plan permits each participant to direct the investments of his or her
account. The three participants had the following account balances as
of August 31, 1993:
------------------------------------------------------------------------
Account Balance
------------------------------------------------------------------------
Margaret Chapman (Mrs. Chapman)............................ $1,024,482
Loyal Chapman (Mr. Chapman)................................ 502,225
Lou Chapman Koester (Mrs. Koester)......................... 120,440
------------
Total.................................................... 1,647,147
------------------------------------------------------------------------
The trustee of the Plan is Loyal Chapman, who is also the president of
L.H. Chapman Investment Company (the Employer) and its sole
shareholder. The sponsor of the Plan is the Employer which is an Ohio
corporation engaged in the jewelry business.
2. The Interests are undivided interests in two promissory notes
(the Notes) which consist of a $400,000 promissory note made payable to
Indianapolis Life Insurance Company (the Indianapolis Note) and an
$850,000 promissory note made payable to Columbus Mutual Life Insurance
Company (the Columbus Note). The Notes ultimately resulted from the
Employer's acquisition in 1974 of 5.7 acres of real property in
Washington Court House, Ohio and the subsequent construction of a
shopping center on the property (the Shopping Center).
3. The Notes, dated January 10, 1974, are twenty-five year
promissory notes with interest accruing at a rate of 8-7/8 percent per
annum. The Notes are secured by a first deed of trust on the Shopping
Center which was valued at $2,200,000 as of March 1, 1994. The terms of
the Notes provide that the Employer has the right to prepay the entire
indebtedness in full with a prepayment premium required only if the
prepayment of the Notes is made in years eleven through twenty of the
twenty-five year term. The Employer represents that, as of February 1,
1994, the Notes were twenty-one years old and, therefore, can be
purchased by the Employer, without paying a premium, for their
outstanding principal balances. As of March 29, 1994, the outstanding
principal balance of the Indianapolis Note was $152,238 and the
outstanding principal balance of the Columbus Note was $323,515. Prior
to the Purchase, the Employer proposes to make a $63,966 payment
towards the Indianapolis Note, thereby reducing its outstanding
principal balance to $88,272 and the total outstanding principal
balances of the Notes to $411,787.
Mrs. and Mr. Chapman and Mrs. Koester (the Applicants) propose to
have the Employer, acting as agent for the Accounts, purchase the
Interests for the Accounts for their outstanding principal balances on
the date of the Purchase provided that the outstanding principal
balances of the Notes are not greater than the aggregate fair market
values of the Interests. The Accounts will purchase the Interests based
upon the proportion of their respective accounts relative to the total
assets in the Plan. Accordingly, the Accounts will purchase the Notes
in the following proportions:
------------------------------------------------------------------------
Indianapolis Columbia
note note
Account ------------------------
(percent) (percent)
------------------------------------------------------------------------
Mrs. Chapman................................... 62.20 62.20
Mr. Chapman.................................... 30.49 30.49
Mrs. Koester................................... 7.31 7.31
------------------------
Total........................................ 100 100
------------------------------------------------------------------------
Accordingly, the Applicants request an administrative exemption from
the Department to permit the Purchase under the terms and conditions
described herein.
4. The Employer obtained an appraisal of the Interests dated March
29, 1994 from John R. Garvin, MAI-GRE of Continental Appraisal Company
of Columbus, Ohio. Mr. Garvin represents that both he and Continental
Appraisal are independent of and unrelated to the Applicants and the
Employer, although he has provided some consulting services for Mr.
Chapman. Mr. Garvin states that, on average in the past five years, he
has derived less than one percent of his annual income from the
Employer and Mr. Chapman.
Mr. Garvin placed the fair market value of the Notes at $419,948.
Such amount takes into consideration the $63,966 payment that will be
made on the Indianapolis Note by the Employer. In assigning fair market
values to the Interests based upon the value of the Notes, Mr. Garvin
discounted the two minority interests (Mr. Chapman and Mrs. Koester's
interests) by five percent to reflect their lack of liquidity. Mr.
Garvin represents that because the majority interest (Mrs. Chapman's
interest) could liquidate the investment at any time without the
consent of the minority interests, there is no basis for any such
discount with respect to the majority interest. The fair market values
of the Interests, as of March 29, 1994, are as follows:
------------------------------------------------------------------------
Amount of
FMV of FMV after Percent outstanding
interest discount balance
------------------------------------------------------------------------
Mrs. Chapman........ $261,197 $261,197 62.20% $256,132
Mr. Chapman......... 128,045 121,643 30.49 125,553
Mrs. Koester........ 30,706 29,171 7.31 30,102
---------------------------------------------------
Totals............ 419,948 412,011 100.00 411,787
------------------------------------------------------------------------
Accordingly, because the outstanding balance of the Notes are less than
the fair market values of the Interests, the Accounts will purchase the
Interests for their pro rata share of the outstanding balance.
5. The Applicants represent that the Purchase is in the best
interests of the participants because it offers the Accounts the
opportunity to purchase the Interests at less than their fair market
values. Also, the Purchase will allow the Accounts to enhance their
current rate of return without additional risk. The Applicants
represent that the Purchase will not involve more than twenty-five
percent of the assets in each of the Accounts. The Accounts are not
required to pay any fees, commissions or expenses in connection with
the Purchase.
