[Federal Register: December 22, 2009 (Volume 74, Number 244)]
[Notices]
[Page 68101-68129]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22de09-91]
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Part II
Department of Labor
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Employee Benefits Security Administration
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Notice of Proposed Exemptions; Notice
[[Page 68102]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[D-11509; D-11532; D-11555; D-11556; L-11558; et al.]
Notice of Proposed Exemptions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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Application Nos. and Proposed Exemptions: D-11509, Goldman, Sachs &
Co. and its Affiliates (Goldman or the Applicant); D-11532, Louis B.
Chaykin, M.D., P.A.; D-11555, The Coca-Cola Company (TCCC, or the
Applicant); D-11556, Columbia Management Advisors, LLC (Columtia, or
the Applicant) and its Current and Future Affiliates (collectively,
the Applicants); and L-11558, Boston Carpenters Apprenticeship and
Training Fund (the Fund); et al.
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.
Warning: If you submit written comments or hearing requests, do not
include any personally-identifiable or confidential business
information that you do not want to be publicly-disclosed. All comments
and hearing requests are posted on the Internet exactly as they are
received, and they can be retrieved by most Internet search engines.
The Department will make no deletions, modifications or redactions to
the comments or hearing requests received, as they are public records.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Goldman, Sachs & Co. and Its Affiliates (Goldman or the Applicant),
Located in New York, New York.
[Application No. D-11509.]
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).\1\
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\1\ For purposes of this proposed exemption, references to
section 406 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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Section I. Sales of Auction Rate Securities From Plans to Goldman:
Unrelated to a Settlement Agreement
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) and (D) and section 406(b)(1) and (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), (D), and (E) of the Code, shall not
apply, effective February 1, 2008, to the sale by a Plan (as defined in
Section V(e)) of an Auction Rate Security (as defined in Section V(c))
to Goldman, where such sale (an Unrelated Sale) is unrelated to, and
not made in connection with, a Settlement Agreement (as defined in
Section V(f)), provided that the conditions set forth in Section II
have been met.
Section II. Conditions Applicable to Transactions Described in Section
I
(a) The Plan acquired the Auction Rate Security in connection with
brokerage or advisory services provided by Goldman to the Plan;
(b) The last auction for the Auction Rate Security was
unsuccessful;
(c) Except in the case of a Plan sponsored by Goldman for its own
employees (a Goldman Plan), the Unrelated Sale is made pursuant to a
written offer by Goldman (the Offer) containing all of the material
terms of the Unrelated Sale. Either the Offer or other materials
available to the Plan provide: (1) The identity and par value of the
Auction Rate Security; (2) the interest or dividend amounts that are
due and unpaid with respect to the Auction Rate Security; and (3) the
most recent rate information for the Auction Rate Security (if reliable
information is available). Notwithstanding the foregoing, in the case
of a pooled fund maintained or advised by Goldman, this condition shall
be deemed met to the extent each Plan invested in the pooled fund
(other than a Goldman Plan) receives written notice regarding the
Unrelated Sale, where such notice contains the material terms of the
Unrelated Sale;
[[Page 68103]]
(d) The Unrelated Sale is for no consideration other than cash
payment against prompt delivery of the Auction Rate Security;
(e) The sales price for the Auction Rate Security is equal to the
par value of the Auction Rate Security, plus any accrued but unpaid
interest or dividends;
(f) The Plan does not waive any rights or claims in connection with
the Unrelated Sale;
(g) The decision to accept the Offer or retain the Auction Rate
Security is made by a Plan fiduciary or Plan participant or IRA owner
who is independent (as defined in Section V(d)) of Goldman.
Notwithstanding the foregoing: (1) In the case of an IRA (as defined in
Section V(e)) which is beneficially owned by an employee, officer,
director or partner of Goldman, the decision to accept the Offer or
retain the Auction Rate Security may be made by such employee, officer,
director or partner; or (2) in the case of a Goldman Plan or a pooled
fund maintained or advised by Goldman, the decision to accept the Offer
may be made by Goldman after Goldman has determined that such purchase
is in the best interest of the Goldman Plan or pooled fund; \2\
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\2\ The Department notes that the Act's general standards of
fiduciary conduct also would apply to the transactions described
herein. In this regard, section 404 of the Act requires, among other
things, that a fiduciary discharge his duties respecting a plan
solely in the interest of the plan's participants and beneficiaries
and in a prudent manner. Accordingly, a plan fiduciary must act
prudently with respect to, among other things, the decision to sell
the Auction Rate Security to Goldman for the par value of the
Auction Rate Security, plus unpaid interest and dividends. The
Department further emphasizes that it expects Plan fiduciaries,
prior to entering into any of the proposed transactions, to fully
understand the risks associated with this type of transaction
following disclosure by Goldman of all relevant information.
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(h) Except in the case of a Goldman Plan or a pooled fund
maintained or advised by Goldman, neither Goldman nor any affiliate
exercises investment discretion or renders investment advice within the
meaning of 29 CFR 2510.3-21(c) with respect to the decision to accept
the Offer or retain the Auction Rate Security;
(i) The Plan does not pay any commissions or transaction costs with
respect to the Unrelated Sale;
(j) The Unrelated Sale is not part of an arrangement, agreement or
understanding designed to benefit a party in interest to the Plan;
(k) Goldman and its affiliates, as applicable, maintain, or cause
to be maintained, for a period of six (6) years from the date of the
Unrelated Sale, such records as are necessary to enable the persons
described below in paragraph (l)(1), to determine whether the
conditions of this exemption, if granted, have been met, except that:
(1) No party in interest with respect to a Plan which engages in an
Unrelated Sale, other than Goldman 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 not available for examination, as
required, below, by paragraph (l)(1); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of Goldman or its affiliates, as applicable, such records are lost or
destroyed prior to the end of the six-year period;
(l)(1) Except as provided below in paragraph (l)(2), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to above in paragraph (k) 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, or the U.S. Securities and
Exchange Commission;
(B) Any fiduciary of any Plan, including any IRA owner, that
engages in a Sale, or any duly authorized employee or representative of
such fiduciary; or
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a Plan that engages in the
Unrelated Sale, or any authorized employee or representative of these
entities;
(2) None of the persons described above in paragraphs (l)(1)(B)-(C)
shall be authorized to examine trade secrets of Goldman, or commercial
or financial information which is privileged or confidential; and
(3) Should Goldman refuse to disclose information on the basis that
such information is exempt from disclosure, Goldman shall, by the close
of the thirtieth (30th) day following the request, provide a written
notice advising that person of the reasons for the refusal and that the
Department may request such information.
Section III. Sales of Auction Rate Securities From Plans to Goldman:
Related to a Settlement Agreement
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) and (D) and section 406(b)(1) and (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), (D), and (E) of the Code, shall not
apply, effective February 1, 2008, to the sale by a Plan of an Auction
Rate Security to Goldman, where such sale (a Settlement Sale) is
related to, and made in connection with, a Settlement Agreement,
provided that the conditions set forth in Section IV have been met.
Section IV. Conditions Applicable to Transactions Described in Section
III
(a) The terms and delivery of the Offer are consistent with the
requirements set forth in the Settlement Agreement and acceptance of
the offer does not constitute a waiver of any claim of the tendering
Plan;
(b) The Offer or other documents available to the Plan specifically
describe, among other things:
(1) The securities available for purchase under the Offer;
(2) The background of the Offer;
(3) The methods and timing by which Plans may accept the Offer;
(4) The purchase dates, or the manner of determining the purchase
dates, for Auction Rate Securities tendered pursuant to the Offer, if
the Offer had any limitation on such dates;
(5) The timing for acceptance by Goldman of tendered Auction Rate
Securities, if there were any limitations on such timing;
(6) The timing of payment for Auction Rate Securities accepted by
Goldman for payment, if payment was materially delayed beyond the
acceptance of the Offer;
(7) The expiration date of the Offer; and
(8) How to obtain additional information concerning the Offer;
(c) The terms of the Settlement Sale are consistent with the
requirements set forth in the Settlement Agreement; and
(d) All of the conditions in Section II have been met.
Section V. Definitions
For purposes of this proposed exemption:
(a) The term ``affiliate'' means any person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or
under common control with such other person;
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual;
(c) The term ``Auction Rate Security'' means a security: (1) That
is either a debt instrument (generally with a long-term nominal
maturity) or preferred stock; and (2) with an interest rate or dividend
that is reset at specific intervals through a Dutch auction process;
[[Page 68104]]
(d) A person is ``independent'' of Goldman if the person is: (1)
Not Goldman or an affiliate; and (2) not a relative (as defined in
section 3(15) of the Act) of the party engaging in the transaction;
(e) The term ``Plan'' means an individual retirement account or
similar account described in section 4975(e)(1)(B) through (F) of the
Code (an IRA); an employee benefit plan as defined in section 3(3) of
the Act; or an entity holding plan assets within the meaning of 29 CFR
2510.3-101, as modified by section 3(42) of the Act; and
(f) The term ``Settlement Agreement'' means a legal settlement
involving Goldman and a U.S. State or Federal authority that provides
for the purchase of an ARS by Goldman from a Plan.
Effective Date: If granted, this proposed exemption will be
effective as of February 1, 2008.
Summary of Facts and Representations
1. The Applicant, Goldman, is a global financial services firm
headquartered in New York, New York. As of August 29, 2008, Goldman had
approximately $1 trillion in assets. Among other things, Goldman is
both a registered investment adviser subject to the Investment Advisers
Act of 1940 and a broker-dealer registered with the U.S. Securities and
Exchange Commission. In this last regard, Goldman acts as a broker and
dealer with respect to the purchase and sale of securities, including
Auction Rate Securities.
2. The Applicant describes Auction Rate Securities and the
arrangement by which ARS are bought and sold as follows. Auction Rate
Securities are securities (issued as debt or preferred stock) with an
interest rate or dividend that is reset at periodic intervals pursuant
to a process called a Dutch Auction. Investors submit orders to buy,
hold, or sell a specific ARS to a broker-dealer selected by the entity
that issued the ARS. The broker-dealers, in turn, submit all of these
orders to an auction agent. The auction agent's functions include
collecting orders from all participating broker-dealers by the auction
deadline, determining the amount of securities available for sale, and
organizing the bids to determine the winning bid. If there are any buy
orders placed into the auction at a specific rate, the auction agent
accepts bids with the lowest rate above any applicable minimum rate and
then successively higher rates up to the maximum applicable rate, until
all sell orders and orders that are treated as sell orders are filled.
Bids below any applicable minimum rate or above the applicable maximum
rate are rejected. After determining the clearing rate for all of the
securities at auction, the auction agent allocates the ARS available
for sale to the participating broker-dealers based on the orders they
submitted. If there are multiple bids at the clearing rate, the auction
agent will allocate securities among the bidders at such rate on a pro
rata basis.
3. The Applicant states that, under a typical Dutch Auction
process, Goldman is permitted, but not obligated, to submit orders in
auctions for its own account either as a bidder or a seller and
routinely does so in the auction rate securities market in its sole
discretion. Goldman may place one or more bids in an auction for its
own account to acquire ARS for its inventory, to prevent: (a) A failed
auction (i.e., an event where there are insufficient clearing bids
which would result in the auction rate being set at a specified rate,
resulting in no ARS being sold through the auction process); or (b) an
auction from clearing at a rate that Goldman believes does not reflect
the market for the particular ARS being auctioned.
4. The Applicant states that for many ARS, Goldman has been
appointed by the issuer of the securities to serve as a dealer in the
auction and is paid by the issuer for its services. Goldman is
typically appointed to serve as a dealer in the auctions pursuant to an
agreement between the issuer and Goldman. That agreement provides that
Goldman will receive from the issuer auction dealer fees based on the
principal amount of the securities placed through Goldman.
5. The Applicant states further that Goldman may share a portion of
the auction rate dealer fees it receives from the issuer with other
broker-dealers that submit orders through Goldman, for those orders
that Goldman successfully places in the auctions. Similarly, with
respect to ARS for which broker-dealers other than Goldman act as
dealer, such other broker-dealers may share auction dealer fees with
Goldman for orders submitted by Goldman.
6. According to the Applicant, since February 2008, only a minority
of auctions have cleared, particularly involving municipalities. As a
result, Plans holding ARS may not have sufficient liquidity to make
benefit payments, mandatory payments and withdrawals and expense
payments when due.\3\
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\3\ The Department notes that Prohibited Transaction Exemption
80-26 (45 FR 28545 (April 29, 1980), as amended at 71 FR 17917
(April 7, 2006)) permits interest-free loans or other extensions of
credit from a party in interest to a plan if, among other things,
the proceeds of the loan or extension of credit are used only: (1)
For the payment of ordinary operating expenses of the plan,
including the payment of benefits in accordance with the terms of
the plan and periodic premiums under an insurance or annuity
contract, or (2) for a purpose incidental to the ordinary operation
of the plan.
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7. The Applicant represents that, in certain instances, Goldman may
have previously advised or otherwise caused a Plan to acquire and hold
an Auction Rate Security.\4\ In connection with Goldman's role in the
acquisition and holding of ARS by various Goldman clients, including
the Plans, Goldman entered into Settlement Agreements with certain U.S.
states and Federal authorities. Pursuant to these Settlement
Agreements, among other things, Goldman was required to send a written
offer to certain Plans that held ARS in connection with the advice and/
or brokerage services provided by Goldman. As described in further
detail below, eligible Plans that accepted the Offer were permitted to
sell the ARS to Goldman for cash equal to the par value of such
securities, plus any accrued but unpaid interest and/or dividends. The
Applicant is requesting retroactive and prospective relief for the
Settlement Sales. With respect to Unrelated Sales, the Applicant states
that to the best of its knowledge, no Unrelated Sale has occurred.
However, the Applicant is requesting retroactive relief (and
prospective relief) for Unrelated Sales in the event that a sale of
Auction Rate Securities by a Plan to Goldman has occurred outside the
Settlement process. If granted, the proposed exemption will be
effective February 1, 2008.
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\4\ The relief contained in this proposed exemption does not
extend to the fiduciary provisions of section 404 of the Act.
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8. Specifically, the Applicant is requesting exemptive relief for
the sale of Auction Rate Securities under two different circumstances:
(a) Where Goldman initiates the sale by sending to a Plan a written
Offer to acquire the ARS (i.e., an Unrelated Sale), notwithstanding
that such Offer is not required under a Settlement Agreement; and (b)
where Goldman is required under a Settlement Agreement to send to Plans
a written Offer to acquire the ARS (i.e., a Settlement Sale). The
Applicant states that the Unrelated Sales and Settlement Sales
(hereinafter, either, a Covered Sale) are in the interests of Plans. In
this regard, the Applicant states that the Covered Sales would permit
Plans to normalize Plan investments. The Applicant represents that each
Covered Sale will be for no consideration other than cash payment
against prompt delivery of the ARS, and
[[Page 68105]]
such cash will equal the par value of the ARS, plus any accrued but
unpaid interest or dividends. The Applicant represents further that
Plans will not pay any commissions or transaction costs with respect to
any Covered Sale.
9. The Applicant represents that the proposed exemption is
protective of the Plans. The Applicant states that: each Covered Sale
will be made pursuant to a written Offer; and the decision to accept
the Offer or retain the ARS will be made by a Plan fiduciary or Plan
participant or IRA owner who is independent of Goldman. Additionally,
each Offer will be delivered in a manner designed to alert a Plan
fiduciary that Goldman intends to purchase ARS from the Plan. Offers
made in connection with an Unrelated Sale will include the material
terms of the Unrelated Sale and either the Offer or other materials
available to the Plan describe: The identity and par value of the
Auction Rate Security; the interest or dividend amounts that are due
with respect to the Auction Rate Security; and the most recent rate
information for the Auction Rate Security (if reliable information is
available). Offers made in connection with a Settlement Agreement will
specifically include, among other things: The background of the Offer;
the method and timing by which a Plan may accept the Offer; the
expiration date of the Offer; and how to obtain additional information
concerning the Offer. The Applicant states that neither Goldman nor any
affiliate will exercise investment discretion or render investment
advice with respect to a Plan's decision to accept the Offer or retain
the ARS.\5\ In the case of a Goldman Plan or a pooled fund maintained
or advised by Goldman, the decision to engage in a Covered Sale may be
made by Goldman after Goldman has determined that such purchase is in
the best interest of the Goldman Plan or pooled fund. The Applicant
represents further that Plans will not waive any rights or claims in
connection with any Covered Sale.
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\5\ The Applicant states that while there may be communication
between a Plan and Goldman subsequent to an Offer, such
communication will not involve advice regarding whether the Plan
should accept the Offer.
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10. The Applicant represents that the proposed exemption, if
granted, would be administratively feasible. In this regard, the
Applicant notes that each Covered Sale will occur at the par value of
the affected ARS (plus accrued but unpaid interest and dividends, to
the extent applicable), and such value is readily ascertainable. The
Applicant represents further that Goldman will maintain the records
necessary to enable the Department and Plan fiduciaries, among others,
to determine whether the conditions of this exemption, if granted, have
been met.
11. In summary, the Applicant represents that the transactions
described herein satisfy the statutory criteria of section 408(a) of
the Act because, among other things:
(a) Each Covered Sale shall be made pursuant to a written Offer;
(b) Each Covered Sale shall be for no consideration other than cash
payment against prompt delivery of the ARS;
(c) The amount of each Covered Sale shall equal the par value of
the ARS, plus any accrued but unpaid interest or dividends;
(d) Plans will not waive any rights or claims in connection with
any Covered Sale;
(e)(1) the decision to accept an Offer or retain the ARS shall be
made by a Plan fiduciary or Plan participant or IRA owner who is
independent of Goldman; and (2) neither Goldman nor any affiliate shall
exercise investment discretion or render investment advice within the
meaning of 29 CFR 2510.3-21(c) with respect to the decision to accept
the Offer or retain the ARS;
(f) Plans shall not pay any commissions or transaction costs with
respect to any Covered Sale;
(g) A Covered Sale shall not be part of an arrangement, agreement
or understanding designed to benefit a party in interest to the
affected Plan;
(h) With respect to any Settlement Sale, the terms and delivery of
the Offer, and the terms of Settlement Sale, shall be consistent with
the requirements set forth in the Settlement Agreement;
(i) Goldman shall make available in connection with an Unrelated
Sale the material terms of the Unrelated Sale, including: (1) The
identity and par value of the Auction Rate Security; (2) the interest
or dividend amounts that are due but unpaid with respect to the Auction
Rate Security; and (3) the most recent rate information for the Auction
Rate Security (if reliable information is available);
(j) Each Offer made in connection with a Settlement Agreement shall
describe the material terms of the Settlement Sale, including the
following (and shall not constitute a waiver of any claim of the
tendering Plan): (1) The background of the Offer; (2) the methods and
timing by which the Plan may accept the Offer; (3) the purchase dates,
or the manner of determining the purchase dates, for ARS pursuant to
the Offer; (4) the expiration date of the Offer; and (5) how to obtain
additional information concerning the Offer.
Notice to Interested Persons
The Applicant represents that the potentially interested
participants and beneficiaries cannot all be identified, and,
therefore, the only practical means of notifying such participants and
beneficiaries of this proposed exemption is by the publication of this
notice in the Federal Register. Comments and requests for a hearing
must be received by the Department not later than 30 days from the date
of publication of this notice of proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Brian Shiker of the Department,
telephone (202) 693-8552. (This is not a toll-free number.)
Louis B. Chaykin, M.D., P.A., Cross-Tested Profit Sharing Plan (the
Plan), Located in Lakewood Ranch, Florida.
[Exemption Application Number: D-11532.]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570 Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act, and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A), through (E) of
the Code, shall not apply to the proposed sale (the Sale) at fair
market value by the Plan of certain coins (the Collectibles), to Louis
B. Chaykin, M.D. (the Applicant), a party in interest with respect to
the Plan, provided that the following conditions are satisfied:
(a) The Sale is a one-time transaction for cash;
(b) The Plan pays no commissions, fees or other expenses in
connection with the Sale;
(c) The terms and conditions of the Sale are at least as favorable
as those obtainable in an arm's length transaction with an unrelated
third party;
(d) The fair market value of the Collectibles was determined by a
qualified, independent appraiser;
(e) The Plan receives no less than the fair market value of the
Collectibles at the time of the Sale; and
(f) All of the participants of the Plan, with the exception of the
Applicant, have been paid their benefits in full.
