[Federal Register Volume 63, Number 216 (Monday, November 9, 1998)]
[Notices]
[Pages 60398-60410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29963]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 98-51; Exemption Application No. L-
9583, et al.]
Grant of Individual Exemptions; U.S. West, Inc.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of Individual Exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) 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).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, D.C. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, 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
[[Page 60399]]
exemptions of the type proposed to the Secretary of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
U S WEST, Inc.; Located in Englewood, Colorado
[Prohibited Transaction Exemption 98-51; Application No. L-9583]
Exemption
Section I--Transactions Involving Contributions In-kind
Effective March 31, 1994, the restrictions of sections
406(a)(1)(E), 407(a)(2), 406(b)(1), and 406(b)(2) of the Act shall not
apply to voluntary contributions in-kind by U S WEST, Inc., any
successor to U S WEST, Inc., and/or any affiliates of U S WEST, Inc.
(collectively, U S WEST) of certain shares of publicly traded common
stock of U S WEST (the Stock) and/or any replacement publicly traded
shares of such Stock to certain trusts (the Trusts or Trust) for the
purpose of pre-funding welfare benefits under one or more employee
welfare benefit plans (the Plan or Plans) maintained by U S WEST,
provided that:
(a) The Plan provisions explicitly authorize U S WEST to pre-fund
benefits through in-kind contributions of Stock, and all contributions
of Stock have been and will be made in conformity with such Plan
provisions;
(b) Neither the Plans nor the Trusts have paid nor will pay,
whether in cash or in other property or in a diminution of any funding
obligation of U S WEST, any consideration for Stock contributed in-kind
by U S WEST;
(c) U S WEST has no obligation to pre-fund welfare benefits
provided to participants under any of the Plans, either pursuant to the
plan documents, the terms of any collective bargaining agreement, or
the provisions of the Act;
(d) None of the Plans have ceded, nor will cede, any right to
receive cash contributions from U S WEST;
(e) None of the Plans or Trusts have paid, nor will pay, any
commissions in connection with the contribution in-kind of Stock by U S
WEST; and
(f) Each of the conditions, as set forth below in Section II, have
been satisfied and at all times will be satisfied.
Section II--Conditions
The exemption is conditioned upon the adherence by U S WEST
to the material facts and representations described in the Notice of
Proposed Exemption (the Notice) as modified by this exemption and upon
satisfaction of the following requirements:
(a) All Stock contributed in-kind by U S WEST to any of
the Trusts or acquired by such Trusts, as a result of the
recapitalization of U S WEST, constituted qualifying employer
securities (QES), as defined in section 407(d)(5) of the Act; and all
Stock contributed in-kind in the future and any replacement publicly
traded shares of such Stock will constitute QES;
(b) Stock contributed in-kind by U S WEST or acquired as a result
of the recapitalization of U S WEST has been held in Trusts, which are
qualified under section 501(c)(9) of the Code, and which are
established for the purpose of funding life, sickness, accident, and
other welfare benefits for the participants and beneficiaries of the
Plans, and all Stock contributed in-kind in the future and any
replacement publicly traded shares of such Stock will be held in such
Trusts;
(c) All Stock contributed in-kind by U S WEST to any
Trust or acquired by any Trust as a result of the recapitalization of U
S WEST has been held in a separate account (the Account or Accounts)
under such Trust, and all Stock contributed in-kind in the future and
any replacement publicly traded shares of such Stock will be held in an
Account under such Trust. Such Accounts under a Trust have been and
will be managed by an independent fiduciary ( the I/F), who is an
independent, qualified investment manager, or any successor
independent, qualified investment manager, and who has represented and
will represent the interests of the Plans which are funded by such
Trust for all purposes with respect to the Stock for the duration of
the Trust's holding of any of such Stock;
(d) The I/F of the Accounts in the Trusts which fund any welfare
plan benefits, has accepted Stock from U S WEST, through in-kind
contributions and recapitalization of U S WEST, and will accept Stock,
through future in-kind contributions and through any replacement
publicly traded shares of such Stock, only after such I/F determines at
the time of the transactions that such transactions are feasible, in
the interest of, and protective of participants and beneficiaries of
the Plans funded by such Trusts;
(e) The I/F has had sole responsibility and, at all times, will
have sole responsibility for the ongoing management of the Accounts
under the Trusts which hold the Stock and has taken and will take
whatever action is necessary to protect the rights of the Plans funded
by such Trusts, including but not limited to all decisions regarding
the acceptance of contributions in-kind by U S WEST, the sale or
retention of such Stock, the exercise of voting rights of such Stock,
and any other acquisition or dispositions of such Stock;
(f) Any contributions in-kind of Stock made by U S WEST to any Plan
through any Trust and any acquisitions of Stock in connection with the
recapitalization of U S WEST did not cause immediately after each such
transaction, and in the future any contributions in-kind of Stock and
any replacement publicly traded shares of such Stock will not cause
immediately after each such transaction the aggregate fair market value
of such Stock, plus the fair market value of all qualifying employer
real property (QERP), as defined by section 407(d)(4) of the Act, and
the fair market value of all other QES held by such Plan to exceed 25
percent (25%) of the fair market value of the assets of such Plan as
determined on the date of each such transaction;
(g) The percentage limitations, as set forth above in paragraph (f)
of this Section II, have been and will be applied without regard to
amounts of securities issued by U S WEST that may be held by an
unrelated common or collective trust fund maintained by an independent
manager in which any of the Plans through the Trusts may have invested
or may invest, provided that the fair market value of the securities
issued by U S WEST and held in such unrelated common or collective
trust fund does not exceed 5 percent (5%) of the fair market value of
each such common or collective trust fund; and provided further that
the conditions of Prohibited Transaction Class Exemption 91-38 (PTCE
91-38) 1 are satisfied, including the requirement that the
interests of the Plans in such unrelated common or collective trust
fund does not exceed 10 percent (10%) of the total
[[Page 60400]]
of all assets in such common or collective trust fund;
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\1\ The Notice of Proposed Exemption for exemption application
number D-8414 was published at 56 FR 4856 on February 6, 1991. PTCE
91-38 was granted at 56 FR 31966 on July 12, 1991.
