[Federal Register Volume 64, Number 77 (Thursday, April 22, 1999)]
[Notices]
[Pages 19807-19816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10104]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10021, et al.]
Proposed Exemptions; First Security Corporation (FSC) et al.
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) the name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
[[Page 19808]]
statement of the facts and representations.
First Security Corporation (FSC) Located in Salt Lake City, UT
[Application No. D-10021]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).1
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\1\ For purposes of this proposed exemption, reference to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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Section I. Proposed Exemption for the In-Kind Transfer of Assets
If the exemption is granted the restrictions of section 406(a) and
section 406(b) of the Act and the sanctions resulting from the
application of section 4975 of the Code by reason of section
4975(c)(1)(A) through (F) shall not apply to the in-kind transfers,
that occurred on December 28, 1994, to any open-end investment company
(the Fund or Funds) registered under the Investment Company Act of 1940
(the Investment Company Act) to which FSC or any of its affiliates
(collectively, First Security) serves as investment adviser and/or may
provide other services, of the assets of various employee benefit plans
(the Plan or Plans) that are held in certain collective investment
funds (the CIF or CIFs) maintained by First Security, in exchange for
shares of such Funds, provided that the following conditions were met:
(a) A fiduciary (the Second Fiduciary) which was acting on behalf
of each affected Plan and which was independent of and unrelated to
First Security, as defined in paragraph (g) of Section II below,
received advance written notice of the in-kind transfer of assets of
the CIFs in exchange for shares of the Funds, a full and detailed
written disclosure of information concerning any such Fund including,
but not limited to--
(1) A current prospectus for each of the Funds in which such Plan
considered investing;
(2) A statement describing the fees for investment management,
investment advisory, or other similar services, any fees for secondary
services (Secondary Services), as defined in paragraph (h) of Section
II below, and all other fees charged to or paid by the Plan and by the
Funds to First Security, including the nature and extent of any
differential between the rates of such fees;
(3) The reasons why First Security considered such investment to be
appropriate for the Plan;
(4) A statement describing whether there were any limitations
applicable to First Security with respect to which assets of a Plan may
be invested in the Funds, and, if so, the nature of such limitations;
and
(5) When available, upon request of the Second Fiduciary, a copy of
the proposed exemption and/or a copy of the final exemption, if
granted.
(b) On the basis of the information described above in paragraph
(a) of this Section I, the Second Fiduciary authorized in writing--
(1) The investment of assets of the Plans in shares of the Fund, in
connection with the transactions set forth in Section I;
(2) the investment portfolios of the Funds in which the assets of
the Plans were invested; and
(3) the fees received by First Security in connection with its
services to the Funds. Such authorization by the Second Fiduciary was
consistent with the responsibilities, obligations and duties imposed on
fiduciaries by Part 4 of Title I of the Act.
(c) All transferred assets were securities for which market
quotations were readily available, or cash.
(d) No sales commissions or redemption fees, including fees that
are payable pursuant to Rule 12b-1 of the Investment Company Act (the
12b-1 Fees), were paid by the Plans in connection with the in-kind
transfers of the assets of the CIFs in exchange for shares of the
Funds.
(e) Neither First Security nor its affiliates, including any
officers or directors, would be permitted to purchase from or sell to
any of the Plans shares of any of the Funds.
(f) The Plans were not sponsored or maintained by First Security.
(g) The transferred assets in exchange for shares of such Funds
constituted the Plan's pro rata portion of all assets that were held by
the CIFs prior to the transfer. A Plan not electing to invest in the
Fund received a cash payment representing a pro rata portion of the
assets of the terminating CIF before the final liquidation took place.
(h) The CIFs received shares of the Funds that had a total net
asset value equal to the value of the transferred assets of the CIFs
exchanged for such shares on the date of transfer.
(i) The current market value of the assets of the CIFs transferred
in-kind in exchange for shares of the Funds was determined in a single
valuation performed in the same manner and at the close of business on
the same day, using independent sources in accordance with the
procedures set forth in Rule 17a-7(b) (Rule 17a-7) under the Investment
Company Act, as amended from time to time or any successor rule,
regulation, or similar pronouncement and the procedures established
pursuant to Rule 17a-7 for the valuation of such assets. Such
procedures required that all securities for which a current market
price could not be obtained by reference to the last sale price for
transactions reported on a recognized securities exchange or NASDAQ
were to be valued based on an average of the highest current
independent bid and lowest current independent offer, as of the close
of business on the last business day preceding the CIF transfers
determined on the basis of reasonable inquiry from at least three
sources that are broker-dealers or pricing services independent of
First Security.
(j) Not later than 30 days after completion of each in-kind
transfer of assets of the CIFs in exchange for shares of the Funds,
First Security sent by regular mail to the Second Fiduciary, which was
acting on behalf of each affected Plan and which was independent of and
unrelated to First Security, as defined in paragraph (g) of Section II
below, a written confirmation that contained the following information:
(1) The identity of each of the assets that was valued for purposes
of the transaction in accordance with Rule 17a-7(b)(4) under the
Investment Company Act;
(2) The current market price, as of the date of the transfer, of
each such security involved in the purchase of Fund shares; and
(3) The identity of each pricing service or market maker consulted
in determining the value of such assets.
(k) Not later than 90 days after completion of each in-kind
transfer of assets of the CIFs in exchange for shares of the Funds,
First Security sent by regular mail to the Second Fiduciary, which was
acting on behalf of each affected Plan and which was independent of and
unrelated to First Security, as defined in paragraph (g) of Section II
below, a written confirmation that contained the following information:
(1) The number of CIF units held by each affected Plan immediately
before the conversion (and the related per unit value and the aggregate
dollar value of the units transferred); and
(2) the number of shares in the Funds that were held by each
affected Plan
[[Page 19809]]
following the conversion (and the related per share net asset value and
the aggregate dollar value of the shares received).
(l) As to each individual Plan, the combined total of all fees
received by First Security for the provision of services to the Plans,
and in connection with the provision of services to any of the Funds in
which the Plans hold shares acquired in connection with an in-kind
transfer transaction, was not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
(m) On an ongoing basis, First Security has provided and will
continue to provide a Plan investing in a Fund--
(1) At least annually with a copy of an updated prospectus of such
Fund; and
(2) at least annually with a report or statement (which may take
the form of the most recent financial report, the current statement of
additional information, or some other written statement) which contains
a description of all fees paid by the Fund to First Security, upon the
request of such Second Fiduciary.
