[Federal Register Volume 59, Number 218 (Monday, November 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28059]
[[Page Unknown]]
[Federal Register: November 14, 1994]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9742, et al.]
Proposed Exemptions; Allied Old English, Inc. Employees' Profit
Sharing Plan (the Plan) et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
-----------------------------------------------------------------------
SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction 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
request 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
request 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. 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 request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 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 (43 FR 47713, October 17, 1978) 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.
Allied Old English, Inc. Employees' Profit Sharing Plan (the Plan)
Located in Port Reading, New Jersey [Application No. D-9742]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed loan (the Loan) of $600,000 by
the Plan to the Harold Ross Trust (the Ross Trust), a party in interest
with respect to the Plan.
This proposed 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 an independent, qualified
appraiser to ensure that the fair market value of the Property is at
least 150 percent of the amount of the Loan; (d) 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;
(e) the 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 (f) the independent,
qualified fiduciary monitors compliance with the terms of the Loan and
conditions of the exemption 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.
Summary of Facts and Representations
1. Allied Old English (Allied), the Plan sponsor, is a New Jersey
corporation with its principal place of business located in Port
Reading, New Jersey. Allied engages in the business of food
manufacturing and distributing.
The Plan is a profit sharing plan with assets totaling $2,489,603
as of December 31, 1993. Thirty individuals participate in the Plan.
The Plan trustees, Frederick Ross, Harold Ross and Richard Owens (the
Trustees), possess the sole investment discretion with regard to the
Plan's assets. Frederick Ross and Harold Ross both serve as directors
as well as President and Treasurer, respectively, of Allied.
2. On May 9, 1980, Harold Ross and Lucille Ross (the Grantors)
established the Ross Trust, which is an irrevocable investment trust.
As of October 5, 1994, the Ross Trust had $1,925,000 in total assets,
with the Ross Trust's only asset being the Property. Frederick Ross is
the trustee of the Ross Trust. The Grantors, the Grantors' son,
Frederick Ross, and the trustee of the Ross Trust on behalf of the
Grantors' daughter, Elyse Ames, hold the beneficial interests of the
Ross Trust. The Trustees represent that because at least fifty percent
of the beneficial interests of the Ross Trust are held by two of the
Plan's trustees, the Ross Trust appears to be a party in interest with
respect to the Plan under section 3(14)(G) of the Act.
3. The Trustees request an administrative exemption from the
Department to permit the Loan to the Ross Trust under the terms and
conditions described herein. The Ross Trust proposes to use the Loan
proceeds towards retiring an outstanding first mortgage on the Property
in the amount of $760,572 which becomes due and payable on January 1,
1995.
4. The Loan will be in a principal amount of $600,000. The
applicant states that at no time will the amount of the Loan represent
more than twenty-five percent of the Plan's total assets. The Loan will
be secured by a first deed of trust on the Property, which consists of
a 60,000 square foot, one-story manufacturing warehouse distribution
facility situated on 4.25 acres located at 100 Markley Street, Port
Reading, New Jersey. As of June 15, 1994, Allied leased the Property
pursuant to a lease scheduled to expire on October 31, 2007. Allied has
the option to renew such lease for five additional five-year periods
with a maximum term ending on October 31, 2032. The deed of trust will
be duly recorded in Middlesex County to reflect the Plan's security
interest in the Property. In addition, the Ross Trust will insure the
Property against casualty loss and designate the Plan as the loss payee
of such insurance.
5. The Loan will have a ten-year term and will be evidenced by a
promissory note (the Note). The Note will require the Ross Trust to
make monthly payments of principal and interest which will be fully
amortized over the ten-year term. The interest rate on the Loan will be
the greater of: (a) The prime rate of CoreStates Bank, N.A.
(CoreStates) of Philadelphia, Pennsylvania, an unrelated entity, plus
three quarters of a percentage point; or (b) 9.65 percent. The Plan
will not be required to pay any commissions, fees or other expenses in
connection with the Loan.
As a condition of the proposed exemption, the terms and conditions
of the Loan must be at least as favorable to the Plan as those which
the Plan could obtain in dealing at arm's length with an unrelated
party. In this regard, CoreStates states in a letter dated July 12,
1994 that CoreStates would make a secured loan of $600,000 to the Ross
Trust with interest accruing at either: (1) A daily floating rate equal
to its prime rate plus three quarters of a percentage point; or (2) a
fixed rate equal to 9.65 percent. In addition, CoreStates states that
it would charge the Ross Trust a facility fee equal to one percent of
the principal amount of such loan or $6000. Accordingly, the applicants
represent that the Ross Trust will pay a facility fee of $6000 to the
Plan at the inception of the Loan.
6. Dale R. Kilpatrick, MAI and Robert Appaluccio (the Appraisers)
of National Valuation Services, Inc. (National Valuation), a valuation
firm located in Florham Park, New Jersey, appraised the Property. Mr.
Kilpatrick is the Vice President of National Valuation and Mr.
Appaluccio has been actively engaged in appraising real estate since
1986. The Appraisers represent that both they and National Valuation
are independent of, and unrelated to, both the Ross Trust and Allied.
The Appraisers placed the fair market value of the Property at
$1,925,000 as of June 2, 1994. The Appraisers utilized the sales
comparison and income approaches of valuation by using recent sales and
current leases from comparable properties in the Woodbridge area.
Primary emphasis was given to the sale comparison approach.
Mr. Appaluccio, in a letter dated October 14, 1994, stated that the
fact that the Property is subject to a long term lease does not warrant
a discount on the Property's fair market value because several types of
investors would be willing to purchase the Property at its full fair
market value. By letter dated October 21, 1994, Mr. Kilpatrick
concurred with Mr. Appaluccio's position regarding such discount.
7. Milgrom, Galuskin, Rosner & Company (MGR&C), an accounting firm
located in Edison, New Jersey, will serve as the independent, qualified
fiduciary for the Plan with respect to the Loan. Paul D. Milgrom of
MGR&C represents that MGR&C has extensive experience in business and
loan transactions. Mr. Milgrom represents that both he and MGR&C are
independent of, and unrelated to, both the Ross Trust and Allied. Mr.
Milgrom states that MGR&C understands and acknowledges their duties,
responsibilities, and liabilities in acting as a fiduciary with respect
to the Plan based upon consultation with counsel experienced with the
fiduciary responsibility provisions of the Act.
Mr. Milgrom represents that MGR&C has reviewed the terms of the
Loan and all of the documents and relevant information in connection
with the Loan, including the appraisal. Mr. Milgrom states that the
terms of the Loan compare favorably with the terms of similar
transactions between unrelated parties and would be an arm's length
transaction as evidenced by the terms offered by CoreStates (see Item
#5 above). Mr. Milgrom represents that MGR&C believes that the Loan is
in the best interests of the Plan and its participants and
beneficiaries as an investment for the Plan's portfolio. Mr. Milgrom
states that MGR&C believes that the Loan would be an appropriate and
desirable investment for the Plan, based on the Loan's rate of return,
the collateral securing the Loan, the character and diversification of
the Plan's other assets and the projected liquidity needs of the Plan.
MGR&C has reviewed the financial condition of the Ross Trust in
order to establish its ability to repay the Loan. In this regard, MGR&C
has reviewed the Ross Trust's financial statements as well as Allied's
financial statements. MGR&C concludes that the Ross Trust is credit
worthy and, based upon its available monthly cash flow, the Ross Trust
is financially capable of making the monthly Loan payments without such
payments having an adverse impact on its cash flow.
Mr. Milgrom represents that MGR&C will monitor the Loan throughout
its entire duration and will take any appropriate action necessary to
protect the interests of the Plan and its participants and
beneficiaries, including a foreclosure on the Property in the event of
default. MGR&C will monitor the Property to ensure that the Loan
remains secured by collateral worth at least 150 percent of the Loan at
all times. Finally, MGR&C will monitor the conditions of the exemption
and will ensure that such conditions are met.
8. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because: (a) The terms of the Loan will be 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 will be secured by a first deed of
trust on certain real property (the Property) which has been appraised
by an independent, qualified appraiser to ensure that the fair market
value of the Property is at least 150 percent of the amount of the
Loan; (d) the fair market value of the Property will remain at least
equal to 150 percent of the outstanding balance of the Loan throughout
the duration of the Loan; (e) MGR&C, as the Plan's independent,
qualified fiduciary, determined on behalf of the Plan that the Loan is
in the best interest of the Plan and protective of the Plan's
participants and beneficiaries; and (f) MGR&C will monitor compliance
with the terms of the Loan and the conditions of the exemption
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 FURTHER INFORMATION CONTACT: Kathryn Parr of the Department,
telephone (202) 219-8971. (This is not a toll-free number.
Westinghouse Pension Plan (The Plan)
Located in Pittsburgh, Pennsylvania [Application No. D-9519]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR 2570,
Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a)(1)(A) through (D),
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the
contribution of certain securities (the Securities) to the Plan on
September 14, 1993 and October 29, 1993 by Westinghouse Electric
Corporation (WEC), the Plan's sponsor and as such a party in interest
with respect to the Plan, provided the following conditions are met:
(a) The Securities were valued at an amount which was no greater
than their fair market value at the time of contribution, as
established by an independent, qualified appraiser;
(b) The terms and conditions of the contributions were at least as
favorable to the Plan as terms and conditions which the Plan could have
obtained in a purchase of similar securities from an unrelated party;
(c) The Plan did not pay any commissions or other expenses with
respect to the contributions;
(d) The fair market value of the Securities represents at all times
an amount of the Plan's total assets which is consistent with the
Plan's investment guidelines and objectives;
(e) Mellon Bank N.A. (Mellon), as an independent, qualified
fiduciary for the Plan, determined that each contribution of the
Securities to the Plan was in the best interests and protective of the
Plan and its participants and beneficiaries at the time of the
transactions;
(f) Mellon monitored each contribution made to the Plan and took
all appropriate actions necessary to protect the interests of the Plan
and its participants and beneficiaries;
(g) Mellon monitors the performance of the Securities as an
investment for the Plan and takes whatever action is necessary to
protect the interests of the Plan and its participants and
beneficiaries;
(h) On the third anniversary of the date of the first contribution
made to the Plan (i.e. September 14, 1996), WEC shall contribute to the
Plan the difference between the sum of:
(1) The sales proceeds received by the Plan on the disposition of
any of the Securities, plus
(2) The current fair market value of the Securities remaining in
the Plan, plus
(3) Interest accrued and interest and dividends received on the
Securities, and the aggregate value of the Securities on the date that
they were originally contributed to the Plan (i.e. $188,882,694), plus
any adjustments to such aggregate value requested by Mellon to reflect
changes in the Consumer Price Index (CPI) during the period that the
Securities were held by the Plan, upon demand by Mellon as the Plan's
independent fiduciary under the terms of a ``makewhole agreement'' with
the Plan (the Makewhole Agreement). Mellon shall have sole authority to
determine the current fair market value of the Securities remaining in
the Plan under the Makewhole Agreement through either appointment of
one or more independent appraisers or by its own appraisal of the
Securities at the time of the transaction;
(i) No later than December 31, 1994, WEC makes a cash contribution
to the Plan in the amount of $25 million to support any amounts that
may become due under the Makewhole Agreement, provided that this cash
contribution is held as a separate credit balance in the Plan's funding
standard account until September 14, 1996 (the termination date of the
Makewhole Agreement) and is not used to offset any other funding
obligation owed by WEC to the Plan until such date. Mellon, as the
Plan's independent fiduciary, shall be responsible for investing the
$25 million and ensuring that the Plan receives all interest and other
income earned on the $25 million; and
(j) Mellon monitors the compliance by all parties with the terms
and conditions of the exemption.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective for each contribution as of September 14 and October
29, 1993, respectively.
Summary of Facts and Representations
1. The Plan is a defined benefit plan which had 135,969
participants and total assets of approximately $3.7 billion, as of
December 31, 1992. The Plan is maintained by WEC, a diversified, global
technology-based corporation with its headquarters in Pittsburgh,
Pennsylvania. The trustee of the Plan is Mellon. As of September 15,
1993, the Plan was funded above the required minimum funding level and
WEC had no minimum funding obligation.
2. The named fiduciary of the Plan is the WEC Pension Plan
Administration Committee (the Committee). The Committee has the general
authority to control and manage the operation and administration of the
Plan, including the authority to appoint, direct, and monitor the
trustee and investment managers. The Committee also has the authority
to employ attorneys, consultants and other advisers in furtherance of
its duties.
The Committee retained The Frank Russell Company (Russell) in 1990
as a consultant to review the Plan's asset allocation guidelines. The
purpose of these guidelines is to establish percentage goals for the
allocation of Plan assets among various categories of investments to
enable the Plan to meet targeted returns, achieve diversification, and
satisfy projected liquidity needs.
Pursuant to this review, Russell concluded that a target of
approximately 5.2 percent of total Plan assets would be an appropriate
asset allocation goal for so-called ``alternative investments'' that
would be consistent with the Plan's investment needs and objectives.
Alternative investments generally are relatively illiquid investments
in an asset class other than traditional classes of cash, stock, fixed
income securities and real estate. Alternative investments typically
include venture capital, buyout funds, distressed companies, mezzanine
financing, oil and gas programs, timberland or farmland, and
economically targeted investments addressing certain social policies.
Russell states that allocation of a small portion of assets to
alternative investments is common among large corporate pension plans,
such as the Plan.
3. As the result of a corporate reorganization in 1992, WEC held
the investments of its former subsidiary, Westinghouse Credit
Corporation (WCC). These assets included a portfolio of corporate
securities which contained numerous alternative investments of the type
described above. These assets had a value of approximately $1 billion.
WEC had determined to liquidate all assets of WCC pursuant to the
corporate restructuring. However, upon internal review of these assets,
WEC concluded that some of the assets were high quality alternative
investments possessing a significant potential for strong investment
returns. In view of the fact that the Plan had an unsatisfied asset
allocation target for such alternative investments, WEC began
considering the possibility of contributing some of these assets to the
Plan.
