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Secretary of Labor Hilda L. Solis
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EBSA Notices

Application Nos. and Proposed Exemptions; D-11489, Morgan Stanley & Co., Incorporated; L-11609, The Finishing Trades Institute of the Mid-Atlantic Region (the Plan) et al.   [7/2/2010]
[PDF]
FR Doc 2010-16096
[Federal Register: July 2, 2010 (Volume 75, Number 127)]
[Notices]               
[Page 38557-38564]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02jy10-106]                         

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

 
Application Nos. and Proposed Exemptions; D-11489, Morgan Stanley 
& Co., Incorporated; L-11609, The Finishing Trades Institute of the 
Mid-Atlantic Region (the Plan) et al.

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the 
Internal Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5700, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No.------, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of 
the scheduled comment period. The applications for exemption and the 
comments received will be available for public inspection in the Public 
Documents Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.
    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.

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA) and section 4975(c)(2) of the Internal Revenue Code 
of 1974 (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 Involving Plans Described in Both Title I and 
Title II of ERISA

    If the proposed exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) and section 406(b) of ERISA, and the sanctions 
resulting from the application of sections 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1) of the Code, shall not apply, effective 
February 1, 2008, to the following transactions, if the conditions set 
forth in Section III have been met: \1\
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    \1\ For purposes of this proposed exemption, references to 
section 406 of ERISA should be read to refer also to the 
corresponding provisions of section 4975 of the Code.
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    (a) The sale or exchange of an ``Auction Rate Security'' (as 
defined in Section IV (b)) by a ``Plan'' (as defined in Section IV(h)) 
to the ``Sponsor'' (as defined in Section IV (g)) of such Plan; or

[[Page 38558]]

    (b) A lending of money or other extension of credit to a Plan in 
connection with the holding of an Auction Rate Security by the Plan, 
from (1) Morgan Stanley & Co. Incorporated or an Affiliate (Morgan 
Stanley); (2) an ``Introducing Broker'' (as defined in Section IV (f)); 
or (3) a ``Clearing Broker'' (as defined in Section IV (d))--where the 
loan is (i) repaid in accordance with its terms, and (ii) guaranteed by 
the Plan Sponsor.

II. Transactions Involving Plans Described in Title II of ERISA Only

    If the proposed exemption is granted, the sanctions resulting from 
the application of section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1) of the Code, shall not apply, effective February 1, 
2008, to the following transactions, if the conditions set forth in 
Section III have been met: (a) The sale or exchange of an Auction Rate 
Security by a ``Title II-Only Plan'' (as defined in Section IV(i)) to 
the Beneficial Owner'' (as defined in Section IV(c)) of such Plan; or 
(b) A lending of money or other extension of credit to a Title II-Only 
Plan in connection with the holding of an Auction Rate Security by the 
Title II-Only Plan, from (1) Morgan Stanley; (2) an Introducing Broker; 
or (3) a Clearing Broker--where the loan is (i) repaid in accordance 
with its terms, and (ii) guaranteed by the Beneficial Owner.

