[Federal Register: September 25, 2009 (Volume 74, Number 185)]
[Notices]
[Page 49025-49034]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25se09-132]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. and Proposed Exemptions; D-11423, Cotter Merchandise
Storage Company Defined Benefit Pension Plan (the Plan); D-11445, Unaka
Company, Incorporated Employees Profit Sharing Plan (the Plan); and D-
11522, State Street Bank and Trust Company, et al.]
Notice of Proposed Exemptions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
-----------------------------------------------------------------------
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 (ERISA or 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 Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
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 EBSA via e-mail or FAX. Any such comments or
requests should be sent either by e-mail to: moffitt.betty@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
Employee Benefits Security 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).
[[Page 49026]]
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.
Cotter Merchandise Storage Company, Defined Benefit Pension Plan (the
Plan), Located in Akron, OH.
[Application No. D-11423.]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to (1) the proposed sale by the Plan to the
Cotter Merchandise Storage Company (Cotter or the Applicant), the Plan
sponsor and a party in interest with respect to the Plan, of certain
promissory notes (the Notes) which are currently held by the Plan; and
(2) the assignment, by the Plan to Cotter, of a civil judgment (the
Judgment) against the Plan's former trustee, Robert Geib (Mr. Geib).
This exemption is subject to the following conditions:
(a) The terms and conditions of the proposed sale transaction are
at least as favorable to the Plan as those that the Plan could obtain
in an arm's length transaction with an unrelated party;
(b) As consideration for the Notes, the Plan receives either (1)
the greater of $372,197 or (2) the fair market of the Notes (based upon
the value of the Plan's proportionate share of Mr. Geib's ownership
interest in Cotter common stock), as determined by a qualified,
independent appraiser on the date of the sale transaction;
(c) The proposed sale is a one-time transaction for cash;
(d) The Plan pays no fees, commissions, costs or other expenses in
connection with the proposed sale;
(e) Cotter pays the Plan all recoveries resulting from the
Judgment; and
(f) An independent fiduciary (1) determines that the sale is an
appropriate transaction for the Plan and is in the best interests of
the Plan and its participants and beneficiaries; (2) monitors the sale
on behalf of the Plan; and (3) ensures that the Plan receives all
future recoveries resulting from the Judgment.
Summary of Facts and Representations
1. The Plan is a defined benefit plan that was established in
August 1964 by Cotter, an Ohio corporation that is located in Akron,
Ohio. Cotter is a real estate holding company that owns a warehousing
subsidiary, Cotter Merchandise Storage Company of Ohio, Inc. (CMSCO).
Cotter's current directors and officers are Messrs. Chris Geib, John
Seikel, and Ms. Tonya Bridgeland. Chris Geib also serves as the Plan
trustee and he makes investment decisions on behalf of the Plan. As of
December 4, 2008, the Plan had 21 participants of which 11 are retired
or separated. As of June 30, 2008, the Plan had total assets of
$566,444.
2. Mr. Geib, the father of Chris Geib, was formerly an officer and
an owner of Cotter, as well as a Plan trustee. Between 1988 and 1990,
Mr. Geib made a series of unauthorized withdrawals from the Plan, which
he characterized as ``loans.'' \1\ The loans were unsecured at the time
of their execution and were evidenced by promissory notes. The Notes
carried interest at the rate of 12% per annum and ranged from $6,000 to
$100,000 in principal amounts. These Notes are set forth as follows:
---------------------------------------------------------------------------
\1\ (According to T.C. Memo. 2000-391, 2000 WL 1899306 (U.S. Tax
Ct.), the Plan allowed loans to participants subject to certain
requirements. In this regard, the Plan limited loan amounts,
required a Qualified Waiver of Spouse from the participant taking
the loan, and stipulated that the loan be secured by the
participant's entire interest in the Plan's trust. Mr. Geib's loans
were made in excess of the Plan's loan limitations and without a
Qualified Waiver of Spouse. Further, the loans were not adequately
secured and they did not meet the requirements of the Plan document.
Therefore, the loans would not satisfy the statutory exemption for
participant loans under section 408(b)(1) of the Act.
------------------------------------------------------------------------
Date Loan amount
------------------------------------------------------------------------
March 1, 1988.............................................. $62,000
March 7, 1988.............................................. 20,000
April 16, 1990............................................. 10,000
April 19, 1990............................................. 100,000
April 20, 1990............................................. 6,000
April 30, 1990............................................. 6,000
May 19, 1990............................................... 6,500
------------------------------------------------------------------------
The total principal amount of the loans was $210,500 and they each had
a maturity date of January 1, 1992.
In 1988, the outstanding loan balance represented 25.3% of the
Plan's assets. In 1990, the outstanding loan balance represented 37.35%
of the Plan's assets. The Applicant has no record that Mr. Geib made
any repayments. Moreover, all of the loans remained unpaid at their
maturity and have since remained unpaid.
3. On November 2, 1990, due to mismanagement, Cotter filed a
voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. On August 29, 1991, the Bankruptcy Court appointed Mr.
Seikel as the Chapter 11 Bankruptcy Trustee. Mr. Seikel subsequently
discovered the Notes and reported Mr. Geib to the U.S. Department of
Justice (the Justice Department).
4. On January 18, 1994, Mr. Seikel, who had also been appointed
Plan trustee by the Bankruptcy Court, obtained a judgment against Mr.
Geib in the amount of $272,500,\2\ plus interest at the rate of 10% per
annum (which had been reduced by the Bankruptcy Court from 12% per
annum), as the result of the outstanding Notes. Pursuant to the Plan of
Reorganization, the then existing Cotter stock was canceled and Mr.
Geib was issued 1,642.2 new shares of Cotter common stock. The Plan's
Judgment, along with other judgments held by Cotter and CMSCO against
Mr. Geib were (and are still) secured by these 1,642.2 shares.
---------------------------------------------------------------------------
\2\ According to the Applicant, the March 1, 1988 Note notation
was erroneously duplicated in the Plan's judgment. The correct
amount of the judgment should have been $210,500.
---------------------------------------------------------------------------
5. Also in 1994, the Justice Department indicted and charged Mr.
Geib in the U.S. District Court for the Northern District of Ohio,
Eastern Division with seven counts of bankruptcy fraud for unauthorized
transfers of company funds and one count of embezzling approximately
$100,000 from the Plan. On August 22, 1995, Mr. Geib entered into a
plea agreement with the Justice Department (the Plea Agreement) in
which he pled guilty to three counts of bankruptcy fraud and one count
of embezzlement. Mr. Geib admitted in the Plea Agreement that he took
$100,000 from the Plan in order to run Cotter.
