[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38557-38564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16096]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Application Nos. and Proposed Exemptions; D-11489, Morgan Stanley
& Co., Incorporated; L-11609, The Finishing Trades Institute of the
Mid-Atlantic Region (the Plan) et al.
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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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.
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974 (ERISA) and section 4975(c)(2) of the Internal Revenue Code
of 1974 (the Code), and in accordance with the procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Transactions Involving Plans Described in Both Title I and
Title II of ERISA
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and section 406(b) of ERISA, and the sanctions
resulting from the application of sections 4975(a) and (b) of the Code,
by reason of section 4975(c)(1) of the Code, shall not apply, effective
February 1, 2008, to the following transactions, if the conditions set
forth in Section III have been met: \1\
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\1\ For purposes of this proposed exemption, references to
section 406 of ERISA should be read to refer also to the
corresponding provisions of section 4975 of the Code.
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(a) The sale or exchange of an ``Auction Rate Security'' (as
defined in Section IV (b)) by a ``Plan'' (as defined in Section IV(h))
to the ``Sponsor'' (as defined in Section IV (g)) of such Plan; or
[[Page 38558]]
(b) A lending of money or other extension of credit to a Plan in
connection with the holding of an Auction Rate Security by the Plan,
from (1) Morgan Stanley & Co. Incorporated or an Affiliate (Morgan
Stanley); (2) an ``Introducing Broker'' (as defined in Section IV (f));
or (3) a ``Clearing Broker'' (as defined in Section IV (d))--where the
loan is (i) repaid in accordance with its terms, and (ii) guaranteed by
the Plan Sponsor.
II. Transactions Involving Plans Described in Title II of ERISA Only
If the proposed exemption is granted, the sanctions resulting from
the application of section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1) of the Code, shall not apply, effective February 1,
2008, to the following transactions, if the conditions set forth in
Section III have been met: (a) The sale or exchange of an Auction Rate
Security by a ``Title II-Only Plan'' (as defined in Section IV(i)) to
the Beneficial Owner'' (as defined in Section IV(c)) of such Plan; or
(b) A lending of money or other extension of credit to a Title II-Only
Plan in connection with the holding of an Auction Rate Security by the
Title II-Only Plan, from (1) Morgan Stanley; (2) an Introducing Broker;
or (3) a Clearing Broker--where the loan is (i) repaid in accordance
with its terms, and (ii) guaranteed by the Beneficial Owner.
III. Conditions
(a) Morgan Stanley acted as a broker or dealer, non-bank custodian,
or fiduciary in connection with the acquisition or holding of the
Auction Rate Security that is the subject of the transaction;
(b) For transactions involving a Plan (including a Title II-Only
Plan) not sponsored by Morgan Stanley for its own employees, the
decision to enter into the transaction is made by a Plan fiduciary who
is ``Independent'' (as defined in Section IV(e)) of Morgan Stanley.
Notwithstanding the foregoing, an employee of Morgan Stanley who is the
Beneficial Owner of a Title II-Only Plan may direct such Plan to engage
in a transaction described in Section II, if all of the other
conditions of this Section III have been met;
(c) The last auction for the Auction Rate Security was
unsuccessful;
(d) The Plan does not waive any rights or claims in connection with
the loan or sale as a condition of engaging in the above described
transaction;
(e) The Plan does not pay any fees or commissions in connection
with the transaction;
(f) The transaction is not part of an arrangement, agreement, or
understanding designed to benefit a party in interest or disqualified
person;
(g) With respect to any sale described in Section I(a) or Section
II(a):
(1) The sale is for no consideration other than cash payment
against prompt delivery of the Auction Rate Security; and
(2) For purposes of the sale, the Auction Rate Security is valued
at par, plus any accrued but unpaid interest; \2\
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\2\ The Department notes that this proposed exemption does not
address tax issues. The Department has been informed by the Internal
Revenue Service and the Department of the Treasury that they are
considering providing limited relief from the requirements of
sections 72(t)(4), 401(a)(9), and 4974 of the Code with respect to
retirement plans that hold Auction Rate Securities. The Department
has also been informed by the Internal Revenue Service that if
Auction Rate Securities are purchased from a Plan in a transaction
described in Sections I and II at a price that exceeds the fair
market value of those securities, then the excess value would be
treated as a contribution for purposes of applying applicable
contribution and deduction limits under sections 219, 404, 408, and
415 of the Code.
