[Federal Register Volume 63, Number 216 (Monday, November 9, 1998)]
[Notices]
[Pages 60386-60391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29962]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10535, et al.]
Proposed Exemptions; Moody-Day, 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, 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
[[Page 60387]]
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.
Moody-Day, Inc. Profit Sharing Plan, (the Plan), Located in
Carrollton, Texas
(Application No. D-10535)
Proposed Exemption
The Department of Labor (the Department) is considering granting an
exemption under the authority of section 408(a) of the Act and section
4975(c)(2) of the Code and in accordance with the procedures set forth
in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10,
1990).\1\ If the exemption is granted, the restrictions of sections
406(a), 406(b)(1) and (b)(2) of the Act and the sanctions resulting
from the application of section 4975(a) and (b) of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to
the past sale (the Sale) by the Plan of an unimproved three-acre tract
of real property located in Austin, Texas (the Property) to Metroport
Realty Corporation (Metroport), an affiliate of Moody-Day, Inc., the
Plan sponsor and a party in interest with respect to the Plan, provided
the following conditions were satisfied:
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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally
transferred the authority of the Secretary of the Treasury to issue
exemptions under section 4975(c)(2) of the Code to the Secretary of
Labor. In the discussion of the exemption, references to sections
406 and 408 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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(a) the Sale was a one-time transaction for cash;
(b) the Plan received the fair market value of the Property on the
date of the Sale;
(c) the Property was appraised by qualified, independent real
estate appraisers;
(d) a qualified, independent fiduciary determined that the Sale was
in the best interests of the Plan; and
(e) the Plan paid no commissions or other expenses relating to the
Sale.
Effective Date of Exemption: If granted, the effective date of this
exemption will be May 24, 1995.
Summary of Facts and Representations
1. The Applicants are Donald J. Carter, William J. Hendrix, and M.
Douglas Adkins in their capacity as trustees (Trustees) of the Moody-
Day, Inc. Profit Sharing Plan, and Ronald L. Carter and Jeffery Fink
who were directors of Moody-Day, Inc. (Moody-Day) on the date of the
Sale.
2. The Applicants state that the Plan is a defined contribution
plan which had 50 participants as of the end of the 1994 Plan year. The
Applicants state further that at the time of consummation of the Sale,
the fair market value of the total assets of the Plan was $217,545. The
fair market value of the Property was determined to be $165,000 (see
paragraph 8 below) at that time. Thus, approximately 76% of the Plan's
assets was involved in the subject transaction.\2\
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\2\ It is represented that a high percentage of the Plan's
assets was involved in the Sale because the Property was one of the
only remaining assets of the Plan at the time of the transaction. In
this regard, the Sale was carried out in connection with completing
the affairs of the Plan for termination.
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3. The Property was owned by the Plan at the time of the Sale free
and clear of any encumbrances. The Property consists of approximately 3
acres of unimproved land at the Northeast corner of Middle Fiskville
Road and Northcape Drive in the City of Austin, Travis County, Texas.
The Property was not adjacent to any property owned by the Plan sponsor
or a party in interest with respect to the Plan.
The Property was acquired by the Plan in 1977 from an unrelated
party, for $47,154. The Applicants represent that the Property has been
held by the Plan since it was acquired in 1977 and it has not been
leased to or used by any party in interest or other related party
during such time.\3\
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\3\ The Department expresses no opinion herein regarding whether
the acquisition and holding of the Property by the Plan violated any
of the provisions of Part 4 of Title I of the Act. The Department is
providing no retroactive exemptive relief herein with respect to the
acquisition and holding of the Property by the Plan.
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4. The Applicants represent that the motivation for the Sale of the
Property by the Plan to Metroport was solely to benefit the Plan's
participants and beneficiaries. The Plan had been frozen since 1991 and
the participants and beneficiaries were requesting that distributions
of their assets be made. The Plan had tried, without success, to sell
the Property on the open market since 1989. The Applicants represent
that the Sale of the Property was in the best interests of the Plan and
its participants and beneficiaries. At the time of the Sale, the
Property was the last remaining asset of the Plan. Thus, the Sale
provided the necessary liquidity to allow for a termination of the Plan
and a final distribution of its assets.
