[Federal Register Volume 75, Number 112 (Friday, June 11, 2010)]
[Notices]
[Pages 33333-33343]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14022]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Prohibited Transaction Exemptions 2010-16, 2010-17, and 2010-18;
Grant of Individual Exemptions involving: D-11521, Morgan Stanley &
Co., Inc., and Its Current and Future Affiliates and Subsidiaries
(Morgan Stanley) and Union Bank, N.A., and Its Affiliates (Union Bank),
PTE 2010-16; D-11584, The Bank of New York Mellon (BNY Mellon), PTE
2010-17; L-11558, Boston Carpenters Apprenticeship and Training Fund,
PTE 2010-18
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Grant of Individual Exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(ERISA or the Act) and/or the Internal Revenue Code of 1986 (the Code).
A notice was published in the Federal Register of the pendency
before the Department of a proposal to grant such exemption. The notice
set forth a summary of facts and representations contained in the
application for exemption and referred interested persons to the
application for a complete statement of the facts and representations.
The application has been available for public inspection at the
Department in Washington, DC. The notice also invited interested
persons to submit comments on the requested exemption to the
Department. In addition, the notice stated that any interested person
might submit a written request that a public hearing be held (where
appropriate). The applicant has represented that it has complied with
the requirements of the notification to interested persons. No requests
for a hearing were received by the Department. Public comments were
received by the Department as described in the granted exemption.
The notice of proposed exemption was issued and the exemption is
being granted solely by the Department because, effective December 31,
1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1
(1996), transferred the authority of the Secretary of the Treasury to
issue exemptions of the type proposed to the Secretary of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemption is administratively feasible;
(b) The exemption is in the interests of the plan and its
participants and beneficiaries; and
(c) The exemption is protective of the rights of the participants
and beneficiaries of the plan.
Morgan Stanley & Co., Inc., and Its Current and Future Affiliates and
Subsidiaries (Morgan Stanley) and Union Bank, N.A., and Its Affiliates
(Union Bank), Located in New York, NY and San Francisco, CA
Exemption
Section I--Transactions
Effective October 1, 2008, the restrictions of section 406(a)(1)(A)
through (D) and 406(b)(1) and (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:
(a) The lending of securities to:
(1) Morgan Stanley & Co. Incorporated, and its successors (MS&Co.)
and Union Bank, N.A., and its successors (UB);
(2) Any current or future affiliate of MS&Co. or UB,\1\ that is a
bank, as defined in section 202(a)(2) of the Investment Advisers Act of
1940, that is supervised by the U.S. or a state, any broker-dealer
registered under the Securities Exchange Act of 1934 (the ``1934
Act''), or any foreign affiliate that is a bank or broker-dealer that
is supervised by (i) the Securities and Futures Authority (``SFA'') in
the United Kingdom; (ii) the Bundesanstalt fur Finanz dienstleist ung
sauf sicht (the ``BAFin'') in Germany; (iii) the Ministry of Finance
(``MOF'') and/or the Tokyo Stock Exchange in Japan; (iv) the Ontario
Securities Commission, the Investment Dealers Association and/or the
Office of Superintendent of Financial Institutions in Canada; (v) the
Swiss Federal Banking Commission in
[[Page 33334]]
Switzerland; (vi) the Reserve Bank of Australia or the Australian
Securities and Investments Commission and/or Australian Stock Exchange
Limited in Australia; (vii) the Commission Bancaire (``CB''), the
Comite des Establissements de Credit et des Enterprises
d'Investissement (CECEI) and the Autorite des Marches Financiers
(``AMF'') in France; and (viii) the Swedish Financial Supervisory
Authority (``SFSA'') in Sweden (the branches and/or affiliates in the
enumerated foreign countries hereinafter referred to as the ``Foreign
Affiliates'') and together with their U.S. branches or U.S. affiliates
(individually, ``Affiliated Borrower'' and collectively, ``Affiliated
Borrowers''), by employee benefit plans, including commingled
investment funds holding plan assets (the Client Plans or Plans),\2\
for which MS&Co., UB or an affiliate of either acts as securities
lending agent or subagent (the ``Lending Agent''),\3\ and also may
serve as directed trustee or custodian of securities being lent, or for
which a subagent is appointed by the Lending Agent, which subagent is
either (I) a bank, as defined in section 202(a)(2) of the Investment
Advisers Act of 1940 or a broker-dealer registered under the 1934 Act,
(i) which has, as of the last day of its most recent fiscal year,
equity capital in excess of $100 million and (ii) which annually
exercises discretionary authority to lend securities on behalf of
clients equal to at least $1 billion; or (II) an investment adviser
registered under the Investment Advisers Act of 1940, (i) which has, as
of the last day of its most recent fiscal year, equity capital in
excess of $1 million and (ii) which annually exercises discretionary
authority to lend securities on behalf of clients equal to at least $1
billion (each, a ``Lending Subagent''); and
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\1\ Any reference to MS&Co. or UB shall be deemed to include any
successors thereto.
\2\ The common and collective trust funds maintained by MS&Co.,
UB or an affiliate, and in which Client Plans invest, are referred
to herein as ``Commingled Funds.'' The Client Plan separate accounts
for which MS&Co., UB or an affiliate act as directed trustee or
custodian are referred to herein as ``Separate Accounts.''
Commingled Funds and Separate Accounts are collectively referred to
herein as ``Lender'' or ``Lenders.''
\3\ MS&Co., UB or an affiliate may be retained by primary
securities lending agents to provide securities lending services in
a sub-agent capacity with respect to portfolio securities of clients
of such primary securities lending agents. As a securities lending
sub-agent, MS&Co.'s or UB's role parallels that under the lending
transactions for which MS&Co., UB or an affiliate acts as a primary
securities lending agent on behalf of its clients. References to
MS&Co.'s or UB's performance of services as securities lending agent
should be deemed to include its parallel performance as a securities
lending sub-agent and references to the Client Plans should be
deemed to include those plans for which the Lending Agent is acting
as a sub-agent with respect to securities lending, unless otherwise
specifically indicated or by the context of the reference.
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(b) The receipt of compensation by the Lending Agent and the
Lending Subagent in connection with these transactions.
Section II--Conditions
Section I of this exemption applies only if the conditions of
Section II are satisfied. For purposes of this exemption, any
requirement that the approving fiduciary be independent of MS&Co., UB,
and their affiliates shall not apply in the case of an employee benefit
plan sponsored and maintained by the Lending Agent and/or an affiliate
for its own employees (an Affiliated Plan) invested in a Commingled
Fund, provided that at all times the holdings of all Affiliated Plans
in the aggregate comprise less than 10% of the assets of the Commingled
Fund.
(a) For each Client Plan, neither MS&Co., UB, nor any of their
affiliates has or exercises discretionary authority or control with
respect to the investment of the assets of Client Plans involved in the
transaction or renders investment advice (within the meaning of 29 CFR
2510.3-21(c)) with respect to such assets, including decisions
concerning a Client Plan's acquisition or disposition of securities
available for loan.
(b) Any arrangement for the Lending Agent to lend securities is
approved in advance by a Plan fiduciary who is independent of MS&Co.,
UB, and their affiliates (the Independent Fiduciary).
Notwithstanding the foregoing, section II(b) shall be deemed
satisfied with respect to loans of securities by Client Plans to MS&Co.
or a U.S. affiliate (Morgan Stanley Affiliated Borrower) by UB as
Lending Agent or Lending Subagent that were outstanding as of October
1, 2008 (the Existing Loans), provided (i) no later than April 1, 2009,
UB provided to Client Plans with Existing Loans a description of the
general terms of the securities loan agreements between such Client
Plans and the Morgan Stanley Affiliated Borrowers, and (ii) at the time
of providing such information, UB notified each such Client Plan that
if the Client Plan did not approve the continued lending of securities
to Morgan Stanley by May 11, 2009, UB would terminate the loans and
cease to make any new securities loans on behalf of that Client Plan to
Morgan Stanley.
