[Federal Register Volume 63, Number 124 (Monday, June 29, 1998)]
[Notices]
[Pages 35281-35291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17135]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10483, et al.]
Proposed Exemptions; Van Ness Plastic Molding Co., Inc.
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).
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, NW., Washington, DC
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, NW.,
Washington, DC 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.
Van Ness Plastic Molding Co., Inc. Employees' Money Purchase Pension
Plan (the Plan) Located in Belleville, NJ
[Application No. D-10483]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) 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), 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 (1) the making to the Plan of a restoration
payment (the Restoration Payment) with respect to certain defaulted
third-party notes (Note 1, Note 2 and Note 3; collectively, the Notes)
by the Van Ness Plastic Molding Co., Inc. (the Employer), a party in
interest with respect to the Plan; and (2) the potential future receipt
by the Employer of recapture payments (the
[[Page 35282]]
Recapture Payments) made to the Plan pursuant to bankruptcy proceedings
involving the issuer/assignor of the Notes.
This proposed exemption is subject to the following conditions:
(a) Mr. William Van Ness, the Plan trustee (the Trustee), agrees to
have excluded from his individual account in the Plan (the Account) any
benefit attributable to the Restoration Payment, such that the total
Restoration Payment is allocated to the Accounts of the other Plan
participants and does not include any portion related to the interest
of Mr. Van Ness's Account in the Notes.
(b) The Restoration Payment, which is calculated based upon the
Account balances in the Plan of participants other than Mr. Van Ness,
covers--
(1) The aggregate unrecovered principal of the Notes plus accrued,
but unpaid, interest on the Notes as of the dates of default,
calculated through December 31, 1997;
(2) An additional amount representing interest on the unrecovered
principal of Notes 2 and 3, originally scheduled for maturity in 1999,
from January 1998 until the date the Restoration Payment is made; and
(3) Lost opportunity costs associated with Note 1, which was
originally scheduled for maturity in 1997, from January 1998 until the
date the Restoration Payment is made.
(c) Any Recapture Payments are restricted solely to the amounts, if
any, recovered by the Plan with respect to the Notes in litigation or
otherwise.
(d) The Restoration Payment is made to resolve potential claims for
breach of fiduciary duty relating to the management of the Plan.
(e) The Employer receives a favorable ruling from the Internal
Revenue Service (the Service) that the Restoration Payment does not
constitute a ``contribution'' or other payment that will disqualify the
Plan.
Summary of Facts and Representations
1. The Plan is a nonstandardized prototype money purchase pension
plan having 96 participants and total assets of $1,831,873.27 as of
December 31, 1997. The Plan is sponsored by the Employer, a New Jersey
corporation that is engaged in the manufacture of plastic molding. Mr.
William Van Ness, the Trustee, also serves as the sole shareholder and
president of the Employer. As Trustee, Mr. Van Ness has full investment
discretion and authority with regard to Plan investments except with
respect to those that are under the control of an investment manager.
2. Among the assets of the Plan are three notes that were issued or
assigned by The Bennett Funding Group, Inc. (Bennett), an unrelated
party. The Notes, which were acquired by the Plan between 1993 and 1995
at the direction of Mr. Van Ness, are in the face amounts of $250,000
(Note 1), $17,688.48 (Note 2), and $13,842.22 (Note 3). In order to
purchase the Notes, the Plan paid Bennett an aggregate cash purchase
price of $281,530.70. Following acquisition, the Plan did not incur any
servicing fees or costs in connection with the administration of the
Notes.
The Notes are further described as follows:
(a) Note 1 represented a contractual or an insurable interest in a
pooled investment vehicle that was established and sold by Bennett and
its subsidiary, Resort Funding, Inc., on a non-recourse basis to
accredited investors. The investment pool consisted of consumer sales
agreements, leases and rental agreements, installment sales contracts
or consumer sales agreements generated by third party business
equipment dealers and others. The amount of the issue was $60 million.
Each unit or interest had a minimum purchase price of $10,000. The term
of each investment contract or ``note'' ranged from 11 months to 60
months and carried interest at the rate of approximately 6 percent to 9
percent per annum.
On March 15, 1993, the Plan acquired Note 1 from Bennett for the
cash purchase price of $250,000. Note 1, which carried interest at the
rate of 9 percent per annum, was scheduled to mature on December 15,
1997. Interest under Note 1 was payable to the Plan in monthly
installments of $1,875, with payments commencing on April 15, 1993.
(b) Note 2 was acquired by the Plan from Bennett on August 1, 1995
for a total purchase price of $17,688.48. Note 2 had a term commencing
on September 30, 1995 and ending on August 30, 1999. It carried
interest at the annualized rate of 9.5 percent. Principal and interest
were payable to the Plan in monthly installments of $444.39.
(c) Note 3 was acquired by the Plan from Bennett on November 16,
1995 for a total purchase price of $13,842.22. Note 3 had a term
commencing from January 15, 1996 until December 15, 1999. It carried
interest at the annualized rate of 9.5 percent. Principal and interest
were payable to the Plan in monthly installments of $337.76.
Each Note was secured by (a) equipment owned by Bennett which
Bennett was leasing to unrelated parties; and (b) an assignment of the
income stream generated by such leases.1 The Employer and
the Trustee believed that the Notes were relatively low-risk and safe
investments.
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\1\ According to the applicant, the question of whether the
Notes were also secured by a master insurance policy issued by
Generali Underwriters, Inc., an unrelated party, which guaranteed
the income stream from the leases, continues to be the subject of
litigation.
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4. On or about March 29, 1996, Bennett filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court for the
Northern District of New York (Case Nos. 96-61376 et seq.). Richard C.
Breeden, formerly the Chairman of the Securities and Exchange
Commission (the SEC), was appointed Bankruptcy Trustee for the Bennett
debtors on April 18, 1996. Subsequent to the March 29, 1996 filing,
five additional affiliates of Bennett filed for Chapter 11 protection
and Mr. Breeden was again appointed as Bankruptcy Trustee for these
entities.
5. The Declaration of Bankruptcy by the Bennett debtors stemmed
from a lawsuit by the SEC regarding alleged widespread fraudulent
practices involving the Bennett debtors. In this regard, (a) over $55
million of fictitious leases were sold to investors and the funds
derived from investors were used to service these leases; (b)
assignments made of government leases were typically illegal and
ineffective; and (c) through certain ``sham'' transactions Bennett
appeared to be profitable while it was actually losing money.
6. The Plan filed a Proof of Claim (the Claim) in the amount of
$326,355.73 for the ``money loaned and purchase of lease/assignments''
in the Bennett bankruptcy.2 The Plan's Claim was classified
as an unsecured nonpriority claim, since Mr. Breeden noted that there
was no collateral or lien on the property of the debtor securing the
Claim. The Claim includes both principal and interest payments on the
Notes' outstanding balances from the date of the last payment received
in 1996 through December 15, 1997. In this regard, the Plan received
aggregate payments from Bennett with respect to the Notes of
$70,396.67. Such payments can be broken down as follows:
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\2\ The Department expresses no opinion herein on whether the
acquisition and holding of the Notes by the Plan violated any of the
provisions of Part 4 of Title I of the Act.
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(a) For Note 1, the Plan received a final interest payment from
Bennett in March 1996 in the amount of $1,875 or total interest
payments of $67,500.
(b) For Note 2, the Plan received monthly interest payments from
Bennett until February 1996 in the amount of $444.39 or a total payment
of both principal and interest of $2,221.95.
