[Federal Register Volume 64, Number 165 (Thursday, August 26, 1999)]
[Notices]
[Pages 46724-46732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22024]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10671, et al.]
Proposed Exemptions; Pacific Coast Roofers Pension Plan
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 requests 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
[[Page 46725]]
102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17,
1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor.
Therefore, these notices of proposed exemption are issued solely by the
Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Pacific Coast Roofers Pension Plan (the Plan); Located in San Jose,
California
[Application No. D-10671]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a)(1)(D) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(D) of the Code, shall not apply to the
making of loans by certain banks (the Banks), under a loan program (the
Program) providing for loans to Bank customers for residential and
commercial re-roofing jobs that are performed by contributing employers
to the Plan, pursuant to an arrangement in which the Plan will purchase
certificates of deposit (the CDs) issued by the Banks, provided the
following conditions are met:
(a) Alan D. Biller and Associates, Inc. (Biller), an independent
investment manager with respect to the Plan's equities and fixed-income
investments, determines on an on-going basis the appropriateness of the
Plan's investment of up to 5% of the Plan's total assets in CDs,
including CDs issued under the Program, with respect to the Plan's
overall investment objectives and policy guidelines;
(b) Turner Dale Associates, Inc. (TDA), an independent investment
manager with respect to the Plan's assets involved in the Program,
which is also independent of the Banks, acts on the Plan's behalf
pursuant to a written Investment Management Agreement to determine on
an on-going basis whether the Plan should make each particular
investment in the CDs under the Program, and should continue or
terminate participation in the Program;
(c) TDA determines at least annually that the Banks participating
in the Program are solvent institutions, based on analysis of all
relevant information involving the Banks' financial status;
(d) The requirements of section 408(b)(4) of the Act are satisfied
if any Bank participating in the Program is a fiduciary or other party
in interest with respect to the Plan (see 29 CFR 2550.408b-4);
(e) The Plan's CDs will have a maturity date of at least one year
from the date of issuance and will pay the maximum rates of interest
provided by the Banks for CDs of the same size and maturity being
purchased at the time of the transaction by customers of the Bank not
participating in the Program;
(f) The Banks offer CDs provided under the Program to other,
unrelated customers in the ordinary course of business;
(g) Interest rates on CDs under the Program, and the total net
rates of return to the Plan, taking into consideration all expenses
associated with the transaction, are at least comparable to or better
than those rates which the Plan could obtain on similar fixed-income
investments of similar risk and term at the time of each CD purchase;
(h) No person who is a party in interest with respect to the Plan,
including contributing employers, trustees and other plan fiduciaries,
receives a loan under the Program;
(i) The total outstanding amount of CDs purchased by the Plan from
the Banks will not exceed 5% of the Plan's total assets at the time of
any transaction;
(j) No Plan trustee currently engages in any personal or business
transactions with a Bank which will be involved in the Program, and if
a trustee engages in such transactions in the future, the trustee shall
recuse himself or herself with respect to any decision regarding the
Program on behalf of the Plan;
(k) The Plan's investment in CDs is not part of an agreement,
arrangement or understanding designed to benefit any investment
manager, other Plan fiduciary, or contributing employer, other than to
the extent that residential or commercial re-roofing jobs will be
performed by contributing employers to the Plan; and
(l) If a customer defaults on a loan, the Bank has no claim
against, or recourse to, the CDs or other assets of the Plan.
Summary of Facts and Representations
1. The Plan, which covers workers in the roofing industry, is a
multiemployer defined benefit plan established in accordance with
section 302(c)(5) of the Labor Management Relations Act of 1947, as
amended. The Plan currently has approximately 5400 participants and
approximately $300 million in net assets. The Plan is administered by a
board of trustees (the Trustees) with an equal number of Trustees
representing labor and management, who are the named fiduciaries of the
Plan. The Trustees are authorized to appoint one or more investment
managers to handle investment decisions for portions of the assets of
the Plan. These Plan assets include fixed-income investments made
pursuant to the Plan's investment guidelines established by the
Trustees. The Trustees have appointed Biller to act as investment
manager with respect to the decision to include the Program among the
Plan investments.
Biller is an independent investment manager with respect to the
Plan. Biller has no interest in, or affiliation with, the Bank. Biller
will also not have any interest in, affiliation with, or any business
dealings with any bank selected in the future to participate in the
Program. Biller has determined that up to 5% of the Plan's assets may
be invested in certificates of deposit (CDs) in accordance with the
Plan's investment guidelines.
2. With respect to the Program, the Trustees have selected TDA as
investment manager, within the meaning of Act section 3(38), with full
authority and responsibility regarding the investment by the Plan in
each particular CD under the Program. TDA, as investment manager, is an
independent fiduciary with respect to the Plan, and is an investment
adviser registered with the Securities and Exchange Commission under
the Investment Advisers Act of 1940. TDA has experience handling
investments for collectively bargained, jointly-trusteed employee
benefit plans subject to the Act. TDA, which is located in Burlingame,
California, currently has approximately $130 million in employee
benefit plan assets under management.
3. The Plan proposes to invest up to 5% of its assets in CDs to be
issued by various banks selected by TDA. The bank currently selected by
TDA to issue CDs under the Program is United Labor Bank (hereinafter
referred to as ``the Bank''), although the Plan may invest in CDs
issued by other Banks meeting the Program's standards and requirements.
