[Federal Register Volume 75, Number 193 (Wednesday, October 6, 2010)]
[Notices]
[Pages 61932-61957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24892]
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Part III
Department of Labor
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Employee Benefits Security Administration
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Proposed Exemptions From Certain Prohibited Transaction Restrictions;
Notice
Federal Register / Vol. 75 , No. 193 / Wednesday, October 6, 2010 /
Notices
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions From Certain Prohibited Transaction
Restrictions
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).
This notice includes the following proposed exemptions: D-11576,
Bank of America, NA et al.; D-11591, Citigroup Inc. and its affiliates
(Citigroup), the Citigroup 401(k) Plan, the Citibuilder 401(k) Plan for
Puerto Rico the (Citibuilder Plan) and collectively with the Citigroup
401(k) Plan, the Participant Directed Plans, the Citigroup Pension Plan
(and collectively with the Participant Directed Plans, the Plans) (the
Applicants); and D-11611, The West Coast Bancorp 401(k) Plan (the
Plan); et al.
DATES: 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.
ADDRESSES: 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.
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.
SUPPLEMENTARY INFORMATION:
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).
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.
Bank of America, NA et al. Located in Charlotte, North Carolina.
Exemption Application Number D-11576
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, as amended (ERISA or the Act), and section 4975(c)(2) of
the Internal Revenue Code of 1986, as amended (the Code), and in
accordance with the procedures set forth in 29 CFR Part 2570, Subpart B
(55 FR 32836, 32847, August 10, 1990).\1\
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\1\ For purposes of this proposed exemption, references to
section 406 of ERISA should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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Section I. Covered Transactions
If the proposed exemption is granted, the restrictions of sections
406(a) and 406(b) of the Act and the sanctions resulting from the
application of 4975 of the Code, by reason of section 4975(c)(1)(A)
through (F) of the Code, shall not apply: (a) Effective January 1,
2009: (1) To the operation of the RPT Stable Value Agreements, pursuant
to the terms thereof, and to the receipt of a fee by BANA in connection
therewith; and (2) to transactions under the RPT Stable Value
Agreements (the RPT Wrap-Related Transactions); (b) effective April 23,
2009: (1) To the execution of the RPT Special Purpose Wrap Agreement;
(2) to the operation of the RPT Special Purpose Wrap Agreement,
pursuant to the terms thereof, and to the receipt of a fee by BANA in
connection therewith; and (3) to transactions under the RPT Special
Purpose Wrap Agreement (the Special Purpose Wrap-Related Transactions);
and (c) effective January 1, 2009: (1) To the operation of the
Separately Managed Account Wrap Agreements, pursuant to the terms
thereof, and to the receipt of a fee by BANA in connection therewith;
and (2) to transactions under the Separately Managed Account Wrap
Agreements (the Separately Managed Account Wrap-Related Transactions),
provided that the following conditions, as applicable, have been met.
Section II. Conditions Applicable to Transactions Described in Section
I(a)
(a) Effective June 1, 2009, B1ackRock Advisors may change the
formula for calculating the Crediting Rate with respect to the Global
Wrap Account or the Global Buy and Hold Account (either, a Global
Account) only after obtaining prior approval from:
(1) Each financial institution that has entered into a wrap
agreement covering assets included in the applicable Global Account;
and
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(2) The Independent Fiduciary, after BlackRock Advisors has
provided the Independent Fiduciary with any information that the
Independent Fiduciary has reasonably requested in determining whether
to approve the proposed change in the Crediting Rate formula;
(b) BANA may not reset a Crediting Rate attributable to a Global
Account more frequently than on a monthly basis unless:
(1) A crediting rate attributable to a non-BANA wrap agreement
covering assets in the same Global Account is reset more frequently
than on a monthly basis; and
(2) BANA resets the Crediting Rate at the same time, and in the
same manner, as such other non-BANA wrap agreement crediting rate;
(c) Each financial institution entering into a wrap agreement
covering assets included in a Global Account obtains information from
BlackRock Advisors on a monthly basis regarding the investments
included in such Global Account. This information must be sufficiently
detailed to enable the financial institution to independently verify
that the applicable Crediting Rate was calculated properly;
(d) The fee received by BANA in connection with the BANA RPT Global
Wrap Agreement or the BANA RPT Buy and Hold Wrap Agreement will be
reasonable relative to market conditions and risks, as determined
annually by the Independent Fiduciary. Notwithstanding the above, in no
event shall the fee received by BANA under the BANA RPT Global Wrap
Agreement or the BANA RPT Buy and Hold Wrap Agreement exceed the
maximum percentage fee paid to any other financial institution pursuant
to a wrap agreement covering assets in the applicable Global Wrap
Account or the Global Buy and Hold Account, as relevant;
(e) The Trustee may trigger immunization with respect to the BANA
RPT Global Wrap Agreement only if:
(1) The Trustee triggers immunization with respect to another wrap