(n) All dealings between the Plans and any of the Funds have been
and will remain on a basis no less favorable to such Plans than
dealings between the Funds and other shareholders holding the same
class of shares as the Plans.
(o) First Security has maintained and will maintain for a period of
6 years the records necessary to enable the persons, as described below
in paragraph (p)(1) of this Section I, to determine whether the
conditions of this proposed exemption have been met, except that:
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of First Security,
the records are lost or destroyed prior to the end of the 6 year
period; and
(2) no party in interest, other than First Security, 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 below by paragraph (p) of this Section I.
(p)(1) Except as provided in paragraph (p)(2) of this Section I and
notwithstanding any provisions of subsection (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (o) of Section II
above are unconditionally available at their customary location for
examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC);
(B) Any fiduciary of each of the Plans who has authority to acquire
or dispose of shares of any of the Funds owned by such a Plan, or any
duly authorized employee or representative of such fiduciary; and
(C) any participant or beneficiary of the Plans or duly authorized
employee or representative of such participant or beneficiary.
(2) None of the persons described in paragraph (p)(1)(B) and
(p)(1)(C) of this Section I shall be authorized to examine trade
secrets of First Security, or commercial or financial information which
is privileged or confidential.
Section II. Definitions
For purposes of this proposed exemption--
(a) The term ``First Security'' means FSC and any affiliate of FSC,
as defined in paragraph (b) of this Section II.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund,'' ``Funds'' or ``Affiliated Funds'' means any
open-end management investment company or companies registered under
the Investment Company Act for which First Security serves as
investment adviser and/or provides any Secondary Service as approved by
such Funds. As noted in the Preamble, the Funds are also referred to as
the ``Affiliated Funds'' to distinguish them from certain third party
funds (the Third Party Funds) for which First Security and its
affiliates provide subadministrative services and which are not
involved in conversion transactions that are described herein.
(e) 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 a method as set forth in a Fund's prospectus
and statement of additional information, and other assets belonging to
each of the portfolios in such Fund, less the liabilities charged to
each portfolio, by the number of outstanding shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term ``Second Fiduciary'' means a fiduciary of a plan who
is independent of and unrelated to First Security. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to First Security if:
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by, or is under common control with First Security;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary is an officer, director,
partner, or employee of First Security (or is a relative of such
persons); or
(3) Such Second Fiduciary directly or indirectly receives any
compensation or other consideration for his or her own personal account
in connection with the transactions described in this proposed
exemption.
If an officer, director, partner, or employee of First Security (or
a relative of such persons), is a director of such Second Fiduciary,
and if he or she abstains from participation in (A) the choice of the
Plan's investment manager/adviser or (B) the approval of any purchase
or sale by the Plan of shares of the Funds, in connection with the
transactions described in Section I, then paragraph (g)(2) of this
Section II, shall not apply.
(h) The term ``Secondary Service'' means a service, other than an
investment management, investment advisory, or similar service, which
is provided by First Security to the Funds, including but not limited
to custodial, accounting, brokerage, administrative, or any other
service.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of December 28, 1994.
Preamble
First Security initially filed a request for retroactive and
prospective exemptive relief (Exemption Application No. D-09916) with
the Department to permit the in-kind transfer of Plan assets held in
CIFs maintained by First Security to any Affiliated Fund for which
First Security might serve as investment adviser and/or provide other
fiduciary services. In addition, First Security requested that the
exemption cover any fees it might receive from the Affiliated Funds as
well as from certain Third Party Funds
[[Page 19810]]
for which it might serve as a custodian, subadministrator or other
service provider. If granted, the exemption would have been effective
as of December 28, 1994.
Upon further consideration, First Security decided to withdraw the
fee transaction aspect of its exemption request and continue to rely on
its interpretation of Prohibited Transaction Exemption (PTE) 77-4 (42
FR 18732, April 8, 1977) with respect to its receipt of fees from the
Affiliated Funds. In pertinent part, PTE 77-4 permits the purchase and
sale by an employee benefit plan of shares of a mutual fund when a
fiduciary with respect to the plan is also the investment adviser of
the investment company. In addition, Section II(c) of PTE 77-4
requires, in part, that a plan may pay an investment advisory fee to
the plan fiduciary based on total plan assets from which a credit has
been subtracted representing the plan's pro rata share of investment
advisory fees paid by the plan to the mutual fund.
The Department expresses no opinion herein on whether interim and
subsequent fee arrangements adopted by First Security comply with the
relevant provisions of PTE 77-4. As a result of the uncertainty
regarding the application of PTE 97-41 2 to the original
exemption request, the Department has made a determination to propose
the exemption and limit the scope of exemptive relief to the three
conversion transactions described below.
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\2\ PTE 97-41 is a class exemption which permits an employee
benefit plan (the Client Plan) to purchase shares of one or more
open-end management investment companies (i.e., Funds) registered
under the Investment Company Act, the investment adviser for which
is a bank (the Bank) or a plan adviser (the Plan Adviser) registered
under the Investment Advisers Act of 1940 (the Advisers Act), that
also serves as a fiduciary of the Client Plan, in exchange for plan
assets transferred in-kind to the Fund from a CIF maintained by the
Bank or the Plan Adviser, in connection with the complete withdrawal
of a Client Plan's assets from the CIF.
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Summary of Facts and Representations
1. The parties involved in the in-kind transfer transactions that
are discussed herein are described as follows:
(a) FSC is a national association bank holding company/financial
services corporation incorporated under the laws of the State of
Delaware and headquartered in the State of Utah. FSC's affiliates
include the following banks: First Security Bank of New Mexico, N.A.;
First Security Bank of Oregon; First Security Bank of Utah, N.A. (FSB
Utah); First Security Bank of Idaho, N.A. (FSB Idaho); First Security
Trust Company of Nevada (FSB Nevada); First Security Bank of Wyoming;
and First Security Investment Management, Inc. (FSIM), an indirect,
wholly owned subsidiary registered as an investment adviser under the
Advisers Act. As of December 31, 1997, First Security had aggregate
assets under management of approximately $5.2 billion. FSB Utah
formerly served as trustee with respect to the CIFs described herein
and FSIM serves as investment adviser to the Funds also described
herein.
