[Federal Register Volume 63, Number 38 (Thursday, February 26, 1998)]
[Notices]
[Pages 9862-9870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4840]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10410, et al.]
Proposed Exemptions; SmartRetirement: The OLDE 401(k) 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 restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
[[Page 9863]]
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register notice. Comments and
requests 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.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ____________, stated in each Notice
of Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
SmartRetirement: The OLDE 401(k) Plan (the Plan) Located in Detroit, MI
[Application No. D-10410]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).1
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\1\ For purposes of this proposed exemption, reference to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, 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, (1) effective October 4, 1996, to the past and
continuing receipt, by OLDE Discount Corporation (OLDE Discount), a
wholly owned subsidiary of OLDE Financial Corporation (OLDE Financial),
the Plan sponsor, of a portion of certain distribution fees that are
paid by third party mutual funds (the Funds) to OLDE Discount pursuant
to Rule 12b-1 (Rule 12b-1; the 12b-1 Fees) under the Investment Company
Act of 1940 (the 1940 Act) and which are attributable to Plan assets
that are invested in the Funds; and (2) the proposed cash rebate of
such 12b-1 Fees, by OLDE Discount, to either the Plan or to the
individually-directed accounts (the Accounts) of the participants in
the Plan.2
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\2\ Unless otherwise noted, OLDE Financial and its affiliates
are collectively referred to herein as OLDE.
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The transactions are conditioned on the requirements set forth
below in Section II.
Section II. General Conditions
(a) The decision to invest the assets of an Account in the Funds is
made by a Plan participant and not by OLDE nor is OLDE providing
``investment advice'' to the participant within the meaning of section
3(21) of the Act.
(b) No sales commissions, other than 12b-1 Fees, are paid by an
Account in connection with the purchase or sale of shares in the Funds
and no redemption fees are paid by an Account with respect to the sale
of shares of the Funds.
(c) The Plan, or if applicable, Account, receives a rebate from
OLDE Discount in the form of cash equal to such Plan's or Account's pro
rata portion of all 12b-1 Fees charged by OLDE Discount to the Funds
under a rebate program (the Rebate Program).
(d) For purposes of the Rebate Program:
(1) During the course of each calendar year, as it receives 12b-1
Fees from the Funds, OLDE Discount calculates that portion of the 12b-1
Fees that are attributable to the Plan, including interest based on the
Federal Funds Rate plus 2 percent.
(2) Within 30 days of receipt by OLDE Discount of the 12b-1 Fees,
OLDE Discount separates and transfers the Plan's allocable portion of
the 12b-1 Fees, together with interest earned on such fees (as
determined in Step 1 above), to a money market account that has been
established in the Plan's name with an unrelated bank, Comerica Bank of
Detroit, Michigan (Comerica).
(3) The Plan may draw upon its Comerica money market account during
the course of the year for the purpose of paying the Plan's
administrative expenses owed to third parties.
(4) Immediately following the end of each calendar year, any
remaining rebated 12b-1 Fees that are not drawn upon, after the payment
of the Plan's administrative expenses, are allocated by the Plan to the
participant Accounts.
(5) OLDE establishes and maintains a system of internal and
external accounting controls for the Rebate Program.
(6) OLDE retains an independent auditor outside of the control of
OLDE to audit, on an annual basis, OLDE Discount's rebating of 12b-1
Fees to either the Plan or the Accounts.
(e) Prior to purchasing shares in the Funds, each Plan participant
receives full written disclosure of information concerning the Funds,
including, but not limited to the following:
(1) Copies of applicable prospectuses for the Funds discussing the
investment objectives of the Funds, the policies employed to achieve
these objectives, the relationship, if any, existing between OLDE
Discount with the parties who act as sponsors, distributors,
administrators, investment advisers and sub-advisers, custodians and
transfer agents to the Funds and a statement describing the fee
structure and the 12b-1 Fees. (OLDE will
[[Page 9864]]
supplement such disclosures with information describing the Rebate
Program.)
(2) Upon written or oral request to OLDE, a statement of additional
information supplementing the applicable prospectus, which describes
the types of securities and other instruments in which the Funds may
invest, the investment policies and strategies that the Funds may
utilize, including a description of the risks.
(3) Upon written request to OLDE, a copy of OLDE Discount's
distribution agreements pertaining to the various Funds.
(4) Copies of the proposed exemption and grant notice describing
the exemptive relief provided herein.
(f) After receiving the disclosures noted above, the participant
acknowledges receipt of the documents in writing and provides
authorization to OLDE with respect to investing in the Funds.
(g) Each additional purchase or redemption of shares in the Funds
is directed by the participant, provided OLDE makes available to the
participant, copies of the applicable Fund prospectus and disclosures
regarding the fee structure and the 12b-1 Fees.
(h) Each Plan participant receives the following written or oral
disclosures from OLDE with respect to ongoing investment in the Funds:
(1) Written confirmations of each purchase or redemption
transaction involving shares of a Fund.