agreement covering assets in the Global Wrap Account immediately prior
to, or at the same time as, the Trustee triggers immunization with
respect to the BANA RPT Global Wrap Agreement; or
(2) A financial institution not affiliated with BANA triggers
immunization with respect to assets in the Global Wrap Account
immediately prior to, or at the same time as, the Trustee triggers
immunization with respect to the BANA RPT Global Wrap Agreement; or
(3) The Trustee determines that BANA is no longer financially
responsible and the Independent Fiduciary determines that immunization
is in the interests of Plans invested in RPT;
(f) Assets held in RPT will be valued at their current fair market
value on a daily basis utilizing the following BlackRock firm-wide
approved valuation process:
(1) Valuations will be performed without regard to whether the
security is held in RPT or another account or commingled vehicle
advised by BlackRock;
(2) Valuations will be based on the price that may be obtained in a
current arm's-length sale to an unrelated third party;
(3) BlackRock will first obtain prices for securities from
independent third-party sources, including index providers, broker-
dealers and independent pricing services. BlackRock will maintain a
hierarchy that prioritizes pricing sources by asset class or type and
will value securities based on the price generated by the highest
priority source. The hierarchy may vary by asset class or type, but not
for a particular security;
(4) If no third-party sources are available to value a security or
the price generated by the third-party falls outside specified
statistical norms and after review BlackRock determines that such price
is not reliable, BlackRock will value the security using an analytic
methodology in accordance with its written valuation policy. If
BlackRock values a security using such analytic methodology, the
Independent Fiduciary will review that methodology and valuation and
will obtain its own valuation if it deems appropriate; and
(5) Values determined in accordance with (1) through (4) above will
be provided to each financial institution that has entered into a wrap
agreement covering assets in the Global Wrap Account or the Global Buy
and Hold Account, as the case may be;
(g) Each financial institution that has entered into a wrap
agreement covering assets in the Global Wrap Account and/or the Global
Buy and Hold Account, including BANA, may raise an objection regarding
a particular security's valuation, regardless of the source of such
valuation. Once an objection is raised, wrap providers other than BANA
may determine a new valuation for such security and BANA must accept
this new valuation, provided that BANA is given reasonably satisfactory
documentation supporting the new valuation;
(h) Prior to a Plan sponsor's decision to include RPT as an
investment option for its Plan's participants, the Trustee will provide
the Plan sponsor with the following:
(1) RPT's Declaration of Trust (as amended and restated as of April
23, 2009, and as may be further amended from time to time);
(2) A purchase agreement to be entered into by the Plan fiduciary
and the Trustee;
(3) Upon request, a copy of the Annual Report for RPT and a fact
sheet describing RPT's investment objective and strategy and a
performance analysis; and
(4) A copy of this proposed exemption or, if granted, a copy of the
final exemption;
(i) The Trustee will provide the following ongoing disclosures to
Plan fiduciaries regarding a Plan's investment in RPT:
(1) The Annual Report for RPT; and
(2) The Plan's Investment Summary and Accounting;
(j) Plan participants will be provided the following disclosures
regarding their investment in RPT:
(1) Prior to and following their initial investment, information
describing the investment objectives and performance of RPT; and
(2) A statement, delivered at least quarterly, that sets forth the
value of the participant's account contributions, withdrawals,
distributions, loans and change in value since the prior statement;
(k) The Independent Fiduciary must receive a copy of any RPT Stable
Value Agreement amendment prior to the effective date of such
amendment. The Independent Fiduciary must review and approve the
amendment prior to its implementation, except that no such review and
approval shall be required for an amendment that is purely ministerial
in nature;
(l) The dollar amount of Global Wrap Account assets covered by the
BANA RPT Global Wrap Agreement shall not exceed 50% of the total assets
held in such Account, and the terms associated with the BANA RPT Global
Wrap Agreement at the time such Agreement was entered into, amended,
modified or renewed shall be no less favorable to RPT than the terms
associated with comparable agreements with unrelated parties;
(m) The dollar amount of Global Buy and Hold Account assets covered
by the BANA RPT Buy and Hold Wrap Agreement shall not exceed 60% of the
total assets held in such Account, and the terms associated with the
BANA RPT Buy and Hold Wrap Agreement at
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the time such Agreement was entered into, amended, modified or renewed
shall be no less favorable to RPT than the terms associated with
comparable agreements with unrelated parties; and
(n) Any RPT Wrap-Related Transaction that involves: (1) the
exercise by BANA, the Trustee, or BlackRock Advisors of their rights
under the RPT Stable Value Agreements; or (2) the performance by BANA,
the Trustee, or BlackRock of their obligations under the RPT Stable
Value Agreements, shall be subject to prior review and approval by the
Independent Fiduciary if such exercise or performance affects the
Crediting Rate or would otherwise have an adverse impact on the book
value of a participant's or beneficiary's investment in RPT.
