[Federal Register Volume 61, Number 174 (Friday, September 6, 1996)]
[Notices]
[Pages 47195-47205]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22717]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10200, et al.]
Proposed Exemptions; Chase Manhattan Bank
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
[[Page 47196]]
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 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.
The Chase Manhattan Bank (National Association) Located in New York,
New York
Exemption Application No. D-10200
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).
Section I--Transactions
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 following transactions, provided that the
conditions set forth in Section II below are met:
(a) Any acquisition or sale of ``emerging market'' securities (the
Securities), and any repurchase agreement involving such Securities,
which occurs between The Chase Manhattan Bank, N.A. (Chase) or its
Affiliates and the IBM Retirement Plan (the IBM Plan), to which Chase
or an Affiliate is a party in interest under the Act at the time of the
transaction; and
(b) Certain repurchase agreements involving the Securities which
occurred between the IBM Plan and Chemical Bank, N.A. (Chemical) that
were outstanding as of March 31, 1996, the date of the merger between
Chemical and Chase (the Merger). (All references herein to Chase which
refer to the period of time after March 31, 1996 shall include
Chemical.)
Section II--Conditions
(a) The assets of the IBM Plan involved in the transactions
described in Section I(a) and I(b) above are managed by Wasserstein
Perella Emerging Markets Asset Management L.P. (W-P), as the
independent qualified fiduciary for the IBM Plan;
(b) W-P, as the IBM Plan's independent fiduciary and investment
manager for the assets invested in the Securities, negotiates the terms
of such transactions on behalf of the IBM Plan and makes the decision
to have the IBM Plan enter into any such transactions with Chase;
(c) W-P, as the IBM Plan's independent fiduciary and investment
manager for the assets invested in the Securities, monitors the
investments made by the IBM Plan in such Securities and takes whatever
actions are necessary to protect the interests of the IBM Plan;
(d) Neither Chase nor an Affiliate has discretionary authority or
control with respect to the investment of the IBM Plan's assets
involved in the transactions or renders investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
(e) In any transaction where the IBM Plan acquires a Security from
Chase, the IBM Plan pays a price which is no greater than the fair
market value of such Security, as determined by W-P in accordance with
either W-P's internal valuation process or independent third party
sources (such as independent broker-dealers and market-makers dealing
in such Securities);
(f) In any transaction where the IBM Plan sells a Security to
Chase, the IBM Plan receives a price which is no less than the fair
market value of such Security, as determined by W-P in accordance with
either W-P's internal valuation process or independent third party
sources (such as independent broker-dealers and market-makers dealing
in such Securities);
(g) The repurchase agreements between the IBM Plan and Chase are
entered into pursuant to a written agreement between the parties which
describes all of the material terms and conditions for such
transactions, including the rights and obligations of each party, and
is consistent with the specific guidelines established by the IBM
Plan's named fiduciary for transactions involving the Securities;
(h) All repurchase agreements between the IBM Plan and Chase,
including those agreements which were in place at the time of the
Merger with Chemical, have terms and conditions which are at least as
favorable to the IBM Plan as terms and conditions which would exist in
a similar transaction with an unrelated party;
(i) All other terms of each transaction described above in Section
I(a) are not less favorable to the IBM Plan than the terms available in
an arm's-length transaction between unrelated parties;
[[Page 47197]]
(j) W-P does not engage in, or commit to sell, any uncovered put or
call options (including, but not exclusive to, ``straddles'' and
``strangles'') in transactions with Chase on behalf of the IBM Plan;
(k) Any transactions involving the use of leverage by W-P, on
behalf of the IBM Plan, do not exceed the specific guidelines
established by the IBM Plan's named fiduciary under its investment
management agreement with W-P;
(l) No brokerage commission, sales commission, or similar
compensation other than the particular dealer mark-up for the Security,
is paid to Chase by the IBM Plan with regard to such transactions; and
(m) The amount of the IBM Plan's assets involved in the
transactions described in Section I(a) and I(b) represents no more than
two (2) percent of the total assets of the IBM Plan.
Section III--Definitions
(a) The term ``Chase'' refers to The Chase Manhattan Bank (National
Association) and its Affiliates, as defined below, including Chemical
Bank, N.A., effective as of March 31, 1996, pursuant to the terms of
the Merger which occurred on such date.
(b) The term ``Chemical'' refers to Chemical Bank, N.A., as it
existed as an independent entity prior to March 31, 1996;
(c) The term ``Affiliate'' refers to affiliates of Chase, including
entities controlling, controlled by, or under common control with Chase
as well as successors to such entities.
(d) The term ``control'' for purposes of the above definition of
``Affiliate'' means the power to exercise a controlling influence over
the management or policies of an entity.
(e) The term ``emerging market'' or ``emerging markets'' refers to
capital markets in developing or less developed countries that are,
with the exception of Mexico, not member countries of the Organization
for Economic Cooperation and Development.
(f) The term ``Security'' refers to certain ``emerging market''
securities and instruments issued in, or on behalf of, an ``emerging
market'' (including both corporate and sovereign issuers of debt
securities as well as corporate issuers of equity securities). For
purposes of the proposed exemption, such ``Securities'' would include
publicly traded or privately placed debt, equity, or convertible
securities, certain put and call options (as described herein),
collateralized bonds, Brady Bonds and Eurobonds.
(g) The term ``IBM Plan'' refers to the IBM Retirement Plan, a
defined benefit pension plan covering employees of the International
Business Machines Corporation and its affiliates (IBM), which is an
employee benefit plan covered by the Act.
(h) The term ``W-P'' refers to Wasserstein Perella Emerging Markets
Asset Management L.P. and its affiliates, including the Emerging
Capital Markets Division of Wasserstein Perella Securities, Inc.
EFFECTIVE DATE: The exemption, if granted, will be effective as of the
date that this notice of proposed exemption is published in the Federal
Register for all transactions described in Section I(a), and as of
March 31, 1996, for the transactions described in Section I(b).
Summary of Facts and Representations
1. The subject exemption request is made on behalf of Chase and its
Affiliates (referred to hereafter as ``the Applicant'') for certain
transactions with the IBM Plan involving securities and instruments
issued in, or on behalf of, various emerging capital markets in
developing or less developed countries throughout the world.
2. Chase is a national banking association and acts as a non-
discretionary trustee of the IBM Retirement Plan Trust (the IBM Trust),
a trust that holds the assets of the IBM Plan.1 Chase's
subsidiary, Chase Investment Bank Limited (CIBL) is an underwriter of,
and a dealer and market-maker in, various securities and instruments,
including securities of emerging market issuers (i.e. Securities). CIBL
is hereafter not referred to separately but is one of Chase's
Affiliates included within the definition of the term ``Affiliate'' in
Section III(c) above.
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\1\ With respect to all Securities acquired by the IBM Plan
pursuant to this proposed exemption, the applicant represents that
the requirements of section 404(b) of the Act and the regulations
thereunder will be met (see 29 CFR 2550.404b-1). In this regard,
section 404(b) of the Act states 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, except as
authorized by regulation by the Secretary of Labor. The Department
is providing no opinion herein as to whether such requirements will
be met.