(b) The Plans consist of retirement plans qualified under section
401(a) of the Code, pension plans as defined in section 3(2) of the
Act, ``plans'' as defined in section 4975(e)(1) of the Code, including
certain individual retirement accounts (the IRAs) that are subject to
section 408(a) of the Code and certain Keogh Plans that are qualified
under section 401(a) of the Code. For these Plans, First Security
serves as a directed trustee, a discretionary trustee, an investment
manager or a fiduciary. The Plans also include participant-directed
plans subject to the provisions of section 404(c) of the Act
3 but they do not include any plans sponsored by First
Security.4 Whether a Plan would be an investor in a CIF at
the time of a conversion transaction or elect to invest in any Fund
depended solely on the decision of a Plan fiduciary which was
independent of First Security.
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\3\ The Department is not providing exemptive relief to such
Plans to the extent such transactions are covered under section
404(c) of the Act.
\4\ The applicants have not requested exemptive relief with
respect to any investment in the Funds by Plans sponsored by First
Security. The applicants note that First Security-sponsored plans
might acquire or redeem shares in the Funds pursuant to Prohibited
Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977). PTE
77-3 permits the acquisition or sale of a registered, open-end
investment company by an employee benefit plan covering only
employees of such investment company, employees of the investment
adviser or principal underwriter for such investment company, or
employees of any affiliated person (as defined therein) of such
investment adviser or principal underwriter, provided certain
conditions are met. The Department is expressing no opinion in this
proposed exemption regarding whether any transactions with the Funds
by First Security-sponsored Plans would be covered by PTE 77-3.
Similarly, First Security has not requested exemptive relief
with respect to future purchases or sales of shares of a Fund by
Plans since it believes such transactions would be covered by PTE
77-4.
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(c) The CIFs consisted of certain portfolios of the Affiliated
Banks of First Security Corporation Investment Trust for Employee
Benefit Plans. These portfolios were the Common Stock Trust, the Two
Year Bond Trust and the Intermediate Corporate/Government Bond Trust.
As of September 30, 1994, the aggregate fair market value of these CIFs
was approximately $66 million. Participation in the CIFs was open to
any Plan with respect to which a First Security bank was a fiduciary.
As described below, the three CIFs were terminated as of December 28,
1994 following the conversion transactions.
(d) The Funds consist of separate portfolios of open-end investment
companies registered under the Investment Company Act. The Funds
constitute part of the Achievement Funds Trust, a registered, open-end
series management investment company which has been organized under
Massachusetts law as an unincorporated business trust. The Funds are
identified as follows: the Short Term Bond Fund, the Intermediate Bond
Fund, the Equity Fund, the Balanced Fund, the Idaho Municipal Bond Fund
and the Short Term Municipal Fund.5
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\5\ Although the Idaho Municipal Fund and the Short Term
Municipal Fund are included within the Achievements Fund Trust,
these Funds are not offered to Plan investors.
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FSIM serves as investment adviser to the Funds. In this capacity,
FSIM makes investment decisions with respect to the assets of each Fund
and reviews, supervises and administers each Fund's investment program.
In the future, First Security proposes to serve as the subadministrator
for the Funds and will provide Secondary Services to the Funds.
Two classes of beneficial interests (i.e., shares) in the Funds
have been issued. Retail Class A Shares are offered primarily to
individuals (including certain non-fiduciary IRA and Keogh accounts).
Retail Class D Shares are offered to individuals, Plans and IRAs
through intermediaries such as banks or investment managers. Except for
their fee structures, the two classes are identical and hold interests
in the same underlying Fund assets.
2. First Security represents that it has maintained CIFs as
investment options for Plans in accordance with requirements under
Federal or state banking laws that apply to collective investment
trusts. However for business reasons, it decided to terminate the
Common Stock Trust, the Two Year Bond Trust and the Intermediate
Corporate/Government Bond Trust and to offer Plans formerly
participating in such CIFs alternative investments in certain Funds.
Because interests in CIFs generally must be liquidated or withdrawn to
effect distributions, First Security believed that the interests of the
Plans investing in CIFs would be better served by in-kind transfers to
the Funds. Overall, First Security believed that the Funds would offer
Plans
[[Page 19811]]
numerous advantages as pooled investment vehicles, including daily
valuations reported in newspapers of general circulation, increased
liquidity, portability, investment consolidation, voting and other
shareholder rights. Further, First Security wished to expand the range
of investment options available to Plans by offering other Funds (i.e.,
the Balanced Fund, the International Equity Portfolio and the Small Cap
Growth Portfolio) that did not correspond to its existing CIFs.
3. First Security also noted that Plans investing in the Funds
would periodically receive certain disclosures concerning the Funds.
Such disclosures would include, but would not be limited to, (a) an
updated copy of the prospectus provided on an annual basis; and (b) an
annual report containing audited financial statements of the Funds and
information regarding such Funds' performance (unless such information
is included in the prospectus of the Funds) and the fees paid to First
Security, depending upon the type of Plan account that was established.
Further, First Security represented that it would report all
transactions in shares of the Funds in periodic account statements
provided to the Second Fiduciary of each of the Plans.
4. Thus, to avoid the potentially large brokerage expenses, on
December 28, 1994, First Security transferred the assets of the three
affected CIFs, which assets consisted of cash and marketable
securities, to corresponding portfolios of the Funds, in exchange for
shares of such Funds. First Security represents that the in-kind
transfers were ministerial transactions performed in accordance with
pre-established, objective procedures which were approved by the board
of trustees of each Fund. Such procedures require that assets
transferred to a Fund (a) be consistent with the investment objectives,
policies, and restrictions of the corresponding portfolios of such
Fund, (b) satisfy the applicable requirements of the Investment Company
Act and the Code, and (c) have a readily ascertainable market value
established by independent sources. In addition, any assets that were
transferred were required to be liquid and would not be subject to
restrictions on resale. Assets which did not meet these criteria were
required to be sold in the open market through an unaffiliated
brokerage firm prior to any transfer in-kind. Further, prior to
entering into and following an in-kind transfer transaction, each
affected Plan would be required to receive certain disclosures from
First Security and approve such transactions in writing. Accordingly,
First Security requests retroactive exemptive relief from the
Department.
