[Federal Register Volume 60, Number 172 (Wednesday, September 6, 1995)]
[Notices]
[Pages 46311-46314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22043]



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[[Page 46312]]


DEPARTMENT OF LABOR
[Application No. D-09956, et al.]


Proposed Exemptions; TSC International Ltd., Custom Marketing and 
Import Profit Sharing Plan (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemption.

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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

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing 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.
TSC International Ltd., Custom Marketing and Import Profit Sharing Plan 
(the Plan) Located in Kansas City, MO

[Application No. D-09956]

Proposed Exemption

    The Department of Labor is considering granting an exemption under 
the authority of 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 sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) shall not apply to the proposed (1) 
redemption by TSC International Merchandising Ltd., Custom Marketing 
and Import Company (TSC) of 19,000 shares of common stock issued by TSC 
and held by the Plan; and (2) the extension of credit by the Plan to 
TSC in connection with the redemption of the stock.1

     1 Because Mr. Jack Hardgree is the sole participant in the 
Plan, there is no jurisdiction under Title I of the Employee 
Retirement Income Security Act of 1974 (the Act). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
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    The proposed exemption is conditioned on the following 
requirements:
    (1) The redemption price for the stock is determined by a 
qualified, independent appraiser.
    (2) The note which evidences the redemption price for the stock 
represents not more than 25 percent of the Plan's assets.
    (3) The terms of the note are based upon terms that are comparable 
to those that would be extended by a third party lender.
    (4) The stock, which secures TSC's obligations under the note, at 
all times represents 200 percent of the outstanding balance of the 
note; however, if the value of the stock ever falls below the 200 
percent level, TSC will pledge additional collateral.
    (5) The Plan is not required to pay any fees or commissions in 
connection with the redemption of the stock or the administration of 
the note.
    (6) Boatmen's First National Bank of Kansas City (Boatmen's) holds 
certificates representing the stock in an escrow account until TSC pays 
the redemption price in full.
    (7) The Plan increases its liquidity and investment yield by 
disposing of an asset and receives cash to promote asset 
diversification.

Summary of Facts and Representations

    1. The Plan is a profit sharing plan with Mr. Jack Hardgree as its 
only participant. As of December 12, 1994, the Plan had net assets of 
$565,500. The trustee of the Plan and the decisionmaker with respect to 
the Plan's investments is Mr. Hardgree.
    2. TSC is a ``C'' corporation that maintains its principal place of 
business in Prairie Village, Kansas. It is engaged in the import 
business and primarily deals in metal products for U.S. manufacturers. 
Mr. Hardgree is the sole director, officer and employee of TSC.
    3. The Plan currently holds 19,000 shares of common stock of TSC. 
The stock has a stated par value of $10 per share and it is not 
publicly-traded. The shares of stock that are held by the Plan 
represent 97 percent of the issued and outstanding stock of TSC. The 3 
percent remaining shares of stock are owned by Mr. Hardgree.
    4. Prior to the incorporation of TSC in January 1984, Mr. Hardgree 
was a manufacturer's representative with an unrelated company, 
Merchandise International, Inc. (MII). That company had a money 
purchase pension plan (the MII Plan) with individually-directed 
accounts. In late 1983, Mr. Hardgree resigned from his employment with 
MII, having been bought out by the two remaining principals of MII. 
Although Mr. Hardgree had no further connections with MII as an 
employee or 

[[Page 46313]]
owner after his resignation, he continued to participate in the MII 
Plan.
    5. In January 1984, Mr. Hardgree formed TSC. At the time of 
incorporation of TSC, Mr. Hardgree, in his personal capacity, acquired 
500 shares of TSC common stock directly from TSC for $10 per share. 
This amount represented the par value of such stock. In May 1985, Mr. 
Hardgree directed the trustee of the MII Plan to acquire, from TSC, 
9,500 shares of TSC common stock for his individually-directed account 
in such Plan. The acquisition price for the stock was $10 per share. 
Although the stock had been authorized in TSC's corporate charter, it 
had not been been issued.
    In 1986, Mr. Hardgree again directed the trustee of the MII Plan to 
acquire, from TSC, an additional 9,500 shares of TSC's authorized but 
unissued common stock, for his individually-directed account in the MII 
Plan. The acquisition price for the stock was also established at $10 
per share. It is represented that at the time of both stock 
acquisitions, Mr. Hardgree had no interest in MII other than as a 
participant in the MII Plan. It is also represented that following the 
stock acquisitions, TSC common stock constituted the majority of the 
assets of Mr. Hardgree' account in the MII Plan.2

     2 The Department expresses no opinion herein on whether the 
acquisition of TSC common stock by Mr. Hardgree's individually-
directed account in the MII Plan violated any of the provisions of 
Part 4 of Title I of the Act.
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    6. In January 1991, TSC established the Plan by adopting the Mid 
American Bank & Trust Company Defined Contribution Master Plan. Soon 
after the establishment of the Plan, the trustee of the MII Plan 
transferred all 19,000 shares of TSC common stock to Mid American Bank 
& Trust Company, the former trustee of the Plan, in a ``trustee-to-
trustee transfer.'' It is represented that Mr. Hardgree was advised 
that the stock transfer which was made on behalf of the Plan did not 
constitute a prohibited transaction.3