The Bank had assets in excess of $67 million as of September, 1997. The
Bank was incorporated in 1990 and operates branches in Oakland and Los
Angeles, California. The Bank is a member of the Federal Home Loan Bank
System, and is federally regulated. The Bank is subject to certain
regulatory requirements
[[Page 46726]]
administered by the board of Governors of the Federal Reserve System,
the Office of Thrift Supervision and the Federal Financial Institution
Examination Council.
TDA is independent of the Bank, and will be independent of any
Banks selected in the future to provide CDs under the Program. There
will be no transactions between TDA and the Bank (or future Banks) that
will interfere with the independence of TDA to serve as the Plan's
investment manager for CD investment purposes. TDA will review, at
least annually, the financial condition and creditworthiness of the
Bank to ensure that it continues to be a solvent financial institution.
Moreover, TDA would base its selection of any other Banks to
participate in the Program on the Banks' capitalization,
creditworthiness, and ability to provide the Plan maximum rates of
returns on CDs.
The Bank is not currently a fiduciary for the Plan's assets and
will not be a fiduciary for any assets of the Plan involved in the
proposed CD investment.1 In addition, with the exception of
one Trustee who previously served on the Bank's board of directors, no
member of the Plan's Board of Trustees has any ownership interest in
the Bank, or maintains an account with the Bank. That Trustee owns 100
out of approximately 200,000 shares of stock in the Bank. The
applicants represent that the Trustee will not participate in any
decisions with respect to the Program. If, in the future, any member of
the Board of Trustees acquires an interest in the Bank, that member
will be precluded from participating in any decisions with respect to
the Program on behalf of either the Plan or the Bank.
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\1\ Section 408(b)(4) of the Act states, in pertinent part, that
the prohibitions of section 406(a) of the Act shall not apply to the
investment of a plan's assets in deposits which bear a reasonable
interest rate in a bank supervised by the United States or a State,
if such bank is a fiduciary of such plan and if such investment is
expressly authorized by a provision of the plan or by a fiduciary
(other than such bank or an affiliate thereof) who is expressly
empowered by the plan to so instruct the trustee with respect to
such investment. Thus, the Plan's proposed purchase of the CDs from
a Bank that is a fiduciary or other party in interest with respect
to the Plan would be exempt from the restrictions of section 406 by
section 408(b)(4) of the Act if the conditions of the exemption, and
the regulations thereunder (see 29 CFR 2550.408b-4), were met.
However, the exemptive relief proposed herein would permit the Banks
to make certain loans to customers for re-roofing jobs performed by
contributing employers of the Plan pursuant to an arrangement
involving the Plan's purchase of CDs from the Banks. The Department
notes that such an arrangement is a separate transaction which would
not be exempted by section 408(b)(4) of the Act. The Department also
notes that the proposed exemption is limited only to relief from the
prohibitions of section 406(a)(1)(D) of the Act which may result
from the making of such loans pursuant to the described arrangement.
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Further, no Trustee currently engages in any personal or business
transactions with the Bank. Should a Trustee wish to engage in personal
or business relations with the Bank or other Banks that may become
involved in the Program in the future, that Trustee must make his
intention known to the Board and must remove himself from any
considerations or decisions regarding the Plan's participation in the
Program while such Banks are involved in the Program. As a result, the
Trustees will not derive any financial benefit, such as banking
services at a reduced cost, or business or personal loans under more
favorable terms than those provided to other customers, as a result of
the Plan's participation in the Program.2
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\2\ Section 406(b) of the Act states, in pertinent part, that a
fiduciary with respect to a plan shall not deal with the assets of a
plan in his own interest or for his own account and shall not
receive any consideration for his personal account from any party
dealing with such plan in connection with a transaction involving
the assets of the plan.
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4. The terms and conditions of the proposed agreement with the Bank
are embodied in a written agreement (the Deposit Agreement). The Plan's
initial $1 million deposit will be invested in a master certificate of
deposit (Master CD) at the Bank's regular 30-day rate for large CDs,
subject to adjustment higher or lower each month. The Master CD is
essentially the total pool of available assets for investment in the
CDs at any given time.
5. Under the Program, after the Plan's initial investment in the
CDs, and as subsequent investments in CDs are made, the Bank will make
loans (the Loans) from its own funds to customers who meet the Bank's
normal lending standard for similar loans, to finance re-roofing jobs
(whether residential or commercial), provided the work is done by
employers who are required under collective bargaining agreements to
contribute to the Plan on behalf of the employees who would be doing
the re-roofing work. As the Program proceeds, and new Loans are made,
the Plan will have the opportunity each month to make additional CD
investments. The Loans will be for at least $1,500 and will have terms
ranging from 2 to 5 years. The applicant represents that if the Bank
makes Loans in a greater dollar amount than the dollar amount of CDs
purchased by the Plan, the Plan will be under no obligation to make an
additional CD purchase. Further, the applicant represents that there is
no intention, express or implicit, to link the dollar amount of Loans
made to Bank customers with the Plan's CD investments under the
Program.
The Loans under the Program will not be made directly to Plan
participants or parties in interest with respect to the
Plan.3 More specifically, no Loans would be made to
contributing employers under the Program. Further, the Trustees and
other Plan fiduciaries involved in any decision regarding the Plan's
participation in the Program will be prohibited from receiving Loans
under the Program.
