[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Notices]
[Pages 46245-46254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23282]
[[Page 46245]]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09952, et al.]
Proposed Exemptions; RREEF America L.L.C. (RREEF)
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
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and 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.
RREEF America L.L.C. (RREEF) Located in San Francisco, California
[Application No. D-09952]
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.)
Section I--Covered Transactions
The restrictions of sections 406(a), 406 (b)(1) and (b)(2) of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1) (A) through (E) of the Code,
shall not apply to the:
(1) The provision of certain leasing services (the Leasing
Services) by RREEF's leasing affiliates (the Leasing Affiliates, as
defined in Section IV) to certain accounts established by RREEF (the
Accounts, as defined in Section IV); and
(2) The payment of leasing commissions in connection with the
provision of Leasing Services by the Leasing Affiliates to the
Accounts; provided that the conditions set forth in Section II are met.
Section II--Conditions
(1) The arrangement under which the leasing services are performed
with respect to any Account is subject to the prior authorization of
either (i) an independent plan fiduciary for each employee benefit plan
or other plan for which RREEF serves as trustee or investment manager
(a Client Plan) that invests in a Single Client Account, or (ii)
independent plan fiduciaries with respect to Client Plans or other
institutional investors holding at least 60 percent of the units of
beneficial interest in a Multiple Client Account, following disclosure
of information in the manner described in paragraph (2) below. In the
case of a Client Plan whose assets are proposed to be invested in an
Account subsequent to the provision of leasing services to the Account,
the Client Plan's investment in the Account is subject to the prior
written authorization of an authorizing plan fiduciary following
disclosure of the information described in paragraph (2).
(2) Not less than 45 days prior to the first date it proposes to
provide leasing services for any Account, RREEF, as investment manager,
shall furnish the authorizing plan fiduciary with any reasonably
available information which RREEF believes to be necessary to determine
whether such approval should be given, as well as such information
which is reasonably requested by the authorizing plan fiduciary. Such
information will include: (a) a description of the leasing services to
be performed by the Leasing Affiliate; (b) an explanation of the
potential conflicts of interest involved in selecting the Leasing
Affiliate; (c) an explanation of the selection process (including the
role of the Independent Fiduciaries (as defined in Section IV)); (d)
identification of properties for which leasing services will be
required; (e) an estimate of the leasing fees to be paid to the Leasing
Affiliate if it is selected to provide such services; and (f) a
description of the terms upon which a Client Plan may withdraw from an
Account.
(3) In the event an authorizing plan fiduciary of any Client Plan
whose assets are invested in an Account submits a notice in writing to
RREEF, as investment manager, at least 15 days prior to the provision
of leasing services, objecting to the provision of the leasing
services, and RREEF proposes to proceed with the provision of leasing
services, the Client Plan on whose behalf the objection was tendered
will be given the opportunity to terminate its investment in the
Account, without penalty. With the exception of a Client Plan which has
invested in a closed-end Account under which the rights of withdrawal
from the Account
[[Page 46246]]
may be limited, as provided in the Client Plan's written agreement to
invest in the Account, if a written objection to the leasing services
is submitted to RREEF any time after 15 days prior to implementation of
the leasing services (or after implementation), the Client Plan must be
able to withdraw without penalty, within such time as may be necessary
to effect such withdrawal in an orderly manner that is equitable to all
withdrawing and the non-withdrawing Client Plans. However, the Leasing
Affiliate need not discontinue providing the leasing services, once
implemented, by reason of a Client Plan electing to withdraw after 15
days prior to the scheduled implementation date of the leasing
services. Any Client Plan which invests in a Single Client Account may
terminate the Leasing Services arrangement and withdraw from the
Account at any time (upon reasonable written notice).
(4)(a) RREEF shall furnish the Independent Fiduciary (as defined in
section IV) acting on behalf of the Client Plans participating in the
Account with an annual report (the RREEF Annual Report) containing the
information described in this paragraph, not less frequently than once
a year and not later than 45 days following the end of the period to
which the report relates. The RREEF Annual Report shall disclose the
total of all fees incurred by the Account during the preceding year
under contracts with RREEF and its affiliates and shall include a
description of all leasing activities with respect to each property
under the responsibility of the Independent Fiduciary for which a
Leasing Affiliate provides services, including marketing/advertising
activities, leases under negotiation, lease offers rejected (and why),
and such other information as shall be reasonably requested by the
Independent Fiduciary. The RREEF Annual Report shall also delineate the
leasing commissions that are anticipated to be paid to RREEF and its
affiliates in the coming year for services provided by these entities
in connection with the properties held by the Account. The RREEF Annual
Report will contain a description of a method for the termination of
the leasing arrangement (see Section II(5)) by the Independent
Fiduciary and/or by investing Client Plans in each Account.
(b) The Independent Fiduciary shall furnish RREEF and the
authorizing plan fiduciaries with an annual report (the I/F Annual
Report), within 90 days following the end of the period to which the
report relates, summarizing its activities for the year, indicating its
opinion as to the continued validity of the leasing guidelines with
respect to any property for the next year, and recommending any
amendments to, or termination of the leasing agreement with the Leasing
Affiliate. The I/F Annual Report will contain a description of a method
for the termination of the leasing arrangement with the Leasing
Affiliate and for the confirmation and/or removal of the Independent
Fiduciary by the Client Plans investing in the Accounts.
(c) RREEF implements procedures to ensure each authorizing plan
fiduciary of a Client Plan investing either in a Multiple Client
Account, or a Single Client Account, has an opportunity to vote on the
reconfirmation of the Independent Fiduciary on an annual basis. These
procedures require that the Independent Fiduciary: (i) provide each
authorizing independent client plan fiduciary with a ballot
1 by certified mail (or another method of delivery pursuant
to which confirmation of receipt is provided), with the ballot
instructions that direct the authorizing independent client plan
fiduciary to return the ballot to RREEF; (ii) ensure that the ballot
clearly indicates that the authorizing plan fiduciary may vote for or
against continuation of the Independent Fiduciary; (iii) ensure that
the ballot must be accompanied by a statement that failure to return
the ballot within 45 days following the independent plan fiduciaries'
receipt of the ballots will be counted as a ``for'' vote (unless
holders of a majority of the units of beneficial interests in the
Accounts have voted against reconfirmation); and (iv) 30 days after the
Independent Fiduciary mails the ballot to the authorizing plan
fiduciary, RREEF must make at least one follow-up contact with the
authorizing plan fiduciary that has not previously returned the ballot
prior to treating the unreturned ballot as a ``for'' vote. If RREEF
does not receive a response from the authorizing plan fiduciary within
15 days after initiating contact with the authorizing plan fiduciary,
RREEF may treat the unreturned ballot as a vote for reconfirmation. The
reconfirmation will become effective on the earlier of the date
affirmative ballots are obtained from the holders of a majority of the
units of beneficial interests in the Accounts, or 45 days following the
authorizing plan fiduciaries' receipt of the ballots (unless holders of
a majority of the units of beneficial interests in the Accounts have
voted against reconfirmation.)