[[Page 35283]]
(c) For Note 3, the Plan received monthly interest payments until
February 1996 of $337.36 or a total payment of both principal and
interest of $674.72.
At the time of the Bennett bankruptcy proceedings, the amount of
unrecovered principal for Notes 1, 2 and 3 were $250,000, $15,825.81
and $13,363.98, respectively.
7. Because of the complexity surrounding the Bennett debtors'
bankruptcy, it is unclear whether any recovery of the Notes will occur.
Also, due to uncertainty about whether the Notes have actually been
insured, the applicant believes it unlikely that any insurance company
would pay investors' claims (including individual investors and
retirement plans) relating to the individual leases inasmuch as the
insured is listed as Bennett. The applicant further represents that
whatever amount, if any, that the Plan is able to recover with respect
to the Notes through the bankruptcy proceedings, or otherwise, it is
likely to suffer significant losses.
8. As stated in Representation 1, as of December 31, 1997, the
assets of the Plan totaled $1,831,873.27. This figure reflects the fair
market value of the Plan's assets and assumes that the Notes (plus
accrued interest) are valued at $0. According to the applicant, the
exact fair market value of the Notes is not ascertainable at this time
as litigation is ongoing with respect to this matter.
9. At present, the amount of unrecovered principal of the Notes is
$279,189.79. In addition, the accrued interest associated with the
Notes through the dates of default, calculated through December 31,
1997 is $44,458.89. In order to avoid potential fiduciary claims by
Plan participants and others relating to the Plan's investment in the
Notes, the Employer proposes to restore the losses to the Plan by
making a ``Restoration Payment.'' Therefore, an administrative
exemption is requested from the Department.
10. The Restoration Payment will consist, in part, of the aggregate
amount of the principal loss on the Notes (i.e., $279,189.79) plus
accrued, but unpaid, interest (i.e., $44,458.89), calculated from the
time of default through December 31, 1997, and multiplied by 58.38
percent, which percentage reflects the interests in the Plan of
participants other than Mr. Van Ness, who has a 41.62 percent interest
in the Plan. In other words, 58.38 percent of the unrecovered principal
and interest (or $188,946.09) will be paid to the Accounts of the
remaining Plan participants. The Restoration Payment will also include
an additional amount representing accrued interest on the unpaid
principal of Notes 2 and 3, for the period January 1998 until the date
the Restoration Payment is made, again attributable to the Accounts of
participants in the Plan other than the Account of Mr. Van Ness.
Finally, the Restoration Payment will include the lost opportunity
costs with respect to the unrecovered principal of Note 1 from the
period of its scheduled maturity in December 1997 and ending with the
date immediately preceding the date the Restoration Payment is made,
again attributable to the Accounts of participants in the Plan other
than the Account of Mr. Van Ness. Such opportunity costs will be based
on the average rate of return for the Plan, excluding the Notes, for
the years 1995 through 1997.3
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\3\ The average rate of return earned by the Plan for 1995
through 1997 is 12.54 percent. This figure does not include the
Plan's investment in the Notes. In a letter dated September 11,
1997, Mark Shemtob, A.S.A of Abar Pension Services, Inc., an
independent actuarial and pension consulting firm, located in
Livingston, New Jersey, represented that the Plan had net investment
earnings of $198,126 in 1995 and an average account balance of
$1,198,876, which would result in a 16.53 percent rate of return for
1995. In 1996, Mr. Shemtob noted that the Plan had net investment
earnings of $131,397 and an average account balance of $1,032,459,
which would result in a 12.73 percent rate of return for that year.
By letter dated April 29, 1998, the applicant noted that the
Plan's rate of return for the year 1997 was 8.41 percent based upon
a telephone communication with Mr. Shemtob. Accordingly, the average
rate of return for the Plan for the period 1995 through 1997 is
12.54 percent.
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Assuming the Restoration Payment is made to the Plan on June 30,
1998, the applicant represents that the opportunity costs associated
with Note 1 is $18,302.13 and would be calculated as follows:
$250,000 (Unrecovered Principal of Note 1) x 58.38% (Plan's Interest
in Note 1) x 12.54% (Plan's Average Rate of Return for 1995-1997) =
$18,302.13.
Again assuming the Restoration Payment is made to the Plan on June
30, 1998, the applicant represents that the total payment would be
approximately $208,321.87. Of this amount,
(a) $188,946.09 would denote the Restoration Payment as of December
31, 1997, which would be calculated as follows:
$250,000.00. Note 1 Unrecovered Principal
15,825.81... Note 2 Unrecovered Principal
13,363.98... Note 3 Unrecovered Principal
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$279,189.79. Total Unrecovered Principal
$44,458.89.. Accrued interest on Notes from Default through 12/31/97
$323,648.68. Total Unrecovered Principal and Accrued Interest through
12/31/97
$323,648.68 x 58.38% (Plan's Interest in Notes 1, 2 and 3 plus Accrued
Interest) = $188,946.09;
(b) $18,302.13 would be attributed to the opportunity costs
associated with Note 1 from January 1998 through June 30, 1998, as
already calculated above;
(c) $438.86 would be attributed to actual interest accruing on Note
2 from January 1998 through June 30, 1998, calculated as follows:
$15,825.81 (Note 2 Unrecovered Principal) x 58.38% (Plan's Interest
in Note 2) x 4.75% (\1/2\ year interest) = $438.86; and
(d) $634.79 would represent the additional interest accruing on
Note 3 from January 1998 until June 30, 1998, calculated as follows:
$13,363.98 (Note 3 Unrecovered Principal) x 58.38% (Plan's Interest
in Note 3) x 4.75% (\1/2\ year interest) = $634.79.
11. Because Mr. Van Ness has agreed to have excluded from his
Account any benefit which may be attributable to the Restoration
Payment, each affected Plan participant will have allocated to his or
her Account in the Plan the applicable portion of the Restoration
Payment as determined by the third-party Plan administrator. However,
in no event will a restored Account have assets exceeding the amount
that would have been in the Account of the affected Plan participant
but for the loss due to the Bennett bankruptcy.
The Plan will be required to refund the Restoration Payment to the
Employer only to the extent of any amount or amounts that the Plan is
able to recover from Bennett (the Recapture Payment). The Employer will
bear all expenses of prosecuting the Plan's claims with respect to the
Notes, including those relating to the Bennett bankruptcy proceedings,
as well as the costs of the exemption application.
12. Coincident with its filing of the exemption application, the
Employer requested a Private Letter Ruling from the Service on the
issues of whether the Restoration Payment (a) would constitute a
``contribution'' or other payment to the Plan subject to the provisions
of either sections 404 or 4972 of the Code; (b) would adversely affect
the qualified status of the Plan pursuant to either Code sections
401(a)(4) or 415; (c) would result in taxable income to affected Plan
participants and beneficiaries; and (d) would be deductible in full by
the Employer pursuant to section 162 of the Code.4 In
[[Page 35284]]
its ruling letter of March 2, 1998, the Service stated that neither the
Code nor the Income Tax Regulations provide guidance on whether the
Employer's proposed Restoration Payment would constitute a contribution
under the Code. However, in the instant case, the Service noted that
the Restoration Payment would ensure that the affected participants
would recover their Account balances and place such participants in the
position in which they would have been in the absence of the Trustee's
decision to invest a portion of the Plan's assets in the Notes.
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\4\ Section 401(a)(4) of the Code provides that contributions
made by an employer to or under a stock bonus, pension, profit
sharing or annuity plan shall be deductible under section 404
subject to certain limitations contained therein.
