[Federal Register: October 26, 2006 (Volume 71, Number 207)]
[Notices]
[Page 62612-62615]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc06-66]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2006-15; Exemption Application No. D-
11039]
Grant of Individual Exemption To Amend Prohibited Transaction
Exemption (PTE) 95-31 Involving the Financial Institutions Retirement
Fund (the Fund) and the Financial Institutions Thrift Plan (the Thrift
Plan) Located in White Plains, NY
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Grant of Individual Exemption to Amend PTE 95-31.
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SUMMARY: This document contains a final exemption that amends PTE 95-31
(60 FR 18619, April 12, 1995), an exemption granted to the Fund and the
Thrift Plan. PTE 95-31 involves the provision of certain services, and
the receipt of compensation for such services, by Pentegra Services,
Inc. (Pentegra), a wholly-owned, for-profit subsidiary corporation of
the Fund. These transactions are described in a notice of pendancy that
was published in the Federal Register on July 3, 2002 (67 FR 44643).
EFFECTIVE DATE: This exemption is effective October 26, 2006.
FOR FURTHER INFORMATION CONTACT: Christopher Motta, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, telephone (202) 693-8544. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: PTE 95-31 provides an exemption from certain
prohibited transaction restrictions of section 406(a) and 406(b)(1) and
(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA or
the Act) and from the sanctions resulting from the application of
section 4975 of the Internal Revenue Code of 1986 (the Code), as
amended, by reason of section 4975(c)(1)(A) through (E) of the Code.
Specifically, PTE 95-31 permits the provision of certain services, and
the receipt of compensation for such services, by Pentegra to:
Employers (the Employers) that participate in the Fund and the Thrift
Plan; and employee benefit plans (the Plans) sponsored by such
Employers. The exemption contained herein expands the scope of PTE 95-
31 by permitting the provision of certain trust services, and the
receipt of compensation for such services, by Trustco (a wholly-owned,
for-profit subsidiary corporation of the Fund that will provide
directed, non-discretionary trust services) to the Plans, the
Employers, the Thrift Plan, and individual retirement accounts (the
IRAs) established by certain employees, officers, directors and/or
shareholders of the Employers (the Individuals). In addition, the
exemption permits the provision of certain services by Pentegra to the
Thrift Plan and the IRAs; and the receipt of compensation by Pentegra
in connection therewith.
This individual exemption to amend PTE 95-31 was requested in an
application filed on behalf of the Fund and the Thrift Plan (together,
the Applicants) 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, August 10, 1990).\1\ The
notice of proposed amendment gave interested persons an opportunity to
submit written comments or requests for a public hearing on the
proposed amendment to the Department. The Department received 7
comments and no written requests for a public hearing. The Applicants
responded to these comments in a letter received by the Department on
February 19, 2004. Ernst & Young LLP, an independent fiduciary as
discussed in further detail below, submitted a letter received by the
Department on February 9, 2006.
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\1\ Section 102 of the Reorganization Plan No. 4 of 1978 (43 FR
44713, October 17, 1978, 5 U.S.C. App 1 [1995]) generally
transferred the authority of the Secretary of the Treasury to issue
administrative exemptions under section 4975 of the Code to the
Secretary of Labor.
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Discussion of the Comments Received
Several of the commenters expressed general concern that the
proposed exemption does not contain sufficient safeguards to protect
the Fund. In response, the Applicants state that numerous safeguards
will be in place to protect the Fund with regard to both the creation
and operation of Trustco. In this regard, the Applicants represent that
the establishment and operation of Trustco will be overseen by: The
Office of the Comptroller of the Currency (the OCC), an independent
fiduciary, an independent auditor, and the Fund's board of trustees.
The Applicants state that, before granting trust status to Trustco, the
OCC must determine that Trustco can reasonably be expected to achieve
and maintain profitability, and operate in a safe and sound manner. To
the extent trust status is granted to Trustco, the OCC will thereafter
periodically examine, among other things, the trust company's
management, operations, internal controls, audits, earnings, asset
management and compliance with applicable laws and regulations.