6. In summary, it is represented that the proposed transaction will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because: (a) the terms of the Purchase will be at least as
favorable to the Accounts as those obtainable in an arm's-length
transaction with an unrelated party; (b) the Purchase price will be
equal to the outstanding principal balances of the Notes on the day of
the Purchase; (c) the Purchase will occur only if such outstanding
principal balances are not greater than the aggregate fair market
values of the Interests on the day of the Purchase as determined by a
qualified, independent appraiser; (d) the Purchase will not involve
more than twenty-five percent of the assets in each of the Accounts;
and (e) the Accounts will not be required to pay any fees, commissions
or expenses in connection with the Purchase.
Notice to Interested Persons
Because the only Plan assets involved in the proposed transaction
are those in Mrs. Chapman, Mr. Chapman & Mrs. Koester's Accounts and
they are the only participants 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 thirty days after the date of publication of this
notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Kathryn Parr of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
AT&T Corporation (AT&T), and AT&T Investment Corporation (ATTIMCO),
Located in New York, New York
[Application Nos. D-9716 and D-9717]
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 C.F.R. Part
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990).
Part I--Exemption for Payment of Certain Fees to Asset Managers
The restrictions of section 406(b)(1) and (b)(2) of the Act and the
taxes imposed by section 4975 of the Code, by reason of section
4975(c)(1)(E) of the Code, shall not apply to the payment of
Performance Fees by an AT&T Investment Fund to an Asset Manager in
exchange for real estate management or advisory services rendered
pursuant to an Agreement, provided that the conditions set forth in
Parts II and III are satisfied.
Part II--General Conditions
(a) The Asset Manager is not an affiliate of AT&T and the terms of
any Performance Fee are approved in writing by AT&T.
(b) The terms of any Performance Fee shall be at least as favorable
to the AT&T Investment Fund as those obtainable in arm's-length
transactions between unrelated parties.
(c) No AT&T Trust shall allocate, in the aggregate, more than
twenty percent of its total assets to Arrangements which are the
subject of this exemption, determined at the time any such Arrangement
is established and at the time of any subsequent allocation of
additional assets (including the reinvestment of assets) to such an
Arrangement. The foregoing limitation shall not apply to an AT&T Plan
Assets Entity. However, that percentage of the Assets of an AT&T Plan
Assets Entity which is deemed to be ``plan assets'' of an AT&T Trust
invested therein shall be treated as assets of such AT&T Trust for the
purpose of applying the foregoing limitation to the AT&T Trust.
(d) AT&T shall receive the following written information with
respect to assets subject to this exemption (Assets):
(1) annual audited financial statements prepared by independent
certified public accountants approved by AT&T;
(2) quarterly and annual reports prepared by the Asset Manager
relating to the overall financial position of the Assets (Each such
report shall include a statement regarding the amount of fees paid to
the Asset Manager during the period covered by such report); and
(3) annual reports indicating the fair market value of the Assets
determined on the basis of the most recently available Independent
Valuations.
(e) The total fees paid to an Asset Manager shall constitute no
more than reasonable compensation.
(f) The Performance Fee shall be payable after Net Proceeds with
respect to the Assets exceed the Threshold Amount. The Threshold Amount
and the amount of the Performance Fee, expressed as a percentage (or
percentages) of the Net Proceeds in excess of the Threshold Amount (or
Threshold Amounts), shall be established by the Agreement. The
Threshold Amount for any Performance Fee shall include at least a
minimum rate of return to the AT&T Investment Fund, as described in
Part III, Section (q).
(g) The provisions of this paragraph (g) shall apply only where an
Asset Manager has discretion to sell Assets without prior approval of
AT&T. For any sale of an Asset which gives rise to the payment of a
Performance Fee to an Asset Manager prior to the Termination Date, the
sales price of the Asset shall be at least equal to a Target Amount in
order for the Asset Manager to sell the Asset and receive its
Performance Fee without further approval. If the proposed sales price
of the Asset is less than the applicable Target Amount, the proposed
sale shall be disclosed to and subject to the approval of AT&T, in
which event the Asset Manager shall be entitled to sell the Asset and
receive its Performance Fee. If the proposed sales price is less than
the applicable Target Amount and AT&T's approval is not obtained, the
Asset Manager shall retain the authority to sell the Asset, provided
that the Performance Fee that would have been payable to the Asset
Manager by reason of the sale of the Asset shall be paid only at the
termination of the Arrangement.
(h) In the event of termination of the Arrangement upon its
Termination Date, the Asset Manager shall be entitled to receive a
Performance Fee payable on the Termination Date. The amount of the
Performance Fee upon termination shall be determined by assuming a sale
for cash of the remaining Assets at their fair market value (determined
on the basis of Independent Valuations) and no reinvestment of such
cash in Assets subject to the Arrangement.
(i) In the event of the removal or resignation of an Asset Manager
prior to the Termination Date, the Asset Manager shall be entitled to
receive a Performance Fee payable on the Termination Date pursuant to
this paragraph (i). The Performance Fee shall be calculated on a
preliminary basis at the time of such removal or resignation by
assuming a sale for cash of the remaining Assets at their fair market
value (determined on the basis of Independent Valuations) and no
reinvestment of such cash in Assets subject to the Arrangements. As of
the Termination Date, the amount so determined on a preliminary basis
shall be multiplied by a fraction, the numerator of which is the sum of
(1) the actual sales prices received by the AT&T Investment Fund on
disposition of all Assets sold after the date of the Asset Manager's
removal or resignation and prior to the Termination Date, and (2) in
the case of Assets which have not been sold prior to the Termination
Date, the value of the Assets as of the Termination Date (determined on
the basis of Independent Valuations), and the denominator of which is
the aggregate value of the Assets which was used in connection with the
preliminary determination of the Performance Fee at the time of removal
or resignation, provided that this fraction shall never exceed 1.0. The
resulting amount shall be the Performance Fee payable to the Asset
Manager upon the Termination Date.