Section III. Conditions Applicable to Transactions Described in Section
I(b)
(a) Below Investment Grade Securities will be transferred
automatically to a RPT account (the Type D1 Account) and covered by the
RPT Special Purpose Wrap Agreement. The RPT Special Purpose Wrap
Agreement shall cover up to in the aggregate $200 million of the
following:
(1) Book value of Downgraded Securities that have not been sold;
and/or
(2) Aggregate unamortized realized losses with respect to sold
Downgraded Securities;
(b) The Minimum Ratio shall be maintained;
(c) The total book value of the assets included in the Type D1
Account and covered by the RPT Special Purpose Wrap, including the
Permitted Securities, will not exceed $700 million without the prior
written consent of the Trustee, BlackRock Advisors, BANA and the
Independent Fiduciary;
(d) The crediting rate with respect to the Type D1 Account (the
Type D1 Account Crediting Rate) shall be 0.00% at times when there are
unamortized losses (whether realized or unrealized) attributable to
Downgraded Securities in the Type D1 Account, calculated in accordance
with the provisions of the RPT Special Purpose Wrap Agreement. In the
event there are no unamortized losses (i.e., neither realized nor
unrealized) recorded to the Type D1 Account which relate to Downgraded
Securities, the Type D1 Account Crediting Rate shall be determined in
accordance with a formula that has been reviewed by the Independent
Fiduciary;
(e) Effective June 1, 2009, BlackRock Advisors may change the
formula for calculating the Type D1 Account Crediting Rate only after
obtaining prior approval from BANA and the Independent Fiduciary.
BlackRock Advisors shall provide the Independent Fiduciary with any
information it may reasonably request in determining whether to approve
a proposed change in the Type D1 Account Crediting Rate formula;
(f) The Type D1 Account Crediting Rate will not be reset more
frequently than on a monthly basis;
(g) Permitted Securities will have a maximum duration of 3.5 years
at the time of purchase;
(h) The fee charged by BANA for the RPT Special Purpose Wrap will
be reasonable relative to market conditions and risks, as determined
annually by the Independent Fiduciary. Notwithstanding the above, in no
event shall the fee received by BANA under the BANA RPT Global Wrap
Agreement or the BANA RPT Buy and Hold Wrap Agreement exceed the
maximum percentage fee paid to any other financial institution pursuant
to a wrap agreement covering assets in the applicable Global Wrap
Account or the Global Buy and Hold Account, as relevant, as determined
annually by the Independent Fiduciary. Notwithstanding the above, in no
event shall such fee exceed 15 basis points per annum of the total book
value of assets included in the Type D1 Account;
(i) Assets covered by the RPT Special Purpose Wrap Agreement will
be valued in accordance with the methodology specified in section II(f)
above, provided, however, that if the Independent Fiduciary obtains a
valuation, such valuation will be binding on BANA;
(j) The Trustee has the right to immunize the portfolio of
securities included in the Type D1 Account only if BANA elects to
terminate the RPT Special Purpose Wrap Agreement, or if BANA defaults
under the RPT Special Purpose Wrap Agreement. If an immunization
election becomes effective (the RPT Special Purpose Immunization Date),
the RPT Special Purpose Wrap Agreement would terminate on the later of:
(1) The date that is the number of years after the RPT Special Purpose
Immunization Date which does not extend beyond the modified duration
(as defined in the RPT Special Purpose Wrap Agreement) of the
underlying assets on the RPT Special Purpose Immunization Date; or (2)
the first date on which the market value of the underlying assets
equals or exceeds the book value under the wrap agreement;