Summary of Facts and Representations
1. The Plan is a profit-sharing plan sponsored by Louis B. Chaykin,
M.D., P.A., a private professional corporation
[[Page 68106]]
engaged in the practice of medicine in Lakewood Ranch, Florida. The
Applicant represents that, as of January 1, 2007, there were seven (7)
participants in the Plan, including five employees, the Applicant, and
the Applicant's spouse. The Applicant is also the discretionary trustee
of the Plan. The Plan, which was formally terminated on March 1, 2006,
received a favorable determination letter from the Internal Revenue
Service on May 11, 2007. The determination letter stated that the
termination of the Plan did not adversely affect its qualification for
Federal tax purposes.
The Applicant represents that, pursuant to the termination of the
Plan, all participants (with the exception of the Applicant) have been
paid their benefits in full. In this regard, the Applicant represents
that, of the five employees who were participants in the Plan, two
rolled over cash into their respective individual retirement accounts
(IRAs), while the other three took lump sum distributions of cash. The
Applicant's spouse also rolled over cash to her IRA. The Applicant
himself has received prior distributions of cash to satisfy his minimum
distribution requirements because he is over age 70 and a half. The
Applicant has also rolled over some publicly-traded securities in kind
to his IRA. Apart from the Collectibles, the Plan holds residual assets
consisting of a limited partnership interest and other coins. The
Applicant represents that the total value of the non-Collectibles held
by the Plan as of December 31, 2008 is $63,720.17.
2. The Applicant represents that the IRA custodial trustee which
the Applicant has designated to receive his rollover contributions from
the Plan will not accept the Collectibles as IRA assets. Accordingly,
the Applicant requests an exemption to permit the Sale of the
Collectibles and the distribution of the resulting cash proceeds to
himself, which he would then roll over into his IRA account. The Plan
had originally purchased the Collectibles from unrelated parties at
various times between 2005 and 2008. The Applicant also represents that
the Plan purchased the Collectibles as an investment and held the
Collectibles for appreciation. The Applicant states that the
Collectibles have never used by himself, or by any other party in
interest with respect to the Plan, for personal purposes. The Applicant
represents that the proposed Sale will maximize the preservation of the
Plan assets by avoiding the payment of sales commissions, advertising
costs and other selling expenses which would generally be incurred in
open market sales.\6\ In addition, the Applicant states that the Plan
will receive an amount in cash reflecting the fair market value of the
Collectibles, as established by a qualified, independent appraiser.
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\6\ Section 408(m) of the Code stipulates that the acquisition
by an individual retirement account or by an individually-directed
account under a plan described in section 401(a) of the Code of any
collectible shall be treated (for purposes of sections 402 and 408
of the Code) as a distribution from such account in an amount equal
to the cost to such account of such collectible. The Applicant
represents, however, that this provision of the Code is not
applicable to the proposed transaction because the Plan is trusteed
by a discretionary trustee (e.g., the Applicant), and does not allow
for participant direction of Plan investments. The Department is
providing no determination with respect to the Applicant's
representation detailed above.
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3. The Collectibles were appraised in June of 2009 by Mr. John
Albanese of Blanchard and Company, an independent qualified appraiser
located in New Orleans, Louisiana. Mr. Albanese represents that he has
over 28 years experience in the appraisal of coins. Mr. Albanese
further states that he has not previously sold or been promised future
sales of coins to the Applicant. Additionally, Mr. Albanese represents
that less than 1% of the gross receipts of his business for the past
year are derived from the Applicant. Mr. Albanese states that he
examined the Collectibles submitted to him by the Applicant and, after
evaluating the condition of the Collectibles, he reviewed the Coin Deal
Newsletter as well as major auction results to arrive at their current
value. Based on the foregoing methodology, Mr. Albanese determined
that, as of June 3, 2009, the Collectibles had a fair market value of
$284,895.
4. In summary, the applicant represents that the transaction will
satisfy the statutory requirements for an exemption under section
408(a) of the Act because: (a) The Sale is a one-time transaction for
cash; (b) The Plan pays no commissions, fees or other expenses in
connection with the Sale; (c) The terms and conditions of the Sale are
at least as favorable as those obtainable in an arm's length
transaction with an unrelated third party; (d) The fair market value of
the Collectibles was determined by Mr. Albanese, a qualified,
independent appraiser; and (e) The Plan receives no less than the fair
market value of the Collectibles at the time of the Sale.
Notice to Interested Persons: The Applicant represents that the
Plan has been terminated and that all participants of the Plan (with
the exception of the Applicant) have been paid their benefits in full.
Accordingly, the only practical means of notifying terminated plan
participants is by publication of the proposed exemption in the Federal
Register. Therefore, the Department must receive all written comments
and requests for a hearing no later than forty-five (45) days after
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Mark Judge of the Department,
telephone (202) 693-8550. (This is not a toll-free number).
The Coca-Cola Company (TCCC, or the Applicant), Located in Atlanta,
Georgia.
[Application No. D-11555.]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act 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 section 406(a) and (b) of the Act shall not apply to the reinsurance
of risks and the receipt of premiums therefrom by Red Re Inc. (Red Re),
in connection with a medical stop-loss insurance policy sold by the
Prudential Insurance Company of America (Prudential), or any successor
insurance company to Prudential which is unrelated to TCCC, which would
pay for certain benefits under the TCCC Retiree Health Plan (the Plan),
provided the following conditions are met:
(a) Red Re--
(1) Is a party in interest with respect to the Plan by reason of a
stock or partnership affiliation with TCCC that is described in section
3(14)(E) or (G) of the Act;
(2) Is licensed to sell insurance or conduct reinsurance operations
in at least one State as defined in section 3(10) of the Act;
(3) Has obtained a Certificate of Authority from the Insurance
Commissioner of its domiciliary state that has not been revoked or
suspended;
(4)(A) Has undergone an examination by an independent certified
public accountant for its last completed taxable year immediately prior
to the taxable year of the reinsurance transaction; or
(B) Has undergone a financial examination (within the meaning of
the law of its domiciliary State, by the Insurance Commissioner of the
State within 5 years prior to the end of the year preceding the year in
which the reinsurance transaction occurred; and
(5) Is licensed to conduct reinsurance transactions by a State
whose law requires that an actuarial review of reserves be conducted
annually by an
[[Page 68107]]
independent firm of actuaries and reported to the appropriate
regulatory authority; and
(b) The Plan pays no more than adequate consideration for the
insurance contracts;
(c) No commissions are paid by the Plan with respect to the direct
sale of such contracts or the reinsurance thereof;
(d) In the initial year of any contract involving Red Re, there
will be an immediate and objectively determined benefit to the Plan's
participants and beneficiaries in the form of increased benefits;
(e) In subsequent years, should the relationship with Prudential be
terminated, the formula used to calculate premiums by any successor
insurer will be similar to formulae used by other insurers providing
comparable stop-loss coverage under similar programs. Furthermore, the
premium charge calculated in accordance with the formula will be
reasonable and will be comparable to the premium charged by the insurer
and its competitors with the same or a better rating providing the same
coverage under comparable programs;
(f) To the extent Red Re earns any profit due to favorable claims
experience, such profit will be promptly returned to the Plan.
(g) The Plan only contracts with insurers with a rating of A or
better from A.M. Best Company. The reinsurance arrangement between the
insurer and Red Re will be indemnity insurance only, i.e., the insurer
will not be relieved of liability to the Plan should Red Re be unable
or unwilling to cover any liability arising from the reinsurance
arrangement;
(h) The Plan retains an independent fiduciary (the Independent
Fiduciary), at TCCC's expense, to analyze the transactions and render
an opinion that the requirements of sections (a) thorough (g) have been
complied with. For purposes of this exemption, the Independent
Fiduciary is a person who:
(1) Is not directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with TCCC or Red Re (this relationship hereinafter referred to as an
``Affiliate'');
(2) Is not an officer, director, employee of, or partner in TCCC or
Red Re (or any Affiliate of either);
(3) Is not a corporation or partnership in which TCCC or Red Re has
an ownership interest or is a partner;
(4) Does not have an ownership interest in TCCC or Red Re, or any
of either's Affiliates;
(5) Is not a fiduciary with respect to the Plan prior to the
appointment; and
(6) Has acknowledged in writing acceptance of fiduciary
responsibility and has agreed not to participate in any decision with
respect to any transaction in which the Independent Fiduciary has an
interest that might affect its best judgment as a fiduciary.
For purposes of this definition of an ``Independent Fiduciary,'' no
organization or individual may serve as an Independent Fiduciary for
any fiscal year if the gross income received by such organization or
individual (or partnership or corporation of which such individual is
an officer, director, or 10 percent or more partner or shareholder)
from TCCC, Red Re, or their Affiliates (including amounts received for
services as Independent Fiduciary under any prohibited transaction
exemption granted by the Department) for that fiscal year exceeds 3
percent of that organization or individual's annual gross income from
all sources for the prior fiscal year.
In addition, no organization or individual who is an Independent
Fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director, or 10 percent or more partner or
shareholder, may acquire any property from, sell any property to, or
borrow funds from TCCC, Red Re, or their Affiliates during the period
that such organization or individual serves as Independent Fiduciary,
and continuing for a period of six months after such organization or
individual ceases to be an Independent Fiduciary, or negotiates any
such transaction during the period that such organization or individual
serves as Independent Fiduciary.
Summary of Facts and Representations
1. TCCC, which is headquartered in Atlanta, Georgia, is the world's
largest beverage company and markets four of the world's top five non-
alcoholic sparkling brands. In 2008, TCCC employed 92,400 associates
worldwide with approximately 13,000 associates in the United States.
TCCC reported revenue of approximately $31.2 billion in 2008.
2. Red Re is a captive insurance company owned by Coca-Cola Oasis,
Inc., a consolidated entity of TCCC. Red Re was established on March
14, 2006 in Charleston, South Carolina. Red Re was issued a Certificate
of Authority permitting it to transact the business of a captive
insurance company by the State of South Carolina on April 25, 2006. Red
Re is a sound, viable insurance company that has been in business since
2006. Management and administrative services for Red Re are performed
by Marsh Management Services, Inc. of Charleston, South Carolina. Red
Re currently provides deductible reimbursement policies to TCCC for
selected automobile liability, product liability, general liability,
workers' compensation and terrorism risks. In addition, TCCC's
international employee benefits for selected countries are reinsured
with Red Re. As of December 31, 2008, Red Re had total capital and
surplus of $18.1 million and gross written premium of $46 million.
3. TCCC provides medical benefits to eligible retired employees in
the United States under the TCCC Retiree Health Plan (the Plan). The
Plan provides coverage or reimbursement for major medical expenses,
treatment of illness, sickness or injury, prescriptions and, in most
cases, preventative care and vision exams to eligible retired employees
(and their beneficiaries) of TCCC or its affiliates. Depending on the
geographic area in which a Plan participant lives, there are a number
of different coverage options, including an HMO option in some areas.
As of January 1, 2009, the Plan provided retiree health benefits to
approximately 5,000 retirees and dependents. TCCC has established a
Voluntary Employees' Beneficiary Association (VEBA) as a funding
vehicle for the Plan. However, TCCC retains the option of making
benefit payments out of its general assets and may then seek
reimbursement from the VEBA.\7\ Participants make contributions to the
Plan which vary from year-to-year, but which generally are set at
levels intended to cover 15-20% of the Plan's costs. However, the
Applicant represents that no participant contributions will be used to
pay any premium for the stop-loss policy which is the subject of this
proposed exemption.
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\7\ See representation 16.
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4. TCCC has proposed that the VEBA purchase a non-cancellable
accident and health medical stop-loss policy from the Prudential
Insurance Company of America (Prudential) to insure benefits under the
Plan as follows. This policy would pay the sum of all individual
participant claims that are greater than a certain amount (the
Attachment Point) in any year, but no more than an upper limit (the
Upper Corridor Limit) for certain retirees (other than those who have
either selected an HMO coverage option or are younger than age 55 on
January 1, 2008) and their dependents as of the purchase date of the
policy (the Covered Group). The Covered Group consists of approximately
4,000 individuals (each of whom will be
[[Page 68108]]
specifically identified in an attachment to the stop-loss policy). At
the time the exemption application for the subject transaction was
filed, it was anticipated that for those members of the Covered Group
who are under age 65, the Attachment Point would be $100 and the Upper
Corridor Limit would be $5,800. For those members of the Covered Group
aged 65 or higher, the Attachment Point would be $100 and the Upper
Corridor Limit would be $3,500. (The range of covered benefits between
the Attachment Point and the Upper Corridor Limit is referred to as
``the Corridor.'') These coverage limits would apply per participant,
per year. Claims below the Attachment Point would continue to be paid
out of TCCC's general assets. It was also anticipated that TCCC through
the VEBA, would pay a premium to Prudential of approximately $185.3
million to cover or insure benefits within the Corridor for the
lifetime of the members of the Covered Group.\8\
---------------------------------------------------------------------------
\8\ The Upper Corridor Limits were based on an expected premium
of $185.3 million for the stop-loss policy. However, since the 2006
TCCC contribution of $216 million to the VEBA, approximately $50
million in Plan benefits have been paid from the VEBA. Further, the
VEBA has suffered approximately $23 million in investment losses.
Thus, it is anticipated that the VEBA will pay a premium lower than
$185.3 million. As a result, the Upper Corridor Limits for members
of the Covered Group will be reduced. Because there may be
additional changes to the value of the VEBA's assets (including
potential increases due to investment earnings), TCCC is unable to
predict with certainty the exact dollar amount that the Upper
Corridor Limits will be until the time the policy is issued. If the
exemption proposed herein is granted, the premium will be paid at
that time, the Upper Corridor Limits will be fixed, and the Corridor
will be guaranteed for the lifetime of the members of the Covered
Group irrespective of the performance of the investment markets or
claims experience. The Department expects that TCCC will provide an
estimate as to the expected Upper Corridor Limits by the end of the
comment period.
---------------------------------------------------------------------------
5. The Applicant anticipates that Prudential will enter into a
reinsurance agreement with Red Re for 100 percent of the risks under
the stop-loss policy. Specifically, Prudential would provide the
medical stop-loss insurance policy for the Plan's benefit risks in
connection with the Covered Group, but Red Re would provide reinsurance
coverage for 100 percent of those risks pursuant to Red Re's agreement
with Prudential. Prudential's reinsurance agreement will be ``indemnity
only''--that is, Prudential will not be relieved of its liability for
benefits under the Plan if Red Re is unable or unwilling to satisfy the
liabilities arising from the reinsurance agreements. The overall
financial strength of Prudential is rated A+ by A.M. Best.
6. The Applicant represents that in connection with the proposed
transaction, the Plan will pay no more than adequate consideration for
the stop-loss insurance contracts with Prudential or any successor
insurer. The formula that Prudential and any successor insurer will use
to calculate its premiums will be similar to the formulae used by other
insurers providing similar insurance coverages under similar insurance
programs. Moreover, the premium charge resulting from application of
the formula will be reasonable and comparable to the premium charged by
the insurer and its competitors with the same rating or better,
providing the same coverage under comparable programs of insurance.
Finally, the Plan will not pay any commissions in connection with
either the direct sale of insurance or the reinsurance transactions
described herein.
7. The Applicant represents that the subject transactions have a
number of advantages for the Plan. Specifically, TCCC will
substantially improve benefits for members of the Covered Group by
converting the currently revocable commitment to provide benefits into
a fully paid-for insured arrangement that will provide them with
benefits under the Plan for the rest of their lives. Currently, TCCC
has reserved the right to reduce benefits or terminate the Plan at any
time. Thus, for any claims not yet accrued, Plan participants do not
have a guarantee or expectation that benefits will be paid. However,
the VEBA's purchase of the non-cancellable medical stop-loss policy
from Prudential will fully fund a contract insuring that members of the
Covered Group will receive all benefits within the Corridor for the
rest of their lives. If TCCC were to exercise its right to reduce
benefits or terminate the Plan as to other participants who are not
members of the Covered Group sometime in the future, members of the
Covered Group would continue to receive all benefit payments within the
Corridor. TCCC represents that this benefit enhancement is not required
of TCCC as part of a legal proceeding, court order or judgment, or by
State law.
8. In connection with this exemption request, Red Re engaged the
services of U.S. Trust Company, N.A. (U.S. Trust), as the Independent
Fiduciary for the Plan.\9\ U.S. Trust is a national banking association
formed under the laws of the United States and authorized to exercise
all fiduciary powers that may be exercised by State banks and trust
companies under the laws of the State of Connecticut. In May, 2009,
BOA's Special Fiduciary Services business was acquired by Evercore
Trust Company, N.A. (Evercore). All of the BOA personnel who were part
of the Special Fiduciary Services business joined Evercore. TCCC gave
its written consent to the transfer of its account from BOA to
Evercore. Thus, for purposes of the exemption proposed herein, the
Independent Fiduciary is Evercore.
---------------------------------------------------------------------------
\9\ The Independent Fiduciary was, in fact, Bank of America,
N.A. (BOA), which had acquired U.S. Trust effective July 1, 2007.
BOA continued to do business under the U.S. Trust name.
---------------------------------------------------------------------------
9. Evercore has represented that it meets the following
requirements to be an independent fiduciary:
(a) Evercore is not directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with TCCC or Red Re;
(b) Evercore is not an officer, director, employee of, or partner
in TCCC or Red Re (or any Affiliate of either);
(c) Evercore is not a corporation or partnership in which TCCC or
Red Re has an ownership interest or is a partner;
(d) Evercore does not own any shares of TCCC or Red Re, or any of
their Affiliates, for its own account;
(e) Evercore was not a fiduciary to the Plan prior to its
appointment in connection with the transactions described herein;
(f) Evercore has acknowledged, in writing, its acceptance of
fiduciary obligations, and has agreed not to participate in any
decision with respect to any transaction in which it would have an
interest that might affect its judgment as a fiduciary;
(g) The gross income received by Evercore from TCCC or Red Re and
their Affiliates (including amounts received for services as the
Independent Fiduciary for the Plans under any prohibited transaction
exemption granted by the Department), does not exceed 3 percent of
Evercore's annual gross income from all sources for its prior fiscal
year; and
(h) Evercore, and any partnership or corporation of which Evercore
is an officer, director, or ten (10) percent or more partner or
shareholder, will not acquire any property from, sell any property to,
or borrow funds from TCCC or Red Re while it is the Independent
Fiduciary for the Plan and for a period of six months thereafter.
10. Evercore represents that: (i) Red Re is licensed to do business
in the State of South Carolina; and (ii) Red Re obtained a Certificate
of Authority from the State of South Carolina on April 25, 2006 which
has neither been revoked nor suspended. Red Re has undergone an audit
examination by Ernst & Young LLP, certified CPAs, for the year ended
[[Page 68109]]
December 31, 2008. Evercore and its legal advisor have reviewed a copy
of the audit report, and are satisfied there are no issues outstanding.
Evercore has determined that Red Re is licensed to conduct reinsurance
transactions by a State whose law requires that an actuarial review of
reserves be conducted annually by an independent firm of actuaries, and
reported to the appropriate regulatory authority.
11. The Independent Fiduciary has represented that the Plan will
pay no more than adequate consideration for the insurance contract. In
addition, the Plan will pay no commissions with respect to the direct
sale of the insurance contract or the reinsurance thereof.
12. The Independent Fiduciary has reviewed the proposed
transactions and determined that they will provide an important
financial benefit to the Plan's participants and beneficiaries. TCCC
has reserved the right to modify or eliminate its retiree health
benefit. By virtue of the proposed transactions, TCCC will effectively
vest the Covered Group with medical benefits in an amount equal to the
Corridor.\10\ The terms of the arrangement provide that Prudential
cannot cancel or terminate the coverage, and this will help assure
benefit payments, within the coverage parameters, to participants and
beneficiaries. Thus, the Independent Fiduciary has concluded that this
protection of the retirees' health benefits provides an immediately and
objectively determined benefit to the Plan's participants and
beneficiaries as of the initial year of the contract.
---------------------------------------------------------------------------
\10\ The Applicant states that since the right of members of the
Covered Group to have claims within the Corridor paid for the rest
of their lives will be guaranteed under the proposed transaction, it
may be said that members of the Covered Group have a vested right to
receive benefits in that amount. However, the guarantee is to dollar
amounts, not particular types of medical procedures and treatments
that may be covered under the Plan.
