[Federal Register: May 22, 2003 (Volume 68, Number 99)]
[Notices]
[Page 28018-28030]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22my03-105]
[[Page 28018]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11004, et al.]
Proposed Exemptions; Deutsche Bank AG (DB)
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 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the notice of proposed exemption, within 45 days from the
date of publication of this Federal Register notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ------, stated in each notice of
proposed exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Deutsche Bank AG (DB), located in Germany, with affiliates in New
York, New York and other locations; and JPMorgan Chase Bank, located in
New York, New York; (collectively, with their Affiliates, the
Applicants). (Application Nos. D-11004 and D-11106).
Proposed Exemption
Under the authority of section 408(a) of the Employee Retirement
Income Security Act of 1974 (the Act) and section 4975(c)(2) of the
Internal Revenue Code of 1986 (the Code) and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
32847, August 10, 1990), the Department is considering amending the
following individual prohibited transaction exemptions (PTEs) and
authorization made pursuant to PTE 96-62 (61 FR 39988, July 31, 1996--
referred to herein as ``EXPRO''): PTE 2000-25 (65 FR 35129, June 1,
2000), issued to Morgan Guaranty Trust Company of New York and J.P.
Morgan Investment Management, Inc., and PTE 2000-27, issued to the
Chase Manhattan Bank (65 FR 35129, June 1, 2000), and Final
Authorization Number (FAN) 2001-19E, issued to DB and its Affiliates
(June 23, 2001).\1\
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\1\ See also PTE 2000-26 (65 FR 35129, June 1, 2000), issued to
Goldman, Sachs & Co., and its Affiliates; PTE 2000-29 (65 FR 35129,
June 1, 2000), issued to Morgan Stanley Dean Witter & Co. and its
Affiliates; FAN 2001-24E (October 6, 2001), issued to Barclays
Global Investors N.A., Barclays Capital, Inc. and their Affiliates;
and FAN 2002-09E (September 14, 2002), issued to The TCW Group,
Inc., and its Affiliates. The Department will separately consider
similar amendments to those exemptions and authorizations upon the
receipt of applications or submissions relating thereto from such
entities.
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Section I--Transactions
If the proposed exemption is granted, the restrictions of section
406 of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1) of the Code,
shall not apply to the purchase of any securities by the Asset Manager
on behalf of employee benefit plans (Client Plans), including Client
Plans investing in a pooled fund (Pooled Fund), for which the Asset
Manager acts as a fiduciary, from any person other than the Asset
Manager or an affiliate thereof, during the existence of an
underwriting or selling syndicate with respect to such securities,
where the Affiliated Broker-Dealer is a manager or member of such
syndicate (an ``affiliated underwriter transaction'' (AUT)), and/or
where an Affiliated Trustee serves as trustee of a trust that issued
the securities (whether or not debt securities) or serves as indenture
trustee of securities that are debt securities (an ``affiliated trustee
transaction'' (ATT)), provided that the following conditions are
satisfied:
(a) The securities to be purchased are--
(1) Either:
(i) Part of an issue registered under the Securities Act of 1933
(the 1933 Act) (15 U.S.C. 77a et. seq.) or, if exempt from such
registration requirement, are (A) issued or guaranteed by the United
States or by any person controlled or supervised by and acting as an
instrumentality of the United States pursuant to authority granted by
the Congress of the United States, (B) issued by a bank, (C) exempt
from such registration requirement pursuant to a Federal statute other
than the 1933 Act, or (D) are the subject of a distribution and are of
a class which is required to be registered under section 12 of the
Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 781), and the
issuer of which has been subject to the reporting requirements of
section 13 of that Act (15 U.S.C. 78m) for a period of at least 90 days
immediately preceding the sale of securities and has filed all
[[Page 28019]]
reports required to be filed thereunder with the Securities and
Exchange Commission (SEC) during the preceding 12 months; or
(ii) Part of an issue that is an ``Eligible Rule 144A Offering,''
as defined in SEC rule 10f-3 (17 CFR 270.10f-3(a)(4)). Where the
Eligible Rule 144A Offering is of equity securities, the offering
syndicate shall obtain a legal opinion regarding the adequacy of the
disclosure in the offering memorandum;
(2) Purchased prior to the end of the first day on which any sales
are made, at a price that is not more than the price paid by each other
purchaser of securities in that offering or in any concurrent offering
of the securities, except that --
(i) If such securities are offered for subscription upon exercise
of rights, they may be purchased on or before the fourth day preceding
the day on which the rights offering terminates; or
(ii) If such securities are debt securities, they may be purchased
at a price that is not more than the price paid by each other purchaser
of securities in that offering or in any concurrent offering of the
securities and may be purchased on a day subsequent to the end of the
first day on which any sales are made, provided that the interest rates
on comparable debt securities offered to the public subsequent to the
first day and prior to the purchase are less than the interest rate of
the debt securities being purchased; and
(3) Offered pursuant to an underwriting or selling agreement under
which the members of the syndicate are committed to purchase all of the
securities being offered, except if--
(i) Such securities are purchased by others pursuant to a rights
offering; or
(ii) Such securities are offered pursuant to an over-allotment
option.
(b) The issuer of such securities has been in continuous operation
for not less than three years, including the operation of any
predecessors, unless --
(1) Such securities are non-convertible debt securities rated in
one of the four highest rating categories by at least one nationally
recognized statistical rating organization, i.e., Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the
Rating Organizations); or
(2) Such securities are issued or fully guaranteed by a person
described in paragraph (a)(1)(i)(A) of this exemption; or
(3) Such securities are fully guaranteed by a person who has issued
securities described in (a)(1)(i)(B), (C), or (D), and who has been in
continuous operation for not less than three years, including the
operation of any predecessors.
(c) The amount of such securities to be purchased by the Asset
Manager on behalf of a Client Plan does not exceed three percent of the
total amount of the securities being offered. Notwithstanding the
foregoing, the aggregate amount of any securities purchased with assets
of all Client Plans (including Pooled Funds) managed by the Asset
Manager (or with respect to which the Asset Manager renders investment
advice within the meaning of 29 CFR 2510.3-21(c)) does not exceed:
(1) 10 percent of the total amount of any equity securities being
offered;
(2) 35 percent of the total amount of any debt securities being
offered that are rated in one of the four highest rating categories by
at least one of the Rating Organizations; or
(3) 25 percent of the total amount of any debt securities being
offered that are rated in the fifth or sixth highest rating categories
by at least one of the Rating Organizations; and
(4) If purchased in an Eligible Rule 144A Offering, the total
amount of the securities being offered for purposes of determining the
percentages for (1)-(3) above is the total of:
(i) The principal amount of the offering of such class sold by
underwriters or members of the selling syndicate to ``qualified
institutional buyers'' (QIBs), as defined in SEC rule 144A (17 CFR
230.144A(a)(1)); plus
(ii) The principal amount of the offering of such class in any
concurrent public offering.
(d) The consideration to be paid by the Client Plan in purchasing
such securities does not exceed three percent of the fair market value
of the total net assets of the Client Plan, as of the last day of the
most recent fiscal quarter of the Client Plan prior to such
transaction.
(e) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit the Asset Manager or an affiliate.
(f) If the transaction is an AUT, the Affiliated Broker-Dealer does
not receive, either directly, indirectly, or through designation, any
selling concession or other consideration that is based upon the amount
of securities purchased by Client Plans pursuant to this exemption. In
this regard, the Affiliated Broker-Dealer may not receive, either
directly or indirectly, any compensation that is attributable to the
fixed designations generated by purchases of securities by the Asset
Manager on behalf of its Client Plans.
(g) If the transaction is an AUT,
(1) The amount the Affiliated Broker-Dealer receives in management,
underwriting or other compensation is not increased through an
agreement, arrangement, or understanding for the purpose of
compensating the Affiliated Broker-Dealer for foregoing any selling
concessions for those securities sold pursuant to this exemption.
Except as described above, nothing in this paragraph shall be construed
as precluding the Affiliated Broker-Dealer from receiving management
fees for serving as manager of the underwriting or selling syndicate,
underwriting fees for assuming the responsibilities of an underwriter
in the underwriting or selling syndicate, or other consideration that
is not based upon the amount of securities purchased by the Asset
Manager on behalf of Client Plans pursuant to this exemption; and
(2) The Affiliated Broker-Dealer shall provide to the Asset Manager
a written certification, signed by an officer of the Affiliated Broker-
Dealer, stating the amount that the Affiliated Broker-Dealer received
in compensation during the past quarter, in connection with any
offerings covered by this exemption, was not adjusted in a manner
inconsistent with section I, paragraphs (e), (f), or (g), of this
exemption.
(h) In the case of a single Client Plan, the covered transaction is
performed under a written authorization executed in advance by an
independent fiduciary (Independent Fiduciary) of the Client Plan.
(i) Prior to the execution of the written authorization described
in paragraph (h) above, the following information and materials (which
may be provided electronically) must be provided by the Asset Manager
to the Independent Fiduciary of each single Client Plan:
(1) A copy of the notice of proposed exemption and of the final
exemption, if granted, as published in the Federal Register; and
(2) Any other reasonably available information regarding the
covered transactions that the Independent Fiduciary requests.
(j) Subsequent to an Independent Fiduciary's initial authorization
permitting the Asset Manager to engage in the covered transactions on
behalf of a single Client Plan, the Asset Manager will continue to be
subject to the requirement to provide any reasonably available
information regarding the covered transactions that the Independent
Fiduciary requests.