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(h) With respect to an in-kind exchange described in Section (I)(a)
or Section II(a), the exchange involves the transfer by a Plan of an
Auction Rate Security in return for a ``Delivered Security,'' as such
term is defined in Section IV(j), where:
(1) The exchange is unconditional;
(2) For purposes of the exchange, the Auction Rate Security is
valued at par, plus any accrued but unpaid interest;
(3) The Delivered Security is valued at fair market value, as
determined at the time of the in-kind exchange by a third party pricing
service or other objective source;
(4) The Delivered Security is appropriate for the Plan and is a
security that the Plan is otherwise permitted to hold under applicable
law; \3\
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\3\ The Department notes that ERISA's general standards of
fiduciary conduct would also apply to the transactions described
herein. In this regard, section 404 requires, among other things,
that a fiduciary discharge his duties respecting a plan solely in
the interest of the plan's participants and beneficiaries and in a
prudent manner. Accordingly, a plan fiduciary must act prudently
with respect to, among other things: (1) The decision to exchange an
Auction Rate Security for a Delivered Security; and (2) the
negotiation of the terms of such exchange (or a cash sale or loan
described above), including the pricing of such securities. The
Department further emphasizes that it expects plan fiduciaries,
prior to entering into any of the transactions, to fully understand
the risks associated with these types of transactions, following
disclosure by Morgan Stanley of all the relevant information.
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(5) The total value of the Auction Rate Security (i.e., par, plus
any accrued but unpaid interest) is equal to the fair market value of
the Delivered Security;
(i) With respect to a loan described in Section I(b) or II(b):
(1) The loan is documented in a written agreement containing all of
the material terms of the loan, including the consequences of default;
(2) The Plan does not pay an interest rate that exceeds one of the
following three rates as of the commencement of the loan:
(A) The coupon rate for the Auction Rate Security;
(B) The Federal Funds Rate; or
(C) The Prime Rate;
(3) The loan is unsecured; and
(4) The amount of the loan is not more than the total par value of
the Auction Rate Securities held by the Plan.
(j) Morgan Stanley maintains, or causes to be maintained, for a
period of at least six (6) years from the date of a covered
transaction, such records as are necessary to enable the persons
described in paragraph (k), below, to determine whether the conditions
of this exemption, if granted, have been met, except that--
(1) No party in interest with respect to a Plan that engages in a
covered transaction, other than Morgan Stanley shall be subject to a
civil penalty under section 502(i) of ERISA or the taxes imposed by
section 4975(a) and (b) of the Code, if such records are not
maintained, or are not available for examination, as required, below,
by paragraph (k); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of Morgan Stanley, such records are lost or destroyed prior to the end
of the six-year period; and
(k)(1) Except as provided in subparagraph (2), below, and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of ERISA, the records referred to in paragraph (j), above, 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 U.S. Securities and
Exchange Commission;
(B) Any fiduciary of any Plan, including any IRA owner, or any duly
authorized employee or representative of such fiduciary; or
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by the Plan that engages in a
covered transaction, or any authorized employee or representative of
these entities;
(2) None of the persons described above in paragraph (k)(1)(B) or
(C) shall be authorized to examine trade secrets of Morgan Stanley, or
commercial or financial information which is privileged or
confidential; and
[[Page 38559]]
(3) Should Morgan Stanley refuse to disclose information on the
basis that such information is exempt from disclosure, Morgan Stanley
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.
IV. Definitions
(a) The term ``Affiliate'' means any person, directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such other person;
(b) The term ``Auction Rate Security'' or ``ARS'' means a security:
(1) That is either a debt instrument (generally with a long-term
nominal maturity) or preferred stock; and
(2) With an interest rate or dividend that is reset at specific
intervals through a Dutch Auction process;
(c) The term ``Beneficial Owner'' means the individual for whose
benefit the Title II-Only Plan is established and includes a relative
or family trust with respect to such individual;
(d) The term ``Clearing Broker'' means a member of a securities
exchange who acts as a liaison between an investor and a clearing
corporation, helps to ensure that a trade is settled appropriately,
ensures that the transaction is successfully completed, and is
responsible for maintaining the paper work associated with the clearing
and execution of a transaction;
(e) The term ``Independent'' means a person who is (1) not Morgan
Stanley or an Affiliate, and (2) not a ``relative'' (as defined in
ERISA section 3(15)) of the party engaging in the transaction;
(f) The term ``Introducing Broker'' means a registered broker who
is able to perform all the functions of a broker, except for the
ability to accept money, securities, or property from a customer;
(g) The term ``Sponsor'' means a plan sponsor as described in
section 3(16)(B) of ERISA and any Affiliates;
(h) The term ``Plan'' means any plan described in section 3(3) of
ERISA and/or section 4975(e)(1) of the Code;
(i) The term ``Title II-Only Plan'' means any plan described in
section 4975(e)(1) of the Code that is not an employee benefit plan
covered by Title I of ERISA;
(j) The term ``Delivered Security'' means a security that is (1)
Listed on a national securities exchange (excluding OTC Bulletin Board-
eligible securities and Pink Sheets-quoted securities); or (2) A U.S.