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\1\ RREEF will direct the Independent Fiduciary as to the
specific form of a ballot. The applicant represents that for a
Single Client Account, this will not be a ``ballot'', but a
``direction'' form.
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(d) The Independent Fiduciary receives confirmation, and certifies
to RREEF that the notice and the ballots sent to the authorizing plan
fiduciary pursuant to subparagraphs (b) and (c) regarding the continued
retention of the Independent Fiduciary and RREEF have been received by
the authorizing plan fiduciary. The method used to confirm notice to
the authorizing plan fiduciaries must be sufficient to ensure that the
authorizing Client Plan fiduciaries actually receive notice. In all
cases, return receipt for certified mail, printed confirmation of
facsimile transmissions and manifest or computer data entries of
independent courier services will be considered acceptable methods of
confirming receipt.
(5)(a) The leasing agreement for any property may also be
terminated or modified at any time at the written direction of the
Independent Fiduciary, and may be terminated by a vote in favor of such
termination by the holders of a majority of the units of beneficial
interests in the Account (or such greater percentage, not to exceed 60
percent, as shall be set out in the agreements establishing the
Account). Further, any Client Plan which invests in a Single Client
Account may terminate the Leasing Services arrangement and withdraw
from the Account at any time (upon reasonable notice).
(b) In the event of a vote to terminate the leasing services
arrangement pursuant to paragraph (4)(c) or (5)(a), RREEF shall cease
submitting to the Independent Fiduciary any new proposals to engage in
covered transactions and RREEF will not renew or extend any covered
transactions. Moreover, within 180 days after the vote of the Account
holders, RREEF shall cease engaging in any existing covered
transactions.
(6)(a) Each leasing services agreement shall be in writing and
shall be reviewed at least annually and approved by an Independent
Fiduciary. However, prior to proposing a transaction to the Independent
Fiduciary, RREEF will first determine that such transaction is in the
best interest of the Account.
(b) The Independent Fiduciary shall negotiate each leasing services
agreement. The Independent Fiduciary shall also consider the cost to
the Account of such fiduciary's involvement in connection with its
consideration of whether to approve a particular leasing services
agreement.
(c) Each leasing agreement and the performance of the Leasing
Affiliate under such agreement shall be reviewed at least annually by
the Independent Fiduciary, who shall instruct RREEF of any action which
should be taken by
[[Page 46247]]
RREEF on behalf of the Account with respect to the continuation,
termination or other exercise of rights available to the Account under
the terms of the leasing agreement. RREEF will carry out such
instruction from the Independent Fiduciary to the extent it is legal
and permitted by the terms of the leasing agreement.
(d) In the case of any emergency circumstances, RREEF or the
Leasing Affiliates may provide leasing services to an Account for a
period not exceeding 90 days without entering into a leasing services
agreement, but no compensation may be paid by an Account for such
services without prior approval of the Independent Fiduciary.
(7) If RREEF holds Account properties, and any RREEF affiliate or
principal holds for its own account any properties in the same real
estate market during a period when there is leasing competition between
those properties, RREEF will hire, during such period, a third party
leasing agent for Account properties.
(8)(a) RREEF shall furnish the Independent Fiduciary with any
reasonably available information which RREEF reasonably believes to be
necessary or which the Independent Fiduciary shall reasonably request
to determine whether such approval of the transactions described above
should be given, or to accomplish the Independent Fiduciary's periodic
reviews of RREEF's performance under such agreements.
(b) With respect to RREEF, such information will include: a
description of the leasing services for the Account and the Client
Plans investing therein; the qualifications of RREEF to do the job; a
statement, supported by appropriate factual representations, of the
reasons for RREEF's belief that RREEF is qualified to provide the
services; a copy of the proposed leasing services agreement and the
terms on which RREEF would provide the services; the reasons why RREEF
believes the retention of RREEF would be in the best interest of the
Account; information demonstrating why the fees and other terms of the
arrangement are reasonable and comparable to the fees customarily
charged by similar firms for similar services in comparable locales;
the identities of non-affiliated service providers and the terms under
which these service providers might perform the services; and whether
any RREEF affiliate is a property manager to any properties that are in
competition for tenants with the property for which RREEF is under
consideration.
(9) Any Independent Fiduciary may be removed at any time by a vote
of holders of a majority of the units of beneficial interests in an
Account. In the event of the removal of an Independent Fiduciary,
existing leasing agreements overseen by that Independent Fiduciary will
not be affected; however, RREEF will designate a replacement
Independent Fiduciary within sixty (60) days.
(10) Seventy-five percent (75%) or more of the units of beneficial
interests in an Account must be held by Client Plans or other investors
having total assets of at least $100 million. In addition, 50 percent
(50%) or more of the Client Plans investing in an Account must have
assets of at least $100 million. For purposes of the 50% test above, a
group of Client Plans maintained by a single employer or controlled
group of employers, any of which individually has assets of less than
$100 million, will be counted as a single Client Plan if the decision
to invest in the Account (or the decision to make investments in the
Account available as an option for an individually directed account) is
made by a fiduciary other than RREEF, who exercises such discretion
with respect to Client Plan assets in excess of $100 million.
(11) No Client Plan covering employees of RREEF will be invested in
an Account.
(12) Not more than 20 percent of the assets of any Client Plan on
whose behalf RREEF proposes to provide leasing services can be invested
in RREEF Accounts.
(13) At the time any leasing agreement is entered into, the terms
of the agreement must be at least as favorable to the Account as the
terms of an arm's length transaction between unrelated parties. In
addition, the compensation paid to the Leasing Affiliate for leasing
services by any Account must not exceed the amount paid in an arm's
length transaction between unrelated parties for comparable properties
in similar locales. In any event, such compensation will not exceed
reasonable compensation within the meaning of section 408(b)(2) of the
Act and regulation 29 CFR 2550.408b-2. (The Independent Fiduciary must
certify that an economic advantage to the Accounts exists before
consummation of any leasing agreement).
(14)(a) Within one-year of the grant of this exemption, and after
the beginning of each subsequent five-year period, each Independent
Fiduciary will prepare with the assistance of RREEF a survey of leasing
fees for the properties that have similar geographic location and
property types to those held by the Accounts for which the Independent
Fiduciary is responsible. The survey will include data regarding the
fees that have been charged to the Accounts by several firms that are
unaffiliated with RREEF for leasing services during the one year period
prior to the beginning of the new five-year period. Also, the survey
will include data as to the fees paid by RREEF for such services
performed for the properties not held by the Accounts during the same
period and other market data regarding the cost of leasing services by
geographic location and property types.