Prior to the Sale, the Applicants were advised by their legal
counsel (Counsel) that the Property could be sold to Metroport pursuant
to Prohibited Transaction Exemption (PTE) 84-14 (49 FR 9494, March 13,
1984), a class exemption for certain prohibited transactions by a plan
whose assets are managed by a ``qualified professional asset manager''
or ``QPAM'' (the QPAM Exemption).\4\ The Applicants represent that they
now believe that the conditions of PTE 84-14 may not have been
satisfied with respect to the Sale. As a result, they request that the
Department consider granting an individual exemption under section
408(a) of the Act, which would be effective as of May 24, 1995, the
date of the Sale.
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\4\ PTE 84-14 provides relief from the restrictions of section
406(a) of the Act for transactions between parties in interest and
plans where a QPAM (as defined in Part V(a) of that class exemption)
is the decision-maker for the assets of the plan involved, and
certain other conditions are met.
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5. In order to fulfill what the Applicants, Moody-Day, Inc.,
Metroport and Counsel believed to be the requirements of PTE 84-14 with
respect to the Sale, on or about December 19, 1994, the Applicants, on
behalf of the Plan, hired Lucian L. Morrison (Mr. Morrison) as an
independent fiduciary for the purpose of appointing a QPAM to sell the
Property owned by the Plan. Prior to this time, Counsel had contacted
Mr. Morrison, the past President of Heritage Trust Company in Houston,
Texas, with regard to his willingness to act as an independent
fiduciary for the Plan. Counsel, on behalf of the Applicants, had
contacted Mr. Morrison because he had acted in a fiduciary capacity in
a number of
[[Page 60388]]
situations for various entities. On July 11, 1994, Counsel informed the
Applicants that Mr. Morrison was willing to act on behalf of the Plan
in appointing a QPAM to have investment discretion with respect to the
Sale. Counsel advised Moody-Day and the Applicants that in order to
comply with PTE 84-14, the Sale would proceed as follows:
(1) Mr. Morrison would appoint a QPAM to represent the Plan with
respect to the potential sale of the Property;
(2) the QPAM would hire its own appraiser or appraisers and
attorney to represent it in the transaction and, if appropriate, to
negotiate the terms of the sale between the Plan and Metroport; and
(3) after the final terms of any transaction were negotiated and
approved, the sale would close with all appropriate documents properly
executed.
Therefore, on December 19, 1994, Mr. Morrison was engaged as an
independent fiduciary of the Plan to select and hire a QPAM to evaluate
the proposed transaction and to negotiate the terms thereof. Mr.
Morrison had full authority to select the QPAM and to allocate a
portion of his fiduciary authority to the QPAM. No recommendations for
the selection of the QPAM were made by either Moody-Day, the
Applicants, or any other party in interest with respect to the Plan.
6. On December 19, 1994, a ``Limited Purpose Independent Fiduciary
Agreement'' (the Limited Agreement) was formally entered into between
Moody-Day, the Trustees, and Mr. Morrison. The purpose of the Limited
Agreement was to facilitate the Sale of the Property. The Limited
Agreement stated that the Sale would be a prohibited transaction unless
an exemption from the prohibited transaction rules of the Act was
utilized. The Limited Agreement further specified that the QPAM
Exemption was available for this purchase if the conditions of that
exemption were met.\5\
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\5\ In this regard, Part I(a) of PTE 84-14 provides that:
(a) At the time of the transaction (as defined in section V(i))
the party in interest, or its affiliate (as defined in section
V(c)), does not have, and during the immediately preceding one year
has not exercised, the authority to--
(1) Appoint or terminate the QPAM as a manager of any of the
plan's assets, or (2) negotiate the terms of the management
agreement with the QPAM (including renewals or modifications
thereof) on behalf of the plan; * * *
Part I(c) of PTE 84-14 provides that:
(c) The terms of the transaction are negotiated on behalf of the
investment fund by, or under the authority and general directions
of, the QPAM, and either the QPAM or (so long as the QPAM retains
full fiduciary responsibility with respect to the transaction) a
property manager acting in accordance with written guidelines
established and administered by the QPAM, makes the decision on
behalf of the investment fund to enter into the transaction,
provided that the transaction is not part of an agreement,
arrangement or understanding designed to benefit a party in
interest; * * *
Part V(c)(3) of PTE 84-14 provides, in relevant part, that a
named fiduciary (within the meaning of section 402(a)(2) of the Act)
of a plan and an employer any of whose employees are covered by the
plan will also be considered affiliates with respect to each other
for purposes of Part I(a) if such an employer * * * has the
authority * * * to appoint or terminate the named fiduciary or
otherwise negotiate the terms of the named fiduciary's employment
agreement.
