EBSA
Notices
Proposed Exemptions From Certain Prohibited Transaction Restrictions
[ 1/20/2012]
[ PDF]
Federal Register, Volume 77 Issue 13 (Friday, January 20, 2012)
[Federal Register Volume 77, Number 13 (Friday, January 20, 2012)]
[Notices]
[Pages 3038-3064]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-932]
[[Page 3037]]
Vol. 77
Friday,
No. 13
January 20, 2012
Part II
Department of Labor
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Employee Benefits Security Administration
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Proposed Exemptions From Certain Prohibited Transaction Restrictions;
Notice
Federal Register / Vol. 77 , No. 13 / Friday, January 20, 2012 /
Notices
[[Page 3038]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions From Certain Prohibited Transaction
Restrictions
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). This notice includes the
following proposed exemptions: D-11655, Renaissance Technologies, Inc.
(Renaissance or the Applicant); D-11677, Weyerhaeuser Company
(Weyerhaeurser) and Federalway Asset Management LP (collectively the
Applicants); and D-11680, Citigroup Inc. (Citigroup); et al.)
DATES: 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.
ADDRESSES: 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.
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 email or FAX. Any such comments or
requests should be sent either by email 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.
SUPPLEMENTARY INFORMATION:
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). 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.
Renaissance Technologies, LLC (Renaissance, or the Applicant)
Located in New York, New York
[Application No. D-11655]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act (or ERISA) 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).
Section I. Covered Transactions Involving IRAs Subject to Title I and
TITLE II of ERISA
If the exemption is granted, the restrictions of section
406(a)(1)(A) and (D) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) and (D) of the Code,\1\ shall not apply, effective
January 1, 2012, to:
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\1\ For purposes of this proposed exemption, references to the
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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(a) The direct or indirect acquisition by a Participant's IRA of an
interest in a Medallion Fund through such IRA's acquisition of an
interest in a New Medallion Vehicle;
(b) The acquisition of an additional interest by a Participant's
IRA in a New Medallion Vehicle; and
(c) The redemption of all or a portion of a Participant's IRA's
interest in a New Medallion Vehicle.
This proposed exemption is subject to the general conditions set
forth below in Section III.
Section II. Covered Transactions Involving IRAs Subject to Title II of
ERISA Only
If the exemption is granted, the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) and (D) of the Code,\2\ shall not apply, effective
January 1, 2012, to:
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\2\ Pursuant to 29 CFR 2510.3-2(d), the Spouses' IRAs are not
within the jurisdiction of Title I of the Act. However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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(a) The direct or indirect acquisition by a Spouse's IRA of an
interest in a Medallion Fund through such IRA's acquisition of an
interest in a New Medallion Vehicle;
(b) The acquisition of an additional interest by a Spouse's IRA in
a New Medallion Vehicle; and
(c) The redemption of all or a portion of a Spouse's IRA's interest
in a New Medallion Vehicle.
This proposed exemption is subject to the general conditions set
forth below in Section III.
Section III. General Conditions
(a) An IRA's acquisition of an interest in a New Medallion Vehicle
is made at the specific direction of an IRA Holder.
(b) Renaissance renders no investment advice (within the meaning of
29 CFR 2510.3-21(c)) to IRA Holders concerning a potential acquisition
of an
[[Page 3039]]
interest in a New Medallion Vehicle and does not engage in marketing
activities or offer employment-related incentives of any kind intended
to cause IRA Holders to consider such acquisition.
(c) An interest in a New Medallion Vehicle is only available to IRA
Holders who satisfy the securities law-based investor qualifications
applicable to all investors in such New Medallion Vehicle.
(d) No commissions, sales charges, or other fees or profit
participations in the form of performance allocations or otherwise,
direct or indirect, are assessed against an IRA in connection with its
acquisition and holding of an interest in a New Medallion Vehicle.
(e) An IRA pays no more and receives no less for its particular
interest in any of the New Medallion Vehicles than they would in an
arm's length transaction with an unrelated party.
(f) An IRA's interest in a New Medallion Vehicle is redeemable, in
whole or in part, without the payment of any redemption fee or penalty,
no less frequently than on a quarterly basis upon no less than 10 days
advance written notice.
(g) An acquisition or redemption of an IRA's interest in a New
Medallion Vehicle is made for fair market value, determined as follows:
(1) Equity securities are valued at their last sale price or
official closing price on the market on which such securities primarily
trade using sources independent of Renaissance and the issuer. If no
sales occurred on such day, equity securities are valued at the last
reported independent ``bid'' price or, if sold short, at the last
reported independent ``asked'' price.
(2) Fixed income securities are valued on either the basis of
``firm quotes'' obtained at the time of an acquisition or redemption
from U.S.-registered or foreign broker-dealers, which are registered
and subject to the laws of their respective jurisdiction, which quotes
reflect the share volume involved in the transaction, or on the basis
of prices provided by independent pricing services that determine
valuations based on market transactions for comparable securities and
various relationships between such securities that are generally
recognized by institutional traders.
(3) Options are valued at the mean between the current independent
``bid'' price and the current independent ``asked'' price or, where
such prices are not available, are valued at their fair value in
accordance with Fair Value Pricing Practices by the Renaissance
Valuation Committee, which utilizes a set of defined rules and an
independent review process.
(4) If current market quotations are not readily available for any
investments, such investments are valued at their fair value by the
Renaissance Valuation Committee in accordance with Fair Value Pricing
Practices.
(h) Redemption of an IRA's interest in a New Medallion Vehicle, in
whole or in part, is made in cash.
(i) In the event that a redemption of any portion of an IRA
Holder's interest in any of the Medallion Funds becomes necessary as
the result of a reduction of the Investment Allocation applicable to an
IRA Holder, then, at such IRA Holder's election, a redemption is first
made of the IRA Holder's taxable investments (if any) prior to his or
her IRA's interest in a New Medallion Vehicle.
(j) With respect to the investment by Participants in the New
Medallion Vehicles through IRAs, Renaissance acknowledges that such
investments may constitute investments by a ``pension plan'' within the
meaning of section 3(2) of the Act, and the Applicant represents that,
with respect to such investments, it will comply with all applicable
requirements of Title I of the Act.
(k) Renaissance does not use the fact that IRAs invested in the
Funds in any marketing activities or publicity materials for the Funds.
(l) In advance of the initial investment by an IRA in a New
Medallion Vehicle, the IRA Holder receives:
(1) A copy of the proposed exemption and the final exemption,
following the publication of the final exemption in the Federal
Register;
(2) A private offering memorandum (with all related exhibits)
describing the relevant investment vehicles, including its investment
objectives, risks, conflicts, operating expenses and redemption and
valuation policies, and any IRA Holder whose IRA owns an interest in a
New Medallion Vehicle receives the same disclosures and information
provided to other investors with respect to the Fund in which he or she
invests; and
(3) All reasonably available relevant information as such IRA
Holder may request.
(m) On an on-going basis, Renaissance provides each IRA Holder
whose IRA owns an interest in a New Medallion Vehicle with the
following information:
(1) Unaudited performance reports at the end of each month; and
(2) Audited annual financial statements following the end of each
calendar year.
(n) Prior to the acquisition by an IRA of an interest in a New
Medallion Vehicle or each Fund or vehicle in which, or through which, a
New Medallion Vehicle invests, Renaissance or the applicable New
Medallion Vehicle manager (the New Medallion Vehicle Manager):
(1) Agrees to submit to the jurisdiction of the federal and state
courts located in the State of New York;
(2) Agrees to appoint an agent for service of process for the New
Medallion Vehicle, and any other Fund described in this section, in the
United States (the Process Agent);
(3) Consents to service of process on the Process Agent; and
(4) Agrees that any enforcement by an IRA Holder of his or her
rights pursuant to this exemption will, at the option of the IRA
Holder, occur exclusively in the United States courts.
(o) Renaissance maintains or causes to be maintained for a period
of six years from the date of any covered transaction such records as
are necessary to enable the persons described in paragraph (p)(i) below
to determine whether the conditions of this proposed exemption, if
granted, have been met, provided that (i) a separate prohibited
transaction will not be considered to have occurred if, due to
circumstances beyond the control of Renaissance, the records are lost
or destroyed prior to the end of the six-year period, and (ii) no party
in interest or disqualified person other than Renaissance shall be
subject to a civil penalty under section 502(i) of the Act or the taxes
imposed by section 4975(a) and (b) of the Code, if such records are not
maintained, or are not available for examination as required by
paragraph (p)(i) below; and
(p)(i) Except as provided below in paragraph (p)(ii), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to above in paragraph (o) are
unconditionally available at their customary location for examination
during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, the Commodity Futures Trading
Commission (CFTC), or the U.S. Securities and Exchange Commission
(SEC), and
(B) Any IRA Holder or any duly authorized representative or
beneficiary of an IRA; and
(ii) None of the persons described above in paragraph (p)(i)(B)
shall be authorized to examine trade secrets of Renaissance, or
commercial or financial information which is privileged or
confidential, and should Renaissance
[[Page 3040]]
refuse to disclose information on the basis that such information is
exempt from disclosure, Renaissance 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 IV. Definitions
For purposes of this proposed exemption:
(a) The term ``Renaissance'' means Renaissance Technologies, LLC,
and its affiliates.
(b) An ``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 entity (for purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual); and
(2) Any officer of, director of, or partner in such person.
(c) The term ``Fair Value Pricing Policies'' means the Official
Pricing Policy established in good faith by the Renaissance Valuation
Committee for valuing an instrument, which is subject to the approval
of the Renaissance Technologies LLC Board of Directors.
(d) The term ``Fund'' or ``Funds'' means, individually or
collectively, the nine privately offered U.S. and non-U.S. collective
investment vehicles managed by Renaissance, comprised almost
exclusively of assets of Renaissance and its owners and employees (the
Proprietary Funds) and the five privately offered U.S. and non-U.S.
collective investment vehicles, consisting primarily of assets of
clients of Renaissance (the non-Proprietary Funds).
(e) The term ``Investment Allocation'' means the permitted
investment allocation in the Medallion Funds applicable to a
Renaissance employee, which such employee and his or her Spouse may
utilize to make investments in a Medallion FF or Kaleidoscope, or in an
applicable New Medallion Vehicle investing in such Funds, subject to
each such employee's overall Investment Allocation limit.
(f) The term ``IRA'' means an ``individual retirement account'' as
defined under section 408(a) of the Code or a ``Roth IRA'' as defined
under section 408A of the Code that is beneficially owned by an IRA
Holder.
(g) The term ``IRA Holder'' means a Participant, or the Spouse of a
Participant, who is eligible to invest in a New Medallion Vehicle
through his or her IRA.
(h) The term ``Kaleidoscope'' means Kaleidoscope Fund LLC, a
Delaware limited liability company established by Renaissance to
facilitate the investment by certain employees of Renaissance in the
other Proprietary Funds.
(i) The term ``Medallion Funds'' means six of the nine Proprietary
Funds, organized in a ``master-feeder'' investment structure, comprised
of six Medallion Fund feeder funds (Medallion FFs) engaging in their
investment and trading activities only through certain master funds and
their subsidiaries (the Medallion Master Funds).
(j) The term ``New Medallion Vehicle'' or ``New Medallion
Vehicles'' means, individually or collectively, New Medallion FF, the
New Medallion Conduit, and New Kaleidoscope.
(k) The term ``New Kaleidoscope'' means Kaleidoscope RF Fund LLC,
the Delaware limited liability company to be established by Renaissance
in order to facilitate the investment in the Medallion Funds (through
the New Medallion Conduit), by IRA Holders who do not meet the investor
qualifications to invest in the New Medallion FF.
(l) The term ``New Medallion Conduit'' means Medallion RMPRF Fund
LP, the Bermuda Limited Partnership that is treated as a corporation
for US Federal Income Tax purposes, to be established by Renaissance in
order to facilitate the investment by New Kaleidoscope in the Medallion
Funds.
(m) The term ``New Medallion FF'' means Medallion Fund RF LP, the
Bermuda Limited Partnership that is treated as a corporation for US
Federal Income Tax purposes, to be established by Renaissance in order
to facilitate an IRA Holder's investment in the Medallion Master Funds.
(n) The term ``Participant'' means a former participant in the
Renaissance Technologies, LLC 401(k) Plan (the 401(k) Plan) who
received a distribution of their entire account balance in the 401(k)
Plan prior to December 31, 2010 as a result of the termination of such
plan, and is either an employee or a Permitted Owner of Renaissance at
the time of such individual's investment in the New Medallion Vehicles.
(o) The term ``Permitted Owners'' means the seven individuals
permitted to invest in the Medallion Funds following the termination of
their Renaissance employment, comprised of three Renaissance
``founders,'' and four former employees who are owners of Renaissance.
(p) The term ``Renaissance Valuation Committee,'' or ``RVC,'' means
the committee, established by Renaissance in 2008, that oversees and
monitors the valuation process, and establishes the methods of, and
procedures for, valuing various instruments traded by Renaissance
(e.g., the Proprietary Funds), composed of high-level Renaissance
employees who also are Fund investors.
(q) The term ``Spouse'' means a person who is (a) married to a
Participant, or (b) to the extent not prohibited by applicable law, in
a civil union or similar marriage-equivalent institution established
pursuant to State law of the State where the Participant resides (or
otherwise recognized by the State where the Participant resides) with a
Participant.
Section IV. Effective Date
If granted, this proposed exemption will be effective as of January
1, 2012.
Summary of Facts and Representations\3\
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\3\ The Summary of Facts and Representations (the Summary) is
based on the Applicant's representations and does not reflect the
views of the Department.
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The Applicant
1. Renaissance is an investment adviser registered with the SEC and
a commodity pool operator and commodity trading advisor registered with
the CFTC. The firm was founded in 1982 and is headquartered in New York
City, and its research and trading activities are conducted from its
office in East Setauket, New York. Renaissance implements quantitative
investment strategies on behalf of its clients, employing quantitative
analysis, specifically, mathematical and statistical methods, to
uncover technical indicators with predictive value. This analysis is
used to construct proprietary computer models which use publicly
available financial data to identify and implement trading decisions
electronically. Renaissance's quantitative analysis and trading
activities are applied to mature, highly liquid, publicly-traded
instruments in both U.S. and foreign markets.
2. The Applicant has approximately 275 employees, about 100 of whom
are owners of Renaissance. According to the Applicant, many of
Renaissance's employees are specialists with non-financial backgrounds,
including mathematicians, physicists, astrophysicists, and
statisticians. In this respect, about a third of the more than 200
employees at the Long Island office have Ph.D.s.
[[Page 3041]]
3. Renaissance is the investment manager of the Funds, fourteen
privately offered U.S. and non-U.S. collective investment vehicles with
aggregate net assets under management as of April 30, 2011 of
approximately $19 billion. Renaissance's nine Proprietary Funds are
comprised almost exclusively of assets of Renaissance and its owners
and employees, and include, among others, the six Medallion Funds and
Kaleidoscope. According to the Applicant, none of the assets of any
Proprietary Fund is treated as ``plan assets'' of any ``benefit plan
investor,'' as those terms are defined in section 3(42) of the Act and
29 CFR 2510.3-101. Renaissance's non-Proprietary Funds consist
primarily of assets of clients, such as foundations, private- and
public-sector pension funds, financial institutions, and high net worth
individuals, as well as a small amount of proprietary assets.
According to Renaissance, as of April 30, 2011 the breakdown of
aggregate assets under management between the Proprietary Funds and the
non-Proprietary Funds is $13.3 billion and $5.8 billion, respectively.
Of this, the Applicant states that the Medallion Funds (described
below) represent approximately $10.2 billion of the Proprietary Funds'
assets under management as of April 30, 2011.
The Medallion Funds
4. Renaissance explains that the Medallion Funds are organized in a
``master-feeder'' structure, with investors owning shares of a ``feeder
fund'' that invests directly in one or more ``master funds,'' generally
organized as such for tax or other regulatory reasons. There are six
Medallion FFs, each of which is intended for investors who meet certain
criteria specific to that Medallion FF concerning that investor's
residency (U.S. or non-U.S.) and regulatory status under the U.S.
federal securities laws. All equity interests in each Medallion FF are
owned by the investors in that Medallion FF, and, as described below,
also by Renaissance (in certain Medallion FFs).
5. The Applicant states that the Medallion FFs all have the same
investment objectives and trading strategies and currently do, and
will, invest and trade together through the same master trading
vehicles that were formed solely for that purpose. In this regard, each
Medallion FF engages in its investment and trading activities only
through the Medallion Master Funds. Investors contribute capital to a
Medallion FF and receive interests or shares (depending on the
Medallion FF structure as either a partnership or a corporation) in
such Medallion FF. All investment capital in each Medallion FF (minus a
small amount necessary to pay expenses at the Medallion FF level) is
re-invested in the Medallion Master Funds where all investment and
trading activities occur. According to the Applicant, as a practical
matter, the Medallion FFs have a minimum capital investment requirement
of $25,000, from subscribers but do have the discretion to accept less
in appropriate circumstances.
6. The Medallion Master Funds and the Medallion FFs are organized
as either limited partnerships or corporations, and all equity
interests in the Medallion Master Funds are owned collectively and
directly by one or more of the Medallion FFs, and indirectly, primarily
by Renaissance, owners of Renaissance, and Renaissance's employees. All
investors in the Medallion FFs (as well as the other Proprietary Funds
and non-Proprietary Funds) must, among other things, meet the entry
requirements established under the U.S. federal securities laws for
admission.\4\ Further, the Medallion Funds are audited annually by a
nationally-recognized accounting firm.
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\4\ The Medallion FFs currently operate under the exemptions set
forth in sections 3(c)(7), 3(c)(1), or 6(b) of the 1940 Act, and
Rule 506 of Regulation D under the Securities Act of 1933, as
amended (the 1933 Act).
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7. The Applicant states that the primary objective of each
Medallion Fund is to achieve appreciation of its assets through
investment and trading in a variety of both securities-related and
futures-related financial instruments. According to the Applicant, the
Medallion Funds seek out investments that are reasonably liquid in
nature and that complement their other trading activities. The
Applicant states further that the Medallion Funds trading takes place
on organized U.S. and foreign exchanges, as well as through the
interbank or cash markets, or on or through recognized markets of
regional, national or international standing, based on a proprietary
and highly confidential computational trading system developed by
Renaissance.
8. According to the Applicant, the Medallion Funds invest and trade
in various types of financial instruments as determined by Renaissance,
including, without limitation: (a) Equity securities and related
instruments, such as common and preferred stocks, ADRs, options,
warrants, convertible securities and swaps and other derivatives
relating to equity securities, (b) futures contracts (and options
thereon) and forward contract transactions, and (c) fixed income
securities and related derivatives, including U.S. and non-U.S.
government issued (and U.S. government agency guaranteed) securities,
mortgage-related securities and derivatives and credit default swaps.
The Applicant explains that allocations of the Medallion Funds' assets
among these investment areas will vary based on market opportunities
and other related factors. Furthermore, the Medallion Funds also may
utilize other securities, options, cash instruments, interest rate
swaps and futures and other derivatives for hedging purposes.
Nevertheless, the Applicant notes that the Medallion Funds are not
limited to the specific investments described above and Renaissance has
the exclusive responsibility for choosing the investments and
strategies in which the Medallion Funds may from time to time invest
and the amount of capital that will be invested.
