[Federal Register Volume 59, Number 45 (Tuesday, March 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5248]


[[Page Unknown]]

[Federal Register: March 8, 1994]


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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 94-21; Exemption Application No. D-
9464, et al.]

 

Grant of Individual Exemptions; Ashley Construction, Inc. 
Retirement Plan, et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) 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).
    Notices were published in the Federal Register of the pendency 
before the Department of proposals to grant such exemptions. The 
notices set forth a summary of facts and representations contained in 
each application for exemption and referred interested persons to the 
respective applications for a complete statement of the facts and 
representations. The applications have been available for public 
inspection at the Department in Washington, DC. The notices also 
invited interested persons to submit comments on the requested 
exemptions to the Department. In addition the notices stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicants have represented that they 
have complied with the requirements of the notification to interested 
persons. No public comments and no requests for a hearing, unless 
otherwise stated, were received by the Department.
    The notices of proposed exemption were issued and the exemptions 
are being granted solely by the Department because, effective December 
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978) transferred the authority of the Secretary of 
the Treasury to issue exemptions of the type proposed to the Secretary 
of Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:

    (a) The exemptions are administratively feasible;
    (b) They are in the interests of the plans and their 
participants and beneficiaries; and
    (c) They are protective of the rights of the participants and 
beneficiaries of the plans.

Ashley Construction, Inc. Retirement Plan (the Plan) Located in Hidden 
Hills, CA

[Prohibited Transaction Exemption 94-21; Exemption Application No. D-
9464]

Exemption

    The restrictions of sections 406(a), 406 (b)(1) and (b)(2) of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1) (A) through (E) of the Code, 
shall not apply to: (1) The loan (the Loan) by the Plan of an amount 
that will not exceed $350,000 to Ashley Construction, Inc. (the 
Employer), a party in interest with respect to the Plan; and (2) the 
personal guarantee of the Employer's obligations under the Loan by 
Michael F. Ashley (Mr. Ashley), a party in interest with respect to the 
Plan.
    This exemption is conditioned upon the following requirements: (a) 
The terms of the Loan are at least as favorable to the Plan as those 
obtainable in an arm's-length transaction with an unrelated party; (b) 
the Loan will not exceed twenty-five percent of the assets of the Plan 
at any time during the duration of the Loan; (c) the Loan is secured by 
a first deed of trust on certain real property (the Property), which 
has been appraised by a qualified, independent appraiser to ensure that 
the fair market value of the Property is at least 150 percent of the 
amount of the Loan; (d) the Employer's obligations under the Loan are 
personally guaranteed by Mr. Ashley; (e) the fair market value of the 
Property remains at least equal to 150 percent of the outstanding 
balance of the Loan throughout the duration of the Loan; (f) an 
independent, qualified fiduciary determines on behalf of the Plan that 
the Loan is in the best interests of the Plan and protective of the 
Plan's participants and beneficiaries; and (g) the independent, 
qualified fiduciary monitors compliance with the terms and conditions 
of the exemption and the Loan throughout the duration of the 
transaction, taking any action necessary to safeguard the Plan's 
interest, including foreclosure on the Property in the event of 
default.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on December 17, 1993 at 58 
FR 66034.

For Further Information Contact: Kathryn Parr of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)

The Avram A. Jacobson, M.D. Employee Profit Sharing Plan (the Profit 
Sharing Plan) and the Avram A. Jacobson, M.D. Employee Money Purchase 
Pension Plan (the Money Purchase Plan; Collectively, the Plans) Located 
in Beverly Hills, CA

[Prohibited Transaction Exemption 94-22; Application Nos. D-9470 
through D-9473]

Exemption

    The sanctions resulting from the application of section 4975 of the 
Code by reason of section 4975(c)(1) (A) through (E) of the Code, shall 
not apply to the cash sale (the Sale) of certain works of art (the Art 
Work) by the Plans to Avram A. Jacobson, M.D., a sole proprietor and 
disqualified person with respect to the Plans.
    This exemption is conditioned upon the following requirements: (1) 
The Sale is a one-time cash transaction; (2) the Plans are not required 
to pay any commissions, costs or other expenses in connection with this 
transaction; (3) the Art Work is appraised by qualified, independent 
appraisers; (4) the sale price for the Art Work reflects the greater of 
either: (a) The original amount paid by the Plans at the time of 
acquisition; or (b) its fair market value on the date of the Sale; and 
(5) within ninety days of the publication in the Federal Register of 
the grant of this exemption, Dr. Jacobson will file Forms 5330 with the 
Internal Revenue Service and pay all applicable excise taxes that are 
due by reason of the past prohibited transactions.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on January 5, 1994 at 59 FR 
599.
    For Further Information Contact: Kathryn Parr of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)