(k) No Below Investment Grade Securities will be added to the RPT
Special Purpose Wrap Agreement after April 23, 2011, unless otherwise
agreed by BANA, the Trustee, and the Independent Fiduciary. No party to
the RPT Special Purpose Wrap Agreement is obligated to amend or extend
the RPT Special Purpose Wrap Agreement;
(l) The tasks performed by the Independent Fiduciary will include:
(1) Determining whether the RPT Special Purpose Wrap Agreement and
the portfolio arrangement for the Type D1 Account (including the wrap
fee payable to BANA, the Minimum Ratio, the prefunding of the RPT
Special Purpose Wrap Agreement and the formula for resetting the Type
D1 Account Crediting Rate) are prudent and in the best interest of
participants and beneficiaries of Plans investing in RPT;
(2) Reviewing valuations generated by BlackRock (in connection with
the RPT Special Purpose Wrap Agreement) in any situation where
BlackRock is unable to obtain a reliable valuation from independent
third party sources. If, after such review, the Independent Fiduciary
deems appropriate, the Independent Fiduciary will obtain an independent
valuation which will be binding on the parties;
(3) Reviewing and monitoring whether the Type D1 Account Crediting
Rate is calculated correctly;
(4) Monitoring the addition and removal of Below Investment Grade
Securities and any changes in Permitted Securities in the Type D1
Account, and opining, in a written report, whether such addition,
removal or change is appropriate;
(5) If BANA objects to the calculation by the Trustee or its
designee of the Type D1 Account Crediting Rate or the information used
to calculate the Type D1 Account Crediting Rate, the Independent
Fiduciary will make a conclusive and binding determination regarding
such calculation or information;
(6) Determining whether to approve any proposed change to the Type
D1 Account Crediting Rate formula, including any proposed adjustment to
the duration component of the Type D1 Account Crediting Rate formula;
(7) No later than April 30, 2011, working with BANA, BlackRock, and
the Trustee to review and determine whether additional Below Investment
Grade Securities may be transferred to the Type D1 Account and be
covered by the RPT Special Purpose Wrap Agreement;
(8) Making an initial and, thereafter, annual determination
regarding whether the fee described in paragraph (h) of this section is
reasonable relative to the specific attributes of the RPT Special
Purpose Wrap Agreement;
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(9) Making an annual determination regarding whether the continued
maintenance of the RPT Special Purpose Wrap Agreement is appropriate
and in the interest of Plans;
(10) Making a monthly determination regarding whether the
appropriate Type D1 Crediting Rate formula is being used; and
(11) Reviewing and approving any amendment to a RPT Special Purpose
Wrap Agreement consistent with paragraph (n) of this section;
(m) Any Special Purpose Wrap-Related Transaction that involves: (1)
The exercise by BANA, the Trustee, or BlackRock Advisors of their
rights under the RPT Special Purpose Wrap Agreement; or (2) the
performance by BANA, the Trustee, or BlackRock of their obligations
under the RPT Special Purpose Wrap Agreement, shall be subject to prior
review and approval by the Independent Fiduciary if such exercise or
performance affects the Type D1 Crediting Rate or otherwise would have
an adverse impact on the book value of a participant's or beneficiary's
investment in RPT; and
(n) The Independent Fiduciary must receive a copy of any RPT
Special Purpose Wrap Agreement amendment prior to the effective date of
such amendment. The Independent Fiduciary must review and approve the
amendment prior to its implementation, except that no such review and
approval shall be required for an amendment that is purely ministerial
in nature.