Treasury obligation; or (3) A fixed income security that has a rating
at the time of the exchange that is in one of the two highest generic
rating categories from an Independent nationally recognized statistical
rating organization (e.g., a highly rated municipal bond or a highly
rated corporate bond); or (4) A certificate of deposit insured by the
Federal Deposit Insurance Corporation. Notwithstanding the above, the
term ``Delivered Security'' shall not include any Auction Rate
Security, or any related Auction Rate Security, including derivatives
or securities materially comprised of Auction Rate Securities or any
illiquid securities.
Summary of Facts and Representations
1. The applicant Morgan Stanley & Co. Incorporated and its
Affiliates (hereinafter, either ``Morgan Stanley'' or the
``applicant''), headquartered in New York, New York, is one of the
nation's pre-eminent global financial services firms. Morgan Stanley
serves a large and diversified group of clients and customers,
including corporations, governments, financial institutions, and
individuals around the world. On September 21, 2008 Morgan Stanley
obtained approval from the Board of Governors of the Federal Reserve
System to become a bank holding company upon the conversion of its
wholly owned indirect subsidiary, Morgan Stanley Bank (Utah), from a
Utah industrial bank to a national bank. On September 23, 2008 the
Office of the Comptroller of the Currency authorized Morgan Stanley
Bank (Utah) to commence business as a national bank, operating as
Morgan Stanley Bank, N.A. Concurrent with this conversion, Morgan
Stanley became a financial holding company under the Bank Holding
Company Act of 1956, as amended. Morgan Stanley & Co. Incorporated,
Morgan Stanley's primary operating unit, is also both a registered
investment adviser subject to the Investment Advisers Act of 1940 and a
SEC-registered broker-dealer subject to the supervision of various
governmental and self-regulatory bodies. Morgan Stanley offers a full
array of investment-related services, including securities research,
brokerage, execution, asset allocation, financial planning, investment
advice, discretionary asset management services, sweep, and trust/
custody services.
Morgan Stanley Smith Barney has recently been formed as a joint
venture. Under the joint venture agreement, Citigroup, Inc. (Citigroup)
and Morgan Stanley (including their respective subsidiaries) each
contributed specified businesses to 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 include
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
are also included. In the case of Morgan Stanley, the contributed
businesses generally consist of Morgan Stanley's global wealth
management (retail brokerage) and private wealth management businesses.
As of September 30, 2009, Morgan Stanley employed 62,000
individuals and operates 1200 offices in 36 countries with over $1.5
trillion in client assets held at its broker-dealer.
The applicant requests both retroactive and prospective exemptive
relief for transactions involving certain of Morgan Stanley's client
accounts in the time frame prior to the formation of the joint venture
and going forward.
2. Among other things, Morgan Stanley acts as a broker and dealer
with respect to the purchase and sale of securities, including Auction
Rate Securities (ARS). The applicant describes ARS and the arrangement
by which ARS are bought and sold as follows. ARS are securities (issued
as debt or preferred stock) with an interest rate or dividend that is
reset at periodic intervals pursuant to a process called a Dutch
Auction. Investors submit orders to buy, hold, or sell a specific ARS
to a broker-dealer selected by the entity that issued the ARS. The
broker-dealers, in turn, submit all of these orders to an auction
agent. The auction agent's functions include collecting orders from all
participating broker-dealers by the auction deadline, determining the
amount of securities available for sale, and organizing the bids to
determine the winning bid. If there are any buy orders placed into the
auction at a specific rate, the auction agent accepts bids with the
lowest rate above any applicable minimum rate and then successively
higher rates up to the maximum applicable rate, until all sell orders
and orders that are treated as sell orders are filled. Bids below any
applicable minimum rate or above the applicable maximum rate are
rejected. After determining the clearing rate for all of the securities
at auction, the auction agent allocates the ARS available for sale to
the participating broker-dealers based on the orders they submitted. If
there are multiple bids at the clearing rate, the auction agent will
allocate
[[Page 38560]]
securities among the bidders at such rate on a pro rata basis.
3. The applicant represents that Morgan Stanley is permitted, but
not obligated, to submit orders in auctions for its own account either
as a bidder or a seller and routinely does so in the ARS market in its
sole discretion. Morgan Stanley may routinely place one or more bids in
an auction for its own account to acquire ARS for its inventory, to
prevent (1) a failed auction (i.e., an event where there are
insufficient clearing bids that would result in the auction rate being
set at a specified rate); or (2) an auction from clearing at a rate
that Morgan Stanley believes does not reflect the market for the
particular ARS being auctioned.
4. The applicant represents that for many ARS, Morgan Stanley has
been appointed by the issuer of the securities to serve as a dealer in
the auction and is paid by the issuer for its services. Morgan Stanley
is typically appointed to serve as a dealer in the auctions pursuant to
an agreement between the issuer and Morgan Stanley. That agreement
provides that Morgan Stanley will receive from the issuer auction
dealer fees based on the principal amount of the securities placed
through Morgan Stanley.
