[Federal Register Volume 59, Number 227 (Monday, November 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29168]
[Federal Register: November 28, 1994]
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DEPARTMENT OF LABOR
[Application No. D-9743, et al.]
Proposed Exemptions; Sammons Enterprises, Inc. Employees Stock
Ownership Trust et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction 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.
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.
Sammons Enterprises, Inc. Employee Stock Ownership Trust (the Trust)
Located in Dallas, Texas
[Exemption Application No. D-9743]
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, 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 cash sale (the Sale) by certain
accounts (the Prior Plan Accounts) in the Trust of certain limited
partnership interests (the Limited Partnership Interests) and an
undivided interest in certain real property (the Property Interest;
collectively, the Interests) to Otter, Inc. (Otter), a party in
interest with respect to the Trust.
This proposed exemption is conditioned upon the following
requirements: (1) All terms and conditions of the Sale are at least as
favorable to the Prior Plan Accounts as those obtainable in an arm's
length transaction; (2) the Sale is a one-time cash transaction; (3)
the Prior Plan Accounts are not required to pay any commissions, costs
or other expenses in connection with the Sale; (4) the Prior Plan
Accounts receive a sales price equal to the greater of: (a) the fair
market value of the Interests as determined by qualified, independent
appraisers; or (b) the Prior Plan Accounts' aggregate costs of
acquiring and holding the Interests; (5) the trustee of the Trust
determines that the Sale is appropriate for the Prior Plan Accounts and
is in the best interests of the Prior Plan Accounts and their
participants and beneficiaries; (6) the Prior Plan Accounts, prior to
the Sale, obtain the written consent of the general partner of each of
the limited partnerships involved with respect to the sale of the
Limited Partnership Interests; and (7) the other partners of such
limited partnerships, as per the limited partnership agreements, are
given the right of first refusal with respect to the Limited
Partnership Interests.
Summary of Facts and Representations
1. Sammons Corporate Services, Inc. (SCSI), an affiliate of Sammons
Enterprises, Inc. (SEI), sponsors a defined contribution plan
designated as the Sammons Employee Stock Ownership Plan (the Plan), the
assets of which are the corpus of the Trust. SEI is the common parent
of Consolidated Investment Services, Inc. (CIS), of which Otter, SCSI
and many other corporations are subsidiaries. SEI, through various
wholly owned subsidiaries, is involved in a variety of industries,
including the insurance, cable television, industrial supply and
bottled water industries. Otter is engaged primarily in the business of
collecting and monetizing debts incurred in oil and gas related
transactions.
2. As of December 31, 1993, the Trust had total assets of
$101,618,265 and 2,242 participants. The trustee of the Trust (the
Trustee) is Texas Commerce Bank, N.A., formerly Ameritrust, N.A. The
Trustee has the sole investment discretion with regard to the Trust's
assets. The purpose of the Plan is to invest primarily in the
outstanding stock of SEI (the Stock), which is not publicly
traded.1 As of December 31, 1993, the Trust held approximately
ninety-eight percent of its assets in the Stock. The Trust owns 7.65
percent of the Stock; the balance of the outstanding stock is privately
held.
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\1\The applicants represent that the Stock is qualifying
employer securities (QES) within the meaning of section 407(d)(5) of
the Act and that the exemption provided by section 408(e) of the Act
applies to the acquisition of the Stock by the Trust. In this
proposed exemption, the Department expresses no opinion on whether
the Stock constitutes QES within the meaning of section 407(d)(5) of
the Act or whether the requirements of the statutory exemption, as
set forth by section 408(e) of the Act, have been met by the Trust
under the circumstances described.
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3. In 1960, Texas Marine & Industrial Supply Company (TMIS), a
Texas corporation engaged in the business of selling marine supplies,
adopted the Texas Marine & Industrial Supply Company Profit Sharing
Plan (the TMIS Plan). In 1971, TMIS was acquired by TMI Supply Company
and, as a result of that transaction, became a member of the
consolidated group of which SEI is the common parent. Effective 1991,
the TMIS Plan merged into the Plan. As a result of this merger, the
existing TMIS Plan accounts were frozen and all future contributions
under the TMIS Plan were discontinued. The Prior Plan Accounts consist
of these frozen accounts which have been maintained as separate
accounts for TMIS employees under the Trust and have continued to be
invested in assets other than the Stock, such as the Interests
described herein below and certain liquid investments in securities.
The Prior Plan Accounts involve forty-three participants. The fair
market value of the assets in the Prior Plan Accounts totalled
$1,994,394 as of December 31, 1993. The Interests account for
approximately twenty-five percent of the Prior Plan Accounts' assets.
Several TMIS employees who have substantial amounts in the Prior Plan
Accounts are expected to retire in the near future. Therefore, the
Trust must convert the assets in the Prior Plan Accounts into more
liquid investments to insure that sufficient cash will be available to
make such distributions. Because Otter has offered to purchase the
Interests at a price higher than any actual or anticipated offers
resulting from the Trustee's efforts to sell the Interests to an
unrelated party, the Trustee proposes to sell the Interests to Otter
for the greater of: (a) The fair market values of the Interests as
determined by qualified, independent appraisers; or (b) the Prior Plan
Accounts' aggregate costs of acquiring and holding the Interests. The
Sale will be a one-time cash transaction, and the Prior Plan Accounts
will not be required to pay any fees, commissions or expenses in
connection with the Sale. The Trustee has determined that the Sale is
appropriate for the Prior Plan Accounts and is in the best interests of
the Prior Plan Accounts and their participants and beneficiaries.
However, the Sale will be subject to the Prior Plan Accounts obtaining,
prior to the Sale, the written consent of the general partner of each
of the limited partnerships involved with respect to the sale of the
Limited Partnership Interests. In addition, the other partners of such
limited partnerships, as per the limited partnership agreements, must
be given the right of first refusal with respect to the Limited
Partnership Interests. The inability of the Prior Plan Accounts to sell
one of the Limited Partnership Interests to Otter either due to the
failure of the Prior Plan Accounts to obtain the written consent of the
general partner or the exercise of the right of first refusal by any
partner does not preclude the sale of the other Limited Partnership
Interest to Otter if the requisite conditions are met. Accordingly,
Otter and the Trustee request an administrative exemption from the
Department to permit the Sale of the Interests under the terms and
conditions described herein.
The Limited Partnership Interests
4. The Limited Partnership Interests consist of a 22.50 percent
interest in Sunbelt Commercial Associates (Sunbelt Commercial) and two
interests--a 14.15 percent Class A interest and a 14.5 percent Class B
interest--in Sunbelt City, Ltd. (Sunbelt Oklahoma). (Sunbelt Commercial
and Sunbelt Oklahoma are collectively referred to as the Limited
Partnerships). The Prior Plan Accounts acquired the Limited Partnership
Interests as a result of a series of purchases occurring between 1981
and 1993, in the case of Sunbelt Commercial, and 1982 and 1984, in the
case of Sunbelt Oklahoma. The Prior Plan Accounts made such purchases
either directly from the Limited Partnerships or from withdrawing
limited partners. The general partners of both Limited Partnerships, as
well as the other investors, are unrelated to the Prior Plan Accounts,
SEI and its affiliates. The Limited Partnerships were formed for the
purpose of investing in real estate through a sale-leaseback
arrangement with Cyclops Inc. (Cyclops). In 1982, the Limited
Partnerships purchased certain properties in Tulsa and Oklahoma City
from Cyclops and leased such properties back to Cyclops for use by its
Silo Division for the retail sale of major electrical appliances. The
leases are triple net leases for a term of fifteen years with two five-
year lessee renewal options. In 1993, Cyclops closed its Silo stores in
the Tulsa and Oklahoma City locations but has advised the Limited
Partnerships that it intends to honor its lease agreements.