(2) Telephone quotations of such participant's Account balance.
(3) A monthly statement of account specifying the net asset value
of the assets in a participant's Account, a summary of current year
contributions, contributions since inception, beginning and ending
account balances, summaries of contributions, purchases and sales
during the month, a summary of the participant's final Account
portfolio and, to the extent applicable during one month per year only,
any rebated fees that are allocated to the participant's Account.
(4) Semiannual and annual reports that include financial statements
for the Funds as well as the fees paid to OLDE Discount.
(5) Investment performance histories and other information provided
by the Funds to OLDE;
(6) Ratings information received about the Funds from independent
sources such as Morningstar;
(7) Responses to oral or written inquiries of participants upon
request.
(i) The terms of each purchase or redemption of shares in the Funds
remain at least as favorable to an Account as those obtainable in an
arm's length transaction with an unrelated party.
(j) OLDE maintains for a period of six years the records necessary
to enable the persons described below in paragraph (k) 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 OLDE, the records are lost
or destroyed prior to the end of the six year period, and (2) no party
in interest, other than OLDE, 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 (k) below; and
(k)(1) Except as provided in paragraph (k)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (j) are unconditionally available at their
customary location for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC), and
(B) Any participant or beneficiary of the Plan or duly authorized
employee or representative of such participant or beneficiary;
(2) None of the persons described in paragraph (k)(1)(B) shall be
authorized to examine trade secrets of OLDE, or commercial or financial
information which is privileged or confidential.
III. Definitions
For purposes of this proposed exemption:
(a) The term ``OLDE'' means OLDE Financial Corporation and any
affiliate of OLDE Financial, as defined in paragraph (b) of this
Section III.
(b) An ``affiliate'' of OLDE includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with OLDE.
(2) Any officer, director or employee or relative of such person,
or partner in any such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(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 ``participant'' includes participants in the Plan and
their beneficiaries who may invest in the Funds.
(e) The term ``Fund'' or ``Funds'' means any open-end management
investment company or companies registered under the 1940 Act for which
OLDE Discount provides distribution and related services.
(f) The term ``net asset value'' means the amount calculated by
dividing the value of all securities, determined by a method as set
forth in a Fund's prospectus and statement of additional information,
and other assets belonging to each of the portfolios in such fund, less
the liabilities chargeable to each portfolio, by the number of
outstanding shares.
(g) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of October 4, 1996 with respect to transactions involving the past
and continuing receipt, by OLDE Discount, of 12b-1 Fees that are
attributable to the Plan from the Funds. However, it will be
prospective for transactions involving the cash rebate, by OLDE
Discount, of such fees to either the Plan or to the Accounts.
Summary of Facts and Representations
1. The Plan is a defined contribution plan with a 401(k) cash or
deferred feature permitting employee pre-tax deferrals. The Plan was
established by OLDE Financial, effective July 1, 1995, and it allows
participants to direct the investment of their account balances among a
menu of investment options. Currently, these investment alternatives
consist of a series of ``load-type'' Funds that are offered by parties
unrelated to OLDE Financial and whose net asset values are listed daily
in financial and other news publications.3 The Funds have
been offered to the Plan at ``no-load'' pursuant to agreements with the
Fund sponsors.
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\3\ Among the mutual funds offered to Plan participants are the
Franklin Age High Income Fund I, the American Mutual Fund, the
Franklin Equity Income Fund, the GT Global International Growth
Fund, the Growth Fund of America and the Templeton Global Real
Estate Fund.
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The trustees of the Plan are Randal J. Mudge, President of OLDE
Financial, and Mack Sutton, Vice President and Chief Financial Officer
of OLDE Discount. As of December 31, 1997, the
[[Page 9865]]
Plan had 1,146 participants and total assets of approximately
$14,872,000.
2. OLDE Financial, the Plan sponsor, is a holding company with
several subsidiaries, the largest being OLDE Discount. OLDE Financial
maintains its principal place of business in Detroit, Michigan. It
generally performs administrative functions relating to the Plan,
including recordkeeping, reporting and disclosure and the purchases of
investments under the Plan. In this regard, the Plan Administration
Committee, which is comprised of five voting members, all of whom are
employees of OLDE, has the responsibility as a fiduciary for selecting
the investment alternatives that are available under the Plan from
which participants may choose, including the subject transactions that
are described herein. As such, the Plan Administration Committee is
empowered to add or remove mutual fund families that it makes available
to the Plan.4 No fee is charged to the Plan or to any
participants and beneficiaries for the services provided by OLDE
directly or through the Administration Committee.5
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\4\ In ERISA Advisory Opinion 97-15A (May 22, 1997), involving
the Frost National Bank, the Department stated, in part, in a
footnote reference (see Footnote 9, page 5) to the final regulation
regarding participant-directed individual account plans (the ERISA
Section 404(c) Plans) (57 FR 46906, 46924, n. 27 (October 12, 1992)
that ``the act of limiting or designating investment options which
are intended to constitute all or part of the investment universe of
an ERISA Section 404(c) Plan is a fiduciary function which, whether
achieved through fiduciary designation or express plan language, is
not a direct or necessary result of any participant direction of
such plan.''