(j) AT&T shall maintain or cause to be maintained with respect to
the Assets, for a period of six years, the records necessary to enable
the persons described in paragraph (k) of this Part II to determine
whether the conditions of this exemption have been met, except that (1)
a prohibited transaction will not be considered to have occurred if,
due to circumstances beyond the control of AT&T, the records are lost
or destroyed prior to the end of the six-year period, and (2) no party
in interest, other than AT&T, shall be subject to the civil penalty
that may be assessed under section 502(i) of the Act or to the taxes
imposed by section 4975 (a) and (b) of the Code if the records are not
maintained or are not available for examination as required by Part
III, Section (k) below.
(k) Notwithstanding any provisions of Section 504(a)(2) and 504(b)
of the Act, the records referred to in Section (j) of this Part II
shall be unconditionally available at their customary location for
examination during normal business hours by:
(1) any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(2) any contributing employer to any employee benefit plan the
assets of which are held in the AT&T Investment Fund which has entered
into the Arrangement or any duly authorized employee or representative
of such employer;
(3) any participant or beneficiary of any employee benefit plan the
assets of which are held in the AT&T Investment Fund or any duly
authorized representative of such participant or beneficiary; and
(4) nothing in this paragraph (k) shall authorize any of the
persons described in subsections (2) and (3) to examine any trade
secrets of AT&T or information which is privileged or confidential.
Part III--Definitions
(a) An ``affiliate'' of a person means:
(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 of, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(b) The term ``Agreement'' means the investment management, trust
or other agreement entered into between an Asset Manager and AT&T for
the provision of real estate management or advisory services.
(c) The term ``Arrangement'' means a fee arrangement entered into
between AT&T and an Asset Manager pursuant to an Agreement providing
for the payment of Performance Fees to the Asset Manager by an AT&T
Investment Fund in exchange for real estate management or advisory
services.
(d) The term ``Asset Manager'' means any person or entity providing
real estate management or advisory services to an AT&T Investment Fund.
(e) The term ``Assets'' means assets of an AT&T Investment Fund
which are the subject of an Arrangement with an Asset Manager.
(f) The term ``AT&T'' means AT&T Corporation, AT&T Investment
Management Corporation and/or any Subsidiary.
(g) The term ``AT&T Investment Fund'' means an AT&T Trust or an
AT&T Plan Assets Entity.
(h) The term ``AT&T Plan Assets Entity'' means any group trust,
partnership or other entity (including without limitation the Telephone
Real Estate Equity Trust), the assets of which are deemed to be ``plan
assets'' by reason of the application of 29 CFR 2510.3-101, but only if
(1) fifty percent or more of the interests in such entity are held by
one or more AT&T Trusts, and (2) AT&T is the named fiduciary or manager
of the assets of such entity.
(i) The term ``AT&T Trust'' means the AT&T Master Pension Trust or
any other trust (other than an AT&T Plan Assets Entity), one hundred
percent of the assets of which are assets of employee benefit plans
maintained by AT&T.
(j) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(k) The term ``Independent Valuations'' means valuations based on
independent and objective third party sources acceptable to AT&T
(including without limitation NASDAQ, newspapers, or other general
publications, or brokers which are independent of the Asset Manager and
its affiliates), or, if such sources are not available with respect to
a particular asset or at the option of AT&T, valuations conducted by an
appraiser independent of the Asset Manager and its affiliates which has
been approved by AT&T; provided, however, that, solely for purposes of
the reports described in Part II, Section (d)(3) above, no such
appraisal will be required with respect to any Asset if AT&T
determines, in its sole discretion, that such an appraisal is
unnecessary.
(l) The term ``Net Proceeds'' means, with respect to an
Arrangement, the aggregate amount of cash and other assets (valued at
fair market value as determined on the basis of Independent Valuations)
which cease to be Assets which are subject to such Arrangement, in
accordance with the terms of the Agreement establishing such
Arrangement.
(m) The term ``Performance Fee'' means a fee which equals a pre-
specified percentage (or several pre-specified percentages) of all Net
Proceeds in excess of the Threshold Amount (or several Threshold
Amounts), subject to such limitations, if any, as AT&T may approve or
impose.
(n) The term ``Subsidiary'' means a corporation, partnership, or
other entity of which (or in which) fifty percent or more of
(1) the combined voting power of all classes of stock entitled to
vote or the total value of shares of all classes of such corporation,
(2) the capital interest or profits interest of such partnership,
or
(3) the beneficial interest of such other entity,
is owned directly or indirectly by AT&T Corporation or AT&T Investment
Management Corporation.
(o) The term ``Target Amount'' means a value assigned to each Asset
either (1) at the time the Asset becomes subject to the Arrangement, by
mutual agreement between the Asset Manager and AT&T, or (2) pursuant to
an objective formula approved by the Asset Manager and AT&T at the time
the Arrangement is established. However, in no event will the value be
less than the value of the Asset at the time the Asset becomes subject
to the Arrangement.