III. Conditions

    (a) Morgan Stanley acted as a broker or dealer, non-bank custodian, 
or fiduciary in connection with the acquisition or holding of the 
Auction Rate Security that is the subject of the transaction;
    (b) For transactions involving a Plan (including a Title II-Only 
Plan) not sponsored by Morgan Stanley for its own employees, the 
decision to enter into the transaction is made by a Plan fiduciary who 
is ``Independent'' (as defined in Section IV(e)) of Morgan Stanley. 
Notwithstanding the foregoing, an employee of Morgan Stanley who is the 
Beneficial Owner of a Title II-Only Plan may direct such Plan to engage 
in a transaction described in Section II, if all of the other 
conditions of this Section III have been met;
    (c) The last auction for the Auction Rate Security was 
unsuccessful;
    (d) The Plan does not waive any rights or claims in connection with 
the loan or sale as a condition of engaging in the above described 
transaction;
    (e) The Plan does not pay any fees or commissions in connection 
with the transaction;
    (f) The transaction is not part of an arrangement, agreement, or 
understanding designed to benefit a party in interest or disqualified 
person;
    (g) With respect to any sale described in Section I(a) or Section 
II(a):
    (1) The sale is for no consideration other than cash payment 
against prompt delivery of the Auction Rate Security; and
    (2) For purposes of the sale, the Auction Rate Security is valued 
at par, plus any accrued but unpaid interest; \2\
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    \2\ The Department notes that this proposed exemption does not 
address tax issues. The Department has been informed by the Internal 
Revenue Service and the Department of the Treasury that they are 
considering providing limited relief from the requirements of 
sections 72(t)(4), 401(a)(9), and 4974 of the Code with respect to 
retirement plans that hold Auction Rate Securities. The Department 
has also been informed by the Internal Revenue Service that if 
Auction Rate Securities are purchased from a Plan in a transaction 
described in Sections I and II at a price that exceeds the fair 
market value of those securities, then the excess value would be 
treated as a contribution for purposes of applying applicable 
contribution and deduction limits under sections 219, 404, 408, and 
415 of the Code.
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    (h) With respect to an in-kind exchange described in Section (I)(a) 
or Section II(a), the exchange involves the transfer by a Plan of an 
Auction Rate Security in return for a ``Delivered Security,'' as such 
term is defined in Section IV(j), where:
    (1) The exchange is unconditional;
    (2) For purposes of the exchange, the Auction Rate Security is 
valued at par, plus any accrued but unpaid interest;
    (3) The Delivered Security is valued at fair market value, as 
determined at the time of the in-kind exchange by a third party pricing 
service or other objective source;
    (4) The Delivered Security is appropriate for the Plan and is a 
security that the Plan is otherwise permitted to hold under applicable 
law; \3\
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    \3\ The Department notes that ERISA's general standards of 
fiduciary conduct would also apply to the transactions described 
herein. In this regard, section 404 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: (1) The decision to exchange an 
Auction Rate Security for a Delivered Security; and (2) the 
negotiation of the terms of such exchange (or a cash sale or loan 
described above), including the pricing of such securities. The 
Department further emphasizes that it expects plan fiduciaries, 
prior to entering into any of the transactions, to fully understand 
the risks associated with these types of transactions, following 
disclosure by Morgan Stanley of all the relevant information.
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    (5) The total value of the Auction Rate Security (i.e., par, plus 
any accrued but unpaid interest) is equal to the fair market value of 
the Delivered Security;
    (i) With respect to a loan described in Section I(b) or II(b):
    (1) The loan is documented in a written agreement containing all of 
the material terms of the loan, including the consequences of default;
    (2) The Plan does not pay an interest rate that exceeds one of the 
following three rates as of the commencement of the loan:
    (A) The coupon rate for the Auction Rate Security;
    (B) The Federal Funds Rate; or
    (C) The Prime Rate;
    (3) The loan is unsecured; and
    (4) The amount of the loan is not more than the total par value of 
the Auction Rate Securities held by the Plan.
    (j) Morgan Stanley maintains, or causes to be maintained, for a 
period of at least six (6) years from the date of a covered 
transaction, such records as are necessary to enable the persons 
described in paragraph (k), below, 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 that engages in a 
covered transaction, other than Morgan Stanley shall be subject to a 
civil penalty under section 502(i) of ERISA or the taxes imposed by 
section 4975(a) and (b) of the Code, if such records are not 
maintained, or are not available for examination, as required, below, 
by paragraph (k); and
    (2) A separate prohibited transaction shall not be considered to 
have occurred solely because, due to circumstances beyond the control 
of Morgan Stanley, such records are lost or destroyed prior to the end 
of the six-year period; and
    (k)(1) Except as provided in subparagraph (2), below, and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of ERISA, the records referred to in paragraph (j), above, are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the U.S. Securities and 
Exchange Commission;
    (B) Any fiduciary of any Plan, including any IRA owner, 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 the Plan that engages in a 
covered transaction, or any authorized employee or representative of 
these entities;
    (2) None of the persons described above in paragraph (k)(1)(B) or 
(C) shall be authorized to examine trade secrets of Morgan Stanley, or 
commercial or financial information which is privileged or 
confidential; and

[[Page 38559]]

    (3) Should Morgan Stanley refuse to disclose information on the 
basis that such information is exempt from disclosure, Morgan Stanley 
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.

IV. Definitions

    (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 ``Auction Rate Security'' or ``ARS'' 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;
    (c) The term ``Beneficial Owner'' means the individual for whose 
benefit the Title II-Only Plan is established and includes a relative 
or family trust with respect to such individual;
    (d) The term ``Clearing Broker'' means a member of a securities 
exchange who acts as a liaison between an investor and a clearing 
corporation, helps to ensure that a trade is settled appropriately, 
ensures that the transaction is successfully completed, and is 
responsible for maintaining the paper work associated with the clearing 
and execution of a transaction;
    (e) The term ``Independent'' means a person who is (1) not Morgan 
Stanley or an Affiliate, and (2) not a ``relative'' (as defined in 
ERISA section 3(15)) of the party engaging in the transaction;
    (f) The term ``Introducing Broker'' means a registered broker who 
is able to perform all the functions of a broker, except for the 
ability to accept money, securities, or property from a customer;
    (g) The term ``Sponsor'' means a plan sponsor as described in 
section 3(16)(B) of ERISA and any Affiliates;
    (h) The term ``Plan'' means any plan described in section 3(3) of 
ERISA and/or section 4975(e)(1) of the Code;
    (i) The term ``Title II-Only Plan'' means any plan described in 
section 4975(e)(1) of the Code that is not an employee benefit plan 
covered by Title I of ERISA;
    (j) The term ``Delivered Security'' means a security that is (1) 
Listed on a national securities exchange (excluding OTC Bulletin Board-
eligible securities and Pink Sheets-quoted securities); or (2) A U.S. 
Treasury obligation; or (3) A fixed income security that has a rating 
at the time of the exchange that is in one of the two highest generic 
rating categories from an Independent nationally recognized statistical 
rating organization (e.g., a highly rated municipal bond or a highly 
rated corporate bond); or (4) A certificate of deposit insured by the 
Federal Deposit Insurance Corporation. Notwithstanding the above, the 
term ``Delivered Security'' shall not include any Auction Rate 
Security, or any related Auction Rate Security, including derivatives 
or securities materially comprised of Auction Rate Securities or any 
illiquid securities.