\5\ The applicants believe that such services are covered by the
statutory exemptive relief provided under section 408(b)(2) of the
Act. However, the Department expresses no opinion herein on whether
such services are statutorily exempt.
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3. OLDE Discount is a full service discount broker with offices
located throughout the United States. OLDE Discount maintains its
principal place of business in Detroit, Michigan and its employees
participate in the Plan.
4. In its role as broker, OLDE Discount is often engaged in
arrangements whereby it receives certain fees from the Funds for
dividend distribution, tax reporting and statement distribution
services provided to shareholders who have purchased their Fund shares
through OLDE Discount. These 12b-1 Fees, which are paid to OLDE
Discount in accordance with Distribution Plans and Related Agreements
adopted under Rule 12b-1 of the 1940 Act, are calculated quarterly by
the Funds based on the dollar volume of mutual fund shareholders that
are customers of a given broker (i.e., who purchased the shares through
the broker and who are receiving shareholder services from that
broker).6
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\6\ Historically, the SEC has taken the position that section
12(b) of the 1940 Act makes it illegal for a mutual fund to finance
the distribution of its shares. Thus, the primary method used by
mutual funds to finance sales of their shares has been a front-end
sales charge deducted from the offering price of a mutual fund's
shares.
In 1980, the SEC adopted Rule 12b-1 under the 1940 Act. Rule
12b-1 allows a mutual fund to use a portion of its assets to pay for
charges related to the distribution of its shares. In effect, Rule
12b-1 provides a limited exception to the general principle stated
in section 12(b) of the 1940 Act by permitting a mutual fund to bear
expenses pursuant to a Rule 12b-1 Plan, provided such plan is
adopted and approved by the mutual fund shareholders as well as its
board of directors. Once these requirements are met, a mutual fund
may pay a percentage of its net assets on a periodic basis in
accordance with the Rule 12b-1 Plan the mutual fund has adopted.
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5. OLDE Discount has 12b-1 Fee arrangements with virtually every
mutual fund that is utilized by participants as investment alternatives
for their Accounts in the Plan.7 Although OLDE Discount
receives no commissions or fees from the Plan, or for that matter, the
participant Accounts, the Funds treat such transactions as purchases
for which annualized fees (ranging from 0.15 percent to 0.50 percent)
are due and payable to OLDE Discount.
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\7\ In the case of the Plan, OLDE Discount serves in a
facilitative role with regard to purchases of Fund shares. Based on
instructions received from the Plan, OLDE Discount utilizes
participant contributions that have been made to the Plan to acquire
Fund shares directly from the Funds on behalf of participant
Accounts. Under no circumstances will the Plan purchase Fund shares
from existing holdings of OLDE Discount.
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6. OLDE Discount has attempted to identify that portion of the 12b-
1 Fees it receives which are related to purchases made by it on behalf
of the Plan. With nearly every Fund, this is accomplished by coding
purchases made by OLDE Discount on behalf of the Plan in a distinct
manner. While 12b-1 Fees are received by OLDE Discount from each Fund
in a lump sum, these payments are generally accompanied by a detailed
breakdown of those fees that are attributable to the Plan. For those
Funds which do not provide such a breakdown, OLDE Discount calculates
the breakdown of Plan's portion of the 12b-1 Fees based on its own
internal coding system. Then, OLDE Discount applies the result to the
formula used by the Fund to calculate the 12b-1 Fees.
7. Because there is a time lag between the accrual and payment of
12b-1 Fees, few have been paid to OLDE Discount which are attributable
to the Plan. Such fees are, however, being maintained in a segregated
account titled ``OLDE Trailer Fee Segregation Account.'' The special
purpose account has been established in OLDE Financial's name with
Comerica, an unrelated bank. Between October 4, 1996 and December 31,
1997, the amount of 12b-1 Fees and interest held in the segregated
account totaled $24,826.
8. Due to potential prohibited transactions that may arise from its
receipt of 12b-1 Fees from the Funds which are attributable to the
Plan, OLDE has considered a number of options to remove these concerns.
First, OLDE considered an option that would allow OLDE Discount to
waive the receipt of all 12b-1 Fees, provided the Funds would agree to
remove their automatic 12b-1 Fee deductions from the Plan's
investments. However, in discussions with representatives for the
Funds, it became clear to OLDE that any waiver of 12b-1 Fees by OLDE
Discount would not result in the removal of the 12b-1 Fee deduction
presumably because the internal system for each Fund could not
accommodate this action. Thus, OLDE Discount's waiver of Plan-related
12b-1 Fees, would result in the Fund's retention of the Plan's
deduction. In other words, Plan participants would be still paying 12b-
1 Fees even if OLDE Discount did not receive them.
As a second option, OLDE considered offering mutual funds to the
Plan for which it did not have 12b-1 Fee arrangements. However, OLDE
deemed this option to be untenable because it would remove virtually
all Funds as investment options for Plan participants.