(p) The term ``Termination Date'' means the date, established in
the Agreement, on which the Arrangement will terminate by reason of the
passage of time, as the same may be amended from time to time with the
approval of AT&T.
(q) The term ``Threshold Amount'' means with respect to any
Arrangement an amount which equals one hundred percent of the AT&T
Investment Fund's capital invested in the Assets plus a pre-specified
annual compounded cumulative rate or rates of return, each of which is
at least a minimum rate of return determined as follows:
(1) A non-fixed rate which is a least equal to the rate of change
in the consumer price index (CPI) during the period from the time the
Assets become subject to the Arrangement until Net Proceeds equal or
exceed the applicable Threshold Amount; or
(2) a fixed rate which is at least equal to the average rate of
change in the CPI over some period of time specified in the Agreement,
which shall not exceed ten years.
EFFECTIVE DATE: This exemption, if granted, will be effective as of the
date this notice of proposed exemption is published in the Federal
Register.
Summary of Facts and Representations
1. AT&T is a New York corporation which provides a wide variety of
national and international telecommunications services. ATTIMCO is a
wholly-owned subsidiary of AT&T which performs investment management
functions. ATTIMCO is a registered investment adviser under the
Investment Advisers Act of 1940, as amended. AT&T is the sponsor of the
AT&T Master Pension Trust (AT&T MPT), a qualified trust holding assets
of certain employee benefit plans maintained by AT&T. The bulk of the
real estate assets of the AT&T MPT is held through the Telephone Real
Estate Equity Trust (TREET), a group trust established in connection
with AT&T's divestiture in 1984 of the regional telephone holding
companies, including BellSouth Corporation (BellSouth). The beneficial
interests in TREET currently are held by the AT&T MPT and the BellSouth
Master Pension Trust, a qualified trust holding the assets of employee
benefit plans maintained by BellSouth. As of January 1, 1994, the
Assets of the AT&T MPT (including its interest in TREET) exceeded $38
billion.
2. AT&T is the named fiduciary of both the AT&T MPT and TREET with
the power to manage and control the assets of such trusts and to
appoint investment managers of such assets. In order to facilitate
investment of these and other such funds in potentially beneficial
transactions and to encourage asset managers to maximize the value of
assets under management, AT&T seeks the flexibility to enter into
arrangements described below (the Arrangements) involving the payment
of performance fees to independent asset managers, pursuant to formal
agreements with current and future asset managers (the Agreements).
AT&T is requesting an exemption to permit its payment of performance
fees to asset managers for services rendered to the funds pursuant to
Arrangements established by the Agreements, subject to the conditions
in the proposed exemption, as described herein.
3. The proposed exemption will be available for Arrangements
involving any AT&T Investment Fund (collectively, the Funds), a term
which is defined as (1) the AT&T MPT or any other trust of which one
hundred percent of the assets are assets of employee benefit plans
maintained by AT&T, and (2) any group trust, partnership or other
entity (including without limitation the Telephone Real Estate Equity
Trust), the assets of which are deemed to be ``plan assets'' by reason
of the application of 29 C.F.R. 2510.3-101, but only if (1) fifty
percent or more of the interests in such entity are held by one or more
AT&T Trusts, and (2) AT&T is the named fiduciary or manager of the
assets of such entity. Under the Arrangements proposed, an asset
manager would provide, or continue to provide, real estate management
or advisory services to one or more Funds. Depending on the terms of
the particular Agreement, an asset manager may have complete discretion
with respect to assets of the Fund allocated to its account, including
discretion to identify appropriate investments, make investment
decisions, and manage and dispose of investments, or may be limited to
making investment recommendations subject to the ultimate approval of
AT&T. Alternatively, the asset manager may be given limited discretion
with respect to some, but not all, aspects of the management of the
assets allocated to its account. For example, the asset manager may
have discretion with respect to all aspects of managing such assets
except for specific major decisions such as acquisition and
disposition.
4. The applicants represent that under the Agreements, assets of
the Funds will be managed with the investment objective of obtaining
current income and/or capital appreciation, primarily through
investment directly or indirectly, in real estate and interests in real
estate, including without limitation fee simple interests, interests in
partnerships and joint ventures having an interest in real property,
mortgages, options to purchase real estate, leaseholds, leasebacks, and
investments in real estate funds, real estate investment trusts or
other entities with assets which are invested, directly or indirectly,
primarily in real estate. Assets potentially to be subject to the
Arrangements include the following: (a) investments selected or
recommended by an asset manager after an Agreement is executed, in
accordance with investment guidelines established by the Agreement; (b)
pre-identified investments which are particular properties which have
been identified by the asset manager for investment (or recommended for
investment) prior to the execution of the Agreement; (c) pre-existing
assets which are already held by a Fund prior to the execution of the
Agreement; and (d) combinations of the foregoing.
