[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Notices]
[Pages 27625-27629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13179]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10340, et al.]


Proposed Exemptions; McLane Company, Inc. Profit Sharing Plan and 
Trust (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restriction of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    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

[[Page 27626]]

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.

McLane Company, Inc. Profit Sharing Plan and Trust (the Plan) Located 
in Temple, Texas

[Application No. D-10340]

Proposed Exemption

    The Department of Labor (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 If the exemption is granted, the restrictions of 
sections 406(a), 406(b)(1) and (b)(2) of the Act and the sanctions 
resulting from the application of section 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not 
apply to the past sale (the Sale) by the Plan of two parcels of 
unimproved real property located in Temple, Texas and Goodyear, Arizona 
(the Properties) to McLane Company, Inc. (McLane), the Plan sponsor and 
a party in interest with respect to the Plan, provided that the 
following conditions are satisfied: (a) The Sale was a one time 
transaction for a lump sum cash payment; (b) the purchase prices were 
the fair market values of the Properties as of the date of the Sale; 
(c) the Properties have been appraised by qualified, independent real 
estate appraisers; (d) a qualified, independent fiduciary determined 
that the Sale was in the best interests of the Plan; and (e) the Plan 
paid no commissions or other expenses relating to the Sale.
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally 
transferred the authority of the Secretary of the Treasury to issue 
exemptions under section 4975(c)(2) of the Code to the Secretary of 
Labor. In the discussion of the exemption, references to section 406 
and 408 of the Act should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.

EFFECTIVE DATE OF EXEMPTION: The effective date of this exemption is 
April 21, 1993.

Summary of Facts and Representations

    1. The Applicant is Sarofim Realty Advisors (SRA). SRA was formally 
known as F.S. Realty Partners (FSRP) when it acted as an Investment 
Manager for the Plan during the subject transaction. SRA is 
headquartered in Dallas, Texas. As of December 31, 1995, SRA employed 
18 full-time employees and had approximately $772 million in aggregate 
market value of employee benefit plan assets under management. SRA 
oversees the acquisition, development, leasing, management, financing 
and sale of select property types in select regions and major cities 
throughout the country for several pension plans and endowment funds.
    The Applicant states that under the terms of the April 12, 1993 
Investment Management Agreement (the IMA) between McLane, Mr. Lucian L. 
Morrison and FSRP, FSRP served as investment manager with exclusive 
investment discretion over the Properties. As the investment manager, 
FSRP was a fiduciary of the Plan. The Applicant represents that FSRP 
was not related to or otherwise affiliated with McLane.
    2. The Applicant states that the Plan is a defined contribution 
plan whose total participants numbered 6,967 at the end of the 1993 
Plan year. Additionally, the Applicant understands that at the time of 
consummation of the Sale, the approximate fair market value of the 
total assets of the Plan was $44,710,368 and that approximately 5.5% of 
the total assets for the 1993 Plan year were involved in the subject 
transaction.
    At the time of the Sale, the company treasurer of McLane, Mr. 
Webster F. Stickney, Jr. (Mr. Stickney), was a Plan trustee. McLane, 
located in Temple, Texas, was the Plan sponsor and a party in interest 
with respect to the Plan. McLane is a wholesale grocery distribution 
company. Wal-Mart, Inc. owned one hundred percent of the issued and 
outstanding common stock of McLane at the time of the Sale.
    3. The Properties were owned by the Plan at the time of the Sale. 
The Temple, Texas property consists of 86.245 acres of unimproved land 
bisected by McLane Parkway and located in the City of Temple, Bell 
County, Texas. Directly adjacent to the west and southwest are 
properties owned by McLane including the McLane corporate headquarters. 
Directly adjacent to the east are 212 acres purchased by McLane/Lone 
Star, Inc. for a 750,000 square foot warehouse used as a major 
distribution center. The Goodyear, Arizona property consists of 32.605 
acres of unimproved land located on the south side of McDowell Road, 
2,164 feet west of Litchfield Road in Goodyear, Arizona. McLane has a 
125,828 square foot industrial distribution center adjacent to the east 
side of the Goodyear, Arizona property. This facility is the trucking 
hub that distributes grocery products to convenience stores and food 
establishments.
    The Temple, Texas property was acquired by the Plan in two 
segments. The first piece constituted 84.711 acres and was purchased on 
December 29, 1986 from Mr. and Mrs. Calvin Emery for a total price of 
$621,400. The second segment, comprising 1.534 acres, was acquired from 
Mr. and Mrs. Ray Looney on November 30, 1987, for $22,652. Mr. Stokes 
represents that Mr. and Mrs. Emery and Mr. and Mrs. Looney were not 
parties in interest with respect to the Plan.
    The Goodyear, Arizona property was also acquired at two different 
times. The Plan originally acquired a 51 percent interest in the 
property from Mr. Thomas Yamashita on June 20, 1984, for $793,800. It 
is represented that Mr. Yamashita was unrelated to the Plan. On May 16, 
1988, McLane contributed to the Plan the remaining 49 percent interest 
in the property. It is represented that the property had been appraised 
by an independent appraiser on February 22, 1988 at $2,270,000. Also, 
it is represented that McLane's contribution of its interest in the 
property in 1988 was a purely discretionary contribution to the Plan 
and that McLane was under