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(h) Nothing in the conditions, as set forth above in paragraph (f)
of this Section II, shall preclude, the holding by any Plan of Stock,
any other QES and QERP, in amounts in excess of 25 percent (25%) of the
assets of such Plan, if the aggregate fair market value of such Stock,
other QES and QERP exceeds 25 percent (25%) of the value of the assets
of such Plan solely by reason of:
(1) A greater rate of appreciation to the value of such Stock,
other QES and QERP relative to the rate of appreciation to the value of
the assets in such Plan, other than the Stock, other QES and QERP; or
(2) A greater decline in the value of the other assets of the Plan
relative to that of such Stock, other QES and QERP;
(i) None of the assets of any of the Trusts have reverted, nor at
any time will any of the assets of such Trusts revert to the use or
benefit of U S WEST.
EFFECTIVE DATE: The exemption is effective as of March 31, 1994.
Written Comments
In the Notice, the Department invited all interested persons to
submit written comments and requests for a hearing on the proposed
exemption within ninety (90) days of the date of the publication of the
Notice in the Federal Register on March 31, 1998. All comments and
requests for hearing were due by June 29, 1998.
During the comment period, the Department received two (2) requests
for a hearing. The Department has taken into consideration the concerns
expressed by the individuals who requested a hearing. After a review of
these concerns, the Department does not believe that any issues have
been raised which would require the convening of a hearing.
The Department received letters from thirty-five (35) interested
persons commenting on the subject transaction. At the close of the
comment period, the Department forwarded copies of these letters to the
applicant and requested that the applicant address in writing the
various concerns raised by the commentators. Most of the comments fell
into broad categories that the applicant responded to generally. Where
a single commentator raised a specific issue, such issue was responded
to individually. A description of the comments and the applicant's
responses thereto are summarized below.
The applicant noted that several commentators objected to the
granting of the requested exemption based on the belief that the assets
of the Plans, the assets of U S WEST Pension Plan, or the assets of
retirees would be used to purchase QES. In this regard, the applicant
reiterated that the exemption would permit the voluntary contribution
of QES by the applicant or its affiliates. Thus, it is represented that
the cost of the QES contributed to the Trusts has been and will be
borne solely by U S WEST. No assets of the Plans, of the U S WEST
Pension Plan, or of the retirees has been or will be used to pay for
the QES, nor have the Trusts ceded nor will the Trusts cede any right
to receive cash contributions in exchange for the contribution by U S
WEST of the QES.
Three (3) commentators expressed identical beliefs that the
applicant should be required to contribute to the Trusts the cash which
the applicant's affiliate, U S WEST Communications (USWC) receives from
its telephone service customers (the Rate Payers), and which is
attributable to the expense borne by the Rate Payers as a result of the
cost of the Plans being passed along to the Rate Payers in the state
rate making procedures. The three commentators that raised the rate
making issue were from Arizona, which the applicant maintains does not
permit accrued expenses for post-retirement welfare benefits to be
taken into account for purposes of setting the rates charged by USWC in
that state.
Notwithstanding the circumstances in Arizona, and in the interest
of ensuring a complete response to the issues raised, the applicant
considered the comments in light of each of the fourteen (14) states
served by USWC. In this regard, it is represented that until recently
accrued expenses for future post-retirement welfare benefits could not
be included in the calculation of cost of service for rate making
purposes. Instead, such expenses could be included in cost of service
calculations only to the extent they were paid out in the form of
benefits. Following the adoption by the Financial Accounting Standards
Board of Financial Accounting Standard 106 ( FAS 106) in 1990, most
state regulatory jurisdictions in which USWC does business have begun
permitting utilities to use some type of accrual method similar to that
provided in FAS 106 for recognizing post-retirement welfare benefit
expenses in the cost of service. These accrued expenses are not
automatically included in rates but may be included at the request of
USWC.
As part of the procedure for determining the extent to which
accrued post-retirement welfare benefit expenses should be included in
rates, many jurisdictions consider how these expenses are funded
through trusts or other means, and certain states require U S WEST to
maintain a specified minimum level of funding for benefits in one or
more external accounts (i.e. trust accounts). More specifically, some
of the states served by USWC may require a certain level of funding of
benefits be designated as funded by that state's utility customers. In
this regard, the applicant represents that no part of U S WEST's two
prior contributions of QES was attributable to funding these
designations. In the future, even if the applicant chooses to make an
additional contribution attributable to a particular state's Rate
Payers, rather than choose other alternatives, New U S WEST is able to
ensure that no part of such contribution will consist of QES, and
accordingly will do so.
The three commentators who raised the rate structuring issues,
discussed in the paragraphs above, also suggested that the Stock should
be discounted to protect the Plans against the potential loss of value
over time. In the opinion of the applicant the intent of the
commentators in making this suggestion is unclear, inasmuch as Plans
are not paying for the Stock contributed by U S WEST, and the financial
reporting standards of the Act require plan assets to be reported at
fair market value.
Several commentators objected to permitting the Plans to invest
more than the statutory limit (10%) in QES. Some of these commentators
expressed their concern that the holding by the Plans of QES in excess
of the statutory limit would reduce the security of Plan benefits (e.g.
by exposing the Plans to volatility in Stock prices). In response, the
applicant points out that welfare benefits under the Plans are not
intended to be fully pre-funded, and that the voluntary contributions
of Stock do not replace any required cash contributions of U S WEST.
The applicant notes that no business purpose would be served if U S
WEST were to contribute Stock that is expected to decline in value,
because the cost of any benefits that are not pre-funded remain a
liability of U S WEST. Accordingly, in the opinion of the applicant the
exemption is in the interest of the participants and beneficiaries of
the Plans in that U S WEST will be encouraged to make voluntary
contributions to the Plans that would not otherwise be made.
Finally, several commentators expressed concern that the proposed
exemption would affect their benefits under the Plans or their benefits
under the U S WEST Pension Plan. In response, the applicant represents
that the exemption will have no impact on these benefits. Further, one
[[Page 60401]]
commentator noted that the applicant has made certain promises relating
to the continuation of benefits to persons who retired prior to 1991.