[[Page 49027]]
According to the Plea Agreement, Mr. Geib could be incarcerated for up
to 18 months. Ultimately, Mr. Geib was incarcerated.
6. In a letter dated January 22, 1996, the Tax Division of the
Justice Department accepted an offer from Cotter's counsel to settle
claims made by the Internal Revenue Service (the Service) against
Cotter and CMSCO. The Justice Department found that as of June 30,
1995, the Plan had accumulated a funding deficiency equal to
$368,185.00. In order to pay excise taxes under section 4971(a) of the
Code triggered by the funding deficiency, the United States Treasury
received a $100,000 unsecured priority claim against Cotter in the
bankruptcy.
Among other things, the settlement offer was contingent upon the
Service's determination that Cotter, CMSCO, and Mr. Seikel were not
liable for any excise taxes due under section 4975 of the Code with
respect to the prohibited loan transactions involving the Plan and Mr.
Geib. Another letter, also dated January 22, 1996 but from the Service,
affirmed that Cotter, CMSCO and Mr. Seikel were not liable under
section 4975 of the Code with respect to the prohibited loan
transactions. The Service did not provide any relief to Mr. Geib and in
2000 sued him in the U.S. Tax Court (the Tax Court).
7. On May 1, 1997, Cotter emerged from bankruptcy. In addition,
Cotter asserted that it had paid off its accumulated funding deficiency
with a $337,609.00 payment to the Plan. The settlement of the funding
deficiency also resolved the $100,000 unsecured tax claim against
Cotter.
8. On June 13, 1997, the Bankruptcy Court ordered the offset of the
vested Plan benefit owed to Mr. Geib in partial satisfaction of the
amounts owed to the Plan under the Notes. Mr. Geib's entire benefit
under the Plan was valued at $252,890. Of this amount, Mr. Seikel
applied $242,084.26 to accrued interest and $10,805.74 to principal on
the Notes leaving a balance remaining of $199,194.26.
9. At each stage of the legal proceedings described above, it is
the Applicant's understanding that the Service was kept apprised of and
approved those actions. According to the Applicant, the Plan still
holds the Notes as a plan asset and all expenses incurred in connection
with the servicing or administration of such Notes have been borne by
Cotter. As of March 31, 2009, Mr. Geib owed the Plan $625,282. This
amount is based upon the face amount of the Notes plus all accrued but
unpaid interest (for which the rate had been reduced from 12 to 10
percent interest by the Bankruptcy Court). In addition, Mr. Geib owed
Cotter $447,910 and $307,866 to CMSCO as of March 31, 2009 from
previous misappropriations of their funds.
10. In 2000, the Tax Court found Mr. Geib liable for excise taxes
under section 4975 of the Code for the prohibited transaction arising
from the Notes. Additionally, the Tax Court found Mr. Geib in violation
of section 6651(a)(1) of the Code for the failure to file Forms 5330
for the prohibited transactions. These liabilities totaled $174,761.00
in 1998 and it is not evident that any payments have been made by Mr.
Geib.
In a March 1, 2009 personal financial statement, Mr. Geib claimed
that various creditors and other parties, including Cotter and the
Plan, had obtained a total of $1,830,620.00 in judgments against him.
He also claimed an annual income of $22,200, of which $16,200 was
derived from Social Security. In a May 14, 2009 affidavit, Mr. Geib
claimed that there had been no substantial changes to his financial
position since November 1, 2008. In addition, the Applicant represents
that it has no knowledge of Mr. Geib's current personal circumstances.
Based on these representations, Mr. Geib is essentially insolvent
and the Plan has little expectation of ever collecting the debt. The
amounts owed by Mr. Geib to the Plan cannot be retired because the
Notes are secured by the Cotter stock owned by Mr. Geib. The stock,
which is held in escrow, is also subject to the Judgment obtained by
the Plan, Cotter and CMSCO against Mr. Geib.
11. The Applicant represents that the Plan cannot foreclose on the
Notes and take legal custody of the stock collateralizing the Notes
without violating the provisions of section 406(a) of the Act. In this
regard, section 406(a)(1)(E) of the Act provides that a fiduciary with
respect to a plan shall not cause the plan to engage in a transaction
if he or she knows or should know that such transaction constitutes a
direct or indirect ``acquisition, on behalf of the plan, of any
employer security * * * in violation of section 407(a).''
Section 406(a)(2) of the Act prohibits a fiduciary who has
authority or discretionary control of plan assets to permit the plan to
hold any employer security if he or she knows or should know that
holding such security violates section 407(a).
Section 407(a)(1) of the Act states that a plan may not acquire or
hold any employer security which is not a qualifying employer security.
Section 407(a)(2) of the Act states further that a plan, such as a
defined benefit plan, may not acquire any qualifying employer security,
if immediately after such acquisition the aggregate fair market value
of the employer securities held by the plan exceeds 10% of the fair
market value of the assets of the plan.
Section 407(d)(5) of the Act defines the term ``qualifying employer
security'' to mean an employer security which is a stock, a marketable
obligation, or an interest in certain publicly traded partnerships.
However, after December 17, 1987, in the case of a plan, other than an
eligible individual account plan, an employer security will be
considered a qualifying employer security only if such employer
security satisfies the requirements of section 407(f)(1) of the Act.
Section 407(f)(1) of the Act states that stock satisfies the
requirements of this provision if, immediately following the
acquisition of such stock no more than 25% of the aggregate amount of
the same class issued and outstanding at the time of acquisition is
held by the plan, and at least 50% of the aggregate amount of such
stock is held by persons independent of the issuer.
The Cotter stock does not comply with the requirements of section
407(f)(1) of the Act, because at least 50% of the stock is not held by
persons ``independent of Cotter.'' In this regard, Mr. Chris Geib, who
is not ``independent of the issuer,'' owns over half of the issued and
outstanding 3,619.7 shares of Cotter stock.
In addition, even if the Cotter stock constituted qualifying
employer securities, as provided in section 407(d)(5) of the Act, the
Applicant states that the acquisition by the Plan of the Cotter stock
would cause the Plan to exceed the 10% assets limitation under section
407(a)(2) of the Act. Thus, the fiduciaries of the Plan cannot permit
the Plan to acquire Cotter stock without violating the Act.
