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EBSA Notices

Grant of Individual Exemptions.   [12/6/2000]
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[Federal Register: December 6, 2000 (Volume 65, Number 235)]
[Notices]               
[Page 76306-76310]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de00-115]                         

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

 
Prohibited Transaction Exemption 2000-63; [Exemption Application 
No. D-10651, et al.] Grant of Individual Exemptions; Merrill Lynch & 
Co., Inc. (ML&Co.)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of Individual Exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) from certain of the prohibited transaction 
restrictions of the Employee Retirement Income Security Act of 1974 
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
    Notices were published in the Federal Register of the pendency 
before the Department of proposals to grant such exemptions. The 
notices set forth a summary of facts and representations contained in 
each application for exemption and referred interested persons to the 
respective applications for a complete statement of the facts and 
representations. The applications have been available for public 
inspection at the Department in Washington, D.C. The notices also 
invited interested persons to submit comments on the requested 
exemptions to the Department. In addition the notices stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicants have represented that they 
have complied with the requirements of the notification to interested 
persons. No public comments and no requests for a hearing, unless 
otherwise stated, were received by the Department.
    The notices of proposed exemption were issued and the exemptions 
are being granted solely by the Department because, effective December 
31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App. 1 (1996), transferred the authority of the Secretary of the 
Treasury to issue exemptions of the type proposed to the Secretary of 
Labor.

[[Page 76307]]

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:

(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants and 
beneficiaries; and
(c) They are protective of the rights of the participants and 
beneficiaries of the plans.

Merrill Lynch & Co., Inc. (ML&Co.) Located in New York, NY

[Prohibited Transaction Exemption 2000-63 Exemption Application No. D-
10651]

Exemption

Section I. Covered Transactions

    The restrictions of section 406(a)(1)(A) through (D) 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 (1) the purchase or sale by employee benefit plans (the 
Plans), other than Plans sponsored by ML&Co. or its affiliates 
(collectively, the Applicants), of Market Index Target-Term Securities 
(the MITTS), which are debt securities issued by the Applicants; and 
(2) the extension of credit by the Plans to the Applicants in 
connection with the holding of the MITTS.
    This exemption is subject to the general conditions that are set 
forth below in Section II.