9. According to the Applicant, Renaissance operates a diverse
proprietary equity trading program consisting of several different
equity trading strategies primarily based on technical methods that
produce a statistical forecast of future prices of individual
securities. In this regard, the Applicant explains that the Medallion
Funds' portfolio of equity securities may consist of both long and
short positions, and a substantial portion of the positions are
structured as derivative transactions. Furthermore, the Applicant notes
that Renaissance may from time to time develop and utilize other equity
trading strategies as a part of the Medallion Funds' overall equity
trading program, which may be integrated into the existing Medallion
Master Funds and their subsidiaries or may be implemented through new
affiliates of such Funds.
10. According to the Applicant, the Medallion Funds' investment
strategy for its proprietary futures trading program is based primarily
on technical analysis using a trading method based on input from
certain proprietary computer programs, databases and algorithms, and to
a limited extent on the basis of fundamental analysis of factors
affecting prices of futures instruments. The Applicant notes that a
wide variety of traditional commodity futures contracts are traded,
together with certain financial futures contracts and contracts in
major currencies, although there will not necessarily be positions in
each such contract on every day.
11. The Applicant states that the Medallion Funds also invest and
trade
[[Page 3042]]
in a variety of fixed income securities as a cash management strategy
in support of its other investment programs. According to the
Applicant, these fixed income securities include, but are not limited
to, U.S. government-issued (and U.S. government agency-guaranteed) and
non-U.S. government issued instruments including securities and
repurchase and/or reverse repurchase transactions thereon. The
Applicant states further that cash instruments, such as money market
shares, also are employed, as are mortgage-related securities and
derivatives, and credit default swaps.
12. According to the Applicant, the Medallion Funds use leverage in
their investment and trading activities, derived from two sources--
borrowed funds in securities transactions and inherent leverage
embedded in futures contracts and related instruments. In this regard,
the Medallion Funds borrow, either directly or indirectly, in order to
finance the acquisition of securities and secure such borrowings with
its assets, at market rates of interest without recourse to the Funds'
investors. The Applicant states that the amount of these borrowings
varies, but that the Medallion Funds' equities positions generally
equal 4 to 5 times its investor capital. According to the Applicant,
futures and forward contracts trading also is leveraged in that the
margin deposits required to establish and to maintain these positions
create inherent leverage on these transactions, but do not involve any
borrowed funds (they are good faith deposits).\5\
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\5\ The Applicant explains that futures contract positions on
recognized exchanges in the U.S. may be acquired with initial margin
deposits generally that range from 2% to 15% of the face amount of a
contract (e.g., a $37,997 contract to acquire wheat can be
established with an initial deposit of $3,037 (8% of its face
value).
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13. The Applicant states that the risk of investing in the
Medallion Funds results from a variety of factors, including the
volatility in the various markets for financial instruments that the
Funds trade in, the use of leverage (which can exacerbate both profits
and losses), and the uncertainty of governmental actions around the
world and their impact on the interconnected global financial markets
(e.g., actions of central banks that affect interest rates in various
currencies). However, the Applicant observes that these risks are
mitigated by several factors, including the Medallion Funds' broad
investment diversification, the liquidity of most of the instruments
the Funds trade, the quarterly liquidity afforded to each investor, and
the success that Renaissance has achieved in trading the various
Medallion Funds that have resulted in average annual returns (before
management fees and performance allocations) of 76.91% over the past
twenty years.
The Kaleidoscope Fund
14. One of the nine Proprietary Funds maintained by Renaissance is
Kaleidoscope, a Delaware limited liability company, established
exclusively as a ``perk'' to Renaissance's employees who do not meet
the financial qualification requirements under the U.S. federal
securities laws for eligibility to invest in any of the other eight
Proprietary Funds.\6\ Kaleidoscope is a ``fund-of-funds'' that
currently invests in the Medallion Funds through one of the Medallion
FFs, known as ``Medallion RMP,'' in addition to the other Proprietary
Funds. As of April 30, 2011, Kaleidoscope held approximately $29.1
million in assets under management, approximately $8.9 million of which
was invested in Medallion RMP. Further, as Kaleidoscope only invests in
the Proprietary Funds, it invests indirectly in the instruments and
transactions that such Funds invest in directly. Kaleidoscope is also
audited annually by a nationally-recognized accounting firm.
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\6\ Kaleidoscope currently operates under the exemption set
forth in section 3(c)(1) of the 1940 Act and Rule 506 of Regulation
D under the 1933 Act.
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The RIFF and RIEF Funds
15. In addition to the Medallion Funds and Kaleidoscope, RIEF RMP
LLC (RIEF) and RIFF RMP LLC (RIFF) make up the remainder of the
Proprietary Funds. RIEF is a Delaware limited liability company that
does not trade in a master-feeder structure, but instead engages in
direct investing and has multiple classes of ownership interests. RIEF
invests and trades for its own account primarily in a widely
diversified portfolio consisting almost exclusively of listed U.S. and
non-U.S. equity securities that are publicly traded on U.S. securities
exchanges, and to a more limited extent in derivatives, such as
exchange traded futures contracts and total return swaps. RIFF is also
a Delaware limited liability company, but, unlike RIEF, it operates in
a master-feeder structure similar to the Medallion Funds. Thus, all
investment decisions are made at the level of the ultimate RIFF master
fund, through which RIEF invests and trades primarily in futures
contracts on organized exchanges, forward contracts, and other
derivative instruments.
16. Investors in RIEF and RIFF are limited primarily to certain of
Renaissance's employees and their family members, as well as entities
maintained for the benefit of the foregoing persons, each of whom meets
the applicable federal securities law requirements.\7\ Such investors
either invest directly by acquiring interests in such Funds, or they
may invest indirectly through Kaleidoscope. RIEF and RIFF are subject
to both SEC registration and regulation by the CFTC, and are both
audited annually by a nationally-recognized accounting firm.\8\
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\7\ According to the Applicant, Renaissance owns less than 1% of
the equity interests in each of RIEF and RIFF, and no Participant is
a majority owner of either of such Funds. Therefore, the Applicant
states that neither RIEF nor RIFF are parties in interest or
disqualified persons with respect to IRAs investing therein. As a
result, the Department is not proposing exemptive relief for such
transactions, nor fully describing them, herein.
\8\ RIEF qualifies under section 6(b) of the 1940 Act and Rule
506 of Regulation D under the 1933 Act, and RIFF qualifies under
Rule 506 of Regulation D under the 1933 Act (there is no parallel
exemption under the 1940 Act because RIFF trades primarily in
futures, and thus is a ``futures'' fund and not a ``securities''
fund).
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The Interests of Renaissance and its Owners and Employees in the
Medallion Funds
17. Renaissance is the general partner of the Medallion FFs and
Medallion Master Funds that are organized as limited partnerships, and
certain of Renaissance's owners serve as directors of the Medallion FFs
and Medallion Master Funds that are organized as non-U.S. corporations.
Renaissance is also the investment manager to all the Medallion Funds,
including both Medallion FFs and Medallion Master Funds, and has
investment discretion over their assets. However, the Applicant states
that Renaissance's role as ``investment manager'' of the Medallion FFs
is extremely narrow in practice, as each Medallion FF, by its terms,
only may invest in, and thus effectively is ``hardwired'' to, the
Medallion Master Funds. In effect, the Applicant contends,
Renaissance's role at the Medallion FF level is more administrative
than investment related (as compared to the role of an ``investment
manager'' as defined in Section 3(38) of the Act).
18. As the investment manager of the Medallion Funds, Renaissance
receives a quarterly, fixed management fee from each Medallion FF,
based on the net asset value of each Medallion fund at the beginning of
each semi-annual period (January 1 and July 1 of each year), and
payable in cash. However,
[[Page 3043]]
Renaissance does not receive a management fee from any of the Medallion
Master Funds. These management fees are charged at the annualized rate
of 5% of net asset value (i.e., 2\1/2\% of net asset value at the
beginning of each semi-annual period). Thus, the most recent fixed
quarterly management fees paid to Renaissance by the Medallion FFs are
equal to approximately $107 million.
19. Renaissance also maintains substantial capital investments in
the four U.S. Medallion FFs that are organized as Delaware limited
partnerships, and hence has a ``capital account'' in each U.S.
Medallion FF. In addition, Renaissance owns a separate class of non-
participating shares in the two non-U.S. Medallion FFs that are
organized as Bermuda corporations. Combined, Renaissance owns
approximately 28.49% of the combined equity interests in the Medallion
FFs.\9\ Because the Medallion FFs directly invest solely in the
Medallion Master Funds, Renaissance indirectly owns 28.49% of the
combined equity interests in the Medallion Master Funds.
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\9\ According to the Applicant, Renaissance directly owns 28.41%
of the combined Medallion FFs, but Kaleidoscope, which invests
directly in the Medallion FFs, is owned approximately 94.6% by
Renaissance and 5.4% by its owners, directors, and employees. Taking
this into account, Renaissance's equity ownership percentage of the
combined Medallion FFs is actually 28.49%.
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20. Renaissance also receives a contractual performance allocation
equal to a percentage of the semi-annual net profits that are earned by
each investor, from (a) the two non-U.S. Medallion FFs, through its
separate class of non-participating shares in each such non-U.S.
Medallion FF, and (b) each of the four U.S. Medallion FFs through its
capital account in each such Medallion FF. According to the Applicant,
performance allocations are calculated and assessed on an investor-by-
investor basis within each Medallion fund in an amount that ranges
between 20% and 44% of the new high net capital appreciation (realized
and unrealized) experienced by each investor during each semi-annual
period (i.e., January 1 to June 30 and July 1 to December 31 of each
year).\10\ The Applicant states that the performance allocation is
calculated on a ``high-watermark'' basis (i.e., only after any
cumulative net losses from prior semi-annual calculation periods are
overcome).\11\ Thus, the quarterly performance allocations paid to
Renaissance by the Medallion FFs for the most recent calculation period
are equal to approximately $891 million. Furthermore, payment of such
performance allocations increases the amount of Renaissance's capital
account in the applicable Medallion Fund. According to the Applicant,
Renaissance then has the option in whole or in part to withdraw such
performance allocation in cash or to leave the performance allocation
in its capital account (which is available to be withdrawn at any time
in the future).
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\10\ The Applicant states that calculating the performance
allocation on an investor-by-investor basis assures that every
investor only pays a performance allocation on its own investment
profits (because it is possible for a Fund to have net profits while
certain investors do not).
\11\ The Applicant explains that performance allocations are not
assessed on any unrecouped losses from prior periods, which must be
made up before a new performance allocation is assessed.
Furthermore, the Applicant notes that performance allocations are
assessed as of a redemption date that occurs in the middle of a
performance allocation calculation period with respect to any
redeemed amounts as of that date. In such event, the date used to
calculate appreciation of the Funds is the date of redemption.
---------------------------------------------------------------------------
Renaissance does not receive a performance allocation directly from
any of the Medallion Master Funds. However, as a result of its
contractual performance allocations from the Medallion FFs, Renaissance
indirectly holds a 36% profits interest in the Medallion Master Funds.
21. According to the Applicant, since the Medallion Master Funds
are owned by the Medallion FFs, Renaissance has an indirect profits
interest in the Medallion Master Funds in excess of 50% through a
combination of its (a) profit participation in the Medallion FFs' net
profits received through the performance allocations resulting from the
Medallion Master Funds' trading and investment activities, and (b)
direct ownership interests in the U.S. Medallion FFs, which in turn
invest in the Medallion Master Funds.\12\ The Applicant explains that,
since Renaissance holds a 36% profits interest in the Medallion Master
Funds through its contractual performance allocations from the
Medallion FFs, 64% of the profits interest in the Medallion Master
Funds remains to be divided among all equity holders, in proportion to
their equity ownership in the Medallion FFs. Because Renaissance owns
approximately 28.49% of the combined equity interests in the Medallion
FFs, they own a corresponding 18.23% interest in profits in the
Medallion Master Funds based on their equity interest in the Medallion
FFs (28.49% of 64% = 18.23%). Thus, Renaissance has a 54.23% profits
interest (36% + 18.23% = 54.23%) in the Medallion Master Funds.
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\12\ Section 3(14)(G) of the Act and/or section 4975(e)(2)(G) of
the Code provides that a partnership is a party in interest or a
disqualified person with respect to a plan if 50% or more of the
capital or profits interest in the partnership is owned by, among
others, a fiduciary, service provider, or an employer any of whose
employees are covered by such plan.
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22. Renaissance's owners and employees (and their affiliated
entities) also may invest in the Medallion FFs in their personal
capacities (if they meet the investor qualification requirements
applicable to such Funds) and would thus have direct ownership
interests in the Medallion FFs (but not necessarily in the same
Medallion FFs or in the same proportions). As of April 30, 2011, such
individuals owned approximately 71.46% of the total assets under
management of the Medallion FFs, or $7.3 billion.
23. In addition, small ownership interests in the Medallion FFs are
held by Kaleidoscope (0.09% or $8.9 million) and certain ``outsiders,''
i.e., individuals who are employed by two entities in which Renaissance
has a minority ownership interest in connection with these entities'
management of two venture capital partnerships (0.13% or $13.4
million). As described below, the investment by Kaleidoscope
facilitates the indirect investment in the Medallion FFs by individuals
who do not otherwise qualify to invest directly in such Funds.
24. Renaissance is also the managing member of Kaleidoscope and its
investment manager. However, since Renaissance maintains Kaleidoscope
purely as a ``perk'' to its employees, it does not receive any
performance allocations or management fees (or other compensation) from
Kaleidoscope for acting as its managing member or investment manager,
respectively. Kaleidoscope does, however, pay management fees to, and
is subject to performance allocations at the investee Fund levels in
the same manner as are all other investors. The Applicant explains that
Kaleidoscope currently invests only in Medallion RMP, RIEF, and RIFF.
As an investor in such Funds, Kaleidoscope is subject to the same fixed
fees and performance allocations payable to Renaissance as are all the
other investors in such Funds (although such fees and allocations may
vary by investor). In this regard, the most recent fixed quarterly
management fees and performance allocations for the most recent
calculation period paid to Renaissance by Medallion RMP, that are
allocable to Kaleidoscope's investment in such Fund, are equal to
$196,154, and $774,654, respectively. However, no extra compensation is
paid to Renaissance for its role in managing Kaleidoscope.
[[Page 3044]]
25. As of April 30, 2011, Kaleidoscope held $29,117,684 in assets
under management, approximately $60,037 of which represented expenses
accrued to the partners in such Fund. Furthermore, as of April 30,
2011, Renaissance held an ownership interest in Kaleidoscope worth
$27,554,570 or approximately 94.6% of the Fund's value, and
Renaissance's owners and employees (and their affiliated entities,
e.g., personal trusts) held an ownership interest of approximately 5.4%
of Kaleidoscope's assets under management, or $1,563,114, in their
personal capacities.
The Decision To Terminate the 401(k) Plan
26. Renaissance previously sponsored the 401(k) Plan for its
employees. All aspects of the 401(k) Plan, including the investment
options, were provided by Fidelity Investments (Fidelity), the Plan
recordkeeper, and a directed trustee and an unrelated party.
Renaissance relates that many of its employees expressed an interest to
invest their retirement assets in the Medallion Funds or in some other
investment vehicle that is managed by Renaissance. According to the
Applicant, these individuals were dissatisfied with the investment
options offered under the 401(k) Plan and their marked volatility and
poor performance (many 401(k) Plan investment options lost over 40% of
their value in 2008 alone), and they desired to take advantage of the
Funds' comparatively high investment returns. The Applicant notes that
the Medallion Funds have historically been excellent investments,
earning a net average return in excess of 40 percent per annum since
1998, including net returns for 2005 through 2010 ranging from
approximately 33 to 98 percent.\13\ In addition, according to the
Applicant, Kaleidoscope has earned a net average return in excess of 22
percent per annum since its inception in 2007.
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\13\ As the New Medallion Vehicles will not charge fees or
profit participations in the form of performance allocations,
Renaissance anticipates that their returns to IRA investors will
exceed the historical net returns of the existing Proprietary Funds.
---------------------------------------------------------------------------
27. The Applicant relates that there were a number of factors
which, taken together, led Renaissance to conclude that the best
opportunity for its employees to invest their retirement assets in the
Medallion Funds was through the termination of the 401(k) Plan and the
application for an administrative exemption to permit Participants to
invest in the Medallion Funds through their IRAs. As a threshold
consideration, Renaissance explains that Fidelity's management policies
would not permit unregistered, alternative investment vehicles such as
the Funds as an investment option for the Plan. However, even if
Fidelity had agreed to allow the 401(k) Plan to offer the Funds as an
investment option, the Applicant suggests that there were considerable
legal obstacles to establishing such investments options.
28. According to the Applicant, offering the Funds as investment
options under the 401(k) Plan could have created a potential issue
under section 404(c) of the Act in connection with Participants'
ability to reallocate their investments among the different investment
options in the 401(k) Plan.\14\ The Applicant explains that, although
the Medallion Funds invest primarily in liquid investments which can be
valued on a daily basis, they permit redemptions only on a quarterly or
monthly basis. By contrast, the 401(k) Plan investments were comprised
of mutual funds that permitted investments in or out on a daily basis
(subject to frequent trading restrictions imposed by some of the mutual
funds). Renaissance suggests that, if the 401(k) Plan investment
options other than the Medallion Funds all allowed daily investments
and redemptions, but the Medallion Funds did not, there could have been
a question as to whether the regulations under section 404(c) of the
Act were satisfied.
---------------------------------------------------------------------------
\14\ 29 CFR 2550.404c-1(b)(2)(ii)(C) provides that ``each
investment alternative * * * [must permit] participants and
beneficiaries to give investment instructions with a frequency which
is appropriate in light of the market volatility to which the
investment alternative may reasonably be expected to be subject.''
---------------------------------------------------------------------------
29. The Applicant also observes that, as a tax-qualified plan, the
401(k) Plan was subject to the nondiscrimination requirements of
section 401(a)(4) of the Code, including the requirement that benefits,
rights and features under the 401(k) Plan be available on a basis that
does not discriminate in favor of non-highly compensated employees. In
order to comply with provisions of laws governing securities and
futures contracts, and provisions relating to the registration of fund
offerings and pre-filing requirements linked to investor financial
qualifications, each Fund (except Kaleidoscope) provides financial
standards for ownership that would exclude some persons who were
participants in the Plan. Thus, according to the Applicant, if a group
of 401(k) Plan participants was ineligible to invest in the Funds
through the Plan as a result of those restrictions, and those
participants were non-highly compensated employees, there could be an
issue as to whether the Plan satisfied the requirements under section
401(a)(4) of the Code.\15\
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\15\ See Income Tax Reg. 1.401(a)(4)-4(e)(3)(i) and (iii)(C).
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30. Finally, the Applicant states that an important consideration
for Renaissance was to give participants the opportunity to take
advantage of the special rule for spreading the tax liability from a
Roth conversion in 2010 over two taxable years.\16\ The Applicant
explains that, while legislation was adopted in September 2010 to amend
section 402A of the Code to permit a ``Roth rollover'' inside a
qualified plan, there was no IRS guidance on this provision in 2010,
while there was guidance on Roth IRA conversions. Thus, Renaissance
determined that it was most advantageous to the Participants to
terminate the 401(k) Plan in October 2010, so that Participants could
take their distributions prior to the end of that year, because they
would only have the opportunity to take advantage of the ``two-year
averaging'' tax benefit if such election was made in 2010.
---------------------------------------------------------------------------
\16\ See section 408A(3)(A)(iii) of the Code.
