[Federal Register: September 29, 2003 (Volume 68, Number 188)]
[Notices]
[Page 55993-56006]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29se03-127]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11167]
Notice of Proposed Exemption for Certain Transactions Involving
Aetna Life Insurance Company (Aetna) and UBS Realty Investors LLC (UBS
Realty) Located in Hartford, CT
AGENCY: Department of Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed exemption from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and the Internal
Revenue Code of 1986 (the Code). The proposed exemption would exempt
certain transactions that may occur as a result of the sharing of real
estate investments among various Accounts maintained by Aetna,
including the Aetna general account and the general accounts of Aetna's
affiliates which are insurance companies licensed to do business in at
least one state (collectively, the General Account), and the ERISA-
Covered Accounts with respect to which both Aetna and UBS Realty are
fiduciaries. Aetna and UBS Realty (pursuant to the arrangement
described herein) are primarily responsible for the acquisition,
management and disposition of the assets allocated to the ERISA-Covered
Accounts. Aetna has hired UBS Realty as a discretionary sub-adviser for
the ERISA-Covered Accounts maintained by Aetna. UBS Realty will perform
such services for the Accounts as of the transition effective date
(expected to be October 1, 2003). However, Aetna will retain fiduciary
authority over the ERISA-Covered Accounts after such date.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before November 28, 2003.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent of the Office of Exemption Determinations,
Employee
[[Page 55994]]
Benefits Security Administration, Room N-5649, U.S. Department of
Labor, 200 Constitution Avenue, NW., Washington, DC 20210, Attention:
Application No. D-11167 (Aetna and UBS Realty). The application for
exemption and the comments received will be available for public
inspection in the Public Documents Room of the Employee Benefits
Security Administration, U.S. Department of Labor, Room N-1513, 200
Constitution Avenue, NW., Washington, DC 20210.
SUPPLEMENTARY INFORMATION: Notice is hereby given of the 2 pendency
before the Department of an application for exemption from the
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of the Act and
from 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.
The proposed exemption was requested in an application filed by Aetna
and UBS Realty pursuant to 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).
Summary of Facts and Representations
1. Aetna is an insurance company organized under the laws of
Connecticut. Among the many insurance products and financial services
Aetna offers are funding, asset management and other services for
thousands of employee benefit plans subject to the provisions of Title
I of the Act. Historically, Aetna had been significantly involved in
managing real estate investments (both real estate mortgage loans and
real estate equity interests) held both in its general account for its
own benefit as well as in various accounts for the benefit of its
investment clients. In connection with this real estate management
business, Aetna obtained an exemption--Prohibited Transaction Exemption
91-10 (``PTE 91-10'') \1\--from the Department in 1991 that provided
exemptive relief for certain transactions involving the real estate
investments in such accounts. For the reasons set forth below, Aetna
and UBS Realty have jointly requested that this exemptive relief be
modified to reflect certain changed circumstances. If the proposed
exemption is granted, PTE 91-10 shall be superseded and replaced by the
restated prohibited transaction exemption set forth in this notice.
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\1\ See 56 FR 3273 (January 29, 1991).
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2. Aetna effectively disposed of a substantial portion of its
third-party institutional real estate advisory business a number of
years ago by selling that business to a newly-created entity owned by
several of the employees in its institutional real estate group and
certain private equity investors. This entity was subsequently
purchased by UBS AG, a leading global financial services concern and
the largest bank in Switzerland, and currently operates as UBS Realty,
a wholly-owned indirect subsidiary of UBS AG. The former employees of
Aetna's institutional real estate group have (subject to normal
turnover) continued to manage and operate the business that is now UBS
Realty. (Aetna and UBS Realty are sometimes collectively referred to
herein as the ``Applicant.'')
3. UBS Realty is an independent organization that is part of one of
the largest financial service organizations in the world. UBS Realty
represents that it: (i) Is a registered investment adviser under the
Investment Advisers Act of 1940; (ii) meets the requirements of a
``qualified professional asset manager'' within the meaning of
Prohibited Transaction Class Exemption 84-14; \2\ (iii) had net equity,
as of December 31, 2002, of approximately $37 million; and (iv) had
total assets under management, as of September 30, 2002, of
approximately $9.3 billion, of which approximately $5.7 billion was
derived from Aetna, as described further below. Significantly, UBS
Realty had approximately $3.6 billion of U.S. commercial real estate
assets under management as of September 30, 2002, that was independent
of its relationship with Aetna. More generally, the entire UBS group of
companies had approximately $16.1 billion of real estate assets under
management as of June 30, 2002, and approximately $1.5 trillion of
total assets under management as of August, 2002.
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\2\ See 49 FR 9494 (March 13, 1984)
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4. Aetna has retained, and until transitioned to UBS Realty (as
described below) will continue to retain, discretionary authority and
control over the management of the various real estate accounts
maintained by Aetna, including those real estate accounts in which
employee benefit plans participate (the ``ERISA-Covered Accounts'')
that are structured as pooled or single customer insurance company
separate accounts (collectively, the ``Client Accounts''). In
connection with its exercise of this discretionary authority and
control, Aetna has retained UBS Realty (including its predecessor) to
provide non-discretionary advice, recommendations and related services
regarding the management of the Client Accounts. The Applicant
represents that, consistent with the provisions of PTE 91-10, until
day-to-day discretionary management responsibility is transitioned to
UBS Realty, all of the Client Accounts have continued to be ``managed''
by Aetna, and the various decisions covered by the exemptions contained
in PTE 91-10 have continued to be made by Aetna.
5. It is now anticipated that the day-to-day discretionary
management authority with respect to the Accounts will be delegated to
UBS Realty, with the approval of the investors having an interest in
the Client Accounts. Aetna, however, will continue to manage the real
estate assets in its general account and in the general accounts of one
or more of its affiliated insurance companies (collectively, the
``General Account'' and together with the Client Accounts, the
``Accounts''). The receipt of the requisite investor approval is
expected in the near future with an anticipated effective date of such
delegation on or about October 1, 2003. On and after the effective date
of the transition (the ``Transition Effective Date''), the Client
Accounts will be managed by UBS Realty on a discretionary basis,
subject to the investment guidelines applicable to the particular
Client Account and the ultimate oversight of Aetna. Accordingly, after
the Transition Effective Date, many of the decisions covered by the
exemptions contained in PTE 91-10 will be made by UBS Realty rather
than by Aetna.
The Client Accounts will nevertheless continue to be maintained by
Aetna as insurance company separate accounts holding assets owned by
Aetna that, in effect, ``fund'' Aetna's obligations to the holders of
the annuity contracts that relate to the Client Accounts. Moreover, as
discussed above, UBS's day-to-day management authority will be
undertaken pursuant to an investment advisory agreement with Aetna
that, among other things, includes UBS Realty's agreement to operate
the Client Accounts in accordance with the Act and UBS Realty's
acknowledgement of its fiduciary status to the extent that the assets
of the Client Accounts are ``plan assets'' subject to the Act. Finally,
Aetna will monitor UBS Realty's performance of its responsibilities and
retains the right to terminate its delegation to UBS Realty as a result
of default by UBS Realty under the investment advisory agreement or if
Aetna determines that such action is required to comply with its
fiduciary obligations.
6. UBS Realty's general real estate investment strategy is set by
its senior
[[Page 55995]]
management. Within these pre-determined parameters, its real estate
acquisitions and underwriting professionals seek quality real estate
investments for its various accounts. These potential equity
investments are evaluated through a team approach. An acquisition
specialist heads the team, which includes an asset manager, an
attorney, an accountant, an engineer, an economic researcher, and a
risk management specialist. Each member of the team must sign off on
the investment before it is presented for approval to UBS Realty's
Investment Committee. The Investment Committee, which consists of the
senior management of UBS Realty, including the chief executive officer,
all portfolio managers, the head of acquisitions, asset management,
valuation, legal, and the chief financial officer, as well as the asset
management region head, must approve all acquisitions in excess of
$2,000,000 and sales in excess of $5,000,000. Approval of the
investment transaction requires a concurrence of a majority of the
members of the Investment Committee voting, and the portfolio manager
for the account. In any event, either the chief executive officer or
the head of U.S. operations must approve each transaction. Aetna
maintains its own committee process to review investment actions taken
by the UBS Realty Investment Committee.
7. The Accounts, including the ERISA-Covered Accounts and the
General Account, continue to participate in the sharing of certain real
estate investments pursuant to PTE 91-10. As of the Transition
Effective Date, those shared real estate investments involving the
General Account (which were entered into before the Transition
Effective date) will continue to be held by both the ERISA-Covered
Accounts and the General Account. Accordingly, exemptive relief is
requested with respect to those continuing shared investments. After
the Transition Effective Date, the General Account will not share in
any new real estate investments made by UBS Realty on behalf of the
Client Accounts.