(k) In the case of existing plan investors in a Pooled Fund, such
Pooled Fund may not engage in any covered
[[Page 28020]]
transactions pursuant to this exemption, unless the Asset Manager has
provided the written information described below to the Independent
Fiduciary of each plan participating in the Pooled Fund. The following
information and materials (which may be provided electronically) shall
be provided not less than 45 days prior to the Asset Manager's engaging
in the covered transactions on behalf of the Pooled Fund pursuant to
the exemption:
(1) A notice of the Pooled Fund's intent to purchase securities
pursuant to this exemption and a copy of the notice of proposed
exemption and of the final exemption, if granted, as published in the
Federal Register;
(2) Any other reasonably available information regarding the
covered transactions that the Independent Fiduciary requests; and
(3) A termination form expressly providing an election for the
Independent Fiduciary to terminate the plan's investment in the Pooled
Fund without penalty to the plan. Such form shall include instructions
specifying how to use the form. Specifically, the instructions will
explain that the plan has an opportunity to withdraw its assets from
the Pooled Fund for a period at least 30 days after the plan's receipt
of the initial notice described in subparagraph (1) above and that the
failure of the Independent Fiduciary to return the termination form by
the specified date shall be deemed to be an approval by the plan of its
participation in covered transactions as a Pooled Fund investor.
Further, the instructions will identify the Asset Manager and its
Affiliated Broker-Dealer and/or Affiliated Trustee and state that this
exemption may be unavailable unless the Independent Fiduciary is, in
fact, independent of those persons. Such fiduciary must advise the
Asset Manager, in writing, if it is not an ``independent Fiduciary,''
as that term is defined in section II(g) of this exemption.
For purposes of this paragraph, the requirement that the
authorizing fiduciary be independent of the Asset Manager shall not
apply in the case of an in-house plan sponsored by the Applicants or an
affiliate thereof. However, in-house plans must notify the Asset
Manager, as provided above.
(l) In the case of a plan whose assets are proposed to be invested
in a Pooled Fund subsequent to implementation of the procedures to
engage in the covered transactions, the plan's investment in the Pooled
Fund is subject to the prior written authorization of an Independent
Fiduciary, following the receipt by the Independent Fiduciary of the
materials described in subparagraphs (1) and (2) of paragraph (k). For
purposes of this paragraph, the requirement that the authorizing
fiduciary be independent of the Asset Manager shall not apply in the
case of an in-house plan sponsored by the Applicants or an affiliate
thereof.
(m) Subsequent to an Independent Fiduciary's initial authorization
of a plan's investment in a Pooled Fund that engages in the covered
transactions, the Asset Manager will continue to be subject to the
requirement to provide any reasonably available information regarding
the covered transactions that the Independent Fiduciary requests.
(n) At least once every three months, and not later than 45 days
following the period to which such information relates, the Asset
Manager shall:
(1) Furnish the Independent Fiduciary of each single Client Plan,
and of each plan investing in a Pooled Fund, with a report (which may
be provided electronically) disclosing all securities purchased on
behalf of that Client Plan or Pooled Fund pursuant to the exemption
during the period to which such report relates, and the terms of the
transactions, including:
(i) The type of security (including the rating of any debt
security);
(ii) The price at which the securities were purchased;
(iii) The first day on which any sale was made during this
offering;
(iv) The size of the issue;
(v) The number of securities purchased by the Asset Manager for the
specific Client Plan or Pooled Fund;
(vi) The identity of the underwriter from whom the securities were
purchased;
(vii) In the case of an AUT, the spread on the underwriting;
(viii) In the case of an ATT, the basis upon which the Affiliated
Trustee is compensated;
(ix) The price at which any such securities purchased during the
period were sold; and
(x) The market value at the end of such period of each security
purchased during the period and not sold;
(2) Provide to the Independent Fiduciary in the quarterly report
(i) in the case of AUTs, a representation that the Asset Manager has
received a written certification signed by an officer of the Affiliated
Broker-Dealer, as described in paragraph (g)(2), affirming that, as to
each AUT covered by this exemption during the past quarter, the
Affiliated Broker-Dealer acted in compliance with section I, paragraphs
(e), (f), and (g) of this exemption, and that copies of such
certifications will be provided to the Independent Fiduciary upon
request, and (ii) in the case of ATTs, a representation of the Asset
Manager affirming that, as to each ATT, the transaction was not part of
an agreement, arrangement or understanding designed to benefit the
Affiliated Trustee;
(3) Disclose to the Independent Fiduciary that, upon request, any
other reasonably available information regarding the covered
transactions that the Independent Fiduciary requests will be provided,
including, but not limited to:
(i) The date on which the securities were purchased on behalf of
the plan;
(ii) The percentage of the offering purchased on behalf of all
Client Plans and Pooled Funds; and
(iii) The identity of all members of the underwriting syndicate;
(4) Disclose to the Independent Fiduciary in the quarterly report,
any instance during the past quarter where the Asset Manager was
precluded for any period of time from selling a security purchased
under this exemption in that quarter because of its status as an
affiliate of the Affiliated Broker-Dealer or of an Affiliated Trustee
and the reason for this restriction;
(5) Provide explicit notification, prominently displayed in each
quarterly report, to the Independent Fiduciary of a single Client Plan,
that the authorization to engage in the covered transactions may be
terminated, without penalty, by the Independent Fiduciary on no more
than five days' notice by contacting an identified person; and
(6) Provide explicit notification, prominently displayed in each
quarterly report, to the Independent Fiduciary of a Client Plan
investing in a Pooled Fund, that the Independent Fiduciary may
terminate investment in the Pooled Fund, without penalty, by contacting
an identified person.
(o) Each single Client Plan shall have total net assets with a
value of at least $50 million. In addition, in the case of a
transaction involving an Eligible Rule 144A Offering on behalf of a
single Client Plan, each such Client Plan shall have at least $100
million in securities, as determined pursuant to SEC rule 144A (17 CFR
230.144A).\2\ In the case of
[[Page 28021]]
a Pooled Fund, the $50 million requirement will be met if 50 percent or
more of the units of beneficial interest in such Pooled Fund are held
by plans having total net assets with a value of at least $50 million.
For purchases involving an Eligible Rule 144A Offering on behalf of a
Pooled Fund, the $100 million requirement will be met if 50 percent or
more of the units of beneficial interest in such Pooled Fund are held
by plans having at least $100 million in assets and the Pooled Fund
itself qualifies as a QIB, as determined pursuant to SEC rule 144A (17
CFR 230.144A(a)(F)).
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\2\ SEC rule 10f-3(a)(4), 17 CFR 270.10f-3(a)(4), states that
the term ``Eligible Rule 144A Offering'' means an offering of
securities that meets the following conditions:
(i) The securities are offered or sold in transactions exempt
from registration under section 4(2) of the Securities Act of 1933
(15 U.S.C. 77d(d)), rule 144A thereunder (Sec. 230.144A of this
chapter), or rules 501-508 thereunder (Sec. Sec. 230.501-230-508 of
this chapter);
(ii) The securities are sold to persons that the seller and any
person acting on behalf of the seller reasonably believe to include
qualified institutional buyers, as defined in Sec. 230.144A(a)(1)
of this chapter; and
(iii) The seller and any person acting on behalf of the seller
reasonably believe that the securities are eligible for resale to
other qualified institutional buyers pursuant to Sec. 230.144A of
this chapter.
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For purposes of the net asset tests described above, where a group
of Client Plans is maintained by a single employer or controlled group
of employers, as defined in section 407(d)(7) of the Act, the $50
million net asset requirement or the $100 million net asset requirement
may be met by aggregating the assets of such Client Plans, if the
assets are pooled for investment purposes in a single master trust.
(p) The Asset Manager qualifies as a ``qualified professional asset
manager'' (QPAM), as that term is defined under part V(a) of Prohibited
Transaction Exemption 84-14 (49 FR 9494, 9506, March 13, 1984) and, in
addition, has, as of the last day of its most recent fiscal year, total
client assets under its management and control in excess of $5 billion
and shareholders' or partners' equity in excess of $1 million.
(q) No more than 20 percent of the assets of a Pooled Fund, at the
time of a covered transaction, are comprised of assets of employee
benefit plans maintained by the Asset Manager, the Affiliated Broker-
Dealer, the Affiliated Trustee or an affiliate thereof for their own
employees, for which the Asset Manager, the Affiliated Broker-Dealer,
or an affiliate exercises investment discretion.
(r) The Asset Manager, and the Affiliated Broker-Dealer, as
applicable, maintain, or cause to be maintained, for a period of six
years from the date of any covered transaction such records as are
necessary to enable the persons described in paragraph (s) of this
proposed exemption to determine whether the conditions of this
exemption have been met, except that--
(1) No party in interest with respect to a Client Plan, other than
the Asset Manager and the Affiliated Broker-Dealer or Affiliated
Trustee, as applicable, shall be subject to a civil penalty under
section 502(i) of the Act or the taxes imposed by section 4975(a) and
(b) of the Code, if such records are not maintained, or not available
for examination, as required by paragraph (s); and
(2) This record-keeping condition shall not be deemed to have been
violated if, due to circumstances beyond the control of the Asset
Manager or the Affiliated Broker-Dealer, or Affiliated Trustee, as
applicable, such records are lost or destroyed prior to the end of the
six-year period.
(s)(1) Except as provided in subparagraph (2) of this paragraph (s)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (r) are
unconditionally available at their customary location for examination
during normal business hours by--
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the SEC; or
(ii) Any fiduciary of a Client Plan, or any duly authorized
employee or representative of such fiduciary; or
(iii) Any employer of participants and beneficiaries and any
employee organization whose members are covered by a Client Plan, or
any authorized employee or representative of these entities; or
(iv) Any participant or beneficiary of a Client Plan, or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraphs (s)(1)(ii)--(iv)
shall be authorized to examine trade secrets of the Asset Manager or
the Affiliated Broker-Dealer, or the Affiliated Trustee or commercial
or financial information which is privileged or confidential; and
(3) Should the Asset Manager or the Affiliated Broker-Dealer or the
Affiliated Trustee refuse to disclose information on the basis that
such information is exempt from disclosure pursuant to paragraph (s)(2)
above, the Asset Manager shall, by the close of the thirtieth (30th)
day following the request, provide a written notice advising that
person of the reasons for the refusal and that the Department may
request such information.