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3. The Applicant states that ``emerging markets'' are defined to
include, for purposes of the proposed exemption, capital markets in
developing or less developed countries that are, with the exception of
Mexico, not member countries of the Organization for Economic
Cooperation and Development (OECD). The Securities are securities and
instruments issued in, or on behalf of, an ``emerging market''
(including both corporate and sovereign issuers of debt securities as
well as corporate issuers of equity securities). These ``Securities''
would include publicly traded or privately placed debt, equity, or
convertible securities, certain put and call options, collateralized
bonds, Brady Bonds and Eurobonds (as described in greater detail
below).
4. The Applicant states that as a major bank with branches in 58
countries, Chase has a physical presence in most of the principal
emerging market countries and has access to local market information
through such means as review of local press and access to local
business and government officials. The Applicant represents that it
engages in extensive corporate and sovereign research relevant to
emerging markets. As a result the Applicant states that it is a major
market-maker in the Securities and is a source of premier research and
market reports to its customers that are interested in such markets.
The Applicant represents that it is also a major underwriter of new
issues in emerging market securities and a prominent secondary market-
maker for all issuers of emerging market securities and instruments.
The Applicant states that because trading in these Securities is not
done primarily on an exchange and there are few definitive industry
reports, it is difficult to quantify the exact amount of the
Applicant's share of various markets. However, the Applicant estimates
that prior to the Merger between Chase and Chemical, it accounted for
as much as 30 percent of the trading volume in the Eurobond market and
as much as 15 to 20 percent of the trading volume in the sovereign debt
market. The Applicant notes that according to figures made public by
major sovereign bond dealers for 1994, Chase's trading volume of $268.4
billion ranked it second in that market. After the Merger, Chase became
even more of a presence in emerging markets and an even larger dealer/
underwriter of the Securities because Chemical had also been a major
dealer/underwriter for such Securities.
5. Wasserstein Perella Emerging Markets Asset Management L.P. (i.e.
W-P) is an investment advisor registered with the Securities and
Exchange Commission (SEC) under the Investment Advisors Act of 1940 and
provides discretionary asset management services for various
institutional clients, including employee benefit plans. W-P is managed
by the Emerging Capital Markets Division of Wasserstein Perella
Securities, Inc. (WPS). WPS is a broker-dealer registered with the SEC.
The Grantchester Securities Division of WPS
[[Page 47198]]
is one of the leading dealers in the high yield debt securities market.
In addition, WPS, through its equities division, has been increasing
its underwriting and market-making in emerging market equity securities
as well as adding to its equity research and trading presence in this
market. For example, W-P states that WPS's equities division has been a
manager on a number of significant syndicate transactions involving
emerging market securities. The WPS Emerging Capital Markets Division
also has a presence in the sales and trading of pre-Brady loans, Brady
Bonds, other debt instruments of less developed countries, local
currency products and equities issued by businesses in such markets. W-
P states that the principal officials of W-P have extensive experience
in structuring transactions involving emerging market securities and in
managing investments in, and trading, such securities.
6. W-P currently serves as an investment manager for certain assets
of the IBM Plan. Pursuant to its reserved powers as named fiduciary
under a trust indenture between IBM Plan and Chase, as trustee, the
International Business Machines Corporation (IBM) has appointed W-P as
an investment manager with respect to a portion of the IBM Trust (the
W-P Account). The terms of the investment management agreement (the
Agreement) governing the W-P Account provide W-P with full discretion
to manage the IBM Plan's assets held in the Account, including the
power to give investment directions to Chase as the trustee of such
assets. The Agreement also requires W-P to manage the W-P Account in
accordance with investment guidelines established by IBM, as the named
fiduciary for the IBM Plan. These investment guidelines (the
Guidelines) call for W-P to invest all of the assets in the W-P Account
in emerging market securities of the type described herein (i.e. the
Securities).2 The Guidelines also prescribe that no more than 10
percent of the W-P Account's assets may be invested in such Securities
which are equity securities. Thus, W-P must invest at least 90 percent
of the IBM Plan's assets managed in the W-P Account in Securities which
are either corporate or sovereign debt securities.
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2 The Department is expressing no opinion in this
proposed exemption regarding whether the acquisition and holding of
any of the Securities by the IBM Plan would violate the fiduciary
responsibility provisions of Part 4 of Title I of the Act.
The Department notes that section 404(a) of the Act requires,
among other things, that a fiduciary of a plan act prudently, solely
in the interest of the plan's participants and beneficiaries, and
for the exclusive purpose of providing benefits to participants and
beneficiaries when making investment decisions on behalf of a plan.
Section 404(a) of the Act also states that a plan fiduciary should
diversify the investments of a plan so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent
not to do so.
Nor is the Department providing any views herein as to whether a
particular category of investments or investment strategy would be
considered prudent or in the best interests of a plan as required by
section 404 of the Act. The determination of the prudence of a
particular investment or investment course of action must be made by
a plan fiduciary after appropriate consideration to those facts and
circumstances that, given the scope of such fiduciary's investment
duties, the fiduciary knows or should know are relevant to the
particular investment or investment course of action involved,
including the plan's potential exposure to losses and the role the
investment or investment course of action plays in that portion of
the plan's investment portfolio with respect to which the fiduciary
has investment duties. The Department also notes that in order to
act prudently in making such investment decisions, a plan fiduciary
must consider, among other factors, the availability, risks and
potential return of alternative investments for the plan. Thus, a
particular investment by a plan, which is selected in preference to
other alternative investments, would generally not be prudent if
such investment involves a greater risk to the security of a plan's
assets than comparable investments offering a similar return or
result.
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The Guidelines state that the Securities that are debt securities
may be either dollar-denominated or non dollar denominated, and equity
securities may be either listed or unlisted. The Guidelines also
contain geographic restrictions and restrictions requiring
diversification of issuers with respect to such Securities held in the
W-P Account's portfolio. The Guidelines have specific provisions
regarding the use by the portfolio of, and exposure of the portfolio
to, certain instruments known as ``derivatives'' (as discussed in
greater detail below).3
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\3\ The term ``derivatives'', as used in the Guidelines,
includes: (i) Futures contracts; (ii) options on futures contracts;
(iii) over-the-counter options on eligible Securities; (iv) interest
rate caps, floors, and swaps; and (v) currency forwards, futures and
options. However, as discussed herein, W-P's use of derivatives for
assets of the IBM Plan is generally limited to the purchase of put
and call options, and the sale of covered put and call options, and
does not involve futures contracts, options on futures contracts, or
swap transactions. Accordingly, the Department is providing no
relief under this proposed exemption for transactions involving
``derivatives'' other than the purchase of put and call options and
the sale of covered put and call options described herein.
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In addition, the Guidelines expressly permit the use of leverage.