With respect to such promises, the applicant represents that it intends
neither to enlarge nor to reduce the scope of its obligations by any
representations made in connection with the requested exemption.
In addition to the comments described above, in letters dated June
29, August 10, 1998, September 17, and September 23, 1998, the
Department also received comments and additional information from the
applicant. In these submissions, the applicant requested certain
modifications to the exemption as proposed, provided documentation for
such modifications, and informed the Department of certain
clarifications and changes in the Summary of Facts and Representations
(SFR) in the Notice. The applicant's comments fall into four (4)
categories: (1) clarification of the purpose of the contribution; (2)
the application of limits on the acquisition and holding of QES; (3)
information on the separation of U S WEST; and (4) the impact of such
separation on the requested exemption.
With respect to category 1, above, regarding the purpose of the
contribution, the applicant has requested confirmation of its
interpretation of the language in Section I of the Notice. In this
regard, Section I states that the contribution by U S WEST of Stock to
the Trusts was ``for the purpose of pre-funding post-retirement welfare
benefits'' under the Plans. In its comment, the applicant expressed its
understanding that the exemption would not require Stock or any other
specific asset contributed to a Trust to be used solely for the
provision of post-retirement welfare benefits. In this regard, the
applicant notes that where a Plan provides benefits to retirees, as
well as to active employees, and such Plan holds an interest in a
Trust, the terms of such Trust would permit the use of plan assets held
in the Trust to pay benefits on behalf of either group, to the extent
that such assets are not segregated for tax and accounting purposes for
one or the other group. The Department concurs in the understanding, as
expressed by the applicant, and has deleted the words, ``post-
retirement,'' from the language in Section I of the exemption.
With respect to category 2, above, regarding issues associated with
the application of limits on the acquisition and holding of QES, the
applicant has requested a modification of the language of Section III
(f) of the Notice. In this regard, Section III (f) states that:
any contributions in-kind of Stock made by U S WEST to any Trust,
any acquisitions of Stock in connection with the recapitalization of
U S WEST, did not cause immediately after each such transaction, and
in the future any contributions in-kind of Stock, any replacement
publicly traded shares of such Stock or any Stock purchases in
connection with rebalancing of a Trust's holding of Stock will not
cause immediately after each such transaction the aggregate fair
market value of such Stock, plus the fair market value of all
qualifying employer real property (QERP), as defined by section
407(d)(4) of the Act, and the fair market value of all other QES
held by such Trust to exceed 25 percent (25%) of the fair market
value of the assets of such Trust as determined on the date of each
such transaction.
In the opinion of the applicant the 25 percent limitation (the 25%
Limitation) should be calculated at the Plan level, rather than at the
Trust level. In this regard, the applicant believes that applying the
25% Limitation at the Plan level would ensure consistency with the
method of accounting required under the reporting rules of the Act, and
that the primary impact of applying the 25% Limitation at the Trust
level would be that fewer voluntary contributions would be made to the
trusts, specifically, to the U S WEST Occupational Welfare Benefit
Trust (formerly the U S WEST Benefit Assurance Trust) (the Assurance
Trust). Further, the applicant points out that if the final exemption
were revised to provide for calculation of the 25% Limitation at the
Plan level, rather than at the Trust level, the assets of the Assurance
Trust that could be invested in QES would not significantly exceed 25
percent (25%) of the asset of such trust.
In support of its position, the applicant represents that the value
of each Plan's interest in each Trust can be measured. In addition, the
applicant represents that each Plan holds a proportionate interest in
each Trust asset (that is, a Plan's interest in each Trust asset, is
the same as such Plan's interest in the Trust as a whole). Because each
Plan can account for its interest in the Trust and holds an undivided
interest in each of the underlying assets of the Trust in the same
proportion as its interest in the Trust as a whole, it is represented
that each Plan's interest in a particular asset, including the Stock,
can be readily determined. Because a single Plan's benefits may be
funded under more than one Trust, the applicant believes that applying
the 25% Limitation at the Plan level would provide a more useful and
accurate measurement of each Plan's interest in the Stock.
Further, it is represented that where a single Trust funds the
benefits of more than one Plan, the assets attributable to each Plan
are identifiable. The applicant represents that this is achieved either
by commingling plan assets for investment purposes and attributing a
pro rata share of each asset in the commingled Account to each Plan
participating in the Trust, or by establishing one or more separate
investment management Accounts solely on behalf of a plan participating
in the Trust, or by combining both approaches. In this regard, it is
represented that a Trust that funds benefits under more than one Plan
functions as a ``master trust.'' Moreover, when assets of a Plan are
utilized to pay benefits, the liquidation of the assets attributable to
the benefit paying Plan funded under a Trust will not affect the assets
of any other Plan funded under such Trust. Once U S WEST has determined
that benefits are to be paid for a Plan from the assets in an Account
that holds QES, then the Independent Fiduciary of such Account
continues to be responsible for the allocation as between QES or cash
equivalents in funding the benefit payment.
The Department has decided that it is in the interests of the
participants and beneficiaries whose Plan benefits are funded in whole
or in part by the assets in the Accounts under the Trusts, if the 25%
Limitation is imposed on the Plan level. This decision is based on the
representations of the applicant, as discussed in the paragraph above,
and on the fact that all Stock contributed in-kind by U S WEST in the
past or in the future to any Accounts under such Trusts have been and
will be managed by an I/F who has had and, at all times, will have sole
responsibility for the ongoing management of the Accounts under the
Trusts which hold the Stock and has taken and will take whatever action
is necessary to protect the rights of the Plans funded by such Trusts,
including but not limited to all decisions regarding the acquisition,
retention, or disposition of such Stock. Accordingly, the Department
concurs with the applicant's request to modify the language, as set
forth in Section III(f) of the Notice. However, the Department notes
that Section III(f), has been renumbered in the final exemption, as
Section II(f) which reads as follows:
any contributions in-kind of Stock made by U S WEST to any Plan
through any Trust and any acquisitions of Stock in connection with
the recapitalization of U S WEST did not cause immediately after
each such transaction, and in the future any contributions in-kind
of Stock and any replacement publicly traded shares of such
[[Page 60402]]
Stock will not cause immediately after each such transaction the
aggregate fair market value of such Stock, plus the fair market
value of all qualifying employer real property (QERP), as defined by
section 407(d)(4) of the Act, and the fair market value of all other
QES held by such Plan to exceed 25 percent (25%) of the fair market
value of the assets of such Plan as determined on the date of each
such transaction.