---------------------------------------------------------------------------
13. In designing and implementing the proposed transactions, TCCC
worked with Towers Perrin (TP), one of the largest benefits, insurance
and reinsurance consulting firms in the world, with extensive
experience in captive reinsurance transactions. TP has advised TCCC
that non-cancellable medical stop-loss insurance is not a new product,
but that it is offered in the market by only one insurer, John Hancock,
as a method to finance post-retirement medical liabilities. Prudential
is the only insurer that has developed an insurance product for such
liabilities that couples a stop-loss policy with captive reinsurance.
TP introduced the same concept to three other ``A''-rated insurers, but
none were interested in offering the coverage. TP compared the standard
cost parameters of the John Hancock stop-loss policy to the Prudential/
Captive product and determined that the latter has lower costs for the
Plan, as measured by discounted cash flows over 50 years. TP also
evaluated the costs and risks of other financing options including:
paying benefits from the general assets of TCCC, trust-owned life
insurance, and VEBA trusts with no insurance investments, and found
that the Prudential/Captive product offered the lowest cost solution
for the Plan.
14. TP represents that this type of guaranteed, long-term health
insurance is not available in the market for individuals; it is only
because Red Re is willing to assume these risks for TCCC retirees that
the retirees can hope to obtain this valuable coverage. Thus, it is
difficult to assign an absolute dollar amount to the value of the
benefit enhancement. However, TP compared the value of the lifetime
guarantee of coverage within the Corridor to the cost of an annuity
with annual payments equal to the size of the Corridor. The Applicant
states that from the perspective of the participant, having an annuity
that provides cash that is equal to the amount of claims that he or she
can expect to have paid by the proposed stop-loss insurance is the same
as having an insurer who is obligated to pay those same claims pursuant
to a contract for health insurance. TP represents that the average
expected claims would be approximately $10,000 per year for retirees
under age 65, and approximately $5,000 per year for retirees over age
65. Since the proposed coverage Corridors are $5,700 for retirees
younger than 65 years of age and $3,400 for retirees 65 years of age
and older,\11\ TP assumes that the participants, on average, will use
the full Corridor to cover their claims. TP then estimated the value of
an annuity that would provide payments equal to the amounts the average
participant will receive in health insurance coverage under the
proposed transactions. TP used the present value of the expected
payment each year until death is expected. TP estimates that for an
individual who retires at age 55 with a life expectancy of age 85, the
present value of those payments (discounted at 4%) would be
approximately $77,000. TP estimates that for an individual who retires
at age 65 with a life expectancy of age 85, the present value of those
payments (discounted at 4%) would be approximately $46,000.
---------------------------------------------------------------------------
\11\ The exact coverage limits will be set closer to the time
the transaction is executed.
---------------------------------------------------------------------------
15. The Applicant represents that the policy premium charged to the
Plan by Prudential does not include a profit or risk charge for Red Re.
There is an assumption in Red Re's business model which anticipates an
expected return on investments greater than the rate of 4% used to
price the stop-loss policy. Notably, that investment ``profit'' may
turn out to be an investment ``loss'' to Red Re if investment returns
are less than 4%. Moreover, Red Re is taking the risk that there will
not be mortality improvements that would cause benefits to be paid for
longer periods than expected. Both scenarios present substantial risks,
which are not accounted for in the pricing by risk charges.
Nonetheless, TCCC and Red Re both represent that to the extent Red Re
earns any profit due to favorable claims experience, such profit will
be returned to the Plan.
16. The Applicant represents that the premiums paid to Red Re by
Prudential pursuant to the proposed reinsurance arrangement, plus any
investment earnings thereon, will be held in a New York Regulation 114
Trust (114 Trust). The 114 Trust is a three-way investment trust
agreement involving the ceding insurance company (i.e., Prudential), a
financial institution (the trustee), and the reinsurer (i.e., Red
Re).\12\ The 114 Trust is a method for securing the obligations of an
insurance company that cedes reserves to reinsurers not admitted in the
State of the ceding company. It is named after Regulation 114 of the
Official Compilation of Codes, Rules and Regulations of the New York
State Insurance Department (11 NYCRR 4). Under Regulation 114, the
reinsurer (Red Re) establishes a trust of which the ceding company
(Prudential) is the beneficiary; the beneficiary is entitled to demand
assets from the trust at any time to satisfy the reinsurer's
obligations under the reinsurance agreement. Regulation 114 prohibits
the assets in a 114 Trust from being loaned to any affiliate of the
reinsurer. Thus, the Applicant represents that no loans will be made by
Red Re to TCCC using assets held by Red Re as a result of the proposed
transaction.
---------------------------------------------------------------------------
\12\ In this proposed exemption, the Department is expressing no
opinion on whether the assets of the 114 Trust constitute Plan
assets.
---------------------------------------------------------------------------
17. TCCC has represented that it will retain the option of making
benefit payments out of its general assets and may then seek
reimbursement from the VEBA. TCCC represents that many claims paid
under the Plan will be paid
[[Page 68110]]
directly by TCCC without expectation of any reimbursement from the
VEBA. For example, where a claim is paid that falls outside the
Corridor, TCCC will likely pay the claim out of its general assets
without seeking any reimbursement from the VEBA. However, because the
VEBA, and not TCCC, will be the policyholder of the Stop-Loss Policy,
claims within the Corridor must be submitted by the VEBA to Prudential,
which will in turn submit them to Red Re. In order to avoid the need
for a separate administrative mechanism (under which some claims would
be paid directly by TCCC while others are paid directly by the VEBA),
TCCC will pay such claims and then submit them to the VEBA for
reimbursement (with the VEBA submitting them to Prudential in turn).
The Applicant represents that to the extent that this arrangement
might be considered an extension of credit between a party in interest
and a Plan, TCCC will fully comply with the provisions of Prohibited
Transaction Exemption (PTE) 80-26, as amended (71 FR 17917, April 7,
2006). In particular, no interest or fee will be charged to the Plan
when TCCC pays a claim and later seeks reimbursement. Further, the
proceeds of such extension of credit will be used only to pay operating
expenses of the Plan, including benefits paid in accordance with the
terms of the Plan. Such loan or extension of credit would be unsecured,
will not be made by an employee benefit plan, and will not be the type
of loan described in section 408(b)(3) of the Act. It is not
anticipated that more than 60 days will pass between the date TCCC pays
a claim and the date the VEBA reimburses TCCC for such claim; to ensure
compliance with the provisions of PTE 80-26 in the event unforeseen
delay results in more than 60 days passing before reimbursement, a
written loan agreement will be entered into setting forth the material
terms of such extension of credit between TCCC and the Plan.\13\
---------------------------------------------------------------------------
\13\ The Department expresses no opinion as to whether such
proposed arrangement would be exempt under PTE 80-26.
---------------------------------------------------------------------------
18. TCCC represents that an audit procedure will be in place to
ensure that reimbursements received by TCCC do not exceed the amount
due to TCCC. TCCC represents that the Plan will undergo an annual audit
by an independent qualified public accountant that will contain the
following: (a) A description of the process, methodology and criteria
used to select the Plan's transactions which comprise the sample
collected for review and an explanation of how the sample was
objectively determined to be representative of the reimbursements made
during the Plan year; (b) an explanation of why the number of
transactions comprising the sample selected for review was appropriate,
taking into account, among other things, each instance in which there
was a specific finding that there was a reimbursement that exceeded the
amount due to TCCC; and (c) specific findings made (without condition,
qualification, caveat or limitation) by the independent qualified
public accountant for each instance in which a reimbursement exceeded
the amount due to TCCC. The audit will be completed within the time
frame required for the timely filing of the Plan's Form 5500. A copy of
the audit will be provided to the Independent Fiduciary within 30 days
after the audit is received by TCCC.
19. In summary, the Applicant represents that the proposed
reinsurance transactions will meet the criteria of section 408(a) of
the Act because: (a) The Plan's participants and beneficiaries are
afforded insurance protection by Prudential, a carrier rated A or
better by A.M. Best; (b) Red Re, which will enter into the reinsurance
agreements with Prudential, is a sound and viable insurance company;
(c) the protections provided to the Plan and its participants and
beneficiaries under the proposed reinsurance transactions are based, in
part, on those required for direct insurance by a ``captive'' insurer,
under the conditions of Prohibited Transaction Exemption 79-41 (PTE 79-
41), 44 FR 46365 (notwithstanding certain other requirements related
to, among other things, the amount of gross premiums or annuity
considerations received from customers who are not related to, or
affiliated with, the insurer); \14\ (d) the Plan's Independent
Fiduciary, has reviewed the proposed reinsurance transaction and has
determined that the transaction is appropriate for, and in the best
interests of, the Plan and that there will be an immediate benefit to
the Plan's participants as a result thereof by reason of the guaranteed
payment of benefits in the Corridor by Prudential; and (e) the
Independent Fiduciary will monitor compliance by the parties with the
terms and conditions of the proposed reinsurance transaction, and will
take whatever action is necessary and appropriate to safeguard the
interests of the Plans and of their participants and beneficiaries.
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\14\ The proposal of this exemption should not be interpreted as
an endorsement by the Department of the transactions described
herein. The Department notes that the fiduciary responsibility
provisions of Part 4 of Title I of the Act apply to the fiduciary's
decision to engage in the reinsurance arrangement.
Specifically, section 404(a)(1) of the Act requires, among
other things, that a plan fiduciary 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 the
plan. In this regard, the Department is not providing any opinion as
to whether a particular insurance or investment product, strategy or
arrangement would be considered prudent or in the interests of a
plan, as required by section 404 of the Act. The determination of
the prudence of a particular product or arrangement must be made by
a plan fiduciary after appropriate consideration to those facts and
circumstances that, given the scope of such fiduciary's investment
duties, the fiduciary knows or should know are relevant to the
particular product or arrangement involved, including the plan's
potential exposure to losses and the role a particular insurance or
investment product plays in that portion of the plan's investment
portfolio with respect to which the fiduciary has investment duties
and responsibilities (see 29 CFR 250.404a-1).
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
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telephone (202) 693-8546. (This is not a toll-free number.)
Columbia Management Advisors, LLC (Columbia, or the Applicant) and
its Current and Future Affiliates (collectively, the Applicants),
Located in Boston, Massachusetts.
[Application No. D-11556.]
Proposed Exemption
The Department of Labor (the Department) is considering granting an
exemption under the authority of section 408(a) of the Employee
Retirement Income Security Act of 1974 (the Act) and section 4975(c)(2)
of the Internal Revenue Code of 1986 (the Code) and in accordance with
the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).
Section I--Transactions
If the proposed exemption is granted, the restrictions of section
406 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
(F) of the Code, shall not apply to the purchase of certain securities
(the Securities), as defined, below in Section III(i), by an Asset
Manager, as defined, below, in Section III(d), from any person other
than such Asset Manager, during the existence of an underwriting or
selling syndicate with respect to such Securities, where a broker-
dealer affiliated with Columbia (the Affiliated Broker-Dealer), as
defined, below, in Section III(b), is a manager or member of such
syndicate and the Asset
[[Page 68111]]
Manager purchases such Securities, as a fiduciary:
(a) On behalf of an employee benefit plan or employee benefit plans
(Client Plan(s)), as defined, below, in Section III(f); or
(b) On behalf of Client Plans, and/or In-House Plans, as defined,
below, in Section III(m), which are invested in a pooled fund or in
pooled funds (Pooled Fund(s)), as defined, below, in Section III(g);
provided that the conditions as set forth, below, in Section II, are
satisfied (An affiliated underwriter transaction (AUT)).\15\
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\15\ For purposes of this proposed exemption an In-House Plan
may engage in AUTs only through investment in a Pooled Fund.
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Section II--Conditions
The proposed exemption is conditioned upon adherence to the
material facts and representations described herein and upon
satisfaction of the following requirements:
(a)(1) The Securities to be purchased are either--
(i) Part of an issue registered under the Securities Act of 1933
(the 1933 Act) (15 U.S.C. 77a et seq.). If the Securities to be
purchased are part of an issue that is exempt from such registration
requirement, such Securities:
(A) Are issued or guaranteed by the United States or by any person
controlled or supervised by and acting as an instrumentality of the
United States pursuant to authority granted by the Congress of the
United States,
(B) Are issued by a bank,
(C) Are exempt from such registration requirement pursuant to a
Federal statute other than the 1933 Act, or
(D) Are the subject of a distribution and are of a class which is
required to be registered under section 12 of the Securities Exchange
Act of 1934 (the 1934 Act) (15 U.S.C. 781), and are issued by an issuer
that has been subject to the reporting requirements of section 13 of
the 1934 Act (15 U.S.C. 78m) for a period of at least ninety (90) days
immediately preceding the sale of such Securities and that has filed
all reports required to be filed thereunder with the Securities and
Exchange Commission (SEC) during the preceding twelve (12) months; or
(ii) Part of an issue that is an Eligible Rule 144A Offering, as
defined in SEC Rule 10f-3 (17 CFR 270.10f-3(a)(4)).\16\ Where the
Eligible Rule 144A Offering of the Securities is of equity securities,
the offering syndicate shall obtain a legal opinion regarding the
adequacy of the disclosure in the offering memorandum;
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\16\ SEC Rule 10f-3(a)(4), 17 CFR 270.10f-3(a)(4), states that
the term ``Eligible Rule 144A Offering'' means an offering of
securities that meets the following conditions:
(i) The securities are offered or sold in transactions exempt
from registration under section 4(2) of the Securities Act of 1933
[15 U.S.C. 77d(d)], rule 144A thereunder [Sec. 230.144A of this
chapter], or rules 501-508 thereunder [Sec. Sec. 230.501-230-508 of
this chapter];
(ii) The securities are sold to persons that the seller and any
person acting on behalf of the seller reasonably believe to include
qualified institutional buyers, as defined in Sec. 230.144A(a)(1)
of this chapter; and
(iii) The seller and any person acting on behalf of the seller
reasonably believe that the securities are eligible for resale to
other qualified institutional buyers pursuant to Sec. 230.144A of
this chapter.
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(2) The Securities to be purchased are purchased prior to the end
of the first day on which any sales are made, pursuant to that
offering, at a price that is not more than the price paid by each other
purchaser of the Securities in that offering or in any concurrent
offering of the Securities, except that--
(i) If such Securities are offered for subscription upon exercise
of rights, they may be purchased on or before the fourth day preceding
the day on which the rights offering terminates; or
(ii) If such Securities are debt securities, they may be purchased
at a price that is not more than the price paid by each other purchaser
of the Securities in that offering or in any concurrent offering of the
Securities and may be purchased on a day subsequent to the end of the
first day on which any sales are made, pursuant to that offering,
provided that the interest rates, as of the date of such purchase, on
comparable debt securities offered to the public subsequent to the end
of the first day on which any sales are made and prior to the purchase
date are less than the interest rate of the debt Securities being
purchased; and
(3) The Securities to be purchased are offered pursuant to an
underwriting or selling agreement under which the members of the
syndicate are committed to purchase all of the Securities being
offered, except if--
(i) Such Securities are purchased by others pursuant to a rights
offering; or
(ii) Such Securities are offered pursuant to an over-allotment
option.
(b) The issuer of the Securities to be purchased pursuant to this
proposed exemption must have been in continuous operation for not less
than three years, including the operation of any predecessors, unless
the Securities to be purchased are--
(1) Non-convertible debt securities rated in one of the four
highest rating categories by Standard & Poor's Rating Services, Moody's
Investors Service, Inc., FitchRatings, Inc., Dominion Bond Rating
Service Limited, Dominion Bond Rating Service, Inc., or any successors
thereto (collectively, the Rating Organizations), provided that none of
the Rating Organizations rates such Securities in a category lower than
the fourth highest rating category; or
(2) Debt securities issued or fully guaranteed by the United States
or by any person controlled or supervised by and acting as an
instrumentality of the United States pursuant to authority granted by
the Congress of the United States; or
(3) Debt securities which are fully guaranteed by a person (the
Guarantor) that has been in continuous operation for not less than
three years, including the operation of any predecessors, provided that
such Guarantor has issued other securities registered under the 1933
Act; or if such Guarantor has issued other securities which are exempt
from such registration requirement, such Guarantor has been in
continuous operation for not less than three years, including the
operation of any predecessors, and such Guarantor is:
(a) A bank; or
(b) An issuer of securities which are exempt from such registration
requirement, pursuant to a Federal statute other than the 1933 Act; or
(c) An issuer of securities that are the subject of a distribution
and are of a class which is required to be registered under section 12
of the 1934 Act (15 U.S.C. 781), and are issued by an issuer that has
been subject to the reporting requirements of section 13 of the 1934
Act (15 U.S.C. 78m) for a period of at least ninety (90) days
immediately preceding the sale of such securities and that has filed
all reports required to be filed thereunder with the SEC during the
preceding twelve (12) months.
(c) The aggregate amount of Securities of an issue purchased,
pursuant to this proposed exemption, by the Asset Manager with: (i) The
assets of all Client Plans; and (ii) The assets, calculated on a pro-
rata basis, of all Client Plans and In-House Plans investing in Pooled
Funds managed by the Asset Manager; and (iii) The assets of plans to
which the Asset Manager renders investment advice within the meaning of
29 CFR 2510.3-21(c) does not exceed:
(1) Ten percent (10%) of the total amount of the Securities being
offered in an issue, if such Securities are equity securities;
(2) Thirty-five percent (35%) of the total amount of the Securities
being offered in an issue, if such Securities are debt securities rated
in one of the four highest rating categories by at least one of the
Rating Organizations, provided that none of the Rating Organizations
rates such Securities in a category lower
[[Page 68112]]
than the fourth highest rating category; or
(3) Twenty-five percent (25%) of the total amount of the Securities
being offered in an issue, if such Securities are debt securities rated
in the fifth or sixth highest rating categories by at least one of the
Rating Organizations; provided that none of the Rating Organizations
rates such Securities in a category lower than the sixth highest rating
category; and
(4) The assets of any single Client Plan (and the assets of any
Client Plans and any In-House Plans investing in Pooled Funds) may not
be used to purchase any Securities being offered, if such Securities
are debt securities rated lower than the sixth highest rating category
by any of the Rating Organizations;
(5) Notwithstanding the percentage of Securities of an issue
permitted to be acquired, as set forth in Section II(c)(1), (2), and
(3), above, of this proposed exemption, the amount of Securities in any
issue (whether equity or debt securities) purchased, pursuant to this
proposed exemption, by the Asset Manager on behalf of any single Client
Plan, either individually or through investment, calculated on a pro-
rata basis, in a Pooled Fund may not exceed three percent (3%) of the
total amount of such Securities being offered in such issue, and;
(6) If purchased in an Eligible Rule 144A Offering, the total
amount of the Securities being offered for purposes of determining the
percentages, described, above, in Section II(c)(1)-(3) and (5), is the
total of:
(i) The principal amount of the offering of such class of
Securities sold by underwriters or members of the selling syndicate to
``qualified institutional buyers'' (QIBs), as defined in SEC Rule 144A
(17 CFR 230.144A(a)(1)); plus
(ii) The principal amount of the offering of such class of
Securities in any concurrent public offering.
(d) The aggregate amount to be paid by any single Client Plan in
purchasing any Securities which are the subject of this proposed
exemption, including any amounts paid by any Client Plan or In-House
Plan in purchasing such Securities through a Pooled Fund, calculated on
a pro-rata basis, does not exceed three percent (3%) of the fair market
value of the net assets of such Client Plan or In-House Plan, as of the
last day of the most recent fiscal quarter of such Client Plan or In-
House Plan prior to such transaction.
(e) The covered transactions are not part of an agreement,
arrangement, or understanding designed to benefit the Asset Manager or
its affiliate.
(f) The Affiliated Broker-Dealer does not receive, either directly,
indirectly, or through designation, any selling concession, or other
compensation or consideration that is based upon the amount of
Securities purchased by any single Client Plan, or that is based on the
amount of Securities purchased by Client Plans or In-House Plans
through Pooled Funds, pursuant to this proposed exemption. In this
regard, the Affiliated Broker-Dealer may not receive, either directly
or indirectly, any compensation or consideration that is attributable
to the fixed designations generated by purchases of the Securities by
the Asset Manager on behalf of any single Client Plan or any Client
Plan or In-House Plan in Pooled Funds.