4. The process leading to the subject contribution of the
Securities involved a number of steps. First, Westinghouse Pension
Investment Corporation (WPIC), a wholly-owned subsidiary of WEC that
managed the Plan's existing alternative investment portfolio, examined
the entire $1 billion portfolio of available securities and identified
$300 million in securities that were suitable for contribution to the
Plan. Second, once WPIC had completed its initial review, the Plan
retained Mellon to act as its independent fiduciary to examine the
remaining securities for purposes of the proposed contribution of some
of these securities to the Plan. Mellon was vested with full authority
to act on behalf of the Plan and to determine whether accepting the
contribution of any of the securities identified by WPIC would be in
the best interests of the Plan and its participants and beneficiaries.
As a result, Mellon had the authority either to refuse to accept any
contribution, to accept the entire contribution identified by WPIC, or
to further choose among the $1 billion portfolio of offered securities.
Mellon reviewed the $300 million of securities identified by WPIC
and concluded that the contribution of four specific securities (i.e.
the Securities) valued at approximately $188 million would be in the
best interests of the Plan.
5. The Securities, all of which were issued by entities unrelated
to WEC and its affiliates as well as Mellon, represent equity and debt
interests that are within the asset category of alternative investments
because the Securities are fairly illiquid and high risk investments.
KPMG Peat Marwick (Peat Marwick) of Chicago, Illinois, and Stern
Brothers & Company (Stern Brothers) of Kansas City, Missouri, were
engaged as qualified, independent appraisers to value the Securities
for purposes of the contribution.
The Securities are described as follows: (i) 35.1% of the
outstanding shares of common stock of Topps Appliance City Inc. (the
Topps Securities), appraised by Peat Marwick as having a fair market
value of approximately $32,804,694; (ii) a senior revolving loan,
subordinated notes, and 100% of the class A cumulative preferred stock
of Tele-Media Company of Western Connecticut (the Tele-Media
Securities), appraised by Peat Marwick as having a fair market value of
approximately $62,000,000; (iii) 12% of the outstanding shares of class
B common stock of Federated Investors (the Federated Securities),
appraised by Stern Brothers as having a fair market value of
approximately $20,100,000;1 and (iv) 2% of the senior debt, 37.4%
of the subordinated debt, 37.9% of the preferred stock and 31.6% of the
common stock of First Britannia Mezzanine N.V. (the First Britannia
Securities), appraised by Peat Marwick as having a fair market value of
approximately $73,978,000.
---------------------------------------------------------------------------
\1\The applicant states that Mellon agreed to have the
Securities valued by Peat Marwick because of its expertise in the
field of valuing alternative investment securities. However, Peat
Marwick determined that as a result of a pre-existing relationship
with Federated Investors, it would be unable to evaluate the
Federated Securities. Therefore, at Peat Marwick's suggestion with
the approval of Mellon, Stern Brothers was chosen to value these
Securities.
---------------------------------------------------------------------------
The total fair market value of the Securities established by Peat
Marwick and Stern Brothers (together, the Appraisers) was approximately
$188,882,694. The Appraisers' reports state that certain discount rates
were used to value each of the Securities to reflect their lack of
marketability and the rate of return which investors would require to
compensate for the risks involved.
The Topps Securities, the Tele-Media Securities, and the Federated
Securities were contributed by WEC to the Plan on September 14, 1993.
The First Britannia Securities were contributed by WEC to the Plan on
October 29, 1993 (for reasons discussed in Item 6 below). The
Securities represented approximately 5.1% of the Plan's total assets as
of the date of the last contribution.
6. Mellon represents that it thoroughly reviewed, prior to the
subject contributions, both the Appraisers' reports and the Securities
themselves in order to determine whether and at what amount to accept
the Securities on behalf of the Plan. Mellon had access to all
information relating to the Securities in the possession of WEC, WCC
and WPIC, including legal documentation of the Securities, various
financial statements, and annual reports on the issuers of the
Securities. Mellon reviewed and approved the valuation methodologies
contained in the Appraisers' reports, which utilized both independent,
market-based data as well as information provided by the issuers of the
Securities. Mellon concluded that the Appraisers used accepted
valuation methods and relied on information that was reliable and
consistent with the information developed by Mellon during its review
of the contribution of the Securities.
With respect to the Topps Securities, the investment consists of
2,523,438 shares of common stock of Topps Appliance City Inc. (Topps),
a NASDAQ listed retailer of home appliances and consumer electronics in
the New York City area. Mellon states that the shares, although
publicly traded, are unregistered and subject to certain sale
restrictions under Rule 144 of the Securities and Exchange Commission
(SEC). Thus, Mellon notes that the Topps Securities can be disposed of
only in a private placement or in the public market over a period of
approximately 8-10 years under the timing and volume restrictions of
SEC Rule 144. However, Mellon states that the valuation of the Topps
Securities by Peat Marwick analyzed the price volatility and trading
volume of the common stock of Topps as well as the discounts at which
private placements of such stock occur in the market. Peat Marwick's
valuation of the Topps Securities reflected a 20% discount off the
traded share price of $16.25 as of September 13, 1993, to account for
the lack of liquidity. Mellon believed that this discount and the
potential for significant returns over a long term made the Topps
Securities an appropriate alternative investment for the Plan.
With respect to the Tele-Media Securities, the investment consists
of a senior revolving loan, subordinated debt and 100% of the
cumulative preferred stock of Tele-Media Company of Western Connecticut
(Tele-Media), a cable television and video production studio operator
in Naugatuck Valley, Connecticut. Tele-Media is a privately-held
company. WEC was the sole lender under the senior revolving loan, sole
holder of Tele-Media's subordinated debt, and sole owner of the Tele-
Media preferred stock prior to the subject contribution to the Plan.
Peat Marwick's valuation of the Tele-Media Securities utilized in part
a discounted cash flow analysis of the company. The discounted cash
flow method attempts to measure what a buyer is willing to pay
currently for the future cash generating potential of an entity. The
estimate of the present value of future cash flows of Tele-Media, using
an average of management's best and worst case scenarios for a five-
year earnings forecast and a discount rate of 14.5%, suggested a value
for Tele-Media's total capital of approximately $70 million. However,
Peat Marwick's valuation also utilized a market approach analysis
involving trades of similar securities by companies within the
industry. This approach was given more weight because of uncertainty
regarding the potential impact of new cable regulations on Tele-Media's
future cash flow. Under this approach, the fair market value of senior
and subordinated debt was determined by computing the present value of
the expected principal and interest payments at rates which reflected
current market rates for similar debt instruments. Peat Marwick
concluded that the value of the Tele-Media Securities under the market
approach was $62 million.\2\ Mellon states that Peat Marwick's
valuation of the Tele-Media Securities appropriately reflected the risk
of holding such a position in a private company. Mellon believed that
the potential for significant returns over the long term made the Tele-
Media Securities an appropriate alternative investment for the Plan.
---------------------------------------------------------------------------
\2\In this regard, a current market rate of 9% per annum was
assumed for Tele-Media's $51 million senior debt outstanding and a
current market rate of 20% per annum was assumed for Tele-Media's
$12 million subordinated debt outstanding as of June 30, 1993. Thus,
the estimated present value of the senior and subordinated debt
totalled approximately $59 million as of such date. Peat Marwick
states that, based on a total invested capital value for Tele-Media
of $62 million, $3 million was allocated to Tele-Media's preferred
stock. Peat Marwick made no further adjustments to its valuation of
the Tele-Media Securities at the time of the contribution (i.e.
September 14, 1993).
---------------------------------------------------------------------------
The applicant states that on June 16, 1994, the Tele-Media
Securities were sold by the Plan to Tele-Media for $66,050,000. Thus,
based on Peat Marwick's determination that the Tele-Media Securities
had a fair market value of $62 million as of September 14, 1993, the
applicant represents that the Plan has realized a net gain of
$4,050,000 as a result of the contribution and sale of these
securities.
With respect to the Federated Securities, the investment consists
of 1,200,000 shares of class B common stock of Federated Investors
(Federated), a nationwide mutual fund sponsor and service-provider
based in Pittsburgh, Pennsylvania. The Federated Securities represent a
minority interest (i.e. approximately 12%) in a privately-held company.
Stern Brothers' valuation of the Federated Securities utilized a
capitalization of earnings approach, which considered the market value
of Federated's invested capital as a multiple of projected earnings,
and a discounted cash flow approach. Stern Brothers used these
approaches to arrive at a $20.87 per share value, on a publicly traded
equivalent basis, for the Federated Securities. In addition, Stern
Brothers applied a 20% discount to this amount to account for the lack
of marketability of the Federated Securities. Mellon believed that this
discount and the potential for significant returns over the long term
made the Federated Securities an appropriate alternative investment for
the Plan. With respect to the First Britannia Securities, the
investment consists of 2% of the outstanding senior debt, 37.39% of the
subordinated debt, 37.96% of the preferred stock (i.e. 873,140 shares)
and 31.61% of the common stock (i.e. 4,425,322 shares) of First
Britannia Mezzanine N.V. (First Britannia), an investment fund based in
London, England, whose purpose is to invest in high yield, subordinated
debt with associated equity securities focusing primarily on companies
in the United Kingdom. First Britannia's portfolio consisted of
investments in 16 diversified operating companies at the time of Peat
Marwick's valuation. Peat Marwick selected the adjusted net asset value
approach to determine the fair market value of First Britannia's equity
interests. In this regard, Peat Marwick relied on a current valuation
of the equity investments in First Britannia's portfolio by Coopers &
Lybrand, an independent qualified appraiser. Peat Marwick assumed that
the fair market value of First Britannia's debt interests was equal to
book value since all portfolio loans were current and had adjustable
interest rates based on the London Interbank Offered Rate (LIBOR).
Mellon states that the valuation of the First Britannia Securities
reflected appropriate investment company, minority ownership and
marketability discounts. Mellon believed that these discounts and the
potential for significant returns over the long term made the First
Britannia Securities an appropriate alternative investment for the
Plan. However, Mellon withheld final approval of the Plan accepting the
First Britannia Securities on September 14, 1993, the contribution date
for the other Securities, because First Britannia was in the process at
that time of refinancing its senior debt. The refinancing was completed
on October 25, 1993, with terms which were more favorable to senior
debtholders, including an increase in the interest rate.\3\ Mellon,
upon review of the terms of First Britannia's new senior debt,
determined that the contribution of the First Britannia Securities was
in the best interest of the Plan and accepted those Securities on
October 29, 1993. Peat Marwick established the fair market value of the
First Britannia Securities to be 49,733,000 pounds sterling on the date
of contribution, which equated to $73,978,000 based on exchange rates
as of close of business on October 28, 1993.
---------------------------------------------------------------------------
\3\First Britannia's new senior debt has interest payable semi-
annually at a rate equal to LIBOR plus 200 basis points, an increase
of 35 basis points over the original senior debt which paid semi-
annual interest equal to LIBOR plus 165 basis points. First
Britannia's subordinated debt pays interest semi-annually at a rate
equal to LIBOR plus 300 basis points.
---------------------------------------------------------------------------
7. As the Plan's independent fiduciary, Mellon represents that it
also: (i) Reviewed the Plan's investment allocation policy and
guidelines relating to alternative investments; (ii) confirmed that
such investment guidelines were independently reviewed by Russell who
had worked with WPIC to assure that the guidelines were designed to
meet appropriate investment return and diversification needs of the
Plan; (iii) determined that it was proper to rely on the investment
guidelines with respect to the need for alternative investments and the
percentage to be committed to such investments; (iv) determined the
value of Plan assets currently committed to alternative investments;
and (v) determined that the Plan could accept the Securities without
exceeding the guidelines relating to alternative investments. Mellon
concluded, prior to each contribution of the Securities to the Plan,
that the Plan's allocation policy and investment guidelines relating to
alternative investments were appropriate and that acceptance of the
Securities would be within these guidelines and would not adversely
affect the Plan's liquidity needs. Accordingly, Mellon represents that
the contribution of the Securities was in the best interests and
protective of the Plan and its participants and beneficiaries at the
time of the subject transactions.\4\
---------------------------------------------------------------------------
\4\The Department expresses no opinion in this proposed
exemption as to whether the contribution and subsequent holding of
the Securities by the Plan would violate section 404(a) of the Act.
Section 404(a) of the Act requires, among other things, that a
fiduciary of a plan act prudently, solely in the interest of the
plan's participants and beneficiaries, and for the exclusive purpose
of providing benefits to participants and beneficiaries when making
investment decisions on behalf of a plan.
---------------------------------------------------------------------------
8. Mellon states that it monitored the contributions of the
Securities on behalf of the Plan and took all appropriate actions
necessary to protect the interests of the Plan and its participants and
beneficiaries. Mellon represented the Plan in the preparation and
review of all documentation necessary to effect the transfer of the
Securities from WEC to the Plan. In addition to reviewing and approving
the valuation methodologies utilized by the Appraisers, Mellon ensured
that the valuation of each of the Securities was adjusted to reflect
the current fair market value on the date of contribution to the Plan.
In this regard, Mellon requested that the Appraisers provide updated
valuations of the Securities as of the date of the contributions. Where
market forces resulted in changes in the valuations of the Securities,
Mellon states that it reviewed the stated causes for these changes and
was satisfied that the changes were accurately reflected in the
valuations.
9. Mellon agreed to act as the Plan's independent investment
manager for the holding of the Securities. Mellon has full authority
for decisions relating to whether to hold or dispose of the Securities
on behalf of the Plan. Mellon states that it has and will continue to
monitor the performance of the Securities as an investment for the Plan
and will take whatever action is necessary to protect the interests of
the Plan and its participants and beneficiaries.
10. WEC has entered into the Makewhole Agreement with the Plan for
the Securities in order to provide additional protections to the Plan.