(b) Based upon its survey and its professional resources and
expertise, the Independent Fiduciary will determine a typical range of
annual fees for leasing services for the Accounts. The average of the
range, as determined from such survey, will serve as the basis of
comparison for determining for the next five-year period whether
continuation of the leasing services policy has provided cost savings
or other benefits to the Accounts.
(c) RREEF will demonstrate to the Independent Fiduciary at the end
of the applicable five-year period that leasing fees charged to each
Account by RREEF or its affiliates plus the cost of the services of the
Independent Fiduciary under the exemption that are allocated to the
Accounts, are less than the fees that would have been charged using the
benchmark rate established at the beginning of the five year period. In
making its determinations, the Independent Fiduciary shall take into
account to the extent it deems necessary property management fees paid
by the Accounts to RREEF and its affiliates.2
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\2\ With respect to Multiple Client Accounts, property
management services by RREEF are currently provided in accordance
with PTE 82-51 (47 FR 14238/14241, April 2, 1982). PTE 82-51 permits
collective investment funds (the Funds) managed by RREEF or any of
its affiliates, in which Client Plans participate, to engage in
certain transactions with parties in interest with respect to the
Client Plans that are investors in the Funds, provided that certain
conditions are met. Therefore, the requested exemption is necessary
only for the provision of Leasing Services by RREEF's affiliates to
the Multiple Client Accounts in connection with the properties held
by the Accounts.
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(d) The Independent Fiduciary will review the data supplied by
RREEF and, to the extent considered necessary by the Independent
Fiduciary, data collected from the Independent Fiduciary's own surveys,
and will document its findings and analysis of such cost savings in a
report to be delivered to each of the Client Plans participating in the
Accounts within 90 days after the end of the five year period and each
subsequent five-year period and prior to the implementation of the
annual confirmation procedure
[[Page 46248]]
described in paragraph (6) of Section II with respect to such period.
In the event the Independent Fiduciary finds that cost savings have not
been achieved for the Accounts, it will not approve any additional
services arrangements until RREEF and its affiliates have demonstrated
to the satisfaction of the Independent Fiduciary that policies intended
to assure cost savings to the Accounts have been implemented by RREEF
and its affiliates. The survey, the Independent Fiduciary's report
reviewing the survey, and the final report of the Independent Fiduciary
analyzing whether cost savings had been achieved during the five year
period to which the survey relates, will be maintained by RREEF in
accordance with the recordkeeping requirements of Section III.
(15) The fees paid to RREEF and/or its affiliates for leasing
services provided in connection with a property held for an Account
shall not exceed: (a) 7 percent of the lease amount for new leases; (b)
2 percent of the lease amount for renewal leases; and (c) for leases in
which outside brokers are involved, 2.75 percent of the lease amount.
(16) Before entering into any leasing arrangement pursuant to the
terms of this exemption, if granted, copies of the proposed exemption
and the final exemption will be delivered to each Client Plan for which
RREEF or its affiliate propose to perform leasing services as described
herein.
Section III--Recordkeeping
(1) RREEF and any Leasing Affiliate will maintain, for a period of
six years, the relevant records necessary to enable the persons
described in paragraph (2) of this Section III to determine whether the
conditions of this exemption have been met. Included in these records
will be the written records of the Independent Fiduciary which had been
periodically furnished by the Independent Fiduciary to RREEF, and the
records described in paragraph (14) of Section II. However, a
prohibited transaction will not be considered to have occurred if, due
to circumstances beyond RREEF's, the Leasing Affiliate's, or the
Independent Fiduciary's control, the records are lost or destroyed
prior to the end of the six-year period.3
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\3\ RREEF represents that its contract with each Independent
Fiduciary will require that the Independent Fiduciary's written
records be maintained in accordance with this section.
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(2)(a) Except as provided in subsection (b) of this paragraph and
notwithstanding any provisions of section 504(a)(2) and (b) of the Act,
the records referred to in paragraph (1) of this section shall be
unconditionally available at their customary location for examination
during normal business hours by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(2) Any fiduciary of a Client Plan who has authority to acquire or
dispose of the interests of the Client Plan in the Accounts or any duly
authorized employee or representative of such fiduciary;
(3) Any contributing employer to any Client Plan that has an
interest in the Accounts or any duly authorized employee or
representative of such employer;
(4) Any participant or beneficiary of any Client Plan participating
in the Accounts, or any duly authorized employee or representative of
such participant or beneficiary; and
(5) The Independent Fiduciaries.
(b) None of the persons described above in subparagraphs (2)-(5) of
this paragraph shall be authorized to examine the trade secrets of
RREEF or any Leasing Affiliate or commercial or financial information
which is privileged or confidential.
Section IV--Definitions
(1) The Accounts--The Accounts are any existing or future pooled
accounts (i.e., Multiple Client Accounts) or single-customer accounts
(i.e., Single Client Accounts), including joint ventures, general or
limited partnerships or other real estate investment vehicles
established by RREEF for the investment of employee benefit Client Plan
assets in real-estate related investments to the extent that (i) such
Accounts hold ``plan assets'' within the meaning of the regulations at
29 CFR section 2510.3-101 and (ii) management of their assets is
subject to the discretionary authority of RREEF.
(2) RREEF--For purposes of this proposed exemption, the term RREEF
means RREEF America L.L.C., and certain of their officers who may serve
as trustees of group trusts managed by RREEF America L.L.C., or who may
serve in similar fiduciary capacities with respect to other commingled
investment vehicles managed by them, and/or any other affiliates of
RREEF as defined in paragraph (4) of this section IV which act as
investment fiduciaries with respect to any Account.
(3) Leasing Affiliate--RREEF Management Company or other affiliates
of RREEF (as defined in paragraph (4) of this Section IV) retained to
provide leasing services with respect to an Account.
(4) An affiliate of a person means any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with the person.
(5) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(6) Independent Fiduciary--A person who:
(a) is not an affiliate of RREEF as defined in Section IV(4);
(b) is not an officer, director, employee of, or partner in, RREEF
(or affiliates thereof as defined in Section IV(4));
(c) is not a corporation or partnership in which RREEF has an
ownership interest or is a partner;
(d) does not have an ownership interest in RREEF or any of its
affiliates;
(e) is not a fiduciary with respect to any Client Plan's investment
in the Account;
(f) has represented in writing that it is qualified to perform the
services contemplated by the proposed exemption, which qualifications
shall include, among other things: (i) demonstrated experience,
generally over a period of not less than five years, in the business of
commercial real estate, brokerage, management, or appraisal generally
and in reviewing or negotiating leasing agreements and commissions
specifically; (ii) familiarity with the relevant real estate,
specifically as it relates to comparable property types with respect to
the specific properties for which the Leasing Affiliate proposes to
perform leasing services (for example, in the case of office
properties, the Independent Fiduciary's experience shall relate
specifically to office properties in the same market); (iii) experience
in complying with the fiduciary standards of the Act in connection with
the representation of the Client Plans; and
(g) has acknowledged in writing acceptance of fiduciary obligations
and has agreed not to participate in any decision with respect to any
transaction in which the Independent Fiduciary has an interest that
might affect its best judgement as a fiduciary. For purposes of the
foregoing, each Independent Fiduciary shall represent in writing that
it has no relationship with RREEF or its affiliates, or with any
Account, that would affect its best judgement as a fiduciary.
