[Federal Register Volume 61, Number 148 (Wednesday, July 31, 1996)]
[Notices]
[Pages 40000-40005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19482]
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DEPARTMENT OF LABOR
[Prohibited Transaction Exemption 96-59; Exemption Application No. D-
09818, et al.]
Grant of Individual Exemptions; PaineWebber Incorporated
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, D.C. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978) transferred the authority of the Secretary of
the Treasury to issue exemptions of the type proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
PaineWebber Incorporated (PaineWebber), Located in New York, NY
[Prohibited Transaction Exemption 96-59; Exemption Application No. D-
09818]
EXEMPTION
Section I. Covered Transactions
The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (D) of the Code, shall not apply,
effective August 18, 1995, to the purchase or redemption of shares by
an employee benefit plan, a plan described in section 403(b) of the
Code (the Section 403(b) Plan), an individual retirement account (the
IRA) or a retirement plan for a self-employed individual (the Keogh
Plan) (collectively referred to herein as the Plans) in the PaineWebber
Managed Accounts Services Portfolio Trust (the Trust) established in
connection with such Plans' participation in the PaineWebber PACE
Program (the PACE Program).
In addition, the restrictions of section 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(E) and (F) of the Code, shall not
apply, effective August 18, 1995, to (a) the provision, by PaineWebber
Managed Accounts Services (PMAS), a division of PaineWebber, of asset
allocation and related services to an independent fiduciary of a Plan
(the Independent Fiduciary) or to a directing participant (the
Directing Participant) in a Plan that is covered under and permits
participant selection as contemplated by the provisions of section
404(c) of the Act (the Section 404(c) Plan), which may result in the
selection by the Independent Fiduciary or the Directing Participant of
portfolios of the Trust (the Portfolios) in the PACE Program for the
investment of Plan assets; and (b) the provision of investment
management services by Mitchell Hutchins Asset Management, Inc.
(Mitchell Hutchins) to the PACE Money Market Investments Portfolio of
the Trust.
This exemption is subject to the conditions set forth below in
Section II.
Section II. General Conditions
(a) The participation of each Plan in the PACE Program is approved
by an Independent Fiduciary or, if applicable, Directing Participant.
(b) As to each Plan, the total fees paid to PMAS and its affiliates
constitute no more than reasonable compensation and do not include the
receipt of fees pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the '40 Act) by PMAS and its affiliates in connection with the
transactions.
(c) No Plan pays a fee or commission by reason of the acquisition
or redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares remain
at least as favorable to an investing Plan as those obtainable in an
arm's length transaction with an unrelated party.
(e) PMAS provides written documentation to an Independent Fiduciary
or a Directing Participant of its recommendations or evaluations based
upon objective criteria.
(f) Any recommendation or evaluation made by PMAS to an Independent
Fiduciary or Directing Participant is implemented only at the express
direction of such fiduciary or participant.
(g) PMAS provides investment advice in writing to an Independent
Fiduciary or Directing Participant with respect to
[[Page 40001]]
all Portfolios made available under the Plan.
(h) With the exception of the PACE Money Market Investments
Portfolio, any sub-adviser (the Sub-Adviser) appointed by Mitchell
Hutchins to exercise investment discretion with respect to a Portfolio
is independent of PaineWebber and its affiliates.
(i) The quarterly fee that is paid by a Plan to PMAS for asset
allocation and related services rendered to such Plan under the PACE
Program (i.e., the outside fee) is offset by such amount as is
necessary to assure that Mitchell Hutchins retains 20 basis points as a
management fee from any Portfolio (with the exception of the PACE Money
Market Investments Portfolio from which Mitchell Hutchins retains an
investment management fee of 15 basis points) containing investments
attributable to the Plan investor. However, the quarterly fee of 20
basis points that is paid to Mitchell Hutchins for administrative
services is retained by Mitchell Hutchins and is not offset against the
outside fee.
(j) With respect to its participation in the PACE Program prior to
purchasing Trust shares,
(1) Each Independent Fiduciary receives the following written or
oral disclosures from PaineWebber:
(A) A copy of the prospectus (the Prospectus) for the Trust
discussing the investment objectives of the Portfolios comprising the
Trust; the policies employed to achieve these objectives; the corporate
affiliation existing between PaineWebber, PMAS, Mitchell Hutchins and
their affiliates; the compensation paid to such entities; any
additional information explaining the risks of investing in the Trust;
and sufficient and understandable disclosures relating to rebalancing
of investor accounts.