5. The applicant states that Morgan Stanley may share a portion of
the auction rate dealer fees it receives from the issuer with other
broker-dealers that submit orders through Morgan Stanley, for those
orders that Morgan Stanley successfully places in the auctions.
Similarly, with respect to ARS for which broker-dealers other than
Morgan Stanley act as dealer, such other broker-dealers may share
auction dealer fees with Morgan Stanley for orders submitted by Morgan
Stanley.
6. According to the applicant, since February 2008, a minority of
auctions have cleared, particularly involving municipalities. As a
result, Plans holding ARS may not have sufficient liquidity to make
benefit payments, mandatory payments and withdrawals, and expense
payments when due.\4\
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\4\ The Department notes that Prohibited Transaction Exemption
(PTE) 80-26 (45 FR 28545 (Apr. 29, 1980), as amended at 71 FR 17917
(Apr. 7, 2006)) is a class exemption that permits interest-free
loans or other extensions of credit from a party in interest to a
plan if, among other things, the proceeds of the loan or extension
of credit are used only (1) for the payment of ordinary operating
expenses of the plan, including the payment of benefits in
accordance with the terms of the plan and periodic premiums under an
insurance or annuity contract, or (2) for a purpose incidental to
the ordinary operation of the plan.
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7. The applicant represents that, in certain instances, Morgan
Stanley may have previously advised or otherwise caused a Plan to
acquire and hold an ARS and thus may be considered a fiduciary to the
Plan so that a loan to the Plan by Morgan Stanley may violate section
406(a) and (b) of ERISA; in addition, a sale between a Plan and its
sponsor or an IRA and its Beneficial Owner violates ERISA section 406
and/or section 4975(c)(1) of the Code.\5\ The applicant is therefore
requesting relief for the following transactions, involving all
employee benefit plans: (1) The sale or exchange of an ARS from a Plan
to the Plan's Sponsor; \6\ and (2) a lending of money or other
extension of credit to a Plan in connection with the holding of an ARS
from Morgan Stanley, an Introducing Broker, or a Clearing Broker--where
the subsequent repayment of the loan is made in accordance with its
terms and is guaranteed by the Plan Sponsor.
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\5\ The Department notes that the relief contained in this
proposed exemption does not extend to the fiduciary provisions of
section 404 of ERISA.
\6\ The Applicant represents that, as of May 7, 2010, no in-kind
exchanges have occurred but may in the future.
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8. The applicant is requesting similar relief for plans covered by
only Title II of ERISA. In this regard, the applicant is requesting
relief for: (1) The sale or exchange of an ARS from a Title II-Only
Plan to the Beneficial Owner of such Plan; and (2) a lending of money
or other extension of credit to a Title II-Only Plan in connection with
the holding of an ARS from Morgan Stanley, an Introducing Broker, or a
Clearing Broker--where the subsequent repayment of the loan is made in
accordance with its terms and is guaranteed by the Beneficial Owner.
9. The applicant represents that the proposed transactions are in
the interests of the Plans. In this regard, the applicant represents
that the exemption, if granted, will provide Plan fiduciaries with
liquidity, notwithstanding changes that have occurred in the ARS
markets. The applicant also notes that, other than for Plans sponsored
by the applicant, the decision to enter into a transaction described
herein will be made by a Plan fiduciary who is Independent of Morgan
Stanley.
10. The proposed exemption contains a number of safeguards designed
to protect the interests of each Plan. With respect to the sale of an
ARS by a Plan, the Plan must receive cash equal to the par value of the
Security, plus any accrued interest. The sale must also be
unconditional, other than being for payment against prompt delivery.
For in-kind exchanges covered by the proposed exemption, the security
delivered to the Plan (i.e., the Delivered Security) must be: (1)
Listed on a national securities exchange (excluding OTC Bulletin Board-
eligible securities and Pink Sheets-quoted securities); or (2) a U.S.
Treasury obligation; or (3) a fixed income security that has a rating
at the time of the exchange that is in one of the two highest generic
rating categories from an independent nationally recognized statistical
rating organization (e.g., a highly rated municipal bond or a highly
rated corporate bond); or (4) a certificate of deposit insured by the
Federal Deposit Insurance Corporation. The Delivered Security must be
appropriate for the Plan and must be a security that the Plan is
permitted to hold under applicable law. The proposed exemption further
requires that the Delivered Security be valued at its fair market
value, as determined at the time of the exchange from a third party
pricing service or other objective source and must equal the total
value of the ARS being exchanged (i.e., par value, plus any accrued
interest).