For purposes of this definition of Independent Fiduciary, no
organization or individual may serve as an Independent Fiduciary for
any fiscal year if the gross income received by
[[Page 46249]]
such organization or individual (or partnership or corporation of which
such organization or individual is an officer, director, or 10 percent
or more partner or shareholder) from RREEF or any affiliates of RREEF
(including amounts received for services as Independent Fiduciary under
any prohibited transaction exemption granted by the Department) for
that fiscal year exceeds 5 percent of its or his annual gross income
from all sources for such fiscal year.
In addition, no organization or individual who is an Independent
Fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director or 10 percent or more partner or
shareholder, may acquire any property from, sell any property to or
borrow any funds from RREEF or any affiliates of RREEF, or any Account
maintained by RREEF or any affiliates of RREEF, during the period that
such organization or individual serves as an Independent Fiduciary and
continuing for a period of 6 months after such organization or
individual ceases to be an Independent Fiduciary or negotiates any such
transaction during the period that such organization or individual
serves as Independent Fiduciary.
The proposed exemption, if granted, will be subject to the express
condition that the material facts and representations contained in the
application are true and complete, and that the application accurately
describes all material terms of the transaction to be consummated
pursuant to the exemption.
Summary of Facts and Representations
1. RREEF America L.L.C and its affiliate, RREEF Management Company,
provide investment and property management services to institutional
investors, including employee benefit Client Plans and other tax-exempt
entities, through various separate accounts (Single Client Accounts)
and commingled accounts (Multiple Client Accounts; collectively, the
Accounts). On January 27, 1998, RREEF America L.L.C. and its affiliates
(collectively, RREEF) were acquired by RoProperty Services, B.V.
(RoProperty), a major Dutch investment advisory firm. As a result, the
RREEF entities were combined into a newly created Delaware limited
liability company which continues to use the name RREEF America L.L.C.
RREEF operates as an autonomous entity which continues to provide
investment management services, and its affiliate, RREEF Management
Company, continues to provide property management services.
RREEF requests an exemption to permit: (i) the provision of certain
leasing services (the Leasing Services) by RREEF's leasing affiliates
(the Leasing Affiliates) to the Accounts; and (ii) the payment of
leasing commissions in connection with the provision of Leasing
Services by the Leasing Affiliates to the Accounts, as described below.
The Leasing Services that will be performed pursuant to this proposed
exemption, if granted, would generally be provided by RREEF Management
Company.
2. RREEF acts as an investment manager as defined in section 3(38)
of the Act for each Client Plan that invests in a Single or a Multiple
Client Account. RREEF has discretion for the day-to-day operation of
each Account and, in many cases, has full discretion over an Account's
acquisition and disposition decisions. However, in certain cases, final
investment authority may remain with independent authorizing plan
fiduciaries (Authorizing Client Plan Fiduciaries) for the Account. The
applicant requests that the proposed exemption extend relief to both
discretionary and non-discretionary Accounts.4
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\4\ RREEF's non-discretionary Accounts are generally Accounts
over which an independent (in-house) Client Plan Fiduciary retains
final discretion with respect to the acquisition and disposition of
real property assets. The Client Plan may also retain discretion in
setting or approving leasing guidelines for properties held by the
Accounts.
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3. The Client Plans are various pension plans as defined in section
3(2) of the Act and other plans as defined in section 4975(e)(1) of the
Code, for which RREEF serves as a trustee or investment manager.
Several of the Client Plans participate in RREEF USA Fund-I (Fund I), a
Multiple Client Account in which non-ERISA fiduciary clients may
invest. The Client Plans may participate in other Accounts, as
described herein. In all instances, an Authorizing Client Plan
Fiduciary which is independent of RREEF and its affiliates, will make
the decision regarding the investment of Client Plan assets in an
Account which may receive leasing services performed by a Leasing
Affiliate.
4. A Client Plan may enter into one or more Single Client Account
relationships with RREEF pursuant to the individually negotiated
investment agreements with RREEF. In each case primary investment
discretion will be delegated to RREEF pursuant to an investment
management agreement between RREEF and the Account.5
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\5\ Except as set forth in paragraph 2 above.
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Alternatively, a Client Plan may invest in a commingled investment
fund (i.e., a Multiple Client Account) managed by RREEF. Currently,
Multiple Client Accounts consist primarily of tax-exempt group trusts
organized pursuant to IRS Revenue Ruling 81-100, and limited
partnerships. RREEF principals and officers serve as trustees for
Multiple Client Accounts that are group trusts. Other Multiple Client
Accounts may be organized in the future, including title-holding
corporations, real estate investment trusts, or limited liability
corporations. RREEF principals and officers may serve as directors and
officers of these vehicles.
5. The Accounts established to date have been so-called ``blind''
investment relationships where investors initially are not told about
any specific properties which the Account may acquire. In such
instances, the Account receives cash from the Client Plan and then
identifies and acquires real property investments that meet certain
investment criteria that have been agreed to by such investors. In the
future, RREEF states that so-called ``specified-property'' investment
relationships may be established with the Client Plans and/or other
investors to invest in pre-identified real property investments that
are disclosed to the Client Plans prior to such Plans' cash investment
in the Account.
6. RREEF represents that in recent years real estate investments
have become increasingly attractive to pension plan investors. The
quality of real estate-related services is of central importance in
maximizing returns available to such investors. Large real estate
investment managers typically manage properties themselves or through
property management firms they have acquired. This strategy enables
such managers to use a unified leasing strategy and other efficient
management techniques, and is a superior alternative to retaining
independent managers for property management and leasing services.
RREEF maintains that in many instances the provision of leasing
services for the properties held by the Accounts would be more
effectively provided through in-house personnel or through firms which
are affiliated with RREEF, or in which RREEF has an interest. Such
firms possess special expertise in the type of properties held by the
Accounts and knowledge of the Accounts. RREEF and the Leasing
Affiliates represent that they are in the best position to aggressively
lease properties held by an Account, and to maximize the value of the
properties to the Account.