Under the Makewhole Agreement, the parties agree that on the third
anniversary of the date of the first contribution made to the Plan (the
Exercise Date), WEC shall contribute to the Plan the difference between
the sum of:
(i) The sales proceeds received by the Plan on the disposition of
any of the Securities, plus
(ii) The current fair market value of the Securities remaining in
the Plan, plus
(iii) Interest accrued and interest and dividends received on the
Securities, and the aggregate value of the Securities on the date that
they were originally contributed to the Plan (i.e. $188,882,694), if
such amount is greater, plus any adjustments to such aggregate value
requested by Mellon to reflect changes in the CPI during the period
that the Securities were held by the Plan (referred to below as ``the
Makewhole Amount''), upon demand by Mellon as the Plan's independent
fiduciary. Mellon will exercise the rights under the Makewhole
Agreement on behalf of the Plan by delivery of a notice (the Notice of
Exercise) to WEC no later than the sixtieth (60th) day after the
Exercise Date. Mellon represents that it has full authority regarding
whether and when to deliver the Notice of Exercise. In the event Mellon
determines to exercise the rights under the Makewhole Agreement, it
will have sole authority to determine the current fair market value of
the Securities remaining in the Plan, for purposes of establishing the
Makewhole Amount, through either appointment of one or more independent
appraisers or by its own appraisal of the Securities at the time of the
transaction.
Mellon states that the terms of the Makewhole Agreement are in the
best interests of the Plan. The Makewhole Agreement is designed to
guarantee the full value of the Securities as a contribution to the
Plan, based on their fair market value at the time of each
contribution, even though WEC was under no legal obligation to make a
cash contribution at the time of the transactions. Under the Makewhole
Agreement, WEC will guarantee the value of the Securities as an
investment for the Plan during a three-year time period in order to
ensure that the Plan will be protected from any losses that may result
from holding the Securities during this period. Thus, the Makewhole
Agreement ensures that the Plan will be in at least as favorable a
position at the end of this period as it would have been had it
received a cash contribution of the amount given in-kind through the
contribution of the Securities and used the cash to purchase similar
alternative investments. WEC states that the Plan incurred significant
transaction cost savings in acquiring the Securities from WEC because
no commissions or other expenses were paid by the Plan for the
Securities.
11. WEC states that it will adhere to all minimum funding
obligations that will otherwise accrue to the Plan during the three
year period covered by the Makewhole Agreement.\5\ In addition, as
support for the Makewhole Amount, the applicant has agreed to the
following arrangement:
---------------------------------------------------------------------------
\5\The applicant represents that the Securities became plan
assets upon contribution to the Plan, and the value of the
Securities was included in the Plan's funding standard account.
However, WEC states that it has no minimum funding payments that
must be made to the Plan until 1995. The value of the Securities
(including the proceeds from the sale of any of the Securities and
the dividends, interest and other income generated by the
Securities), along with certain other contributions made by WEC,
will be included in the basis for the calculation of the amount of
minimum funding payments due to the Plan in 1995. In this regard,
WEC made a cash contribution of $75 million to the Plan on June 30,
1994. WEC states that, as in the case of the contribution of the
Securities, this cash contribution was not a required minimum
funding payment but was made as part of WEC's ongoing efforts to
improve the funding status of the Plan.
---------------------------------------------------------------------------
(a) WEC will make a cash contribution to the Plan in the amount of
$25 million. This amount represents at least 20 percent of the
difference between the original value of the Securities at the time of
contribution and the proceeds of the sale of the Tele-Media Securities
($188,882,694-$66,050,000 = $122,832,694).
(b) This $25 million contribution will not alter the terms of the
Makewhole Agreement or any obligation WEC may have as a result of the
operation of the Makewhole Agreement.
(c) This contribution will be made no later than December 31, 1994.
(d) WEC will make this contribution solely as the result of and in
connection with the requested exemption. WEC has no currently
outstanding annual minimum funding obligation that would otherwise be
satisfied by this contribution.
(e) This $25 million contribution will be held as a separate credit
balance in the Plan's funding standard account until September 14, 1996
(the termination date of the Makewhole Agreement). Until that date,
this $25 million credit balance will not be used to offset any other
funding obligation owed by WEC to the Plan, and will not be used in
calculating the amount of any other funding payment or contribution
made by WEC to the Plan.
(f) This $25 million will be managed by Mellon (as investment
manager for the Plan) and all interest and other income produced by
this contribution will be credited to the Plan.
12. In summary, the applicant represents that the contributions of
the Securities met the statutory criteria of section 408(a) of the Act
and section 4975(c)(2) of the Code because: (a) The Securities were
valued at an amount which was no greater than their fair market value
at the time of the transactions, as established by independent,
qualified appraisers; (b) Mellon analyzed the Securities as an
investment for the Plan, prior to the contributions, and concluded that
the acquisition of the Securities would be in the best interests of the
Plan and its participants and beneficiaries; (c) the Securities were
contributed under terms and conditions which were at least as favorable
to the Plan as a purchase of similar securities on the open market; (d)
the fair market value of the Securities represented an amount of the
Plan's total assets which was consistent with the Plan's investment
guidelines and objectives, as reviewed and approved by Russell and
Mellon; (e) WEC will contribute, on the third anniversary of the date
of the first contribution made to the Plan, the difference between the
sum of (i) the sales proceeds received by the Plan on the disposition
of any of the Securities, plus (ii) the current fair market value of
the Securities remaining in the Plan, plus (iii) interest accrued and
interest and dividends received on the Securities, and the aggregate
value of the Securities on the date that they were originally
contributed to the Plan (plus any adjustments to such aggregate value
requested by Mellon to reflect changes in the CPI during the period
that the Securities were held by the Plan), upon demand by Mellon as
the Plan's independent fiduciary under the terms of the Makewhole
Agreement; (f) WEC will make an additional cash contribution to the
Plan in the amount of $25 million as support for the Makewhole Amount;
and (g) Mellon will monitor the holding of the Securities by the Plan,
as well as the conditions of the exemption, and will take whatever
action is necessary to protect the interests of the Plan and its
participants and beneficiaries.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
General Motors Hourly-Rate Employes Pension Plan (The Plan)
Located in Detroit, Michigan
[Application No. D-9734]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2),
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 Code6 shall not apply to:
---------------------------------------------------------------------------
\6\For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
(1) The transfer of shares of Class E common stock (the Class E
stock) of General Motors Corporation (GM) to the Plan through the in-
kind contribution of such shares by GM, a party in interest with
respect to such Plan;
(2) The holding of the Class E stock by the Plan;
(3) The sale for cash of shares of Class E stock by the Plan to GM
or its affiliates or to certain defined contribution plans sponsored by
GM or its affiliates;
(4) The exchange of shares of Class E stock for publicly-traded
securities between the Plan and GM or its affiliates under the same
terms and conditions as are made available to all shareholders of Class
E stock; and
(5) The acquisition, holding, and exercise by the Plan of a put
option granted by GM which permits the Plan to sell the Class E stock
or a successor security for which the Class E stock has been exchanged
to GM.
This exemption is conditioned upon adherence to the material facts
and representations described herein and upon the satisfaction of the
following requirements:
(a) GM contributes to the Plan at least 177 million shares of Class
E stock but no more than 186 million shares plus $4 billion in cash,
with at least $2 billion contributed in conjunction with or prior to
the contribution of the Class E stock, and the remaining $2 billion
contributed no later than September 30, 1995;
(b) If less than 177 million shares of Class E stock are
contributed, GM will contribute additional cash in an amount equal to
the difference between 177 million and the number of shares of Class E
stock contributed times the per-share value of such stock at the time
of contribution, or a weighted average price if such stock is not
contributed on a single date;
(c) United States Trust (UST), an independent qualified fiduciary,
or a successor independent fiduciary acceptable to the Pension Benefit
Guaranty Corporation (PBGC) represents the Plan's interests for all
purposes with respect to the Class E stock and determines, prior to
entering into any of the transactions described herein, that each such
transaction, including the contribution of the Class E stock, is in the
interest of the Plan;
(d) UST negotiates and approves the terms of any of the
transactions between the Plan and GM or its affiliates or certain
defined contribution plans sponsored by GM or its affiliates;
(e) UST manages the holding and disposition of the Class E stock
and takes whatever action it deems necessary to protect the rights of
the Plan;
(f) The terms of any of the transactions between the Plan and
parties in interest are no less favorable to such Plan than terms
negotiated at arm's length under similar circumstances with unrelated
third parties;
(g) A credit balance reserve is maintained in the Plan consisting
of the cash credit balance or cash generated from stock that has been
sold in an amount equal to at least 25 percent (25%) of the contributed
value7 of the Class E stock which remains unsold in the Plan, for
so long as such stock or any securities received in exchange exceeds
the percentage limitations described in sections 407(a) and 407(f) of
the Act (the ERISA Limits);
---------------------------------------------------------------------------
\7\Contributed value means the value of the Class E stock when
contributed to the Plan, as determined by Duff & Phelps Capital
Markets Co. (formerly Duff & Phelps Financial Consulting Co.) (Duff
& Phelps).
---------------------------------------------------------------------------
(h) An independent qualified appraiser determines the fair market
value of the Class E stock contributed to the Plan as of the date of
such contribution, and determines the fair market value of the Class E
stock at various other times as required under the agreement between GM
and the PBGC (the PBGC agreement);
(i) With respect to any sale or exchange of Class E stock by the
Plan to GM or its affiliates or to any defined contribution plans
sponsored by GM or its affiliates, no commission will be charged to or
paid by the Plan;
(j) Any sale or exchange of Class E stock between the Plan and GM
or its affiliates will be for no less than ``adequate consideration''
within the meaning set forth in section 3(18) of the Act, and any sale
of Class E stock by the Plan to a defined contribution plan sponsored
by GM or its affiliates will be at the prevailing price for such stock
on the New York Stock Exchange (NYSE); and
(k) The Plan incurs no fees, costs, or other charges or expenses as
a result of its participation in any of the transactions.
EFFECTIVE DATE: If this proposed exemption is granted, it will be
effective on the later of the date on which the final exemption appears
in the Federal Register or the date on which the PBGC Agreement is
executed.
Summary of Facts and Representations
1. GM, the applicant, is a Delaware corporation, headquartered at
3044 West Grand Boulevard, Detroit, Michigan. GM is best known as a
full-line vehicle manufacturer and supplier of automotive components
and systems to other major manufacturers. In this regard, GM makes and
sells cars, trucks, locomotives, and automotive components worldwide.
It is represented that, as of December 31, 1993, GM had net sales and
revenues of $138.2 billion and employed an average of 448,000
individuals. GM's other substantial business interests include three
wholly-owned subsidiaries: (1) GM Hughes Electronics Corporation
(GMHE); (2) General Motors Acceptance Corporation (GMAC); and (3)
Electronic Data Systems Corporation (EDS). GMHE was organized in 1985
as a holding company for Hughes Aircraft Company and Delco Electronics
Corporation and is involved in telecommunications systems, satellite
systems, automotive electronic components, and other electronic
products for commercial, aviation, and defense applications. GMAC and
its affiliates provide financing and insurance to GM customers and
dealers. EDS, acquired by GM in 1984, and operated as an independent
and autonomous unit of GM, provides customers worldwide with
information systems management and development, telecommunications,
data processing, and other technological consulting services.
2. The Plan is a non-contributory defined benefit pension plan
covering substantially all of the hourly employees of GM in the United
States. The Plan uses an October 1-September 30 plan year. For the 1992
Plan year which ended September 30, 1993, the Plan covered a total of
599,262 participants and beneficiaries. Of these, 274,257 were fully
vested active participants, 280,633 were retirees or their
beneficiaries in pay status, and 44,372 were terminated vested
participants. The GM hourly employees are represented by eleven
different unions. In this regard, more than 500,000 of the participants
of the Plan are members of the International Union, United Automobile,
Aerospace, and Agricultural Implement Workers of America.
The named fiduciary of the Plan is the Finance Committee of the
Board of Directors of GM (the Board). A majority of the members of the
Finance Committee are outside directors. Acting in its fiduciary
capacity, GM appointed a wholly-owned subsidiary, the General Motors
Investment Management Corporation (GMIMCO), to serve as the primary
investment manager for the Plan. GMIMCO is a registered investment
advisor under the Investment Advisers Act of 1940 and has acknowledged
that it is a fiduciary with respect to the Plan. It is represented that
EDS began providing administrative services in January 1994 to the Plan
and to another plan sponsored by GM, after being chosen in competitive
bidding to do so. In this regard, it is represented that the Plan pays
only direct costs for the provision of such services.8
---------------------------------------------------------------------------
\8\The Department expresses no opinion, herein, as to whether
the provision of services by EDS to the Plan and the compensation
received therefor satisfy the terms and conditions as set forth in
section 408(b)(2) of the Act.
---------------------------------------------------------------------------
As of September 30, 1993, the Plan had assets of $19.6 billion. In
this regard, the Plan's investments were held in two master trusts (the
Master Trusts), the General Motors Hourly-Rate Employes Pension Trust
(the Hourly Trust) and the General Motors Global Pension Trust (the
Global Trust). The Master Trusts permit commingling of the assets of
one or more GM employee benefit plans for investment and administrative
purposes. The Plan has an undivided interest in the net assets of the
Master Trusts, and allocations are made monthly.
The Global Trust invests primarily in foreign equities, and for
reporting purposes its investments are translated into U.S. dollar
equivalents. The Hourly Trust invests principally in U.S. equity and
fixed income securities, real estate mortgages, and commingled pension
trust funds. As of September 30, 1992, the Hourly Trust and the Global
Trust had net assets of $13,791,304,000 and $6,881,072,000,
respectively. Banker's Trust Company (Banker's Trust), Mellon Bank,
N.A. (Mellon Bank), and Chase Manhattan Bank, N.A. (Chase Bank)
administer the Hourly Trust, and Chase Bank administers the Global
Trust. Effective December 31, 1991, the Hourly Trust became a master
trust by amendment of the provisions of existing trust agreements
between GM and Banker's Trust, Mellon Bank, and Chase Bank.