12. Currently, the Plan is fully funded. In its Statement of
Financial Accounting Standards (SFAS) No. 158 Statement for Fiscal Year
Ended June 30, 2008 (SFAS Statement), Summit Retirement Plan Services
(Summit), an actuarial consulting company located in Cleveland, Ohio,
determined that as of June 30, 2008, the Plan was funded with an excess
of $214,691.00 (including the Notes). The SFAS Statement applied a
$448,700.00 value to the Notes based upon a 2007 independent appraisal
performed by Raymond H. Dunkle, CPA, ABV, CVA, CFE, of Brockman, Coats,
Gedelian & Co. (BCG) of Akron, Ohio. Accordingly, the Plan's funded
status would depend on the enforceable value
[[Page 49028]]
of the Notes. The sale of the Notes would afford the Plan more
liquidity and further ensure its funded status.
13. Cotter requests an administrative exemption from the Department
in order to purchase the Notes from the Plan and to receive the
Judgment from the Plan.\3\ The proposed sale price for the Notes will
reflect their fair market value, as determined by a qualified,
independent appraiser on the date of the sale transaction. Cotter will
pay the consideration to the Plan in cash and the Plan will not be
required to pay any fees, commissions or incur any expenses in
connection therewith in connection with the proposed sale. As a result
of the sale, the Plan will surrender the Notes, while retaining the
right to receive future recoveries from Cotter based on the Judgment.
---------------------------------------------------------------------------
\3\ According to the Applicant, the Service had suggested that
the Plan sell the Notes to Cotter in previous audits. However, the
Applicant explains that the Plan has held the Notes for so long
because the Bankruptcy Court required that Cotter meet a certain
level of performance that would take Cotter at least six years to
meet following its emergence from bankruptcy.
---------------------------------------------------------------------------
14. In 2009, the Notes were reappraised by Mr. Dunkle, a qualified,
independent appraiser, who is the Senior Manager of the Forensic &
Valuation Services Group at BCG. Mr. Dunkle has experience in providing
business advisory services, including business valuations of stock and
intangible assets, economic damage calculations, forensic accounting,
internal control studies, fraud investigations, fraud prevention
services, financial projections and forecasts, business planning, and
merger and acquisition assistance. Mr. Dunkle also has experience in
providing audit, review and compilation services to clients in a
variety of industries. He has certified that he has no present or
prospective interest in the Notes or in the parties involved in the
proposed transaction. Mr. Dunkle represents that BCG received less than
1% of its 2008 gross income from Cotter and its affiliates.
In his Valuation Report of Cotter dated May 13, 2009 (the 2009
Valuation), Mr. Dunkle placed the fair market value of Cotter common
stock on a minority, non-marketable basis at $500.59 per share as of
March 31, 2009, relying primarily on the Asset Approach to valuation.
Based upon the 2009 Valuation, Mr. Dunkle determined that the 1,642.2
shares of Cotter common stock owned by Mr. Geib had a fair market value
of $822,069 as of March 31, 2009.
Because of Mr. Geib's insolvency and the existence of combined
equal priority debt of $1,381,058, Mr. Dunkle explained that the value
of the Notes as of March 31, 2009 would be equal to the pro rata
portion of Mr. Geib's interest in Cotter that served as collateral for
such debt. The $1,381,058 total debt, which included principal and
interest due to the Plan as of March 31, 2009, consists of amounts owed
to the Plan ($625,282), Cotter ($447,910) and CMSCO ($307,866).
According to Mr. Dunkle, the Plan's pro rata interest in this debt was
45.2756% or ($625,282/$1,381,058). Applying this percentage to the
value of Mr. Geib's ownership interest in Cotter common stock
($822,069), Mr. Dunkle concluded that the Notes had a fair market value
equivalent to the prorated collateral value of $372,197 ($822,069 x
45.2756%) as of March 31, 2009.
Mr. Dunkle also noted that he had not become aware of any changes
to the values reported between March 31, 2009 and the May 13, 2009 date
of the 2009 Valuation. He will again update the 2009 Valuation on the
date of the proposed sale.
15. Pursuant to an engagement letter dated August 6, 2009, Cotter
retained Summit to serve as the independent fiduciary for the Plan with
respect to the proposed transactions. Summit has served as the Plan's
actuary since June 1, 2001. In this capacity, Summit states that it
tests and determines that the Plan has been adequately funded and that
annual testing and reporting is compliant with Federal laws and
regulations, such as the Act and the Code. In this regard, Summit
likens its responsibilities to those of an independent third party that
has had no conflicting interests with either the Plan or Cotter. As the
Plan's actuary, Summit represents that it received $4,970 from Cotter
and its affiliates in 2008. This amount represents less than 0.1% of
Summit's gross annual revenues.
Although Summit states that it has never acted as an independent
fiduciary on this type of issue, its professionals have significant
experience with the Act. In this regard, Summit explains that it has
three enrolled actuaries and it states that the majority of its staff
have professional designations, such as CPC, CPA, CBP, QPA and QKA. In
addition, Summit represents that its CEO and Chief Actuary Michael M.
Spickard, EA, MAAA, MSPA, CPC, QPA was appointed by the Department of
the Treasury to the Advisory Committee on Taxation--Employee Benefits
Group. Further, since its inception in 1996, Summit indicates that it
has serviced over 1,000 plans.
Summit states that it has reviewed the duties, responsibilities and
liabilities imposed by the Act on plan fiduciaries and it has worked
with outside attorneys on such matters and will retain the services of
such attorneys should the need arise regarding the proposed
transactions. Summit also acknowledges and accepts the duties,
responsibilities and liabilities imposed by the Act on plan
fiduciaries.
Summit represents that it has had knowledge of the Notes since 2001
when it began performing actuarial valuations and consulting services
for the Plan. Summit represents that the proposed transactions are
administratively feasible and in the best interest of the Plan, its
participants and beneficiaries. Summit explains that it has had
knowledge of the impact of the Notes on the Plan's investment portfolio
and its liquidity requirements. Because the Notes represent
approximately 67% of the Plan's assets (based upon the 2009 Valuation),
Summit states that the Plan is not very diversified. Therefore, the
proposed sale of the Notes by the Plan to Cotter would allow the Plan
to diversify its assets.
Further, Summit explains that the proposed sale complies with the
Plan's investment policies and objectives. This is because the
principle behind the sale is to free the Plan of illiquid, limited
marketability assets and to allow the Plan to invest in other assets
having an easily ascertainable market value that can be liquidated.
According to Summit, the proposed sale of the Notes will give the Plan
an infusion of cash that can be used to purchase investments that are
in alignment with the Plan's investment policy and objectives.
As the independent fiduciary Summit has agreed to monitor the
proposed sale and ensure that any future recoveries from the Judgment
that are received by Cotter will be paid to the Plan.
16. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The terms and conditions of the proposed sale transaction will
be at least as favorable to the Plan as those that the Plan could
obtain in an arm's length transaction with an unrelated party;
(b) As consideration for the Notes, the Plan will receive either
(1) the greater of $372,197 or (2) the fair market value of the Notes
(based upon the Plan's proportionate share of Mr. Geib's ownership of
Cotter common stock), as determined by a qualified, independent
appraiser on the date of the sale transaction;
(c) The proposed sale will be a one-time transaction for cash;
(d) The Plan will pay no fees, commissions, costs or other expenses
in connection with the proposed sale;
[[Page 49029]]
(e) Cotter will pay the Plan all recoveries resulting from the
Judgment; and
(f) An independent fiduciary will (1) determine that the sale is an
appropriate transaction for the Plan and is in the best interests of
the Plan and its participants and beneficiaries; (2) monitor the sale
on behalf of the Plan; and
(3) ensure that the Plan receives all future recoveries resulting
from the Judgment.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested
persons within 5 days of the publication of the notice of proposed
exemption in the Federal Register. The notice will be given to
interested persons by first class mail or personal delivery. Such
notice will contain a copy of the notice of proposed exemption, as
published in the Federal Register, and a supplemental statement, as
required pursuant to 29 CFR 2570.43(b)(2). The supplemental statement
will inform interested persons of their right to comment on and/or to
request a hearing with respect to the pending exemption. Written
comments and hearing requests are due within 35 days of the publication
of the notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Anh-Viet Ly of the Department at
(202) 693-8648. (This is not a toll-free number.)
Unaka Company, Incorporated Employees, Profit Sharing Plan (the Plan),
Located in Greeneville, Tennessee.
[Application No. D-11445.]
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,\4\ by reason of section 4975(c)(1)(A) through (E) of
the Code, shall not apply to the proposed sale by the Plan (the Sale)
to Unaka Company Incorporated (Unaka), a party in interest with respect
to the Plan, of two promissory notes (the Notes) that are secured by
deeds of trust on certain parcels of real property; provided that the
following conditions are satisfied:
---------------------------------------------------------------------------
\4\ Unless otherwise noted herein, reference to specific
provisions of the Act refer also to the corresponding provisions of
the Code.
---------------------------------------------------------------------------
(a) The Sale is a one-time transaction for cash;
(b) As consideration, the Plan receives the greater of the current
outstanding balance of the Notes, plus all accrued but unpaid interest
to the date of the Sale (Sale Date), or the fair market value of the
Notes as determined by qualified, independent appraisers in updated
appraisals on the Sale Date.
(c) The Plan pays no commissions, costs, fees, or other expenses
with respect to the Sale; and
(d) As soon as it is feasible following the Sale, the Plan releases
the deeds of trust securing the Notes.
Summary of Facts and Representations
1. Unaka, the sponsor of the Plan and the Unaka Company, Inc.
401(k) Plan (the 401(k) Plan), are located at 1550 Industrial Road,
Greenville, Tennessee. Unaka is the parent company of SOPACO, MECO and
the Round Table Office Complex subsidiaries. These subsidiaries make
``Meals Ready to Eat,'' folding chairs and other items.
2. The Plan is a qualified retirement plan that was established by
Unaka effective March 1, 1967. As of July 1, 2006, the Plan's Form 5500
indicated that the Plan had 903 participants and net assets of
$12,865,825. Included among these assets were certain third-party notes
that are described herein. Bisys Retirement Services (Bisys) serves as
the Plan's third party administrator. Until January 2009, Paul Rodeford
served as the Plan trustee and he exercised investment discretion over
the Plan's assets. Currently, Unaka serves as the Plan trustee.
3. On March 26, 2007, Unaka merged the Plan with the 401(k) Plan.
Bisys serves as the plan administrator for the 401(k) Plan. However,
for unspecified reasons, Bisys did not wish to administer the subject
Notes, which remain in the Plan.\5\ The other assets of the Plan were
transferred to the 401(k) Plan at the time of the merger. According to
its Form 5500 for the plan year ending June 30, 2008, the 401(k) Plan
had net assets of $15,525,162. As of the plan year ending June 30,
2008, the 401(k) Plan had 857 participants, which included all of the
participants from the Plan. The trustee of the 401(k) Plan is MG Trust
Company and the investment manager is Rather & Kittrell.
---------------------------------------------------------------------------
\5\ The Department is expressing no opinion on whether the
holding of the Notes by the Plan has violated section 403 of the
Act. In pertinent part, section 403 requires that all assets of an
employee benefit plan shall be held in trust by one or more trustee.
---------------------------------------------------------------------------
4. The Plan originated the first Note to Billy Joe and Kathyrn
Carter for $38,000 (the Carter Note) for the purchase of residential
property located at 80 Debusk Road, Greenville, TN (the Carter
Property) on September 6, 1984. The Plan originated the second Note to
Lloyd and Mary Weemes for $21,000 (the Weemes Note) for the purchase of
residential property located at 55 Lick Hollow Road, Greenville, TN
(the Weemes Property) on February 10, 1986.\6\ At no time have the
Carters or the Weemes been parties in interest with respect to the
Plan. The Plan also did not require the Carters or the Weemes to
purchase private mortgage insurance or to obtain property insurance.
---------------------------------------------------------------------------
\6\ It is believed that the decision to cause the Plan to make
the loans and execute the Notes with the Carters and Weemes was made
by two former officers of Unaka. The Department is expressing no
opinion herein on whether the decision by the former Unaka officers
to cause the Plan to originate the Carter and Weemes Notes or the
Plan's continued holding of the Notes has violated section 404(a) of
the Act. In pertinent part, 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.
---------------------------------------------------------------------------
5. The interest rate on the Carter Note is set annually to the
prime rate as determined by the Commerce Union Bank plus 2%, with a
maximum rate of 15% and a minimum floor rate of 10%. Principal and
interest under the Carter Note are payable in monthly installments for
a twenty five (25) year period, with interest and monthly principal
payments to be adjusted on March 31 of each year. At the time of
execution, the interest rate for the Carter Note was 15% per annum. The
initial monthly payment was $486.72. The first payment was due on
October 6, 1984 and similar monthly payments were due until March 31,
1985, at which time interest and monthly payments were recalculated. In
the event of default, the Carter Note provides that the Carters would
pay all collection costs, the unpaid amounts would accrue at 15% or the
then current rate and the Plan could proceed at once to foreclosure.
The failure to exercise the foreclosure option does not constitute a
waiver of the Plan's right to foreclose on the Carter Note. The Carter
Note is also non-assumable, and in the event the Carter Property is
sold, the entire balance of the Carter Note becomes due and payable.