Section II. General Conditions

    (a) The MITTS are made available by the Applicants in the ordinary 
course of their business to Plans as well as to customers which are not 
Plans.
    (b) The decision to invest in the MITTS is made by a Plan fiduciary 
(the Independent Plan Fiduciary) or a participant in a Plan that 
provides for participant-directed investments (the Plan Participant), 
which is independent of the Applicants.
    (c) The Applicants do not have any discretionary authority or 
control or provide any investment advice, within the meaning of 29 CFR 
2510.3-21(c), with respect to the Plan assets involved in the 
transactions.
    (d) The Plans pay no fees or commissions to ML&Co. or its 
affiliates in connection with the transactions covered by the requested 
exemption, other than the mark-up for a principal transaction 
permissible under Part II of Prohibited Transaction Class Exemption 
(PTCE) 75-1 (40 FR 50845, October 31, 1975).\1\
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    \1\ The Department is providing no opinion herein as to whether 
any principal transactions involving debt securities would be 
covered by PTCE 75-1, or whether any particular mark-up by a broker-
dealer for such transaction would be permissible under Part II of 
PTCE 75-1.
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    (e) ML&Co. agrees to notify Plan investors in the prospectus (the 
Prospectus) for the MITTS that, at the time of acquisition, no more 
than 15 percent of a Plan's assets should be invested in any of the 
MITTS.
    (f) The MITTS do not have a duration which exceeds 9 years from the 
date of issuance.
    (g) Prior to a Plan's acquisition of any of the MITTS, the 
Applicants fully disclose, in the Prospectus, to the Independent Plan 
Fiduciary or Plan Participant, all of the terms and conditions of such 
MITTS, including, but not limited to, the following:
    (1) A statement to the effect that the return calculated for the 
MITTS will be denominated in U.S. dollars;
    (2) The specified index (the Index) or Indexes on which the rate of 
return on the MITTS is based;
    (3) A numerical example, capable of being understood by the average 
investor, which explains the calculation of the return on the MITTS at 
maturity and reflects, among other things, (i) a hypothetical initial 
value and closing value of the applicable Index, and (ii) the effect of 
any adjustment factor on the percentage change in the applicable Index;
    (4) The date on which the MITTS are issued;
    (5) The date on which the MITTS will mature and the conditions of 
such maturity;
    (6) The initial date on which the value of the Index is calculated;
    (7) Any adjustment factor or other numerical methodology that would 
affect the rate of return, if applicable;
    (8) The ending date on which interest is determined, calculated and 
paid;
    (9) Information relating to the calculation of payments of 
principal and interest, including a representation to the effect that, 
at maturity, the beneficial owner of the MITTS is entitled to receive 
the entire principal amount, plus an amount derived directly from the 
growth in the Index (but in no event less than zero);
    (10) All details regarding the methodology for measuring 
performance;
    (11) The terms under which the MITTS may be redeemed;
    (12) The exchange or market where the MITTS are traded or 
maintained; and
    (13) Copies of the proposed and final exemptions relating to the 
exemptive relief provided herein, upon request.
    (h) The terms of a Plan's investment in the MITTS are at least as 
favorable to the Plan as those available to an unrelated non-Plan 
investor in a comparable arm's length transaction at the time of such 
acquisition.
    (i) In the event a MITTS security is delisted from either the 
American Stock Exchange (the AMEX), the New York Stock Exchange or any 
other nationally-recognized securities exchange, Merrill Lynch, Pierce, 
Fenner & Smith Incorporated (MLPF&S) will apply for trading through the 
National Association of Securities Dealers Automated Quotations System, 
which requires that there be independent market-makers establishing a 
market for such securities in addition to MLPF&S. If there are no 
independent market-makers, the exemption will no longer be considered 
effective with respect to that MITTS security.
    (j) The MITTS are rated in one of the three highest generic rating 
categories by at least one nationally-recognized statistical rating 
service at the time of their acquisition.
    (k) The rate of return for the MITTS is objectively determined and, 
following issuance, the Applicants retain no authority to affect the 
determination of the return for such security, other than in connection 
with a ``market disruption event'' that is described in the Prospectus 
for the MITTS.
    (l) The MITTS are based on an Index that is--
    (1) Created and maintained \2\ by an entity that is unrelated to 
the Applicants and is a standardized and generally-accepted Index of 
securities; or
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    \2\ For purposes of this exemption, the term ``maintain'' means 
that all calculations relating to the securities in the Index, as 
well as the rate of return of the Index, are made by an entity that 
is unrelated to the Applicants or their affiliates.
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    (2) Created by the Applicants or an affiliate, but maintained by an 
entity that is unrelated to the Applicants, and
    (i) Consists either of standardized and generally-accepted Indexes 
or an Index comprised of at least 10 publicly-traded securities that 
are not issued by the Applicants or their affiliates, are designated in 
advance and listed in the Prospectus for the MITTS (under either 
circumstance, neither the Applicants nor their affiliates may 
unilaterally modify the composition of the Index, including the 
methodology comprising the rate of return),
    (ii) Meets the requirements for an Index in Rule 19b-4 under the 
Securities Exchange Act of 1934, and

[[Page 76308]]