It is represented that the Plan owns land and buildings in sixteen
(16) separate sites dispersed throughout the United States that are
leased to GM and on which are located GM training centers (the Training
Centers). As of March 31, 1994, the aggregate fair market value of the
Training Centers was $2,266,000 which represented a small fraction
(approximately one one-hundredth of one percent) of the total assets of
the Plan, as of that date. It is represented that each of the Training
Centers constitutes ``qualifying employer real property,'' as defined
in section 407(d)(4) of the Act, such that the acquisition by the Plan
of such centers and the leaseback to GM were exempt from the prohibited
transaction provisions under section 408(e) of the Act.9
---------------------------------------------------------------------------
\9\The Department, herein, expresses no opinion as to whether
the Training Centers constitute ``qualifying employer real
property,'' as defined in section 407(d)(4) of the Act or whether
the acquisition and leaseback of the Training Centers satisfy the
conditions, as set forth under section 408(e) of the Act.
---------------------------------------------------------------------------
As of March 31, 1994,11 the Plan also held the following securities
issued by GM: (1) 17,306,532 million shares of Class E stock with a
market value of $592.7 million; (2) 516,425 shares of GM $1\2/3\ common
stock with a market value of $27.8 million; (3) GM Corp Series C
Depositary Shares with a market value of $6.2 million, and (4) debt
securities of GMAC with a market value of $3,798,000. It is further
represented that these securities constitute ``qualifying employer
securities,'' as defined in section 407(d)(5) of the Act, such that the
acquisition and holding by the Plan of such securities were exempt from
the prohibited transaction provisions under section 408(e) of the
Act.10
---------------------------------------------------------------------------
\1\0The Department, herein, expresses no opinion as to whether
these securities constitute ``qualifying employer securities,'' as
defined in section 407(d)(5) of the Act, or whether the acquisition
and holding by the Plan of such securities satisfy the conditions,
as set forth under section 408(e) of the Act.
---------------------------------------------------------------------------
3. The Plan was established October 1, 1950, to provide normal
retirement, early retirement, disability retirement, death and survivor
benefits, and other benefits to participants and beneficiaries.
Effective October 1, 1990, the Plan was amended to provide for
increases in basic, temporary, and certain supplemental benefit rates
for retirees. It is represented that the Plan, as amended in October
1990, meets the Code requirements for a qualified pension plan.
Subsequent to September 30, 1992, the Plan was amended to provide
unreduced retirement benefits for certain employees who elected
voluntary early retirement.
Benefits provided under the Plan are based generally on an
employee's credited service and vest generally after five years.
Contributions by GM to the Plan are determined on the basis of
actuarial cost methods and include amortization of prior service cost.
It is represented that such contributions are made periodically by GM
within the limits set by the Act. As of September 30, 1991 and 1992,
the net assets of the Plan available for benefits totaled
$17,953,494,000 and $18,399,015,000 respectively.
4. With regard to the net assets of the Plan available to pay
benefits, it is represented that the Plan is significantly underfunded,
even though GM has never failed to make any funding payment required by
the Act. For purposes of financial accounting, GM reports the
liabilities of the Plan in accordance with the Statement of Financial
Accounting Standards No. 87 (SFAS No. 87) issued by the Financial
Accounting Standards Board. Although the Plan was overfunded on an SFAS
No. 87 basis as recently as 1987, it is represented that the
liabilities of the Plan have doubled over the last six (6) years. As of
December 31, 1993, the Plan was underfunded by $18.3 billion. It is
represented that the unfunded liabilities of the Plan rose 60 percent
(60%) from year end 1992 to year end 1993, from $11.4 billion to $18.3
billion.11 It is represented that the major factors contributing
to this increase were: (1) The decline in interest rates which resulted
in lower discount rates that GM uses to calculate the actuarial present
value of the liabilities of the Plan; (2) pension benefit increases as
a result of labor negotiations; and (3) the cost of a 1993 early
retirement program for certain GM employees.
---------------------------------------------------------------------------
\1\1It is represented that the SFAS No. 87 calculations use the
same dates as those for plan years, but serve as proxy for calendar
year reporting purposes, as permitted under the accounting standard.
GM's liability shortfall on an SFAS No. 87 basis for its pension
plans worldwide was $22.3 billion at year-end 1993. GM maintains
that the Plan's $18.3 billion in underfunding accounts for the vast
bulk (82%) of GM's pension underfunding. The remaining underfunded
liabilities are primarily attributable to two non-U.S. pension
programs. It is represented that GM's other domestic qualified
defined benefit plans are each fully or nearly fully funded on an
SFAS No. 87 basis.
---------------------------------------------------------------------------
5. It is represented that reducing the underfunding of the Plan is
a key objective of GM. In this regard, GM believes that it is
imperative to accelerate the pace at which this goal will be
accomplished before the next cyclical downturn in the automobile
industry anticipated for 1997. In the opinion of GM, a significant
reduction in the underfunding of the Plan will improve the security of
pension benefits for the participants and beneficiaries. In addition,
GM believes that such action would strengthen its long-term financial
soundness, its credit ratings, and decrease the cost of debt and
improve access to equity capital both for GM and GMAC.12
---------------------------------------------------------------------------
\1\2GM believes that accelerating the funding of the Plan will
also help reduce the exposure of the PBGC to liability for certain
benefits of the Plan which are guaranteed.
---------------------------------------------------------------------------
Generally, in order to correct the unfunded liability of its main
U.S. plans, GM has revised the mortality assumptions in such plans to
more closely reflect recent actual experience. Further, effective for
1993, GM has lowered the asset earnings rate assumption for its main
U.S. plans. With regard to funding, GM's Board decided in 1992 to
substantially improve the funded status of GM's pension plans by the
end of the decade. In this regard, during 1992 and 1993, GM contributed
more to such plans than was required by law and will continue to
contribute additional amounts above those required in 1994 and future
years. Specifically, given current estimates GM anticipates that
contributions of over $20 billion will be required to sufficiently fund
the Plan which is the subject of this exemption request. GM maintains
that it has significant competing cash needs and that not all cash
generated by its operations can be used to fund the Plan.
Contributions of Cash and Class E Stock
6. In order to help correct the Plan's unfunded liability, GM
proposes to contribute in kind to the Plan shares of Class E stock and
$4 billion dollars in cash. In this regard, it is proposed that the
Plan receive all of the remaining 222 million unissued shares of Class
E stock, less approximately 45 million shares reserved for conversion
of GM's Series C Preference Stock, or approximately 177 million
shares.13 If the number of shares available for contribution to
the Plan falls below 177 million, GM has agreed to increase the cash
contributed by an amount equal to the shortfall (the difference between
177 million and the number of shares actually contributed times the per
share value of the contributed stock at the time of contribution or a
weighted average price if the stock is not contributed on a single
date)14. GM estimates that, based on the per share market price as
of June 9, 1994, the value of the cash and Class E stock proposed to be
contributed is approximately $10 billion. It is represented that the
contribution of cash and the Class E stock will in the aggregate
immediately reduce the underfunding of the Plan by over 40 percent
(40%) on the basis of SFAS No. 87.
---------------------------------------------------------------------------
\1\3It is represented that GM regularly issues Class E stock to
certain 401(k) and stock option plans maintained for employees of GM
and its affiliates. As a result, it is possible that at the time of
the contribution the remaining number of unissued nonreserved shares
of Class E stock will be less than the 177 million shares
specifically referenced in the PBGC Agreement, discussed below. GM
or EDS contemplates purchase of approximately 9 million shares of
Class E stock currently held by the General Motors Retirement
Program for Salaried Employes. In the event such sale is
consummated, GM may use some or all such shares to bring the number
of shares contributed to the Plan up to 177 million. Any remaining
shares may then be added to the stock portion of the contribution up
to a total of 186 million. It is represented that the additional
contributed shares of Class E stock will be treated in the same
manner as the 177 million shares under the PBGC Agreement.
\1\4The weighted average price will be determined by Duff &
Phelps which has been engaged by UST, independent fiduciary.
---------------------------------------------------------------------------
7. GM has issued three classes of publicly-held common stock with
the following number of shares issued and outstanding, as of December
31, 1993: (a) 718,652,709 shares of $1\2/3\ par value common stock; (b)
89,930,845 shares of Class H common stock; and (c) 255,763,512 shares
of Class E stock. Each class of common stock has dividend, voting, and
liquidation rights, as provided in GM's Restated Certificate of
Incorporation, as amended. No class has any rights to preferential or
cumulative dividends, nor is the amount of dividends payable with
respect to any class limited by either contract law or to any
predetermined amount. The Certificate of Incorporation authorizes the
Board under certain terms to exchange every outstanding share of Class
E stock for shares of GM $1\2/3\ par value stock in a specified ratio
if various circumstances arise.
8. While the Class E stock which will be contributed to the Plan
will be unregistered, Class E stock which is registered and issued has
been widely-held and actively traded on the NYSE for nearly ten (10)
years under the symbol GME. Holders of GM Class E common stock have no
direct equity interest in EDS nor a priority claim on the assets of
EDS, but rather have liquidation rights in the aggregate equity and
assets of GM, which include 100 percent (100%) of the common stock of
EDS. In the event of the liquidation, dissolution, or winding up of the
business of GM, assets remaining after payments to creditors or to
preferred or preference stockholders, if any, will be distributed to
holders of Class E stock, as well as to holders of $1\2/3\ par value
common stock, and Class H common stock, on a per share basis in
proportion to the respective per share liquidation units of such
classes of stock.
9. For almost thirty (30) years, EDS has provided, both in the
United States and in thirty (30) other countries, applications of
information technology to small business, governments, and large
corporations, including GM and the Plan. EDS is headquartered in
Dallas, Texas and employs approximately 70,500 individuals to provide
information technology at customer sites or at one of EDS' nineteen
(19) information processing centers worldwide.
As of December 31, 1993, EDS had revenues totaling $8.6 billion,
and a net income of $724 million. It is represented that EDS has
experienced rapid and consistent growth. In this regard, since 1988,
total revenues have increased by 12 percent (12%) annually, and net
income has averaged 14 percent (14%) annual growth. Although 39 percent
(39%) of the revenues of EDS in 1993 were attributable to business with
GM and its affiliates, it is represented that increasingly EDS'
business has become independent of GM. In this regard, during the last
five (5) years, EDS' revenues from non-GM sources have increased from
40 percent (40%) to 61 percent (61%) of all revenues.
10. Dividends on Class E stock are linked to the earnings
performance of EDS. In this regard, under GM's Certificate of
Incorporation, dividends on Class E stock may be declared and paid out
of assets of GM only to the extent of the paid-in surplus attributable
to Class E stock, plus the ``Available Separate Consolidated Net Income
of EDS'' earned since the date GM acquired EDS.15 Under the
dividend policy in effect since 1989, but subject to alteration by the
Board, the aggregate annual dividend on a share of Class E stock is
equal to approximately 30 percent (30%) of the prior year's Available
Separate Consolidated Net Income of EDS. It is represented that
stockholders' equity with respect to Class E stock has climbed from
$1.4 billion in 1988 to $3.6 billion in 1993, while dividends have
increased from $.17 per share to $.40 per share over the same six-year
period. Further, the earnings per share attributable to GM Class E
stock increased by a compound 14 percent (14%) per annum from 1988 to
1993 when earnings per share equaled $1.51, as of December 31,
1993.16
---------------------------------------------------------------------------
\1\5The Available Separate Consolidated Net Income of EDS is
defined so as to require GM to make quarterly allocations of the
portion of its consolidated net income earned during that quarter
that is attributable to EDS. Such allocations are made between (a)
amounts that are available for the payment of dividends on Class E
stock and (b) amounts that are available for the payment of
dividends on $1\2/3\ par value common stock. For each quarterly
accounting period, the proportion of GM's net income attributable to
EDS allocated to amounts available for the payment of dividends on
Class E stock is equal to that proportion of such earnings that can
be derived by multiplying those earnings by a fraction--the
numerator of which is the weighted average number of shares of GM
Class E stock outstanding during the period, and the denominator of
which is a number initially established by the GM Certificate of
Incorporation. At the discretion of the Board, as appropriate, the
number in the denominator from time to time decreases as shares of
Class E stock are purchased and increases as shares are needed in
order to meet certain requirements of GM's employee benefit plans.
As of December 1991, 1992, and 1993, the denominator was 478
million, 479.3 million, and 480.9 million shares.
\1\6It is represented that the acquisition by the Plan of the
177 million shares of Class E stock will not have any dilutive
effect on the dividends paid on or the earnings per share reported
for Class E stock, because the increase in the number of shares of
Class E stock outstanding that occurs in the numerator of the
fraction discussed in footnote 10 without an adjustment to the
denominator of such fraction will simply reallocate among existing
GM common shareholder groups the amounts of GM earnings available
for payment of dividends.
---------------------------------------------------------------------------
11. With respect to the stock portion of the contribution, GM
requests exemptive relief from the prohibitions of sections 406 and 407
of the Act because of its belief, more fully discussed below, that the
contribution would not meet the requirements for the acquisition of
``employer securities'' under section 408(e) of the Act. In this
regard, section 408(e) provides, in part, that sections 406 and 407 of
the Act shall not apply to the acquisition or sale by a plan of
``qualifying employer securities,'' as defined in section 407(d)(5) of
the Act, if such acquisition or sale is for adequate consideration, no
commission is charged, and, in the case of a plan other than an
eligible individual account plan, such as a defined benefit plan, such
acquisition does not exceed 10 percent (10%) of the fair market value
of the assets of such plan. Under section 407(d)(5) stock is a
``qualifying employer security,'' if such stock is issued by an
employer of employees covered by the plan or by an affiliate of such
employer. Section 407(d)(5) further provides that in the case of a plan
other than an eligible individual account plan, such as a defined
benefit plan, an employer security shall be considered a ``qualifying
employer security,'' only if such employer security satisfies the
requirements of section 407(f)(1). Section 407(f)(1) provides that
stock satisfies the requirements of this paragraph if no more than 25
percent (25%) of the aggregate issued and outstanding shares of stock
of the same class is held by the plan and at least 50 percent (50%) of
the aggregate amount of such shares is held by persons independent of
the issuer.
GM believes that some portion of the Class E Stock to be
contributed to the Plan may be viewed as ``qualifying employer
securities'' under the Act because, up to a certain level, the
contribution would not violate the ERISA Limits. GM represents that the
Plan already owns 17 million shares of Class E stock. Assuming receipt
of the cash portion of the contribution, GM maintains that the Plan
could acquire additional shares of Class E stock without violating the
10 percent (10%) limitation under section 407(a) of the Act. However,
GM desires to contribute a far larger amount of Class E stock to the
Plan, with the result that immediately after the transaction the Class
E stock held by the Plan would exceed the 10 percent (10%) limitation.