Section 415 of the Code provides, in relevant part, that a trust
which is part of a pension, profit sharing or stock bonus plan shall
not constitute a qualified trust under section 401(a)--
(A) in the case of a defined benefit plan, the plan provides for
the payment of benefits with respect to a participant which exceeds
the limitations of subsection (b), or
(B) in the case of a defined contribution plan, contributions
and other additions under the plan with respect to any participant
for any taxable year exceed the limitations of subsection (c).
Section 415(e) of the Code provides limitations on employer
contributions and benefits where an individual is a participant in
both a defined benefit and a defined contribution plan maintained by
the same employer.
Section 1.415-6(b)(2) of the Income Tax Regulations provides
that the term ``annual additions'' includes employer contributions
which are made under the plan. Section 1.415-6(b)(2) further
provides that the Commissioner of the Service may treat transactions
between the plan and the employer or certain allocations to
participants' accounts as giving rise to annual additions.
Section 4972 of the Code imposes on an employer an excise tax on
nondeductible contributions to a qualified plan.
Finally, section 402(a) of the Code generally provides that
amounts held in a trust that is exempt from tax under Code section
501(a) and that is part of a plan that meets the qualification
requirements of Code section 401(a) will not be taxable to
participants until such time as such amounts are actually
distributed to distributees under the plan.
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The Service explained that it was reasonable to characterize the
Restoration Payment as a ``replacement payment.'' In this regard, the
replacement payment would be made by the Employer in response to
potential claims against the Employer and those individuals who were
responsible for investing the Plan's assets in the Notes. In addition,
the replacement payment would be allocated to the Accounts of
participants in the Plan who had incurred a principal loss as a result
of the Note investment. Thus, the Service concluded that the proposed
Restoration Payment (a) would not constitute a contribution or other
payment subject to the provisions of Code sections 404 or 4972; (b)
would not adversely affect the qualified status of the Plan pursuant to
either Code section 401(a)(4) or Code section 415; and (c) would not,
when made, result in taxable income to affected Plan participants and
beneficiaries.
Finally, the ruling letter is conditioned on two requirements.
Firstly, the Restoration Payment must be made to resolve potential
claims for breach of fiduciary duty relating to the management of the
Plan. Secondly, the ruling letter is based on the representation that
no part of the Restoration Payment will be added to the Account of the
Trustee.
13. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because: (a) The Restoration Payment will enable the
Plan to recover immediately the unpaid principal of the Notes, accrued
interest and lost opportunity costs; (b) any Recapture Payments will be
restricted solely to the amounts, if any, recovered by the Plan with
respect to the Notes in litigation or otherwise; (c) the Employer has
received a favorable ruling from the Service that the Restoration
Payment does not constitute a ``contribution'' or other payment that
will disqualify the Plan; (d) Mr. Van Ness's Account will not share in
the Restoration Payment such that the total Restoration Payment will be
made to the Accounts of Plan participants other than Mr. Van Ness; and
(e) the Restoration Payment will be made to resolve potential claims
for breach of fiduciary duty relating to the management of the Plan.
For Further Information Contact: Ms. Jan D. Broady of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
John Hancock Mutual Life Insurance Company (JHMLIC) Located in Boston,
Massachusetts
[Application No. D-10484]
Proposed Exemption
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). If the exemption
is granted, the restrictions of section 406(b)(2) of the Act shall not
apply to:
(1) The proposed purchases and sales of timber properties between
various separate accounts (the Accounts), such as the ForesTree
Separate Account, that are maintained by JHMLIC and managed by Hancock
Natural Resource Group, Inc. (HNRG), John Hancock Timber Resource
Corporation (JHTRC), or another Affiliate of JHMLIC; and
(2) The proposed purchases and sales of timber properties between
the Accounts where HNRG or another Affiliate of JHMLIC serves as the
investment manager and various partnerships (the Partnerships) in which
JHTRC or another Affiliate of JHMLIC is the general partner.
Conditions and Definitions
This proposed exemption is subject to the following conditions:
1. ERISA-Covered Plans may participate in the proposed transactions
only if they have total assets in excess of $100 million.
2. At least 30 days prior to the proposed transaction, each
affected Customer invested in the Accounts or Partnerships
participating in the transaction will be provided with information
regarding the timber properties involved and the terms of the
transaction, including the purchase price and how the transaction would
meet the goals and investment policies of the Customer. Notice of any
change in the purchase price will be provided to the Customer at least
30 days prior to the consummation of the transaction.
3. An Independent Fiduciary will be appointed by JHMLIC or an
Affiliate to represent the interests of the ERISA-Covered Plans as
follows:
(a) Where the proposed transaction involves an ERISA-Covered Plan
(including a Pooled Separate Account or Partnership holding ``plan
assets'' subject to the Act) 5 and a Non-ERISA Plan or other
Non-ERISA Customer, an Independent Fiduciary will be appointed to
represent the ERISA-Covered Plan (or Pooled Separate Account or
Partnership), whether that Account or Partnership is the buyer or the
seller of a timber property in the proposed transaction;
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\5\ See 29 CFR 2510.3-101 for the Department's definition of
``plan assets'' relating to plan investments.
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(b) Where the proposed transaction involves two ERISA-Covered Plans
(or Pooled Separate Accounts or Partnerships holding ``plan assets''
subject to the Act) and the decision to liquidate the timber property
is the result of one or more ``triggering events'' described below, an
Independent Fiduciary will be appointed by JHMLIC or an Affiliate to
represent the purchasing plan (or Pooled Separate Account or
Partnership)--i.e. the Buying Account or Buying Partnership. A
``triggering event'' will exist whenever:
(i) JHMLIC or an Affiliate receives a direction from the Customer
to liquidate
[[Page 35285]]
all of the Customer's Account or interest in a Partnership;
(ii) JHMLIC or an Affiliate receives a request by the Customer to
liquidate a specified timber property; or
(iii) A liquidation of all of the assets held in the Selling
Account or Selling Partnership, or a particular property held by such
Account or Partnership, is required under the terms of the investment
contract, insurance contract or investment guidelines governing the
Account or Partnership, and the decision to select any particular
timber property to be sold is outside of the control of JHMLIC and its
Affiliates; and
(c) Where the proposed transaction involves two ERISA-Covered Plans
(or Pooled Separate Accounts or Partnerships holding ``plan assets''
subject to the Act) and there is no ``triggering event'' as described
above in Condition 3(b), an Independent Fiduciary will be appointed by
JHMLIC or an Affiliate for each Account or Partnership involved in the
transaction.
4. With respect to each transaction requiring the participation of
an Independent Fiduciary (as described in Condition 3 above), the
purchase and sale of a timber property shall not be consummated unless
the Independent Fiduciary determines that the transaction, including
the price to be paid or received for the property, would be in the best
interest of the particular Account or Partnership involved based on the
investment policies and objectives of such Account or Partnership.
5. Each Account or Partnership which buys or sells a particular
timber property pays no more than or receives no less than the fair
market value of the timber property at the time of the transaction, as
determined by a qualified independent real estate appraiser experienced
with the valuation of timber properties similar to the type involved in
the transaction.
6. Each purchase or sale of a timber property between the Accounts
or Partnerships is a one-time transaction for cash.
7. Each Account or Partnership involved in the purchase or sale of
a timber property pays no real estate commissions or brokerage fees
relating to the transaction.
8. JHMLIC or an Affiliate acts as a discretionary investment
manager for the assets of the Accounts or Partnerships involved in each
transaction.
9. No purchase or sale transaction is designed to benefit the
interests of one particular Account or Partnership over another.