Section IV. Conditions Applicable to Transactions Described in Section
I(c)
(a) Effective June 1, 2009, BlackRock Advisors may change the
formula for calculating the Crediting Rate with respect to each
Separately Managed Account Wrap Agreement only after obtaining prior
approval from BANA and the Independent Fiduciary. BlackRock Advisors
shall provide the Independent Fiduciary with any information it may
reasonably request in determining whether to approve a proposed change
in the Crediting Rate formula;
(b) Effective June 1, 2009, the Crediting Rate will be reset no
more frequently than on a monthly basis;
(c) BANA will not receive a fee under the BANA Wal-Mart Separately
Managed Wrap Agreement in excess of the maximum percentage fee received
by any other Tier 3 Wrap Provider in the Wal-Mart Separately Managed
Account; and BANA will not receive a fee under the BANA Hertz
Separately Managed Wrap Agreement in excess of the maximum percentage
fee received by any other financial institution that has entered into a
wrap agreement covering assets in the Hertz Separately Managed Account;
(d) Assets covered under each Separately Managed Account Wrap
Agreement will be valued in accordance with the same methodology
specified in section II(f) above; provided, however, that if BANA
objects to the valuation of any asset, the Independent Fiduciary will
make a binding determination of the value of the asset;
(e) The tasks performed by the Independent Fiduciary will include:
(1) Conducting a monthly review of the Crediting Rate, including,
confirming: (A) The book value of the portfolio of assets wrapped by
each Separately Managed Account Wrap Agreement; (B) the valuation of
securities; (C) the duration of securities; (D) the market yield of
securities; and (E) that the Crediting Rate formula was calculated
properly;
(2) Reviewing and approving any proposed amendment to a Separately
Managed Wrap Agreement consistent with paragraph (i) below;
(3) Reviewing any exercise of contract provisions by any of BANA,
BlackRock Advisors or, in the case of the BANA Wal-Mart Separately
Managed Wrap Agreement, the Trustee, and analyze its potential impact
on investors;
(4) Evaluating any changes to the fees paid to BANA under each
Separately Managed Account Wrap Agreement to determine reasonableness
relative to market conditions and risks; and
(5) Providing quarterly reports to BlackRock Advisors and to the
named fiduciaries of the Wal-Mart Plan and the Hertz Plan. These
reports must certify that the Independent Fiduciary has reviewed the
factors described above and state whether BlackRock Advisors has
complied with all requirements of the contract. The Independent
Fiduciary will inform the named fiduciaries of a Plan if it believes
that BANA or BlackRock Advisors has taken any actions that are not in
the best interests of the participants and beneficiaries in the Wal-
Mart Plan or the Hertz Plan, as relevant;
(f) The Separately Managed Account Wrap Agreements shall authorize
the Independent Fiduciary to:
(1) Review and approve any proposed changes in the formula for
calculating the Crediting Rate, prior to implementation of any such
change;
(2) If BlackRock Advisors generates its own valuation, review the
valuation, and if the Independent Fiduciary deems appropriate, obtain
an independent valuation, which shall be binding on the parties,
subject to BANA's right to raise an objection to any valuation;
(3) If BANA objects to the valuation of any asset, make a binding
determination of the value of the asset;
(g) The named fiduciaries (or their authorized representatives) for
the Wal-Mart Plan have the right to terminate BlackRock Advisors, as
investment manager for the Wal-Mart Separately Managed Account, on 90
days' written notice. The named fiduciaries (or their authorized
representatives) for the Hertz Plan have the right to terminate
B1ackRock Advisors as investment manager for the Hertz Separately
Managed Account, on 30 days' written notice;
(h) Any Separately Managed Account Wrap-Related Transaction that
involves: (1) The exercise by BANA, the Trustee, or BlackRock Advisors
of their rights under a Separately Managed Account Wrap Agreement; or
(2) the performance by BANA, the Trustee, or BlackRock of their
obligations under a Separately Managed Wrap Agreement: shall be subject
to prior review and approval by the Independent Fiduciary if such
exercise or performance affects the Crediting Rate or otherwise would
have an adverse impact on the book value of a participant's or
beneficiary's investment in RPT;
(i) The Independent Fiduciary must receive a copy of any amendment
contemplated for a Separately Managed Wrap Agreement. The Independent
Fiduciary must review and approve the amendment prior to its
implementation, except that no such review and approval shall be
required for an amendment that is purely ministerial in nature; and
(j) BlackRock may not terminate a Separately Managed Account Wrap
Agreement without the prior approval of the Independent Fiduciary.
