[Federal Register Volume 75, Number 112 (Friday, June 11, 2010)]
[Notices]
[Pages 33343-33355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14023]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Application Nos. and Proposed Exemptions; D-11573, Citigroup
Global Markets, Inc. and Its Affiliates (Together, CGMI or the
Applicant); and L-11624, Boston Carpenters Apprenticeship and Training
Fund (the Fund), et al.
AGENCY: Employee Benefits Security Administration, Labor
ACTION: Notice of proposed exemptions.
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[[Page 33344]]
SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
[email protected], or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Warning: If you submit written comments or hearing requests, do not
include any personally-identifiable or confidential business
information that you do not want to be publicly-disclosed. All comments
and hearing requests are posted on the Internet exactly as they are
received, and they can be retrieved by most Internet search engines.
The Department will make no deletions, modifications or redactions to
the comments or hearing requests received, as they are public records.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 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 requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Citigroup Global Markets, Inc. and Its Affiliates (Together, CGMI or
the Applicant) Located in New York, New York
[Application No. D-11573]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA) 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).
Section I. Covered Transactions
A. If the exemption is granted, the restrictions of section 406(a)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply, effective May 31, 2009, to the purchase or
redemption of shares by an employee benefit plan, an individual
retirement account (an IRA), a retirement plan for self-employed
individuals (a Keogh Plan), or an individual account pension plan that
is subject to the provisions of Title I of the Act and established
under section 403(b) of the Code (the Section 403(b) Plan)
(collectively, the Plans) in the Trust for Consulting Group Capital
Markets Funds (the Trust), sponsored by MSSB in connection with such
Plans' participation in the TRAK Personalized Investment Advisory
Service (the TRAK Program).
B. If the exemption is granted, the restrictions of section 406(b)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of the
Code, shall not apply, effective May 31, 2009, with respect to the
provision of (i) investment advisory services by the Adviser or (ii) an
automatic reallocation option as described below (the Automatic
Reallocation Option) to an independent fiduciary of a participating
Plan (the Independent Plan Fiduciary), which may result in such
fiduciary's selection of a portfolio (the Portfolio) \1\ in the TRAK
Program for the investment of Plan assets.
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\1\ For the avoidance of doubt, unless the context suggests
otherwise, the term ``Portfolio'' includes the Stable Value
Investments Fund, a collective trust fund established and maintained
by First State Trust Company, formerly a wholly-owned subsidiary of
Citigroup.
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This exemption is subject to the following conditions set forth
below in Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program is
(b) approved by an Independent Plan Fiduciary. For purposes of this
requirement, an employee, officer or director of the Adviser and/or its
affiliates covered by an IRA not subject to Title I of the Act will be
considered an Independent Plan Fiduciary with respect to such IRA.
(c) The total fees paid to the Adviser and its affiliates will
constitute no more than reasonable compensation.
(d) No Plan pays a fee or commission by reason of the acquisition
or redemption of shares in the Trust.
(e) The terms of each purchase or redemption of Trust shares remain
at least as favorable to an investing Plan as those obtainable in an
arm's length transaction with an unrelated party.
(f) The Adviser provides written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon
objective criteria.
(g) Any recommendation or evaluation made by the Adviser to an
[[Page 33345]]
Independent Plan Fiduciary is implemented only at the express direction
of such Independent Plan Fiduciary, provided, however, that--
(1) If such Independent Plan Fiduciary elects in writing (the
Election), on a form designated by the Adviser from time to time for
such purpose, to participate in the Automatic Reallocation Option under
the TRAK Program, the affected Plan or participant account is
automatically reallocated whenever the Adviser modifies the particular
asset allocation recommendation which the Independent Plan Fiduciary
has chosen. Such Election continues in effect until revoked or
terminated by the Independent Plan Fiduciary in writing.
(2) Except as set forth below in paragraph II(f)(3), at the time of
a change in the Adviser's asset allocation recommendation, each account
based upon the asset allocation model (the Allocation Model) affected
by such change is adjusted on the business day of the release of the
new Allocation Model by the Adviser, except to the extent that market
conditions, and order purchase and redemption procedures, may delay
such processing through a series of purchase and redemption
transactions to shift assets among the affected Portfolios.
(3) If the change in the Adviser's asset allocation recommendation
exceeds an increase or decrease of more than 10 percent in the absolute
percentage allocated to any one investment medium (e.g., a suggested
increase in a 15 percent allocation to greater than 25 percent, or a
decrease of such 15 percent allocation to less than 5 percent), the
Adviser sends out a written notice (the Notice) to all Independent Plan
Fiduciaries whose current investment allocation may be affected,
describing the proposed reallocation and the date on which such
allocation is to be instituted (the Effective Date). If the Independent
Plan Fiduciary notifies the Adviser, in writing, at any time within the
period of 30 calendar days prior to the proposed Effective Date that
such fiduciary does not wish to follow such revised asset allocation
recommendation, the Allocation Model remains at the current level, or
at such other level as the Independent Plan Fiduciary then expressly
designated, in writing. If the Independent Plan Fiduciary does not
affirmatively `opt out' of the new Adviser recommendation, in writing,
prior to the proposed Effective Date, such new recommendation is
automatically effected by a dollar-for-dollar liquidation and purchase
of the required amounts in the respective account.
(4) An Independent Plan Fiduciary will receive a trade confirmation
of each reallocation transaction. In this regard, for all Plan
investors other than Section 404(c) Plan accounts (i.e., 401(k) Plan
accounts), CGMI or MSSB, as applicable, mails trade confirmations on
the next business day after the reallocation trades are executed. In
the case of Section 404(c) Plan participants, notification depends upon
the notification provisions agreed to by the Plan recordkeeper.
(h) The Adviser generally gives investment advice in writing to an
Independent Plan Fiduciary with respect to all available Portfolios.
However, in the case of a Plan providing for participant-directed
investments (the Section 404(c) Plan), the Adviser provides investment
advice that is limited to the Portfolios made available under the Plan.
(i) Any sub-adviser (the Sub-Adviser) that acts for the Trust to
exercise investment discretion over a Portfolio is independent of
Morgan Stanley, Inc. (Morgan Stanley), CGMI, MSSB and their respective
affiliates (collectively, the Affiliated Entities).
(j) Immediately following the acquisition by a Portfolio of any
securities that are issued by any Affiliated Entity, such as Citigroup
or Morgan Stanley common stock (the Adviser Common Stock), the
percentage of that Portfolio's net assets invested in such securities
will not exceed one percent. However, this percentage limitation may be
exceeded if--
(1) The amount held by a Sub-Adviser in managing a Portfolio is
held in order to replicate an established third-party index (the
Index).
(2) The Index represents the investment performance of a specific
segment of the public market for equity securities in the United States
and/or foreign countries. The organization creating the Index is:
(i) Engaged in the business of providing financial information;
(ii) A publisher of financial news information; or
(iii) A public stock exchange or association of securities dealers.
The Index is created and maintained by an organization independent
of the Affiliated Entities and is a generally-accepted standardized
Index of securities which is not specifically tailored for use by the
Affiliated Entities.
(3) The acquisition or disposition of Adviser Common Stock does not
include any agreement, arrangement or understanding regarding the
design or operation of the Portfolio acquiring such Adviser Common
Stock, which is intended to benefit the Affiliated Entities or any
party in which any of the Affiliated Entities may have an interest.
(4) The Independent Plan Fiduciary authorizes the investment of a
Plan's assets in an Index Fund which purchases and/or holds the Adviser
Common Stock and the Sub-Adviser is responsible for voting any shares
of Adviser Common Stock that are held by an Index Fund on any matter in
which shareholders of Adviser Common Stock are required or permitted to
vote.
(k) The quarterly investment advisory fee that is paid by a Plan to
the Adviser for investment advisory services rendered to such Plan is
offset by any amount in excess of 20 basis points that MSSB retains
from any Portfolio (with the exception of the Money Market Investments
Portfolio and the Stable Value Investments Portfolio for which neither
MSSB nor the Trust will retain any investment management fee) which
contains investments attributable to the Plan investor.