In this regard, the fair market value of the total assets of the
Plan, as of March 31, 1994, was approximately $20.7 billion. The fair
market value of the ``employer securities'' and ``employer real
property'' held by the Plan, as of that date, including the Class E
stock the Plan already owns, constitutes approximately 3.1 percent
(3.1%) of the fair market value of the assets of the Plan. GM estimates
that, assuming the Plan receives the cash portion of the contribution
and a discount on the Class E stock as a result of certain restrictions
applicable to such stock, the aggregate value of ``employer
securities'' and ``employer real property'' held by the Plan
immediately after the contribution will constitute approximately 21
percent (21%) of the value of the total assets of the Plan.
The applicant further notes that the number of shares of Class E
stock which GM intends to contribute to the Plan may violate the 25
percent (25%) limitation under section 407(f) of the Act. It is
represented that there were 255,763,512 shares of Class E stock issued
and outstanding, as of December 31, 1993. If GM contributes 177 million
shares of Class E stock, those shares plus the 17 million shares the
Plan already owns would boost the Plan's holding to approximately 194
million shares. Accordingly, it is anticipated that immediately after
the transaction, the Plan would hold approximately 45 percent (45%) of
all the then issued and outstanding shares of Class E stock.
Further, it is represented that several other plans sponsored by GM
or its affiliates held, as of January 31, 1994, in the aggregate, some
47.1 million shares of Class E stock. If the contribution was made
pursuant to an exemption granted by the Department, it is estimated
that the shares of Class E stock held by other GM plans would equal
approximately 11 percent (11%) of the then issued and outstanding
shares. GM believes an issue exists as to whether such plans are
independent of the issuer, within the meaning of section 407(f)(1)(B)
of the Act. If the other plans are not independent of the issuer, the
Plan's acquisition of Class E stock would violate the 50 percent (50%)
limitation under section 407(f).
Following the contribution of the Class E stock, the Plan will hold
such stock for some period of time in amounts exceeding the ERISA
Limits discussed above. Accordingly, GM requests exemptive relief from
sections 406(a)(2) and 407 of the Act for the continued holding of the
Class E stock until UST determines that it is appropriate to dispose of
such stock on behalf of the Plan.
Agreement With PBGC and Use of Credit Balance
12. Pursuant to an agreement in principle executed on May 9, 1994,
GM and the PBGC agreed upon terms respecting both the timing and use of
credit balances in the Plan's funding standard account that will result
from the contribution. Under the general terms of this agreement, the
contribution of the approximately $10 billion combined value of cash
and Class E stock will be credited to the Plan's funding standard
account. A cash and stock credit balance would be established for the
Plan representing the value of such cash and Class E stock. It is
represented that the actual contribution of the cash and Class E stock
may not occur all at one time but will be completed by September 30,
1995. In this regard, GM contributed on July 27, 1994, $2.5 billion in
cash to the Plan and on September 19, 1994, GM contributed an
additional $750 million. It is anticipated that before the end of 1994,
GM, at its election, may contribute another $750 million to the Plan.
If this exemption is granted, GM has the option to consider such cash
contributions as part of the proposed $4 billion contribution in cash
to the Plan required under the PBGC Agreement, or, at its discretion,
GM may elect to make an additional payment of $4 billion in cash to the
Plan.
This contribution will be in excess of the minimum funding
requirements of the Act and the Code. Under the normal operation of the
minimum funding account, the credited value of such contribution would
reduce in the year contributed the amount that GM is otherwise required
to contribute to the Plan. Further, if the credits were not utilized in
any given year, GM ordinarily would be able to use the resulting credit
balance, with interest thereon, in succeeding years because the
contribution had not previously been applied to meet its minimum
funding obligations.
However, pursuant to the agreement between GM and the PBGC, GM has
agreed to defer for two (2) years the use of the credit balance arising
from the contribution and, thereafter, to phase in full access by GM to
the credit balance in the Plan's funding standard account. This
approach is designed to assure that the Plan will continue to receive
contributions substantially in excess of those to which it would
otherwise be entitled.
The terms of the PBGC Agreement contemplate that the contribution
of cash and shares of the Class E stock to be made in 1994\17\ and 1995
would be in addition to the satisfaction by GM of its statutory funding
requirements to the Plan. For 1994, GM could not credit any of the
amounts contributed pursuant to the PBGC Agreement towards satisfying
its statutory funding requirements. Before 1997, GM could use only the
interest generated by the cash portion of the contribution to offset
its funding requirements. Starting in 1997 and continuing forward, GM
could use all of this cash credit balance subject to one limitation. A
credit balance reserve is maintained in the Plan consisting of the cash
credit balance or cash generated from stock that has been sold in an
amount equal to at least 25 percent (25%) of the contributed value of
any remaining unsold, contributed Class E stock for so long as the then
current value of Class E stock or other shares (``employer securities''
or non-employer securities exchanged for Class E stock) exceeds the
ERISA Limits. This restriction will expire on October 1, 2003, if the
Class E stock has been exchanged for non-employer securities. The
balance of available credits without regard to this limitation could be
used by GM without restriction starting in 2004 and continuing in later
years.
---------------------------------------------------------------------------
\1\7Because the reporting year for the Plan runs from October
1st through the following September 30th, reference to year (e.g.)
1994 means Plan year 1993; 1995 means Plan year 1994, etc.
---------------------------------------------------------------------------
Beginning in 1999 and continuing until 2004, GM will have access
annually to an amount of up to $1.5 billion of the stock credit balance
generated by the stock which has been sold. Any unused portion of this
$1.5 billion can be carried forward with interest to future years and
could be used in addition to amounts otherwise allowed.
There are two exceptional circumstances which if they arise will
permit GM access to greater amounts of the cash and stock credit
balances than the amounts described above. First, if a new law is
passed which increases GM's funding obligations, then GM will have
access to an additional amount of the cash and stock credit balances
each year to satisfy such increase generated by the legislation. From
1996 through 2000, the additional amounts from the cash and stock
balances available would be the lesser of $750 million per year or the
amount of the legislative increase in the minimum funding account.
Thereafter, GM would have access to the lesser of $950 million per year
or the amount of the legislative increase in the minimum funding
account.
Second, starting in 1997, if GM experiences a ``bad'' year in which
losses from its North American Operations exceed $1.5 billion and its
cash18 falls below $3 billion, GM can access up to an additional
$1 billion of the credit balances that year; subject to a cap of no
more than $2 billion in any five (5) year period. In any subsequent
``good'' year in which GM's profits from its North American Operations
exceeds $1 billion, the available credit balances would be reduced by
the additional amount used in the prior ``bad'' year. In effect, GM
would be able to access the available credit balances from a future
``good'' year to use in a ``bad'' year. In addition, within five (5)
years after GM takes any credits in a ``bad'' year, the remaining
credit balances will be reduced by a corresponding amount.
---------------------------------------------------------------------------
\1\8``Cash'' is defined as U.S. Automotive cash and marketable
securities (excluding EDS and GMHE) as currently defined by U.S.
GAAP as measured on December 31 of that year.
---------------------------------------------------------------------------
Subject to these annual caps, the actual amount of the stock credit
balance available to GM will depend on whether the Plan continues to
hold contributed Class E stock (or other ``employer securities''
exchanged for such stock) above the ERISA Limits. For purposes of this
determination, the contributed Class E stock (or other ``employer
securities'' exchanged for such stock) would be valued at the lesser of
the contributed value (plus interest)19 or the then current fair
market value of such stock.
---------------------------------------------------------------------------
\1\9It is represented that interest will be computed at the
Plan's funding standard account rate, currently 9%.
---------------------------------------------------------------------------
In this regard, for as long as the value of the Class E stock in
the Plan (or other ``employer securities'' exchanged for such stock)
exceeds the ERISA Limits, GM's access to the stock credit balance will
be limited to an amount equal to the value of the contributed Class E
stock that has been sold. For purposes of this provision, the value of
Class E stock that has been sold is defined to mean the lesser of the
contributed value of the sold Class E stock (plus interest) or the
actual proceeds received upon sale of such stock.
When the lesser of the contributed value (plus interest) or the
then current fair market value of the ``employer securities'' held by
the Plan constitutes less than the ERISA Limits, the maximum amount of
the stock credit balance GM will have access to would be the value of
the Class E stock that has been sold, plus 75 percent (75%) of the
value of the Class E stock (or ``employer securities'' exchanged for
such Class E stock) still held in the Plan.
In the event the Class E stock contributed to the Plan has been
exchanged for non-employer securities, the amount of the stock credit
balance available to GM will be 75 percent (75%) of the value of the
unsold shares plus the value of the stock sold with a further
limitation that the total amount of the credit balance related to
unsold securities that can be used by GM may not exceed 10 percent
(10%) of the then fair market value of the assets of the Plan.
When Class E stock (or any shares exchanged for Class E stock) are
sold, the amount of the stock credit balance related to such shares
shall be adjusted to the value actually received for such shares if the
value received is less than the contributed value of the shares plus
interest. If the Class E stock (or any shares exchanged for Class E
stock) are sold for more than the contributed value plus interest, any
excess proceeds will be amortized as actuarial gain. If GM uses any
amount of the stock credit balance related to unsold shares, such
amount shall be adjusted to reflect the lower of (i) contributed value
plus interest thereon or (ii) the then current fair market value as of
the date GM accessed the stock credit balance. If the value ultimately
received for the shares with respect to which the related portion of
the credit balance has previously been used is less than the credit
balance utilized, then the amount of the remaining credit balance
related to the contribution of Class E stock shall be reduced by the
amount of any loss (offset by unamortized gains) which has not been
previously amortized.
Under the terms of the PBGC Agreement, PBGC will have
responsibility for monitoring GM's compliance with the terms of such
agreement. The enrolled actuary for the Plan will calculate GM's
statutory funding requirements and certify GM's use of the contribution
credit balances. GM will also provide the PBGC with a copy of the
actuarial valuation reports for the Plan and information concerning
GM's use of the contribution credit balances, including the
distribution of the stock credit balance between sold and unsold Class
E stock. GM's independent auditor will provide a statement to PBGC once
GM utilizes the financial flexibility provisions described above.
UST has engaged Duff & Phelps to determine the fair market value of
the shares of Class E stock as of the date of the contribution of such
shares to the Plan. As requested by UST, Duff & Phelps will also
determine the fair market value of the Class E stock at various times
required under the PBGC Agreement.
Future Transfers and Other Dispositions of Class E Stock
13. UST, the independent fiduciary acting on behalf of the Plan,
has negotiated registration and other rights attendant to the Plan's
ownership of the Class E stock. These rights are reflected in the terms
and conditions as set forth in two agreements--the Registration Rights
Agreement and the Transfer Agreement (the RRA and the Transfer
Agreement) and give the Plan the ability to sell its Class E stock at
such times and in such amounts so as to balance the objectives of
diversification and maximization of the value of such stock to the
Plan, including maintenance of an orderly market.
It is proposed that these registration and transfer rights20
will apply to all Class E stock held by the Plan whether acquired
pursuant to the proposed contribution in-kind or otherwise held by the
Plan at the time the exemption is granted. In this regard, the 17
million shares of Class E stock held by the Plan prior to the
contribution will be surrendered to GM so that restrictions may be
placed on such shares. At the same time, a registration rights
agreement to which the 17 million shares of Class E stock held by the
Plan are now subject will be cancelled. UST represents that the
substitution of the RRA for the current registration rights agreement
to which the 17 million shares are subject will not devalue such
shares.
---------------------------------------------------------------------------
\2\0For purposes of the RRA and the Transfer Agreement, the
term, ``transfer'' means any offer, sale, transfer, or other
disposition of the Class E stock held by the Plan.
---------------------------------------------------------------------------
The RRA contains various provisions regarding registration
procedures, including selection of underwriters, GM and Plan holdbacks
in connection with securities offerings effected by each other, payment
of registration expenses and indemnification for disclosure-related
liability. If the Class E stock is converted or exchanged into
securities of any issuer other than GM in connection with a transaction
to which GM is a party, GM will cause the issuer of such securities to
be bound by all the provisions of the RRA, and such issuer will succeed
to the rights and obligations of GM, other than those relating solely
to GM's contribution of the shares to the Plan. Upon reduction of the
Plan's ownership to less than 2 percent (2%) of the outstanding Class E
stock the registration rights will terminate. Under the RRA, as long as
the Plan owns more than 2 percent (2%) of the outstanding Class E
stock, the Plan may transfer such stock only under certain terms and
conditions summarized in the paragraphs below.
Pursuant to the RRA, the Plan may make two ``demand'' transfers in
any twelve (12) month period. Such transfers may, at UST's discretion,
be effected pursuant to either underwritten public offerings registered
under the Securities Act of 1933 or negotiated transactions, whether
registered or not. The RRA requires GM to prepare and file the
appropriate registration statements with the Securities and Exchange
Commission (SEC) upon the Plan's ``demand'' registration and to
cooperate with the Plan and the underwriters in the registration and
selling process.
It is represented that there will be no limit, except for market
considerations, on the amount of Class E stock that can be sold
pursuant to a ``demand'' transfer by the Plan. However, in any public
offering the lead underwriters must agree to use their best efforts to
assure that no more than 2 percent (2%) of the outstanding Class E
stock is transferred to any person or related group. In addition, in a
negotiated transaction, the Plan may not transfer more than 2 percent
(2%) of the outstanding Class E stock to any person or related group or
may not transfer at all to any person or related group required to file
a Schedule 13D under the Securities Exchange Act of 1934.
The RRA permits GM to postpone any ``demand'' transfer by the Plan
in order that such transfer not interfere with certain corporate
transactions or if such transfer would require disclosure of previously
non-public information. The Plan has also agreed not to make any
transfer of Class E stock until ninety (90) days after the completion
of any underwritten public offering of such stock or any securities
convertible into or exchangeable or exercisable for such stock. If, as
a result of such postponements or such market holdbacks, the Plan is
not able to effect a ``demand'' transfer for a period of thirteen (13)
months, GM must terminate the postponement within sixty (60) days of
the Plan's notification to GM of such fact and take all reasonable
actions necessary to effect such transfer.