11. With respect to a loan to a Plan holding an ARS, such loan must
be documented in a written agreement containing all of the material
terms of the loan, including the consequences of default. Further, the
Plan may not pay an interest rate that exceeds one of the following
three rates as of the commencement of the loan: The coupon rate for the
ARS, the Federal Funds Rate, or the Prime Rate. Additionally, such loan
must be unsecured and for an amount that is no more than the total par
value of ARS held by the affected Plan.
12. Additional conditions apply to each transaction covered by the
exemption, if granted. Among other things, the Plan may not pay any
fees or commissions in connection with the transaction and the
transaction may not be part of an arrangement, agreement, or
understanding designed to benefit a party in interest or disqualified
person. Further, any waiver of rights or claims by a Plan is
prohibited, in connection with the sale or exchange of an ARS by a
Plan, or a lending of money or other extension of credit to a Plan
holding an ARS.
13. In summary, the applicant represents that the transactions
described herein satisfy the statutory criteria set forth in section
408(a) of ERISA and section 4975(c)(2) of the Code because:
(1) Any sale will be:
(A) For no consideration other than cash against prompt delivery of
the ARS; and
(B) At par, plus any accrued but unpaid interest;
[[Page 38561]]
(2) Any in-kind exchange will be unconditional, other than being
for payment against prompt delivery, and will involve Delivered
Securities that are:
(A) Appropriate for the Plan;
(B) Listed on a national securities exchange (but not OTC Bulletin
Board-eligible securities and Pink Sheets-quoted securities); U.S.
Treasury obligations; fixed income securities; or certificates of
deposit; and
(C) Securities that the Plan is permitted to hold under applicable
law; and,
(3) Any loan will be:
(A) Documented in a written agreement containing all of the
material terms of the loan, including the consequences of default;
(B) At an interest rate not in excess of the coupon rate for the
ARS, the Federal Funds Rate, or the Prime Rate;
(C) Unsecured; and
(D) For an amount that is not more than the total par value of ARS
held by the affected Plan.
Notice to Interested Persons
The applicant represents that all the potentially interested
persons cannot be identified and that, therefore, the only practicable
means of notifying interested persons of this proposed exemption is by
the publication of this notice in the Federal Register. Comments and
requests for a hearing are due within 45 days from the date of
publication of this notice of proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8557. (This is not a toll-free number.)
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA), and in accordance
with the 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 sections
406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act shall not
apply to the proposed loan of approximately $1,081,416 (the Loan) to
the Plan by the International Union of Painters and Allied Trades,
District Council 21 (the Union), a party in interest with respect to
the Plan, for (1) the repayment of an outstanding loan (the Original
Loan) made to the Plan by Commerce Bank and currently held by TD Bank
(the Bank), both of which are unrelated parties; and (2) to facilitate
the expansion of a training facility (the Facility) that is situated on
certain real property (the Land) \7\ owned by the Plan, provided that
the following conditions are met:
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\7\ Unless otherwise stated herein, the Facility and the Land
are together referred to as the ``Property.''
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(a) The terms and conditions of the Loan are at least as favorable
to the Plan as those which the Plan could have obtained in an arm's
length transaction with an unrelated party;
(b) The Plan's trustees determine in writing that the Loan is
appropriate for the Plan and in the best interests of the Plan's
participants and beneficiaries;
(c) A qualified, independent fiduciary that is acting on behalf of
the Plan (the Qualified Independent Fiduciary) reviews the terms of the
Loan and determines that the Loan is an appropriate investment for the
Plan and protective of and in the best interests of the Plan and its
participants and beneficiaries;
(d) In determining the fair market value of the Property that
serves as collateral for the Loan, the Qualified Independent Fiduciary
(1) obtains an appraisal of the Property from a qualified, independent
appraiser (the Qualified Independent Appraiser); and (2) ensures that
the appraisal prepared by the Qualified Independent Appraiser is
consistent with sound principles of valuation;
(e) The Qualified Independent Fiduciary monitors the Loan, as well
as the terms and conditions of the exemption, and takes whatever
actions are necessary and appropriate to safeguard the interests of the
Plan and its participants and beneficiaries under the Loan;
(f) The Loan is repaid by the Plan solely with the funds the Plan
retains after paying all of its operational expenses; and
(g) The Plan does not pay any fees or other expenses in connection
with the servicing or administration of the Loan.
Summary of Facts and Representations
1. The Union is located in Philadelphia, Pennsylvania, and it
represents members in the finishing trades, such as painters, drywall
finishers, wall coverers, glaziers and glass workers, in Pennsylvania
and New Jersey. The Plan was established by the Union in 1966 as a
training program for individuals who are Union members and are employed
by contributing employers with regard to the Plan. The Plan has twelve
(12) trustees (the Trustees). Half of the Trustees represent Union
members and half of the Trustees represent contributing employers. The
purpose of the Plan is to provide eligible participants (the
Participants) with training for career advancement to journeyperson
status and continued education in the Union's construction industries.
