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EBSA Notices

Notice of Proposed Exemptions   [9/25/2009]
[PDF]
FR Doc E9-23168
[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]                         

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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.

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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 (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:
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    \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.
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    \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.
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    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.
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    \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.
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    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:
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    \4\ Unless otherwise noted herein, reference to specific 
provisions of the Act refer also to the corresponding provisions of 
the Code.
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    (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.
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    \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.
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    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\
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    \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