8. UBS Realty represents that it has procedures in place that
provide a system of fair and equitable allocation of investments to the
Accounts. Aetna and UBS Realty do not share investment opportunities
with each other. Each Account has written predetermined investment
guidelines (such as product mix and geographic diversification
standards) which are generally in place over extended periods. However,
they may be modified by the Account's portfolio manager if appropriate,
in conjunction with the contractholder, if applicable. An investment
whose size or other characteristics qualify it for only one Account
will be allocated to that Account. An investment whose size and other
characteristics qualify it for allocation to more than one Account will
be allocated based on a ``rotation'' system. Under this procedure,
investments are allocated to the account that has not received an
allocation for the longest period of time. Investments of a size
exceeding eligible Account capacities may be shared.
9. UBS Realty will seek to make investments in real estate on a
shared basis for those Client Accounts that it manages, in the same
manner that Aetna made such shared investments pursuant to PTE 91-10.
UBS Realty will continue to manage the shared investments in real
estate for Client Accounts in the same manner that Aetna managed such
investments pursuant to PTE 91-10. UBS Realty represents that an
inherent advantage of shared investments in real estate is the
opportunity to enhance the diversity of investments available to the
Client Accounts and their participating plans. By investing on a shared
basis, the Client Accounts can obtain the advantage of interests in a
larger number of high quality properties, regardless of cost. Further,
shared investments frequently result in substantial savings associated
with administrative and start-up costs.
10. The Applicant frequently structures investments as
partnerships, in which a third party (usually a real estate developer)
participates in a partnership. It may then allocate the interest in
such partnership to more than one Account. The Applicant states that
partnership investments typically involve several particular features
(by virtue of the terms and conditions of their partnership agreements)
that may, in the case of shared investments, result in possible
violations of section 406(a) or (b) of the Act. Therefore, an exemption
for such partnerships is necessary.
11. During the course of holding a real estate investment, certain
situations may arise that require a decision to be made with regard to
the management or disposition of the investment. For example, there may
be a need for additional contributions of operating capital, or there
may be an offer to purchase the investment by a third party or a joint
venture partner. When these investments are shared among more than one
of the Accounts, a potential for conflict arises since the same
decision may not be in the best interest of each Account. Therefore,
the Applicant has submitted a framework of proposed safeguards to
protect the interests of any participating ERISA-Covered Account in the
resolution of potential or actual conflicts.
12. Each plan contractholder participating in an ERISA-Covered
Account that shares or proposes to share real estate investments has
been or will be furnished with a written description of the
transactions that may occur involving such investments that might raise
questions under the conflict of interest prohibitions of the Act with
respect to the Applicant's involvement in such transactions and that
are the subject of PTE 91-10 or this proposed exemption. This
description will discuss the reasons why such conflicts of interest may
be present (i.e., because the General Account has been participating in
the investment and may benefit from the transaction \3\ or because the
interests of the various Accounts participating in the investment may
be adverse to each other at certain times with respect to the
transaction). The description will also disclose the principles and
procedures to be used to resolve anticipated impasses, as will be
outlined below. In addition, each contractholder in an ERISA-Covered
Account that currently shares investments has received a copy of PTE
91-10, and will receive a copy of this exemption, if granted.
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\3\ As noted in Paragraph 7 above, the General Account will not
share in any new real estate investments made by UBS Realty on
behalf of the Client Accounts after the Transition Effective Date.
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13. With respect to new contractholders in an ERISA-Covered Account
that currently participates in the sharing of investments, each such
new contractholder will be provided with the above mentioned written
description, a copy of the notice of pendency and a copy of the
exemption, if granted, before the contractholder begins to participate
in the ERISA-Covered Account. With respect to contractholders who are
already in an ERISA-Covered Account that does not currently share
investments but that proposes to participate in the sharing of
investments in the future, each such contractholder will be provided
with the description outlined above, a copy of the notice of pendency
and a copy of the exemption, if granted, before the ERISA-Covered
Account begins to participate in the sharing of investments.
14. Withdrawals from pooled, open-end Accounts are made, at the
written request of the contractholder, at market value, subject to the
availability of cash. The Applicant is not obligated to liquidate
investments to meet withdrawal requests. If cash available
[[Page 55996]]
for withdrawals is insufficient to meet all the withdrawal requests on
any valuation date, available cash is paid to each withdrawing
contractholder on a pro rata basis. With respect to pooled closed-end
Accounts, the actual cash flow, including amounts received from the
sale of investments, is generally paid out to all contractholders on a
pro rata basis until all assets of the Account have been liquidated.
Prior to liquidation of the Account, contractholders have the right,
subject to the Applicant's agreement which cannot be unreasonably
withheld, to sell their interests in the Account. For single customer
Accounts, the contractholder with respect to wholly-owned properties
can cause the Applicant to liquidate the investment or transfer it to a
successor investment manager.
15. An independent fiduciary or independent fiduciary committee
must be appointed to act on behalf of each ERISA-Covered Account
participating in the sharing of investments with respect to certain
transactions and decisions contemplated by the proposed exemption. The
independent fiduciary, acting on behalf of the ERISA-Covered Account,
shall have the responsibility and authority to approve or reject
recommendations made by the Applicant regarding the allocation of
shared real estate investments to the ERISA-Covered Account and
recommendations concerning subsequent transactions that are the subject
of this proposed exemption. The independent fiduciary must be informed
of the procedures set forth in the proposed exemption for the
resolution of anticipated impasses prior to an acceptance by the
fiduciary of the appointment. The Applicant shall provide the
independent fiduciary with the information and materials necessary for
the independent fiduciary to make an informed decision on behalf of the
ERISA-Covered Account. No allocation or transaction that is the subject
of the proposed exemption will be undertaken prior to the rendering of
such informed decision by the independent fiduciary. The independent
fiduciary shall also review on an as-needed basis, but not less than
twice annually, the shared real estate investments in the ERISA-Covered
Account's portfolio to determine whether the holding of such shared
real estate investments continues to be in the best interest of the
ERISA-Covered Account.\4\
16. The independent fiduciary must be unrelated to Aetna and UBS
Realty as well as any of their respective affiliates. The independent
fiduciary may not be, or consist of, any officer, director or employee
of either Aetna or UBS Realty, or be affiliated in any way with either
Aetna or UBS Realty or any of their respective affiliates. The
independent fiduciary must be either: (1) A business organization that
has at least five (5) years of experience with respect to commercial
real estate investments; (2) a committee comprised of one or more
individuals who each have at least five (5) years of experience with
respect to commercial real estate investments; or (3) the sponsor (or
its designee) of a plan or plans that is the sole participant in an
ERISA-Covered Account. An organization or individual may not serve as
an independent fiduciary for an ERISA-Covered Account for any fiscal
year if the gross income (other than fixed, non-discretionary
retirement income and cost of living increases thereon) received by
such organization or individual (or any partnership or corporation of
which such organization or individual is an officer, director, or ten
percent or more partner or shareholder) from either Aetna or UBS Realty
and their respective affiliates for that fiscal year exceeds five (5)
percent of such person's annual gross income in the aggregate from all
sources for the prior fiscal year. If such organization or individual
had no income for the prior fiscal year, the five (5) percent
limitation shall be applied with reference to the fiscal year in which
such organization or individual serves as an independent fiduciary. The
income limitation will include services rendered to the Accounts as
independent fiduciary under any prohibited transaction exemptions
granted by the Department. In addition, no organization or individual
who is an independent fiduciary, and no partnership or corporation of
which such organization or individual is an officer, director or ten
percent or more partner or shareholder, may: (i) Acquire any property
from, sell any property to, or borrow any funds from, either Aetna or
UBS Realty or any of their respective affiliates, or any Account
managed by either Aetna or UBS Realty or any of their respective
affiliates, during the period that such organization or individual
serves as an independent fiduciary and continuing for a period of six
(6) months after such organization or individual ceases to be an
independent fiduciary; or (ii) negotiate any such transaction during
the period that such organization or individual serves as independent
fiduciary. A sponsor (or its designee) of a plan participating in an
ERISA-Covered Account may not serve as independent fiduciary with
respect to any pooled ERISA-Covered Account. A business organization or
committee member may not serve as an independent fiduciary of more than
one ERISA-Covered Account.
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\4\ For example, in the case of an investment shared by the
General Account and an ERISA-Covered Account, if the independent
fiduciary of the ERISA-Covered Account determined, after its review
of the Account's shared investment portfolio and financial
information relating thereto, that the ERISA-Covered Account's
interest in the shared investment should be disposed of, UBS Realty
would be required to carry out the decision of the independent
fiduciary. If the portfolio manager of the General Account agreed
that its interest in the shared investment should also be disposed
of, then the entire shared investment would be sold. If the
portfolio manager of the General Account did not agree that its
interest in the shared investment should be sold, UBS Realty would
first try to sell only the ERISA-Covered Account's interest in the
shared investment. However, to the extent that it is not feasible or
possible to sell the ERISA-Covered Account's interest alone, the
entire shared investment would be sold notwithstanding the non-
acquiescence of the General Account.