The RRA contains provisions for coordinating the registration
rights of the Plan with the registration rights granted by GM to other
investors, including a strategic partner (the Strategic Partner). A
Strategic Partner is an investor acting in concert with respect to an
investment in GM and designated by the Board of GM, that acquires more
than 10 percent (10%) of the outstanding Class E stock in a transaction
intended to achieve a strategic objective. In this regard, until the
earlier of the date the Plan reduces its holdings to less than 100
million shares of Class E stock or the fifth anniversary of the
contribution of such stock to the Plan by GM, the Plan's right to a
``demand'' transfer will take priority over any ``demand'' registration
rights granted to the Strategic Partner. In addition, until the Plan
reduces its holdings to less than 25 million shares of Class E stock,
the Plan may elect to participate in any ``demand'' registration
requested by the Strategic Partner on an equal basis. After the Plan
has reduced its holdings of Class E stock to less than 25 million
shares, it may participate in any Strategic Partner ``demand''
registration. However, if there is a limit on the number shares of
Class E stock included in such registration, those of the Strategic
Partner will be included first, but the Plan's shares will have
priority over all other holders of registration rights from GM.
The Plan may participate in ``piggyback'' registrations in
connection with underwritten public offerings initiated by GM or any
other holder of Class E stock with registration rights, subject to
customary cutback provisions and coordination with such other holders.
In a ``piggyback'' registration, if the Plan expects to include at
least 25 percent (25%) of the total number of shares of Class E stock
in the offering, the Plan may select a co-manager reasonably acceptable
to GM. The number of shares that the Plan may include in a
``piggyback'' registration may be limited, if the lead underwriter or
co-managers determine that the total number of shares of Class E stock
proposed to be sold will adversely affect the marketability of the
offering. In this regard, the shares that GM proposes to sell will take
priority. Until the earlier of the date the Plan reduces its holdings
of Class E stock to less than 100 million shares or the seventh
anniversary date of the initial contribution, the Plan's shares will
take priority over those of any other holder of registration rights,
including the Strategic Partner. Until the Plan reduces its holdings of
Class E stock to less than 25 million shares, the Plan's shares and
those held by the Strategic Partner (who owns at least 25 million
shares) will be included in the offering on a pro rata basis after the
shares of GM and before the shares proposed to be sold by other holders
of registration rights.
If the Plan has reduced its ownership of Class E stock to below 7.5
percent (7.5%) on a fully diluted basis, excluding employee stock
options and similar rights, the Plan may tender into third-party tender
offers for such stock. However, at any time while the Plan holds more
than 7.5 percent (7.5%) of the Class E stock, it may tender or ``put''
such stock only under certain conditions. Those conditions center
around whether GM has in effect a stockholders rights plan. If a
stockholders rights plan has not been adopted the Plan may tender its
shares of Class E stock. Generally, however, if a stockholder's rights
plan has been adopted and remains in effect during the offering
(assuming the rights have not been redeemed or revoked), the Plan may
not tender into the offer unless other conditions are met, including
GM's consent to the tender.
In the event GM withholds its consent and prevents the Plan from
tendering into a third-party tender offer and the tender results in the
purchase of more than 50% of the total combined voting power of all
outstanding securities of GM, the Plan will have the option to put to
GM the same number of shares that would have been tendered for a
purchase price in cash equal to the price per share offered in the
tender. In the event the consideration offered in the tender was
payable in a form other than cash, the RRA provides procedures for
valuing such consideration for purposes of the Plan's put option.
In addition to the transfers described in the paragraphs above, the
Plan under the RRA is also permitted to transfer Class E stock: (1)
Pursuant to Rule 144 under the Securities Act of 1933 after the Plan
has reduced its ownership to less than 50 million shares of such stock,
subject to certain volume limitations; (2) pursuant to Rule 144 of the
Securities Act of 1933 after the Plan has reduced its holdings of Class
E stock to less than 25 million shares, subject to certain volume
limitations only if the Plan is then an affiliate of GM; (3) to GM or
any of its subsidiaries or to any employee benefit plan sponsored by GM
or its affiliates;21 and (4) pursuant to mergers or consolidations
in which GM or a subsidiary is a constituent corporation.
---------------------------------------------------------------------------
\2\1GM represents that only defined contribution plans
maintained by GM or its affiliates will be involved in such
transfers and that the purchase price paid will be at the prevailing
price for such stock on the NYSE. In this regard, the Department
notes that no relief is proposed herein for the acquisition of Class
E stock by defined contribution plans maintained by GM. However,
relief for such transactions may be provided by section 408(e) of
the Act.
---------------------------------------------------------------------------
14. Certain additional restrictions will be imposed on the Plan's
ability to transfer the Class E stock under the terms of the Transfer
Agreement. Unlike the RRA, restrictions on transfer contained in the
Transfer Agreement are only effective between GM and the Plan. These
restrictions will be modified or terminated at various times depending
on the occurrence of certain events.
In this regard, until the Class E stock is converted into or
exchanged for shares of capital stock of EDS in a transaction that
results in GM no longer controlling EDS (the Split-Off), the Plan will
not be permitted to transfer more than 5 percent (5%) of the total
value of Class E stock then outstanding to any foreign person, as
defined in the Code. Further, until 185 days after the effective date
of the Split-Off, the Plan may not transfer Class E stock to any person
or related group that would, as a result of such transfer, own 40
percent (40%) or more of the outstanding Class E stock. Under certain
circumstances after the Split-Off, the Plan may not transfer any Class
E stock if, as a result, the Plan would own less than 50 percent (50%)
of the Class E stock that it owned immediately after it received notice
from GM of the Split-Off. From the date of the initial contribution
until the second anniversary of the Split-Off, unless EDS announces a
merger with one or more corporations, the Plan may not transfer Class E
stock to any person or related group, if, as a result, such person or
group would own 5 percent (5%) or more of the Class E stock then
outstanding.
15. In managing the Class E stock, UST anticipates liquidating such
shares over time in a prudent and orderly fashion in accordance with
the terms of the RRA and the Transfer Rights Agreement. Such
dispositions may result from sales or exchanges of the Class E stock
between the Plan and GM or its affiliates, or certain defined
contributions plans sponsored by GM or its affiliates, or the exercise
of the put option held by the Plan pursuant to the terms of the RRA. It
is represented that the amount received by the Plan upon any sale or
exchange of Class E stock with GM or its affiliates will be for no less
than ``adequate consideration'' within the meaning set forth in section
3(18) of the Act, and the amount received by the Plan upon any sale of
Class E stock to a defined contribution plan maintained by GM or its
affiliates will be the prevailing price for such stock on the NYSE. GM
requests relief under section 406 of the Act in connection with such
transactions.
In the case of dispositions to defined contribution plans
maintained by GM, it is represented that the trustee of such plan will
acquire Class E stock only for the purposes of satisfying demand
created by the plan's participants. Any Class E stock so acquired by
the defined contribution plan will be allocated to participants
accounts. The transactions in which plan participants acquire Class E
stock will be registered under SEC form S-8 and, thus, the ability to
resell such shares will not be restricted in any way.
16. The Class E stock to be contributed by GM will be acquired and
managed on behalf of the Plan by UST. UST has been appointed to serve
as independent fiduciary on behalf of the Plan with respect to the
acquisition of the Class E stock and will also serve as trustee of the
Plan with sole discretion respecting the management and disposition of
the Class E stock after the acquisition.
It is represented that neither GM nor any of its subsidiaries has
any ownership interest in UST or in any of its affiliates. Further, it
is represented that UST is independent of GM in that neither UST nor
any of its affiliates performed any services for GM, as of the date the
application was filed.
UST represents that it is qualified to serve as independent
fiduciary and trustee on behalf of the Plan with respect to the
proposed transactions. In this regard, UST represents that it has
provided investment management and trust services to plans,
institutions, endowments, foundations, and individuals for the past 150
years. In addition to its investment management expertise, UST has
extensive experience in providing asset allocation, trading strategy,
investment advisory, and broker-dealer services. In this regard, UST
represents that it currently has under discretionary management more
than $30.5 billion in assets and more than $241 billion in assets under
non-discretionary custodianship. It is represented that UST has
extensive experience with the prudent acquisition and management of
``employer securities,'' pursuant to the provisions of Act. It is
further represented that UST employs a staff of professionals who have
actually managed ``employer securities'' for plans in diverse
situations, including ESOP-financed leveraged buy-outs, proxy voting,
and other matters.
Under the terms of its engagement, UST has sole and exclusive
authority and responsibility to act on behalf of the Plan to: (1)
Negotiate with GM the terms and conditions, including registration
rights, under which the Class E stock may be acquired and held by the
Plan; (2) determine whether the Plan should acquire the Class E stock
on such terms and conditions; (3) prepare and issue to the Plan a
report containing its reasoning and conclusions as to the propriety
under the Act of acquiring and holding the Class E stock; and (4)
determine, with the assistance of Duff & Phelps, the fair market value
of the Class E stock contributed to the Plan and determine the fair
market value of such stock at various times pursuant to the terms of
the PBGC Agreement.
It is represented that, after the contribution of the Class E stock
by GM to the Plan, such contributed stock together with any other
shares of Class E stock owned by the Plan, will be held in a separate
trust for which UST has agreed to serve as trustee. As trustee, it is
represented that UST will have sole discretionary control respecting
the management and disposition of all the Class E stock in such trust
and will exercise all voting and other rights attendant to ownership of
the shares. With regard to disposition of the Class E stock, UST may
need to retain a broker or other service provider. It is represented
that such service provider will not be an affiliate of UST or GM or its
affiliates.\22\
---------------------------------------------------------------------------
\22\The applicant represents that it will rely in this regard on
section 408(b)(2) of the Act.
---------------------------------------------------------------------------
UST is authorized to engage outside advisors to assist in the
performance of its duties. In this regard, UST has engaged the law firm
of Jones, Day, Reavis & Pogue to advise it and to serve as legal
counsel. UST has engaged the services of Goldman, Sachs & Company
(Goldman) as its financial advisor to aid in: (1) Evaluating market-
related issues with respect to the Class E stock; (2) assisting UST in
negotiating the terms and conditions of the acquisition of the Class E
stock; and (3) providing background information to UST to facilitate
the determination of the value of Class E stock at the time of the
initial acquisition by the Plan. UST has also retained Duff & Phelps to
furnish at the time of each contribution of shares of Class E stock its
opinion as to the value of such shares which will reflect an
appropriate discount from the trading price in light of: (a) The number
of shares being contributed, (b) the Class E stock already owned by the
Plan, and (c) the terms and conditions in certain agreements with GM,
relating to the transfer of such shares. The dollar amount of the 25
percent (25%) credit balance reserve maintained in the Plan will be
based on the value of the Class E stock as determined by Duff & Phelps
at the request of UST at the time of the contribution. UST also
represents that it will engage a financial advisor to assist it in
planning for and timing the disposition of Class E stock held by the
Plan. It is further represented that GM and its affiliates have no
ownership interest in Goldman or Duff & Phelps, and neither party
currently serves in any capacity for GM.
Because the marketability and dividends of Class E stock are based
on the earnings and financial performance of EDS, UST has reviewed the
business of EDS, as well as that of GM. In this regard, UST has
reviewed historical financial information, equity research views, and
rating agency views with respect to both GM and EDS.
In evaluating the proposed transaction, UST along with its
financial advisor and legal counsel, have reviewed those documents
which it deemed relevant to the proposed contribution of cash and Class
E stock, including but not limited to: (a) the Certificate of
Incorporation of GM and of EDS; (b) the RRA currently in effect between
GM and the Plan; (c) the prior acquisitions of GM securities by other
plans; (d) the trust agreements pursuant to the Master Trusts; (e) the
audited financial statements of the Plan for 1991 and 1992; (f) the
Plan's annual reports on Forms 5500 for 1991 and 1992; (g) other
information provided by GMIMCO regarding the Plan's assets held at
various times in 1993 and 1994; (h) an analysis of the liquidity needs
to pay benefits and administrative expenses over the next five (5)
years prepared by the actuaries of the Plan; and (i) the sources of
funds, other than the Class E stock, available to meet such liquidity
needs. In addition, UST attended meetings and participated in numerous
telephone conversations with officers and other representatives of GM
and EDS and has also met with representatives of the PBGC and the
Department.
With respect to securities issued by GM, UST has reviewed the
price, trading volume history, and trading patterns of both the Class E
stock and GM's $1\2/3\ par value common stock. Specifically with regard
to the Class E stock, it is represented that UST has analyzed the
voting, liquidity, and conversion rights features of such stock and has
considered possible scenarios which could result in alternative
securities being substituted for the Class E stock. Further, UST
represents that it has considered the impact on the Plan and has
analyzed various holding, disposition, and risk management strategies,
under each of these scenarios.
It is represented that UST has on several occasions met with the
named fiduciary of the Plan to consider the impact of the contribution
of cash and Class E stock on the Plan's diversification and to address
strategies to assure prudent diversification of the Plan's entire asset
holding, including making adjustments to the asset allocation
guidelines of the Plan that are appropriate in light of the acquisition
of the shares.