5. In accordance with the criteria described above in
Representation 4, First Security stated that it conducted the in-kind
transfer transactions as follows:
Prior to each in-kind transfer, the assets of the three CIFs were
reviewed to confirm that they were appropriate investments for the
corresponding portfolios of the Funds. If any of the assets of such
CIFs were not appropriate for the Funds, First Security sold the assets
in the open market through an unaffiliated brokerage firm.
Participants in the affected CIFs who did not elect to participate
in the conversion transactions received distributions of the value of
their interests therein. However, with respect to participants in the
CIFs who elected to participate in the in-kind transfers and transfer
their interests to the Funds, the transferred assets constituted the
participants' and Plans' pro rata portion of all assets that were held
by the CIF immediately prior to the transfer. Further, the Funds had
investment objectives and policies that were substantially identical to
those of the CIFs. Following the in-kind transfers, the affected CIFs
were terminated.
No brokerage commissions, redemption fees, 12b-1 Fees or expenses
(other than customary transfer charges paid to parties other than First
Security or its affiliates) were charged to the Plans or the CIFs in
connection with the in-kind transfers of assets into the Funds or would
be charged with respect to the redemption of shares of such Funds.
Further, neither First Security nor its affiliates, including any
officers or directors, were (nor would be) permitted to purchase from
or sell to any of the Plans shares of the Funds.
6. First Security provided the Second Fiduciary, as defined in
Section II(g), for each affected Plan with disclosures announcing the
termination of the CIFs, summarized the transaction, and otherwise
complied with provisions of Section I of this proposed exemption. Based
on these disclosures, the Second Fiduciary from each Plan approved, in
writing, the in-kind transfer of the CIFs assets to the corresponding
Funds, in exchange for shares of the Funds, and the receipt by First
Security of fees for services provided to such Funds.
7. The assets transferred by the affected CIFs to the Funds
consisted entirely of cash and securities for which market quotations
were readily available. The value of the securities in each of the
three CIFs was determined based on market values as of the close of
business on December 27, 1994, the last business date prior to the
transfer. Such values were determined in a single valuation performed
in the same manner and at the close of business on the same day, using
independent sources in accordance with the procedures described in Rule
17a-7 under the Investment Company Act, as amended from time to time or
any successor rule, regulation or similar pronouncement and the
procedures established by the Funds pursuant to Rule 17a-7 for the
valuation of such assets. 6 In this regard, First Security
represents that the ``current market price'' for specific types of CIF
securities involved in the transactions was determined as follows:
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\6\ Rule 17a-7 provides an exemption from section 17(a) of the
Investment Company Act, which prohibits, among other things,
principal transactions between an investment company and its
investment adviser or affiliates of the investment adviser. Among
the conditions of Rule 17a-7 is the requirement that the transaction
be effected at the ``independent current market price'' for specific
types of CIF or Plan assets involved in the in-kind transfer.
(a) If the security was a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934
(the 1934 Act), the last sale price with respect to such security
reported in the consolidated transaction reporting system (the
Consolidated System) for December 27, 1994; or if there were no
reported transactions in the Consolidated System that day, the
average of the highest current independent bid and the lowest
current independent offer for such security (reported pursuant to
Rule 11Ac1-1 under the 1934 Act), as of the close of business on
December 27, 1994.
(b) If the security was not a reported security, and the
principal market for such security was an exchange, then the last
sale on such exchange on December 27, 1994; or if there were no
reported transactions on such exchange that day, the average of the
highest current independent bid and lowest current independent offer
on such exchange as of the close of business on December 27, 1994.
(c) If the security was not a reported security and was quoted
in the NASDAQ system, then the average of the highest current
independent bid and lowest current independent offer reported on
Level 1 of NASDAQ as of the close of business on December 27, 1994.
(d) For all other securities, the average of the highest current
independent bid and lowest current independent offer as of the close
of business on December 27, 1994, determined on the basis of
reasonable inquiry. (For securities in this category, First Security
represents that it obtained quotations from at least three sources
that were either broker-dealers or pricing services independent of
and unrelated to First Security and used the average of the
quotations to value the securities, in
[[Page 19812]]
conformance with interpretations by the SEC and practice under Rule
17a-7.)
8. The securities received by the corresponding portfolios of the
Funds were valued by each such portfolio for purposes of the in-kind
transfers in the same manner and on the same day as such securities
were valued by the CIFs. The per share value of the shares of each
portfolio of the Funds issued to the CIFs was based on the
corresponding portfolio's then current net asset value. As a result of
this procedure, the aggregate value of the shares of the corresponding
Fund issued to the CIF was equal to the value of the assets (cash and
marketable securities) transferred to such portfolio as of the opening
of business on December 28, 1994. In addition, the value of a Plan's
investment in shares of a corresponding portfolio, as of the opening of
business on the date of the transactions (December 28, 1994), was equal
to the value of such Plan's investment in the corresponding CIFs as of
the close of business on the last business day prior to the transaction
(December 27, 1994).
9. Not later than 30 days after completion of the in-kind transfer
transaction, First Security sent by regular mail a written confirmation
of the transaction to each affected Plan. Such confirmation contained:
(a) the identity of each security that was valued in accordance with
Rule 17a-7(b)(4), as described above; (b) the price of each such
security for purposes of the transaction; and (c) the identity of each
pricing service or market maker consulted in determining the value of
such securities.
In addition, not later than 90 days after completion of each in-
kind transfer transaction, First Security sent, by regular mail to the
Second Fiduciary of each affected Plan, a written confirmation
containing the following information: (a) the number of CIF units held
by each affected Plan immediately before the conversion (and the
related per unit value and the aggregate dollar value of the units
transferred); and (b) the number of shares in the Funds that were held
by each affected Plan following the conversion (and the related per
share net asset value and the aggregate dollar value of the shares
received).
10. The requested exemption is also subject to the satisfaction of
certain general conditions. For example, the transactions are subject
to the prior authorization of a Second Fiduciary, acting on behalf of
each of the Plans, who has been provided with full written disclosure
by First Security. The Second Fiduciary is generally the administrator,
sponsor or a committee appointed by the sponsor to act as a named
fiduciary for a Plan.