(c) The specific terms of the securities loan agreement (the Loan
Agreement) are negotiated by the Lending Agent which acts as a liaison
between the Lender and the Affiliated Borrower to facilitate the
securities lending transaction. In the case of a Separate Account, the
Independent Fiduciary of a Client Plan approves the general terms of
the Loan Agreement between the Client Plan and the Affiliated Borrower
as well as any material change in such Loan Agreement. In the case of a
Commingled Fund, approval is pursuant to the procedure described in
paragraph (i), below.
(d) The terms of each loan of securities by a Lender to an
Affiliated Borrower are at least as favorable to such Separate Account
or Commingled Fund as those of a comparable arm's-length transaction
between unrelated parties.
(e) A Client Plan, in the case of a Separate Account, may terminate
the lending agency or sub-agency arrangement at any time, without
penalty, on five business days notice. A Client Plan in the case of a
Commingled Fund may terminate its participation in the lending
arrangement by terminating its investment in the Commingled Fund no
later than 35 days after the notice of termination of participation is
received, without penalty to the Plan, in accordance with the terms of
the Commingled Fund. Upon termination, the Affiliated Borrowers will
transfer securities identical to the borrowed securities (or the
equivalent thereof in the event of reorganization, recapitalization or
merger of the issuer of the borrowed securities) to the Separate
Account or, if the Plan's withdrawal necessitates a return of
securities, to the Commingled Fund within:
(1) The customary delivery period for such securities;
(2) Five business days; or
(3) The time negotiated for such delivery by the Client Plan, in a
Separate Account, or by the Lending Agent, as lending agent to a
Commingled Fund, and the Affiliated Borrowers, whichever is least.
(f) The Separate Account, Commingled Fund or another custodian
designated to act on behalf of the Client Plan, receives from each
Affiliated Borrower (either by physical delivery, book entry in a
securities depository located in the United States, wire transfer or
similar means) by the close of business on or before the day the loaned
securities are delivered to the Affiliated Borrower, collateral
consisting of U.S. currency, securities issued or guaranteed by the
United States Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by a U.S. bank, other than
Morgan Stanley or Union Bank (or any subsequent parent corporation of
the Lending Agent) or an
[[Page 33335]]
affiliate thereof, or any combination thereof, or other collateral
permitted under Prohibited Transaction Exemption (PTE) 2006-16 (71 FR
63786, October 31, 2006) (as it may be amended or superseded)
(collectively, the Collateral).\4\ The Collateral will be held on
behalf of a Client Plan in a depository account separate from the
Affiliated Borrower.
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\4\ PTE 2006-16 permits the use of certain types of foreign
collateral if the lending fiduciary is a U.S. Bank or U.S. Broker-
Dealer (as defined in the exemption) and such fiduciary indemnifies
the plan with respect to the difference, if any, between the
replacement cost of the borrowed securities and the market value of
the collateral on the date of a borrower default plus interest and
any transaction costs which a plan may incur or suffer directly
arising out of a borrower default. See PTE 2006-16, Section V(f)(5).
The Department notes that the requirements of Section V(f)(5) of PTE
2006-16 must be satisfied in order for those types of collateral to
be used in connection with this exemption.
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(g) The market value (or in the case of a letter of credit, a
stated amount) of the Collateral on the close of business on the day
preceding the day of the loan is initially equal at least to the
percentage required by PTE 2006-16 (as amended or superseded) but in no
case less than 102 percent of the market value of the loaned
securities. The applicable Loan Agreement gives the Separate Account or
the Commingled Fund in which the Client Plan has invested a continuing
security interest in, and a lien on or title to, the Collateral. The
level of the Collateral is monitored daily by the Lending Agent. If the
market value of the Collateral, on the close of trading on a business
day, is less than 100 percent of the market value of the loaned
securities at the close of business on that day, the Affiliated
Borrower is required to deliver, by the close of business on the next
day, sufficient additional Collateral such that the market value of the
Collateral will again equal 102 percent or the percentage otherwise
required by PTE 2006-16 (as amended or superseded).
(h)(1) For a Lender that is a Separate Account, prior to entering
into a Loan Agreement, the applicable Affiliated Borrower furnishes its
most recently available audited and unaudited financial statements to
the Lending Agent which will, in turn, provide such statements to the
Client Plan before the Client Plan approves the terms of the Loan
Agreement. The Loan Agreement contains a requirement that the
applicable Affiliated Borrower must give prompt notice at the time of a
loan of any material adverse changes in its financial condition since
the date of the most recently furnished financial statements. If any
such changes have taken place, the Lending Agent will not make any
further loans to the Affiliated Borrower unless an Independent
Fiduciary of the Client Plan in a Separate Account is provided notice
of any material change and approves the continuation of the lending
arrangement in view of the changed financial condition.
Notwithstanding the foregoing, section II(h)(1) shall be deemed
satisfied with respect to the Existing Loans provided (i) UB provided
to such Client Plans no later than April 1, 2009, the most recently
available audited and unaudited financial statements of the Morgan
Stanley Affiliated Borrower and notice of any material adverse change
in financial condition since the date of the most recent financial
statement being furnished to the Client Plans, and (ii) at the time of
providing such information, UB notified each Client Plan that if the
Client Plan did not approve the continued lending of securities to
Morgan Stanley by May 11, 2009, UB would terminate the loans and cease
to make any new securities loans on behalf of that Client Plan to
Morgan Stanley.
(h)(2) For a Lender that is a Commingled Fund, the Lending Agent
will furnish upon reasonable request to an Independent Fiduciary of
each Client Plan invested in the Commingled Fund the most recently
available audited and unaudited financial statements of the applicable
Affiliated Borrower prior to authorization of lending, and annually
thereafter.
(i) In the case of Commingled Funds, the information described in
paragraph (c) (including any information with respect to any material
change in the arrangement) shall be furnished by the Lending Agent as
lending fiduciary to the Independent Fiduciary of each Client Plan
whose assets are invested in the Commingled Fund, not less than 30 days
prior to implementation of the arrangement or material change to the
lending arrangement as previously described to the Client Plan, and
thereafter, upon the reasonable request of the Client Plan's
Independent Fiduciary. In the event of a material adverse change in the
financial condition of an Affiliated Borrower, the Lending Agent will
make a decision, using the same standards of credit analysis the
Lending Agent would use in evaluating unrelated borrowers, whether to
terminate existing loans and whether to continue making additional
loans to the Affiliated Borrower.
In the event any such Independent Fiduciary submits a notice in
writing within the 30-day period provided in the preceding paragraph to
the Lending Agent, as lending fiduciary, objecting to the
implementation of, material change in, or continuation of the
arrangement, the Plan on whose behalf the objection was tendered is
given the opportunity to terminate its investment in the Commingled
Fund, without penalty to the Plan, no later than 35 days after the
notice of withdrawal is received. In the case of a Plan that elects to
withdraw pursuant to the foregoing, such withdrawal shall be effected
prior to the implementation of, or material change in, the arrangement;
but an existing arrangement need not be discontinued by reason of a
Plan electing to withdraw. In the case of a Plan whose assets are
proposed to be invested in the Commingled Fund subsequent to the
implementation of the arrangement, the Plan's investment in the
Commingled Fund shall be authorized in the manner described in
paragraph (c).
(j) In return for lending securities, the Lender either--(1)
Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash Collateral. (Under such circumstances, the Lender
may pay a loan rebate or similar fee to the Affiliated Borrowers, if
such fee is not greater than the fee the Lender would pay in a
comparable arm's-length transaction with an unrelated party.)
(k) Except as otherwise expressly provided herein, all procedures
regarding the securities lending activities will, at a minimum, conform
to the applicable provisions of PTE 2006-16, as amended or superseded,
as well as to applicable securities laws of the United States, the
United Kingdom, Canada, Australia, Switzerland, Japan, France, Sweden
and Germany.