As of February 15, 2010, the Plan had approximately 5,000 Participants
and approximately $5,649,370 in total assets.
2. Among the Plan's assets is the Facility, which is located at
2190 Hornig Road, Philadelphia, PA. The Facility is comprised mainly of
classrooms and indoor work areas, and it is used by Participants to
acquire construction training.
3. In 2004, the Trustees determined a need to purchase a training
facility to better serve the ongoing needs of the Participants due to
the increasingly sophisticated requirements of workers in the finishing
trades, particularly with regard to glazing and architectural glass and
metalworking. In November 2004, the Trustees identified the Property as
a viable option to serve their training needs.
4. The Trustees secured third party financing of $1,200,000 to
assist in the purchase of the Property, for a total purchase price of
$2,600,000 (the Purchase).\8\ The Property was purchased from a party
that was not related to the Plan or the Union. To finance the Purchase,
the Trustees caused the Plan to receive the Original Loan from the
Bank. The Original Loan was entered into on March 23, 2005.
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\8\ The difference between $2,600,000 and $1,200,000 was paid
with a cash down payment.
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5. The Original Loan, which is in the principal amount of
$1,200,000, has a term of 15 years, and it requires the Plan to pay an
adjustable rate of interest. At the time the Original Loan was made,
the interest rate was set at the prime rate published in The Wall
Street Journal, or 5.5%, calculated based on a 360-day year. Since
entering into the Original Loan with the Plan, the Bank has reduced the
interest rate to 3.5%. The Bank is required to review the annual
interest rate of the Original Loan on the fifth and tenth anniversaries
of the Original Loan, but the annual interest rate cannot exceed 5.5%.
Under the terms of the Original Loan, the Plan is required to make,
commencing May 1, 2005, 179 consecutive monthly installments of
principal and interest, amortized over the fifteen (15) year loan
period in an amount equal to $9,805, followed by one final payment of
all outstanding principal, interest and fees on the maturity date of
April 1, 2020.
Further, under the Original Loan, the Plan has assigned its
lessor's interest in all rents, income and profits arising from leases
pertaining to the Property as
[[Page 38562]]
well as all contracts, licenses and permits associated with its
ownership of the Property, and it has executed an environmental
indemnity agreement. In addition, the Original Loan allows the Bank to
reserve the right to elect, on the fifth and tenth anniversaries of the
Original Loan, to call such loan in full and require the Plan to repay
the remaining principal of the Original Loan and any interest then due
and payable. Finally, as security for the Original Loan, the Plan has
granted the Bank a first lien interest in both the Facility and the
Land. As of March 23, 2010, the principal balance outstanding on the
Original Loan was $881.418.95.\9\
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\9\ The outstanding principal balance on the Original Loan will
decline with each monthly payment made by the Plan. As a result, the
anticipated Loan amount will be adjusted to reflect any such
decline.
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6. In March 2010, despite the fact that the Plan has made all of
the payments required under the Original Loan on time without any
defaults or delinquencies, the Bank indicated that it may elect to call
the Original Loan by July 1, 2010. Therefore, the Union proposes to
lend the Plan, as of March 23, 2010, $1,081,416 under the terms of a
replacement loan (i.e., the Loan). The Loan will enable the Plan to
repay the Original Loan and provide approximately $200,000 in
additional funds to finance an expansion of the Facility by adding two
new classrooms.\10\ Accordingly, an administrative exemption is
requested from the Department.
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\10\ The Department is expressing no opinion in this proposed
exemption regarding whether the Loan violates any of the fiduciary
responsibility provisions of Part 4 of Title I of the Act. In this
regard, the Department notes that section 404(a) of the Act
requires, among other things, that a fiduciary of a plan act
prudently, solely in the interest of the plan's participants and
beneficiaries, and for the exclusive purpose of providing benefits
to participants and beneficiaries when making investment decisions
on behalf of a plan. Section 404(a) of the Act also states that a
plan fiduciary should diversify the investments of a plan so as to
minimize the risk of large losses, unless under the circumstances it
is clearly prudent not to do so.
Moreover, the Department is not providing any opinion as to
whether a particular category of investments or investment strategy
would be considered prudent or in the best interests of a plan as
required by section 404 of the Act. The determination of the
prudence of a particular investment or investment course of action
must be made by a plan fiduciary after appropriate consideration of
those facts and circumstances that, given the scope of such
fiduciary's investment duties, the fiduciary knows or should know
are relevant to the particular investment or investment course of
action involved, including a plan's potential exposure to losses and
the role the investment or investment course of action plays in that
portion of the plan's portfolio with respect to which the fiduciary
has investment duties (see 29 CFR 2550.404a-1). The Department also
notes that in order to act prudently in making investment decisions,
a plan fiduciary must consider, among other factors, the
availability, risks and potential return of alternative investments
for the plan. Thus, a particular investment by a plan, which is
selected in preference to other alternative investments, would
generally not be prudent if such investment involves a greater risk
to the security of a plan's assets than other comparable investments
offering a similar return or result.