As a third option, OLDE considered hiring another brokerage firm to
facilitate the purchase and sale of Fund shares on behalf of the Plan.
Aside from the level of concern this alternative would create in
participants regarding the use of a competitor to perform transactions
with their Accounts, OLDE noted that this arrangement would result in
transaction fees as well as 12b-1 Fees being charged to Plan
participants.
Bearing these options in mind, OLDE considered a fourth alternative
for Plan participants and beneficiaries which would involve the
rebating, to the Plan by OLDE Discount, of the Plan's pro rata portion
of all 12b-1 Fees received by OLDE Discount. This option is the basis
for the exemptive relief that has been requested herein. Specifically,
OLDE requests an administrative exemption from the Department, which
will be effective as of October 4, 1996, with respect to the past and
continuing receipt, by OLDE Discount, of 12b-1 Fees that are
attributable to the Plan from the Funds. In addition, OLDE
[[Page 9866]]
requests prospective exemptive relief that would permit OLDE Discount
to make cash rebates of such 12b-1 Fees to the Plan or to the Accounts
of individual participants.
9. To implement the proposed Rebate Program, OLDE has developed the
following procedures:
(a) During the course of each calendar year, as it receives 12b-1
Fees from the Funds, OLDE Discount will calculate that portion of the
12b-1 Fees that are attributable to the Plan, including interest based
on the Federal Funds Rate plus 2 percent. (It is represented that this
interest rate will approximate the expected returns on the 12b-1 Fees
during the period prior to their segregation by OLDE Discount.)
(b) Within 30 days of receipt by OLDE Discount of the 12b-1 Fees,
OLDE Discount will separate and transfer the Plan's allocable portion
of the 12b-1 Fees, together with interest earned on such fees (as
determined in Step (a) above), to a money market account that will be
established in the Plan's name with Comerica.
(c) The Plan may draw upon its Comerica money market account during
the course of the year for the purpose of paying its administrative
expenses owed to unrelated parties.8
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\8\ In this regard, the Department notes that the use of amounts
in the Comerica money market account to pay third party expenses
would be permissible under section 408(b)(2) of the Act and the
corresponding regulations only if such expenses were incurred in
connection with a service otherwise exempt under section 408(b)(2)
and the Plan is obligated to pay such expenses under applicable Plan
provisions.
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(d) All facets of the Plan and the use of the Comerica money market
account will be subject to audit each year by the Plan's independent
auditors.
(e) Immediately following the end of each calendar year, any
remaining rebated 12b-1 Fees, after the payment of the administrative
expenses, will be allocated to the Accounts of Plan participants
(including alternate payees under Qualified Domestic Relations Orders
and beneficiaries of deceased participants) who had Account balances in
the Plan as of the last day of the calendar year for which the
calculation was made. This allocation will be made based on the
relative Account balance of each such participant as of the last day of
the calendar year for which the calculations was made.
10. As stated above, OLDE will establish a system of internal and
external accounting controls with respect to the Rebate Program. In
this regard, internal audit employees of OLDE will review the records
and statements with respect to the special purpose accounts established
by OLDE with Comerica. In addition, OLDE will retain the services of
Ernst & Young, an independent accounting firm, to audit, on an annual
basis, the OLDE Discount's rebating of 12b-1 Fees to either the Plan or
the Accounts. Such audits will provide independent verification of the
proper crediting of such fees. Specifically, the independent auditors
will be instructed to (a) review and test compliance with the
operational controls established by OLDE for purposes of the rebating;
(b) verify, on a test basis, the rebates made; (c) verify, on a test
basis, the coding system utilized by OLDE in making the rebates; and
(d) recompute, on a test basis, rebated amounts at the discretion of
the auditors. In the event any shortfalls are uncovered during the
audit as a result of errors made by OLDE, OLDE will make a cash payment
to the Plan equal to the amount of the error plus interest paid at
money market rates under the Comerica money market account for the
period of time of the error until the correction is made. Any excess
rebates will be corrected by a corresponding adjustment of future
rebates to the Plan in the amount of the excess rebate and will not
require that the Plan pay any interest.