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\3\ Thus, the Department is providing no relief in this proposed
exemption for any prohibited transactions that may occur as a result
of a Bank making a Loan to a party in interest with respect to the
Plan under an arrangement designed to benefit that party in
interest.
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6. Each month TDA will consider whether, and to what amount, to
invest in a specific CD under the Program. TDA will use its discretion
to determine whether it is prudent to invest the principal amount of
the Loans then outstanding, or some larger amount, in CDs. The amount
determined by TDA to be prudent would then be transferred from the
Master CD to a CD. The CD in which the Plan invests will have terms
identical to those of CDs of the same size and maturity offered and
sold by the Bank to unrelated customers not participating in the
Program. The applicants represent that the CDs will have a maturity
term of at least one year from the date of issuance. Further, the
interest rates on the CDs will pay the maximum rates of interest for
CDs of the same size and maturity offered by the Bank or Banks at the
time of the CD investment.
All decisions concerning the Plan's CD investments will be made by
TDA. TDA will determine whether the Plan should make CD purchases based
upon a variety of factors, including: (1) The financial condition and
creditworthiness of the Bank, or Banks, issuing the CDs; (2) the
presence and extent of Federal Deposit Insurance Corporation (FDIC)
protection for the Plan's CD investments; (3) the yield and liquidity
of the CD in comparison to other CDs of similar risk and term; and (4)
the expenses that the Plan will incur in connection with the purchase.
In this manner, TDA will ensure that the total net rate of return to
the Plan from the CD investments will be at least comparable to, or
better than, the rate of return available on other fixed-income
investments of similar risk and term at the time of the CD purchase.
TDA will also be responsible for decisions to suspend purchases of CDs
by the Plan based on these criteria. The Trustees will monitor TDA's
investments to ensure that the CD purchases are
[[Page 46727]]
consistent with the Plan's asset allocation guidelines. TDA has
reviewed the Bank's financial condition and has determined that it is
prudent for the Plan to invest in CDs of the Bank.
7. To ensure that the interest rate on Loans under the Program is
at a fair market rate, the Bank will set the interest rate for the
borrower at 4% more than the interest rate for the CD as set by TDA. As
noted, CDs will pay the maximum rate of interest for CDs issued by the
Bank. The 4% difference represents the Bank's compensation for its
origination, servicing, marketing and assumption of the risk of loss
with respect to the Loans. By setting the Loan rates in this manner,
the Bank will ensure that interest rates and fees are reasonable, so
that potential borrowers are not discouraged from seeking Loans. The
Loan interest rate will in no way impact the return to the Plan on the
CDs.
8. Counsel for the Bank has prepared an opinion that all CDs issued
by the Bank are eligible for FDIC pass-through deposit insurance up to
the maximum limit under current regulations of the FDIC (see 12 CFR
Part 330). Pursuant to FDIC regulation section 330.14(a), deposits of
an employee benefit plan, such as the Plan, are insured on a pass-
through basis in an amount of up to $100,000 per plan participant where
certain recordkeeping requirements are met.4 Should any
funds on deposit with the Bank or other Banks participating in the
Program cease to be eligible for such insurance, the Plan will be
entitled to withdraw such funds from such Bank(s) immediately.
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\4\ The applicant represents that in order for FDIC insurance to
be provided on a pass-through basis, FDIC regulation section 330.5
requires that a pension plan deposit be identified as such, and that
records evidencing the ownership interests of each beneficiary under
the plan be maintained by either the bank or the plan. The applicant
represents that these requirements will be met with respect to the
Program, and, accordingly, the CDs under the Program will be
eligible for FDIC pass-through insurance.
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9. If TDA reasonably believes that interest rates on CDs will
decline during an upcoming period, TDA may establish a minimum rate at
which the Plan will invest in a CD for that upcoming period that is not
to exceed 25 basis points below the effective annual yield at the end
of the preceding period on U.S. Treasury Notes with the same term. TDA
will not invest in a CD that does not meet this threshold. TDA
represents that this measure of flexibility will allow it to exercise
its expertise as an investment manager to obtain for the Plan the
maximum CD rate set by the Bank or Banks for a given period based on
the anticipated change.
10. Biller has the ongoing responsibility to determine whether up
to 5% of the Plan's assets can prudently be invested in CDs in
connection with the Program, and will make this determination based on,
among other factors, the asset allocations for the Plan and the Plan's
investment guidelines. TDA has the responsibility to monitor whether
the Bank is financially secure, whether the CDs are at maximum rates,
and whether it is in the best interest of the Plan to continue or
suspend its participation in the Program with the Bank. Under the terms
of the Deposit Agreement, the Plan has the right: (a) To inform the
Bank prior to the beginning of a month of the minimum acceptable CD
interest rate it will accept with respect to Loans made that month; (b)
to suspend the transfer of assets from the Master CD to a CD in any
month by giving notice to the Bank prior to the beginning of the month;
and (c) to terminate its participation in the Program on 15 days'
written notice to the Bank (upon termination, the Master CD would be
paid to the Plan at the end of the month, and any outstanding CD would
continue for a period of one year, at which time it would be paid to
the Plan). Biller represents that based on its review of the Plan's
projections of contributions, benefits and actuarial liabilities, it
has determined that it is prudent for the Plan to invest up to 5% of
its assets in federally-insured CDs issued at competitive market rates.