The Prior Plan Accounts invested $250,600 in Sunbelt Commercial and
$230,089 in Sunbelt Oklahoma with the total Prior Plan Account
investment in the two Limited Partnerships amounting to $480,689. As of
December 31, 1993, the Prior Plan Accounts had received distributions
representing returns of capital totaling $480,689 and income
distributions totaling $146,064 for the two Limited Partnerships
combined. Sunbelt Commercial and Sunbelt Oklahoma have experienced
average compounded rates of return of 10.1 percent and 10.8 percent,
respectively.
Annual valuations of interests in both partnerships are furnished,
on behalf of the general partners, to investors by Churchill Management
Corporation (Churchill), the investment adviser to the Limited
Partnerships. The applicants represent that Churchill is independent
of, and unrelated to, the Prior Plan Accounts, SEI and its affiliates.
Based upon the valuation reports from Churchill dated February 14,
1994, the aggregate fair market value of the Limited Partnership
Interests for the three Limited Partnership investments was $400,508 as
of December 31, 1993.
Substantially all of the assets of each Limited Partnership consist
of its real estate and its lease contract with Silo. The Limited
Partnerships' only other material asset is cash. Therefore, Churchill
bases its valuation of the Limited Partnerships on the fair market
values of the underlying assets of the Limited Partnership, which are
the Tulsa and Oklahoma City properties, plus the Limited Partnerships'
available cash. Independent, qualified appraisers annually value these
underlying properties.
The most recent appraisals, dated January 14, 1994, by Duane J.
Blevins, MAI of Tulsa, Oklahoma, taking into account the existing long-
term leases on the properties, place primary emphasis on the income
approach. Mr. Blevins placed the fair market values on the Tulsa and
Oklahoma City properties at $950,000 and $1,250,000, respectively. Mr.
Blevins notes that the values of these properties have declined since
the closing of the Silo stores because the Limited Partnerships will
not be able to renew the lease with Cyclops. As a result, Mr. Blevins
further notes, the Limited Partnerships, as owners, will be faced with
added expenses such as marketing, leasing commissions, vacancy and
possibly up-front renovation costs for a prospective tenant. The
applicants represent that the Limited Partnership Interests are highly
illiquid investments for which there is a very limited secondary
market.2 On March 14, 1994, an attorney for the Trust contacted
Churchill and inquired whether either the general partner or any of the
other limited partners would be interested in purchasing the Limited
Partnership Interests. On April 6, 1994, Churchill advised the attorney
that none of the Limited Partners were interested in purchasing those
interests and that the general partner would consider purchasing them
at a purchase price equal to one third to one half of their original
purchase price.
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\2\ The Department expresses no opinion, in this proposed
exemption, on whether plan fiduciaries violated any of the fiduciary
responsibility provisions of Part 4 of Title I of the Act in
acquiring and holding the Limited Partnership Interests.
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The Real Property Interest
5. The Property Interest consists of a 3.125 percent undivided
interest in a 117,956 square foot retail center with a 1,500 square
foot addition and the underlying land (collectively, the Property). The
Property is located at 5029-5139 Austell Road in Cobb County, Georgia.
On November 30, 1988, the TMIS Plan participated with unrelated
investors in a loan in the original amount of $1,600,000 to Atlanta
Austell Plaza, Ltd. (Atlanta Ltd.), a California limited partnership
which was unrelated to the Prior Plan Accounts.3 The TMIS Plan's
contribution was $50,000 or 3.125 percent of the total principal
amount. A second deed of trust on the Property secured the loan. The
first deed of trust, originally held by the Fulton National Bank of
Atlanta, secured a loan in the original principal amount of $1,800,000.
The first deed of trust note was subsequently assigned to Western
Savings Bank and is now held by Meritor Savings Bank (formerly known as
Philadelphia Savings Fund Society, successor by merger to Western
Savings Bank). At the time that the parties entered into the second
deed of trust loan, the unpaid principal balance on the first deed of
trust loan was $1,113,000.
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\3\The Department expresses no opinion, in this proposed
exemption, on whether plan fiduciaries violated any of the fiduciary
responsibility provisions of Part 4 of Title I of the Act in
acquiring and holding the Property Interest.
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Eventually, Atlanta Ltd. experienced difficulties and became unable
to service the debt on the first and second deed of trust loans. In
February of 1991, the Prior Plan Accounts and the other lenders
foreclosed on the second deed of trust, thereby acquiring direct
ownership of the Property.4 In accordance with their original
investment, the Prior Plan Accounts received a 3.125 percent interest
in the Property. The other investors in the Property are unrelated to
SEI and its affiliates. The Prior Plan Accounts and the other lenders
contributed the necessary funds to make current the principal and
interest payments on the first deed of trust loan. The Trust
contributed a total of $11,406 to cover the costs of foreclosure, the
payments of the first deed of trust loan and other costs which included
operating, maintenance and advertising expenses.5 As a result of
such foreclosure, the Prior Plan Accounts and the other lenders assumed
Atlanta Ltd.'s position as debtor on the first deed of trust loan.
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\4\The applicants represent that Atlanta Ltd. ceased making
payments approximately three months prior to the foreclosure in
February 1991. Accordingly, the Prior Plan Accounts' share of the
interest which was due but never received under the second deed of
trust loan will total $23,554 as of December 31, 1994.
\5\The applicants represent that interest in the amount of
$4,160 would have reasonably accrued on the $11,406 of holding
costs, assuming an interest rate of nine percent per annum, for the
period beginning on February of 1991 and ending December 31, 1994.
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In 1993, the Property owners, pursuant to the terms of a lease,
were required to make tenant improvements in the amount of $225,000.
Several of the Property owners objected to further mortgaging the
Property in an effort to raise this additional $225,000. Finally, the
tenant and the Property owners agreed that the tenant would pay for its
own improvements but would be reimbursed in the amount of $225,000 by
the Property owners out of any proceeds which resulted from the sale of
the Property. As of December 31, 1993, the outstanding balance on the
original first deed of trust loan was $617,000. Accordingly, the
outstanding liabilities on the Property (the Liabilities), as of
December 31, 1993, increased by $350,000 to $842,000.
The applicants represent that the Property has been and continues
to be leased to unrelated parties. As of December 31, 1993, the
Property had a fifty percent occupancy rate with the average lease
being a five-year, triple net lease with the tenant responsible for all
of the actual tenant finish work on the space. The Prior Plan Accounts'
portion of the lease income collected since 1991 will amount to $36,349
as of December 31, 1994.