Summary of Facts and Representations

    1. The applicant Morgan Stanley & Co. Incorporated and its 
Affiliates (hereinafter, either ``Morgan Stanley'' or the 
``applicant''), headquartered in New York, New York, is one of the 
nation's pre-eminent global financial services firms. Morgan Stanley 
serves a large and diversified group of clients and customers, 
including corporations, governments, financial institutions, and 
individuals around the world. On September 21, 2008 Morgan Stanley 
obtained approval from the Board of Governors of the Federal Reserve 
System to become a bank holding company upon the conversion of its 
wholly owned indirect subsidiary, Morgan Stanley Bank (Utah), from a 
Utah industrial bank to a national bank. On September 23, 2008 the 
Office of the Comptroller of the Currency authorized Morgan Stanley 
Bank (Utah) to commence business as a national bank, operating as 
Morgan Stanley Bank, N.A. Concurrent with this conversion, Morgan 
Stanley became a financial holding company under the Bank Holding 
Company Act of 1956, as amended. Morgan Stanley & Co. Incorporated, 
Morgan Stanley's primary operating unit, is also both a registered 
investment adviser subject to the Investment Advisers Act of 1940 and a 
SEC-registered broker-dealer subject to the supervision of various 
governmental and self-regulatory bodies. Morgan Stanley offers a full 
array of investment-related services, including securities research, 
brokerage, execution, asset allocation, financial planning, investment 
advice, discretionary asset management services, sweep, and trust/
custody services.
    Morgan Stanley Smith Barney has recently been formed as a joint 
venture. Under the joint venture agreement, Citigroup, Inc. (Citigroup) 
and Morgan Stanley (including their respective subsidiaries) each 
contributed specified businesses to the joint venture, together with 
all contracts, employees, property licenses, and other assets (as well 
as liabilities) used primarily in the contributed businesses. 
Generally, in the case of Citigroup, the contributed businesses include 
Citigroup's retail brokerage and futures business operated under the 
name ``Smith Barney'' in the United States and Australia and operated 
under the name ``Quilter'' in the United Kingdom, Ireland and Channel 
Islands. Certain investment advisory and other businesses of Citigroup 
are also included. In the case of Morgan Stanley, the contributed 
businesses generally consist of Morgan Stanley's global wealth 
management (retail brokerage) and private wealth management businesses.
    As of September 30, 2009, Morgan Stanley employed 62,000 
individuals and operates 1200 offices in 36 countries with over $1.5 
trillion in client assets held at its broker-dealer.
    The applicant requests both retroactive and prospective exemptive 
relief for transactions involving certain of Morgan Stanley's client 
accounts in the time frame prior to the formation of the joint venture 
and going forward.
    2. Among other things, Morgan Stanley acts as a broker and dealer 
with respect to the purchase and sale of securities, including Auction 
Rate Securities (ARS). The applicant describes ARS and the arrangement 
by which ARS are bought and sold as follows. ARS 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

[[Page 38560]]