11. When, in the judgment of TDA, the expected rate of return on a
CD issued by a Bank through the Program will not equal or exceed the
rates available to the Plan from comparable, insured fixed-income
investments, TDA will suspend or terminate the Plan's participation in
the Program with respect to that Bank. TDA will make this determination
by ensuring, based on relevant available information and its own
expertise, that the interest rates on the CDs made available by the
Bank remain comparable to other fixed-income investments of similar
risk and duration and do not fall below the rates available for CDs
offered by other banks.
12. The Plan's assets have been invested in a broadly diversified
portfolio of fixed-income securities, common stocks and real estate
investments. Biller has evaluated the Plan's portfolio of fixed-income
investments and determined that the investment of up to 5% of net
assets in insured CDs having rates of return which would be equal to,
or greater than, those available in comparable, insured fixed-income
investments would be an appropriate investment for the Plan. TDA has
also determined that the purchase of Master CDs and CDs through
participation in the Program, under conditions which it can monitor,
would be a prudent investment strategy for the Plan. These
determinations are supported by TDA's assessment of the economic merits
of the investments apart from any benefits that may accrue to the
Plan's participants as a result of increased employment opportunities
and employer contributions to the Plan that may be generated by the
Program.5
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\5\ In this regard, the Department notes that the Act's
standards of fiduciary conduct will apply to the decision to include
the Program among the Plan's investments, and to invest in
particular CDs under the Program. Section 404(a)(1) of the Act
requires, among other things, that a fiduciary of a plan must act
prudently, solely in the interest of the plan's participants and
beneficiaries, and for the exclusive purpose of providing benefits
to participants and beneficiaries. Accordingly, the fiduciaries of
the Plan must act ``prudently'' with respect to the decision to
include the Program, as well as to the actual decision to commit
Plan assets to the Program (including, where relevant, the
determination of how much, if any, to invest in CDs under the
Program, which banks to purchase the CDs from, and the maturity
dates of the CDs). In order to act prudently in making investment
decisions, a plan fiduciary must consider, among other factors, the
availability, risks and potential return of alternative investments
for the plan. Investing assets in CDs would not be prudent if such
CDs would provide the plan with less return, in comparison to risk,
than comparable investments available to the plan or if such CDs
would involve a greater risk to the security of plan assets than
other investments offering a similar return. The Department has
construed the requirements that a fiduciary act solely in the
interest of, and for the exclusive purpose of providing benefits to,
participants and beneficiaries as prohibiting a fiduciary from
subordinating the interests of participants and beneficiaries in
their retirement income to unrelated objectives. Thus, in deciding
whether and to what extent to invest in CDs, a plan fiduciary must
consider only factors relating to the interests of the plan
participants and beneficiaries in their retirement income. A
decision to make an investment in CDs of a particular bank may not
be influenced by non-economic factors, such as a desire to encourage
the bank to make loans to finance re-roofing jobs where the work is
being performed by contributing employers, unless the CD investment,
when judged solely on the basis of its economic value, would be
equal to or superior to alternative investments available to the
Plan. Finally, we note that the granting of the exemption proposed
herein should not be viewed as an endorsement by the Department of
the Plan's participation in the Program or any CD purchases
thereunder.
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13. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act because:
(a) Biller, an independent equities and fixed-income investment manager
for the Plan, has reviewed the proposed investment Program and has
determined that an investment of up to 5% of the Plan's assets in CDs,
including CDs issued under the Program, is appropriate and consistent
with the Plan's investment guidelines; (b) TDA, the independent
investment manager with respect to the assets of the Plan
[[Page 46728]]
involved in the Program, has reviewed the Program and determined that
it is in the Plan's interest based solely on the economic and financial
merits of the Plan's involvement in the Program; (c) TDA will act on
the Plan's behalf regarding the Plan's investment in Master CDs and CDs
and will monitor all transactions relating to such investments; (d) the
requirements of Act section 408(b)(4) will be satisfied if any bank
participating in the Program is a fiduciary or party in interest with
respect to the Plan; (e) the Plan's CDs will have a maturity of at
least one year from the date of issuance and will pay the maximum rates
of interest provided by the Bank for CDs of the same size and maturity;
(f) the Bank will offer CDs provided under the Program to other,
unrelated customers in the ordinary course of its business; (g)
interest rates on CDs under the Program, and the total net rates of
return to the Plan, taking into consideration all expenses associated
with the transaction, will be at least comparable to or better than
those rates which the Plan could obtain on similar fixed-income
investments of similar risk and term at the time of each CD purchase;
(h) TDA will determine at least annually that the Bank, or any other
Bank participating in the Program in the future, is a solvent
institution, based on an analysis of all relevant information involving
the Bank's (or other Banks') financial status; (i) no person who is a
party in interest with respect to the Plan, including contributing
employers, Trustees and other plan fiduciaries, will receive a loan
under the Program; (j) the total outstanding amount of CDs purchased by
the Plan from the Banks will not exceed 5% of the fair market value of
the Plan's total assets at the time of any transaction; (k) no Plan