(B) Upon written or oral request to PaineWebber, a Statement of
Additional Information supplementing the Prospectus, which describes
the types of securities and other instruments in which the Portfolios
may invest, the investment policies and strategies that the Portfolios
may utilize and certain risks attendant to those investments, policies
and strategies.
(C) An investor questionnaire.
(D) A written analysis of PMAS's asset allocation recommendation of
specific Portfolios.
(E) A copy of the agreement between PMAS and such Plan relating to
participation in the PACE Program.
(F) Upon written request to Mitchell Hutchins, a copy of the
respective investment advisory agreements between Mitchell Hutchins and
the Sub-Advisers.
(G) Copies of the proposed exemption and grant notice describing
the exemptive relief provided herein.
(2) In the case of a Section 404(c) Plan, the Independent Fiduciary
will--
(A) Make copies of the foregoing documents available to Directing
Participants.
(B) Allow Directing Participants to interact with PaineWebber
Investment Executives and receive information relative to the services
offered under the PACE Program, including the rebalancing feature, and
the operation and objectives of the Portfolios.
(3) If accepted as an investor in the PACE Program, an Independent
Fiduciary of a Section 403(b) Plan, an IRA or a Keogh Plan, is required
to acknowledge, in writing to PMAS, prior to purchasing Trust shares
that such fiduciary has received copies of the documents described in
paragraph (j)(1) of this Section II.
(4) With respect to a Section 404(c) Plan, written acknowledgement
of the receipt of such documents is provided by the Independent
Fiduciary (i.e., the Plan administrator, trustee, investment manager or
named fiduciary). Such Independent Fiduciary will be required to
represent in writing to PMAS that such fiduciary is--
(A) Independent of PaineWebber and its affiliates;
(B) Knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and;
(C) Able to make an informed decision concerning participation in
the PACE Program.
(5) With respect to a Plan that is covered under Title I of the
Act, where investment decisions are made by a trustee, investment
manager or a named fiduciary, such Independent Fiduciary is required to
acknowledge, in writing, receipt of such documents and represent to
PMAS that such fiduciary is
(A) Independent of PMAS and its affiliates;
(B) Capable of making an independent decision regarding the
investment of Plan assets;
(C) Knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto; and
(D) Able to make an informed decision concerning participation in
the PACE Program.
(k) As applicable, subsequent to its participation in the PACE
Program, each Independent Fiduciary receives the following written or
oral disclosures with respect to its ongoing participation in the PACE
Program:
(1) Written confirmations of each purchase or redemption
transaction by the Plan with respect to a Portfolio.
(2) Telephone access to quotations from PaineWebber of such Plan's
account balance.
(3) A monthly statement of account from PaineWebber specifying the
net asset value of the Plan's investment in such account. Such
statement is also anticipated to include cash flow and transaction
activity during the month, unrealized gains or losses on Portfolio
shares held; and a summary of total earnings and capital returns on the
Plan's PACE Portfolio for the month and year-to-date.
(4) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid
by each Portfolio.
(5) A written quarterly monitoring report that includes (a) a
record of the Plan's PACE Program portfolio for the quarter and since
inception, showing the rates of return relative to comparative market
indices (illustrated in a manner that reflects the effect of any fees
for participation in the PACE Program actually incurred during the
period); (b) an investment outlook summary containing market
commentary; and (c) the Plan's actual PACE Program portfolio with a
breakdown, in both dollars and percentages, of the holdings in each
portfolio. The quarterly monitoring report will also contain an
analysis and an evaluation of a Plan investor's account to assist the
investor to ascertain whether the Plan's investment objectives have
been met and recommending, if required, changes in Portfolio
allocations.
(6) A statement, furnished at least quarterly or annually,
specifying--
(A) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to PaineWebber and its affiliates;
(B) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to unrelated brokerage firms;
(C) The average brokerage commissions per share that are paid by
the Trust to brokers affiliated with PaineWebber, expressed as cents
per share; and
(D) The average brokerage commissions per share that are paid by
the Trust to brokers unrelated to PaineWebber and its affiliates,
expressed as cents per share for any year in which brokerage
commissions are paid to PaineWebber by the Trust Portfolios in which a
Plan's assets are invested.