Thus, when managing the IBM Plan's assets in the W-P Account, W-P may
use portfolio Securities as collateral for a ``loan'' (i.e. repurchase
agreement) the proceeds of which will be used to acquire more
Securities. In this regard, the Guidelines require that borrowings
against the portfolio may not exceed 150 percent of the portfolio's net
asset value, but are usually only 75-80 percent of such value. Such
transactions are entered into by the IBM Plan with large banks, such as
Chase and Chemical. These ``loans'' are structured as repurchase
agreements (REPOs). As discussed further below, W-P entered into
certain REPOs relating to the Securities with Chemical, on behalf of
the IBM Plan, which were outstanding as of March 31, 1996, the date of
the Merger.
Finally, the Guidelines require that the investment performance of
the W-P Account be measured by investment objectives which call for
returns of the Account to exceed certain specified benchmarks, such as
the Lehman Brothers Aggregate Bond Index and the Salomon Brothers Brady
Bond Index, with lower than normal volatility of returns.4
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\4\ As a general rule, W-P states that its investment objectives
are to target a 15 percent to 20 percent annualized rate of return
for investors and to strive to produce steady returns with a focus
on reduction of volatility.
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7. The Applicant states that, as of December 1993, the IBM Plan had
approximately 289,829 participants and beneficiaries. The total assets
of the IBM Plan at that time were approximately $28.2 billion. The
assets of the IBM Plan currently managed in the W-P Account are
approximately $400 million, an amount which represents less than 1.5
percent of the IBM Plan's total assets. Thus, the amount of the IBM
Plan's assets involved in the transactions described herein with Chase
will not represent more than two (2) percent of the total assets of the
IBM Plan.
The Applicant represents that the IBM Plan's assets under
management by W-P exceed 20 percent of W-P's total assets under
management. Therefore, W-P is unable to rely on Prohibited Transaction
Exemption (PTE) 84-14 (49 FR 9494, March 13, 1984), a class exemption
for certain ``plan asset'' transactions which are determined by an
independent qualified professional asset manager (``QPAM'').5 W-P
represents that it is a QPAM, as defined under Section V(a) of PTE 84-
14, and would otherwise be able to use that
[[Page 47199]]
class exemption for the transactions described herein involving Chase.
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5 The Department is expressing no opinion in this
proposed exemption as to whether the subject transactions between
these parties would meet all of the conditions required for an
exemption under either PTE 84-14 or any other class exemption, such
as PTE 75-1 (40 FR 50845, October 31, 1975). The Department notes
that the exemptive relief provided in PTE 84-14 for transactions
engaged in on behalf of a plan by a QPAM, acting as the plan's
fiduciary, is not available if the plan's assets (combined with any
other assets of plans maintained by the same employer or employee
organization which are managed by the QPAM) represent more than 20
percent of the total client assets managed by the QPAM at the time
of the transaction (see Part I(e) of PTE 84-14).
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The Applicant maintains that W-P is entirely independent of Chase
and its Affiliates. Specifically, the Applicant states that there is no
ownership or management relationship between W-P and Chase or its
Affiliates. The Applicant and W-P engage in arm's-length trading of
emerging market securities involving accounts other than the W-P
Account for the IBM Plan. However, the Applicant represents that they
have no contractual or other arrangements that would cause them to be
viewed other than as acting entirely independent of one another. In
particular, the Applicant states that Chase, as a non-discretionary
trustee of the IBM Trust, lacks any discretionary authority over
investment or management of the IBM Plan's assets, including the assets
in the W-P Account. Neither Chase nor an Affiliate has, or has
exercised, any authority to appoint or terminate W-P as an investment
manager for the IBM Plan.
8. The Applicant seeks an exemption to permit W-P, as an investment
manager and independent fiduciary for the IBM Plan, to engage in
transactions involving emerging market securities and instruments (i.e.
the Securities) with Chase, a party in interest with respect to the IBM
Plan as a result of being a non-discretionary trustee of the Plan's
assets. Such transactions could include purchases, sales and exchanges
of the Securities between Chase and the IBM Plan, as well as REPOs that
may be entered into between the parties in connection with the IBM
Plan's acquisition and holding of the Securities. In addition, the
Applicant seeks a retroactive exemption for certain REPOs involving the
Securities which occurred between the IBM Plan and Chemical that were
not prohibited transactions at the time such transactions were entered
into, but which became prohibited transactions as of March 31, 1996,
the date of the Merger with Chase. As noted above, Chase was and
continues to be a party in interest (i.e. a non-discretionary trustee)
with respect to the IBM Plan and Chemical, as a result of the Merger,
became a party in interest to the IBM Plan on March 31, 1996.
Retroactive Relief for Certain REPOs
9. With respect to the retroactive relief necessary as a result of
the Merger, the Applicant states that the IBM Plan had engaged in
several REPOs with Chemical whereby the Plan's acquisition of new
Securities was being financed in part by a REPO with Chemical. The
Applicant represents that a number of the REPOs were terminated prior
to the Merger to avoid additional prohibited transactions with respect
to the IBM Plan. However, as of March 31, 1996, there were five (5)
open positions with Chemical involving the IBM Plan's acquisition of
Securities.
These open positions involved the following Securities: (i) A $3.5
million issue of Bulgarian IABs (Interest Arrears Bonds), paying a
floating interest rate based on LIBOR 6 with maturity scheduled
for July 28, 2011, issued under the terms of Bulgaria's Brady Bond Plan
(as discussed further below) completed in July 1994; (ii) a $4 million
issue of Certificates of Deposit (CDs) issued by Argentina Banco de la
Nacion, which matured on May 15, 1996; (iii) a $2.8 million issue of
Brazil Bamerindus Eurobonds issued by a private Brazilian bank, which
matured on July 15, 1996; (iv) a $605,000 issue of Brazil Bamerindus
Euro Medium Term Notes, which matured on June 5, 1996; and (v) a $1.5
million issue of Morocco Tranche A Loans, which are bank loans made to
the Kingdom of Morocco as part of a debt restructuring and are due to
mature in January 2009. In this regard, the Securities described above
in (ii)-(iv) have matured and were paid in full.
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\6\ ``LIBOR'' is a widely used interest rate index and refers to
the London Interbank Offered Rate. LIBOR is derived from current
market quotations offered by major European banks for short-term
(i.e. one-month, six-month, etc.) Eurodollar deposits.
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10. With respect to the terms of the REPOs with Chemical, the
Applicant states that the REPO value 7 vis a vis the Face Amount
of the Securities was determined based on the market value of the
underlying Securities and the advance rate extended by the REPO
counterparty (i.e. Chemical). For example, at the time that the terms
of the REPO on the Bulgaria IAB Bonds were set (i.e. the Latest REPO
Date),8 the market value of the Bonds (including any accrued
interest) was equal to approximately 48.3 percent of the Face Amount
(i.e. $1,690,238 of the $3,500,000 Face Amount), and the advance rate
given by Chemical was 80 percent (i.e. Chemical was willing to lend the
IBM Trust 80 percent of the market value of the Bonds that were given
to Chemical as collateral). Therefore, the REPO value of the Securities
on this transaction was calculated as follows:
\7\ The term ``REPO value'' refers to that amount of money,
expressed as a percentage of the market value of the Securities
involved, which a bank, as a REPO counterparty, would be willing to
``loan'' or ``advance'' to the owner of the Securities (i.e. a plan
investor) under a particular REPO.