[[Page 46250]]
7. The services provided to the Accounts by the Leasing Affiliates
6 will be day-to-day leasing responsibilities associated
with operating income-producing properties owned by the Accounts. These
responsibilities will include using best efforts to lease a property to
desirable tenants and negotiating the terms and renewals of such
leases. Any hiring of a Leasing Affiliate to provide leasing services
for a property owned by an Account will be negotiated with, and subject
to the approval of, the Independent Fiduciary appointed on behalf of an
Account for the particular leasing market to which the property is
subject (as discussed more fully below).
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\6\ Currently, RREEF anticipates that RREEF Management will be
the Leasing Affiliate which performs the leasing services.
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8. RREEF, as the investment manager or trustee for the Account,
will consider the type, size and location of an Account property, and
whether the Leasing Affiliates are best suited to provide leasing
services to that property. Upon determining that the provision of
services by the Leasing Affiliate would be in the best interest of that
Account, RREEF will propose to the Independent Fiduciary that the
Leasing Affiliate be retained for the property. Because the Leasing
Affiliates currently perform property management services for most of
the properties managed by RREEF and its affiliates under PTE 82-51 (see
footnote 2), RREEF expects that a Leasing Affiliate will be considered
to provide leasing services to each of the properties. RREEF maintains
that the Account will benefit from the Leasing Affiliate's
comprehensive knowledge of the local market and from the expertise of
the staff in that location.
9. RREEF may hold properties in a relevant real estate market
7 both as the investment manager or trustee for an Account,
and on behalf of RREEF or any entity in which RREEF owns a 10% or
greater interest. In the event there is a potential for leasing
competition among these properties, RREEF will retain an independent,
qualified leasing agent for the Account's properties.
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\7\ The applicant represents that the term ``relevant real
estate market'' is a term used by managers, leasing agents,
appraisers, etc. to mean a general geographic area from which the
property is most likely to draw its tenant base. Within this area a
specific property will be competing with similar properties for
tenants. The area varies based on property type, size, age and
location, access to transportation, etc. Typically, an assessment of
the relevant real estate market is included, as part of the overall
economic analysis, in the materials prepared at the time the
property is acquired. The applicant maintains that, under the
condition of this proposed exemption, the Independent Fiduciary will
make its own independent assessment of the relevant real estate
market.
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The Independent Fiduciary will have the same responsibilities when
the Account acquires a new property with a Leasing Affiliate acting as
a pre-existing leasing agent as when RREEF proposes to provide leasing
services with a Leasing Affiliate for an existing property. In both
cases, the leasing agreement with a Leasing Affiliate for a property
will be negotiated with, and approved by, the Independent Fiduciary for
the Account. This negotiation of the leasing agreement may be
concurrent with RREEF's acquisition of the property.
RREEF may also acquire a property with a Leasing Affiliate acting
as a pre-existing leasing agent for an Account where RREEF is not yet
authorized to perform leasing services for the property with a Leasing
Affiliate. In such situations, under the terms of this proposed
exemption, RREEF must obtain approval from the Client Plans
8 before it can receive compensation for such services.
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\8\ Such approval will be obtained pursuant to Section II(1) and
(2) of this proposed exemption.
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10. RREEF will appoint several Independent Fiduciaries, subject to
confirmation by the holders of a majority of the units of beneficial
interest in the Accounts (or by the Client Plan in the case of a Single
Client Account), to act on behalf of the Accounts for the provision of
leasing services by the Leasing Affiliates. Each Independent Fiduciary
will be an individual, group of individuals or a business entity which
has substantial experience with commercial real estate investments,
including the expertise to make decisions required under the exemption.
RREEF proposes to use the same Independent Fiduciary for all Accounts
that have properties in the same real estate market. However, because
individual Client Plans can veto RREEF's selection of an Independent
Fiduciary, RREEF cannot guarantee that the same Independent Fiduciary
will be used for all such Accounts.
An Independent Fiduciary will not have any ownership interest in
RREEF nor will RREEF have any ownership interest in the Independent
Fiduciary. An Independent Fiduciary may have a preexisting relationship
as a service provider (including as a fiduciary) for one or more of the
Client Plans. However, all business dealings between the Independent
Fiduciary and RREEF, including services rendered to the Accounts as
Independent Fiduciary under all other prohibited transaction exemptions
granted by the Department, 9 may not in the aggregate result
in the Independent Fiduciary receiving in any one of its fiscal years
more than five percent (5%) of its gross income from RREEF. No person
hired as an Independent Fiduciary for any real property held by the
Account will provide any other service for such property while that
person is serving as the Independent Fiduciary. In addition, an
Independent Fiduciary will not be retained by the Account, RREEF, or
any affiliate thereof, under a contract to perform leasing, property
management, or real estate brokerage services with respect to such
property for at least a six month period after having served as the
Independent Fiduciary.
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\9\ See, for example, PTE 82-51, which was mentioned earlier.
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Generally, the compensation and expenses of each Independent
Fiduciary will be proportionately paid by the Account(s) which it
serves.
11. Any Independent Fiduciary may be removed with or without cause
by a vote of the holders of a majority of the units of beneficial
interests in an Account. A vote removing the Independent Fiduciary will
not affect existing covered transactions, but RREEF will cease
submitting to the Independent Fiduciary any proposals to engage in new
transactions. RREEF will designate within sixty (60) days a replacement
Independent Fiduciary, whose appointment will be subject to the same
confirmation by the Client Plans as was the initial Independent
Fiduciary.
12. The Independent Fiduciary will select the Leasing Affiliates to
provide the leasing services described herein. The selection process
will proceed as follows:
(a) RREEF will propose a Leasing Affiliate to provide services for
a specific property if it believes it is in the best interest of the
Account to do so. If RREEF does not propose a Leasing Affiliate to
provide services to an Account property, it will select an unrelated
service provider.
(b) The Independent Fiduciary will determine the qualifications of
the Leasing Affiliate by thoroughly reviewing its background and
experience, and those of its personnel. The Independent Fiduciary will
consider, among other things, the following factors:
(1) The compensation and the terms of the service arrangement
proposed by the Leasing Affiliate will be compared to those from
similarly qualified firms for similar services in the similar locales.
If no similar firms exist for
[[Page 46251]]
comparison, the Independent Fiduciary will determine whether the
agreement is reasonable within the meaning of section 408(b)(2) of the
Act. If the Leasing Affiliate is replacing another service provider,
the Independent Fiduciary will make similar determinations, and will
consider whether the change in service providers will increase costs to
the Accounts.
(2) The Independent Fiduciary must determine if the Leasing
Affiliate is the best qualified candidate to provide a particular
service under the arrangement in question. If the qualifications are
equal among potential service providers, the Independent Fiduciary may
choose the Leasing Affiliate if its proposed fee arrangement is most
advantageous to the Account. If the qualifications and the proposed
fees are essentially equal, the Independent Fiduciary will select the
Leasing Affiliate only where it makes a determination that the
affiliated service provider is the best-qualified, considering the
affiliate's experience and familiarity with the Account and the
property. The Independent Fiduciary is not required to regard the
Leasing Affiliate as its first choice for providing services for any
particular property.