The Carter Note is secured by a first deed of trust on the Carter
Property and Unaka has no knowledge of any other liens against the
Carter Property.
6. According to records running from June 2002 to October 2008,
Mrs. Carter
[[Page 49030]]
began to miss payments beginning with the November 2002 payment
following the death of Mr. Carter. Although Mrs. Carter has missed
payments for periods of up to six months, the Carter Note does not
provide for any late penalties.
7. The Weemes Note, which was in the original principal amount of
$21,000, carries similar interest rate terms, default terms and non-
assumption provisions to the Carter Note. However, the Weemes Note has
a twenty (20) year duration and the initial interest rate was set at
11[frac12]% per annum, with a monthly payment of $223.96 that commenced
on March 10, 1986. In the event of default, the unpaid amounts would
accrue at 15% per annum or the then current rate. The Weemes Note is
secured by a first deed of trust on the Weemes Property and Unaka has
no knowledge of any other liens against the Weemes Property.
8. According to records running from January 2002 to October 2008,
the Weemes began to miss payments beginning with their January 2002
payment after Mr. Weemes became unemployed. Since that time, the Weemes
have missed several payments for periods of up to two months before
resuming payments. The Weemes Note also does not provide for any late
fees.
9. Unaka has paid all costs and expenses associated with the Plan's
holding of the Notes (except for real property taxes, which have been
paid by the borrowers). As of March 31, 2009, the Carter Note had an
outstanding balance of $30,772.10 and the Weemes Note had an
outstanding balance of $9,667.01. Although the borrowers' payments on
the Notes have been sporadic, Unaka represents that if it foreclosed on
the Notes it is very unlikely it would recover the remaining balances.
Unaka represents also that under Tennessee law, if the Plan finds the
Carter and Weemes Notes in default, the Plan would have to foreclose on
the Carter and Weemes Properties. Further, Unaka states that if a third
party were to purchase the Weemes or the Carter properties in
foreclosure, it would be for a discounted price.
10. Accordingly, Unaka proposes to purchase the Notes from the Plan
and requests an administrative exemption from the Department in order
to engage in the Sale. The proposed Sale will be a one-time transaction
for cash. As consideration, the Plan will receive the greater of the
current outstanding balance of the Notes, plus all accrued but unpaid
interest to the Sale Date, or the fair market value of the Notes as
determined by qualified, independent appraisers in updated appraisals
on the Sale Date. The Plan will pay no commissions, costs, fees, or
other expenses with respect to the Sale. Finally, as soon as it is
feasible following the Sale, the Plan will release the deeds of trust
securing the Notes.
11. Unaka retained Braun & Associates, Inc. of Maryville,
Tennessee, to perform an independent appraisal of both properties.
Specifically, Woody Fincham and his supervisor, David A. Braun,
performed appraisals of the subject properties and they prepared
separate appraisal reports for such properties that are dated March 5,
2009. Both Mr. Braun and Mr. Fincham are licensed as appraisers in the
State of Tennessee. Mr. Braun is a certified general appraiser having
both ``MAI'' and ``SRA'' designations. Both Mr. Fincham and Mr. Braun
are qualified independent appraisers.
Messrs. Fincham and Braun acknowledge that their appraisal reports
are being used by Unaka in connection with this exemption request.
Messrs. Fincham and Braun represent that neither they nor anyone
involved in the preparation of the appraisal has any present or
prospective interest in the properties involved and no personal
interest with respect to the parties involved. After using the Sales
Comparison Approach to value the Carter and Weemes Properties, Messrs.
Fincham and Mr. Braun placed the fair market value of the Weemes
Property at $5,850 and the Carter Property at $37,500 as of March 5,
2009.
12. Unaka also retained Robin Carmichael, a real estate consultant
who is employed by Rocky Top Realty of Knoxville Tennessee, to appraise
the Notes. Ms. Carmichael states that she has 13 years of experience in
the East Tennessee real estate market including knowledge in the
mortgage resale business and recent foreclosures in the East Tennessee
area. Ms. Carmichael also indicates that she has 11 years of experience
in the mortgage lending industry. Ms. Carmichael explains that she has
assessed the value of roughly 400 different properties regarding their
valuation and that her valuation of the Notes combines her experience
in the real estate industry with buying and selling of commercial and
residential properties and her knowledge of mortgage lending. Ms.
Carmichael acknowledges her appraisal will be used by Unaka in
connection with this exemption request and she states that her combined
income from Unaka, its principals or any parties in interest with
respect to the Plan represent no more than 1% of her gross 2008 income.
In her appraisal of March 18, 2009 and addenda dated April 25, 2009
and May 13, 2009, Ms. Carmichael states that the fair market value of
the Carter Note and Weemes Note should be discounted 50 to 60% against
their respective MAI appraised value. She has applied a discount that
takes into account such factors as a declining real estate market, the
condition of the Weemes and Carter Properties, the non-transferability
of the Notes, the payment histories of the borrowers, the loan to value
ratio of the Notes, their interest rates and the employment status of
the borrowers. Ms. Carmichael also states that the Notes do not appear
to have any existing liens or encumbrances. Accordingly, Ms. Carmichael
concludes that as of April 28, 2009, the midpoint value of both Notes,
after taking into account, among other things, the applicable discount,
is 45% of the MAI appraised value ascertained by Messrs. Fincham and
Braun.
13. The outstanding balance of the Weemes Note as of March 31, 2009
was $9,677.01. This amount exceeds the fair market value of the Weemes
Note as of March 5, 2009, which was $2,632.50 ($5,850 x 45%). The
current outstanding principal balance of the Carter Note as of March
31, 2009 was $30,772.10. This amount exceeds the fair market value of
the Carter Note, which was $16,875.00 ($37,500 x 45%) as of March 5,
2009. Unaka represents that it will pay the greater of the current
outstanding balance of the Notes plus accrued but unpaid interest to
the Sale Date or the fair market value of the Notes as determined by
qualified, independent appraiser on the Sale Date. Thus, if the Sale
had occurred on March 31, 2009, Unaka would have paid the Plan the
principal balance outstanding, plus accrued but unpaid interest for
both the Weemes and Carter Notes.
14. In summary, Unaka represents that the proposed transaction will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
(a) The Sale will be a one-time transaction for cash.