[[Page 27627]]

no obligation to make any contribution to the Plan. The Properties have 
been held by the Plan since their respective purchase dates and have 
not been used by or leased to any person since their acquisition by the 
Plan.2
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    \2\ The Department expresses no opinion herein on whether the 
acquisition and holding of the Temple, Texas property or the 
Goodyear, Arizona property by the Plan violated any of the 
provisions of Part 4 of Title I of the Act. The Department is 
providing no retroactive exemptive relief herein with respect to the 
acquisition and holding of the Temple, Texas property or the 
Goodyear, Arizona property by the Plan.
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    4. The Applicant represents that the motivation for the Plan's 1993 
Sale of the Properties to McLane was solely to benefit Plan 
participants and beneficiaries and that Plan participants were unhappy 
both about the lack of income from the subject Properties and a concern 
about declining property values.
    5. In order to fulfill what McLane believed to be the requirements 
of Prohibited Transaction Exemption 84-14 (49 FR 9494 March 13, 1984) 
(PTE 84-14) 3 with respect to the Sale, on or about February 
15, 1993, McLane hired Lucian L. Morrison (Mr. Morrison) as an 
independent fiduciary for the purpose of appointing a qualified 
professional asset manager (QPAM) to sell the Properties owned by the 
Plan. On February 15, 1993, legal counsel to McLane informed the McLane 
treasurer that Mr. Morrison was willing to act on behalf of McLane in 
appointing a QPAM to have investment discretion with respect to the 
potential sale of the Properties to McLane. Legal counsel advised 
McLane that in order to comply with PTE 84-14, the Sale would proceed 
as follows: (1) Mr. Morrison would appoint a QPAM to represent the Plan 
with respect to the potential sale of the property to McLane; (2) the 
QPAM would hire its own appraiser and attorney to represent it in the 
transaction and, if appropriate, to negotiate the terms of the sale 
between the Plan and McLane; and (3) after the final terms of any 
transaction are negotiated, the sale would close in the same manner 
that any real estate sale would close, complete with deeds, title 
policies, etc.
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    \3\ PTE 84-14 provides relief from the restrictions of section 
406(a) of ERISA for transactions between parties in interest and 
plans where a QPAM (as defined in the class exemption) is the 
decision maker and certain other conditions are met.
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    On February 17, 1993, Mr. Morrison was formally hired as an 
independent fiduciary of the Plan to select and hire a QPAM to evaluate 
the proposed transactions and to negotiate the terms thereof and direct 
the trustees to enter into the Sale to McLane. Legal counsel to McLane 
gave Mr. Morrison the names of two prospective QPAMs from whom to 
solicit bids and told Mr. Morrison that McLane understood, under the 
PTE 84-14 requirements, that McLane could not dictate to Mr. Morrison 
or ``taint the selection process'', but McLane believed ``it 
appropriate'' to give Mr. Morrison the names of two firms McLane 
believed to be qualified to serve as a QPAM.
    6. On February 26, 1993, the Limited Purpose Independent Fiduciary 
Agreement (Limited Agreement) was formally entered into between McLane 
and Mr. Morrison. The Limited Agreement provided that the purpose of 
the agreement was to facilitate the purchase of the Plan's Properties 
and that this purchase would be a prohibited transaction unless an 
exemption from the prohibited transaction rules of ERISA was utilized. 
The Limited Agreement further specified that the QPAM exemption was 
available for this purchase.4
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    \4\ In this regard, section I(a) of PTE 84-14 provides that:
    (a) At the time of the transaction (as defined in section V(i)) 
the party in interest, or its affiliate (as defined in section 
V(c)), does not have, and during the immediately preceding one year 
has not exercised the authority to--
    (1) Appoint or terminate the QPAM as a manager of any of the 
plan's assets, or
    (2) Negotiate the terms of the management agreement with the 
QPAM (including renewals or modifications thereof) on behalf of the 
plan; * * *
    Section I(c) of PTE 84-14 provides that:
    (c) The terms of the transaction are negotiated on behalf of the 
investment fund by, or under the authority and general directions of 