In addition, the Department notes that reference was made in the
language of Section III(h), as set forth in the Notice, to the
application, under certain conditions, of the 25% Limitation to the
Trust level. In order to maintain consistency throughout the exemption
the Department has renumbered Section III(h), as Section II(h) and has
substituted the word, ``Plan,'' wherever the word, ``Trust,'' appears
in the language of Section II(h). Accordingly, the language of Section
II(h) reads as follows:
nothing in the conditions, as set forth above in paragraph (f) of
this Section II, shall preclude, the holding by any Plan of Stock,
any other QES and QERP, in amounts in excess of 25 percent (25%) of
the assets of such Plan, if the aggregate fair market value of such
Stock, other QES and QERP exceeds 25 percent (25%) of the value of
the assets of such Plan solely by reason of:
(1) a greater rate of appreciation to the value of such Stock,
other QES and QERP relative to the rate of appreciation to the value
of the assets in such Plan, other than the Stock, other QES and
QERP; or
(2) a greater decline in the value of the other assets of the
Plan relative to that of such Stock, other QES and QERP.
With respect to category 3, above, regarding information relating
to the separation of U S WEST, the applicant informed the
Department that the Board of Directors of U S WEST, on April 20, 1998,
submitted for shareholder approval a proposal under which U S WEST
would be separated into two (2) independent companies. In this regard,
pursuant to the terms of the separation, those parts of the business
representing U S WEST Communications Group (the Communications Group)
and U S WEST's directory services (DEX) would be known as U S WEST,
Inc. (New U S WEST), and those parts of the business representing U S
WEST Media Group (the Media Group) would be known as MediaOne Group,
Inc. (MediaOne). It is represented that the terms of the separation
were approved for fairness by two (2) independent investment banking
firms, and that the opinions of these firms were provided to all
shareholders of U S WEST. On June 4, 1998, shareholders of U S WEST
approved the proposal to separate U S WEST, effective June 12, 1998. It
is represented that after the separation of U S WEST, there is no
ownership or management relationship between New U S WEST and MediaOne
(other than the fact that shareholders may choose to hold shares issued
by both companies).
Prior to the separation of U S WEST, the different lines of
business engaged in by U S WEST through its subsidiaries were reflected
in two (2) classes of stock, ``C'' shares and ``M'' shares (the ``C''
Shares and the ``M'' Shares). The ``C'' Shares represented the
Communications Group's business involving integrated communications,
entertainment, information and transactions services. The ``M'' Shares
reflected the Media Group's business involving cable, wireless,
directory, interactive and international services.
To effect the separation of U S WEST, it is represented that the
businesses of the Communications Group and DEX were contributed to New
U S WEST, and stock of New U S WEST was distributed to the holders of
``C'' Shares. It is represented that the ``M'' Shares continue to
reflect the business of the Media Group which after the separation of U
S WEST is engaged in by MediaOne. No additional shares were distributed
to the holders of ``M'' shares, other than $850 million shares of New U
S WEST stock that such holders received as compensation for the
transfer of DEX from the Media Group to New U S WEST.
The Department acknowledges the separation of U S WEST into New U S
WEST and MediaOne, as described by the applicant, and notes that this
information has been included in the record of the exemption. For a
more detailed description of the circumstances preceding the separation
of U S WEST and/or a description of the steps taken to effect such
separation, interested persons are encouraged to obtain a copy of the
exemption application file (L-9583) which is available in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5638, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
With respect to category 4, above, it is represented that the
separation of U S WEST into two distinct companies did not
have an impact on the holding of the Stock contributed in-kind by U S
WEST to the Assurance Trust, on March 1994, and again on March 1995. In
this regard, the applicant represents that such Stock was not affected
by the separation of U S WEST on June 12, 1998, because such Stock had
already been sold out of the Assurance Trust by December 31, 1997.
Further, it is represented that the cash proceeds from sales of ``C''
Shares or the ``M'' Shares were not used to purchase shares of Stock in
connection with ``rebalancing'' the portfolio of ``C'' Shares and ``M''
Shares by the Assurance Trust. Accordingly, the applicant represents
that the transactions, as described in Section II of the Notice and in
the SFR, have not occurred and will not occur, such that relief will no
longer be necessary, either on a retroactive or prospective basis.
Accordingly, the applicant does not object to the removal in its
entirety of Section II of the Notice from the final exemption.
The Department concurs with the applicant, has deleted Section II
from the exemption, and has renumbered the former Section III, as
Section II in the final exemption. In addition, the Department has
deleted any reference to transactions involving ``rebalancing'' of a
Trust's holding of Stock from the terms and conditions of the final
exemption.