Cargill, Incorporated and Associated Companies Salaried Employees' 
Pension Plan, et al. (the Plans) Located in Minneapolis, MN

[Prohibited Transaction Exemption 94-23; Application Nos. D-9424 
through D-9430]

Exemption

    The restrictions of sections 406(a), 406 (b)(1) and (b)(2) and 
407(a) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1) (A) through 
(E) of the Code shall not apply to (1) a series of purchases by the 
Cargill, Incorporated and Associated Companies Master Pension Trust 
(the Master Trust) of shares of common stock (the Common Stock) of 
Cargill, Incorporated (Cargill), a party in interest with respect to 
the Plans and the Master Trust; (2) the Master Trust's holding of the 
Common Stock; and (3) the acquisition, holding, and exercise by the 
Master Trust of an irrevocable put option (the Put Option) with respect 
to the Common Stock; provided that the following conditions are 
satisfied:
    (A) The Master Trust pays no more than the fair market value of the 
Common Stock on the date of each acquisition;
    (B) The Master Trust's interests for all purposes with respect to 
the Common Stock are represented by a qualified, independent fiduciary 
for the duration of the Master Trust's holding of any of the Common 
Stock;
    (C) Prior to each acquisition of Common Stock by the Master Trust, 
the independent, qualified fiduciary must determine on behalf of the 
Plans and the Master Trust that the proposed acquisition is appropriate 
for and in the best interests of the Plans and the Master Trust;
    (D) The independent fiduciary will take whatever action is 
necessary to protect the Master Trust's rights, including, but not 
limited to the exercise of the Put Option, if the independent 
fiduciary, in its sole discretion, determines that such exercise is 
appropriate;
    (E) The independent fiduciary retains the right under the Put 
Option to require Cargill, at any time, to purchase some or all of the 
Common Stock from the Master Trust for the greater of: (1) the price of 
the Common Stock on the date of the Master Trust's acquisition of the 
Common Stock, or (2) the fair market value of the Common Stock as of 
the date the Put Option is exercised;
    (F) Cargill's obligations under the Put Option remain secured by an 
escrow account containing cash or U.S. government securities worth at 
least 25 percent of the fair market value of the Common Stock; and
    (G) Subsequent to each acquisition, none of the Plans in the Master 
Trust will have more than 10 percent of the fair market value of its 
assets invested in the Common Stock.

Temporary Nature of Exemption

    The exemption is temporary and will expire five years from the date 
this Final Grant is published in the Federal Register with respect to 
the Master Trust's acquisition of the Common Stock. The Master Trust 
may hold the Common Stock pursuant to the terms of the exemption 
subsequent to the end of the five year period.