Trustee currently engages in any personal or business transactions with
the Bank, and if a Trustee engages in such transactions in the future,
the Trustee will recuse himself with respect to any decision regarding
the Program on behalf of the Plan; (l) the Plan's investment in CDs is
not part of an arrangement designed to benefit any investment manager,
other Plan fiduciary, or contributing employer, other than to the
extent that residential or commercial re-roofing jobs will be performed
by contributing employers to the Plan; and (m) if a customer defaults
on a Loan, the Bank has no claim against, or recourse to, the CDs or
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other assets of the Plan.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Electric Pension Trust (the Trust); Located in Fairfield,
Connecticut
[Application Nos. D-10679 through D-10682]
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, as of October 1, 1998, to the lease (the Lease)
by the Trust of office space in a certain commercial office building
(the Property) to Transport International Pool, Inc. (TIP), a party in
interest with respect to employee benefit plans of General Electric
Company (GE) and/or an affiliate whose assets are held in the Trust,
provided that the following conditions are satisfied:
(1) The Trust was and is represented for all purposes under the
Lease by a qualified, independent fiduciary;
(2) The terms and conditions of the Lease are at least as favorable
to the Trust as those the Trust could have obtained in a comparable
arm's length transaction with an unrelated party;
(3) The rent paid to the Trust under the Lease is no less than the
fair market rental value of the office space occupied by TIP, as
established by a qualified, independent appraiser;
(4) The independent fiduciary for the Trust reviewed the terms and
conditions of the Lease on behalf of the Trust and determined that the
Lease was in the best interests of the Trust;
(5) The independent fiduciary monitors and enforces compliance with
all of the terms and conditions of the Lease, and of the exemption (if
granted), throughout the duration of the Lease; and
(6) The independent fiduciary expressly approves any renewal of the
Lease, and the rental rate under such renewal is based upon an updated
independent appraisal of the office space being leased to TIP (but in
no event shall the rental rate be less than that for the preceding
period).
EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of October 1, 1998.
Summary of Facts and Representations
1. The Trust holds assets of the GE Pension Plan, which constitutes
approximately 99% of Trust assets, and also of the Knolls Atomic
Laboratories Pension Plan, ERC Retirement Plan, and Components Pension
Plan for Puerto Rico (collectively, the Plans). The Plans are all
defined benefit plans that cover employees of GE and various GE
subsidiaries. As of October 5, 1998, the Plans had, in the aggregate,
over 400,000 participants and beneficiaries. As of December 31, 1997,
the Trust had total assets of approximately $38.9 billion.
The trustees of the Trust are five individuals (the Trustees), who
are officers of GE and/or its subsidiaries. The Trustees are appointed
by the Benefit Plans Investment Committee of GE, an oversight committee
that determines the investment policies of the Trust. The Trustees
maintain overall responsibility for investment of the Trust assets. The
specific responsibility for investment of the Trust assets that are
relevant to the application rests with the General Electric Investment
Corporation (GEIC), subject to the approval of one or more of the
Trustees.
GEIC, a Delaware corporation and a wholly owned subsidiary of GE,
is a registered investment adviser under the Investment Advisers Act of
1940. GEIC provides investment management and advisory services to a
variety of GE-affiliated entities. As of January 1, 1998, GEIC had
approximately $53.25 billion of assets under management.
2. TIP, a Pennsylvania corporation, is a wholly owned subsidiary of
Transport Pool Corporation, which is a wholly owned subsidiary of
General Electric Capital Corporation. General Electrical Capital
Corporation is a wholly owned subsidiary of General Electric Financial
Services, Inc., which, in turn, is a wholly owned subsidiary of GE. TIP
is primarily engaged in the business of semi-trailer sales and leasing.
TIP sponsors its own pension plan, and its employees do not participate
in the GE Pension Plan. Accordingly, TIP is not an employer (within the
meaning of section 3(5) of the Act) with respect to the Plans whose
assets are held in the Trust, but is a party in interest with respect
to the Plans under section 3(14)(G) of the Act by virtue of its
relationship to GE and other GE affiliates.
3. The transaction for which an exemption is requested involves the
leasing, by the Trust to TIP, of office space in an 18-story office
tower located at 18101 Von Karman Avenue, Irvine, California (i.e., the
Property). The value of the Property, as of October 5, 1998, was
approximately $75 million.
[[Page 46729]]
The Property is within the Lakeshore Towers Project. Lakeshore
Towers Limited Partnership Phase I (the Partnership) is a California
limited partnership through which the Trust owns the Lakeshore Towers
Project.6 The Lakeshore Towers Project consists of the
Property, a 1,700 space parking garage, a restaurant, and a sporting
club on approximately 15 acres of land. The Lakeshore Towers Project is
located on land that is ground leased from unrelated parties. The land
consists of seven separately parceled leasehold estates. It is located
in the John Wayne Airport Area of Orange County, California.
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\6\ For convenience, this notice will refer to the Trust as the
``landlord'' under the Lease rather than to the Partnership through
which the Trust owns Lakeshore Towers Project, in which the Property
is contained.
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Dorn-Platz & Company (the Property Manager), a realty company which
is independent of GE and its affiliates, serves as a manager of the
Property and is located in Glendale, California. In this capacity, the
Property Manager oversees any new construction or developments,
supervises and negotiates the leasing of space, and manages any
financing and re-financing arrangements involving the Property.