With respect to disclosures, the Second Fiduciary of such Plan
received, in writing, in advance of the investment by a Plan in any of
the Funds: (a) a current prospectus for each of the Funds in which such
Plan might invest; (b) a statement describing the fees for investment
management, investment advisory, or other similar services, any fees
for Secondary Services, and all other fees to be charged to or paid by
the Plan and by such Funds to First Security, including the nature and
extent of any differential between the rates of such fees, (c) the
reasons why First Security considered such investment to be appropriate
for the Plan, (d) a statement describing whether there were any
limitations applicable to First Security with respect to which assets
of a Plan may be invested in the Funds, and, if so, the nature of such
limitations. Upon written request, the Second Fiduciary will be
provided with a copy of the proposed exemption and/or the final
exemption, if granted.
On the basis of the information disclosed, the Second Fiduciary of
a Plan authorized, in writing, the investment of assets of the Plan in
shares of a Fund in connection with the transactions set forth herein,
the investment portfolios of the Funds in which the assets of the Plans
may be invested and the compensation received by First Security in
connection with its services to the Funds. In addition, the Second
Fiduciary received each Fund's current prospectus and the written
disclosures referred to above which specifically referenced the Fund
and afforded such fiduciary the opportunity to select the Fund for its
prior authorization. Having obtained the authorization of the Second
Fiduciary, First Security invested the assets of a Plan among the
portfolios and in the manner covered by the authorization, subject to
the satisfaction of the other terms and conditions of the proposed
exemption.
In addition to the above, as to each individual Plan, the combined
total of all fees received by First Security for the provision of
services to the Plans, and in connection with the provision of services
to any of the Funds in which the Plans hold shares acquired in
connection with the in-kind transfers, were required not to be in
excess of ``reasonable compensation'' within the meaning of section
408(b)(2) of the Act. Further, all dealings by or between the Plans and
the Funds were required to remain on a basis which would be at least as
favorable to the Plans as such dealings are with other shareholders of
the Funds.
11. Besides the disclosures provided to the Plan prior to
investment in any of the Funds, First Security represents that it will
routinely provide, at least annually to the Second Fiduciary, updated
prospectuses of the Funds in accordance with the requirements of the
Investment Company Act and the SEC rules promulgated thereunder.
Further, the Second Fiduciary will be supplied, at least annually, with
a report or statement (which may take the form of the most recent
financial report of such Funds, the current statement of additional
information, or some other written statement) containing a description
of all fees paid by the Fund.
12. In summary, First Security represents that the in-kind transfer
transactions satisfied the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The CIFs did not pay sales commissions or redemption fees in
connection with the in-kind transfer of assets to the Funds in exchange
for shares of the Funds.
(b) With respect to any in-kind transfer of assets, the CIFs
received shares of the Funds that were equal in value to the assets of
the CIFs exchanged for such shares, the latter values determined in a
single valuation performed in the same manner and at the close of
business on the same day in accordance with the procedures set forth in
Rule 17a-7 under the Investment Company Act, as amended from time to
time or any successor rule, regulation, or similar pronouncement.
(c) Not later than 30 days after completion of each in-kind
transfer of assets in exchange for shares of the Funds, the Second
Fiduciaries of the affected Plans received written confirmation of the
assets involved in the exchange which were valued by a third-party
source (e.g., pricing service or market maker) in accordance with Rule
17a-7(b)(4), the price of such assets and the identity of the pricing
service or market maker consulted.
(d) Not later than 90 days after completion of each in-kind
transfer of assets of the CIFs in exchange for shares of the Funds,
First Security mailed to each affected Plan a written confirmation of
the number of CIF units held by such Plan immediately before the
conversion (and the related per unit value and the aggregate dollar
value of the units transferred), and the number of shares in the Funds
that were held by the Plan following the conversion (and the related
per share net asset value or the aggregate dollar value of the shares
received).
[[Page 19813]]
(e) The price paid or received by the Plans for shares in the Funds
was the net asset value per share at the time of the transaction and
was the same price for the shares which would have been paid or
received by any other investor at that time.
(f) First Security, its affiliates, and officers or directors would
not be permitted to purchase or sell to any of the Plans shares of any
of the Funds.
(g) As to each individual Plan, the combined total of all fees
received by First Security for the provision of services to the Plans,
and in connection with the provision of services to any of the Funds in
which the Plans may invest, was not in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(h) Prior to investment by a Plan in any of the Funds, in
connection with transactions, the Second Fiduciary received a full and
detailed written disclosure of information concerning such Fund.
(i) Subsequent to the investment by a Plan in any of the Funds,
First Security would provide the Second Fiduciary of such Plan with an
updated copy of the prospectus for each of the Funds in which the Plan
invests, at least annually as well as other pertinent information.
(j) All dealings between the Plans and any of the Funds would
remain on a basis no less favorable to such Plans than dealings between
the Funds and other shareholders holding the same class of shares as
the Plans.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
San Diego Electrical Pension Trust, (the Pension Plan); and San
Diego Joint Apprenticeship and Training Trust (the Training Plan;
collectively, the Plans) Located in San Diego, California
[Application Nos. D-10581 and L-10582]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of section 406(b)(2) of the Act shall not apply to the proposed
purchase by the Training Plan from the Pension Plan of a minority
interest (the Minority Interest) in certain improved real property (the
Property) jointly owned by the Plans, provided that the following
conditions are satisfied:
(1) The purchase is a one-time transaction for cash;
(2) The terms and conditions of the transaction are not less
favorable to either Plan than those each could obtain in a comparable
arm's length transaction with an unrelated party;
(3) The Training Plan pays no more, and the Pension Plan receives
no less, than the fair market value of the Minority Interest, as of the
date of the transaction, as determined by a qualified, independent
appraiser;
(4) Neither the Pension Plan nor the Training Plan pays any
commissions or fees in connection with the transaction;
(5) The trustees of the Plans (other than their common trustees),
the Pension Plan's investment manager, and a qualified, independent
fiduciary that has been retained to represent the Training Plan, have
reviewed the terms and conditions of the transaction and determined
that such terms and conditions are in the best interests of, and
appropriate for, their respective Plans; and
(6) The independent fiduciary for the Training Plan monitors the
proposed transaction and takes whatever actions necessary to safeguard
the interests of the Training Plan.