(l) If any event of default occurs, to the extent that (i)
liquidation of the pledged Collateral or (ii) additional cash received
from the Affiliated Borrower does not provide sufficient funds on a
timely basis, the Client Plan will have the right to purchase
securities identical to the borrowed securities (or their equivalent as
discussed in paragraph (e) above) and apply the Collateral to the
payment of the purchase price. If the Collateral is insufficient to
accomplish such purchase, the Affiliated Borrower will indemnify the
Client Plan invested in a Separate Account or Commingled Fund in the
United States with respect to the difference between the replacement
cost of the borrowed securities and the market value of the Collateral
on the date the loan is declared in default, together with expenses
incurred by the Client Plan plus applicable interest at a reasonable
[[Page 33336]]
rate, including reasonable attorney's fees incurred by the Client Plan
for legal action arising out of default on the loans, or failure by the
Affiliated Borrower to properly indemnify the Client Plan. The
Affiliated Borrower's indemnification will enable the Client Plan to
collect on any indemnification from a U.S.-domiciled affiliate of the
Affiliated Borrower.
(m) The Lender receives the equivalent of all distributions made to
holders of the borrowed securities during the term of the loan,
including but not limited to all interest and dividends on the loaned
securities, shares of stock as a result of stock splits and rights to
purchase additional securities, or other distributions.
(n) Prior to any Client Plan's approval of the lending of its
securities to any Affiliated Borrower, a copy of this final exemption
and the notice of proposed exemption is provided to the Client Plan.
Notwithstanding the foregoing, effective October 1, 2008, through
June 11, 2010, section II(n) shall be deemed satisfied with respect to
the Existing Loans, provided (i) UB provides to such Client Plans that
have consented to securities lending prior to June 11, 2010, a copy of
the requested exemption and (ii) UB advises each such Client Plan that
unless the Client Plan notifies UB to the contrary within 30 days, its
consent to make loans to Morgan Stanley will be presumed.
(o) The Independent Fiduciary of each Client Plan that is invested
in a Separate Account is provided with (including by electronic means)
quarterly reports with respect to the securities lending transactions,
including, but not limited to, the information described in
Representation 40 of the Summary of Facts and Representations of the
Notice of Proposed Exemption (75 FR 3078, January 19, 2010)
(``Notice''), so that the Independent Fiduciary may monitor such
transactions with the Affiliated Borrower. The Independent Fiduciary
invested in a Commingled Fund is provided with (including by electronic
means) quarterly reports with respect to the securities lending
transactions, including, but not limited to, the information described
in Representation 40 of the Summary of Facts and Representations of the
Notice, so that the Independent Fiduciary may monitor such transactions
with the Affiliated Borrower. The Lending Agent may, in lieu of
providing the quarterly reports described in this paragraph (o) to each
Independent Fiduciary of a Client Plan invested in a Commingled Fund,
provide such Independent Fiduciary with the certification of an auditor
selected by the Lending Agent who is independent of MS&Co, UB and their
affiliates (but who may or may not be independent of the Client Plan)
that the loans appear no less favorable to the Lender than the pricing
established in the schedule described in paragraph 29 of the Summary of
Facts and Representations of the Notice. Where the Independent
Fiduciary of a Client Plan invested in a Commingled Fund is provided
the certification of an auditor, such Independent Fiduciary shall be
entitled to receive the quarterly reports upon request.
Notwithstanding the foregoing, section II(o) shall be deemed
satisfied with respect to the Existing Loans provided UB provides to
such Client Plans no later than July 31, 2009, the material described
in section II(o) with respect to the period from October 1, 2008,
through June 30, 2009.
(p) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Affiliated Borrowers; provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization, whose assets are commingled for investment purposes in a
single master trust or any other entity the assets of which are ``plan
assets'' under 29 CFR 2510.3-101 (the Plan Asset Regulation), which
entity is engaged in securities lending arrangement with the Lending
Agent, the foregoing $50 million requirement shall be deemed satisfied
if such trust or other entity has aggregate assets which are in excess
of $50 million; provided that if the fiduciary responsible for making
the investment decision on behalf of such master trust or other entity
is not the employer or an affiliate of the employer, such fiduciary has
total assets under its management and control, exclusive of the $50
million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a group trust or any other form of entity the assets of
which are ``plan assets'' under the Plan Asset Regulation, which entity
is engaged in securities lending arrangements with the Lending Agent,
the foregoing $50 million requirement is satisfied if such trust or
other entity has aggregate assets which are in excess of $50 million
(excluding the assets of any Client Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of corporations including such fiduciary is the employer maintaining
such Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity--
(A) Has full investment responsibility with respect to plan assets
invested therein; and
(B) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
In addition, none of the entities described above are formed for
the sole purpose of making loans of securities.
(q) With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Lenders will be to borrowers unrelated to MS&Co., UB and
their affiliates.
(r) In addition to the above, all loans involving foreign
Affiliated Borrowers have the following requirements:
(1) The foreign Affiliated Borrower is a bank, supervised either by
a state or the United States, a broker-dealer registered under the
Securities Exchange Act of 1934 or a bank or broker-dealer that is
supervised by (i) the SFA in the United Kingdom; (ii) the BAFin in
Germany; (iii) the MOF and/or the Tokyo Stock Exchange in Japan; (iv)
the Ontario Securities Commission, the Investment Dealers Association
and/or the Office of Superintendent of Financial Institutions in
Canada; (v) the Swiss Federal Banking Commission in Switzerland; and
(vi) the Reserve Bank of Australia or the Australian Securities and
Investments Commission and/or Australian Stock Exchange Limited in
Australia; (vii) the CB, the CECEI, and the AMF in France; and (viii)
the SFSA in Sweden;
(2) The foreign Affiliated Borrower is in compliance with all
applicable provisions of Rule 15a-6 under the Securities Exchange Act
of 1934 (17 CFR 240.15a-6) (Rule 15a-6) which provides foreign broker-
dealers a limited exemption from United States registration
requirements;
(3) All Collateral is maintained in United States dollars or U.S.
dollar-denominated securities or letters of credit (unless an
applicable exemption provides otherwise);
(4) All Collateral is held in the United States and the situs of
the securities
[[Page 33337]]
lending agreements is maintained in the United States under an
arrangement that complies with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1 related to the lending of securities; and
(5) Prior to a transaction involving a foreign Affiliated Borrower,
the foreign Affiliated Borrower--
(A) Agrees to submit to the jurisdiction of the United States;
(B) Agrees to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(C) Consents to service of process on the Process Agent; and
(D) Agrees that enforcement by a Client Plan of the indemnity
provided by the Affiliated Borrower will, at the option of the Client
Plan, occur exclusively in the United States courts.
(s) The Lending Agent maintains, or causes to be maintained, within
the United States for a period of six years from the date of such
transaction, in a manner that is convenient and accessible for audit
and examination, such records as are necessary to enable the persons
described in paragraph (t)(1) to determine whether the conditions of
the exemption have been met, except that--(1) A prohibited transaction
will not be considered to have occurred if, due to circumstances beyond
the control of the Lending Agent and/or its affiliates, the records are
lost or destroyed prior to the end of the six-year period; and (2) No
party in interest other than the Lending Agent or its affiliates shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act, or to the taxes imposed by section 4975(a) and (b)
of the Code, if the records are not maintained, or are not available
for examination as required below by paragraph (t)(1).
(t)(1) Except as provided in subparagraph (t)(2) of this paragraph
and notwithstanding any provisions of sections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (s) are
unconditionally available at their customary location for examination
during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission;
(B) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(C) Any contributing employer to any participating Client Plan or
any duly authorized employee or representative of such employer; and
(D) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(t)(2) None of the persons described above in paragraphs (t)(1)(B)-
(t)(1)(D) are authorized to examine the trade secrets of the Lending
Agent or its affiliates or commercial or financial information which is
privileged or confidential.