10. For purposes of this proposed exemption:
(a) ``Account'' means a Separate Account as defined below,
including a ``Non-Pooled Separate Account'' or a ``Pooled Separate
Account'';
(b) ``Partnership'' means a limited partnership with assets, that
may or may not be considered ``plan assets'' subject to the Act, for
which JHTRC or another Affiliate of JHMLIC is the general partner and
HNRG or another Affiliate of JHMLIC serves as investment manager;
(c) ``ERISA-Covered Plan'' is an employee benefit plan as defined
under section 3(3) of the Act;
(d) ``Non-ERISA Plan'' or ``Non-ERISA Customer'' means an entity or
investor not covered by the provisions of Title I of the Act, such as a
governmental plan, a university endowment fund, a charitable foundation
fund or other institutional investor, whose assets are managed in an
Account or Partnership for which JHMLIC or an Affiliate acts as
investment manager;
(e) ``Affiliate'' means any person directly or indirectly through
one or more intermediaries, controlling, controlled by, or under common
control with JHMLIC;
(f) ``Buying Account'' or ``Buying Partnership'' means the Account
or Partnership which seeks to purchase timber properties from another
Account or Partnership;
(g) ``Selling Account'' or ``Selling Partnership'' means the
Account or Partnership which seeks to sell timber properties to another
Account or Partnership;
(h) ``Independent Fiduciary'' means a person or entity with
authority to both review the appropriateness of the proposed
transaction for an Account or Partnership, that is considered to hold
``plan assets'' subject to the fiduciary responsibility provisions of
the Act, based on the investment policy established for that Account or
Partnership, and to negotiate the terms of the transaction, including
the price to be paid for the timber property. An individual or firm
selected to serve as an Independent Fiduciary shall meet the following
criteria:
(1) The individual or firm may have no current employment
relationship with John Hancock or an Affiliate, although a prior
employment relationship would not disqualify the individual or firm;
(2) The individual or firm must not have received more than five
(5) percent of its annual gross receipts during the preceding calendar
year from business with John Hancock and its Affiliates;
(3) The individual or individuals in the firm must have an
undergraduate or graduate academic degree in forestry;
(4) The individual or individuals in the firm must have a minimum
of five (5) years experience and a demonstrated proficiency in
timberland appraisal work;
(5) The individual or individuals in the firm must have a current
certification as a Member of the Appraisal Institute, a Senior Real
Estate Analyst under the Society of Real Estate Appraisers, or a
similar nationally recognized certification;
(6) The individual or firm must have the ability to access
appropriate timberland sales comparison data and make appropriate
adjustments to the subject property; and
(7) The individual or firm must not have a criminal record
involving fraud, fiduciary standards, or securities laws violations;
(i) ``Separate Account'' means a segregated asset Account which
receives premiums or contributions from customers, including employee
benefit plans subject to the Act, in connection with group annuity
contracts and funding agreements, with investments held in the name of
JHMLIC, but where the value of the contract or agreement to the
Customer (contractholder) fluctuates with the value of the investment
associated with such Account;
(j) ``Non-Pooled Separate Account'' or ``Non-Pooled Account'' means
a Separate Account established to back a single contract issued to one
Customer, which may be an employee benefit plan subject to the Act;
(k) ``Pooled Separate Account'' or ``Pooled Account'' means a
Separate Account established to back a group of substantially identical
contracts issued to a number of unrelated Customers, including employee
benefits plans subject to the Act; and
(l) ``Customer'' means a person or entity that acts as the
authorized representative for an Account or Partnership involved in a
proposed purchase or sale of timber properties, that is independent of
JHMLIC and its Affiliates.
Summary of Facts and Representations
1. The Applicants. The applicant for the exemption is John Hancock
Mutual Life Insurance Company of Massachusetts (JHMLIC or ``John
Hancock'') on behalf of itself and on behalf of its indirect wholly-
owned subsidiaries, Hancock Natural Resource Group, Inc. (HNRG) and
John Hancock Timber Resource Corporation (JHTRC), both Delaware
corporations.
[[Page 35286]]
John Hancock ranks as one of the largest insurance companies in the
United States and is a registered investment advisor. John Hancock and
its subsidiaries had total assets of approximately $58.6 billion as of
December 31, 1996, and assets under management of approximately $107
billion as of that date.
John Hancock offers group annuity contracts and funding agreements
to Customers, including employee benefit plans subject to the Act.
Certain of these contracts and agreements provide that, in accordance
with contractholder direction, the premiums or contributions received
from the contractholder will be allocated internally on the books of
John Hancock to segregated asset accounts or ``Separate Accounts.'' The
Separate Account investments are held in John Hancock's name, but the
value of the contract or agreement to the contractholder fluctuates
with the value of the investments associated with the Separate Account.
The direct expenses of managing the investments and John Hancock's fees
are charged against the value of the Separate Account.
Separate Accounts may be established to back a single contract
issued to one customer (a ``Non-Pooled Separate Account''). In
addition, a Separate Account may be established to back a group of
substantially identical contracts issued to a number of unrelated
customers (a ``Pooled Separate Account'').
2. John Hancock currently maintains a number of Separate Accounts
that invest almost exclusively in timberland. These Pooled and Non-
Pooled Separate Accounts are known as the ForesTree Separate Accounts.
The contractholders of both the pooled and non-pooled ForesTree
Separate Accounts include both ERISA-covered plans and non-ERISA
governmental plans. As of July 1997, John Hancock had established a
total of 14 such pooled and non-pooled ForesTree Separate Accounts in
which 32 contractholders participate. Currently, over two million acres
of timberland are allocated to the ForesTree Separate Accounts, and
these properties have a fair market value in excess of $2.3 billion.
Under the applicable contract or agreement, John Hancock has the
right to control, manage and administer each Separate Account,
including the sole discretion to select and dispose of investments in
accordance with the investment policy established for the Account.
3. John Hancock's management responsibilities under the ForesTree
Separate Accounts are performed mostly by its wholly-owned subsidiary,
HNRG, which was established in 1995. Prior to its incorporation in
1995, HNRG functioned as a division within John Hancock. HNRG currently
manages 2.5 million acres of timberland valued at approximately $2.87
billion. HNRG's managed assets include assets held in the ForesTree
Separate Accounts as well as assets managed through other arrangements.
HNRG is responsible for all decisions regarding the acquisition and
disposition of timberland properties held in the ForesTree Separate
Accounts, although such decisions must be reviewed and approved by John
Hancock's internal investment committees. HNRG also has sole
responsibility for the management of John Hancock's timberland
properties, including site preparation and reforestation, road building
and construction, maintenance, acquisition of insurance and payment of
taxes. On-site work is performed by independent forest managers under
contract to HNRG.
4. Assets invested in the ForesTree Separate Accounts are managed
by John Hancock and HNRG in accordance with the investment policies
established for the Accounts. The investment policy for each Non-Pooled
Account is established jointly by John Hancock and the contractholder.
For each of the Pooled Accounts, the investment policy is established
by John Hancock and adopted by each contractholder when it chooses to
participate in a Pooled Account. Under the investment policy of most of
the ForesTree Separate Accounts, timberland properties are purchased or
sold opportunistically to favor the return of the particular portfolio.
However, John Hancock states that as a practical matter the properties
allocated to the ForesTree Separate Accounts are fairly illiquid
investments, and are considered by its customers to be long-term
investments.
HNRG has established certain guidelines that are followed as
investments are acquired and allocated to timberland portfolios it
manages, including those portfolios for Accounts holding ``plan
assets'' subject to the Act such as the ForesTree Separate Accounts.