(t) An indenture trustee whose affiliate has, within the prior 12
months, underwritten any securities for an obligor of the indenture
securities will resign as indenture trustee if a default occurs upon
the indenture securities.
Section II--Definitions
(a) The term ``Asset Manager'' means any asset management affiliate
of the Applicants (as ``affiliate'' is defined in paragraph (c)) that
meets the requirements of this proposed exemption.
(b) The term ``Affiliated Broker-Dealer'' means any broker-dealer
affiliate of the Applicants (as ``affiliate'' is defined in paragraph
(c)) that meets the requirements of this exemption. Such Affiliated
Broker-Dealer may participate in an underwriting or selling syndicate
as a manager or member. The term ``manager'' means any member of an
underwriting or selling syndicate who, either alone or together with
other members of the syndicate, is authorized to act on behalf of the
members of the syndicate in connection with the sale and distribution
of the securities being offered, or who receives compensation from the
members of the syndicate for its services as a manager of the
syndicate.
(c) The term ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) Any officer, director, partner, employee, or relative (as
defined in section 3(15) of the Act) of such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) The term ``Client Plan'' means an employee benefit plan that is
subject to the fiduciary responsibility provisions of the Act and whose
assets are under the management of the Asset Manager, including a plan
investing in a Pooled Fund (as ``Pooled Fund'' is defined in paragraph
(f) below).
(f) The term ``Pooled Fund'' means a common or collective trust
fund or pooled investment fund maintained by the Asset Manager.
(g)(1) The term ``Independent Fiduciary'' means a fiduciary of a
Client Plan who is unrelated to, and independent of, the Asset Manager,
the Affiliated Broker-Dealer and the Affiliated Trustee. For purposes
of this exemption, a Client Plan fiduciary will be deemed to be
unrelated to, and independent of, the Asset Manager, the Affiliated
Broker-Dealer and the Affiliated Trustee if such fiduciary represents
that neither such fiduciary, nor any individual responsible for the
decision to authorize or terminate authorization for transactions
described in section I, is an officer, director, or
[[Page 28022]]
highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the Asset Manager, the Affiliated Broker-
Dealer or the Affiliated Trustee and represents that such fiduciary
shall advise the Asset Manager if those facts change.
(2) Notwithstanding anything to the contrary in this section II(g),
a fiduciary is not independent if:
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Asset Manager, the Affiliated
Broker-Dealer or the Affiliated Trustee;
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration from the Asset Manager, the
Affiliated Broker-Dealer or the Affiliated Trustee for his or her own
personal account in connection with any transaction described in this
exemption;
(iii) Any officer, director, or highly compensated employee (within
the meaning of section 4975(e)(2)(H) of the Code) of the Asset Manager,
responsible for the transactions described in section I, is an officer,
director, or highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the Client Plan sponsor or of the
fiduciary responsible for the decision to authorize or terminate
authorization for transactions described in section I. However, if such
individual is a director of the Client Plan sponsor or of the
responsible fiduciary, and if he or she abstains from participation in
(A) the choice of the Plan's investment manager/adviser and (B) the
decision to authorize or terminate authorization for transactions
described in section I, then section II (g)(2)(iii) shall not apply.
(3) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policy-making function for the entity.
(4) In the case of existing Client Plans in a Pooled Fund, at the
time the Asset Manager provides such Client Plans with initial notice
pursuant to this exemption, the Asset Manager will notify the
fiduciaries of such Client Plans that they must advise the Asset
Manager, in writing, if they are not independent, within the meaning of
this section II (g).
(h) The term ``security'' shall have the same meaning as defined in
section 2(36) of the Investment Company Act of 1940 (the 1940 Act), as
amended (15 U.S.C. 80a-2(36)(1996)). For purposes of this exemption,
mortgage-backed or other asset-backed securities rated by a Rating
Organization will be treated as debt securities.
(i) The term ``Eligible Rule 144A Offering'' shall have the same
meaning as defined in SEC rule 10f-3(a)(4) (17 CFR 270.10f-3(a)(4))
under the 1940 Act.
(j) The term ``qualified institutional buyer'' or ``QIB'' shall
have the same meaning as defined in SEC rule 144A (17 CFR
230.144A(a)(1)) under the 1933 Act.
(k) The term ``Rating Organizations'' means Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co., or Fitch IBCA, Inc., or their successors.
(l) The term ``Affiliated Trustee'' means the Applicants and any
bank or trust company affiliate of the Applicants (as ``affiliate'' is
defined in paragraph (c)(1)) that serves as trustee of a trust that
issues securities which are asset-backed securities or as indenture
trustee of securities which are either asset-backed securities or other
debt securities that meet the requirements of this proposed exemption.
For purposes of this proposed exemption, other than section I(t),
performing services as custodian, paying agent, registrar or in similar
ministerial capacities is also considered serving as trustee or
indenture trustee.
Preamble
This document contains a notice of pendency before the Department
of a proposed individual exemption which, if granted, would amend: PTE
2000-25, issued to Morgan Guaranty Trust Company of New York and J.P.
Morgan Investment Management, Inc. (65 FR 35129, June 1, 2000), PTE
2000-27, issued to the Chase Manhattan Bank (65 FR 35129, June 1,
2000), and FAN 2001-19E, issued to DB and its Affiliates (June 23,
2001), pursuant to EXPRO. The exemptions, and EXPRO authorization,
respectively, permit purchases of securities by the Applicants' asset
management affiliate on behalf of employee benefit plans for which such
asset management affiliate is a fiduciary, from underwriting or selling
syndicates where the Applicants' broker-dealer affiliate participates
as a manager or syndicate member. If granted, this proposed amendment
would permit a plan's asset manager to acquire securities, on behalf of
the plan, in an initial public offering (IPO) when it or its affiliate
is the trustee, indenture trustee or a similar functionary for the
trust which issued the securities. Thus, the relief requested is
designed to cover acquisitions of asset-backed securities by plans
where the plans' asset manager is affiliated with such a trustee for an
issuing trust, as described herein. If adopted, this proposed amendment
would affect the participants and beneficiaries of the plans involved
in such transactions and the fiduciaries with respect to such plans.
Summary of Facts and Representations
The facts and representations contained in the applications are
summarized below. Interested persons are referred to the applications
on file with the Department (see D-11004 and D-11106) for the complete
representations of the Applicants.
1. DB is a German banking corporation and a leading commercial
bank, with total assets of 928,994 million euros and shareholders
equity of 43,683 million euros, as of 2001. DB and its Affiliates
(including the New York Branch of Deutsche Bank (DBNY)) provide a wide
range of banking, fiduciary, record keeping, custodial, brokerage and
investment services to corporations, institutions, governments,
employee benefit plans, governmental retirement plans and private
investors worldwide. DB is regulated by the Bundesanstalt fuer
Finanzdienstleistungsaufsicht (the ``BAFin'') in Germany.
2. Deutsche Bank Trust Company Americas (``DBTCA'') is a New York
banking corporation and member bank of the U.S. Federal Reserve System.
Deutsche Asset Management, Inc. (``DeAM Inc.'') is an investment
adviser registered under the Investment Advisors Act of 1940. Both
DBTCA and DeAM Inc. are indirect wholly-owned subsidiaries of DB. DBTCA
and DeAM Inc., among other DB Affiliates, provide investment management
and investment advisory services to plans covered by the Act.
Hereinafter, DB, DBTCA, and DeAM Inc., and their other current and
future asset management affiliates, shall be collectively referred to
as the ``Asset Manager'' when discussing DB's activities relating to
investment management or investment advisory services. Collectively,
assets under management by DB and its Affiliates through collective
trusts, separately managed accounts, and mutual funds currently exceed
$585 billion.
3. Deutsche Banc Securities, Inc., a wholly-owned subsidiary of DB,
is a registered broker-dealer (hereinafter, collectively with any other
current and future broker-dealer affiliates, the ``Affiliated Broker-
Dealer'') and regulated by the United States Securities & Exchange
Commission (``SEC'') under Section 15 of the Securities Exchange Act of
1934. The Affiliated Broker-Dealer serves, and engages in
[[Page 28023]]
transactions with, plans covered by the Act.
4. J.P. Morgan Chase & Co. (``J.P. Morgan Chase'') is a financial
holding company incorporated under Delaware law in 1968 and
headquartered in New York, New York. As of December 31, 2001, after
giving effect to the merger referred to below, J.P. Morgan Chase was
the second largest banking institution in the United States, with
approximately $694 billion in assets and approximately $41 billion in
stockholders' equity. On December 31, 2000, J.P. Morgan & Co.
Incorporated merged with and into The Chase Manhattan Corporation. Upon
completion of the merger, The Chase Manhattan Corporation changed its
name to ``J.P. Morgan Chase & Co.''
J.P. Morgan Chase is a global financial services firm with
operations in over 60 countries, and has as its principal bank
subsidiaries: JPMorgan Chase Bank, a New York banking corporation
headquartered in New York City, which was formed in November 2001 by
the merger of The Chase Manhattan Bank and Morgan Guaranty Trust
Company of New York; and Chase Manhattan Bank USA, National
Association, headquartered in Delaware.
The principal non-bank subsidiary of J.P. Morgan Chase is its
investment bank subsidiary, J.P. Morgan Securities Inc. (``J.P. Morgan
Securities''). J.P. Morgan Investment Management Inc. (``JPMIM'') is a
wholly-owned subsidiary of J.P. Morgan Chase. J.P. Morgan Fleming Asset
Management (USA) Inc. (JPMFAM), which was formerly known as Chase Asset
Management, Inc., is a wholly-owned subsidiary of JPMorgan Chase Bank.