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17. In the case of a single customer ERISA-Covered Account, if the
plan sponsor or its designee decides not to act as the independent
fiduciary, the independent fiduciary or independent fiduciary committee
will be selected initially by either Aetna or UBS Realty. The
independent fiduciary must be approved by the plan sponsor or another
plan fiduciary prior to the commencement of its fiduciary
responsibilities on behalf of the ERISA-Covered Account. In the case of
a closed-end pooled ERISA-Covered Account, the appropriate plan
fiduciary of each participating plan will be required to approve the
initial selection of the independent fiduciary proposed by either Aetna
or UBS Realty prior to the commencement of its fiduciary
responsibilities on behalf of the ERISA-Covered Account. In the case of
an open-end pooled ERISA-Covered Account, the independent fiduciary or
the independent fiduciary committee will be selected initially by
either Aetna or UBS Realty. The Applicant represents that because these
Client Accounts often include a significant number of plan
contractholders, the independent fiduciary will not be approved
initially by plan contractholders. The selection of the independent
fiduciary, however, must be approved by a majority of the
contractholders in such a Client Account within twelve (12) months
after the selection has been made.
18. For both single customer and pooled ERISA-Covered Accounts,
prior to the making of any decision to approve the selection of an
independent fiduciary, plan contractholders must be furnished
appropriate biographical information pertaining to the independent
fiduciary or members of the independent fiduciary committee.
[[Page 55997]]
This biography must set forth the background and qualifications of the
fiduciary (or fiduciaries) to serve in that capacity. In the case of
any biographical information furnished after the date of this proposed
exemption, the information must also disclose the total amount of
compensation received by the fiduciary (or each member of a fiduciary
committee) from either Aetna or UBS Realty or any of their respective
affiliates during the preceding year, including pension or other
deferred compensation paid to fiduciaries who may be former employees
of either Aetna or UBS Realty or any of their respective affiliates,
and compensation for any business services performed by the fiduciary
or any affiliate for either Aetna or UBS Realty or any of their
respective affiliates. The disclosure relating to compensation must be
updated annually thereafter. Subsequent disclosures must also include
the amount of fees and expenses paid for independent fiduciary
services. The plans will be able to use this information to determine
whether to approve the initial selection of the fiduciary committee and
whether to continue such approval each year thereafter.\5\
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\5\ The Applicant represents that the contractholders in its
single customer and pooled closed-end real estate Client Accounts
are knowledgeable and sophisticated investors who fully understand
the operation of the ERISA-Covered Accounts.
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19. Once an independent fiduciary is appointed, the independent
fiduciary will continue to serve subject to an annual nomination by the
Applicant and vote by each of the plans participating in the ERISA-
Covered Account. An independent fiduciary may be removed by a majority
vote of the ERISA-Covered Account's contractholders. The Applicant will
not have the authority to remove an independent fiduciary during the
term of that independent fiduciary. If a vacancy occurs by virtue of
the death, resignation or removal of an independent fiduciary, a
replacement independent fiduciary will be nominated by either Aetna or
UBS Realty and approved by a majority vote of the ERISA-Covered
Account's contractholders. Possible replacements may also be nominated
by any of the ERISA-Covered Account's contractholders.
20. The independent fiduciary will normally be compensated by the
ERISA-Covered Account. However, upon advance notice to the independent
fiduciary and the ERISA-Covered Account's contractholders, the
Applicant (or the Plan Sponsor in the case of a Single Customer
Account) may pay such fees itself. The Applicant will indemnify any
independent fiduciary or members of an independent fiduciary committee
with respect to any action or threatened action to which such person is
made a party by reason of his or her service as an independent
fiduciary. Indemnification will be provided as permitted under the laws
of the State of Connecticut and subject to the requirement that such
person acted in good faith and in a manner reasonably believed to be
solely in the interests of the participants and beneficiaries of the
plans participating in the ERISA-Covered Account.
21. The independent fiduciary will record in writing all decisions
that are made in such capacity. In addition to the decisions of such
independent fiduciary, the rationale and support thereof must also be
set forth in writing and maintained by the Applicant pursuant to the
recordkeeping requirements outlined in the General Conditions below. An
independent fiduciary committee will be required to make its decisions
on the basis of a two-thirds majority.
22. The independent fiduciary of each ERISA-Covered Account is
required to approve any recommendation by UBS Realty, acting on behalf
of the ERISA-Covered Accounts, involving a shared investment.
Situations may arise where a conflict of interest may develop and the
independent fiduciaries of the ERISA-Covered Accounts may not agree on
what the appropriate course of action should be for a proposed
transaction. In such cases, UBS Realty, acting on behalf of the ERISA-
Covered Accounts, will make recommendations, which may be outlined as
alternatives, to the independent fiduciaries regarding the proposed
transaction. If an alternative course of action is not found that is
acceptable, and the independent fiduciaries of such ERISA-Covered
Accounts are in effect stalemated, a procedure has been developed by
the Applicant to ensure that a decision can be made.
23. This stalemate procedure is designed to provide a result that
is the same as would be followed in comparable situations where
unrelated parties to a transaction were dealing at arm's length. This
means that the action that will be taken in such cases is the one that
does not require an ERISA-Covered Account to invest new money and will
not change the terms of an existing agreement or the existing
relationship between the Client Accounts. For example, in the case of a
proposed modification to a debt investment shared by two ERISA-Covered
Accounts, if the independent fiduciaries cannot agree on such
modification, no modification will be made. Rather, the terms of the
loan agreement, as originally stated, will be carried out. Or, in the
case of a partnership interest shared by two ERISA-Covered Accounts,
the exercise of a buy-sell provision in the partnership agreement by a
co-partner will require the two ERISA-Covered Accounts that share the
interest in the partnership to either sell their partnership interest
to the co-partner at a stated price, as determined by the partnership
agreement, or buy the co-partner's interest at the stated price. If the
independent fiduciaries cannot agree on the action to be taken, and no
alternative course of action is found to be acceptable, the ERISA-
Covered Accounts will be required to sell their interest to the co-
partner. This action would be taken because the other (purchase) option
would require the expenditure of additional funds by an objecting
ERISA-Covered Account.
In addition, situations may arise where an ERISA-Covered Account
and a non-ERISA-Covered Client Account wish to pursue different courses
of action. In such situations the decision on behalf of the non-ERISA-
Covered Client Account will be made by persons independent of Aetna,
UBS Realty and any of their respective affiliates.\6\
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\6\ In this regard, the Applicant represents that persons
independent of Aetna, UBS Realty and any of their respective
affiliates will make the decisions on behalf of non-ERISA-Covered
Client Accounts pursuant to Section I(e)(2) and Sections II (b)(2)
and (c)(2) (d)(2) of the proposed exemption.
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Specific Transactions
I. Direct Real Estate Investments
(a) Transfers Between Accounts
24. Following the initial sharing of investments, it may be in the
best interests of the Accounts participating in the investment for one
Account to sell its interest to the other(s). Such a situation may
arise, for example, when one Account experiences a need for liquidity
in order to satisfy the cash needs of the plans participating in the
Account, while for the other Account(s) the investment remains
appropriate. One possible means of reconciling this situation is for
the ``selling'' Account to sell its interest in the shared investment
to the remaining participating Account(s) or to another Account(s) at
current fair market value. Such sales may not, however, be appropriate
in all circumstances. An inter-Account transfer will only be permitted
when it is determined to be in the best interests of each Account that
would be involved
[[Page 55998]]
in the transaction. Where two or more Accounts are involved in such a
transfer, the transfer would also be subject to the approval of the
Connecticut Insurance Department. In addition, the Applicant has
determined that no such transfers will be permitted between the General
Account and an ERISA-Covered Account. Because the Applicant would be
acting on behalf of both the ``buying'' and ``selling'' Accounts in
such an inter-Account transfer, the transfer might be deemed to
constitute a prohibited transaction under section 406 of the Act.
Accordingly, exemptive relief is requested herein for the sale or
transfer of an interest in a shared real estate investment by one
ERISA-Covered Account to another Client Account of which either Aetna
or UBS Realty is a fiduciary. Such transfers would have to be at fair
market value and approved by the independent fiduciary for each ERISA-
Covered Account involved in the transfer. See Section I(a).