The Applicants state that the establishment and operation of
Trustco will be further overseen by an independent fiduciary
(currently, Ernst & Young LLP). In this regard, the independent
fiduciary will review the services that will be provided by Trustco,
and, if the services are reasonable and appropriate for the trust
company, give an express approval for such services. The independent
fiduciary will also review the provision of trust services by Trustco
to ensure that the terms contained therein reflect terms at least as
favorable to Trustco and the Retirement Fund. Thereafter, the
independent fiduciary must perform periodic reviews to ensure that the
services being provided by Trustco remain appropriate for Pentegra and
Trustco.
The Applicants additionally state that Trustco's financial
statements will be audited each year by an independent certified public
accountant, and such audited statements will be reviewed by the
independent fiduciary.
The Applicants represent also that the Trustco board will be
independent from the Pentegra and Thrift Plan boards (as described in
further detail below). The Applicants state that, at least once a year,
the Trustco board of directors will provide a written report to the
Fund Board, describing in detail: the services provided by Trustco, the
fees received for such services, and an estimate of the fees the trust
company expects to receive the following year.
A commenter requested specific information regarding: (1) Pentegra
clients that have requested the creation of Trustco; (2) Pentegra's
stand-alone expenses, and the percentage that such
[[Page 62613]]
expenses will increase if Trustco is established; (3) the revenue
streams that will result from the creation of Trustco; and (4) the
return on investment that the creation of Trustco will provide to the
Fund.
With regard to (1) above, the Applicants represent that certain
employers that receive services from Pentegra have asked Pentegra to
provide related trust services. Specifically, sponsors of qualified and
nonqualified plans that receive recordkeeping services from Pentegra
have asked whether Pentegra can serve as trustee with respect to such
plans. The Applicants represent also that certain Pentegra clients have
indicated that they would prefer to have all of their services,
including trust services, provided by one entity. With regard to (2)
above, the Applicants state that preliminary financial projections for
Trustco indicate that Trusto will incur expenses of $866,500 in year
one. If 2004 had been the first year of the existence of Trustco, the
projected expenses of $866,500 would represent a 29.5% increase over
Pentegra's 2004 budgeted stand-alone expenses of $2,942,388. With
regard to (3) above, the Applicants state that Trustco anticipates
charging an asset-based fee of four basis points for 401(k) plan trust
services. According to the Applicants, this is the same fee that is
charged by trust companies to plans that receive non-trust services
from Pentegra. With respect to trust services provided to employee
stock ownership plans (ESOPs), the Applicants state that Trustco
anticipates charging $7,000 per plan. According to the Applicants, this
is the same fee charged by trust companies to ESOPs that receive non-
trust services from Pentegra. With regard to (4) above, the Applicants
anticipate that the creation of Trustco will result in the following
expenses in years One through Five, respectively: $866,500; $1,057,825;
$1,188,466; $1,327,115 and $1,474,429. The Applicants further
anticipate that the creation of Trustco will result in the following
revenue in years one through five, respectively: $869,729; $1,085,667;
$1,306,877; $1,533,609 and $1,766,124. Accordingly, the Applicants
expect that Trustco will be profitable from the first year of its
existence onward. Given the expected capital investment of $2 million
by Pentegra, the expected returns on investment regarding the proposed
trust company are: 0.2% for Year One; 1.4% for Year Two; 5.9% for Year
Three; 10.3% for Year Four; and 14.6% for Year Five.
Several commenters questioned the necessity of the Fund's proposed
creation of Trustco. These commenters expressed concern that Trustco
might not be an appropriate investment for the Fund. In response, the
Applicants state that the following factors were relevant to the Fund's
decision to create Trustco: (1) Employers currently receiving services
from Pentegra have asked Pentegra to provide related trust services;
and (2) the ``market'' for defined benefit pension plans is stagnant,
at best. The Applicants state that, given these factors, the creation
of Trustco is necessary since it will enable Pentegra, a Fund asset, to
retain existing clients and attract new ones in a shrinking market. The
Applicants state further that the creation of Trustco is appropriate
since it will enable the Fund to ``unlock'' the employee benefit plan-
expertise contained in Pentegra and create greater economies of scale
with respect to the costs of administering the Fund.
