[Federal Register Volume 62, Number 172 (Friday, September 5, 1997)]
[Notices]
[Pages 47056-47060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23640]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10393]


AEW Capital Management, L.P. (AEW); Located in Boston, 
Massachusetts

AGENCY: Pension and Welfare Benefits Administration.

ACTION: Notice of proposed exemption, U.S. Department of Labor to 
replace Prohibited Transaction Exemption (PTE) 93-40 Involving Aldrich, 
Eastman & Waltch, L.P. and Aldrich, Eastman & Waltch, Inc. 
(collectively, Old AEW).

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed individual exemption 
which, if granted, would replace PTE 93-40 (58 FR 34821, June 29, 
1993). PTE 93-40 permitted the payment to Old AEW of certain investment 
fees and disposition fees relating to real estate investments by 
employee benefit plans for which Old AEW provided investment management 
services, as well as the investment by such plans in a multiple client 
commingled account managed by Old AEW, subject to certain conditions. 
These transactions were described in a notice of pendency that was 
published in the Federal Register on April 27, 1993 at 58 FR 25662. PTE 
93-40, which was effective as of April 27, 1993, expired by operation 
of law, as discussed below. The proposed exemption would provide 
conditional relief identical to that provided by PTE 93-40 for a newly-
merged entity known as ``AEW Capital Management, L.P.''

DATES: Written comments and/or requests for a public hearing should be 
received by the Department within 45 days of the date of publication of 
this notice of proposed exemption in the Federal Register. The proposed 
exemption, if granted, will be effective December 10, 1996.

ADDRESSES: All written comments and/or requests for a public hearing 
(preferably, three copies) should be sent to the Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW, 
Washington, DC 20210, Attention: Application No. D-10393. The 
application pertaining to the proposed exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5507, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed exemption that would replace PTE 
93-40. PTE 93-40 provided an exemption from certain prohibited 
transaction restrictions of section 406 of the Employee Retirement 
Income Security Act of 1974 (the Act) and from the sanctions resulting 
from the application of section 4975 of the Internal Revenue Code of 
1986 (the Code), as amended, by reason of section 4975(c)(1) of the 
Code. The proposed exemption was requested in an application filed by 
AEW pursuant to section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures (the Procedures) set forth 
in 29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990). 
Effective December 31, 1978,

[[Page 47057]]

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. 
Accordingly, this proposed replacement exemption is being issued solely 
by the Department.
    Specifically, PTE 93-40 provided exemptive relief from 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, with respect to the payment by the plans of 
certain initial investment fees and disposition fees to Old AEW. In 
addition, PTE 93-40 provided exemptive relief from the restrictions of 
section 406(a)(1) (A) through (D) 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, with respect to the 
investment by the plans in a multiple client commingled account managed 
by Old AEW.
    Subsequent to the granting of PTE 93-40, AEW informed the 
Department that, effective as of December 10, 1996, all the assets of 
Old AEW and certain of their affiliates had been transferred to the new 
AEW Capital Management, L.P. (denoted herein as AEW). All of the 
partnership interests of AEW are owned, directly or indirectly, by New 
England Investment Companies, a publicly held limited partnership, 
which in turn is approximately 53 percent owned by The Metropolitan 
Life Insurance Company. Because AEW is a newly created legal entity, 
the Department determined that PTE 93-40 was no longer effective as of 
December 10, 1996. Thus, the Department is of the view that PTE 93-40 
would be unavailable for use by AEW with respect to the subject 
transactions.
    AEW represents that, in all material respects, notwithstanding its 
changes in structure and ownership, AEW has otherwise continued to 
operate in the same manner, and with the same senior management 
personnel. AEW is an investment adviser registered under the Investment 
Advisers Act of 1940 whose client accounts continue to consist of 
either separate accounts for individual clients or commingled accounts 
for multiple clients. Accordingly, the Department has decided to 
publish a new exemption for AEW which, if granted, would replace PTE 
93-40 and would have an effective date of December 10, 1996 for 
transactions described in PTE 93-40.

Notice to Interested Persons

    In accordance with the requirements of the Investment Advisers Act 
of 1940, Old AEW provided notice and obtained the consent of the 
independent fiduciary of each of its client plans with respect to its 
anticipated changes in structure and ownership. AEW will further 
provide written notice of the proposed exemption to same within 15 days 
of the date of publication of this notice of pendency in the Federal 
Register. Such notice will include a copy of this notice of pendency as 
published in the Federal Register and an explanation of the rights of 
interested persons to comment on and/or request a hearing with respect 
thereto. Written comments and hearing requests are due within 45 days 
of the date of publication of this notice in the Federal Register.