\8\ The initial REPO date was the date that the repurchase
contract was initially settled--i.e. the date on which Chemical
received the Securities and, in exchange for the Securities,
extended cash to the IBM Trust. The Applicant explains that REPOs
are often set for a specified term, such as one month, three months,
etc. At the end of that term, the REPO counterparty (Chemical) will
often give the other party (IBM Plan) the option of renewing the
REPO for another term (i.e. ``rolling it over''). Thus, the ``latest
rollover date'' refers to the last time a REPO transaction was
rolled over.
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Advance Rate (80%) x Market Value ($1,690,238.17) = $1,352,190.97.
Thus, the IBM Trust was able to receive $1,352,190.97 in cash under
this REPO in exchange for the Bonds for a stated period. The IBM Trust
was committed to ``repurchase'' the Bonds at the end of the REPO's term
(i.e. by paying Chemical back the money advanced plus interest at a
certain agreed upon rate), unless the REPO was ``rolled over''. W-P
states that the other REPOs with Chemical involving the Securities
mentioned above operated under similar terms.
W-P represents that it attempts to obtain the cheapest REPO
financing available consistent with the creditworthiness of the
counterparty, since the cheaper the cost of borrowing through REPOs,
the higher the returns will be to the IBM Trust. W-P states that it
contacts potential counterparties to bid on REPOs and negotiates the
best available terms with each counterparty. Because the credit-
standing of the IBM Trust is excellent, W-P is able to negotiate very
favorable terms for these REPOs, including low interest rates. W-P
represents that all REPO interest rates negotiated with Chemical, as
with other counterparties, were rates that were at least as favorable
to the IBM Trust as rates available from other counterparties of
similar credit standing.
The Mechanics and Concept Behind REPOs
11. With respect to W-P's philosophy and purpose for using
leverage, W-P explains that assets purchased for the IBM Trust are
often pledged to a creditworthy counterparty (typically a single A
rated institution or better), who in turn provides financing against
the asset they hold as collateral. W-P uses the standard Public
Securities Association (PSA) REPO agreement, which is used not only for
emerging market securities but for other securities. W-P generally
utilizes leverage for the IBM Trust in order to increase the
portfolio's exposure to low duration/low volatility assets (with
maturities typically less than one (1) year and high credit quality--
most often from sovereign issuers). W-P states that its long-term
performance demonstrates that exposure to such low duration assets
provides a cushion of stable returns. Thus, W-P states that while
leverage is traditionally used as a means
[[Page 47200]]
of gaining access to a greater overall exposure (i.e. risk) for a
portfolio via borrowed funds, W-P utilizes the leverage vehicle to
mitigate, rather than magnify, the portfolio's volatility.9
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9 The Department is providing no opinion or views herein on
the use of such leveraging as a means to mitigate portfolio risk or
volatility.
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With respect to the selection of assets for a REPO, W-P represents
that it seeks leverage on assets on which it receives the most
attractive terms--the lowest interest rates, highest advance rates and
most flexible terms. W-P states that generally it is able to receive
the best REPO terms on Brady Bonds (see discussion below), because they
are the most liquid assets in the market for emerging market
securities. However, W-P states that because it has a general strategy
for building a portfolio with a foundation in low duration/low
volatility assets, capital preservation is the main goal. In this
regard, W-P targets a specific degree of leverage based on the cash
needs of the portfolio at particular times.
With respect to choosing the counterparties, W-P states that REPO
transactions are entered into only with high-quality institutions that
actively trade in emerging market instruments. Selection of these REPO
counterparties depends on a variety of factors, including the rates
charged on financing, the percentage of leverage advanced, the
flexibility of terms, and operational ease. After credit is determined
to be suitable, pricing (i.e. the rate charged on the leverage) is
generally the most important variable in selecting a REPO counterparty.
With respect to the mechanics of the REPO agreement, W-P states
that the agreement: (i) Basically outlines the procedures for
transferring Securities to and from the REPO counterparty; (ii) defines
terms contained in the REPO confirmations, such as the interest rate
charged; (iii) sets the maturity date for the REPO; (iv) covers the
terms and conditions for margin calls and substitution of assets; and
(v) covers each party's remedies under any events of default. W-P
states that the only real risk to the IBM Trust that stems specifically
from the REPO agreement is that the REPO counterparty, who holds the
Securities as collateral, could renege on its obligations under the
agreement (i.e. the counterparty could fail to return the collateral to
the IBM Trust when the REPO matures). W-P notes that it is for this
reason that it is careful in selecting the REPO counterparty and
chooses only reliable, creditworthy counterparties for these
transactions.
Types of Securities Involved in Transactions Between the IBM Plan and
Chase
12. The Applicant has provided the following general descriptions
of each type of Security or instrument involved in the emerging market
transactions that would be covered by the proposed exemption.
(i) Brady Bonds. The most liquid asset class in fixed income
emerging market securities, these Bonds were issued in exchange for
outstanding sovereign bank loans in a number of developing countries as
part of the debt reduction/restructuring plans named after former
Treasury Secretary Nicholas Brady. Brady Bond plans have been
implemented since 1989 in over a dozen countries in Latin America,
Eastern Europe, Asia and Africa. The current outstanding market for
Brady Bonds equals approximately $140 billion, and annual turnover
exceeds $2 trillion, according to the Emerging Markets Trader's
Association. Brady Bonds have maturities ranging from 6 years to 30
years, and many (including all par and discount bonds) carry principal
and interest collateral guarantees in the form of U.S. Treasury
securities. W-P states that a large secondary market exists for these
Bonds, and financing can be obtained on virtually all Brady Bond
assets.
(ii) Eurobonds/144A. Bonds denominated in U.S. dollars or other
currencies issued by sovereign or corporate entities in many countries.
These bonds usually mature within 2 to 5 years and are issued in sizes
ranging from $50 million to $1 billion. The Eurobond market is an
important source of capital for multinational corporations and foreign
governments, particularly in emerging market countries. These bonds are
Euroclearable--i.e. transferable to U.S. investors via the Depository
Trust Company. Eurobonds are not registered with the SEC, but are
available for purchase by U.S. persons that meet certain SEC
requirements under SEC Rule 144A.10 W-P states that leverage is
available on larger issues and there is a growing REPO market.
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\10\ SEC Rule 144A requires that investors have available to
them offering memoranda. Transactions covered under a Rule 144A
offering are limited to ``qualified institutional buyers'' (i.e.
large institutional investors, such as pension plans) that are
considered to be sophisticated investors capable of insisting that
they be furnished with adequate disclosure.
In this regard, the Department notes that a plan fiduciary in
meeting its obligations to act prudently, as required under section
404(a) of the Act, should seek to obtain any relevant information
that it believes necessary in order to determine whether a
particular investment in emerging market securities, such as
Eurobonds, would be appropriate for and in the best interests of the
plan.
