EBSA
Notices
[Application No. D-11031, et al.] Proposed Exemptions; Northwoods Bank of Minnesota Employee Stock Ownership Plan (the Plan)
[ 4/26/2002]
[ PDF]
[Federal Register: April 26, 2002 (Volume 67, Number 81)]
[Notices]
[Page 20837-20845]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ap02-120]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-11031, et al.]
Proposed Exemptions; Northwoods Bank of Minnesota Employee Stock
Ownership Plan (the Plan)
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 restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests 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
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration (PWBA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ______, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to PWBA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffittb@pwba.dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 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, 5 U.S.C. App. 1 (1996), 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.
[[Page 20838]]
Northwoods Bank of Minnesota Employee Stock Ownership Plan (the
Plan) Located in Park Rapids, Minnesota
[Application No. D-11031]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale by individual accounts (the
Stock Accounts) within the Plan of certain shares of common stock (the
Shares) of Dorset Bancshares, Incorporated (the Holding Company) to the
Holding Company, a party in interest with respect to the Plan; provided
that the following conditions are satisfied:
(a) The proposed sale is a one-time cash transaction;
(b) The Stock Accounts receive the greater of: (i) $32,000 per
Share, as currently apppraised by an independent, qualified appraiser;
or (ii) the current fair market value for the Shares established at the
time of the sale by an independent qualified appraiser; and
(c) The Stock Accounts pay no commissions or other expenses
associated with the sale.
Summary of Facts and Representations
1. Northwoods Bank of Minnesota (the Bank) is a community bank
located in Park Rapids, Minnesota. The bank is a wholly-owned
subsidiary of the Holding Company. Both the Bank and the Holding
Company are closely-held corporations under Minnesota state law.
Effective November 1, 1967, the Bank established the Plan as a profit
sharing plan (the Original Plan) for the benefit of its employees.
In 1986, the Original Plan was converted to an employee stock
ownership plan (i.e., the Plan). Effective February 15, 1995, the Plan
also added a 401(k) salary deferral feature. Effective January 1, 1999,
the Bank and the Holding Company each elected to be treated as a
subchapter ``S'' corporation.
As of December 31, 2001, the Plan had 30 active participants and 6
inactive participants. Only the participants (both active and inactive)
that have a Stock Account in the Plan will be affected by the proposed
transaction.
Mark Hewitt (Mr. Hewitt) is the Chairman/CEO of the Bank, the
president of the Holding Company, and a co-trustee of the Plan. Mr.
Hewitt currently owns 194 Shares, which represents an approximately
91.5% ownership interest in the Holding Company. Brian Grave (Mr.
Grave) is also a co-trustee of the Plan, and the Chief Financial
Officer of the Bank. Mr. Grave does not own any interest in the Bank or
the Holding Company.
2. On December 31, 1986, the Plan purchased 20 Shares of the
Holding Company from Mr. Hewitt at a price of $4,489.15 per Share, for
a total purchase price of $89,783. On April 18, 1996, the Plan sold 3
Shares to the Holding Company at a price of $15,500 per Share, for a
total purchase price of $46,500.\1\ The Stock Accounts have received
distributions, as shareholders of an ``S'' corporation, in the
following amounts:
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\1\ The applicant represents that the original purchase of the
Shares by the Plan and the subsequent sale of certain Shares to the
Holding Company occurred before the Bank and the Holding Company
elected subchapter ``S'' status. Therefore, the applicant states
that such transactions were permitted by the statutory exemption
under ERISA section 408(e) and the Internal Revenue Code section
4975(d)(13).
The Department expresses no opinion in this proposed exemption
as to whether the Plan's purchase, holding or sale of the Shares met
the requirements necessary for relief under section 408(e) of the
Act or section 4975(d)(13) of the Code.
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Amount of
Year distribution
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1999.................................................... $15,476.12
2000.................................................... 19,419.61
2001.................................................... \1\ 35,957.52
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\1\Through 9/30/01.
Since 1996, the Plan has continued to hold the remaining 17 Shares
(which represents approximately 8.02% of the outstanding Shares), but
no additional Shares have been purchased or contributed to the Plan.
These 17 Shares are held in thirty (30) Stock Accounts within the Plan.
The applicant states that the certificates for the Shares are held at
the Bank, while other contributions are invested in mutual funds
unrelated to the Bank. The Plan's ownership of the 17 Shares
represented 47.8% of total Plan assets, as of December 31, 2000. The
Plan had approximately $941,738 in total assets as of December 31,
2000.
3. The Plan was originally established to invest primarily in
``qualifying employer securities'' (QES), as defined under section
407(d)(5) of the Act. However, since 1995 the Plan's participants have
made deferral contributions (pursuant to section 401(k) of the Code) to
the Plan which have been invested in mutual funds. The Bank's matching
contributions to the Plan have been made in cash, rather than in
Shares. Consequently, the percentage of the Plan's assets invested in
QES has declined over time and is expected to continue declining as
additional cash contributions are made.\2\
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\2\ Section 407(d)(6) of the Act defines the term ``employee
stock ownership plan'' as an individual account plan (A) which is a
stock bonus plan which is qualified, or a stock bonus plan and money
purchase plan both of which are qualified, under section 401 of the
Code, and which is designed to invest primarily in qualifying
employer securities, and (B) which meets such other requirements as
the Secretary of the Treasury may prescribe by regulation.
The Department is providing no opinion herein as to whether such
requirements have been met.