5. As proposed by the applicant, the performance fee payable to an
asset manager under an Agreement (the Performance Fee) is a fee payable
after net proceeds (Net Proceeds) from the assets under management
pursuant to the Agreement exceed a certain amount (the Threshold
Amount).4 Net Proceeds, with respect to an Arrangement, are the
aggregate amount of cash and other assets (valued at fair market value
on the basis of independent valuations5) which cease to be assets
subject to the Arrangement. Each Agreement establishing an Arrangement
will specifically identify the assets to be subject to the Arrangement,
and the basis upon which income and earnings on such assets will cease,
or continue, to be subject to the Arrangement. For example, the
applicant represents that an Agreement might provide that the assets
initially allocated to the Arrangement plus all earnings and proceeds
thereon will be reinvested and remain subject to the Arrangement until
the Termination Date, whereupon all such assets will cease to be
subject to the Arrangement. In such case, there will be no Net Proceeds
during the term of the Arrangement, and therefore no Performance Fee
would be payable until the Termination Date. Alternatively, the
applicant represents that an Agreement might provide that all net
income and other proceeds generated by the assets initially allocated
to the Arrangement will cease to be subject to the Arrangement and will
thereby constitute Net Proceeds. In such case, Net Proceeds will be
generated as and when the initial assets generate net income or other
proceeds, and a Performance Fee would be payable once the amount of
these Net Proceeds exceed the Threshold Amount. The Threshold Amount is
defined as an amount equal to one hundred percent of the Fund's capital
investment plus a pre-specified annual compounded cumulative rate or
rates of return each of which is at least a minimum rate of return as
determined by a formula based on the consumer price index, as required
in Part III, Sections (q) (1) and (2) of the proposed exemption. The
proposed exemption provides that the Performance Fee is payable (a)
after Net Proceeds exceed the Threshold Amount, and/or (b) on the
Agreement's termination date (the Termination Date, defined as the date
on which the Arrangement will terminate by reason of the passage of
time, as the same may be amended from time to time with the approval of
AT&T), either upon termination of the Arrangement or in the event of
the prior removal or resignation of an asset manager. The Performance
Fee will be equal to a pre-specified percentage, or several pre-
specified percentages, of all Net Proceeds in excess of the Threshold
Amount, or Threshold Amounts, subject to such limitations as AT&T may
impose. In this regard, AT&T represents that there is a possibility
that several Threshold Amounts may be established with different
percentages being utilized to determine the Performance Fee, depending
upon which Threshold Amount has been exceeded. AT&T states that this
structure will allow AT&T to negotiate an arrangement on behalf of a
Fund pursuant to which the amount of the Performance Fee will increase
as the level of investment performance increases. AT&T states that, as
an example, AT&T could negotiate a Performance Fee whereby an asset
manager would receive ten percent of all Net Proceeds in excess of an
initial Threshold Amount (e.g., all invested capital plus an eight
percent annual return), and twenty percent of all Net Proceeds once a
second Threshold Amount (e.g., all invested capital plus a twelve
percent annual return) has been achieved. Both the annual rate(s) of
return used in determining the Threshold Amount(s) and the
percentage(s) used to determine the amount of the Performance Fee will
be negotiated between AT&T and the asset manager prior to the
application of any Arrangement to assets under management of the asset
manager.
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\4\The Department herein is proposing an exemption only for the
payment by AT&T Investment Funds of Performance Fees for services
rendered to the Funds pursuant to the Agreements, and is not
proposing any exemption for any other prohibited transactions or any
violations of Title I, Part 4 of the Act which may arise from any
other elements of the fee structure established under an Agreement.
\5\Under the proposed exemption, the term ``independent
valuations'' means valuations based on independent and objective
third party sources acceptable to AT&T (including without limitation
NASDAQ, newspapers, or other general publications, or brokers which
are independent of the Asset Manager and its affiliates). AT&T
represents that the assets of AT&T Investment Funds to be subject to
the Arrangements will consist primarily of real estate or interests
in real estate which will be valued, as a general matter, by
independent appraisers. However, a portion of an AT&T Investment
Fund's assets subject to an Arrangement may consist of real estate-
related securities, such as shares in real estate investment trusts,
that may be valued using independent sources other than appraisers,
such as NASDAQ and the other sources described in the definition of
``independent valuations''.
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With respect to the determination of the Threshold Amount, each of
the pre-specified rates of return will be at least equal to a minimum
rate of return as specified in Part III, Section (q) of the proposed
exemption. In determining the Threshold Amount, different assets or
different groups of assets may be subject to different annual rates of
return, with the rate of return applicable to any particular asset
being established by the Agreement.6 Net Proceeds in excess of the
Funds invested capital plus the minimum return must actually be
achieved (or deemed achieved upon the Termination Date or the removal
of the asset manager) in order for the Threshold Amount to be reached.
The Performance Fee payable to an asset manager may be reduced by all
or a portion of any fees previously paid to the asset manager with
respect to the assets under any prior fee arrangement if and to the
extent such a reduction is called for by the Agreement and shall be
subject to such other limitations as AT&T may impose.
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\6\AT&T represents that under the Agreements, asset managers
will not have discretion to shift assets within the Arrangement from
one class to another, and that AT&T will be responsible for
determining whether assets may be shifted from one class to another
during the term of the Arrangement.