The activities of J.P. Morgan Chase are internally organized, for
management reporting purposes, into five major businesses:
[sbull] Investment Banking, which includes securities underwriting
and financial advisory, trading, mergers and acquisitions advisory, and
corporate lending and syndication businesses;
[sbull] Investment Management and Private Banking, which includes
an asset management business, including mutual funds; institutional
money management and cash management businesses; and a private bank,
which provides wealth management solutions for a global client base of
individuals and families;
[sbull] Treasury & Securities Services, which provides information
and transaction processing services, and moves securities and cash
daily for its wholesale clients. Treasury & Securities Services
includes custody, cash management, investor and institutional trust
service businesses;
[sbull] J.P. Morgan Partners, a large and diversified private
equity investment firm, with total funds under management in excess of
$30 billion; and
[sbull] Retail and Middle Market Financial Services, which serves
over 30 million consumers, small business and middle-market customers
nationwide. Retail and Middle Market Financial Services offers a wide
variety of financial products and services, including consumer banking,
credit cards, mortgage services and consumer finance services, through
a diverse array of distribution channels, including the internet and
branch and ATM networks.
Requested Exemption
5. The Applicants seek to amend existing individual exemptions
(i.e., PTE 2000-25 (JP Morgan); PTE 2000-27 (Chase)) and an
authorization made pursuant to PTE 96-62 a/k/a/ EXPRO (i.e., FAN 2001-
19E (DB)) that deal with the situation where an Asset Manager seeks to
purchase securities for an employee benefit plan, in an initial
offering, where the Asset Manager's Affiliate is a manager or member of
the underwriting syndicate for such securities. Such a transaction is
described herein as an Affiliated Underwriter Transaction or ``AUT''.
The amendment proposed by the Applicants would add relief for two other
transactions: (i) Where the Asset Manager is related to the trustee of
the trust that issued the securities being underwritten or the
indenture trustee of securities that are debt securities but its
Affiliated Broker-Dealer is not part of the underwriting syndicate
(i.e., an Affiliated Trustee Transaction or ``ATT''); and (ii) where
the Asset Manager is related both to the trustee and to a member or
manager of the underwriting syndicate (i.e., both an ``AUT'' and an
``ATT'' at the same time).
Therefore, the Applicants represent that the exemption, if granted,
could be used in any of the following circumstances:
(i) Where an Asset Manager seeks to purchase securities (equities,
debt, or asset-backed securities, regardless of whether the latter are
treated for tax purposes as equity or debt) in an initial offering
where an Affiliate of the Asset Manager is a manager or member of the
underwriting syndicate but where, in the case of a debt security or an
asset-backed security, the trustee or indenture trustee is an
unaffiliated entity;
(ii) Where an Asset Manager seeks to purchase securities (debt or
asset-backed securities, regardless of whether the latter are treated
for tax purposes as equity or debt) in an initial offering where an
Affiliate of the Asset Manager is the trustee or indenture trustee but
where no member or manager of the underwriting syndicate is an
Affiliate of the Asset Manager; or
(iii) Where an Asset Manager seeks to purchase securities (debt or
asset-backed securities, regardless of whether the latter are treated
for tax purposes as equity or debt) in an initial offering where an
Affiliate of the Asset Manager is both the trustee or indenture trustee
and a manager or member of the underwriting syndicate.
In such instances involving an ``AUT'', the exemption (if granted)
would permit an Asset Manager to purchase for its Client Plans, or
Pooled Funds, securities in an initial public offering (i.e., an IPO)
from underwriting or selling syndicates in which the Affiliated Broker-
Dealer participates as a manager or member. In such instances involving
an ``ATT'', DB or JPMorgan Chase Bank or an Affiliate of either, will
act as a trustee, indenture trustee, or similar functionary
(collectively, a ``Trustee'') with respect to the issuer of the
securities (i.e., a trust). The Applicants state that all such
purchases of securities, whether in an ``AUT'' or ``ATT'' or both,
would be made from an underwriter or broker-dealer other than the
Affiliated Broker-Dealer and that the Affiliated Broker-Dealer would
not receive any selling concessions with respect to the securities sold
to Client Plans. Thus, the proposed exemption would not cover any
purchases of securities for a plan by an Asset Manager directly from
the Asset Manager's Affiliate.\3\
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\3\ With respect to possible acquisitions of asset-backed
securities that could be made by plans in the secondary market,
where the plans' asset manager has an affiliate that acts as a sub-
servicer for the issuing trust, see DOL Adv. Op. 99-03A (January 25,
1999).
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6. The Applicants represent that where the Affiliated Broker-Dealer
is a member of an underwriting or selling syndicate, the Asset Manager
generally makes purchases of securities for its Client Plans in
compliance with part III of PTE 75-1, 40 FR 50845 (October 31, 1975).
PTE 75-1, part III, provides a class exemption, under certain
conditions, for a plan fiduciary to purchase securities from an
underwriting or selling syndicate of which the fiduciary or an
affiliate is a member. However, relief under PTE 75-1 is unavailable if
the fiduciary or its affiliate is a manager of the underwriting or
selling syndicate.
7. PTE 2000-25, PTE 2000-27 and FAN 2001-19E expanded the relief
[[Page 28024]]
afforded under PTE 75-1 to, among other things, situations where the
Affiliated Broker-Dealer is a manager of the underwriting or selling
syndicate. However, neither PTE 75-1, PTE 2000-25, PTE 2000-27 nor FAN
2001-19E currently addresses the situation where the fiduciary or its
affiliate serves as Trustee with respect to a trust that is the issuer
of the securities. Such trusts are normally associated with so-called
asset-backed securities (ABS). ABS are usually issued as certificates
representing an undivided interest in a trust which holds a portfolio
of assets (e.g., secured consumer receivables or credit instruments
that bear interest).\4\
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\4\ For a discussion of prohibited transactions under the Act
and exemptions relating to a plan's acquisition and holding of ABS,
interested persons should review PTE 2002-41 (67 FR 54487, August
22, 2002) and the so-called ``Underwriter Exemptions'' listed
therein, as well as PTE 2002-19 (67 FR 14979, March 28, 2002), which
amended three of the Underwriter Exemptions granted to J.P. Morgan
Chase and certain Affiliates prior to the general amendment to the
other Underwriter Exemptions provided by PTE 2002-41.
Thus, the proposed exemption, if granted, would provide relief
for prohibited transactions relating to a plan's acquisition and
holding of ABS where a Plan's Asset Manager is affiliated with the
Trustee of an issuing trust for a series of ABS (i.e., an ATT).
However, other prohibited transactions that may be involved with the
plan's investment in ABS would have to be covered by an existing
Underwriter Exemption (absent any other applicable exemption),
including amendments relating thereto as described in PTEs 2002-19
and 2002-41. Interested persons should also review the Department's
regulations defining ``plan assets'' for purposes of plan
investments (see 29 CFR 2510.3-101, Definition of ``plan assets''--
plan investments).
The Department notes that a fiduciary or other party in interest
desiring relief afforded by one or the other of these exemptions
would have to ensure that the applicable conditions of the
appropriate exemption are met. Thus, for example, if the securities
sold in an underwriting are asset-backed securities, both the
proposed exemption and the existing exemptions involving asset-
backed securities referred to above may be relevant for the
contemplated transactions. However, it should be noted that the
party seeking the relief offered by a particular exemption must
ensure that the conditions of the exemption have been met.
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With respect to the types of Trustees that would be covered by the
proposed exemption, the Applicants state that in asset-backed
securities, which are structured as pass-through securities, there is
generally a trustee of the pool of assets. In certain transactions,
such as offerings of collateralized bond obligations (CBOs), there may
also be an indenture trustee to hold the debt obligation of the
obligor. In more traditional public debt offerings, there is generally
only an indenture trustee, who holds the debt obligation of the
obligor, holds any assets pledged as collateral to secure payment of
the debt obligation, makes required payments and keeps records, and in
the event of a default, acts for the note holders. The Applicants
represent that the functions and obligations of an indenture trustee
are aligned with the interests of the note holders because such a
trustee is generally appointed only to perform such ministerial
functions (i.e., hold collateral, maintain records, and make payments
when due). In this regard, the proposed exemption would also cover
situations where an Asset Manager's Affiliate serves as a custodian,
paying agent, registrar or other similar ministerial capacities (see
Definition of ``Affiliated Trustee'' in section II(l) above).
8. The Applicants state that the Affiliated Broker-Dealer is
frequently involved in offerings of ABS and other securities where the
Asset Manager or its Affiliate serves as a Trustee for the trust which
issues such securities. The inability of the Asset Manager to purchase
ABS or other securities for its Client Plans in such cases can be
detrimental to those accounts because the accounts can lose important
fixed-income investment opportunities that are relatively less
expensive or qualitatively better than other available opportunities in
such securities.
9. The Applicants represent that the frequency of such offerings of
ABS or other securities results from consolidation in the banking
industry and the attendant reduction in the number of banks
participating in the corporate trust business. Many factors that have
made participation in the trust business less attractive to banks have
contributed to this trend. On the income side, these factors include
competitive pressure on pricing corporate trust services and loss of
transactional fees and traditional ``float'' income due to the growth
in book entry securities. On the expense side, the Applicants represent
that the cost of entry into the corporate trust business and the cost
of remaining competitive in the business have increased dramatically.
This increase includes both technological and personnel costs which are
necessary to remain competitive. The cost increase is particularly
acute in the structured finance sector of the corporate trust business,
where both systems and staff need to have the capability of supporting
increasingly complex transactions.