(b) The Plan will receive the greater of the current outstanding
balance of the Notes, plus all accrued but unpaid interest to the Sale
Date, or the fair market value of the Notes as determined by qualified,
independent appraisers in updated appraisals on the Sale Date;
(c) The Plan will pay no commissions, costs, or other expenses with
respect to the Sale; and
(d) As soon as it is feasible following the Sale, the Plan will
release the deeds of trust.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested
persons
[[Page 49031]]
within 5 days of the publication of the notice of proposed exemption in
the Federal Register. The notice will be given to interested persons by
first class mail or personal delivery. Such notice will contain a copy
of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to 29 CFR
2570.43(b)(2). The supplemental statement will inform interested
persons of their right to comment on and/or to request a hearing with
respect to the pending exemption. Written comments and hearing requests
are due within 35 days of the publication of the notice of proposed
exemption in the Federal Register.
For Further Information Contact: Mr. Anh-Viet Ly of the Department
at (202) 693-8648. (This is not a toll-free number.)
State Street Bank and Trust Company, Located in Massachusetts.
[Application No. D-11522.]
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)(1)(A) and (D) and 406(b) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A), (D), (E), and (F) of the Code, shall not apply as of
October 24, 2008, to the cash sale of certain mortgage, mortgage-
related, and other asset-backed securities for $2,447,381,010 (the
Sale) by stable value commingled funds and separate accounts both
holding assets of employee benefit plans (the Accounts) to State Street
Bank and Trust Company (State Street), the investment manager and/or
trustee for the Accounts, provided that the conditions set forth below
are met.
(a) The Sale was a one-time transaction for cash payment made on a
delivery versus payment basis.
(b) The Accounts did not bear any commissions or transaction costs
in connection with the Sale.
(c) The Accounts received as a purchase price for the securities an
amount which, as of the effective date of the Sale, was equal to the
fair market value of the securities, determined by reference to prices
provided by independent third-party pricing sources consulted in
accordance with pricing procedures used by the Accounts prior to the
transaction.
(d) In connection with the Sale, State Street transferred to and
allocated among the Accounts cash in the amount of $450,000,000.
(e) At the time of the transaction, State Street, as trustee of the
Accounts, determined (except with respect to the State Street Salary
Savings Program, an employee benefit plan maintained for employees of
State Street and certain affiliates (the State Street Plan)) that the
Sale was appropriate for and in the best interests of the Accounts and
the employee benefit plans invested in the Accounts. An independent
fiduciary determined at the time of the transaction that the Sale was
appropriate for and in the best interest of the State Street Plan and
its participants and beneficiaries.
(f) An independent consultant reviewed, after the Sale, the
reasonableness of the prices used to purchase the securities, and
concluded that the pricing methodology used by State Street provided a
reasonable basis for determining the fair market value of the
securities and that the methodology was reasonably applied with only
immaterial deviations.
(g) In carrying out the Sale, State Street took all appropriate
actions necessary to safeguard the interests of each Account and each
employee benefit plan with a direct or indirect interest in an Account.
(h) State Street and its affiliates, as applicable, will maintain,
or cause to be maintained, for a period of six (6) years from the date
of the Sale such records as are necessary to enable the persons
described below in paragraph (i)(i) to determine whether the conditions
of this exemption have been met, except that--
(i) No party in interest with respect to a plan which engaged in
the covered transaction, other than State Street and its affiliates, as
applicable, shall be subject to a civil penalty under section 502(i) of
the Act or the taxes imposed by section 4975(a) and (b) of the Code, if
such records are not maintained or are not available for examination as
required by paragraph (i) below; and
(ii) A separate prohibited transaction shall not be considered to
have occurred solely because due to circumstances beyond the control of
State Street or its affiliate, as applicable, such records are lost or
destroyed prior to the end of the six-year period.
(i)(i) Except as provided below, in paragraph (ii), and
notwithstanding any provisions of subsections (a)(2) and (b) of
sections 504 of the Act, the records referred to in paragraph (h)
above, are unconditionally available at their customary location for
examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, the Securities and Exchange
Commission or the Federal Reserve Board;
(B) Any fiduciary of any plan that engaged in the covered
transaction, or any duly authorized employee or representative of such
fiduciary;
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a plan that engages in the
covered transactions, or any authorized employee or representative of
these entities; or
(D) Any participant or beneficiary of a plan that engages in the
covered transactions, or duly authorized employee or representative of
such participant or beneficiary;
(ii) None of the persons described above in subparagraphs (B)-(D)
of paragraph (i)(i) are authorized to examine the trade secrets of
State Street or commercial or financial information that is privileged
or confidential.
(iii) Should State Street refuse to disclose information on the
basis that such information is exempt from disclosure, State Street
shall, by the close of the thirtieth (30th) day following the request,
provide written notice advising that person of the reason for the
refusal and that the Department may request such information.
Summary of Facts and Representations
1. State Street Bank and Trust Company (State Street), a
Massachusetts trust company and a member bank of the Federal Reserve
System, is a wholly-owned subsidiary of State Street Corporation, a
bank holding company organized under the laws of the Commonwealth of
Massachusetts. State Street is a global financial services company that
provides a wide range of banking, fiduciary, and investment management
services to institutional investors, including employee benefit plans
subject to the Act.
2. State Street is the investment manager and/or trustee for a
variety of commingled investment funds and separate accounts, including
certain stable value commingled funds and separate accounts holding
plan assets (the Accounts). The Accounts comprise employee benefit
plans invested through one of several structures including: direct
investment in commingled funds for which State Street acts as
investment manager and/or trustee; investment in separate portfolios
under the Stable Fixed Income Fund for Employee Benefit
[[Page 49032]]
Trusts for which State Street is the investment manager and trustee;
separately managed accounts appointing State Street as investment
manager and directing State Street to invest plan assets in bonds and
other debt securities as well as in other State Street commingled funds
(where State Street acts as trustee for some of the accounts and for
assets held in the accounts that are invested in State Street
commingled funds); and investment in funds set up specifically for a
particular plan, for which State Street acts as investment manager and
trustee.
3. Certain third party financial institutions are contractually
obligated to provide financial support to the Accounts under certain
circumstances (the Wrap Providers). The contractual arrangements with
the Wrap Providers (the Wrap Contracts) permit the Accounts to use
benefit responsive accounting and to issue and redeem units at book
value despite fluctuations in the market value of the Account's
underlying assets.
4. The Wrap Providers are contractually committed to covering any
shortfall between market and book values upon the complete redemption
of the Account. However, the Wrap Providers are also contractually
entitled to limit their exposure to a decline in the market value of an
Account's assets either by making an immunization election (i.e., an
election to force the securities to be sold and replaced by a pool of
Treasury, AAA-rated or similar securities with a duration managed to
zero over an agreed period and being excused from providing book value
protection to additional contributions to the Account) or by electing
to terminate the Wrap Contract, thereby causing State Street to make an
immunization election.
