[Federal Register Volume 64, Number 219 (Monday, November 15, 1999)]
[Notices]
[Pages 61944-61947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29678]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 99-46; Exemption Application No. D-
10514]


Grant of Individual Exemption; Plumbers and Pipe Fitters National 
Pension Fund (the Fund), Located in Alexandria, VA

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemption.

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SUMMARY: This document contains an exemption issued by the Department 
of Labor (the Department) from certain of the prohibited transaction 
restrictions of the Employee Retirement Income Security Act of 1974 
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
    Notice was published in the Federal Register of the pendency before 
the Department of a proposal to grant such exemption. The notice set 
forth a summary of facts and representations contained in the 
application for exemption and referred interested persons to the 
respective application for a complete statement of the facts and 
representations. The application has been available for public 
inspection at the Department in Washington, D.C. The notice also 
invited interested persons to submit comments on the requested 
exemption to the Department. In addition the notice stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicant has represented that it has 
complied with the requirements of the notification to interested 
persons.
    The notice of proposed exemption was issued and the exemption is 
being granted solely by the Department because, effective December 31, 
1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, 
October 17, 1978) transferred the authority of the Secretary of the 
Treasury to issue exemptions of the type proposed to the Secretary of 
Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department finds that the exemption is:
    (a) Administratively feasible;
    (b) In the interests of the plan and its participants and 
beneficiaries; and
    (c) Protective of the rights of the participants and beneficiaries 
of the plan.

Plumbers and Pipe Fitters National Pension Fund (the Fund), Located 
in Alexandria, VA

[Prohibited Transaction Exemption 99-46 Application No. D-10514]

Exemption

    The restrictions of sections 406(a)(1)(A), 406(a)(1)(B), 
406(a)(1)(D), 406(b)(1), and 406(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, effective October 9, 1997, to the transfer to the Fund from 
the United Association of Journeymen and Apprentices of the Plumbing 
and Pipe Fitting Industry of the United States and Canada, AFL-CIO (the 
Union), a party in interest with respect to the Fund, of the Union's 
limited partnership interests in Diplomat Properties, Limited 
Partnership (the Partnership), the sole asset of which is the Diplomat 
Resort

[[Page 61945]]

and Country Club (the Property); and to the transfer to the Fund of the 
Union's holding of stock in Diplomat Properties, Inc., the corporate 
general partner of such Partnership, in consideration for a capital 
contribution by the Fund to the Partnership in the amount of $40 
million dollars, plus reasonable costs incurred by the Union in 
purchasing the Property, and in consideration for the release of a 
certain loan obligation of the Partnership which was guaranteed by the 
Union and collateralized by Union assets; provided that:
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    \*\ For purposes of this exemption, references 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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    (1) The transaction was a one-time transaction;
    (2) An independent fiduciary (the I/F) which has the following 
qualifications acted on behalf of the Fund:
    (a) The I/F is an individual, group of individuals, or a business 
entity which has substantial experience and expertise in the commercial 
real estate field;
    (b) Neither the I/F nor any of its affiliates have any ownership or 
other interest in the Union or its affiliates, nor does the Union or 
any of its affiliates have any ownership interest in the I/F or its 
affiliates; and
    (c) Neither the I/F nor its affiliates engages in any business 
transactions with the Union or its affiliates.
    (3) Prior to the Fund entering the transaction, the I/F reviewed 
and approved the terms of the transaction, determined that the 
transaction was an appropriate investment for the Fund, that the amount 
paid by the Fund to acquire ownership of the Property through the 
Partnership was appropriate and fair, that the total costs incurred 
were necessary for the acquisition of the Property and were reasonable, 
and that the transaction was in the best interest of the Fund and its 
participants and beneficiaries;
    (4) The fair market value of the Property held by the Partnership 
was determined by an independent, qualified appraiser, as of the date 
of the transaction;
    (5) The Fund paid no fees or commissions as a result of the 
transaction; and
    (6) The terms of the transaction were no less favorable to the Fund 
than those it would have received under similar circumstances when 
negotiated at arm's length with unrelated third parties.
    Effective Date: The exemption is effective October 9, 1997.