securities among the bidders at such rate on a pro rata basis.
    3. The applicant represents that Morgan Stanley 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 ARS market in its 
sole discretion. Morgan Stanley may routinely place one or more bids in 
an auction for its own account to acquire ARS for its inventory, to 
prevent (1) a failed auction (i.e., an event where there are 
insufficient clearing bids that would result in the auction rate being 
set at a specified rate); or (2) an auction from clearing at a rate 
that Morgan Stanley believes does not reflect the market for the 
particular ARS being auctioned.
    4. The applicant represents that for many ARS, Morgan Stanley 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. Morgan Stanley 
is typically appointed to serve as a dealer in the auctions pursuant to 
an agreement between the issuer and Morgan Stanley. That agreement 
provides that Morgan Stanley will receive from the issuer auction 
dealer fees based on the principal amount of the securities placed 
through Morgan Stanley.
    5. The applicant states that Morgan Stanley may share a portion of 
the auction rate dealer fees it receives from the issuer with other 
broker-dealers that submit orders through Morgan Stanley, for those 
orders that Morgan Stanley successfully places in the auctions. 
Similarly, with respect to ARS for which broker-dealers other than 
Morgan Stanley act as dealer, such other broker-dealers may share 
auction dealer fees with Morgan Stanley for orders submitted by Morgan 
Stanley.
    6. According to the applicant, since February 2008, 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.\4\
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    \4\ The Department notes that Prohibited Transaction Exemption 
(PTE) 80-26 (45 FR 28545 (Apr. 29, 1980), as amended at 71 FR 17917 
(Apr. 7, 2006)) is a class exemption that 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, Morgan 
Stanley may have previously advised or otherwise caused a Plan to 
acquire and hold an ARS and thus may be considered a fiduciary to the 
Plan so that a loan to the Plan by Morgan Stanley may violate section 
406(a) and (b) of ERISA; in addition, a sale between a Plan and its 
sponsor or an IRA and its Beneficial Owner violates ERISA section 406 
and/or section 4975(c)(1) of the Code.\5\ The applicant is therefore 
requesting relief for the following transactions, involving all 
employee benefit plans: (1) The sale or exchange of an ARS from a Plan 
to the Plan's Sponsor; \6\ and (2) a lending of money or other 
extension of credit to a Plan in connection with the holding of an ARS 
from Morgan Stanley, an Introducing Broker, or a Clearing Broker--where 
the subsequent repayment of the loan is made in accordance with its 
terms and is guaranteed by the Plan Sponsor.
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    \5\ The Department notes that the relief contained in this 
proposed exemption does not extend to the fiduciary provisions of 
section 404 of ERISA.
    \6\ The Applicant represents that, as of May 7, 2010, no in-kind 
exchanges have occurred but may in the future.
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    8. The applicant is requesting similar relief for plans covered by 
only Title II of ERISA. In this regard, the applicant is requesting 
relief for: (1) The sale or exchange of an ARS from a Title II-Only 
Plan to the Beneficial Owner of such Plan; and (2) a lending of money 
or other extension of credit to a Title II-Only Plan in connection with 
the holding of an ARS from Morgan Stanley, an Introducing Broker, or a 
Clearing Broker--where the subsequent repayment of the loan is made in 
accordance with its terms and is guaranteed by the Beneficial Owner.
    9. The applicant represents that the proposed transactions are in 
the interests of the Plans. In this regard, the applicant represents 
that the exemption, if granted, will provide Plan fiduciaries with 
liquidity, notwithstanding changes that have occurred in the ARS 
markets. The applicant also notes that, other than for Plans sponsored 
by the applicant, the decision to enter into a transaction described 
herein will be made by a Plan fiduciary who is Independent of Morgan 
Stanley.
    10. The proposed exemption contains a number of safeguards designed 
to protect the interests of each Plan. With respect to the sale of an 
ARS by a Plan, the Plan must receive cash equal to the par value of the 
Security, plus any accrued interest. The sale must also be 
unconditional, other than being for payment against prompt delivery. 
For in-kind exchanges covered by the proposed exemption, the security 
delivered to the Plan (i.e., the Delivered Security) must be: (1) 
Listed on a national securities exchange (excluding OTC Bulletin Board-
eligible securities and Pink Sheets-quoted securities); or (2) a U.S. 
Treasury obligation; or (3) a fixed income security that has a rating 
at the time of the exchange that is in one of the two highest generic 
rating categories from an independent nationally recognized statistical 
rating organization (e.g., a highly rated municipal bond or a highly 
rated corporate bond); or (4) a certificate of deposit insured by the 
Federal Deposit Insurance Corporation. The Delivered Security must be 
appropriate for the Plan and must be a security that the Plan is 
permitted to hold under applicable law. The proposed exemption further 
requires that the Delivered Security be valued at its fair market 
value, as determined at the time of the exchange from a third party 
pricing service or other objective source and must equal the total 
value of the ARS being exchanged (i.e., par value, plus any accrued 
interest).
    11. With respect to a loan to a Plan holding an ARS, such loan must 
be documented in a written agreement containing all of the material 
terms of the loan, including the consequences of default. Further, the 
Plan may not pay an interest rate that exceeds one of the following 
three rates as of the commencement of the loan: The coupon rate for the 
ARS, the Federal Funds Rate, or the Prime Rate. Additionally, such loan 
must be unsecured and for an amount that is no more than the total par 
value of ARS held by the affected Plan.
    12. Additional conditions apply to each transaction covered by the 
exemption, if granted. Among other things, the Plan may not pay any 
fees or commissions in connection with the transaction and the 
transaction may not be part of an arrangement, agreement, or 
understanding designed to benefit a party in interest or disqualified 
person. Further, any waiver of rights or claims by a Plan is 
prohibited, in connection with the sale or exchange of an ARS by a 
Plan, or a lending of money or other extension of credit to a Plan 
holding an ARS.
    13. In summary, the applicant represents that the transactions 
described herein satisfy the statutory criteria set forth in section 
408(a) of ERISA and section 4975(c)(2) of the Code because:
    (1) Any sale will be:
    (A) For no consideration other than cash against prompt delivery of 
the ARS; and
    (B) At par, plus any accrued but unpaid interest;