---------------------------------------------------------------------------
31. Accordingly, the Applicant terminated the 401(k) Plan, causing
the distribution of the 401(k) Plan's account balances (the Proceeds)
to Participants. Renaissance intended that Participants would receive
their Proceeds in newly created or pre-existing IRAs or Roth IRAs and
could either invest in the Funds through a group of new feeder funds,
described below, designed specifically for that purpose, or, if they
desired, in unrelated investments managed by third parties.
Furthermore, Renaissance intended that the Spouses of Participants
would be allowed to invest alongside such Participants through their
IRAs to the extent such investment is allowed under Renaissance's
investment guidelines governing the Medallion Funds.
32. The Applicant states that most of Renaissance's approximately
275 current employees are potential IRA investors in the Funds. They
note that 249 of Renaissance's employees are currently investors in the
Funds on an after-tax basis. The Applicant notes further that, based on
the amount of Proceeds, the potential amount of IRA assets of
Participants that could be invested in the Funds if the proposed
transactions are granted exemptive relief is equal to approximately $88
million (representing all Participants' account balances). However,
according to the Applicant, some Proceeds were distributed to persons
(e.g., former employees) who are not eligible to
[[Page 3045]]
invest in the new feeder funds,\17\ and it will not be clear how many
employees intend to invest in the Funds through IRAs until after such
new feeder funds are established and begin accepting investments. In
addition, the Applicant states that the IRAs of Spouses also may be
permitted to invest in the Funds, and it is impossible to know how many
of these persons will invest. Nevertheless, the Applicant believes that
the total of all of such IRA investments would constitute less than one
percent (1%) of its total assets under management.
---------------------------------------------------------------------------
\17\ The eligibility requirements for investing in the New
Medallion Vehicles are discussed below.
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The New Medallion Vehicles
33. In order to facilitate investment by Participants and their
Spouses in the Proprietary Funds, Renaissance has proposed to create a
group of new feeder funds that will only accept investment from the
IRAs of such individuals; provided that, in order for a Participant or
a Participant's Spouse to invest, such Participant is employed by
Renaissance at the time of such investment.\18\ Specifically,
Renaissance has proposed to create the New Medallion FF, the New
Medallion Conduit, and New Kaleidoscope, referred to as the ``New
Medallion Vehicles,'' in order to facilitate the investment of IRAs
into the Medallion Funds, in addition to two other new feeder funds
designed to facilitate the investment by IRAs into RIEF and RIFF.\19\
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\18\ However, according to the Applicant, there are seven owners
of Renaissance (the Permitted Owners), who would be eligible to
invest their IRAs in the new feeder funds regardless of whether they
are employed by Renaissance.
\19\ Because neither RIEF nor RIFF are covered under the
exemptive relief proposed herein, the new feeder funds created to
facilitate investment in the Funds by IRAs are not fully described
herein.
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34. According to the Applicant, the New Medallion Vehicles are an
essential part of the covered transactions, because: (a) They are
necessary for the IRA Holders in each Fund to avoid being subject to
taxes on unrelated business taxable income under the Code on the income
resulting from each Fund's borrowings; (b) they are required to assure
compliance to the maximum extent with the requirements of the various
United States securities laws; and (c) in the case of New Medallion FF,
it is preferable (although not essential) to create a new vehicle that
would be parallel to the New Medallion Conduit (where a new vehicle was
essential) rather than create a new class of an existing Medallion FF.
35. New Medallion FF would be organized as a Bermuda Limited
Partnership that elects to be treated as a corporation for US Federal
Income Tax purposes, and will invest directly in the Medallion Master
Funds. New Medallion FF would be available only to IRAs maintained by
Participants who meet the same investor qualifications as those
investing in the Medallion Funds. The Applicant states that absolutely
no management fees or other fees or profit participations in the form
of performance allocations or otherwise, direct or indirect, will be
charged to or imposed on IRAs that invest in the New Medallion FF.
36. New Kaleidoscope is proposed to be a new fund-of-funds
patterned after Kaleidoscope that is available only to IRAs maintained
by Participants that do not meet the investor qualifications to invest
directly in the New Medallion FF. New Kaleidoscope would be organized
as a Delaware limited liability company, and will invest in the
Medallion Master Funds through the New Medallion Conduit, a Bermuda
Limited Partnership that will elect to be treated as a corporation for
US Federal Income Tax purposes.\20\ In addition, New Kaleidoscope will
invest in the two other newly established feeder funds which are
designed to facilitate investment in RIEF and RIFF. Absolutely no
management fees or other fees or profit participations in the form of
performance allocations or otherwise, direct or indirect, will be
charged to IRAs that invest any Proceeds in New Kaleidoscope.\21\
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\20\ New Medallion FF and the New Medallion Conduit are
structurally identical, save for the securities law qualifications
for investors' admittance, as described below. Furthermore, New
Medallion FF will accept direct IRA investment, whereas the New
Medallion Conduit will only accept investment by New Kaleidoscope,
and thus will have no direct investment by IRAs.
\21\ The Applicant notes that IRAs investing in the two new
feeder funds designed to facilitate the investment into RIEF and
RIFF, will similarly not be charged management fees or profit
participations of any kind.
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37. The investment portfolios of New Medallion FF and New
Kaleidoscope will be different from each other but will have the same
respective portfolios as the existing Medallion FFs and Kaleidoscope,
respectively, as described above. For example, the Applicant explains
that the New Medallion FF will invest alongside the other Medallion FFs
in the Medallion Master Funds, which generally invest and trade in the
transactions and instruments described above. As New Kaleidoscope only
invests in the Medallion Master Funds (through the New Medallion
Conduit) and the other two non-Medallion Proprietary Funds, it will not
have its own portfolio of investments but instead will own indirect
interests in each of the instruments and transactions that such Funds
invest in directly. Thus, New Kaleidoscope will have the same portfolio
as Kaleidoscope.
Qualifications To Invest in the New Medallion Vehicles
38. The Applicant states that, in order to qualify for investment
in one of the New Medallion Vehicles with an IRA, such an individual
must generally be either a current employee or owner of Renaissance who
received Proceeds, or such person's Spouse, except for the Permitted
Owners of Renaissance who may be eligible to invest in the New
Medallion Vehicles past the termination of their employment.
Additionally, an ``IRA Holder'' must meet the particular securities law
based investor qualifications of such New Medallion Vehicles.
39. According to Renaissance, an IRA investing in the New Medallion
FF will be required to be a ``Qualified Purchaser'' as defined in
section 3(c)(7) of the 1940 Act, an IRA whose beneficial owner is a
``knowledgeable employee'' as defined in Rule 3c-5 of the 1940 Act (a
Knowledgeable Employee), or an ``Accredited Investor,'' as defined in
Rules 501-506 of Regulation D under the 1933 Act.\22\ Renaissance
explains that an IRA qualifies as an Accredited Investor if the person
for whose benefit it is established is an Accredited Investor in his/
her own right or if the IRA has a net worth of at least $15 million.
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\22\ A Qualified Purchaser under the 1940 Act is an individual
who owns at least $5,000,000 in investments (as defined in Rule
2a51-1 under the 1940 Act). An Accredited Investor under the 1933
Act is an individual who (i) has a net worth, or joint worth with
that person's spouse, at the time of his purchase in excess of
$1,000,000 (excluding the value of the primary residence of such
person); or (ii) had an income in excess of $200,000 in each of the
two most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and who reasonably expects
an income in excess of the same income level in the current year.
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40. The Applicant states that New Kaleidoscope will qualify as a
3(c)(1) fund under the 1940 Act, and thus will accept investment by
IRAs that are Accredited Investors, plus up to 35 non-Accredited
Investors.\23\ The New Medallion Conduit, through which New
Kaleidoscope will invest in the Medallion Master Funds, will similarly
allow investment by Accredited Investors and up to 35 non-Accredited
Investors. Thus, the Applicant explains that any investors in New
Kaleidoscope
[[Page 3046]]
in excess of 35 must be Accredited Investors.\24\
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\23\ Under Regulation D of the 1933 Act, up to 35 persons who
are not Accredited Investors are eligible to invest in any vehicle
that determines to accept them (as have Kaleidoscope and one of the
Medallion Funds).
\24\ The Applicant notes that potential non-Accredited Investors
in New Kaleidoscope will be admitted in the order that Participants'
completed IRA transfer applications are received. However, the
Applicant does not expect there to be 35 such applications, as there
are currently only 25 non-Accredited Investors in Kaleidoscope.
---------------------------------------------------------------------------
41. The Applicant notes that the investor qualifications for New
Kaleidoscope mirror those of Kaleidoscope itself, as there are no
financial qualification requirements for investors in the Kaleidoscope
Fund. Accordingly, the Applicant believes that it is consistent with
the purpose for which Kaleidoscope was created that anyone eligible to
invest in Kaleidoscope who wishes to invest his or her IRA in New
Kaleidoscope should be able to do so, without further investment
restrictions. Furthermore, the Applicant notes that by combining
investment by New Kaleidoscope (including the New Medallion Conduit)
with investment by the New Medallion FF in the Medallion Master Funds,
Renaissance will be able to maximize the number of IRAs that can be
invested in the Medallion Funds.\25\
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\25\ The Applicant notes that section 3(c)(7) of the 1940 Act
does not limit the number of investors a Fund may take, but Funds
qualifying under section 3(c)(1) of the 1940 Act are limited to 100
in number.
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42. According to the Applicant, based on representations made by
the 249 employees that invest in the Funds on an after-tax basis,
approximately 100 are Qualified Purchasers and approximately 125 (who
are not Qualified Purchasers) are Accredited Investors. The Applicant
notes that all the Qualified Purchasers also are Accredited Investors.
The other 24 employees invested in the Applicant's Funds on an after-
tax basis are neither Qualified Purchasers nor Accredited Investors.
Coverage Issues Related to the Investment by IRAs in the New Medallion
Vehicles
43. The Applicant notes that the characteristics of the structure
and implementation of the transactions described herein raise certain
coverage issues under Title I of the Act. In this regard, the
Department believes that, with respect to the investment by
Participants' IRAs in the Proprietary Funds, the transactions described
herein do not satisfy the requirements for the safe harbor for
individual retirement accounts under DOL Regulation 29 CFR 2510.3-2(d).
The Department is unable to conclude that, with respect to the
investment by Participants' IRAs in the New Medallion Vehicles,
Renaissance has not created a pension plan subject to Title I of the
Act. However, the Department notes that the IRAs beneficially owned by
the Spouses of Participants would be not subject to Title I of the Act,
but would remain subject to Title II of the Act and the rules and
regulations promulgated thereunder.
44. As a result of the Department's view that the covered
transactions may constitute a Title I plan with respect to the
investment of Participants' IRAs in the New Medallion Vehicles, the
Department believes that Renaissance, as the sponsor of a Title I plan
and the fiduciary with respect to the Participants' IRAs, would be
required to operate the arrangement in accordance with Title I of the
Act. This includes, to the extent applicable, ensuring compliance with
section 404 of the Act and the duty to diversify plan investments. In
this regard, the Department does not believe that it would be practical
to develop a single percentage limitation that would apply to
investment in the Medallion Funds by IRAs due to the different types of
investment activities engaged in by such entities. The Department notes
that section 404(a) of the Act requires, among other things, that a
fiduciary discharge his duties with respect to a plan solely in the
interest of the participants and beneficiaries, and in a prudent
fashion. Section 404(a)(1)(C) of the Act further requires that a
fiduciary diversify the investments of the plan so as to minimize the
risk of large losses, unless under the circumstances it is clearly
prudent not to do so.
Accordingly, it is the responsibility of the relevant fiduciary
intending to take advantage of the relief provided by this proposed
exemption to determine the appropriate level of investment in the
Medallion Master Funds, based on the particular facts and
circumstances, consistent with its responsibilities under section 404
of the Act.\26\
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\26\ The Department notes that its views regarding the
Applicant's establishment of a plan, and the operation of such plan,
subject to Title I of the Act, also extend to the investment by IRAs
in the new feeder funds created by Renaissance to facilitate the
investment by IRAs in RIEF and/or RIFF.
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The Request for Exemptive Relief
45. The Applicant states that, prior to an IRA Holder's investment
of Proceeds in a New Medallion Vehicle, such IRA Holder will have no
disqualified person or party in interest relationship with Renaissance
or any affiliate of Renaissance (in this regard, see 29 CFR 2510.3-
2(d)). However, the Applicant states that IRAs will hold 25% or more of
the equity interests in each New Medallion Vehicle in which they
invest.\27\ The IRAs are ``benefit plan investors'' for purposes of
section 3(42) of the Act and 29 CFR 2510.3-101, as the IRAs constitute
plans described in section 4975(e)(1) of the Code, and in the case of
IRAs owned by Participants, may constitute an ``employee benefit
plan(s)'' under section 3(3) of the Act.\28\ Thus, investment by
benefit plan investors in each New Medallion Vehicle would be deemed
``significant,'' and each IRA would own an undivided interest in the
assets of each New Medallion Vehicle in which it invests.\29\
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\27\ According to the Applicant, benefit plan investors will not
hold 25% or more of the equity interests in any Medallion Master
Fund or any other Fund maintained by Renaissance.
\28\ 29 CFR 2510.3-101(f)(2). As stated above, the Department is
unable to conclude that Renaissance has not established a Title I
plan pursuant to 29 CFR 2510.3-2(d).
\29\ 29 CFR 2510.3-101(a)(2).
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46. According to the Applicant, once a Participant's IRA invests in
a New Medallion Vehicle, establishing the plan asset relationships
described above, Renaissance, the Medallion Master Funds, and certain
employees, officers, directors, and 10% owners of each will become
parties in interest under section 3(14) of the Act and/or disqualified
persons and section 4975(e)(2) of the Code, with respect to IRAs that
invest in the New Medallion Vehicles.\30\
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\30\ As the Applicant states, neither RIEF nor RIFF are
currently parties in interest and/or disqualified persons with
respect to the IRA Holders. It is the Department's view that, absent
a current showing of a disqualified person relationship, no
exemptive relief for such transactions is appropriate. However, once
a disqualified person relationship exists between the IRAs and the
two non-Medallion Proprietary Funds, the Applicant could resubmit an
application for exemptive relief for covered transactions involving
those Funds.
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47. As a result, the Applicant states that the indirect acquisition
by an IRA of an interest in a Medallion Master Fund through such IRA's
acquisition of an interest in a New Medallion Vehicle constitutes the
initial prohibited transaction, pursuant to section 406(a)(1)(A) and
(D) of the Act and/or section 4975(c)(1)(A) and (D) of the Code. After
such initial acquisition of an interest in a Medallion Master Fund has
been made by an IRA, additional acquisitions or redemptions of
interests in a New Medallion Vehicle by such IRA would constitute
additional prohibited transactions pursuant to section 406(a)(1)(A) and
(D) of the Act and/or section 4975(c)(1)(A) and (D) of the Code.
48. Furthermore, the Applicant states that Renaissance's provision
of services to a New Medallion Vehicle would constitute a prohibited
transaction pursuant to section 406(a)(1)(C) of the Act and/or section
4975(c)(1)(C) of the
[[Page 3047]]
Code with respect to each IRA investing in such New Medallion Vehicle.
The Applicant explains that Renaissance will provide certain
administrative services to the New Medallion Vehicles that are strictly
ministerial in nature. However, the Applicant states that Renaissance
will also provide a ``limited'' amount of investment management
services where, for example, it makes semi-annual distributions,\31\ or
limits the overall size of the Medallion Funds, either of which could
cause a full or partial redemption of an IRA investment.
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\31\ Renaissance states that, because of capacity constraints in
the operation of the strategy employed by the Medallion Funds, for a
number of years the Funds have returned all or substantially all of
their profits to investors.
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49. However, the Applicant states that Renaissance's providing of
investment management and ministerial services to a New Medallion
Vehicle would be exempted by section 408(b)(2) of the Act (provided all
conditions were satisfied). Section 408(b)(2) of the Act provides
relief for the ``[c]ontracting or making reasonable arrangements with a
party in interest for office space, or legal, accounting or other
services necessary for the establishment or operation of the plan, if
no more than reasonable compensation is paid therefor.'' \32\ Under the
Department's regulations, a service is necessary for the establishment
or operation of a plan if the service is ``appropriate and helpful to
the plan obtaining the service in carrying out the purposes for which
the plan is established or maintained.'' \33\
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\32\ Section 408(b)(2) of the Act.
\33\ 29 CFR 2550.408(b)(2).
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50. Nevertheless, the Applicant contends that a single, individual
exemption covering section 406(a)(1)(A), (C), and (D) of the Act and/or
section 4975(d)(1)(A), (C), and (D) of the Code would be appropriate,
given that the parties to whom this relief would apply are all
individuals. Otherwise, according to the Applicant, an IRA Holder would
be forced to rely in part on section 408(b)(2) of the Act and in part
on the administrative exemptive relief provided herein, which the
Applicant suggests is unnecessarily burdensome on such individual
investors.
51. Despite the Applicant's concerns, the Department believes that
it would be more appropriate for the Applicant to rely on the statutory
relief in section 408(b)(2) of the Act and/or section 4975(d)(2) of the
Code for Renaissance's provision of investment management and
ministerial services to the IRAs, rather than to propose administrative
exemptive relief for such transactions. As a fiduciary to the New
Medallion Vehicles, it would ultimately be Renaissance's responsibility
to determine whether the services it provides satisfy all of the
conditions set forth in the statutory exemption and pertinent
regulations. Moreover, Renaissance should be in the best position to
determine whether the conditions of that exemption are satisfied, and
to demonstrate compliance therewith.
52. Accordingly, the Applicant is seeking administrative exemptive
relief under section 408(a) of the Act and/or section 4975(c)(2) of the
Code from the prohibitions outlined in sections 406(a)(1)(A) and (D) of
the Act and section 4975(c)(1)(A) and (D) of the Code, for the
following transactions: (a) The direct or indirect acquisition by a
Participant's IRA of an interest in a Proprietary Fund through such
IRA's acquisition of an interest in a New Medallion Vehicle; (b) the
acquisition of an additional interest by a Participant's IRA in a New
Medallion Vehicle; and (c) the redemption by a Participant's IRA of all
or a portion of its interest in a New Medallion Vehicle. Additionally,
the Applicant is seeking administrative exemptive relief under section
4975(c)(2) of the Code from the prohibitions of section 4975(c)(1)(A)
and (D) of the Code for the following transactions: (a) The direct or
indirect acquisition by a Spouse's IRA of an interest in a Proprietary
Fund through such IRA's acquisition of an interest in a New Medallion
Vehicle; (b) the acquisition of an additional interest by a Spouse's
IRA in a New Medallion Vehicle; and (c) the redemption by a Spouse's
IRA of all or a portion of its interest in a New Medallion Vehicle.\34\
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\34\ The Applicant states that it does not believe relief from
section 406(b)(1) or (2) of the Act and/or section 4975(c)(1)(E) or
(F) of the Code is necessary in connection with the covered
transactions, because, according to Renaissance, neither it nor any
IRA Holder will be using any of its authority, control or
responsibility as a fiduciary to benefit itself or a person in which
it has an interest which may affect the exercise of its best
judgment as a fiduciary. The Department notes that regulation 29 CFR
2550.408b-2(e)(2) provides that a fiduciary does not engage in an
act described in section 406(b)(1) of the Act if the fiduciary does
not use any of the authority control, or responsibility that makes
him a fiduciary to cause a plan to pay additional fees for a service
furnished by such fiduciary or to pay a fee for a service furnished
by a person in which the fiduciary has an interest that may affect
the exercise of his judgment as a fiduciary. It is also the
Department's view that generally a fiduciary's decision to retain
itself or an affiliate service provider whose fees will be paid by
the plan sponsor (or who does not charge fees of any kind for the
provision of services) will not involve an adversity of interests as
contemplated by section 406(b)(2) of the Act. Accordingly, the
decision to invest the IRAs' assets in the Funds, which are managed
by Renaissance, would not appear, in itself, to raise issues under
section 406(b)(1) or (b)(2) of the Act.