Summary of Facts and Representations
1. The Plans are multiple employer, jointly trusteed employee
benefit plans, established pursuant to collective bargaining agreements
between Local 569, the International Brotherhood of Electrical Workers,
and the National Electrical Contractors Association, San Diego Chapter,
Inc. The Plans cover members of Local 569.
The Pension Plan is a defined benefit plan and, as of January 9,
1998, had approximately 2,790 participants and beneficiaries. As of
September 30, 1997, the fair market value of the assets of the Pension
Plan was $181,250,000.
The Training Plan is a welfare plan that operates a five-year
apprenticeship program approved and regulated by the Division of
Industrial Relations, State of California. As of January 9, 1998, the
approximate number of apprentices participating in the Training Plan
was 230. As of December 31, 1997, the fair market value of the assets
of the Training Plan was $2,930,680.
Each of the Plans is managed by a board of trustees, with eight
trustees on each board. Currently, there are three trustees who serve
on both boards: Mr. Michael Sparks, Mr. Ronald Cooper, and Mr. James
Aylsworth. These individuals have each signed a sworn affidavit
removing themselves from all considerations in connection with the
purchase of the Minority Interest by the Training Plan from the Pension
Plan.
2. The Property consists of a two-story commercial office building
located at 4675 Viewridge Avenue, San Diego, California. The Property
consists of a land area of 77,101 gross sq. ft. and a building area of
31,435 gross sq. ft.
Title to the Property is jointly held, with the Training Plan
having a 77.6475% interest and the Pension Plan having a 22.3525%
interest.7 The land relating to the Property was purchased
by the Plans in August, 1981, from Booth Enterprises, Inc., an
unrelated party, for a total of $810,168. The Pension Plan and the
Training Plan subsequently held the land as tenants-in-common, with a
view to developing the land to provide administrative offices for both
Plans, as well as training facilities for the Training Plan. The
building was constructed in 1983, with the majority of the cost
ultimately paid by the Training Plan, based upon its percentage
interest in the Property.
---------------------------------------------------------------------------
\7\ The Department expresses no opinion herein as to whether the
joint ownership of the Property by the Pension Plan and the Training
Plan may have violated any of the fiduciary responsibility
provisions of Part 4 of Title I of the Act.
---------------------------------------------------------------------------
The Property is the location of the classrooms and administrative
offices of the Training Plan, as well as the administrative offices for
the Pension Plan and the San Diego Electrical Health and Welfare Trust
(the Health Plan). The Health Plan, like the Pension Plan and the
Training Plan, is a multiple employer plan that covers members of Local
569. The Pension Plan has been leasing office space in the Property to
its sister plans (i.e., the Training Plan and the Health
Plan).8
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\8\ Prohibited Transaction Class Exemption (PTCE) 77-10 (42 FR
33918, July 1, 1977) provides an exemption, under certain
conditions, from section 406(b)(2) of the Act for the leasing of
office space by a multiple employer plan to another such plan with
common trustees. No individual exemptive relief is proposed herein
for the leasing of office space in the Property by the Pension Plan
to the Training Plan and the Health Plan. It is represented that
such leasing has been done in accordance with the conditions of PTCE
77-10. However, the Department expresses no opinion herein as to
whether the conditions of PTCE 77-10 have been satisfied.
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3. The Property has been appraised by Lipman Stevens Marshall &
Thene, Inc. (Lipman, Inc.), a qualified, independent appraiser. Mr.
Walter J. Stevens, MAI and Vincent G. Ferrer, of Lipman, Inc., are both
certified real estate appraisers in the State of California. Utilizing
the sales comparison and the income capitalization approaches to value
the Property, Messrs. Stevens and Ferrer concluded that the fair market
value of the Property was $2,000,000, as of August 1, 1997.
The Minority Interest in the Property has been appraised by
American Realty
[[Page 19814]]
Advisors (ARA), the Pension Plan's real estate investment
manager.9 ARA concluded that the fair market value of the
Minority Interest was $415,756.50, as of November 11, 1997. ARA first
determined a value of $2,000,000 for the Property overall, utilizing
the following approaches (but giving greatest weight to the first as
most accurate): (1) Discounted cash flow analysis; (2) direct
capitalization analysis; and (3) sales comparison analysis. With
respect to the Minority Interest, ARA applied a 7% discount factor to
reflect its illiquidity and derived a value for the Minority Interest
as follows.
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\9\ It is represented that ARA is a ``qualified professional
asset manager'' (QPAM), as defined in PTCE 84-14 (49 FR 9494, March
13, 1984), for the Pension Plan. PTCE 84-14, a/k/a the QPAM Class
Exemption, permits, under certain conditions, parties in interest to
engage in various transactions with plans whose assets are managed
by persons, defined for purposes of the exemption as QPAMs, which
are independent of the parties in interest (with certain limited
exceptions) and which meet specified financial standards.
Property Value............................................ $2,000,000
Less: 7% Discount......................................... (140,000)
-------------
1,800,000
22.3525% Minority Interest................................ 415,756.50
In its report, ARA explains that a discount factor must be applied
because investors typically wish to purchase a controlling interest in
real estate, not minority positions, and the majority owner is the most
logical purchaser of a minority interest. Thus, ARA concludes that the
7% discount is appropriate in a purchase of the Minority Interest by
the Training Plan, as the majority owner of the Property, and no
premium would be associated with such purchase.
Mr. Stevens, of Lipman, Inc., reviewed ARA's report and, in a
letter to the Department dated March 20, 1998, confirmed that the
valuation methodology used and the fair market value arrived at by ARA
for the Minority Interest was fair and reasonable.
4. It is proposed that the Pension Plan and the Training Plan enter
into a transaction wherein the Training Plan will purchase for cash all
of the Minority Interest in the Property held by the Pension Plan. The
purchase price will be an amount equal to the fair market value of the
Minority Interest ($415,756.50, as of November 11, 1997) as of the date
of the sale, based on an updated independent appraisal. Neither the
Pension Plan nor the Training Plan will pay any commissions or fees in
connection with the transaction.