(b) Joint Sales of Property
25. In situations involving shared real estate investments, an
opportunity may arise to sell the entire investment to a third party,
and it may be determined that the sale is desirable for all of the
participating Accounts. When the General Account is participating in
the investment, and the sale is therefore determined to be in the best
interests of the General Account (in addition to being in the interests
of the other Account(s)), the sale might be deemed to constitute a
prohibited transaction under section 406 of the Act and section 4975 of
the Code.\7\ Similarly, the Applicant may be acting on behalf of two
ERISA-Covered Accounts or an ERISA-Covered Account and a non-ERISA-
Covered Account other than the General Account. Accordingly, exemptive
relief is requested for these joint sales. The sales would have to be
approved by the independent fiduciary for each ERISA-Covered Account
involved in the sale. See Section I(b).
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\7\ The Department notes that all future references to the
provisions of the Act shall be deemed to include the parallel
provisions of the Code.
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(c) Additional Capital Contributions
26. On occasion, commercial real estate investments require
infusions of additional capital in order to fulfill the investment
expectations of the property. For example, developmental real estate
investments sometimes require additional capital in order to complete
the construction of the property. In addition, the cash flow to improve
or operate completed buildings may also result in the need for
additional capital. Such additional capital is frequently provided by
the owners of the property. In the case of a property that is owned
entirely on behalf of the Accounts, it is contemplated that needed
additional capital will ordinarily be contributed in connection with
the investment in the form of an equity capital contribution made by
each participating Account in an amount equal to such Account's
existing percentage equity interest in the shared investment;\8\ that
is, in the first instance, each Account would be afforded the
opportunity to contribute additional capital on a fully proportionate
basis. In the case of ERISA-Covered Accounts, all decisions regarding
the making of additional capital contributions must be approved by the
independent fiduciary for the ERISA-Covered Account. The making of an
additional capital contribution could be deemed to involve a prohibited
transaction under section 406 of the Act. If one or more participating
Accounts in a shared investment is unable to provide its share of the
needed additional capital, various alternatives may be appropriate,
including having the other Account(s) make a disproportionate
contribution. For example, where the General Account and an ERISA-
Covered Account participate in a shared investment and the need for
additional capital arises, it might be determined for liquidity reasons
or other factors involving the ERISA-Covered Account that the
additional contribution should not be made by that ERISA-Covered
Account. As a result, the additional equity capital may be provided
entirely by the General Account with the further consequence that the
General Account would thereafter have a larger interest in the
investment and, therefore, a larger share in the appreciation and
income to be derived from the property.\9\ Such an adjustment in
ownership interests might be deemed to constitute a prohibited
(indirect sales) transaction under section 406 of the Act. In addition,
these situations could also occur where two ERISA-Covered Accounts or
an ERISA-Covered Account and a non-ERISA-Covered Client Account are
involved. Accordingly, the Applicant is requesting exemptive relief
that would permit the contribution of additional equity capital for a
shared investment by Accounts participating in the investment. Any
decision made or action taken by an ERISA-Covered Account (i.e., the
contribution of either no additional capital, the ERISA-Covered
Account's pro rata share of additional capital, less than or more than
the ERISA-Covered Account's pro rata share, etc.) must be approved by
such independent fiduciary. See Section I(c).
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\8\ In any case where the General Account participates in a
shared investment with one or more ERISA-Covered Accounts and a call
for additional capital is made, the General Account will always
contribute at least its pro rata share of such capital.
\9\ In the case of shared real estate investments owned entirely
by Aetna, if an Account contributes capital equaling less than its
pro rata interest in the investment (or makes no contribution at
all), that Account's equity interest will be re-adjusted and reduced
based on the change in the fair market value of the property caused
by the infusion of new capital.
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(d) Lending of Funds To Meet Additional Capital Requirements
27. If the General Account and an ERISA-Covered Account participate
in a shared investment that experiences the need for additional
capital, and it is determined that the ERISA-Covered Account does not
have sufficient funds available to meet the call for additional
capital, the General Account might be willing and able to loan the
required funds to the ERISA-Covered Account. Prior to any loan being
made, it must be approved by the independent fiduciary for the ERISA-
Covered Account. Such loan will be unsecured and non-recourse, will
bear interest at a rate that will not exceed the prevailing interest
rate on 90-day Treasury Bills, will not be callable at any time by the
General Account, and will be prepayable at any time without penalty at
the discretion of the independent fiduciary of the ERISA-Covered
Account. See Section I(d).
(e) Shared Debt Investments
28. The Applicant occasionally makes real estate investments
consisting of interim construction loans or medium or long-term
mortgage loans on a property. In some instances, the Applicant may have
the opportunity to obtain an equity ownership interest in the
underlying real property upon maturity of the debt or at the election
of the Applicant. It is possible that shared real estate debt
investments might raise questions under section 406 of the Act in
essentially two situations: (1) A material modification in the terms of
a loan agreement, or (2) a default on a loan. From time to time, the
terms of outstanding real estate loans need to be modified to take into
account new developments. Such modifications may commonly include
extensions of the terms of the loan, revised interest rates, revised
repayment schedules, changes in covenants or warranties to permit, for
example, additional financing to be provided by others, and the
provision of additional financing to the borrower by the Applicant.
These situations require a decision on behalf of the lender as to
[[Page 55999]]
whether it would be in its own interest to make the modifications in
question. Similarly, when a borrower commits an act of default under a
loan agreement, the lender must determine, in its own interest, what
action, if any, it wishes to take. Such action might involve
foreclosure on the loan, a restructuring of the loan arrangement, or,
in some cases as appropriate, no action at all. When a debt investment
is shared among Accounts, a decision must be made on behalf of each
Account with respect to the action to be taken when a loan modification
or loan default situation occurs. In some cases, moreover, it is
conceivable that different actions might be desired by different
Accounts. Normally, however, only one unified course of action is
possible in the situation. Since UBS Realty manages each of the Client
Accounts (while the General Account is managed by Aetna), the action
the Applicant decides to take for the particular Accounts may raise
questions under section 406 of the Act. Accordingly, exemptive relief
is being requested that will permit the Applicant on behalf of the
Accounts to take appropriate action with respect to the modification of
the material terms of a loan, or with respect to a default situation
when the loan is a shared investment involving one or more ERISA-
Covered Accounts, or with respect to the acquisition of additional
debt. Each such action would require approval of the independent
fiduciary for each ERISA-Covered Account and the Applicant or the
client for each non-ERISA-Covered Client Account. If there is an
agreement among the independent fiduciaries and the non-ERISA-Covered
Client Accounts as to the course of action to follow with regard to a
proposed loan modification, or an adjustment in the rights upon
default, such modification or adjustment will be implemented. If, upon
full discussion of the matter, no course of action can be agreed upon
by the independent fiduciaries and the non-ERISA-Covered Client
Accounts, no modification of the terms of the loan or adjustment in the
rights upon default would be made. The terms of the loan agreement as
originally stated would be carried out. With respect to shared debt
investments involving ERISA-Covered Accounts and non-ERISA-Covered
Client Accounts, decisions on behalf of the non-ERISA-Covered Accounts
will be made by persons independent of Aetna, UBS Realty and any of
their respective affiliates. See Section I(e).
II. Partnership Investments
29. Many real estate investments are structured as partnership
arrangements (rather than 100 percent ownership interest in property)
in which the Applicant and another party, such as a real estate
developer or manager, participate as co-partners. Generally, the
Applicant's co-partner acts as managing partner of the joint venture.
The Applicant, in turn, may allocate its interest in the partnership to
more than one Account. Partnership investments typically involve
several particular features by virtue of the terms and conditions of
the partnership agreements that may, when the partnership interest is
shared, result in possible violations of section 406 of the Act.
(a) Additional Capital Contributions to Joint Ventures
30. As in the case of investments made entirely by Aetna,
partnership real estate investments sometimes require additional
operating capital. Typically, the partnership agreements entered into
by Aetna and many other real estate investors provide for a capital
call by the general partner of the partnership to be made to each
partner and that each partner provide the needed capital on a pro rata
basis either in the form of an equity contribution or a loan to the
partnership. If one partner refuses to contribute its pro rata equity
share of the capital call, the other partner(s) may contribute
additional capital to cover the short-fall and thereby ``squeeze down''
the interest in the venture of the non-contributing partner.\10\
Alternatively, if sufficient additional capital is not provided by the
partners, other financing may be sought or the partnership may be
liquidated. In the case of a capital call where Aetna's partnership
interest is shared by two or more Accounts, a determination must be
made on behalf of each Account participating in the shared investment
with respect to whether it is appropriate for the Account to provide
its proportionate share of additional capital requested by the
partnership. The general rule that the Applicant will follow is that
each Account will be given the opportunity to provide its pro rata
share of the capital call, but for some Accounts it may be determined
to be appropriate to provide less than a full share or no additional
capital at all. In such cases, the interest of the Account would be
reduced proportionately on a fair market basis. In the case of ERISA-
Covered Accounts, all decisions regarding the making of additional
capital contributions must be approved by the independent fiduciary for
the ERISA-Covered Account. In addition to situations where some
Accounts participating in the ownership of Aetna's partnership interest
may not be in a position to provide their share of a capital call,
other situations may arise where a partner is unable to make its
additional capital contributions. Both of these situations may result
in prohibited transactions under section 406 of the Act. See Section
II(a).