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6. As a specific provision of any Agreement which gives an asset
manager complete discretion over the acquisition and disposition of
assets, AT&T will require that for any sale of an asset which causes
the payment of a Performance Fee and which occurs prior to the
Termination Date, the sales price for the asset must be at least equal
to a certain amount (the Target Amount) in order for the asset manager
to sell the asset and receive the Performance Fee without further
approvals. The Target Amount for each asset will be assigned either at
the time the asset becomes subject to the Arrangement, as agreed
between AT&T and the asset manager, or pursuant to an objective formula
approved by AT&T and the asset manager at the time the Arrangement is
established. If the proposed sales price of the asset is less than the
applicable Target Amount, the proposed sale must be disclosed to AT&T
for approval in order for the asset manager to receive its Performance
Fee as a result of the sale. If the proposed sales price is less than
the applicable Target Amount and AT&T's approval is not obtained, the
asset manager will continue to have authority to sell the asset but the
Performance Fee which would have been payable to the asset manager by
reason of the asset sale will be paid only at the Termination Date.
Under each Arrangement subject to the proposed exemption, all realized
income on, and proceeds from the sale of, the assets, net of expenses
and reasonable reserves, will either (a) be reinvested in assets
subject to the Arrangement, if the Agreement so provides or if AT&T so
determines pursuant to the Agreement, or (b) cease to be subject to the
Arrangement and thereby become Net Proceeds.
AT&T represents that the Target Amount concept provides protection
for the AT&T Investment Fund to assure that an asset manager will not
sell any assets at unduly low prices to trigger immediate payment of
the related performance fee. AT&T states that this concept is intended
to provide a floor on the price at which an asset can be sold and the
performance fee paid immediately without having to obtain AT&T's
approval. For newly-acquired assets, the minimum floor is deemed to be
the cost of the asset; for previously acquired assets, the minimum
floor amount is the value of the asset at the time the asset becomes
subject to the Arrangement, an approach which AT&T represents to be the
most logical to establish the minimum Target Amount for previously
acquired assets. AT&T notes that it has the flexibility to negotiate a
higher Target Amount in any case where it believes the minimum Target
Amount permitted by the proposed exemption would be inadequate.
7. AT&T offers four hypothetical examples to illustrate the
operation of the proposed exemption with respect to the Target Amount
concept. In each example, it is assumed that the asset manager has
discretion to sell the relevant asset without the prior approval of
AT&T\7\ and that its performance fee is equal to ten percent of all Net
Proceeds in excess of the Threshold Amount. In each example, the
Threshold Amount at the time the relevant asset is sold is $110:
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\7\AT&T represents that under the typical Arrangements
contemplated, it intends to retain this discretion, in which event
the Target Amount concept will not apply.
---------------------------------------------------------------------------
Example 1: AT&T and an asset manager enter into an Arrangement
whereby the asset manager agrees to manage a portion of the real estate
investment of an AT&T Investment Fund, including Parcel X, a real
estate investment to be acquired by the AT&T Investment Funds at the
time the Arrangement is entered into. The cost of Parcel X is $100
cash. At the time the Arrangement is entered into, the asset manager
and AT&T agree that the Target Amount shall be $100. Two years later,
the asset manager sells Parcel X for $150 without the prior approval of
AT&T. Having exceeded the Threshold Amount for the Arrangement, the
asset manager is entitled to a performance fee of $4.00 (i.e., [$150 -
$110] x .10). Since the asset manager exceeded the Target Amount for
Parcel X, this performance fee is payable at the time of the sale of
Parcel X.
Example 2: Assume the same facts as in Example 1 except that Parcel
X was acquired by the AT&T Investment Fund three years prior to the
date the Arrangement was entered, that the initial cost of Parcel X was
$50, and that its value at the time it becomes subject to the
Arrangement is $100. AT&T and the asset manager agree that the Target
Amount is $100, the value of Parcel X at the time it becomes subject to
the Arrangement. Upon the sale of Parcel X for $150, the asset manager
is entitled to a Performance Fee of $4.00, calculated and payable in
the same manner as described in Example 1.
Example 3: Assume the same facts as Example 2 except that the
original acquisition price of Parcel X three years prior to the
Arrangement was $120. AT&T and the asset manager agree that the Target
Amount is $100, the value of Parcel X at the time it becomes subject to
the Arrangement. Upon the sale of Parcel X, the asset manager is
entitled to a performance fee equal to $4.00, calculated and payable in
the same manner as described in Example 1.
Example 4: Assume the same facts as Example 3 except that the
asset manager and AT&T agree that the Target Amount for Parcel X is
$130 and that the asset manager sells Parcel X for $125 without the
prior approval of AT&T. Upon the sale of Parcel X, the asset manager
becomes entitled to a performance fee of $1.50 (i.e., [$125 - $110] x
.10). However, because AT&T did not approve the sale at a price below
the Target Amount, payment of the performance fee is deferred until the
Termination Date of the Arrangement. Had AT&T approved the sale at the
price below the Target Amount, the performance fee of $1.50 would have
been payable upon the sale.
8. An Arrangement will terminate upon the Termination Date set
forth in the Agreement, which may be changed with the approval of AT&T.
Upon termination of an Arrangement, the assets under management will be
either sold or retained by the Fund, and the asset manager will be
entitled to a Performance Fee or an additional Performance Fee if the
Threshold Amount has been reached at or before such time. In the case
of any assets which are not sold upon termination of the Arrangement,
the Performance Fee will be calculated using the fair market value of
such assets as determined on the basis of independent valuations.
9. Each Arrangement will provide that the asset manager may be
removed by AT&T at any time, without cause, upon AT&T's delivery of a
notice of removal to the asset manager. An asset manager may resign at
any time, without cause, upon written notice to AT&T. Upon removal or
resignation of an asset manager, the asset manager will be entitled to
receive a Performance Fee if, at the time of the asset manager's
removal or resignation, Net Proceeds with respect to the assets under
management would exceed an amount equal to the Threshold Amount.