Commenters expressed further concern regarding the impact the
creation of Trustco would have on benefits provided under the Fund. In
response, the Applicants represent that the Fund does not permit the
reduction of accrued benefits, regardless of any investments made by
the Fund. The Applicants state that any expenses incurred in connection
with the formation of Trustco will not result in a reduction of
benefits accrued by participants in the Fund.
Another commenter inquired the following: (1) How, and in what
amounts, would Trustco provide value to the participants and
beneficiaries of the Fund; (2) whether Trustco is sufficiently separate
from the Fund and Pentegra so as not to create a significant risk or
liability to Pentegra, the Fund, the Thrift Plan, and affected
participants and beneficiaries; (3) what is the source and amount of
Trustco's initial capitalization; (4) whether Trustco will be staffed
with competent, experienced staff and have sufficient bonding or
insurance to mitigate liability; and (5) what is the expected timeframe
for Trustco to become profitable.
With regard to (1) above, the Applicants state that the creation of
Trustco would benefit the Fund by permitting Pentegra to use existing
resources/skills to retain clients and attract new ones. The Applicants
state further that the creation of Trustco would enable the Fund to
further diversify its portfolio and create new products and services,
the benefits of which would inure to the Fund's participants. The
Applicants represent that preliminary financial projections for Trustco
project that net income will increase from $3,229 in Year One to
$291,694 in Year Five.
With regard to (2) above, the Applicants state that the Trustco
board of directors will be structured to be independent from the
Pentegra and Fund boards of directors. Any member of the Fund board who
is also a member of the Trustco board will abstain from any discussions
or deliberations undertaken by the respective boards of directors with
respect to any service or lease agreements between the Fund and
Trustco. The Applicants represent also that Trustco will be subject to
a limited amount of liability since Trustco will provide only directed,
nondiscretionary trust services and will not have any investment
discretion with respect to the assets being held in trust.
Additionally, Trustco will not engage in any securities lending
transactions and/or provide any cash management services.
With regard to (3) above, the Applicants state that the Fund will
provide the trust company's initial capitalization of $2,000,000, an
amount that is consistent with OCC requirements. The Applicants
anticipate that, on an ongoing basis, no more than one-half of one
percent of the Fund's assets will be invested in Trustco.
With regard to (4) above, the Applicants represent that Trustco
will be staffed with competent, experienced employees, at least one of
which will be a Trustco officer who will be fully dedicated to
overseeing the company's day-to-day operations. The Applicants state
that the OCC will carefully evaluate the credentials of such officer
prior to the establishment of Trustco as a trust company. The
Applicants state further that Trustco will have the necessary insurance
to comply with any applicable laws and/or regulations.
With regard to (5) above, the Applicants represent that preliminary
financial projections (described above) indicate that Trustco will be
profitable in its initial and subsequent years of operation.
Another commenter questioned: (1) Whether it would be more
appropriate for the Thrift Plan, and not the Fund, to own a profit-
making enterprise such as Trustco; and (2) whether a business plan has
been developed by Pentegra for Trustco.
With regard to (1) above, the Applicants state that the Fund may
invest a portion of its assets in a trust company as long as such an
investment is prudent, in the best interests of the participants and
beneficiaries of the Fund, and supports the primary objective of the
Fund's investment program of meeting/beating its
[[Page 62614]]
liabilities. In contrast, the Thrift Plan is a tax-qualified multiple
employer defined contribution plan and, therefore, participants in the
Thrift Plan determine how to invest their accounts (within the array of
investment options offered under the Thrift Plan). The Applicants
represent that there is no opportunity for the Thrift Plan to more
aggressively pursue a return on investments through fee-based services
because the assets of the Thrift Plan are fully allocated to the
accounts of the participants who control the investments.
With regard to (2) above, the Applicants represent that before
Trustco can be created, a formal business plan must be submitted to,
and approved by, the OCC and the Fund Board of Directors. The
Applicants represent that waiting to develop a formal business plan
until after the proposed exemption is granted precludes the possibility
that the Fund will pay an unnecessary and costly expense (i.e., in the
event the Department did not grant the proposed exemption).\2\
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\2\ A copy of the preliminary financial projections provided by
Pentegra to the Department of Labor for the first five years of
Trustco's existence is on file with the Department under D-11039.