    (iii) The index value for the Index is publicly-disseminated 
through an independent pricing service, such as Reuters Group, PLC or 
Bloomberg L.P., or through a national securities exchange, such as the 
AMEX.
    (m) The Applicants do not trade in any way intended to affect the 
value of the MITTS through holding or trading in the securities which 
comprise an Index.
    (n) The Applicants maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (o) of this 
section to determine whether the conditions of this proposed 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 the Applicants, 
the records are lost or destroyed prior to the end of the six year 
period; and
    (2) No party in interest other than the Applicants shall be subject 
to the civil penalty that may be assessed under section 502(i) of the 
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if 
the records are not maintained, or are not available for examination as 
required by paragraph (o) below.
    (o)(1) Except as provided in section (o)(2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (n) are 
unconditionally available at their customary location during normal 
business hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission;
    (B) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any Plan Participant or beneficiary of any participating Plan, 
or any duly authorized representative of such Plan Participant or 
beneficiary.
    (o)(2) None of the persons described above in subparagraphs (B)-(D) 
of paragraph (o)(1) are authorized to examine the trade secrets of the 
Applicants or commercial or financial information which is privileged 
or confidential.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the proposed exemption published on October 19, 2000 at 65 FR 62756.

Written Comments

    The Department received one written comment with respect to the 
notice of proposed exemption. The comment, which was submitted on 
behalf of the Applicants, requests several clarifications to the 
conditional language of the proposal. First, in Section II(i) of the 
General Conditions, in the first sentence thereof, the Applicants 
suggest that the phrase ``In the event a MITTS security is delisted * * 
*'' be substituted for the phrase ``In the event the MITTS are delisted 
* * *'' Second, in the last sentence of the same subparagraph, at the 
end thereof, the Applicants request the addition of the following new 
phrase ``with respect to that MITTS security.'' Third, in Section II(l) 
of the General Conditions, the Applicants suggest that the word ``and'' 
be added at the end of subparagraph (l)(2), that the comma prior to the 
parenthetical in subparagraph (l)(2)(i) be deleted, that a lower case 
``u'' be substituted for the upper case ``U'' in the word ``under'' in 
the parenthetical and that the period at the end of (but within) the 
parenthetical be deleted.
    The Department concurs with these clarifications to the proposed 
exemption and has made the changes requested by the Applicants in the 
operative language of the final exemption. The Department has also 
noted these changes in the Summary of Facts and Representations of the 
proposed exemption.
    For further information regarding the Applicants' comment letter 
and other matters discussed therein, interested persons are encouraged 
to obtain copies of the exemption application file (Exemption 
Application No. D-10651) the Department is maintaining in this case. 
The complete application file, as well as all supplemental submissions 
received by the Department, are made available for public inspection in 
the Public Documents Room of the Pension and Welfare Benefits 
Administration, Room N-5638, U.S. Department of Labor, 200 Constitution 
Avenue, NW, Washington, DC 20210.
    Accordingly, after giving full consideration to the entire record, 
including the Applicants' comment, the Department has decided to grant 
the exemption subject to the modifications described above.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

The David Mandelbaum IRA Rollover Account (the IRA) Located in West 
Orange, New Jersey

[Prohibited Transaction Exemption 2000-64; Exemption Application No. D-
10765]

Exemption

    The sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c)(1)(A) through (F) of the Code shall 
not apply to the cash sale by the IRA \* * *\ to the David Mandelbaum 
Family Trust of a 50 percent (50%) undivided interest in two (2) 
parcels of improved real property subject to a long term lease (the 
Property); provided the following conditions are satisfied:
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    * * * Pursuant to the provisions contained in 29 CFR 2510.3-
2(d), the IRA is not subject to Title I of the Employee Retirement 
Income Security Act of 1974 (the Act). However, the IRA is subject 
to Title II of the Act, pursuant to section 4975 of the Code.
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    (1) The sale is a one time transaction for cash;
    (2) The terms and conditions of the sale are at least as favorable 
to the IRA, as the terms of similar transactions negotiated at arm's 
length with unrelated third parties;
    (3) The IRA receives the greater of $4,307,000 dollars or the fair 
market value of the IRA's undivided interest in the Property, as of the 
date of the sale;
    (4) The fair market value of the IRA's undivided interest in the 
Property is determined by an independent, qualified appraiser, as of 
the date of the sale; and
    (5) The IRA does not pay any commissions, costs, finder's fees, or 
other expenses in connection with such sale.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption refer to 
the Notice of Proposed Exemption published on October 11, 2000, at 65 
FR 60464.

FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883 (this is not a toll-free number).