(l) With respect to its participation in the TRAK Program prior to
purchasing Trust shares,
(1) Each Plan receives the following written or oral disclosures
from the Adviser:
(A) A copy of the Prospectus for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate
affiliation existing among the Adviser and its affiliates, and the
compensation paid to such entities.\2\
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\2\ The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
Independent Plan Fiduciary from the general fiduciary responsibility
provisions of section 404 of the Act. In this regard, the Department
expects the Independent Plan Fiduciary to consider carefully the
totality of the fees and expenses to be paid by the Plan, including
any fees paid directly to MSSB, CGMI or to other third parties.
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(B) Upon written or oral request to the Adviser, a Statement of
Additional Information supplementing the Prospectus which describes the
types of securities and other instruments in which the Portfolios may
invest, the investment policies and strategies that the Portfolios may
utilize and certain risks attendant to those investments, policies and
strategies.
(C) A copy of the investment advisory agreement between the Adviser
and such Plan which relates to participation in the TRAK Program and
describes the Automatic Reallocation Option.
(D) Upon written request of the Adviser, a copy of the respective
investment advisory agreement between MSSB and the Sub-Advisers.
[[Page 33346]]
(E) In the case of a Section 404(c) Plan, if required by the
arrangement negotiated between the Adviser and the Plan, an explanation
by an Adviser representative (the Financial Advisor) to eligible
participants in such Plan, of the services offered under the TRAK
Program and the operation and objectives of the Portfolios.
(F) A copy of the proposed exemption and the final exemption
pertaining to the exemptive relief described herein.
(2) If accepted as an investor in the TRAK Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan is required to acknowledge, in
writing, prior to purchasing Trust shares that such fiduciary has
received copies of the documents described above in subparagraph (k)(1)
of this section.
(3) With respect to a Section 404(c) Plan, written acknowledgement
of the receipt of such documents is provided by the Independent Plan
Fiduciary (i.e., the Plan administrator, trustee or named fiduciary, as
the recordholder of Trust shares). Such Independent Plan Fiduciary is
required to represent in writing to the Adviser that such fiduciary is
(a) independent of the Affiliated Entities and (b) knowledgeable with
respect to the Plan in administrative matters and funding matters
related thereto, and able to make an informed decision concerning
participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the
Act, where investment decisions are made by a trustee, investment
manager or a named fiduciary, such Independent Plan Fiduciary is
required to acknowledge, in writing, receipt of such documents and
represent to the Adviser that such fiduciary is (a) independent of the
Affiliated Entities, (b) capable of making an independent decision
regarding the investment of Plan assets and (c) knowledgeable with
respect to the Plan in administrative matters and funding matters
related thereto, and able to make an informed decision concerning
participation in the TRAK Program.
(m) Subsequent to its participation in the TRAK Program, each Plan
receives the following written or oral disclosures with respect to its
ongoing participation in the TRAK Program:
(1) The Trust's semi-annual and annual report including a financial
statement for the Trust and investment management fees paid by each
Portfolio.
(2) A written quarterly monitoring statement containing an analysis
and an evaluation of a Plan investor's account to ascertain whether the
Plan's investment objectives have been met and recommending, if
required, changes in Portfolio allocations.
(3) If required by the arrangement negotiated between the Adviser
and a Section 404(c) Plan, a quarterly, detailed investment performance
monitoring report, in writing, provided to an Independent Plan
Fiduciary of such Plan showing Plan level asset allocations, Plan cash
flow analysis and annualized risk adjusted rates of return for Plan
investments. In addition, if required by such arrangement, Financial
Advisors meet periodically with Independent Plan Fiduciaries of Section
404(c) Plans to discuss the report as well as with eligible
participants to review their accounts' performance.
(4) If required by the arrangement negotiated between the Adviser
and a Section 404(c) Plan, a quarterly participant performance
monitoring report provided to a Plan participant which accompanies the
participant's benefit statement and describes the investment
performance of the Portfolios, the investment performance of the
participant's individual investment in the TRAK Program, and gives
market commentary and toll-free numbers that enable the participant to
obtain more information about the TRAK Program or to amend his or her
investment allocations.
(5) On a quarterly and annual basis, written disclosures to all
Plans of (a) the percentage of each Portfolio's brokerage commissions
that are paid to the Affiliated Entities and (b) the average brokerage
commission per share paid by each Portfolio to the Affiliated Entities,
as compared to the average brokerage commission per share paid by the
Trust to brokers other than the Affiliated Entities, both expressed as
cents per share.
(n) The Adviser maintains or causes to be maintained, for a period
of (6) six years, the records necessary to enable the persons described
in paragraph (m)(1) of this section to determine whether the applicable
conditions of this exemption have been met. Such records are readily
available to assure accessibility by the persons identified in
paragraph (1) of this section.
(1) Notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in the first paragraph of this section
are unconditionally available at their customary location for
examination during normal business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(iii) Any contributing employer to any participating Plan or any
duly authorized employee representative of such employer; and
(iv) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) A prohibited transaction is not deemed to have occurred if, due
to circumstances beyond the control of the Adviser, the records are
lost or destroyed prior to the end of the six-year period, and no party
in interest other than the Adviser is subject to the civil penalty that
may be assessed under section 502(i) of the Act or to the taxes imposed
by sections 4975(a) and (b) of the Code if the records are not
maintained or are not available for examination as required by
paragraph (1) of this section.
(3) None of the persons described in subparagraphs (ii)-(iv) of
this section (m)(1) is authorized to examine the trade secrets of the
Adviser or commercial or financial information which is privileged or
confidential.
(4) Should the Adviser refuse to disclose information on the basis
that such information is exempt from disclosure, the Adviser 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.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Adviser'' means CGMI or MSSB as investment adviser
to Plans.
(b) The term ``Affiliated Entities'' means Morgan Stanley, CGMI,
MSSB and their respective affiliates.
(c) The term ``CGMI'' means Citigroup Global Markets Inc. and any
affiliate of Citigroup Global Markets Inc.
(d) An ``affiliate'' of any of the Affiliated Entities includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the Affiliated Entity. (For purposes of this subparagraph, the
term ``control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual);
(2) Any individual who is an officer (as defined in Section III(g)
hereof), director or partner in the Affiliated Entity or a person
described in subparagraph (d)(1);
(3) Any corporation or partnership of which the Affiliated Entity,
or an affiliate described in subparagraph (d)(1), is a 10 percent or
more partner or owner; and
[[Page 33347]]
(4) Any corporation or partnership of which any individual which is
an officer or director of the Affiliated Entity is a 10 percent or more
partner or owner.
(e) An ``Independent Plan Fiduciary'' is a Plan fiduciary which is
independent of the Affiliated Entities and is either:
(1) A Plan administrator, sponsor, trustee or named fiduciary, as
the recordholder of Trust shares under a Section 404(c) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under (i) a self-directed IRA or (ii) a
Section 403(b) Plan, which invests in Trust shares;
(4) A trustee, investment manager or named fiduciary responsible
for investment decisions in the case of a Title I Plan that does not
permit individual direction as contemplated by Section 404(c) of the
Act; or
(5) A participant in a Plan, such as a Section 404(c) Plan, who is
permitted under the terms of such Plan to direct, and who elects to
direct, the investment of assets of his or her account in such Plan.
(f) The term ``MSSB'' means Morgan Stanley Smith Barney Holdings
LLC, together with its subsidiaries.
(g) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policymaking function for the entity.
Section IV. Effective Date
If granted, this proposed exemption will be effective as of May 31,
2009 with respect to the Covered Transactions, the General Conditions
and the Definitions that are described in Sections I, II and III.
Summary of Facts and Representations
1. If granted, the proposed individual exemption described herein
would replace Prohibited Transaction Exemption (PTE) 2009-12 (74 FR
13231, March 26, 2009), an exemption previously granted to CGMI. PTE
2009-12 relates to the operation of the TRAK Personalized Investment
Advisory Service (the TRAK Program) and the Trust for Consulting Group
Capital Markets Funds (the Trust).
