[Federal Register Volume 60, Number 236 (Friday, December 8, 1995)]
[Notices]
[Pages 63064-63070]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29984]



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DEPARTMENT OF LABOR
[Application Nos. D-09969 and D-09970]


Proposed Exemptions; Timberland Investment Group, Inc. 
(Timberland) and Wachovia Bank of Georgia, N.A. (the Investment 
Manager)

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). 

[[Page 63065]]


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.

Timberland Investment Group, Inc. (Timberland) and Wachovia Bank of 
Georgia, N.A. (the Investment Manager) Located in Atlanta, GA; Proposed 
Exemption

[Application Nos. D-09969 and D-09970]
    Based on the facts and representations set forth in the 
application, 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).1

     1 For purposes of this exemption, reference to provisions of 
Title I of the Act, unless otherwise specified, refer also to the 
corresponding provisions of the Code.
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Section I. Covered Transaction

    If the exemption is granted, the restrictions of section 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)(E) of the 
Code, shall not apply to the payment of an incentive fee (the Incentive 
Fee) by Timberland, a special purpose corporation which holds plan 
assets from the American Telephone and Telegraph Master Trust (the AT&T 
Trust) and the BellSouth Master Pension Trust (the BellSouth Trust; 
collectively, the Trusts), to the Investment Manager of Timberland, a 
party in interest with respect to the Trusts.
    This proposed exemption is conditioned upon the requirements set 
forth below in Section II.

Section II. General Conditions

    (a) The investment of the assets of each Trust in Timberland, 
including the terms and payment of the Incentive Fee, is approved in 
writing by a Trust fiduciary who is independent of the Investment 
Manager and its affiliates (the Independent Fiduciary).
    (b) Each Trust participating in Timberland has total assets that 
are in excess of $50 million and no Trust has invested more than one 
percent of its assets in Timberland.
    (c) The terms of the Trusts' investment management agreements for 
Timberland, including the Incentive Fee, are at least as favorable to 
the Trusts as those obtainable in an arm's length transaction with an 
unrelated party.
    (d) Prior to investing in Timberland, each Independent Fiduciary 
entered into an agreement with the Investment Manager disclosing all 
material facts concerning the purpose, structure and operation of 
Timberland including the fee arrangements.
    (e) With respect to its ongoing participation in Timberland, each 
Trust receives the following written documentation from the Investment 
Manager:
    (1) Audited financial statements of Timberland prepared by 
independent, qualified public accountants on an annual basis, which 
disclose the fees that are paid to the Investment Manager and its 
affiliates.
    (2) Quarterly valuations, transmitted routinely to the Trusts, 
which indicate the fair market value of Timberland's assets as 
established by appraisers who are independent of the Investment Manager 
and its affiliates.
    (3) Upon request, valuations performed by independent appraisers at 
three year intervals which determine the underlying land value of 
Timberland.
    (4) Upon request, a timber inventory valuation of Timberland 
performed every five years by independent, registered consulting 
foresters in order to determine timber volume and growth rates.
    (f) The total fees paid to the Investment Manager constitute no 
more than reasonable compensation.
    (g) The Incentive Fee is payable to the Investment Manager upon the 
complete liquidation of the Trusts' account in Timberland (the 
Timberland Account) and only if the Trusts recover distributions equal 
to their initial investments in Timberland.
    (h) In the event that the Investment Manager resigns or is removed 
prior to the complete liquidation of the Timberland Account,
    (1) The Trusts will appoint a successor Investment Manager to 
effect the liquidation of such account.
    (2) The Incentive Fee will not be paid to the former Investment 
Manager until the complete liquidation of the Timberland Account takes 
place.
    (3) The Incentive Fee will only be paid to the former Investment 
Manager if it represents the lowest of three fee amounts. 