Roger R. Upton, MAI and Martha H. Mathis, MAI (the Appraisers) of
Upton Associates located in Atlanta, Georgia appraised the Property as
of January 14, 1994 on an ``as is'' basis, i.e., a fifty percent lease
rate. Otter represents that both the Appraisers and Upton Associates
are independent of and unrelated to SEI and its affiliates. In placing
the fair market value of the Property at $2,650,000, the Appraisers
utilized the income approach and the market approach, but gave primary
emphasis to the income approach for the value estimate of the Property.
Accordingly, the Trust's 3.125 percent interest in the Property minus
its pro rata share of the Liabilities would be worth $56,500.
6. Because the fair market value of the Property Interest is less
than the Prior Plan Accounts' aggregate costs of acquiring and holding
the Property Interest, the Property Interest will be sold by the Trust
to Otter for the aggregate costs of acquiring and holding the Property
which totaled $61,406. The rental income received by the Prior Plan
Accounts covered any interest which might have reasonably accrued on
the holding costs as well as any interest which was due but not
received under the second deed of trust loan. However, the rental
income is insufficient to fully cover the actual holding costs.6
Because the Prior Plan Accounts have received a complete return of
capital with regard to their investment in the Limited Partnerships,
the Trust will sell the Limited Partnership Interests to Otter at their
combined fair market values of $400,508. Accordingly, the Trust will
sell the Interests for an aggregate sales price of $461,914.
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\6\The rental income minus the Prior Plan Accounts' pro rata
share of the interest which was due but never received under the
second deed of trust loan minus the interest which reasonably would
have accrued on the holding costs equals $8,689 ($36,349 -$23,554
-$4,106). Because the holding costs amount to $11,406, the remaining
rental income of $8,689 is insufficient to cover these costs. See
Representation #5 for an explanation of the rental income received
by the Prior Plan Accounts. See Footnotes #4 and #5 for an
explanation as to how the applicants calculated the interest
attributable to the second deed of trust loan and the holding costs,
respectively.
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7. In summary, it is represented that the transaction will satisfy
the statutory criteria of section 408(a) of the Act because: (a) All
terms and conditions of the Sale will be at least as favorable to the
Prior Plan Accounts as those obtainable in an arm's length transaction;
(b) the Sale will be a one-time cash transaction; (c) the Prior Plan
Accounts will not be required to pay any commissions, costs or other
expenses in connection with the Sale; (d) the Prior Plan Accounts will
receive a sales price equal to the greater of the: (1) the fair market
values of the Interests as determined by qualified, independent
appraisers; or (2) the Prior Plan Accounts' aggregate costs of
acquiring and holding the Interests; (e) the trustee of the Plan will
determine that the Sale is appropriate for the Prior Plan Accounts and
is in the best interests of the Prior Plan Accounts and their
participants and beneficiaries; (f) the Prior Plan Accounts, prior to
the Sale, will obtain the written consent of the general partner of
each of the limited partnerships involved; and (g) the other partners
of such limited partnerships, as per the limited partnership
agreements, will be given the right of first refusal with respect to
the Limited Partnership Interests.
FOR FURTHER INFORMATION CONTACT: Kathryn Parr of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Lucky Electric Supply Inc. Employees Pension Plan (the Plan) Located in
Memphis, Tennessee
[Application No. D-9792]
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 cash sale by the Plan to
Lucky Electric Supply, Inc. (the Employer), the sponsor of the Plan, of
a group annuity contract (the GAC) issued by Mutual Benefit Life
Insurance Company of New Jersey (Mutual Benefit); provided that the
following conditions are satisfied:
(A) The sale is a one-time transaction for cash;
(B) The Plan does not suffer any loss or incur any expenses in
the transaction;
(3) The Plan receives a purchase price of no less than the fair
market value of the GAC at the time of the transaction; and
(4) The proceeds of the sale are used solely to discharge the
Plan's obligations to participants and beneficiaries in connection
with the termination of the Plan.
Summary of Facts and Representations
1. The Plan is a defined benefit pension plan, with 30 participants
as of December 31, 1993. The Plan was established in 1974 by Lucky
Electric Supply, Inc. (the Employer), which is a closely-held Tennessee
corporation engaged in wholesale and retail electrical supply
operations, with its place of business in Memphis, Tennessee. The
trustee of the Plan is Marylew Lewis who is a director of the Employer.
2. In 1991, the Employer took the actions necessary to terminate
the Plan, and established May 31, 1991 as the termination date. The
Employer represents that notice of intent to terminate the Plan was
made to Plan participants, and was filed with the Pension Benefit
Guaranty Corporation (PBGC), in accordance with the requirements of the
PBGC.
3. The sole asset in the Plan upon its termination was group
annuity contract No. 03057 (the GAC) issued by Mutual Benefit Life
Insurance Company of New Jersey (Mutual Benefit). The Employer
represents that Mutual Benefit was notified of the termination of the
Plan, and that Mutual Benefit acknowledged receipt of such notification
in a letter to the Employer dated July 22, 1991. Mutual Benefit also
advised the Employer that effective July 16, 1991, Mutual Benefit had
been placed in a rehabilitory conservatorship (the Conservatorship) by
the insurance commissioner of the State of New Jersey (the
Commissioner).7 The Employer represents that the Conservatorship
effected a freeze on regular payments and withdrawals from Mutual
Benefits group annuity contracts, including the GAC held by the Plan.
Since the Conservatorship commenced, the only withdrawals with respect
to the GAC have been to enable hardship distributions under the Plan
(the Hardship Withdrawals). The Employer represents that upon
commencement of the Conservatorship on July 16, 1991, the GAC had a
face value, referred to in the terms of the GAC as ``contract value'',
of $147,477.68 (the Conservatorship Face Value), consisting of total
principal deposits, plus interest at the rates guaranteed by the GAC
(the Contract Rates), less previous withdrawals. The Employer
represents that a total of $37,743.55 in Hardship Withdrawals from the
GAC have been made by the Plan since the commencement of the
Conservatorship.
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\7\The Department notes that the decisions to acquire and hold
the GAC are governed by the fiduciary responsibility requirements of
Part 4, Subtitle B, Title I of the Act. In this proposed exemption,
the Department is not proposing relief for any violations of Part 4
which may have arisen as a result of the acquisition and holding of
the GAC.
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4. In January of 1993, the Employer received a letter from the PBGC
requesting a certification that final distribution of Plan benefits, in
connection with termination of the Plan, had been accomplished. Due to
the Conservatorship's freeze on withdrawals and payments with respect
to the GAC, other than the Hardship Withdrawals, the Employer has not
been able to accomplish final distribution of benefits to the Plan's
participants, in accordance with requirements of the PBGC. In order to
enable the Plan to accomplish complete discharge of Plan benefit
obligations and distribution of assets in accordance with requirements
of the PBGC, the Employer proposes to purchase the GAC from the Plan,
and is requesting an exemption to permit such transaction under the
terms and conditions described herein.