The goal of these guidelines is to enable HNRG to provide its clients
with access to a variety of timberland acquisitions through a fair,
consistent and unbiased process. The central element of the procedure
is a determination of the suitability of an investment for a portfolio.
In the event that an investment is suitable for more than one
portfolio, priorities are set in accordance with an investment queue
procedure.
HNRG states that the first step in determining portfolio
suitability is to identify all potential funding sources for a pending
acquisition among its existing clients. Each prospective participating
Account is evaluated independently. The client's investment policy,
setting forth specific objectives and constraints, is the primary
determinant of whether or not a particular acquisition is suitable for
allocation to the Account. The portfolio ``fit'' is based on financial
analysis that projects and measures future portfolio performance,
including and excluding the pending acquisition, against established
performance targets. Performance targets may include total return,
appreciation and income. Different levels of investment in the pending
acquisition are reviewed. Consideration is given to diversification by
geographic region, timber markets and timber species. The proposed
investment is analyzed to determine if it can be broken into
appropriate parcels to fit the client portfolio's needs. Portfolio
investment recommendations are intended to be consistent with the
standards defined by the Association for Investment Management and
Research (AIMR), a professional association which has adopted certain
standards for best practices by investment managers.
The amount of funding available for any potential acquisition is
determined after the portfolio suitability analysis has been completed.
As a result, HNRG states that when it comes to funding an acquisition,
one of the following three situations will exist: (i) The acquisition
will be undersubscribed (i.e. there are not enough funds available to
acquire the investment); (ii) the acquisition is fully subscribed (i.e.
there are ample funds available to acquire the investment), or (iii)
the acquisition is oversubscribed (i.e. client portfolio funding
availability exceeds the amount needed to fund the acquisition).
The ``investment queue'' sets the priorities for utilizing funds
from existing client Accounts in the event an investment is suitable
for more than one client's portfolio. The ``investment queue'' is based
on the source of available client funds with the following order of
priority:
(a) Client funds committed to timber property acquisitions, but
unallocated;
(b) Timberland disposition proceeds designated for reinvestment;
(c) Cash flow from operations; and
(d) Contingent funds.
Within each of the four categories of available funds, the length
of time that the funds have been available for investment will
determine the level of priority. For example, funds that have
[[Page 35287]]
been committed to an HNRG timberland investment program, but are
unallocated, will receive priority between clients in the chronological
order of when each commitment was established.
5. Customers that want to use John Hancock's timber management
expertise typically invest in the ForesTree Separate Accounts. These
customers include both ERISA-covered plans and non-ERISA plans.
Customers may also invest directly in Partnerships that own timber
properties. In these cases, JHTRC is usually appointed the general
partner of the Partnership holding the property and HNRG serves as
investment manager of the Partnership. These management
responsibilities are exercised in accordance with the investment
guidelines contained in the partnership agreements, which contain
HNRG's investment selection and allocation policy procedures (as
described in Paragraph 4 above).
For purposes of this proposed exemption, both ForesTree Separate
Account contractholders and John Hancock's investment management
clients who directly invest in Partnerships holding timber properties,
including ERISA-Covered Plans, are referred to as ``Customers'.
The Transactions
6. The Applicants state that occasions may arise when it is
appropriate to liquidate timber property held in an Account or
Partnership, even though the property remains an attractive investment.
For example, a Customer's timber investments may have so increased in
value from its initial investment that the timber-related portion of
the Customer's aggregate portfolio exceeds the Customer's current asset
allocation guidelines for that investment class. In addition, a
Customer may request that John Hancock liquidate a portion of its
timber portfolio in order to recognize some of the portfolio's gains,
even though the particular timber parcel remains an attractive
investment. John Hancock may also conclude that a particular timber
parcel, through individually an attractive investment, is no longer
appropriate for the Customer's Account, in light of the composition of
the Account, its liquidity needs and other available investment
opportunities.
The Applicants state that in these and other situations in which
timber parcels might be sold, the parcels chosen for liquidation could
be appropriate investments for other Customers. Under the proposed
exemption, John Hancock could satisfy the objectives of a Selling
Account or Selling Partnership and a Buying Account or Buying
Partnership in a manner that provides advantages to both sides of the
transaction. Therefore, John Hancock requests an exemption that would
permit it (and its Affiliates) to transfer timber parcels between its
Customer Accounts and Partnerships under certain conditions and
procedures described herein.
7. If John Hancock determines that it should liquidate any
timberland assets held in a Customer's Account or Partnership, or if as
the result of certain ``triggering events'' described below such a
liquidation must occur, and John Hancock concludes that a particular
parcel of timberland to be sold is an appropriate investment for the
portfolio of another Account or Partnership, John Hancock will engage
independent fiduciaries (the I/Fs) to represent the interests of any
ERISA-Covered Plans involved.
Under the procedures described by the Applicants, an I/F will be
appointed by JHMLIC or an Affiliate to represent the interests of the
ERISA-Covered Plans as follows:
(a) Where the proposed transaction involves an ERISA-Covered Plan
(including a Pooled Separate Account or Partnership holding ``plan
assets'' subject to the Act) and a Non-ERISA Plan or other Non-ERISA
Customer, an I/F will be appointed to represent the ERISA-Covered Plan
(or Pooled Separate Account or Partnership), whether that Account or
Partnership is the buyer or the seller of a timber property in the
proposed transaction.
(b) Where the proposed transaction involves two ERISA-Covered Plans
(or Pooled Separate Accounts or Partnerships holding ``plan assets''
subject to the Act) and the decision to liquidate the timber property
is the result of one or more ``triggering events'' described below, an
I/F will be appointed by JHMLIC or an Affiliate to represent the
purchasing plan (or Pooled Separate Account or Partnership)--i.e. the
Buying Account or Buying Partnership. A ``triggering event'' will exist
whenever:
(i) JHMLIC or an Affiliate receives a direction from the Customer
to liquidate all of the Customer's Account or interest in a
Partnership;
(ii) JHMLIC or an Affiliate receives a request by the Customer to
liquidate a specified timber property; or
(iii) A liquidation of all of the assets held in the Selling
Account or Selling Partnership, or a particular timber property held by
such Account or Partnership, is required under the terms of the
investment contract, insurance contract or investment guidelines
governing the Account or Partnership, and the decision to select any
particular property to be sold is outside the control of JHMLIC and its
Affiliates.
(c) Where the proposed transaction involves two ERISA-Covered Plans
(or Pooled Separate Accounts or Partnerships holding ``plan assets''
subject to the Act) and there is no ``triggering event'', an I/F will
be appointed by JHMLIC or an Affiliate for each Account or Partnership
involved in the transaction.
With respect to each transaction requiring the participation of an
I/F, the purchase and sale of a timber property shall not be
consummated unless the I/F determines that the transaction, including
the price to be paid or received for the property, would be in the best
interest of the particular Account or Partnership involved based on the
investment policies and objectives of such Account or Partnership. The
I/F will have the authority both to review the appropriateness of the
proposed purchase or sale in light of the Customer's investment policy
and to negotiate the terms of the transaction, including the price to
be paid for the property and the allocation of the transaction cost
savings to the buyer and seller.6 The I/F will always be
provided with a recent appraisal of the timber property obtained by
HNRG from a qualified independent real estate appraiser experienced
with the valuation of timber properties similar to the type involved in
the transaction. Under the conditions of this proposed exemption, each
Account or Partnership which buys or sells a particular timber property
must pay no more than or receive no less than the fair market value of
the timber property at the time of the transaction, as determined by an
independent qualified real estate appraiser.