[[Page 38561]]

    (2) Any in-kind exchange will be unconditional, other than being 
for payment against prompt delivery, and will involve Delivered 
Securities that are:
    (A) Appropriate for the Plan;
    (B) Listed on a national securities exchange (but not OTC Bulletin 
Board-eligible securities and Pink Sheets-quoted securities); U.S. 
Treasury obligations; fixed income securities; or certificates of 
deposit; and
    (C) Securities that the Plan is permitted to hold under applicable 
law; and,
    (3) Any loan will be:
    (A) Documented in a written agreement containing all of the 
material terms of the loan, including the consequences of default;
    (B) At an interest rate not in excess of the coupon rate for the 
ARS, the Federal Funds Rate, or the Prime Rate;
    (C) Unsecured; and
    (D) For an amount that is not more than the total par value of ARS 
held by the affected Plan.

Notice to Interested Persons

    The applicant represents that all the potentially interested 
persons cannot be identified and that, therefore, the only practicable 
means of notifying interested persons of this proposed exemption is by 
the publication of this notice in the Federal Register. Comments and 
requests for a hearing are due within 45 days from the date of 
publication of this notice of proposed exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department, 
telephone (202) 693-8557. (This is not a toll-free number.)

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act (or ERISA), and in accordance 
with the 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) and 406(b)(1) and (b)(2) of the Act shall not 
apply to the proposed loan of approximately $1,081,416 (the Loan) to 
the Plan by the International Union of Painters and Allied Trades, 
District Council 21 (the Union), a party in interest with respect to 
the Plan, for (1) the repayment of an outstanding loan (the Original 
Loan) made to the Plan by Commerce Bank and currently held by TD Bank 
(the Bank), both of which are unrelated parties; and (2) to facilitate 
the expansion of a training facility (the Facility) that is situated on 
certain real property (the Land) \7\ owned by the Plan, provided that 
the following conditions are met:
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    \7\ Unless otherwise stated herein, the Facility and the Land 
are together referred to as the ``Property.''
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    (a) The terms and conditions of the Loan are at least as favorable 
to the Plan as those which the Plan could have obtained in an arm's 
length transaction with an unrelated party;
    (b) The Plan's trustees determine in writing that the Loan is 
appropriate for the Plan and in the best interests of the Plan's 
participants and beneficiaries;
    (c) A qualified, independent fiduciary that is acting on behalf of 
the Plan (the Qualified Independent Fiduciary) reviews the terms of the 
Loan and determines that the Loan is an appropriate investment for the 
Plan and protective of and in the best interests of the Plan and its 
participants and beneficiaries;
    (d) In determining the fair market value of the Property that 
serves as collateral for the Loan, the Qualified Independent Fiduciary 
(1) obtains an appraisal of the Property from a qualified, independent 
appraiser (the Qualified Independent Appraiser); and (2) ensures that 
the appraisal prepared by the Qualified Independent Appraiser is 
consistent with sound principles of valuation;
    (e) The Qualified Independent Fiduciary monitors the Loan, as well 
as the terms and conditions of the exemption, and takes whatever 
actions are necessary and appropriate to safeguard the interests of the 
Plan and its participants and beneficiaries under the Loan;
    (f) The Loan is repaid by the Plan solely with the funds the Plan 
retains after paying all of its operational expenses; and
    (g) The Plan does not pay any fees or other expenses in connection 
with the servicing or administration of the Loan.