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7. The Loan will have a fixed rate of interest of 4% per annum, and
the Loan will not be able to be called by the Union, except in the
event of a complete default upon the Loan. Under the terms of the Loan,
the Plan will be required to make 180 consecutive monthly installments
of principal and interest, amortized over the fifteen (15) year loan
period, calculated over a 365-day year, followed by one final payment
of all outstanding principal, interest and fees on the maturity date.
The Plan will not be required to assign its lessor's interest in rents,
income and profits arising from leases pertaining to the Property or
its interests in contracts, licenses and permits associated with its
ownership of the Property. In addition, the Loan will not require the
Plan to execute an environmental indemnity agreement. As security for
the Loan, the Plan will grant the Union a first lien interest in the
Facility and the Land. Finally, the Plan will not be required to pay
any fees or other expenses in connection with the servicing or the
administration of the Loan.
8. The Trustees represent that the Loan will be beneficial to the
Plan since it allows the Plan to forecast more accurately the cost of
its debt service over the life of the Loan. Further, the Trustees
explain that the potential for the interest rate of the Original Loan
to reset on the fifth and tenth anniversaries of the Original Loan
raises problems for the Plan's ability to conduct accurate expense
forecasting.
The Trustees also represent that the terms of the Loan are more
favorable to the Plan than the terms of the Original Loan for several
reasons. First, the Loan cannot be called by the Union except in the
event of a complete default upon the Loan. Second, unlike the Original
Loan, the Loan does not require provisions such as environmental
indemnity agreements; assignments of contracts, licenses and permits;
and assignments of leases and rents. Third, the Loan provides a more
favorable interest calculation in comparison to the Original Loan, with
such interest being calculated based on a 365-day year instead of a
360-day year.
Further, the Trustees state that the Loan will be beneficial to the
Plan in that it will allow the Plan to expand the Facility to better
serve the Participants. The Trustees note that the Plan will add two
classrooms with $200,000 of the proceeds from the Loan, thus allowing
the Plan to offer training sessions in a broader range of subjects and
to a higher number of Participants.
Finally, the Trustees assert that the Plan will repay the Loan
solely with funds retained by the Plan after paying for all of its
operational expenses (the Excess Funds).\11\
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\11\ The Union represents that the Plan's operational expenses
are funded by contributions made to the Plan by contributing
employers. These contributions are based on a portion of each
Participant's hourly wage paid by such employers. The Union
represents that the Participants' hourly wage rate is negotiated
periodically between the Union and the contributing employers. Thus,
the Union represents that the Participants' wage deduction amount
for contributions made by the employers to the Plan is determined by
the parties each year.
The Union further represents that the computation of the amount
of Excess Funds available for repayment of the Loan will be
according to generally accepted accounting principles by a certified
public accountant representing the Plan.
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9. The Plan retained Louis A. Iatarola, MAI, SRA, to appraise the
Property. Mr. Iatarola is a Qualified Independent Appraiser who is
affiliated with the real estate appraisal firm of Louis A. Iatarola
Appraisal Group, Ltd., located in Philadelphia, PA. Mr. Iatarola has no
present or prospective interest in the Loan transaction, and he is
unrelated to the Union. During 2009, he derived less than one percent
of his gross revenue from parties in interest with respect to the Plan.
Mr. Iatarola visited the Property on November 17, 2009, prepared a
valuation report, dated December 16, 2009, and examined relevant public
records. As of November 17, 2009, Mr. Iatarola opined in his appraisal
report that an unencumbered fee simple interest in the Property had a
fair market value $4,000,000, with such opinion based on a
reconciliation of value estimates derived from the Sales Comparison
Approach and the Income Capitalization Approach to valuation.
10. The terms of the Loan have been initially reviewed and,
thereafter, will be monitored by John Ward, an attorney in Washington,
DC, who will act as the Plan's Qualified Independent Fiduciary. Mr.
Ward has no present or prospective interest in the Loan transaction,
and he is unrelated to the Union. Mr. Ward has represented labor unions
and their associated benefit funds throughout his career, and he has
focused his professional energies on tax and ERISA matters faced by
those organizations. During 2009, Mr. Ward derived less than one
percent of his gross revenue from parties in interest with respect to
the Plan. Mr. Ward represents that he is qualified to act as the
Qualified
[[Page 38563]]
Independent Fiduciary, and he understands and accepts the duties,
responsibilities and liabilities in acting as a fiduciary with respect
to the Plan. In this regard, Mr. Ward states (a) that the Loan is both
an appropriate investment for the Plan and in the best interest of the
Plan and its participants and beneficiaries and (b) that he will
continue to monitor the Plan's repayment of the Loan and will take
whatever actions are necessary to protect the interest of the Plan and
its participants and beneficiaries.