The trustees of both Plans, other than their common trustees, have
reviewed the terms and conditions of the transaction and determined
that such terms and conditions are in the best interests of, and
appropriate for, their respective Plans. The Pension Plan trustees
desire to divest the Pension Plan of its otherwise illiquid Minority
Interest, while the Training Plan trustees desire to acquire the
Minority Interest so that the Training Plan will have total ownership
and control of the Property, over 80% of whose space the Training Plan
occupies.
5. The Pension Plan's real estate investment manager, ARA, not only
has appraised the fair market value of the Minority Interest but, in
its report dated November 11, 1997, has expressed its approval of the
proposed sale, which is consistent with ARA's investment strategy of
ultimately liquidating all of the Pension Plan's direct real estate
investments. ARA has determined that due to the size of the Pension
Plan and its ongoing need for liquidity, direct investments in real
estate are not appropriate for the Pension Plan in the long term. ARA
is monitoring the three major real estate assets that it manages for
the Pension Plan to time their disposition. Given the even greater
illiquidity of a minority interest in real estate, ARA has concluded
that the Training Plan should take advantage of this opportunity to
sell its Minority Interest in the Property at fair market value to the
majority owner.
6. Amresco Advisors, Inc. (Amresco), a registered investment
advisor, has been retained to act as an independent fiduciary to
represent the Training Plan's interests with respect to the proposed
purchase. Amresco represents that it has extensive experience as a
fiduciary under the Act and that it is knowledgeable as to the subject
transaction. Amresco acknowledges and accepts its duties, liabilities,
and responsibilities in acting as a fiduciary with respect to the
Training Plan.
Amresco, in its report dated March 27, 1998, has expressed its
approval of the proposed purchase because, as explained in detail
below, it will immediately provide the Training Plan with an excellent
return on its investment, as well as securing the additional space in
the Property that will be needed in the future for expansion.
Amresco has reviewed the appraisal of Lipman, Inc. and concurs with
their conclusion as to the fair market value of $2,000,000 for the
Property. Amresco has also reviewed the ARA report and concurs with
their valuation methodology and their conclusion as to the fair market
value of $415,756.50 for the Minority Interest.
Amresco notes that with real estate, the whole is more than the sum
of its parts. Because of the extremely limited marketability of an
undivided interest (as opposed to an outright, or whole interest) in
real estate, the Training Plan is able to purchase the Pension Plan's
Minority Interest at a 7% discount from its proportionate value of the
total fee interest in the Property, an economic value that would
immediately accrue to the Training Plan.
In addition, Amresco notes that the Training Plan's space
requirements exceed its approximately 78% proportionate share of the
Property. Thus, the Training Plan currently must lease an additional
1,900 sq. ft. in the Property from the Pension Plan 10 at
the rate of $1,400/mo., or $16,800/yr. This lease rate is projected to
increase soon to approximately $2000/mo., or $24,000/yr. The Training
Plan will require even more space in the future to accommodate an
expanding student body, at ever-increasing rents.
---------------------------------------------------------------------------
\10\ See Footnote 1 regarding PTCE 77-10.
---------------------------------------------------------------------------
Following the Training Plan's purchase of the Minority Interest, no
immediate change will occur with respect to occupancy of space in the
Property. The Training Plan has no re-development plans for the
Property and, thus, will incur no significant additional expenses, in
connection with the proposed transaction. It is intended that the
Training Plan will lease approximately 4,800 sq. ft. of the Property to
the Pension Plan until such time as the Training Plan needs to fully
utilize this space. The Pension Plan, in turn, will sublease a portion
of its space to the Health Plan.11 At rental rates of
approximately $1.05/sq. ft./mo. and $.35/sq. ft./mo., the lease will
generate approximately $3,350/mo., or $40,320/yr., in net rental income
to the Training Plan.
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\11\ It is represented that the proposed lease of office space
in the Property by the Training Plan to the Pension Plan, if the
exemption is granted, as well as the sublease of office space by the
Pension Plan to the Health Plan, will meet the conditions for
exemptive relief under PTCE 77-10.
---------------------------------------------------------------------------
Thus, Amresco states that the combination of a projected $24,000/
yr. savings in rent, plus $40,320/yr. in net rental income, or $64,320/
yr., will provide an immediate 15% return on the Training Plan's
$415,756.50 investment. In addition, the Training Plan, instead of
being a renter, will enjoy the benefits of equity ownership in real
estate, such as any appreciation in value.
In anticipation of the proposed transaction, the collective
bargaining parties have designated new money of $0.37 per hour worked
to fund the purchase price for the Minority Interest. Since the
purchase price is being
[[Page 19815]]
specially funded by an increase in the contribution rate to the
Training Plan required to be met by contributing employers, Amresco
states that the Training Plan will have sufficient cash available to
purchase the Minority Interest without affecting the ordinary
operational costs and liquidity needs of the Training Plan.
Amresco, as the independent fiduciary for the Training Plan, will
monitor the proposed transaction and take whatever actions necessary to
safeguard the interests of the Training Plan.
7. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons:
(a) The purchase will be a one-time transaction for cash; (b) the
terms and conditions of the transaction will not be less favorable to
either Plan than those each could obtain in a comparable arm's length
transaction with an unrelated party; (c) the Training Plan will pay no
more, and the Pension Plan will receive no less, than the fair market
value of the Minority Interest, as of the date of the transaction, as
determined by a qualified, independent appraiser; (d) neither the
Pension Plan nor the Training Plan will pay any commissions or fees in
connection with the transaction; (e) the trustees of the Plans (other
than their common trustees), the Pension Plan's real estate investment
manager (i.e., ARA), and a qualified, independent fiduciary (i.e.,
Amresco) representing the Training Plan, have reviewed the terms and
conditions of the transaction and determined that such terms and
conditions are in the best interests of, and appropriate for, their
respective Plans; and (f) Amresco will monitor the proposed transaction
and take whatever actions necessary to safeguard the interests of the
Training Plan.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the epartment,
telephone (202) 219-8881. (This is not a toll-free number.)
Hanson Operating Company, Inc. Defined Benefit Pension Plan (the
Plan) Located in Roswell, New Mexico
[Application No. D-10702]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale by the Plan of certain
closely-held stock (the Stock) to Douglas L. McBride and Basil R.