17. It is the opinion of UST that it is prudent to accept the
contribution of cash and shares of Class E stock and that such shares
can be prudently managed consistent with the diversification
requirements of the Act. Further, for the reasons set forth below, UST
has concluded that the proposed contribution of cash and shares is not
only in the interest of the Plan and its participants and beneficiaries
but is also protective of such interests. In this regard, (a) the
contribution of cash and shares of Class E stock will cause an
immediate and significant reduction in the amount of the Plan's
underfunded liabilities and will enhance the Plan's long term ability
to pay benefits to participants and beneficiaries; (b) under the terms
of the PBGC agreement, GM will continue to make regular cash
contributions to the Plan during the next several years; (c) as EDS has
demonstrated consistent growth in revenue, income, and shareholder
value and has potential to continue such success, the Plan's holding of
the Class E stock over the long term will add to the value of the
assets of the Plan; (d) UST has determined that the acquisition by the
Plan of the Class E stock will not violate the diversification
requirements of section 404(a)(1) of the Act, even though such stock
will represent more than 20 percent (20%) of the total value of the
assets of the Plan and will constitute approximately 40 percent (40%)
of the outstanding Class E stock; (e) UST has determined that the
Plan's ability to pay benefits and expenses when due will not be
impaired by the receipt of the Class E stock; (f) the Class E stock is
widely held and actively traded on an established securities market;
(g) UST has negotiated various transfer rights which will give the Plan
sufficient access to the capital markets to permit UST to prudently
manage the Plan's holdings of the Class E stock consistent with the
maintenance of an orderly market, so as to minimize the risk of the
Plan's continued holding of the Class E stock, diversify the Plan's
assets by decreasing its investment in such stock, and maximize the
value such investment; and (h) to the extent the Plan's receipt of the
Class E stock improves GM's financial strength, the proposed
contribution of stock will also improve GM's long term ability to
reduce the Plan's remaining underfunding over a reasonable period of
time.
18. In summary, GM represents that the proposed transactions meet
the statutory criteria of section 408(a) of the Act because:
(a) GM will contribute to the Plan at least 177 million shares of
Class E stock but no more than 186 million shares plus $4 billion in
cash, with at least $2 billion contributed in conjunction with or prior
to the contribution of the Class E stock, and the remaining $2 billion
contributed no later than September 30, 1995;
(b) If less than 177 million shares of Class E stock are
contributed, GM will contribute additional cash in an amount equal to
the difference between 177 million and the number of shares of Class E
stock contributed times the per-share value of such stock at the time
of contribution, or a weighted average price if such stock is not
contributed on a single date;
(c) UST, an independent qualified fiduciary, or a successor
independent fiduciary acceptable to the PBGC represents the Plan's
interests for all purposes with respect to the Class E stock and will
determine prior to entering into any of the transactions, that each
such transaction, including the contribution of the Class E stock, is
in the interest of the Plan;
(d) UST will negotiate and approve the terms of any of the
transactions between the Plan and GM or its affiliates or certain
defined contribution plans sponsored by GM or its affiliates;
(e) UST will manage the holding and disposition of the Class E
stock and will take whatever action it deems necessary to protect the
rights of the Plan;
(f) The terms of any of the transactions between the Plan and
parties in interest will be no less favorable to such Plan than terms
negotiated at arm's length under similar circumstances with unrelated
third parties;
(g) A credit balance reserve is maintained in the Plan consisting
of the cash credit balance or cash generated from stock that has been
sold in an amount equal to at least 25 percent (25%) of the contributed
value of the Class E stock which remains unsold in the Plan, for so
long as such stock or any securities received in exchange exceeds the
percentage limitations described in section 407(a) and 407(f) of the
Act;
(h) An independent qualified appraiser will determine the fair
market value of the Class E stock contributed to the Plan, as of the
date such shares are contributed, and will determine the fair market
value of the Class E stock at various times as required under the PBGC
agreement;
(i) With respect to any sale or exchange of Class E stock by the
Plan to GM or its affiliates or to any defined contribution plans
sponsored by GM or its affiliates, no commission or fee will be charged
to or paid by the Plan;
(j) Any sale or exchange of Class E stock between the Plan and GM
or its affiliates will be for no less than ``adequate consideration''
within the meaning set forth in section 3(18) of the Act, and any sale
of Class E stock by the Plan to a defined contribution plan sponsored
by GM or its affiliates will be at the prevailing price for such stock
on the NYSE;
(k) The Plan will incur no fees, costs, or other charges or
expenses as a result of its participation in any of the transactions;
(l) In the opinion of UST, the contribution of cash and shares of
Class E stock will cause an immediate and significant reduction in the
amount of the Plan's underfunded liabilities and will enhance the
Plan's long term ability to pay benefits to participants and
beneficiaries;
(m) The Plan's holding of the Class E stock over the long term will
add to the value of the assets of the Plan;
(n) UST has determined that the acquisition by the Plan of the
Class E stock will not violate the diversification requirements of the
Act, and the Plan's ability to pay benefits and expenses when due will
not be impaired by the receipt of the Class E stock;
(o) The Class E stock is widely held and actively traded on an
established securities market; and
(p) The Plan will have sufficient access to the capital markets to
permit UST to prudently manage the Plan's holdings of the Class E stock
in order to maximize the value of such investment.
Notice to Interested Persons
Included among those persons who may be interested in the pendency
of the requested exemption are all active GM employees participating in
the Plan, all retired or separated participants either receiving or
entitled to receive benefits from the Plan, all beneficiaries of
deceased participants of the Plan who are receiving or are entitled to
receive benefits, and all unions representing active GM employees who
participate in the Plan.
It is represented that these various classes of interested persons
will be notified within fifteen (15) calendar days of publication of
the Notice of Proposed Exemption (the Notice) in the Federal Register,
either by mailing first class or by posting a photocopy of the Notice,
plus a copy of the supplemental statement (Supplemental Statement), as
required, pursuant to 29 CFR 2570.43(b)(2). Notification will be
provided to all retired or separated participants and to all
beneficiaries by first-class mail at their last known mailing address.
Notification will be provided to active participants by posting at all
GM locations, in areas that are customarily used for notices to
employees with regard to employee benefits or labor relations matters.
GM shall also seek to post a copy of the Notice and a copy of the
Supplemental Statement at the offices of the unions that represent GM
active employees who participate in the Plan.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8776 (This is not a toll-free number.)
Wilson Sporting Goods Co. 401(k) Savings Plan (The Plan)
Located in Chicago, Illinois
[Application No. D-9803]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply to (1) the past interest-free loan to the Plan
(the Loan) by Wilson Sporting Goods Co. (the Employer), a party in
interest with respect to the Plan, and (2) the Plan's potential
repayment of the Loan upon the receipt by the Plan of payments under
Guaranteed Investment Contract No. CG01314A3A (the GIC) issued by
Executive Life Insurance Company (Executive Life); provided the
following conditions are satisfied:
(A) No interest or expenses are paid by the Plan in connection with
the transaction;
(B) The Loan will be repaid only out of amounts paid to the Plan by
Executive Life, its successors, or any other responsible third party;
and
(C) Repayment of the Loan is waived with respect to the amount by
which the Loan exceeds GIC proceeds.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
April 1, 1994.
Summary of Facts and Representations
1. The Employer, a Delaware Corporation which is headquartered in
Chicago, Illinois, is a wholly owned subsidiary of Amer Group Ltd., a
Helsinki, Finland Corporation. The Plan is a defined contribution plan
which includes a cash or deferred arrangement under section 401(k) of
the Code. The Plan provides for Employer matching contributions and
additional Employer discretionary contributions. As of December 31,
1993, the Plan had total assets of approximately $32,150,000.
Currently, there are approximately 1700 participants. Participants are
entitled to direct the investment of their account balances among
various funds established under the Plan's trust agreement: The Bond
Fund, the Balanced Fund, the Equity Index Fund, and the Fixed Income
Fund. In April, 1989, The American National Bank and Trust Company of
Chicago,\23\ as trustee for the Plan and at the direction of the Plan's
Employee Benefits Committee, purchased the GIC on behalf of the Plan's
Fixed Income Fund. The GIC provided a rate of return of 9.93% per annum
and a maturity date of March 31, 1994.
---------------------------------------------------------------------------
\23\The Northern Trust Company succeeded The American Bank and
Trust Company of Chicago as the Plan's trustee in April, 1992.
---------------------------------------------------------------------------
2. On April 11, 1991, Executive Life was placed into
conservatorship by the Insurance Commissioner of the State of
California. The Employer represents that Executive Life was required to
cease payments on certain of its insurance products, including the GIC,
upon commencement of the conservatorship. The effect of the
conservatorship has been to freeze all assets invested in the GIC.\24\
This freeze has prevented Plan participants from exercising the rights
they would normally have to change investments upon the maturity of a
guaranteed investment contract under the Plan.\25\ The Employer
represents that the Loan was made in order to preserve the Plan's
rights with respect to the GIC, and to give participants and
beneficiaries the ability to exercise their right to request investment
transfers. Since the Loan was not made for the purpose of enabling the
Plan to make participant distributions, it is not covered by PTE 80-26.
The Loan, which was made on April 7, 1994, was in the amount of
$3,184,792.57, which represents the maturity value\26\ of the GIC,
adjusted for any amounts previously withdrawn from the GIC by the Plan,
minus the $1.2 million in periodic advances already made to the Plan.
The Employer represents that the Loan is non-interest bearing and the
Plan has not and will not incur any expenses in connection with the
transaction.
---------------------------------------------------------------------------
\24\The Department notes that the decisions to acquire and hold
the GIC are governed by the fiduciary responsibility requirements of
Part 4, Subtitle B, Title I of the Act. In this regard, the
Department is not herein proposing relief for any violations of Part
4 which may have arisen as a result of the acquisition and holding
of the GIC issued by Executive Life.
\25\Following the cessation of payments by Executive Life with
respect to the GIC, the Employer made the decision to make periodic
advances to the Plan as and when necessary to permit the Plan to
make distributions to participants and beneficiaries entitled to
distributions as a consequence of termination of employment or the
hardship distribution provisions of the Plan. The applicant
represents that, as of February, 1994, the periodic advances to the
Plan totaled approximately $1.2 million. The applicant also
represents that the terms of those periodic advances satisfy the
conditions of PTE 80-26 (45 FR 28545, April 29, 1980). This
conditional class exemption permits a party in interest to make an
interest-free loan to an employee benefit plan, and the repayment of
such loan. Specifically, the exemption states, in relevant part,
that effective January 1, 1975, the restrictions of section
406(a)(1)(B) and (D) and section 406(b)(2) of the Act and the taxes
imposed by section 4975(a) and (b) of the Code by reason of section
4975(c)(1)(B) and (D) of the Code, shall not apply to the lending of
money from a party in interest to an employee benefit plan, nor to
the repayment of such loan in accordance with its terms, if no
interest or other fee is charged to the plan, the loan is unsecured,
and the loan proceeds are used only for the payment of ordinary
operating expenses of the plan, including the payment of benefits in
accordance with the terms of the plan.
In this proposed exemption the Department expresses no opinion
as to whether the periodic advances satisfy the provisions of PTE
80-26.
\26\The maturity value is defined as the total amount deposited
under the GIC, plus interest at the guaranteed interest rate,
through the date of maturity.
---------------------------------------------------------------------------
3. Repayment of the Loan is limited to payments made to the Plan by
or on behalf of Executive Life, or its successor, or any other
responsible third parties. No other assets of the Plan will be
available for repayment of the Loan. If the payments by or on behalf of
Executive Life are not sufficient to fully repay the Loan, the Employer
will have no recourse against the Plan, or against any participants or
beneficiaries of the Plan, for the unpaid amount.
4. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (1) The transaction has preserved the Plan's ability to allow
participant-directed investment re-allocations; (2) The Plan has not
and will not incur any expenses with respect to the transaction; (3)
Repayment of the Loan will be made only from amounts paid to the Plan
by Executive Life, its successor, or any other third party; (4) If the
payments by or on behalf of Executive Life are not sufficient to fully
repay the Loan, the Employer will have no recourse against the Plan, or
against any participants or beneficiaries of the Plan, for the unpaid
amount; and (5) Repayment of the Loan will be waived with respect to
the amount by which the Loan exceeds the amount the Plan receives from
GIC proceeds.
FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Peoples Security Life Insurance Company (Peoples)
Located in Durham, North Carolina
Commonwealth Life Insurance Company (Commonwealth)
Located in Louisville, Kentucky
[Application Nos. D-9462 and D-9463]
Proposed Exemption
Section I. Covered Transactions
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(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 (D) of the Code, shall not
apply to: (1) The extension of credit by Peoples or Commonwealth (the
Applicants), the sponsors of an investment product (the Group Annuity
Contract or GAC) in connection with a plan's investment in the GAC; and
(2) the reimbursement of Peoples or Commonwealth for benefit payments
made to investing plans from the cashflow generated by the investments
in the plans' Custodian Accounts which are set up by a plan pursuant to
the GAC, or (3) the reimbursement of Peoples or Commonwealth for
benefit payments made to investing plans from the proceeds generated by
liquidation of investments in the Custodial Accounts upon termination
of the Group Annuity Contract.
The proposed exemption is subject to the following conditions which
are set forth below in Section II.
Section II. General Conditions
The relief provided under Section I is available only if the
following conditions are met:
1. The decision to enter into the Group Annuity Contract will be
made by a plan fiduciary who is independent of Peoples and Commonwealth
and any affiliates of such entities (the Independent Fiduciary).
2. Prior to a plan's investment in the Group Annuity Contract, the
Independent Fiduciary for such plan receives full and detailed written
disclosures of all features of the Group Annuity Contract including all
applicable premium charges.
3. Neither Peoples nor Commonwealth or any of their affiliates has
discretionary authority or control with respect to the decision to
invest plan assets in the investment product described herein or
renders investment advice (within the meaning of 29 CFR 2510.3-21(a))
with respect to those assets.
4. Neither Peoples nor Commonwealth or any of their affiliates
exercises any discretion or renders investment advice on behalf of a
plan with respect to the ongoing acquisition, management or disposition
of Custodian Account assets.
5. Peoples and Commonwealth provide copies of the proposed and
final exemption as published in the Federal Register to each plan which
invests in a Group Annuity Contract.
6. The premiums charged by Peoples and Commonwealth for the GAC
(including early termination charges assessed in the event of early
contract termination) will not be in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act and
will constitute the only fees charged by Peoples or Commonwealth in
connection with such contract other than accrued interest on
unreimbursed benefit payments.
7. Peoples and Commonwealth maintain or cause to be maintained, for
a period of six years, the records necessary to enable the persons
described in paragraph (7) of this section to determine whether the
conditions of this exemption have been met, except that (a) a
prohibited transaction will not be considered to have occurred if, due
to circumstances beyond the control of Peoples or Commonwealth or its
agents, the records are lost or destroyed prior to the end of the six
year period, and (b) no party in interest other than Peoples or
Commonwealth shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are
not available for examination as required by paragraph (7) below.