PTE 2009-12 provides exemptive relief from section 406(a) of the
Act and section 4975(c)(1)(A) through (D) of the Code, for the purchase
or redemption of shares by various types of Plans, such as ERISA Title
I Plans, IRAs, Keogh Plans, and Section 403(b) Plans, whose assets are
invested in the Trust that was previously established by Citigroup in
connection with such Plans' participation in the TRAK Program.
PTE 2009-12 also provides exemptive relief from section 406(b) of
the Act and section 4975(c)(1)(E) and (F) of the Code, with respect to
the provision, by Citigroup's Consulting Group, of (i) investment
advisory services or (ii) an Automatic Reallocation Option to an
independent fiduciary of a participating Plan (i.e., the Independent
Plan Fiduciary), which may result in such fiduciary's selection of a
Portfolio \3\ in the TRAK Program for the investment of Plan assets.
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\3\ For the avoidance of doubt, unless the context suggests
otherwise, the term ``Portfolio'' includes the Stable Value
Investments Fund, a collective trust fund established and maintained
by First State Trust Company (First State), formerly a wholly-owned
subsidiary of Citigroup.
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2. The Department originally granted to Shearson Lehman Brothers,
Inc. PTE 92-77, which relates to a less evolved form of the TRAK
Program.\4\ PTE 92-77 was superseded by PTE 94-50, which allowed Smith,
Barney Inc. (Smith Barney), the predecessor to Salomon Smith Barney
Inc. (Salomon Smith Barney), to add a daily-traded collective
investment fund (the GIC Fund) to the existing fund Portfolios,
describe the various entities operating the GIC Fund, and replace
references to Shearson Lehman with Smith Barney.\5\ PTE 99-15, which
superseded PTE 94-50, allowed Salomon Smith Barney to create a broader
distribution of TRAK-related products, implement a record-keeping
reimbursement offset procedure under the TRAK Program, adopt the
Automated Reallocation Option under the TRAK Program that would reduce
the asset allocation fee paid to Salomon Smith Barney by a Plan
investor, and expand the scope of the exemption to include Section
403(b) Plans.\6\
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\4\ 57 FR 45833 (October 5, 1992).
\5\ 59 FR 32024 (June 21, 1994).
\6\ 64 FR 1648 (April 5, 1999).
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3. Thereafter, PTE 99-15 was replaced by PTE 2000-45, which
primarily modified the definition of an ``affiliate'' of Salomon Smith
Barney so that it only covered persons or entities that had a
significant role in the decisions made by, or which were managed or
influenced by, Salomon Smith Barney, or included any corporation or
partnership of which Salomon Smith Barney or an affiliate was a 10
percent or more partner or owner.\7\
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\7\ 65 FR 54315 (September 7, 2000).
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4. Finally, on March 26, 2009, the Department granted PTE 2009-12.
As the result of a merger transaction (the Merger Transaction) between
Citigroup and Legg Mason, Inc. (Legg Mason), on December 1, 2005, an
affiliate of Citigroup acquired an approximately 14% equity ownership
interest in Legg Mason common and preferred stock. This meant that two
investment adviser subsidiaries of Legg Mason (Brandywine Asset
Management LLC and Western Asset Management Company), which were sub-
advisers (the Sub-Advisers) to three Trust Portfolios under the TRAK
Program, were no longer considered ``independent'' of Citigroup and its
affiliates in violation of Section II(h) of the General Conditions.\8\
Also, the Sub-Advisers were considered ``affiliates'' of Citigroup
under Section III(b)(3) of the General Definitions of PTE 2000-45
inasmuch as Citigroup became a 10% or more indirect owner of each Sub-
Adviser following the Merger Transaction.
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\8\ In PTE 2000-45, Section II(h) of the General Conditions
provided that ``Any sub-adviser (the Sub-Adviser) that acts for the
Trust to exercise investment discretion over a Portfolio will be
independent of Salomon Smith Barney and its affiliates.''
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5. Although Citigroup reduced its ownership interest in Legg Mason
to under the 10% ownership threshold on March 10, 2006, the Department
decided that PTE 2000-45 was no longer effective for the transactions
described therein, because Section II(h) of the General Conditions and
Section III(b) of the Definitions were not met. Therefore, the
Department granted PTE 2009-12, a new exemption, which replaced PTE
2000-45. Unless otherwise noted, PTE 2009-12 incorporates by reference
the facts, representations, operative language and definitions of PTE
2000-45. In addition, PTE 2009-12 updates the operative language of PTE
2000-45. Further, PTE 2009-12 provides a temporary and limited
exception to the definition of the term ``affiliate,'' so that during
the three month period of time within which Citigroup held a 10% or
greater economic ownership interest in Legg Mason, the Sub-Advisers
would continue to be considered ``independent'' of CGMI and its
affiliates for purposes of Section II(h) and not ``affiliated'' with
CGMI and its affiliates for purposes of Section III(b) of the
exemption. Finally, PTE 2009-12 provides exemptive relief for a new
method to compute fee offsets that are required under the exemption to
mitigate past anomalies.
PTE 2009-12 is effective from December 1, 2005 until March 10,
2006, with respect to the limited exception. It is also effective as of
December 1, 2005 with respect to the transactions covered by the
exemption, the General Conditions, and the Definitions. Further, PTE
2009-12 is effective as of
[[Page 33348]]
January 1, 2008, with respect to the new fee offset procedure.
Replacement of PTE 2009-12
6. CGMI and its predecessors and current and future affiliates and
Morgan Stanley Smith Barney LLC and its current and future affiliates
(collectively, the Applicants) have requested a new exemption that
would replace PTE 2009-12 to reflect the terms of a joint venture
transaction (the Joint Venture Transaction) between Citigroup and
Morgan Stanley, Inc. (Morgan Stanley) that occurred on May 31, 2009. As
a result of the Joint Venture Transaction, which is described in detail
below, the Applicants state that the exemptive relief provided under
PTE 2009-12 is no longer effective due to a change in the parties and
the ownership structure of the TRAK Program. Therefore, the Applicants
request a new exemption that would replace PTE 2009-12. If granted, the
new exemption would be made retroactive to May 31, 2009 and it would
provide the same relief with respect to the transactions covered under
PTE 2009-12. In addition, the General Conditions and Definitions of the
new exemption would be similar to those as set forth in PTE 2009-12.
The Joint Venture Transaction
7. The Applicants represent that on January 13, 2009, Citigroup and
Morgan Stanley entered into a ``Joint Venture Contribution and
Formation Agreement'' (the Joint Venture Agreement), which established
the terms of a new joint venture (the Joint Venture) between Citigroup
and Morgan Stanley. Citigroup and Morgan Stanley are global financial
services providers, each headquartered in New York, New York. As of the
end of 2008, Citigroup reported total client assets under management as
approximately $1.3 trillion. Citigroup's current employee workforce
consists of approximately 300,000 individuals in approximately 16,000
offices in 140 countries around the world. As of the end of 2008,
Morgan Stanley reported total client assets under management as
approximately $546 billion. Its current employee workforce of
approximately 60,000 serves a diversified group of corporations,
governments, financial institutions, and individuals, and operates from
over 1,200 offices in over 36 countries around the world.
8. Under the Joint Venture Agreement, each of Citigroup and Morgan
Stanley (including their respective subsidiaries) agreed to contribute
specified businesses into the Joint Venture, together with all
contracts, employees, property licenses and other assets (as well as
liabilities) used primarily in the contributed businesses. Generally,
in the case of Citigroup, the contributed businesses included
Citigroup's retail brokerage and futures business operated under the
name ``Smith Barney'' in the United States and Australia and operated
under the name ``Quilter'' in the United Kingdom, Ireland and Channel
Islands. Certain investment advisory and other businesses of Citigroup
were also contributed, including Citigroup's Consulting Group and the
sponsorship of the TRAK Program. In the case of Morgan Stanley, the
contributed businesses consisted generally of Morgan Stanley's global
wealth management (retail brokerage) and private wealth management
businesses. According to the Applicants, no valuations for the
contributed businesses were agreed upon between the parties. It was
agreed, however, that the value of the Smith Barney business plus $2.75
billion would equal an ownership percentage of 49% of the Joint Venture
entity, Morgan Stanley Smith Barney Holdings LLC (Holdings), a Delaware
limited liability company (together with its subsidiaries, MSSB). The
closing date of the Joint Venture Transaction occurred on May 31, 2009
(the Closing).