[[Page 63066]]

    (i) The Investment Manager maintains, for a period of six years, 
the records necessary to enable the persons described in paragraph (i) 
of this Section to determine whether the conditions of this exemption 
have been met, except that (1) a prohibited transaction will not be 
considered to have occurred if, due to circumstances beyond the control 
of the Investment Manager and/or its affiliates, the records are lost 
or destroyed prior to the end of the six year period, and (2) no party 
in interest other than the Investment Manager shall be subject to the 
civil penalty that may be assessed under section 502(i) of the Act, or 
to the taxes imposed by section 4975 (a) and (b) of the Code, if the 
records are not maintained, or are not available for examination as 
required by paragraph (i) below.
    (i)(1) Except as provided in section (2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (i) of this 
Section shall be unconditionally available at their customary location 
during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service (the Service);
    (B) Any fiduciary of a plan (the Plan) participating in the Trusts 
or any duly authorized representative of such fiduciary;
    (C) Any contributing employer to any Plan participating in the 
Trusts or any duly authorized employee representative of such employer; 
and
    (D) Any participant or beneficiary of any Plan participating in the 
Trusts, or any duly authorized representative of such participant or 
beneficiary.
    (2) None of the persons described above in subparagraphs (B)-(D) of 
this paragraph (i) shall be authorized to examine the trade secrets of 
the Investment Manager or commercial or financial information which is 
privileged or confidential.

Section IV. Definitions

    For purposes of this exemption:
    (a) An ``affiliate'' of the Investment Manager includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the Investment Manager. (For purposes of this subsection, the term 
``control'' means the power to exercise a controlling influence over 
the management or policies of a person other than an individual.)
    (2) Any officer, director, employee, relative of, or partner of any 
such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (b) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (c) An ``Independent Fiduciary'' is a Trust fiduciary which is 
independent of the Investment Manager and its affiliates.

Summary of Facts and Representations

    1. Wachovia Corporation (Wachovia) is a Southeastern interstate 
bank holding company maintaining dual headquarters in Winston-Salem, 
North Carolina and Atlanta, Georgia. The Investment Manager is one of 
Wachovia's principal banking subsidiaries. As of December 31, 1994, the 
Investment Manager had 493 branches in 206 cities and 3 states.
    2. The American Telephone & Telegraph Company (AT&T), a New York 
corporation, and BellSouth Corporation (BellSouth), a Georgia 
corporation, provide telecommunication services. AT&T, whose 
headquarters are in New York, New York, primarily provides long 
distance telephone communication services. BellSouth, one of the seven 
regional telephone companies that was divested from AT&T in 1984 as 
part of the Department of Justice's antitrust settlement with AT&T, is 
located in Atlanta, Georgia and provides a wide array of 
telecommunication services, including mobile communications and 
advertising services.
    3. The AT&T Trust covers active management and nonmanagement 
employees of AT&T as well as retirees throughout the United States. The 
AT&T Trust is comprised of the AT&T Management Pension Plan (the AT&T 
Management Plan) and the AT&T Nonmanagement Pension Plan (the AT&T 
Nonmanagement Plan). As of December 31, 1993, the participant and asset 
breakdown of these Plans were as follows:

------------------------------------------------------------------------
              AT&T Trust                Participants    Net ssset value 
------------------------------------------------------------------------
Management Plan.......................      180,491      $20,024,695,000
Nonmanagement Plan....................      262,237       18,210,547,000
                                       ---------------------------------
  Totals..............................      442,728      $38,235,242,000
------------------------------------------------------------------------

    The AT&T Trust has six trustees. They are Citibank, N.A.; Chase 
Manhattan Bank, N.A.; Northern Trust Company; Bankers Trust Company; 
Mellon Bank, N.A.; and State Street Bank & Trust Company.
    4. The BellSouth Trust covers active employees and retirees of 
BellSouth. The BellSouth Trust is comprised of the BellSouth Personal 
Retirement Account Pension Plan (the BellSouth PRA Plan), which covers 
management employees, the BellSouth Corporation Pension Plan (the 
BellSouth Pension Plan), which covers union employees, and the 
Retirement Pension Plan of Stephens Graphics, Inc. (the Stephens Plan), 
which covers management employees. In addition to covering active 
employees of BellSouth, all three plans include retirees. The retirees 
reside in all states comprising the United States. The active employees 
reside in Florida, Georgia, Alabama, Mississippi, Louisiana, Tennessee, 
Kentucky, North Carolina and South Carolina.
    As of December 31, 1993, the participant and asset breakdown of the 
BellSouth Trust were as follows:

------------------------------------------------------------------------
            BellSouth Trust             Participants    Net asset value 
------------------------------------------------------------------------
PRA Plan..............................       43,669       $6,064,663,690
Pension Plan..........................       91,797        7,065,931,097
Stephens Plan.........................          248           24,011,213
                                       ---------------------------------
  Totals..............................      135,714      $13,154,606,000
------------------------------------------------------------------------

    The Investment Manager serves as the trustee of the BellSouth 
Trust.
    5. On January 1, 1985, AT&T and the First National Bank of Atlanta, 
predecessor in interest to the Investment Manager, entered into an 
investment management agreement (the AT&T Agreement) whereby the 
Investment Manager agreed to serve as investment manager with respect 
to a portion of the assets held in the AT&T Trust. Similarly, on 
September 20, 1990, BellSouth Corporation entered into an investment 
management agreement (the BellSouth Agreement) whereby the Investment 
Manager agreed to serve as investment manager with respect to a portion 
of the assets held in the BellSouth Trust. The decision by AT&T and 
BellSouth to enter into the Agreements with the Investment Manager was 
made by fiduciaries of the Trusts who are independent of the Investment 
Manager following written disclosure of all of the relevant facts and 
information concerning the purpose, structure and operation of 
Timberland including the proposed fee arrangements described herein and 
their 

[[Page 63067]]
probable effect on the management of the assets of the Trusts.2

    \2\ With respect to the proposed Incentive Fee, section 404 of 
the Act requires, among other things, that a plan fiduciary act 
prudently and solely in the interest of the plan's participants and 
beneficiaries. Thus, the Department expects a plan fiduciary, prior 
to entering into any performance-based compensation arrangement with 
an investment manager, to fully understand the risks and benefits 
associated with the compensation formula following disclosure by the 
investment manager of all relevant information pertaining to the 
proposed arrangement. In addition, a plan fiduciary must be capable 
of periodically monitoring the actions taken by the investment 
manager in the performance of its duties and must consider, prior to 
entering into the arrangement, whether such plan fiduciary is able 
to provide adequate oversight of the investment manager during the 
course of the arrangement.
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    6. As contemplated by both the AT&T Agreement and the BellSouth 
Agreement, Timberland is a special purpose corporation with a projected 
duration of 7 years.3 Timberland was formed in 1990 for the 
purpose of holding title to timberland investments made on behalf of 
the AT&T Trust and the BellSouth Trust. The stock of Timberland is 
owned in equal shares by the Trusts. The assets of the Trusts that are 
invested in Timberland have been placed in an account which is referred 
to herein as the ``Timberland Account.'' 4 As of June 21, 1994, 
the Timberland Account had total assets of $100,000,000.