5. The Accounts are managed in accordance with investment
guidelines approved by both the plans and the Wrap Providers that
permit, subject to diversification and credit limitations, investment
in a broad range of fixed income securities. Prior to October 2008, the
assets in the Accounts included certain mortgage, mortgage-related and
other asset-backed debt securities. As a result of disruptions in the
market for fixed income securities that began in 2007 and became more
pronounced in 2008, the assets experienced significant liquidity and
pricing issues, contributing to a decline in the market-to-book value
ratio of the Accounts and creating a continuing risk of further
decline.
6. Throughout 2008, State Street engaged in active dialogue with
the Wrap Providers regarding market conditions and the potential impact
of the fixed income markets and the composition of the Accounts'
portfolios on the potential risk exposure of the Wrap Providers. State
Street also was engaged in negotiations relating to the decision by one
Wrap Provider to exit the business of providing benefit responsive
contracts, and, as a result, to terminate its Wrap Contracts with the
Accounts.
7. State Street believed that immunization would be harmful to
Plans and their participants both in the short term, as assets are sold
to comply with the immunization investment guidelines, and over the
longer term, as crediting rates are adjusted to reflect reinvestment in
lower yielding assets and to amortize the market-to-book differential
over the duration of the immunization period. In State Street's
judgment, a forced sale of all of the assets in the portfolios at
distressed prices attributable to illiquidity in the markets would
likely result in greater losses to plans and their participants than if
the markets were given a chance to recover.
8. In May 2008, State Street retained an independent consulting
firm, Oliver Wyman, a management consulting subsidiary of Marsh &
McLennan Companies, to evaluate the economic performance of the
Accounts. Oliver Wyman's initial analysis focused both on credit
performance and projections for both market-to-book and crediting rates
at the individual fund level.
9. Oliver Wyman's initial credit analysis identified three
distressed asset classes that had a negative impact on stable value
fund performance and recommended that State Street consider removing
these securities from the portfolios. The securities identified
consisted of all of the sub prime and Alt-A mortgage securities, and
all non-agency prime adjustable rate mortgage (ARM) securities in the
portfolio. In the aggregate, the total book value of these securities
was approximately $1.96 billion.
10. State Street shared Oliver Wyman's analysis of the portfolio
and the potential impact of an immunization election with the Wrap
Providers as part of its ongoing dialogue. While, in the Applicant's
view, the analysis supported State Street's favorable credit view of
the assets, it did not eliminate the Wrap Providers' concerns about the
risk characteristics of the Accounts. As part of its portfolio review,
State Street also evaluated measures that it could take to provide
financial support to the Accounts; however, banking, ERISA and
accounting issues, among others, resulted in there being no clearly
executable means of supporting the Accounts.
11. State Street then entered into discussions with two potential
purchasers of its stable value business. Both purchasers concurred in
the need to remove the securities identified from the stable value
portfolios in order to mitigate potential downside price risk to the
portfolios. In addition, they proposed removing $1.1 billion of
additional securities, consisting of all non-ARM securities in the non-
agency prime category, all auto loan asset-backed securities and
certain other non-mortgage asset-backed securities, and all securities
held through the passively managed Asset Backed Index Fund. The
expanded list of securities (the Selected Assets) had a total book
value of approximately $3.1 billion.
12. State Street explored a variety of measures to address the risk
to the Accounts presented by the Selected Assets. It determined to
address the risk to the Accounts presented by the Selected Assets
outside the context of the transfer of its stable value business,
having concluded that a transaction could not be arranged in a
timeframe that would prevent immunization by one or more of the Wrap
Providers. In addition, after exploring a variety of possible sale
transactions with respect to all or a portion of the Selected Assets,
it concluded that there was no likelihood of finding a third party to
purchase the Selected Assets at prices State Street believed to
represent fair value to the Accounts. Therefore, State Street
determined, based on a variety of factors including discussions with
the Department, that it would be prudent and in the best interests of
the investing plans for State Street to purchase the Selected Assets
from the Accounts, as described below.
13. State Street purchased the Selected Assets from the Accounts
before the opening of the U.S. financial markets on Monday, October 27,
2008 (the Sale). The aggregate consideration paid for the Selected
Assets was $2,447,381,010, which was the market price of the securities
on the previous trading day, Friday, October 24, 2008.
14. The Sale was a one-time transaction for cash payment made on a
delivery versus payment basis. The Accounts did not bear any
commissions or transaction costs in connection with the Sale.
15. The consideration paid for each security was the market price
for such security determined by reference to prices provided by an
independent third-party pricing service, Interactive Data Corporation
(IDC), consulted in accordance with pre-established pricing
[[Page 49033]]
procedures. For a small number of securities for which no IDC price was
available, a hierarchy of alternative third-party pricing sources was
used, also in accordance with pre-existing pricing procedures. The
existing hierarchy was: (1) IDC; (2) Bear Stearns (now part of
JPMorgan); and (3) other broker quotations provided through State
Street's Data Management & Pricing Group.
16. Securities held through certain commingled funds were purchased
at prices determined by independent third-party pricing sources in
accordance with the same hierarchies as were used for such commingled
funds prior to the transaction. That hierarchy was different for assets
of different types. For mortgage-backed and asset-backed securities the
hierarchy was: (1) Lehman Brothers (now owned by Barclays Global); (2)
Bear Stearns (now part of JPMorgan); (3) IDC; and (4) other broker
quotations. For other fixed income securities (such as U.S. corporate
bonds) the hierarchy was: (1) Lehman Brothers (now owned by Barclays
Global); (2) IDC; (3) Bear Stearns (now part of JPMorgan); and (4)
other broker quotations.
17. In connection with the Sale, State Street deposited and
allocated among the Accounts cash equal to $450,000,000 (the Cash
Infusion). As of the date of the transaction, the Cash Infusion
improved the average market-to-book ratio across all Accounts to 96.6%
on a total account basis. Although market data on stable value accounts
is limited, State Street believes that the market-to-book value ratios
of the Accounts immediately after the Cash Infusion were generally
consistent with industry averages.\7\ The Cash Infusion was allocated
among the Accounts systematically, according to a predetermined
mathematical formula. Oliver Wyman verified that the allocation method
had been properly applied.\8\
---------------------------------------------------------------------------
\7\ State Street conducts a separate business as a wrap provider
to the accounts of third party investment managers. Its estimates of
industry averages for market-to-book value ratios were based upon an
evaluation of the accounts to which it provides benefit responsive
contracts, discussions with the Wrap Providers, and the limited
amount of market data available from third party consulting sources.