Summary of Facts and Representations

    1. The Union is located in Philadelphia, Pennsylvania, and it 
represents members in the finishing trades, such as painters, drywall 
finishers, wall coverers, glaziers and glass workers, in Pennsylvania 
and New Jersey. The Plan was established by the Union in 1966 as a 
training program for individuals who are Union members and are employed 
by contributing employers with regard to the Plan. The Plan has twelve 
(12) trustees (the Trustees). Half of the Trustees represent Union 
members and half of the Trustees represent contributing employers. The 
purpose of the Plan is to provide eligible participants (the 
Participants) with training for career advancement to journeyperson 
status and continued education in the Union's construction industries. 
As of February 15, 2010, the Plan had approximately 5,000 Participants 
and approximately $5,649,370 in total assets.
    2. Among the Plan's assets is the Facility, which is located at 
2190 Hornig Road, Philadelphia, PA. The Facility is comprised mainly of 
classrooms and indoor work areas, and it is used by Participants to 
acquire construction training.
    3. In 2004, the Trustees determined a need to purchase a training 
facility to better serve the ongoing needs of the Participants due to 
the increasingly sophisticated requirements of workers in the finishing 
trades, particularly with regard to glazing and architectural glass and 
metalworking. In November 2004, the Trustees identified the Property as 
a viable option to serve their training needs.
    4. The Trustees secured third party financing of $1,200,000 to 
assist in the purchase of the Property, for a total purchase price of 
$2,600,000 (the Purchase).\8\ The Property was purchased from a party 
that was not related to the Plan or the Union. To finance the Purchase, 
the Trustees caused the Plan to receive the Original Loan from the 
Bank. The Original Loan was entered into on March 23, 2005.
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    \8\ The difference between $2,600,000 and $1,200,000 was paid 
with a cash down payment.
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    5. The Original Loan, which is in the principal amount of 
$1,200,000, has a term of 15 years, and it requires the Plan to pay an 
adjustable rate of interest. At the time the Original Loan was made, 
the interest rate was set at the prime rate published in The Wall 
Street Journal, or 5.5%, calculated based on a 360-day year. Since 
entering into the Original Loan with the Plan, the Bank has reduced the 
interest rate to 3.5%. The Bank is required to review the annual 
interest rate of the Original Loan on the fifth and tenth anniversaries 
of the Original Loan, but the annual interest rate cannot exceed 5.5%.
    Under the terms of the Original Loan, the Plan is required to make, 
commencing May 1, 2005, 179 consecutive monthly installments of 
principal and interest, amortized over the fifteen (15) year loan 
period in an amount equal to $9,805, followed by one final payment of 
all outstanding principal, interest and fees on the maturity date of 
April 1, 2020.
    Further, under the Original Loan, the Plan has assigned its 
lessor's interest in all rents, income and profits arising from leases 
pertaining to the Property as

[[Page 38562]]