     3 Although Timberland is currently structured as a 
corporation, the parties may, for tax reasons, decide to change that 
form to, or make additional timberland investments through, a 
partnership. The ownership interest in the partnership would be 
unchanged, i.e., BellSouth and AT&T would each retain a 50 percent 
ownership interest in the new entity. Furthermore, any change in the 
form of ownership would only occur if agreed to by BellSouth, AT&T 
and the Investment Manager.
     4 The applicants are assuming, for purposes of this 
exemption, that the assets of the Trusts that have been invested in 
Timberland are ``plan assets'' within the meaning of 29 CFR 2510.3-
101. Although the applicants represent that they have considered 
whether Timberland qualifies as a ``real estate operating company'' 
within the meaning of 29 CFR 2510.3-101(e), they are unable to 
conclude that Timberland can qualify primarily due to the absence of 
direct authority on whether the activities associated with 
timberland management are real estate management activities as 
contemplated by the regulatory definition of ``real estate operating 
company.''
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    7. Timberland holds title to the underlying land and timber on 
properties located in the States of Arkansas, Mississippi, Florida, 
Georgia, North Carolina, South Carolina, Michigan, Alabama and 
Louisiana. Such forest properties are primarily ``mature'' in that they 
predominately consist of sawtimber-sized trees that can be converted 
into lumber. Timberland also holds a fewer number of acres on which 
smaller trees are grown. Some of these smaller trees are merchantable 
as pulpwood while the remainder are premerchantable in that they have 
not yet attained sufficient size to have any marketable value.
    8. Effective October 15, 1990, Timberland entered into an 
investment management agreement with the Investment Manager (the 
Timberland Agreement). The Timberland Agreement was contemplated by 
both the BellSouth Agreement and the AT&T Agreement and is intended to 
ensure that the Timberland would bear directly on the investment 
management fees for the Investment Manager's services to the 
corporation. The Timberland Agreement is designed to reflect the 
operative provisions of the BellSouth and AT&T Agreements as they 
pertain to timberland investments.
    9. Pursuant to the Timberland Agreement, the Investment Manager has 
full discretion and authority to purchase, sell convey or transfer 
timberland properties. To date, the Investment Manager has not incurred 
any debt in connection with the timberland properties. According to the 
applicants, it is not contemplated that such debt will ever be 
incurred.
    The Investment Manager is also empowered to establish an overall 
plan for the management of timberland properties. In this regard, day-
to-day management of the timber is performed by independent consulting 
foresters or their subcontractors who are retained on a per diem basis 
by the Investment Manager. Some of the duties performed by the 
consulting foresters include the construction and maintenance of 
firelines, timber stand improvement, inspection for and control of 
forest insects and disease, site preparation and planting, boundary 
line marking and maintenance and estimation of forest inventory.
    10. Prior to the purchase of a property, the Investment Manager has 
the underlying bare land value and timber value independently 
appraised, along with an inventory of the volume of timber on the 
property, including estimates of the growth rates of the various 
species and timber products present on the property. At the end of each 
calendar quarter, the Investment Manager determines the closing market 
valuation of the timberland assets (excluding any then pending trades, 
accruals and cash) as of the end of that period. The Investment Manager 
derives the current volume of timber, net of growth and removals (sales 
and harvests), based on the independently arrived at growth rates. The 
Investment Manager retains the services of the independent consulting 
foresters licensed to do business in states in which the timber in 
question is located to provide estimates of the per unit value of the 
various timber species and products on each tract of timberland in 
which Timberland has an interest.
    As an additional method of valuation, the Investment Manager 
utilizes the services of Timber Mart South, a price reporting service 
which regularly quotes per unit market prices for timber products in 
conjunction with the information provided by the consulting foresters 
to establish a range of unit values of those areas. The Investment 
Manager may also use its own judgment to determine the appropriate unit 
values applicable to current volumes, employing the independently 
established ranges of values and thus arriving at closing market values 
for each timberland property in which Timberland has an interest.
    In addition to quarterly valuations, the Investment Manager will 
have the underlying land value (bare land value) reappraised every 
three years by independent, state-certified appraisers. The purpose of 
these appraisals is to assist the Investment Manager in deciding 
whether to liquidate a tract of timberland. Further, the Investment 
Manager will have the timber inventory of Timberland appraised every 
five years by independent, registered consulting foresters to determine 
timber volume and growth rates.
    The Investment Manager will select the independent, registered 
foresters referred to above based upon their prior satisfactory 
performance or their professional reputations as ascertained from 
knowledgeable sources within the industry. The consultants on timber 
value will be chosen on the basis of their reputations for reliability 
within the timber industry.
    11. As compensation for its services under the Timberland 
Agreement, the Investment Manager is entitled to receive an investment 
management fee (the Management Fee). Initially, the Management Fee was 
paid quarterly in arrears at the annual rate of $600,000. The first 
payment was made at the conclusion of the calendar quarter which 
included October 2, 1990. Over the next 11 quarters, Management Fee 
payments continued to be calculated at this rate until September 30, 
1993 when a final payment was made to the Investment Manager.
    Commencing in December 1993, the twelfth full quarter, the 
Management Fee is being paid quarterly in arrears in accordance with 
the following Annual Fee Schedule:

------------------------------------------------------------------------
                     Annual fee schedule                                
------------------------------------------------------------------------
First $100 Million...........................................     0.60% 

[[Page 63068]]
                                                                        
Next $200 Million............................................      0.50%
Next $300 Million............................................      0.40%
  Balance....................................................      0.30%
------------------------------------------------------------------------



    Such fee is being computed on the basis of the closing market value 
of timberland assets as of the end of each calendar quarter based on 
independent appraisals of timber volume and bare land.5

     5 The applicants represent that the Management Fee is 
statutorily exempt under section 408(b)(2) of the Act. However, the 
Department expresses no opinion herein on whether such fee is 
statutorily exempt under section 408(b)(2) of the Act.
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    12. In addition to the Management Fee, the Investment Manager is 
entitled to receive an Incentive Fee upon the complete liquidation of 
the Trusts' Timberland Account provided the Trusts recover 
distributions equal to their initial investments. Liquidation of the 
Trusts' Timberland Account is to be completed by October 2, 1997. This 
is also the ``termination date'' for Timberland.6

     6 Initially, October 2, 1997 was the expected ``termination 
date'' for Timberland, subject to an extension for two additional 
years. However, no reinvestments in Timberland are currently being 
made and proceeds from the disposition of properties are being 
distributed to the Trusts as the proceeds are collected. It is not 
anticipated that further reinvestments will occur. Thus, absent 
agreement by the parties that changes in the investment climate 
warrant further investment, Timberland will cease to operate when 
its present holdings have been disposed of. Although the rate of 
disposition of these holdings will depend on prevailing market 
conditions, the current expectation is that liquidation will be 
completed by October 2, 1997.
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    The intent of the Incentive Fee is to induce the Investment Manager 
to liquidate the assets of the Timberland Account in a manner that 
maximizes the return to the Trusts. However, market conditions at the 
time of the liquidation will dictate the pattern governing the sale of 
assets in the Timberland Account as well as the sales price of such 
assets. To the extent that the Investment Manager can exercise 
discretion regarding the timing or the amount of the Incentive Fee, the 
applicants recognize that a violation of the prohibited transaction 
rules may occur. Accordingly, the applicants request an administrative 
exemption from the Department.
    The Incentive Fee is a one-time fee that will be based on the 
annual, real internal rate of return (the IRR) achieved on the assets 
of Timberland. The IRR is the periodic rate at which an investment of a 
given size grows to a terminal value of a given size. The IRR is 
determined by the interaction of three variables--(a) the percentage 
gain in net asset value of the Timberland Account, (b) the time over 
which the gain is achieved, and (c) the rate of inflation.7