[[Page 40002]]
(7) Periodic meetings with a PaineWebber Investment Executive (or
the appropriate PaineWebber representative) by Independent Fiduciaries
to discuss the quarterly monitoring report or any other questions that
may arise.
(l) In the case of a Section 404(c) Plan where the Independent
Fiduciary has established an omnibus account in the name of the Plan
(the Undisclosed Account) with PaineWebber, depending upon the
arrangement negotiated by the Independent Fiduciary with PMAS, certain
of the information noted above in subparagraphs (k)(1) through (k)(7)
of this Section II may be provided by PaineWebber to the Directing
Participants or to the Independent Fiduciary for dissemination to the
Directing Participants.
(m) If previously authorized in writing by the Independent
Fiduciary, the Plan investor's account is automatically rebalanced on a
periodic basis to the asset allocation previously prescribed by the
Plan or participant, as applicable, if the quarterly screening reveals
that one or more Portfolio allocations deviates from the allocation
prescribed by the investor by the agreed-upon formula threshold.
(n) The books and records of the Trust are audited annually by
independent, certified public accountants and all investors are sent
copies of an audited financial report no later than 60 days after the
close of each Trust fiscal year.
(o) PaineWebber maintains, for a period of six years, the records
necessary to enable the persons described in paragraph (p) of this
Section II 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 PaineWebber
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 PaineWebber 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 (p)(1) of this Section II below.
(p)(1) Except as provided in subparagraph (p)(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 (o) of
this Section II are unconditionally available at their customary
location during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service (the Service) or the
Securities and Exchange Commission (the SEC);
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(p)(2) None of the persons described above in paragraphs (p)(1)(B)-
(p)(1)(D) of this paragraph (p) are authorized to examine the trade
secrets of PaineWebber or Mitchell Hutchins or commercial or financial
information which is privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) The term ``PaineWebber'' means PaineWebber Incorporated and any
affiliate of PaineWebber, as defined in paragraph (b) of this Section
III.
(b) An ``affiliate'' of PaineWebber includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with PaineWebber.
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Independent Fiduciary'' means a Plan fiduciary which
is independent of PaineWebber and its affiliates and is either
(1) A Plan administrator, trustee, investment manager or named
fiduciary of a Section 404(c) Plan or a Section 403(b) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under a self-directed IRA which invests
in Trust shares;
(4) An employee, officer or director of PaineWebber and/or its
affiliates covered by an IRA not subject to Title I of the Act;
(5) A trustee, Plan administrator, investment manager or named
fiduciary responsible for investment decisions in the case of a Title I
Plan that does not permit individual direction as contemplated by
Section 404(c) of the Act; or
(e) The term ``Directing Participant'' means a participant in a
Plan covered under the provisions of section 404(c) of the Act, who is
permitted under the terms of the Plan to direct, and who elects to so
direct, the investment of the assets of his or her account in such
Plan.
(f) The term ``Plan'' means a pension plan described in 29 CFR
2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, a plan
described in section 4975(e)(1) of the Code, and in the case of a
Section 404(c) Plan, the individual account of a Directing Participant.
EFFECTIVE DATE: This exemption will be effective as of August 18, 1995.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption (the Notice) published on March 22,
1996 at 61 FR 11882.
Written Comments
The Department received one written comment with respect to the
Notice and no requests for a public hearing. The comment was submitted
by PaineWebber, PMAS and Mitchell Hutchins (collectively, the
Applicants). Their comment is broken down into the areas discussed
below.
(1) Section 403(b) Plan Participation. In addition to IRAs, Keogh
Plans, Section 404(c) Plans and other types of employee benefit plans
that will participate in the PACE Program, the Applicants represent
that they wish to offer shares in the Trust to Plans that are described
in section 403(b) of the Code. Therefore, the Applicants have requested
that the Department include references to Section 403(b) Plans in the
exemptive language set forth in Section I, in the conditional language
set forth in Sections II(j)(3) and III(d)(1) and in Representation 6 of
the Summary of Facts and Representations (the Summary). The Department
has revised the Notice accordingly.