5. The Employer proposes a purchase price for the GAC which
represents its new value as determined with reference to the
Conservatorship, as described herein. As a result of the
Conservatorship, a plan of rehabilitation of Mutual Benefit (the Rehab
Plan) has been approved by the Commissioner, under which the terms of
the GAC have been redefined and restated. Under the Rehab Plan, as the
holder of a Mutual Benefit group annuity contract, the Plan had the
options of ``opting out'' of the Rehab Plan, in which case the GAC
would have been terminated, or ``opting in'', in which case the GAC
would be restated, redefined, and would be supported and reinsured by a
consortium of life insurance companies. By not submitting the forms
necessary to ``opt out'' of the Rehab Plan, the Trustee allowed the
Plan to be ``opted in'' automatically. Consequently, the GAC has been
assigned a new value (the New Value) equal to 100 percent of the
Conservatorship Face Value, less subsequent Hardship Withdrawals, plus
interest on this amount as follows: (a) For the period of July 16, 1991
through December 31, 1991, interest at the Contract Rates; (b) for
calendar year 1992, interest an annual rate of four percent; and (c)
for calendar years 1993 and 1994, an annual rate of 3.5 percent. The
Rehab Plan provides that subsequent to 1994, the New Value will earn an
annual rate of interest determined each year by the performance of a
separate account maintained by Mutual Benefit. On the basis of the
foregoing, the GAC's New Value plus interest, as of December 31, 1993,
was $123,422.43. The Employer represents that the Plan is unable to
withdraw its investment in the GAC without the payment of a substantial
fee, which would be assessed by Mutual Benefit under the terms of the
Rehab Plan.
6. In accordance with the Rehab Plan's new valuation of the GAC,
the Employer proposes to pay the Plan cash for the GAC in the amount of
the New Value plus all interest accrued in accordance with the Rehab
Plan as of the date of the purchase. The Employer states that such a
purchase transaction will allow the Plan to substitute the GAC, which
is illiquid due to the inability to withdraw its value, for the cash
assets necessary for the Plan's participants to receive the full amount
of the benefits due them under the terms of the Plan. The Employer
represents that no participant will receive less than the full value of
his or her accrued benefits under the terms of the Plan. The Employer
estimates that the termination value of all Plan participants' accrued
benefits as of March 31, 1995 will be $239,953.57. Commensurate with
the Employer's proposed purchase of the GAC, the Employer will make
cash contributions to the Plan to supply funding for the excess of the
Plan's accrued benefit obligations over the purchase price of the GAC.
7. In summary, the applicant represents that the transaction
satisfies the criteria of section 408(a) of the Act for the following
reasons: (1) The transaction enables the Plan to liquidate it sole
asset, the GAC, to enable distribution of benefits in connection with
termination of the Plan; (2) The transaction is a one-time cash
transaction in which the Plan will incur no losses or expenses; (3) The
Plan will receive a purchase price for the GAC equal to its New Value
plus interest through the date of sale in accordance with the Rehab
Plan; and (4) All Plan participants will receive all benefits due them
under the terms of the Plan.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
CNA Employees' Retirement Trust (the Trust) Located in Chicago,
Illinois
[Application Nos. D-9539 through D-9544]
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, effective January 17, 1992, to fifteen past
sales and purchases by the Trust of twelve issues of short-term
commercial paper (the CNA Transactions), as identified below, involving
the Continental Casualty Company, the Continental Assurance Company,
the Continental Assurance Company Guaranteed Investment Fund, the
Valley Forge Life Insurance Company, Valley Forge Insurance Company,
and the American Casualty Company of Reading, Pennsylvania
(collectively, the CNA Companies), each of which is a party in interest
with respect to the CNA Employees' Retirement Plan (the Plan), whose
assets are held by the Trust; provided that the following conditions
are satisfied:
(A) In each of the CNA Transactions, the Trust paid no more, or
received no less, than the fair market value of the commercial paper
involved in the transaction;
(B) The CNA Transactions constituted, in the aggregate, less than
four percent of all commercial paper transactions of the Trust during
1992; and
(C) The CNA Companies have undertaken efforts to prevent any
recurrence of direct or indirect transactions involving the Trust and
the CNA Companies, including the appointment of an independent
investment manager of all the Trust's commercial paper investments.
Summary of Facts and Representations
1. The Plan is a defined contribution pension plan sponsored by CNA
Financial Corporation (CNAF), an Illinois public corporation, 83
percent of the stock of which is owned by Loews Corporation. CNAF's
largest wholly-owned subsidiary is the Continental Casualty Company
(Casualty), one of the largest property-casualty insurance underwriters
in the United States. Among Casualty's eleven insurance subsidiaries
(collectively, the CNA Companies) are the Continental Assurance Company
(Assurance) and the American Casualty Company of Reading, Pennsylvania
(ACCP). Valley Forge Life Insurance Company (VF Life) is a wholly-owned
subsidiary of Assurance, and Valley Forge Insurance Company (VF
Insurance) is a wholly-owned subsidiary of ACCP. Assurance is a
registered investment advisor under the Investment Advisors Act of
1940, as amended. The Plan had 19,858 participants as of December 31,
1992, and total assets of approximately $443 million as of June 30,
1993.
2. Prior to January 2, 1992, the Plan's assets had been invested by
Assurance, as Plan fiduciary, through a variety of separate accounts,
and in a participating investment contract issued by Assurance.
Effective January 1, 1992, all of the Plan's investment contracts and
separate accounts were canceled and terminated, and the liquidated
assets were transferred to the CNA Employees' Retirement Trust (the
Trust). Simultaneously, CNAF entered into a contract with Assurance
(the Advisory Agreement), effective January 1, 1992, under which
Assurance agreed to provide investment advice to the Trust.8 Among
other things, Assurance agreed to supervise the composition of the
Trust's portfolio continuously, and to determine the nature and timing
of changes in the portfolio and the manner of effectuating such
changes, subject to the oversight of the Trust's trustees. Assurance's
responsibilities under the Advisory Agreement include the provision of
advice, information and recommendations with respect to acquisition,
holding and disposition of securities by the Trust. During 1992, two
individuals who were employed by Assurance and Casualty (the Traders)
had investment discretion over commercial paper transactions of the
Trust, Casualty, and the other CNA Companies.
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\8\The Applicants represent that the Trust does not pay any fees
to Assurance with respect to services rendered pursuant to the
Advisory Agreement.
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3. The Applicants represent that as part of an internal compliance
program, Casualty's employee benefits planning staff developed a
systems program designed to detect related-party transactions involving
the Trust. A trial run of that program on May 6, 1993 detected that
certain Trust transactions involved commercial paper which was
purchased by CNA Companies. Upon this discovery, further investigations
were conducted by Casualty's legal staff in June 1993 to determine
whether any more of the Trust's commercial paper transactions involved
CNA Companies. As a result of these voluntary investigative efforts,
Casualty has determined that fifteen of the commercial paper
transactions engaged in by the Trust between January 17 and December
10, 1992 involved five of the CNA Companies (the CNA Transactions). In
response to the discovery of these transactions, the five CNA Companies
involved (the Applicants) are requesting an exemption for the CNA
Transactions under the terms and conditions described herein.