(g)(1) The amount the Affiliated Broker-Dealer receives in
management, underwriting, or other compensation or consideration is not
increased through an agreement, arrangement, or understanding for the
purpose of compensating the Affiliated Broker-Dealer for foregoing any
selling concessions for those Securities sold pursuant to this proposed
exemption. Except as described above, nothing in this Section II(g)(1)
shall be construed as precluding the Affiliated Broker-Dealer from
receiving management fees for serving as manager of the underwriting or
selling syndicate, underwriting fees for assuming the responsibilities
of an underwriter in the underwriting or selling syndicate, or other
compensation or consideration that is not based upon the amount of
Securities purchased by the Asset Manager on behalf of any single
Client Plan, or on behalf of any Client Plan or In-House Plan
participating in Pooled Funds, pursuant to this proposed exemption; and
(2) The Affiliated Broker-Dealer shall provide to the Asset Manager
a written certification, dated and signed by an officer of the
Affiliated Broker-Dealer, stating the amount that the Affiliated
Broker-Dealer received in compensation or consideration during the past
quarter, in connection with any offerings covered by this proposed
exemption, was not adjusted in a manner inconsistent with Section
II(e), (f), or (g) of this proposed exemption.
(h) The covered transactions are performed under a written
authorization executed in advance by an independent fiduciary of each
single Client Plan (the Independent Fiduciary), as defined, below, in
Section III(h).
(i) Prior to the execution by an Independent Fiduciary of a single
Client Plan of the written authorization described, above, in Section
II(h), the following information and materials (which may be provided
electronically) must be provided by the Asset Manager to such
Independent Fiduciary.
(1) A copy of the Notice of Proposed Exemption (the Notice) and a
copy of the final exemption (the Grant) as published in the Federal
Register, provided that the Notice and the Grant are supplied
simultaneously; and
(2) Any other reasonably available information regarding the
covered transactions that such Independent Fiduciary requests the Asset
Manager to provide.
(j) Subsequent to the initial authorization by an Independent
Fiduciary of a single Client Plan permitting the Asset Manager to
engage in the covered transactions on behalf of such single Client
Plan, the Asset Manager will continue to be subject to the requirement
to provide within a reasonable period of time any reasonably available
information regarding the covered transactions that the Independent
Fiduciary requests the Asset Manager to provide.
(k)(1) In the case of an existing employee benefit plan investor
(or existing In-House Plan investor, as the case may be) in a Pooled
Fund, such Pooled Fund may not engage in any covered transactions
pursuant to this proposed exemption, unless the Asset Manager provides
the written information, as described, below, and within the time
period described, below, in this Section II(k)(2), to the Independent
Fiduciary of each such plan participating in such Pooled Fund (and to
the fiduciary of each such In-House Plan participating in such Pooled
Fund).
(2) The following information and materials (which may be provided
electronically) shall be provided by the Asset Manager not less than 45
days prior to such Asset Manager engaging in the covered transactions
on behalf of a Pooled Fund, pursuant to this proposed exemption, and
provided further that the information described below, in this Section
II(k)(2)(i) and (iii) is supplied simultaneously:
(i) A notice of the intent of such Pooled Fund to purchase
Securities pursuant to this proposed exemption, a copy of this Notice,
and a copy of the Grant, as published in the Federal Register;
(ii) Any other reasonably available information regarding the
covered transactions that the Independent Fiduciary of a plan (or
fiduciary of an In-House Plan) participating in a Pooled Fund requests
the Asset Manager to provide; and
[[Page 68113]]
(iii) A termination form expressly providing an election for the
Independent Fiduciary of a plan (or fiduciary of an In-House Plan)
participating in a Pooled Fund to terminate such plan's (or In-House
Plan's) investment in such Pooled Fund without penalty to such plan (or
In-House Plan). Such form shall include instructions specifying how to
use the form. Specifically, the instructions will explain that such
plan (or such In-House Plan) has an opportunity to withdraw its assets
from a Pooled Fund for a period of no more than 30 days after such
plan's (or such In-House Plan's) receipt of the initial notice of
intent, described, above, in Section II(k)(2)(i), and that the failure
of the Independent Fiduciary of such plan (or fiduciary of such In-
House Plan) to return the termination form to the Asset Manager in the
case of a plan (or In-House Plan) participating in a Pooled Fund by the
specified date shall be deemed to be an approval by such plan (or such
In-House Plan) of its participation in the covered transactions as an
investor in such Pooled Fund.
Further, the instructions will identify the Asset Manager and the
Affiliated Broker-Dealer and will provide the address of the Asset
Manager. The instructions will state that this proposed exemption may
be unavailable, unless the fiduciary of each plan participating in the
covered transactions as an investor in a Pooled Fund is, in fact,
independent of the Asset Manager and the Affiliated Broker-Dealer. The
instructions will also state that the fiduciary of each such plan must
advise the Asset Manager, in writing, if it is not an ``Independent
Fiduciary,'' as that term is defined, below, in Section III(h).
For purposes of this Section II(k), the requirement that the
fiduciary responsible for the decision to authorize the transactions
described, above, in Section I of this proposed exemption for each plan
be independent of the Asset Manager shall not apply in the case of an
In-House Plan.
(l)(1) In the case of each plan (and in the case of each In-House
Plan) whose assets are proposed to be invested in a Pooled Fund after
such Pooled Fund has satisfied the conditions set forth in this
proposed exemption to engage in the covered transactions, the
investment by such plan (or by such In-House Plan) in the Pooled Fund
is subject to the prior written authorization of an Independent
Fiduciary representing such plan (or the prior written authorization by
the fiduciary of such In-House Plan, as the case may be), following the
receipt by such Independent Fiduciary of such plan (or by the fiduciary
of such In-House Plan, as the case may be) of the written information
described, above, in Section II(k)(2)(i) and (ii), provided that the
Notice and the Grant, described above in Section II(k)(2)(i), are
provided simultaneously.
(2) For purposes of this Section II(l), the requirement that the
fiduciary responsible for the decision to authorize the transactions
described, above, in Section I of this proposed exemption for each plan
proposing to invest in a Pooled Fund be independent of the Asset
Manager and its affiliates shall not apply in the case of an In-House
Plan.
(m) Subsequent to the initial authorization by an Independent
Fiduciary of a plan (or by a fiduciary of an In-House Plan) to invest
in a Pooled Fund that engages in the covered transactions, the Asset
Manager will continue to be subject to the requirement to provide
within a reasonable period of time any reasonably available information
regarding the covered transactions that the Independent Fiduciary of
such plan (or the fiduciary of such In-House Plan, as the case may be)
requests the Asset Manager to provide.
(n) At least once every three months, and not later than 45 days
following the period to which such information relates, the Asset
Manager shall furnish:
(1) In the case of each single Client Plan that engages in the
covered transactions, the information described, below, in this Section
II(n)(3)-(7), to the Independent Fiduciary of each such single Client
Plan.
(2) In the case of each Pooled Fund in which a Client Plan (or in
which an In-House Plan) invests, the information described, below, in
this Section II(n)(3)-(6) and (8), to the Independent Fiduciary of each
such Client Plan (and to the fiduciary of each such In-House Plan)
invested in such Pooled Fund.
(3) A quarterly report (the Quarterly Report) (which may be
provided electronically) which discloses all the Securities purchased
pursuant to this proposed exemption during the period to which such
report relates on behalf of the Client Plan, In-House Plan, or Pooled
Fund to which such report relates, and which discloses the terms of
each of the transactions described in such report, including:
(i) The type of Securities (including the rating of any Securities
which are debt securities) involved in each transaction;
(ii) The price at which the Securities were purchased in each
transaction;
(iii) The first day on which any sale was made during the offering
of the Securities;
(iv) The size of the issue of the Securities involved in each
transaction;
(v) The number of Securities purchased by the Asset Manager for the
Client Plan, In-House Plan, or Pooled Fund to which the transaction
relates;
(vi) The identity of the underwriter from whom the Securities were
purchased for each transaction;
(vii) The underwriting spread in each transaction (i.e., the
difference, between the price at which the underwriter purchases the
Securities from the issuer and the price at which the Securities are
sold to the public);
(viii) The price at which any of the Securities purchased during
the period to which such report relates were sold; and
(ix) The market value at the end of the period to which such report
relates of the Securities purchased during such period and not sold;
(4) The Quarterly Report contains:
(i) A representation that the Asset Manager has received a written
certification signed by an officer of the Affiliated Broker-Dealer, as
described, above, in Section II(g)(2), affirming that, as to each AUT
covered by this proposed exemption during the past quarter, the
Affiliated Broker-Dealer acted in compliance with Section II(e), (f),
and (g) of this proposed exemption, and
(ii) A representation that copies of such certifications will be
provided upon request;
(5) A disclosure in the Quarterly Report that states that any other
reasonably available information regarding a covered transaction that
an Independent Fiduciary (or fiduciary of an In-House Plan) requests
will be provided, including, but not limited to:
(i) The date on which the Securities were purchased on behalf of
the Client Plan (or the In-House Plan) to which the disclosure relates
(including Securities purchased by Pooled Funds in which such Client
Plan (or such In-House Plan) invests);
(ii) The percentage of the offering purchased on behalf of all
Client Plans (and the pro-rata percentage purchased on behalf of Client
Plans and In-House Plans investing in Pooled Funds); and
(iii) The identity of all members of the underwriting syndicate;
(6) The Quarterly Report discloses any instance during the past
quarter where the Asset Manager was precluded for any period of time
from selling Securities purchased under this proposed exemption in that
quarter because of its status as an affiliate of an Affiliated Broker-
Dealer and the reason for this restriction;
[[Page 68114]]
(7) Explicit notification, prominently displayed in each Quarterly
Report sent to the Independent Fiduciary of each single Client Plan
that engages in the covered transactions that the authorization to
engage in such covered transactions may be terminated, without penalty
to such single Client Plan, within five (5) days after the date that
the Independent Fiduciary of such single Client Plan informs the person
identified in such notification that the authorization to engage in the
covered transactions is terminated; and
(8) Explicit notification, prominently displayed in each Quarterly
Report sent to the Independent Fiduciary of each Client Plan (and to
the fiduciary of each In-House Plan) that engages in the covered
transactions through a Pooled Fund that the investment in such Pooled
Fund may be terminated, without penalty to such Client Plan (or such
In-House Plan), within such time as may be necessary to effect the
withdrawal in an orderly manner that is equitable to all withdrawing
plans and to the non-withdrawing plans, after the date that the
Independent Fiduciary of such Client Plan (or the fiduciary of such In-
House Plan, as the case may be) informs the person identified in such
notification that the investment in such Pooled Fund is terminated.
(o) For purposes of engaging in covered transactions, each Client
Plan (and each In-House Plan) shall have total net assets with a value
of at least $50 million (the $50 Million Net Asset Requirement). For
purposes of engaging in covered transactions involving an Eligible Rule
144A Offering, each Client Plan (and each In-House Plan) shall have
total net assets of at least $100 million in securities of issuers that
are not affiliated with such Client Plan (or such In-House Plan, as the
case may be) (the $100 Million Net Asset Requirement).
For purposes of a Pooled Fund engaging in covered transactions,
each Client Plan (and each In-House Plan) in such Pooled Fund shall
have total net assets with a value of at least $50 million.
Notwithstanding the foregoing, if each such Client Plan (and each such
In-House Plan) in such Pooled Fund does not have total net assets with
a value of at least $50 million, the $50 Million Net Asset Requirement
will be met if 50 percent (50%) or more of the units of beneficial
interest in such Pooled Fund are held by Client Plans (or by In-House
Plans) each of which has total net assets with a value of at least $50
million. For purposes of a Pooled Fund engaging in covered transactions
involving an Eligible Rule 144A Offering, each Client Plan (and each
In-House Plan) in such Pooled Fund shall have total net assets of at
least $100 million in securities of issuers that are not affiliated
with such Client Plan (or such In-House Plan, as the case may be).
Notwithstanding the foregoing, if each such Client Plan (and each such
In-House Plan) in such Pooled Fund does not have total net assets of at
least $100 million in securities of issuers that are not affiliated
with such Client Plan (or In-House Plan, as the case may be), the $100
Million Net Asset Requirement will be met if 50 percent (50%) or more
of the units of beneficial interest in such Pooled Fund are held by
Client Plans (or by In-House Plans) each of which have total net assets
of at least $100 million in securities of issuers that are not
affiliated with such Client Plan (or such In-House Plan, as the case
may be), and the Pooled Fund itself qualifies as a QIB, as determined
pursuant to SEC Rule 144A (17 CFR 230.144A(a)(F)).
For purposes of the net asset requirements described above, in this
Section II(o), where a group of Client Plans is maintained by a single
employer or controlled group of employers, as defined in section
407(d)(7) of the Act, the $50 Million Net Asset Requirement (or in the
case of an Eligible Rule 144A Offering, the $100 Million Net Asset
Requirement) may be met by aggregating the assets of such Client Plans,
if the assets of such Client Plans are pooled for investment purposes
in a single master trust.
(p) The Asset Manager qualifies as a ``qualified professional asset
manager'' (QPAM), as that term is defined under Part V(a) of PTE 84-14.
Further, the Asset Manager, which qualifies as a QPAM, must also have
total client assets under its management and control in excess of $5
billion, as of the last day of its most recent fiscal year and
shareholders' or partners' equity in excess of $1 million.
(q) No more than 20 percent of the assets of a Pooled Fund at the
time of a covered transaction are comprised of assets of In-House Plans
for which the Asset Manager or the Affiliated Broker-Dealer exercises
investment discretion.
(r) The Asset Manager and the Affiliated Broker-Dealer, as
applicable, maintain, or cause to be maintained, for a period of six
(6) years from the date of any covered transaction such records as are
necessary to enable the persons, described, below, in Section II(s), to
determine whether the conditions of this proposed exemption have been
met, except that--
(1) No party in interest with respect to a plan which engages in
the covered transactions, other than the Asset Manager and the
Affiliated Broker-Dealer, 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 not
available for examination, as required, below, by Section II(s); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of the Asset Manager, or the Affiliated Broker-Dealer, as applicable,
such records are lost or destroyed prior to the end of the six-year
period.
(s)(1) Except as provided, below, in Section II(s)(2), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to above, in Section II(r), are
unconditionally available at their customary location for examination
during normal business hours by--
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the SEC; or
(ii) Any fiduciary of any plan that engages in the covered
transactions, or any duly authorized employee or representative of such
fiduciary; or
(iii) 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
(iv) Any participant or beneficiary of a plan that engages in the
covered transactions, or duly authorized employee or representative of
such participant or beneficiary;
(2) None of the persons described above, in Section II(s)(1)(ii)-
(iv), shall be authorized to examine trade secrets of the Asset
Manager, or the Affiliated Broker-Dealer, or commercial or financial
information which is privileged or confidential; and
(3) Should the Asset Manager or the Affiliated Broker-Dealer refuse
to disclose information on the basis that such information is exempt
from disclosure, pursuant to Section II(s)(2) above, the Asset Manager
shall, by the close of the thirtieth (30th) day following the request,
provide a written notice advising that person of the reasons for the
refusal and that the Department may request such information.
Section III--Definitions
(a) The term, ``the Applicant,'' means Columbia Management
Advisors, LLC.
(b) The term, ``Affiliated Broker-Dealer,'' means any broker-dealer
affiliate, as ``affiliate'' is defined, below, in Section III(c), of
the Applicant, as
[[Page 68115]]
``Applicant'' is defined, above, in Section III(a), that meets the
requirements of this proposed exemption. Such Affiliated Broker-Dealer
may participate in an underwriting or selling syndicate as a manager or
member. The term, ``manager,'' with respect to a syndicate, means any
member of an underwriting or selling syndicate who, either alone or
together with other members of the syndicate, is authorized to act on
behalf of the members of the syndicate in connection with the sale and
distribution of the Securities, as defined below, in Section III(i),
being offered or who receives compensation from the members of the
syndicate for its services as a manager of the syndicate.
(c) The term ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) Any officer, director, partner, employee, or relative, as
defined in section 3(15) of the Act, of such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
For purposes of this proposed exemption, the definition of
``affiliate'' shall include any entity that satisfies such definition
in the future.
(d) The term ``Asset Manager'' means Columbia or an affiliate of
Columbia as defined above in Section III(c), which entity acts as the
fiduciary with respect to Client Plan(s), as defined in Section III(f),
below, or Pooled Fund(s), as defined in Section III(g), below.
(e) The term, ``control,'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(f) The term, ``Client Plan(s),'' means an employee benefit plan(s)
that is subject to the Act and/or the Code, and for which plan(s) an
Asset Manager exercises discretionary authority or discretionary
control respecting management or disposition of some or all of the
assets of such plan(s), but excludes In-House Plans, as defined, below,
in Section III(m).
(g) The term, ``Pooled Fund(s),'' means a common or collective
trust fund(s) or a pooled investment fund(s):
(1) In which employee benefit plan(s) subject to the Act and/or
Code invest,
(2) Which is maintained by an Asset Manager, and
(3) For which such Asset Manager exercises discretionary authority
or discretionary control respecting the management or disposition of
the assets of such fund(s).
(h)(1) The term, ``Independent Fiduciary,'' means a fiduciary of a
plan who is unrelated to, and independent of the Asset Manager and the
Affiliated Broker-Dealer. For purposes of this proposed exemption, a
fiduciary of a plan will be deemed to be unrelated to, and independent
of the Asset Manager and the Affiliated Broker-Dealer, if such
fiduciary represents in writing that neither such fiduciary, nor any
individual responsible for the decision to authorize or terminate
authorization for the transactions described above, in Section I of
this proposed exemption, is an officer, director, or highly compensated
employee (within the meaning of Code section 4975(e)(2)(H)) of the
Asset Manager and the Affiliated Broker-Dealer, and represents that
such fiduciary shall advise the Asset Manager within a reasonable
period of time after any change in such facts occur.
(2) Notwithstanding anything to the contrary in this Section
III(h), a fiduciary of a plan is not independent:
(i) If such fiduciary directly or indirectly controls, is
controlled by, or is under common control with the Asset Manager or the
Affiliated Broker Dealer;
(ii) If such fiduciary directly or indirectly receives any
compensation or other consideration from the Asset Manager, or the
Affiliated Broker-Dealer for his or her own personal account in
connection with any transaction described in this proposed exemption;
(iii) If any officer, director, or highly compensated employee
(within the meaning of Code section 4975(e)(2)(H)) of the Asset Manager
responsible for the transactions described above, in Section I of this
proposed exemption, is an officer, director, or highly compensated
employee (within the meaning of Code section 4975(e)(2)(H)) of the
sponsor of the plan or of the fiduciary responsible for the decision to
authorize or terminate authorization for the transactions described
above, in Section I. However, if such individual is a director of the
sponsor of the plan or of the responsible fiduciary, and if he or she
abstains from participation in: (A) The choice of the plan's investment
manager/adviser; and (B) the decision to authorize or terminate
authorization for transactions described above, in Section I, then this
Section III(h)(2)(iii) shall not apply.
(3) The term, ``officer,'' means a president, any vice president in
charge of a principal business unit, division, or function (such as
sales, administration, or finance), or any other officer who performs a
policy-making function for Columbia or any affiliate thereof.
(i) The term, ``Securities,'' shall have the same meaning as
defined in section 2(36) of the Investment Company Act of 1940 (the
1940 Act), as amended (15 U.S.C. 80a-2(36)(2001)). For purposes of this
proposed exemption, mortgage-backed or other asset-backed securities
rated by one of the Rating Organizations, as defined, below, in Section
III(l), will be treated as debt securities.
(j) The term, ``Eligible Rule 144A Offering,'' shall have the same
meaning as defined in SEC Rule 10f-3(a)(4) (17 CFR 270.10f-3(a)(4))
under the 1940 Act).
(k) The term, ``qualified institutional buyer,'' or the term,
``QIB,'' shall have the same meaning as defined in SEC Rule 144A (17
CFR 230.144A(a)(1)) under the 1933 Act.
(l) The term, ``Rating Organizations,'' means Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Fitch Ratings, Inc.,
Dominion Bond Rating Service Limited, and Dominion Bond Rating Service,
Inc., or any successors thereto.
(m) The term, ``In-House Plan(s),'' means an employee benefit
plan(s) that is subject to the Act and/or the Code, and that is
sponsored by the Applicant as defined, above, in Section III(a), or its
affiliate, as defined in Section III(c), for its own employees.