Prior to the Closing, Morgan Stanley had formed Holdings, the sole
member of Morgan Stanley Smith Barney LLC, which conducts most of the
Joint Venture's domestic operations as a dual-registered broker-dealer
and investment adviser. Holdings presently generates about $14 billion
in net revenues. It has 18,500 financial advisers, 1,000 locations
worldwide and services about 6.8 million households.
Immediately following the Closing, Morgan Stanley owned indirectly
through subsidiaries 51% of Holdings, and Citigroup owned 49% of
Holdings, through CGMI. Morgan Stanley has call rights to purchase from
Citigroup (a) an additional 14% of Holdings after the third anniversary
of Closing, (b) an additional 15% of Holdings after the fourth
anniversary and (c) the balance of Citigroup's interest in Holdings
after the fifth anniversary.\9\
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\9\ The Applicants believe that Citgroup's ownership interest in
MSSB will reach a point where it will no longer have an interest in
MSSB or the Trust that could affect its best judgment as a
fiduciary. The Applicants explain that at such point in time, it
will no longer be necessary for Citigroup to rely on this exemption
for the TRAK Program. The Department expresses no opinion on when it
will no longer be necessary for Citigroup to rely on this exemption,
given that this will be a facts and circumstances determination.
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9. The Joint Venture Agreement was amended and restated on May 29,
2009 (the Amended Contribution Agreement). Under the Amended
Contribution Agreement, Citigroup transferred its managed futures
business and its proprietary investments to MSSB on July 31, 2009, in
exchange for a cash payment of $299.778 million paid by Morgan Stanley,
and Morgan Stanley purchased additional interests in MSSB worth
approximately $2.7 billion on August 1, 2009, in order to maintain its
total percentage of ownership interests in MSSB at 51%. The Amended
Contribution Agreement also provided for an ``introducing broker''
structure for a period of time after the Closing. Under the
``introducing broker'' structure, clients of Morgan Stanley's legacy
businesses continue to have their brokerage transactions cleared
through, and their accounts custodied and carried by, Morgan
Stanley.\10\ Similarly, customers of the Citigroup legacy businesses
continue to have their brokerage transactions cleared through, and have
their accounts custodied and carried by, CGMI.\11\ Over time, it is
expected that the contributed businesses and operations of Morgan
Stanley and Citigroup will be integrated into one operation and that
ultimately, MSSB will become a fully self-clearing and self-custody
service firm and will carry its own customer accounts.
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\10\ Morgan Stanley continues to provide an array of services
for these accounts which include clearing and settling securities
transactions, providing trade confirmations and customer statements
and performing certain cashiering functions, custody services and
other related services.
\11\ CGMI clears and settles securities transactions, provides
trade confirmations and customer statements and performs certain
cashiering functions, custody services and other related services
for these accounts.
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Current Status of Operations
10. Since the Closing, MSSB's advisory services are being provided
through two distribution channels. One distribution channel generally
sponsors the advisory programs, including the TRAK Program, previously
sponsored by Smith Barney and/or CGMI (the SB Channel). Therefore,
since the Closing, the TRAK Program has continued to be made available
to customers of the SB Channel. The other distribution channel
generally sponsors the advisory programs previously sponsored by Morgan
Stanley's Global Wealth Management Group (the MS Channel). As stated
previously, the parties' ultimate goal is for the businesses,
operations and systems of the MS Channel and the SB Channel to be
integrated. However, decisions as to which programs will be offered to
[[Page 33349]]
whom or which programs will survive over the long-term have not been
made.
11. Also, since the Closing, CGMI has continued to offer the TRAK
Program to its retained clients. As of August 31, 2009, the TRAK
Program had assets in excess of $6.13 billion, over $3.74 billion of
which is held in Plan accounts. At present, the investments under the
TRAK Program encompass the Trust, which consists of eleven Portfolios,
as well as the Stable Value Investments Fund, a collective trust fund
established and maintained by First State. The Trust and the Stable
Value Investment Fund are advised by one or more unaffiliated Sub-
Advisers selected by MSSB and First State, respectively. In addition to
the TRAK Program, CGMI offers other investment advisory programs to its
retained clients under an advisory services agreement between Citigroup
and Holdings dated as of the Closing. Under the agreement, Holdings
provides a wide range of investment advisory services to Citigroup
advisory programs pursuant to a delegation by Citigroup to Holdings of
certain of Citigroup's obligations to provide such services. Citigroup
retained clients were provided notice of this arrangement.
Descriptions of Revisions to the Operative Language of PTE 2009-12
12. The proposed exemption generally modifies the operative
language of PTE 2009-12 to take into account the new ownership
structure of the TRAK Program formed as a result of the Joint Venture
Transaction. Section I of PTE 2009-12 has been modified to conform the
effective date of the proposal with the closing of the Joint Venture
Transaction, May 31, 2009. In addition, the operative language in
Section I(A) and I(B) has been revised to provide that, as a result of
the Joint Venture, MSSB rather than Citigroup is now the sponsor of the
Trust in connection with Plans' investment in the TRAK Program, and
that investment advisory services may be provided by MSSB in addition
to CGMI, respectively.
13. Section II of PTE 2009-12, General Conditions, has been
modified throughout by replacing the terms ``CGMI,'' ``Consulting
Group,'' or ``Citigroup,'' with the term ``Adviser,'' which has been
added as a new defined term in Section III to mean ``CGMI or MSSB as
investment adviser to Plans.'' The changes were made to these terms in
order to reflect the addition of MSSB as a sponsor of the TRAK Program
resulting from the Joint Venture Transaction. In addition, in Section
II(h), the term ``Affiliated Entities,'' which has been added as a new
defined term in Section III to mean ``Morgan Stanley, CGMI, MSSB, and
their respective affiliates,'' has been added to take into account the
addition of MSSB as a sponsor of the TRAK Program.
14. Section II(j) of PTE 2009-12 has been modified to reflect the
fact that CGMI has been removed from the reallocation formula because
it no longer manages and supervises the Trust and the Portfolios. Prior
to the Closing, Citigroup Investment Advisory Services LLC (CIAS), an
affiliate of CGMI, managed and supervised the Trust and Portfolios. In
connection with the Joint Venture Transactions, CIAS was contributed to
MSSB and as an affiliate of MSSB, it manages and supervises the Trust
and the Portfolios. Thus, the modifications to the language in Section
II(j) seek to clarify the parties to the covered transactions, but do
not change the formula for the calculation of the quarterly investment
advisory fee that is paid by the Plan to the Adviser. Furthermore,
Section II(j) has been amended to correct the names of the Portfolios
that are excluded from the calculation of the quarterly investment
advisory fee, namely by substituting the term ``Money Markets
Investment Portfolio'' for ``Government Money Investments Portfolio,''
and the term ``Stable Value Investments Portfolio'' for ``GIC Fund.''