11. It is represented that participants with Account balances in
the Plan will receive full written disclosures from OLDE concerning the
Funds, including, but not limited to, the following: (a) copies of
applicable prospectuses for the Funds discussing the investment
objectives of the Funds, the policies employed to achieve these
objectives, the relationship, if any, existing between OLDE Discount
and parties who act as sponsors, distributors, administrators,
investment advisers and sub-advisers, custodians and transfer agents to
the Funds; and (b) a statement describing the fee structure and the
12b-1 Fees. (OLDE will supplement such disclosures with information
describing the Rebate Program.); (c) upon written or oral request to
OLDE, a statement of additional information supplementing the
applicable prospectus, which describes the types of securities and
other instruments in which the Funds may invest, the investment
policies and strategies that the Funds may utilize, including a
description of the risks; (d) upon written request to OLDE, a copy of
OLDE Discount's distribution agreements pertaining to the various
Funds; and (e) copies of the proposed exemption and grant notice
describing the exemptive relief provided herein.
After receiving the foregoing disclosures, the participant will
acknowledge receipt of the documents in writing and provide
authorization to OLDE with respect to investing in the Funds. Each
additional purchase or redemption of shares in the Funds that is
directed by the participant will be conditioned on OLDE's making
available to the participant, copies of the applicable Fund prospectus
and disclosures regarding the fee structure and the 12b-1 Fees.
With respect to ongoing disclosures, OLDE 9 will provide
each participant investing in the Funds with (a) written confirmations
of each purchase or redemption transaction involving shares of a Fund;
(b) telephone quotations of such participant's Account balance; (c) a
monthly statement of account specifying the net asset value of the
assets in a participant's Account, a summary of current year
contributions, contributions since inception, beginning and ending
account balances, summaries of contributions, purchases and sales
during the month, a summary of the participant's final Account
portfolio, and, to the extent applicable during one month per year
only, any rebated fees that are allocated to the participant's Account;
(d) semiannual and annual reports that include financial statements for
the Funds as well as the fees paid to OLDE Discount; (e) investment
performance histories and other information provided by the Funds to
OLDE; (f) ratings information received about the Funds from independent
sources such as Morningstar; and (g) responses to oral or written
inquiries of participants upon request.
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\9\ As noted above, OLDE Financial represents that it is a
fiduciary with respect to the Plan by reason of its ability to
select investment alternatives for the Plan or to add or remove
mutual fund families that it decides to make available to the Plan.
However, OLDE Financial represents that neither it nor OLDE Discount
provides investment advice to Plan participants that would make
either entity a fiduciary with respect to the Plan within the
meaning of section 3(21) of the Act.
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Finally, OLDE will maintain, for a period of six years, written
records that will enable the Department, Plan participants and others
to determine whether the conditions of this exemption have been met.
12. In summary, it is represented that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The decision to invest in the Funds has been made and will be
made by a Plan participant and not by OLDE.
(b) No sales commissions, other than 12b-1 Fees, have been paid or
will be paid by an Account in connection with the purchase or sale of
shares in the
[[Page 9867]]
Funds and no redemption fees have been or will be paid by an Account
with respect to the sale of shares of the Funds.
(c) The Plan or, if applicable, an Account, will receive a rebate
from OLDE Discount in the form of cash equal to its pro rata portion of
all 12b-1 Fees charged by OLDE Discount to the Funds under the Rebate
Program.
(d) Participants with Accounts in the Plan have received or will
receive full written disclosure of information concerning the Funds at
the time of, and subsequent to, such investment.
(e) The terms of each purchase or redemption of shares in the Funds
have remained and will remain at least as favorable to an Account as
those obtainable in an arm's length transaction with an unrelated
party.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Consolidated Associations of Railroad Employees Health Care Plan (the
Plan) Located in Topeka, Kansas
[Application No. L-10527]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of section 406(a) of the Act shall not apply, effective June 10, 1997
to: (1) The current leasing (the Lease) of certain real property (the
Property) by the Plan to Century Health Solutions, Inc. (Century), a
party in interest with respect to the Plan; (2) the proposed new
leasing of substantially the same Property by the Plan to Century
effective April 1, 1998 (the New Lease); and (3) the possible future
sale of the Property by the Plan to Century pursuant to a right of
first refusal under the terms of the Lease, provided the following
conditions are satisfied: (a) The Property represents no more than 25%
of the value of the Plan's assets; (b) The terms of the Lease are, and
will remain, at least as favorable to the Plan as those obtainable in
an arm's-length transaction with an unrelated party; (c) the fair
market rental value is determined on an annual basis by a qualified,
independent appraiser; (d) the Plan's independent fiduciary has
determined that the transaction is appropriate for the Plan and in the
best interests of the Plan's participants and beneficiaries; (e) the
Plan's independent fiduciary will continue to monitor the transaction
and the conditions of the exemption and take whatever action is
necessary to enforce the Plan's rights under the Lease; and (f) the
Plan's independent fiduciary acts to ensure that any sale of the
Property by the Plan to Century is properly effected under the terms of
the Lease, pursuant to Century's right of first refusal in the event
the Plan receives a bona fide offer from a third party to purchase the
Property, and Century is not in default on any of its obligations under
the Lease.
EFFECTIVE DATE: If this proposed exemption is granted, it will be
effective June 10, 1997.