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Therefore, the applicant believes that the employee stock ownership
portion of the Plan should be discontinued and proposes that the Plan
sell the Shares to the Holding Company for cash at their fair market
value. In this regard, the applicant states that section 408(d) of the
Act excludes owner-employees (including shareholder-employees), and any
corporation which is 50% or more owned by such persons (subchapter
``S'' corporations), from using the statutory exemption provided under
section 408(e) of the Act for purchases or sales of QES. The applicant
notes that section 408(d)(2)(B) of the Act provides an exception to
this exclusion for a sale of QES to an employee stock ownership plan
(ESOP) by a shareholder-employee or related subchapter ``S''
corporation. However, the applicant notes further that because the
exception described in section 408(d)(2)(B) applies only to sales of
QES to an ESOP, the applicant is requesting an individual exemption to
permit the cash sale of the Shares by the Plan to the Holding Company.
4. The Shares were appraised on December 31, 2000 (the Appraisal).
The Appraisal was prepared by the Bank Advisory Group, Inc. (BAGI), an
independent consulting firm in Austin, Texas. BAGI provides appraisal
services for closely-held banks and other financial institutions.
The Appraisal states that the Holding Company is a ``shell''
holding company for the Bank, a federally-chartered savings bank
located in Minnesota. The Appraisal considered three valuation
methodologies (i.e., the net asset value, the market value, and the
investment value) of the Holding Company to determine the fair market
value of the Shares.
The Appraisal relied primarily on the market value and the
investment value in determining fair market value of the
[[Page 20839]]
Shares. Specifically, the Appraisal considered the following factors:
(i) The Holding Company's restricted market presence and relatively
low future growth prospects when compared to that of larger, publicly-
traded thrift organizations;
(ii) the Holding Company's small asset base;
(iii) the Holding Company's high level of ownership;
(iv) ongoing branch divestitures by larger financial institutions
in outlying markets; and
(v) larger financial institutions' competitive advantage with
regard to technology and customer diversification.
Based on these factors, BAGI determined that the Shares had a fair
market value of $26,000 per Share, as of December 31, 2000.
An update to the Appraisal (the Update) was prepared by BAGI on
April 5, 2002. The Update states that the fair market of the Shares was
$32,000 per Share, as of December 31, 2001. Thus, the Plan's 17 Shares
had a total fair market value of $544,000 as of that date.
5. The applicant proposes that the Holding Company purchase the
shares from the Plan in a one-time cash transaction. The Plan will pay
no commissions or other expenses associated with the sale. The
aggregate fair market value of the Shares will be determined by BAGI,
an independent qualified appraiser, at the time of the transaction. In
this regard, the Holding Company proposes to pay the Plan the greater
of: (i) $32,000 per Share, which is the fair market value per share
established by BAGI, as of December 31, 2001; or (ii) the fair market
value of the Shares as established by a further update of the Appraisal
at the time of the transaction.
The applicant represents that the proposed transaction is in the
best interest and protective of the Plan and its participants and
beneficiaries. The sale of the Shares to the Holding Company will
increase the liquidity and the diversification of the Plan's investment
portfolio and allow the Plan to eliminate its employee stock ownership
component.
6. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria of section 408(a) of
the Act and section 4975(c)(2) of the Code because:
(a) The proposed sale will be a one-time cash transaction;
(b) the Plan will receive the greater of (i) $32,000 per Share, as
currently appraised by BAGI; or (ii) the current fair market value for
the Shares, as established at the time of the sale by an independent
qualified appraiser;
(c) the Plan will pay no commissions or other expenses associated
with the sale;
(d) the sale will provide the Plan and its participants with more
liquidity and an opportunity to increase their return with more
diversified investments; and
(e) only the assets in Stock Accounts within the Plan will be
affected by the transaction.
For Further Information Contact: Ekaterina A. Uzlyan of the
Department at (202) 693-8540. (This is not a toll-free number.)
Louisville Electrical Joint Apprentice and Training Committee Trust
Fund (the Fund) Located in Louisville, Kentucky
[Exemption Application No: L-10981]
Proposed Exemption
The Department of Labor 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 procedures set forth in 29 C.F.R. Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the proposed
exemption is granted, the restrictions of sections 406(a)(1)(A) through
(D), 406(b)(1), and 406(b)(2) of the Act shall not apply to the
purchase by the Fund of an interest in a condominium regime (the Condo)
from the International Brotherhood of Electrical Workers (IBEW), Local
369 Building Corporation (the Building Corporation), a party in
interest with respect to the Fund; provided that, at the time the
transaction is entered into, the following conditions are satisfied:
(1) The purchase by the Fund of the interest in the Condo is a one-
time transaction for cash;
(2) the Board of Trustees (the Trustees), acting as named fiduciary
on behalf of the Fund, prior to entering the transaction, determine
that the transaction is feasible, in the interest of the Fund, and
protective of the participants and beneficiaries of the Fund;
(3) an independent qualified fiduciary (the I/F) after analyzing
the relevant terms of the transaction advises the Trustees that
proceeding with the transaction would be in the interest of the Fund;
(4) the purchase price paid by the Fund for the interest in the
Condo is the lesser of: (a) the total amount actually expended by the
Building Corporation in the construction of the north wing unit (the
Unit) of the condominium building (the Condo Building), as documented
in writing and approved by the I/F, plus the value of that portion of
the land underlying such Unit, which is equivalent to the percentage of
the square footage of such Unit to the total square footage in the
Condo Building, plus the value of the same portion of any other common
elements of the Condo; or (b) the fair market value of the Fund's
interest in the Condo, as determined by an independent, qualified
appraiser, as of the date of the transaction, provided that such value
does not exceed $2,655,000, the fair market value of the Fund's
interest in the Condo, as determined by such independent, qualified
appraiser, as of December 11, 2001;
(5) the terms of the transaction are no less favorable to the Fund
than terms negotiated under similar circumstances at arm's length with
unrelated third parties;
(6) the Fund does not purchase the interest in the Condo or take
possession of the Unit in the Condo Building until such Unit is
substantially completed;
(7) the Fund has not been, is not, and will not be a party to the
construction financing loan or the permanent financing loan between the
IBEW, Local Union 369 (the Local) and the Bank of Louisville (the
Bank);
(8) the Fund does not pay any commissions, sales fees, or other
similar payments to any party as a result of the proposed transaction,
and the costs incurred in connection with the purchase by the Fund at
closing does not include, directly or indirectly, interest incurred by
the Building Corporation on the construction financing loan or the
permanent financing loan from the Bank;
(9) under the terms of the loan agreement between the Bank and the
Fund, the Bank in the event of a default by the Fund has recourse only
against the interest in the Condo and not against the general assets of
the Fund; and
(10) under the terms of the loan agreement between the Bank and the
Building Corporation, in the event of default by the Building
Corporation, the Bank has no recourse against any assets of the Fund.