15. Section III of PTE 2009-12, which sets forth the Definitions,
has been modified by: (i) Adding Section III(a), Adviser, to mean
``CGMI or MSSB as investment adviser to Plans'' to reflect the new
sponsorship of the TRAK Program by MSSB, in addition to the previous
sponsorship by CGMI; (ii) adding Section III(b), Affiliated Entities,
to mean ``Morgan Stanley, CGMI, MSSB and their respective affiliates''
to reflect the addition of MSSB as a sponsor of the TRAK Program
resulting from the Joint Venture Transaction; (iii) substituting the
term ``Affiliated Entities'' for ``CGMI'' throughout Section III(d) in
order to broaden the scope of the term ``affiliate'' to capture the
current affiliates of the Applicants; (iv) amending the sectional
references in Sections III(d)(2) and (3) to conform to the
corresponding modifications to Section III; (v) amending the definition
of ``Independent Plan Fiduciary'' in Section III(e) so that the
Independent Plan Fiduciary is independent of MSSB in addition to CGMI
and their respective affiliates, thereby preserving the purpose of the
provisions in PTE 2009-12 that provide that only a party independent of
the Applicants is exercising discretion with respect to, among other
things, Plans' decisions to invest in the TRAK Program; and (vi) adding
a new definition of ``MSSB'' in Section III(f) to mean ``Morgan Stanley
Smith Barney Holdings LLC, together with its affiliates.''
16. Section IV of PTE 2009-12, pertaining to exemptive relief for
the temporary and limited exception to the definition of the term
``affiliate,'' has been stricken since it is no longer applicable.
Previously, Section IV provided that, during the three month period of
time within which Citigroup held a 10% or greater economic ownership
interest in Legg Mason, the Sub-Advisers would continue to be
considered ``independent'' of CGMI and its affiliates for purposes of
Section II(h) and not ``affiliated'' with CGMI and its affiliates for
purposes of Section III(b) of the exemption. Because the time period
has expired, Section IV is no longer relevant to the exemption.
Finally, the Effective Date in new Section IV is modified to
provide that the exemption, if granted, will be effective as of May 31,
2009, which is the closing date of the Joint Venture Transaction.
Summary
17. In summary, the Applicant represents that the transactions
described herein have satisfied or will satisfy the statutory criteria
for an exemption set forth in section 408(a) of the Act because:
(a) The participation of Plans in the TRAK Program has been
approved or will be approved by an Independent Plan Fiduciary;
(b) The total fees paid to the Adviser and its affiliates has
constituted or will constitute no more than reasonable compensation;
(c) No Plan has paid or will pay a fee or commission by reason of
the acquisition or redemption of shares in the Trust;
(d) The terms of each purchase or redemption of Trust shares have
remained or will remain at least as favorable to an investing Plan as
those obtainable in an arm's length transaction with an unrelated
party;
(e) The Adviser has provided or will provide written documentation
to an Independent Plan Fiduciary of its recommendations or evaluations
based upon objective criteria, and such recommendation or evaluation
has been implemented or will be implemented only at the express
direction of such Independent Plan Fiduciary.
(f) The Adviser has given or will give investment advice in writing
to an Independent Plan Fiduciary with respect to all available
Portfolios (with respect to participant directed plans,
[[Page 33350]]
such advice is limited to the Portfolios made available under the
Plan);
(g) Any Sub-Adviser that acts for the Trust to exercise investment
discretion over a Portfolio has been independent or will be independent
of Morgan Stanley, CGMI, MSSB and their respective affiliates;
(h) Immediately following the acquisition by a Portfolio of Adviser
Common Stock, the percentage of that Portfolio's net assets invested in
such securities generally has not exceeded or will not exceed one
percent;
(i) The quarterly investment advisory fee that is paid by a Plan to
the Adviser for investment advisory services rendered to such Plan has
been offset or will be offset by any amount in excess of 20 basis
points that MSSB retains from any Portfolio (with the exception of the
Money Market Investments Portfolio and the Stable Value Investments
Portfolio for which neither MSSB nor the Trust will retain any
investment management fee) which contains investments attributable to
the Plan investor;
(j) With respect to its participation in the TRAK Program, prior to
purchasing Trust shares, each Plan has received or will receive written
or oral disclosures and offering materials from the Adviser which
generally disclose all material facts concerning the purpose,
structure, operation, and investment in the TRAK Program, and describe
the Adviser's recommendations or evaluations, including the reasons and
objective criteria forming the basis for such recommendations or
evaluations;
(k) Subsequent to its participation in the TRAK Program, each Plan
has received or will receive periodic written disclosures from the
Adviser with respect to the financial condition of the TRAK Program,
the total fees that it and its affiliates will receive from such Plans
and the value of the Plan's interest in the TRAK Program, and on a
quarterly and annual basis, written disclosures to all Plans of (a) the
percentage of each Portfolio's brokerage commissions that are paid to
the Affiliated Entities and (b) the average brokerage commission per
share paid by each Portfolio to the Affiliated Entities, as compared to
the average brokerage commission per share paid by the Trust to brokers
other than the Affiliated Entities, both expressed as cents per share;
and
(l) The Adviser has complied with, and will continue to comply
with, the recordkeeping requirements provided in Section II(m) of the
proposed exemption, for so long as such records are required to be
maintained.
Notice to Interested Persons
Notice of the proposed exemption will be mailed by first class mail
to the Independent Plan Fiduciary of each Plan currently participating
in the TRAK Program, or, in the case of a Plan covered by Section
404(c) of the Act, to the recordholder of the Trust shares. Such notice
will be given within 45 days of the publication of the notice of
pendency in the Federal Register. The notice will contain a copy of the
notice of proposed exemption, as published in the Federal Register, and
a supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2).
The supplemental statement will inform interested persons of their
right to comment on and/or to request a hearing with respect to the
pending exemption. Written comments and hearing requests are due within
75 days of the publication of the proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Warren Blinder of the Department,
telephone (202) 693-8553. (This is not a toll-free number.)
Boston Carpenters Apprenticeship and Training Fund (the Fund) Located
in Boston, Massachusetts
[Exemption Application No: L-11624]
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Act in accordance with
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the proposed exemption is granted, the
restrictions of 406(b)(1), and 406(b)(2) of the Act shall not apply
effective for the period from January 29, 2010, through June 30, 2010,
to the lease (the Lease) 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
Building Corporation, where the New England Regional Council of
Carpenters (the Union), also a party in interest with respect to the
Fund, indirectly owns the only other condominium unit in the Building;
provided that, at the time the transaction was entered into, the
following conditions were satisfied:
(a) The proposed exemption is conditioned upon satisfaction at all
times of the terms and conditions of this exemption, and upon adherence
to the material facts and representations, as described in this
proposed exemption, and, as set forth in application D-11624, and in
application D-11558, including those representations that are required
by 29 CFR 2570.34 and 29 CFR 2570.35 of the Department's regulations;
(b) prior to entering into the Lease, the Fund sought legal advice
from Aaron D. Krakow, Esq. (Mr. Krakow), acting as legal counsel on
behalf of the Fund, who advised the Fund that it was permissible for
the Fund to enter into a short term lease with the Building
Corporation, and the Board of Trustees of the Fund (the Board) relied
on Mr. Krakow's advice;
(c) the Lease which is the subject of this exemption and any other
leasing arrangement of the Condo between the Fund and the Building
Corporation and/or the Union, if not terminated sooner, shall terminate
on the date that the Fund closes on the purchase of the Condo from the
Building Corporation; and the Fund shall have no obligation to pay rent
to the Union or to the Building Corporation after the date of such
termination;
(d) before the Fund entered into the Lease of the Condo, James F.