(c) The Independent Fiduciary's decisions will be based solely upon
the interests of the Account. The Independent Fiduciary will
independently compile, or retain others to compile, information
relevant to its determination. This information will include the
qualifications of and the terms for engaging the Leasing Affiliate,
whether RREEF Management is also providing property management services
to the property, and the fees charged by RREEF Management for these
various services.
The Independent Fiduciary can also consider certain additional
information provided by RREEF. Such information will include: (1) a
description of the Account's policy for leasing services and the Client
Plans investing therein; (2) a description of the leasing services to
be provided; (3) the qualifications of the Leasing Affiliate to perform
the required services; (4) a statement, supported by appropriate
factual representations, as to why RREEF believes the Leasing Affiliate
is qualified to provide the services; (5) a copy of the proposed
arrangement for services, and the Leasing Affiliate's terms for the
provision of such services; (6) RREEF's reasons as to why retaining the
Leasing Affiliate is in the interest of the Account; (7) information as
to why the fees and other terms of the arrangement are reasonable as
compared to the fees charged by similar firms for similar services in
comparable locales; (8) the identity of the current non-affiliated
leasing agent, if any, and the terms under which it renders services;
(9) the identities of other non-affiliated service providers and the
terms under which they would render such services; and (10) whether the
Leasing Affiliate or any affiliate thereof is a property manager with
respect to any properties that are in competition for tenants with the
property for which the Leasing Affiliate is under consideration.
(d) If the Independent Fiduciary selects the Leasing Affiliate to
provide leasing services to an Account property, it will negotiate the
terms of the leasing agreement directly with the Leasing Affiliate.
(e) If the Independent Fiduciary does not select the Leasing
Affiliate, the Independent Fiduciary will so advise RREEF. RREEF will
then select an unrelated leasing agent and negotiate the terms of the
arrangement with the unrelated leasing agent.
13. If the Leasing Affiliate is replacing another leasing agent, or
if a leasing agreement with a Leasing Affiliate is significantly
modified, advance approval of the Independent Fiduciary will be
required. Advance approval of the Independent Fiduciary will also be
required when the Account acquires a property subject to a leasing
agreement with the Leasing Affiliate. Any decision by the Leasing
Affiliate that may affect its compensation will be reviewed and
approved by the Independent Fiduciary.
14. RREEF will have the authority to retain a Leasing Affiliate in
certain emergency situations where advance approval by the Independent
Fiduciary would be impractical (e.g., an existing leasing agent
suddenly goes out of business). Under these circumstances, RREEF will
retain the Leasing Affiliate for a period not to exceed 90 days.
However, the Independent Fiduciary will have to approve any fees paid
to the Leasing Affiliate prior to their actual payment.
15. The Independent Fiduciary will also review, at least annually
(or more frequently if it deems appropriate), the performance of the
Leasing Affiliates under each leasing agreement with the Accounts. In
conducting these periodic reviews, the Independent Fiduciary will
consider: (i) The information contained in RREEF's annual reports, as
furnished by RREEF; (ii) information furnished in connection with
RREEF's selection of the Leasing Affiliates; (iii) summaries of all
leases executed by the Leasing Affiliates; and (iv) any other
information the Independent Fiduciary believes necessary.
In addition, the Independent Fiduciary will: (i) prepare an annual
report of its activities for the prior year; (ii) render its opinion as
to the continued validity of the leasing guidelines for the subsequent
year; and (iii) recommend any amendments to, or termination of, the
leasing agreement.
If the Independent Fiduciary determines that the services of any
Leasing Affiliate are no longer necessary, or that such Leasing
Affiliate has failed to comply with its obligations under the leasing
agreement, it will instruct RREEF to terminate or modify the leasing
agreement, or to exercise other rights available under the leasing
agreement.10 RREEF will carry out such instruction from the
Independent Fiduciary to the extent it is legal and permitted by the
terms of the leasing agreement.
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\10\ In this regard, RREEF acknowledges that the Department's
regulations issued under section 408(b)(2) (29 CFR 2550.408b-2)
provide, in relevant part, that no contract or arrangement for the
provision of services is reasonable within the meaning of section
408(b)(2) and regulation 2550.408b-2(a)(2) if it does not permit
termination by the Client Plan without penalty to the Client Plan on
reasonably short notice under the circumstances to prevent the
Client Plan from becoming locked into an arrangement that has become
disadvantageous.
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16. The Independent Fiduciary will maintain written records with
respect to the determinations it makes regarding Leasing Affiliates.
The written records will reflect, among other things, the information
considered, including the identity of non-affiliated leasing agents,
the source of the information, the steps taken by the Independent
Fiduciary in reaching its decision, and the reasons for its decision.
The Independent Fiduciary will also document any actions it takes in
connection with its periodic review of the Leasing Affiliates'
performance, as well as its approval or disapproval of the fees paid to
the Leasing Affiliates for services rendered pursuant to any emergency
procedures. These written records will be delivered periodically to
RREEF or the Leasing Affiliates and kept in accordance with the
Department's recordkeeping requirements under this exemption, if
granted.
17. RREEF is one of the largest real estate managers in the United
States. RREEF maintains portfolios for its clients which represent
different types of real estate, including office, retail, residential
and industrial properties. RREEF states that it cannot use a single
Independent Fiduciary for the transactions described herein due to the
large number of Account properties it manages in many diverse real
estate markets. While some of RREEF's
[[Page 46252]]
Accounts may contain all these properties, other Accounts may have
investment guidelines that limit them to specific categories or
subcategories (e.g. office properties may include large urban ``core''
properties, other high-rise properties, suburban ``build-to-suit''
space, etc.).
RREEF represents that there are very few real estate firms
qualified to act as Independent Fiduciaries which can review leasing
arrangements on a national basis. RREEF states that even those firms
may not be the most qualified in specific markets or for specific
properties. RREEF further states that the few real estate firms that
are qualified may also manage competing properties in relevant markets.
Thus, these firms will have a conflict of interest in reviewing such
leasing arrangements. Given the large number of properties which RREEF
manages, some candidates may be disqualified because the fees they
would receive from RREEF for serving as an Independent Fiduciary would
exceed 5% of their annual revenues. In addition, RREEF states that it
cannot use a single Independent Fiduciary for the transactions
described herein because, under RREEF's agreement with the Client
Plans, a single Client Plan that invests in an Account can prevent the
use of an Independent Fiduciary that has been selected by the Client
Plans for other Accounts.