     3 The Department expresses no opinion herein on whether the 
transfer of the TSC common stock from the MII Plan to the Plan 
violated the exclusive benefit rule of section 401(a) of the Code.
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    7. Mid American Bank & Trust Company later became part of Johnson 
County Bank which was thereafter acquired by Mercantile Bank. In 
December 1994, Mercantile Bank became the custodian for the Plan and 
Mr. Hardgree, the trustee.
    8. TSC paid an unrelated third-party investment banking firm, Stern 
Brothers & Co. of Kansas City, Missouri for a valuation report of the 
19,000 shares of TSC common stock that are held by the Plan. According 
to the appraisal report dated December 14, 1994, which was prepared by 
Messrs. John C. Korschot, CFA, ASA, CBA and David K. Jones, CBA of the 
firm, as of December 2, 1994, the 19,000 shares of TSC common stock 
held by the Plan had a fair market value of $535,500 or $27.46 per 
share. The appraisers stated that they used the adjusted book value 
approach and the market comparison approach in rendering their opinion 
as to the fair market value of the Plan's controlling interest in the 
stock. In addition, the appraisers explained that they applied a 
discount factor of 15 percent to the initial value of $640,000 they had 
determined for the stock due to its lack of marketability. The 
appraisers further noted that a control premium was implied in the 
$640,000 initial value.
    9. Although the value of TSC common stock and Plan assets have 
increased significantly, it is represented that by holding only TSC 
stock, the Plan is in an illiquid position should assets be needed for 
distributions. Moreover, it is represented that TSC cannot promise that 
its stock will hold or increase in value. Therefore, TSC requests an 
administrative exemption from the Department in order to redeem the 
shares of TSC common stock that are held by the Plan in return for cash 
and a promissory note.
    10. TSC proposes to redeem the stock held by the Plan by giving the 
Plan a cash downpayment of $394,125 and a promissory note in the 
principal amount of $141,375. The note will bear a fixed rate of 
interest of 11 percent per annum. The note will also provide for 
monthly installments of principal and interest over a period of two 
years after the date of the redemption. The note may be prepayable 
without penalty at any time by TSC. In addition, the Plan will not be 
required to pay any fees or commissions in connection with the 
redemption of the TSC common stock or with respect to the 
administration of the proposed loan.
    11. The note will be secured by the shares of the TSC common stock 
that are redeemed from the Plan. The security interest in such shares 
will be a first security interest and it will be governed by an escrow 
agreement (the Escrow Agreement) between TSC and Boatmen's, with whom 
TSC currently has a revolving loan arrangement, as escrow agent. At all 
times, the fair market value of the stock will represent 200 percent of 
the outstanding principal balance of the note. If, however, the fair 
market value of the stock should ever fall below this level, TSC will 
pledge additional collateral to cover the loan payments made under the 
note. As further security, Mr. Hardgree will assign a portion of his 
life insurance policy in the amount of the note.
    12. By letter dated June 23, 1995, TSC received a loan commitment 
in the amount of $141,375 from an unrelated lender, Missouri Bank & 
Trust Company of Kansas City (Missouri Bank & Trust). The terms offered 
by Missouri Bank & Trust are comparable to the terms of the note.
    13. Under the Escrow Agreement, TSC will pledge all 19,000 shares 
of the stock that are redeemed from the Plan by the delivery of 
certificates evidencing such pledged shares to Boatman's. Boatmen's 
will hold the certificates until the loan is repaid. If at any time TSC 
defaults in the payment of principal or interest on the note, and the 
default remains uncured for two months after written notice, the entire 
unpaid principal amount of the note and accrued interest thereon will 
become immediately due and payable. Then, the Plan will have all of the 
certificates on deposit delivered to it. At the end of 20 days after 
receipt of a written demand from the Plan, together with evidence that 
the notice of the demand has been given to TSC, Boatmen's will deliver 
to the Plan the certificates held by Boatmen's. If, however, 
satisfactory proof is presented to Boatmen's that all installments of 
the note have been paid, Boatmen's will deliver to TSC, the shares 
remaining in its possession. Afterwards, all obligations between the 
Plan, TSC and Boatmen's will cease.
    The Plan will not be required to pay any fees or expenses in 
connection with the administration of the Escrow Agreement. Further, no 
parties to the Escrow Agreement will grant a security interest in any 
of the securities deposited with Boatmen's or create a lien, 
encumbrance, or other claim against monies or borrow from such stock.
    14. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
4975(c)(2) of the Code because:
    (a) The redemption price for the stock has been determined by a 
qualified, independent appraiser.
    (b) The note which evidences the redemption price for the stock 
will represent 25 percent of the Plan's assets.
    (c) The terms of the note are based upon terms that are comparable 
to those that would be extended by a third party lender.
    (d) The stock, which secures TSC's obligations under the note, at 
all times will represent 200 percent of the outstanding balance of the 
note. 

[[Page 46314]]

    (e) The Plan will not be required to pay any fees or commissions in 
connection with the redemption of the stock or the administration of 
the note.
    (f) Boatmen's will hold certificates representing the stock in an 
escrow account until TSC pays the redemption price for the stock in 
full.
    (g) The Plan will increase its liquidity and investment yield by 
disposing of an asset and receive cash to promote greater asset 
diversification.

Notice to Interested Persons

    Because Mr. Hardgree is the only participant in the Plan who will 
be affected by the proposed transactions, it has been determined that 
there is no need to distribute the notice of pendency to interested 
persons. Therefore, comments and requests for a public hearing are due 
30 days from the date of publication of this notice of proposed 
exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady 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 accurately describe all 
material terms of the transaction which is the subject of the 
exemption. In the case of continuing exemption transactions, if any of 
the material facts or representations described in the application 
change after the exemption is granted, the exemption will cease to 
apply as of the date of such change. In the event of any such change, 
application for a new exemption may be made to the Department.

    Signed at Washington, DC, this 31st day of August, 1995.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-22043 Filed 9-5-95; 8:45 am]
BILLING CODE 4510-29-P