Section V. General Conditions
(a) BlackRock Advisors shall maintain in the United States the
records necessary to enable the persons described in (b) below to
determine whether the conditions of this exemption, if granted, were
met, except that:
(1) If the records necessary to enable the persons described in (b)
below to determine whether the conditions of the exemption have been
met are lost or destroyed, due to circumstances beyond the control of
BlackRock Advisors, 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 BlackRock Advisors shall be
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
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(b) of the Code if the records have not been maintained or are not
available for examination as required by paragraph (b) below;
(b) Except as provided in paragraph (c) of this section V and
notwithstanding the provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in section V(a) are
unconditionally available for examination during normal business hours
at their customary location to the following persons or an authorized
representative thereof:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(2) Any fiduciary of a Plan participating in RPT or the Hertz Plan
or the Wal-Mart Plan;
(3) Any participant or beneficiary of a Plan participating in RPT
or the Hertz Plan or the Wal-Mart Plan; or
(4) The Independent Fiduciary.
(c) None of the persons described above in paragraphs (2), (3), and
(4) of paragraph (b) of this section V shall be authorized to examine
trade secrets of BlackRock, BANA, the Trustee or any of their
Affiliates, or any commercial or financial information which is
privileged or confidential. Should BlackRock Advisors refuse to
disclose information on the basis that such information is exempt from
disclosure, BlackRock Advisors 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; and
(d) Promptly following any publication of a final exemption in the
Federal Register, the Trustee or BlackRock Advisors will provide a copy
of the final exemption to the Plan sponsor of each Plan invested in
RPT, and to the Plan sponsor of the Hertz Plan, and to the Plan sponsor
of the Wal-Mart Plan.
Section VI. Definitions
(a) The term Act means: The Employee Retirement Income Security Act
of 1974, as amended;
(b) The term Affiliate means: Any person, directly or indirectly,
through one or more intermediaries, controlling, controlled by or under
common control with such person;
(c) The term BANA means: Bank of America, N.A. and its Affiliates;
(d) The term BANA Hertz Separately Managed Wrap Agreement means:
The agreement dated as of July 27, 2007 (and amended effective as of
December 31, 2008) among BANA, BlackRock Advisors (as investment
manager for a portion of the assets of the Hertz Plan), and the Bank of
New York Mellon (the successor by operation of law to Mellon Bank N.A.,
and the trustee of the trust created pursuant to the Hertz Plan), as
such agreement may be amended from time to time, pursuant to which BANA
provides a book value benefit responsive facility with respect to a
portion of the assets held in the Hertz Separately Managed Account;
(e) The term BANA RPT Buy and Hold Wrap Agreement means: The
agreement dated as of October 16, 1996, between Barclays Bank PLC and
the Trustee (as assigned to BANA as of April 1, 1998, and amended
effective as of December 31, 2008), as such agreement may be amended
from time to time, pursuant to which BANA provides a book value benefit
responsive facility with respect to an undivided portion of the assets
held in the Global Buy and Hold Account;
(f) The term BANA RPT Global Wrap Agreement means: The agreement
dated as of May 1, 2004 (and amended effective as of December 31, 2008)
between BANA and the Trustee, as such agreement may be amended from
time to time, pursuant to which BANA provides a book value benefit
responsive facility with respect to an undivided portion of the assets
held in the Global Wrap Account;
(g) The term BANA Wal-Mart Separately Managed Wrap Agreement means:
The agreement dated as of August 19, 2003 (and amended effective as of
December 31, 2008) between BANA and the Trustee, as such agreement may
be amended from time to time, pursuant to which BANA provides a book
value benefit responsive facility with respect to a portion of the
assets held in the Wal-Mart Separately Managed Account;
(h) The term Below Investment Grade Security means: Securities that
cease to be covered by a benefit responsive contract in RPT (other than
by the RPT Special Purpose Wrap Agreement) solely as a result of a
downgrade in the credit rating of the security to below Baa3, BBB- or
BBB- by Moody's Investors Services, Inc., Standard & Poor's Rating
Group, or Fitch Ratings, respectively; provided, however, that a Below
Investment Grade Security shall not include any security that is an
Impaired Security;
(i) The term BlackRock means: BlackRock, Inc.;