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Investments in the New Medallion Vehicles To Be Made at IRA Holders'
Discretion
53. Renaissance notes that each Participant has complete investment
discretion over his or her Proceeds. Thus, a Participant could, in his
or her discretion, receive the Proceeds as taxable income and choose to
invest them as he or she determines. One investment option would be to
roll the Proceeds over to an IRA (either a Roth IRA or a traditional
IRA). The Applicant notes that, subject to an IRA Holder's Investment
Allocation discussed below, no upper dollar amount limitations would be
imposed on the portion of the Proceeds which a Participant may invest
in the New Medallion Vehicles. However, for administrative reasons, the
Applicant states that it is necessary to provide for a $1,000 minimum
threshold for each New Medallion Vehicle.\35\ Nevertheless, a
Participant could invest none, some, or all of his or her Proceeds in
the New Medallion Vehicles. An IRA Holder could also redeem his or her
interest in the Funds at his or her discretion, subject to the
redemption guidelines attributable to the respective New Medallion
Vehicles, described below.
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\35\ The Applicant states that the New Medallion Vehicles'
offering documents will provide for a $1,000 minimum investment
unless Renaissance agrees to accept less in a particular
circumstance.
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54. Moreover, the Applicant states that it has not provided, nor
will it at any time provide, investment advice concerning an IRA
Holder's investment of their IRA in the New Medallion Vehicles or offer
any financial or employment-related incentives to invest in the Funds.
The Applicant notes that there have been no official communications
with Participants regarding the opportunity to invest in the Funds
through IRAs since the termination of the 401(k) Plan, except that
Renaissance's general counsel recently advised the Firm's management
committee that comments on the application were received and are being
addressed. However, the Applicant states that, once the proposed
exemption is granted, it will provide certain disclosures intended to
facilitate the informed decision making of IRA Holders regarding the
investment of their IRAs in the New Medallion Vehicles.
55. According to Renaissance, in advance of the initial investment
by an IRA in a New Medallion Vehicle, each IRA Holder will receive (a)
the copy of the proposed exemption and the final
[[Page 3048]]
exemption, following the publication of the final exemption in the
Federal Register, (b) a private offering memorandum (with all related
exhibits) describing the relevant investment vehicles, including its
investment objectives, risks, conflicts, operating expenses and
redemption and valuation policies (which disclosures and information
will be the same as that provided to other investors with respect to
the Fund in which such IRA Holder invests), and (c) any other
reasonably available relevant information as such IRA Holder may
request. Moreover, after the initial investment by an IRA in a New
Medallion Vehicle, on an on-going basis, Renaissance will provide each
IRA Holder whose IRA owns an interest in a New Medallion Vehicle with
(a) unaudited performance reports at the end of each month, and (b)
audited annual financial statements following the end of each calendar
year.
56. The Applicant observes that, as IRA Holders have the discretion
to invest in the New Medallion Vehicles, they may use whatever IRA
custodian they so choose. According to the Applicant, two major
financial institutions with which it has banking and other customer and
investment relationships have indicated that they would be willing to
act as IRA custodians on a fee-free basis through their private wealth
management divisions to facilitate Participants' IRA investments.\36\
The Applicant has also identified other IRA custodians who are willing
to act as custodians for investments that are not publicly-traded, on a
fee-basis, whose names Renaissance will make available to IRA Holders
who inquire. However, the Applicant stresses that it will not make any
endorsement or recommendation concerning IRA custodians, and will
impose no restrictions on the custodian that a Participant may use, and
neither Renaissance nor any Participant (or Spouse) will obtain any
additional benefit from using a particular custodian.
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\36\ Deutsche Bank AG provides brokerage and other investment-
related services, including acting as a prime broker and equity
derivatives counterparty, to the Medallion Funds, and receives
market-competitive fees from such Funds for those services; and
JPMorgan Chase & Co. provides brokerage and banking services to all
of Applicant's Funds, and receives market-competitive fees from the
Funds for those services. The Applicant emphasizes that neither
custodian will receive any fees from a New Medallion Vehicle,
although they will receive market-rate fees from such New Medallion
Vehicle's underlying master funds for separate services that they
perform for such Funds.
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57. Finally, the Applicant notes that there should not be any
institutional or corporate pressure on Participants to invest in the
New Medallion Vehicles, as only a small number of individuals within
Renaissance will have actual knowledge of an employee's investment in
the New Medallion Vehicles. According to Renaissance, the CFO/CCO and
the General Counsel would have access to that information, in addition
to approximately 10 other employees of Renaissance in Investor
Relations, Fund Accounting, and Infrastructure, who, as a result of
their respective job positions, are responsible for the preparation and
distribution to investors of investor statements.
Voting of IRAs' Interests in the New Medallion Vehicles
58. According to the Applicant, IRA investors in the New Medallion
Vehicles will have certain voting rights that will mirror the rights of
other investors in the existing Medallion and Kaleidoscope Funds. In
this regard, the Applicant states that IRA Holders will generally have
the right to vote for all material amendments to an organizational
document (i.e., a limited partnership agreement or a limited liability
company agreement) that either are proposed by, or are consented to by,
Renaissance (i.e., those amendments not involving ministerial, legally
mandated, or technically conforming or corrective changes). For
example, the Applicant observes that IRA Holders also may vote to
approve (a) the admission of an additional general partner to New
Medallion FF or New Medallion Conduit proposed by Renaissance, or (b)
the appointment of a liquidator when one is required and Renaissance is
unable to serve in such a role. Finally, in the event of a New
Medallion Vehicle's dissolution, IRA Holders will generally have the
right to vote to continue or reconstitute (as applicable) the business
of each New Medallion Vehicle and to select one or more successors to
Renaissance as its manager.
The Applicant states that IRA Holders will be able to exercise
their voting rights either (a) at a formal meeting of all investors
where votes may be exercised in person or by proxy, or (b) by executing
a written consent pursuant to a prior written solicitation from
Renaissance on reasonable prior notice. Furthermore, each New Medallion
Vehicle will have the right to vote on certain matters arising at their
master fund levels. However, the Applicant notes that these master fund
voting rights effectively are held by Renaissance because of its
control position with respect to each master fund entity. Nevertheless,
the Applicant represents that it will seek the consent of IRA Holders
for matters described above to the extent that a situation arises at a
master fund level where it would be inequitable or imprudent for
Renaissance not to obtain the requisite IRA Holder consents at the
feeder fund level consistent with the IRA Holders' voting rights set
out above.
Voluntary Redemptions of IRAs' Interests
59. The Applicant states that voluntary redemptions of an IRA's
interest in a New Medallion Vehicle would be available periodically
with prior notice given to Renaissance. The Medallion Funds permit
redemptions to be effected quarterly on 10 days' prior notice, and the
New Medallion FF would also allow redemptions quarterly on 10 days'
prior notice. Kaleidoscope also has quarterly redemptions on 45 days'
prior notice and New Kaleidoscope would be the same. At present,
greater than 75% of the Medallion Funds' net assets are in cash, cash
equivalents or can be liquidated into cash on one week's notice or
less. The same is true indirectly for Kaleidoscope, which invests in
the Medallion Funds as well as the other two non-Medallion Proprietary
Funds.
60. According to the Applicant, redemptions of investors' interests
in the Funds are normally made in cash, as the Funds do not ordinarily
invest in illiquid investments. Further, since the IRAs' potential
combined interests in the New Medallion Vehicles are not expected
initially to exceed 1% of the total assets of all Renaissance-managed
funds, any request for redemption by an IRA from any of the New
Medallion Vehicles should be redeemable in cash on a timely basis.
However, the provision for in-kind distributions exists in the
operating agreements of the Funds in the event of an unforeseen event,
such as the liquidation of a Fund where the issuer of one its portfolio
securities is in bankruptcy.
Nevertheless, the Department is concerned that, in the event that a
Fund makes a distribution in-kind to an IRA, such IRA may receive
illiquid assets in exchange for its interest in the New Medallion
Vehicles, and consequently may experience difficulty in realizing full
value in redemption of its investment in the Funds. In response to the
Department's concerns, the Applicant states that it will provide for
any redemption of IRAs' interests in the New Medallion Vehicles in
cash.
Compulsory Redemptions of IRAs' Interests
61. Renaissance states that its investment and trading strategy for
the
[[Page 3049]]
Medallion Funds cannot be executed efficiently if too much capital has
been invested in such Funds. Therefore, the Medallion Funds have for a
number of years imposed an aggregate limit on the amount of capital
that the Medallion Funds can accept. The Applicant explains that, as a
result, each Renaissance employee from the President to the lowest-paid
employee, has a permitted ``Investment Allocation'' in the Medallion
Funds that is based on his or her compensation level, and, if
applicable, an employee's ownership interest in Renaissance itself, and
is adjusted at the beginning of each semi-annual period (January 1 and
July 1 of each year). The Investment Allocation specifies the aggregate
dollar amount that each Renaissance employee is entitled, at the
employee's discretion, to invest in a Medallion Fund, subject to that
employee's ability to comply with all applicable securities law
requirements for the relevant Medallion Fund, or in Kaleidoscope (which
invests up to 40% of its assets in Medallion and the balance in the
remaining two non-Medallion Proprietary Funds).
62. The Applicant states that IRA Holders would be able, at their
discretion, to utilize their Investment Allocations in connection with
making an investment of some or all of their IRA assets in the New
Medallion Vehicles, subject to each Participant's overall Investment
Allocation limit. In addition, Renaissance permits an employee to share
his or her Investment Allocation with certain family members. Thus, a
Spouse could invest his or her IRA in New Medallion FF or in New
Kaleidoscope to the extent of the remainder of such IRA Holder's
Investment Allocation. However, the Applicant states that, on occasion,
Renaissance may proportionately reduce employees' Investment
Allocations, in order, for example, to maintain the Funds'
profitability or to permit an allocation to be made to new
employees.\37\ According to the Applicant, any reduction of Investment
Allocations would be effected on a pro rata basis with respect to all
Renaissance employees with Investment Allocations.\38\
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\37\ As noted above, because of capacity constraints in the
operation of the Medallion Funds, Renaissance may determine the
appropriate size of the Medallion Funds and reduce investors'
Investment Allocations accordingly.
\38\ As noted above, Renaissance has the option in whole or in
part to receive its performance allocation in cash or to leave such
amounts in its capital account, which could cause a corresponding
reduction in the Investment Allocations of other investors,
including IRAs. The Department generally notes that, even if a
transaction, at its inception, did not involve a violation of
section 406(b)(1) or (b)(2) of the Act, if a divergence of interests
develops between the IRA and the fiduciary (or persons in which the
fiduciary has an interest), the fiduciary must take steps to
eliminate the conflict of interest in order to avoid engaging in a
prohibited transaction.
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63. In the event IRA Holders' Investment Allocations are reduced,
the Funds may be forced to redeem a portion of such IRA Holders'
interests in New Medallion FF or New Kaleidoscope. The Applicant states
that the size of such IRA Holders' redemption would correspond to the
amount necessary to lower an IRA Holder's total investment in the Funds
to comply with the limit imposed by his or her Investment Allocation.
According to the Applicant, in the event that an IRA Holder had both an
individual account and an IRA account invested in the Medallion Funds,
he or she would generally be able to choose from where the redemption
would come. Furthermore, the Applicant suggests that an IRA Holder
should be able to redeem a portion of his or her IRA's interest without
any adverse tax consequence by reinvesting the IRA in other assets.\39\
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\39\ In such case, an IRA Holder may desire to reallocate his or
her IRA's investments to investments outside of the Funds or to the
other new feeder funds for RIEF or RIFF that are designed to accept
investment from Participants' IRAs and are not subject to Investment
Allocations.
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64. Redemptions of IRAs' interests in the New Medallion Vehicles
may also be necessary when IRA Holders terminate employment with
Renaissance. According to the Applicant, when employees and owners of
Renaissance terminate employment, they retain their Investment
Allocations for a period of between 6 to 12 months following such
termination, depending upon an employee's length of service and other
negotiated terms of the employment arrangement. The Applicant states
that an IRA would generally also be permitted to retain its interest in
a New Medallion Vehicle for up to 12 months, and potentially as long as
14 months or more, following the date of termination.
65. Thereafter, the Applicant explains that IRA Holders could, in
their sole discretion, transfer their IRAs' investments to RIEF or RIFF
(but not the newly created feeder funds for such Funds), or redeemed
outright in exchange for cash.\40\ Likewise, the Applicant states that,
if a person ceases to be a Spouse, he or she is no longer eligible to
invest in any New Vehicle and will be redeemed. Renaissance notes that
such Funds are generally available to employees of Renaissance as
investments past termination of their employment, but that IRA Holders'
investments transferred to such Funds will be subject to the payment of
management fees and profit participations in the same manner as such
individual's taxable investments.\41\
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\40\ The Applicant states that Renaissance generally desires to
restrict the availability of fee-free investment in the New
Medallion Vehicles and the new feeder funds for RIEF and RIFF to
IRAs of current employees and owners of Renaissance (and such
individuals' spouses).
\41\ Notwithstanding the foregoing, the Applicant notes that
there are seven Participants, the Permitted Owners, whose IRA
investments (and those of their Spouses) would not be compulsorily
redeemed from the New Medallion Vehicles upon their termination of
employment with Renaissance, comprised of a group referred to as
Renaissance ``founders'' and current owners who are also permitted
to retain a reduced Investment Allocation.
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Valuations of IRAs' Interests in the New Medallion Vehicles
66. According to Renaissance, the Medallion Funds are designed to
trade highly diversified portfolios of liquid securities and other
instruments traded on international exchanges or derivatives whose
value is based on such liquid securities or instruments. The Applicant
notes that to the extent that a Fund's assets are traded through OTC
derivative products, the majority of those products follow the
liquidity of the underlying assets.
67. The Applicant emphasizes that Renaissance's valuation policies
would apply equally to all investors, including IRA Holders. According
to the Applicant, an acquisition or redemption of an IRA's interest in
a New Medallion Vehicle would be made for fair market value.
Renaissance explains that equity securities are valued at their last
sale price or official closing price on the market on which such
securities primarily trade using sources independent of Renaissance and
the issuer. Furthermore, if no sales occurred on such day, equity
securities are valued at the last reported independent ``bid'' price
or, if sold short, at the last reported independent ``asked'' price.
Fixed income securities are valued on either the basis of ``firm
quotes'' obtained at the time of an acquisition or redemption from
U.S.-registered or foreign broker-dealers, which are registered and
subject to the laws of their respective jurisdiction, which quotes
reflect the share volume involved in the transaction, or on the basis
of prices provided by independent pricing services that determine
valuations based on market transactions for comparable securities and
various relationships between such securities that are generally
recognized by institutional traders.
[[Page 3050]]
68. Options are valued at the mean between the current independent
``bid'' price and the current independent ``asked'' price or, where
such prices are not available, are valued at their fair value in
accordance with Fair Value Pricing Practices by the Renaissance
Valuation Committee, which utilizes a set of defined rules and an
independent review process. Except for derivative transactions
described above, Renaissance states that the Funds generally do not
invest in other non-publicly traded investments. However, in the very
unlikely event that neither primary nor secondary pricing sources are
available for a particular security or instrument, Renaissance would
assess in good faith all information available in the market, including
dealer quotations, and establish ``fair value'' according to their Fair
Value Pricing Policies established by Renaissance Valuation Committee.
69. The Applicant explains that the Renaissance Valuation Committee
establishes valuation policies and provides a check and balance on the
entire valuation process. Among other things, Renaissance states that
it meets monthly with Renaissance's Fund Accounting Group, which is
responsible for the daily valuation issues, interfaces with the Fund's
auditors when necessary to assist the auditors in understanding certain
valuations in connection with the auditors review of the Funds'
financial statements, and keeps abreast of industry valuation standards
in an attempt to assure that Renaissance follows ``best valuation
practices.''
70. According to the Applicant, Renaissance's Official Pricing
Policy reflects Renaissance's judgment of best practices in the
financial services industry for valuing various assets. The Applicant
notes that the methodology utilized in establishing these policies
involves constant reassessment and review to determine whether or not
Renaissance's pricing sources and reliance thereon are fair and
reasonable and consistent with practices of other firms and
professionals in the financial services industry, and these policies
attempt to be as objective and fair as they can be given the
circumstances.
71. The Applicant clarifies that, with respect to ``hard to value
assets,'' the following guidelines generally will apply for stale or
unpriced equity securities trading on U.S. or Foreign Exchanges:
If the security has not been traded for a period of 30 days or
less, then the last price from the pricing source as per the
official pricing policy will be applied as the closing price.
If the security has not traded for a period of more than 30 days
but less than 60 days, then the last price from the pricing source
as per the official pricing policy will be reduced by 50% and
applied as the closing price.
If the security has not traded for a period of more than 60
days, then the last price from the pricing source as per the
official pricing policy will be reduced by 90% and applied as the
closing price.
If a security has been delisted from an exchange, then the
security will be marked to zero.
If, from time to time, a quoted price is not available for a
particular security, the RVC will establish a methodology for
valuing the security, and the ultimate valuation is subject to
approval by the Renaissance Technologies LLC Board of Directors.
72. It is stressed by the Applicant that the RVC's pricing policies
are not ad hoc. Rather, according the Applicant, the policies
established to address hard to value assets are applied uniformly and
equitably across all Funds at the same time. However, the Applicant
explains that by definition, hard to value assets frequently will have
their own unique circumstances that require flexibility and judgment to
value them; and not rigid and inflexible rules. Thus, the Applicant
notes that the policy is to obtain the best available information from
leading data vendors and other pricing sources and to use that
information to value these assets as fairly, equitably and uniformly as
possible.\42\
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\42\ The Applicant notes that Renaissance's asset valuations are
also reviewed by the Funds' auditors in connection with their
certification of audited financial statements for the Funds under
GAAP.
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Statutory Findings
73. According to the Applicant, the proposed exemption is
administratively feasible because it is similar to other relief that
the Department previously granted in Prohibited Transaction Exemption
(PTE) 91-1 and PTE 2008-03,\43\ and the purchase of interests in the
New Medallion Vehicles would be consummated at the discretion of the
Participants and regulated by certain provisions of the 1940 Act and
the 1933 Act, as described above.
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\43\ PTE 2008-03, published in the Federal Register at 73 FR
13582 (March 13, 2008), granted exemptive relief for (A) the
acquisition, from an offshore corporation (the Offshore Corporation)
of non-voting equity securities, representing an economic interest
in the Offshore Corporation by an ERISA-covered client plan (the
Client Plan), where the Offshore Corporation is a party in interest
with respect to the Client Plan, due to the ownership of all of the
voting equity shares of the Offshore Corporation by Wellington
Global Administrator, Ltd., a subsidiary of Wellington Management,
which is (or may become) a fiduciary and a service provider with
respect to the Client Plan; and (B) the redemption of the Client
Plan's Shares by the Offshore Corporation either in cash or in kind;
and PTE 91-1, published in the Federal Register at 56 FR 448
(January 4, 1991), granted exemptive relief for the acquisition,
sale or redemption of limited partnership units between pension
plans (the Plans) investing in the International Small Float Fund
(the Fund) and PIM, the general partner of the Fund and a party in
interest to the Plans.