10. The Applicants represent that equally significant are the
changes in the securities underwriting business, including increased
participation by banks and bank affiliates, and consolidation within
the industry. In 1990, Morgan Guaranty was the only bank in the
corporate trust business that also had a significant underwriting
affiliate. By 2000, four of the top ten underwriters for structured
finance transactions, such as ABS, had affiliated corporate trust
businesses. Eight of the top ten trustees of trusts issuing ABS, a
group with a combined market share of over 76 percent in 2000, were
affiliates of underwriters active in the structured finance sector.\5\
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\5\ Under the Gramm-Leach-Bliley Act, signed into law by the
President on November 12, 1999, certain provisions of the Glass-
Steagall Act and the Bank Holding Company Act of 1956, as amended,
are repealed. The Department notes that the effect of such law will
likely be further consolidation of the financial services industry.
The new law will facilitate cross-ownership and control among bank
holding companies and securities firms through the creation of
``financial holding companies'' that will be permitted to engage in
a broad range of financial and related activities, including
underwriting and dealing activities.
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11. The Applicants represent that currently most providers of
corporate trust and related services in the structured finance
marketplace are large banks that have the requisite staff and systems
resources to efficiently serve the various types of ABS that are common
to this marketplace. Most of these same banks, particularly those that
are profitable and well capitalized, have expanded into the securities
underwriting business, including underwriting of structured finance
transactions. The Applicants represent that not only will plan
investors be disadvantaged if banks and their affiliates that
underwrite securities continue to be precluded from providing trustee
services, but, further, it is clearly not in the best interest of plan
investors to eliminate those banks--often the most competent in the
servicing of structured finance transactions--from the pool of
available corporate trust service providers.
12. The Applicants state that the Trustee in a structured finance
transaction for ABS, while involved in complex calculations and
reporting, typically does not perform any discretionary functions. Such
a Trustee operates as a stakeholder and strictly in accordance with the
explicit terms of the governing agreements, so that the intent of the
crafters of the transaction may be carried out. These functions are
essentially ministerial and include establishing accounts, receiving
funds, making payments, and issuing reports, all in a predetermined
manner. Unlike trustees for corporate or municipal debt, Trustees in
structured finance transactions for ABS need not assume discretionary
functions to protect the interests of debt holders in the event of
default or bankruptcy because structured finance entities are designed
to be bankruptcy remote vehicles. The Applicants represent that there
is no
[[Page 28025]]
``issuer'' outside the structured transaction to pursue for repayment
of the debt. The Trustee's role is defined by a contract-explicit
structure that spells out the actions to be taken upon the happening of
specified events. The Applicants state that there is no opportunity (or
incentive) for the Trustee in a structured finance transaction, by
reason of its affiliation with an underwriter, asset manager, or
otherwise, to take or not to take actions that might benefit the
underwriter or asset manager to the detriment of plan investors.
With respect to offerings of more traditional public debt
securities that are not part of a structured finance transaction, the
Applicants state that an indenture trustee may have more discretion
when the issuer of the securities is not bankruptcy remote.\6\ In such
instances, indenture trustees generally exercise meaningful discretion
only in the context of a default, at which time the indenture trustee
has the duty to act for the bondholders, in a manner consistent with
the interests of investing plans (and other investors) and not with the
interests of the issuer. In such situations, an indenture trustee may
be an affiliate of an underwriter for the securities. In the event of a
default, the duty of an indenture trustee in pursuing the bondholders'
rights against the issuer might conflict with the indenture trustee's
other business interests. However, the Applicants represent that under
the Trust Indenture Act of 1939 (the Trust Indenture Act), an indenture
trustee whose affiliate has, within the prior 12 months, underwritten
any securities for an obligor of the indenture securities generally
must resign as indenture trustee if a default occurs upon the indenture
securities. Thus, the Applicants maintain that this requirement and
other provisions of the Trust Indenture Act are designed to protect
bondholders from conflicts of interest to which an indenture trustee
may be subject.\7\
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\6\ The amount of discretion possessed by an indenture trustee
will depend on the terms of the particular indenture, and factual
issues, such as whether a default has occurred.
\7\ The Applicants submit that the Trust Indenture Act addresses
analogous circumstances and is thus instructive regarding potential
conflicts of interest. DB represents that the Trust Indenture Act
was amended in 1990 to correct unnecessarily restrictive provisions
that deemed a conflict of interest to exist where an indenture
trustee or its affiliate simultaneously acts in other capacities
(e.g., underwriter) for the issuer of the debt securities. The
Applicants state that the U.S. Congress, at the SEC's instigation,
determined that an indenture trustee and its affiliates could act in
multiple capacities (including as trustee and underwriter for the
issuer) absent a default under the governing trust indenture.
According to the Applicants, the premise for this change was that
until such a default occurs, there is no risk that the trustee could
or would act in any way that might conflict with the interests of
security holders (i.e., certificate holders of ABS). One of the
reasons for the amendments to the Trust Indenture Act was the
recognition of the alternative: withdrawal from the corporate trust
business of the largest and best service providers, whose management
would undoubtedly be attracted to the greater profitability of
underwriting as opposed to the steady, but smaller profits from
acting as an indenture trustee. According to the Applicants, the
amendment to the Trust Indenture Act has in fact proved to be a
benefit to the public in encouraging the best providers of trustee
services to continue to provide such services.
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13. According to the Applicants, the role of the underwriter in a
structured financing for a series of ABS involves, among other things,
assisting the sponsor or originator of the applicable receivables or
other assets in structuring the contemplated transaction. The Trustee
becomes involved later in the process, after the principal parties have
agreed on the essential components, to review the proposed transaction
from the limited standpoints of technical workability and potential
Trustee liability. After the issuance of securities to plan investors
in a structured financing, while the Trustee performs its role as
Trustee over the life of the transaction, the underwriter of the
securities has no further role in the transaction. In addition, the
Trustee has no opportunity to take or not take action, or to use
information in ways that might advantage the underwriter to the
detriment of plan investors. The Applicants state that an underwriter,
in order to protect its reputation, clearly wants the transaction to
succeed as it was structured, which includes the Trustee performing in
a manner independent of the underwriter.
14. The Applicants represent that, in many offerings of ABS or
other securities, the Trustee's fee is a fixed dollar amount that does
not depend on the size of the offering. In such cases, the Asset
Manager has no conflict of interest in an ATT because it cannot
increase the Trustee's fee by causing Client Plans to participate in
the offering. Where the Trustee's fee in an ATT is a portion of the
principal amount of outstanding securities to be offered, the Asset
Manager could conceivably cause Client Plans to participate to affect
the size of the offering and thus the Trustee's fee.\8\ The Applicants
further represent that the protective conditions of the requested
exemption (e.g., the requirement of advance approval by an independent
fiduciary and reporting of the basis for the Trustee's fee) render this
possibility remote.
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\8\ The Applicants note that this theoretical conflict is
directly addressed by the protective conditions in the Underwriter
Exemptions and in this proposed exemption. In this regard, the
Applicants state that the exemption (if granted) will apply only to
firm commitment underwritings, where, by definition, the entire
issue of securities will be purchased, either by the public or the
underwriters (see section I(a)(3) above). Thus, where the trustee's
fee would be a fixed percentage of the total dollar amount of the
securities issued in the offering, the amount of the trustee's fee
would be, in fact, a fixed dollar amount that would be known to plan
investors as part of disclosures made relating to the offering
(e.g., the prospectus or private placement memorandum). The
Department notes that plan fiduciaries would have a duty to
adequately review, and effectively monitor, all fees paid to
service-providers, including those paid to parties affiliated with
an Asset Manager.
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In this regard, the Applicants state that the present conditions of
the proposed exemption, which are based on the prior individual
exemptions granted by the Department for an ``AUT'', impose adequate
safeguards as well for an ``ATT'' in order to prevent possible abuse.
First, there are significant limitations on the quantity of securities
that the Asset Manager may acquire for a Client Plan, meaning not only
that there will be significant limitations on the ability of the Asset
Manager to affect the fees of its Affiliate, but also insuring that
significant numbers of independent investors also decided that the
securities were an appropriate purchase. Second, the Asset Manager must
obtain the consent of an independent fiduciary to engage in these
transactions. Third, regular reporting of the subject transactions to
an independent fiduciary will take place. Fourth, an independent
fiduciary must be provided information on how securities purchased
under the proposed exemption actually performed. Finally, the consent
of the independent fiduciary may be revoked if it suspects that
purchases by the Asset Manager have been motivated by a desire to
generate fees for its Affiliated Trustee.
Investments in Offered Securities
15. The Applicants represent that the Asset Manager makes
investment decisions on behalf of, or renders investment advice to, its
Client Plans in accordance with the governing document of the
particular Client Plan or Pooled Fund and the guidelines and objectives
established in the investment management or advisory agreement. Since
the Client Plans are covered by Title I of the Act, such investment
decisions are also subject to the fiduciary responsibility provisions
of the Act.\9\
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\9\ By proposing this exemption, the Department is not
expressing an opinion regarding whether any investment decisions or
other actions taken by an Asset Manager regarding the acquisition
and holding of ABS or other securities in an ATT would be consistent
with its fiduciary obligations under part 4 of title I of the Act.
In this regard, section 404 of the Act requires, among other things,
that a plan fiduciary act prudently, solely in the interest of the
plan's participants and beneficiaries, and for the exclusive purpose
of providing benefits to participants and beneficiaries when making
decisions on behalf of a plan.
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[[Page 28026]]
16. The Applicants state that a decision by an Asset Manager for a
Client Plan to invest in particular securities is made on the basis of
price, value, and the particular Client Plan's investment criteria, not
on whether the Trustee with respect to the securities is, or is
affiliated with, the Asset Manager. The Applicants further assert that
the Asset Manager has little incentive to make purchases for Client
Plans in IPOs involving an ATT that are not in the interests of the
Client Plans because the Asset Manager's compensation for its services
is generally based upon total assets under its management. If the
assets under its management do not perform well, the Asset Manager will
receive less compensation and could lose the Client Plan's future
business.