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\6\ The Applicants state that generally all of the transaction
expenses for the buyer and the seller would be saved. However, to
the extent that there are any expenses that cannot be avoided, such
expenses would be negotiated between the independent fiduciary and
John Hancock, or a second independent fiduciary, as the case may be.
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8. An individual or firm selected to serve as an I/F would be
required to meet the following criteria:
(a) The individual or firm may have no current employment
relationship with John Hancock or an Affiliate, although a prior
employment relationship would not disqualify the individual or firm;
(b) The individual or firm must not have received more than five
(5) percent of its annual gross receipts during the preceding calendar
year from business with John Hancock and its Affiliates;
[[Page 35288]]
(c) The individual or individuals in the firm must have an
undergraduate or graduate academic degree in forestry;
(d) The individual or individuals in the firm must have a minimum
of five (5) years experience and a demonstrated proficiency in
timberland appraisal work;
(e) The individual or individuals in the firm must have a current
certification as a Member of the Appraisal Institute, a Senior Real
Estate Analyst under the Society of Real Estate Appraisers, or a
similar nationally recognized certification;
(f) The individual or firm must have the ability to access
appropriate timberland sales comparison data and make appropriate
adjustments to the subject property; and
(g) The individual or firm must not have a criminal record
involving fraud, fiduciary standards, or securities laws violations.
In addition to the appointment of an I/F, the Applicants state that
at least 30 days prior to any transaction, each affected Customer
involved with the Accounts or Partnerships participating in the
transaction will be provided with information regarding the timber
properties involved and the terms of the transaction, including the
purchase price and how the transaction would meet the goals and
investment policies of the Customer. John Hancock will provide an
additional notice to Customers should the price of a timber property
change following the initial notice. The transaction will not be
consummated until 30 days after the second notice has been provided.
Any Customer that is an ERISA-Covered Plan will be responsible for
monitoring the performance of John Hancock and its Affiliates as well
as the I/F, when an I/F is required, to ensure that the conditions of
this proposed exemption are met. The Applicants state that all ERISA-
Covered Plans will be large plans with sophisticated fiduciaries
capable of monitoring the performance of the parties in the proposed
transaction. Under the conditions of this proposed exemption, ERISA-
Covered Plans may participate in the proposed transactions only if they
have total assets in excess of $100 million.
Justification for Transactions
9. The Applicants represent that the transfer of timber properties
from one Account or Partnership to another will have a number of
advantages to both the Buying Account or Partnership and the Selling
Account or Partnership.
First, when the transfer is between two of John Hancock's ForesTree
Separate Accounts, it will not require the transfer of legal ownership
of the property. John Hancock has legal title to all assets allocated
to its Separate Accounts and may reallocate these assets among Separate
Accounts without a change in legal title. This means that significant
transaction costs can be avoided, including real property transfer
taxes, title insurance policy costs, closing and recording costs and,
where required, phase one environmental audits.7 In
addition, each Account or Partnership involved in the purchase or sale
of a timber property would not pay any real estate commissions or
brokerage fees for the transaction. The allocation of any remaining
transaction costs would be negotiated between the buyer and the seller
for each transaction. Under the transactions that would be covered by
this proposed exemption, the I/Fs would be responsible for negotiating
the allocation of any remaining transaction costs for the Accounts or
Partnerships for which they are acting.
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\7\ For example, in a transaction between Lyons Falls Pulp &
Paper, Inc., as seller, and a JHMLIC Non-Pooled Separate Account, as
buyer, which involved 67,430 acres of timberland that was sold to
the Account for approximately $12.1 million on February 14, 1996,
the total transaction costs involved more than 7.15 percent of the
acquisition price or over $865,150 ($12,100,000 x .0715). This
figure excludes the New York State Gains Tax of over $1,000,000 that
was incurred by the seller.
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Second, a transfer of timber properties between the Accounts or
Partnerships will often allow a Buying Account or Partnership to invest
its assets more quickly and in properties that might not otherwise be
available to them. John Hancock believes that investors commit to
establishing a timberland investment portfolio because they have
identified a current need for such an asset category. Therefore, John
Hancock states that once a Customer has committed to a ForesTree
Separate Account or to a Partnership, it is important to the Customer
to invest its funds as rapidly as is prudent. However, attractive
timber properties are relatively scarce, and allowing a transfer of
timber parcels in accordance with this proposed exemption would provide
an opportunity for the purchasing Customers to invest funds more
rapidly than would be possible if the purchase involved a seller having
no relationship to John Hancock.
Third, the Applicants represent that because HNRG is the manager of
the Selling Account's or Partnership's timber property, much more
information about the property would be available to a Buying Account
or Partnership than would be if the property were not managed by HNRG.
John Hancock states that this situation reduces the risk to its
purchasing Customers. In addition, because HNRG is already familiar
with the timber property, the Buying Account or Partnership would avoid
certain expenses normally associated with the purchase of a new
property. These ``start-up'' expenses include the costs of lot
management plan development, aerial photographs and geographical
information systems (GIS) mapping.
Finally, each purchase and sale of a timber property between the
Accounts and/or Partnerships will be a one-time transaction for cash.
No purchase or sale transaction will be designed to benefit the
interests one particular Account or Partnership over another.
10. In summary, John Hancock represents that the proposed
transactions will meet the statutory criteria of section 408(a) of the
Act because: (a) Each purchase or sale of a timber property between the
Accounts or Partnerships will be a one-time transaction for cash; (b)
each affected Customer involved with the Accounts or Partnerships
participating in the transaction will be provided with information, at
least 30 days prior to the proposed transaction, regarding the timber
properties involved and the terms of the transaction, including the
purchase price and how the transaction would meet the goals and
investment policies of the Customer; (c) an I/F will be appointed by
JHMLIC or an Affiliate to represent the interests of the ERISA-Covered
Plans in the proposed transaction, unless the decision to liquidate a
timber property from a Selling Account or Selling Partnership is the
result of one or more ``triggering events'; (d) in a transaction where
an I/F is involved, the purchase or sale of the timber property shall
not be consummated unless the I/F determines that the transaction,
including the price to be paid or received for the property, would be
in the best interest of the particular Account or Partnership involved
based on the investment policies and objectives of such Account or
Partnership; (e) each Account or Partnership which buys or sells a
particular timber property will pay no more than or will receive no
less than the fair market value of the timber property at the time of
the transaction, as determined by an independent qualified real estate
appraiser; (f) each Account or Partnership involved in the purchase or
sale of a timber property will pay no real estate commissions or
brokerage fees relating to the transaction; (g) no purchase or sale
transaction will be designed to benefit the interests one particular
Account or
[[Page 35289]]
Partnership over another; and (h) ERISA-Covered Plans will be able to
participate in the proposed transactions only if they have total assets
in excess of $100 million.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the
Department, telephone (202) 219-8194. (This is not a toll-free number.)
ACRA Local 725 Health & Welfare Fund (the Welfare Plan) and ACRA Local
725 Pension Fund (the Pension Plan; together, the Plans) Located in
Macon, Georgia
[Application Nos. L-10536 and D-10537]
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(b)(2) of the Act shall not apply to the proposed payment
of interest by the Pension Plan to the Welfare Plan on past mistaken
contributions (the Mistaken Contributions) pursuant to an
indemnification agreement by the Board of Trustees of the Pension Plan
with respect to the Mistaken Contributions, provided the following
conditions are satisfied: (a) The Mistaken Contributions occurred as a
result of an inadvertent clerical error committed by the Plans'
independent third party administrator; (b) the principal amount of the
Mistaken Contributions was repaid as soon as the error was discovered;
and (c) the amount of interest to be paid to the Welfare Plan by the
Pension Plan has been determined by a third party bank to be the fair
market rate of interest.