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 section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and 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 require, among other things, a fiduciary to 
discharge his or her 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 requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries
    (2) Before an exemption can be granted under section 408(a) of the 
Act and 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 such plan; and
    (3) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions. 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.
    (4) The proposed exemption, if granted, will be applicable to the 
transactions previously described in PTE 93-40 only if the conditions 
specified herein are satisfied.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the proposed replacement exemption to the 
address above, within the time period set forth above. All comments 
will be made a part of the record. Comments and requests for a hearing 
should state the reasons for the writer's interest in the proposed 
exemption. Comments received will be available for public inspection 
with the referenced application at the address set forth above.

Proposed 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, the Department proposes to replace PTE 
93-40 as follows:

Part I. Exemption for Payment of Certain Fees to AEW

    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 certain initial investment fees (the Investment Fee) and 
disposition fees (the Disposition Fee) to AEW by employee benefit plans 
for which AEW provides investment management services (the Client 
Plans), pursuant to an investment management agreement (the Agreement) 
entered into between AEW and the Client Plans either individually, 
through the establishment of a single client separate account (Single 
Client Account), or collectively, as participants in a multiple client 
commingled account (Multiple Client Account), provided that the 
conditions set forth below in Part III are satisfied. (Single Client 
Accounts and Multiple Client Accounts are collectively referred to 
herein as Accounts).

Part II. Exemption for Investments in a Multiple Client Account

    The restrictions of section 406(a)(1) (A) through (D) 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 to any investment by a Client Plan in a Multiple Client 
Account managed by AEW, provided that the conditions set forth below in 
Part III are satisfied.

[[Page 47058]]