However, each Agreement will provide that such a Performance Fee will
not be payable until the Termination Date and shall be subject to a
reduction as determined under Part II, Section (i) of the proposed
exemption. Accordingly, even if the aggregate value of the assets under
management declines after an asset manager's removal or resignation,
the asset manager will still receive a Performance Fee for the period
of time that it provided services under an Arrangement if Net Proceeds,
based on an assumed sale of the assets at their fair market value,
exceed an amount equal to the Threshold Amount at the time of the asset
manager's removal or resignation, subject to the calculation required
under Part II, Section (i) of the proposed exemption. The applicant
represents that this provision ensures that an appropriate reduction in
the Performance Fee will be made if the aggregate value of the assets
declines after the asset manager resigns or is removed.
10. No AT&T Trust will be permitted to allocate, in the aggregate,
more than twenty percent of its total assets to Arrangements which are
the subject of the proposed exemption, determined at the time any such
Arrangement is established and at the time of any subsequent allocation
of additional assets, including the reinvestment of assets, to such
Arrangement. The foregoing limitation does not apply to an AT&T Plan
Assets Entity, which is defined as any group trust, partnership or
other entity, the assets of which are deemed to be ``plan assets'' by
reason of the application of 29 C.F.R. 2510.3-101, but only if (a)
fifty percent or more of the interests in such entity are held by one
or more AT&T Trusts and (b) AT&T is the named fiduciary or manager of
the assets of such entity. An AT&T Plan Assets Entity may allocate up
to one hundred percent of its asset to Arrangements subject to the
proposed exemption. However, solely for determining if an AT&T Trust
satisfies the twenty percent limitation, the assets of any AT&T Plan
Assets Entity in which such AT&T Trust has an interest will be deemed
to be the asset of such AT&T Trust only to the extent of such AT&&
Trust's interest in the AT&T Plan Assets Entity. As an example, the
applicant explains a hypothetical situation in which an AT&T Trust has
total assets of $100 million: This AT&T Trust may allocate up to $20
million to Arrangements. In the hypothetical example, $15 million of
the AT&T Trust's assets are invested in an AT&T Plan Assets Entity
which has total assets of $30 million, fifty percent of which are
allocated to Arrangements. For the purpose of determining if the AT&T
Trust satisfies the twenty percent allocation limit, $15 million of the
assets of the AT&T Plan Assets Entity, representing the AT&T Trust's
investment therein, are deemed to be assets of the AT&T Trust. Because
fifty percent of the AT&T Plan Assets Entity's overall assets are
allocated to Arrangements, fifty percent (or $7.5 million) of this $15
million is deemed to be allocated to Arrangements. Thus, by virtue of
its investment in the AT&T Plan Assets Entity, the AT&T Trust is
treated as having allocated $7.5 million to Arrangements. Accordingly,
in this hypothetical example, the AT&T Trust may allocate up to $12.5
million of its remaining assets to Arrangements.
11. Throughout the term of an Arrangement, AT&T will receive
quarterly and annual reports prepared by the asset manager relating to
the overall financial position of the assets under management,
including a statement regarding the amount of all fees paid to the
asset manager during the period covered by the report, and annual
reports indicating the current fair market value of all assets as
determined on the basis of the most recently available independent
valuations, as defined in Part III, Section (k) of the proposed
exemption. AT&T will also receive annual audited financial statements
prepared by independent certified public accountants approved by AT&T,
generally within ninety days of the end of the twelve month period
covered by the statement.
12. The proposed exemption requires AT&T to provide for the
maintenance, for six years, of records necessary to enable
determinations of whether the conditions of the proposed exemption are
satisfied. Such records must be unconditionally available at their
customary location for examination during normal business by any duly
authorized representative of the Department or the Internal Revenue
Service, any contributing employer (or its representative) with respect
to an employee benefit plan with assets held in a Fund which has
entered into an Arrangement, and any participant or beneficiary (or
his/her representative) of such a plan.
13. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (a) Each Arrangement is authorized in writing by
AT&T as named fiduciary or manager of the relevant Fund; (b) No AT&T
Trust may invest, in the aggregate, more than twenty percent of its
total assets in Arrangements which are the subject of the proposed
exemption; (c) AT&T will receive written reports with respect to the
condition of assets and payment of fees under the Arrangements, and
will maintain accessible records to enable determinations of whether
the terms of the proposed exemption are satisfied; (d) The fees paid to
an asset manager under any Arrangement will constitute no more than
reasonable compensation; (e) The timing and formula for determining
fees under the Arrangements will be established and approved by AT&T
prior to a Fund's entering into an Arrangement, and will be based on
pre-specified percentages of Net Proceeds after the Fund has recovered
its invested capital plus a minimum pre-specified rate of return; (f)
The terms of any Performance Fee will be at least as favorable to the
Fund as those obtainable in arm's-length transactions with unrelated
parties; and (g) AT&T may remove an asset manager under an Arrangement
at any time.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Union Electric Savings Investment Plan (the Plan), Located in St.