4. The CNA Transactions fall into four categories: (a) Direct Trust
sales, which are direct sales by the Trust of commercial paper to a CNA
Company; (b) Indirect Trust sales through the issuer, which are sales
by the Trust of commercial paper to the issuer of the commercial paper,
and the purchase by CNA Companies, on the same date and from the same
issuer, of commercial paper issued by that same issuer with the same
maturity date; (c) Indirect Trust sales through dealers, which are
sales by the Trust of commercial paper to independent broker-dealers,
and the purchase by CNA Companies on the same date from the same
broker-dealers of commercial paper of the same issuer and with the same
maturity date; and (d) Indirect Trust purchases through dealers, which
are sales by CNA Companies of commercial paper to independent broker-
dealers, and the purchase by the Trust on the same date from the same
broker-dealers of commercial paper of the same issuer and with the same
maturity date. The Applicants describe the details of the CNA
Transactions as follows:
(a) Direct Trust sales:
(1) On November 2, 1992, the Trust sold Ameritech Capital Funding
commercial paper with a maturity date of November 13, 1992, principal
amount $17,575,000, to Casualty for $17,558,245.17.
(2) On November 2, 1992, the Trust sold Woolworth Corporation
commercial paper with a maturity date of November 13, 1992, principal
amount $17,950,000, to Casualty for $17,928,011.25.9
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\9\The Applicants represent that the sale prices in both of the
direct Trust sales were determined by contemporaneous independent
price quotes for the commercial paper from dealers in such paper.
The Applicants further represent that due to an irregularity in the
U.S. commercial paper market on the day of the transactions, the
Trust's representative, Mr. Wayne Gulgren, succeeded in obtaining
prices for the Ameritech Capital Funding and Woolworth Corporation
commercial paper on November 2, 1992, which were actually more
favorable to the Trust than the Trust could have obtained through
dealers in the open market.
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(b) Indirect Trust sales through the issuer: On November 2, 1992,
the Trust sold Chevron commercial paper which it had acquired on
October 28, 1992, with a maturity date of December 3, 1992 and the
principal amount $65,900,000, to Chevron for $65,928,614.85,10 and
on the same date Assurance and Casualty bought Chevron commercial paper
with the same maturity date and in the same principal amount from
Chevron.
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\1\0The Applicants represent that the Chevron paper, unlike all
the other commercial paper involved in the CNA Transactions, is
referred to as ``coupon paper'' which sells at its principal face
amount, rather than at a discount, and has a stated interest rate.
Interest accrues at the stated interest rate, and the principal
amount plus the accrued interest is returned at maturity or on
prepayment. Thus, when the Trust acquired $65,900,000 principal
amount Chevron paper with a maturity of December 3, 1992 and a 3.125
percent stated interest rate, the Trust had paid $65,900,000. When
the Trust sold this position back to Chevron on November 2, 1992,
the Trust received $65,928,614.85, including five days' interest at
the paper's stated rate of 3.125 percent. The Applicant represents
that the remainder of the commercial paper involved in the CNA
Transactions is referred to as ``discount paper'', for which the
purchaser pays a price below the principal face amount and is paid
the face amount upon the paper's maturity. The Applicants state that
approximately one-half of Chevron's commercial paper is issued as
discount paper, and the remainder is issued as coupon paper. The
Applicants represent that investors typically preferring to invest
in U.S. Treasury bills, which are issued only in discount form, are
likely to invest in discount paper, while coupon paper is a more
likely investment for investors which typically invest in interest-
bearing securities.
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(c) Indirect Trust sales through dealers:
(1) On January 17, 1992, the Trust sold Federal Farm Credit
commercial paper, in the principal amount of $15 million with a
maturity date of January 24, 1992, to an independent broker-dealer for
$14,988,625, and on the same date Assurance bought Federal Farm Credit
commercial paper with the same maturity date and in the same principal
amount from the same independent broker-dealer for $14,988,654.17.
(2) On January 31, 1992, the Trust sold Student Loan Mortgage
commercial paper, in the principal amount of $24,800,000 with a
maturity date of February 14, 1992, to an independent broker-dealer for
$24,762,097.33, and on the same date Student Loan Mortgage commercial
paper with the same maturity date in a lesser principal amount was
purchased from the same independent broker-dealer for $20,693,567.08 by
the Continental Assurance Company Guaranteed Investment Fund (the G.I.
Fund), which is a sub-account of a separate account maintained by
Assurance.
(3) On February 18, 1992, the Trust sold Bell Atlantic commercial
paper, in the principal amount of $24,700,000 with a maturity date of
February 21, 1992, to an independent broker-dealer for $24,691,252.08,
and on the same date the G.I. Fund bought Bell Atlantic commercial
paper with the same maturity date and in the same principal amount from
the same independent broker-dealer for $24,691,355.
(4) On November 2, 1992, the Trust sold Detroit Edison commercial
paper, in the principal amount of $10 million with a maturity date of
November 23, 1992, to an independent broker-dealer for $9,979,466.67,
and on the same date Casualty bought Detroit Edison commercial paper
with the same maturity date and in the same principal amount from the
same independent broker-dealer for $9,980,722.22.
(5) On November 18, 1992, the Trust sold Abbot Labs commercial
paper, in the principal amount of $13,970,000 with a maturity date of
December 14, 1992, to an independent broker-dealer for $13,938,218.25,
and on the same date Casualty bought Abbott Labs commercial paper with
the same maturity date and in the same principal amount from the same
independent broker-dealer for $13,938,420.04.
(6) On December 1, 1992, the Trust sold Wal-Mart commercial paper,
in the principal amount of $20,645,000 with a maturity date of December
10, 1992, to an independent broker-dealer for $20,628,225.94, and on
the same date Casualty, VF Life, and ACCP bought Wal-Mart commercial
paper with the same maturity date and in the same principal amount from
the same independent broker-dealer for $20,628,484.
(d) Indirect Trust purchases through dealers:
(1) On March 4, 1992, Casualty sold Unilever Capital Corporation
commercial paper, in the principal amount of $17,530,000 with a
maturity date of April 2, 1992, to an independent broker-dealer for
$17,471,396.24, and on the same date the Trust bought Unilever Capital
Corporation commercial paper with the same maturity date in the
principal amount of $13,390,000 from the same independent broker-dealer
for $13,883,992.31.
(2) On September 29, 1992, ACCP sold Nestles Capital Corporation
commercial paper, in the principal amount of $2,200,000 with a maturity
date of October 13, 1992, to an independent broker-dealer for
$2,197,347.78, and on the same date the Trust bought Nestles Capital
Corporation commercial paper with the same maturity date and in the
same principal amount from the same independent broker-dealer for
$2,197,364.89.
(3) On December 10, 1992, VF Insurance sold GTE Corporation
commercial paper, in the principal amount of $11 million with a
maturity date of January 13, 1993, to an independent broker-dealer for
$10,959,275.56, and on the same date the Trust bought GTE Corporation
commercial paper with the same maturity date and in the same principal
amount from the same independent broker-dealer for $10,959,483.33.
5. The Applicants represent that any violations of the Act
attributable to the participation of CNA Companies in the CNA
Transactions resulted inadvertently and unintentionally from actions
customarily taken by the Traders in effecting commercial paper
transactions. The Applicants represent that, except for three indirect
Trust purchases of commercial paper through dealers, the CNA
Transactions were effected to accomplish the necessary liquidation of
Trust assets in order to satisfy the Trust's obligations arising from
commitments to purchase U.S. Treasury securities or short-term
commercial paper issued by U.S. corporations. The Applicants state that
in all of the CNA Transactions, the commitments on behalf of the Trust
to purchase the commercial paper or U.S. Treasury securities were made
because the yields on the obligations to be purchased were higher than
those on the commercial paper which was sold. The Applicants maintain
that if the commercial paper in issue had not been sold by the Trust on
the dates of the CNA Transactions, the Trust would have foregone the
incremental return on the government obligations and commercial paper
to which it was committed, and the Trust would have been required to
reimburse its broker for any costs of carrying the obligations until
settlement.