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74. The Applicant further states that the proposed exemption is in
the interest of the IRAs and their beneficiaries, because, if the
Medallion Funds' investments continue to perform in a manner consistent
with their historical returns, the IRAs will realize excellent
investment returns compared to the alternatives previously available in
the 401(k) Plan or otherwise in the marketplace. Furthermore, IRA
Holders would be able to take advantage of those above-average
investment returns on a tax-deferred (or in the case of a Roth IRA,
tax-free), and a fee-free, basis.
The Applicant offers that many investment management firms seek to
permit their employees to invest in the investment products that they
manage. In its conversations with the Department, the Applicant
emphasized that it is motivated by goodwill in creating the New
Medallion Vehicles to accept Participants' IRA investments, and that
Renaissance will not benefit in any material sense from such
transactions. In this regard, the Applicant observes that Renaissance
will not charge or accept any fees or profit participations, and no
compensatory benefit will be received by any owner or employee of
Renaissance in connection with an IRA's investment in a New Medallion
Vehicle.\44\
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\44\ Renaissance notes that certain operating expenses of the
New Medallion Vehicles payable to third parties will be paid from
the assets of the New Medallion Vehicles, but nothing in the manner
of management fees or performance allocations, direct or indirect,
will accrue to the Applicant. Additionally, the underlying Funds in
which the New Medallion Vehicles invest will incur substantial
obligations to pay third party brokerage commissions, option
premiums, and other transaction costs, regardless of whether the
Funds realize any profits. Such expenses, as noted in certain of the
Funds' ``Private Offering Memoranda,'' are significantly higher than
those incurred by most other investment programs, due to the highly
active nature of Renaissance's trading programs.
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In addition, according to the Applicant, no meaningful marketing
benefit could inure to Renaissance through IRA Holders' purchasing of
interests in the New Medallion Vehicles. The Applicant contends that
current and potential third party investors are already well aware of
the significant holdings by Applicant's own employees and directors in
the Funds in such individuals' personal capacities. Renaissance states
that the Medallion Funds are already virtually entirely owned by
employees of Renaissance and their families.
[[Page 3051]]
75. Finally, Renaissance states that the proposed exemption is
protective of IRAs and their beneficiaries because all transactions
would be required to be effected at the discretion of IRA Holders.
Renaissance has not made, nor will it make, an endorsement or
recommendation to Participants that they establish IRAs to invest any
Proceeds in the New Medallion Vehicles. Moreover, Renaissance will not
engage in any marketing activities intended to cause IRA Holders to
consider such an investment or offer any financial or employment-
related incentive for IRA Holders to invest in the New Medallion
Vehicles. Further, the Applicant contends that neither Renaissance nor
any employee or owner of Renaissance will exercise any of its
authority, control, or responsibility as a fiduciary of a New Medallion
Vehicle to benefit itself or a person in which it has an interest which
may affect the exercise of its best judgment as a fiduciary.
The Applicant observes that no IRA Holder will be able to invest in
a New Medallion Vehicle for a particular Fund unless he or she
satisfies the securities law-based requirements for other investors in
the same Fund. In addition, prior to and during an investment in the
Funds, IRA Holders will receive written disclosures allowing them to
make informed decisions regarding any determination to invest (or
redeem) Proceeds in the Funds. The Applicant notes that each Medallion
Fund's investment objectives, strategies, risks, and mechanics of
maintaining an investment (including information about redemptions),
are described in detail in the relevant offering document delivered to
each investor. Renaissance points out that the Participants are
comprised of a highly educated cadre of professionals with over 200
combined Ph.D.'s in mathematics, physics, and statistics. Thus, they
explain, the population of potential IRA Holders is on the whole more
educated, and possibly more sophisticated, that the average investor,
and thus better able to judge the merits of an investment in the Funds.
The Applicant states that the risks involved in the proposed
transactions are mitigated by several factors, including the Medallion
Funds' broad investment diversification, the liquidity of most of the
instruments that the Medallion Funds trade, and the quarterly liquidity
afforded to each investor. Moreover, the Applicant represents that it
is knowledgeable and experienced in the transactions contemplated by
the Funds and has a significant record of positive investment returns.
Moreover, only a relatively small amount of IRA assets would be
invested through the New Medallion Vehicles, facilitating the valuation
and ready redemption of such investments, in cash, upon the receipt of
a redemption request.
Finally, with respect to the investment by Participants in the New
Medallion Vehicles through IRAs, the Applicant acknowledges that such
investments may constitute investments by a ``pension plan'' within the
meaning of Section 3(2) of the Act and the Applicant represents that,
with respect to such investments, it will comply with all applicable
requirements of Title I of the Act. Moreover, prior to the acquisition
by an IRA of an interest in a New Medallion Vehicle, the Applicant
states that it will submit to the jurisdiction of the federal and state
courts located in the State of New York, take steps to facilitate the
service of process by an IRA Holder, and submit itself to jurisdiction
in the United States courts, in the event that an IRA Holder is
required to exercise his or her rights pursuant to this exemption.
Summary
76. In summary, the Applicant represents that the covered
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act and/or section 4975(c)(2) of the Code
because:
(a) An IRA's acquisition of an interest in a New Medallion Vehicle
will only be made at the specific direction of an IRA Holder.
(b) Renaissance will render no investment advice to IRA Holders
concerning a potential acquisition of an interest in a New Medallion
Vehicle and will not engage in marketing activities or offer
employment-related incentives of any kind intended to cause IRA Holders
to consider such acquisition.
(c) An interest in a New Medallion Vehicle will only be available
to IRA Holders who satisfy the securities law-based investor
qualifications applicable to all investors in such New Medallion
Vehicle.
(d) No commissions, sales charges, or other fees or profit
participations in the form of performance allocations or otherwise,
direct or indirect, will be assessed against an IRA in connection with
its acquisition and holding of an interest in a New Medallion Vehicle.
(e) An IRA will pay no more and receive no less for its particular
interest in any of the New Medallion Vehicles than it would in an arm's
length transaction with an unrelated party.
(f) An IRA's interest in a New Medallion Vehicle will be
redeemable, in whole or in part, without the payment of any redemption
fee or penalty, no less frequently than on a quarterly basis upon no
less than 10 days advance written notice.
(g) All acquisitions and redemptions by an IRA of its interest in a
New Medallion Vehicle will be made for fair market value.
(h) Redemption of an IRA's interest in a New Medallion Vehicle, in
whole or in part, will be made in cash.
(i) In the event that a redemption of any portion of an IRA
Holder's interest in any of the Medallion Funds becomes necessary as
the result of a reduction of the Investment Allocation applicable to an
IRA Holder, then, at such IRA Holder's election, a redemption will
first be made of the IRA Holder's taxable investments (if any) prior to
his or her IRA's interest in a New Medallion Vehicle.
(j) With respect to the investment in the New Medallion Vehicles
through Participants' IRAs, Renaissance acknowledges that such
investments may constitute investments by a ``pension plan'' within the
meaning of section 3(2) of the Act, and the Applicant represents that,
with respect to such investments, it will comply with all applicable
requirements of Title I of the Act.
(k) Renaissance will not use the fact that IRAs invested in the
Funds in any marketing activities or publicity materials for the Funds.
(l) In advance of the acquisition of an interest by an IRA in a New
Medallion Vehicle, and periodically thereafter, the IRA Holder will
receive certain disclosures and financial information related to the
Funds, described herein, enabling such individual to make an informed
decision regarding his or her investment in the Funds.
(m) Renaissance, the New Medallion Vehicles, and each Fund or
vehicle in which, or through which, a New Medallion Vehicle invests,
will agree to the legal jurisdictional, service of process, and venue
requirements described herein.
(n) Renaissance will comply with the recordkeeping requirements
provided herein to enable certain authorized persons to determine
whether the conditions of the exemption have been met, for so long as
such records are required to be maintained.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested
persons within 3 days of the publication of the notice of proposed
exemption in the Federal Register. The notice will be given to
interested persons who are
[[Page 3052]]
current employees by electronic mail, with receipt of delivery
requested (or its equivalent), and to other interested persons by
overnight mail with proof of delivery required. Such notice will
contain a copy of the notice of proposed exemption, as published in the
Federal Register, and a supplemental statement, as required pursuant to
29 CFR 2570.43(b)(2). The supplemental statement will inform interested
persons of their right to comment on and/or to request a hearing with
respect to the pending exemption. Written comments and hearing requests
are due within 33 days of the publication of the notice of proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Warren Blinder of the Department,
telephone (202) 693-8553. (This is not a toll-free number.)
Weyerhaeuser Company (Weyerhaeuser) and Federalway Asset Management LP
(Collectively, the Applicants)
Located in Federalway, Washington
[Application No. D-11677]
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).
Section I: Specific Proposed Exemption Involving the Contribution In-
Kind
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(A), 406(b)(1), and 406(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) and 4975(c)(1)(E) of the Code,\45\ shall not
apply, effective as of the date of the publication of a final exemption
in the Federal Register, to the contribution in-kind by the
Weyerhaeuser Company (Weyerhaeuser), the sponsor of the Weyerhaeuser
Pension Plan (the Plan), of a bundle of assets (the Assets) owned by
Weyerhaeuser Asset Management LLC (WAM), a wholly-owned subsidiary of
Weyerhaeuser NR Company which is in turn a wholly-owned subsidiary of
Weyerhaeuser, to the Weyerhaeuser Company Master Retirement Trust (the
Master Trust); provided that the conditions, as set forth, below, in
section IV, and the following conditions are satisfied:
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\45\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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(a) Prior to the execution and closing on the in-kind contribution
of the Assets, an independent, qualified fiduciary (the I/F), as
defined in section V(k), acting on behalf of the Master Trust,
determines whether and on what terms to enter into the in-kind
contribution of such Assets;
(b) The I/F negotiates, reviews, and approves the specific terms
and conditions of the in-kind contribution of the Assets and
determines, prior to entering into such in-kind contribution, that such
transaction is feasible, in the interest of, and protective of the
Master Trust and its participants and beneficiaries;
(c) The I/F takes the necessary steps to ensure compliance by
Weyerhaeuser with the terms and conditions of the in-kind contribution
of the Assets;
(d) As of the date the Assets are contributed to the Master Trust,
the contributed value of the Assets is equal to the fair market value
of the Assets, as determined by the I/F;
(e) The terms and conditions of the in-kind contribution of the
Assets are no less favorable to the Master Trust than terms negotiated
at arm's length under similar circumstances between unrelated parties;
(f) The fair market value of the Assets will constitute less than
one percent (1%) of the assets of the Master Trust at the time such
Assets are contributed to the Master Trust;
(g) The Master Trust incurs no commissions, fees, costs, or other
charges and expenses in connection with the in-kind contribution of the
Assets to the Master Trust;
(h) The in-kind contribution of the Assets is a one-time
transaction;
(i) The fair market value of the Assets is not credited in the
prefunding balance for purposes of calculating the minimum required
contributions of Weyerhaeuser to the Plan;
(j) Pursuant to the royalty interest agreement (the Royalty
Agreement) with Federalway Asset Management LP (Newco), the Master
Trust will be entitled to receive annual royalty payments in the amount
of 12.5 percent (12.5%) on revenues of less than $25 million per year
and 15 percent (15%) on revenues of more than $25 million per year; and
(k) The termination of Newco as investment manager of the Master
Trust will have no impact on the Master Trust's rights under the
Royalty Agreement.
Section II: Specific Proposed Exemption Involving the Management by
Newco of the Assets of Employee Benefit Plans
Effective for a period of five (5) years, beginning on the date of
the publication of a final exemption in the Federal Register and ending
on the day which is five (5) years from such publication date, the
restrictions of section 406(a)(1)(A) through (D) of the Act and the
taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(A) through (D) of the Code, shall not apply to:
(a) Any transaction between a party in interest, as defined in
section V(e), with respect to the Plan and the Master Trust in which
such Plan has an interest; and any transaction between a party in
interest, as defined in section V(e), with respect to any other
employee benefit plan or employee benefit plans sponsored by
Weyerhaeuser (the Other Plan(s)) and the Master Trust in which such
Other Plan(s) have an interest; and
(b) Any transaction between a party in interest, as defined in
section V(e), and any employee benefit plan or any employee benefit
plans, as defined in section V(i), (the Client Plan(s)), where such
Client Plan has engaged Newco to act as investment manager within the
meaning of section 3(38) of the Act, or where such Client Plan is
invested in a collective investment vehicle managed by Newco, the
assets of which are treated as plan assets under section 3(42) of the
Act; provided that:
(1) Newco has discretionary authority or control with respect to
the assets of the Plan, the assets of the Other Plan(s), or the assets
of the Client Plan(s) which are invested in an investment fund (a
Managed Account) involved in any such transaction;
(2) Newco satisfies the definition, as set forth, below, in section
V(a)of this exemption; and
(3) The conditions as set forth, below, in section III, and section
IV, are satisfied.
Section III: Specific Conditions Applicable to Transactions Described
in Section II of This Proposed Exemption
(a) At the time of the transaction, as defined in section V(h),
neither the party in interest, as defined in section V(e), nor any
affiliate, as defined in section V(b):
(1) Has the authority to appoint or terminate Newco as a manager of
the Managed Account involved in the transaction, or
(2) Has the authority to negotiate on behalf of the Plan, the Other
Plan(s), or the Client Plan(s), the terms of the management agreement
with Newco
[[Page 3053]]
(including renewals or modifications thereof) with respect to the
Managed Account involved in the transaction.
Notwithstanding the foregoing, in the case of a Managed Account in
which two (2) or more unrelated plans, as defined in section V(i), have
an interest, a transaction with a party in interest, as defined in
section V(e), with respect to a plan will be deemed to satisfy the
requirements of section III(a), if the assets of the plan managed by
Newco in the Managed Account, when combined with the assets of other
plans established or maintained by the same employer (or affiliate
thereof, as described in section V(b)(1)) or by the same employee
organization, and managed in the same Managed Account, represent less
than 10 percent (10%) of the assets of the Managed Account;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 2006-16 (71 FR 63786; October
31, 2006) (relating to securities lending arrangements) (as amended or
superseded),
(2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7,
1983) (relating to acquisitions by plans of interests in mortgage
pools) (as amended or superseded), or
(3) Prohibited Transaction Exemption 82-87 (47 FR 21331; May 18,
1982) (relating to certain mortgage financing arrangements) (as amended
or superseded);
(c) The terms of the transaction are negotiated on behalf of the
Managed Account by, or under the authority and general direction of,
Newco, and either Newco, or (so long as Newco retains full fiduciary
responsibility with respect to the transaction) a property manager
acting in accordance with written guidelines established and
administered by Newco, makes the decision on behalf of the Managed
Account to enter into the transaction, provided that the transaction is
not part of an agreement, arrangement, or understanding designed to
benefit a party in interest, as defined in section V(e);
(d) The party in interest, as defined in section V(e), dealing with
the Managed Account is neither Newco nor a person related to Newco,
within the meaning of section V(g);
(e) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of Newco, the terms of the transaction are at least as
favorable to the Managed Account as the terms generally available in
arm's length transactions between unrelated parties;
(f) Neither Newco nor any affiliate thereof, as defined in section
V(c), nor any owner, direct or indirect, of a 5 percent (5%) or more
interest in Newco is a person who within the ten (10) years immediately
preceding the transaction has been either convicted or released from
imprisonment, whichever is later, as a result of:
(1) Any felony involving abuse or misuse of such person's employee
benefit plan position or employment, or position or employment with a
labor organization;
(2) Any felony arising out of the conduct of the business of a
broker, dealer, investment adviser, bank, insurance company, or
fiduciary;
(3) Income tax evasion;
(4) Any felony involving the larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, or misappropriation of funds or securities;
(5) Conspiracy or attempt to commit any such crimes or a crime in
which any of the foregoing crimes is an element; or
(6) Any other crime described in section 411 of the Act. For
purposes of this section III(f), a person shall be deemed to have been
``convicted'' from the date of the judgment of the trial court,
regardless of whether that judgment remains under appeal.
Section IV--General Requirements Applicable to Transactions Described
in Section I and Section II of This Proposed Exemption
(a) Newco or an affiliate, as defined in section V(l), maintains or
causes to be maintained within the United States, for a period of six
(6) years from the date of each covered transaction, the records
necessary to enable the persons described, below, in section
IV(b)(1)(A)-(E), to determine whether the conditions of this proposed
exemption have been met, except that:
(1) a separate prohibited transaction will not be considered to
have occurred solely because, due to circumstances beyond the control
of Newco and/or its affiliates, as defined in section V(l), the records
are lost or destroyed prior to the end of the six (6) year period, and
(2) No party in interest or disqualified person, as defined in
section V(e), other than Newco, shall be subject to the civil penalty
that may be assessed under section 502(i) of the Act, or to the taxes
imposed by section 4975(a) and (b) of the Code, if the records are not
maintained, or are not available for examination, as required by
section IV(b)(1).
(b)(1) Except as provided in section IV(b)(2), and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act,
the records referred to, above, in section IV(a) are unconditionally
available for examination at their customary location during normal
business hours by:
(A) Any duly authorized employee or representative of the
Department or of the Internal Revenue Service;
(B) Any fiduciary of the Plan, any fiduciary of any Other Plan(s),
any fiduciary of any Client Plan(s), and any duly authorized
representative of such fiduciary;
(C) Any contributing employer to the Plan, any contributing
employer to any Other Plan(s), any contributing employer to any of the
Client Plan(s), and any duly authorized employee representative of such
contributing employer;
(D) Any participant or beneficiary of the Plan, any participant or
beneficiary of any Other Plan(s), any participant or beneficiary of any
Client Plan(s), and any duly authorized representative of such
participants or beneficiaries; and
(E) Any employee organization whose members are covered by the
Plan, any employee organization whose members are covered by the Other
Plan(s), and any employee organization whose members are covered by any
Client Plan(s);
(2) None of the persons, described in section IV(b)(1)(B) through
(E), shall be authorized to examine trade secrets of Newco or its
affiliates, as defined in section V(l), or commercial or financial
information which is privileged or confidential.
Section V--Definitions
(a) For purposes of this proposed exemption, the term, Federalway
Asset Management LP, and the term, ``Newco,'' means a fiduciary (as
defined in section V(j)) which is an investment adviser registered
under the Investment Advisers Act of 1940 that has total client assets
under its management and control in excess of $85,000,000, as of the
date Newco commences operations, and shareholders' or partners' equity
(as defined in section V(m) in excess of $1,000,000.
(b) For purposes of section III(a), an ``affiliate'' of a person
means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, 10 percent
(10%) or more partner, or highly compensated employee as defined in
section 4975(e)(2)(H) of the Code (but
[[Page 3054]]
only if the employer of such employee is the plan sponsor), and
(3) Any director of the person or any employee of the person who is
a highly compensated employee, as defined in section 4975(e)(2)(H) of
the Code, or who has direct or indirect authority, responsibility or
control regarding the custody, management or disposition of plan assets
involved in the transaction. A named fiduciary (within the meaning of
section 402(a)(2) of the Act) of a plan with respect to the plan assets
involved in the transaction and an employer any of whose employees are
covered by the plan will also be considered affiliates with respect to
each other for purposes of section III(a), if such employer or an
affiliate of such employer has the authority, alone or shared with
others, to appoint or terminate the named fiduciary or otherwise
negotiate the terms of the named fiduciary's employment agreement.