RREEF represents that each Independent Fiduciary selected for the
leasing transactions will be an experienced and recognized real estate
consulting/brokerage firm familiar with the specific markets in which
each Account property is located.
18. RREEF represents further that the leasing commissions charged
pursuant to the proposed exemption, if granted, will not exceed market
rates. The Leasing Affiliates will agree to certain limitations
regarding the aggregate leasing commissions and property management
fees they will receive for services rendered to the same property. For
purposes of this proposed exemption, the fees paid to RREEF and/or its
affiliates for leasing services provided in connection with a property
held for an Account shall not exceed: (a) 7 percent of the lease amount
for new leases; (b) 2 percent of the lease amount for renewal leases;
and (c) for leases in which outside brokers are involved, 2.75 percent
of the lease amount.
19. The fees paid to the Leasing Affiliate for providing leasing
services will be governed by a written leasing agreement that will be
binding on the Leasing Affiliates and the respective Account. The
compensation and other terms under the leasing agreement will be
comparable to the compensation and terms between unrelated parties for
similar services in connection with comparative properties in the same
or similar locales.
20. In the event RREEF offers leasing services to any existing
Account, RREEF will issue separate policy statements to the investors
in the Account. The policy statements will disclose that RREEF or the
Leasing Affiliates are under consideration to provide leasing services
to the Account properties. The policy regarding these services will be
subject to prior approval of the authorizing independent fiduciaries of
the Client Plans (the Authorizing Fiduciaries) holding at least 60
percent of the units of beneficial interest in the Multiple Client
Account.
With respect to Fund I, RREEF represents that it has already
reviewed and negotiated with an Independent Fiduciary for each Client
Plan the possibility of the Account retaining the Leasing Affiliates.
RREEF states that it has received approval from all such Independent
Fiduciaries to proceed with the proposed transactions. Accordingly, the
Client Plans that participate in Fund I should be fully aware of (a)
the potential conflicts of interest involved in the selection of the
Leasing Affiliates as service providers; (b) the identification of the
properties which may require leasing services; (c) the services to be
rendered and the fees to be charged; and (d) the selection process. In
addition, RREEF will provide the Client Plans that participate in Fund
I with notice of the proposed exemption and the final exemption, and
will require approval of the appointment of one or more Independent
Fiduciaries.
21. RREEF, as the investment manager or trustee, will furnish each
Authorizing Fiduciary, not less than 45 days prior to the
implementation of the leasing policy, with any reasonably available
information necessary for the Authorizing Fiduciary to determine
whether to give its approval. Such information will include: (a) an
explanation of the potential conflicts of interest involved in
selecting RREEF and the Leasing Affiliates to provide leasing services;
(b) properties that may require such services at the time of
disclosure; (c) a description of the services and the fees to be
charged; (d) an explanation of the selection process (including the
selection of the Independent Fiduciary); and (e) a description of the
terms, if any, upon which a Client Plan may withdraw from the Account.
In the event an authorizing plan fiduciary of any Client Plan whose
assets are invested in an Account submits a notice in writing to RREEF,
as investment manager, at least 15 days prior to the provision of
leasing services, objecting to the provision of the leasing services,
and RREEF proposes to proceed with the provision of leasing services,
the Client Plan on whose behalf the objection was tendered will be
given the opportunity to terminate its investment in the Account,
without penalty. With the exception of a Client Plan which has invested
in a closed-end Account under which the rights of withdrawal from the
Account may be limited, as provided in the Client Plan's written
agreement to invest in the Account, if a written objection to the
leasing services is submitted to RREEF any time after 15 days prior to
implementation of the leasing services (or after implementation), the
Client Plan must be able to withdraw without penalty, within such time
as may be necessary to effect such withdrawal in an orderly manner that
is equitable to all withdrawing and the non-withdrawing Client Plans.
However, the Leasing Affiliate need not discontinue providing the
leasing services, once implemented, by reason of a Client Plan electing
to withdraw after 15 days prior to the scheduled implementation date of
the leasing services. Any Client Plan which invests in a Single Client
Account may terminate the Leasing Services arrangement and withdraw
from the Account at any time (upon reasonable written notice).
As in the case of a new Account, the Client Plan's assets may be
invested in an Account which already retains the Leasing Affiliate. If
that Client Plan has not yet authorized the leasing arrangement in the
manner described above, the Authorizing Client Plan Fiduciary will
execute a prior written authorization approving the investment in the
Account and the service arrangements. Also, RREEF will provide such
Authorizing Client Plan Fiduciary with the same disclosures as those it
provided to Authorizing Fiduciaries of the Client Plans currently
invested in the Account.
Each leasing agreement may be terminated by a vote in favor of such
termination by the holders of a majority of units of beneficial
interests in the Account. Within 180 days after the vote terminating
the leasing agreement, RREEF will replace the Leasing Affiliate with an
unaffiliated leasing agent.
22. To ensure that the Client Plans investing in the Accounts have
resources and necessary investment sophistication to evaluate the
[[Page 46253]]
contemplated service arrangements, RREEF proposes the following
standard to be applied to the Multiple Client Accounts. Seventy-five
percent (75%) or more of the units of beneficial interests in the
Account must be held by Client Plans or other investors having total
assets of at least $100 million. In addition, 50 percent (50%) or more
of the Client Plans investing in the Account must have assets of at
least $100 million. For purposes of the 50% test, a group of Client
Plans maintained by a single employer or controlled group of employers,
any of which individually has assets of less than $100 million, will be
counted as a single Client Plan, if the decision to invest in the
Account (or the decision to make investments in the Account available
as an option for an individually directed account) is made by a
fiduciary other than RREEF, who exercises such discretion with respect
to plan assets in excess of $100 million. RREEF represents that this
requirement will only have an impact on Multiple Client Accounts.
Single Client Accounts will be established on behalf of Client Plans
that have more than $100 million in assets.
As an added condition to the exemption, RREEF proposes that no more
than 20 percent of a particular Client Plan's assets will be invested
in all RREEF Accounts on whose behalf the Leasing Affiliates will
provide leasing services.