(t)(3) Should the Lending Agent refuse to disclose information on
the basis that such information is exempt from disclosure, the Lender
shall, by the close of the thirtieth (30th) day following the request,
provide written notice advising that person of the reason for the
refusal and that the Department may request such information.
The Department received two comments with respect to the Notice of
Proposed Exemption (75 FR 3078, January 19, 2010) (``Notice''), one
from Union Bank and one from Morgan Stanley. A discussion of the
comments and the Department's views follows.
Union Bank commented on the first sentence of footnote 42 of the
Notice, which states: ``The common and collective trust funds for which
MS&Co., UB or an affiliate act as directed trustee or custodian, and in
which Client Plans invest, are referred to herein as `Commingled
Funds.' '' According to Union Bank, ``[c]onsistent with federal
securities law exceptions and exemptions and banking regulations
applicable to the Commingled Funds, Union Bank has and exercises
`exclusive management' of the Commingled Funds it maintains.'' Union
Bank further stated that it understood the same was the case with
respect to banking affiliates of MS&Co. and their Commingled Funds.\5\
Therefore, Union Bank requested that the first sentence of footnote 42
be revised to read as follows: ``The common and collective trust funds
maintained by MS&Co., UB or an affiliate, and in which Client Plans
invest, are referred to herein as `Commingled Funds.' ''
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\5\ In its comment, Morgan Stanley echoes Union Bank's comment
on this point.
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In order to accurately describe the relationship between these
entities, the Department has revised the sentence as requested. In this
regard, however, the Department notes that Section II(a) of the
exemption provides that neither MS&Co., UB nor any of their affiliates
may have or exercise discretionary authority or control with respect to
the investment of the assets of Client Plans involved in transactions
covered by the exemption, nor may these entities render investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to such
assets, including decisions concerning a Client Plan's acquisition or
disposition of securities available for loan.
Section II(a) applies equally to Commingled Funds, which are
included in the definition in Section I of the term ``Client Plans'' or
``Plans.'' The prohibition in Section II(a) remains a condition of the
exemption regardless of the revised language in the footnote. The
exemption does not provide relief for lending from Commingled Funds for
which MS&Co., UB, or any affiliate, has or exercises discretionary
authority or control with respect to the investment of the assets
involved in the transaction, or for which MS&Co., UB, or any affiliate
renders investment advice (within the meaning of 29 CFR 2510.3-21(c))
with respect to such assets, including decisions concerning a Client
Plan's acquisition or disposition of securities available for loan. For
purposes of clarity the Department states that the exemption does not
provide relief for securities lending from index funds and model-driven
funds.
Morgan Stanley, as noted above, provided the same comment as Union
Bank with respect to footnote 42 of the Notice. Additionally, Morgan
Stanley wished to clarify a statement in paragraph 27 of the Summary of
Facts and Representations of the Notice. Paragraph 27 stated:
In return for lending securities, the Lender either will receive
a reasonable fee which is related to the value of the borrowed
securities and the duration of the loan, or will have the
opportunity to derive compensation through the investment of cash
collateral or a combination of both. In the case of a Lender
investing the cash collateral, the Lender may pay a loan rebate or
similar fee to the Affiliated Borrowers, if such fee is not greater
than the fee the Lender would pay in a comparable arm's-length
transaction with an unrelated party.
Morgan Stanley wished to clarify that where collateral for a loan
consists of both securities and cash, the Lender would receive a fee
from the Affiliated Borrower in respect of the portion of the loan
collateralized by securities and the Lender would have the opportunity
to derive compensation from the investment of cash collateral (less the
rebate paid to the Affiliated Borrower and any fees to the Lending
Agent) in respect of the portion of the loan collateralized with cash.
Finally, Morgan Stanley informed the Department of a typographical
error in footnote 48 of the Notice. The Department has reproduced the
footnote in its entirety as it should have appeared in the Notice:
[[Page 33338]]
Separate maximum daily rebate rates will be established with
respect to loans of securities within the designated classes
identified above. Such rebate rates will be based upon an objective
methodology which takes into account several factors, including
potential demand for loaned securities, the applicable benchmark
cost of fund indices, and anticipated investment return on overnight
investments permitted by the Client Plan's independent fiduciary.
The Lending Agent will submit the method for determining such
maximum daily rebate rates to such fiduciary before initially
lending any securities to an Affiliated Borrower on behalf of the
Client Plan.
After giving full consideration to the entire record, including the
written comments, the Department has determined to grant the exemption.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the Notice, 75 FR 3078 (January 19, 2010).
FOR FURTHER INFORMATION CONTACT: Karen E. Lloyd of the Department, 202-
693-8554. (This is not a toll free number.)
Exemption
The restrictions of sections 406(a), 406(b)(1) and 406(b)(2) \6\ of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of sections 4975(c)(1)(A) through (E) of
the Code, shall not apply as of July 10, 2009, to the cash sale of
certain medium term notes (the Notes) issued by Stanfield Victoria
Finance Ltd. (Victoria Finance or the Issuer) for an aggregate purchase
price of $26,997,049.52 by the BNY Mellon's Short Term Investment Fund
(the Fund) to The Bank of New York Mellon Corporation (BNYMC), a party
in interest with respect to employee benefit plans (the Plans)
invested, directly or indirectly, in the Fund, provided that the
following conditions are met:
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\6\ For purposes of this proposed exemption, references to
section 406 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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(a) The sale was a one-time transaction for cash;
(b) The Fund received an amount which was equal to the sum of (1)
the total current amortized cost of the Notes as of the date of the
sale plus (2) interest for the period beginning on January 1, 2008 to
July 12, 2009, calculated at a rate equal to the earnings rate of the
Fund during such period;
(c) The Fund did not bear any commissions, fees, transaction costs,
or other expenses in connection with the sale;
(d) BNY Mellon, as trustee of the Fund, determined that the sale of
the Notes was appropriate for and in the best interests of the Fund,
and the Plans invested, directly or indirectly, in the Fund, at the
time of the transaction;
(e) BNY Mellon took all appropriate actions necessary to safeguard
the interests of the Fund, and the Plans invested, directly or
indirectly, in the Fund, in connection with the transaction;
(f) If the exercise of any of BNYMC's rights, claims or causes of
action in connection with its ownership of the Notes results in BNYMC
recovering from Victoria Finance, the Issuer of the Notes, or from any
third party, an aggregate amount that is more than the sum of: (1) The
purchase price paid for the Notes by BNYMC and (2) interest on the
purchase price paid for the Notes at the interest rate specified in the
Notes, then BNYMC will refund such excess amount promptly to the Fund
(after deducting all reasonable expenses incurred in connection with
the recovery);
(g) BNY Mellon and its affiliates, as applicable, maintain, or
cause to be maintained, for a period of six (6) years from the date of
any covered transaction such records as are necessary to enable the
person described below in paragraph (h)(1), to determine whether the
conditions of this exemption have been met, except that:
(1) No party in interest with respect to a Plan which engages in
the covered transaction, other than BNY Mellon and its affiliates, as
applicable, shall be subject to a civil penalty under section 502(i) of
the Act or the taxes imposed by sections 4975(a) and (b) of the Code,
if such records are not maintained, or not available for examination,
as required, below, by paragraph (h)(1); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of BNY Mellon or its affiliates, as applicable, such records are lost
or destroyed prior to the end of the six-year period.
(h)(1) Except as provided in paragraph (h)(2), and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act,
the records referred to, above, in paragraph (g) are unconditionally
available at their customary location for examination during normal
business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission;
(B) Any fiduciary of any Plan that engages in the covered
transaction, or any duly authorized employee or representative of such
fiduciary;
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a Plan that engages in the
covered transaction, or any authorized employee or representative of
these entities; or
(D) Any participant or beneficiary of a Plan that engages in the
covered transaction, or duly authorized employee or representative of
such participant or beneficiary;
(2) None of the persons described in paragraphs (h)(1)(B)-(D) shall
be authorized to examine trade secrets of BNY Mellon or its affiliates,
or commercial or financial information which is privileged or
confidential; and
(3) Should BNY Mellon refuse to disclose information on the basis
that such information is exempt from disclosure, BNY Mellon shall, by
the close of the thirtieth (30th) day following the request, provide a
written notice advising that person of the reasons for the refusal and
that the Department may request such information.