(2) Available Portfolios. Section II(g) of the Notice states that
PMAS will provide investment advice in writing to an Independent
Fiduciary or a Directing Participant with respect to all available
Portfolios offered by the Trust. The Applicants note, however, that, in
the case of a Section 404(c) Plan, an Independent Fiduciary will
determine the initial array of Portfolios among which the Directing
Participants may allocate Plan assets, and that such fiduciary may
decide to include less than all of the Portfolios in that array.
Therefore, the Applicants have requested that the Department revise
Section II(g) of the Notice as follows to
[[Page 40003]]
make it clear that ``available'' Portfolios are those that will be
selected by the Independent Fiduciary under such circumstances:
(g) PMAS provides investment advice in writing to an Independent
Fiduciary or Directing Participant with respect to all Portfolios
made available under the Plan.
The Department has made the change requested by the Applicants.
(3) Independent Fiduciary Role. With respect to a Section 404(c)
Plan, Section II(j)(4) of the Notice states that written
acknowledgement of the receipt of initial disclosures from PaineWebber
will be provided by the Independent Fiduciary who may be the Plan
administrator, trustee, investment manager or the named fiduciary, as
the recordholder of Trust shares. The Applicants wish to clarify that
because the trustee of a trust is generally the legal owner of trust
assets, the Plan trustee rather than the Independent Fiduciary is the
actual recordholder of Trust shares. Therefore, the Applicants request
that the Department revise Section II(j)(4) of the Notice to read as
follows:
(4) With respect to a Section 404(c) Plan, written
acknowledgement of the receipt of such documents is provided by the
Independent Fiduciary (i.e., the Plan administrator, trustee,
investment manager or named fiduciary).
The Department has amended the Notice in this regard.
(4) Directing Participant Disclosure. Section II(l) of the Notice
states, in relevant part, that if an Independent Fiduciary of a Section
404(c) Plan has established an Undisclosed Account with PaineWebber,
certain disclosures will be provided by PaineWebber to the Directing
Participants or to the Independent Fiduciary for dissemination to the
Directing Participants, depending upon the arrangement negotiated with
PMAS. In an effort to reflect the manner in which that information will
be distributed or made available to Directing Participants and/or to
the Independent Fiduciaries of Section 404(c) Plans, the Applicants
request that the Department modify Section II(l) of the Notice.
The Department has amended Section II(l) of the Notice to read as
follows:
(l) In the case of a Section 404(c) Plan where the Independent
Fiduciary has established an omnibus account in the name of the Plan
(the Undisclosed Account) with PaineWebber, depending upon the
arrangement negotiated by the Independent Fiduciary with PMAS,
certain of the information noted above in subparagraphs (k)(1)
through (k)(7) of this Section II may be provided by PaineWebber to
the Directing Participants or to the Independent Fiduciary for
dissemination to the Directing Participants.
(5) Description of Paine Webber Group and PaineWebber.
Representation 1(a) of the Summary, states, in part, that the Paine
Webber Group is a member of all principal securities and commodities
exchanges in the United States and the National Association of
Securities Dealers, Inc. It is also represented that Paine Webber Group
holds memberships or associate memberships on several principal foreign
securities and commodities exchanges. Although the Applicants furnished
this information to the Department, they wish to clarify that these
representations pertain to PaineWebber rather than to the Paine Webber
Group. Therefore, they request that the Department make appropriate
changes to the Summary.
The Department has revised the language in Representation 1(b) of
the Summary as follows:
PaineWebber is a member of all principal securities and
commodities exchanges in the United States and the National
Association of Securities Dealers, Inc. It also holds memberships or
associate memberships on several principal foreign securities and
commodities exchanges.
(6) Net Asset Value Per Share. In pertinent part, Representation 2
of the Summary states that with the exception of the PACE Money Market
Investments Portfolio, shares in the Trust were initially offered to
the public by PaineWebber at a net asset value of $10 per share and
that shares in the PACE Money Market Investments Portfolio are being
offered to the public at a net asset value of $1.00 per share. The
Applicants wish to clarify that with the exception of the PACE Money
Market Investments Portfolio in which shares are offered to the public
at a net asset value of $1.00 per share, shares in the other Portfolios
were initially offered to the public at a net asset value of $12 per
share.