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As noted above, the Department received a letter from Ernst & Young
on February 9, 2006. In the letter, Ernst & Young states that it
reviewed the application (D-11039) for this exemption submitted by the
Applicants to the Department as well as the comments submitted by
Retirement Fund participants. Ernst & Young states further that the
rationale expressed by the Applicants for providing trust services is
consistent with the provision of services Pentegra currently provides.
Ernst & Young acknowledges that it will review whether the provision of
trust services by Trustco reflect terms that are at least as favorable
to Trustco and the Retirement Fund as the terms generally available in
arm's length transactions between Trustco and employers which do not
participate in the Retirement Fund. Ernst & Young states that it is
reasonable to assume that the contemplated formation of a national
trust company will be in the interests of the Retirement Fund
participants and that the OCC's oversight will provide sufficient
protection.
After full consideration and review of the entire record, including
the written comments, the Applicants response, and the independent
fiduciary's statements, the Department has determined to grant the
individual exemption to amend 95-31, as proposed. The comments, the
Applicants' response, and the independent fiduciary's letter have been
included as part of the public record of the exemption application. The
complete application file, including all supplemental submissions
received by the Department, is available for public inspection in the
Public Disclosure Room of the Employee Benefits Security
Administration, Room N-1513, U.S. Department of Labor, 200 Constitution
Avenue, NW., Washington, DC 20210.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) 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 require, among other things, a fiduciary to
discharge his or her 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 requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) The exemption will not extend to transactions prohibited under
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) The Department finds that the amended 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;
(4) This exemption supplements, and is not in derogation of, any
other provisions of the Act and the Code, including statutory or
administrative exemptions. Furthermore, the fact that a transaction is
subject to an administrative or statutory exemption is not dispositive
of whether the transaction is in fact a prohibited transaction; and
(5) This exemption is subject to the express condition that the
facts, representations, and statements made, or referred to, in: PTE
95-31, the notice of proposed exemption relating to the amendment of
PTE 95-31, and this grant, accurately describe, where relevant, the
material terms of the transactions to be consummated pursuant to this
exemption.
Exemption
Section I. Covered Transactions
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 the provision of certain services, and the receipt
of compensation for such services, by Pentegra Services, Inc.
(Pentegra), a wholly-owned, for-profit subsidiary corporation of the
Fund, and Trustco, a wholly-owned subsidiary corporation of Pentegra
(collectively, the Service Providers), to: The Thrift Plan; employers
that participate in the Fund and/or the Thrift Plan (the Employers);
employee benefit plans sponsored by the Employers (the Plans); and the
individual retirement accounts (the IRAs) established by certain
employees, officers, directors and/or shareholders of the Employers
(the Individuals); provided that the following conditions are met:
(a) A qualified, independent fiduciary of the Fund determines that
the services provided by the Service Providers are in the best
interests of the Fund and are protective of the rights of the
participants and beneficiaries of the Fund;
(b) The terms associated with the provision of services by the
Service Providers to the Plans, the Thrift Plan, and the IRAs, at the
time such services are entered into, are not less favorable to all
parties to the transaction than the terms generally available in
comparable arm's-length transactions involving unrelated parties;
(c) The Service Providers receive reasonable compensation for the
provision of services, as determined by an independent fiduciary;
(d) Prior to the provision of services by the Service Providers,
the independent fiduciary will first review such services and will
determine that such services are reasonable and appropriate for the
Service Providers, taking into account such factors as: Whether the
Service Providers have the capability to perform such services, whether
the fees to be charged reflect arm's-length terms, whether Service
Provider personnel have the qualifications to provide such services,
and whether such arrangements are reasonable based upon a comparison
with similarly qualified firms in the same or similar locales in which
the Service Providers propose to operate;
(e) No services will be provided by the Service Providers without
the prior review and approval of the independent fiduciary;
[[Page 62615]]
(f) Not less frequently than quarterly, the independent fiduciary