DATES: Effective Date: This exemption is effective as of July 10, 2009.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on February 23, 2010 at 75
FR 8134.
FOR FURTHER INFORMATION CONTACT: Brian Shiker of the Department,
telephone (202) 693-8552. (This is not a toll-free number.)
Exemption
I. The restrictions of sections 406(a)(1)(A) through (D),
406(b)(1), and 406(b)(2) of the Act shall not apply to the purchase by
the Fund from the NERCC, LLC (the Building Corporation), a party in
interest with respect to the Fund, of a condominium unit (the Condo) in
a building (the Building) owned by the New England Regional Council of
Carpenters (the Union), also a party in interest with respect to the
Fund, where the Union will own the only other condominium unit in the
Building; provided that, at the time the transaction is entered into,
the following conditions are satisfied:
(1) An independent, qualified fiduciary (the I/F), acting on behalf
of the Fund, is responsible for analyzing the relevant terms of the
transaction and deciding whether the Board of Trustees (the Trustees)
should proceed with the transaction;
[[Page 33339]]
(2) The Fund may not purchase the Condo, unless and until the I/F
approves such purchase;
(3) Acting as the independent fiduciary on behalf of the Fund, the
I/F is responsible for: (a) Establishing the purchase price of the
Condo, (b) reviewing the financing terms, (c) determining that such
financing terms are the product of arm's length negotiations, and (d)
ensuring that the Fund will not close on the Condo until the I/F has
determined that proceeding with the transaction is feasible, in the
interest of, and protective of the participants and beneficiaries of
the Fund;
(4) The purchase price paid by the Fund for the Condo, as
documented in writing and approved by the I/F, acting on behalf of the
Fund, is the lesser of:
(a) The fair market value of the Condo, as of the date of the
closing on the transaction, as determined by an independent, qualified
appraiser selected by the I/F; or
(b) 58.3 percent (58.3%) of the amount actually expended by the
Building Corporation in the construction of the Condo under the
guaranteed maximum price contract (the GMP), plus the following
amounts:
(i) 58.3 percent (58.3%) of the additional construction soft costs
incurred outside the GMP contract (i.e., the amount expended on
furniture, fixtures, and equipment, and the amount expended for
materials for minor work);
(ii) 54.4 percent (54.4%) of the amount expended on construction
soft costs (i.e. architect, legal, zoning, permits, and other fees);
and
(iii) 54.4 percent (54.4%) of the cost of the land underlying the
Building;
(5) Acting as the independent fiduciary on behalf of the Fund, the
I/F is responsible, prior to entering into the transaction, for: (a)
Reviewing an appraisal of the fully completed Condo, which has been
prepared by an independent, qualified appraiser, and updated, as of the
date of the closing on the transaction, (b) evaluating the sufficiency
of the methodology of such appraisal, and (c) determining the
reasonableness of the conclusions reached in such appraisal;
(6) The terms of the transaction are no less favorable to the Fund
than terms negotiated under similar circumstances at arm's length with
unrelated third parties;
(7) The Fund does not purchase the Condo or take possession of the
Condo until such Condo is completed;
(8) The Fund has not been, is not, and will not be a party to the
construction financing loan or the permanent financing loan obtained by
the Building Corporation and/or by the Union;
(9) The Fund does not pay any commissions, sales fees, or other
similar payments to any party as a result of the transaction, and the
costs incurred in connection with the purchase of the Condo by the Fund
at closing do not include, directly or indirectly, any developer's
profit, any premium received by the developer, nor any interest charges
incurred on the construction financing loan or the permanent financing
loan obtained by the Building Corporation and/or by the Union;
(10) Under the terms of the current collective bargaining
agreement(s) and any future collective bargaining agreement(s), the
Union must have the ability, unilaterally, to increase the contribution
rate to the Fund at any time by diverting money to the Fund from wages
and contributions within the total wage and benefit package, and under
the terms of the financing that the Fund obtains to purchase the Condo,
the Union must be obligated to increase the contribution rate to the
Fund at any time in order to prevent a default by the Fund;
(11) In the event the Building Corporation and/or the Union
defaults on the construction financing loan or the permanent financing
loan obtained by the Building Corporation and/or the Union, the
creditors under the terms of such construction financing loan or such
permanent financing loan shall have no recourse against the Condo or
any of the assets of the Fund;
(12) Acting as the independent fiduciary with respect to the Fund,
the I/F is responsible for reviewing and approving the allocation
between funding the purchase of the Condo from the Fund's existing
assets or financing; and
(13) Acting as the independent fiduciary with respect to the Fund,
the I/F is responsible for determining whether the transaction
satisfies the criteria, as set forth in section 404 and section 408(a)
of the Act.
Written Comments
In the Notice of Proposed Exemption (the Notice), the Department
invited all interested persons to submit written comments and requests
for a hearing on the proposed exemption within 45 days of the date of
the publication of the Notice in the Federal Register on December 22,
2009. All comments and requests for hearing were due by February 5,
2010.
During the comment period, the Department received no requests for
hearing. However, the Department did receive a comment via an e-mail,
dated January 28, 2010, from the applicant. In the e-mail, the
applicant requested certain changes in the facts and circumstances
reflected in the Summary of Facts and Representations (SFR), as
published in the Notice in the Federal Register, and also requested a
modification to the language of one of the conditions of the exemption,
as set forth in the Notice. The applicant's comments are discussed in
paragraphs 1-8, below, in an order that corresponds to the appearance
of the relevant language in the Notice.
1. The applicant has requested a modification to the language of
condition 10 of the exemption, as set forth on page 68120, column 3,
line 3 of the Notice. Condition 10 in the Notice reads, as follows:
(10) Under the terms of the current collective bargaining
agreement(s) and any future collective bargaining agreement(s), the
Union has the ability, unilaterally, to increase the contribution
rate to the Fund at any time by diverting money from wages and
contributions to other benefit funds within the total wage and
benefit package, and the Union is obligated to do so in order to
prevent a default by the Fund under the terms of the financing
(emphasis added) obtained by the Fund to purchase the Condo.
The applicant requests that the phrase, ``under the terms of the
financing,'' in bold in the quotation, above, be deleted from Condition
10 in the final exemption. In support of this request, the applicant
argues that, as the terms of the financing for the Fund to purchase the
Condo have not yet been negotiated and cannot be finalized until after
the publication of the exemption, that it is not accurate to say that
the Union is presently obligated by the financing terms to divert money
from wages and contributions to other benefit funds within the total
wage and benefit package in order to increase the contribution rate to
the Fund and prevent default. Rather than say that the Union is
obligated by the terms of the financing, the applicant suggests that
the language of Condition 10 state that the Union is committed to
divert money from wages and contributions to other benefit funds within
the total wage and benefit package in order to increase the
contribution rate to the Fund.
Further, the applicant argues that, as set forth in representation
19, in the SFR on page 68124, column 2, lines 20-22 in the Notice, the
Union has represented its willingness to make such a commitment and, as
set forth on page 68124, column 2, lines 9-20 in the Notice, it is
represented that the Union anticipates having to make such a commitment
as a pre-condition of the
[[Page 33340]]
Fund's obtaining tax exempt bond financing. In addition, the applicant
points out that, as set forth in representation 33 in the SFR on page
68127, column 3, lines 38-45 in the Notice, Independent Fiduciary
Services (IFS), as part of its review and possible approval of the
proposed transaction, ``will require that the Union pledge to increase
contributions to the Fund by diversion from other aspects of the wage
and benefit package to cover the Fund's cash flow needs.'' Accordingly,
the applicant believes that the deletion of the phrase, ``under the
terms of the financing,'' from Condition 10 of the exemption does not
lessen the Union's commitment.