The separation of U S WEST into two distinct companies did cause
changes in the employee welfare benefit plans sponsored by each
company. In this regard, because MediaOne and New U S WEST are not
affiliated, it is no longer possible to cover employees of each company
under the same welfare benefit plan. Accordingly, it is represented
that the respective boards of directors of each company have determined
that New U S WEST will adopt the Plans previously maintained by U S
WEST (the New U S WEST Plans), and that MediaOne will establish
``mirror'' welfare benefit plans (the MediaOne Plans) on behalf of the
former employees of U S WEST who transferred to MediaOne. It is
anticipated the welfare benefit plans maintained by New U S WEST and
MediaOne, respectively, will provide the same benefits provided by the
Plans maintained by U S WEST. In this regard, it is represented that
the operation and administration of the welfare benefit plans and
trusts maintained by New U S WEST and MediaOne will be the same
in all material respects to the operation and administration of Plans
and the Trusts established by U S WEST. It is further represented that
the welfare benefits provided to employees of New U S WEST and MediaOne
will have the same level of funding protection that such employees had
prior to the separation of U S WEST. Each company will reserve the same
right to amend or terminate, respectively, the New U S WEST Plans and
the MediaOne Plans, as was reserved by U S WEST with respect to the
Plans it sponsored. As described in the Notice, in order to pre-fund a
portion of the welfare benefits provided under the Plans, U S WEST
established
[[Page 60403]]
under section 501(c)(9) of the Code, three Trusts: (1) the Assurance
Trust, (2) the U S WEST Management Benefit Assurance Trust (the
Management Trust), and (3) the U S WEST Life Insurance and Welfare
Trust (the Life Insurance Trust). In its comment, the applicant
informed the Department of the effect of the separation of U S WEST on
these three Trust and on a fourth trust, the U S WEST VEBA Trust (the
VEBA Trust), maintained by U S WEST, pursuant to section 501(c)(9) of
the Code, to provide short-term funding of health care benefits for any
of the Plans.
In this regard, it is represented that, effective with the
separation of U S WEST, New U S WEST adopted the Assurance Trust, the
Management Trust, and the Life Insurance Trust to provide funding for
the New U S WEST Plans, while MediaOne has adopted the VEBA Trust.
Further, New U S WEST has transferred a proportionate share of the
assets and liabilities of the Management Trust and the Life Insurance
Trust to the VEBA Trust for the purpose of funding the MediaOne Plans.
In addition, the applicant has represented that no assets of the
Assurance Trust were transferred to the VEBA Trust, because the assets
of the Assurance Trust are held solely on behalf employees covered
under collective bargaining agreements, and none of these employees are
employed by MediaOne.
Notwithstanding the changes caused by the separation of U S WEST,
as described in the paragraphs above, New U S WEST and MediaOne have
requested that the final exemption continue to be available
prospectively to both companies; provided certain conditions are
satisfied. It is represented that the conditions of the exemption will
ensure that the rights of participants and beneficiaries of the New U S
WEST Plan and the MediaOne Plan will be protected. In this regard, New
U S WEST and MediaOne each confirm that the Department may rely on
representations made in the exemption application and incorporated in
the Notice, subject to those modifications necessarily resulting from
the separation of U S WEST, as described herein. Specifically, New U S
WEST and MediaOne have omitted representations (b) and (c) in paragraph
12 of the SFR in the Notice, because such conditions relate solely to
the ``rebalancing'' transactions for which exemptive relief is no
longer requested or required.
New U S WEST and MediaOne believe that it would be in the interest
of participants of the welfare benefit plans sponsored respectively by
each company to continue to receive contributions of QES. In support of
this request, it is represented that the reasons that additional
voluntary contribution of QES are in the best interest of participants
are completely unchanged. In this regard, it is represented that the
operation and administration of the welfare benefit plans and trusts
that will be maintained respectively by New U S WEST and MediaOne
``mirror'' the terms of the Plans in existence prior to the separation
of U S WEST. Further, it is represented that the level of protection
afforded to participants and beneficiaries in the New U S WEST Plans
and the MediaOne Plans will be unaffected, in that voluntary
contributions of QES will permit a higher level of contributions and
will provide greater security that assets will be available to fund
future benefits.
Finally, the applicant argues that the separation of U S WEST into
two (2) lines of business should not necessitate the filing of another
application for exemption, as such a filing would only duplicate the
information that has already been provided to the Department.
Similarly, it is represented that a separate exemption application
would not serve to provide notice to additional interested persons,
because all persons who would be interested in such application have
already been notified by the publication of Notice in the Federal
Register.
The Department concurs that the exemption will cover future
contributions in-kind of QES by New U S WEST, and accordingly,
has altered Section I of the exemption by adding the italicized words
to the language of Section I, as follows,
Effective March 31, 1994, the restrictions of sections 406(a)(1)(E),
407(a)(2), 406(b)(1), and 406(b)(2) of the Act shall not apply to
voluntary contributions in-kind by U S WEST, Inc., any successor to
U S WEST, Inc., and/or any affiliates of U S WEST, Inc.
(collectively, U S WEST) of certain shares of publicly traded common
stock of U S WEST (the Stock) and/or any replacement publicly traded
shares of such Stock to certain trusts (the Trusts or Trust) for the
purpose of pre-funding post-retirement welfare benefits under one or
more employee welfare benefit plans (the Plan or Plans) maintained
by U S WEST.
However, with regard to the request that the exemption continue to
be available prospectively to MediaOne, the Department does not believe
that the Notice, as published in the Federal Register, contemplated
future contributions in-kind of QES by MediaOne to the MediaOne Plans.
In this regard, the Department notes that the MediaOne Plans are new
``mirror'' plans which were not in existence at the time of the
publication of the Notice in the Federal Register. Further, the
Department is not convinced that the notice to interested persons that
was provided with regard to the exemption requested by U S WEST
afforded sufficient opportunity for comment from persons who would be
interested persons with regard to future transactions by MediaOne. As a
result, the Department does not believe that the exemption can be
interpreted to be available prospectively to MediaOne. MediaOne may
submit another application for exemption relief should MediaOne wish to
make voluntary in-kind contributions of QES in the future to MediaOne
Plans.
Accordingly, after full consideration and review of the entire
record, including the written comments, the Department has determined
to grant the exemption, as modified and amended herein. The comments
submitted by the commentators to the Department and the applicant's
response thereto has been included as part of the public record of the
exemption application. The complete application file, including all
supplemental submissions received by the Department, is available for
public inspection in the Public Documents Room of the Pension Welfare
Benefits Administration, Room N-5638, U.S. Department of Labor, 200
Constitution Avenue N.W., Washington, D.C. 20210.
For a complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the Notice published on March 31, 1998, 61 FR 15443.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (This is not a toll-free number.)
RREEF America L.L.C. (RREEF); Located in San Francisco, California
[Prohibited Transaction Exemption 98-52; Exemption Application No. D-
9952]
Exemption
The Department is 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 C.F.R. 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
[[Page 60404]]
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to:
(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 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
2 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
[[Page 60405]]
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.)