23. In summary, RREEF represents that the proposed transactions
will satisfy the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) Following full disclosure by RREEF, independent Client Plan
Fiduciaries will authorize the Client Plans to participate in an
Account that will utilize the services of RREEF or a Leasing Affiliate;
(b) RREEF, as the investment manager for the Accounts, will first
determine on a property-by-property basis that it is in the best
interests of the Accounts for RREEF or a Leasing Affiliate to provide
the leasing services before it recommends to the Independent Fiduciary
that RREEF or the Leasing Affiliate provide such services;
(c) the Independent Fiduciary must consider the recommendation and
specific alternatives for obtaining leasing services for a particular
property before RREEF or a Leasing Affiliate is selected to perform
leasing services for the property;
(d) the Independent Fiduciary will evaluate the reasonableness of
the fees charged by RREEF and its Leasing Affiliates for leasing
services and will negotiate the terms of each leasing agreement;
(e) the Independent Fiduciary will review the performance of RREEF
or any Leasing Affiliate under the leasing arrangements and instruct
RREEF, as the investment manager, to terminate or modify the contract
or exercise other rights available under the contract, whenever such
actions are appropriate;
(f) the compensation paid to RREEF and the Leasing Affiliates will
be no greater than that charged by similar firms for comparable
services in connection with comparable properties in similar locales,
and such compensation will not exceed what RREEF or the Leasing
Affiliate would charge an unrelated party;
(g) the Client Plans investing in the Accounts will be subject to a
minimum Plan size requirement to assure that such Client Plans have the
resources and investment sophistication necessary to evaluate the
risks, benefits and costs associated with the service arrangements; and
(h) limitations will also be placed on the percentage of a
particular Client Plan's assets that may be invested in all of the
Accounts maintained by RREEF, on whose behalf the Leasing Affiliates
will provide leasing services.
Notice to Interested Persons
RREEF will notify each Client Plan, which maintains a Single Client
Account with RREEF, of the proposed exemption by first class mail,
facsimile, or overnight delivery via commercial courier, within 15 days
of publication of the proposed exemption in the Federal Register. With
respect to the Multiple Client Accounts, RREEF represents that Client
Plans that currently invest in such Accounts will not receive copies of
the proposed exemption because such Accounts will not be affected by
this exemption, if granted. However, for the Client Plans that invest
in any future Multiple Client Accounts, RREEF will provide copies of
this notice of proposed exemption as well as the final exemption, if
granted, prior to such investment.
For Further Information Contact: Ekaterina A. Uzlyan of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
John B. Vick, D.D.S., P.A. Pension Plan (the Plan) Located in
Minneapolis, Minnesota
[Exemption Application No. D-10578]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and 4975(c)(2) of the Code and
in accordance with the procedures set forth in 29 CFR Part 2570,
Subpart B (55 FR 32836, 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 the proposed cash sale (the Sale) of two promissory notes
(the Notes) by the Plan to Dr. John B. Vick, a party in interest and
disqualified person with respect to the Plan, provided the following
conditions are met:
(a) The Sale is a one-time transaction for cash;
(b) The terms and conditions of the Sale are at least as favorable
to the Plan as those obtainable in an arm's length transaction with an
unrelated party;
(c) The Plan receives an amount equal to the fair market value of
the Notes as determined by a qualified, independent appraiser as of the
date of Sale; and
(d) The Plan is not required to pay any commissions, costs or other
expenses in connection with the Sale.
Summary of Facts and Representations
1. The Plan, a profit sharing plan, was terminated on June 30,
1996. The Plan was sponsored by Dr. John B. Vick, a dentist practicing
in Minneapolis, Minnesota. At the time of termination, the Plan had
four participants and held assets in excess of $1.4 million.
2. Among the remaining assets in the Plan are two Notes originally
purchased in an arm's length transaction from an unrelated party. The
first promissory note carries a principal amount of $58,500 at an
interest rate of 13.75%. The term is 48 months. Interest only payments
of $2010.94 are due each quarter with a balloon payment of the
principal due on April 15, 2000. The second note, which is subordinated
to the debt of the first, carries a principal amount of $15,660 with an
interest rate of 20%. Interest only payments of $783 are due each
quarter with a balloon payment of the principal due on April 15, 2000.
The collateral for both notes is a parcel of improved real property
located in Glendale, Arizona and owned by the unrelated party.
3. The applicant requests an exemption for the proposed Sale of the
Notes to Dr. John Vick. At present, every participant in the Plan,
excluding Dr. Vick, has received his or her distribution. Dr. Vick has
transferred the majority of the assets in his account to his IRA and is
awaiting the opportunity to transfer the remainder. Because the trustee
of the IRA refuses to accept transfer of the Notes, Dr. Vick is
[[Page 46254]]
currently unable to complete the termination of the Plan and obtain, in
his personal capacity, the remaining portion of his assets from his
account in the Plan.
4. Robert N. Prentiss (Mr. Prentiss), president of the Independent
Service Company located, in Minneapolis, Minnesota, appraised the Notes
on November 19, 1997, and supplemented the appraisal on April 28, 1998.
Mr. Prentiss is an investment banker with over 20 years of experience
in valuing financial instruments, and represents that he has no present
or prospective interest in the Notes, no personal interest or bias with
respect to the parties involved, and is otherwise independent. After
analyzing the Notes, specifically focusing on the risk, liquidity,
collateral, and legal rights pertaining thereto, Mr. Prentiss
determined the value of the Notes to be equal to their face amounts.
Mr. Prentiss cited a number of reasons in support of his
conclusion. Specifically, he emphasized the following points: (1) the
Notes are highly speculative; (2) the Notes are illiquid as they cannot
be sold or paid off before their maturity dates; (3) the Notes are of
the interest only variety with the entire principal at risk during the
term; and (4) it would be difficult to obtain title in the event of
default because the collateral for the Notes is a parcel of real estate
which is subject to junior liens of $250,000. In light of the
foregoing, Mr. Prentiss believes that the Notes should be sold at par,
or $58,500 for the first note and $15,660 for the second note.
5. The applicant represents that the proposed transaction would be
administratively feasible in that it would be a one-time transaction
for cash. Furthermore, the applicant states that the transaction would
be in the best interests of the Plan in that it would enable the Plan
to dispose of the Notes thus facilitating the termination and saving on
future administrative costs. Finally, the applicant asserts that the
transaction only involves the account of Dr. Vick and will be
protective because the Plan will receive the fair market value of the
Notes as determined by a qualified, independent appraiser on the date
of Sale and will incur no commissions, costs, or other expenses as a
result of the Sale.
6. In summary, the applicant represents that the subject
transaction satisfies the statutory criteria for an exemption because:
(a) The Sale is a one-time transaction for cash; (b) The terms and
conditions of the Sale are at least as favorable to the Plan as those
obtainable in an arm's length transaction with an unrelated party; (c)
The Plan receives an amount equal to the fair market value of the Notes
as determined by a qualified, independent appraiser as of the date of
Sale; and (d) The Plan is not required to pay any commissions, costs or
other expenses in connection with the Sale.
Notice to Interested Persons
Because Dr. Vick is the only remaining participant in the Plan, it
has been determined that there is no need to distribute the notice of
the Proposed exemption (the Notice) to interested persons. Comments and
requests for a hearing are due (30) days after publication of the
Notice in the Federal Register.
For Further Information Contact: Mr. James Scott Frazier, 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 accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 24th day of August, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-23282 Filed 8-28-98; 8:45 am]
BILLING CODE 4510-29-P