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(iii) Commercial Bank Loans. These assets are direct or syndicated
bank loans, usually to governments or quasi- governmental entities,
that are transferred between buyer and seller via assignment or
participation agreements. Some loans (e.g. Jamaica, Morocco) are
current, though most are in default on interest and principal payments
(e.g. Russian Vnesh loans, Yugoslavia, Vietnam). Defaulted loans are
purchased in the secondary market at a deep discount to the face value
of the loan and are purchased with the expectation of a ``Brady plan''
type restructuring that will convert the loans into new, current
securities. The loans are accounted for in the same way as other
Securities in the portfolio and they are marked-to-market daily.
Liquidity varies from loan to loan, but prices are quoted daily. W-P
states that leverage is available on the more liquid loans (Morocco),
so that they can be used in REPO transactions as described above.
(iv) Commercial Paper/Certificates of Deposit. Short-term (30-160
day) debt obligations of banks or corporations in emerging market
countries with interest and principal typically paid in U.S. dollars.
The interest rates on these debt obligations are usually pegged to
LIBOR. W-P states that leverage is available at times from
counterparties that sell the assets.
(v) Short-term Sovereign Debt.
(A) Local Currency: Local treasury debt issued on an ongoing basis
by foreign governments with interest rates often based on LIBOR.
Maturities generally range from 30 days to 2 years.
(B) Dollar-denominated or dollar-hedged: Some countries (e.g.
Argentina) have outstanding debt denominated in U.S. dollars (issued in
exchange for frozen US dollar bank deposits), with remaining maturities
ranging from 2 months to 12 years. Other countries (e.g. Ecuador,
Brazil) offer dollar-hedged structures that guarantee specific foreign
exchange exit levels. These latter instruments are new issues, and have
maturities ranging from 3 months to 1 year.
(vi) Equities. Exchange-traded stocks of companies in emerging
market countries, denominated (for the most part) in that country's
local currency.
(vii) Convertibles. Debt instruments issued by companies (usually
with maturities of 3 to 10 years) that contain provisions whereby the
bondholder can exchange their bonds for a set number of shares of the
issuer's stock.
[[Page 47201]]
Processes Used in Determining Which Securities To Acquire for the IBM
Trust
13. W-P represents that in addition to following the Guidelines set
forth for the IBM Trust, its overall goal as an investment manager for
emerging market securities is to obtain superior absolute and risk-
adjusted returns for the IBM Plan relative to certain key fixed income
indices. As noted earlier, in addition to investing in directional
assets, such as those included in the Salomon Brothers Brady Bond
Index,11 W-P builds a low duration portfolio (i.e. by investing in
securities with short maturities issued by high-quality borrowers) upon
which it adds moderate leverage.12 This low duration portfolio
insulates the overall portfolio from a portion of the volatility often
experienced in emerging market securities. W-P's approach to managing
risk is to focus primarily on the duration of the Securities in the
portfolio. W-P states that in times of high volatility, it does not
exit the market for the Securities but instead lowers the portfolio's
average maturity profile because lower duration assets will generally
exhibit lower volatility. Thus, W-P's strategies place particular
emphasis on the liquidity needs of each portfolio.
---------------------------------------------------------------------------
\11\ Such Securities are generally Brady Bonds, Pre-Brady loans
and some equities relating to companies in these emerging markets.
\12\ The low duration Securities are generally short-term
sovereign debt, Eurobonds, Bank CDs and Commercial Paper.
---------------------------------------------------------------------------
14. With respect to the use of derivatives, W-P represents that it
engages in the trading of certain instruments that would be considered
derivatives when it determines that it is prudent to do so to achieve
its goals. These derivatives include: (i) The sale of covered call
options to enhance the return on portfolio Securities; (ii) the
purchase of call options to obtain exposure to particular assets
without the necessity of using large sums of money; and (iii) the
purchase of put options to mitigate market value deterioration for
portfolio Securities. W-P also engages in two strategies that provide
incremental income while exposing the IBM Trust, as the option writer,
to additional market exposure. These strategies involve: (i) The
purchase and sale of ``straddles''--the simultaneous purchase or sale
of a put and call option with identical strike prices on the same
Security); and (ii) the purchase and sale of ``strangles''--the
simultaneous purchase or sale of a put and call option with strike
prices set at a specific amount which is ``out-of-the-money''.13
---------------------------------------------------------------------------
\13\ For example, W-P states that if the market price of the
underlying Security is 85 percent of a certain designated price,
then a ``2-point out-of-the-money strangle'' on that asset would
include a put option with a strike price of 83 percent and a call
option with a strike price of 87 percent.
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However, W-P represents that it rarely enters into trades of
uncovered options (puts or calls) for any client accounts.14
Therefore, as a condition of the proposed exemption, W-P has committed
not to sell any uncovered put or call options, including (but not
exclusive to) ``straddles'' and ``strangles'', in transactions with
Chase for assets of the IBM Plan.
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14 To the extent that W-P chooses to enter into any
uncovered options or other ``derivatives'' with the assets of the
IBM Plan managed in the W-P Account with counterparties other than
Chase, the Department is providing no opinion in this proposed
exemption as to whether such transactions would be consistent with
the prudence requirements of section 404(a) of the Act and the
regulations thereunder. For a current statement of the Department's
views on the use of ``derivatives'' by pension plans, see DOL Letter
from Olena Berg, Assistant Secretary for Pension and Welfare
Benefits, to The Honorable Eugene A. Ludwig, Comptroller of the
Currency, dated March 21, 1996.
---------------------------------------------------------------------------
W-P represents that the use of derivatives in the W-P Account for
the IBM Trust is generally limited to the purchase and sale of put and
call options on Brady Bonds and Commercial Bank Loans. These are over-
the-counter (OTC) options. W-P states that the counterparties involved
are always large, creditworthy emerging markets' broker-dealers,
similar to those used for REPO transactions. W-P typically uses such
options for one of three purposes:
(i) To hedge long positions, through the sale of covered call
options, or the purchase of put options;
(ii) To earn incremental income through the sale of covered calls
and covered puts when W-P judges that the market will move little, or
at least less than the premium available from the sale of such options;
and
(iii) To obtain a leveraged exposure to an asset through the
purchase of call options, without downside risk beyond the cost of the
option.
15. With respect to the process for buying and selling Securities,
W-P states that it has real time access through electronic media to
data which provides pricing for assets traded in the emerging markets.
W-P also deals routinely with other market-makers that provide bid/
offer quotations on demand. When buying or selling a Security, W-P
typically obtains prices from three different counterparties and
chooses the best price. In instances where a less actively traded
Security is purchased, W-P looks at assets of the same credit quality,
size and duration to verify its relative value. W-P represents that its
central mandate as an IBM Plan fiduciary is to secure the ``best''
price available on any trade. In this regard, W-P states that it is not
compelled to deal with any particular party, including Chase, should
that party not provide competitive pricing for the Securities involved.