---------------------------------------------------------------------------
\2\ 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.
---------------------------------------------------------------------------
(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 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 a Multiple Client 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 a
Multiple Client Account must have assets of at least $100 million. 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
[[Page 60406]]
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.3
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\3\ 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.
---------------------------------------------------------------------------
(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 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, 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.4
---------------------------------------------------------------------------
\4\ 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.
---------------------------------------------------------------------------
(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 future pooled accounts
(i.e., Multiple Client Accounts) or any existing or future 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.
[[Page 60407]]
(2) RREEF--For purposes of this 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 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 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.
This exemption is 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 transactions to be consummated pursuant to the
exemption.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the notice of proposed exemption published on August 31, 1998 at 63 FR
46245 (the Notice).
Written Comments
The Department received two written comments (the Comments) with
respect to the Notice and no requests for a public hearing. The
Comments were filed by RREEF and generally request clarifications and
modifications to the Notice. Set forth below in section I is a
discussion of those aspects of the Comments which relate to the
language of the final exemption (the Exemption). In addition, section
II below discusses those aspects of the Comments which relate to the
Summary of Facts and Representations (the Summary) contained in Notice.
I. Discussion of the Comments Regarding the Exemption
1. Section II(10) of the Notice relates to the appropriate
percentage of beneficial interests in an Account which must be held by
Client Plans with a certain minimum asset size. Specifically, Section
II(10) of the Notice states, in relevant part, that 75% or more of the
units of beneficial ownership in ``an Account'' must be held by Client
Plans or other investors having total assets of at least $100 million.
In addition, Section II(10) of the Notice states that 50% or more of
the Client Plans investing in ``an Account'' must have assets of at
least $100 million.
The Comments state that the foregoing 75% and 50% tests are
relevant only in the case of, and are meant to apply to, Multiple
Client Accounts (see paragraph 22 of the Summary contained in the
Notice). For purposes of this Exemption, RREEF has represented that
Single Client Accounts will be established only for Client Plans with
at least $100 million in assets. Accordingly, RREEF requests that the
foregoing references to ``an Account'' in the first and second
sentences of Section II(10) of the Exemption be changed to ``Multiple
Client Account.''
The Department acknowledges RREEF's request, as stated in the
Comments, and has modified the language of Section II(10) of the
Exemption accordingly.
2. The Comments also state that the third sentence in Section
II(10) of the Notice provides that ``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 is made at the direction of an unaffiliated
fiduciary who exercises discretion with respect to
[[Page 60408]]
total Client Plan assets in excess of $100 million.
The Comments state that the phrase ``. . . . For purposes of the
50% test'', as it appears in the third sentence of Section II(10) of
the Notice, should be deleted. The Comments note that this reference to
only the ``50% test'' is not completely accurate in the context of
RREEF's Multiple Client Accounts, as contemplated under this Exemption.
In this regard, the Comments state that if a fiduciary unaffiliated
with RREEF directs the investment of multiple affiliated plans (usually
through a single ``master trust'') into a Multiple Client Account, it
is appropriate to treat the affiliated plans as a Single Client Plan
for both the ``75% test'' and the ``50% test'' referred to in Section
II(10). In addition, the Comments state that it is RREEF's
understanding that multiple plans of a single employer, invested as a
unit at the direction of a fiduciary independent of RREEF, would be
treated as a single Client Plan for purposes of establishing a Single
Client Account under the Exemption.
The Department acknowledges RREEF's request and has modified the
Exemption by deleting the phrase ``. . . . For purposes of the 50%
test'' in the third sentence of Section II(10) of the Exemption.
II. Discussion of the Comments Regarding the Summary
1. The Comments state that the Exemption will not be relevant to
RREEF USA Fund-I because this Multiple Client Account is in
liquidation. Moreover, as stated in the Notice, the Comments reaffirm
that RREEF has no intention of using the Exemption for any other
current Multiple Client Accounts. Therefore, the Comments note that the
references to USA Fund-I in the Notice, which are located in Paragraphs
3 and 20 of the Summary, should be disregarded.
The Department acknowledges the applicant's clarification regarding
the applicability of the Exemption to existing Multiple Client
Accounts, including USA Fund-I. Thus, in response to this Comment, the
Department has modified the definition of the term ``Accounts,'' as it
appears in Section IV(1) of the Notice, to clarify that this term does
not apply to any existing Multiple Client Accounts. Section IV(1) of
the Exemption states, in pertinent part, that the Accounts are any
future pooled accounts (i.e., Multiple Client Accounts) or any existing
or future single-customer accounts (i.e., Single Client Accounts).
2. With respect to Paragraph 9 of the Summary, the Comments state
that the discussion regarding the potential for leasing competition
among properties held by an Account and another property held by a
RREEF affiliate for its own account in the same real estate market, is
not meant to refer in any way to the potential for competition between
two properties held by two different Accounts. In the latter case,
RREEF and the Independent Fiduciary, subject to the veto rights of the
Client Plan(s), will determine whether it would be appropriate for a
Leasing Affiliate to provide Leasing Services to one or both of the
properties held by such Accounts.
3. With regard to Paragraph 10 of the Summary, the Comments state
that the reference to the use of the same Independent Fiduciary for all
Accounts that have properties in the same real estate market is not
entirely accurate. In this regard, the Comments note that RREEF
proposes to use the same Independent Fiduciary for all Accounts that
have properties of the same type in the same real estate market. Thus,
for example, different Independent Fiduciaries may be retained in the
same real estate market for retail and commercial properties.
The Department concurs with all of the Comments relating to the
Summary.
Accordingly, after giving full consideration to the entire record,
including the Comments, the Department has decided to grant the
exemption subject to the modifications and clarifications described
above. The Comments have been included as part of the public record of
the exemption application.