4. TIP formerly had its local office in the Los Angeles business
district. In late 1997, it began looking to relocate its office to
Orange County, largely for the increased convenience of its employees
and the need for a larger space. In the course of its search for space,
it independently located the Property, unaware of the Partnership's
affiliation with the Trust. TIP decided that it was interested in
leasing space in the Property and entered into negotiations with the
Property Manager. Only during negotiations with the Property Manager
did TIP discover the relationship of the parties and the need to obtain
an exemption from the prohibited transaction rules of the Act. Once
this discovery was made, negotiations ceased, and the Trustees sought
independent legal counsel regarding the possibility of obtaining an
administrative exemption.
5. In accordance with the advice of counsel, the Trustees at that
point retained John S. Adams, M.A.I., of John S. Adams & Associates,
Inc., as an independent fiduciary to represent the Trust with respect
to the Lease. Mr. Adams is a real estate appraiser who is licensed in
the State of California. Mr. Adams represents that he and his firm are
independent of the Trust, GE, and GE's affiliates (including TIP) and
derive less than 1% of annual gross income therefrom. Mr. Adams states
that he is knowledgeable as to the subject transaction, for he has 26
years experience in the valuation and analysis of all types of real
estate, including urban office buildings similar to the Property. Mr.
Adams also acknowledges his duties, responsibilities, and liabilities
in acting as a fiduciary under the Act to the Trust for purposes of the
Lease.7
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\7\ In this regard, Mr. Adams will confer with legal counsel
having expertise with respect to the requirements of the Act, as
needed.
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Mr. Adams prepared a report, dated September 9, 1998, which
provides an appraisal of the Property, as well as an evaluation of the
Lease. In the report, Mr. Adams states that he inspected and analyzed
the Property, which has a net rentable area of 378,781 sq. ft. On the
basis of a review of a number of comparable leases in the same general
market area, Mr. Adams concluded that the space in the Property covered
by the Lease had a fair market rental value, as of August 31, 1998, in
the range of $2.21 to $2.48 per sq. ft. Mr. Adams' analysis of the
Lease terms is described in Paragraph 7, below.
6. The Lease, which commenced on October 1, 1998, has a term of
five years. The urgency to execute the Lease was due to TIP's immediate
need for additional space to house its divisional sales and operations
office. As of that date, the Trust had substantially completed the
agreed upon tenant improvements: construction of a wall to separate the
TIP office space from other rentable areas on the 10th floor of the
Property, painting interior walls, etc. The cost to the Trust came to
$1.95 per sq. ft.
Under the Lease, TIP has leased approximately 2,532 rentable sq.
ft. of space on the 10th floor of the Property, which constitutes
approximately 0.67 percent of the rentable square footage in the
Property. The space may be used for general office use only. In
addition, TIP leases eight parking spaces allocated to TIP on an in-
common, non-exclusive and unreserved basis in the parking facility for
the Property at the monthly charge of $60.00 per stall.
The Lease provides for a rental rate of $2.40 per sq. ft. of
rentable area, or $6,076.80 per month. TIP is to pay its proportionate
share of the Trust's real estate taxes and other expenses relating to
the Property for years after 1998, to the extent that these taxes and
expenses exceed those for the 1998 year (the ``base'' year). In
addition, TIP is responsible for any additional taxes levied or
assessed that are attributable to TIP's improvements to personal
property within the leased space, its activities with the leased space,
or any transactions involving the leased space.
Late payments are subject to (1) an interest charge on amounts
unpaid from the time due until paid to compensate the Trust for the
loss of the use of amounts owed and (2) an additional 10% late payment
charge to compensate for administrative expenses incurred by the Trust
in handling delinquent payments.
TIP does not have any options or rights to expand or extend the
Lease, nor has it received any period of free rent. Any assignments or
subleases by TIP are void unless the Trust has provided prior written
consent, and, if consented to, may be subject to additional charges. In
such instances, TIP is not released from any of its Lease obligations.
Any alterations to be made by TIP to the leased space during the term
of the Lease are also subject to the Trust's written consent.
7. Prior to the execution of the Lease, Mr. Adams, the independent
fiduciary, reviewed and approved the terms and conditions of the Lease
on behalf of the Trust. In his report, dated September 9, 1998, Mr.
Adams stated that such terms and conditions were at least as favorable
to the Trust as those the Trust could obtain in a comparable arm's
length transaction with an unrelated party. Mr. Adams noted that the
effective rental rate was $2.40 per sq. ft., which was at the upper end
of the appraised range of $2.21 to $2.48 per sq. ft. for the Property.
Mr. Adams took into account the fact that the Lease does not provide
for periodic rental adjustments. He explained that if the Lease had
been negotiated to include an escalation clause, the Trust would have
been required to accept a lower rental rate than $2.40 per sq. ft. for
the initial years of the Lease. Mr. Adams stated that he considered the
flat rental rate favorable to the Trust, as landlord, because it allows
the Trust to obtain a higher starting rent upfront. In all other
respects, Mr. Adams noted that the Lease provides TIP, as tenant, with
no unusual market advantages.
Mr. Adams also determined that the Lease was in the best interests
of the Trust. In this regard, Mr. Adams stated that the execution of
the Lease would reduce building vacancy and enhance cash flow for the
Trust with respect to the Property.
Finally, Mr. Adams has agreed to monitor and enforce compliance
with the terms and conditions of the Lease, and of the exemption (if
granted), throughout the duration of the Lease, and will take whatever
actions necessary to safeguard the interests of the Trust with respect
to the Lease. Mr.