Part III. General Conditions

    (a) The investment of plan assets in a Single or Multiple Client 
Account, including the terms and payment of any Investment Fee and 
Disposition Fee, shall be approved in writing by a fiduciary of a 
Client Plan which is independent of AEW and its affiliates and, in the 
case of a Multiple Client Account for which ultimate investment 
discretion is exercised by a bank trustee, a fiduciary which is 
independent of the bank trustee and AEW and its affiliates (the 
Independent Fiduciary). Notwithstanding the foregoing, AEW may 
authorize the transfer of cash from a Single Client Account to a 
Multiple Client Account, provided that: (1) The Multiple Client Account 
has similar investment objectives and the identical fee structure as 
the Single Client Account; (2) the Agreement governing the Single 
Client Account authorizes AEW to invest in a Multiple Client Account; 
(3) AEW receives no additional fees from the Single Client Account for 
cash invested in the Multiple Client Account and no additional 
Investment Fee is paid with respect to cash transferred to the Multiple 
Client Account; (4) a binding commitment to make the transfer to the 
Multiple Client Account is made by AEW within six months of the 
Independent Fiduciary's decision to allocate assets to the Single 
Client Account or, in the event that AEW's binding commitment to make 
the transfer occurs more than six months after such Fiduciary's 
decision, AEW obtains an additional authorization from the Independent 
Fiduciary; and (5) each transfer of assets from the Single Client 
Account to the Multiple Client Account occurs within 60 days of the 
actual transfer of such assets to the Single Client Account.
    (b) The terms of any investment in an Account and of any Investment 
Fee or Disposition Fee shall be at least as favorable to the Client 
Plans as those obtainable in arm's length transactions between 
unrelated parties.
    (c) At the time any Account is established and at the time of any 
subsequent investment of assets (including the reinvestment of assets) 
in such Account:
    (1) Each Client Plan shall have total net assets with a value in 
excess of $50 million; and
    (2) No Client Plan shall invest, in the aggregate, more than five 
percent of its total assets in any Account or more than 10 percent of 
its total assets in all Accounts established by AEW.
    (d) Prior to making an investment in any Account, the Independent 
Fiduciary of each Client Plan investing in an Account shall receive 
offering materials from AEW which disclose all material facts 
concerning the purpose, structure, and operation of the Account, 
including any fee arrangements.
    (e) With respect to its ongoing participation in an Account, each 
Client Plan shall receive the following written information from AEW:
    (1) Audited financial statements of the Account prepared by 
independent public accountants selected by AEW no later than 90 days 
after the end of the fiscal year of the Account;
    (2) Quarterly and annual reports prepared by AEW relating to the 
overall financial position and operating results of the Account and, in 
the case of a Multiple Client Account, the value of each Client Plan's 
interest in the Account. Each such report shall include a statement 
regarding the amount of fees paid to AEW during the period covered by 
such report;
    (3) Annual appraisals indicating the fair market value of the 
Account's assets as established by an M.A.I. licensed real estate 
appraiser independent of AEW and its affiliates which has been approved 
by the Client Plan prior to investing in the Account, provided that if 
a new appraiser for a property is chosen by AEW, the appraiser shall be 
approved by the Independent Fiduciary of the Client Plan or the 
responsible independent fiduciaries of Client Plans and other 
authorized persons acting for investors in a Multiple Client Account 
(the Responsible Independent Fiduciaries, as defined in Part IV(e) 
below), prior to any valuation of such property; and
    (4) In the case of any Multiple Client Account, a list of all other 
investors in the Account.
    (f) The total fees paid to AEW shall constitute no more than 
reasonable compensation.
    (g) The Investment Fee shall be equal to a specified percentage of 
the net value of the Client Plan assets allocated to the Account, which 
shall be payable either:
    (1) At the time assets are deposited (or deemed deposited in the 
case of reinvestment of assets) in the Account; or
    (2) In periodic installments, the amount (as a percentage of the 
aggregate Investment Fee) and timing of which have been specified in 
advance based on the percentage of the Client Plan's assets invested in 
real property as of the payment date, provided that (i) the installment 
period is no less than three months, and (ii) if the percentage of the 
Client Plan assets which have actually been invested by a payment date 
is less than the percentage required for the aggregate Investment Fee 
to be paid in full through that date (both determined on a cumulative 
basis), the Investment Fee paid on such date shall be reduced by the 
amount necessary to cause the percentage of the aggregate Investment 
Fee paid to equal only the percentage of the Client Plan assets 
actually invested by that date. The unpaid portion of such Investment 
Fee shall be deferred to and payable on a cumulative basis on the next 
scheduled payment date (subject to the percentage limitation described 
in the preceding sentence).
    (h) The Disposition Fee shall be payable after the Client Plan has 
received distributions from the Account in excess of an amount equal to 
100 percent of its invested capital plus a pre-specified annual 
compounded cumulative rate of return (the Threshold Amount), except 
that in the case of AEW's removal or resignation, AEW shall be entitled 
to receive a Disposition Fee payable either at the time of removal or, 
in the event of AEW's resignation, upon sale of the assets to which the 
fee is allocable or upon termination of the Account as the case may be, 
subject to the requirements of paragraph (k) below, as determined by a 
deemed distribution of the assets of the Account based on an assumed 
sale of such assets at their fair market value (in accordance with 
independent appraisals), only to the extent that the Client Plan would 
receive distributions from the Account in excess of an amount equal to 
the Threshold Amount at the time of AEW's removal or resignation. Both 
the Threshold Amount and the amount of the Disposition Fee, expressed 
as a percentage of the amount distributed (or deemed distributed) from 
the Account in excess of the Threshold Amount, shall be established by 
the Agreement and agreed to by the Independent Fiduciary of the Client 
Plan.
    (i) The Threshold Amount for any Disposition Fee shall include at 
least a minimum rate of return to the Client Plan, as defined below in 
Part IV(f).
    (j) For any sale of property in an Account which shall give rise to 
the payment of a Disposition Fee to AEW prior to the termination of the 
Account, the sales price of the property shall be at least equal to a 
target amount (the Target Amount), as defined in Part IV(g), in order 
for AEW to sell the property and receive its Disposition Fee. If the 
proposed sales price of the property is less than the Target Amount, 
the proposed sale shall be disclosed to and approved by the Independent 
Fiduciary for a Single Client Account or the Responsible Independent 
Fiduciaries for

[[Page 47059]]