Interested persons should note that the complete exemption file is
available for public inspection in the Public Disclosure Room of the
Pension and Benefits Administration, Room N-5638, U.S. Department of
Labor, 200 Constitution Avenue, NW., Washington DC 20210.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Pacific Income Advisers, Inc. (PIA); Located in Santa Monica, CA
[Prohibited Transaction Exemption 98-53; Exemption Application No. D-
10324]
Exemption
Section I--Exemption Involving Plans Where PIA Is Both a Fiduciary or
Other Party in Interest With Respect to the Plan and Investment Adviser
of Certain Trusts in Which the Plans Invest
The restrictions of sections 406(a) and 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1) (A) through (F) of the Code shall not
apply to: (1) the acquisition, sale or redemption of trust units (the
Units) in the Pacific Income Advisers Fixed-Income Group Investment
Trust (Fixed Income Trust), the Pacific Income Advisers Short-Term
Group Investment Trust (Short-Term Trust), the Pacific Income Advisers
Equity Group Investment Trust (Equity Trust), and the Pacific Income
Advisers Global Group Investment Trust (Global Trust; each a Trust and
collectively, the Trusts), by employee benefit plans, and Individual
Retirement Accounts (IRA's; collectively, the Plan(s)); and (2) the
payment of fees by a Trust to Pacific Income Advisers (PIA) where PIA
is a fiduciary or other party in interest with respect to a Plan
investing in a Trust and the investment adviser to each of the Trusts,
provided the conditions of Section II are met.
Section II--Conditions
(1) (a) The investment of a Plan's assets in the each of the Trusts
and the fees to be paid by a Trust to PIA are authorized in writing by
a Plan fiduciary who is independent of PIA (Independent
Fiduciary).5 Such authorization shall be consistent with the
responsibilities, obligations and duties imposed on fiduciaries by Part
4 of Title I of the Act. In addition, such authorization shall be
either: (1) Set forth in the investment management agreement between
the Plan and PIA; (2) indicated in writing prior to each purchase or
sale; or (3) indicated in writing prior to the commencement of a
specified purchase or sale program in the Units of the Trusts.
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\5\ A fiduciary will not be deemed independent of PIA if: (1)
such fiduciary is directly or indirectly controlled by PIA or an
affiliate thereof; (2) such fiduciary or any officer, director,
partner, highly compensated employee, or the relative of such
fiduciary is an officer, director, partner, or highly compensated
employee, of PIA or an affiliate of PIA; and (3) such fiduciary
directly or indirectly receives any compensation or other
consideration for that fiduciary's own personal account in
connection with any transaction described in this exemption.
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(b) PIA does not provide investment advice to a Plan's Independent
Fiduciary within the meaning of 29 CFR 2510.3-21(c)(1)(ii) with respect
to a Plan's acquisition of Units of a Trust.
(2) Prior to making an initial investment in the Units, each Plan's
Independent Fiduciary shall receive the following written disclosures
from PIA:
(a) The proposed exemption and grant notice describing the
exemptive relief provided herein;
(b) The applicable Trust's Offering Memorandum, outlining the
investment
[[Page 60409]]
objective(s) of the Trust and the policies employed to achieve these
objectives and a description of all fees associated with investment in
the Trust; and
(c) The applicable Trust's Agreement and Declaration of Trust,
disclosing the structure and manner of operation of the Trust.
(d) A statement describing the relationship between PIA and the
Trusts.
(3) The Independent Fiduciary shall acknowledge in writing that the
Plan is an ``accredited investor'' as defined in Rule 501 of Regulation
D of the Securities Act of 1933 (1933 Act). In addition, the
Independent Fiduciary shall acknowledge in writing that it has not
relied upon the advice of PIA with respect to the acquisition, sale or
redemption of the Units.
(4) No Plan shall pay a sales commission or redemption fee, in
connection with the acquisition, sale or redemption of the Units of the
Trusts.
(5) (a) No participating Plan may invest more than 25% of its total
assets in the Global Trust.
(b) No Plan, other than a multiple employer welfare arrangement
(MEWA), a multiple employer trust (MET), or voluntary employee benefit
association (VEBA), may acquire or hold Units representing more than
20% of the assets of a Trust.6 A MEWA, MET, or VEBA may
acquire and hold Units representing up to 35% of the assets of either
the Short-Term Trust or Fixed Income Trust only. As to investment in
any other Trust, a MEWA, MET, or VEBA may not acquire or hold Units
representing more than 20% of the assets of such Trust.
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\6\ A MEWA is defined in section 3 (40)(A) of the Act and
provides benefits described in section 3(1) of the Act for employees
of two or more employers. Although the term ``MET'' is not used or
defined in Title I of the Act, a MET may be covered by Title I of
the Act, to the extent that it provides benefits described in
section 3(1) of the Act and it is established or maintained by an
employer, an employee organization, or both. A VEBA is defined in
section 501(c)(9) of the Code and is subject to Title I to the
extent that it provides benefits described in section 3(1) of the
Act and it is established or maintained by an employer, an employee
organization, or both.
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(c) For purposes of determining the percentage of the assets of a
Trust being held by a single Plan, PIA shall first make the calculation
90 days after the first Unit of a Trust is sold to such Plan.
(6)(a) At the time the transactions are entered into, the terms of
the transactions shall be at least as favorable to the Plans as those
obtainable in arm's length transactions between unrelated parties.
(b) PIA, including any officer or director of PIA, does not
purchase or sell shares of the Trusts from or to any Plan Client.
(c) The price paid or received by a Plan Client for Units of a
Trust is the net asset value per Unit at the time of the transaction
and it is the same price which would have been paid or received for the
Units of a Trust by any other investor at that time. For purposes of
this paragraph, the term ``net asset value'' means the amount for
purposes of pricing all purchases and sales calculated by dividing the
value of all securities, determined by an objective method as set forth
in each Trust's relevant Trust documents and Trust Offering Memorandum,
and other assets belonging to the Trust, less the liabilities charged
to such Trust, by the total number of Units of the Trust.
(7) The combined total of all fees paid by a participating Plan
shall constitute no more than reasonable compensation within the
meaning of section 408(b)(2)of the Act.
(8) The Plan does not pay any Plan-level investment management
fees, investment advisory fees or similar fees to PIA with respect to
any of the assets of such Plan which are invested in Units of a Trust.