the QPAM, and either the QPAM or (so long as the QPAM retains full 
fiduciary responsibility with respect to the transaction) a property 
manager acting in accordance with written guidelines established and 
administered by the QPAM, makes the decision on behalf of the 
investment fund to enter into the transaction, provided that the 
transaction is not part of an agreement, arrangement or 
understanding designed to benefit a party in interest; * * *
    Section V(c)(3) of PTE 84-14 provides, in relevant part, that a 
named fiduciary (within the meaning of section 402(a)(2) of ERISA) 
of a plan and an employer any of whose employees are covered by the 
plan will also be considered affiliates with respect to each other 
for purposes of section I(a) if such an employer * * * has the 
authority * * * to appoint or terminate the named fiduciary or 
otherwise negotiate the terms of the named fiduciary's employment 
agreement.
    Section 402(a) of ERISA provides that every employee benefit 
plan shall be established and maintained pursuant to a written 
instrument. This instrument must provide for one or more named 
fiduciaries who have the authority to control and manage the 
operation and administration of the plan. Under sections 402(c)(3) 
and 403(a) of ERISA, only a named fiduciary has the authority to 
appoint an investment manager, and such an appointment may be made 
only as specifically provided in the plan instrument.
    The preamble to the proposed class exemption, 47 FR 56945 at 
56947 (December 21, 1982), explains that the Department is prepared 
to grant broad exemptive relief only where an independent asset 
manager has, and in fact exercises, discretionary authority to cause 
an investment fund to enter into a transaction which is otherwise 
prohibited. Party in interest transactions that are negotiated by, 
e.g., an employer which sponsors a plan, and are then presented to a 
QPAM for approval would not qualify for the class exemption as 
proposed.
    It is the view of the Department that the retention of a QPAM 
solely to approve a specific transaction presented for its 
consideration by a plan sponsor at the time of its engagement is 
inconsistent with the underlying intent of the exemption, i.e., the 
transfer of plan assets to an independent, discretionary manager 
free from the undue influence of the sponsor. Such a transaction 
also raises issues under section I(c) of the exemption which 
requires that the transaction not be a part of an agreement, 
arrangement or understanding designed to benefit a party in 
interest.
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    Mr. Morrison accepted his appointment as a limited purpose 
independent fiduciary and agreed to act as provided for in the Limited 
Agreement, the Plan Document, and ERISA. Mr. Morrison solicited bids 
from the U.S. Trust of California and from FSRP, asking for their fee 
for serving as the QPAM to transact the purchase by McLane of the 
Plan's Properties.
    7. On April 12, 1993, Mr. Morrison, McLane and FSRP entered into an 
``Investment Management Agreement''. As independent fiduciary, Mr. 
Morrison appointed FSRP as an Investment Manager (IM) of the Plan. In 
Section 2 of the IMA, FSRP acknowledged that in acting as an IM under 
the IMA, it would be acting as a fiduciary to the Plan as defined in 
ERISA. Section 4 of the IMA provides that the IM shall: (1) Evaluate 
the proposed transaction and, if appropriate; (2) negotiate the terms 
of the Sale; and (3) direct the Plan to sell the Properties to McLane 
if, in FSRP's sole discretion, the sales price negotiated by FSRP and 
agreed to by McLane represents the fair market value of each parcel of 
real estate as determined by FSRP considering one or more appraisals 
obtained from qualified, independent appraisers. Section 6 of the IMA 
provides that the agreement shall terminate on the closing date of the 
proposed sales in the event that FSRP directs the Plan to enter into 
the sales of the Properties to McLane.
    8. Plan records show that a full appraisal of the Temple, Texas 
property was completed for McLane on December 30, 1991 by Elbert 
Aldrich, Inc. (Aldrich), a real estate appraiser. Aldrich specified 
that only the Sales Comparison Approach was used in the valuation 
process of the appraisal due to the absence of any improvements on the 
subject property. Aldrich noted that the property was ``essential for 
the continued development of the McLane Company, Inc. as the property 
is the nucleus of other properties held by McLane'' and concluded the 
estimated fair market value of the property to be $763,000. An updated 
appraisal by

[[Page 27628]]