Summary of Facts and Representations
1. The Fund is an employee benefit welfare plan located at 1021
South Floyd Street (the Existing Facility) in Louisville, Kentucky. The
Fund is maintained under a collective bargaining agreement between the
Local and the Louisville Chapter, of the National Electrical
Contractors Association (NECA). The Fund is designed to provide
programs to recruit and train workers as electricians. In
[[Page 20840]]
addition, the Fund also provides continuing education and advanced
training for electrical workers.
Members of the Local are covered by the Fund. As of December 1,
2000, there were 340 participants in the Fund.
As of June 30, 2001, the Fund had cash and cash equivalents of
$1,420,542 and a ``net worth'' of $2,056,940. An unaudited balance
sheet of the Fund's assets prepared by William P. Schmitz (Mr.
Schmitz), the Fund's independent accountant, indicated that the Fund
had, as of December 31, 2001, $1,829,704 in cash and $2,656,242 in
``net worth.''
2. The Trustees have authority to invest the assets of the Fund.
Among the eight (8) individuals who serve as Trustees, four (4) are
management representatives and four (4) are labor representatives. Two
(2) of the Trustees, Scott Pulliam and Steve Silliman (Mr. Silliman),
also serve as officers of the Local.
3. The Local is the sole shareholder of the Building Corporation, a
Kentucky corporation. The Local and the Building Corporation are
parties in interest with respect to the Fund, pursuant to section
3(14)(D) and 3(14)(G) of the Act, respectively.
4. The Building Corporation owns real estate (the Property) located
at 4315 Preston Highway in Louisville, Kentucky. It is represented that
this location offers immediate interstate access from the Louisville
metropolitan area and has parking availability. The Property consists
of an irregularly shaped level parcel of 3.09 acres of land. As of
December 11, 2000, the Property was improved with two buildings. The
first building, a two-story, 8,092 square foot concrete block structure
(the Original Building) was used, as of December 11, 2000, for offices
and meeting space for the Local. The second building, a 900 square foot
concrete block garage (the Garage) located in the rear of the Property,
was used, as of the same date, for storage by the Local. A sewage
treatment plant was also located on the Property, as of December 11,
2000.
In 2001, the Building Corporation chose to expand the total square
footage of the Original Building on the Property from 8,092 square feet
to 53,353 square feet by adding a north and a south wing. Included in
the site improvements to the Property are 110 striped parking spaces,
asphalt cement paving, walks, lighting, and landscaping.
To finance the expansion of the Original Building, the Building
Corporation obtained in March 2001, a construction loan in the amount
of $5.9 million dollars from the Bank. It is represented that the Fund
is under no obligation to the Bank or the Union under the terms of this
loan.
5. It is represented that by March 15, 2002, the Building
Corporation, as the developer of the Property, had filed documents
establishing a condominium regime on the Property in accordance with
Kentucky Horizontal Property law.\3\ Under the provisions of the
Kentucky Horizontal Property Law,\4\ an owner of an interest in a
condominium has the exclusive ownership of its unit and also has a
right to share the common elements of the property with the owners of
other units in the condominium. Except as otherwise provided, the
common elements of a condominium include the underlying land, the
foundations, main walls, roofs, halls, lobbies, stairways, entrances,
exits, basements, yards, gardens, the installations of central
services, and all other elements rationally of common use or necessary
for upkeep and safety. It is represented that the amount of an
ownership interest in a unit of a condominium is equivalent to the
percentage representing the floor area of such individual unit to the
total floor area of such condominium. It is further represented that
this percentage is expressed at the time the condominium regime is
established, is recorded with the county clerk, and cannot be altered
without the agreement of all owners of the units of the condominium.
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\3\ It is represented that Kentucky Horizontal Property Law, KRS
381.805-381.910 creates a framework for developing and owning
condominium units in the state of Kentucky.
\4\ KRS 381.830.(1)(a).
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It is represented that the Building Corporation, as the developer
of the Property, chose to use a condominium regime, because a
traditional approach to dividing the Property, as subsequently
improved, would have taken too long and have been more expensive. In
this regard, numerous local governmental approvals and variances would
have been required. It is represented that such approvals and variances
would have created a delay in construction and in occupancy.
6. It is represented that the offices and union hall of the Local
occupy the Original Building plus the south wing (32,079 square feet)
of the Condo Building on the Property (approximately 60.13 percent
(60.13%) of the total square footage in such building). The north wing
(21,274 square feet) of the Condo Building on the Property
(approximately 39.87 percent (39.87%) of the total square footage in
such building) is intended to house the training facility and the
administrative offices of the Fund.