Under the conditions of the proposed exemption, when the IBM Plan
acquires a Security from Chase, the IBM Plan must not pay a price which
is greater than the fair market value of such Security, as determined
by W-P in accordance with either W-P's internal valuation process or
independent third party sources (such as independent broker-dealers and
market- makers dealing in such Securities). In addition, in any
transaction where the IBM Plan sells a Security to Chase, the IBM Plan
must receive a price which is no less than the fair market value of
such Security, as determined by W-P in accordance with such valuation
processes or sources. W-P notes that no brokerage commission, sales
commission, or similar compensation other than the particular dealer
mark-up for the Security, will be paid to Chase by the IBM Plan with
regard to such transactions. W-P will endeavor to achieve the best
possible prices for the Securities involved in transactions with Chase
and will use its expertise in emerging markets to ensure that the
particular mark-ups paid to Chase are reasonable based on W-P's
valuations of the Securities.
16. W-P acknowledges its duties, responsibilities and liabilities
in acting as a fiduciary under the Act for the IBM Trust in connection
with its investments and represents that it will ensure that the
conditions of this exemption, if granted, are met.
W-P represents that it will ensure that the terms of each
transaction with Chase are at least as favorable to the IBM Plan as the
terms which would exist in a similar transaction with an unrelated
party. W-P states that it will determine, prior to each transaction,
that the acquisition and holding of the particular Securities is in the
best interests of the IBM Plan, and will ensure that each transaction
is consistent with the IBM Plan's investment guidelines, objectives,
and liquidity needs. W-P states further that there will be proper
diversification of the investments in the IBM Plan portfolio to prevent
unnecessary exposure to the risks involved in a particular market
sector. W-P notes that its use of leverage (i.e. REPOs) for the IBM
Plan assets will be moderate and is usually about half of the maximum
allowable under the Guidelines. As a condition of the proposed
exemption, W-P represents that it will not exceed the maximum amount of
leverage
[[Page 47202]]
allowable under the Guidelines (i.e. 150 percent of the net asset value
of the Securities involved in the particular REPO). Finally, W-P states
that while it may utilize certain derivatives for the IBM Plan's
account under the Guidelines, such use does not normally involve
selling uncovered put or call options and will not involve any such
transactions with Chase. W-P states that it does not use futures
contracts or other derivatives, other than those previously discussed,
to hedge risks as part of its investment management strategies.
W-P represents that it will monitor all of the investments made by
the IBM Plan in the Securities or other instruments and will take
whatever actions are necessary to protect the interests of the IBM
Plan.
17. In summary, the Applicant represents that the transactions
described herein have met and will continue to meet the statutory
criteria under section 408(a) of the Act because, among other things:
(a) The assets of the IBM Plan involved in the transactions are managed
by W-P, an independent qualified fiduciary for the IBM Plan; (b) W-P,
as the IBM Plan's independent fiduciary and investment manager for the
assets invested in the Securities, negotiates the terms of such
transactions on behalf of the IBM Plan and makes the decision to have
the IBM Plan enter into any such transactions with Chase; (c)W-P
monitors the investments made by the IBM Plan in such Securities and
takes whatever actions are necessary to protect the interests of the
IBM Plan; (d) neither Chase nor an Affiliate has discretionary
authority or control with respect to the investment of the IBM Plan's
assets involved in the transactions or renders investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets; (e) all terms and conditions of the transactions between the
parties on behalf of the IBM Plan, including the prices paid or
received by the IBM Plan for any Securities and the interest rates paid
by the IBM Plan for any REPOs, are at least as favorable to the IBM
Plan as the terms and conditions that would exist in an arm's-length
transaction between unrelated parties; (f) the REPOs between the IBM
Plan and Chase are entered into pursuant to a written agreement between
the parties which describes all of the material terms and conditions
for such transactions, including the rights and obligations of each
party, and is consistent with the specific guidelines established by
the IBM Plan's named fiduciary for transactions involving the
Securities; (g) W-P does not engage in, or commit to sell, any
uncovered put or call options in transactions with Chase on behalf of
the IBM Plan and adheres to all of the investment guidelines
established for the IBM Plan by the Plan's named fiduciary; (h) no
brokerage commission, sales commission, or similar compensation other
than the particular dealer mark-up for the Security, is paid to Chase
by the IBM Plan with regard to such transactions; and (i) the amount of
the IBM Plan's assets involved in the transactions represents no more
than two (2) percent of the total assets of the IBM Plan.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng or Mr. E. F. Williams
of the Department, telephone (202) 219-8881 or 219-8194, respectively.
(These are not toll-free numbers.)
International Brotherhood of Electrical Workers Local Union 613 (IBEW),
Local 613 Defined Contribution Pension Fund (the Fund), Located in
Atlanta, Georgia
[Application No. D-10225]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32847, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a), 406(b) (1) and (2) and
the sanctions resulting from the application of section 4975 of the
Code by reason of section 4975(c)(1) (A) through (E) of the Code shall
not apply to the proposed sale (the Sale) of a certain parcel of
improved real property (the Property) from the Fund to Mr. Charles W.
Eason, Sr., a party in interest with respect to the Fund provided that
the following conditions are met: (1) The fair market value of the
Property is established by an independent and qualified real estate
appraiser; (2) Mr. Eason will pay the greater of: the fair market value
of the Property at the time of the transaction or $123,000; (3) The
Sale will be a one-time transaction for cash; and (4) The Fund will pay
no fees or commissions associated with the Sale.
Summary of Facts and Representations
1. The Fund is a multi-employer defined contribution plan. As of
December 31, 1994, the Fund had approximately 2,592 participants and
assets of $72,773,801. The Fund is maintained pursuant to collective
bargaining agreements between the IBEW and employers of members of the
IBEW. The Fund trustees are comprised of a Board of Trustees consisting
of three representatives of the IBEW and three representatives of the
employers. Mr. Eason is a member of the Board of Trustees of the Fund.
2. The Property is located at 1249 Jennie Lane, Lilburn, Georgia
and consists of a single-family dwelling that has been converted to
office use and a detached garage. The Fund acquired the Property from
Bowman Electric, Inc. (Bowman). Bowman originally purchased the
Property in 1986 from James and Alice Yancey subject to a promissory
note issued to the Yanceys secured by a deed to secure debt dated
February 4, 1986.
Bowman was required to pay benefit contributions to the Fund and
other multi-employer funds (the Other Funds) and dues to the IBEW
pursuant to a collective bargaining agreement. Bowman became delinquent
with respect to the contributions and dues owed to the Fund, the Other
Funds, and the IBEW. The Fund, the Other Funds and the IBEW took steps
to collect the money owed by Bowman. Specifically, Bowman owed the Fund
contributions in the amount of $5,529.07. As a result, Bowman executed
a promissory note dated August 10, 1993 payable to the Fund, the Other
Funds and the IBEW.15 This promissory note was secured by a
second-in-priority deed to secure debt and security agreement dated
August 10, 1993 on the Property. Bowman defaulted on the promissory
note increasing the money owed to the Fund by $3,987 (This amount
reflects the contributions Bowman failed to pay from August 10, 1993,
the date Bowman executed a promissory note and gave the Fund, the Other
Funds and the IBEW a second mortgage as security for the debt through
the date of foreclosure.) The Fund, the Other Funds and the IBEW began
non-judicial foreclosure proceedings.