While the Department acknowledges that the terms of the financing
for the Fund to purchase the Condo have not yet been negotiated and
cannot be finalized until after the publication of the final exemption
in the Federal Register, the Department believes that the financing
terms that the Fund obtains to purchase the Condo should obligate the
Union to increase the contribution rate to the Fund at any time by
diverting money from the wage and benefit package in order to prevent
default by the Fund. Accordingly, the language of Condition 10 has been
amended, as follows:
(10) Under the terms of the current collective bargaining
agreement(s) and any future collective bargaining agreement(s), the
Union must have the ability, unilaterally, to increase the
contribution rate to the Fund at any time by diverting money to the
Fund from wages and contributions within the total wage and benefit
package, and under the terms of the financing that the Fund obtains
to purchase the Condo, the Union must be obligated to increase the
contribution rate to the Fund at any time in order to prevent a
default by the Fund.
2. The applicant has requested a change to the language in
representation 4, as set forth in the SFR on page 68121, column 1, line
6 and line 16 in the Notice. In this regard, in March 2009, Richard
Scaramozza replaced Neal O'Brien, as one of the labor representatives
serving as Trustees of the Fund, and in July 2009, Tom Gunning, III,
replaced Steven Affanato, as one of the representatives of management
serving as Trustees of the Fund. Further, on March 19, 2010, John
Estano, one of the labor representative serving as Trustee of the Fund,
retired and was replaced by Thomas Flynn.
The Department concurs with the applicant's requested change.
3. The applicant has requested a change to the language in
representation 10, as set forth in the SFR on page 68122, column 1,
line 18 in the Notice. In this regard, the applicant has informed the
Department that the amount of the Union's construction loan is $8.48
million dollars and not the $10 million dollars estimated at the time
the application was filed with the Department.
The Department concurs with the applicant's requested change.
4. The applicant has requested that one sentence in representation
10, as set forth in the SFR on page 68122, column 1, lines 47-50 in the
Notice, should be stated differently. In this regard, the applicant
suggests replacing this sentence, ``These loans will bear a very low
annual interest charge, estimated at one percent (1%) or below, to
cover annual accounting expenses,'' with the following sentence, ``The
New Market Tax Credit (NMTC) benefits are provided through a low
interest loan with an effective rate of two percent (2%) to cover the
annual fee to Bank of America, the entity providing the NMTC benefits
to the Union.'' The applicant represents that this replacement sentence
describes the Union's actual NMTC transaction, as opposed to the
estimated version reflected in the application as filed with the
Department.
The Department concurs with the applicant's requested replacement.
5. The applicant has requested a change to one of the sentences in
representation 12, as set forth in the SFR on page 68122, column 2,
lines 22-29 in the Notice. In this regard, the applicant suggests
adding the phrase, ``and journeyman upgrade,'' after the word,
``apprentice,'' such that the sentence reads, as follows:
The first floor of the Building intended for the Fund will have
approximately 21,406 square feet of training space with fifteen (15)
foot ceilings which are necessary for erecting and working off
scaffolding, a major component of apprentice and journeyman upgrade
training (emphasis added).
The Department concurs with the applicant's requested change.
6. The applicant has requested a change to the last sentence in
representation 14, as set forth in the SFR on page 68122, column 3,
line 46 in the Notice. In this regard, the last sentence in
representation 14, as set forth in the Notice reads as follows: ``It is
represented that the intended retail lessees, include an eye care
center (emphasis added), a banking area, and an ATM.'' The applicant
requests that the phrase, ``an eye care center,'' in bold, above,
should be deleted from this sentence, because the eye care center
office is not a separate retail tenant, as stated in the SFR. Further,
in its comment letter, the applicant informed the Department that the
eye care center is the employee benefit fund tenant, referred to in the
SFR on page 68122, column 3, line 39 in the Notice, to which the Union
may lease office space and to which the Union is a party in interest.
As set forth in the SFR on page 68122, column 3, lines 40-42 in the
Notice, if the Union leases offices space to such employee benefit
fund, the Union intends to do so, pursuant to section 408(b)(2) of the
Act.\7\
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\7\ The Department is offering no view, herein, as to whether
the leasing of office space to any employee benefit fund to which
the Union is a party in interest is covered by the statutory
exemption provided in sections 408(b)(2) of the Act and the
Department's regulations, pursuant to 29 CFR 2550.408b-2. Further,
the Department is not providing, herein, any relief with respect to
the leasing of office space to any such employee benefit fund by the
Union.
---------------------------------------------------------------------------
The Department concurs with the applicant's requested change.
7. The applicant has requested a change to footnote 24, as set
forth in the SFR on page 68124, column 1, in the Notice. In this
regard, footnote 24, as set forth in the Notice reads as follows:
It is represented that ownership interests in FTUB are as
follows: New England Carpenters Pension Fund--36.5%, New England
Carpenters Guaranteed Annuity Fund--18.2%, Empire State Carpenters
Pension Fund--45%, and Bank Senior Management (through rabbi
trust)--.3%.
In its comment, the applicant informed the Department that the
ownership interests in First Trade Union Bank should read, as follows:
It is represented that ownership interests in FTUB are as
follows: New England Carpenters Pension Fund--32.0%, New England
Carpenters Guaranteed Annuity Fund--17.9%, Empire State Carpenters
Pension Fund--49.9%, and Bank Senior Management (through rabbi
trust)--.2%.
The Department concurs with the applicant's requested change.
8. The applicant has requested a change to representation 28(c), as
set forth in the SFR on page 68125, column 3, lines 6-12 in the Notice.
In this regard, subparagraph (c) in representation 28, as set forth in
the Notice, reads as follows:
(c) a review of the Fund's independently prepared financial
statements and projections of future cash flow in order to evaluate
the Fund's ability to financially support the purchase of the Condo
and the future operating costs associated with it.
The applicant represents that IFS will be reviewing the Fund's
financial statements which are independently prepared, but that the
projections of future cash flow are internally prepared by the Fund
office and not by an outside accountant. Accordingly, the applicant
[[Page 33341]]
suggests that the phrase, ``the Fund office's internally prepared,'' be
inserted before the word, ``projections,'' such that sub-paragraph (c)
in representation 28, should read as follows,
(c) a review of the Fund's independently prepared financial
statements and the Fund office's internally prepared projections of
future cash flow in order to evaluate the Fund's ability to
financially support the purchase of the Condo and the future
operating costs associated with it.
The Department concurs with the applicant's requested change.
9. In addition to the applicant's comments, discussed in paragraphs
1-8, above, the Department also received a comment via facsimile, dated
February 4, 2010, from a commentator. In this comment, the commentator
raised various issues regarding labor management relations under other
statutory and regulatory programs beyond the scope of the Department's
authority. It is the applicant's view that these issues are not
relevant to the requested exemption. Accordingly, the applicant has
chosen not to respond to those sections of the commentator's comment.
However, the applicant has responded to the following four (4)
issues raised by the commentator which in the applicant's view are
relevant to the requested exemption: (a) the sufficiency of the
notification provided to interested persons of the publication of the
Notice in the Federal Register; (b) the leasing of space in the
Building by the Fund prior to the purchase of the Condo by the Fund;
(c) the decline in work hours for carpenters in 2009; (d) the fact that
the cost of the Building will likely exceed the fair market value of
the Building upon completion. These issues raised by the commentator
and the applicant's responses thereto are discussed in paragraphs 10-
13, below.
10. The commentator maintains that the notification to interested
persons of the publication of the Notice in the Federal Register was
defective, because the mailing in booklet form could have been mistaken
by interested persons as a progress report on the Building and/or a
solicitation to register for classes. In this regard, it is the
commentator's position that interested persons were denied the
opportunity to comment and/or request a hearing on the proposed
exemption.