Grosso, Esq. (Mr. Grosso), of O'Reilly, Grosso & Gross, PC, acting as
attorney for the Fund, assisted in the negotiation of the terms of the
Lease, reviewed and approved the terms of such Lease to ensure that
such terms are at least as favorable to the Fund as an arm's length
transaction with an unrelated party, determined that such terms are
fair and reasonable, and selected an independent, qualified appraiser
to determine the fair market rental value of the Condo;
(e) Mr. Grosso is responsible throughout the duration of the Lease
for: (i) Monitoring the rent payments made by the Fund to ensure that
such payments are consistent with the amount of rental specified under
the terms of such Lease, (ii) monitoring the payments of the Fund's
share of the expenses for taxes, insurance, and operating expenses
(including repairs) to ensure that such payments represent a fair
apportionment of such expenses; and (iii) determining that the Fund has
sufficient assets to pay the rental amount and its portion of taxes,
insurance, and operating expenses (including repairs);
(f) throughout the duration of the Lease, the terms of the Lease of
the Condo between the Fund and the Building Corporation are at all
times satisfied;
(g) the rent paid by the Fund for the Condo under the terms of the
Lease is at no time greater than the fair market rental value of the
Condo, as determined by an independent, qualified appraiser selected by
Mr. Grosso;
[[Page 33351]]
(h) under the provisions of the Lease, the subject transaction is
on terms and at all times remains on terms that are at least as
favorable to the Fund as those that would have been negotiated under
similar circumstances at arm's length with an unrelated third party;
(i) the transaction is appropriate and helpful in carrying out the
purposes for which the Fund is established or maintained;
(j) the Board maintains, or causes to be maintained within the
United States for a period of six (6) years in a manner that is
convenient and accessible for audit and examination, such records as
are necessary to enable the persons described, below, in paragraph
(k)(1) of this exemption to determine whether the conditions of this
exemption have been met; except that--
(1) if the records necessary to enable the persons described,
below, in paragraph (k)(1) of this exemption to determine whether the
conditions of this exemption have been met are lost or destroyed, due
to circumstances beyond the control of the Board, then no prohibited
transaction will be considered to have occurred solely on the basis of
the unavailability of those records; and
(2) No party in interest, other than the Board 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 (j) of this exemption; and
(k)(1) Except as provided, below, in paragraph (k)(2) of this
exemption and notwithstanding any provisions of sections (a)(2) and (b)
of section 504 of the Act, the records referred to in paragraph (j) of
this exemption 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 any other applicable
federal or state regulatory agency;
(B) Any fiduciary of the Fund, or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to the Fund and any employee
organization whose members are covered by the Fund, or any duly
authorized employee or representative of these entities; or
(D) Any participant or beneficiary of the Fund, or any duly
authorized representative of such participant or beneficiary.
(2) None of the persons described, above, in paragraph (k)(1)(B)-
(D) of this exemption are authorized to examine trade secrets or
commercial or financial information that is privileged or confidential.
Summary of Facts and Representations
1. The Union is a labor organization made up of thirty (30) local
carpenter unions in six (6) New England states. The local unions that
are affiliated with the Union include local union nos. 33, 40, 67, 218,
and 723 (the Locals). Members of the Union are covered by the Fund. The
Union and the Locals are parties in interest with respect to the Fund,
pursuant to section 3(14)(D) of the Act, as employee organizations any
of whose members are covered by such Fund.
2. The Fund is an employee welfare benefit plan, as that term is
defined in the Act. Further, the Fund is a multiemployer apprenticeship
and training fund. The Fund is a Massachusetts nonprofit organization,
and is exempt from income taxes under the provisions of Section
501(c)(3) of the Internal Revenue Code.
3. The Fund provides training and education to carpenter
apprentices in the greater Boston area. The Fund also provides training
and education to journeymen carpenters in the greater Boston area.
4. The Fund is maintained under collective bargaining agreements
negotiated between the Union of the United Brotherhood of Carpenters
and Joiners of America (the UBCJA) and the following multiemployer
bargaining organizations: (a) The Labor Relations Division of the
Associated General Contractors of Massachusetts, Inc.; (b) The Building
Trades Employers' Association of Boston and Eastern Massachusetts,
Inc.; and (c) The Labor Relations Division of the Construction Industry
of Massachusetts (collectively, the Employer Associations). Employers
any of whose employees are covered by the Fund, are parties in interest
with respect to the Fund, pursuant to section 3(14)(C) of the Act. The
UBCJA is a party in interest with respect to the Fund, pursuant to
section 3(14)(D) of the Act, as an employee organization any of whose
members are covered by such Fund.
5. The Board has the authority to invest the assets of the Fund.
The Board and the members of the Board, as persons who have investment
discretion over the assets of the Fund, are fiduciaries with respect to
the Fund, pursuant to section 3(21)(A) of the Act. As a fiduciaries of
the Fund, the Board and the members of the Board are also parties in
interest with respect to such Fund, pursuant to section 3(14)(A) of the
Act.
The Board consists of six (6) labor representatives and six (6)
management representatives. Among the labor representatives serving on
the Board are Joseph Power (Mr. Power), Thomas Flynn, Steve Tewksbury,
Charles MacFarlane, Richard Pedi (Mr. Pedi), and Richard Scaramozza.
All of the labor representatives on the Board are Union employees and
members of various locals affiliated with the Union. Mr. Power, one of
the labor representatives on the Board, also serves on the Executive
Board of the Union.
The representatives of management serving on the Board are Donald
MacKinnon (Mr. MacKinnon), Tom Gunning, III, George Allen (Mr. Allen),
William Fitzgerald, Christopher Pennie, and Mark DeNapoli (Mr.
DeNapoli).
It is represented that the Board, and more specifically the Finance
Committee of the Board, each meet monthly, and at those meetings review
the Fund's finances for the month, including the Fund's payments to the
Union for rent and for the Fund's share of taxes, insurance, and
operating expenses (including repairs) in connection with the Lease of
the Condo to the Fund.
6. In the fiscal year ending September 30, 2008, the Fund received
employer contributions of $2,584,069, based on approximately 6.7
million hours of work. In addition, the Fund received other income of
approximately $189,000. As of September 30, 2008, the Fund had expenses
of $2,254,078 and total assets of $5,910,043. Included in the Fund's
total assets is a parcel of improved real property (the Existing
Facility) located at 385 Market Street in the Brighton section of
Boston, Massachusetts.
7. Until February 2010 when construction on the Condo was
completed, the Fund provided all of its classes and training in the
Existing Facility. Purchased in 1975, from an unrelated third party,
the Fund owns the Existing Facility free and clear of any mortgages. In
February of 2010, the Fund entered into a purchase and sale agreement
for the Existing Facility with Eli Jammal of Brookline Development, an
unrelated party, for $1.5 million. It is represented that the sales
price of the Existing Facility is $210,000 more than the net book value
of the Existing Facility carried on the 2008 audited financial
statement of the Fund.
8. On February 1, 2008, the Union purchased for cash in the amount
of $5.8 million, a parcel of improved real property (the Original
Property) from an unrelated third party. The Original
[[Page 33352]]
Property is described as a 48,000 square foot two-story building on a
64,000 square foot lot located at 750 Dorchester Avenue, in Boston,
Massachusetts. When purchased, the Union planned to renovate and expand
the Original Property.
9. The Union established the Building Corporation as a limited
liability company for the purpose of developing the Original Property.
In this regard, the Union contributed the Original Property to the
Building Corporation in exchange for sole interest in the Building
Corporation. The Building Corporation is a party in interest with
respect to the Fund, pursuant to section 3(14)(G) of the Act, as 50
percent (50%) or more of the interests in the Building Corporation are
owned by the Union.
10. Construction on the renovation and expansion of the Original
Property began in January 2009. As of February 2010, the Union had
completed the renovation and expansion of the Original Property and had
separated the Building into two (2) condominium units. The Union owns
one of the condominium units through its ownership of the Building
Corporation, and the Building Corporation intends to sell the other
condominium unit to the Fund.
On February 24, 2009, the Fund filed an application (L-11558) with
the Department seeking an administrative exemption to permit the Fund
to purchase the Condo. The Department published a Notice of Proposed
Exemption (the Notice) in the Federal Register on December 22,
2009.\12\ In this regard, appearing elsewhere in this issue of the
Federal Register, the Department is publishing a final exemption for
the purchase of the Condo by the Fund.
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\12\74 FR 68120.
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11. In order that the Fund could hold its spring 2010 classes in
the Condo and in order to establish a closing date with the prospective
purchaser of the Existing Facility, the Board decided to pursue the
option of renting the Condo to the Fund for a short term until the Fund
could obtain financing to close on the purchase of the Condo and could
obtain a final exemption from the Department to permit the Fund to
purchase the Condo from the Building Corporation.