Comments

    In the Notice of Proposed Exemption, the Department invited 
interested persons to submit written comments and requests for a 
hearing on the exemption. All comments and requests for hearing were 
due by December 13, 1993. The Department received over 50 telephone 
inquiries from interested persons who expressed concern over the 
effect, if any, of the transaction on their pension benefits. These 
inquiries were responded to by a Department representative who informed 
the callers that the transaction does not affect the calculation of 
pension benefits or the Plans' obligation to make benefit payments.
    The Department received a total of 31 written comments with 7 of 
those comments containing a request for a hearing.\1\ Three 
commentators stated that they did not understand the proposed exemption 
or how it would affect their pensions. One commentator expressed 
concern about the impact of the exemption on his retirement benefits 
but did not specifically object to the exemption. Three interested 
persons encouraged the Department to grant the exemption. The remaining 
commentators were opposed to the granting of the exemption.
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    \1\Because the exemption provides relief from section 406(b) of 
the Act, 29 CFR 2570.46 of the Department's regulations provides 
that the Department in its discretion may convene a hearing if 
requested by interested persons.
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    The interested persons who were opposed to the granting of the 
exemption expressed concerns about the following subjects: (1) The 
security of their retirement benefits under the Plans and the current 
funding status of the Plans; (2) the possibility that the acquisition 
of the Common Stock would be detrimental to the Plans because it would 
decrease the liquidity and diversification of the Plans' investment 
portfolio; (3) the perceived lack of independence on the part of the 
qualified appraiser, independent fiduciary and Plan trustees; (4) the 
alleged payment of fees to the independent fiduciary and the 
independent appraiser by the Master Trust; (5) the prudence of allowing 
the Plans to invest in the Common Stock, including questions concerning 
the past investment performance and the current value of the Common 
Stock; and (6) the belief that the Plans' interests were not adequately 
protected by the escrow account (the Escrow) established by Cargill to 
safeguard the Plans' investment in the Common Stock.
    State Street (the Plans' independent fiduciary), D&P (the qualified 
appraiser) and the applicant all submitted separate responses to the 
relevant portions of these comments.
    With regard to the security of retirement benefits under the Plans, 
the applicant and State Street explain that all of the Plans invested 
in the Master Trust are defined benefit plans, the benefits of which 
are pre-determined by a formula. It is represented, therefore, that any 
decreases in the value of an asset held in the Master Trust should not 
adversely affect the amount or timely payment of benefits under any of 
the Plans. The applicant responds to the concerns over the funding 
status of the Plans by pointing out that the Plans, in the aggregate, 
have been overfunded since 1988. The applicant represents that as of 
December 31, 1992, the Plans, in the aggregate, were overfunded by 
approximately $46 million.
    With respect to concerns that investment in the Common Stock may 
jeopardize the diversification or liquidity of the Plans' investments, 
the applicant represents that Cargill has established mechanisms to 
assure that the Plans' investment portfolio will remain diversified in 
compliance with section 404 of the Act and that the investment in the 
Common Stock is prudent and does not jeopardize the Plans' liquidity. 
In this regard, the applicant states that the Plans' Investment 
Committee determines the types of investments that are appropriate to 
assure that the Master Trust investments are diversified and 
sufficiently liquid. Furthermore, State Street represents that in 
reaching its conclusion that the Common Stock would be a prudent 
investment for the Plans, it relied upon the determination of the 
Investment Committee that such an investment would be consistent with 
the overall investment policy of the Plans. State Street represents 
that, prior to each proposed acquisition of Common Stock, State Street 
will review the Master Trust's asset allocation schedule and the 
Investment Committee's determinations regarding the diversification and 
liquidity requirements of the Plans. If, following such review, State 
Street believes that the Investment Committee's conclusions are not 
reasonable, State Street will not allow the Master Trust to consummate 
the proposed acquisition of the Common Stock.
    State Street also represents that the Put Option provides the 
Master Trust with a substantial degree of liquidity because it enables 
the independent fiduciary to require Cargill to purchase up to 100% of 
the Common Stock held by the Master Trust at any time. In addition, 
State Street notes that the valuation method used by D&P takes into 
account the fact that the Common Stock is not publicly traded. Finally, 
the conditions of the exemption prohibit the Plans from investing more 
than 10% of the fair market value of their assets in the Common Stock 
and provide that the exemption will expire 5 years from the date it is 
granted. After the expiration of the exemption, the applicant would 
have to apply for another exemption in order to allow the Master Trust 
to acquire additional shares of the Common Stock.
    The applicant has responded to each of the comments questioning the 
independence of the parties selected to represent the interests of the 
Plans. The applicant explains that, contrary to the commentator's 
assertion, the trustees of the plan are not employees or former 
employees of Cargill. As stated in the Proposed Exemption, the Trustee 
is the Boston Safe Deposit and Trust Company. The applicant also 
explains, that, contrary to the commentator's assertion, D&P was 
selected as the qualified appraiser by State Street, not by Cargill. 
D&P represents that, other than serving as a financial advisor to State 
Street in matters relating to Cargill qualified plans, D&P has no 
ongoing business relationship with Cargill. Finally, in response to a 
comment questioning State Street's independence from Cargill, State 
Street represents that its existing business relationships with Cargill 
are clearly de minimis and will in no way undermine its ability to 