According to the Applicants, the proposed exemption would be in the
interest of a Client Plan's participants and beneficiaries because it
will increase investment opportunities for such plans in ABS or other
securities. Failure to grant the exemption will unnecessarily restrict
the investment opportunities available to Client Plans in fixed-income
securities.
17. In summary, the Applicants represent that the proposed
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The Client Plans will gain access to desirable investment
opportunities;
(b) In each offering, the Asset Manager will purchase the
securities for its Client Plans from an underwriter or broker-dealer
other than the Affiliated Broker-Dealer;
(c) Conditions similar to those of PTE 75-1, part III, will
restrict the types of securities that may be purchased, the types of
underwriting or selling syndicates and issuers involved, and the price
and timing of the purchases;
(d) The amount of securities that the Asset Manager may purchase on
behalf of Client Plans will be subject to percentage limitations;
(e) The Affiliated Broker-Dealer will not be permitted to receive,
either directly, indirectly, or through designation, any selling
concessions with respect to the securities sold to the Asset Manager;
(f) Prior to any purchase of securities, the Asset Manager will
make the required disclosures to an Independent Fiduciary of each
Client Plan and obtain written authorization for such transaction
(i.e., an ATT);
(g) The Asset Manager will provide regular reporting to an
Independent Fiduciary of each Client Plan with respect to all
securities purchased pursuant to the exemption, if granted, including
all ATTs;
(h) Each Client Plan participating in these transactions will be
subject to a minimum size requirement of at least $50 million ($100
million for ``Eligible Rule 144A Offerings''), with certain exceptions
for Pooled Funds;
(i) The Asset Manager must have total assets under management in
excess of $5 billion and shareholders' or partners' equity in excess of
$1 million; and
(j) The Trustee will be unable to subordinate the interests of the
investing Client Plans to those of the Asset Manager.
For a complete discussion of the facts and representations
supporting the Department's decision to grant the original exemptions
for JPMorgan Chase Bank and its Affiliates (i.e., PTEs 2000-25 and
2000-27) for AUTs, interested persons should review the notice of
proposed exemption for Morgan Guaranty Trust of New York, et al.,
published in the Federal Register on February 8, 2000 (65 FR 6229).
Copies of all documents relating thereto are available for public
inspection and may be obtained by interested persons from the Public
Documents Room, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Interested persons should request File Numbers D-10119 and D-10120,
and D-10779 with respect to the application for JPMorgan Chase Bank
(formerly, Morgan Guaranty Trust of New York and The Chase Manhattan
Bank). With regard to FAN 2001-19E for DB and its Affiliates,
interested persons should request File Number E-00226.
Notice to Interested Persons: The Applicants represent that because
those potentially interested Client Plans that may invest in
securities, involving either an AUT or an ATT (or both), cannot all be
identified, the only practical means of notifying such Client Plans of
this proposed exemption is by the publication of this notice in the
Federal Register. Comments and requests for a hearing must be received
by the Department not later than 30 days from the date of publication
of this notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 693-8546. (This is not a toll-free number). IBEW Local
No. 1 Health and Welfare Fund, (the Welfare Fund) and IBEW Local No. 1,
Apprenticeship and Training Fund, (the Training Fund; collectively, the
Funds or the Applicants), located in St. Louis, MO. (Application Nos.
L-11155 and L-11156, respectively.)
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA) and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (55 FR
32836, 32847, August 10, 1990). If the exemption is granted, the
restrictions of section 406(a) of the Act shall not apply to the lease
of certain classroom space and supplemental facilities (the Lease) by
the Welfare Fund to the Training Fund, a party in interest with respect
to the Welfare Fund.
The proposed exemption is subject to the following conditions:
(1) The terms of the Lease are at least favorable to the Welfare
Fund and the Training Fund as those obtainable in an arm's length
transaction with an unrelated party.
(2) Qualified, independent appraisers have determined the initial
amount of the Lease payments.
(3) A qualified, independent fiduciary, The Philip Company (TPC),
has approved the Lease and has agreed to monitor the terms of the
exemption, at all times, on behalf of the Welfare Fund.
(4) The independent fiduciary agrees to take whatever actions are
necessary and proper to enforce the Welfare Fund's rights under the
Lease and to protect the participants and beneficiaries of the Welfare
Fund.
(5) The rental payments under the Lease are adjusted once every
five years by the independent fiduciary to ensure that such Lease
payments are not greater than or less than the fair market rental value
of the leased space.
(6) The fair market rental amount for the leased space, at no time,
will exceed 25 percent of the assets of either Fund, including any
improvements that are constructed thereon.
(7) The independent fiduciary and the Board of Trustees of the
Welfare Fund (the Welfare Fund Trustees) have determined that the Lease
is an appropriate investment for the Welfare Fund and is in the best
interest of the Welfare Fund's participants and beneficiaries.
[[Page 28027]]
(8) The Board of Trustees of the Training Fund (the Training Fund
Trustees) has determined that the Lease transaction is an appropriate
investment for the Training Fund and is in the best interest of the
Training Fund's participants and beneficiaries.
Summary of Facts and Representations
1. The Welfare Fund, which operates under a formal Trust Agreement,
is a collectively-bargained, multiemployer joint welfare plan. The
Welfare Fund provides medical and related benefits to union
electricians and their families. The Welfare Fund was established by
Local 1, of the International Brotherhood of Electrical Workers, AFL-
CIO (Local 1), a labor organization, and the St. Louis Chapter, of the
National Electrical Contractors Association (St. Louis Chapter, NECA),
an employer association.
The benefits provided by the Welfare Fund are funded by
contributions made by the employers pursuant to collective bargaining
agreements between Local 1 and the St. Louis Chapter, NECA. As of
December 31, 2001, the Welfare Fund had net assets available for
benefits of $87,890,891 based upon audited financial statements.\10\ As
of April 30, 2003, the Welfare Fund had 4,782 participants. The Welfare
Fund's operations are located at 3260 Hampton Avenue, St. Louis,
Missouri.
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\10\ According to the Applicants, the Welfare Fund's 2002 audit
report has not been completed. However, draft balance sheets for
this Fund show net assets available for benefits of $91,586,030 as
of December 31, 2002, and $89,305,694, as of March 31, 2003.
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2. The Training Fund, which is administered under a formal Trust
Agreement, is a collectively-bargained, multiemployer joint
apprenticeship training plan. The Training Fund was established by
Local 1 and the St. Louis Chapter, NECA. The Training Fund provides
training and educational benefits to electrical apprentices and
journeymen. The benefits are funded by contributions made by the
employers to the Training Fund pursuant to collective bargaining
agreements between Local 1 and the St. Louis Chapter, NECA. The
Training Fund is a party in interest with respect to the Welfare Fund
because employees of the Training Fund are participants in the Welfare
Fund. As of December 31, 2002, the Training Fund had net assets
available for benefits of $4,998,407 based upon audited financial
statements.\11\ As of April 30, 2003, the Training Fund had 3,267
participants. The Training Fund's present facility is located at 2300
Hampton Avenue, St. Louis, Missouri (the 2300 Hampton Avenue Building).
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\11\ Based on an unaudited financial statement, the Training
Fund had net assets available for benefits of $4,832,184.44 as of
March 31, 2003.
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3. The Welfare Fund is administered by six trustees. Three of the
Welfare Fund Trustees are appointed by Local 1 while the remaining
three Welfare Fund Trustees have been appointed by the St. Louis
Chapter, NECA. The Local 1 appointed Welfare Fund Trustees are Messrs.
Stephen P. Schoemehl, James Reinheimer and Mathew Lampe. The St. Louis
Chapter, NECA appointed trustees of the Welfare Fund are Messrs.
Douglas R. Martin, Robert Kaemmerlen and Eric Aschinger.
The Training Fund is also administered by six trustees, three of
whom are appointed by Local 1, and three of whom are appointed by the
St. Louis Chapter, NECA. The Local 1 appointed Training Fund Trustees
are Messrs. Stephen P. Schoemehl, Thomas E. George, and Dan King. The
St. Louis Chapter, NECA appointed Training Fund Trustees are Messrs.
Douglas R. Martin, T. Michael Fogarty, and Stephen J. Kohnen. As noted
herein, Messrs. Stephen P. Schoemehl and Douglas Martin are common
Trustees to both Funds.
4. The IBEW-NECA Service Center (the Service Center), which is a
``not for profit'' Missouri corporation, is a party in interest with
respect to the Welfare Fund because it is an employer whose employees
participate in such Fund. The Board of Directors of the Service Center
are appointed by the Business Manager of Local 1 and the St. Louis
Chapter, NECA. The Service Center provides employee benefit plan
administration to approximately 17 welfare and pension funds, including
the Funds. The largest group of employee benefits funds administered by
the Service Center were established by Local 1 and the St. Louis
Chapter, NECA pursuant to collective bargaining. The Service Center
also administers employee benefit funds established by Local 257, IBEW,
and the St. Louis Chapter, NECA, and a pension fund established by the
Illinois Chapter, NECA and several locals of the IBEW. The Service
Center's costs of administration are allocated among the various
employee benefit funds that the Service Center administers.
The Service Center's sole administrative facility is located at
3260 Hampton Avenue, St. Louis, Missouri. There, the Service Center
leases portions of three separate two-story buildings (the 3260 Hampton
Avenue Buildings) from the Local 1, IBEW Pension Benefit Trust Fund
(the Pension Fund), which is the owner of the 3260 Hampton Avenue
Buildings. The Pension Fund is one of the employee benefit plans
administered by the Service Center. The three 3260 Hampton Avenue
Buildings comprise a total of 12,000 square feet of space. Of this
total, the Service Center leases 9,300 square feet of space in these
premises.\12\ Two unrelated tenants occupy the remaining space in the
3260 Hampton Avenue Buildings.
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\12\ As noted above, the Pension Fund currently leases portions
of its 3260 Hampton Avenue Buildings to the Service Center, a party
in interest with respect to the Pension Fund. The Applicants
represent that the current lease satisfies the terms and conditions
of Prohibited Transaction Exemptions (PTEs) 76-1 and 77-10 (41 FR
12740, March 26, 1976 and 42 FR 33918, July 1, 1977, respectively).