Section 402(a) of ERISA provides that every employee benefit
plan shall be established and maintained pursuant to a written
instrument. This instrument must provide for one or more named
fiduciaries who have the authority to control and manage the
operation and administration of the plan. Under sections 402(c)(3)
and 403(a) of ERISA, only a named fiduciary has the authority to
appoint an investment manager, and such an appointment may be made
only as specifically provided in the plan instrument.
The preamble to the proposed class exemption, 47 FR 56945 at
56947 (December 21, 1982), explains that the Department is prepared
to grant broad exemptive relief only where an independent asset
manager has, and in fact exercises, discretionary authority to cause
an investment fund to enter into a transaction which is otherwise
prohibited. Party in interest transactions that are negotiated by,
e.g., an employer which sponsors a plan, and are then presented to a
QPAM for approval would not qualify for the class exemption as
proposed.
It is the view of the Department that the retention of a QPAM
solely to approve a specific transaction presented for its
consideration by a plan sponsor at the time of its engagement is
inconsistent with the underlying intent of the exemption, i.e., the
transfer of plan assets to an independent, discretionary manager
free from the undue influence of the sponsor. Such a transaction
also raises issues under section I(c) of the exemption which
requires that the transaction not be a part of an agreement,
arrangement or understanding designed to benefit a party in
interest.
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Mr. Morrison accepted his appointment as a limited purpose
independent fiduciary and agreed to act as provided for under the
Limited Agreement, the Plan Document, and the Act. Mr. Morrison
selected Sarofim Realty Advisors (SRA) as a ``QPAM'' to transact the
Sale of the Property by the Plan. SRA, as a fiduciary of the Plan,
served as investment manager with exclusive investment discretion over
the Property. The Applicants represent that SRA, as fiduciary of the
Plan, was not related to or otherwise affiliated with Moody-Day, Inc.,
Metroport, Counsel or the Applicants.
7. On December 22, 1994, Mr. Morrison, SRA and Moody-Day entered
into an ``Investment Management Agreement'' (the IMA). As independent
fiduciary, Mr. Morrison appointed SRA as an Investment Manager (IM) of
the Plan for purposes of the proposed transaction. In Section 2 of the
IMA, SRA acknowledged that in acting as an IM under the IMA, it would
be acting as a fiduciary of the Plan as defined under section 3(21) of
the Act. Section 4 of the IMA provides, in pertinent part, that the IM
shall: (1) Evaluate the proposed transaction and, if appropriate; (2)
negotiate the terms of the Sale. Section 4 also provides that the IM
shall sell the Property to Metroport if, in the IM's judgement, the
sale price negotiated by the IM represented the fair market value of
the Property as determined by the IM after considering one or more
appraisals obtained from qualified, independent appraisers. Finally,
section 6 of the IMA provides that the agreement shall terminate on the
closing date of the proposed sale in the event that the IM directs the
Plan to enter into the sale of the Property to Metroport.
8. In order to determine the fair market value of the Property,
SRA, in its capacity as IM, retained the independent appraisal firm of
Bach Thoreen McDermott, Inc., of Houston, Texas, to appraise the
Property. Mr. Steven N. Bach (Mr. Bach), MAI, prepared the appraisal
that was used to establish the value of the Property for the Sale.
6 Using the Sales Comparison Approach (i.e. which relied on
recent sales of similar properties in the open market) to value the
Property, Mr. Bach determined that the fair market value of the
Property, as of January 30, 1995, was $165,000. Mr. Bach reported his
finding to SRA on the same date.
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\6\ SRA also secured an appraisal from Crosson Dennis, Inc., an
independent real estate appraisal firm, who determined that the
Property had a fair market value of $95,000 as of December 22, 1994.
However, after consulting with Counsel and the Trustees, SRA
selected Mr. Bach for the purpose of securing a second appraisal of
the Property.
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9. On February 1, 1995, SRA in its capacity as IM, opined that
$165,000 represented the fair market value of the Property and
determined that the Sale to Metroport at that price would be in the
best interests of the Plan and its participants and beneficiaries.