(c) For purposes of section III(f), an ``affiliate'' of a person
means--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any director of, relative of, or partner in, any such person,
(3) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
(5%) or more partner or owner, and
(4) Any employee or officer of the person who--
(A) Is a highly compensated employee (as defined in section
4975(e)(2)(H)) or officer (earning 10 percent (10%) or more of the
yearly wages of such person), or
(B) Has direct or indirect authority, responsibility or control
regarding the custody, management or disposition of plan assets.
(d) For purposes of section V(b), section V(c), and section V(l),
the term, ``control,'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) For purposes of this proposed exemption, the term, ``party in
interest,'' means a person described in section 3(14) of the Act and
includes a ``disqualified person,'' as defined in Code section
4975(e)(2).
(f) For purposes of section V(c)(2) and section V(l)(2), the term,
``relative,'' means a relative as that term is defined in section 3(15)
of the Act, or a brother, a sister, or a spouse of a brother or sister.
(g) Newco is ``related'' to a party in interest for purposes of
section III(d), if, as of the last day of its most recent calendar
quarter: (i) Newco owns a 10 percent (10%) or more interest in the
party in interest; (ii) a person controlling, or controlled by, Newco
owns a 20 percent (20%) or more interest in the party in interest;
(iii) the party in interest owns a 10 percent (10%) or more interest in
Newco; or (iv) a person controlling, or controlled by, the party in
interest owns a 20 percent (20%) or more interest in Newco.
Notwithstanding the foregoing, a party in interest is ``related'' to
Newco if: (i) A person controlling, or controlled by, the party in
interest has an ownership interest that is less than 20 percent (20%)
but greater than 10 percent (10%) in Newco and such person exercises
control over the management or policies of Newco by reason of its
ownership interest; (ii) a person controlling, or controlled by, Newco
has an ownership interest that is less than 20 percent (20%) but
greater than 10 percent (10%) in the party in interest and such person
exercises control over the management or policies of the party in
interest by reason of its ownership interest. For purposes of this
definition:
(1) The term ``interest'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership, or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest if, other than in a
fiduciary capacity, the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
(h) For purposes of this proposed exemption, the time as of which
any transaction occurs is the date upon which the transaction is
entered into. In addition, in the case of a transaction that is
continuing, the transaction shall be deemed to occur until it is
terminated. If any transaction is entered into on or after the date of
the publication of the final exemption in the Federal Register or a
renewal that requires the consent of the Newco occurs on or after the
date of the publication of the final exemption in the Federal Register,
and the requirements of the final exemption are satisfied at the time
the transaction is entered into or renewed, respectively, the
requirements will continue to be satisfied thereafter with respect to
the transaction. Nothing in this paragraph shall be construed as
exempting a transaction entered into by a Managed Account which becomes
a transaction described in section 406 of the Act or section 4975 of
the Code while the transaction is continuing, unless the conditions of
the final exemption were met either at the time the transaction was
entered into or at the time the transaction would have become
prohibited but for the final exemption.
(i) For purposes of this proposed exemption, the terms, ``employee
benefit plan'' and ``plan,'' include an employee benefit plan described
in section 3(3) of the Act and/or a plan described in section
4975(e)(1) of the Code, but do not include a plan sponsored by Newco or
any affiliate of Newco.
(j) For purposes of section V(a), the term ``fiduciary'' means a
fiduciary managing the assets of a plan, as defined in section V(i), in
a Managed Account that is independent of and unrelated to the employer
sponsoring such plan. For purposes of this proposed exemption, a
fiduciary will not be deemed to be independent of and unrelated to the
employer sponsoring the plan, if such fiduciary directly or indirectly
controls, is controlled by, or is under common control with the
employer sponsoring the plan.
(k) For purposes of section I, the term, ``I/F,'' means a fiduciary
that:
(1) Can demonstrate, through experience and/or education,
proficiency in matters involving the in-kind contribution of assets,
including assets such as the Assets which are the subject of section I
of this proposed exemption;
(2) Is an expert with respect to the valuation of assets, such as
the Assets, or has the ability to access (itself or through persons
engaged by it) appropriate data regarding the value of assets, such as
the Assets, in the relevant market;
(3) Has not engaged in any criminal activity involving fraud,
fiduciary standards, or securities law violations;
(4) Is appointed to act on behalf of the Master Trust for all
purposes related to in-kind contribution of the Assets; and
(5) Is independent of and unrelated to Weyerhaeuser and its
affiliates, as defined, below, in section V(l). For purposes of this
proposed exemption, a fiduciary will not be deemed to be independent of
and unrelated to Weyerhaeuser and its affiliates if:
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with
[[Page 3055]]
Weyerhaeuser and its affiliates, as defined, below, in section V(l),
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration in connection with any of the
transactions described in this proposed exemption; except that an I/F
may receive compensation for acting as an I/F in connection with the
transactions contemplated herein, if the amount or payment of such
compensation is not contingent upon or in any way affected by the I/F's
ultimate decisions, and
(iii) The annual gross revenue from Weyerhaeuser and its
affiliates, as defined, below, in section V(l), received by such
fiduciary, during any year of its engagement, does not exceed one
percent (1%) of such fiduciary's annual gross revenue from all sources
for its prior tax year.
(l) For purposes of section IV(a) and section V(k), the term,
``affiliate,'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(m) For purposes of section V(a), the term ``shareholders' or
partners' equity'' means the equity shown in the balance sheet, as of
the date Newco commences operations, prepared in accordance with
generally accepted accounting principles.
Temporary Nature of the Exemption
Effective Date: With regard to the transaction described in section
I, the Department has determined that the relief proposed with respect
to such transaction shall be effective, as of the date of the
publication of the final exemption in the Federal Register.
With regard to the transactions described in section II, the
Department has determined that the relief proposed with respect such
transactions is temporary in nature, and, if granted, shall be
effective, beginning on the date of the publication of the final
exemption in the Federal Register and ending on the day which is five
(5) years from the date of the publication of the final exemption in
the Federal Register. Accordingly, relief described in this proposed
exemption, if granted, with respect to the transactions described in
section II will not be available upon the expiration of such five-year
period for any new or additional transactions, as described herein,
after such date, but would continue to apply beyond the expiration of
such five-year period for continuing transactions entered into within
the five-year period; provided that the conditions of this proposed
exemption, if granted, continue to be satisfied. Should the applicant
wish to extend, beyond the expiration of such five-year period, the
relief provided for new or additional transactions, as described in
section II, the Applicants may submit another application for
exemption. In this regard, the Department expects that prior to filing
another exemption application seeking relief for new or additional
transactions, as described in section II, the Applicants should be
prepared to demonstrate compliance with the conditions of the final
exemption.
Summary of Facts and Representations
1. The Plan is a non-contributory defined benefit pension plan tax-
qualified under section 401(a) of the Code. As of June 1, 2011, the
date the Applicants filed the application for exemption, the Plan is
the sole defined benefit pension plan sponsored by Weyerhaeuser. The
Plan is maintained for salaried employees of Weyerhaeuser and
participating subsidiaries. The Plan also covers certain hourly
employees. In this regard, the Weyerhaeuser Company Retirement Plan for
Hourly Rated Employees and the Weyerhaeuser Company Retirement Plan for
Salaried Employees were merged, effective December 31, 2010, and were
renamed the Weyerhaeuser Pension Plan, which is the Plan that is
subject to this proposed exemption. As of January 1, 2011, the Plan had
75,607 participants.
It is represented that, as of December 31, 2010, the Plan had
assets with a fair market value of $4.235 billion, with projected
benefit obligations of $4.233 billion, and with a funded ratio of
100.47%. In this regard, it is represented that the Plan is fully-
funded as of January 2008, 2009, 2010. Further, the Plan has no minimum
required contribution due in 2011.
2. Established in 1900, Weyerhaeuser (NYSE: WY) operates in 10
countries, primarily in the United States and Canada. Weyerhaeuser's
four major business segments span nearly all aspects of the forest
products industry, including cellulose fibers, real estate,
timberlands, and wood products. In this regard, Weyerhaeuser manages
20.5 million acres of forests and generated approximately $6.6 billion
in net sales in 2010. As the sponsor of the Plan, Weyerhaeuser is a
party in interest with respect to the Plan, pursuant to section
3(14)(C) of the Act.
3. The named fiduciary for the Plan, within the meaning of section
402(a)(2) of the Act, is an investment committee (the Investment
Committee). As a fiduciary with respect to the Plan, the Investment
Committee is a party in interest, pursuant to section 3(14)(A) of the
Act. Plan administration and investment monitoring are the
responsibilities of the administrative committee and the Investment
Committee, respectively. Certain employees of Weyerhaeuser and its
subsidiaries serve as members of these two (2) committees. The Chairman
of the Investment Committee is a retired employee of and currently a
consultant to Weyerhaeuser.
4. The assets of the Plan are held in a Master Trust. The Master
Trust is qualified under the Code and is exempt from federal income
taxes. The Plan received a favorable determination letter from the
Internal Revenue Service (IRS), dated October 28, 2005. The Plan has
been amended and restated since that date. However, it is the opinion
of Weyerhaeuser that the Plan, as amended and restated, meets the Code
requirements; and that therefore, the Master Trust continues to be tax
exempt.
The Master Trust has total assets, as of December 31, 2010, of
approximately $4.235 billion. As of June 1, 2011, the Plan is the only
plan funded by the Master Trust. The trustee of the Master Trust is
Bank of New York Mellon Corporation. The custodian for the group
annuity contract held in the Master Trust is Metropolitan Life
Insurance Company.
5. During 2008 and 2009, Morgan Stanley Investment Management, Inc.
(Morgan Stanley), and Northwater Capital Management Inc. (Northwater),
and WAM acted as investment managers of the assets of the Plan in the
Master Trust. It is represented that Morgan Stanley and Northwater each
qualify as qualified professional asset managers (QPAMs) under
Prohibited Transaction Exemption 84-14 (PTE 84-14).G \46\ Effective
July 1, 2009, Northwater's investment management duties were
transferred to WAM.
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\46\ 49 FR 9494, March 13, 1984, as corrected at 50 FR 41430,
October 10, 1985, amended at 70 FR 49305, August 23, 2005, and
amended at 75 FR 38837 (July 6, 2010).
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WAM provides a broad array of investment advisory and investment
management services to the Master Trust. It is represented that WAM is
a registered investment adviser with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended. It is
further
[[Page 3056]]
represented that WAM qualifies as an in-house asset manager (INHAM)
within the meaning of Prohibited Transaction Exemption 96-23.\47\ If
the proposed exemption is granted, it is represented that WAM will
cease to be an investment manager for the Master Trust.
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\47\ 61 FR 15975, April 10, 1996, amended at 76 FR 18255 (April
1, 2011).
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As the current investment managers with respect to the assets of
the Plan, Morgan Stanley and WAM are fiduciaries, pursuant to section
3(21)(A) of the Act and are parties in interest with respect to the
Plan, pursuant to section 3(14)(A) of the Act. Further, Morgan Stanley
and WAM, as service providers to the Plan, are parties in interest with
respect to the Plan, pursuant to section 3(14)(B) of the Act. As a
wholly-owned subsidiary of a wholly-owned affiliate of Weyerhaeuser,
WAM is also a party in interest with respect to the Master Trust,
pursuant to 3(14)(G) of the Act.
The In-Kind Contribution of Assets to the Plan
6. Section I of this proposed exemption describes an in-kind
contribution of assets. Specifically, Weyerhaeuser proposes to
contribute in-kind to the Master Trust certain Assets which are owned
by WAM. It is represented that the proposed contribution of the Assets
will not be used to reduce Weyerhaeuser's cash contributions to the
Plan. In this regard, it is represented that the fair market value of
the Assets will not be credited in the prefunding balance for purposes
of calculating minimum required contributions by Weyerhaeuser to the
Plan.
As Weyerhaeuser is the sponsor of the Plan, the Applicants are
concerned that the in-kind contribution of the Assets by Weyerhaeuser
to the Master Trust could be viewed as a prohibited transaction,
pursuant to section 406(a)(1)(A) of the Act for which an exemption
would be needed.\48\ Further, as both WAM and Weyerhaeuser are parties
in interest with respect to the Plan, the in-kind contribution to the
Master Trust by Weyerhaeuser of the Assets owned by WAM raises issues
of conflict of interest for which the Applicants have requested relief
from sections 406(b)(1) and 406(b)(2) of the Act.
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\48\ The Applicants site to Advisory Opinion 81-69A (July 28,
1981) in which the Department determined that in-kind contributions
of property to a defined benefit pension plan would be a prohibited
sale or exchange of property between a plan and a party in interest
under section 406(a)(1)(A) of the Act, because such in-kind
contribution would constitute a discharge by the employer of its
legal obligation to make a yearly cash contribution to such plan.
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The Assets arise from WAM's management of the assets of the Master
Trust and WAM's management of the assets of the Weyerhaeuser Company
Limited Master Trust (the Canadian Trust), established in connection
with Weyerhaeuser's Canadian pension plans. The Assets include: (1) A
limited right to disclose the ``Weyerhaeuser'' name; (2) access to
WAM's historical investment performance calculations and related work
papers; (3) access to the books and records of the Canadian Trust; (4)
certain business contracts; (5) computers, scanners, printers, MFD's,
polycom video conference hardware; (6) office furniture and fixtures;
(7) information filed within personal hard drives and filed within
shared drives of transferring employees; (8) various newsletters,
publications, reviews, analysis, and reports; (9) books, studies,
research articles, and publications purchased by WAM; and (10) various
analytical models, spread sheets, and periodic reports. It is
represented that, if this proposed exemption is granted, the fair
market value of the Assets when contributed in-kind to the Master Trust
will constitute less than one percent (1%) of the assets of the Master
Trust.
7. The Assets contributed in-kind by WAM and certain other property
owned by the Master Trust, including performance backup books and
records relating to WAM's management of the Master Trust (collectively,
the Licensed Assets) will be licensed by the Master Trust under the
Royalty Agreement with Newco. Newco will be permitted to market the
track record of WAM and may refer to the management by certain WAM
personnel of all or a portion of the Master Trust when marketing to
other clients. Pursuant to the Royalty Agreement, the Master Trust will
be entitled to receive annual royalty payments of a specified
percentage \49\ of Newco's revenue, other than any revenue received by
Newco relating to Newco's management of the assets of the Plan invested
in the Master Trust.
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\49\ It is represented that the specified percentage would be
12.5% on revenues of less than $25 million per year and 15% on
revenues of more than $25 million per year.
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In accordance with section 3.4 of the Royalty Agreement, commencing
on December 31, 2018, the Master Trust could elect to require Newco to
purchase the royalty interest and the Licensed Assets (the Put) in
exchange for payment within a certain time frame of an amount based
upon a specific formula, as set forth in the Royalty Agreement. Under
the terms of the Put, proceeds equal to four (4) times the prior year's
royalty payment are payable no later than 180 days following the ``put
option measurement date.'' The ``put option measurement date'' is
generally the December 31st following the one year anniversary of the
date on which the Master Trust gives notice of its intent to exercise
the Put, but in no event earlier than December 31, 2020. The Investment
Committee would be responsible for exercising the Put.
In accordance with section 3.3 of the Royalty Agreement, commencing
on December 31, 2020, Newco could elect to require the Master Trust to
sell the royalty interest and the Licensed Assets to Newco (the Call)
in exchange for payment within a certain time frame of an amount based
upon a specific formula, as set forth in the Royalty Agreement. Under
the terms of the Call, proceeds equal to five (5) times the prior
year's royalty payment are payable no later than 180 days following the
``call option measurement date.'' The ``call option measurement date''
is generally the December 31st following the one year anniversary of
the date on which Newco gives notice of its intent to exercise the
Call, but in no event earlier than December 31, 2022. A majority of the
Board of Directors of Federalway Asset Management GP LLC (the Newco GP)
would be responsible for exercising the Call. The Royalty Agreement,
pursuant to section 3.6 therein, also makes provision for Newco to
charge back-end fees to the Master Trust.\50\
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\50\ The Applicants have not requested any relief from the
prohibited transactions provision of the Act, with respect to the
entry into the Royalty Agreement between Newco and the Master Trust,
nor have the Applicants requested any relief for the operation of
the terms of such agreement, including the exercise of the Put, or
the exercise of the Call, and the receipt by Newco of back-end fees.
In the opinion of the Applicants, Newco is not a fiduciary to the
Master Trust with respect to the decision by the Master Trust to
enter into the Royalty Agreement nor with respect to the operation
of the Royalty Agreement, the exercise of the Put, the exercise of
the Call, or the receipt of back-end fees, all of which the
Applicants maintain are independent rights that are unconnected with
any determination of whether the Master Trust becomes or remains a
client of Newco. The Investment Committee and Newco represent that
they are comfortable that the terms of the Royalty Agreement
represent an arm's-length transaction and that the consideration, as
set forth in the Royalty Agreement represents fair market value.
Accordingly, the Investment Committee and Newco intend to rely on
the relief provided by the statutory exemption, as set forth in
section 408(b)(17) of the Act with respect to the decision by the
Master Trust to enter into the Royalty Agreement, and with respect
to the operation of the Royalty Agreement, the exercise of the Put,
the exercise of the Call, and the receipt of back-end fees by Newco.
The Department, herein, is offering no view as to the Applicant's
reliance on the statutory exemption, as set forth in section
408(b)(17) of the Act, for such transactions, nor is the Department
offering any view, as to whether the Applicants satisfy the
conditions, as set forth in such statutory exemption. Further, the
Department, herein, is not providing any relief with regard to the
entry into the Royalty Agreement, nor is the Department providing
any relief, herein, with regard to the operation of terms of the
Royalty Agreement, including the Put, the Call, and the back-end
fees.
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[[Page 3057]]
8. The Applicants represent that the in-kind contribution of the
Assets to the Master Trust, as described in section I of the proposed
exemption, is administratively feasible in that such in-kind
contribution will be a one-time transaction. The Applicants represent
further that the transaction, as described in section I of this
proposed exemption, is feasible, as the Applicants will be required to
maintain records necessary to enable the Department and the IRS and
other interested parties to determine whether the conditions of this
proposed exemption, if granted, have been met.
9. The Applicants represent that the transaction, described in
section I of the proposed exemption, is protective of the rights of
participants and beneficiaries of the Plan, because Evercore Trust
Company, N.A. (Evercore Trust) has been retained by Weyerhaeuser and by
the Investment Committee, pursuant to a written agreement (the
Agreement), dated June 9, 2011, to serve as the I/F, who will act on
behalf of the Plan with respect to the contribution in-kind of the
Assets.
Evercore Trust's responsibilities, pursuant to such Agreement, are
to: (a) Determine whether to accept on behalf of the Plan the
contribution in-kind of the Assets, subject to the Department's grant
of a final exemption; (b) prepare the valuation of the current fair
market value of the Assets; (c) negotiate on behalf of the Plan the
terms and conditions of the contribution in-kind of the Assets; and (d)
render an opinion in the form of a report suitable for submission to
the Department in connection with the application for exemption. In
addition, it is represented that Evercore Trust will take the necessary
steps to ensure compliance by Weyerhaeuser with the terms and
conditions of the in-kind contribution of the Assets. Further, as of
the date the Assets are contributed to the Master Trust, the
contributed value of the Assets will be equal to the fair market value
of the Assets, as determined by Evercore Trust.