11. As part of his review of the Loan transaction, Mr. Ward engaged
two additional Qualified Independent Appraisers, George Calomiris, AIA,
CDS, Certified General Appraiser, and Kevin Boyle, Certified
Residential Appraiser, to confirm the accuracy of the initial appraisal
performed by Mr. Iatarola. Messrs. Calomiris and Boyle are affiliated
with the real estate appraisal firm of William Calomiris Company, LLC,
located in Washington, DC. They have no present or prospective interest
in the Loan transaction, and they are unrelated to the Plan and the
Union. During 2009, Messrs. Calomiris and Boyle derived less than one
percent of their gross revenue from parties in interest with respect to
the Plan. In developing their opinion on the accuracy of Mr. Iatarola's
appraisal, Messrs. Calomiris and Boyle visited the Property, reviewed a
valuation report prepared by Mr. Iatarola, and examined relevant public
records. In an appraisal report dated February 19, 2010, Messrs.
Calomiris and Boyle confirmed the opinion of Mr. Iatarola that the
Property would have a fair market value of at least $4,000,000, which
would place the loan-to-value ratio at 28%.
12. Mr. Ward investigated the interest rates that would be
available to the Plan were it to secure a fixed rate loan from an
unrelated lender. In so doing, he noted that not only would any
potential lender benefit from the 28% loan to value ratio, thereby
making any potential loan highly secured, but that the Plan had
consistently demonstrated over the past five (5) years that it was
willing and able to make monthly mortgage payments on time and in full,
with more than sufficient annual income to easily cover monthly
obligations under nearly any potential mortgage loan.
Mr. Ward also opined that the current commercial interest rates
would be higher than the rate charged by the Union under the Loan.
Specifically, Mr. Ward sampled senior loan officers at PNC Bank and
Wachovia Bank/Wells Fargo, and such senior loan officers indicated that
neither bank would be able to match the terms provided in the Loan. In
this regard, the PNC Bank representative informed Mr. Ward that a fixed
rate loan at 4% for 15 years seemed rather low and that a 6% rate would
be more realistic for a 15 year commercial loan. The Wachovia Bank/
Wells Fargo representative concurred with the guidance offered by the
PNC Bank representative.
In conclusion, Mr. Ward opined that (a) the Loan is both an
appropriate investment for the Plan and in the best interest of the
Plan and its participants and beneficiaries; and (b) the terms and
conditions of the Loan are more favorable to the Plan and its
participants and beneficiaries than the terms of similar loans which
might be made to the Plan by an unrelated party in an arm's length
transaction.\12\
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\12\ In an addendum to his Qualified Independent Fiduciary
report, dated May 6, 2010, Mr. Ward stated that he was unaware that
the interest rate for the Original Loan at its outset had been 5.5%,
with the interest rate being lowered to 3.5% at a later date.
Nevertheless, he explained that the fact that the Original Loan's
interest rate had been reduced from 5.5 to 3.5 percent would have no
bearing on his opinion regarding the appropriateness of the Loan.
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13. In summary, the Plan represents that the transaction satisfies
the statutory criteria for an administrative exemption that are
contained in section 408(a) of the Act for the following reasons: (a)
The terms and conditions of the Loan will be at least as favorable to
the Plan as those which the Plan could obtain in an arm's length
transaction with an unrelated party; (b) the Trustees have determined
in writing that the Loan is appropriate for the Plan and in the best
interests of the Plan's participants and beneficiaries; (c) Mr. Ward,
as the Plan's Qualified Independent Fiduciary, has reviewed the terms
of the Loan and has determined that the Loan would be protective of and
in the best interests of the Plan and its participants and
beneficiaries; (d) in determining the fair market value of the
Property, Mr. Ward has obtained an appraisal from a Qualified
Independent Appraiser and has ensured that the appraisal prepared by
the Qualified Independent Appraiser is consistent with sound principles
of valuation; (e) Mr. Ward will monitor the Loan, as well as the terms
and conditions of the proposed exemption (if granted), and will take
whatever actions are necessary to safeguard the interests of the Plan
and its participants and beneficiaries under the Loan; (f) the Loan
will be repaid by the Plan solely with the funds the Plan retains after
paying all of its operational expenses; and (g) the Plan will not pay
any fees or other expenses in connection with the servicing or
administration of the Loan.
FOR FURTHER INFORMATION CONTACT: Mr. Brian Shiker of the Department,
telephone (202) 693-8552. (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.
[[Page 38564]]
Signed at Washington, DC, this 28th day of June, 2010.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2010-16096 Filed 7-1-10; 8:45 am]
BILLING CODE 4510-29-P