However, the Department expresses no opinion herein on whether such
lease satisfies the terms and conditions of these class exemptions.
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The Welfare Fund is administered by the Service Center in the 3260
Hampton Avenue Buildings. Of the 9,300 square feet of space leased by
the Service Center, employees of the Service Center perform work for
the Welfare Fund within approximately 3,965 square feet of space.
The parking facilities at the 3260 Hampton Avenue Buildings are
limited with a total of 45 spaces, of which 13 spaces are leased to the
two outside tenants. There is no convenient overflow parking at the
3260 Hampton Avenue Buildings.
5. Under section 4.05 of the Welfare Fund Trust Agreement, the
Welfare Fund Trustees are authorized to invest in real estate.
Therefore, on September 26, 2002, the Welfare Fund Trustees signed a
contingent sales contract for the purchase of a two-story, concrete
block building, with office and training center facilities, located at
5735 Elizabeth Avenue, St. Louis, Missouri (the 5735 Elizabeth Avenue
Building) with the owner, the Plumbers' and Pipefitters' Welfare
Educational Fund, an unrelated party. Following the initial planning
meetings, Messrs. Schoemehl and Martin, who are the common Trustees of
the Welfare Fund and the Training Fund, did not participate in the
decisions to purchase the 5735 Elizabeth Avenue Building or to lease
it, in accordance with the Lease described herein.
Under the terms of the contingent sales contract, the Welfare Fund
must satisfy the purchaser's contingencies prior to the last day of the
applicable contingency period. The contingencies to be satisfied
contemplate the Welfare Fund (a) obtaining any and all inspections and
assessment reports pertaining to the 5735 Elizabeth Avenue Building;
(b) obtaining a commitment for title insurance; (c) obtaining a survey
of the 5735 Elizabeth Avenue Building
[[Page 28028]]
by a licensed Missouri land surveyor; (d) obtaining verification that
the present zoning and deed restrictions of the 5735 Elizabeth Avenue
Building will permit the Welfare Fund's intended commercial use and
development; (e) reviewing and approving all documents and contracts
pertaining to the 5735 Elizabeth Avenue Building; (f) receiving
evidence satisfactory to the Welfare Fund in all respects as to the
economic feasibility of acquiring, developing, and improving the 5735
Elizabeth Building; and (g) obtaining, from the Department, an
individual exemption from the Act's prohibited transactions rules in
order to engage in the subject Lease of a portion of the 5735 Elizabeth
Avenue Building by the Welfare Fund to the Training Fund.
The relevant terms of the proposed sale contemplate that the 5735
Elizabeth Avenue Building will be sold to the Welfare Fund for
$1,070,000 on an ``as is'' basis. The sale will take place
approximately 30 days from the date the Department publishes the notice
granting the requested exemption in the Federal Register.
6. Under section 3.03(a)(3) of the Training Fund Trust Agreement,
the Training Fund Trustees are authorized to enter into a lease of
buildings related to the training program. In this regard, the
Applicants represent that the Training Fund requires overflow classroom
and lab space at a location which is conveniently located to the
Training Fund's 2300 Hampton Avenue Building. The Applicants state that
the lease of the second floor of the 5735 Elizabeth Avenue Building
would present an attractive opportunity for the Training Fund to
acquire overflow classroom and lab space at a location that is one
block away from the Training Fund's existing facility in the 2300
Hampton Avenue Building, and close to the Local 1 office.
The Training Fund Trustees represent that the Training Fund cannot
meet current and anticipated demand for training programs at the 2300
Hampton Avenue Building. This is because the 2300 Hampton Avenue
Building is located on a landlocked parcel. The Training Fund Trustees
also state that constructing on the existing land parcel would be
disruptive and costly for the Training Fund. Furthermore, the Training
Fund Trustees maintain that leaving the existing facility at 2300
Hampton Avenue would not be an option for the Training Fund because it
owns the property and, as of 1999, renovations costing $1,600,000 were
made to the building.
7. The Applicants state that the Welfare Fund and its
administrator, the Service Center, also require additional space for
claims administration offices. The Applicants assert that the first
floor of the 5735 Elizabeth Avenue Building will present an opportunity
to expand and consolidate the Service Center's administrative offices
on a single floor at a location that is convenient to many participants
because of its proximity to the Training Fund and Local 1, one block
apart in distance. The Applicants represent that the proposed lease of
office space between the Welfare Fund and the Service Center, a
participating employer, will be subject to the exemptive relief
provided under PTEs 76-1 and 77-10. The Applicants further explain that
it is the parties' intention that the Service Center Lease will comply
with the terms and conditions of these class exemptions.\13\ Therefore,
the Applicants do not request additional administrative exemptive
relief from the Department regarding such Lease.
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\13\ The Welfare Fund Trustees represent that the Service Center
Lease will satisfy the terms and conditions of PTEs 76-1 and 77-10.
However, the Department expresses no opinion herein on whether such
lease will satisfy the terms and conditions of these class
exemptions.
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8. Accordingly, with respect to the second floor of the 5735
Elizabeth Avenue Building, the Applicants request an administrative
exemption from the Department that will permit, if granted, the Welfare
Fund to lease classroom space and supplemental facilities to the
Training Fund. The exemption transaction and related transactions will
be structured as follows:
(a) The Welfare Fund will purchase the 5735 Elizabeth Avenue
Building for a purchase price of $1,070,000, contingent upon, among
other things, the Department granting this exemption;
(b) The Welfare Fund and the Training Fund will enter into the
subject Lease for classroom space and supplemental facilities on the
second floor of the 5735 Elizabeth Avenue Building; and
(c) The Welfare Fund and the Service Center will enter into the
Service Center Lease on the first floor of the 5735 Elizabeth Avenue
Building in a manner that is designed to comply with PTEs 76-1 and 77-
10.
9. The construction costs in renovating the 5735 Elizabeth Avenue
Building are estimated at $1,503,934, with an estimated additional
$115,000 in professional costs related to architectural, legal, and
appraisal services.\14\ The Training Fund will contribute $426,207 to
fund its allocated share of the second floor construction costs. This
will result in a total net cost to the Welfare Fund of $2,262,727 for
the purchase price and renovation costs of the 5735 Elizabeth Avenue
Building. However, such costs will not exceed 5 percent of the assets
of the Welfare Fund.
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\14\ It is contemplated that Kadean Construction Company
(Kadean), a general contractor, will perform the renovation work to
be performed for the Training Fund. Kadean is not a party in
interest to the Welfare Fund or the Training Fund because it is not
a contributing employer. However, Kadean will subcontract the
electrical work on the project to signatory employers who are
parties in interest to the Training and Welfare Funds as
contributing employers.
The Department is providing no opinion in this proposed
exemption on whether the contemplated expenditures to be made by the
Training Fund for the construction of the second floor of the 5735
Elizabeth Avenue Building are (or will be) consistent with the
fiduciary responsibilities contained in part 4 of title I of the
Act. In this regard, the Department notes that section 404(a) of the
Act requires, among other things, that plan fiduciaries act
prudently and solely in the interest of the plan and its
participants and beneficiaries when providing benefits to such
participants and beneficiaries and defraying reasonable expenses of
administering the plan.
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10. The second floor Lease of the 5735 Elizabeth Avenue Building to
the Training Fund is for 8,309 square feet in ``white box'' condition,
with renovations completed to bring the second floor into compliance
with applicable building codes.\15\ Initially, the Training Fund's base
rent was set at $10.50 per square foot \16\ based upon an independent
appraisal (the Appraisal) of the property that was performed on
November 20, 2002 by Messrs. Edward W. Dinan, MAI, CRE and Mark B.
Baffa, Appraiser/Analyst, who are qualified, independent appraisers
(the Appraisers), employed by Dinan Real Estate Advisors of St. Louis,
Missouri. (See Representation 14 for further details about the
Appraisal.) The Appraisers concluded that the market rent for the first
floor Service Center Lease was $14.50 per square foot, and for the
second floor Training Fund Lease, $10.50 per square foot. The $10.50
per square foot rental amount was based on the assumption that the
Welfare Fund would fund the full $426,207 of construction costs for the
renovation and any rehabilitation of the second floor of the 5735
Elizabeth Avenue Building. However, the Training Fund Trustees decided
to
[[Page 28029]]
finance the second floor improvements by agreeing to pay the Welfare
Fund $426,207, thereby buying down the Training Fund's rent to $6 per
square foot.\17\
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\15\ The Applicants represent that the Welfare Fund and the
independent fiduciary are required to approve any alterations,
additions, modifications, or improvements of a permanent nature to
the second floor. During the term of the Lease, the alterations are
the property of the Training Fund, and the Training Fund is required
to reimburse the Welfare Fund for any additional taxes, inspections,
and fees that are attributable in any way to such alterations. At
the expiration of the Lease, or sooner termination, the alterations
automatically become the property of the Welfare Fund.
\16\ Or $7,270 monthly and $87,245 annually.
\17\ Or $4,155 monthly and $49,854 annually. With the payment of
renovation costs and first year rent, the Training Fund's total
investment in the 5735 Elizabeth Avenue Building ($476,061) would
represent approximately 10 percent of the Training Fund's assets.
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11. The Training Fund Lease is a written, triple net lease, having
an initial term of five years and two five year renewal options. The
Training Fund will pay 41.25 percent of the operating costs of the
Building. Among others, these operating expenses include real estate
taxes and insurance. At the time the Lease options are to be exercised,
rent is to be set by the Welfare Fund's independent fiduciary, who has
experience in real estate valuations.