The Applicants represent that Evercore Trust is qualified to serve
as the independent fiduciary in connection with the proposed in-kind
contribution of the Assets. In this regard, Evercore Trust is a
nationally chartered trust bank with 12.8 billion in assets under
management. Evercore Trust is a subsidiary of Evercore Partners, Inc.
(NYSE:EVR) which provides specialized investment management,
independent fiduciary, and trustee services to employee benefit plans.
Charles E. Wert and Norman P. Goldberg at Evercore Trust lead a multi-
disciplinary team of 29 professionals, including relationship managers,
plan administrators, financial analysts, and in-house legal counsel.
Evercore Trust represents that it is independent and unrelated to
Weyerhaeuser and the Investment Committee. In this regard: (a) Evercore
Trust does not directly or indirectly control, is not controlled by,
and is not under common control with, Weyerhaeuser; (b) neither is
Evercore Trust nor any of its officers, directors, or employees an
officer, director, partner, or employee of Weyerhaeuser (nor a relative
of such persons); (c) Evercore Trust may receive compensation from
Weyerhaeuser only for performing the services for acting as the I/F, as
described in the Agreement, as long as the amount of such payment is
not contingent upon or in any way affects such services; and (d) the
annual compensation received by Evercore Trust, pursuant to the
Agreement, does not exceed one percent (1%) of annual gross revenue of
Evercore Trust.
Evercore Trust represents that it understands and acknowledges its
duties and responsibilities under ERISA in acting as the I/F on behalf
of the Plan in connection with the in-kind contribution of the Assets.
In this regard, Evercore Trust represents that it is required to act
solely in the interest of the Plan's participants and beneficiaries
with care, skill, and prudence in discharging its obligations.
It is represented that Evercore Trust conducted a thorough due
diligence process in evaluating the proposed in-kind contribution of
the Assets. In this regard, the due diligence process involved a number
of meetings with personnel from Weyerhaeuser, WAM, Lindsay Goldberg,
and the Applicants' outside counsel. These meetings were conducted in
person by Evercore Trust in an on-site visit with Weyerhaeuser and WAM
personnel in Federal Way, WA on September 27, 2011, as well as via
email and telephone conference calls. It is represented that these
sessions enabled Evercore Trust to understand a number of important
elements related to the in-kind contribution of the Assets, including
the investment performance of WAM, the Plan's funded status, the
projections for Newco, and the estimated cash flow to be generated by
the Royalty Agreement. In addition, Evercore Trust reviewed and relied
on a variety of information provided by Weyerhaeuser, represented to be
accurate and complete in all material respects. In addition, Evercore
Trust independently gathered and reviewed additional information that
was publicly available.
In evaluating whether to accept the in-kind contribution of the
Assets on behalf of the Plan, Evercore Trust determined that the Plan
would receive significant monetary benefits associated with such
Assets. In this regard, once Newco is retained by the Client Plans, the
Plan would accrue royalty payments. Based on the Royalty Agreement and
certain base case projections for Newco (the Base Case
Projections),\51\ the Assets would generate $1.3 million in royalty
payments in year three (3) after start up. Based on the Base Case
Projections and reasonable assumptions, Evercore Trust has projected
that the Plan would receive between $17 million and $24.8 million in
total royalty payments excluding any revenue received from the exercise
of the Put or the Call. In addition, the Plan would receive proceeds
associated with the expected exercise of either the Put or the Call.
Based on the Base Case Projections and reasonable assumptions, Evercore
Trust has projected that the Plan would receive either $13.2 million
from the exercise of the Put in year nine (9) after start up or $18.9
million from the exercise of the Call in year eleven (11) after start
up. Based on these calculations the Plan would receive between $30.2
million and $43.7 million in total proceeds generated by the Assets
over these timeframes.
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\51\ Newco management prepared pro forma projections for Newco
for six (6) years based on WAM's track record, cost structure,
discussions with potential clients of Newco, and general industry
conditions. As the Base Case Projections were prepared for Newco as
a consolidated business, Evercore Trust reviewed all the revenue and
cost assumptions underlying the Base Case Projections and concluded
such assumptions were reasonable.
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With respect to diversification, to the extent that the returns
generated by the Assets were uncorrelated to the returns generated by
the Master Trust's investment portfolio, the in-kind contribution of
the Assets would potentially reduce volatility for the Plan.
With respect to Plan funding, the Plan does not have a required
minimum contribution due in 2011. In this regard, it is represented
that the in-kind contribution of the Assets would be a voluntary
contribution of assets to the Plan. Moreover, Evercore Trust represents
the proposed in-kind contribution of the Assets would have no adverse
effect on Weyerhaeuser's
[[Page 3058]]
ability to satisfy future funding requirements of the Plan and would
not materially impact Weyerhaeuser's operations, or financial
condition. Accordingly, Evercore Trust represents that the in-kind
contribution of the Assets will not be used to reduce Weyerhaeuser's
cash contribution to the Plan and will not be used to directly offset
future required contributions.
With regard to the arrangement between the Plan and Newco, Evercore
Trust states that the in-kind contribution of the Assets would
indirectly support the continuity of the Plan's current investment
team. In addition, the Plan would not be responsible for any start-up
costs associated with Newco. Further, the Plan would not be locked into
a long term arrangement with Newco, nor would the Investment Committee
be prevented from selecting another service provider in the future.
Evercore Trust states that the Plan would benefit from the
favorable fee arrangement to be established with Newco. In this regard,
the initial fee schedule to be charged by Newco to the Plan is designed
to cover cost without a profit margin. It is represented that Newco
will charge 25 basis points of assets under management to provide full
service investment advisory and investment management services to the
Plan, whereas Newco expects to charge 50 basis points for such services
to the Client Plans. Further, in the opinion of Evercore Trust the
floor and the cap on annual charges provides the Plan with greater
certainty related to investment management fees. Accordingly, Evercore
Trust concluded that the Plan would be no worse off with the fees
charged by Newco than its current fee arrangement with WAM.
Finally, Evercore Trust considered and resolved several possible
issues associated with the in-kind contribution of the Assets. In this
regard, Evercore Trust concluded that the stated limit on the growth of
Newco and the Investment Committee's ongoing duty to monitor the Plan's
service providers mitigates the risk that Newco's attention to the
Plan's assets will decline as Newco develops and maintains new clients.
Further, in the view of Evercore Trust, potential conflicts of interest
that could arise, if the Investment Committee were reluctant to replace
Newco as a service provider, are addressed by the fact that the Assets
would represent less than .3 percent (.3%) of the Plan's assets and
should not influence prudent fiduciary decision-making. Accordingly,
Evercore Trust concluded that these potential issues are insignificant,
unlikely, and vastly outweighed by the expected benefits associated
with the in-kind contribution of the Assets to the Plan.
Based on the preceding analysis, Evercore Trust has determined that
on behalf of the Plan that it would be prudent to accept the in-kind
contribution of the Assets and that such contribution in-kind is in the
interests of the Plan and its participants and beneficiaries. In the
opinion of Evercore Trust, the in-kind contribution of the Assets would
provide monetary, diversification, and funding benefits to the Plan
without significant costs or downside risk. Therefore, Evercore Trust
has determined to accept on behalf of the Plan the in-kind contribution
of the Assets, subject to the Department's grant of a final exemption.
Evercore Trust has also concluded that additional negotiation on the
terms and conditions of the proposed in-kind contribution of the Assets
is not necessary, because the proposed structure provides sufficient
protection of the Plan's interests.
10. The Applicants believe that the relief requested in section I
of this proposed exemption offers significant potential benefits to the
Plan. In this regard, as of the date the Assets are contributed to the
Master Trust, the contributed value of the Assets will be equal to the
fair market value of the Assets, as determined by Evercore Trust.
Evercore Trust represents that it is qualified to serve as the
independent appraiser of the fair market value of the Assets, because
of Evercore Trust's comprehensive valuation experience utilizing the
discounted cash flow approach (the DCF Approach) upon which Evercore
Trust relied in valuing the Assets.
With regard to the methodology used, Evercore Trust employed the
DCF Approach \52\ to value the stream of royalty payments to the Master
Trust and the Put and the Call, pursuant to the Royalty Agreement.
Under the DCF Approach, the free cash flow of the Assets is estimated
and then discounted back to the present at a weighted average cost of
capital. In addition, a residual value multiple or growth rate is
generally assigned and then applied to the last year of the projected
cash flow to take into account the future free cash flows into
perpetuity.
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\52\ It is represented that the Evercore Trust did not use the
comparable precedent transactions approach, as information regarding
comparable precedent transactions of similar assets was not publicly
available. Further, Evercore Trust did not employ the comparable
valuation multiples approach, because there are no instructive
publicly traded comparable securities.
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As only gross fees from assets under management from the Client
Plan generate royalty payments, only assumptions regarding these fees
directly impact the valuation of the Assets. The assumptions used by
Evercore Trust for such gross fees from assets under management from
the Client Plans are as follows: (a) A fee of 50 basis points, based on
Newco's expectations of the fees clients will pay; (b) a $2 billion
client acquired at the beginning of year three; and a $2 billion client
acquired at the beginning of year six, based on the current pipeline of
potential new clients and a long lead time to attract clients; and (c)
six percent (6%) assets under management growth from existing clients
based on the historical performance of the Master Trust assets managed
by WAM. Evercore Trust reviewed the assumptions regarding such gross
fees and found them reasonable.
Further, Evercore Trust in valuing the Assets under the DCF
Approach considered three (3) possible scenarios: (a) The royalty
payments are continued in perpetuity; (b) the Put is exercised on
December 31, 2020, (in which case the royalty payments would not be
continued); and (c) the Call is exercised on December 31, 2022, (also
in which case the royalty payments would not be continued). In
discussions with Weyerhaeuser, Newco management, and LG Asset
Management L.P. (Lindsay Goldberg) (see, paragraph no. 14, below),
Evercore Trust was told that it as highly likely that the Put or the
Call will be exercised and that there is about an equal chance that the
Put or the Call will be exercised. As a result, Evercore Trust weighted
exercising the Put and the Call at 50 percent (50%) each and did not
give any weight to the scenario where the Master Trust received royalty
payments in perpetuity.
It is represented that Evercore Trust valued the potential Put and
Call using the DCF Approach, whereby Evercore Trust calculated the
exercised value of the Put and the Call and discounted those values
back to the present at a weighted average cost of capital and weighed
the three (3) scenarios to arrive at a valuation conclusion for the
Assets. Evercore Trust used a 15 percent (15%) discount rate, based on
the implied cost of equity for Newco, assuming Newco was 100% equity
financed. Further, Evercore Trust did not deduct taxes from the stream
of payments, because the Plan does not pay taxes. Accordingly, in the
opinion of Evercore Trust the fair market value of the Assets, as of
October 21, 2011, the date of the valuation report, is $11,700,000.
11. In addition, it is represented that the in-kind contribution of
the Assets, as described in section I of this
[[Page 3059]]
proposed exemption, will be in the interest of the Plan and its
participants and beneficiaries, because the Plan will not pay any
commissions, fees, costs, charges, or other expenses in connection with
the in-kind contribution of Assets to the Plan.
Management by NEWCO of All or a Portion of the Assets in the Master
Trust
12. It is represented that the Master Trust has been at the
forefront of investing in alternative investment vehicles for more than
20 years. In this regard, the Master Trust's investments include cash
and short-term investments, hedge funds, private equity, real estate
fund investments, and common and preferred stock. In addition, the
Master Trust is invested in equity index derivatives, fixed income
derivatives, swaps, and other derivative instruments. For approximately
the past seven (7) years, it is represented that a large portion of the
assets of the Master Trust have been managed in this way by an
investment team employed ``in house'' by WAM, as an INHAM, pursuant to
PTE 96-23.
13. It is represented that key personnel of the investment team
currently employed ``in house'' by WAM will be leaving WAM (the Former
WAM Personnel) and will be forming Newco, a new registered investment
adviser under the Investment Advisers Act of 1940, as amended. The
Former WAM Personnel who join Newco will be entering into employment
agreements with Newco. Newco will be a Delaware limited partnership
which will be outside of the Weyerhaeuser control group. Newco intends
to market an alternative asset management platform designed to provide
full-service investment advisory and investment management services to
unrelated entities. These unrelated entities will include large
investment firms such as foundations, sovereign wealth funds, endowment
funds, public funds, and corporate pension funds (collectively, the
Funds). Newco would initially target a few of the Funds unrelated to
Weyerhaeuser with investable asset between $1 billion and $2 billion to
add as new clients (the Unrelated Funds) Newco would initially limit
the number of Unrelated Funds to between two (2) to five (5). Salim
Shariff would be the Chief Investment Officer and President of Newco.
14. In connection with the establishment and operation of Newco,
the Former WAM Personnel will enter into a joint venture with an
affiliate of Goldberg Lindsay & Co. LLC (GLCo). GLCo, a registered
investment adviser, is the investment manager to a series of private
investment funds with aggregate capital commitments of approximately
$10 billion that are focused on making long-term equity investments in
established industries. The affiliate of GLCo which will enter into the
joint venture with Former WAM Personnel is LG Asset Management L.P.,
and is referred to, herein, as Lindsay Goldberg. It is represented that
Lindsay Goldberg will assist Newco with the provision of (or, in the
alternative, the retention of persons to provide) various services,
including marketing, IT operations, HR, administration, and use of
space. However, Lindsay Goldberg will not provide portfolio management
services. Such portfolio management services will be provided
exclusively by Newco.
It is represented that Lindsay Goldberg has an experienced team of
investment professionals led by its co-managing partners, Alan E.
Goldberg (Mr. Goldberg) and Robert D. Lindsay (Mr. Lindsay) each of
whom has more than 25 years of private investment experience.
15. Newco will initially be funded by Lindsay Goldberg. In this
regard, it is represented that the Master Trust will not pay, directly
or indirectly, any part of Newco's start up fees. Approximately 60
percent (60%) of Newco will be owned by Lindsay Goldberg. Approximately
40 percent (40%) of Newco will be owned by key personnel of Newco. A
substantial portion of the equity of Newco will be held by the Former
WAM Personnel.
16. The Newco GP will be a Delaware limited liability company. The
Newco GP will be managed by a board of four (4) managers (the Board).
Lindsay Goldberg will be entitled to appoint two (2) managers to the
Board of the Newco GP. The Former WAM Personnel will be entitled to
appoint one (1) manager to the Board. The Master Trust will be entitled
to appoint one (1) of the managers to the Board.
17. Weyerhaeuser and the Investment Committee wish to retain the
services of the Former WAM Personnel after such personnel have been
engaged by Newco. In this regard, Weyerhaeuser has determined that
expansion of WAM under the corporate umbrella, as a wholly-owned
business providing investment management services to unrelated entities
is not within its overall corporate strategy and would not be a core
business of Weyerhaeuser. Accordingly, to accommodate the desire of the
Former WAM Personnel to expand their business operations and also to
ensure the continuity of investment management services provided to the
Master Trust by the Former WAM Personnel, the Investment Committee has
made a preliminary determination to engage Newco as an investment
manager, within the meaning of section 3(38) of the Act, for some or
all of the assets in the Master Trust. It is represented that any such
investment management services provided by Newco to the Master Trust
will be pursuant to a written investment management agreement
terminable by the Investment Committee on reasonably short notice.\53\
The Master Trust will have no obligation to engage Newco or to continue
the services of Newco for any set period of time. It is represented
that initially Newco will charge a fee for providing investment
management services to the Master Trust at a cost that approximates the
cost incurred by WAM to manage the Master Trust's assets (i.e., no
profit margin included). In this regard, it is represented that the
initial ad valorem fee charged would be 25 basis points with a floor
and a cap on annual increases of 3 percent (3%) and 6 percent (6%),
respectively. The Applicants represent that the fees payable by the
Master Trust to Newco will be significantly less than ``market rate''
fees for similar services.\54\
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\53\ It is represented that termination of Newco as investment
manager of the Master Trust will have no impact on the Master
Trust's rights under the Royalty Agreement, discussed above.
\54\ The Applicants have not requested and the Department,
herein, is not providing any relief for the receipt of a fee by
Newco from the Master Trust for the provision of investment
management services to such Master Trust. The statutory exemption,
as set forth in section 408(b)(2) of the Act and the Department's
regulations, pursuant to 29 CFR 2550.408b-2, provides relief from
section 406(a) of the Act for contracting or making reasonable
arrangements with a party in interest for services necessary for the
establishment or operation of a plan, if no more than reasonable
compensation is paid therefore. The Department, herein, is offering
no view, as to whether the receipt by Newco of a fee for the
provision of investment management services to the Master Trust is
covered by such statutory exemption, nor is the Department, herein,
offering any view as to whether Newco satisfies the conditions set
forth in such statutory exemption.
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It is represented that the determination of the Investment
Committee to hire Newco as the investment manager for some or all of
the assets in the Master Trust is conditioned upon the grant by the
Department to Newco of a final exemption permitting Newco to enter into
transactions on behalf of the Master Trust, as though Newco were a
QPAM. Accordingly, the Applicants have requested that the proposed
exemption be modeled after PTE 84-14, as amended.
18. PTE 84-14 generally permits various parties in interest with
respect
[[Page 3060]]
to an employee benefit plan to engage in a transaction involving plan
assets, if the transaction is authorized by a QPAM, provided certain
conditions are satisfied. Specifically, the Applicants seek an
individual exemption for transactions that are described in Part I of
PTE 84-14.\55\ Part I of PTE 84-14 provides relief from the
restrictions of section 406(a)(1)(A)-(D) of the Act and section
4975(c)(1)(A)-(D) of the Code for transactions between a party in
interest with respect to an employee benefit plan and an investment
fund in which such plan has an interest and which is managed by a QPAM,
provided certain conditions are satisfied.
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\55\ The Applicants have not requested an administrative
exemption for the transactions described in Part II, Part III, and
Part IV, and Part V of PTE 84-14.
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One such condition (the Diverse Clientele Test), as set forth in
Part I(e) of PTE 84-14, requires that:
The transaction is not entered into with a party in interest
with respect to any plan whose assets managed by QPAM, when combined
with the assets of other plans established or maintained by the same
employer (or affiliate thereof * * * or by the same employee
organization, and managed by the QPAM, represent more than 20
percent of the total client assets managed by the QPAM at the time
of the transaction.
Another condition, as set forth in Part VI(a)(4) of PTE 84-14(the
Assets Under Management Test), requires that an investment adviser
registered under the Investment Advisers Act of 1940 have total client
assets under its management and control in excess of $85,000,000, as of
the last day of its most recent fiscal year. As a newly established
entity, Newco will not be able, as of the last day of its most recent
fiscal year, to satisfy the Assets Under Management Test, as set forth
in PTE 84-14. However, it is anticipated that Newco will have
$85,000,000 in assets under management on the date it commences
operations.
In addition, another condition, as set forth in Part VI(a)(4) of
PTE 84-14 (the Shareholders'/Partners' Equity Test), requires that an
investment adviser in order to qualify as a QPAM must either have
shareholders' or partners' equity in excess of $1 million, as evidenced
by the most recent balance sheet prepared within the immediately
preceding two years, or payment of all of its liabilities including any
liabilities that may arise by reason of a breach or violation of a duty
described in sections 404 and 406 of the Act unconditionally guaranteed
by a party, including an affiliate, a bank, a saving and loan, an
insurance company, or a broker-dealer who must satisfy certain net
worth requirements. As a newly established entity, Newco will not be
able to satisfy the Shareholders'/Partners' Equity Test, as set forth
in PTE 84-14, because it will not have a recent balance sheet prepared
within the immediately preceding two years. However, it is represented
that Newco will be capitalized in excess of $1 million, as of the date
Newco commences operations.