Willis, parties in interest with respect to the Plan, provided that the
following conditions are satisfied: (a) the sale is a one-time
transaction for cash; (b) the Plan pays no commissions nor other
expenses relating to the sale; and (c) the Plan receives an amount that
is no less than the fair market value of the Stock as of the date of
the sale, as determined by a qualified, independent appraiser.
Summary of Facts and Representations
1. The Plan is a defined benefit pension plan established by Hanson
Operating Company, Inc. (the Employer). The Employer, a New Mexico
corporation, is engaged in the business of oil and gas exploration and
is located in Roswell, New Mexico. As of June 30, 1998, the Plan had 12
participants and beneficiaries and total assets of approximately
$808,183.01. The trustees of the Plan are Mr. McBride and Mr. Willis
(the Applicants), who are also officers of the Employer.
2. Among the assets of the Plan is the Stock, which consists of
7,500 shares of common stock of Commerce Bankshares of Roswell Inc.
(CBR), a closely-held one-bank holding company organized under the laws
of the State of New Mexico. CBR's subsidiary bank is the Valley Bank of
Commerce (the Bank), a state-chartered commercial bank. The Applicants
represent that they acquired 7,500 shares of the Stock for the Plan in
1992 in a limited offering at $20 per share, for a total cost of
$150,000. Neither of the Applicants was or is related to CBR or the
Bank.
3. The Stock was appraised by Patten, MacPhee & Associates, Inc.
(Patten, MacPhee), a qualified, independent appraiser located in
Denver, Colorado that performs annual valuations of the Stock. In a
cover letter dated August 25, 1998, accompanying the appraisal report,
Ms. E. Jayne MacPhee and Mr. Gary M. Schwartz state that their firm has
performed over 200 common stock and intangible asset valuations for
clients nationwide.
The appraisal states that as of June 30, 1998, the 151,218 shares
of common stock of CBR issued and outstanding were held by 60
shareholders, and the Plan owned 7,500 shares of the Stock, or
approximately 4.96%. As of June 30, 1998, the 7,500 shares of the Stock
had an estimated fair market value of approximately $76.30 per share,
or a total value of $572,250, which represents approximately 71% of the
assets of the Plan.12
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\12\ The Department expresses no opinion herein as to whether
the Plan's acquisition and holding of the Stock violated any of the
general fiduciary responsibility provisions of Part 4 of Title I of
the Act. However, the Department notes that section 404(a) of the
Act requires, among other things, that a plan fiduciary act
prudently and solely in the interest of the plan's participants and
beneficiaries when making investment decisions on behalf of the
plan. Section 404(a) of the Act also requires that a plan fiduciary
diversify the investments of a plan so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent
not to do so.
---------------------------------------------------------------------------
Patten, MacPhee performed another appraisal of the Stock's value,
as of December 31, 1998, for purposes of the Plan's annual report. As
of December 31, 1998, there were 149,208 shares of common stock of CBR
issued and outstanding, which were held by 57 shareholders. As of that
date, the 7,500 shares of the Stock had an estimated fair market value
of approximately $80.95 per share, or a total value of $607,125.
Each appraisal states, in regard to the valuation methodology, that
a number of documents and information sources were considered, as well
as the elements for the valuation of corporate stock as set forth in
the Internal Revenue Service's Revenue Ruling 59-60. Such valuation
elements included: the financial condition of both the Bank and CBR;
strengths of current management, market share, economic conditions, and
competitive factors; the fair market value of the underlying assets and
liabilities of the Bank and CBR; historical and projected earnings; and
sales of other banks and bank holding company stock within the
southwestern United States. The appraisals state that, inasmuch as the
Bank represents the only significant asset and activity of CBR, many of
the foregoing factors were considered solely in regard to the Bank. In
addition, since much of the published information utilized in valuation
relates to the transfer of control, the appraisals focussed on those
issues which influence the market values of minority interests, namely
marketability, liquidity risk, and lack of control.
4. The Applicants propose to purchase 5,500 of the 7,500 shares of
the Stock held by the Plan for the fair market value of the Stock as of
the date of the sale, based upon an updated independent appraisal. Mr.
McBride proposes to purchase 3,000 shares of the Stock, and Mr. Willis
proposes to purchase 2,500 shares of the Stock. Based upon an appraised
value for the Stock, as of December 31, 1998, of
[[Page 19816]]
$80.95 per share, 5,500 shares of the Stock have a total value of
$445,225. The sale will be a one-time transaction for cash, and the
Plan will pay no commissions nor other expenses relating to the sale.
The Applicants represent that following a large benefit
distribution made by the Plan in 1993, the proportion of Plan assets
represented by the Stock rose to 28%. At that time, the Applicants, as
trustees of the Plan, determined that future contributions due to the
Plan from the Employer, plus dividends paid on the Stock, would keep
the assets of the Plan diversified and provide the liquidity needed to
make benefit payments. However, the Stock has appreciated so much over
the last few years that the Plan has been fully funded, and no
additional Employer contributions have been allowed.
Although the Stock has been a good investment for the Plan, the
Applicants, as Plan trustees, have determined that the proposed sale of
5,500 shares of the Stock is in the best interests of, and appropriate
for, the Plan because such sale will enhance the liquidity and
diversification of the assets of the Plan. In addition, the sale will
reduce the risk of loss to the Plan in the event that the market value
of the Stock should decline in the future, or in the event that the
Stock, because it is not publicly traded, cannot be sold expeditiously
when the Plan requires the funds to make benefit payments, forcing a
distress sale in order to generate cash. Finally, the Applicants, as
Plan trustees, have determined that the continued holding by the Plan
of the remaining 2,000 shares of the Stock will not adversely affect
the Plan's liquidity needs.
5. In summary, the Applicants represent that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) the sale will
be a one-time transaction for cash; (b) the Plan will pay no
commissions nor other expenses relating to the sale; (c) the Plan will
receive an amount that is no less than the fair market value of the
Stock as of the date of the sale, as determined by a qualified,
independent appraiser; and (d) the sale will enhance the liquidity and
diversification of the assets of the Plan, as well as reduce the risk
of loss to the Plan, in the event that the market value of the Stock
should decline in the future.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng 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 accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 19th day of April, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-10104 Filed 4-21-99; 8:45 am]
BILLING CODE 4510-29-P