In response, the applicant maintains that the booklet mailed to
interested persons did not resemble the Union's quarterly magazine,
recent course registration notices, or other notifications that
promoted the Building or monitored its progress. It is the applicant's
position that anyone who opened the booklet would have known that the
booklet was not an ordinary mailing and that it contained a copy of the
Notice. Further, the applicant sought and obtained approval from the
Department for the inclusion of a one or two page insert of course
offerings to be mailed to interested persons with the Notice.
Accordingly, the applicant maintains that the notification to all
interested persons was effectively served and was consistent with the
Department's practices.
11. The commentator informed the Department that the Fund is
already occupying space in the Building and is paying to the Building
Corporation $60,000 to $80,000 a month in rent, on a square footage
basis, pending the Department's approval of the sale of the Condo by
the Building Corporation to the Fund. Further, the commentator states
that the rent money paid by the Fund to occupy the Condo is not to be
offset against the sale price of the Condo to be paid by the Fund.
Accordingly, the commentator maintains that the Fund is expending money
on renting space in the Building, when the existing training facility
is suitable, and the Fund owns such facility outright.
In response, the applicant maintains that the leasing transaction
between the Building Corporation and the Fund is covered by Prohibited
Transaction Exemption 78-6 (PTE 78-6).\8\ It is represented that in
order to conduct classes in March 2010, the Building needed to be ready
for occupancy in February 2010. By late fall 2009, the applicant
represents that it was apparent that construction on the Building was
likely to be completed by February 2010, but that the final exemption
and the financing for the Fund to purchase the Condo were not likely to
be in place before the beginning of the March 2010 semester.
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\8\ Among other transactions, PTE 78-6 provides relief from
section 406(a) of the Act for the leasing of real property (other
than office space within the contemplation of section 408(b)(2) of
the Act) by an apprenticeship plan from an employee organization any
of whose members' work results in contributions being made to the
apprenticeship plan, provided certain conditions are satisfied.
Section 408(b)(2) of the Act provides relief from section 406(a) of
the Act for a plan to contract or make reasonable arrangements with
a party in interest for office space, provided certain conditions
are satisfied.
The relief provided by PTE 78-6 and the relief provided by
408(b)(2) of the Act do not extend to transactions prohibited under
section 406(b) of the Act. Section 406(b) of the Act prohibits a
fiduciary from: (i) Dealing with the assets of a plan in his own
interest or for his own account; (ii) acting, in his individual or
any other capacity, in a transaction involving a plan on behalf of a
party or representing a party whose interest are adverse to the
interests of such plan or its participants or beneficiaries; or
(iii) receiving any consideration for his own personal account from
any party dealing with a plan in connection with a transaction
involving the assets of such plan.
The Department has explained in regulations 29 CFR Sec.
2550.408b-2(e) that the prohibitions of section 406(b) are imposed
upon fiduciaries to deter them from exercising the authority,
control, or responsibility that makes them fiduciaries when they
have interests that may conflict with the interests of the plans for
which they act. Thus, a fiduciary may not use the authority,
control, or responsibility that makes him a fiduciary to cause a
plan to pay an additional fee to such fiduciary, or to a person in
which he has an interest that may affect the exercise of his best
judgment as a fiduciary, to provide a service. However, regulation
29 CFR 2550.408b408b-2(e)(2) provides that a fiduciary does not
engage in an act described in section 406(b)(1) of the Act if the
fiduciary does not use any of the authority, control, or
responsibility that makes him a fiduciary to cause a plan to pay
additional fees for a service furnished by such fiduciary or to pay
a fee for a service furnished by a person in which the fiduciary has
an interest that may affect the exercise of his judgment as a
fiduciary. Accordingly, if any trustee had an interest in the
leasing transaction that may have affected his best judgment as a
fiduciary regarding the decision whether to engage in the
transaction on behalf of the Fund, the trustee would have engaged in
a violation of section 406(b)(1) and 406(b)(2) for which no relief
was available under either PTE 78-6 or section 408(b)(2) of the Act.
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Rather than remaining for another semester in the existing training
facility which the applicant maintains is overcrowded and inadequate,
the Trustees began considering the option of renting space in the
Building on a short-term basis. To this end, the Union and the Fund
each designated subcommittees to meet and negotiate the actual terms of
the leasing arrangement. The Fund subcommittee consisted of two (2)
members: (a) Richard Pedi, a Union Trustee, an employee of the Union,
and a member of Local 218; and (b) George Allen, a principal of a
subcontractor on the Building which is also a contributing employer to
the Fund. The Union subcommittee consisted of four (4) members: (a)
Jack Donahue, a member of the Union Executive Board in central
Massachusetts; (b) Dave Palmisciano, a member of the Union Executive
Board from Rhode Island; (c) Beth Conway, the Union's comptroller; and
(d) Mark Erlich, the Executive Secretary/Treasurer and chief executive
officer of the Union. It is represented that the Fund retained its
management co-counsel, James Grosso (Mr. Grosso) of O'Reilly, Grosso &
Gross to represent it in the leasing transaction. In this regard, it is
represented that Mr. Grosso's responsibilities included: (a) Assistance
in the negotiations to ensure that the terms of the lease were at least
as favorable to the Fund as terms negotiated at arms length; (b) the
review and approval of any written agreement that the Fund would sign;
and (c) the responsibility of obtaining an appraisal
[[Page 33342]]
of the fair market rental value of the Condo. On January 15, 2010, Mr.
Grosso obtained an appraisal of the fair market rental value of the
Condo from CBRE/CB Richard Ellis (CBRE), an independent, qualified
appraiser. With regard to the Fund's proposed leasing, CBRE established
the fair market rental value of 35,122 square feet of space in the
Building at $30 per square foot, triple net.
It is represented that the terms of the lease were presented to the
full Board of Trustees of the Fund (the Board). The Board consisted of
the following management representatives: George Allen, Donald
MacKinnon, Thomas Gunning, III, Christopher Pennie, William Fitzgerald,
and Mark DeNapoli. The labor representatives on the Board are Joseph
Power, Richard Pedi, John Estano, Steven Tewksbury, Charles MacFarlane,
and Richard Scaramozza. All of the labor representatives on the Board
are Union employees and members of various locals affiliated with the
Union. In addition, Board members, Richard Pedi and George Allen, are
also members of the Fund subcommittee that negotiated the terms of the
lease.
With two (2) abstentions, the Board voted unanimously to accept the
terms of the lease. The two (2) abstaining members of the Board were
Joseph Power, a Union Trustee who is also a member of the Union
Executive Board, and Mark DeNapoli, an Employer Trustee who is also the
Executive Vice President of the construction manager of the Building
retained by the Union.
Accordingly, on January 29, 2010, the Building Corporation and the
Fund entered into an occupancy agreement for a month to month lease of
34,112 rentable square feet of space in the Building at a monthly
rental rate of $73,150 (based on an annual rental of $25 per rentable
square foot) for total rent of $877,800 per annum. Under the terms of
the occupancy agreement, the Fund is responsible for a pro rata share
of taxes, insurance, and operating expenses (including repairs)
incurred by the Building Corporation with respect to the Building. The
occupancy agreement can be terminated by either party giving not less
than thirty (30) days prior written notice. Under the terms of the
occupancy agreement, in the event that the Fund purchases the Condo,
the lesser of: (a) $52,668, or (b) the product of (ii) 12 percent
(12%), times (ii) the aggregate rental payments paid by the Fund though
the purchase date will be credited to the Fund toward the purchase
price of the Condo.
It is represented that the rent under the terms of the occupancy
agreement is below market value, that the month to month term is
favorable to the Fund, and that such month to month term is not
commonly found in commercial leases. Furthermore, the applicant
maintains that by moving into the Building prior to purchasing the
Condo, the Fund was able to market the existing training facility for
sale. In this regard, it is represented that a tentative agreement on
the purchase of the existing training facility has been reached with an
unrelated third party. It is expected that the sale of the existing
training facility will net the Fund $1.4 million after commission and
fees.