Summary of Facts and Representations
The Applicants
1. The Applicants consist of Columbia and its current and future
affiliates. Columbia and Columbia Wanger Asset Management, LP (CWA),
both of which are SEC-registered investment advisers, are wholly-owned
subsidiaries of Columbia Management Group, LLC (CMG), and collectively
had assets under management of approximately $405 billion as of
September 30, 2008. Of these assets, Columbia managed approximately
$380 billion. CMG, including Columbia and CWA, is the investment
management division of Bank of America Corporation (with its
subsidiaries, BOA). The Applicants manage institutional portfolios for
mutual funds, corporations, pension plans endowments, foundations,
healthcare organizations, educational organizations, public agencies,
insurance companies and Taft-Hartley plans. They also act as fiduciary
to numerous employee benefit plans and individual retirement accounts,
providing trustee, custodial recordkeeping, consulting and investment
management services.
CMG is wholly-owned by BOA, which is one of the world's largest
financial
[[Page 68116]]
institutions, serving individual consumers, small and middle market
businesses and large corporations with a full range of banking,
investing, asset management and other financial and risk-management
products and services. It serves more than 59 million consumer and
small-business relationships. As of October 2008, BOA served clients in
more than 150 countries and had relationships with 99 percent of the
U.S. Fortune 500 companies and 80 percent of the Fortune Global 500.
BOA had approximately $564 billion in assets under management as of
September 30, 2008.
On September 15, 2008, BOA announced an agreement to acquire
Merrill Lynch & Co., Inc. (ML) in an all-stock transaction (the
Merger). The Merger became effective on January 1, 2009. Per the
agreement, a wholly-owned merger subsidiary of BOA merged with and into
ML, with ML continuing as the surviving company that is a subsidiary of
BOA. ML had total client assets of approximately $1.5 trillion and more
than 16,000 financial advisors as of September 26, 2008. Upon
consummation of the Merger, ML and its affiliates became affiliates of
the Applicants.
2. The Applicants' activities are subject to oversight and are
regulated by Federal government agencies, such as the SEC, the Federal
Reserve Board and the Office of the Comptroller of the Currency, as
well as by State government agencies, and industry self-regulatory
organizations (e.g., the New York Stock Exchange and the Financial
Industry Regulatory Authority).
Requested Exemption
3. The Applicants request a prohibited transaction exemption that
would permit the purchase of certain Securities by an Asset Manager
(the Asset Manager), acting on behalf of Client Plans subject to the
Act or Code, and acting on behalf of Client Plans and In-House Plans
which are invested in certain Pooled Funds for which an Asset Manager
acts as a fiduciary, from any person other than such Asset Manager or
any affiliate thereof, during the existence of an underwriting or
selling syndicate with respect to such Securities, where an Affiliated
Broker-Dealer is a manager or member of such syndicate. Further, the
Affiliated Broker-Dealer will receive no selling concessions in
connection with the Securities sold to such plans.
4. The Applicants represent that if the Affiliated Broker-Dealer is
a member of an underwriting or selling syndicate, the Asset Manager may
purchase underwritten securities for Client Plans in accordance with
Part III of Prohibited Transaction Exemption (PTE) 75-1, (40 FR 50845,
October 31, 1975). Part III provides limited relief from the Act's
prohibited transaction provisions for plan fiduciaries that purchase
securities from an underwriting or selling syndicate of which the
fiduciary or an affiliate is a member. However, such relief is not
available if the Affiliated Broker-Dealer manages the underwriting or
selling syndicate.
5. In addition, regardless of whether a fiduciary or its affiliate
is a manager or merely a member of an underwriting or selling
syndicate, PTE 75-1 does not provide relief for the purchase of
unregistered securities. This includes securities purchased by an
underwriter for resale to a ``qualified institutional buyer'' (QIB)
pursuant to the SEC's Rule 144A under the 1933 Act. Rule 144A is
commonly utilized in connection with sales of securities issued by
foreign corporations to U.S. investors that are QIBs. Notwithstanding
the unregistered nature of such shares, it is represented that
syndicates selling securities under Rule 144A (Rule 144A Securities)
are the functional equivalent of those selling registered securities.
6. The Applicants represent that the Affiliated Broker-Dealer
regularly serves as manager of underwriting or selling syndicates for
registered securities, and as a manager or a member of underwriting or
selling syndicates for Rule 144A Securities. Accordingly, the Asset
Manager is currently unable to purchase on behalf of the Client Plans
both registered securities and Rule 144A Securities sold in such
offerings, resulting in such Client Plans being unable to participate
in significant investment opportunities.
7. It is represented that since 1975, there has been a significant
amount of consolidation in the financial services industry in the
United States. As a result, there are more situations in which a plan
fiduciary may be affiliated with the manager of an underwriting
syndicate. Further, many plans have expanded investment portfolios in
recent years to include securities issued by foreign corporations. As a
result, the exemption provided in PTE 75-1, Part III, is often
unavailable for purchase of domestic and foreign securities that may
otherwise constitute appropriate plan investments.
Client Plan Investments in Offered Securities
8. The Applicants represent that the Asset Manager makes its
investment decisions on behalf of, or renders investment advice to,
Client Plans pursuant to the governing document of the particular
Client Plan or Pooled Fund and the investment guidelines and objectives
set forth in the management or advisory agreement. Because the Client
Plans are covered by Title I of the Act and/or are subject to section
4975 of the Code, such investment decisions are subject to, among other
requirements, the fiduciary responsibility provisions of the Act and
the prohibited transaction rules set forth in the Act and the Code.
9. The Applicants state, therefore, that the decision to invest in
a particular offering is made on the basis of price, value and a Client
Plan's investment criteria, not on whether the securities are currently
being sold through an underwriting or selling syndicate. The Applicants
further state that, because the Asset Manager's compensation for its
services is generally based upon assets under management, the Asset
Manager has little incentive to purchase securities in an offering in
which the Affiliated Broker Dealer is an underwriter unless such a
purchase is in the interests of Client Plans. If the assets under
management do not perform well, the Asset Manager will receive less
compensation and could lose clients, costs which far outweigh any gains
from the purchase of underwritten securities.\17\
---------------------------------------------------------------------------
\17\ In fact, under the terms of the proposed exemption set
forth herein, the Affiliated Broker-Dealer may receive no
compensation or other consideration, direct or indirect, in
connection with any transaction that would be permitted under the
proposed exemption.
---------------------------------------------------------------------------
10. The Applicants state that the Asset Manager generally purchases
securities in large blocks because the same investments will be made
across several accounts. If there is a new offering of an equity or
fixed income security that the Asset Manager wishes to purchase, it may
be able to purchase the security through the offering syndicate at a
lower price than it would pay in the open market, without transaction
costs and with reduced market impact if it is buying a relatively large
quantity. This is because a large purchase in the open market can cause
an increase in the market price and, consequently, in the cost of the
securities. Purchasing from an offering syndicate can thus reduce the
costs to the Client Plans.
11. However, absent this proposed exemption, if the Affiliated
Broker-Dealer is a manager of a syndicate that is underwriting a
securities offering, the Asset Manager will be foreclosed from
purchasing any securities on behalf of its Client Plans from that
underwriting syndicate. This will force the Asset Manager to purchase
the same securities
[[Page 68117]]
in the secondary market. In such a circumstance, the Client Plans may
incur greater costs both because the market price is often higher than
the offering price, and because of transaction and market impact costs.
In turn, this may cause the Asset Manager to forego other investment
opportunities because the purchase price of the underwritten security
in the secondary market exceeds the price that the Asset Manager would
have paid to the selling syndicate.
Underwriting of Securities Offerings
12. The Applicants represent that the Affiliated Broker-Dealer
currently manages and participates in firm commitment underwriting
syndicates for registered offerings of both equity and debt securities.
While equity and debt underwritings may operate differently with regard
to the actual sales process, the basic structures are the same. In a
firm commitment underwriting, the underwriting syndicate acquires the
securities from the issuer and then sells the securities to investors.
13. The Applicants represent that while, as a legal matter, a
selling syndicate assumes the risk that the underwritten securities
might not be fully sold, as a practical matter, this risk is reduced,
in marketed deals, through ``building a book'' (i.e., taking
indications of interest from potential purchasers) prior to pricing the
securities. Accordingly, there is no incentive for the underwriters to
use their discretionary accounts (or the discretionary accounts of
their affiliates) to buy up the securities as a way to avoid
underwriting liabilities.
14. Each selling syndicate has one or more lead managers, who are
the principal contact between the syndicate and the issuer and who are
responsible for organizing and coordinating the syndicate. The
syndicate may also have co-managers, who generally assist the lead
manager in working with the issuer to prepare the registration
statement to be filed with the SEC and in distributing the underwritten
securities. While equity syndicates typically include additional
members that are not managers, more recently, membership in many debt
underwriting syndicates has been limited to lead and co-managers.
15. If more than one underwriter is involved in a selling
syndicate, the lead manager, who has been selected by the issuer of the
underwritten securities, contacts other underwriters, and the
underwriters enter into an ``Agreement Among Underwriters.'' Most lead
managers have a standing form of agreement. This document is then
supplemented for the particular deal by sending an ``invitation telex''
or ``terms telex'' that sets forth particular terms to the other
underwriters.
16. The arrangement between the syndicate and the issuer of the
underwritten securities is embodied in an underwriting agreement, which
is signed on behalf of the underwriters by one or more of the managers.
In a firm commitment underwriting, the underwriting agreement provides,
subject to certain closing conditions, that the underwriters are
obligated to purchase the underwritten securities from the issuer in
accordance with their respective commitments. This obligation is met by
using the proceeds received from the buyers of the securities in the
offering, although there is a risk that the underwriters will have to
pay for a portion of the securities in the event that not all of the
securities are sold.
17. The Applicants represent that, generally, the risk that the
securities will not be sold is small because the underwriting agreement
is not executed until after the underwriters have obtained sufficient
indications of interest to purchase the securities from a sufficient
number of investors to assure that all the securities being offered
will be acquired by investors. Once the underwriting agreement is
executed, the underwriters immediately begin contacting the investors
to confirm the sales, at first by oral communication and then by
written confirmation. Sales are finalized within hours and sometimes
minutes. In registered transactions, the underwriters are particularly
anxious to complete the sales as soon as possible because until they
``break syndicate,'' they cannot enter the market. In many cases, the
underwriters will act as market-makers for the security. A market-maker
holds itself out as willing to buy or sell the security for its own
account on a regular basis.
18. The Applicants represent that the process of ``building a
book'' or soliciting indications of interest occurs as follows: In a
registered equity offering, after a registration statement is filed
with the SEC and, while it is under review by the SEC staff,
representatives of the issuer of the securities and the selling
syndicate managers conduct meetings with potential investors, who learn
about the company and the underwritten securities. Potential investors
also receive a preliminary prospectus. The underwriters cannot make any
firm sales until the registration statement is declared effective by
the SEC. Prior to the effective date, while the investors cannot become
legally obligated to make a purchase, they indicate whether they have
an interest in buying, and the managers compile a ``book'' of investors
who are willing to ``circle'' a particular portion of the issue. These
indications of interest are sometimes referred to as a ``soft circle''
because investors cannot be legally bound to buy the securities until
the registration statement is effective. However, the Applicants
represent that investors generally follow through on their indications
of interest, and would be expected to do so, barring any sudden adverse
developments (in which case it is likely that the offering would be
withdrawn or the price range modified and the process restarted),
because, if the investors that gave an indication of interest do not
follow through, the underwriters may be reluctant to include them in
future offerings.
19. Assuming that the marketing efforts have produced sufficient
indications of interest, the Applicants represent that the issuer of
the securities and the selling syndicate managers together will set the
price of the securities and ask the SEC to declare the registration
effective. After the registration statement becomes effective and the
underwriting agreement is executed, the underwriters contact those
investors that have indicated an interest in purchasing securities in
the offering to execute the sales. The Applicants represent that
offerings are often oversubscribed, and many have an over-allotment
option that the underwriters can exercise to acquire additional shares
from the issuer. Where an offering is oversubscribed, the underwriters
decide how to allocate the securities among the potential purchasers.
However, if an issue is a ``hot issue,'' (i.e., it is selling in the
market at a premium above its offering price) the underwriters may not
hold this hot issue in their own accounts, nor sell it to their
employees, officers and directors. Subject to certain exceptions, a hot
issue may also not be sold to the personal accounts of those
responsible for investing for others, such as officers of banks,
insurance companies, mutual funds and investment advisers.
20. The Applicants represent that debt offerings may be
``negotiated'' offerings, ``competitive bid'' offerings, or ``bought
deals.'' ``Negotiated'' offerings, which often involve non-investment
grade securities, are conducted in the same manner as an equity
offering with regard to when the underwriting agreement is executed and
how the securities are offered. ``Competitive bid'' offerings, in which
the issuer determines the price
[[Page 68118]]
for the securities through competitive bidding rather than negotiating
the price with the underwriting syndicate, are performed under
``shelf'' registration statements pursuant to the SEC's Rule 415 under
the 1933 Act (17 CFR 230.415).\18\
---------------------------------------------------------------------------
\18\ Rule 415 permits an issuer to sell debt as well as equity
securities under an effective registration statement previously
filed with the SEC by filing a post-effective amendment or
supplemental prospectus.
---------------------------------------------------------------------------
21. In a competitive bid offering, prospective lead underwriters
will bid against one another to purchase debt securities, based upon
their determinations of the degree of investor interest in the
securities. Depending on the level of investor interest and the size of
the offering, a bidding lead underwriter may bring in co-managers to
assist in the sales process. Most of the securities are frequently sold
within hours, or sometimes even less than an hour, after the securities
are made available for purchase.
22. The Applicants represent that, because of market forces and the
requirements of Rule 415, the competitive bid process is generally
available only to issuers of investment-grade securities who have been
subject to the reporting requirements of the 1934 Act for at least one
(1) year.
23. Occasionally, in highly-rated debt issues, underwriters ``buy''
the entire deal off of a ``shelf registration'' before obtaining
indications of interest. These ``bought'' deals involve issuers whose
securities enjoy a deep and liquid secondary market, such that an
underwriter has confidence without pre-marketing that it can identify
purchasers for the bonds.
Structure of Diversified Financial Services Firms
24. The Applicants represent that there are internal policies in
place that restrict contact and the flow of information between
investment management personnel and non-investment management personnel
in the same or affiliated financial service firms. These policies are
designed to protect against ``insider trading,'' i.e., trading on
information not available to the general public that may affect the
market price of the securities. Diversified financial services firms
must be concerned about insider trading problems because one part of
the firm--e.g., the mergers and acquisitions group--could come into
possession of non-public information regarding an upcoming transaction
involving a particular issuer, while another part of the firm--e.g.,
the investment management group--could be trading in the securities of
that issuer for its clients.
25. The Applicants represent that the business separation policies
and procedures of Columbia and its affiliates are also structured to
restrict the flow of any information to or from the Asset Manager that
could limit its flexibility in managing client assets, and of
information obtained or developed by the Asset Manager that could be
used by other parts of the organization, to the detriment of the Asset
Manager's clients.
26. The Applicants represent that major clients of the Affiliated
Broker-Dealer include investment management firms that are competitors
of the Asset Manager. Similarly, the Asset Manager deals on a regular
basis with broker-dealers that compete with the Affiliated Broker-
Dealer. If special consideration were shown to an affiliate, such
conduct would likely have an adverse effect on the relationships of the
Affiliated Broker-Dealer and of the Asset Manager with firms that
compete with such affiliate. Therefore, a goal of the Applicants'
business separation policies is to avoid any possible perception of
improper flows of information between the Affiliated Broker-Dealer and
the Asset Manager, in order to prevent any adverse impact on client and
business relationships.
Underwriting Compensation
27. The Applicants represent that the underwriters are compensated
through the ``spread,'' or difference, between the price at which the
underwriters purchase the securities from the issuer and the price at
which the securities are sold to the public. The spread is divided into
three components.
28. The first component includes the management fee, which
generally represents an agreed upon percentage of the overall spread
and is allocated among the lead manager and co-managers. Where there is
more than one managing underwriter, the way the management fee will be
allocated among the managers is generally agreed upon between the
managers and the issuer prior to soliciting indications of interest.
Thus, the allocation of the management fee is not reflective of the
amount of securities that a particular manager sells in an offering.
29. The second component is the underwriting fee, which represents
compensation to the underwriters (including the non-managers, if any)
for the risks they assume in connection with the offering and for the
use of their capital. This component of the spread is also used to
cover the expenses of the underwriting that are not otherwise
reimbursed by the issuer of the securities.
30. The first and second components of the ``spread'' are received
without regard to how the underwritten securities are allocated for
sales purposes or to whom the securities are sold. The third component
of the spread is the selling concession, which generally constitutes 60
percent or more of the spread. The selling concession compensates the
underwriters for their actual selling efforts. The allocation of
selling concessions among the underwriters generally follows the
allocation of the securities for sales purposes. However, a buyer of
the underwritten securities may designate other broker-dealers (who may
be other underwriters, as well as broker-dealers outside the syndicate)
to receive the selling concessions arising from the securities they
purchase.
31. Securities are allocated for sales purposes into two
categories. The first and larger category is the ``institutional pot,''
which is the pot of securities from which sales are made to
institutional investors. Selling concessions for securities sold from
the institutional pot are generally designated by the purchaser to go
to particular underwriters or other broker-dealers. If securities are
sold from the institutional pot, the selling syndicate managers
sometimes receive a portion of the selling concessions, referred to as
a ``fixed designation,'' \19\ attributable to securities sold in this
category, without regard to who sold the securities or to whom they
were sold. For securities covered by this proposed exemption, however,
the Affiliated Broker-Dealer may not receive, either directly or
indirectly, any compensation or consideration that is attributable to
the fixed designation generated by purchases of securities by the Asset
Manager on behalf of its Client Plans.
---------------------------------------------------------------------------
\19\ A fixed designation is sometimes referred to as an ``auto
pot split.''
---------------------------------------------------------------------------
32. The second category of allocated securities is ``retail,''
which are the securities retained by the underwriters for sale to their
retail customers. The underwriters receive the selling concessions from
their respective retail retention allocations. Securities may be
shifted between the two categories based upon whether either category
is oversold or undersold during the course of the offering.
33. The Applicants represent that the Affiliated Broker-Dealer's
inability to receive any selling concessions, or any compensation
attributable to the fixed designations generated by purchases of
securities by the Asset Manager's Client
[[Page 68119]]
Plans, removes the primary economic incentive for the Asset Manager to
make purchases that are not in the interests of its Client Plans from
offerings for which the Affiliated Broker-Dealer is an underwriter. The
reason is that the Affiliated Broker-Dealer will not receive any
additional fees as a result of such purchases by the Asset Manager.
Rule 144A Securities
34. The Applicants represent that a number of the offerings of Rule
144A Securities in which the Affiliated Broker-Dealer participates
represent good investment opportunities for the Asset Manager's Client
Plans. Particularly with respect to foreign securities, a Rule l44A
offering may provide the least expensive and most accessible means for
obtaining these securities. However, as discussed above, PTE 75-1, Part
III, does not cover Rule 144A Securities. Therefore, absent an
exemption, the Asset Manager is foreclosed from purchasing such
securities for its Client Plans in offerings in which the Affiliated
Broker-Dealer participates.
35. The Applicants state that Rule 144A acts as a ``safe harbor''
exemption from the registration provisions of the 1933 Act for sales of
certain types of securities to QIBs. QIBs include several types of
institutional entities, such as employee benefit plans and commingled
trust funds holding assets of such plans, which own and invest on a
discretionary basis at least $100 million in securities of unaffiliated
issuers.
36. Any securities may be sold pursuant to Rule 144A except for
those of the same class or similar to a class that is publicly traded
in the United States, or certain types of investment company
securities. This limitation is designed to prevent side-by-side public
and private markets developing for the same class of securities and is
the reason that Rule 144A transactions are generally limited to debt
securities.
37. Buyers of Rule 144A Securities must be able to obtain, upon
request, basic information concerning the business of the issuer and
the issuer's financial statements, much of the same information as
would be furnished if the offering were registered. This condition does
not apply, however, to an issuer filing reports with the SEC under the
1934 Act, for which reports are publicly available. The condition also
does not apply to a ``foreign private issuer'' for whom reports are
furnished to the SEC under Rule 12g3-2(b) of the 1934 Act (17 CFR
240.12g3-2(b)), or to issuers who are foreign governments or political
subdivisions thereof and are eligible to use Schedule B under the 1933
Act (which describes the information and documents required to be
contained in a registration statement filed by such issuers).