10. Pursuant to SRA's findings and instructions for the Sale, the
Plan sold the Property to Metroport for $165,000 in cash on May 24,
1995. In this regard, a Special Warranty Deed conveying title to the
Property from the Plan to Metroport was signed on May 24, 1995 by a
Trustee of the Plan. With respect to the Sale, the Plan paid no
commissions or other expenses.
Moody-Day represents that all parties involved in the Sale
recognized that Metroport was paying the Plan an amount which
represented no less than the current fair market value of the Property.
11. In summary, the Applicants represent that the requested
exemption
[[Page 60389]]
will satisfy the criteria of section 408(a) of the Act for the
following reasons: (a) The Sale was a one-time transaction for cash;
(b) the Plan received the fair market value of the Property on the date
of the Sale; (c) the fair market value of the Property was determined
by an independent, qualified real estate appraiser at the time of the
Sale; (d) a qualified, independent fiduciary acting on behalf of the
Plan appointed an independent investment manager who negotiated the
terms of the transaction, determined that the Sale was in the best
interests of the Plan, and assured that the Plan received an amount in
cash equal to the fair market value of the Property; and (e) the Plan
paid no commissions or other expenses relating to the Sale.
FOR FURTHER INFORMATION CONTACT: Janet L. Schmidt of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Mohammad J. Iqbal Employee Profit Sharing Plan and Trust (the
Plan), Located in Elizabethtown, KY
(Application Number D-10614)
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, August 10, 1990). If the exemption is
granted the restrictions of 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 12 Krugerrand gold
coins (the Coins) by the individually directed account (the Account) in
the Plan of Dr. Mohammad J. Iqbal (Dr. Iqbal), to Dr. Iqbal, a party in
interest and disqualified person with respect to the Plan, provided
that the following conditions are met:
(a) The Sale is a one-time transaction for cash;
(b) The terms and conditions of the Sale are as least as favorable
to the Account as those obtainable in an arm's length transaction with
an unrelated party;
(c) The Account receives the fair market value of the Coins as of
the date of Sale; and
(d) The Account is not required to pay any commissions, costs, or
other expenses in connection with the Sale.
Summary of Facts and Representations
1. The Plan is a defined contribution profit-sharing plan that
provides its 3 participants with the opportunity to direct the
investment of their individual accounts. The Plan is sponsored by Dr.
Iqbal, who also serves as Plan Trustee and Plan Administrator. As of
December 31, 1997, the Plan held assets valued at approximately
$2,199,000. As of the same date, Dr. Iqbal's Account held assets valued
at approximately $2,110,000.
2. Among the assets in the Account are 12 Krugerrand gold coins.
The Coins, issued by the South African government, were purchased by
the Account on March 6, 1992, for $4,848 from the Gumer & Company
brokerage firm located in Louisville, Kentucky.7 As of
Friday, October 23, 1998, the asking price in the Wall Street Journal
was $300 per coin.
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\7\ The applicant represents that, at the time of the original
acquisition, the Plan was not an ``individually directed account
plan.'' The Department notes that section 408(m) of the Code
provides, in pertinent part, that ``[t]he acquisition * * * by an
individually-directed account under a plan described in section
401(a) of any collectible shall be treated (for purposes of this
section and section 402) as a distribution from such account in an
amount equal to the cost to such account of such collectible.''
Section 408(m)(2)(A) includes coins in the definition of the term
collectible. In this regard, the Department is not providing any
exemptive relief to the extent section 408(m) is applicable to the
facts in this case.
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3. The applicant requests an exemption for the proposed Sale of the
Coins by the Account to Dr. Iqbal. Dr. Iqbal represents that he will
pay fair market value for the Coins on the date of the Sale, as
determined by the asking price listed in the ``Cash Prices'' table in
the Wall Street Journal on such date. The applicant wishes to engage in
the proposed transaction because the Coins have steadily declined in
value.8 Dr. Iqbal wishes to have the Account reinvest the
proceeds from the proposed Sale in assets which may generate a higher
rate of return.
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\8\ The Department expresses no opinion in this proposed
exemption as to whether the acquisition and the subsequent holding
of the Coins by the Account violated any of the fiduciary
responsibility provisions of Part 4 of Title I of the Act.
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4. 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 Account because the Sale of the Coins
would enable the Account to invest the proceeds from the Sale in other
assets and potentially achieve a higher rate of return. Finally, the
applicant asserts that the transaction will be protective of the rights
of the participant and beneficiary as indicated by the fact that the
Account will receive the fair market value of the Coins as of the date
of Sale, and will incur no commissions, costs or other expenses as a
result of the Sale.
5. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria of section 408(a) of the
Act and section 4975(c)(2) of the Code because: (a) The Sale will be a
one-time transaction for cash; (b) the terms and conditions of the Sale
will be at least as favorable to the Account as those obtainable in an
arm's length transaction with an unrelated party; (c) the Account will
receive the fair market value of the Coins as of the date of Sale; and
(d) the Account will not be required to pay any commissions, costs, or
other expenses in connection with the Sale.
Notice to Interested Persons: Because Dr. Iqbal is the only
participant to be affected by the proposed transaction, it has been
determined that there is no need to distribute the notice of proposed
exemption to (the Notice) to interested persons. Comments and requests
for a hearing are due thirty (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.)
Individual Retirement Accounts (Collectively, the IRAs) for William
N. Albright, Victor Hamre, and Richard Pearson, (Collectively, the
Participants) Located in Westerville, Ohio; Chicago, Illinois; and
New York, New York, Respectively
(Application No. D--10656, 10657, 10658)
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,
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
cash sales (the Sales) of certain shares of stock (the Stock) in the
First Community Bancshares Corp. (First Community) by each IRA to its
respective Participant, a disqualified person with respect to the
IRA,9 provided that the following conditions are met:
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\9\ There is no jurisdiction under 29 CFR Sec. 2510.3(b) since
the IRAs have only one participant. However, there is jurisdiction
under Title II of the Act pursuant to section 4975 of the Code.
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(a) The terms and conditions of the Sales will be at least as
favorable to each
[[Page 60390]]
IRA as those obtainable in arm's length transactions with an unrelated
party;
(b) The Sales will be one-time transactions for cash;
(c) The IRAs will receive the fair market value of the Stock as
established by a qualified, independent appraiser; and
(d) The IRAs will pay no commissions, costs or other expenses with
respect to the Sales.
Summary of Facts and Representations
1. The IRAs are individual retirement accounts, as described in
Section 408(a) of the Code. Each IRA owns shares of Stock in First
Community. First Community is a bank holding company located in Milton,
Wisconsin with 230,789 shares of Stock issued and outstanding. First
Community's primary assets are First Community's 100% ownership of two
banks: Citizens Savings Bank located in Anamosa, Iowa with
approximately $37.6 million in total assets and First Community Bank
located in Milton, Wisconsin with approximately $62.7 million in total
assets.
2. The Participants of the IRAs are: William N. Albright, the
president of First Community Bank; Victor Hamre, the president of
Citizens Savings Bank; and Richard Pearson, a director at both First
Community Bank and Citizens Savings Bank. The Participants describe the
IRAs as follows:
(a) The IRA of William N. Albright (the Albright IRA) currently
holds total assets valued at approximately $289,538. The Albright IRA's
ownership of 9,200 shares of the Stock comprises 99.74% of the Albright
IRA's total assets and represents a 3.99% interest in First
Community.10 The Albright IRA acquired the Stock in 1995 for
investment purposes from an existing First Community shareholder for
$23.00 per share.
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\10\ The Department notes that the Internal Revenue Service has
taken the position that a lack of diversification of investments may
raise questions with respect to the exclusive benefit rule under
section 401(a) of the Code. See, e.g. Rev. Rul. 73-632, 1973-2 C.B.
128. The Department further notes that section 408(a) of the Code,
which describes the tax qualification provisions for IRAs, mandates
that a trust be created for the exclusive benefit of an individual
or his beneficiaries. However, the Department is expressing no
opinion in this proposed exemption regarding whether violations of
the Code have taken place with respect to the purchase and
subsequent retention of the Stock by the Participants.
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(b) The IRA of Victor Hamre (the Hamre IRA) currently holds total
assets valued at approximately $82,907. The Hamre IRA's ownership of
1,087 shares of the Stock comprises 41.16% of the Hamre IRA's total
assets and represents a 0.47% interest in First Community. The Hamre
IRA acquired the Stock in 1995 for investment purposes from an existing
First Community shareholder for $23.00 per share.
(c) The IRA of Richard Pearson (the Pearson IRA) currently holds
total assets valued at approximately $413,084. The Pearson IRA's
ownership of 5,941 shares of the Stock comprises 41.73% of the Pearson
IRA's total assets and represents a 2.57% interest in First Community.