The Applicants represent that the three indirect Trust purchase
transactions were mistakenly initiated by the Traders, who proceeded on
erroneous assumptions about the Trust's ability to engage in the
transactions with the CNA Companies. The Applicants state that the
sellers in these transactions were under no obligation to sell the
commercial paper to the Trust, nor was the Trust obligated to purchase
the commercial paper from the sellers. The Applicants represent that
the commercial paper involved in the Trust purchase transactions was
readily tradable on the open market, and that sellers other than the
CNA Companies could readily have been located.
The Applicants represent that as a percentage of commercial paper
transactions entered into during 1992 by the Trust, the CNA
Transactions were minor. Specifically, the Applicants state that the
total amount involved in the CNA Transactions constituted only 3.15
percent of all commercial paper transactions entered into by the Trust
during 1992 and only 2.52 percent of all transactions entered into by
the Trust during 1992.
6. The Applicants represent that in each of the CNA Transactions,
the Trust bought or sold commercial paper on terms which were as
favorable or more favorable to the Trust as those which the Trust could
have obtained in arm's-length transactions with unrelated parties on
the open market. Specifically, the Applicants represent that in the
purchase transactions, the Trust did not pay, and the CNA Companies did
not receive, prices which were in excess of the fair market value of
the commercial paper purchased. Similarly, with respect to the sale
transactions, the Applicants represent that the Trust received purchase
prices which were equal to or in excess of the fair market values of
the commercial paper at the time of the transactions.11 With
respect to the Trust purchases, the Applicants also represent that the
commercial paper issues involved in the CNA Transactions were highly
liquid and involved highly liquid issuers, and that none of the parties
to the transactions were under any compulsion or duress because the
commercial paper involved could have been sold by and purchased by
sellers and purchasers other than the Trust and the CNA Companies. The
Applicants have obtained written determinations by independent
commercial paper broker-dealers (the Independent Dealers), confirming
the fair market value prices and liquidity of the commercial paper
involved in the CNA Transactions. The representations of the
Independent Dealers are summarized as follows:
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\1\1The Applicants represent that a retrospective determination
of whether a single trade of commercial paper was made for fair
market value (defined as the price at which the commercial paper
would trade between a willing buyer and willing seller, neither
party being under a compulsion to buy or sell), is difficult, and
includes comparisons of identical or similar transactions, taking
into account differences between the transactions being compared.
The Department expresses no opinion as to the Applicants'
representations regarding the determination of fair market value of
commercial paper, or whether the paper involved in the CNA
Transactions was exchanged at its fair market value.
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(a) In a letter dated December 20, 1993, William H. Honnaker III
(Honnaker), vice-president of Goldman Sachs Money Markets, L.P. (GSMM)
states that after a review of the CNA Transactions, it is the opinion
of GSMM that the Trust sold and purchased the commercial paper at rates
which are representative of those at which such paper would have traded
on the open market for the time periods in question between unrelated
buyers and sellers, and that the Trust purchased the commercial paper
at rates which are representative of those at which such paper would
have traded on the open market for the time periods in question between
unrelated buyers. With respect to the Trust purchases, in a letter
dated January 14, 1994, Honnaker states that GSMM could have found a
willing buyer other than the Trust to purchase the Nestles and Unilever
commercial paper if it had held or acquired such paper at the time of
those transactions, and that the commercial paper traded by Nestles and
Unilever was readily tradable in the market at the time of those
transactions.
(b) In a letter dated December 2, 1993, Andrea L. Dullberg
(Dullberg), a senior vice-president of Merrill Lynch Money Markets,
L.P. (MLMM) states that the prices at which the CNA Transactions were
consummated were within the bid-offer ranges for such securities on the
dates involved. With respect to the Trust purchases of GTE and Unilever
commercial paper, involving MLMM as broker-dealer, Dullberg states the
purchase prices were the fair market prices of the commercial paper at
the time of the transactions.12 In a letter dated January 5, 1994,
another vice president of MLMM, John B. Sprung, states that it could
have found a willing buyer other than the Trust to purchase the GTE and
Unilever commercial paper involved in the Trust purchases in which MLMM
participated as broker-dealer, and that the commercial paper issued by
GTE and Unilever was readily tradable on the open market at the times
of the Trust purchases of that commercial paper.
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\1\2Dullberg's letter does not refer to the fair market value of
any other commercial paper involved in the CNA Transactions, and
Dullberg states that as a matter of policy, MLMM does not opine on
fair market value with respect to trades in which MLMM did not
participate.
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(c) Michael B. Connolly, vice president of Citicorp Securities,
Inc., states in a letter dated January 7, 1994, that the purchase
prices in the CNA Transactions were within the bid-offer range for
similar commercial paper on the dates involved.
(d) William D. Folland, vice president of CS First Boston
Corporation, in a letter dated January 6, 1994, represents that the
prices at which the Trust purchased and sold commercial paper in the
CNA Transactions were equal to or better than the rates which such
paper would have been quoted on the open market by a dealer willing to
make a market in such paper.
7. In addition to the foregoing representations of the Independent
Dealers, the applicants have also obtained the opinions of an
independent professional analyst of commercial paper markets, Dr.
Marcia L. Stigum (Dr. Stigum). Dr. Stigum (Ph. D. in economics, 1961,
Massachusetts Institute of Technology), who is president of her money
market consulting firm in Quechee, Vermont, represents that she is
independent of and unrelated to the CNA Companies, and that she has
substantial experience as an expert on commercial paper market issues.
Dr. Stigum has submitted a report containing analyses of each of the
CNA Transactions and the market environments in which each one
occurred. Dr. Stigum represents that her report was prepared with the
objective of addressing two questions: (1) Was the paper sold to and
bought by the Trust in each CNA Transaction readily marketable at the
time of the transaction? (2) Were the CNA Transactions consummated at
fair market value? Dr. Stigum's findings detailed in her report in
response to these two questions are summarized as follows:
(A) All twelve issues of commercial paper sold to and bought by the
Trust in the CNA Transactions were unequivocally readily marketable.
Dr. Stigum states that in this context, the term ``readily marketable''
means ``highly liquid.'' She states that at any time, the original
owner or subsequent owner of each issue of the commercial paper could
have sold that paper at a fair market value to the issuing dealer or,
in the case of direct paper, could have obtained a prepayment from the
issuer.