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\10\ In the case of a call for additional capital involving a
typical partnership arrangement entered into between parties dealing
at arm's-length, the partnership agreement may commonly provide that
the equity interest of any non-contributing partner be re-adjusted,
or ``squeezed down,'' on a capital interest basis. This involves re-
adjusting the equity interests of the partners solely on the basis
of the percentage of total capital contributed without taking into
account any appreciation on the underlying property. This ``capital
interest'' adjustment can substantially diminish the equity interest
of the non-contributing partner in the actual current market value
of the underlying property. Thus, this type of re-adjustment is
intended to provide an incentive to all partners to make their
proportionate capital contributions so that improvements can be made
and the operation of a property continued without burdening the
other partners.
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31. Aetna Shortfall. In situations where the General Account and an
ERISA-Covered Account are sharing an investment in a partnership, the
General Account and an ERISA-Covered Account may experience a capital
call from the general partner of the partnership for either an
additional equity or debt contribution. If it is determined that the
ERISA-Covered Account does not have sufficient funds available to meet
its contribution requirement,\11\ the General Account may make an
additional equity contribution to the partnership to cover the ERISA-
Covered Account's shortfall. However, in any case where the General
Account contributes an ERISA-Covered Account's shortfall, the ERISA-
Covered Account's share of the partnership interest will be readjusted
and reduced based upon the change in the fair market value of the
partnership interest held by Aetna which is caused by the infusion of
new capital, thus recognizing any appreciation in the investment. There
is no ``capital basis squeeze down'' effect under these circumstances
as there might be under the partnership agreement should Aetna (in its
role as a partner) fail to meet a
[[Page 56000]]
call for additional capital. See Section II(a)(1).
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\11\ In any case where the General Account and one or more
ERISA-Covered Accounts share Aetna's interest in a partnership, the
General Account will always make a capital contribution that is at
least equivalent proportionately to the highest capital contribution
made by an ERISA-Covered Account (but not higher than the General
Account's pro rata share of the required additional capital except,
as described in paragraph 30, in the event of a co-venturer
shortfall). Thus, as between the Accounts, the General Account will
never be the cause of a capital contribution shortfall by Aetna that
would result in a capital basis squeeze down by a partner.
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Additionally, the General Account may make a loan to the ERISA-
Covered Account to enable the ERISA-Covered Account to make its
required pro rata capital contribution. Accordingly, subject to the
conditions of the proposed exemption, this proposed exemption would
provide relief for loans of this type. Prior to any loan being made, it
would have to be approved by the independent fiduciary for the ERISA-
Covered Account. Such loan will be unsecured and non-recourse, will
bear interest at a rate that will not exceed the prevailing interest
rate on 90-day Treasury Bills, will not be callable at any time by the
General Account, and will be prepayable at any time without penalty at
the discretion of the independent fiduciary of the ERISA-Covered
Account. In this way, the needed capital may be provided without
causing a ``squeeze down'' in the equity interest of the participating
ERISA-Covered Account. A similar situation may arise where two ERISA-
Covered Accounts, or an ERISA-Covered Account and a non-ERISA-Covered
Client Account participate in a partnership investment. If one Client
Account is unable or unwilling to provide its proportionate share of a
capital call, the other Client Account may be interested in making up
the shortfall. This might be accomplished by means of an equity
contribution with a resulting re-adjustment on a current fair market
value basis in the equity ownership interests of the participating
Client Accounts. Thus, any of these disproportionate contribution
situations between Client Accounts might result in a violation of
section 406(b)(2) of the Act. Subject to the generally applicable
conditions of this proposed exemption, Section II(a)(3) provides
limited relief for these disproportionate contributions.
32. Co-Partner Shortfall. In some cases, Aetna's partner in a
partnership investment may be unable to meet its additional capital
obligation, and the Applicant may deem it advisable for some or all of
the participating Accounts to contribute capital in excess of their pro
rata share in the partnership in order to finance the operation of the
property (and thereby squeeze down the equity interest of the
partner).\12\ The Applicant is requesting exemptive relief that would
permit additional capital contributions to be made by participating
Accounts on a non-proportionate basis if the need arises. Any instance
involving the infusion of additional capital to a partnership will be
considered by the independent fiduciary for each ERISA-Covered Account
participating in the investment and any action to be taken by the
Account must be approved by the independent fiduciary. These actions
might include contributing a pro rata share of additional equity
capital (including a capital contribution that squeezes down the
interest of a partner on the basis provided in the partnership
agreement), contributing more or less than a pro rata share, or
contributing no additional capital. See Section II(a)(4).
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\12\ In any case involving a shared partnership interest held by
the General Account and an ERISA-Covered Account, if it is
determined that the ERISA-Covered Account will contribute its pro
rata share of extra capital the General Account would also
contribute at least its pro rata share of such capital.
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(b) Third Party Purchase of Partnership Properties
33. Under the terms of certain partnership agreements entered into
by Aetna and other real estate investors, if an offer is received from
a third party to purchase the assets of the partnership, and one
partner (irrespective of the percentage ownership interest of the
partner) wishes to accept the offer, the other partner must either (1)
also accept the offer, or (2) buy out the first partner's interest at
the portion of the offer price that is proportionate to the first
partner's share of the partnership. For example, if Aetna on behalf of
the Accounts and a real estate developer are partners in a property and
an offer is received from another person to acquire the entire property
that the developer wants to accept, the Applicant on behalf of the
Accounts would be obligated either to sell its interest also to the
third party or to buy out the interest of the developer at the portion
of the price offered by the third party proportionate to the
developer's share of the partnership. When the Applicant's interest in
a real estate partnership is shared by two or more Accounts, it is
likely that the same decision will be appropriate for each Account in
any third-party purchase situation. See Sections I(b) and II(b)(1). It
is also possible, however, that it might be in the interests of some
Accounts to reject the offer and buy-out the partner, while other
Accounts might not have the funds to do so or, for some other reason,
would elect to sell to the third party. The partnership agreements
typically require, however, that Aetna on behalf of the Accounts
provide its co-partner with a buy or sell reply. Thus, in making a buy
or sell decision in any of these cases involving an ERISA-Covered
Account, the Applicant might be deemed to be acting in violation of
section 406 of the Act. Further, in order to resolve situations where
the same reply is not appropriate for all participating Accounts,
various alternatives may be adopted. For example, the Account(s) that
wishes to continue owning the property may be willing and able itself
to buy-out not only the co-partner, but also the other participating
Account(s) that wishes to accept the third party offer to sell. The
General Account, however, will not participate in the buy-out of
another Account(s). Or, one Account may itself be willing and able to
buy-out the co-partner while the other Account chooses to continue
holding its original interest in the property. Alternatively, all of
the Accounts may choose to participate in the buy-out, but on a basis
that is not in proportion to their existing ownership interests. When
an ERISA-Covered Account is involved, such potentially desirable
alternatives may also raise questions under section 406 of the Act
(whether or not the General Account is a participant in the
investment). Accordingly, the Applicant is requesting exemptive relief
that would permit the Applicant to respond to third-party property
purchase offers as appropriate under the circumstances. Such a response
might involve acceptance of the offer on behalf of all participating
Accounts, a buy-out of a partner by some or all of the participating
Accounts on a pro rata or non-pro rata basis, or a buy-out of the
interest of one participating Account (and of the co-partner) by other
participating Accounts. Any action by any ERISA-Covered Account in
these situations will be required to be approved by the independent
fiduciary for the Account. Further, in any case involving the sharing
of a partnership interest between the General Account and an ERISA-
Covered Account, the Applicant has determined that the action taken by
the General Account in such third-party purchase offer situations will
not be inconsistent with the action approved for the ERISA-Covered
Account by the independent fiduciary for such Account. For example,
where the Applicant recommends that a third-party purchase offer be
accepted and the independent fiduciary nevertheless determines that the
interest of the co-partner should be bought out, both Accounts will buy
out the interest of the co-partner on a proportionate basis, unless a
disproportionate buy-out is agreeable to both the Applicant and the
independent fiduciary. However, where an offer to sell is acceptable to
the co-partner (and the Applicant has the option of selling
[[Page 56001]]
to the third party or buying out the co-partner) and it is determined
that the General Account is willing and able alone to buy out the co-
partner's interest, the independent fiduciary may elect that the ERISA-
Covered Account retain its existing ownership interest. In such case,
the General Account may buy out the co-partner pursuant to Section
II(b)(1). In any case in which more than one ERISA-Covered Account
participates in a shared partnership investment and there is a lack of
agreement among the independent fiduciaries with respect to whether to
accept a ``sell'' offer or to buy-out a co-partner, the Applicant, as
indicated above, must nevertheless provide a unified response to the
co-partner on behalf of all participating Accounts. Accordingly, in
these instances, all participating Accounts will be required to accept
the ``sell'' offer, unless the Account or Accounts that prefer the buy-
out can buy-out both the co-partner's and the ``selling'' Account's
interest, or unless one Account elects to retain its original ownership
interest while the other Account(s) alone buys out the co-partner's
interest. The Applicant represents that this action is preferred
because the purchase option would require the expenditure of additional
funds by an objecting Account.\13\ See Section II(b).