will perform periodic reviews to ensure that the services offered by
the Service Providers remain appropriate for the Service Providers and
that the fees charged by the Service Providers represent reasonable
compensation for such services;
(g) Not less frequently than annually, the Service Providers will
provide a written report to the board of directors of the Fund
describing in detail the services provided to the Plans, the Employers,
the IRAs, and the Thrift Plan, a detailed accounting of the fees
received for such services, and an estimate as to the amount of fees
the Service Providers expect to receive during the following year from
such Plans and Employers;
(h) Not less frequently than annually, the independent fiduciary
will conduct a detailed review of approximately 10 percent of all
transactions completed by the Service Providers which will include a
reasonable cross-section of all services performed; such transactions
will be reviewed for compliance with the terms and conditions of this
exemption;
(i) The financial statements of the Service Providers will be
audited each year by an independent certified public accountant, and
such audited statements will be reviewed by the independent fiduciary;
(j) The independent fiduciary shall have the authority to prohibit
the Service Providers from performing services that such fiduciary
deems inappropriate and not in the best interests of the Service
Providers and the Fund;
(k) Each Service Provider contract with an Employer, an IRA, the
Thrift Plan or a Plan will be subject to termination without penalty by
any of the parties to the contract for any reason upon reasonable
written notice;
(l) Trustco will act solely as a directed trustee and will not:
(1) Have any investment discretion with respect to the assets being
held in trust,
(2) Engage in any securities lending transactions, and/or
(3) Provide any cash management services; and
(m) A majority of the Board of Directors of the Thrift Plan will at
all times be independent of, and separate from, the Board of Directors
of the Fund, the Board of Directors of Pentegra, and the Board of
Directors of Trustco, and, with respect to the selection of Trustco
and/or Pentegra as provider(s) of services to the Thrift Plan:
(1) Such majority members alone will give prior approval upon
determining that such services are necessary and the associated fees
charged are reasonable; and
(2) Any member of the Board of Directors of the Thrift Plan
contemporaneously participating as a member of the Board of Directors
of Pentegra (Trustco) will remove himself or herself from all
consideration by the Thrift Plan regarding the provision of services by
Trustco (Pentegra) to the Thrift Plan and will not otherwise exercise,
with respect to such provision(s) of services, any of the authority,
control or responsibility which makes him or her a fiduciary.
Section II. Recordkeeping
(1) The independent fiduciary and the Fund will maintain, or cause
to be maintained, for a period of 6 years, the records necessary to
enable the persons described in paragraph (2) of this section to
determine whether the conditions of this exemption have been met,
except that: (a) A prohibited transaction will not be considered to
have occurred if, due to circumstances beyond the control of the
independent fiduciary and the Fund, or their agents, the records are
lost or destroyed before the end of the six year period; and (b) no
party in interest other than the independent fiduciary and the Board of
Directors of the Fund shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by
section 4975(a) and (b) of the Code, if the records are not maintained,
or are not available for examination as required by paragraph (2)
below.
(2)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (1) of this
section shall be unconditionally available at their customary location
during normal business hours by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(2) Any employer participating in the Fund and/or Thrift Plan or
any duly authorized employee or representative of such employer;
(3) Any participant or beneficiary of the Fund, Thrift Plan, or
Plan or any duly authorized representative of such participant or
beneficiary; and
(4) Any Individual;
(b) None of the persons described above in subparagraphs (a)(2) and
(a)(3) of this paragraph (2) shall be authorized to examine trade
secrets of the independent fiduciary or the Fund, or their affiliates,
or commercial or financial information which is privileged or
confidential.
(3) For purposes of this section, references to the Fund shall also
include the Service Providers.
The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application for exemption are true and complete and accurately describe
all material terms of the transactions. In the case of continuing
transactions, if any of the material facts or representations described
in the application change, the exemption will cease to apply as of the
date of such change. In the event of any such change, an application
for a new exemption must be made to the Department.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the proposed exemption and PTE 95-31 which are cited above.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E6-17922 Filed 10-25-06; 8:45 am]
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