serve as the independent fiduciary. Cargill represents that it selected 
State Street to represent the interests of the Plans and the Master 
Trust because of State Street's expertise and extensive experience in 
serving as an independent fiduciary for ERISA retirement plans, 
including plans with investments in employer securities.
    The applicant counters the allegation by one of the commentators 
that the holders of Common Stock would retain indirect control over the 
shares they sold to the Master Trust, by explaining that State Street 
will have complete management authority and control over any and all 
rights relating to the Common Stock.
    In response to the commentator who objects to having the Master 
Trust pay the fees of State Street and D&P, the applicant states that 
Cargill, not the Master Trust, has agreed to pay those fees in order to 
avoid depleting the Masters Trust's assets.
    In its response to the comments concerning the past investment 
performance and the current value of the Common Stock, D&P has 
explained why neither of the methods mentioned in the comments is an 
appropriate method for measuring the value of the Common Stock. 
According to D&P, comparing the performance of the Common Stock with 
the S&P 500 index is inappropriate because the Common Stock is not 
publicly traded and because such a comparison fails to recognize the 
value of the Put Option to the Plans. D&P explains that, unlike the 
securities making up the S&P 500, the Common Stock is an asset which 
has both upside investment potential and downside protection. D&P also 
asserts that a comparison of the dividend yield of the Common Stock 
versus other investments is inappropriate. D&P explains that dividend 
yield is typically calculated as dividends as a percentage of stock 
price. Although Cargill has paid dividends on its Common Stock, 
Cargill's historical dividend yield is not know because its Common 
Stock is not publicly traded and has not been regularly valued. State 
Street represents that, in making its investment decision, not just the 
current dividend, but also the expected total return of the Common 
Stock is considered. In this regard, D&P has determined that that 
Cargill's expected total long term compound annual return on 
investments (dividends plus capital appreciation) is in the range of 11 
to 13 percent per annum.
    As noted in the Proposed Exemption, since there is no public market 
for the Common Stock, D&P has relied primarily on an analysis of 
comparable, publicly traded companies in assessing the fair market 
value of the Common Stock. D&P represents that the comparable company 
method of valuation is generally accepted in the financial and 
investment community and is regularly used by bankers, investment 
bankers and other financial advisors in negotiating a transaction 
between a buyer and seller of a closely held company.
    After consultation with D&P, State Street represents that it is 
satisfied that the Common Stock will be priced in a manner which is 
competitive with the public market prices of comparable public equity 
securities and that the expected total annual rate of return reflected 
in such pricing is in line with that of comparable public equity 
securities and the S&P 500 generally. In addition, State Street is 
satisfied that, when the incremental downside protection, and the 
resultant reduction in risk provided by the Put Option is taken into 
account, the Common Stock becomes favorably priced as compared to 
alternative investments. Significantly, State Steet notes that, because 
D&P will value the Common Stock without taking into consideration the 
Put Option granted to the Master Trust, the incremental value added by 
the Put Option will not be reflected in the purchase price paid by the 
Master Trust for the Common Stock.
    With regard to complaints that the Escrow covers only 25% of the 
amount payable to the Master Trust upon exercise of the Put Option, 
State Street represents that, under the circumstances of this 
transaction, the Escrow provides adequate protection to the Master 
Trust. State Street asserts that the Escrow is adequate in view of (1) 
the size, financial strength and creditworthiness of Cargill relative 
to the amount of its potential obligations under the Put Option and (2) 
the independent fiduciary's right to exercise the Put Option at any 
time that it determines that such an exercise is necessary to protect 
the interests of the Plans.
    Finally, the applicant represents that comments referring to an 
alleged offer by Cargill to sell stock to salaried employees in June, 
1992 are incorrect. Cargill represents that no such offer ever took 
place. Cargill does note, however, that shares of the ESOP common stock 
are automatically allocated to eligible members of the Cargill, 
Incorporated Partnership Plan pursuant to the terms of that plan.
    Seven of the interested persons who commented on the proposed 
exemption requested a public hearing. The Department has considered the 
concerns expressed by the commentators and the applicant's written 
responses addressing such concerns, and, on the basis of the materials 
provided, has determined not to hold a public hearing. Furthermore, 
after giving full consideration to the entire record, including the 
written comments and the responses thereto, the Department has decided 
to grant the exemption.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption refer to 
the Notice of Proposed Exemption published on October 29, 1993, at 58 
FR 58194.

For Further Information Contact: Ms. Virginia J. Miller of the 
Department, telephone (202) 219-8971. (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 to which the exemptions 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) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional 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
    (3) The availability of these exemptions is subject to the express 
condition that the material facts and representations contained in each 
application are true and complete and accurately describe all material 
terms of the transaction which is the subject of the exemption. In the 
case of continuing exemption transactions, if any of the material facts 
or representations described in the application change after the 
exemption is granted, the exemption will cease to apply as of the date 
of such change. In the event of any such change, application for a new 
exemption may be made to the Department.

    Signed at Washington, DC this 3rd day of March 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 94-5248 Filed 3-7-94; 8:45 am]
BILLING CODE 4510-29-P