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\13\ Similarly, in any case involving an ERISA-Covered Account
and a non-ERISA-Covered Client Account, if there is a lack of
agreement between the independent fiduciary and, for example, the
trustees of a foreign or public plan (or the Applicant in the case
of a discretionary non-ERISA-Covered Account), all participating
Accounts will be required to accept the ``sell'' offer unless an
alternative accommodation as described above is made.
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(c) Rights of First Refusal in Partnership Agreements
34. Under the terms of certain partnership agreements entered into
by Aetna and other real estate investors, if a partner wishes to sell
its interest in the partnership to a third party, the other partner
must be given the opportunity to exercise a right of first refusal to
purchase the first partner's interest at the price offered by the third
party. For example, if Aetna and a real estate developer are joint
venture partners and the developer decided to sell its interest to a
third party, Aetna would have the right to purchase the developer's
interest at the price offered by the third party. In the case of shared
real estate partnerships, the decision by the Applicant on behalf of
the Accounts with respect to whether or not to exercise a right of
first refusal might raise questions under section 406 of the Act since
each Account participating in the investment might be affected
differently by such decision. Because, under the terms of the
partnership agreement, only one option (exercise or not exercise) may
be chosen by the Applicant on behalf of the Accounts, exemptive relief
is being requested that would permit the Applicant to exercise or not
exercise a right of first refusal as may be appropriate under the
circumstances. Any action taken on behalf of an ERISA-Covered Account
regarding the exercise of such a right would have to be approved by the
independent fiduciary. Further, under the requested exemption, if the
General Account and an ERISA-Covered Account share a partnership
investment, even though Aetna may initially decide on behalf of the
General Account not to make a purchase under a right of first refusal
option, the General Account will be required to participate in the
purchase of the other partner's interest if the independent fiduciary
determines that it is appropriate for the ERISA-Covered Account to
participate in the exercise of the right of first refusal on at least a
pro rata basis. If, however, two Client Accounts participate in a
shared partnership interest and agreement cannot be reached on behalf
of the Client Accounts on whether to exercise a right of first refusal,
the right will not be exercised and the partner will be permitted to
sell its interest to the third party, unless one Client Account decides
to buy-out the partner alone. In this regard, it is conceivable that
some participating Accounts may elect to take advantage of a right of
first refusal opportunity and buy-out a co-partner without other
participating Accounts taking part in the transaction. For example, in
the case of a shared partnership investment involving the General
Account (or any other Account) and an ERISA-Covered Account, if the co-
partner wishes to accept an offer to sell its interest and the
independent fiduciary of the ERISA-Covered Account decides not to have
the Client Account participate in purchasing that partner's interest,
the General Account (or other participating Account) would be free to
make the purchase on its own. The exercise of a right of first refusal
on such a disproportionate basis might also raise questions under
section 406 of the Act for which exemptive relief may be needed. See
Section II(c).
(d) Buy-Sell Provisions in Partnership Agreements
35. Certain partnership agreements entered into by Aetna may
provide that one partner may demand that the other partner either sell
its interest to the first partner at a price as determined by the terms
of the partnership agreement or buy out the interest of the first
partner at such price. If the other partner refuses to exercise either
option within a specified period, it must sell its interest to the
first partner at the stated price. These ``buy-sell'' provisions are
generally used to resolve serious difficulties or impasses in the
operation of a partnership, but generally a partnership agreement
permits the buy-sell provision to be exercised at any time. As in the
situations discussed above, the decision by the Applicant on behalf of
the Accounts to make a buy-sell offer, or its reaction to such an offer
made by a co-partner, may affect various participating Accounts
differently. Accordingly, any decision made by the Applicant in these
cases involving ERISA-Covered Accounts might raise questions under
section 406 of the Act. The Applicant is requesting exemptive relief
that would permit the Applicant to make an appropriate decision under
the circumstances on behalf of all participating Accounts to make a
buy-sell offer to a co-partner or to react to a buy-sell offer from a
co-partner. Any such decision must be approved by the independent
fiduciary for each ERISA-Covered Account participating in the
investment. Further, under the requested exemption, if the Applicant
decides to exercise (i.e., initiate) a buy-sell option with respect to
the co-partner's interest and the independent fiduciary of a
participating ERISA-Covered Account objects, the buy-sell option will
not be exercised. Similarly, if the buy-sell option is initiated by the
co-partner and there is a split among the independent fiduciaries of
participating ERISA-Covered Accounts with respect to whether to buy or
sell, all such Accounts will be required to sell, unless the Account(s)
that wishes to buy-out the co-partner (or the co-partner and the other
participating Account) can do so without the participation of the other
Accounts. Also, where a buy-sell option is initiated by the co-partner
and Aetna determines that the General Account should purchase the co-
partner's interest, if the independent fiduciary of a participating
ERISA-Covered Account determines that, as between ``buy'' or ``sell'',
such Account's interest should be sold, Aetna's entire partnership
interest will be sold unless the independent fiduciary agrees that it
would be preferable for the ERISA-Covered Account to retain its share
of the partnership interest and Aetna determines that the General
Account is willing and able to purchase the entire interest of the co-
partner. Any such disproportionate purchases may,
[[Page 56002]]
however, also raise questions under section 406 of the Act. See Section
II(d).
(e) Transactions With Partnership Party in Interest.
36. The Applicant represents that when the General Account holds a
50 percent or more interest in a partnership, the partnership itself
may be deemed to be a party in interest under section 3(14)(G) of the
Act. Thus, any subsequent transaction involving the partnership and an
ERISA-Covered Account that is also participating in the partnership
(e.g., an additional contribution of capital) may be deemed to be a
transaction between the plans participating in such ERISA-Covered
Account and a party in interest (the partnership itself) in violation
of section 406. Also, as a result of the partnership becoming a party
in interest under section 3(14)(G) of the Act, other partners in the
partnership having a ten percent or more interest may be parties in
interest under section 3(14)(I). Therefore, transactions such as buy-
outs, sales of property, leases, etc., may occur that involve possible
violations of section 406. Accordingly, the Applicant is requesting
exemptive relief from the restrictions of section 406(a) of the Act,
only, which would permit: (1) Any additional equity or debt capital
contributions to a partnership by an ERISA-Covered Account that is
participating in an interest in the partnership, where the partnership
is a party in interest solely by reason of the General Account's
ownership of a 50 percent or more interest in such partnership; (2) any
material modification in the terms of, or action taken upon default
with respect to, a loan to the partnership in which the ERISA-Covered
Account has an interest as a lender; or (3) other transactions with the
co-partners that arise in connection with the operation of the
partnership. Any such action would be conditioned upon the approval of
the independent fiduciary for the ERISA-Covered Account. In addition,
the transactions would be conducted on a totally arm's-length basis,
and the party in interest involved would have no power or authority to
influence any of the transactions engaged in by the Applicant on behalf
of any of the Accounts managed by the Applicant. See Section III.
Approvals and Disclosures Pursuant to PTE 91-10
1. Because the proposed exemption in this notice is a modification
and replacement of an existing exemption (PTE 91-10), any approvals,
appointments, disclosures and decisions made or given pursuant to PTE
91-10 shall remain in full force and effect with respect to this
replacement exemption. Accordingly, the Applicant is not required to
seek or request any such additional approvals, appointments or
decisions or make any additional disclosures (except as provided in
paragraphs 12 and 13 hereof) by virtue of this proposed exemption. See
Section IV(j).
Initial Proportionate Allocations
The Applicant has not requested exemptive relief for the initial
allocation of shared real estate investments by Aetna among two or more
Accounts, at least one of which is an ERISA-Covered Account, where each
of the Accounts participating in a real estate investment participates
in the debt and equity interests in the same relative proportions.
Accordingly, since it appears that the method by which the
interests in the real estate investments are allocated to the Accounts
does not result in per se prohibited transactions under the Act, the
Department has not proposed exemptive relief with respect to the
initial sharing of these investments.\14\
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\14\ See preamble to the Proposed Exemption for Aetna, 55 FR
45671, at 45678 (October 30, 1990).