38. Sales under Rule 144A, like sales in a registered offering,
remain subject to the protections of the anti-fraud rules of Federal
and State securities laws. These rules include Section 10(b) of the
1934 Act and Rule 10b-5 thereunder (17 CFR 240.10b-5) and Section 17(a)
of the 1933 Act (15 U.S.C. 77a). Through these and other provisions,
the SEC may use its full range of enforcement powers to exercise its
regulatory authority over the market for Rule 144A Securities, in the
event that it detects improper practices or fraud.
39. The Applicants represent that this regulatory structure
provides a considerable incentive to the issuer of the securities and
the members of the selling syndicate to insure that the information
contained in a Rule 144A offering memorandum is complete and accurate
in all material respects. Among other things, the lead manager
typically obtains an opinion from a law firm, commonly referred to as a
``10b-5'' opinion, stating that the law firm has no reason to believe
that the offering memorandum contains any untrue statement of material
fact or omits to state a material fact necessary in order to make sure
the statements made, in light of the circumstances under which they
were made, are not misleading.
40. The Applicants represent that Rule 144A offerings generally are
structured in the same manner as underwritten registered offerings. The
major difference is that a Rule l44A offering uses an offering
memorandum rather than a prospectus that is filed with the SEC. The
marketing process is the same in most respects, except that the selling
efforts are limited to contacting QIBs and there are no general
solicitations for buyers (e.g., no general advertising). In addition,
the Affiliated Broker-Dealer's role in these offerings is typically
that of a lead or co-manager. Generally, there are no non-manager
members in a Rule 144A selling syndicate. Nonetheless, the Applicants
request that the proposed exemption extend to authorization for
situations where the Affiliated Broker-Dealer acts as a manager or as a
syndicate member.
Summary
41. The proposed exemption is administratively feasible. In this
regard, compliance with the terms and conditions of the proposed
exemption will be verifiable and subject to audit.
42. The proposed exemption is in the interest of participants and
beneficiaries of Client Plans that engage in the covered transactions.
In this regard, it is represented that the proposed exemption will
increase investment opportunities and will reduce administrative costs
for Client Plans.
43. In summary, the Applicants represent that the proposed
transactions will satisfy the statutory criteria for an exemption set
forth in section 408(a) of the Act because:
(a) The Client Plans and In-House Plans will gain access to
desirable investment opportunities;
(b) In each offering, the Asset Manager will purchase the
securities for its Client Plans and In-House Plans from an underwriter
or broker-dealer other than the Affiliated Broker-Dealer;
(c) Conditions similar to those of PTE 75-1, Part III, will
restrict the types of securities that may be purchased, the types of
underwriting or selling syndicates and issuers involved, and the price
and timing of the purchases;
(d) The amount of securities that the Asset Manager may purchase on
behalf of Client Plans and In-House Plans will be subject to percentage
limitations;
(e) The Affiliated Broker-Dealer will not be permitted to receive,
either directly, indirectly or through designation, any selling
concessions with respect to the securities sold to the Asset Manager
for the account of a Client Plan or an In-House Plan;
(f) Prior to any purchase of securities, the Applicant will make
the required disclosures to an Independent Fiduciary of each Client
Plan (or the fiduciary of each In-House Plan) and obtain the required
written authorization to engage in the covered transactions;
(g) The Applicant will provide regular reporting to an Independent
Fiduciary of each Client Plan (or the fiduciary of each In-House Plan)
with respect to all securities purchased pursuant to the exemption, if
granted;
(h) Each Client Plan and each In-House Plan will be subject to net
asset requirements, with certain exceptions for Pooled Funds; and
(i) The Asset Manager must have total assets under management in
excess of $5 billion and shareholders' or partners' equity in excess of
$1 million, in addition to qualifying as a QPAM, pursuant to Part V(a)
of PTE 84-14.
Notice to Intersted Persons: The Applicants represent that because
those potentially interested Plans proposing to engage in the covered
transactions cannot all be identified, the only practical means of
notifying Independent Plan Fiduciaries or Plan participants of such
affected Plans is by publication of the proposed exemption in the
Federal Register. Therefore, any comments from interested persons must
[[Page 68120]]
be received by the Department no later than 30 days from the
publication of this notice of proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 693-8546. (This is not a toll-free number.)
Boston Carpenters Apprenticeship and Training Fund (the Fund),
Located in Boston, Massachusetts.
[Exemption Application No.: L-11558.]
Proposed Exemption
The Department of Labor (the Department) is considering granting an
exemption under the authority of section 408(a) of the Act in
accordance with procedures set forth in 29 CFR Part 2570, Subpart B (55
FR 32836, 32847, August 10, 1990). If the proposed exemption is
granted, the restrictions of sections 406(a)(1)(A) through (D),
406(b)(1), and 406(b)(2) of the Act shall not apply to the purchase by
the Fund from the NERCC, LLC (the Building Corporation), a party in
interest with respect to the Fund, of a condominium unit (the Condo) in
a building (the Building) owned by the New England Regional Council of
Carpenters (the Union), also a party in interest with respect to the
Fund, where the Union will own the only other condominium unit in the
Building; provided that, at the time the transaction is entered into,
the following conditions are satisfied:
(1) An independent, qualified fiduciary (the I/F), acting on behalf
of the Fund, is responsible for analyzing the relevant terms of the
transaction and deciding whether the Board of Trustees (the Trustees)
should proceed with the transaction;
(2) The Fund may not purchase the Condo, unless and until the I/F
approves such purchase;
(3) Acting as the independent fiduciary on behalf of the Fund, the
I/F is responsible for: (a) Establishing the purchase price of the
Condo, (b) reviewing the financing terms, (c) determining that such
financing terms are the product of arm's length negotiations, and (d)
ensuring that the Fund will not close on the Condo until the I/F has
determined that proceeding with the proposed transaction is feasible,
in the interest of, and protective of the participants and
beneficiaries of the Fund;
(4) The purchase price paid by the Fund for the Condo, as
documented in writing and approved by the I/F, acting on behalf of the
Fund, is the lesser of:
(a) The fair market value of the Condo, as of the date of the
closing on the transaction, as determined by an independent, qualified
appraiser selected by the I/F; or
(b) 58.3 percent (58.3%) of the amount actually expended by the
Building Corporation in the construction of the Condo under the
guaranteed maximum price contract (the GMP), plus the following
amounts:
(i) 58.3 percent (58.3%) of the additional construction soft costs
incurred outside the GMP contract (i.e., the amount expended on
furniture, fixtures, and equipment, and the amount expended for
materials for minor work);
(ii) 54.4 percent (54.4%) of the amount expended on construction
soft costs (i.e. architect, legal, zoning, permits, and other fees);
and
(iii) 54.4 percent (54.4%) of the cost of the land underlying the
Building;
(5) Acting as the independent fiduciary on behalf of the Fund, the
I/F is responsible, prior to entering into the proposed transaction,
for: (a) Reviewing an appraisal of the fully completed Condo, which has
been prepared by an independent, qualified appraiser, and updated, as
of the date of the closing on the transaction, (b) evaluating the
sufficiency of the methodology of such appraisal, and (c) determining
the reasonableness of the conclusions reached in such appraisal;
(6) The terms of the transaction are no less favorable to the Fund
than terms negotiated under similar circumstances at arm's length with
unrelated third parties;
(7) The Fund does not purchase the Condo or take possession of the
Condo until such Condo is completed;
(8) The Fund has not been, is not, and will not be a party to the
construction financing loan or the permanent financing loan obtained by
the Building Corporation and/or by the Union;
(9) The Fund does not pay any commissions, sales fees, or other
similar payments to any party as a result of the transaction, and the
costs incurred in connection with the purchase of the Condo by the Fund
at closing do not include, directly or indirectly, any developer's
profit, any premium receive by the developer, nor any interest charges
incurred on the construction financing loan or the permanent financing
loan obtained by the Building Corporation and/or by the Union;
(10) Under the terms of the current collective bargaining
agreement(s) and any future collective bargaining agreement(s), the
Union has the ability, unilaterally, to increase the contribution rate
to the Fund at any time by diverting money from wages and contributions
to other benefit funds within the total wage and benefit package, and
the Union is obligated to do so in order to prevent a default by the
Fund under the terms of the financing obtained by the Fund to purchase
the Condo;
(11) In the event the Building Corporation and/or the Union
defaults on the construction financing loan or the permanent financing
loan obtained by the Building Corporation and/or the Union, the
creditors under the terms of such construction financing loan or such
permanent financing loan shall have no recourse against the Condo or
any of the assets of the Fund;
(12) Acting as the independent fiduciary with respect to the Fund,
the I/F is responsible for reviewing and approving the allocation
between funding the purchase of the Condo from the Fund's existing
assets or financing; and
(13) Acting as the independent fiduciary with respect to the Fund,
the I/F is responsible for determining whether the proposed transaction
satisfies the criteria, as set forth in section 404 and section 408(a)
of the Act.
Summary of Facts and Representations
1. The Union is a labor organization made up of thirty (30) local
carpenter unions in six (6) New England states. The local unions that
are affiliated with the Union include local union nos. 33, 40, 67, 218,
and 723 (the Locals). Members of the Union are covered by the Fund. The
Union is a party in interest with respect to the Fund, pursuant to
section 3(14)(D) of the Act, as an employee organization any of whose
members are covered by such Fund.
2. The Fund is an employee welfare benefit plan, as that term is
defined in the Act. Further, the Fund is a multiemployer apprenticeship
and training fund. The Fund is a Massachusetts nonprofit organization,
and is exempt from income taxes under the provisions of Section
501(c)(3) of the Internal Revenue Code.
3. In the fiscal year ending September 30, 2008, the Fund received
employer contributions of $2,584,069, based on approximately 6.7
million hours of work. In addition, the Fund received other income of
approximately $189,000. As of September 30, 2008, the Fund had expenses
of $2,254,078 and total assets of $5,910,043. Included in the Fund's
total assets is a parcel of improved real property (the Existing
Facility) located at 385 Market Street in the Brighton section of
Boston, Massachusetts.
4. The Trustees of the Fund have authority to invest the assets of
the Fund. The Trustees consist of six (6)
[[Page 68121]]
labor representatives and six (6) management representatives. Among the
labor representatives serving as Trustees are Joseph Power, John
Estano, Steve Tewksbury, Charles MacFarlane, Richard Pedi, and Neal
O'Brien. Mr. Power, one of the labor Trustees, also serves on the
Executive Board of the Union. It is represented that Mr. Power will
recuse himself from all votes and matters before the Trustees relating
to the purchase by the Fund of the Condo from the Building Corporation.
The representatives of management serving as Trustees are Donald
MacKinnon, Steven Affanato, George Allen, William Fitzgerald,
Christopher Pennie, and Mark DeNapoli. Mr. DeNapoli, one of the
management Trustees, also is the Executive Vice President and General
Manager of Suffolk Construction (Suffolk) which is responsible for the
construction of the Condo that is the subject of this proposed
exemption. It is represented that Mr. DeNapoli will recuse himself from
all votes and matters before the Trustees relating to the construction
of the Condo.
5. The Fund provides training and education to carpenter
apprentices in the greater Boston area. From 1993 to 2009 there was an
increase in the number of apprentices from 267 to 539.
The Fund also provides training and education to journeymen
carpenters in the greater Boston area. During 2008, the Fund provided
journeyman upgrade training to approximately 2,671 journeymen
carpenters. From 1995-2008 there was an increase in the number of
journeymen carpenters taking classes from the Fund from 292 to 2,671.
In 2008, the Fund offered 265 courses in numerous aspects of the
carpentry trade. These courses represented an increase from the 100
courses offered by the Fund in 2004.
6. The Fund provides all of its classes and training in the
Existing Facility. Purchased in 1975, from an unrelated third party,
the Fund owns the Existing Facility free and clear of any mortgages. In
the opinion of Gary R. Schwandt, a principal of Great Point Investors,
LLC the value of the Existing Facility after brokerage fees and closing
costs is $1,750,000.
The Existing Facility is an approximately 14,600 square foot
building situated on a 33,500 square foot parcel of land. Due to space
limitations at the Existing Facility, it is represented that the Fund
has been unable to offer certain courses.
The Existing Facility has forty-eight (48) regular parking spaces
and two (2) spaces for disabled persons. It is represented that these
parking spaces service approximately 100 to 150 apprentices and
journeymen attending classes nightly at the Existing Facility. In
addition, it is represented that there is not adequate public
transportation for servicing the Existing Facility.
7. The Fund is maintained under collective bargaining agreements
negotiated between the Union of the United Brotherhood of Carpenters
and Joiners of America and the following multiemployer bargaining
organizations: (a) The Labor Relations Division of the Associated
General Contractors of Massachusetts, Inc.; (b) The Building Trades
Employers' Association of Boston and Eastern Massachusetts, Inc.; and
(c) The Labor Relations Division of the Construction Industry of
Massachusetts (collectively, the Employer Associations).
It is represented that when the Union negotiates a multi-year
collective bargaining agreement, it negotiates a single increase in the
wage and benefit package for each year of the contract. Then, on an
annual basis, the Union allocates that increase between wages and
various benefit funds.
It is represented that the wage and benefit package for local union
nos. 33, 40, 67, 218, the commercial construction local unions
affiliated with the Fund, has historically accounted for approximately
93 percent (93%) of the Fund's revenue. It is represented that the
collective bargaining agreement for these commercial construction local
unions was renegotiated for a period of three (3) years, effective
September 1, 2009, through August 31, 2012. The contribution rate to
the Fund for work performed under this collective bargaining agreement
is $.50 per hour. The current total wage and benefit package is $60.23,
and as of March 1, 2012, the total package will be $65.10.
It is represented that the wage and benefit package for local union
no. 723, the wood frame residential union affiliated with the Fund, has
historically accounted for approximately 7 percent (7%) of the Fund's
revenue. The collective bargaining agreement for local union no. 723
expires on March 31, 2010. Under the terms of the collective bargaining
agreement for local union no. 723, as of March 1, 2009, each employer
signatory is required to contribute to the Fund $.25 per hour for each
hour of work performed by its carpenter employees. The current wage and
benefit package for local union no. 723 is $39.68 per hour.
In the fiscal year ending September 30, 2008, there were 6,719,058
hours of work for which contributions in the amount of $2,584,069 were
made to the Fund. It is represented that, at the per hour rates,
effective as of March 1, 2009, under the collective bargaining
agreements, the same number of hours of work, would yield $2,939,516 in
annual contributions to the Fund.
It is represented that under the terms of the collective bargaining
agreements, the Union has the right, at its discretion, to divert money
from wages to benefit funds or to transfer future contributions from
one benefit fund to another benefit fund, provided that the Union gives
sixty (60) days written notice to the employers. It is further
represented that, where the employers and the Union negotiate fixed
contribution rates to the various employee benefit funds, such
collective bargaining agreements at the same time provide that the
Union with advanced notice can divert future contributions from one
fund to another. In doing so, the Union maintains that it is acting as
a settlor and not as a fiduciary. Further, the applicant maintains that
a collective bargaining agreement contribution rate for future hours
does not constitute a plan asset under the Act.\20\
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\20\ The Department, herein, is not opining, as to whether the
Union in diverting money from wages to benefit funds or in
transferring future contributions from one benefit fund to another
benefit fund is acting as a settlor and not as a fiduciary.
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8. The Union currently rents office space at 803 Summer Street,
Boston, Massachusetts, from an unrelated third party. It is represented
that the Union for the past several years has been seeking either to
buy a building or to buy unimproved land and construct a building to
house the Union offices.
To this end, on February 1, 2008, the Union purchased for cash in
the amount of $5.8 million, a parcel of improved real property (the
Original Property). The Union established the Building Corporation as a
limited liability company for the purpose of developing the Original
Property. In this regard, the Union contributed the Original Property
to the Building Corporation in exchange for sole interest in the
Building Corporation. The Building Corporation is a party in interest
with respect to the Fund, pursuant to section 3(14)(G) of the Act, as
50 percent (50%) or more of the interests in the Building Corporation
are owned by the Union.
9. It is represented that the Union purchased the Original Property
from the Tyott Co. Neither the Tyott Co., nor its owners, nor its
principals are parties in interest with respect to the Fund.
The Original Property is described as a 48,000 square foot two-
story building on a 64,000 square foot lot located at 750 Dorchester
Avenue, in Boston, Massachusetts. It is represented that the
[[Page 68122]]
location of the Original Property is within \1/8\ of a mile of the exit
and entrance ramps to a major interstate highway and within \1/4\ of a
mile from two (2) different train stations that offer access to public
transportation.
10. The Union is currently in the process of renovating and
expanding the Original Property into two (2) condominium units. One of
the condominium units is intended for the Union, and the other
condominium unit is intended for the Fund. In order to finance the
renovation and expansion of the Original Property, the Executive Board
of the Union decided, on January 30, 2009, to obtain a construction
loan in the amount of $10 million to finance the renovation and
expansion of the Original Property and to pay the remaining
construction costs from existing assets. It is the Union's intention
for the loan to cover the last $10 million dollars of payment at the
end of the construction project.
Because the Original Property is located in a low-income
neighborhood, the renovation and expansion of the Original Property is
potentially eligible for New Market Tax Credit (NMTC) financing. The
Union is currently pursuing NMTC financing from two (2) Community
Development Entities (CDEs) only for the Union's condominium unit.
These CDEs are, respectively, the Massachusetts Housing Investment
Corporation and the Bank of America. The NMTC financing will be in the
form of long-term, non-recourse loans that must remain in place for at
least seven (7) years during which time the loans will be non-
amortizing. It is represented that the Fund's Condo will not serve as
collateral for these loans, nor will any of the other assets of the
Fund serve as collateral for these loans. These loans will bear a very
low annual interest charge, estimated at one percent (1%) or below, to
cover annual accounting expenses. After seven (7) years and a day,
these loans will be repurchased by the Union at their fair market
value.\21\
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\21\ It is represented that the Fund will attempt to obtain from
NMTC partial financing on its own in 2010 at the time it purchases
the Condo, but is proceeding with the proposed transaction on the
assumption that NMTC financing will not be available for its unit.
It is represented that the Fund will only utilize the NMTC
financing, if obtained, if such financing results in more favorable
financing terms for the purchase of the Condo. It is further
represented that any NMTC financing obtained by the Fund will not
involve any transaction with the Union. For a discussion of
additional methods of financing the purchase of the Condo that are
being considered by the Fund, see the discussion in paragraph 19,
below.
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11. The plans for renovation and expansion of the Original Property
call for taking the walls and columns of the existing building on the
Original Property down to the second floor slab, rebuilding the second
floor, and then adding a new third floor. It is represented that the
full design and construction documents and the city approvals were
completed at the end of 2008. It is expected that renovation and
expansion of the Original Property will take approximately one (1)
year. Construction on the renovation and expansion of the Original
Property began in January 2009. It is anticipated that the renovated
and expanded Building will be ready for occupancy by early 2010.
12. Upon completion of the renovated and expanded Building, it is
represented that there will be approximately 71,539 square feet of
training and office space, and 6,826 square feet of common space. The
first floor of the Building intended for the Fund will have
approximately 21,406 square feet of training space with fifteen (15)
foot ceilings which are necessary for erecting and working off
scaffolding, a major component of apprentice training. The first floor
of the Building will also have 2,354 square feet of common space for
the entrance and lobby. The second floor will have approximately 13,820
square feet of office and classroom space intended for the Fund, 4,233
square feet of office space intended for the Union, and 4,472 square
feet of common space. The third floor will have approximately 25,254
square feet of office space intended for the Union. The Building will
have a parking deck with 40 spaces built above a ground level parking
area with 53 spaces, for a total of approximately 93 parking spaces on
the site that will serve as the parking area for both the Union and the
Fund.
13. The Union retained ADD Inc. to serve as the architect for the
renovation and expansion of the Building. It is represented that ADD
Inc. selected Suffolk to serve as the construction manager for the
project. It is represented that Suffolk is a Union signatory
contractor. As such, Suffolk is a party in interest with respect to the
Fund, pursuant to section 3(14)(C), an employer any of whose employees
are covered by the Fund.
Suffolk and the Union negotiated the GMP contract, including change
orders through May 11, 2009, in the amount of $19.1 million for the
renovation and expansion of the Building. Any savings on that price
will be shared 75 percent (75%) to the Union and 25 percent (25%) to
Suffolk.\22\
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\22\ It is represented that as a condition to the purchase, the
Fund will share in the constructions savings with the Union at a
rate equal to the Fund's proportional share of the square footage of
the Building and this share of the savings will be reflected in the
cost allocation method, as discussed, below, in paragraph 32, in
determining the purchase price of the Condo.