well as all contracts, licenses and permits associated with its 
ownership of the Property, and it has executed an environmental 
indemnity agreement. In addition, the Original Loan allows the Bank to 
reserve the right to elect, on the fifth and tenth anniversaries of the 
Original Loan, to call such loan in full and require the Plan to repay 
the remaining principal of the Original Loan and any interest then due 
and payable. Finally, as security for the Original Loan, the Plan has 
granted the Bank a first lien interest in both the Facility and the 
Land. As of March 23, 2010, the principal balance outstanding on the 
Original Loan was $881.418.95.\9\
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    \9\ The outstanding principal balance on the Original Loan will 
decline with each monthly payment made by the Plan. As a result, the 
anticipated Loan amount will be adjusted to reflect any such 
decline.
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    6. In March 2010, despite the fact that the Plan has made all of 
the payments required under the Original Loan on time without any 
defaults or delinquencies, the Bank indicated that it may elect to call 
the Original Loan by July 1, 2010. Therefore, the Union proposes to 
lend the Plan, as of March 23, 2010, $1,081,416 under the terms of a 
replacement loan (i.e., the Loan). The Loan will enable the Plan to 
repay the Original Loan and provide approximately $200,000 in 
additional funds to finance an expansion of the Facility by adding two 
new classrooms.\10\ Accordingly, an administrative exemption is 
requested from the Department.
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    \10\ The Department is expressing no opinion in this proposed 
exemption regarding whether the Loan violates any of the fiduciary 
responsibility provisions of Part 4 of Title I of the Act. In this 
regard, the Department notes that section 404(a) of the Act 
requires, among other things, that a fiduciary of a plan act 
prudently, solely in the interest of the plan's participants and 
beneficiaries, and for the exclusive purpose of providing benefits 
to participants and beneficiaries when making investment decisions 
on behalf of a plan. Section 404(a) of the Act also states that a 
plan fiduciary should diversify the investments of a plan so as to 
minimize the risk of large losses, unless under the circumstances it 
is clearly prudent not to do so.
     Moreover, the Department is not providing any opinion as to 
whether a particular category of investments or investment strategy 
would be considered prudent or in the best interests of a plan as 
required by section 404 of the Act. The determination of the 
prudence of a particular investment or investment course of action 
must be made by a plan fiduciary after appropriate consideration of 
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 investment or investment course of 
action involved, including a plan's potential exposure to losses and 
the role the investment or investment course of action plays in that 
portion of the plan's portfolio with respect to which the fiduciary 
has investment duties (see 29 CFR 2550.404a-1). The Department also 
notes that in order to act prudently in making investment decisions, 
a plan fiduciary must consider, among other factors, the 
availability, risks and potential return of alternative investments 
for the plan. Thus, a particular investment by a plan, which is 
selected in preference to other alternative investments, would 
generally not be prudent if such investment involves a greater risk 
to the security of a plan's assets than other comparable investments 
offering a similar return or result.
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    7. The Loan will have a fixed rate of interest of 4% per annum, and 
the Loan will not be able to be called by the Union, except in the 
event of a complete default upon the Loan. Under the terms of the Loan, 
the Plan will be required to make 180 consecutive monthly installments 
of principal and interest, amortized over the fifteen (15) year loan 
period, calculated over a 365-day year, followed by one final payment 
of all outstanding principal, interest and fees on the maturity date. 
The Plan will not be required to assign its lessor's interest in rents, 
income and profits arising from leases pertaining to the Property or 
its interests in contracts, licenses and permits associated with its 
ownership of the Property. In addition, the Loan will not require the 
Plan to execute an environmental indemnity agreement. As security for 
the Loan, the Plan will grant the Union a first lien interest in the 
Facility and the Land. Finally, the Plan will not be required to pay 
any fees or other expenses in connection with the servicing or the 
administration of the Loan.
    8. The Trustees represent that the Loan will be beneficial to the 
Plan since it allows the Plan to forecast more accurately the cost of 
its debt service over the life of the Loan. Further, the Trustees 
explain that the potential for the interest rate of the Original Loan 
to reset on the fifth and tenth anniversaries of the Original Loan 
raises problems for the Plan's ability to conduct accurate expense 
forecasting.
    The Trustees also represent that the terms of the Loan are more 
favorable to the Plan than the terms of the Original Loan for several 
reasons. First, the Loan cannot be called by the Union except in the 
event of a complete default upon the Loan. Second, unlike the Original 
Loan, the Loan does not require provisions such as environmental 
indemnity agreements; assignments of contracts, licenses and permits; 
and assignments of leases and rents. Third, the Loan provides a more 
favorable interest calculation in comparison to the Original Loan, with 
such interest being calculated based on a 365-day year instead of a 
360-day year.
    Further, the Trustees state that the Loan will be beneficial to the 
Plan in that it will allow the Plan to expand the Facility to better 
serve the Participants. The Trustees note that the Plan will add two 
classrooms with $200,000 of the proceeds from the Loan, thus allowing 
the Plan to offer training sessions in a broader range of subjects and 
to a higher number of Participants.
    Finally, the Trustees assert that the Plan will repay the Loan 
solely with funds retained by the Plan after paying for all of its 
operational expenses (the Excess Funds).\11\
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    \11\ The Union represents that the Plan's operational expenses 
are funded by contributions made to the Plan by contributing 
employers. These contributions are based on a portion of each 
Participant's hourly wage paid by such employers. The Union 
represents that the Participants' hourly wage rate is negotiated 
periodically between the Union and the contributing employers. Thus, 
the Union represents that the Participants' wage deduction amount 
for contributions made by the employers to the Plan is determined by 
the parties each year.
     The Union further represents that the computation of the amount 
of Excess Funds available for repayment of the Loan will be 
according to generally accepted accounting principles by a certified 
public accountant representing the Plan.
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    9. The Plan retained Louis A. Iatarola, MAI, SRA, to appraise the 
Property. Mr. Iatarola is a Qualified Independent Appraiser who is 
affiliated with the real estate appraisal firm of Louis A. Iatarola 
Appraisal Group, Ltd., located in Philadelphia, PA. Mr. Iatarola has no 
present or prospective interest in the Loan transaction, and he is 
unrelated to the Union. During 2009, he derived less than one percent 
of his gross revenue from parties in interest with respect to the Plan. 
Mr. Iatarola visited the Property on November 17, 2009, prepared a 
valuation report, dated December 16, 2009, and examined relevant public 
records. As of November 17, 2009, Mr. Iatarola opined in his appraisal 
report that an unencumbered fee simple interest in the Property had a 
fair market value $4,000,000, with such opinion based on a 
reconciliation of value estimates derived from the Sales Comparison 
Approach and the Income Capitalization Approach to valuation.
    10. The terms of the Loan have been initially reviewed and, 
thereafter, will be monitored by John Ward, an attorney in Washington, 
DC, who will act as the Plan's Qualified Independent Fiduciary. Mr. 
Ward has no present or prospective interest in the Loan transaction, 
and he is unrelated to the Union. Mr. Ward has represented labor unions 
and their associated benefit funds throughout his career, and he has 
focused his professional energies on tax and ERISA matters faced by 
those organizations. During 2009, Mr. Ward derived less than one 
percent of his gross revenue from parties in interest with respect to 
the Plan. Mr. Ward represents that he is qualified to act as the 
Qualified

[[Page 38563]]