[[Page 46730]]
Adams will also expressly approve any renewal of the Lease.8
The rental rate under such renewal will be based upon an updated
independent appraisal of the office space being leased to TIP (but in
no event shall the rental rate be less than that for the preceding
period).
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\8\ It is represented that in the event it becomes necessary to
appoint a successor independent fiduciary (the Successor) to replace
Mr. Adams, the applicant will notify the Department 60 days in
advance of such appointment. Any Successor shall be independent and
possess comparable experience and responsibilities as Mr. Adams.
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8. In summary, the applicant represents that the subject
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) The Trust was
and is represented for all purposes under the Lease by a qualified,
independent fiduciary (i.e., Mr. Adams); (b) the terms and conditions
of the Lease are at least as favorable to the Trust as those the Trust
could have obtained in a comparable arm's length transaction with an
unrelated party; (c) the rent paid to the Trust under the Lease is no
less than the fair market rental value of the office space occupied by
TIP, as established by a qualified, independent appraiser; (d) Mr.
Adams, the independent fiduciary for the Trust, reviewed the terms and
conditions of the Lease on behalf of the Trust and determined that the
Lease was in the best interests of the Trust; (e) Mr. Adams will
monitor and enforce compliance with all of the terms and conditions of
the Lease, and of the exemption (if granted), throughout the duration
of the Lease; and (f) Mr. Adams will expressly approve any renewal of
the Lease, and the rental rate upon such renewal will be based upon an
updated independent appraisal of the office space being leased to TIP
(but in no event shall the rental rate be less than that for the
preceding period).
Notice to Interested Persons
Notice of the proposed exemption will be given to all active
employees of GE and its affiliates who are participants and
beneficiaries in the plans whose assets are held in the Trust by
posting a notice (along with a copy of the proposed exemption as
published in the Federal Register) at GE locations, in areas that are
customarily used for notices to employees with regard to employee
benefits or labor relations matters. Notice of the proposed exemption
will be given to former employees and retirees, and all others eligible
to receive the Summary Annual Reports for the affected plans, by
publication of a notice in the 1998 Summary Annual Reports, which are
to be mailed no later than December 15, 1999. In both instances, the
notice shall inform interested persons of their right to comment and/or
request a hearing with respect to the proposed exemption. Comments and
requests for a hearing from all interested persons are due within 30
days following distribution of the 1998 Summary Annual Reports.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Jonas Builders, Inc. Restated Profit Sharing Plan (the Plan);
Located in Milwaukee, Wisconsin
[Application No. D-10764]
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 of a certain building, which
contains a warehouse and a single-family residence (collectively; the
Building), by the Plan to Mr. Gerald Jonas, a party in interest with
respect to the Plan, provided that the following conditions are
satisfied:
(a) All terms and conditions of the sale are at least as favorable
to the Plan as those which the Plan could obtain in an arm's-length
transaction with an unrelated party;
(b) The fair market value of the Building has been determined by an
independent qualified appraiser;
(c) The sale of the Building is a one-time transaction for cash;
(d) The Plan does not pay any commissions, costs or other expenses
in connection with the sale of the Building; and
(e) The Plan receives an amount equal to the greater of either: (i)
The original acquisition cost of the Building plus any improvement
costs and real estate taxes that were incurred by the Plan from the
date the Building was acquired by the Plan until the date of the
proposed sale (i.e., the total cost of $1,929,422.73, as of December
31, 1998); or (ii) the current fair market value of the Building, as
established by an independent qualified appraiser at the time of the
sale.
Summary of Facts and Representations
1. The Plan is a profit sharing plan which was established on
December 28, 1970. As of April 27, 1998, the Plan had two participants,
Mr. Gerald Jonas (Gerald Jonas) and his son Mr. Mark Jonas. Gerald
Jonas is also the Plan's trustee. As of December 31, 1998, the Plan had
total assets of $8,649,839.
Jonas Builders, Inc. (the Employer) is the sponsor of the Plan.
Gerald Jonas is the sole owner and shareholder of the Employer. The
Employer is in the business of commercial and industrial real estate.
The Employer was incorporated on November 25, 1981 in the State of
Wisconsin and is located in Milwaukee, Wisconsin.
2. On April 22, 1991, the Plan purchased the Building from Scott
Paper Company, an independent third party, for a purchase price of
$1,530,108. The original acquisition of the Building was financed
through Catholic Family Insurance,9 which lent the Plan
$1,000,000 of the purchase price. The Plan paid the remaining $530,108
in cash. As of May 28, 1999, the outstanding principal balance of the
loan was $276,984.98.10 The Plan paid the remaining $530,108
in cash. At the time it was originally acquired, the value of the
Building represented approximately 36.65% of the Plan's total
assets.11 The applicant represents that the Plan has
incurred $7,422 in improvement costs to install a loading dock.
Furthermore, the Plan has paid $391,892.73 in real estate taxes from
1991 (i.e., year of original acquisition) until December 31, 1998.
Therefore, the total cost to the Plan for the Building was $1,530.108 +
$7,422+ $391,892.73 = $1,929,422.73, as of December 31, 1998.
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\9\ The applicant represents that Gerald Jonas has a personal
mortgage for another piece of property with Catholic Family
Insurance, but that no other relationship exists between the
parties.