Accordingly, the Department has revised the sixth and seventh
sentences of Representation 2 to read as follows:
With the exception of the PACE Money Market Investments
Portfolio, shares in each of the Portfolios were initially offered
to the public at a net asset value of $12 per share. Shares in the
PACE Money Market Investments Portfolio are offered to the public at
a net asset value of $1.00 per share.
(7) Minimum Investments. The second paragraph of Representation 3
of the Summary states, in part, that the minimum initial investment for
a prospective investor in the PACE Program is $10,000. The Applicants
note, however, that the minimum initial investment threshold for an
investor is currently $25,000 and not $10,000. For Plan investors and
Uniform Gift or Transfer to Minors Accounts, the Applicants wish to
clarify that the minimum initial investment is presently $10,000.
The Department has revised part of Representation 3 to read as
follows:
* * * The minimum initial investment in the PACE Program
currently is $25,000 (except for Plans and Uniform Gift or Transfer
to Minors Accounts, for which the minimum initial investment is
currently $10,000).
(8) Valuation of Portfolio Shares. Footnote 10 of the Summary
states, in part, that the net asset value of shares in the PACE Money
Market Investments Portfolio is determined as of 12 p.m. each business
day. To indicate that the net asset value of all Portfolio shares,
including shares of the PACE Money Market Investments Portfolio, is
being determined as of the close of regular trading on the New York
Stock Exchange (currently 4 p.m., Eastern Time) each business day, the
Applicants request that the Department modify Footnote 10 of the
Summary.
The Department has modified Footnote 10 to read as follows:
The net asset value of each Portfolio's shares is determined as
of the close of regular trading on the New York Stock Exchange (the
NYSE) (currently, 4 p.m., Eastern Time) each business day. Each
Portfolio's net asset value per share is determined by dividing the
value of the securities held by the Portfolio plus any cash or other
assets minus all liabilities by the total number of Portfolio shares
outstanding.
In addition, the Applicants have requested that Footnote 16 of the
Summary be revised to incorporate the following language:
* * * The net asset value of each Portfolio's shares is
determined as of the close of regular trading on the NYSE
(currently, 4 p.m. Eastern Time) each business day. PaineWebber may,
in the future, impose a minimum dollar threshold on rebalancing
transactions in order to avoid de minimus transactions.
(9) Payment of Redemption Proceeds. Representation 14 of the
Summary states, in part, that a Portfolio will be required to transmit
redemption proceeds for credit to an investor's account within 5
business days after receipt. Similarly, Representation 17 of the
Summary sets forth the same time frame for the payment of the outside
fee as well as the applicable fee if additional funds are invested
during a calendar quarter. Because Federal Securities laws currently
require PaineWebber to settle its obligations within three business
days, the Applicants have requested that the
[[Page 40004]]
Department revise the Summary to reflect the current timing of such
payments.
The Department does not object to these necessary revisions and has
deleted references to the five business day requirement and inserted
the phrase ``three business days'' in the fourth sentence of paragraph
one of Representation 14, in the first sentence of paragraph two of
Representation 17 and in the first sentence of paragraph three of
Representation 17.
(10) Brokerage Commission Information. Representation 22(i) of the
Summary states, in part, that on a quarterly and annual basis,
PaineWebber will provide written disclosures to an Independent
Fiduciary or, if applicable, a Directing Participant regarding
brokerage commissions that are paid to PaineWebber and/or its
affiliates or to unrelated parties. The Applicants have requested that
the Department revise this representation to reflect that brokerage
commission information will be provided to the Independent Fiduciary
and, depending on the arrangement negotiated between the Independent
Fiduciary of a Section 404(c) Plan and PMAS, to a Directing
Participant. The Applicants state that the language set forth in the
Summary appears to indicate that PaineWebber will provide such
information under all circumstances to Independent Fiduciaries and
where applicable, to Directing Participants only.