8(a) Except as provided in section (b) of the paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph 6 of this section
shall be unconditionally available at their customary location during
normal business hours by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(2) Any fiduciary of an investing Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to an investing Plan or any duly
authorized employee or representative of such employee; and
(4) Any participant or beneficiary of an investing Plan, or any
duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraph (2)-(4) of
this paragraph 8 shall be authorized to examine the trade secrets of
Peoples or Commonwealth or its affiliates or commercial or financial
information which is privileged or confidential.
For purposes of this exemption, affiliate means:
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(b) Any officer, director or partner, in such other person; and
(c) Any corporation or partnership of which such other person is an
officer, director or partner.
Control means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application are true and complete, and that the application accurately
describes all material facts which are the subject of this exemption.
Summary of Facts and Representations
1. Peoples is a North Carolina company which is licensed to conduct
a life insurance business in 20 states and in the District of Columbia.
All of its outstanding shares are owned by Providian Corporation, a
Delaware holding company with its principle place of business in
Louisville, Kentucky. As of December 31, 1992 Peoples had statutory
assets of approximately $3.3 billion and statutory and capital surplus
of approximately $288 million.
2. Commonwealth is a Kentucky company which is licensed to conduct
life insurance business in 37 states and the District of Columbia. All
of its outstanding shares are owned by Providian Corporation. As of
December 31, 1992, Commonwealth had statutory assets of approximately
$4.5 billion and statutory and capital surplus of approximately $273
million.
3. The Applicants represent that they have developed and designed a
new group annuity product to respond to plan demand for new product
alternatives to traditional guaranteed investment contracts (GICs).
They state that traditional GICs provide for a guarantee of a face
amount and the crediting of a guaranteed rate of return on contract
deposits and provide that such deposits may be withdrawn upon request
at book value to pay participant benefits. With a traditional GIC, a
plan is exposed to the credit risk that the insurer issuing the GIC may
be unable to meet its obligations to repay contract deposits and
credited interest.
The Applicants represent that their new group annuity product, the
Group Annuity Contract, allows a plan to retain title to investments
underlying a plan's obligations to participants and provides assurances
that benefits can be paid by the Applicant at any time in an amount up
to the book value of such investments.
4. The Applicants represent that the Group Annuity Contracts will
operate as follows:
The decision to invest in a Group Annuity Contract will be made by
a plan fiduciary who is independent of Peoples, Commonwealth and any
affiliate thereof.\27\ The plan will establish a Custodian Account to
hold title in the name of the plan to a portfolio of assets contributed
to the Account by the plan. The plan's trustee acting as a custodian,
or a sub-custodian, appointed by such trustee, will perform custodial
services in connection with the assets including the safekeeping of
securities, the settlement of securities transactions, recordkeeping
and the disbursement of cashflow. Neither Peoples, Commonwealth nor any
affiliate thereof will perform administrative services in connection
with a Custodian Account.
---------------------------------------------------------------------------
\27\The Group Annuity Contracts will be offered to employee
benefit plans which are subject to Title I of the Act other than any
plan established by Peoples or Commonwealth or any affiliate thereof
for their own employees.
---------------------------------------------------------------------------
Selection and management of the assets held in the Custodian
Account will be the responsibility of an investing plan subject to
investment guidelines established by the plan and agreed to by Peoples
or Commonwealth and incorporated in the Group Annuity Contract.\28\ The
Applicants represent that they will not provide any investment advice
to a plan in connection with the composition of the investment
portfolio held in the Custodian Account. The Applicants further
represent that they will not exercise any discretion on behalf of a
plan with respect to the ongoing acquisition, management or disposition
of Custodian Account assets.
---------------------------------------------------------------------------
\28\Permissible investments are those which are rated by at
least one of the following rating agencies: S&P, Moody's or Duff &
Phelps. At point of purchase of a security, its rating must be at
least Aa3 or AA-A by all those who rate the security. Portfolios
will be constructed and maintained as ``buy and hold'' portfolios.
Upon written mutual consent of the plans and the Applicants
additional securities may be purchased or substituted by the plans.
Accounts will invest only in U.S. dollar denominated, fixed-income
securities.
---------------------------------------------------------------------------
5. The Applicants represent that the Group Annuity Contract
obligates Peoples or Commonwealth to make ``benefit payments'' at the
request of the contracting plan from its general account in an amount
not to exceed the book value of the investment portfolio owned by the
plan. The term ``benefit payments'' is defined in the Group Annuity
Contract to include benefits resulting from a plan participant's
retirement, death, disability or termination of employment, and
payments resulting from a participant's election to withdraw, borrow or
transfer an amount from the participant's account in accordance with
the terms of the plan. Unless a special contract option is elected,
``benefit payments'' do not include benefit payments resulting from
employer initiated events such as mergers, layoffs or early retirement
programs. Each Contract further provides for Peoples or Commonwealth to
provide annuities to participants in lieu of such benefit payments at
the request of the plan. At the plan's option, it may fund benefit
payments directly from the cashflow\29\ of the Custodian Account or
from other plan investments in lieu of requesting benefit payments from
Peoples or Commonwealth, and it is anticipated that the Contract will
only be used by a plan to fund benefits when the Plan's normal sources
of funding are insufficient. Benefits payments are made as follows: If
a Plan participant desires money, he submits a request to the Plan. If
the benefit payment will be made by Peoples or Commonwealth, the Plan
sends Peoples or Commonwealth, as applicable, a notice and Peoples or
Commonwealth makes a payment. The payment from Peoples or Commonwealth
to the plan is an extension of credit. Cashflows are then used to
reimburse Peoples or Commonwealth for the extension of credit for
benefit payments.
---------------------------------------------------------------------------
\29\As used herein and as defined in the Contract, the term
``cashflow'' means the principal (repayment of the face amount of
the security by the issuer of the security), interest, dividends,
and other monies received, other than liquidation proceeds, with
respect to the securities held in the Custodian Account.
---------------------------------------------------------------------------
The maximum amount of benefit payments that Peoples or Commonwealth
is obligated to make is an amount equal to the ``book value'' of the
Custodian Account established by a plan in connection with the Group
Annuity Contract. The term ``book value'' is generally defined at any
time as the (i) initial amount of cash and book value of securities
contributed by the plan to the Custodian Account, plus (ii) additional
deposits and (iii) interest credited for the period based on the
crediting rate, less cash-flow from the Account used to pay any
outstanding benefit payments and additional benefit requests or used to
pay premiums due either Peoples or Commonwealth.
In addition, three separate events may trigger adjustments to
reported book value, including:
(i) If outstanding benefit payments are excessive (e.g., more than
20% of the book value balance), then securities in the Account may be
liquidated with proceeds used in support of Peoples or Commonwealth
making benefit payments;\30\
---------------------------------------------------------------------------
\30\If outstanding benefit payments are excessive, Peoples or
Commonwealth has the right to send a Notification to the Custodian
to liquidate specified securities or a portion thereof pursuant to
the liquidation method stated in the contract.
---------------------------------------------------------------------------
(ii) If a security becomes an impaired security, it does not
conform to the Contract's guidelines, and must be sold and substituted
within a given period, or an adjustment is made to remove the security
from the account;\31\ and
---------------------------------------------------------------------------
\31\If a security becomes impaired, and no substitution is made,
the book value will be reduced by the carrying value of the
security. For an additional premium, Peoples or Commonwealth will
assume the risk of securities becoming impaired by continuing to
value such securities at book value for purposes of determining the
``book value'' of the Custodian Account. It is anticipated that most
plans which do not elect this option will structure the investment
portfolio of assets held in the Custodian Account to consist solely
or primarily of securities having little or no default risk such as
government and government-guaranteed securities.
---------------------------------------------------------------------------
(iii) If requested payments are not for bona fide benefits at book
value, then termination payments are requested and an adjustment to
book value reflects the partial termination amounts.
6. Prior to termination of a Contract, Peoples and Commonwealth are
entitled to reimbursement from a plan for any outstanding benefit
payments. Such reimbursement will come primarily from the cashflow of
investments in the Custodian Account. The Group Annuity Contract
provides that cashflow from the assets held in a Custodian Account will
be first directed to pay Peoples or Commonwealth for the balance of any
outstanding benefit payments (and outstanding contract premiums) before
any remaining cashflow may be applied by the plan for other purposes.
Under certain Group Annuity Contracts, Peoples or Commonwealth may
require a plan to liquidate securities held in the Custodian Account
(pursuant to a liquidation methodology set forth in the Contract) to
reimburse the insurer for outstanding benefit payments if such
outstanding payments exceed a level specified in the Contract. A plan
is not obligated to remit cashflow to Peoples or Commonwealth for
outstanding benefit payments from any source other than the assets held
in the Custodian Account. Peoples or Commonwealth bear the risk that
such assets will be sufficient to repay any outstanding benefit
payments on a timely basis. In some circumstances, as set forth in the
Group Annuity Contracts, a plan may choose, but is not required, to
make other sources of cash available in an effort to reduce the amount
of outstanding benefit payments. If a plan chooses to make other
sources of cash available, the plan will receive a book value credit.
Interest accrues on outstanding benefit payments made by Peoples or
Commonwealth on a pre-determined basis. Interest accrues on a daily
compounded basis at a rate set forth in the Group Annuity Contract from
the day that benefit payments are remitted by the insurer to the plan,
through, but not including, the day of reimbursement of the payments.
Under certain Group Annuity Contracts, the interest rate is equal to
the crediting rate used to calculate the ``book value'' of the
Custodian Account. This rate is based on the expected internal rate of
return on the securities held in the Custodian Account as that rate may
be amended (generally, the rate will not be reset more than quarterly),
based on the then current securities in the Account.\32\ Under other
Group Annuity Contracts, the interest rate is calculated at the
beginning of each month and is based on the average of the closing one-
month London Inter-Bank Offering rate (``LIBOR'') for the last five
business days of the prior calendar month. Plans may select a form of
the Group Annuity Contract offering the interest rate (i.e., LIBOR or
internal rate of return) which they prefer at the time the Group
Annuity Contract is issued.
---------------------------------------------------------------------------
\32\Internal rate of return is based on cashflows of the
underlying securities. Some securities have cashflows that change
over time based on market conditions. As a result, they affect the
internal rate of return. Cashflow information and assumptions are
provided by independent information sources such as broker-dealers
who make a market in the securities or systems such as Bloomberg or
Telerate which carry current information about securities. Peoples
and Commonwealth do not exercise discretion in amending the internal
rate of return.
---------------------------------------------------------------------------
7. The Group Annuity Contract automatically terminates on the
Contract's ``Maturity Date.'' The Maturity Date is specified in the
Contract and generally coincides with the anticipated point in time
when all investments initially held in the Custodian Account have
matured and cashflow paid out. The Group Annuity Contract also can be
terminated at the election of the contractholder upon advance
notification (generally 30 days) to the insurer or by the insurer in
the event that the plan ceases to meet the requirements for
qualification under the Internal Revenue Code, breaches its material
obligations under the Contract or any related agreement that affects
the Contract, or assigns the Contract without the insurer's consent.
Upon termination of the Group Annuity Contract, Peoples or
Commonwealth's obligation to pay benefits ceases and the insurer is
entitled to receive (to the extent that the liquidation value of the
securities in the Custodian Account are sufficient) the balance of any
outstanding benefit payments (including accrued interest) and
premiums.\33\ If the Contract is terminated prior to its maturity by
the plan or by Peoples or Commonwealth under the circumstances
described above, either Peoples or Commonwealth is also entitled to an
early termination charge equal to the estimated amount of any premiums
that would have been paid from the termination date to the earlier of
(i) the Maturity Date or (ii) the date two years from the termination
date. In calculating the early termination charge, Peoples or
Commonwealth will estimate premiums based on book value at the date of
termination and where book value would have been two years from the
effective date of the contract if it has not been terminated.
Calculation of the early termination charge is exact and Peoples and
Commonwealth do not exercise discretion in the process.
---------------------------------------------------------------------------
\33\Under certain Group Annuity Contracts, Peoples or
Commonwealth also may terminate the Contract if the book value of
the assets in the Custodian Account reach a specified de minimis
level but only if the liquidation value of the non-impaired
securities in the Custodian Account exceeds book value. No early
termination charge is assessed under these circumstances.
---------------------------------------------------------------------------
8. The Applicants charge an annualized premium at a fixed rate set
forth in the Group Annuity Contract. The rate is a percentage of the
book value of the securities in a plan's portfolio. The premium and
interest which accrues on outstanding benefit payments and early
termination charges, if any, are the only consideration received by the
Applicant in connection with the Group Annuity Contracts.
9. In summary, the Applicants represent that the proposed
transactions will meet the statutory criteria under section 408(a)
because:
(a). The decision to enter into the Group Annuity Contract will be
made by an independent plan fiduciary who is independent of Peoples and
Commonwealth and any affiliates of such entities.
(b). Prior to a plan's investment in the Group Annuity Contract,
the Independent Fiduciary for such plan receives full and detailed
written disclosures of all features of the Group Annuity Contract
including all applicable premium charges.
(c). Neither Peoples nor Commonwealth or any of their affiliates
has discretionary authority or control with respect to the decision to
invest plan assets in the investment product described herein or
renders investment advice (within the meaning of 29 CFR 2510.3-21(a))
with respect to those assets.
(d). Neither Peoples nor Commonwealth or any of their affiliates
exercises any discretion or renders investment advice on behalf of a
plan with respect to the ongoing acquisition, management or disposition
of Custodian Account assets.
(e). The premiums charged by Peoples and Commonwealth for the GAC
(including early termination charges assessed in the event of early
contract termination) will not be in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act and
will constitute the only fees charged by Peoples or Commonwealth in
connection with such contract other than accrued interest on
unreimbursed benefit payments.
For Further Information Contact: Lyssa E. Hall 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 of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 8th day of November 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 94-28059 Filed 11-10-94; 8:45 am]
BILLING CODE 4510-29-P