7. An administrative exemption has been requested that would permit
the Fund to purchase from the Building Corporation an interest in the
Condo. In this regard, it is represented that in purchasing the
interest in the Condo, the Fund will acquire a real property interest
in the north wing, the land underlying the north wing, and any other
common elements of the Condo. The amount of the Fund's ownership
interest in the land underlying the north wing and any other common
elements of the Condo will be equivalent to the percentage
(approximately 39.87%) representing the square footage of the north
wing of the Condo Building (21,274 square feet) to the total square
footage of such building (53,353 square feet). Further, it is
represented that the Fund's ownership of the interest in the Condo will
be recorded as a deed for real property with the Clerk of Jefferson
County.
8. It is represented that the proposed transaction is feasible in
that the purchase of an interest in the Condo by the Fund is a one-time
transaction for cash.
In addition to the purchase price, with regard to the acquisition
of an interest in the Condo, the Fund will be responsible for paying
the cost of recording the deed, the charges of title examination and
title policy, the state, county, school, and fire tax assessments, and
any other obligations required under Kentucky law governing
condominiums. However, the costs incurred in connection with the
purchase by the Fund at closing may not include, directly or
indirectly, interest incurred by the Building Corporation on the
construction financing loan or the permanent financing loan from the
Bank. Further, the Fund may not pay any commissions, sales fees, or
other similar payments to any party as a result of the proposed
transaction.
It is represented that the Fund will be responsible for paying for
its own electrical, gas, telephone, and water service on its Unit in
the Condo Building. However, the Local and the Fund agree to base all
cost-sharing for the common elements of the Condo on the percentage of
each party's ownership interest in the Condo.
9. The proposed exemption contains conditions which are designed to
ensure the presence of adequate safeguards to protect the interests of
the Fund regarding the subject transaction. In this regard, the
applicant agreed to hire an I/F to act on behalf of the Fund with
respect to the acquisition by the Fund of the interest in the Condo.
With regard
[[Page 20841]]
to the selection of the I/F, the Trustees received proposals from two
(2) entities willing to serve as the I/F. Of the two candidates, the
Trustees chose Independent Fiduciary Services, Inc. (IFS).
10. Pursuant to an agreement (the Agreement), dated October 22,
2001, the Trustees retained IFS to analyze relevant aspects of the
proposed transaction and advise the Trustees, in the Trustees' capacity
as the named fiduciary of the Fund, whether proceeding with the
proposed transaction according to the proposed terms would be in the
Fund's financial interest.
Pursuant to the terms of the Agreement, IFS is responsible for
considering, at a minimum: (a) The appraisal of the fully completed
Property, and evaluating the sufficiency of the methodology of such
appraisal and the reasonableness of the conclusions reached in such
appraisal; (b) the Fund's financial statements and projections of
future cash flows and the Fund's expected ability to financially
support the transaction, subject to certain limitations; (c) the
proposed purchase and sale agreement, the condominium agreement, and
other documents regarding the proposed sale, ownership, and occupancy
of the Property; provided that IFS shall consider such documents solely
from an investment perspective and shall be entitled to confer with and
rely upon counsel for the Fund (the Fund's Counsel) regarding legal
matters; and (d) the Fund's financial and business analysis of whether
to proceed with the transaction, compared to leasing comparable space
or purchasing other comparable space. Further, IFS is responsible for
providing the Trustees with advice and conclusions about the foregoing
matters by way of a written report.
It is represented that IFS is independent of the parties involved
in the proposed transaction in that amounts paid or to be paid to IFS
by the Fund in each of 2001 and 2002 are less than one percent (1%) of
IFS's total revenues in each respective year. IFS confirms that it has
registered as an investment adviser under the Investment Advisers Act
of 1940 and acknowledges that with respect to its duties as set forth
in the Agreement it is a fiduciary, as defined in section 3(21)(A)(ii)
of the Act.
It is represented that although IFS was retained as a fiduciary,
the Trustees remain responsible, as named fiduciary for the Fund, for
deciding whether, when, and on what terms to consummate the proposed
transaction.\5\
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\5\ The Department notes that the relief proposed herein, is
conditioned upon the adherence by the Trustees to the material facts
and representations set forth in the application file and upon
compliance with the conditions, as set forth in this proposed
exemption.
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IFS requested and has reviewed the following documents concerning
the Fund and the proposed transaction: (a) The Prohibited Transaction
Exemption Application, dated March 7, 2001; (b) the Department's
response, dated March 26, 2001; (c) letters from the Fund's Counsel to
the Department, dated April 27, May 30, and September 28, 2001; (d) the
December 11, 2000, appraisal report prepared for the Bank by J. Michael
Jones, MAI, and Jerome S. Cowens of J. Michael Jones and Associates, an
independent, qualified real estate appraiser in Louisville, Kentucky
(the Appraiser); (e) the December 11, 2001, appraisal report, prepared
by the Appraiser and addressed to IFS, supplemented by a letter from
the Appraiser to IFS, dated February 12, 2002; (f) the Construction/
Term Loan Agreement, dated March 1, 2001, between the Bank and the
Building Corporation; (g) the draft undated Condominium Sales Contract
between the Building Corporation and the Fund; (h) the draft
Declaration or Master Deed under which the condominium regime would be
managed; (i) the proposed term sheet for a loan between the Bank and
the Fund and draft loan documents; (j) audited financial statements of
the Fund, dated June 30, 2000, prepared by Buschenberger, Darst &
Eggers, LLC., CPAs; and audited financial statements of the Fund, as of
June 30, 2001, and an unaudited balance sheet and income statement of
the Fund, dated December 31, 2001, prepared by Mr. Schmitz, the Fund's
accountant; (k) a Forecasted Statement of Cash Flows, dated June 20,
2001, prepared by Mr. Schmitz; and more detailed cash flow projections,
dated February 12, 2002, prepared by Mr. Schmitz and the Fund's
Counsel, further refined and tested by IFS; (l) layout drawings of
existing and new structures, land, relationship to other structures and
similar physical aspects; and (m) a breakdown of costs of construction
prepared by Abel Construction Company (the General Contractor).