Louis, Missouri
[Application No. D-9782]
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), 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 (1) the proposed extension of credit to the
Plan by Boatmen's Trust Company (BTC), a party in interest with respect
to the Plan, in the form of a payment (the Advance) with respect to
group annuity contract CG01285B3A (the GIC) issued by Executive Life
Insurance Company (ELIC); and (2) the Plan's potential repayment of the
Advance (the Repayments), provided: (a) all terms of such transactions
are no less favorable to the Plan than those which the Plan could
obtain in arm's-length transactions with an unrelated party; (b) no
interest and/or expenses are paid by the Plan; (c) the Advance is made
with respect to amounts invested by the Plan in the GIC; (d) the
Repayments are restricted to the amounts, if any, paid to the Plan
after August 2, 1994, by ELIC or other responsible third parties with
respect to the GIC (the GIC Proceeds); (e) the Repayments do not exceed
the total amount of the Advance; and (f) the Repayments are waived to
the extent the Advance exceeds the GIC Proceeds.
Summary of Facts and Representations
1. The Plan is a profit sharing plan which had 6,938 participants
as of March 31, 1994. The approximate aggregate fair market value of
the Plan's assets as of that date was $313 million. BTC is the trustee
of the Plan.
2. On February 12, 1988, $763,683.21 of the Plan's assets were
invested in the GIC, yielding 8.5% compound interest with a March 1,
1993 maturity date. As of March 31, 1991, the book value of the GIC
totalled $987,902.02.
3. On April 11, 1991, a California court appointed the Insurance
Commissioner of the State of California as conservator of ELIC.
Pursuant to this action, payouts on ELIC's GICs were suspended.8
Subsequently, the California Insurance Commissioner approved a
Rehabilitation Plan for ELIC (the Rehab Plan), which involved, among
other things, Aurora National Life Assurance Company (Aurora) assuming
most of the insurance policy and GIC obligations of ELIC, in some cases
at discounted values.9 The Rehab Plan also involved liquidation of
certain assets of ELIC, including real estate and so-called ``junk
bonds'', to fund various aspects of the Rehab Plan. For holders of ELIC
GICs, the terms of the Rehab Plan included an election either to:
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\8\In this proposed exemption, the Department expresses no
opinion as to whether the acquisition and holding of the GIC
violated any provisions of Part 4 of Title I of the Act.
\9\The Department notes that the exemption proposed herein is
not intended to affect any cause of action by any participant of the
Plan or the Department with respect to the GIC.
---------------------------------------------------------------------------
(a) Opt into the Rehab Plan, and receive a replacement GIC from
Aurora at a discounted value; or
(b) Opt out of the Rehab Plan, in return for a discounted account
value (DAV) payable partly in cash now and partly in the form of future
contingent cash payments from certain ELIC liquidating trusts.
4. In its capacity as trustee of the Plan, BTC ultimately selected
the opt out option for the Plan. Under the terms of the Rehab Plan and
the opt out election, a substantial portion of the DAV ($569,100.82)
has already been received from ELIC in cash. The balance of the DAV
($260,801.20) represents the California Insurance Commissioner's
estimate of the future contingent payments to be received by the Plan
from the ELIC liquidating trust. It is expected that the remaining
asset liquidations will take several years. The precise timing and
amount of future payments is subject to uncertainty.
5. BTC is willing to make the proposed Advance in order to protect
plan participants from any loss with respect to their initial principal
investment in the GIC. The proposed amount of the Advance, $194,582.39,
represents the difference between the Plan's initial investment in the
GIC ($763,683.21) and the cash payments which have been received to
date from ELIC pursuant to the Rehab Plan ($569,100.82). Without the
Advance, the applicant represents that it is possible that the Plan
might be unable to meet in timely fashion its obligations to pay
benefits and make distributions and to accommodate participant-directed
investment reallocations. BTC proposes the Advance as an alternative to
being forced to ``freeze'' that portion of the Plan invested in the
GIC. Moreover, BTC represents that the Advance will protect the Plan
participants and their beneficiaries from the risk of loss and possible
reduction of benefits attendant to the investment in the GIC.
6. The applicant represents that the Advance will be made in a
single payment of $194,582.39. As a result of the transaction,
participants will receive at least the original principal amount
invested in the GIC. The proposed Advance will be made to the Plan on
an interest-free, unsecured basis. The Plan will incur no expenses in
connection with the proposed Advance. The proposed Advance may be
repaid only out of the GIC Proceeds. If the amounts so received are
less than the amount of the Advance, BTC will bear the loss, having no
recourse against any other of the Plan's assets. In the event that the
GIC Proceeds exceed the amount necessary to repay the Advance, the
excess will be distributed to the Plan for the benefit of participants
and their beneficiaries. BTC represents that it will maintain records
of the proposed Advance for a period of seven years, and such records
will be open for inspection at all times by the Department or any Plan
participant.
7. In summary, the applicant represents that the proposed
transactions will satisfy the criteria contained in section 408(a) of
the Act because: (a) all terms of the transactions will be no less
favorable to the Plans than those which the Plans could obtain in an
arm's-length transaction with an unrelated party; (b) no interest and/
or expenses will be paid by the plans; (c) the Advance will be made
with respect to amounts invested by the Plan in the GIC; (d) the
Repayments are restricted to the GIC Proceeds; (e) the Repayments will
not exceed the total amount of the Advance; and (f) the Repayments are
waived to the extent the Advance exceeds the GIC Proceeds.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 14th day of September, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-23121 Filed 9-16-94; 8:45 am]
BILLING CODE 4510-29-P