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In addition to the $19.1 million construction costs under the GMP
contract, the Union anticipates that there will be $600,000 in
materials and construction costs not included within the scope of the
GMP contract. This $600,000 represents $400,000 in what is known as
furniture, fixtures, and equipment which is frequently contracted out
directly by owners, and $200,000 for materials for minor work. Further,
the Union has incurred ``soft costs'' of $1 million, including
architect's fees, due diligence expenses, legal fees related to the
purchase of the Original Property, and fees related to zoning and
permits. It is estimated that the total cost of acquisition,
development, and construction of the renovated and expanded Building,
including the parking garage, will be approximately $27 million.
14. As mentioned above, the Union will retain one of the
condominium units in the renovated and expanded Building for its own
use. Specifically, the Union's condominium will consist of
approximately 32,597 square feet of floor space, including a portion of
the common space in the Building, and will constitute approximately
45.6 percent (45.6%) of the total square footage (71,539 square feet)
in the Building.
The Union intends to lease out at market rate any space in its
condominium unit that it does not utilize. It is represented that if
the Union leases office space to an employee benefit fund to which it
is a party in interest, the Union will do so pursuant to section
408(b)(2) of the Act.\23\ The Union will also own and intends to lease
the retail portions on the second floor of the Building. It is
represented that the intended retail lessees include an eye care
center, a banking area, and an ATM.
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\23\ The Department is offering no view, herein, as to whether
the leasing of office space to any employee benefit fund to which
the Union is a party in interest is covered by the statutory
exemption provided in sections 408(b)(2) of the Act and the
Department's regulations, pursuant to 29 CFR 2550.408b-2. Further,
the Department is not providing, herein, any relief with respect to
the leasing of office space to any such employee benefit fund by the
Union.
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15. It is represented that in numerous meetings over the past
several years, the Trustees of the Fund have discussed and acknowledged
the need for additional parking, better access to public
transportation, and additional space for offices, classrooms, and
training. In this regard, the Trustees
[[Page 68123]]
reviewed utilization reports proved by the Fund Administrator, Benjamin
Tilton.
In 2003, the Trustees retained Sam Park & Co., a Boston real estate
firm, to research the availability of buildings to purchase or to lease
that would meet the present and future needs of the Fund. After review,
the Trustees found that none of the options resulting from the 2003
search met the needs of the Fund. At that time, the Trustees suspended
the search for a new training space.
16. Because the Union was aware of the Fund's need for additional
training and classroom space, parking, and access to public
transportation, the Union approached the Trustees with a proposal that
the Union develop a portion of the Original Property to the
specifications of the Fund for the purpose of providing apprenticeship
training (i.e., ``build to suit'') and then sell it to the Fund as a
condominium unit.
17. On July 11, 2008, Gary Schwandt of Great Point Investors, LLC
provided the Trustees of the Fund with an update to the 2003 search for
a training facility that would meet the Fund's requirements. After
reviewing the results of the 2003 and 2008 real estate search, the
Trustees determined that the Original Property was the best available
site. In a meeting on May 20, 2008, the Trustees voted to proceed with
the purchase of the Condo from the Building Corporation where the
Fund's space would be ``built to suit,'' provided that: (i) The
transaction is reviewed and approved by an I/F; (ii) the Fund receives
a prohibited transaction exemption from the Department, and (iii) there
is not a better building option available that meets the Fund's space,
parking, access, and financial requirements. Accordingly, the Trustees,
acting on behalf of the Fund, have requested an administrative
exemption from the restrictions of sections 406(a)(1)(A) through (D),
406(b)(1), and 406(b)(2) of the Act which would permit the Fund to
purchase the Condo for cash from the Building Corporation.
18. In order to purchase the Condo, the Trustees of the Fund intend
to sell the Existing Facility and expect to realize net proceeds of
approximately $1.75 million. In the event that the sale of the Existing
Facility is not completed by the closing date on the Fund's purchase of
the Condo, the Trustees intend to obtain a bridge loan. The Trustees
intend to contribute an amount yet to be determined from the Fund's
existing assets toward the purchase of the Condo, and then to finance
the remaining costs. Acting as the independent fiduciary with respect
to the Fund, the I/F is responsible for reviewing and approving the
allocation between funding the purchase of the Condo from the Fund's
existing assets or financing such purchase. It is represented that in
addition to the purchase price, in order to complete the proposed
transaction the Fund will incur certain ``soft costs,'' in the amount
of $650,000, including the cost of engaging the I/F, legal costs
related to the prohibited transaction exemption process, real estate
legal costs, and underwriters fees. Once the Fund purchases the Condo,
the Fund will also be responsible for paying for electrical, gas,
telephone, and water service to the Condo, and for sharing the cost of
the common areas in the Building with the Union.
The Condo will be established in accordance with Massachusetts law
M.G.L. chapter 183A. The Fund's interest in the Condo will be recorded
as a deed for real property with the Suffolk County Registry of Deeds.
Further, the Massachusetts Condominium Act, Massachusetts General Law
Chapter 183A, provides that the default method for allocating common
expenses is that such expenses be ``assessed against all units in
accordance with their respective percentages of undivided interest in
the common areas and facilities.'' Specifically, Section 5(a) of the
Chapter 183A provides:
Each owner shall be entitled to an undivided interest in the
common areas and facilities in the percentage set forth in the
master deed. Such percentage shall be in the approximate relation
that the fair value of the of the unit on the date of the master
deed bears to the aggregate fair value of all the units.
The I/F's projection of the split of common expenses is
approximately 58% for the Fund and 42% for the Union, which percentages
are based on the May 19, 2009 fair market value appraisal of the
Building, as if completed, prepared by CB Richard Ellis/New England,
and is consistent with the methodology set forth in Section 5(a) of the
Chapter 183A of the Massachusetts Condominium Act, Massachusetts
General Law.
19. As discussed above, in footnote 1, the Trustees, on behalf of
the Fund, are considering various means of financing the purchase price
of the Condo and associated costs. It is represented that financing the
purchase of commercial property is the normal method of acquiring such
an asset. It is represented that financing the purchase of the Condo is
in the interest of the Fund, because the Fund does not have sufficient
equity to acquire the Condo on an all equity basis, even if it were
advantageous to do so.
In this regard, the Fund is considering a commercial real estate
loan which may take the form of a private bank loan or private taxable
bond financing. Such a commercial loan would be secured by a first
mortgage on the Condo and by a general pledge of assets. It is
represented that in the current real estate market, non-recourse loans
to commercial entities are not available. Interest rates required on
commercial loans are based on interest rates for highly-rated long term
government bonds, and are priced at a spread above the current market
level of government interest rates. The spread varies with credit
quality.
In the alternative to a commercial loan, the Trustees represent
that certain lenders and underwriters are willing to lend or to finance
projects through the Massachusetts Health and Education Facilities
Agency (HEFA), or similar agency, such as the Massachusetts
Development/Boston Industrial Development Finance Agency (Mass
Development/BIFA). In this regard, HEFA and Mass Development/BIFA offer
availability to capital markets for apprenticeship and training funds.
The interest rate on an HEFA or Mass Development/BIFA loan or public
debt is not subject to Federal or State income tax. Therefore, the
interest rate on such tax-exempt bond financing would be lower than
market interest rates on similar commercial debt. Like a commercial
loan, the tax-exempt bond financing through these agencies would entail
recourse debt to the Fund. In this regard, the debt would be secured by
a first mortgage lien on the Condo, as well as a pledge of revenues of
the Fund, as the borrower. Holders of tax-exempt bonds generated by
these agencies have no recourse or guaranty from HEFA or Mass
Development/BIFA as to the payment of interest or principal.
The Fund is in the process of working with HEFA and Mass
Development/BIFA and anticipates formally applying for tax-exempt bond
financing from one of those agencies. The tax-exempt bond financing
will be either through a fixed rate private placement with a local bank
or through variable-rate debt. The I/F has based its projections
assuming a 5.50 percent (5.50%) fixed tax-exempt rate. It is further
represented that, if the Fund is able to procure a variable rate
financing secured with a letter of credit, as described in the next
paragraph, below, the interest rate on the debt, would be lower than
the 5.50 percent (5.50%) projections. The amount of the
[[Page 68124]]
proposed tax-exempt bond financing is not yet determined.
In May 2009, the Fund obtained an offer of an irrevocable direct
pay letter of credit from First Trade Union Bank (FTUB) \24\ in support
of the tax-exempt bond financing \25\ for the purchase of the Condo by
the Fund. The amount of the letter of credit would not exceed the
lesser of: (i) 80 percent (80%) of the appraised value of the
underlying real estate collateral, or (ii) 80 percent (80%) of the
purchase price, and in no event would exceed the legal lending limit
($8 million) of FTUB. The letter of credit would be secured with a
valid first mortgage and security interest on the Condo and would
include an assignment of all leases, rents, plans, specifications,
contracts, licenses, permits, warranties, and approvals pertaining to
the Condo. The letter of credit would also be secured by a first
position lien on all business assets of the Fund and a negative pledge
of the Fund's deposit and investment accounts held at FTUB with a
minimum liquidity provision, to be determined. The term of the letter
of credit would be seven (7) years. The Union would be required to
provide a letter of support \26\ to assure adequate cash flow to the
Fund to meet debt service requirements. The offer by FTUB has expired,
but it is represented that similar terms are still available to the
Fund.
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\24\ It is represented that ownership interests in FTUB are as
follows: New England Carpenters Pension Fund--36.5%, New England
Carpenters Guaranteed Annuity Fund--18.2%, Empire State Carpenters
Pension Fund--45%, and Bank Senior Management (through rabbi
trust)-.3%.
\25\ The Department, herein, is not providing any relief for the
lending of money or other extension of credit between the Fund and
FTUB, any other bank, financial institution, or entity.
\26\ The Department, herein, is not providing any relief in
connection with the letter of support.
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The Fund is interviewing prospective lenders and underwriters, and
will obtain a firm commitment letter for the initial purchase of the
tax-exempt bonds at the time of the closing on the proposed
transaction. The Union anticipates that as a precondition for the Fund
to obtain tax-exempt bond financing, the Union will be required to make
a commitment to HEFA or to Mass Development/BIFA during the term of
existing and future collective bargaining agreements to increase the
hourly contribution to the Fund whenever necessary to ensure that the
Fund has sufficient income and reserves to meet its debt obligation. It
is represented that the Union is willing to make this commitment.
20. CB Richard Ellis/New England, Consulting and Valuation Group, a
division of CB Richard Ellis/New England is the appraiser chosen by
Mark Haroutunian, VP & Credit Officer of FTUB, for the purposes of
mortgage financing. James T. Moore (Mr. Moore), First Vice President/
Partner of CB Richard Ellis/New England, and Harris E. Collins (Mr.
Collins), Senior Vice President/Partner of CB Richard Ellis/New England
prepared an appraisal of the fair market value of Building, as if
completed.
Mr. Moore is qualified in that he is an associate member of the
Appraisal Institute, a member of the Real Estate Finance Association,
Greater Boston Real Estate Board, and a Massachusetts Certified General
Appraiser. Mr. Collins is qualified in that he is a member of the
Appraisal Institute, a member of the Counselors of Real Estate, and a
member of the Real Estate Finance Association-Greater Boston Real
Estate Board, and is a Massachusetts Certified General Appraiser.
Both Mr. Moore and Mr. Collins are independent in that neither has
a present or prospective interest in or bias with respect to the
property that is the subject of the appraisal and neither have a
business or personal interest in or bias with respect to the parties
involved. It is further represented that the engagement of Mr. Moore
and Mr. Collins and the compensation for completing the appraisal
assignment was not contingent upon the development or reporting of
predetermined results.
The fair market value conclusions and projections reached by Mr.
Moore and Mr. Collins are as follows:
----------------------------------------------------------------------------------------------------------------
Value
Appraisal premise Interest appraised Date of value conclusion
----------------------------------------------------------------------------------------------------------------
As Is (Land & Shell Value).............. Fee Simple Estate......... May 11, 2009.............. $5,710,000
As Complete-Total Property.............. Fee Simple Estate......... January 1, 2010........... 23,000,000
As complete--The Fund's Unit............ Fee Simple Estate......... January 1, 2010........... 13,360,000
As complete--The Union's Unit........... Fee Simple Estate......... January 1, 2010........... 9,640,000
----------------------------------------------------------------------------------------------------------------
21. It is represented that in purchasing the Condo, the Fund will
acquire a real property interest in the Condo, the land underlying the
Building, and any common areas in the Building. Specifically, the
Fund's Condo will consist of approximately 38,942 square feet of space,
including a portion of the common space in the Building, and will
constitute approximately 54.4 percent (54.4%) of the total square
footage (71,539 square feet) in the Building.
It is represented that the Fund may share and/or rent at fair
market value some of the storage and training space (approximately
3,800 square feet) on the first floor and office space (approximately
600 square feet) on the second floor to other apprenticeship and
training funds affiliated with the Union. It is further represented
that the leasing of this space in the Condo will provide the Fund with
supplemental income in the short-term, and that this space will provide
the Fund with room for expansion in the long-term.
The intended lessee is the Pile Drivers Local No. 56 Apprenticeship
and Training Fund (the Pile Drivers Fund). It is represented that
although the Pile Drivers Fund is affiliated with the Union, the Pile
Drivers Fund and the Fund do not share any trustees in common.
Accordingly, the applicant has represented that the Pile Drivers Fund
is not a party in interest with respect to the Fund. To the extent that
any leasing arrangement between the Fund and the Pile Drivers Fund and
any leasing arrangement between the Fund any other training fund
affiliated with the Union violates section 406 of the Act, the
applicant represents that such transaction will either be exempt under
section 408(b)(2) of the Act and/or will be exempt pursuant to class
exemptions, PTE 76-1, PTE 77-10, or PTE 78-6.\27\
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\27\ The Department is offering no view, herein, as to whether
any sharing or leasing arrangement between the Fund and any training
fund affiliated with the Union is covered by the Department's
regulations, pursuant to 29 CFR 2550.408b-2; nor, is the Department
offering a view that any sharing or leasing arrangement between the
Fund and any training fund affiliated with the Union would be exempt
under the provisions of the class exemptions, PTE 76-1, PTE 77-10,
or PTE 78-6. Further, the Department is not providing, herein, any
relief with respect to any sharing or leasing arrangement between
the Fund and any training fund affiliated with the Union.
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22. It is represented that the proposed transaction is feasible in
that the purchase of the Condo by the Fund is
[[Page 68125]]
a one-time transaction for cash. The Fund will not pay any commissions,
sales fees, or other similar payments to any party as a result of the
transaction.
23. The applicant maintains that the proposed transaction is in the
interest of the participants and beneficiaries of the Fund, because the
Fund would obtain a modern state of the art training and education
facility that is ``built to suit'' the Fund's specifications, that is
accessible both by automobile and public transportation, and that would
alleviate the over-crowding that exists at the Existing Facility.
The Union and the Fund also believe that the proposed transaction
would be beneficial, because it would provide ``one-stop shopping'' for
the Fund's apprentices and journeymen and the employers of those
apprentices to have the Fund's training facility and Union offices at
the same location. Such an arrangement would allow the apprentices and
the journeymen to conduct Union business before or after attending
classes or training. This arrangement would also allow contributing
employers of the Fund to conduct business with the Union and address
any apprentice issues with the Fund. Further, the arrangement would
permit the Union and the Fund to showcase the training programs and
facilities to contractors and developers. As the Building directly
abuts a major interstate highway, this location would also provide both
the Union and the Fund with the use of electronic signage on the roof
for low-cost promotional opportunities for their respective programs.
24. The proposed exemption contains conditions which are designed
to ensure the presence of adequate safeguards to protect the interests
of the Fund regarding the subject transaction. In this regard, on July
16, 2008, the Trustees interviewed the candidates for the position of
I/F with respect to the purchase by the Fund of the Condo. The Trustees
selected and entered into an agreement (the Agreement), dated October
30, 2008, with Independent Fiduciary Services, Inc. (IFS) to serve as
the I/F to act on behalf of the Fund with regard to the subject
transaction. IFS has represented that acting as the independent
fiduciary with respect to the Fund, it is responsible for determining
whether the proposed transaction satisfies the criteria, as set forth
in section 404 and section 408(a) of the Act.
25. The Trustees retained IFS to provide a report to the Department
which would state IFS' conclusions and would summarize the analysis and
considerations used by IFS to determine whether it is prudent to go
forward with the proposed transaction.
26. It is represented that IFS is qualified to serve as I/F in that
it specializes in acting as an independent fiduciary to plans covered
by the Act. It is represented that IFS is experienced as a fiduciary in
making and evaluating investment decisions, including decisions
involving the acquisition and management and disposition of real
estate. IFS is registered as an investment adviser under the Investment
Advisers Act of 1940. IFS has acted in a variety of roles, including
independent fiduciary, named fiduciary, investment manager, and adviser
or special consultant. In this regard, IFS serves as an ongoing
investment consultant to plans with assets valued at approximately
$17.9 billion. The staff of IFS includes professionals experienced with
the management and disposition of portfolio assets, including real
estate, as well as lawyers familiar with the Act and sensitive to
fiduciary responsibilities involving investment activities. IFS
acknowledges that with respect to its duties as I/F acting on behalf of
the Fund with regard to the proposed transaction that it is a
fiduciary, as defined in section 3(21)(A) of the Act.
27. It is represented that IFS is independent of the parties
involved in the proposed transaction in that it has no relationship
with either the Fund or the Union, except for its role as the I/F with
respect to the proposed transaction. It is represented that IFS' fee
for its services as I/F of the Fund will be less than 1 percent (1%) of
its annual revenues.
28. Pursuant to the Agreement with the Trustees, IFS has agreed:
(a) To evaluate the proposed transaction to determine whether it is
in the interest of the Fund's participants and beneficiaries and, if
IFS determines that the transaction is in the interest of the Fund, to
submit a report to the Department in support of an application for a
prohibited transaction exemption; and
(b) To negotiate and agree on behalf of the Fund to the specific
terms of the transaction, to decide whether to consummate the proposed
transaction and, if IFS decides to consummate the proposed transaction
to direct the appropriate Fund fiduciaries to execute the instruments
necessary for such transaction.
Further, IFS has represented that acting as I/F on behalf of the
Fund, it is responsible for:
(a) A review of the reasonableness of the purchase price;
(b) A review of architect and contractor documentation to determine
the appropriate proportional cost of the purchase and construction of
the Condo and the common areas;
(c) A review of the Fund's independently prepared financial
statements and projections of future cash flow in order to evaluate the
Fund's ability to financially support the purchase of the Condo and the
future operating costs associated with it;
(d) A review, with legal counsel, of the proposed sale agreement,
the condominium agreement, the financing agreements, and other
documents supporting the sale, ownership, and occupancy of the Condo;
(e) A review of the Fund's financial and business analysis
supporting the purchase of the Condo compared to leasing that space or
buying or leasing other similar space; and
(f) A review of the exemption application and other documentation
provided to the Department.
29. In carrying out its duties, IFS requested, received, and has
reviewed the following documents concerning the Fund and the proposed
transaction: (a) The Prohibited Transaction Exemption application,
dated February 24, 2009, including all attachments; (b) the
Department's response, dated April 1, 2009; (c) the draft purchase and
sale agreement between the Building Corporation, as seller, and the
Fund, as buyer, dated June 9, 2009, as negotiated on behalf of the Fund
by IFS with the assistance of Kenneth Gould of Lawson & Weitzen, who is
acting as independent real estate counsel for the Fund, including the
negotiation of the purchase agreement by which the Fund will acquire
the Condo and various related instruments governing the condominium;
(d) the draft master deed and by-laws of the condominium regime under
which the Fund's Condo would be established and managed; (e) audited
financial statements of the Fund, as at year end September 30, 2004-
2008, prepared by Michael P. Ross, CPA; (f) forecasted income
statements prepared by Christine Riley, Accounting Manager for the
Fund, and Ben Tilton, Fund Administrator; (g) layout drawings of the
existing and new structures; (h) the GMP between the Union and Suffolk,
as set forth through change orders dated May 11, 2009, for the
renovation and expansion of the Building, including exhibits; (i) the
cost allocation report prepared by Casendino & Company (Casendino), an
MAI architecture firm located in Boston, Massachusetts; and (j) the
appraisal report, dated May 11, 2009, prepared by Mr. Moore and Mr.