     7 For purposes of calculating the IRR, the rate of inflation 
used will be defined as the ``Consumer Price Index-U, United States, 
all items (1982-84 = 100)'' (the CPI) currently prepared and 
published by the Department's Bureau of Labor Statistics.
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    13. The proposed Incentive Fee payment would be based upon the IRR 
achieved on Timberland's assets consisting of a capital commitment (the 
Capital Commitment) of $100 million or other amount as mutually agreed 
to by the Trusts and the Investment Manager. Such amount will be net of 
all fees, expenses, income taxes and debt and calculated in accordance 
with the Timberland Account Incentive Fee Payment Schedule which sets 
forth various IRRs (which begin at 1 percent and have no limit) and 
Incentive Fee payments (which are capped at $10.5 million) applicable 
to the IRRs.
    Basically, the Incentive Fee Payment Schedule provides that for 
each 0.1 percent increase in the IRR, the Incentive Fee is increased by 
the dollar amount of the prior increment plus $500. For example, to 
determine the Incentive Fee earned with respect to an IRR of 3 percent, 
the incremental difference between the Incentive Fee earned with 
respect to an IRR of 2.8 and 2.9 percent must be determined initially. 
This difference, as reflected in the Incentive Fee Payment Schedule, is 
$11,750 ($137,750 minus $126,000). Thus, the Incentive Fee for 
achieving an IRR of 3 percent would be $150,000 according to the 
Incentive Fee Payment Schedule ($137,750 plus $11,750 plus $500).
    According to the applicant, the parties agreed to this formula for 
determining the Incentive Fee after considerable negotiation based on 
the understanding that each 0.1 percent increase in the IRR would be 
more difficult to achieve. In other words, increasing the IRR from 2.8 
percent to 2.9 percent is more difficult than increasing it from 1.8 
percent to 1.9 percent. Therefore, the Incentive Fee is designed to 
encourage this extra effort.
    14. For purposes of computing the Incentive Fee, when calculating 
the IRR, any distributions made from the Timberland Account by the 
Investment Manager prior to October 2, 1994 and not recalled to fund 
additional timberland investments, will be subtracted from the cash 
flow used to determine the IRR. Also, any portion of the Capital 
Commitment not called prior to October 1, 1994 will cause the Incentive 
Fee payment amounts to be reduced by the same proportion as the ratio 
of uncalled capital to the Capital Commitment. All capital distributed 
to the Trusts from which said capital is contributed must be recalled 
prior to any additional portion of the Capital Commitment being 
called.8

    \8\ If the requested exemption is not granted, the Timberland 
Agreement provides for the payment, to the Investment Manager, of an 
alternative fee (the Alternative Fee) (in addition to the Management 
Fee) upon the termination of Timberland. The Alternative Fee is 
based upon the value of the assets that are under the control of the 
Investment Manager. The Alternative Fee consists of (a) the payment 
of $100,000 for each of the first twelve quarters of the Timberland 
investment and (b) for the remaining period prior to complete 
liquidation of Timberland removal), an amount equal to a fixed 
percentage of the closing market value of timberland assets as of 
the end of each calendar quarter. The applicants represent that the 
Alternative Fee would be covered by section 408(b)(2) of the Act and 
the regulations promulgated thereunder (see 29 CFR 2550.408b-2). 
However, the Department expresses no opinion herein on whether the 
payment of such fee would satisfy the conditions of section 
408(b)(2) of the Act.
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    15. The Incentive Fee is payable to the Investment Manager upon the 
termination of Timberland (i.e., October 2, 1997). However, if the 
Investment Manager resigns or is removed for any reason prior to 
October 2, 1997 by either AT&T, BellSouth or by both Trusts, the Trusts 
may appoint a successor Investment Manager to complete the liquidation 
of the Timberland Account. In this event, the Incentive Fee will 
calculated, but it will not be paid to the former Investment Manager 
until the Timberland Account is completely liquidated (i.e., by October 
2, 1997). The actual fee that is paid to the former Investment Manager 
will be the lesser of:

    (a) An amount based on the IRR achieved from the inception of 
the Timberland Account to completion of the liquidation of such 
account;
    (b) An amount based on the IRR achieved from the inception of 
the Timberland Account to the effective date of the former 
Investment Manager's removal or resignation, which shall be 
determined based upon the assumption that the liquidation proceeds 
are distributed to the Trusts on the termination date of the former 
Investment Manager in an amount equal to the independently appraised 
value of the property of Timberland as of such termination date (net 
of all fees, expenses and taxes); or
    (c) An amount based upon the Alternative Fee described in the 
preceding footnote. Under such circumstances, the Alternative Fee 
will be computed through the date of the Investment Manager's 
resignation or removal.