I.B.E.W. LU 567 Electrical Joint Apprenticeship and Training Trust Fund 
(the Training Plan) and Money Purchase Retirement Plan of Local 567, 
I.B.E.W (the M/P Plan) (Collectively, the Plans) Located in Falmouth, 
Maine

[Prohibited Transaction Exemption 2000-64; Exemption Application Nos. 
L-10906 and 
D-10907]

Exemption

    The restrictions of sections 406(a), 406 (b)(1) and (b)(2) of the 
Act and the sanctions resulting from the application

[[Page 76309]]

of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(E) of the Code, shall not apply, effective August 31, 2000, to the 
leases (the Leases) of certain office space and supplemental facilities 
(the Leased Space) to the Plans by Local 567 I.B.E.W. Building 
Corporation (the Building Corporation), an entity which is wholly owned 
by Local 567 of the International Brotherhood of Electrical Workers 
(the Union), a party in interest with respect to the Plans, provided 
that the following conditions are satisfied:
    (1) The terms of the Leases are at least as favorable to the Plans 
as those obtainable in an arm's length transaction with an unrelated 
party;
    (2) A qualified, independent appraiser determines annually the fair 
market rental value of the Leased Space;
    (3) The Lease payments are adjusted annually by an independent 
fiduciary to assure that such Lease payments are not greater than the 
fair market rental of the Leased Space. The Lease payments are reduced, 
if the fair market rental value, as determined by the independent 
fiduciary, decreases;
    (4) An independent fiduciary determines that the transactions are 
appropriate for the Plans and in the best interest of the Plans' 
participants and beneficiaries;
    (5) The independent fiduciary monitors the terms of the 
transactions and conditions of this exemption at all times, and takes 
whatever actions are necessary and proper to enforce the Plans' rights 
under the Leases and protect the participants and beneficiaries of the 
Plans. (Such independent fiduciary duties also include, but are not 
limited to, negotiating any required amendments to the Leases on behalf 
of the Plans to make certain the terms of the Leases are commercially 
reasonable.); and
    (6) The annual fair market rental amount for the Leased Space will 
not exceed 5% of the Training Plan's total assets, and 1% of the M/P 
Plan's total assets.

EFFECTIVE DATE: This exemption is effective as of August 31, 2000.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption (the Notice) published on September 
22, 2000 at 65 FR 57397.

Written Comments

    The Department received two written comments (the Comments) with 
respect to the Notice and no requests for a hearing. The Comments were 
submitted by the same commenter (the Commenter), who is a party in 
interest with respect to the Plans. Set forth below is a discussion of 
the major points made by the Commenter, and the applicant's response to 
the issues raised thereby.

Discussion of the Comments

    The Commenter raised certain issues relating to the operation of 
the Union and the Plans. In particular, the Commenter made various 
allegations regarding Milton McBreairty (Mr. McBreairty), who is the 
business manager for the Union and a trustee of the Plans (Trustee). 
The Commenter believed that Mr. McBreairty is not carrying out his 
duties as business manager for the Union in an appropriate manner and 
that his duties as business manager will conflict with his duties as a 
Plan Trustee. Among other things, the Commenter suggested that there 
should be a complete audit and examination of the business manager's 
spending of the Union's monies. The Commenter also questioned whether 
Maineland Appraisal Consultants of Portland, Maine, the Plans' 
independent fiduciary for the Leases (the Independent Fiduciary), and 
Frank R. Montello, the president of the Independent Fiduciary, will be 
able to effectively represent the interests of the Plans or can be 
considered independent of the business manager. In this regard, the 
Commenter asserted that the Independent Fiduciary's fees are being paid 
by the business manager from the Union's funds. In addition, the 
Commenter stated that the M/P Plan should only be permitted to lease a 
maximum of 800 square feet in Building I, instead of the 1200 square 
feet mentioned in the Notice. Finally, the Commenter stated that the 
annual fair market rental amount for the Leased Space paid by the M/P 
Plan should not represent more than 1% of the M/P Plan's total assets, 
rather than the 5% required by condition 6 of the Notice.