Collins of CB Richard Ellis/New
[[Page 68126]]
England, Consulting and Valuation Group.
In addition, IFS discussed the proposed transaction with: (a) Aaron
D. Krakow, Esq., Krakow & Souris, LLC, outside legal counsel
representing the Fund in connection with filing the application for
exemption for the proposed transaction; (b) Richard Kronish, Advisor to
the Fund and to the Union on financial matters; (c) David Cary, Integra
Realty Resources Inc., (Integra) the appraiser for the appraisal of the
Condo to be completed prior to closing; (d) Christine Riley, Accounting
Manager for the Fund; and (e) Benjamin Tilton, the Fund's Training
Director.
30. It is represented that IFS has visited both the Fund's Existing
Facility and the site of the Condo. In this regard, IFS has observed
the following: (i) There is no public transportation station in the
vicinity of the Existing Facility, while the site of the Condo is
approximately \1/4\ mile from two (2) public transportation stations;
(ii) the Existing Facility has no immediate access to a major highway,
while the Condo is adjacent to an interstate highway; (iii) the Condo
will give the Fund's journeymen and apprentices access to almost double
the number of parking spaces available in the Existing Facility; (iv)
the Condo is three (3) times as large as the Existing Facility and
appears to IFS to be proportionate and reasonable in light of the
growth in the number of apprentices and journeymen taking classes and
the increase in the number of courses offered by the Fund; and (v) the
design drawings for the Condo shows that the unit will provide
substantially more shop and classroom space than is available in the
Existing Facility. Based on the foregoing observation, IFS concurs with
the judgment of the Fund's Trustees that the Condo which the Fund will
acquire, if the proposed transaction is consummated, will be adequate
for the Fund's needs and represents a significant improvement over the
current facility as a site for conducting the Fund's training and
apprenticeship programs.
31. According to IFS, the Fund has considered the following
options: (1) Renovate and expand the Existing Facility; (2) purchase
and renovate another building; (3) build a new facility; (4) lease
space in the Building from the Union or lease space from an unrelated
third party; (5) purchase a ``built to suit'' property.
The first option, renovating and expanding the Existing Facility,
according to IFS, is not tenable as the underlying lot is too small for
expansion, there is no room for more parking spaces, and the facility
is not convenient to public transportation. With regard to the second
option, it is represented that the Fund has not been able to find a
suitable property to purchase and renovate. With regard to the third
option, no sites were available to build a new facility that would meet
the Fund's requirements.
With regard to a comparison between: (i) Leasing space from a third
party or from the Union; and (ii) purchasing a ``built to suit''
property, IFS has determined that ownership of the Condo is less
expensive and more secure to the Fund than leasing. First, the Fund's
exemption from property taxes renders purchasing a property superior to
leasing. Leased property would be subject to property taxes,
notwithstanding the Fund's tax exempt status as the tenant. In this
regard, the 2009 property taxes estimated in the CB Richard Ellis
appraisal, dated May 2009, were $211,000. Further, the Condo is being
built according to the Fund's design and meets the Fund's parking,
transportation, space, and usage requirements. The Condo offers the
added benefit of synergies created by sharing common elements with the
Union, permitting the apprentices and journeymen carpenters to do Union
related business and obtain training in the same location. With the
Condo ownership, the Fund has long-term stability in owning the Condo,
control over the space, and the flexibility to modify such space. The
long-term appreciation in value of the Condo would benefit the Fund as
an owner. Accordingly, IFS has concluded that ownership of the Condo is
in the interest and protective of the Fund to a greater extent than
leasing space from a third party or from the Union. Further, IFS agrees
with the Fund's conclusion that a ``build to suit'' facility is the
only feasible solution.
32. It is represented that the terms of the proposed transaction
are on terms which are at least as favorable to the Fund as those which
would have been negotiated at arm's length with an unrelated party. The
purchase contract will be signed not more than thirty (30) days before
the closing on the Condo, and the master deed and by-laws will be
signed at closing. IFS has reviewed drafts of the purchase contract,
master deed, and by-laws for the Condo and concurs, in general, with
the structure of the condominium regime.
It is represented that the master deed and property by-laws, as
currently drafted, are protective of the Fund's interest. IFS
represents that it will continue to negotiate the master deed and by-
laws to make sure that the Fund is protected with regard to allocation
of common expenses, rights with regard to sale of the Condo (either
right of first refusal or right of first offer) \28\ and major
decisions.
---------------------------------------------------------------------------
\28\ The Department, herein, is not proposing any relief with
regard to the entry into a right of first refusal or a right of
first offer between the Union and the Fund.
---------------------------------------------------------------------------
It is represented that the purchase contract between the Fund and
the Building Corporation will set the purchase price that the Fund will
pay for the Condo. In this regard, the purchase price paid by the Fund
for the Condo, as documented in writing and approved by IFS, will be
the lesser of: (1) The fair market value of the Condo (the Appraisal
Method); or (2) the Fund's proportionate share of the cost of
acquisition and development of the Building (the Cost Allocation
Method).
With regard to the Appraisal Method of calculating the purchase
price of the Condo, IFS has engaged Integra, a certified MAI appraiser,
to compute the fair market value of the Condo as of the date of the
closing. It is represented that Integra is an independent company and
will derive less than one percent (1%) of its gross proceeds in the
past year in performing the appraisal of the Fund's Condo unit. It is
represented that the format of this appraisal will be to value the
Condo, according to normal practice, using a combination of income,
replacement cost, and sales comparison approaches. In the view of IFS,
this methodology is reasonable under the circumstances. It is
represented that IFS will use Integra's appraisal to arrive at the fair
market value of the Condo, at closing. The fair market value of the
Condo will be compared to the actual cost of the Condo allocated to the
Fund in order to arrive at the purchase price to be paid by the Fund
for the Condo. In this regard, IFS will require that the purchase price
for the Condo will be the lower of fair market value of the Condo or
the actual cost of the Condo allocated to the Fund.
With regard to the Cost Allocation Method of calculating the
purchase price of the Condo, it is represented that under the
provisions of Massachusetts Property Law and the master deed, an owner
of a condominium unit has an undivided interest in the land equal to
its proportional interest in the building. Comparing the size of the
Fund's Condo (35,226 square feet) and the Union's condominium unit
(29,487 square feet) with the total square footage in the Building
(71,539 square feet), results in a ratio of 54.4 percent (54.4%) for
the Fund and 45.6 percent (45.6%) for the Union. Using this 54.4%
ratio, the
[[Page 68127]]
Fund's share of the cost ($5.8 million) of the land underlying the
Building would be $3.155 million. Similarly, using the same 54.4%
ratio, the Fund's share of the costs ($1 million) incurred by the Union
for architect, legal, zoning, permits, and other construction-related
fees would be approximately $544,000.
IFS estimates that the Fund will bear a slightly higher percentage
58.3 percent (58.3% or $11.152 million) of the $19.128 million in
construction costs, as set forth in the GMP. In addition, IFS estimates
that the Fund will bear 58.3 percent (58.3% or $349,800) of the
$600,000 charges for construction costs outside the GMP (i.e., the
amount expended on furniture, fixtures, and equipment, and the amount
expended for materials for minor work).
In order to confirm its understanding of the allocation of the
acquisition and development costs between the Fund's Condo and the unit
to be retained by the Union, IFS engaged Casendino, an MAI architecture
firm located in Boston, Massachusetts, to review and report on the cost
allocations delineated in the GMP, and more specifically the cost
breakdown between the condominium units. Based on its review, in the
opinion of Casendino, the construction costs for the Fund should be
allocated at 58.34% of the construction budget (including any savings
distribution).
Accordingly, the purchase price paid by the Fund for the Condo, as
documented in writing and approved by IFS, will be the lesser of:
(1) The fair market value of the Condo, as of the date of the
closing on the transaction, as determined by an independent, qualified
appraiser selected by IFS; or
(2) 58.3 percent (58.3%) of the amount actually expended by the
Building Corporation in the construction of the Condo under the GMP,
plus the following amounts:
(i) 58.3 percent (58.3%) of the additional construction soft costs
incurred outside the GMP contract (i.e., the amount expended on
furniture, fixtures, and equipment, and the amount expended for
materials for minor work);
(ii) 54.4 percent (54.4%) of the amount expended on construction
soft costs (i.e., architect, legal, zoning, permits, and other fees);
and
(iii) 54.4 percent (54.4%) of the cost of the land underlying the
Building.
The following chart summarized the purchase price of the Condo
under the Cost Allocation Method:
----------------------------------------------------------------------------------------------------------------
Allocation
Component Price or value percent Fund cost
----------------------------------------------------------------------------------------------------------------
Purchase Land & Building........................................... $5,800,000 54.4 $3,155,200
Construction Soft Costs............................................ 1,000,000 54.5 544,000
GMP Construction Contract.......................................... 19,128,992 58.3 11,152,202
Non-GMP Contract Construction Costs................................ 600,000 58.3 349,800
--------------------------------------------
Total Construction............................................. 26,528,992 ........... 15,201,202
----------------------------------------------------------------------------------------------------------------
33. IFS has considered the size of the investment that the Fund
proposes to make in purchasing the Condo relative to total Fund assets.
In this regard, IFS maintains that as a training fund, the Fund is not
limited by investment diversification principles with regard to
investing in facilities which fulfill the Fund's training purpose and
its ancillary administrative activities. In the opinion of IFS, the
primary consideration is the Fund's ability to meet its financial
obligations, as they come due without impairing its training mandate.
IFS relies on a number of assumptions in evaluating the Fund's
projected financial status, and used these assumptions to develop
sensitivity models to project the Fund's financial status under a
variety of both positive and negative assumptions. The assumptions
break down into four categories: (1) Equity investment as a source of
funds; (2) the collective bargaining agreements; (3) projected
carpenter hours; and (4) fixed and variable costs.
With regard to the first category concerning sources of funds, in
addition to the value of the Existing Facility, the Fund has annual
investment income of approximately $200,000, including revenue
anticipated to arise from rental of excess space in the Condo.
With regard to the second category, the main source of revenue for
the Fund is the hourly contributions to be provided by the current
collective bargaining agreements. It is anticipated that increases in
the hourly rate and increases in the total wage and benefit package
will be included in any future collective bargaining agreements.
With regard to the third category, while the 2009 fiscal year's
carpenter hours underlying the revenue projection is 20 percent (20%)
below the 2008 carpenter hours, IFS estimates that hours will stay at
the 2009 level in 2010, and then increase in each of the years 2011 and
2012, and thereafter stabilizes at 6,720,000 for the next twenty years.
With regard to the fourth category, IFS also reviewed the
anticipated annual fixed costs of operating the Condo and the variable
costs of operating the Fund. In this regard, IFS assumed an annual two-
percent (2%) increase in fixed and variable costs.
IFS evaluated the Fund's ability to service the tax exempt bond
financing under stressed scenarios in which the carpenters' hours upon
which contributions to the Fund are based decrease over time. In
projecting a worse case scenario, IFS assumes annual reductions in
carpenters' hours of 16 percent (16%) per year, each year from 2013 to
2022. In 2022, carpenters' hours would total only 1.05 million (down
from 5.4 million hours in 2009). Under this scenario, the projected
wage and benefit package would be $77.92 per hour, of which the Fund
would receive $.598 per hour. In this regard, IFS estimates that the
contribution rate to the Fund would have to increase by approximately
$1.30 per hour from within the total projected wage and benefit
package. Accordingly, as part of IFS' review and possible approval of
the proposed transaction, IFS will require that the Union pledge to
increase contributions to the Fund by diversion from other aspects of
the wage and benefit package to cover the Fund's cash flow needs. In
IFS' view, these potential diversions by the Union of up to an
additional $1.30 per hour do not appear to be unmanageable given the
projected size of the total wage and benefit package of $77.92.
Based on its review of preliminary information and its financial
analysis, IFS concludes that the Fund reasonably can be expected to
make all payments of interest and principal on its loan to acquire the
Condo, maintain the Condo, and meet its expected training obligations.
In addition, IFS concludes that under certain stress scenarios, a
pledge by the Union to increase contributions to the Fund will be
[[Page 68128]]
required to pay operating costs and debt service requirements.
In the event the Fund does not meet its obligations under the
financing documents, the consequences of such an event would be spelled
out in the loan agreement and the trust indenture of the tax-exempt
bonds which provided such financing. Such instruments customarily
require that the indenture trustee give the Fund notice of any breach
and an opportunity to cure the breach within thirty (30) days. As
discussed above, the cure would be effected by invoking the Union's
obligation to increase the Fund's allocation from the total wage and
benefit package.
34. IFS' analysis of the proposed transaction makes certain
assumptions, about the level, security lien, and interest rate of tax-
exempt debt, the amount of the Fund's equity participation in the
proposed transaction, and the funds available from the sale of the
Existing Facility. Each of these assumptions, as well as escalation
assumptions in revenue and expense calculations and interest rate
assumptions is subject to change and further analysis by IFS. In this
regard, IFS has represented that it will continue to monitor the terms
of the proposed transaction and will not consent to the closing until
IFS is able to confirm that the terms of the purchase contract under
which the Fund will acquire the Condo and all of the closing documents
are reasonable and in the interest of the Fund and its participants.
35. IFS has examined the potential conflict of interest of two (2)
of the Trustees of the Fund. In this regard, one member of the
Executive Board of the Union is also a labor Trustee of the Fund, and a
management Trustee of the Fund is also an executive with Suffolk, the
contractor on the project. Both Trustees have recused themselves from
all votes and matters relating to the construction of the Condo. As IFS
is engaged to decide whether and on what terms to consummate the
proposed transaction and not the Trustees of the Fund, these recusals
provide further assurance that there is no conflict of interest arising
out of the positions these two Trustees hold with the Union and
Suffolk, respectively. It is further represented that any of the
Trustees of the Fund who present similar conflicts in the future will
recuse themselves as well.
IFS will also require that the by-laws and the master deed of the
Building provide the Fund with appropriate authority regarding the on-
going management of the Building over time. In this regard, Article II,
section 2.1 of the proposed by-laws provides for each condominium unit
owner to appoint one ``manager'' to the Condominium Association Board
of Managers that has the responsibility for the operations and
maintenance of the common area. The Trustees of the Fund represent that
the manager appointed by the Fund shall be a management trustee at all
times that the other condominium unit is owned by the Union.
36. IFS has also addressed the marketability of the Condo. In this
regard, it is represented that depending on the needs of various
possible tenants and purchasers the Condo could be sold or leased as a
single unit or could be subdivided into separate rental units. IFS
further represents that the location relative to highway and mass
transit and adequate parking makes the Condo competitively attractive
for a number of commercial uses, as there are very few properties that
combine a large open space suitable for industrial or warehouse use
that also have office space for company staff.
37. In conclusion, subject to certain caveats listed below, and
subject to all of the terms of the Agreement and the assumptions
developed in IFS's financial model to protect the Funds assets, as of
June 11, 2009, IFS finds that the purchase of the Condo by the Fund is
in the interest of the Fund. IFS's ultimate approval of the proposed
transaction will be subject to the following caveats: (a) Review and
agreement on the terms of the NMTC and tax-exempt bond financing; (b)
agreement on the final terms of the Condo by-laws, the purchase
contract, the master deed, and all closing documents, based on
assistance and advice from legal counsel; (c) the final financing
available to the Fund is on terms consistent with the assumptions
described in the report prepared by IFS, dated June 11, 2009, and the
terms thereof have been reviewed and approved by Fund counsel; and (d)
satisfaction of all conditions set forth in the purchase agreement and
related instruments.
38. In summary, the applicant represents that the proposed
transaction meets the statutory criteria for an exemption under section
408(a) of the Act because:
(a) IFS, acting as the I/F on behalf of the Fund, is responsible
for analyzing the relevant terms of the transaction and deciding
whether the Trustees should proceed with the transaction;
(b) The Fund may not purchase the Condo, unless and until IFS,
acting as the I/F on behalf of the Fund, approves such purchase;
(c) IFS, acting as the I/F on behalf of the Fund, is responsible
for: (i) Establishing the purchase price of the Condo, (ii) reviewing
the financing terms, (iii) determining that such financing terms are
the product of arm's length negotiations, and (iv) ensuring that the
Fund will not close on the Condo until IFS has determined that to
proceed with the proposed transaction is feasible, in the interest of,
and protective of the participants and beneficiaries of the Fund;
(d) The purchase price paid by the Fund for the Condo, as
documented in writing and approved by IFS, acting as the I/F on behalf
of the Fund, is the lesser of:
(1) The fair market value of the Condo, as of the date of the
closing on the transaction, as determined by an independent, qualified
appraiser selected by the I/F; or
(2) 58.3 percent (58.3%) of the amount actually expended by the
Building Corporation in the construction of the Condo under the GMP,
plus the following amounts:
(i) 58.3 percent (58.3%) of the additional construction soft costs
incurred outside the GMP contract (i.e., the amount expended on
furniture, fixtures, and equipment, and the amount expended for
materials for minor work);
(ii) 54.4 percent (54.4%) of the amount expended on construction
soft costs (i.e. architect, legal, zoning, permits, and other fees; and
(iii) 54.4 percent (54.4%) of the cost of the land underlying the
Building;
(e) IFS, acting as the independent fiduciary on behalf of the Fund,
is responsible, prior to entering into the proposed transaction, for:
(i) Reviewing an appraisal of the fully completed Condo, which has been
prepared by an independent, qualified appraiser, and updated, as of the
date of the closing of the transaction, (ii) evaluating the sufficiency
of the methodology of such appraisal, and (iii) determining the
reasonableness of the conclusions reached in such appraisal;
(f) The terms of the transaction are no less favorable to the Fund
than terms negotiated under similar circumstances at arm's length with
unrelated third parties;
(g) The Fund does not purchase the Condo or take possession of the
Condo until such Condo is completed;
(h) The Fund has not been, is not, and will not be a party to the
construction financing loan or the permanent financing loan obtained by
the Building Corporation and/or by the Union;
(i) The Fund does not pay any commissions, sales fees, or other
similar
[[Page 68129]]
payments to any party as a result of the transaction, and the costs
incurred in connection with the purchase of the Condo by the Fund at
closing do not include, directly or indirectly, any developer's profit,
any premium receive by the developer, nor any interest charges incurred
on the construction financing loan or the permanent financing loan
obtained by the Building Corporation and/or by the Union;
(j) Under the terms of the current collective bargaining
agreement(s) and any future collective bargaining agreement(s), the
Union has the ability, unilaterally, to increase the contribution rate
to the Fund at any time by diverting money from wages and contributions
to other benefit funds within the total wage and benefit package, and
the Union is obligated to do so in order to prevent a default by the
Fund under the terms of the financing obtained by the Fund to purchase
the Condo;
(k) In the event, the Building Corporation and/or the Union
defaults on the construction financing loan or the permanent financing
loan obtained by the Building Corporation and/or the Union, the
creditors under the terms of such construction financing loan or such
permanent financing loan shall have no recourse against the Condo or
any of the assets of the Fund;
(l) IFS, acting as the independent fiduciary with respect to the
Fund, is responsible for reviewing and approving the allocation between
funding the purchase of the Condo from the Fund's existing assets or
financing such purchase;
(m) IFS, acting as the independent fiduciary with respect to the
Fund, is responsible for determining whether the proposed transaction
satisfies the criteria, as set forth in section 404 and section 408(a)
of the Act.
Notice to Interested Persons
Those persons who may be interested in the publication in the
Federal Register of the Notice of Proposed Exemption (the Notice)
include all members of the Locals in the Boston area and the Employer
Associations.
It is represented that notification will be provided to all such
interested persons by first class mail within fifteen (15) calendar
days of the date of publication of the Notice in the Federal Register.
Such mailing will contain a copy of the Notice, as it appears in the
Federal Register on the date of publication, plus a copy of the
supplemental statement, as required, pursuant to 29 CFR Sec.
2570.43(b)(2) of the Department's regulations, which will advise all
interested persons of the right to comment and to request a hearing.
The Department must receive all written comments and requests for a
hearing no later than forty-five (45) days from the date of the
publication of the Notice in the Federal Register.
Further Information Contact: Angelena C. Le Blanc of the
Department, telephone (202) 693-8551 (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 15th day of December 2009.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E9-30262 Filed 12-21-09; 8:45 am]
BILLING CODE 4510-29-P