a Multiple Client Account, in which event AEW shall be entitled to sell 
the property and receive its Disposition Fee. If the proposed sales 
price is less than the Target Amount and the Independent Fiduciary's or 
Responsible Independent Fiduciaries' approval is not obtained, AEW 
shall still have the authority to sell the property, if the Agreement 
provides AEW with complete investment discretion for the Account, 
provided that the Disposition Fee which would have been payable to AEW 
is paid only at the termination of the Account.
    (k) In the event AEW resigns as investment manager for an Account, 
the Disposition Fee shall be calculated at the time of resignation as 
described above in paragraph (h) and allocated to each property based 
upon the relationship that the appraised value of such property bears 
to the total appraised value of the Account. Each amount arrived at 
through this calculation shall be multiplied by a fraction, the 
numerator of which shall be the actual sales price received by the 
Account on disposition of the property (or in the case of a property 
which has not been sold prior to the termination of the Account, the 
appraised value of the property as of the termination date) and to the 
denominator of which shall be the appraised value of the property which 
was used in connection with determining the Disposition Fee at the time 
of resignation, provided that this fraction shall never exceed 1.0. The 
resulting amount for each property shall be the Disposition Fee payable 
to AEW upon sale of such property or termination of the Account, as the 
case may be.
    (l) AEW or its affiliates shall maintain, for a period of six 
years, the records necessary to enable the persons described in 
paragraph (m) of this Part III 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 AEW 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 AEW, 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 (m) 
below.
    (m)(1) Except as provided in paragraph (m)(2) and notwithstanding 
any provisions of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (l) of this Part III shall be unconditionally 
available at their customary location for examination during normal 
business hours by:
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (ii) Any fiduciary of a Client Plan or any duly authorized employee 
or representative of such fiduciary;
    (iii) Any contributing employer to a Client Plan or any duly 
authorized employee or representative of such employer; and
    (iv) Any participant or beneficiary of a Client Plan or any duly 
authorized employee or representative of such participant or 
beneficiary.
    (2) None of the persons described above in paragraph (m)(1) (ii)-
(iv) shall be authorized to examine the trade secrets of AEW and its 
affiliates or any commercial or financial information which is 
privileged or confidential.

Part IV. Definitions

    For purposes of this exemption:
    (a) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner of 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) The term ``management services'' means:
    (1) Development of an investment strategy for the Account and 
identification of suitable real estate-related investments;
    (2) Directing the investments of the assets of the Account, 
including the determination of the structure of each investment, the 
negotiation of its terms and conditions and the performance of all 
requisite due diligence;
    (3) Timing and directing the disposition of any assets of the 
Account and directing the liquidation of the Account;
    (4) Administration of the overall operation of the investments of 
the Account, including all applicable leasing, management, financing, 
and capital improvement decisions;
    (5) Establishing and maintaining accounting records of the Accounts 
and distributing reports to Client Plans as described in Part III; and
    (6) Selecting and directing all service providers of ancillary 
services as defined in this Part IV.
    (d) The term ``ancillary services'' means:
    (1) Legal services;
    (2) Services of architects, designers, engineers, hazardous 
materials consultants, contractors, leasing agents, real estate 
brokers, and others in connection with the acquisition, construction, 
improvement, management and disposition of investments in real 
property;
    (3) Insurance brokerage and consultation services;
    (4) Services of independent auditors and accountants in connection 
with auditing the books and records of the Accounts and preparing tax 
returns;
    (5) Appraisal and mortgage brokerage services; and
    (6) Services for the development of income-producing real property.
    (e) The term ``Responsible Independent Fiduciaries'' means with 
respect to a Multiple Client Account the Independent Fiduciary of each 
Client Plan invested in the Account and other authorized persons acting 
for investors in the Account which are not employee benefit plans as 
defined under section 3(3) of the Act (such as governmental plans, 
university endowment funds, etc.) that are independent of AEW and its 
affiliates and are persons other than the bank trustee for the Account, 
and that collectively hold at least 50% of the interests in the 
Account.
    (f) The term ``Threshold Amount'' means with respect to any 
Disposition Fee an amount which equals all of a Client Plan's capital 
invested in an Account plus a pre-specified annual compounded 
cumulative rate of return that is at least a minimum rate of return 
determined as follows:
    (1) A non-fixed rate which is at least equal to the rate of change 
in the consumer price index (CPI) during the period from the deposit of 
the Client Plan's assets into the Account until distributions of the 
Client Plan's assets from the Account equal or exceed the Threshold 
Amount; or
    (2) A fixed rate which is at least equal to the rate of change in 
the CPI over some period of time specified in the Agreement, which 
shall not exceed 10 years.
    (g) The term ``Target Amount'' means a value assigned to each 
property in the Account established by AEW either (1) at the time the 
property is acquired, by mutual agreement between AEW and the 
Independent Fiduciary for a Single Client Account or the Responsible 
Independent Fiduciaries for a Multiple Client Account, or (2) pursuant 
to an objective formula approved by such Fiduciaries at the time the 
Account is established. However, in no event will such value be less 
than the acquisition price of the property.


[[Page 47060]]


EFFECTIVE DATE: This exemption, if granted, is effective as of December 
10, 1996.
    The availability of this proposed exemption is subject to the 
express condition that the material facts and representations contained 
in the applications for exemption are true and complete and accurately 
describe all material terms of the transactions.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant PTE 93-40, refer to the 
proposed exemption and grant notice which are cited above.

    Signed at Washington, DC, this 2nd day of September, 1997.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 97-23640 Filed 9-4-97; 8:45 am]
BILLING CODE 4510-29-P