Independent Fiduciary, and he understands and accepts the duties, 
responsibilities and liabilities in acting as a fiduciary with respect 
to the Plan. In this regard, Mr. Ward states (a) that the Loan is both 
an appropriate investment for the Plan and in the best interest of the 
Plan and its participants and beneficiaries and (b) that he will 
continue to monitor the Plan's repayment of the Loan and will take 
whatever actions are necessary to protect the interest of the Plan and 
its participants and beneficiaries.
    11. As part of his review of the Loan transaction, Mr. Ward engaged 
two additional Qualified Independent Appraisers, George Calomiris, AIA, 
CDS, Certified General Appraiser, and Kevin Boyle, Certified 
Residential Appraiser, to confirm the accuracy of the initial appraisal 
performed by Mr. Iatarola. Messrs. Calomiris and Boyle are affiliated 
with the real estate appraisal firm of William Calomiris Company, LLC, 
located in Washington, DC. They have no present or prospective interest 
in the Loan transaction, and they are unrelated to the Plan and the 
Union. During 2009, Messrs. Calomiris and Boyle derived less than one 
percent of their gross revenue from parties in interest with respect to 
the Plan. In developing their opinion on the accuracy of Mr. Iatarola's 
appraisal, Messrs. Calomiris and Boyle visited the Property, reviewed a 
valuation report prepared by Mr. Iatarola, and examined relevant public 
records. In an appraisal report dated February 19, 2010, Messrs. 
Calomiris and Boyle confirmed the opinion of Mr. Iatarola that the 
Property would have a fair market value of at least $4,000,000, which 
would place the loan-to-value ratio at 28%.
    12. Mr. Ward investigated the interest rates that would be 
available to the Plan were it to secure a fixed rate loan from an 
unrelated lender. In so doing, he noted that not only would any 
potential lender benefit from the 28% loan to value ratio, thereby 
making any potential loan highly secured, but that the Plan had 
consistently demonstrated over the past five (5) years that it was 
willing and able to make monthly mortgage payments on time and in full, 
with more than sufficient annual income to easily cover monthly 
obligations under nearly any potential mortgage loan.
    Mr. Ward also opined that the current commercial interest rates 
would be higher than the rate charged by the Union under the Loan. 
Specifically, Mr. Ward sampled senior loan officers at PNC Bank and 
Wachovia Bank/Wells Fargo, and such senior loan officers indicated that 
neither bank would be able to match the terms provided in the Loan. In 
this regard, the PNC Bank representative informed Mr. Ward that a fixed 
rate loan at 4% for 15 years seemed rather low and that a 6% rate would 
be more realistic for a 15 year commercial loan. The Wachovia Bank/
Wells Fargo representative concurred with the guidance offered by the 
PNC Bank representative.
    In conclusion, Mr. Ward opined that (a) the Loan is both an 
appropriate investment for the Plan and in the best interest of the 
Plan and its participants and beneficiaries; and (b) the terms and 
conditions of the Loan are more favorable to the Plan and its 
participants and beneficiaries than the terms of similar loans which 
might be made to the Plan by an unrelated party in an arm's length 
transaction.\12\
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    \12\ In an addendum to his Qualified Independent Fiduciary 
report, dated May 6, 2010, Mr. Ward stated that he was unaware that 
the interest rate for the Original Loan at its outset had been 5.5%, 
with the interest rate being lowered to 3.5% at a later date. 
Nevertheless, he explained that the fact that the Original Loan's 
interest rate had been reduced from 5.5 to 3.5 percent would have no 
bearing on his opinion regarding the appropriateness of the Loan.
---------------------------------------------------------------------------

    13. In summary, the Plan represents that the transaction satisfies 
the statutory criteria for an administrative exemption that are 
contained in section 408(a) of the Act for the following reasons: (a) 
The terms and conditions of the Loan will be at least as favorable to 
the Plan as those which the Plan could obtain in an arm's length 
transaction with an unrelated party; (b) the Trustees have determined 
in writing that the Loan is appropriate for the Plan and in the best 
interests of the Plan's participants and beneficiaries; (c) Mr. Ward, 
as the Plan's Qualified Independent Fiduciary, has reviewed the terms 
of the Loan and has determined that the Loan would be protective of and 
in the best interests of the Plan and its participants and 
beneficiaries; (d) in determining the fair market value of the 
Property, Mr. Ward has obtained an appraisal from a Qualified 
Independent Appraiser and has ensured that the appraisal prepared by 
the Qualified Independent Appraiser is consistent with sound principles 
of valuation; (e) Mr. Ward will monitor the Loan, as well as the terms 
and conditions of the proposed exemption (if granted), and will take 
whatever actions are necessary to safeguard the interests of the Plan 
and its participants and beneficiaries under the Loan; (f) the Loan 
will be repaid by the Plan solely with the funds the Plan retains after 
paying all of its operational expenses; and (g) the Plan will not pay 
any fees or other expenses in connection with the servicing or 
administration of the Loan.

FOR FURTHER INFORMATION CONTACT: Mr. Brian Shiker of the Department, 
telephone (202) 693-8552. (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.


[[Page 38564]]


    Signed at Washington, DC, this 28th day of June, 2010.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 2010-16096 Filed 7-1-10; 8:45 am]
BILLING CODE 4510-29-P