The Pearson IRA acquired the Stock for investment purposes from First
Community when First Community issued new shares in 1991 and 1992 for
$17.15 and $19.14 per share, respectively.11
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\11\ To the extent that First Community or other sellers of the
Stock were not disqualified persons with respect to the IRAs under
section 4975(e)(2), the purchase of the Stock by the IRAs does not
constitute a prohibited transaction under section 4975(c)(1)(A) of
the Code. However, the purchase and holding of the Stock raises
questions under section 4975(c)(1)(D) and (E) depending on the
degree (if any) of the IRA participant's interest in the
transaction. 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. The IRA sponsors,
as presidents or director of the First Community Bank or Citizens
Savings Bank, may have interests in the proposed transactions which
may have affected their best judgment as fiduciaries of their IRAs.
In such circumstances, the transactions may have violated
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 holdings of the Stock by the IRAs, the Department is
extending no relief for these transactions herein.
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3. The Participants represent that business considerations have
recently caused First Community to elect to be taxed as a Subchapter S
corporation. This election is tentatively scheduled to become effective
as of the close of business on December 31, 1998. The Participants
propose to purchase the Stock from their respective IRAs to avoid the
violation of section 1361 of the Code which prohibits IRAs from holding
stock in a Subchapter S corporation.
4. Mr. Kent Fisher and Mr. Neal Richardson (collectively, the
Appraisers) appraised the Stock on June 30, 1998. The Appraisers are
both experienced business appraisers for Lindgren, Callihan, Van Osdol
& Co., Ltd., an appraisal company independent of the IRAs and the
Participants. The Appraisers represent that they have no present or
contemplated financial interest in First Community and their fees were
not contingent upon the results of their findings. In their evaluation
of the Stock, the Appraisers relied solely on the Private Market
Method.12 The Appraisers concluded that the fair market
value of the Participants' interest in the non-marketable, non-
controlling Stock was $31.39 per share.13
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\12\ Although the Appraisers considered the Public Market Method
in their evaluation, they determined that this method was too
difficult to implement due to First Community's geographic location
and financial structure. The Appraisers additionally considered the
prices paid for the Stock in previous Stock purchases but determined
that there were no recent purchases which would provide an accurate
valuation of the Stock.
\13\ The Appraisers calculated the price of the Stock by first
adjusting the equity levels of a comparable group of recently sold
banks to reflect 8% or ``normal'' capitalization levels. The
Appraisers then determined the average price to ``normal'' equity
ratio for this group of banks and multiplied this ratio against
First Community's adjusted book value. After subtracting First
Community's debt from this amount to calculate First Community's
value, this value was then divided by the number of outstanding
shares to determine the Stock's price per share. Finally, the
Appraisers discounted the resulting price per share to reflect the
Stock's non-marketable and non-controlling nature.
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5. The Participants propose to purchase the Stock from their
respective IRAs in one-time transactions for cash. The Participants
represent that the Sales will be in the best interest of the IRAs
because the Sales will allow for greater diversification of the IRAs'
assets and the Stock will be purchased at a price per share greater
than the price per share initially paid by the IRAs. Additionally, the
Participants represent that the Sales will be protective of the rights
of each IRA's participant because each IRA will receive cash equal to
the fair market value of the Stock, as determined by a qualified,
independent appraiser, and each IRA will incur no commissions, costs,
or other expenses as a result of the Sales.
6. In summary, the Participants represent that the Sales satisfy
the statutory criteria of section 4975(c)(2) of the Code because:
(a) The terms and conditions of the Sales will be at least as
favorable to each IRA as those obtainable in arm's length transactions
with an unrelated party;
(b) The Sales will be one-time transactions for cash;
(c) The IRAs will receive the fair market value of the Stock as
established by a qualified, independent appraiser; and
(d) The IRAs will pay no commissions, costs or other expenses with
respect to the Sales.
Notice to Interested Persons: It has been determined that there is
no need to distribute the notice of proposed exemption (the Notice) to
interested persons since the Participants are the only participants in
the IRAs. Comments and requests for a hearing are
[[Page 60391]]
due thirty (30) days after publication of the Notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. Christopher J. Motta 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 4th day of November, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-29962 Filed 11-5-98; 8:45 am]
BILLING CODE 4510-29-P