Summary of Facts and Representations
1. The Welfare Plan is the ACRA Local 725 Health & Welfare Fund of
Dade, Broward and Monroe Counties, Florida, and the Pension Plan is the
ACRA Local 725 Pension Fund of Dade, Broward and Monroe Counties,
Florida. Each Plan is maintained pursuant to Collective Bargaining
Agreements between Air Conditioning Refrigeration Associates, an
employer association representing various employers (the Employers),
and United Association Local Union Number 725 (the Union), an employee
organization whose members are covered by the Plan. The Union
represents individuals who perform, as employees of the Employers,
construction and service work in the air conditioning and pipe trades.
The Welfare Plan provides health and welfare benefits to
participant employees and their families. It is funded solely by
Employer contributions and earnings thereon. The Welfare Plan has been
in existence since 1961. As of April 30, 1997, the Welfare Plan had 674
participants, and approximately $4,275,000 in assets.
The Pension Plan provides retirement and certain disability
benefits to Plan participants and survivor benefits to spouses and/or
other beneficiaries that may be designated by the participant in
accordance with the Plan's procedures. The Pension Plan has been in
existence since 1962. As of April 30, 1997 the Pension Plan had 1,633
participants and assets of approximately $56,100,000.
2. The Board of Trustees of each Plan, all of whom are individuals
who serve in that capacity for both Plans, had for a period of several
years retained the services of Consolidated Benefit Services, Inc. of
Atlanta, Georgia (Consolidated) to serve as administrative manager (the
Administrator) for the Plans. Employer contributions are made to the
Pension Plan and the Welfare Plan as well as other trust funds and
entities to which contributions are required to be paid pursuant to the
Collective Bargaining Agreement between the Employers and the Union.
These contributions are collected and deposited in an escrow account
(the Escrow) under the supervision of the Administrator. The purpose of
the Escrow is to receive and deposit Employer contributions, allow for
clearance of checks and record each Employer contribution to the Plans
in a timely fashion. Sums received by the Escrow are then allocated to
the appropriate accounts. Thus, the appropriate amount of contributions
due to the Welfare Plan are normally allocated and paid to the Welfare
Plan accounts, and the appropriate amount of contributions due to the
Pension Plan are normally allocated and paid to the Pension Plan
accounts.
3. In approximately September, 1996, the Board of Trustees of each
Plan was advised that the parent corporation of Consolidated,
Harrington Benefit Corporation (Harrington), which was also the parent
corporation of American Benefit Plan Administrators, Inc. (ABPA), had
been acquired by Health Services, Inc. (Health Services), a public
company. After the acquisition of Harrington by Health Services, all
administrative record-keeping for the Plans was transferred from the
Atlanta office of Consolidated to the Dallas office of ABPA.
4. In August 1997, the independent accountant for the Plans (the
Auditor), in the course of conducting a routine annual audit,
discovered that in November 1996, ABPA, as the Administrator for the
Plans, withdrew from the Escrow and transferred to the accounts of the
Pension Plan, sums which were in excess of the proper contributions
allocated to the Pension Plan by the Employers. This excess payment
created a shortfall in the proper contributions to the Welfare Plan.
This process continued to occur in subsequent months.8 For
purposes of this proposed exemption, all excess amounts of money
erroneously allocated to the Pension Plan during this period of time
are described herein as ``the Mistaken Contributions''. The applicant
represents that payments from the Escrow to the Pension Plan were
utilized by ABPA to pay current disbursements by the Pension Plan,
including such items as current pension benefits and ongoing
operational expenses. Nonetheless, all financial reports from ABPA to
the Trustees of each Plan erroneously reflected the proper
contributions being allocated to the Pension Plan and the Welfare Plan.
These erroneous financial reports, rather than documentation showing
the actual amounts transferred to the Pension Plan, were delivered to
the respective Boards of Trustees. Accordingly, the Boards of Trustees
of the Plans were not aware of the fact that sums of money were being
allocated erroneously to the Pension Plan from the Escrow. The Trustees
were notified by the Auditor in late August, 1997. At that time,
immediate instructions were made to correct the Mistaken Contributions.
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\8\ In this regard, the Department notes that section 404(a) of
the Act requires, among other things, that a fiduciary discharge his
duties with respect to a plan solely in the interest of the
participants and beneficiaries and with the care, skill, prudence
and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would
use in the conduct of an enterprise of a like character and with
like aims. With respect to the actions and omissions of ABPA, the
Department notes that no relief would be provided under the proposed
exemption for any violation of the general fiduciary provisions of
Part 4 of Title I of the Act.
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5. On October 29, 1997, all excess sums paid erroneously to the
Pension Plan were repaid to the Welfare Plan. The period of delay
between the time of discovery of the error (i.e., August, 1997) and its
correction was the time required by the Auditor to accurately
investigate and calculate the amount necessary to correct the error.
The total amount of the Mistaken Contributions was $796,983.29. This
amount represented approximately 18.6% of the Welfare Plan's assets and
1.4% of the Pension Plan's assets.
[[Page 35290]]
6. The applicants represent that since the Mistaken Contributions
were the result of unintended erroneous allocations by the
Administrator of contributions by the Employers, they may be considered
to come within section 403(c)(2)(A)(ii) of the Act, which would permit
the return of the contributions within 6 months after the plan
administrator discovered that the contributions were made by a mistake
of fact or law.9 As a result, the applicants are not seeking
an exemption for the Mistaken Contributions or the repayment of their
principal amount. Rather, the applicants are requesting an exemption
merely for the proposed payment of interest by the Pension Plan to the
Welfare Plan in connection with the treatment of these transactions as
``Mistaken Contributions'' in order to make the Welfare Plan ``whole''
for the Pension Plan's use of the money that was erroneously allocated
by ABPA from the Escrow to the Pension Plan.
---------------------------------------------------------------------------
\9\ The Department expresses no opinion in this proposed
exemption as to whether the contributions are subject to section
403(c)(2)(A)(ii) of the Act.
---------------------------------------------------------------------------
7. In addition to the Pension Plan's repayment of the principal
amount of the Mistaken Contributions to the Welfare Plan, the Board of
Trustees of the Pension Plan now proposes to pay interest to the
Welfare Plan pursuant to an indemnification agreement (the
Indemnification) with the Board of Trustees of the Welfare Plan. The
Indemnification consists of an agreement to pay a reasonable rate of
interest on the total amount of the Mistaken Contributions to reimburse
the Welfare Plan for lost income. The interest rate to be paid by the
Pension Plan will be established as a fair market rate by an
independent bank. The Liberty Bank (the Bank) in Macon, Georgia, was
contacted for the purpose of establishing such a market rate. The Bank
is an independent bank which has no other relationship with the Plans.
The Bank represents that an appropriate rate for such Mistaken
Contributions would be 8.25 to 8.5% per annum. Accordingly, the
Trustees of both Plans have agreed to utilize the rate of 8.5% per
annum to reimburse the Welfare Plan for losses relating to the period
of time it was denied access to the assets (i.e., $796,983.29).
8. The applicants represent that the Trustees of the Plans have
repeatedly requested ABPA to provide a written explanation of the
manner in which the Mistaken Contributions occurred, but ABPA has
failed to provide any response. Due to dissatisfaction with ABPA's
performance, the Trustees terminated ABPA's services effective August
31, 1997, and appointed a new administrative manager, Core Management
Resources, Inc., of Macon, Georgia.