12. It is represented that the Board retained its management co-
counsel, Mr. Grosso of O'Reilly, Grosso & Gross, PC to represent the
Fund in the leasing transaction. It is represented that Mr. Grosso is
independent in that he has never represented the Building Corporation
and does not provide legal services to the Union. Mr. Grosso is
qualified in that he is an attorney representing employers and
management in labor relations matters, primarily in the construction
industry.
It is represented that the responsibilities of Mr. Grosso, acting
as attorney on behalf of the Fund, included obtaining an appraisal of
the fair market rental value of the Condo.
13. On January 15, 2010, Mr. Grosso obtained an appraisal of the
fair market rental value of the Condo from CBRE/CB Richard Ellis
(CBRE). James T. Moore (Mr. Moore), Senior Vice President/Partner of
CBRE and Harris E. Collins (Mr. Collins), Senior Vice President/Partner
of CBRE prepared an appraisal of the fair market rental value of the
Condo.
Mr. Moore is qualified in that he is an Associate Member of the
Appraisal Institute, a member of the Real Estate Finance Association,
Greater Boston Real Estate Board, and is a Massachusetts Certified
General Appraiser. Mr. Collins is qualified in that, among other
qualifications, he is a member of the Appraisal Institute (MAI), a
member of the Counselors of Real Estate (CRE), a member of the Real
Estate Finance Association-Greater Boston Real Estate Board, and is a
Massachusetts Certified General Appraiser.
Both Mr. Moore and Mr. Collins are independent in that neither has
a present or prospective interest in or bias with respect to the
property that is the subject of the appraisal and neither have a
business or personal interest in or bias with respect to the parties
involved. It is further represented that the engagement of Mr. Moore
and Mr. Collins and the compensation for completing the appraisal
assignment was not contingent upon the development or reporting of
predetermined results.
With regard to the Fund's proposed leasing, CBRE established the
fair market rental value of 35,112 square feet of space in the Building
at $30 per square foot, triple net, as of January 15, 2010, based on
market rent comparables and on the return of cost approach.
14. On January 22, 2010, the Board appointed a subcommittee to act
on behalf of the Fund for the purpose of negotiating the terms of the
Lease. The Fund subcommittee consisted of two (2) members: (a) Mr.
Pedi, a labor representative on the Board, an employee of the Union,
and a member of Local 218; and (b) Mr. Allen, a management
representative on the Board, and a principal of Archer Corporation, a
contributing employer to the Fund and a subcontractor of a
subcontractor on the renovation and expansion of the Building. It is
represented that the Fund subcommittee did not have authority to enter
into the Lease but only to negotiate terms which were to be brought
back to the full Board for approval.
The Union also appointed a subcommittee to negotiate the terms of
the Lease. 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 (Mr. Erlich), the Executive Secretary/Treasurer and
chief executive officer of the Union.
15. It is represented that the responsibilities of Mr. Grosso,
acting as attorney on behalf of the Fund, also included assisting in
the negotiations of the Lease in order to ensure that the terms of the
Lease were at least as favorable to the Fund as terms negotiated at
arm's length. Accordingly, on January 29, 2010, the Union subcommittee,
the Fund subcommittee, and Mr. Grosso met to negotiate the terms of the
Lease.
16. The terms of the Lease negotiated by the Union subcommittee,
the Fund subcommittee, and Mr. Grosso provide for a month-to-month
leasing by the Fund from the Building Corporation of 35,112 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 Lease, 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 Lease can be terminated
by either party giving not less than thirty (30) days prior written
notice. The Lease which is the subject of this exemption and any other
leasing arrangement of the Condo between the Fund and the Building
Corporation and/or the Union, if not terminated sooner, shall terminate
on the date that the Fund closes on the purchase of the Condo from the
Building Corporation; and the Fund shall have no obligation to pay rent
to the Union or to the Building Corporation after the date of such
termination. Under the terms of the Lease, 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
[[Page 33353]]
credited to the Fund toward the purchase price of the Condo.
17. The Building Corporation and the Fund entered into the Lease
dated January 29, 2010. The Lease was signed by Mr. Erlich, on behalf
of the Union, and Mr. MacKinnon on behalf of the Fund.
18. It is represented that on February 26, 2010, the terms of the
Lease were presented to the full Board, including Mr. Pedi and Mr.
Allen, who were 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 Mr. Power, a labor representative on the
Board who is also a member of the Union Executive Board, and Mr.
DeNapoli, a management representative on the Board who is also the
Executive Vice President and General Manager of Suffolk Construction,
the construction manager responsible for the renovation and expansion
of the Building, that was retained by the Union. It is represented that
Mr. Power and Mr. DeNapoli recused themselves from all votes and
matters before the Board relating to the Lease by the Fund of the Condo
from the Building Corporation.
19. As Mr. Grosso's responsibilities, on behalf of the Fund, also
included reviewing and approving any written agreement that the Fund
would sign with respect to the leasing arrangement, it is represented
that the Fund not deliver the February 2010 rent until March 1, 2010,
after Mr. Grosso had reviewed and approved the terms of the Lease.
20. Mr. Grosso is also responsible throughout the duration of the
Lease for: (a) Monitoring the rent payments made by the Fund to ensure
that such payments are consistent with the amount of rental specified
under the terms of such Lease, (b) monitoring the payments of the
Fund's share of the expenses for taxes, insurance, and operating
expenses (including repairs) to ensure that such payments represent a
fair apportionment of such expenses; and (c) determining that the Fund
has sufficient assets to pay the rental amount and its portion of
taxes, insurance, and operating expenses (including repairs). In this
regard, it is represented that Mr. Grosso reviewed the rent invoices,
check register, and balance sheet of the Fund. Mr. Grosso also reviewed
the preparation of the invoices and the allocation of expenses at the
Building Corporation office. Mr. Grosso states that the monthly rent
invoiced by the Building Corporation and paid by the Fund for each
month--February through May 2010--was $73,150, the same amount as set
forth in the Lease. The expenses allocated and billed to the Fund for
February, March, and April 2010, pursuant to the triple net provision
of the Lease were figured each month based on the fact that the Condo
represents a 58 percent (58%) interest in the Building. Mr. Grosso
states that this percentage interest is the same as described in the
Condominium Deed. In the opinion of Mr. Grosso, this percentage is fair
and reasonable. It is represented that the balance sheet of the Fund
shows cash in the amount of $4,245,412.39 which to Mr. Grosso appears
more than adequate for the Fund to be able to afford the rent, taking
into consideration the training expenses of the Fund. It is represented
that Mr. Grosso will continue to review the rent payments made by the
Fund until the Lease is terminated.
21. The applicant represents that in entering into the Lease with
the Building Corporation, the Fund relied on the relief from the
prohibitions of section 406(a) of the Act which is provided by PTE 78-
6.\13\ It is further represented that at the time the Building
Corporation and the Fund entered into the Lease of the Condo, all of
the conditions specified in PTCE 78-6 were satisfied.\14\
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\13\ 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 such apprenticeship plan. The
Department is offering no view, herein, as to whether the Lease
between the Fund and the Building Corporation and/or the Union was
exempt from section 406(a) of the Act under the provisions of the
class exemption PTE 78-6. Further, the Department, herein, is not
providing relief for any leasing between the Fund and the Building
Corporation or the Union beyond that which is proposed herein.
\14\ The conditions of PTE 78-6 require that the terms of a
leasing arrangement by an apprenticeship plan from an employee
organization any of whose members' work results in contributions
being made to such apprenticeship plan must be arm's length, the
transaction must be appropriate and helpful in carrying out the
purposes of such apprenticeship plan, and certain records must be
maintained for a period of six years from the termination of such
leasing arrangement. The Department is not offering any opinion,
herein, as to whether the applicant has satisfied the conditions of
PTE 78-6 with regard to the Lease between the Fund and the Building
Corporation and/or the Union.