Aldrich, dated January 29, 1993, indicated that the Temple, Texas real 
estate maintained the same estimated fair market value of $763,000.
    FSRP, as the IM, requested an additional appraisal of the Temple, 
Texas property from Crosson Dannis, Inc. (Crosson), an independent real 
estate appraiser. In an April 7, 1993 report to FSRP (the Crosson 
Report), Crosson used the Sales Comparison Approach and estimated the 
market value of the Temple, Texas property to be $300,000 as of March 
29, 1993. The Crosson Report noted that the estimate was to assist FSRP 
in its asset management program and noted that the property ``is not 
currently offered for sale nor are there any pending contracts of sale 
affecting it.'' The Crosson Report stated that the only construction 
activity in the area consisted of the Lone Star distribution center for 
McLane and that other than the demand by McLane for its distribution 
facility, there was no apparent demand by owner/users for land in this 
neighborhood. Further, that an analysis of comparable properties 
required that Crosson apply a negative conditions of sale adjustment to 
the surrounding McLane properties to account for the ``buyer's 
motivation'' since a premium was paid for these sites. The Crosson 
report noted that ``[r]eal estate professionals in Temple indicate that 
* * * McLane * * * owns substantial acreage in this neighborhood, [and] 
as an investor, has, in the past, been willing to pay prices above 
market levels to acquire tracts in the neighborhood.''
    The Goodyear, Arizona property was evaluated for McLane by 
Appraisal Technology, Inc., a real estate appraiser, as of February 9, 
1993. Appraisal Technology, Inc. noted that the Goodyear, Arizona 
property was adjacent to a McLane distribution facility. The appraisal 
adopted the Sales Comparison Approach to obtain a final estimated fair 
market value of $1,305,000 for the vacant property. FSRP requested a 
second appraisal of the Arizona property from Burke Hansen, Inc. 
(Burke), an independent real estate appraiser. The Burke appraisal 
specified that it was to be used by FSRP for portfolio management 
decisions. Using the Sales Comparison Approach, Burke estimated the 
market value of the Goodyear, Arizona property to be $390,000 as of 
March 30, 1993. However, the appraisal also provided an estimated use 
value of $1,300,000. The use value represents the value the property 
has for a specific use by a user with specific criteria, not 
necessarily representative of market value. Additionally, the report 
noted that the property was currently listed for sale at $2,000,000. 
The listing agent reported that there had been no offers.
    9. On April 21, 1993, the Plan engaged in the Sale with McLane and 
received $2,463,000 from McLane for the Properties. The Plan received 
$763,000 for the Temple, Texas real estate and $1,700,000 for the 
Goodyear, Arizona real estate. Special Warranty Deeds conveying title 
to these parcels from the Plan to McLane were signed on May 12, 1993 by 
Webster F. Stickney, Jr., as Trustee of the Plan. The purchase 
agreement entered into by the Plan and McLane that agreed to the Sale 
for a total of $2,463,000 was also signed by Webster F. Stickney, Jr., 
as Trustee for the Plan and J.S. Harding, Jr., president of McLane, on 
May 12, 1993.
    McLane represents that all parties involved in the Sale recognized 
that McLane was paying the Plan well in excess of the current fair 
market value for both properties and that this was clearly done to 
avoid having to advise Plan participants that they had incurred losses 
in their accounts due to a large decline in the real estate market at 
the time. McLane represents that both the Arizona and Texas properties 
appeared to be falling rapidly in value during 1992 and that the Sale 
prices for both properties reflected their estimated values in early 
1992.
    McLane also represents that, if McLane had treated the excess of 
the purchase price for the properties over their fair market values as 
a Plan contribution in 1993, the resulting allocations would not have 
violated the limitations of Internal Revenue Code section 415.
    10. In summary, the Applicant represents that it now believes that 
the conditions of PTE 84-14 may not have been satisfied with respect to 
the Sale. As a result, it requests that the Department consider 
retroactive individual exemption relief under section 408(a) of ERISA. 
The Applicant represents that the requested exemption will satisfy the 
criteria of section 408(a) of the Act for the following reasons: (a) 
The Sale was a one time transaction for a lump sum cash payment; (b) 
the Plan received more than the fair market values of the Properties at 
the time of the transaction; (c) the fair market values of the 
Properties have been determined by independent, qualified real estate 
appraisers; (d) a qualified, independent fiduciary has determined that 
the Sale was in the best interests of the Plan; and (e) the Plan paid 
no commissions or other expenses relating to the Sale.

FOR FURTHER INFORMATION CONTACT: Wendy McColough of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete and 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.


[[Page 27629]]


    Signed at Washington, DC, this 14th day of May, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 97-13179 Filed 5-19-97; 8:45 am]
BILLING CODE 4510-29-P