The Department has revised paragraph (i) of Representation 22 to
read, in part, as follows:
(i) On a quarterly and annual basis, PaineWebber will provide
written disclosures to an Independent Fiduciary and, depending on
the arrangement negotiated with PMAS, a Directing Participant, with
respect to (1) the total, expressed in dollars, of each Portfolio's
brokerage commissions that are paid to PaineWebber and its
affiliates; * * *
After giving full consideration to the entire record, the
Department has decided to grant the exemption subject to the
modifications or clarifications described above. The Applicants'
comment letter has been included as part of the public record of the
exemption application. The complete application file, including all
supplemental submissions received by the Department, is made available
for public inspection in the Public Documents Room of the Pension and
Welfare Benefits Administration, Room N-5638, U.S. Department of Labor,
200 Constitution Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
The Everett Clinic Profit Sharing Plan and 401(k) Employee Savings Plan
and Trust (the Plan), Located in Everett, Washington
[Prohibited Transaction Exemption 96-60; Exemption Application No. D-
10171]
Exemption
The restrictions of sections 406(a), 406(b)(1) and (b)(2) of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1)(A) through (E) of the Code,
shall not apply to the following transactions between the Plan and the
Everett Clinic (the Employer), a party in interest with respect to the
Plan: (1) The exchange of cash and real property (Parcel B) owned by
the Plan for other real property (Parcel C) owned by the Employer; (2)
the grant by the Employer to the Plan of a perpetual easement to run
with the land on the Plan's Parcel B to be exchanged and on the
Employer's property (Parcel E); (3) the modification and extension of
an existing lease (the New Lease) of improved real property by the Plan
to the Employer, so as to include Parcel C and, effective January 1,
1997, a parking lot owned by the Employer (Parcel D) to be contributed
gratuitously 1 to the Plan; and (4) the potential future purchase
of the leased premises by the Employer pursuant to the terms of an
option agreement contained in the New Lease.
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\1\ The Department notes the Employer's representation that its
contribution of Parcel D to the Plan will not be a prohibited
transaction under the Department's regulation at 29 CFR 2509.94-3
because the contribution will not be made pursuant to any legal
obligation of the Employer to contribute. The Plan is a profit-
sharing plan which provides for a fully discretionary annual
contribution by the Employer. It is represented that Parcel D will
be contributed to the Plan on December 31, 1996 for the 1996 Plan
Year and that no contribution has been declared for the 1996 Plan
Year; therefore, the Employer has no existing obligation to
contribute any amounts to the Plan. However, the Department
expresses no opinion herein as to whether the Employer's
contribution of Parcel D to the Plan is fully discretionary.
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This exemption is subject to the following conditions:
(1) The Plan is represented in all the transactions by a qualified,
independent fiduciary;
(2) The terms and conditions of the transactions are at least as
favorable to the Plan as those the Plan could obtain in comparable
arm's length transactions with unrelated parties;
(3) Under the purchase agreement (the Purchase Agreement) with
respect to the exchange of Parcel B for Parcel C, the Plan pays to the
Employer an amount no more than the difference between the fair market
values of Parcel B and Parcel C as of the date of the exchange, as
established by a qualified, independent appraiser, with the Plan
receiving full market value for Parcel B (notwithstanding its being
transferred subject to an easement);
(4) The rent paid to the Plan under the New Lease is and continues
to be no less than the fair market rental value of the leased premises,
as established by a qualified, independent appraiser;
(5) The rent is adjusted every three years, based upon an updated
independent appraisal, but never falls below the fair market rental
amount initially established;
(6) The New Lease is a triple net lease under which the Employer as
the tenant is obligated for all operating expenses, including
maintenance, repairs, taxes, insurance, and utilities;
(7) The independent fiduciary expressly approves any improvements
over $100,000 to the leased premises and any renewal of the New Lease
beyond the initial term;
(8) The New Lease contains a two-way option agreement enabling the
Plan to sell the leased premises to the Employer (or the Employer to
purchase the leased premises from the Plan), in the event the
independent fiduciary determines that such a sale is in the best
interests of the Plan, for cash in an amount which is the greater of:
(a) the original acquisition cost of the premises to the Plan plus
expenses, or (b) the fair market value of the premises as of the date
of the sale, as established by a qualified, independent appraiser
selected by the independent fiduciary;
(9) At all times, the fair market value of the leased premises
represents no more than 25% of the total assets of the Plan;
(10) The independent fiduciary determines that all of the
transactions are appropriate for and in the best interests of the Plan
and its participants and beneficiaries at the time of the transactions;
(11) At all times, the independent fiduciary monitors and enforces
compliance with the terms and conditions of the Purchase Agreement, the
New Lease, and the exemption; and
(12) The Plan incurs no commissions, costs, fees, nor other
expenses relating to any of the transactions.