This condition does not preclude the payment of investment advisory or
similar fees by the Trusts to PIA under the terms of investment
management agreements between PIA and each of the Trusts.
(9) All authorizations and approvals made by the Independent
Fiduciary regarding investment in a Trust and the fees paid to PIA are
subject to an annual reauthorization wherein any such prior
authorization shall be terminable at will by the Plan, without penalty
to the Plan, upon written notice of termination. A form expressly
providing an election to terminate the authorization (the Termination
Form) with instructions on the use of the form must be supplied to the
Independent Fiduciary no less than annually; provided that the
Termination Form need not be supplied sooner pursuant to paragraph (10)
below. The Termination Form must include the following information:
(a) The authorization is terminable at will by the Plan, without
penalty to the Plan, upon receipt by PIA of written notice from the
Independent Fiduciary; and
(b) Failure of the Independent Fiduciary to return the Termination
Form will result in continued authorization of PIA to continue to
engage in the transactions described in Sections I.
(10) PIA will provide, at least 30 days in advance of the
implementation of an additional service to a Trust by PIA or a fee
increase for investment management, investment advisory or similar
services, a written notice to the Independent Fiduciary of the Plan
Client explaining the nature and amount of the additional service for
which a fee is charged or the increase in fees.
(11) Each Plan shall receive the following:
(a) A monthly report disclosing the performance and the value of
the Plan's investment in each of the Trusts. Such monthly report shall
disclose the extent to which assets of a Plan have been shifted between
the Trusts by PIA and any fee differential resulting from such shifting
between the Trusts;
(b) An audited financial statement of each of the Trusts in which a
Plan is invested, prepared annually by a independent, certified public
accountant, including a list of investments of each Trust and their
valuations, provided to the Plan not later than 45 days after the end
of the period to which the report relates; and
(c) An annual statement of a Plan's percentage interest in each
Trust and the value of the Plan's Units, provided to the Plan not later
than 45 days after the end of the period to which the report relates.
Such report shall also include the total fees paid to PIA by each
Trust. Further, such report shall also include the brokerage fees paid
by each Trust to unrelated broker-dealers, as well as the total of all
fees and expenses paid by PIA to third parties.
(12) Brokerage transactions for the Trusts are performed by
entities unrelated to PIA for no more than reasonable compensation
within the meaning of section 408(b)(2) of the Act.
(13) PIA shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (14) of this
section to determine whether the conditions of this exemption have been
satisfied, except that (a) prohibited transaction will not be
considered to have occurred if, due to circumstances beyond the control
of PIA, the records are lost or destroyed prior to the end of the six
year period, and (b) no party in interest other than PIA shall be
subject to the civil penalty that may be assessed under section 502(i)
of the Act, or to the taxes imposed by section 4975(a) and (b) of the
Code, if the records are not maintained, or are not available for
examination as required by paragraph (14) below.
(14) (a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsection (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (13) of this
section shall be unconditionally available at their
[[Page 60410]]
customary location during normal business hours for examination by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(2) Any Independent Fiduciary of a Plan investing in a Trust, or
any duly authorized representative of such fiduciary;
(3) Any contributing employer to any Plan investing in a Trust, or
any duly authorized employee representative of such employer;
(4) Any participant or beneficiary of any participating Plan
investing in a Trust, or any duly authorized representative of such
participant or beneficiary; and
(5) Any other person or entity investing in a Trust.
(b) None of the persons described above in subparagraphs (2)-(5) of
this paragraph (14) shall be authorized to examine the trade secrets of
PIA or commercial or financial information which is privileged.
EFFECTIVE DATE: This exemption is effective August 29, 1997.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the notice of proposed exemption published on July 20, 1998 at 63 FR
38855.
Written Comments
The applicant submitted a letter and certain other information
commenting on the notice of proposed exemption (the Notice) and the
Summary of Facts and Representations contained therein (the Summary).
The major points raised by such comments are summarized below.
First, the applicant states that references made in the Notice to
the ``Pacific Income Advisers International Group Investment Trust''
should be changed to refer to the ``Pacific Income Advisers Global
Group Investment Trust''. Thus, the applicant requests that the first
reference to this Trust in the operative language of the exemption
should be changed to reflect the proper name, and that references made
thereafter in the exemption to the ``International Trust'' should be
changed to refer to the ``Global Trust''.
The Department acknowledges the applicant's request and has so
modified the language of the exemption.
Second, with respect to Paragraphs 4, 5 and 7 of the Summary, the
applicant's comments seek to clarify the relationships between PIA and
its clients, including the Plans. In this regard, the applicant states
that it is unlikely that a Plan would discontinue a separate account
investment advisory relationship with PIA and subsequently invest all
of its assets under PIA's management in Units of one or more of the
Trusts. The applicant states that it would be more likely that a Plan
would instruct PIA to sell some of the assets separately managed by PIA
and invest the proceeds in such Units.
Third, with respect to the discussion in Paragraph 10 of the
Summary regarding the fees charged to Plans for investments in each of
the Trusts, the applicant's comments state that the investment advisory
fees payable to PIA by each Trust are subject to change. Such change
must be approved in accordance with the terms and conditions set forth
in the Notice and this exemption. Thus, for example, Section II(10) of
this exemption requires that PIA provide, at least 30 days in advance
of the implementation of any fee increase for investment management,
investment advisory or similar services, a written notice to the
Independent Fiduciary of the Plan explaining the increase in fees.
Section II(9)(a) and (b) also requires that the Independent Fiduciary
be provided with a Termination Form which allows the Plan to authorize
such a fee increase under the procedures described therein.
The Department acknowledges these and other clarifications to the
information contained in the Summary, as stated in the applicant's
comment letter and accompanying materials.
Accordingly, the Department has determined to grant the exemption
as modified.
FOR FURTHER INFORMATION CONTACT: Ms. Janet Schmidt of the Department,
telephone (202) 219-8883. (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 or disqualified
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Signed at Washington, D.C., this 4th day of November, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-29963 Filed 11-6-98; 8:45 am]
BILLING CODE 4510-29-P