    For purposes of calculating the Incentive Fee, if the Investment 
Manager is removed or resigns prior to the complete liquidation of the 
Timberland Account, any required appraisal will be performed by an 
independent appraiser approved by both the Trusts and the Investment 
Manager. The independent appraiser will determine the fair market value 
of 

[[Page 63069]]
the properties in the Timberland Account by assuming the orderly 
liquidation of said properties, normal expenses of liquidation and 
income tax liabilities based on an estimate prepared by an independent 
certified public accounting firm approved by both the Trusts and the 
Investment Manager.
    16. The following examples illustrate the manner in which the 
Incentive Fee would be calculated in four hypothetical situations:
     Example 1.
    Assume that Timberland has a life of 7 years and that the Trusts 
invest a total of $100 million in Timberland. At the end of year 7, 
the sales price of timber plus land, net of all expenses, is 
$207,620,000. Assume also that the rate of inflation is 0%. The IRR 
for this investment can be calculated directly because there is a 
single cash outflow of $100,000,000 and a single cash inflow of 
$207,620,000. The calculation is as follows: [($207,620,000/
$100,000,000) 1/7-1] x 100=11%
    Once the IRR is calculated, the Incentive Fee that will be paid 
by the Trusts can be determined from the Incentive Fee Payment 
Schedule which has been reproduced, in part, as follows:

------------------------------------------------------------------------
                                                           Incentive fee
                Annual real IRR (> or =)                      payment   
------------------------------------------------------------------------
10.8%...................................................      $2,646,000
10.9%...................................................       2,697,750
11.0%...................................................       2,750,000
------------------------------------------------------------------------

    Thus, the total Incentive Fee that will be paid by the Trusts to 
the Investment Manager based upon an IRR of 11% is $2,750,000.
    The above IRR is both a nominal and a real rate because 
inflation was assumed to be 0%. If inflation is positive, however, 
the nominal IRR will be greater than the real IRR. With positive 
inflation as measured by the CPI, the nominal IRR must be adjusted 
for inflation and the Incentive Fee calculated on the basis of the 
adjusted or real IRR. This is done in Example 2.
     Example 2.
    Same as Example 1, except now assume inflation occurred at a 4% 
annual rate over the life of the Trusts' investment in Timberland.
    To determine the real IRR, the 11% nominal IRR must be adjusted 
for 4% inflation. This figure is calculated by dividing the nominal 
IRR by the CPI: 1.11/1.04=1.0673=6.73%.
    Once the real IRR is computed, the Incentive Fee that will be 
paid by Trusts can be determined by referring to the Incentive Fee 
Payment Schedule which has been reproduced, in part, as follows:

------------------------------------------------------------------------
                                                           Incentive fee
                Annual real IRR (> or =)                      payment   
------------------------------------------------------------------------
6.6%....................................................        $924,000
6.7%....................................................         954,750
6.8%....................................................         986,000
------------------------------------------------------------------------

    Thus, the total Incentive Fee that will be paid by the Trusts to 
the Investment Manager based upon a real IRR of 6.73% is $954,750.
     Example 3.
    Assume the Trusts give the Investment Manager $100 million to 
invest in Timberland and that the Investment Manager increases the 
investment amount to $170 million (which is the fair market value 
determined by independent appraisals), net of expenses, by the end 
of 4 years. Assume also that the Investment Manager resigns and is 
replaced by a new Investment Manager. Assume further that the rate 
of inflation over the 4 year period is 4% annually.
    The nominal IRR can be computed directly because there is one 
cash inflow and one cash outflow: [($170,000,000/
$100,000,000)1/4-1] x 100=14.19%. To determine the real IRR, 
the 14.19% nominal IRR must be adjusted for 4% inflation. This 
figure is calculated by dividing the nominal IRR by the CPI: 1.1419/
1.04=1.0979=9.79%.
    From the Incentive Fee Payment Schedule, the Trusts would pay 
the former Investment Manager an Incentive Fee of $2,109,750 based 
upon a real IRR of 9.79%.