Summary of Facts and Representations
1. The Consolidated Associations of Railroad Employees (CARE) and
the Plan are the successors to the A.T. & S.F. Employees' Benefit
Association (EBA) and the EBA Health Care Plan, respectively. EBA was
the entity which, on behalf of the EBA Health Care Plan, initiated the
Lease which is the subject of this proposed exemption. EBA was a
traditional railroad hospital and medical benefit association whose
sole function was to sponsor and maintain a health care arrangement for
employees of the Santa Fe Railroad and their dependents. It did so for
more than 100 years. By 1993, EBA no longer provided point-of-service
hospitalization, but continued to provide point-of-service medical care
and pharmaceuticals through a medical clinic and pharmacy located at
its Topeka offices, and continued to provide indemnity benefits through
its Health Care Plan, which relied exclusively on a comprehensive
provider network.
2. EBA had a closely-related sister organization, the Santa Fe
Employees Hospital Association (EHA). EHA provided similar medical
benefits to Santa Fe Railroad employees in the southern and
southwestern United States. To achieve economies of scale, and thereby
to provide better benefits, EBA and EHA merged in July 1996, and became
CARE, a not-for-profit Kansas corporation. Following the merger, the
EBA and EHA Health Care Plans and their related trusts merged (on or
about January 1, 1997) so that CARE maintains a single welfare plan,
i.e., the Plan. The Plan currently has approximately 18,500
participants, and has assets of approximately $16 million. The Property
has a fair market value of approximately $3.6 million, and the Lease,
which encompasses 25% of the office space in the Property, thus
involves approximately 6% of the assets of the Plan.
3. In late 1992, a group of former (or soon to be former) EBA
employees formed Century. Century is a Missouri not-for-profit
corporation. The applicant represents that its principals and employees
are wholly independent of CARE. Its aim was to provide third party
claims administration and other medically related services to employee
welfare benefit plans. EBA and Century expected that Century would
perform third party claims administration for the EBA Health Care Plan
and also provide, directly to plan participants, point-of-service
health care in a medical clinic, not just to EBA Health Care
participants but to participants in other plans as well.
4. Accordingly, in late 1992, EBA (on behalf of the EBA Health Care
Plan) and Century entered into various agreements, including the Lease
and a services agreement. The applicant represents that the arrangement
for services by Century on behalf of the EBA Health Care Plan are
exempt pursuant to the provisions of section 408(b)(2) of the Act and
the regulations thereunder.10 The Lease, which first became
effective on April 1, 1993, was for approximately 17,145 square feet of
office space in the Property, which consists of an office building
located at 620 S.E. Madison, Topeka, Kansas. The Lease was amended
effective October 1, 1993, September 1, 1994 and May 1, 1995 for the
sole purpose of increasing the space leased to Century and the rent
paid to the EBA Health Care Plan, accordingly. The Lease, providing for
a three year term with two potential extensions of one year each, will
(with the extensions) expire on March 31, 1998. The parties are
contemplating entering into the New Lease, with terms that are similar
to the terms of the current Lease, to take effect April 1, 1998. The
Lease had an initial term of three years and the possibility of two
one-year extensions, and the New Lease is expected to have a similar
term. The Lease built in increases in rent in each of the first three
years and provided for increases based on the Consumer Price Index
(CPI) in each of the two one-year extensions. The Plan's independent
fiduciary (see rep. 7, below) has recommended a rent schedule for the
New Lease that is based in part on CPI increases, as well as increases
in operating costs.
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\10\ The Department expresses no opinion herein as to the
applicability of Act section 408(b)(2) to the provision of such
services by Century.
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5. Except as provided below with respect to storage space, the rent
per square foot paid by Century under the Lease was $12 for the first
year, $13 for
[[Page 9868]]
the second year, and $14 for the third year. The Lease provides for
increases, based on the Consumer Price Index, in each of the two one-
year extensions. For the first one-year extension, the rate in effect
for the last year of the Lease served as the floor rent. For the second
one-year extension, the rate in effect for the first one-year extension
served as the floor rent. The modifications to the original Lease (the
modifications were effective in 1993 and 1994) provided for Century's
lease of additional space in the Property at the same rates which
applied to the original Lease agreement. The 1995 modification provided
for the leasing to Century of 308 square feet of uninhabitable storage
space, with the rent for that space set at $2.50 per square foot.
6. The applicant represents that prior to entering into the Lease
with Century, EBA had received inquiries from several potential third
party tenants, but none was willing to pay more than $8 or $9 per
square foot. On August 12, 1996, independent appraisers Kevin Nunnink
and Brian Coup of Nunnink Associates, Inc. (Nunnink), Kansas City,
Missouri, determined that as of April 1, 1993, a rate of $12 per square
foot for the Property, without any escalation, would have been a fair
market rental rate for the Property for a five year lease.