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Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include fiduciaries of employee benefit plans
investing in ERISA-Covered Accounts that would be affected by the
transition of Accounts from Aetna to UBS Realty. Because of the number
of affected persons, the Department has determined that the only
practical form of providing notice to interested persons is the
distribution, by Aetna or UBS Realty, of the notice of proposed
exemption, as published in the Federal Register, to the appropriate
fiduciaries of each plan described above. The distribution will occur
within 30 days of the publication of the notice of proposed exemption
in the Federal Register. The information provided will include a notice
to interested persons of their right to comment or request a public
hearing, as described in 29 CFR 2570.43(b).
In addition, Aetna or UBS Realty will provide copies of the
proposed exemption, upon request, to other interested persons,
including plan fiduciaries that may invest in ERISA-Covered Accounts in
the future during this period.
Written comments and/or requests of a hearing must be made within
sixty (60) days of the date of publication of this notice in the
Federal Register.
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 Code does not relieve a fiduciary or other
party in interest or disqualified person from certain other provisions
of the Act and 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) The proposed exemption, if granted, will not extend to
transactions prohibited under section 406(b)(3) of the Act and section
4975(c)(1)(F) of the Code;
(3) 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; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and 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.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemption to the address above,
within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the pending exemption.
Comments received will be available for public inspection with the
application for exemption at the address set forth above.
[[Page 56003]]
Proposed Exemption
Under section 408(a) of the Act and section 4975(c)(2) of the Code
and in accordance with the procedures set forth in 29 CFR Part 2570,
subpart B (55 FR 32836, August 10, 1990), the Department proposes to
amend and replace Prohibited Transaction Exemption 91-10, 56 FR 3273
(January 29, 1991), with the following exemption.
Section I--Exemption for Certain Transactions Involving the Management
of Investments Shared by Two or More Accounts
If the exemption is granted, as indicated below, the restrictions
of certain sections of the Act and the sanctions resulting from the
application of certain parts of section 4975 of the Code shall not
apply to the following transactions if the conditions set forth in
Section IV are met:
(a) Transfers Between Accounts--The restrictions of section
406(b)(2) of the Act shall not apply to the sale or transfer of an
interest in a shared investment (including a shared partnership
interest) between two or more Accounts (except the General Account),
provided that each ERISA-Covered Account pays no more, or receives no
less, than fair market value for its interest in a shared investment.
(b) Joint Sales of Property--The restrictions of sections 406(a),
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 to the sale to a
third party of the entire interest in a shared investment (including a
shared partnership interest) by two or more Accounts, provided that
each ERISA-Covered Account receives no less than fair market value for
its interest in the shared investment.
(c) Additional Capital Contributions--The restrictions of sections
406(a), 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 either to the
making of a proportionate equity capital contribution by one or more of
the Accounts to a shared investment; or to the making of a
Disproportionate [as defined in Section V(e)] equity capital
contribution (or the failure to make such additional contribution) by
one or more of such Accounts which results in an adjustment in the
equity ownership interests of the Accounts in the shared investment on
the basis of the fair market value of such interests subsequent to such
contribution, provided that each ERISA-Covered Account is given an
opportunity to make a proportionate contribution.
(d) Lending of Funds--The restrictions of sections 406(a),
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 to the lending
of funds from the General Account to an ERISA-Covered Account to enable
the ERISA-Covered Account to make an additional proportionate
contribution, provided that such loan--
(A) Is unsecured and non-recourse with respect to participating
plans,
(B) Bears interest at a rate not to exceed the prevailing rate on
90-day Treasury Bills,
(C) Is not callable at any time by the General Account, and
(D) Is prepayable at any time without penalty.
(e) Shared Debt Investments--In the case of a debt investment that
is shared between two or more Accounts, including one or more of the
ERISA-Covered Accounts:
(1) The restrictions of sections 406(a) and 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 any material modification in the terms of the
loan agreement resulting from a request by the borrower or any decision
regarding the action to be taken, if any, on behalf of the Accounts in
the event of a loan default by the borrower.
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any decision by Aetna or UBS Realty on behalf of one or more
ERISA-Covered Accounts: (A) Not to modify a loan agreement as requested
by the borrower; or (B) to exercise any rights provided in the loan
agreement in the event of a loan default by the borrower, even though
the independent fiduciary for one of such Accounts has approved such
modification or has not approved the exercise of such rights; and
(3) The restrictions of section 406(a), 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 either to the proportionate acquisition of
additional debt by one or more of the Accounts to a shared debt
investment, or to the acquisition of Disproportionate additional debt
(or the failure to acquire such additional debt) by one or more of such
Accounts which results in an adjustment in the amount of debt held by
the Accounts in the shared investment provided that each ERISA-Covered
Account is given an opportunity to acquire additional debt on a
proportionate basis.
Section II--Exemption for Certain Transactions Involving the Management
of Partnership Interests Shared by Two or More Accounts
If the exemption is granted, the restrictions of certain sections
of the Act and the sanctions resulting from the application of certain
parts of section 4975 of the Code shall not apply to the following
transactions resulting from the sharing of an investment in a real
estate partnership between two or more Accounts, if the conditions set
forth in Section IV are met:
(a) Additional Capital Contributions--(1) The restrictions of
sections 406(a), 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
either to the making of additional proportionate equity capital
contributions by one or more Accounts participating in the partnership;
or to the making of Disproportionate (as defined Section V(e)) equity
capital contributions by one or more of such Accounts which results in
an adjustment in the equity ownership interest of the Accounts in the
shared partnership investment on the basis of the fair market value of
such interests subsequent to such contributions; provided that each
ERISA-Covered Account is given an opportunity to make a proportionate
contribution.
(2) The restrictions of sections 406(a), 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 to the lending of funds from the General Account
to an ERISA-Covered Account to enable the ERISA-Covered Account to make
an additional proportionate capital contribution, provided that such
loan--
(A) Is unsecured and non-recourse with respect to the participating
plans,
(B) Bears interest at a rate not to exceed the prevailing rate on
90-day Treasury Bills,
(C) Is not callable at any time by the General Account, and
(D) Is prepayable at any time without penalty.
(3) The restrictions of section 406(b)(2) of the Act shall not
apply to the making of Disproportionate
[[Page 56004]]
additional equity capital contributions (or the failure to make such
additional contributions) to the partnership by Accounts other than the
General Account which result in an adjustment in the equity ownership
interests of the ERISA-Covered Accounts in the partnership on the basis
of the fair market value of such partnership interests subsequent to
such contributions, provided that each ERISA-Covered Account is given
an opportunity to provide its proportionate share of the additional
equity capital contributions; and
(4) In the event a co-partner fails to provide all or any part of
its proportionate share of an additional equity capital contribution,
the restrictions of sections 406(a), 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 to the making of Disproportionate additional equity capital
contributions to the partnership by an Account up to the amount of such
contribution not provided by the co-partner which result in an
adjustment in the equity ownership interests of the Accounts in the
partnership on the basis provided in the partnership agreement,
provided that such ERISA-Covered Account is given an opportunity to
participate in all additional equity capital contributions on a
proportionate basis.
(b) Third Party Purchase Offers--(1) In the case of an offer by a
third party to purchase any property owned by the partnership, the
restrictions of sections 406(a), 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 to the acquisition by the Accounts, including one or more
ERISA-Covered Account[s], on either a proportionate or Disproportionate
basis of a co-partner's interest in the partnership in connection with
a decision on behalf of such Accounts to reject such purchase offer,
provided that each ERISA-Covered Account is first given an opportunity
to participate in the acquisition on a proportionate basis; and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any acceptance by Aetna or UBS Realty on behalf of two or more
Accounts, including one or more ERISA-Covered Account[s], of an offer
by a third party to purchase a property owned by the partnership even
though the independent fiduciary for one or more of such ERISA-Covered
Account[s] has not approved the acceptance of the offer where all of
the Accounts (other than the General Account) participating in such
investment are not in agreement on how to proceed with respect to such
offer, provided that the declining Account[s] are first afforded the
opportunity to buy out both the co-partner and ``selling'' Account's
interests in the partnership.
(c) Rights of First Refusal--(1) In the case of the right to
exercise a right of first refusal described in a partnership agreement
to purchase a co-partner's interest in the partnership at the price
offered for such interest by a third party, the restrictions of
sections 406(a), 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 to
the acquisition by such Accounts, including one or more ERISA-Covered
Account[s], on either a proportionate or Disproportionate basis of a
co-partner's interest in the partnership in connection with the
exercise of such a right of first refusal, provided that each ERISA-
Covered Account is first given an opportunity to participate on a
proportionate basis; and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any decision by Aetna or UBS Realty on behalf of the ERISA-
Covered Accounts not to exercise such a right of first refusal even
though the independent fiduciary for one or more of such ERISA-Covered
Accounts has approved the exercise of the right of first refusal where
all of the Accounts participating in such investment (other than the
General Account) are not in agreement on how to proceed with respect to
such right of first refusal, provided that the Accounts that approved
the exercise of the right of first refusal are offered the opportunity
to buy-out the co-partner on their own.