\8\ As the participating plans did not give anything of value in
connection with or in exchange for the Cash Infusion, in the
Department's view, no question of a prohibited transaction would
arise in connection with the Cash Infusion or its allocation because
the plan has not engaged in a transaction with a party in interest
prohibited under section 406 of the Act. See e.g., preamble to the
Proposed Class Exemption for the Release of Claims and Extensions of
Credit in Connection with Litigation (68 FR 6953, February 11, 2003)
(granted as PTE 2003-39 (68 FR 75632, December 31, 2003)).
---------------------------------------------------------------------------
18. In connection with the Sale and the Cash Infusion, State Street
also entered into agreements with the Wrap Providers that provided the
Accounts certain assurances with respect to the exercise of
immunization and termination rights by the Wrap Providers and included
a release by the Wrap Providers with respect to State Street.
19. At the time of the transaction, State Street, as trustee of the
Accounts, determined (except with respect to the State Street Salary
Savings Program, an employee benefit plan maintained for employees of
State Street and certain affiliates (the State Street Plan)) that the
Sale was appropriate for and in the best interests of the Accounts.
20. An independent fiduciary, Fiduciary Counselors, Inc. (Fiduciary
Counselors), reviewed the terms of the participation in the Sale by the
State Street Plan and determined that the transaction was in the best
interests of the State Street Plan and its participants and
beneficiaries. In making this determination, Fiduciary Counselors
reviewed the IDC prices as of October 24, 2008, interviewed personnel
from State Street and Oliver Wyman, examined the agreements with the
Wrap Providers, and reviewed State Street's calculations of the amount
due to the State Street Plan. Fiduciary Counselors determined that the
transaction would, among other things: Eliminate most of the difference
between book and market values in the State Street Plan's stable value
fund; significantly improve the average quality of the underlying
investments; and reassure all Wrap Providers that continuing coverage
for the State Street stable value funds does not provide unacceptable
risks.
21. Following the Sale, State Street engaged Capital Market Risk
Advisors (CMRA), a risk management advisory firm, to independently
review the reasonableness of prices used to purchase the Securities.
CMRA was engaged to assess whether the pricing methodology used by
State Street provided a reasonable basis for determining the market
value of the assets acquired in the Sale and whether the methodology
was appropriately implemented.
22. To determine the reasonableness of the market values used by
State Street, CMRA reviewed a listing of bonds sold for each Account,
the prices at which they were sold and the source of such prices, as
well as additional pricing sources and quotes. CMRA also reviewed
copies of State Street's applicable valuation hierarchies and documents
submitted to the Department in connection with the exemption request.
CMRA then undertook a three-pronged review consisting of (A) a
portfolio level analysis of the reasonableness of prices obtained from
the pricing sources utilized by State Street in the aggregate as
compared to prices obtained by utilizing alternative pricing sources in
the aggregate; (B) a more detailed assessment of the reasonableness of
prices utilized by State Street compared to prices obtained through
CMRA's independent valuation of a selected sample of twenty-one
securities (the Independently Valued Securities); \9\ and (C) a review
of methodologies utilized by State Street for each Account to determine
whether such methodologies were consistent with applicable hierarchies.
---------------------------------------------------------------------------
\9\ To create this sample, CMRA focused on the largest bond
positions for which there were significant variations in price
between and among the different pricing sources, and on position
size. The Independently Valued Securities were all non-agency
residential mortgage-backed securities backed by sub prime, Alt-A
and prime mortgage loans. CMRA's independent valuation was performed
seven months after the Sale; however, CMRA made every effort to
limit its inputs to information actually known at the time of the
Sale.
---------------------------------------------------------------------------
23. CMRA concluded that: (1) The pricing methodology used by State
Street was reasonable; (2) the prices used by State Street were
reasonable in the aggregate; (3) the prices used by State Street with
respect to the Independently Valued Securities were within a reasonable
range in all but three instances; two of which were, in CMRA's opinion,
unreasonably high and one of which was unreasonably low. Had all of the
Independently Valued Securities been priced within CMRA's reasonable
range, there would have been a net decrease of $7.1 million or
approximately 1% of the amount paid by State Street for the
Independently Valued Securities or 0.29% of the total amount paid by
State Street in connection with the Sale; and (4) the methodologies
used by State Street varied to a minor extent from State Street's
stated methodologies in that the applicable hierarchy of pricing
sources was not always followed, but the overall effect of this
deviation was immaterial.\10\ Had the prescribed hierarchy been
followed in every instance, there would have been a net decrease of
$12.1 million or approximately 0.5% of the amount paid by State Street
in connection with the Sale. Accordingly, CMRA determined that the
pricing methodology used by State Street provided a reasonable basis
for determining the market value of the
[[Page 49034]]
securities and that the methodology was reasonably applied.
---------------------------------------------------------------------------
\10\ According to CMRA, the valuation methodology used by State
Street for the managed accounts was completely consistent with the
applicable hierarchy. For the commingled funds, it varied to a minor
extent.
---------------------------------------------------------------------------
24. According to the Applicant, the Sale and Cash Infusion were
intended to protect the plans and their participants by increasing the
assets available to meet benefit payment obligations and redemption
requests and by reducing certain risks inherent in each Account's
portfolio resulting from market conditions, thereby eliminating or
reducing the Wrap Providers' incentives to exercise their contractual
termination or immunization rights. State Street represents that it
took all appropriate actions necessary to safeguard the interests of
each Account and each employee benefit plan with a direct or indirect
interest in an Account.
25. In summary, the Applicant represents that the statutory
criteria of section 408(a) of the Act and section 4975 of the Code are
satisfied because:
(a) The exemption is administratively feasible, as the transaction
is already completed and all relevant details have been fully
disclosed;
(b) The transaction, if covered by an exemption, is in the interest
of the participating plans and their participants and beneficiaries
because the transaction will reduce the likelihood that the Wrap
Providers will exercise their immunization and termination rights,
which would adversely affect the plans and their participants;
(c) The exemption is protective of the rights of participants and
beneficiaries of the plans, because: (i) The assets sold were
identified for disposition in arm's length negotiations between State
Street and two bidders for the acquisition of State Street's stable
value business, (ii) independent pricing services were used to value
and price the assets sold to State Street, and (iii) no commissions or
transaction costs were charged in connection with the sale of the
assets.
FOR FURTHER INFORMATION CONTACT: Karen E. Lloyd of the Department, at
(202) 693-8554. 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 21st day of September, 2009.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E9-23168 Filed 9-24-09; 8:45 am]
BILLING CODE 4510-29-P