In addition, IFS met in person or telephonically with: (a) The
Fund's Counsel, Thomas J. Grady, Esq. of Segal, Stewart, Cutler,
Lindsay, Janes, & Berry, PLLC; (b) the Fund's accountant, Mr. Schmitz;
(c) the Bank lending officer, Edward L. Shannon, Senior VP of the Bank;
(d) the Appraiser; (e) the business manager for the Local, Mr.
Silliman; (f) the training director of the Fund, Steve Willinghurst;
and (g) Ricky George (Mr. George) the Fund Chairman and one of the
Trustees who represent the employers of electrical workers.
11. It is represented that because the Fund's Existing Facility is
landlocked and cannot be expanded to meet the growing need for training
electrical workers, the Trustees considered three (3) alternatives: (1)
Purchasing another property and renovating it; (2) building a new
training facility; and (3) leasing additional space. With regard to the
first alternative, the Trustees engaged the help of a commercial real
estate agent, Walter Wagner, Jr. Co., to assist them in finding a
property to purchase and renovate. After considering at least six (6)
sites, the Trustees became more interested in the second alternative,
building a new facility that would satisfy the specific requirements of
the Fund. Recognizing the appeal of a ``one-stop'' campus environment
for the entire membership, the Trustees believe that the Unit in the
Condo Building with proximity to the Local's union hall and offices is
too attractive an offer not to act upon.
With regard to the third alternative, the leasing by the Fund of
the amount of space it needs in the Condo Building or the leasing of
such space in another property, the Trustees had a real estate
professional prepare a draft lease based on an arm's length transaction
between two commercial entities. It is represented that the rent of
21,274 square feet of space equivalent to that in the north wing Unit
of the Condo Building at a fair market rental rate of $14.00 per square
foot would, over the course of 20 years, cost the Fund $5,956,800.
Although evaluating alternatives to the proposed transactions is
outside the scope of IFS's Agreement, IFS noted that the Fund's
conclusion to buy rather than rent appears reasonable. In this regard,
IFS noted that based on a rental value of $14.00 per square foot, as
established by the Appraiser, if the Fund were to rent the Unit in the
Condo Building (or a similar one assuming availability), the Fund would
pay as much in rent over 8.5 years as it is paying to purchase the
interest in the Condo. At the conclusion of the 8.5 years, IFS's notes
that the Fund would then either have to continue paying rent or find
another facility.
12. The applicant maintains that the proposed transaction is in the
interest of the participants and beneficiaries of the Fund in that the
Fund will obtain the additional space needed to increase the number of
training classes offered by the
[[Page 20842]]
Fund and to accommodate more students per class. In this regard, in the
mid-1980's the Fund acquired the Existing Facility to provide training
for 125 apprentices. Despite the fact that, in 1999, the Fund began
scheduling day and evening classes to utilize the Existing Facility
more efficiently, the space (6,200 square feet) in such facility is
inadequate to provide apprenticeship training for the 488 individuals
currently attending school.
According to the applicant, there has been an increased demand for
training that is expected to continue in the future. In this regard, an
aging workforce and early retirements have contributed to a shortage of
electrical workers and created a need for more trained apprentices.
Further, in the last three (3) years, the number of refresher classes
for experienced journeymen has doubled. In addition, due to the merger
of several unions, the Fund's mission has evolved from providing
training locally to providing training regionally. In this regard, the
Fund now provides the sole training facility for IBEW electricians
throughout 68 counties in Kentucky and 6 counties in southern Indiana.
The increase demand for training has also increased the need for
classroom space. In this regard, in 1999, the Fund registered two
additional programs with the State of Kentucky, a residential
electrical program and a telecommunications program. It is represented
that each of these programs requires a dedicated amount of space to
provide hands-on-training, and each will require additional space as
the demand for workers in each industry grows.
IFS represents that its responsibility does not include determining
either the inadequacy of the Existing Facility or the adequacy of the
new facility. However, as support for an assessment of whether the
proposed transaction would be in the interest of the Fund's
participants, IFS visited the Fund's Existing Facility. According to
IFS, statements regarding the size, crowded conditions at the Existing
Facility, lack of parking, and the condition of the neighborhood were
confirmed by observation to reasonably support the conclusion of the
Fund's Counsel about the Fund's needs. IFS also toured the fully
constructed but as yet unoccupied new facility. According to IFS,
statements made by the Fund's Counsel regarding the suitability of the
new facility appear to be reasonable. In this regard, IFS states that
the new facility is clean, spacious, and appears to be able to provide
high quality classroom, lab and practical training venues to a
considerably larger student body than the Existing Facility, as well as
space to provide communication training.