7. Effective May 1, 1997, CARE retained KOLL, The Real Estate
Services Company (KOLL), Kansas City, Missouri, to act as the Plan's
independent fiduciary with respect to the subject transaction. KOLL is
an international real estate company based in Newport Beach, California
which has 350 offices in the United States with 2,700 employees. The
Kansas City office manages over 1 million square feet of space and
provides third party brokerage services for local and national clients.
KOLL represents that it is not related to CARE or Century nor to any of
their principals, nor does KOLL have any business dealings with them.
KOLL further represents that it understands and accepts its position as
a qualified independent fiduciary with respect to the Plan, and its
duties, responsibilities and liabilities as such under the Act. KOLL
reviewed the Lease as of June 10, 1997 and made a detailed report as of
that date. KOLL represents that it has made a determination, as of that
date, that the Lease and retention of Century as a tenant at a market
rental rate for an additional Lease term are in the best interests of
the Plan and its participants and beneficiaries. KOLL represents that
it has reviewed the terms of the Lease document, considered the Lease
with respect to the Plan's diversification of investments and also
considered Century's performance of its obligations under the Lease.
KOLL notes that if Century left the Property, roughly 30% of the
Property would need to be re-leased, which could take up to 6-12 months
to accomplish. KOLL relied in part on the appraisal performed by
Nunnink in light of Nunnink's independence and the quality and timing
of the appraisal. KOLL represents that it will perform or cause to be
performed an updated fair market rental analysis in the 60 day period
preceding the date (April 1, 1998) of the New Lease, and further
represents that the terms of the New Lease will be no less favorable to
the Plan than the fair market rental rates as indicated by that
independent fair market rental analysis. KOLL represents that it will
continue to monitor the Lease and confirm the collection by the Plan of
rents paid by Century, determine whether it is appropriate to renew,
continue or extend the Lease to Century, set the terms and conditions
of any renewal or extension of the Lease, and take all actions
necessary to ensure that the Lease with Century, and the New Lease,
remain in the best interests of the Plan.
8. Under Section 44 of the Lease, Century has a right of first
refusal to purchase the Property from the EBA (now CARE) Health Care
Plan in the event the Plan receives a bona fide offer from a third
party to purchase the Property and Century is not in default of any of
its obligations under the Lease. Century's right (and obligation should
it choose to exercise its right) is to purchase the Property under the
terms and conditions that are contained in the third party's offer.
Century also has a right of first refusal over expansion space in the
Property. This proposed exemption would extend to the purchase of the
Property by Century pursuant to this right of first refusal. KOLL has
agreed, as part of its independent fiduciary's responsibilities, to act
on behalf of the Plan to ensure that this Section 44 of the Lease is
properly effected (or that modifications to the Lease are made if KOLL
considers such modifications necessary or advisable). Thus, KOLL will
ensure that any offer made to the Plan for the purchase of the Property
is, in fact, a bona fide third party purchase offer and that a sale of
the Property to Century, upon the exercise of Century's right of first
refusal, would be consistent with the rights and obligations of the
parties under the Lease.
9. The applicant represents that CB Commercial Real Estate Group,
Inc. (CB), has purchased KOLL. CB represents that it agrees to assume,
and shall assume, as the successor to KOLL, the duties and
responsibilities of the independent fiduciary with respect to the
subject transactions. CB endorses, ratifies and affirms all
representations made by KOLL with respect to the subject transactions.
10. The applicant represents that not later than 30 days after the
grant of the exemption proposed herein is published in the Federal
Register, notice of the exemption will be sent to the appropriate
Regional Office of the Department's Pension and Welfare Benefits
Administration. The appropriate parties in interest agree to pay any
civil penalty that may be due and owing by them under section 502(i) of
the Act with respect to the leasing of the Property by the Plan to
Century for the period before the exemption becomes effective.
11. In summary, the applicant represents that the subject
transactions satisfy the criteria contained in section 408(a) of the
Act for the following reasons: (a) The Lease represents approximately
6% of the Plan's total assets; (b) the rental for the Property has been
demonstrated to be in excess of fair market rental terms as established
by a qualified, independent appraiser, and future terms for the New
Lease will be not less favorable to the Plan than those established by
a qualified, independent appraiser; (c) the Plan's independent
fiduciary, KOLL, has determined that the Lease is appropriate for the
Plan and in the best interests of the Plan's participants and
beneficiaries; (d) KOLL and its successor independent fiduciary, CB,
will continue to monitor the Lease and take whatever action is
necessary to protect the Plan's rights under the Lease; (e) before
entering into the New Lease, CB will determine that the New Lease is
appropriate for the Plan, in the best interests of its participants and
beneficiaries and protective of their rights; and (f) CB, as the Plan's
independent fiduciary, will ensure that any future sale of the Property
by the Plan to Century is properly effected under the terms of the
Lease, pursuant to Century's right of first refusal in the event the
Plan receives a bona fide third party purchase offer.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Thornton, Hegg, Reif, Johnston & Dolan Profit Sharing Plan and Trust
(the Plan) Located in Alexandria, Minnesota
[Application No. D-10563]
Proposed Exemption
The Department of Labor is considering granting an exemption
[[Page 9869]]
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). If the
exemption is granted, the restrictions of sections 406(a) and 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 sale
(the Sale) by the Plan of certain real property (the Property) to
Robert M. Hegg (Mr. Hegg), a party in interest with respect to the
Plan; provided the following conditions are satisfied:
(A) The terms and conditions of the transaction are no less
favorable to the Plan than those which the Plan would receive in an
arm's-length transaction with an unrelated party;
(B) The Sale is a one-time transaction for cash;
(C) The Plan incurs no expenses from the Sale; and
(D) The Plan receives as consideration from the Sale the greater of
either the fair market value of the Property as determined by a
qualified, independent appraiser on the date of the Sale, or an amount
equal to the funds expended in acquiring and maintaining the Property,
less any income produced by the Property.