Written Comments

    In the Notice of Proposed Exemption (the Notice), the Department 
invited all interested persons to submit written comments and requests 
for a hearing on the proposed exemption within 45 days of the date of 
the publication of the Notice in the Federal Register on May 29, 1998. 
All comments and requests for hearing were due by August 3, 1998.
    During the comment period, the Department received four (4) 
requests for a hearing. The Department has considered the concerns 
expressed by the individuals who have requested a hearing. After due 
deliberation, the Department does not believe that any issues have been 
raised by the commentators which would require the convening of a 
hearing.
    The Department received letters from 65 interested persons 
commenting on the proposed transaction. At the close of the comment 
period, the Department forwarded copies of these letters to the 
applicant for response. The applicant responded in writing to the 
various concerns raised by the commentators. A description of the 
comments and the applicant's responses thereto are summarized below.
    1. Many commentators questioned whether the acquisition, holding, 
and redevelopment of the Property by the Fund was an appropriate 
investment. In this regard, some commentators opined that real estate 
is a poor investment and that either hotels, in general, and/or the 
Property, in particular, which is the subject of the exemption, are 
poor real estate investments. Further, some commentators were concerned 
about the prudence and/or risks associated with the acquisition of the 
Property by the Fund in what commentators perceived to be a declining 
hotel market. Other commentators expressed concerns about the 
rehabilitation costs of the Property and questioned whether the Fund 
could make a profit where previous owners of the Property had failed. 
In this regard, a number of commentators noted that the cost to the 
Fund to repair and redevelop the Property would likely exceed the $40 
million expended by the Fund in acquiring the Partnership which holds 
title to the Property. Finally, a commentator was concerned about the 
loss to the Fund that might result from damage to the Property because 
of hurricanes.
    Other commentators were concerned about conflicts of interest 
arising in connection with the use of the Property or the operations of 
the Partnership. In this regard, it was alleged by several commentators 
that the purchase of the Property was an effort to divert plan assets 
to benefit private individuals. Another commentator alleged that the 
Property was acquired for the personal use of union officials. One 
commentator noted that ``there would be too great of a chance of graft 
and unwise decisions to enter in this venture.'' Another commentator 
questioned whether ``outside investors'' could become involved in the 
Partnership.
    In response to these concerns raised by the commentators, the 
trustees of the Fund (the Trustees) have agreed to a number of 
additional requirements, including the retention by the Fund of an 
independent named fiduciary to oversee the Fund's investment in the 
Property. A term sheet dated October 13, 1999, attached as part of the 
representations made to the Department in a letter dated October 29, 
1999 on behalf of the Trustees, details these additional requirements 
and the retention of the independent named fiduciary. In this regard, 
the Trustees will undertake such actions as are required, including 
amendment of the Trust Agreement, and entering into a services 
contract, to appoint Actuarial Sciences Associates (ASA) as named 
fiduciary of the Fund account which holds the Partnership, Diplomat 
Properties, Inc. (the general partner of the Partnership) (the GP), and 
other assets of the Fund either invested in or awaiting investment in 
the Property (collectively, the Diplomat Account).
    ASA's services contract shall be subject to approval by the 
Secretary of Labor (the Secretary). The performance of ASA's services 
and responsibilities shall commence on the date when this exemption is 
executed by the Secretary or her delegate. Upon the effective date of 
the services contract, ASA or its designees will be substituted for the 
current board and officers of the GP. The parties agree to provide to 
the Secretary such information related to the Diplomat project as may 
be requested in order to perform her duties under the Act.
    Pursuant to the terms of such services contract, ASA shall have 
full and complete authority, control, and discretion with respect to 
the construction, use and/or sale of the Property and all of its 
components, including, but not limited to, authority to cease or modify 
any construction, sell or lease any component of the project or the 
entire project, terminate or modify any or all existing contractual 
relationships, enter into new contracts and perform whatever other 
tasks might be necessary to maximize the financial return to the Fund 
of its investment in the Partnership. ASA shall (and shall have the 
authority to) retain on its own behalf or on behalf of the Fund or the 
Partnership, or continue the retention of, such individuals and 
entities as ASA determines are necessary and appropriate for ASA to 
carry out its responsibilities under the services contract consistent 
with its fiduciary