13. It is represented that the terms of the proposed transaction
are on terms which are at least as favorable to the Fund as those which
would have been negotiated at arm's length with an unrelated party. In
this regard, it is represented that the purchase and sale agreement
between the Fund and the Building Corporation will set the purchase
price that the Fund will pay for an interest in the Condo. In this
regard, the purchase price will be the lesser of: (a) The total amount
actually expended by the Building Corporation in the construction of
the Unit in the Condo Building, as documented in writing and approved
by IFS, plus the value of that portion of the land underlying such
Unit, which is equivalent to the percentage of the square footage of
such Unit to the total square footage in the Condo Building, plus the
value of the same portion of any other common elements of the Condo; or
(b) the fair market value of the Fund's interest in the Condo, as
determined by the Appraiser, as of the date of the transaction,
provided that such value does not exceed $2,655,000, the fair market
value of the Fund's interest in the Condo, as determined by the
Appraiser, as of December 11, 2001.
14. In this regard, on December 11, 2001, the Appraiser determined
the fair market value of the Property, after the improvements were
substantially completed. Specifically, the Appraiser established the
fair market value of the north wing (i.e., the Fund's Unit in the Condo
Building) and the south wing (i.e., the Local's unit in the Condo
Building), ``as condominiums,'' to be $2,655,000, and $3,520,000,
respectively. According to the Appraiser, condominiums are, rarely, if
ever, the size of the units in the Condo Building which are the subject
of this proposed exemption. In addition, the Appraiser noted in the
appraisal report that the units in this case are atypical due to their
multi-purpose usage which makes finding reasonable comparables
extremely difficult. In establishing the value of the north wing and
the south wing, as condominiums, the Appraiser gathered information in
the general area of the subject on sales of smaller office condominiums
(850 to 4,100 square feet) in the $85 to $120 per square foot range. In
this regard, the Appraiser assigned $120 per square foot value to the
north wing and $105 per square foot value to the Original Building plus
the south wing. In assigning these values, the Appraiser considered the
smaller size, the entirely new construction, and the higher degree of
flexibility of use of the north wing making it more marketable and more
valuable relative to the south wing, which though larger is less
flexible because it includes both the renovated older structure and an
auditorium.
Based on its review of the appraisal report, a letter from the
Appraiser, dated February 12, 2002, and discussions with the Appraiser,
IFS concluded that the methodology used by the Appraiser is reasonable
under the circumstances and that the fair market value of $2,655,000
for the Unit, including its proportion of the underlying land, as
documented in the appraisal report, is reasonable.
15. It is represented that the entire cost of construction has been
measured, allocated between the units, and certified as correct by the
General Contractor. In this regard, it is represented that the total
cost to construct the Fund's Unit in the Condo Building, including
additional expenses allocated to the Fund's Unit, was $2,490,570.48. It
is represented that, including the value of an undivided interest in
the underlying land and other general common property, the total cost
of the Unit is $2,771,863 (rounded).
Accordingly, IFS represents that based on the ``lower of cost or
market'' standard, the price to be paid for an interest in the Condo by
the Fund is the fair market value of the Unit of $2,655,000, plus
customary closing costs. According to IFS, closing costs could include
simple interest on the price paid by the Fund from the date of the
valuation by the Appraiser (December 11, 2001) to the date of the
closing, at a rate not greater than the rate paid by the Building
Corporation on the construction loan during such period. However, the
Department has determined that as a condition of this exemption the
costs incurred in connection with the purchase by the Fund at closing
may not include, directly or indirectly, interest incurred by the
Building Corporation on the construction financing loan or the
permanent financing loan from the Bank.
16. In order to finance the acquisition of the interest in the
Condo, the Fund will obtain permanent financing from the Bank. It is
represented that the Bank has approved a loan to the Fund of up to $2
million and up to 20 years. In acquiring the interest in the Condo for
$2,655,000, plus customary closing costs, the Fund intends to make a
down payment in cash of no less than $1 million dollars; and therefore,
expects to borrow approximately $1.7 million. It is intended that the
Fund's down payment
[[Page 20843]]
on the purchase and the proceeds from the loan by the Bank to the Fund
will be paid to the Building Corporation. The Building Corporation, in
turn, will use the money it receives from the Fund to reduce the
Building Corporation's outstanding indebtedness to the Bank.
Pursuant to a request from the Trustees, the Bank has offered two
sets of interest rates for the loan between the Bank and the Fund. The
first interest rate involves a floating rate of prime plus zero,
(currently represented to be 4.75%) reset daily with any change in the
prime rate. Payout is calculated over 120 months (ten years) of level
payments. The Fund's Counsel confirms that the loan to the Fund by the
Bank will have level payments of principal and interest over 120 months
and does not include any balloon payment by the Fund at the end of such
period. In addition, the Fund would have the choice of increasing the
monthly payment or increasing the term to cover any future upward
changes in the rate.
The second interest rate involves a rate fixed at the time of
drawdown on the loan between the Bank and the Fund at the Federal Home
Loan Bank five (5) year rate plus 200 basis points, (currently
represented to be 7.00%). The rate would be reset on each fifth
anniversary of such loan.
The Fund has indicated that it wants to and expects to repay the
loan early. In this regard, it is represented that in both interest
rate scenarios discussed above, there is no prepayment penalty,
provided the source of the funds to prepay is from contributions to or
operations of the Fund (i.e., not a refinancing). The loan will be
secured by the Unit, including rights to general common elements of the
Condo, and by rents, if any, generated by such Unit, but not with liens
on any other Fund property. It is represented that there is no cross
collateral or cross defaults between the Fund's loan from the Bank and
the Building Corporation's loan from the Bank.
It is represented that the choice between the two pricing
structures is a matter of cost and risk preference, and, pursuant to
the Agreement, is within the responsibility and authority of the
Trustees, not IFS. In this regard, it is represented that the Trustees
reviewed these two offers and have decided to accept the variable rate.