\10\ The applicant states that this loan will not be paid off as
a result of the proposed transaction. Gerald Jonas will assume the
Plan's obligation under the loan and the Plan will be released from
further liability with respect to the loan.
\11\ The Department is not providing any opinion in this
proposed exemption as to whether the acquisition and holding of the
Building by the Plan violated any of the provisions of Part 4 of
Title I of the Act.
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It is represented that Gerald Jonas, as the Plan's trustee, made
the original decision to purchase the Building as an investment for the
Plan.
3. The Building consists of a warehouse of approximately 217,000
square feet (the Warehouse) and a single family home (the Home). The
Warehouse part of the Building is located at 4425 N. Washington Road,
and the Home is located at 4513 N. Port Washington Road, in Glendale,
[[Page 46731]]
Wisconsin. The Building is located in an area of other warehouse,
office and manufacturing buildings which is approximately 4 miles north
of downtown Milwaukee, Wisconsin. The applicant represents that the
Building is not adjacent to any property owned by the Employer, Gerald
Jonas, or any other parties in interest with respect to the Plan.
For the last several years, only a fraction of the Building has
been leased. The Plan has attempted to find additional tenants for the
Building. Recent tenants have been willing to enter into only short
term leases. The applicant states that leasing the entire Building on a
long-term basis would be very beneficial to the Plan.12
However, the Plan has been unable to find a tenant or tenants willing
to lease the entire Building in its current condition (as noted in
paragraph 4 below) or to enter into any longer term leases.
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\12\ In this regard, the applicant represents that during the
years 1991 through (and including) July, 1999, the aggregate rental
income earned by the Plan from the Building was $2,054,958.
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The applicant represents that the Plan has attempted to sell the
Building to unrelated parties and that the Building has been listed on
the market for several years. However, the Plan has not received any
acceptable offers for the Building. Polacheck Realty was the listing
company.
4. The Building was appraised (the Appraisal) on January 18, 1999,
by Paul A. Vandeveld (Mr. Vandeveld), MAI, an independent and qualified
appraiser with Vandeveld and Associates Real Estate Appraisals located
in Brookfield, Wisconsin. Mr. Vandeveld states that in appraising the
Building, he valued both the Warehouse and the Home.
The Appraisal states that the Building consists of a four building
complex that is partially occupied by two separate commercial tenants
(Wilson Services and Jefferson Smurfit), which are using the Warehouse.
Mr. Vandeveld notes that only 91,380 square feet of the Building is
leased (which is only approximately 41% of the total square feet in the
Building).
Mr. Vandeveld states that the Home is a modest frame structure
which the assessment records indicate was built in 1890. The Home has a
full basement, two upper level bedrooms, living room, dining room,
kitchen and full bath. However, the exterior appearance of the Home is
poor. Mr. Vandeveld concludes that because of the age of the Home, its
small size and its poor appearance and condition, the value of the Home
is minimal compared to the Warehouse.
In preparing the Appraisal, Mr. Vandeveld used the Cost Approach,
the Direct Sales Comparison Approach, and the Income Approach. However,
because the Warehouse is mostly vacant, more reliance was placed on the
direct sales comparison approach to value the Building. Mr. Vandeveld
determined that the fair market value of the Warehouse and the Home was
$2,250,000 and $40,000, respectively, for a total value of $2,290,000,
as of January 18, 1999 .
5. The applicant represents that the proposed transaction is in the
best interest and protective of the Plan because the sale of the
Building will be for an amount equal to the greater of: (i) The
original acquisition cost of the Building, plus any improvement costs
and real estate taxes that were incurred by the Plan from the date of
acquisition until date of the proposed sale (i.e., a total cost of
$1,929,422.73, as of December 31, 1998); or (ii) the current fair
market value of the Building, as established by an independent
qualified appraiser at the time of the sale. The Plan will not pay any
commissions, costs or other expenses in connection with the sale of the
Building.
The transaction will be a one-time cash sale, and will enable the
Plan to diversify its investment portfolio. In this regard, the Plan
has tried unsuccessfully over the last few years to sell the Building
to an unrelated party. The applicant maintains that the Plan will
sustain economic hardship if the Plan is forced to keep the Building
and undertake costly renovations to the Building in order to make it
attractive to either prospective tenants or a third party buyer.
6. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria of section 408(a) of the
Act and section 4975(c)(2) of the Code because:
(a) All terms and conditions of the sale are at least as favorable
to the Plan as those which the Plan could obtain in an arm's-length
transaction with an unrelated party;
(b) The fair market value for the Building has been determined by
an independent qualified appraiser;
(c) The sale of the Building will be a one-time transaction for
cash;
(d) The Plan will not pay any commissions, costs or other expenses
in connection with the sale of the Building; and
(e) The Plan will receive an amount equal to the greater of:
(i) The original acquisition cost of the Building, plus any
improvement costs and real estate taxes that were incurred by the Plan
since the date of the acquisition of the Building until the date of the
proposed sale; or (ii) the current fair market value of the Building,
as established by an independent qualified appraiser at the time of the
sale.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan 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 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
[[Page 46732]]
such change, application for a new exemption may be made to the
Department.
Signed at Washington, DC, this 20th day of August, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-22024 Filed 8-25-99; 8:45 am]
BILLING CODE 4510-29-P