Discussion of the Applicant's Response to the Comments

    1. With respect to the Commenter's assertion that Mr. McBreairty's 
position as business manager of the Union is inconsistent with his 
duties as a Plan Trustee, the applicant stated that the IBEW 
Constitution requires that the Union's business manager serve as a 
Union Trustee for the Plans. Further, the applicant noted that the 
safeguards set forth in the Notice are intended to protect the Plans' 
participants from conflicts of interest relating to all three Union 
Trustees for the Plans (not only Mr. McBreairty). The governing 
documents of the Plans require at least one Union Trustee's affirmative 
vote for any action. The applicant represents that because all of the 
Union Trustees may be construed as having a conflict of interest in 
approving any Plan leases with the Building Corporation, the Plans have 
engaged the Independent Fiduciary to protect the interests of the Plans 
and their participants and beneficiaries.
    2. The applicant also addressed the Commenter's concern that Mr. 
Montello, who is the president of the Independent Fiduciary, is biased 
because the business manager for the Union pays him with the Union 
members' money. The applicant stated that Mr. Montello is not 
compensated by the business manager with Union funds. Rather, all of 
the Independent Fiduciary's fees, just like other administrative 
expenses of the Plans, are paid by the Plans' Trustees out of the 
Plans' assets and are accounted for in the Plans' administrative 
budgets.
    The applicant represented that Mr. McBreairty is paid by the Union 
for his services to the Union as business manager.
    Mr. McBreairty does not receive any compensation from the Plans 
apart from reimbursement of his expenses as the Plans' Trustee while 
doing business for the Plans, as reported to the Department on the 
Plans' annual Form 5500 filings. In addition, the applicant noted that 
each year the Plans engage certified public accountants to audit their 
finances, and such audits have not revealed any misuse of the Plans' 
funds. The applicant represented further that the M/P Plan and the 
Union have been subject to random audits by the Internal Revenue 
Service and the Department, and none of these audits have revealed any 
improper payments to Mr. McBreairty or any other Plan Trustee.
    3. With respect to the Commenter's concerns about the amount of 
space leased to the M/P Plan, the applicant stated that the office 
space needs of the M/P Plan are dictated by its need to house all of 
its staff, equipment and records. In this regard, the applicant 
maintained that the anticipated expansion of its portion of the Leased 
Space up to 1200 square feet is reasonable and appropriate for its 
operations which involve overseeing 500 current Plan participant 
accounts.
    The applicant also addressed the Commenter's request that the 
annual fair market rental for the Leased Space rented to the M/P Plan 
be required to represent less than 1% of the M/P Plan's assets. The 
applicant stated that the 5% limitation with respect to the M/P Plan's 
assets cited in the Notice is intended to be a maximum amount. 
Furthermore,

[[Page 76310]]

the applicant noted that the M/P Plan's initial annual lease payments 
for the Leased Space in Building I represent only approximately 1/100th 
of 1% of the current market value of the M/P Plan's assets.
    In consideration of this Comment, the Department has modified 
condition 6 of the final exemption such that it reads: ``The annual 
fair market rental amount for the Leased Space will not exceed 5% of 
the Training Plan's total assets and 1% of the M/P Plan's total 
assets.''
    After giving full consideration to the entire record, including all 
of the Comments submitted to the Department and the responses made by 
the applicant, the Department has determined to grant the exemption, 
subject to the modification described above.
    The Comments have been included as part of the public record for 
the exemption application. Interested persons should be aware that the 
complete exemption application file is available for public inspection 
in the Public Disclosure Room of the Pension and Welfare Benefits 
Administration, Room N-5638, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington DC 20210.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, U.S. Department 
of Labor, telephone (202) 219-8883. (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 or disqualified 
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional 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
    3. The availability of these exemptions is subject to the express 
condition that the material facts and representations contained in each 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

    Signed at Washington, D.C., this 1st day of December, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 00-31018 Filed 12-5-00; 8:45 am]
BILLING CODE 4510-29-P