17. It is represented that the Fund has sufficient cash to make a
monthly mortgage payment to the Bank and also to meet its ongoing
obligation of providing training to participants. Because of the
increase in employer contributions, it is represented that the Fund has
a monthly net operating excess of approximately $70,000 dollars. It is
represented that the contributions from employers after the current
collective bargaining agreements expire on June 1, 2002, will be
sufficient to meet all of the on-going obligations of the Fund.
Furthermore, it is represented that even a decrease in employer
contributions of 10 percent (10%) or 20 percent (20%) would not
jeopardize operations of the Fund. In support of this representation,
the applicant submitted a Forecast Statement of Cash Flows of the Fund,
dated on June 20, 2001, prepared by Mr. Schmitz, the Fund's certified
public accountant. Based on Mr. Schmitz's analysis, the applicant
maintains that a decrease in employer contributions of 10 percent (10%)
or even 20 percent (20%) by December 2001, would only reduce the Fund's
monthly operating excess from approximately $70,000 dollars to
approximately $63,583 and $48,380 dollars, respectively.
It is represented that, in order to evaluate the ability of the
Fund to own, finance and pay for an interest in the Condo, IFS reviewed
the Fund's financial statements, and has defined, reviewed, and tested
a projection of expected future cash flows of the Fund, dated February
2, 2002, prepared by Mr. Schmitz. Based on its review, IFS has
concluded that the Fund is highly likely to have sufficient net cash
after paying all costs of maintaining the school and training the
members to be able to make all necessary debt service payments to
retire the debt within its terms and may also accumulate cash during
the period of loan servicing.
It is represented that the increase in the assets of the Fund is
largely due to a negotiated increase in contributions from employers.
Under the current collective bargaining agreement, the contribution
rate to the Fund was one percent (1%) of the monthly labor payroll from
June 1, 1999, until August 1, 1999. Then the contribution rate
increased to 1.5 percent (1.5%) until June 1, 2000, when the rate
further increased to 2.5 percent (2.5%). In addition, manhours
increased from 2,059,668 in 1998, to 2,781,350 in 1999, to 3,190,710 in
2000, and to 3,652,569 in 2001. To be conservative, IFS assumed
2,921,000 manhours for 2001-2002, which is the average over the past
four (4) years and a 20 percent (20%) reduction from the 2000-2001
level. IFS also assumed only a one percent (1%) increase in manhours,
far below the actual annual compound growth over the past 11 years of
about 7.5 percent (7.5%).
It is represented that the current contract expires June 1, 2002.
IFS represents that both the Local and the employer representatives to
the Fund expect that the new contract will maintain the current formula
and the current 2.5 percent (2.5%) contribution rate to the Fund. In
this regard, IFS has incorporated this into its base case and assumed a
labor rate increase of two percent (2%) per year.
IFS also reviewed the level and structure and nature of costs
anticipated for the operation and maintenance of the Fund's Unit in the
Condo and the school, as computed by the Fund's accountant. IFS notes
that overall the majority of the costs of maintaining and operation the
Unit are fixed on an annual basis. The costs of operating the school,
other than semi-fixed instructors' salaries, tend to be variable with
the number of students taught. IFS's assumptions, in this regard, were
an annual 3 percent (3%) increase in personnel costs and five percent
(5%) increase in operating costs. Accordingly, IFS conservatively
assumed expenses increasing faster than revenues.
Overall, IFS concluded that the Fund can reasonably be expected to
make all payments of interest and principal on its loan to acquire the
property, maintain the property, and meet its expected training
obligations.
18. As discussed in paragraph 5, above, the Fund's Counsel advised
IFS that, consistent with Kentucky Horizontal Property Law, ownership
of a condominium unit includes a proportional undivided interest in all
the land within the condominium regime. According to IFS, this
structure addresses the concern that the Fund would own only
improvements and not land. In addition, IFS has addressed three (3)
other areas of concern related to this ownership of the land: (1) the
septic system; (2) the status of the Garage; and (3) the ongoing
operating arrangements.
With regard to the first concern, it is represented that the
Original Building was serviced by a septic system. It is further
represented that the Property, including the Original Building, is now
served by city sanitary sewers. The Building Corporation has advised
IFS that the septic system has been removed; and the site had been
inspected and found free of contamination. Despite environmental
considerations being outside the scope of IFS's contract, IFS has
advised the Trustees to ask the Building Corporation to indemnify the
Fund for any preexisting environmental problems. It is IFS's
understanding that the Fund will receive that indemnity.
With regard to the second concern, the Property includes an
unheated
[[Page 20844]]
Garage used for storage. IFS represents that the Garage will be part of
the common elements of the condominium regime.
With regard to the third concern, based on IFS reading of the
relevant law and advice from the Fund's Counsel, IFS understands that
under the standard structure, the Local would have 60 percent (60%) of
each vote, and could thus control every situation, and relegate the
Fund to having no influence, control, or even input into the decisions
of the Board of Directors (Directors) or the Council of Unit Owners
(the Council). The Fund would be responsible for its proportionate
share of all expenses, but would have no recourse other than the full
arbitration process of an aggrieved owner.
IFS has concluded that this situation would not be in the interest
of the Fund. Accordingly, as the Kentucky Horizontal Property Law
permits other arrangements by agreement, IFS has directed certain
changes in the Declaration or Master Deed to provide the Fund with
greater assured participation. In particular, IFS has directed and the
Building Corporation has agreed that: (a) The formula for sharing
expenses in accordance with respective percentages of undivided
interest in the common elements of the Condo and facilities may not be
changed by the Council; (b) a super majority of \2/3\rds of ownership
interests, rather than a simple majority, is necessary to constitute a
quorum; (c) rather than a majority of ownership interests being able to
elect each of the Directors, the owner of the Local's unit will appoint
two Directors and the owner of the Fund's Unit will appoint one; and
(d) exceeding the annual budget increase caps requires a \2/3\rds vote
of the ownership interests, rather than a simple majority.