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\15\ The applicant has not requested and the Department has not
provided exemptive relief for the promissory note issued by Bowman
to the Fund, the Other Funds and the IBEW. In this regard, the
applicant represents that the actions taken to collect outstanding
fringe benefit contributions, including the execution of the
promissory note, are covered by Part A of Prohibited Transaction
Exemption (PTE) 76-1 (41 FR 12740, March 26, 1976) which pertains to
Delinquent Employer Contributions. However, the Department expresses
no opinion herein on whether such transactions are covered by Part A
of PTE 76-1.
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During these proceedings, the Fund, the Other Funds and the Union
discovered that Bowman had also defaulted on the Yancey's promissory
note, and that the Yancey's began foreclosure proceedings. The
applicants represent that if the Yanceys were to foreclose on the first
mortgage on the Property, the second mortgage held by the Fund, the
Other Funds and the
[[Page 47203]]
Union would have been extinguished and they would have lost their
interest in the Property. In order to protect their interest in the
Property, the Fund, the Other Funds and the Union could have attempted
to purchase the Property at the Yancey's foreclosure proceedings.
However, to avoid the uncertainties of such a purchase, the Fund
negotiated an agreement in which the Fund paid the Yanceys
approximately $74,035 to acquire the Yancey's first-in-priority
interest in the Property. The Fund, the Other Funds and the IBEW
completed foreclosure proceedings on the second mortgage and acquired
title to the Property subject to the first mortgage, owned by the Fund.
Percentage ownership interests in the Property were assigned in
accordance with the amounts Bowman owed to the respective entities.
Upon the sale of the Property, once the Fund's first mortgage is paid
off, the remaining sale proceeds will be divided among the Fund, the
Other Funds and the IBEW in accordance with their respective percentage
ownership interests in the Property. The Fund's ownership interest in
the Property equals 31.8%.
3. The Property was appraised by Mr. Glenn Keaton, Jr., MIA of
Keaton and Company, an independent real estate appraisal firm located
in Atlanta, Georgia. Mr. Keaton determined that the market value of the
Property as of December 1995 is $110,000. In his appraisal report, Mr.
Keaton defined market value as the most probable price which a property
should bring in a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller each acting prudently
and knowledgeably, and assuming the price is not affected by undue
stimulus.
4. The Fund has proposed to sell the Property to Mr. Eason for
$123,000 in a one-time cash transactions. Assuming the Property is sold
for that amount, the Fund will receive $74,035.38 (the amount paid by
the Fund to acquire the first mortgage from the Yanceys) plus
approximately $15,585.44 (this amount represents 31.8% of the remaining
$48,964.62 sales proceeds and will provide the Fund with enough money
to recover the delinquent contributions owed by Bowman which currently
total $9,516.48 and the Fund's share of property taxes and assessments
on the Property totaling $1,399.04.) The applicant represents that the
Fund no longer wishes to be in the business of owning and/or managing
rental income properties. Further, the applicant believes that the Sale
will provide the Fund with the opportunity to divest itself of a non-
liquid asset and to replace it with a liquid asset.
5. In summary, the applicant represents that the proposed
transaction will satisfy the criteria for an exemption under section
408(a) of the Act because: (a) The fair market value of the Property is
established by an independent and qualified real estate appraiser; (b)
Mr. Eason will pay the greater of the fair market value of the Property
at the time of the transaction or $123,000; (c) The Sale will be a one-
time transaction for cash; and (d) The Fund will pay no fees or
commissions associated with the Sale.
FOR FURTHER INFORMATION CONTACT: Allison Padams of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Huggler & Silverang Profit Sharing Plan (the Plan) Located in
Philadelphia, Pennsylvania
[Application No. D-10238]
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 the
Code shall not apply to the proposed cash sale (the Sale) by the Plan
of two 5 percent limited partnership interest interests (collectively,
the Interests) in Rosemont Square Associates, L.P. (the Partnership),
one to Mr. David H. Huggler and the second to Mr. Kevin J. Silverang,
respectively, parties in interest with respect to the Plan; provided
(1) the Sale is a one-time transaction for cash, (2) the Plan pays no
commissions nor incurs any expenses in connection with the proposed
transaction, and (3) the Plan receives as consideration for the Sale no
less than the fair market value of the Interests as of the date of the
Sale.
Summary of Facts and Representations
1. The Plan is a defined contribution plan with individual accounts
which are self-directed by the respective participants as to the
investment of the assets. The sponsoring employer of the Plan is
Huggler & Silverang, P.C., a Pennsylvania professional corporation, a
law firm that discontinued operations effective April 30, 1995. After
the sponsoring employer discontinued operations it disbanded, and the
Plan distributed all assets of the Plan to terminated participants
except for the Interests held in the individual accounts of Messrs.
Huggler and Silverang, respectively. Each account of the two remaining
participants in the Plan holds a 5 percent limited partnership interest
in the Partnership that the applicants represent has a fair market
value of $186,010, respectively.
2. The applicants, Messrs. Huggler and Silverang, represent that on
October 17, 1991, each of their respective individual accounts in the
Plan acquired a 5 percent Interest in the Partnership by each tendering
to the Partnership as consideration a 40 percent limited partnership
interest, each valued at $125,000, in another limited partnership,
Saber Associates, a Pennsylvania limited partnership.
The applicants request an administrative exemption from the
prohibited transaction provisions of the Act to enable each of them to
purchase for $186,010 in cash the Interests from their respective
individual accounts in the Plan. The applicants intend to terminate the
Plan and roll over the cash assets remaining in their individual
accounts in the Plan to Individual Retirement Accounts (IRAs). The
applicants represent that they have not been able to find and engage a
trustee-custodian willing to accept and hold their respective Interests
for a reasonable annual fee.
The applicants represent that the proposed transaction is in the
best interests of the Plan and its participants and beneficiaries
because the Plan will be able to terminate and roll-over its remaining
cash assets into IRAs for the last two participants. Also, they
represent that their rights as participants will be protected by the
objective determination of the fair market value of the Interests by
the president of the general partner of the Partnership.
3. The Interests have been appraised, as of August 1, 1996, and
determined to have a fair market value of $186,010, respectively. The
appraisal was done by Mr. Stephen W. Bajus, who is the president of
Rosemont Associates, Ltd., a Pennsylvania corporation and general
partner of the Partnership.
Mr. Bajus represents that he is independent of the Plan and its
sponsoring employer, and although he has been a client of the sponsor
of the Plan and the current law firm of Messrs. Huggler and Silverang,
his relationships never generated revenues that exceeded 2 percent of
the total yearly revenues of either law firm. He further represents
that his relationships never enabled the parties to control or
influence his actions as an independent appraiser of the Interests. Mr.
Bajus further
[[Page 47204]]
represents that there is no market for trading activity in the
Interests and never has been since the initial establishment of the
Partnership. Mr. Bajus represents that the actual value of the
Interests should be determined by reference to the only asset possessed
by the Partnership, which is the Rosemont Square Mall located in Lower
Merion Township, Montgomery County, Pennsylvania.
The Rose Square Mall was appraised on September 28, 1994, by H.
Bruce Thompson, Jr. and Associates, Inc. of Bryn Mawr, Pennsylvania and
determined to have a fair market value of $10,300,000.