The Department, herein, is not providing any relief with respect to
the leasing of space in the Building to the Fund by the Building
Corporation. In this regard, the applicant has applied for a separate
retroactive exemption (L-11624) with respect to the leasing of training
space and office space in the Building to the Fund by the Building
Corporation. By notice appearing elsewhere in this issue of the Federal
Register, the Department is publishing a Notice of Proposed Exemption.
If the proposed exemption is granted, the restrictions of sections
406(b)(1), and 406(b)(2) of the Act shall not apply, effective January
29, 2010 through June 30, 2010, to the leasing of training space and
office space in the Building to the Fund by the Building Corporation.
It is anticipated that the existing occupancy agreement between the
Fund and the Building Corporation will be terminated, effective June
30, 2010. In reliance on the relief provided by Prohibited Transaction
78-6 (PTE 78-6)) and the statutory relief provided by 408(b)(2) of the
Act, the terms of the leasing agreement between the Building
Corporation and the Fund for training space and office space will be
renegotiated, effective July 1, 2010.\9\
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\9\ The Department is offering no view, herein, as to whether
PTE 78-6 covers the future leasing agreement between the Building
Corporation and the Fund for training space. Further, the Department
is not opining as to whether the conditions of PTE 78-6 in
connection with such leasing of training space to the Fund by the
Building Corporation are satisfied.
In addition, the Department is offering no view, herein, as to
whether the future leasing agreement between the Building
Corporation and the Fund for office space is covered by the
statutory exemption provided in section 408(b)(2) of the Act and the
Department's regulations, pursuant to 29 CFR 2550.408b-2. Further,
the Department is not opining as to whether the conditions of
408(b)(2) in connection with such leasing of office space to the
Fund by the Building Corporation are satisfied.
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12. The commentator questions: (a) Why the Fund should take on an
$11 million dollar mortgage for the purchase of the Condo when the
existing training facility is suitable and owned outright; (b) why the
Fund should move to the larger Condo when work hours for carpenters are
down 40 percent and the curriculum and the staff of the Fund must be
cut from the training program; and (c) why fiduciaries of the Fund
pursued the option of building the Condo to suit the Fund, rather than
modifying the existing facility at half the cost?
With regard to the amount of the Fund's mortgage, the applicant
states that the Fund will seek financing in the amount of approximately
$8 million, not $11 million dollars.
With regard to the amount of work hours for carpenters, the
applicant does not dispute that there has been a decline in work hours
for carpenters since the beginning of 2009 when the building project
was started. In this regard, it is represented that carpenter work
hours for calendar year 2009 declined 29 percent (29%) from 6.8 million
to 4.8 million over calendar year 2008. The applicant points out that
while 29 percent (29%) in carpenter work hours is a significant
decline, it is far less than the 40 percent (40%) claimed by the
commentator.
It is further represented by the applicant that IFS anticipated the
possibility of a decline in carpenter work hours and performed a
``stress test'' based on different projected declines in such hours
over the course of a number of years. In this regard, the applicant
points out that IFS has represented that even under the scenario of a
16 percent (16%) decline in carpenter work hours in each year from 2013
through 2022, the Fund would still have adequate revenues to support
the purchase and financing of the Condo.
The Department asked IFS to confirm that the work hours for
carpenters for calendar year 2009 declined 29 percent (29%) from 6.8
million to 4.8 million over calendar year 2008, and to confirm that the
29 percent (29%) decline in work hours for carpenters within one year
is within the parameters of the worst case ``stress test'' suggested by
IFS that is based on an assumed 16 percent (16%) decline each year from
2013 until 2022. Further, the Department asked IFS to respond to the
following question: Given that the work hours for carpenters for
calendar year 2009 declined 29 percent (29%) in one year, is the worst
case ``stress test'' with an assumed 16 percent (16%) in any one year
still valid?
In response, IFS indicates that: (a) The Fund provided the
statistics indicating that the hours worked by Union carpenters during
the calendar year 2009 were 4.8 million, and that this represented a 29
percent (29%)
[[Page 33343]]
reduction from the 6.7 million hours worked in the prior calendar year;
and (b) that IFS has no independent source for this data. IFS
represents that the ``worst case'' scenario IFS developed was based on
a decrease in hours from 6.7 million in 2008 to 1.1 million in 2022,
which is a reduction of 84 percent (84%). IFS considers the 1.1 million
level to be a sufficiently ``worst case'' economic scenario for this
test. IFS represents that this scenario anticipated a significant
decrease in hours for the 2009 period already, albeit somewhat less
than the actual 1.9 million hours. A 29 percent (29%) decline in any
one year is within the range of possibility for the aggregate worst
case result modeled by IFS. In the model, IFS developed, maintaining
the overall 5.6 million hour reduction after substituting the actual
reduction in calendar year 2009 merely requires that the average
declining rate over the final ten (10) years to average 14.5 percent
(14.5%), rather than 16 percent (16%). IFS concludes that a 29 percent
(29%) reduction in work hours in one year is within the reasonable
limits of volatility for the overall 84 percent (84%) decline that IFS
modeled between 2008 and 2022. Accordingly, IFS considers the worst
case scenario to remain valid.
With regard to the feasibility of the subject transaction, the
applicant points out that the structure of the exemption is more
important than the actual number of carpenter work hours in any month.
In this regard, the applicant states that IFS, acting as the
independent fiduciary on behalf of the Fund, is responsible for
reviewing the financing terms, the Fund's cash flow, and the amount of
projected employer contributions to the Fund. Further, the applicant
states that IFS will determine whether the transaction is feasible, in
the interest of, and protective of the participants. If the transaction
does not satisfy those requirements, the applicant states that IFS will
not approve the transaction.
In conclusion, it is the applicant's view that the Fund's purchase
of a new facility is in furtherance of its long-term commitment to its
core mission of training apprentices and carpenters in the Boston area.
The decision by the Trustees to purchase the Condo and the decision of
how much to pay for the Condo are not based on the number of carpenter
work hours in a peak period or during a recession, but on an analysis
of the training needs of participants and the projected revenues and
expenses of the Fund over the long term. Furthermore, the applicant
points out that while the economic downturn has caused a decline in
carpenter work hours and contributions to the Fund, it has also
resulted in lower interest rate financing, and lower construction costs
for the renovation of the Building. In addition, because of the decline
in real estate value, the Fund is likely to experience a savings in the
purchase price of the Condo, as the fair market value is expected to be
less than the Fund's pro rata share of the construction costs for the
renovation of the Building. The applicant maintains that IFS will
analyze all of these factors before making its final decision on
whether to proceed with the subject transaction.
13. The commentator states that the construction costs for the
renovation of the Building were approximately $26 million dollars but
that the fair market of such Building will be approximately $11 million
upon completion.
In response, the applicant maintains that the comment concerning
the decline in the value of the Building is erroneous and misleading.
In this regard, it is represented that while the purchase price and
construction costs of renovating the Building totaled over $26 million,
the pro-rata allocation of those costs to the Union's condominium unit
is in the $11 million range, so the Union did not suffer a $15 million
loss, as implied by the commentator.
After full consideration and review of the entire record, including
the written comments filed by the applicant and by the commentator, the
Department has determined to grant the exemption, as amended,
corrected, and clarified above. Comments and responses submitted to the
Department by the applicant and comments submitted by the commentator
have been included as part of the public record of the exemption
application. Copies of these comments and the responses thereto are
posted on the Department's Web site at http://www.dol.gov/ebsa. The
complete application file (L-11558), including all supplemental
submissions received by the Department, is available for public
inspection in the Public Documents Room of the Employee Benefits
Security Administration, Room N-1513, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the Notice published on December 22, 2009, at 74 FR 68120.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions to which the 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) This exemption is supplemental to and not in derogation of, any
other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional rules. Furthermore, the
fact that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(3) The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Signed at Washington, DC, this 7th day of June 2010.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2010-14022 Filed 6-10-10; 8:45 am]
BILLING CODE 4510-29-P