19. In conclusion, subject to certain caveats listed below, and
subject to all of the terms of the Agreement, IFS finds that the
purchase of the Unit at a price of $2,655,000, plus reasonable closing
costs and legal fees, is in the interest of the Fund. IFS's conclusion
is subject to the following caveats: (a) The changes in representation
on the Council and the Directors are incorporated into the Declaration
or Master Deed and the Council Bylaws; (b) the Fund's Counsel has
reviewed and approved the Condominium Sale Contract, the Declaration or
Master Deed, and all other documents pertaining to the proposed
transaction; (c) the loan between the Bank and the Fund does not exceed
$2 million in principal, and contains the basic rate, payment, and
maturity structure described in IFS's report, dated March 13, 2001, and
has been reviewed and approved by the Fund's Counsel; and (d) all legal
and physical conditions normally evaluated in connection with a
commercial real estate transaction (including but not limited to
environmental, title, Americans with Disabilities Act) have been
evaluated and the Fund's Counsel has determined that there are no
material problems. With regard to caveat (a) above, the Fund's Counsel
has filed with the Department a copy of the Master Deed and a draft of
the Bylaws containing the changes required by IFS in its March 13,
2002, report. Further, the Fund's Counsel has represented that caveats
(b), (c), and (d) above have been satisfied.
20. In summary, the applicant represents that the proposed
transaction meets the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The purchase of an interest in the Condo by the Fund is a one-
time transaction for cash;
(b) the Trustees, acting as named fiduciary on behalf of the Fund,
prior to entering the transaction, will determine that the transaction
is feasible, in the interest of the Fund, and protective of the
participants and beneficiaries of the Fund;
(c) the proposed transaction will not be entered until IFS, after
analyzing the relevant terms of such transaction, has advised the
Trustees that proceeding with such transaction would be in the interest
of the Fund;
(d) the purchase price paid by the Fund for the interest in the
Condo is the lesser of: (a) The total amount actually expended by the
Building Corporation in the construction of the Unit in the Condo
Building, as documented in writing and approved by IFS, plus the value
of that portion of the land underlying such Unit, which is equivalent
to the percentage of the square footage of such Unit to the total
square footage in the Condo Building, plus the value of the same
portion of any other common elements of the Condo; or (b) the fair
market value of the Fund's interest in the Condo, as determined by the
Appraiser, as of the date of the transaction, provided that such value
does not exceed $2,655,000, the fair market value of the Fund's
interest in the Condo, as determined by such Appraiser, as of December
11, 2001;
(e) the Fund will not pay any commissions, sales fees, or other
similar payments to any party as a result of the proposed transaction,
and the costs incurred in connection with the purchase by the Fund at
closing will not include, directly or indirectly, interest incurred by
the Building Corporation on the construction financing loan or the
permanent financing loan from the Bank;
(f) the terms of the transaction are no less favorable to the Fund
than terms negotiated under similar circumstances at arm's length with
unrelated third parties;
(g) the Fund will not purchase the interest in the Condo or take
possession of the Unit in the Condo Building until such Unit is
substantially completed;
(h) the Fund has not been, is not, and will not be a party to the
construction financing loan or the permanent financing loan between the
Building Corporation and the Bank;
(i) under the terms of the loan agreement between the Bank and the
Fund, the Bank, in the event of a default by the Fund, has recourse
only against the interest in the Condo and not against the general
assets of the Fund; and
(j) under the terms of the loan agreement between the Bank and the
Building Corporation, in the event of default by the Building
Corporation, the Bank has no recourse against any assets of the Fund.
Notice to Interested Persons
Those persons who may be interested in the publication in the
Federal Register of the Notice of Proposed Exemption (the Notice)
include Mr. George, the Chairman of the Fund, and each participant in
the Fund.
It is represented that these two classes of interested persons will
be notified through different methods. In this regard, notification
will be provided within seven (7) calendar days of the date of
publication of the Notice in the Federal Register, to all participants
in the Fund by posting on the general bulletin board at the Existing
Facility and by posting at the union hall. Such postings will contain a
copy of the Notice, as it appears in the Federal Register on the date
of publication, plus a copy of the supplemental statement (the
Supplemental Statement), as required, pursuant to 29 CFR 2570.43(b)(2),
which will advise interested persons of their right to comment and to
request a hearing.
It is represented that notification will also be provided to Mr.
George by first class mail, postage prepaid, return receipt requested
within seven (7) calendar days of the date of publication of the Notice
in the Federal Register. Such mailing will contain a copy of the
Notice, as it appears in the Federal Register on the date of
publication, plus a copy of the Supplemental Statement, as required,
pursuant to 29 CFR
[[Page 20845]]
2570.43(b)(2), which will advise Mr. George of his right, as Chairman
of the Fund, to comment and to request a hearing.
The Department must receive all written comments and requests for a
hearing no later than thirty (30) days from the later of: (1) The date
a copy of the Notice and a copy the Supplemental Statement were posted
at the Existing Facility and the union hall; or (2) the date Mr. George
receives a copy of the Notice and a copy of the Supplemental Statement
in the mail.
FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the Department,
telephone (202) 693-8551 (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 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 19th day of April, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 02-10321 Filed 4-25-02; 8:45 am]
BILLING CODE 4510-29-P
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