(1) Dr. Stigum notes that all issues of paper sold by the Trust to
CNA Companies, except for the Chevron paper, was ``dealer paper'' which
the Trust had purchased from dealers rather than directly from the
issuers. Dr. Stigum states that every dealer in commercial paper stands
ready to bid for paper issued by one of the names which that dealer
sells (i.e., ``dealer paper''), in order to make the paper sold by that
dealer as liquid as possible. Dr. Stigum has determined that the Trust
could have sold to an unrelated third party, including any dealer
through whom the paper of a particular name is issued, each piece of
dealer paper it sold to the CNA Companies, on the same date it sold
that paper to the CNA Companies. Accordingly, Dr. Stigum concludes that
all dealer paper in the CNA Transactions was 100 percent liquid. With
respect to the Chevron paper, Dr. Stigum states that it was ``direct
paper'' which the Trust purchased directly from the issuer, featuring
the ability to have the issuer prepay at any time before maturity, and
that this issue of Chevron paper was and is 100 percent liquid.
(2) Dr. Stigum states that two of the three issues of commercial
paper bought by the Trust from the CNA Companies were dealer paper
which carried the top credit ratings given by Moody's and Standard &
Poors, and that the third issue of such paper carried a split rating
which even conservative investors consider to be quite acceptable. Dr.
Stigum states that at no time during the period over which the
commercial paper involved in the CNA Transactions matured, or
subsequently, have any one of the issuers of such paper experienced
financial difficulties that either caused the issuer's paper to be
downgraded or caused the issuer to exit the commercial paper market.
Dr. Stigum concludes that the commercial paper sold by the Trust was
100 percent liquid.
(B) All of the CNA Transactions, both buys and sells, were
consummated at fair market values, i.e., terms at least as favorable to
the Trust as could have been obtained in open-market transactions with
unrelated parties. Dr. Stigum's report includes an analysis of, and
conclusions regarding, each of the CNA Transactions, and she represents
that her findings on each transaction demonstrate that each of the CNA
Transactions was consummated at fair market value, which she defines as
``a price (rate) at which a willing seller would have sold to a willing
buyer, neither being under any compulsion to sell or buy.''
In her report, Dr. Stigum explains that her determinations of the
fair market values of the commercial paper involved in the CNA
Transactions were based on comparisons with LIBOR rates13, because
time-series data on short-term commercial paper rates are not
available, and short-term commercial paper was traded during the
relevant period at a relatively constant spread to LIBOR rates, on
which accurate time-series data are readily available. She states that
over the time period of the CNA Transactions, commercial paper for
different maturities consistently traded at a spread below LIBOR rates
for Eurodollar deposits having those same maturities. Accordingly, for
each CNA Transaction, Dr. Stigum presented and compared actual CNA
Transactions data with two LIBOR yield curves: (1) For the week of the
initial purchase of the commercial paper; and (2) for the week of the
subsequent sale or purchase of such paper. She states that her
determinations were also influenced by her awareness that the rates at
which secondary trades of commercial paper may be effected through a
dealer depend on the name and rating of the issuer, the rates that the
issuer is posting, and the precise time of day at which the secondary
trade is made. On the basis of these factors, Dr. Stigum represents
that she has judged the prices (rates) involved in the CNA Transactions
to be fair market prices if they fell within a range of five basis
points above or below the rate that the data indicated to be a fair
market rate.
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\1\3LIBOR is the London Interbank Offered Rate for Eurodollar
deposits. Dr. Stigum represents that banks post, each day, a number
of different LIBOR rates, one for each maturity in which they are
bidding for funds.
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8. The Applicants represent that since discovery of the CNA
Transactions in May and June 1993, they have undertaken efforts to
prevent any recurrence of direct or indirect transactions between the
Trust and the CNA Companies. The Applicants state that three full-time
attorneys were appointed to review all proposed CNA intercompany trades
of commercial paper, to detect any proposed transactions involving the
Trust. Additionally, a memorandum describing the prohibitions of the
Act was distributed to all personnel involved in commercial paper
transactions on behalf of the Trust, the receipt of which was
acknowledged in writing. The Applicants state that this memorandum will
be recirculated annually to all such investment personnel. The
Applicants represent that personnel involved in the Trust's commercial
paper transactions have been directed to develop a ``real-time''
trading audit computer program which would interdict proposed party-in-
interest transactions before the trade can be accomplished.
Furthermore, Assurance has entered into an investment management
agreement with Harris Investment Management, Inc. (Harris), under which
Harris manages all the Trust's commercial paper investments and
approves all the Trust's commercial paper transactions, in order to
prevent any transactions involving parties related to the Trust.
9. In summary, the Applicants represent that the CNA Transactions
satisfy the criteria of section 408(a) of the Act for the following
reasons: (a) The prices at which the Trust sold commercial paper were
not less than the paper's fair market value, and the prices at which
the Trust purchased commercial paper were not in excess of the paper's
fair market value; (b) The transactions resulted from actions
customarily taken by the Traders in effecting commercial paper
transactions; (c) The transactions involved a very small percentage of
the Trust's total commercial paper transactions for 1992; and (d) The
Applicants have undertaken efforts to prevent any recurrence of direct
or indirect transactions involving the Trust and the CNA Companies,
including the appointment of Harris as an independent investment
manager of all the Trust's commercial paper investments.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department (202)
219-8881. (This is not a toll-free number.)
John R. Lyman Company 401(k) Profit Sharing Plan (the Plan) Located in
Chicopee, Massachusetts
[Application No. D-9759]
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) and 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 cash sale (the Sale) by the Plan
of Guaranteed Investment Contract CGO1303A3A (GIC1303) and Guaranteed
Investment Contract CGO1344A3A (GIC1344, collectively, the GICs) issued
by Executive Life Insurance Company (Executive Life), a California
corporation, located in Los Angeles, California, to John R. Lyman
Company, a Massachusetts corporation (the Employer), the sponsoring
employer and a party in interest with respect to the Plan; provided
that (1) the Sale is a one-time transaction for cash; (2) the Plan
experiences no loss nor incurs any expense from the Sale; (3) the Plan
receives as consideration from the Sale the greater of either the fair
market value of the GICs as determined on the date of the Sale or an
amount that is equal to the total amount expended by the Plan for the
GICs at the time of acquisition, less withdrawals, plus the amount the
GICs would have earned by the date of the Sale if Executive Life had
not been placed under conservatorship; and (4) any funds from the GICs
in excess of the Sale price that are received by the Employer, or its
successors, from Executive Life, or its successors, after the date of
the Sale are paid to the Plan.
Summary of Facts and Representations
1. The Employer, a Massachusetts corporation, is a closely held
corporation that was established in 1906 and currently employs
approximately 186 individuals. It is located in Chicopee, Massachusetts
where it is engaged primarily in the manufacture and distribution of
wiping products that include woven (textiles) and non-woven (paper and
synthetic) materials.
2. The Plan is a defined contribution plan with individual accounts
for participants that is intended to meet the qualification
requirements of sections 401(a) and 401(k) of the Code. The Plan
intends also to comply with section 404(c) of the Act whereby
participants self-direct the investments of assets in their respective
individual accounts. As of January 31, 1994, the Plan had 79
participants and total assets of $499,249.87. Approximately 2.25
percent of the total assets of the Plan, valued at $12,906.58, remain
invested in the GICs for individual accounts of 19 participants of
which 4 are retired.