[[Page 61946]]

duties under the Act with respect to the Fund.
    ASA shall not be responsible for fiduciary breaches, if any, which 
occurred prior to its appointment, but shall use its best efforts to 
mitigate any losses arising from such breaches. ASA shall be 
responsible for any losses caused by its own breaches of fiduciary 
responsibility, and by the breaches of others as provided in the Act or 
as set forth below.
    ASA will be retained for a period of three (3) years from the date 
of the issuance of the exemption unless removed by the Trustees with 
the concurrence of the Department or pursuant to a court order for 
cause. In this regard, ``cause'' shall mean a material breach by ASA of 
its services contract with the Fund, a breach of fiduciary duty under 
the Act by ASA with respect to the Fund, a change in control of ASA, or 
the bankruptcy or insolvency of ASA. If ASA is removed during such 
three-year period, the Trustees shall appoint a replacement named 
fiduciary that is acceptable to the Department and shall designate such 
acceptable replacement and arrange for its acceptance of responsibility 
prior to the effective date of the removal. ASA may not resign during 
such three-year period prior to the designation of a replacement 
acceptable to the Department.
    The Trustees will instruct the custodian of the Fund to transfer to 
the Diplomat Account any additional amounts requested by ASA for the 
operations or expenses of the Diplomat Account or the Partnership, so 
long as the total amount of Fund assets at risk (i.e., the Fund's 
investment in the Partnership plus any recourse debt in excess of the 
value of the assets in the Partnership) does not exceed 13 percent of 
the Fund assets at the time of the transfer.
    ASA will be reimbursed for expenses to the extent permitted under 
the Fund's guidelines for expense reimbursement (the Guidelines). The 
auditor for the Fund will review annually ASA's expense reimbursement 
for compliance with the Guidelines.
    ASA will request and Department will expeditiously consider a 
separate exemption that will permit ASA to act as a QPAM with respect 
to the Diplomat Account, to be retroactively effective as of the date 
that ASA's appointment is effective.
    ASA will be permitted to retain, or continue the existing services 
of, such third party service providers as it deems appropriate. To the 
extent that ASA retains or continues to retain any such service 
providers to carry out any functions currently contained in the 
contracts of Saylor, Driscoll, and Structure Tone, Inc., with respect 
to the Diplomat Account, the Partnership or the successor(s) thereof, 
ASA shall indemnify the Fund for any losses or damages resulting from 
the fiduciary breaches of such service providers which occur subsequent 
to the appointment of ASA. ASA shall not be precluded from obtaining 
indemnification from any such service providers or from exercising any 
rights that the Fund has for indemnification under its existing 
agreements with any service providers and collecting any damages owed 
to the Fund. To the extent that the Fund, directly or indirectly, 
maintains a controlling interest in the underlying assets of the 
Partnership, or any successor(s) thereof, ASA will continue to exercise 
control over the Partnership, its successor(s) and any general partner 
thereof, including acting as or designating the board of directors and 
officers of said Partnership, successor(s) or general partner. In the 
event that the fiduciary responsibility provisions of the Act no longer 
apply to the underlying assets of the Partnership or its successor(s), 
and in the event that the Fund, directly or indirectly, maintains a 
controlling interest in the Partnership or its successor(s), ASA or 
such designees for whom ASA agrees to take full responsibility, shall 
make, and shall retain full responsibility for: all decisions regarding 
the purchase, sale, acquisition, exchange, lease, or encumbrance or 
sale and leaseback of any real property owned by the Partnership and of 
any personalty for which the transaction cost, or series of related 
transaction costs, exceeds $1,000,000; all decisions regarding brand 
affiliation for the hotel or any other piece of Partnership Property; 
and all decisions to assign or lease general management responsibility 
over the Partnership Property or any major component thereof.
    2. One commentator asked why Chadwick, Saylor & Co. Inc. (CSC) had 
rendered its September 1997 opinion ``without all of the information 
that was available.'' In response, the applicant represents that 
although the Partnership's consultants and advisors were in the process 
of finalizing certain economic and financial models for the project, 
CSC's opinion was rendered utilizing all ``available'' information. 
Further, the applicant maintains that there was sufficient information 
at the time for CSC to determine that the transaction was a prudent 
investment for the Fund.
    3. One commentator asked what would happen if the exemption were 
not granted. Another commentator asked why the transaction did not 
include a contingency clause relating to the requested prohibited 
transaction exemption. In response, the applicant expressed its 
understanding that in the event the exemption were denied, the Fund's 
transaction with the Union must be rescinded, pursuant to the 
Department's regulations and applicable law. Further, the applicant 
stated that the terms of the Fund's acquisition of the Property did not 
contain a contingency clause, because the applicant believed and 
intended that the transaction would satisfy the Department's 
requirements for an administrative exemption.
    4. One commentator questioned whether the transaction was a way for 
the Fund to finance alleged losses of the Union Labor Life Insurance 
Company (ULLICO) in which the Fund had invested some of its assets. In 
response, the applicant represents that the Fund acquired the Property 
solely as an investment for the exclusive benefit of participants and 
beneficiaries of the Fund. It is represented that the transfer of the 
Property to ULLICO, then to the Union, and finally from the Union to 
the Fund was in no way intended to finance ULLICO financial losses, if 
any, nor were such transactions related to any investment that the Fund 
has in several ULLICO separate accounts and other investment vehicles.
    5. A number of commentators stated that their pensions and/or the 
cost-of-living increases to their pensions were not large enough. 
Several individuals requested increased ``medical'' benefits, even 
though the Fund does not provide such benefits, or asked for a transfer 
of pension plan assets to a medical fund. One commentator objected to 
the denial by the Board of Trustees (the Trustees) of a pension 
disability claim.
    The Trustees believe that the Prohibited Transaction Exemption 
Procedure is not the appropriate venue in which to address concerns 
about the administration of the Fund, benefits levels, or individual 
benefit claims. Accordingly, the Trustees have made no attempt to 
address these comments.
    6. One commentator expressed opposition to the acquisition of the 
Property by the Fund on the basis that a pension fund sponsored by the 
United Association Local 777, an affiliate of the Union, improperly 
invested the assets of such pension fund. After researching the public 
records, the applicant informed the Department that consent judgments 
were entered on May 5, 1998, against a broker and the trustees of the