19. Because Newco does not satisfy the Assets under Management
Test, the Shareholders'/Partners' Equity Test, and the Diverse
Clientele Test, as those tests are set forth in PTE 84-14, Newco will
not qualify as a QPAM with respect to the Master Trust. Accordingly,
the Applicants request that the Department grant exemptive relief that
will permit Newco to act as though it were a QPAM, in light of the fact
that: (a) Newco's investment team will consist of the same Former WAM
Personnel who managed the assets of the Master Trust as an INHAM; (b)
on the day Newco commences operation, it will be capitalized in excess
of $1 million; and (c) on the day Newco commences operation, it is
anticipated that Newco will have $85,000,000 in assets under
management.
20. In the opinion of the Applicants the proposed transactions, as
set forth in section II, are administratively feasible, because such
transactions are similar in some respect to other class and
administrative exemptions previously granted by the Department. In this
regard, the Former WAM Personnel who will be employed by Newco will
continue to implement the investment management strategy that has been
in operation for the past seven (7) year under the auspices of WAM. In
addition, it is represented that the transactions, as described in
section II of this proposed exemption would not impose any
administrative burdens on the Department which are not already imposed
by PTE 84-14.
Further, the transactions, as described in section II of this
proposed exemption are feasible, as the Applicants will be required to
maintain records necessary to enable the Department and the IRS and
other interested parties to determine whether the conditions of the
proposed exemption, if granted, have been met.
21. With respect to the transactions described in section II of
this proposed exemption, it is represented that the conditions, as set
forth in section III of this proposed exemption provide sufficient
safeguards for the protection of the Plan, any Other Plan(s) and any
Client Plan(s). In this regard, the transactions which are the subject
of section II of this proposed exemption cannot be part of an
agreement, arrangement, or understanding designed to benefit a party in
interest. Neither Newco nor a person related to Newco may engage in
transactions with a Managed Account. Any party in interest (including a
fiduciary) which deals with a Managed Account may only be a remote
party in interest, and such party in interest may not have
discretionary authority or control with respect to the investment of
plan assets involved in the transaction nor render investment advice
with respect to those assets.
22. It is represented that the transactions described in section II
of the proposed exemption are in the interest of the Plan, any Other
Plan(s), and any Client Plan(s) which invest in a Managed Account,
because Newco will be able to negotiate transactions with parties in
interest with respect to such plan(s) where such transactions are
beneficial. Absent the proposed exemption, such plan(s) would be
precluded from engaging in such transactions, even though such
transactions may offer favorable investment opportunities.
Further, the Applicants maintain that if the Department were to
deny to Newco the relief, as set forth in section II of the proposed
exemption, the Master Trust would lose access to the Former WAM
Personnel who have been running a large portion of the assets of the
Plan in the Master Trust for over seven (7) years. Further, if the
Department were not to grant to Newco the ability act as though it were
a QPAM, Newco would not be able to continue to implement its proven
investment strategy on behalf of the Master Trust, as counterparties
are not willing to enter into transactions with the Master Trust, other
than under the umbrella of PTE 84-14 or similar exemptive relief.
23. In summary, the Applicants represent that the subject
transactions satisfy the statutory criteria of section 408(a) of the
Act and section 4975(c)(2) of the Code because:
(a) Prior to the execution and closing on the in-kind contribution
of the Assets, Evercore Trust, acting on behalf of the Master Trust,
will determine whether and on what terms to enter into the in-kind
contribution of such Assets;
(b) Evercore Trust will negotiate, review, and approve the specific
terms of the in-kind contribution of the Assets and will determine,
prior to entering into such in-kind contribution, that such transaction
is feasible, in the interest of, and protective of the Master Trust and
its participants and beneficiaries;
(c) Evercore Trust will take the necessary steps to ensure
compliance by
[[Page 3061]]
Weyerhaeuser with the terms and conditions of the in-kind contribution
of the Assets;
(d) As of the date the Assets are contributed to the Master Trust,
the contributed value of the Assets will be equal to the fair market
value of the Assets, as determined by Evercore Trust.
(e) The terms and conditions of the in-kind contribution of the
Assets will be no less favorable to the Master Trust than terms
negotiated at arm's length under similar circumstances between
unrelated third parties;
(f) The fair market value of the Assets will constitute less than
one percent (1%) of the assets of the Master Trust at the time such
Assets are contributed to the Master Trust;
(g) The Master Trust will incur no commissions, fees, costs, or
other charges and expenses in connection with the in-kind contribution
of the Assets to the Master Trust; and
(h) The in-kind contribution of the Assets is a one-time
transaction;
(i) On the day Newco commences operation, Newco will be capitalized
in excess of $1 million, and on the same day, it is anticipated that
Newco will have $85,000,000 in assets under management;
(j) Newco will be able to continue to implement a proven investment
strategy on behalf of the Master Trust;
(k) The proposed exemption will ensure the continuity of investment
management services provided to the Master Trust by the Former WAM
Personnel, who have been running a large portion of the assets of the
Plan in the Master Trust in recent years;
(l) The Master Trust will not be precluded from engaging in
transactions with parties in interest, even though such transactions
may offer favorable investment opportunities;
(m) The transactions which are the subject of section II of this
proposed exemption cannot be part of an agreement, arrangement, or
understanding designed to benefit a party in interest;
(n) Neither Newco nor a person related to Newco may engage in
transactions with a Managed Account;
(o) Any party in interest (including a fiduciary) which deals with
a Managed Account may only be a remote party in interest, and such
party in interest may not have discretionary authority or control with
respect to the investment of plan assets involved in the transaction
nor render investment advice with respect to those assets; and
(p) The Applicants will be required to maintain records necessary
to enable the Department and the IRS and other interested parties to
determine whether the conditions of the proposed exemption, if granted,
have been met.
Notice to Interested Persons
The persons who may be interested in the publication in the Federal
Register of the Notice of Proposed Exemption (the Notice) include all
the participants in the Plan, the active employees, terminated
participants and each beneficiary.
It is represented that these several classes of interested persons
will be notified of the publication of the Notice through different
methods. In this regard, notification will be provided within twenty
(20) days of the date of publication of the Notice in the Federal
Register, by posting at locations customarily used for notices
regarding labor-management matters for review. Such posting will
contain a copy of the Notice, as it appears in the Federal Register on
the date of publication, plus a copy of the supplemental statement (the
Supplemental Statement) as required, pursuant to 29 CFR 2570.43(b)(2),
which will advise interested persons of their right to comment and to
request a hearing.
It is represented that Weyerhaeuser will also provide notice to
each terminated participant and each beneficiary receiving benefits of
the publication of the Notice by first class mail, within twenty (20)
days 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 2570.43(b)(2), which will
advise all such interested persons of their right to comment and to
request a hearing.
The Department must receive all written comments and/or requests
for a hearing no later than thirty (30) days from the later of: (1) The
date a copy of the Notice and a copy of the Supplemental Statement are
posted; or (2) the date of the mailing first class of a copy of the
Notice and a copy of the supplemental Statement to terminated
participants and beneficiaries of the Plan.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
Citigroup Inc. (Citigroup)
Located in New York, New York
Exemption Application Number D-11680
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act (or ERISA) 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).\56\
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\56\ For purposes of this proposed exemption, references to
section 406 of ERISA should be read to refer to the corresponding
provisions of section 4975 of the Code as well.
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If the proposed exemption is granted, Citigroup Inc. and its
current and future affiliates (collectively, Citigroup) shall not be
precluded, as of December 1, 2010, from functioning as a ``qualified
professional asset manager'' (QPAM), pursuant to Prohibited Transaction
Exemption 84-14 (PTE 84-14), (49 FR 9494 March 13, 1984, as amended on
August 23, 2005 at 70 FR 49305), solely because of a failure to satisfy
Section I(g) of PTE 84-14, as a result of Citigroup's affiliation with
Citibank Belgium SA (CBB), an entity convicted of six (6) counts of
criminal activity in Belgium, provided that the following conditions
are met:
(a) The affiliate convicted under Belgium law does not provide
fiduciary or QPAM services to employee benefit plans (plans) or
otherwise exercise discretionary control over plan assets;
(b) ERISA-covered assets are not involved in the misconduct that is
the subject of the affiliate's conviction(s);
(c) Citigroup imposes its internal procedures, controls, and
protocols on the affiliate to reduce the likelihood of any recurrence
of misconduct to the extent permitted by local law;
(d) This exemption is not applicable if Citigroup, or any affiliate
(other than branches or affiliates found liable for similar crimes in
Belgium in connection with the sale of certain structured notes (the
Lehman Notes) is convicted of any of the crimes described in Section
I(g) of PTE 84-14;
(e) Citigroup maintains records that demonstrate that the
conditions of the exemption have been and continue to be met for at
least six years following the conviction of an affiliate under Belgium
law;
(f) Citigroup has adopted procedures to afford ample protection of
the interests of participants and beneficiaries of employee benefit
plans; and
[[Page 3062]]
(g) Citigroup complies with the other conditions of PTE 84-14, as
amended.
Effective Date: This proposed exemption, if granted, will be
effective as of December 1, 2010.
Summary of Facts and Representations
1. Citigroup Inc. (Citigroup), is a multinational financial
services corporation headquartered in New York. Citigroup operates, for
management reporting purposes, principally via two primary business
segments: Citicorp, consisting of Citigroup's Regional Consumer Banking
businesses (including retail banking and Citi-branded cards in North
America, EMEA, Latin America and Asia) and Institutional Clients Group
(including securities and banking and transaction services); and Citi
Holdings, consisting of Citigroup's Brokerage and Asset Management and
Local Consumer Lending businesses. Citigroup, through securities and
banking, offers a wide array of investment and commercial banking
services and products for corporations, governments, institutional and
retail investors, and high-net-worth individuals. The applicant
represents that on March 31, 2011, Citicorp held approximately $1.3
trillion of assets and $784 billion of deposits, representing
approximately 68% of Citigroup's total assets and approximately 91% of
its deposits. In addition, Citigroup provides fiduciary and asset
management services to employee benefit plans described in section 3(3)
of the Act. Citigroup manages billions of dollars representing ERISA-
covered plan assets. Therefore, it would not be uncommon for a plan for
which Citigroup currently serves as a QPAM to engage in a transaction
which may involve a party in interest. The applicant represents that
without the ability to function as a QPAM pursuant to PTE 84-14,
virtually no manager of ERISA assets will be able to manage such assets
effectively.
2. Section I(g) of PTE 84-14 precludes a person who otherwise
qualifies as a QPAM from serving as a QPAM if such person or an
affiliate thereof has, within 10 years immediately preceding the
transaction, been either convicted or released from imprisonment,
whichever is later, as a result of certain specified criminal activity
described under Section I(g) of PTE 84-14, section 411 of the Act and
various laws incorporated by reference in section 411 of the Act. The
applicant represents that the violations which would jeopardize
Citigroup's QPAM status involve convictions of Citibank Belgium SA
(CBB), a wholly-owned legal entity incorporated under Belgium law that
is responsible for the retail banking activities of Citigroup in
Belgium, and three (3) of CBB's employees. CBB is a part of Citigroup's
global consumer banking business line and focuses on the distribution
of banking products to consumers by offering a wide range of credit
cards, installment credit and deposit services and investment products
to its approximately 580,000 customers, and acts as an intermediary for
life insurance products. The applicant represents that CBB has no ERISA
plan clients and is not expected to have any ERISA plan clients in the
future.
3. On August 14, 2009, CBB and three (3) of its employees \57\ were
criminally charged on six (6) counts in connection with certain
structured bond products issued by Lehman Brothers (Lehman). The
Court's decision was announced on December 1, 2010.\58\ The applicant
represents that, in general, the criminal convictions of CBB and the
three employees were related to the use of certain marketing letters
and leaflets, as well as a prospectus, describing the characteristics
of certain bond products issued by Lehman. Some of these materials had
not been approved by the appropriate Belgium regulator (the FSMA,
formerly known as the CBFA) at the time of distribution, as required by
local law. Additionally, CBB was convicted for the use of unclear and
misleading sales documentation and for inadequate oversight of the
sales agency network. The applicant represents that the convictions
related to the violation of the following Belgian Statutes: Act of 16
June 2006 regarding the public offers of investment instruments and the
admission of investments instruments to trading on regulated markets
(the Prospectus Act), Article 60; the Prospectus Act, Article 69; and
Act of 14 July 1991 on commercial practices and on information and
protection of the consumer (the Commercial Practices Act), Article 94.
The applicant further represents that the Court's judgment did not
detail the statutory provisions on which each conviction is based, that
these convictions are on appeal by CBB and Mr. Staroukine as of the
date of this proposal, and that criminal acts are neither authorized
nor condoned by Citigroup.
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\57\ Jose de Peneranda de Fanchimont, Chief Compliance Officer,
is no longer employed by CBB; Bernard Beyens, former Belgium Country
Counsel, is no longer employed by CBB; and Francois Staroukine, is
the current Belgium Country Counsel for CBB.
\58\ The sentencing date is also December 1, 2010.
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4. Citigroup represents that although none of the unlawful
misconduct involved its (or its affiliates') investment management
activities, the criminal conduct described above would preclude each
component of Citigroup and other affiliated investment managers from
serving as a QPAM pursuant to 84-14. Accordingly, the applicant
requests an exemption to enable Citigroup and any of its current or
future affiliates to act as a QPAM despite their failure to satisfy
Section I(g) of PTE 84-14 solely as a result of CBB and its employees'
December 1, 2010 criminal conviction in Belgium. The transactions
covered by the proposed exemption would include the full range of
transactions that can be executed by investment managers who qualify as
QPAMs pursuant to PTE 84-14. If granted, the exemption will enable
Citigroup and its current and future affiliates to qualify as QPAMs by
satisfying all conditions of PTE 84-14, unless Citigroup or any other
affiliate (other than branches or affiliates found liable for similar
crimes in Belgium in connection with the sale of the Lehman Notes) is
convicted of any additional instances of the crimes described in
Section I(g) of PTE 84-14.
5. The applicant maintains that the requested exemption is
protective of the rights of participants and beneficiaries of affected
plans because: (a) After the time of the conduct described herein,
Citigroup launched an initiative to establish global standards for
addressing the risk associated with its retail and investment products
businesses; (b) a global policy has been created to assist Citigroup's
investment professionals in meeting their responsibilities related to
ensuring that investment product sales are suitable for clients in the
context of the client's investment objectives, risk tolerance, and
knowledge and experience; (c) Citigroup's suitability processes include
a classification system for Citigroup accounts, a corresponding client
rating scale, and defined mechanisms for framing suitability judgments;
(d) consistent requirements were developed through the policy for
mandatory sales force training on products, as well as Citigroup
policies; (e) the investment product risk group has standardized
requirements for review and approval of new products, as well as third
party structured note issuers; (f) a local compliance staff reports to
the global Chief Compliance Officer to ensure independence; (g)
training regarding the policy and the applicant's other global policies
and procedures is conducted in the local language; (h) CBB has
voluntarily agreed to participate in the FSMA's moratorium applicable
to distribution of structured products to retail investors; and (i) the
applicant has
[[Page 3063]]
updated its procedures regarding review of marketing materials and
communications related to ratings changes which should be reflected in
marketing materials, in order to ensure compliance with the laws of
Belgium.\59\
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\59\ The applicant represents that in the event of a breach of
the policies and/or procedures listed, an evaluation will be
performed to determine if any future modifications are needed in the
overall compliance structure.
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The proposed exemption also contains conditions, in addition to
those imposed by PTE 84-14, which are designed to ensure the presence
of adequate safeguards to protect the interests of the ERISA plan
participants and beneficiaries against wrongdoers now and in the
future. In this regard, the proposed exemption will be applicable if:
(a) CBB has not, and does not, provide fiduciary or QPAM service to
employee benefit plans covered by ERISA or otherwise exercise
discretionary control over ERISA assets; (b) ERISA-covered assets were
not involved in the conduct that is the subject of the affiliate's
convictions; (c) Citigroup has imposed and will continue to impose its
internal procedures, controls, and protocols on the affiliate to reduce
the likelihood of any recurrence of misconduct to the extent permitted
by local law; (d) The exemption will not be applicable if the applicant
or any affiliate (other than branches or affiliates found liable for
similar circumstances in Belgium in connection with the sale of the
Lehman Notes) is convicted of any of the crimes described in Section
I(g) of PTE 84-14; (e) Citigroup has kept and will continue to keep
records that demonstrate that the conditions of the exemption have been
and continue to be met for at least 6 years following the conviction of
an affiliate; and (f) Citigroup has adopted procedures to afford ample
protection of the interests of participants and beneficiaries of
employee benefit plans.
6. The applicant represents that the proposed exemption is
administratively feasible because it does not require the Department to
oversee or administer any aspect of the relief provided. Further the
applicant represents that the exemption will enable the plans to
continue their current investment strategy with their current
investment manager.
Moreover, the applicant notes that if the Department denies the
requested exemption, the applicant will be unable to manage assets on
an optimal basis subject to ERISA or the prohibited transaction
provisions of the Code, thereby making it difficult for the applicant
to enter into the transactions deemed necessary to meet the plans'
investment mandates. The applicant also states that plans would need to
find other investment managers who could manage the assets in the
strategy dictated by the plan.
7. The applicant represents that it has adopted substantial
compliance policies and procedures intended to ensure that the
applicable legal requirements are satisfied and that the highest
standard of business integrity is maintained wherever the applicant
conducts business. Employees of the applicant have been required to
complete mandatory policy awareness training, which included training
on global policy disclosure standards. Also, sales, marketing and
promotional materials must now be approved by the applicant's legal
and/or compliance department or the designated authorities prior to
distribution. The applicant further represents that Mr. Staroukine,
although currently serving as CBB's Belgium Country Counsel, has no
involvement with ERISA plans, and will not have any future dealings
with any ERISA plan assets while he is employed by the applicant, CBB
or an affiliate.
8. In summary, it is represented that the transactions have
satisfied and will satisfy the statutory criteria for an exemption
under 408(a) because: (a) The affiliate convicted under Belgium law has
not provided and will not provide fiduciary or QPAM services to ERISA-
covered plans or otherwise exercise discretionary control over plan
assets; (b) ERISA-covered assets have not been involved and will not be
involved in the misconduct that is the subject of the affiliate's
conviction; (c) Citigroup has continued and will continue to impose its
internal procedures, controls, and protocols on the affiliate to reduce
the likelihood of any recurrence of misconduct to the extent permitted
by local law; (d) this exemption is not applicable if Citigroup, or any
affiliate (other than branches or affiliates found liable for similar
crimes in Belgium in connection with the sale of the Lehman Notes) is
convicted of any of the crimes described in Section I(g) of PTE 84-14;
(e) Citigroup has maintained and will maintain records that demonstrate
that the conditions of the exemption have been met for at least six
years following the conviction of the affiliate under Belgium law; and
(f) Citigroup has adopted procedures which have afforded and will
afford ample protection of the interests of participants and
beneficiaries of employee benefit plans.
Notice to Interested Persons
The applicant represents that because those potentially interested
ERISA-covered plans cannot all be identified, the only practical means
of notifying such plans of this proposed exemption is by publication in
the Federal Register. Therefore, comments and requests for a hearing
must be received by the Department not later than 30 days from the
publication of this notice of proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 693-8546. (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 3064]]
Signed at Washington, DC, this 13th day of January, 2012.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2012-932 Filed 1-19-12; 8:45 am]
BILLING CODE 4510-29-P
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