9. The applicants represent that no participant in either Plan
experienced any reduction, deferment or delay in receipt of any benefit
due from either Plan as a result of the errors. All benefits and
expenses of each Plan were paid in a timely fashion by each respective
Plan in the ordinary course of its business.
10. In summary, the applicants represent that the subject
transactions satisfy the criteria contained in section 408(a) of the
Act because: (a) The Mistaken Contributions were inadvertent transfers
that occurred solely through the errors of the Plans' independent third
party administrator, ABPA; (b) the Pension Plan repaid the principal
amount of the Mistaken Contributions to the Welfare Plan as soon as
possible after the error was discovered and properly calculated by the
Auditor; (c) the amount of interest to be paid to the Welfare Plan on
the Mistaken Contributions has been determined by an independent bank
(i.e., the Bank) as a fair market rate of interest to reimburse the
Welfare Plan for losses relating to the period of time it was denied
access to the assets erroneously allocated to the Pension Plan; and (d)
no participant in either the Welfare Plan or the Pension Plan
experienced any reduction, deferment or delay in receipt of any benefit
due from the Plan as a result of the transactions.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
William M. Hitchcock SERP (DB) (the Plan) Located in Houston, Texas
[Application No. D-10605]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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 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 proposed sale by the Plan of 67,466 shares of stock (the Stock) in
Thoratec Laboratories, Inc. (Thoratec) to William M. Hitchcock (Mr.
Hitchcock), a disqualified person with respect to the Plan, provided
the following conditions are satisfied: (a) The sale is a one-time
transaction for cash; (b) the Plan pays no sales commissions or other
expenses in connection with the transaction; (c) the Plan receives the
fair market value of the Stock, as determined by reference to its most
current listed price on the National Association of Securities Dealers
Automated Quotation National Market System (NASDAQ) at the time of the
transaction; and (d) Mr. Hitchcock is the only Plan participant to be
affected by the transaction, and he desires that the transaction be
consummated.10
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\10\ Since Mr. Hitchcock is the sole owner of the Plan sponsor
and the only participant in the Plan, there is no jurisdiction under
Title I of the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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Summary of Facts and Representations
1. The Plan is a defined benefit self-employed retirement plan with
one participant, Mr. Hitchcock, who is the sole owner of the Plan
sponsor. The Plan sponsor is a sole proprietorship which is engaged in
the business of consulting. Mr. Hitchcock is also the Plan's trustee.
As of March 18, 1998, the Plan had $468,873 in total assets.
2. On February 14, 1994, the Plan purchased 2,400 shares of the
Stock at a price of $2.03 per share (i.e., for a total of $4,872). On
April 5, 1995, the Plan purchased 200,000 shares of the Stock at a
price of $1.30 per share (i.e., for a total of $260,000). On June 10,
1996, the Stock underwent a reverse stock split of 1/3 and, as a
result, the Plan currently holds 67,466 shares of the Stock. Mr.
Hitchcock is a director of Thoratec, and together he and the Plan own
1.8% of Thoratec.11 The Stock currently constitutes
approximately 93% of the Plan's assets.12 The Stock is
publicly traded on the NASDAQ.
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\11\ In this proposed exemption, the Department is expressing no
opinion as to whether the Plan's acquisitions of the Stock
constituted a prohibited transaction under section 4975 of the Code,
nor is the Department herein proposing relief for any prohibited
transaction which may have occurred as a result of such acquisitions
of the Stock by the Plan. However, the purchases and holding of the
Stock by the Plan raise questions under section 4975(c)(1)(D) and
(E) of the Code. Section 4975(c)(1)(D) and (E) of the Code prohibits
the use by or for the benefit of a disqualified person of the assets
of a plan and prohibits a fiduciary from dealing with the assets of
a plan in his own interest or for his own account. Mr. Hitchcock, as
a director of Thoratec, may have had an interest in the acquisitions
and holding of the Stock which may have affected his best judgment
as a fiduciary of the Plan. In such circumstances, the transactions
may have violated section 4975(c)(1)(D) and (E) of the Code. See
Advisory Opinion 90-20A (June 15, 1990). Accordingly, to the extent
there were violations of section 4975(c)(1)(D) and (E) of the Code
with respect to the purchases and holding of the Stock by the Plan,
the Department is extending no relief for these transactions herein.
\12\ The Department notes that the Internal Revenue Service has
taken the view that if a plan is exposed to the risk of large losses
because of the lack of diversification and the speculative nature of
investments made by the Plan, such an investment strategy may raise
questions in regard to the exclusive benefit rule under section
401(a) of the Code. For example, see Rev. Rul. 73-532, 1973-2 C.B.
128, which states, among other things, that the safeguards and
diversity that a prudent investor would adhere to must be present in
order for the ``exclusive-benefit-of-employees'' requirement to be
met. However, the Department is expressing no opinion in this
proposed exemption regarding whether violations of section 401(a) of
the Code occurred as a result of the Plan's acquisition of
investments that may be speculative in nature, such as the purchase
of the Stock.
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[[Page 35291]]
3. Mr. Hitchcock now proposes to purchase the Stock from the Plan
for cash. No commissions or other expenses will be paid by the Plan in
connection with the sale. The Plan will receive the fair market value
of the Stock, as determined by its most current listed price on the
NASDAQ at the time of the sale. On March 12, 1998, the Stock was
trading at a price of $7.00 per share. Therefore, based upon this per
share trading price, Mr. Hitchcock would have paid the Plan $472,262
for the Stock (67,466 shares times $7.00 per share).
4. Mr. Hitchcock represents that the proposed sale would be
advantageous to the Plan because it would increase the Plan's liquidity
and diversify the Plan's assets. In addition, 66,666 shares of the
Stock owned by the Plan are unregistered and subject to certain sale
restrictions under Rule 144 of the Securities and Exchange Commission
(SEC). The restricted Stock can be disposed of only in a private
placement or in the public market over a period of years under the
timing and volume restrictions of SEC Rule 144. As a result, all of the
Plan's shares of the Stock may not be sold on the open market at the
present time. These shares of the Stock were purchased by the Plan in a
private placement. However, in any sale of the Plan's shares to a third
party in a private placement, the purchaser would probably demand a
significant discount off the NASDAQ listed price in order to acquire
the shares. Therefore, by selling all of the Stock to Mr. Hitchcock for
the most current listed price for each share of the Stock on the
NASDAQ, the Plan will receive a premium for its shares at the time of
the transaction.
5. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 4975(c)(2) of the Code
because: (a) The sale is a one-time transaction for cash; (b) no
commissions or other expenses will be paid by the Plan in connection
with the sale; (c) the Plan will receive the fair market value of the
Stock, as determined by its most current listed price on the NASDAQ at
the time of the sale; and (d) Mr. Hitchcock is the only Plan
participant to be affected by the transaction, and he desires that the
transaction be consummated.
Tax Consequences of the Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan, and therefore
must be examined under the applicable provisions of the Internal
Revenue Code, including sections 401(a)(4), 404 and 415.
Notice to Interested Persons: Since Mr. Hitchcock is the only Plan
participant to be affected by the proposed transaction, the Department
has determined that there is no need to distribute the notice of
proposed exemption to interested persons. Comments and requests for a
hearing are due within 30 days from the date of publication of this
notice of proposed exemption in the Federal Register.
For Further Information Contact: Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest 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 that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 23rd day of June 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-17135 Filed 6-26-98; 8:45 am]
BILLING CODE 4510-29-P