[[Page 61947]]

Connecticut Plumbers and Pipefitters Pension Fund (the Connecticut 
Fund) for violations of the Act involving imprudent investment in risky 
mortgage-backed securities. The applicant maintains that, as a legal 
matter, the Connecticut Fund is a separate and distinct entity, and the 
activities of its broker and trustees are unrelated to the Fund and the 
Union and, therefore, should not affect the requested exemption.
    Accordingly, based upon the representations made by the applicant, 
the written comments received in response to the proposal and the 
applicant's responses, including the agreement to undertake the actions 
described in the term sheet, the Department has determined to grant the 
exemption. In this regard, the Department notes that the additional 
undertakings agreed to by the applicant, including the appointment of 
ASA as an independent fiduciary, were material factors in the 
Department's determination to grant a final exemption. Finally, the 
Department notes that the representations and term sheet contained in 
the applicant's letter dated October 29, 1999, supercede any of the 
applicant's earlier responses to the comments received by the 
Department to the extent inconsistent.
    The comments submitted by the commentators to the Department and 
the applicant's response thereto have been included as part of the 
public record of the exemption application. The complete application 
file, including all supplemental submissions received by the 
Department, is available for public inspection in the Public Documents 
Room of the Pension Welfare Benefits Administration, Room N-5638, U.S. 
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
    For a complete statement of the facts and representations 
supporting the Department's decision to grant this exemption refer to 
the Notice published on May 29, 1998, 63 FR 29453.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883 (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions to which the exemptions does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) This exemption is supplemental to and not in derogation of, any 
other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional rules. Furthermore, the 
fact that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (3) The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

    Signed at Washington, DC, this 8th day of November, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 99-29678 Filed 11-12-99; 8:45 am]
BILLING CODE 4510-29-P