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In this regard, Mr. Krakow, acting as legal counsel for the Board,
advised the Board that it was permissible for the Fund to enter into a
short term lease with the Union for the Condo; provided that: (a) The
transaction was on terms at least as favorable to the fund as an arm's
length transaction with an unrelated party would be; (b) the
transaction was appropriate and helpful in carrying out the purposes
for which the Fund was established and maintained; and (c) the Fund
maintained records of the transaction for six (6) years from the
termination of the transaction. Mr. Krakow further represents that in
entering into the Lease, the Board, acting in good faith, relied on Mr.
Krakow's advice.
Although 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), it is the view of the
Department that PTE 78-6 does not provide relief for the leasing of
office space by an apprenticeship plan from a contributing employer, a
wholly owned subsidiary of such employer, or from an employee
organization any of whose members' work results in contributions being
made to such apprenticeship plan.
The statutory exemption, pursuant to section 408(b)(2) of the Act,
does provide relief from section 406(a) of the Act for contracting or
making reasonable arrangements with a party in interest for office
space, or legal, accounting, or other services necessary for the
establishment or operation of the plan, if no more than reasonable
compensation is paid therefore. The Department is offering no view,
herein, as to whether the leasing of office space between the Fund and
the Building Corporation and/or the Union would be exempt from section
406(a) of the Act, pursuant to the statutory exemption.
Neither the class exemption, PTE 78-6, nor the statutory exemption,
as set forth in section 408(b)(2) of the Act, provide relief from the
prohibitions of section 406(b) of the Act. Accordingly, the applicant
has requested an administrative exemption from section 406(b)(1) and
(b)(2) of the Act. In addition, as a result of the Fund's occupancy of
the Condo for the period starting on January 29, 2010, and ending on
June 30, 2010, the applicant has requested retroactive relief to
encompass that period.
22. It is represented that the transaction which is the subject of
this proposed exemption is feasible in that the Fund will maintain
records for review by the Department and others to insure that the
conditions of the exemption are satisfied. Further, it is represented
that all the terms of the proposed transaction are known and have been
disclosed in the Lease.
23. The proposed exemption contains conditions which are designed
to ensure the presence of adequate safeguards to protect the interests
of the Fund regarding the subject transaction. In this regard, the fair
market rental value of
[[Page 33354]]
the Condo was determined by an independent, qualified appraiser.
Further, Mr. Grosso, acting as attorney, for the Fund, assisted in the
negotiation of the terms of the Lease, reviewed and approved the terms
of such Lease to ensure that such terms are at least as favorable to
the Fund as an arm's length transaction with an unrelated party, and
determined that such terms are fair and reasonable. In addition, Mr.
Grosso has determined that the rent paid by the Fund for the period
between February and May 2010 was the amount specified under the Lease,
that the expenses for taxes, insurance, and operating expense
(including repairs) have been fairly apportioned to the Fund, and that
the Fund has sufficient assets to pay such rent and expenses. It is
represented that Mr. Grosso will continue to review the payments made
by the Fund in connection with the Lease which is the subject of this
proposed exemption, until such Lease is terminated.
24. The applicant maintains that the proposed transaction is in the
interest of the participants and beneficiaries of the Fund, because the
rent under the terms of the Lease is below the fair market rental
value, as determined by CBRE. Further, it is represented that the month
to month term of the Lease is favorable to the Fund, and that such
month to month term is not commonly found in commercial leases. The
applicant also maintains that by leasing and moving into the Condo
prior to purchasing the Condo, the Fund was able to market the existing
training facility for sale.
25. With respect to the June 30, 2010, ending date for the Lease,
it is represented that the Fund will send the Building Corporation a
notice of termination of the Lease, effective June 30, 2010. In
addition, the Fund will request that the Building Corporation
renegotiate the terms and enter into a new leasing arrangement of the
Condo, starting on July 1, 2010, and continuing, until the Fund closes
on the purchase of the Condo from the Building Corporation. In entering
into the new leasing arrangement, the Fund will rely on the relief
provided by the class exemption, PTE 78-6, for the leasing of training
space by a plan from a party in interest and will rely on the relief
provided by the statutory exemption, pursuant to 408(b)(2) of the Act,
for the leasing of office space by a plan from a party in interest.\15\
It is represented that all of the labor representatives on the Board
will recuse themselves from the discussions, negotiations, and approval
of the new leasing arrangement. Further, Mr. DeNapoli and Mr. Allen,
both of whom are management representatives on the Board, because of
their involvement in the renovation and expansion of the Building, will
recuse themselves from the discussions, negotiations and approval of
the new leasing arrangement.
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\15\ The Department is offering no view, herein, as to whether
PTE 78-6 covers the new 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 have been and will be satisfied.
In addition, the Department is offering no view, herein, as to
whether the 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 have been and will be satisfied.
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25. In summary, the applicant represents that the proposed
transaction meets the statutory criteria for an exemption under section
408(a) of the Act because:
(a) Prior to entering into the Lease, the Fund sought legal advice
from Mr. Krakow, acting as legal counsel on behalf of the Fund, who
advised the Fund that it was permissible for the Fund to enter into a
short term lease with the Building Corporation, and the Board relied on
Mr. Krakow's advice;
(b) The Lease which is the subject of this exemption and any other
leasing arrangement of the Condo between the Fund and the Building
Corporation, if not terminated sooner, shall terminate on the date that
the Fund closes on the purchase of the Condo from the Building
Corporation; and the Fund shall have no obligation to pay rent to the
Union or to the Building Corporation after the date of such
termination;
(c) before the Fund entered into the Lease of the Condo, Mr.
Grosso, acting as attorney for the Fund, assisted in the negotiation of
the terms of the Lease, reviewed and approved the terms of such Lease
to ensure that such terms are at least as favorable to the Fund as an
arm's length transaction with an unrelated party, determined that such
terms are fair and reasonable, and selected an independent, qualified
appraiser to determine the fair market rental value of the Condo;
(d) Mr. Grosso is also responsible throughout the duration of the
Lease for: (1) Monitoring the rent payments made by the Fund to ensure
that such payments are consistent with the amount of rental specified
under the terms of such Lease, (2) monitoring the payments of the
Fund's share of the expenses for taxes, insurance, and operating
expenses (including repairs) to ensure that such payments represent a
fair apportionment of such expenses; (3) determining that the Fund has
sufficient assets to pay the rental amount and its portion of taxes,
insurance, and operating expenses (including repairs); and (4)
monitoring, throughout the duration of the Lease, the terms of the
Lease of the Condo between the Fund and the Building Corporation to
ensure that the terms of the Lease are at all times satisfied;
(e) the rent paid by the Fund for the Condo under the terms of the
Lease is at no time greater than the fair market rental value of the
Condo, as determined by an independent, qualified appraiser selected by
Mr. Grosso;
(f) under the provisions of the Lease, the subject transaction is
on terms and at all times remains on terms that are at least as
favorable to the Fund as those that would have been negotiated under
similar circumstances at arm's length with an unrelated third party;
(g) the transaction is appropriate and helpful in carrying out the
purposes for which the Fund is established or maintained; and
(h) the Board maintains, or causes to be maintained within the
United States for a period of six (6) years in a manner that is
convenient and accessible for audit and examination, such records as
are necessary to determine whether the conditions of this exemption
have been met.
Notice to Interested Persons
Those persons who may be interested in the publication in the
Federal Register of the Notice include all members of the Locals in the
Boston area and all of the Employer Associations.
It is represented that notification will be provided to all such
interested persons by first class mail within fifteen (15) calendar
days of the date of publication of the Notice in the Federal Register.
Such mailing will contain a copy of the Notice, as it appears in the
Federal Register on the date of publication, plus a copy of the
supplemental statement, as required, pursuant to 29 CFR 2570.43(b)(2)
of the Department's regulations, which will advise all interested
persons of the right to comment and to request a hearing.
The Department must receive all written comments and requests for a
hearing no later than forty-five (45) days from the date of the
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department,
[[Page 33355]]
telephone (202) 693-8551. (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 of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each 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. 2010-14023 Filed 6-10-10; 8:45 am]
BILLING CODE 4510-29-P