EFFECTIVE DATE: This exemption is effective as of June 1, 1996.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on June 4, 1996 at 61 FR
28237.
[[Page 40005]]
Written Comments
The Department received one written comment with respect to the
notice of proposed exemption and no requests for a public hearing. The
written comment was submitted by the trustees of the Plan (the
Trustees) and concerns a clarification of the notice of proposed
exemption. The Summary of Facts and Representations, Section 9,
Paragraph 2 (page 28240, column 3) states:
The income from the Current Lease has provided the Plan with a
stable and favorable rate of investment return (over 9% per annum
for the period covering the 1980's and the first half of the 1990's,
ranking in the top 5% of the Independent Consultants Cooperative
database).
The Trustees desired to make the observation that this representation
inaccurately understates the performance of the real estate. A letter
dated November 16, 1995, from Wurts, Johnson & Company (Wurts,
Johnson), investment consultants to the First Interstate Bank of
Washington N.A., the independent fiduciary for the Plan, indicates that
the rate of return to the Plan of ``over 9% per annum'' is actually for
the five-year period ending June 30, 1995. Extending the return
analysis back to January 1, 1983 for a 12-year period ending December
31, 1994, Wurts, Johnson found that the annual rate of return was
12.8%. Moreover, the most recent report from Wurts, Johnson shows that
the annual rate of return for the five-year period ending December 31,
1995 was 14.1%. This rate is significantly higher than that for the
five-year period ending June 30, 1995 due to a significant increase in
the value of the real estate subsequent to June 30, 1995.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
The SUP Welfare Plan (the Plan), Located in San Francisco,
California
[Prohibited Exemption Transaction 96-61; Exemption Application No. L-
10221]
Exemption
The restrictions of sections 406(a), 406(b)(1) and (b)(2) of the
Act shall not apply to the sale by the Plan of the remaining term of a
one-hundred year pre-paid leasehold interest (the Interest) to the
Sailors' Union of the Pacific Building Corporation, a party in interest
with respect to the Plan, provided the following conditions are
satisfied: (a) the sale is a one-time transaction for cash; (b) the
Plan pays no commissions or other expenses in connection with the sale;
(c) the Plan receives the greater of $438,000 or the fair market value
of the Interest as of the date of the sale; and (d) the fair market
value of the Interest has been determined by a qualified, independent
appraiser.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on June 4, 1996 at 61 FR
28241.
Written Comments: The Department received three written comments
(and no hearing requests) with respect to the proposed exemption. Two
of the comments were in favor of granting the exemption as proposed.
The third commentator disagreed with the Plan's trustees' decision to
eliminate its housing program, and also expressed concern that the
transaction would have negative impact on the participants' paychecks
and affect their retirement plan.
The applicant responded to this comment by stating that the
trustees' decision to terminate the housing benefit does not involve
the merits of the subject transaction. Nonetheless, the applicant
states that the trustees did act prudently and in the best interest of
all participants and beneficiaries in terminating the housing benefit.
Over the past 40 years, the number of jobs available for West Coast
unlicensed deck hands has declined from several thousand to about a
hundred. There is a substantial possibility that further shrinkage will
occur if Congress fails to enact a maritime subsidy program. As the
declining contribution base squeezes the Plan's finances, the applicant
represents that the Plan's trustees properly chose to marshal the
Plan's assets to provide benefits to the maximum number of eligible
participants for as long as possible. The applicant further states that
the elimination of the housing benefit will have no impact on any
participant's paycheck, nor will it affect any retirement plan.
The Department has considered the entire record, including the
comments submitted and the applicant's response thereto, and has made a
final determination to grant the exemption as proposed.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz 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 or disqualified
person from certain other provisions to which the exemptions does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional rules. Furthermore, the
fact that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Signed at Washington, D.C., this 26th day of July, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 96-19482 Filed 7-30-96; 8:45 am]
BILLING CODE 4510-29-P