(d) Buy-Sell Options--(1) In the case of the exercise of a buy-sell
option set forth in the partnership agreement, the restrictions of
sections 406(a), 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 to the
acquisition by one or more of the Accounts on either a proportionate or
Disproportionate basis of a co-partner's interest in the partnership in
connection with the exercise of such a buy-sell option, provided that
each ERISA-Covered Account is first given the opportunity to
participate on a proportionate basis; and
(2) The restrictions of section 406(b)(2) of the Act shall not
apply to any decision by Aetna or UBS Realty on behalf of two or more
Accounts, including one or more ERISA-Covered Account[s], to sell the
interest of such Accounts in the partnership to a co-partner even
though the independent fiduciary for one or more of such ERISA-Covered
Account[s] has not approved such sale where all of the Accounts
participating in such investment (other than the General Account) are
not in agreement on how to proceed with respect to the buy-sell option,
provided that such disapproving Account is first afforded the
opportunity to purchase the entire interest of the co-partner.
Section III--Exemption for Transactions Involving a Partnership or
Persons Related to a Partnership
The restrictions of section 406(a) 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 (D) of the Code, shall not apply, if
the conditions in Section IV are met, to any additional equity or debt
capital contributions to a partnership, or any transaction with the co-
partner which arises in connection with the operation of the
partnership, by an ERISA-Covered Account that is participating in an
interest in the partnership, or to any material modification in the
terms of, or action taken upon default with respect to, a loan to the
partnership in which the ERISA-Covered Account has an interest as a
lender, where the partnership is a party in interest solely by reason
of the ownership on behalf of the General Account of a 50 percent or
more interest in such joint venture.
Section IV--General Conditions
(a) The decision to participate in any ERISA-Covered Account that
shares real estate investments must be made by plan fiduciaries who are
totally unrelated to Aetna, UBS Realty and their respective affiliates.
This condition shall not apply to plans covering employees of Aetna,
UBS Realty or any of their respective affiliates.
(b) Each contractholder or prospective contractholder in an ERISA-
Covered Account which shares or proposes to share real estate
investments is provided with a written description of potential
conflicts of interest that may result from the sharing, a copy of the
notice of pendency, and a copy of the exemption if granted.
(c) An independent fiduciary must be appointed on behalf of each
ERISA-Covered Account participating in the sharing of investments. The
independent fiduciary shall be either:
[[Page 56005]]
(1) A business organization which has at least five years of
experience with respect to commercial real estate investments,
(2) A committee comprised of one or more individuals who each have
at least five years of experience with respect to commercial real
estate investments, or
(3) The plan sponsor (or its designee) of a plan (or plans) that is
the sole participant in an ERISA-Covered Account.
(d) The independent fiduciary or independent fiduciary committee
member shall not be or consist of Aetna, UBS Realty or any of their
respective affiliates.
(e) No organization or individual may serve as an independent
fiduciary for an ERISA-Covered Account for any fiscal year if the gross
income (other than fixed, non-discretionary retirement income and any
cost of living increases thereon) received by such organization or
individual (or any partnership or corporation of which such
organization or individual is an officer, director, or ten percent or
more partner or shareholder) from Aetna, UBS Realty, any of their
respective affiliates, and the ERISA-Covered Accounts for that fiscal
year exceeds five percent of its or his annual gross income from all
sources for the prior fiscal year. If such organization or individual
had no income for the prior fiscal year, the five percent limitation
shall be applied with reference to the fiscal year in which such
organization or individual serves as an independent fiduciary. The
income limitation will include income for services rendered to the
Accounts as independent fiduciary under any prohibited transaction
exemption(s) granted by the Department. However, such income limitation
shall not include any income for services rendered to a Single Customer
ERISA-Covered Account by an independent fiduciary selected by the Plan
Sponsor to the extent determined by the Department in any subsequent
prohibited transaction proceeding.
In addition, no organization or individual who is an independent
fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director or ten percent or more partner or
shareholder, may acquire any property from, sell any property to, or
borrow any funds from, Aetna, UBS Realty, any of their respective
affiliates, or any Account managed by Aetna, UBS Realty or any of their
respective affiliates, during the period that such organization or
individual serves as an independent fiduciary and continuing for a
period of six months after such organization or individual ceases to be
an independent fiduciary, or negotiate any such transaction during the
period that such organization or individual serves as independent
fiduciary.
(f) The independent fiduciary acting on behalf of an ERISA-Covered
Account shall have the responsibility and authority to approve or
reject recommendations made by Aetna, UBS Realty or any of their
respective affiliates for each of the transactions in this proposed
exemption. Aetna, UBS Realty and any of their respective affiliates
shall involve the independent fiduciary in the consideration of
contemplated transactions prior to the making of any decisions, and
shall provide the independent fiduciary with whatever information may
be necessary in making its determinations.
In addition, the independent fiduciary shall review on an as-needed
basis, but not less than twice annually, the shared real estate
investments in the ERISA-Covered Account to determine whether the
shared real estate investments are held in the best interest of the
ERISA-Covered Account.
(g) Neither UBS Realty nor any of its affiliates is a co-investor
in the shared investment or partnership to which an exemption provided
by Sections I, II or III above is being applied; provided, however,
that this condition shall not preclude an employee benefit plan
maintained by Aetna, UBS Realty or any of their affiliates from
participating in an ERISA-Covered Account that is such a co-investor.
(h) Aetna or UBS Realty maintains for a period of six years from
the date of the transaction the records necessary to enable the persons
described in paragraph (i) of this Section to determine whether the
conditions of this exemption have been met, except that a prohibited
transaction will not be considered to have occurred if, due to
circumstances beyond the control of Aetna, UBS Realty or any of their
respective affiliates, the records are lost or destroyed prior to the
end of the six-year period.
(i) Except as provided in paragraph (2) of this subsection (i) and
notwithstanding any provisions of subsection (a)(2) and (b) of section
504 of the Act, the records referred to in subsection (h) of this
Section are unconditionally available at their customary location for
examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an ERISA-Covered
Account who has authority to acquire or dispose of the interests of the
plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer to any plan participating in an
ERISA-Covered Account or any duly authorized employee or representative
of such employer, and
(D) Any participant or beneficiary of any plan participating in an
ERISA-Covered Account, or any duly authorized employee or
representative of such participant or beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this subsection (i) shall be authorized to examine trade secrets of
Aetna, UBS Realty or any of their respective affiliates, or commercial
or financial information which is privileged or confidential.
Section V--Definitions
For the purposes of this proposed exemption:
(a) An ``affiliate'' of Aetna or UBS Realty, respectivley,
includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Aetna or UBS Realty, respectivley,
(2) Any officer, director or employee of Aetna, UBS Realty or any
person described in section V(a)(1), and
(3) Any partnership in which Aetna or UBS Realty is a partner.
(b) An ``Account'' means any account maintained by Aetna and,
except in the case of the General Account, managed by UBS Realty. The
term ``Account'' includes the General Account, ERISA-Covered Accounts,
Pooled Accounts and Single Customer Accounts, as well as combinations
of accounts other than the General Account which are consolidated for
investment management purposes as if they were a single account.
(c) The ``General Account'' means the general asset account of
Aetna and any of its affiliates which are insurance companies licensed
to do business in at least one State as defined in section 3(10) of the
Act.
(d) An ``ERISA-Covered Account'' means any Account (other than the
General Account) in which employee benefit plans subject to Title I or
Title II of the Act participate.
(e) ``Disproportionate'' means not in proportion to an Account's
existing equity ownership interest in an investment, partnership or
partnership interest in a debt.
(f) The ``Transition Effective Date'' is the effective date of the
delegation by Aetna to UBS Realty of the management
[[Page 56006]]
of the Accounts, which has been designated as October 1, 2003.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of October 1, 2003, the Transition Effective Date.
The proposed exemption, if granted, will be subject to the express
conditions that the material facts and representations contained in the
application are true and complete, and that the application accurately
describes all material terms of the transactions to be consummated
pursuant to the exemption.
FOR FURTHER INFORMATION CONTACT: Brian J. Buyniski of the Department,
telephone (202) 693-8545. (This is not a toll-free number.)
Signed at Washington, DC, this 24th day of September, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 03-24594 Filed 9-26-03; 8:45 am]
BILLING CODE 4510-29-P