At the adoption of the Plan by the Employer on September 29, 1989,
Edward S. Wright (president, director, and shareholder of the Employer)
and his wife, Jean C. Wright (treasurer, clerk, director, and
shareholder of the Employer) were appointed Trustees of the Plan. In
their undertakings, the Trustees are authorized by the Plan to employ
agents and to pay their reasonable expenses and compensation.
The Plan also provides that the Employer may make appointments of
persons to direct and manage the Plan. In the absence of such an
appointment the Employer is the Plan Administrator and Named Fiduciary.
Currently the Plan is administered by a committee (the Committee) which
consists of 11 members of which 4 members act as a quorum (the
Executive Committee) in administering daily activities of the Plan.
This includes the Executive Committee selecting the optional investment
vehicles used by Plan participants in directing investments for their
respective accounts. The Executive Committee also appoints legal
counsel, accountants, investment advisors, and administrators for the
Plan. The Executive Committee has currently retained Lamoriello &
Company, Inc. of Warwick, Rhode Island to perform various functions for
the Plan, which include the preparation and filing of annual earnings
reports and disbursing periodic reports to participants. The Executive
Committee also has retained Inside Management, Inc. of Wellesley,
Massachusetts as the current registered Investment Advisor for the
Plan.
When the Employer adopted the Plan in 1989, Feingold & Feingold
Insurance Agency, Inc. of Worcester, Massachusetts (Feingold) was
appointed Plan Administrator. Included in Feingold's duties, among
other things, was the responsibility to maintain books and records for
the Plan, manage Plan assets, and recommend investment vehicles for
Plan participants to invest the assets of their respective accounts.
Feingold submitted the GICs as one of its five recommended investment
vehicles for the Plan. The GICs were purchased from Executive Life by
Feingold at the direction of the respective participants and were held
in trust by its subsidiary, Feingold Investment Planning Trust, for the
benefit of the participants in the Plan.\14\ GIC 1303, with an issue
date of January 1, 1989, and a maturity date of December 31, 1995, was
to pay an annual interest yield of 8.95 percent until maturity. GIC
1344, with an issue date of January 1, 1990, and a maturity date of
December 31, 1996, was to pay an annual interest yield of 8.65 percent
until maturity.
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\14\Feingold is no longer Plan Administrator for the Plan, but
its subsidiary continues to hold the GICs in trust for the Plan.
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As of March 31, 1991, GIC 1303 had a balance of $9,147.56, which
was determined by adding its earnings of $1,165.42 to the original
price of $9,227.31 and subtracting $1,245.17 in withdrawals. The GIC
1344 was determined, as of March 31, 1991, to have a balance of
$3,759.12 which was determined by the same calculation of adding its
earnings of $338.20 to the original price of $3,881.30 and subtracting
the withdrawals of $460.38.
3. On April 11, 1991, the California Department of Insurance
obtained a court order placing Executive Life under conservatorship and
freezing, as of March 31, 1991, the value of the GICs and their
interest payments.\15\ The following month, First Executive
Corporation, a Delaware corporation, which wholly owns Executive Life,
filed for reorganization under Chapter 11 of the Bankruptcy Code.
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\15\The Department notes that the decisions to acquire and hold
the GICs are governed by the fiduciary responsibility provisions of
Part 4 of Title I of the Act. In this regard, the Department is not
proposing relief for any violations of Part 4 which may have arisen
as a result of the acquisition and holding of the GICs.
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On August 13, 1993, the Superior Court of California approved a
Rehabilitation Plan of the Department of Insurance of California and
authorized the Insurance Commissioner for California and the successor
of Executive Life, Aurora National Life Insurance Company (Aurora), a
California corporation, to implement all the provisions of the
Rehabilitation Plan. Included in the implementation was an offer of an
option to every contract holder of Executive Life to continued coverage
through Aurora, or opt out of the Rehabilitation Plan and receive a
reduced return over a longer extended period of time.
On or about February 11, 1994, Feingold, with its subsidiary
holding the GICs in trust for the participants of the Plan, elected to
continue the GICs with Aurora under the Rehabilitation Plan.
Under the Rehabilitation Plan the maturity dates of the GICs were
extended to September 3, 1998, from their respective maturity dates of
December 31, 1995, and December 31, 1996. Also, under the
Rehabilitation Plan the interest rates for the GICs were reduced at
various periods of time from a low of 2.68 percent to the high of 5.34
percent.
In addition, the GICs are subject to an ongoing litigation
concerning a determination of the priority of payment to creditors of
Executive Life. The application represents that no payments to the
holders of the GICs are anticipated until all possible appeals to the
litigation are exhausted. The applicant represents that if the court
determines that holders of the GICs are creditors of Executive Life and
not insurance policy holders, the holders of the GICs will have little
or no recovery. The applicant further represents that the GICs do not
have the protection of the State Participating Guaranty Association.
4. In order to avoid the continued risk to the participants and
beneficiaries of the Plan with investments in the GICs, the Employer
proposes to purchase the GICs from the Plan for cash in a one-time
transaction with no expense to the Plan. The Employer intends to pay
the Plan the greater of either the fair market value of the GICs on the
date of the Sale, or an amount that is equal to the total funds
expended by the Plan in acquiring the GICs, less withdrawals, plus the
earnings the GICs would have received to the date of the Sale if
Executive Life had not been placed under conservatorship. In addition
the Employer will pay to the Plan any funds emanating from the GICs in
excess of the Sale price and received by the Employer after the date of
the Sale.
In a written statement dated September 15, 1994, Kidder, Peabody &
Co., Incorporated (Kidder, Peabody) represented that it was retained by
the Employer to make an independent determination on the date of the
Sale that the exact amount of payment will be made to the Plan in
accordance with the formula set forth by the Employer in its
application for exemption. Also, Kidder, Peabody represented that the
payment will not be less than the fair market value of the GICs on the
date of the Sale. Both Kidder, Peabody and Merrill Lynch stated that
there is no market for the GICs in written statements dated September
15, 1994, and July 28, 1994, respectively.
In a statement dated October 20, 1994, Feingold represents that the
Sale will enable the Plan and its participants and beneficiaries to
avoid continued risk associated with holding the GICs; and the proposed
Sale to the Employer is in the best interests of the Plan and its
participants and beneficiaries and protective of the rights of the
participants and beneficiaries.
5. In summary, the applicant represents that the proposed
transaction will satisfy the criteria for an exemption under section
408(a) of the Act because (a) the Plan will receive from the Employer
in a one-time transaction cash in an amount that is the greater of
either the fair market value of the GICs or an amount that is equal to
the total amount paid by the Plan for the GICs, less any withdrawals
during ownership of the GICs, plus earnings the GICs would have
received to the date of the Sale if Executive Life had not been placed
under conservatorship by the Superior Court of California, as well as,
any funds from the GICs in excess of the Sale price received by the
Employer subsequent to date of the Sale; (b) the transaction will
enable the Plan and its participants and beneficiaries to avoid any
risk associated with the continued holding of the GICs; (c) the Plan
will not incur any losses or expenses from the proposed transaction;
and (d) the fiduciaries of the Plan have determined that the proposed
transaction is in the best interests of the Plan and its participants
and beneficiaries.
FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (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 22nd day of November 1994.
Ivan Strasfeld
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 94-29168 Filed 11-25-94; 8:45 am]
BILLING CODE 4510-29-P