Mr. Bajus represents that the methodology that he employed in his
appraisal of the fair market value of the Interests involved
subtracting the mortgaged indebtedness of $6,579,798, as of July 31,
1996, from the fair market value of $10,300,000 of the Rosemont Square
Mall to determine the total equity interests of $3,720,202 that the
Partnership possessed on August 1, 1996. Mr. Bajus then represents that
he determined that each 5 percent ownership in the Partnership has a
fair market value equal to $186,010, respectively.
4. In summary, the applicant represents that the proposed
transaction will satisfy the criteria of section 408(a) of the Act
because (a) the Sale of the Interests involves a one-time transaction
for cash; (b) the Plan will not incur the payment of any commissions
nor incur any expenses from the Sale; (c) the Plan will be able to
terminate and roll-over its remaining cash assets into two IRAs for the
benefit of the two remaining participants; (d) the Interests in the
Partnership have been appraised by the president of the general partner
of the Partnership; and (e) the Plan will receive as consideration for
the Sale no less than the fair market value of the Interests as of the
date of the Sale.
Notice to Interested Persons: Because Messrs. Huggler and
Silverang, the applicants, are the sole participants of the Plan, 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 (30) days after publication of this notice in
the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. C. E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Acme 401(k) Retirement Savings Plan (the Plan) Located in Scottsdale,
Arizona
[Application No. D-10270]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a) and 406 (b)(1) and
(b)(2) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of sections 4975(c)(1) (A) through
(E) of the Code shall not apply to the proposed cash sale (the Sale) by
the Plan of a 2.86% interest (the Interest) in the Arizona Equities V
Real Estate Investment Trust (the REIT) to RSC Holdings, Inc. (RSC),
sponsor of the Plan and a party in interest with respect to the Plan;
provided the following conditions are satisfied: (1) The Sale is a one-
time transaction for cash; (2) the Plan does not incur any expenses in
connection with the Sale; and (3) the Plan receives as consideration
from the Sale the greater of: (a) the fair market value of the REIT
Interest as determined by a qualified independent appraiser at the time
of the Sale or, (b) the Plan's total investment in the Interest in the
amount of $50,572.
Summary of Facts and Representations
1. The Plan is a defined contribution 401(k) plan, and has
approximately 850 participants; 335 participant accounts contain a
share of the REIT Interest. As of December 31, 1995 the fair market
value of total assets in the Plan was $3,163,741. RSC is a Delaware
corporation engaged in the business of rental services. U.S. Bank of
Idaho currently serves as the Plan's trustee and has investment
discretion over all the assets held in the Plan.
2. The Plan acquired the Interest in the REIT in October 1989,
subsequent to a merger with the C & W Action Rentals, Inc. Profit
Sharing Plan. The merger of the two plans occurred after RSC's
predecessor, Acme Holdings, Inc. acquired the sponsor of the C & W
Plan. The C & W Plan had originally purchased the Interest in the REIT
in 1984, in the principal amount of $50,572; the Plan owns a 2.86%
Interest in the REIT.
On November 6, 1984, the REIT made a $1,770,020 loan to an
independent third party. The loan was secured by a deed of trust on
real estate located in Tucson, Arizona (the Tucson Property). The Plan
participated in the loan through the REIT. In March of 1989, the Plan
was notified that the borrower was in default; subsequently the
borrower never repaid the loan 16. After the default, Citibank
(Arizona), formerly known as United Bank of Arizona, as Trustee of the
REIT, foreclosed on the Tucson Property securing the loan and took
possession of it.
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\16\ The Department notes that the decision to acquire and hold
the Interest are governed by the fiduciary responsibility
requirements of Part 4, Subtitle B, Title I of the Act. In this
regard, the Department herein is not proposing relief for any
violations of Part 4 which may have arisen as a result of the
acquisition and holding of the interest by the Plan.
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3. RSC, the applicant, represents that the Tucson Property is
currently the REIT's sole asset and that because the Interest is a
minority interest and it is not publicly traded, there is not an
established market for the Interest.
4. The trustee of the Plan has attempted to sell the Plan's
Interest in the REIT, but has not been successful. West One Bank,
former Plan trustee, made arrangements with Pepper Viner Co., the
REIT's successor trustee to Citibank (Arizona), in 1993, for Pepper
Viner to circulate a letter from West One Bank, to the REIT's other
unit holders to determine if any of them might have an interest in
purchasing the Plan's Interest. However, no one responded. Subsequently
West One Bank contacted several brokers and as a result, received one
offer to purchase the REIT Interest, for a total price of $4,000. West
One Bank declined the offer because they felt that the Plan's interest
in the underlying property had a value much higher than the $4,000.
RSC, the sponsor, requests an exemption to permit the cash Sale by
the Plan of the Interest to RSC. The Plan will receive the greater of:
(1) The fair market value of the Interest as determined by an
independent appraiser at the time of the Sale, or (2) the Plan's total
investment in the Interest of $50,572. The applicant represents that
this Sale is in the best interest of Plan participants and
beneficiaries because the asset provides no income to the Plan, and is
illiquid. The Sale will facilitate full implementation of participant-
directed investing of accounts, which was adopted by the Plan in
January, 1994. The Sale will allow the Plan to convert the Interest
into cash, so that participants whose account balances are partially
invested in the Interest may direct the investment of that portion of
their accounts into assets generating greater returns.
[[Page 47205]]
5. The Interest, the sole value of which is the Plan's undivided
2.86% interest in the Tucson Property, was appraised as of July 19,
1996 by Mr. Thomas A. Baker, MAI, SRA, a State of Arizona Certified
General Real Estate Appraiser who is independent of the Plan and RSC.
Mr. Baker applied the direct sales comparison approach to determine
both the market value and fee simple interest of the total property and
of the Plan's 2.86% interest in the subject property.
In addition, the appraiser used comparable sale information of
partial interest sales in order to determine the fair market value of
the Plan's 2.86% Interest in the REIT. Mr. Baker concluded that the
fair market value of the Plan's 2.86% interest in the REIT, as of July
19, 1996 was $10,900.
6. RSC represents that the plan would incur no expenses nor
commissions with respect to the Sale. The applicant also represents
that the proposed transaction is administratively feasible and
protective of the Plan's participants and beneficiaries. Furthermore,
the applicant represents that any amounts received by the Plan as a
result of the Sale, which are in excess of the fair market value of the
Interest, will be treated as contributions to the Plan, but that these
contributions will not exceed limitations of section 415 of the
Internal Revenue Code.
7. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because: (1) The Sale will be a one-time
transaction for cash; (2) no commissions or fees will be paid by the
Plan as a result of the Sale; (3) the Sale will facilitate full
implementation of participant-directed investing of accounts, which was
adopted by the Plan in January, 1994; and (4) the Sale price will be
the higher of: (a) The fair market value of the Interest on the date of
the Sale, or (b) the Plan's total investment in the Interest, in the
amount of $50,572.
FOR FURTHER INFORMATION CONTACT: Ms. Marianne H. Cole 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 30th day of August, 1996.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 96-22717 Filed 9-5-96; 8:45 am]
BILLING CODE 4510-29-P