Section 2.2 of the Training Fund Lease provides that the rent may
be increased by the independent fiduciary, at the time of renewal, but
in no event can the rent drop below the preceding term's rent. In this
respect, the Welfare Fund is assured that the base rent amount remains
at $6 per square foot. However, the Training Fund will have the right
to terminate its exercise of a renewal option if the Training Fund does
not accept the independent fiduciary's determination of rent payable
during the renewal term.
12. The first floor lease of the 5735 Elizabeth Avenue Building to
the Service Center, which the Applicants believe will be covered under
PTEs 76-01 and 77-10, is for 11,836 square feet of finished office
space. The Service Center's rent is set at $14.50 per square foot. The
Service Center Lease is a written, triple net lease having a 10 year
term, with one five year renewal option. The Service Center Lease
provides for yearly termination during the initial term as of the last
day of each lease year, provided that the Service Center gives at least
6 months prior written notice of such termination and pays a
termination fee equal to the amount of unamortized improvement costs
and a penalty of three months' rent. At the time the lease option is to
be exercised, rent is to be set by the Welfare Fund's independent
fiduciary.
Section 2.2 of the Service Center Lease provides that the rent may
be increased by the independent fiduciary, at the time of renewal, but
in no event can the rent drop below the preceding term's rent. In this
respect, the Welfare Fund is assured that the base rent will remain at
$14.50 per square foot. The Service Center will also pay 58.75 percent
of the operating costs associated with the 5735 Elizabeth Avenue
Building.
13. The Welfare Fund anticipates a rate of return on the 5735
Elizabeth Building of between 8.5 percent to 9.5 percent. With the
assistance of the independent fiduciary, TPC, the Welfare Fund has
established a contingency reserve of 10 percent of the projected
construction costs ($150,000). If the entire contingency reserve is
used, the Welfare Fund's projected return is 8.55 percent.
14. As noted briefly in Representation 10, on November 25, 2002,
the Welfare Fund Trustees obtained an independent appraisal report (the
Appraisal Report) of the 5735 Elizabeth Avenue Building. In the
Appraisal Report, the Appraisers also valued the proposed improvements
and the contemplated Leases.
Initially, the Appraisers determined that the fair market value of
a fee simple interest in the 5735 Elizabeth Avenue Building was
$1,070,000 as of November 20, 2002, in an ``as is'' condition. The
Appraisers then valued the 5735 Elizabeth Avenue Building as of
September 1, 2003, on an ``as proposed basis'' using both a ``direct
capitalization'' valuation ($2,690,000) and a sales comparison approach
($2,620,000).
The Appraisal Report also included a survey of area rents. Under
the survey, the Appraisers concluded that the market rent for the first
floor Service Center Lease was $14.50 per square foot, and $10.50 per
square foot for the second floor Training Fund Lease.
15. As noted above, the proposed rental under the Training Fund
Lease was adjusted to $6 per square foot based upon the Training Fund
agreeing to fund its allocated share of the construction costs. These
costs include, among others, new mechanical, electrical and plumbing
systems for the 5735 Elizabeth Avenue Building. The Appraisers, in a
letter dated December 16, 2002, considered $6 per square foot ``market
rent,'' given the assumption that the Training Fund was financing its
own improvements. The Appraisers also adjusted the direct
capitalization valuation of the 5735 Elizabeth Avenue Building downward
to $2,290,000 in order to take into account the reduction in the
Training Fund's rent to $6 per square foot. However, the Appraisers'
sales comparison valuation remained unchanged at $2,690,000.
16. In addition to its short term obligations, the Welfare Fund is
funding retiree medical benefits which is a long term funding goal
similar to a pension benefit. The Welfare Fund's projected investment
in the 5735 Elizabeth Avenue Building of approximately $2,290,000, with
a projected return ranging from 8.5 percent to 9.5 percent, represents
approximately 2.6 percent of the Welfare Fund's assets. The Welfare
Fund's investment consultant, Mr. Randall Kirkland, has reviewed the
contemplated purchase and has concluded that it does not represent an
over-concentration in real estate and will fit the long term investment
goals of the Welfare Fund which is funding for retiree medical.
Furthermore, the Welfare Fund Trustees, and for that matter, the
Training Fund Trustees, have determined that the Lease is an
appropriate transaction for the Funds and is in the best interests of
the participants and beneficiaries of such Funds.
17. The Welfare Fund Trustees have retained TPC to serve as
independent fiduciary with respect to the Training Fund Lease and the
Service Center Lease. Mr. Philip Hulse, the President of TPC, will
undertake the specific duties of the independent fiduciary. Mr. Hulse
is a real estate broker and a member of several real estate
organizations, including the Society of Industrial and Office Realtors,
National Association of Realtors, St. Louis Association of Realtors,
Missouri Association of Realtors, and the Missouri State Bank Board of
Directors. In addition, Mr. Hulse has partial ownership interests in
several real estate partnerships of over two million square feet of
office, industrial, and commercial space throughout the St. Louis
metropolitan market. Since 1985, Mr. Hulse's firm, TPC, has been
involved in the St. Louis, Missouri commercial and industrial real
estate community where it has assisted clients in a variety of
capacities, including tenant and buyer representation, site selection,
asset disposition, investment, and development.
On December 17, 2002, the Welfare Fund Trustees and Mr. Hulse on
behalf of TPC, entered into and executed an independent fiduciary
engagement agreement. Pursuant to this agreement, TPC has agreed to (a)
evaluate and make recommendations relating to the provisions on the
fair market rental value of the 5735 Elizabeth Avenue Building (and any
proposed amendments thereto); (b) evaluate and make recommendations on
the provisions of the sales contact for the 5735 Elizabeth Avenue
Building (and any proposed amendments thereto); (c) evaluate and make
recommendations on the provisions of the Training Fund and Service
Center Leases (and any proposed amendments thereto), and make a
determination and
[[Page 28030]]
recommendation to the Welfare Fund Trustees whether such Leases would
be in the best interest and protective of the Funds; (d) monitor the
transactions related to the Training Fund Lease, including verification
that monthly rent has been timely paid; (e) monitor the exemption to
ensure that the terms are complied with and take all appropriate
actions to ensure that the Training Fund Lease is protective and in the
best interest of the Welfare Fund; and (f) recommend to the Welfare
Fund Trustees whether the Leases should be terminated or the amount of
the Lease payment adjustments when the five year options under the
Training Fund Lease becomes due.
On behalf of TPC, Mr. Hulse represents that both he and the firm
are independent of, and unrelated to either Applicants. In addition,
Mr. Hulse states that he has been advised by legal counsel to the
Welfare Fund regarding his fiduciary obligations under ERISA and he
acknowledges and accepts such duties, responsibilities and liabilities
as an ERISA fiduciary for the Welfare Fund.
In his fiduciary capacity, Mr. Hulse has reviewed and made
recommendations to the Welfare Fund Trustees on the purchase of the
5735 Elizabeth Avenue Building and contemplated leases involving the
Training Fund and the Service Center. Prior to making its
determination, Mr. Hulse represents that he has examined the Welfare
Fund's overall investment portfolio, considered the liquidity
requirements of the Welfare Fund, considered the diversification of the
portfolio in light of the proposed transactions, and considered whether
the proposed transactions herein comply with the Welfare Fund's
investment objectives and policies. Lastly, Mr. Hulse explains that he
has reviewed the Training Fund's creditworthiness to enter into the
contemplated Lease.
Based on his review, Mr. Hulse has determined that both the
purchase and Lease transactions are suitable for the Welfare Fund and
its participants and beneficiaries. Mr. Hulse also believes that the
Training Fund's ``rent buy down'' represents a common practice within
the real estate industry and is, therefore, appropriate in this
transaction. Further, Mr. Hulse represents that due to his commercial
leasing experience, he has the ability to procure a fair market
valuation of the rental space once the option to renew comes due five
years from the inception of the Lease.
18. In summary, the Applicants represent that the transaction will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
(a) The terms of the Lease will be at least favorable to the
Welfare Fund and the Training Fund as those obtainable in an arm's
length transaction with an unrelated party.
(b) Qualified, independent appraisers have determined the initial
amount of the Lease payments.
(c) A qualified, independent fiduciary has approved the Lease and
will monitor the terms of the exemption, at all times, on behalf of the
Welfare Fund.
(d) The independent fiduciary will take whatever actions are
necessary and proper to enforce the Welfare Fund's rights under the
Lease and to protect the participants and beneficiaries of the Welfare
Fund.
(e) The rental payments under the Lease will be adjusted once every
five years by the independent fiduciary to ensure that such rental
payments are not greater than or less than the fair market rental value
of the leased space.
(f) The fair market rental amount for the leased space, at no time,
will exceed 25 percent of the assets of either Fund, including any
improvements that are constructed thereon.
(g) The independent fiduciary, the Welfare Fund Trustees and the
Training Fund Trustees have determined that the Lease is an appropriate
investment for the Welfare Fund and is in the best interest of the
participants and beneficiaries of the respective Funds.
Notice to Interested Persons
Notice of proposed exemption will be provided to all interested
persons by first class mail within 10 days of publication of the notice
of pendency in the Federal Register. Such notice shall include a copy
of the notice of pendency of the exemption, as published in the Federal
Register, and a supplemental statement, as described at 29 CFR
2570.43(b)(2). Such notice will inform interested persons of their
right to comment on the proposed exemption. Comments are due within 40
days of the date of publication of the proposed exemption in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Silvia M. Quezada of the
Department, telephone (202) 693-8553. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed in Washington, DC, this 19th day of May, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 03-12889 Filed 5-21-03; 8:45 am]
BILLING CODE 4510-29-P