------------------------------------------------------------------------
                                                           Incentive fee
                Annual real IRR (> or =)                      payment   
------------------------------------------------------------------------
9.6%....................................................      $2,064,000
9.7%....................................................       2,109,750
9.8%....................................................       2,156,000
------------------------------------------------------------------------

    However, the actual fee paid to the former Investment Manager 
would be the lowest of (a) $2,109,750, (b) the Alternative Fee or 
(c) an Incentive Fee determined by reference to the IRR achieved 
through the complete liquidation of Timberland (including investment 
results achieved by the successor Investment Manager).
    Example 4 demonstrates how poor performance by a successor 
Investment Manager can reduce the actual payment made to the former 
Investment Manager.
     Example 4.
    Same as Example 3, assuming further that the successor 
Investment Manager continues for a year and that all of Timberland's 
assets are liquidated in one transaction at the end of that period. 
During the extra year, the fair market value of Timberland remains 
at $170 million and the rate of inflation remains at 4 percent.
    The nominal IRR can be computed as follows: [($170,000,000/
$100,000,000)1/5-1] x 100=11.20%.
    To determine the real IRR, the 11.20% nominal IRR must be 
adjusted for 4% inflation. This figure is calculated by dividing the 
nominal IRR by the CPI: 1.112/1.04=6.92%.
    From the Incentive Fee Payment Schedule, shown in part below, 
the former Investment Manager would be entitled to an Incentive Fee 
of $1,017,750 based on a real IRR of 6.92 percent.

------------------------------------------------------------------------
                                                           Incentive fee
                Annual real IRR (> or =)                      payment   
------------------------------------------------------------------------
6.8%....................................................        $986,000
6.9%....................................................       1,017,750
7.0%....................................................       1,050,000
------------------------------------------------------------------------

    Since this Incentive Fee is lower than the Incentive Fee based 
on independent appraisals (see Example 3), the Trusts would pay the 
former Investment Manager the lower of this fee or the Alternative 
Fee.

    17. The Investment Manager will provide the Trusts with quarterly 
unaudited financial statements prepared by Price Waterhouse & Company 
(Price Waterhouse). In addition, the Investment Manager will provide 
the Trusts with annual audited financial statements, also prepared by 
Price Waterhouse. These documents will generally be issued within 
thirty days following their preparation.
    18. In summary, it is represented that the proposed transaction 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The investment of the assets of each Trust in Timberland, 
including the terms and payment of the Incentive Fee, has been approved 
in writing by a fiduciary who is independent of the Investment Manager 
and its affiliates.
    (b) Each Trust participating in Timberland has total assets that 
are in excess of $50 million and no Trust may invest more than one 
percent of its assets in Timberland.
    (c) The terms of the Trusts' investment management agreements for 
Timberland, including the Incentive Fee, will remain at least as 
favorable to the Trusts as those obtainable in an arm's length 
transaction with an unrelated party.
    (d) Prior to investing in Timberland, each Independent Fiduciary 
received offering materials which disclose all material facts 
concerning the purpose, structure and operation of Timberland including 
the fee arrangements.
    (e) The Investment Manager will make periodic written disclosures 
to the Trusts with respect to the financial condition of Timberland and 
the fees paid to the Investment Manager.
    (f) The total fees paid to the Investment Manager will constitute 
no more than reasonable compensation.
    (g) The Incentive Fee will be payable to the Investment Manager 
upon the complete liquidation of the Timberland Account and only if the 
Trusts recover distributions equal to their initial investments in 
Timberland.
    (h) In the event that the Investment Manager resigns or is removed 
prior to the complete liquidation of the Timberland Account, the Trusts 
will appoint a successor Investment Manager to effect the liquidation 
of such account. Under such circumstances, the Incentive Fee will not 
be paid to the former Investment Manager until the Timberland Account 
is fully liquidated and if paid, such Incentive Fee must be 

[[Page 63070]]
represent the lowest of three fee amounts.

Notice to Interested Persons

    Notice of the proposed exemption will be provided to all interested 
persons within 30 days of the publication of the notice of pendency in 
the Federal Register. The notice will include a copy of the notice of 
proposed exemption as published in the Federal Register and a statement 
informing interested persons of their right to comment on and/or to 
request a hearing with respect thereto. The notice will be provided to 
all active employees of AT&T and BellSouth by posting. Mailed notice 
will be given to AT&T and BellSouth union representatives, plan 
administrators and representatives of retirees. Comments to the 
Department are due within 60 days of the publication of the 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 5th day of December, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-29984 Filed 12-07-95; 8:45 am]
BILLING CODE 4510-29-P