Summary of Facts and Representations
1. Thornton, Hegg, Reif, Johnston & Dolan, P. A., a Minnesota
professional association, is the sponsoring employer of the Plan (the
Employer). The Employer is in the general practice of law in
Alexandria, Minnesota, which includes advising clients in various legal
matters involving real estate matters.
2. The Plan is a defined contribution plan that is intended to
qualify under section 401(a) of the Code. The applicant represents that
as of December 31, 1997, the Plan had $1,668,933.96 and 12
participants. The fiduciaries of the Plan, who have investment
discretion over all the assets of the Plan, include Mr. Hegg and
Messrs. Thomas J. Reif, Scott T. Johnston, and Michael J. Dolan. All
the fiduciaries are shareholders and officers of the Employer.
3. The Property is agricultural land, located at 452 County Road 5,
Alexandria, Minnesota, approximately 10 miles from Alexandria,
Minnesota, and consists of 70 acres of unimproved land with
approximately 54 acres in tillable land and the remaining acreage in
woodland and pasture. The Property consists of four separate parcels
that were acquired over three years beginning in 1981 from an unrelated
party for the total sum of $45,000, and the applicant represents that
no expenses were incurred by the Plan when purchasing the Property. The
applicant represents that the Property has been leased to Daryl R.
Krohfeldt, an unrelated person, for farming purposes since 1981 through
1997 for the total sum of $ 23,210. The only expenses the Plan has
incurred from owning the Property is $5,602 for real estate taxes for
the years from 1981 through December 31, 1997, and $50.00 for fence
posts.
The Property was appraised by Virginia M. Swartz, of the Swartz
Appraisal Service, located in Alexandria, Minnesota, who determined
that the Property had a fair market value of $30,500, as of June 8,
1996. The Property was listed for sale, commencing April 23, 1997,
through April 1, 1998, with Jerry-Ginny Swartz Realty, Inc., located in
Alexandria, Minnesota. The realtor represents in a letter dated
December 31, 1997, that the Property has been advertised by various
methods, including signs posted on the site and advertisements in local
newspapers. Also, the realtor represents that no serious inquiries have
been received regarding the Property, and that at this time the demand
is limited for agricultural property in the area.
4. Mr. Hegg proposes to purchase the Property for cash in a one-
time transaction with no expenses incurred by the Plan. The applicant
represents that the Plan will receive as consideration from the Sale
the greater of either the fair market value of the Property as
determined on the date of the Sale by a qualified, independent
appraiser, or an amount equal to the funds expended by the Plan in
acquiring and maintaining the Property, less any income produced by the
Property
Mr. Hegg is prompted to take this action because of the decreasing
value of the Property since its acquisition by the Plan, and because of
the low yields to the Plan from its investment. Also, at this time, Mr.
Hegg desires to purchase the Property because of its illiquidity as an
investment as demonstrated by the inability of the Plan's realtor to
generate interest in the Property from prospective purchasers or to
sell the Property in the open market for its fair market value. The
applicant represents that the Plan desires to convert the funds from
the Sale into more liquid assets with greater yields, and assets
requiring less expenses in administration for the Plan.
5. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act because
(a) the Sale is a one-time transaction for cash; (b) the Plan will not
incur any expenses from the transaction; (c) the Plan will be able to
convert the funds from the Sale into more liquid and higher yielding
assets which will be less expensive to manage and administer for the
fiduciaries of the Plan; and (d) the Plan will receive the greater of
either the fair market value of the Property as determined on the date
of the Sale by a qualified, independent appraiser, or an amount equal
to the funds expended by the Plan in acquiring and maintaining the
Property, less any income produced by the Property.
FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express
[[Page 9870]]
condition that the material facts and representations contained in each
application are true and complete, and that each application accurately
describes all material terms of the transaction which is the subject of
the exemption.
Signed at Washington, DC, this 20th day of February, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-4840 Filed 2-25-98; 8:45 am]
BILLING CODE 4510-29-P