(j) The term BlackRock Advisors means: BlackRock Investment
Management, LLC and its Affiliates;
(k) The term Code means: The Internal Revenue Code of 1986, as
amended;
(l) The term Crediting Rate means: The crediting rate described in
sections II and IV that is used for purposes of determining the accrued
interest to be added to the book value of an individual's account
within RPT or the Separately Managed Accounts;
(m) The term Downgraded Security means: A Below Grade Investment
Security that is held in the Type D1 Account and covered by the RPT
Special Purpose Wrap Agreement;
(n) The term Global Buy and Hold Account means: The book account or
sub-account maintained within RPT for purposes of identifying certain
assets relating to the BANA RPT Buy and Hold Wrap Agreement;
(o) The term Global Wrap Account means: The book account or sub-
account maintained within RPT for purposes of identifying certain
assets relating to the BANA RPT Global Wrap Agreement;
(p) The term Hertz Plan means: The Hertz Corporation Income Savings
Plan;
(q) The term Hertz Separately Managed Account means: The separately
managed stable value account advised by BlackRock Advisors on behalf of
the Hertz Plan;
(r) The term Impaired Security means: (i) A security with respect
to which the issuer or guarantor has failed to make one or more
payments of principal or interest (after giving effect to any
applicable grace period under the terms of such security or prescribed
by any change in law, regulation, ruling or other governmental action);
(ii) a security with respect to which the principal or interest has
become due and payable before it otherwise would have been due or
payable other than: (x) By reason of a call or other prepayment of such
security made in accordance with its terms that does not constitute a
default under such security, or (y) solely on account of any change in
law, regulation, ruling or other governmental action; (iii) a security
where the rate of interest thereon has been reset other than: (x)
Pursuant to the original terms of such security, or (y) solely on
account of any change in law, regulation, ruling or other governmental
action; or (iv) a security with respect to which the issuer becomes
insolvent or institutes or has instituted against it a proceeding
seeking a judgment of insolvency or bankruptcy or any other relief
under any bankruptcy or insolvency law or other similar law affecting
creditor's rights;
(s) The term Independent Fiduciary means an entity that is: (1)
Experienced and knowledgeable in ERISA and the transactions and
arrangements described herein; (ii) independent of and unrelated to
BANA, Merrill,
[[Page 61937]]
BlackRock, and their Affiliates; and (iii) appointed to act on behalf
of Plans investing in RPT or the Separately Managed Accounts with
respect to the matters described herein. The Independent Fiduciary will
not be deemed to be independent of and unrelated to BANA, Merrill,
BlackRock, and their Affiliates if: (i) Such fiduciary directly or
indirectly controls, is controlled by or is under common control with
BANA, Merrill, or BlackRock; (ii) such fiduciary directly or indirectly
receives any compensation or other consideration in connection with any
transaction described in this exemption, if granted, other than for
acting as an Independent Fiduciary in connection with the transactions
described herein, provided that the amount or payment of such
compensation is not contingent upon, or in any way affected by, the
Independent Fiduciary's ultimate decision; and (iii) the annual gross
revenue received by the Independent Fiduciary, during any year of its
engagement, from BANA, Merrill, BlackRock, and any of their Affiliates,
exceeds five percent (5%) of the Independent Fiduciary's annual gross
revenue from all sources (for federal income tax purposes) for its
prior tax year;
(t) The term Minimum Ratio means: A ratio of 2.5 to 1.0 of market
value of Permitted Securities to the total unamortized unrealized and
realized losses with respect to Downgraded Securities;
(u) The term Permitted Securities means any security that: (i) Is a
U.S. Treasury debenture, a security issued by the Government National
Mortgage Association or a security guaranteed by the Federal Deposit
Insurance Corporation; and (ii) has a modified duration on the date of
purchase by RPT of 3.5 years or less;
(v) The term Plan means: An employee benefit plan within the
meaning of and subject to Title I of the Act or an individual
retirement account within the meaning of section 4975 of the Code;
(w) The term RPT means: The Merrill Lynch Retirement Preservation
Trust maintained by the Trustee;
(x) The term RPT Special Purpose Wrap Agreement means: The
agreement dated as of April 23, 2009, as amended, between BANA and the
Trustee, pursuant to which BANA provides a book value benefit
responsive facility with respect to an undivided portion of the assets
held in the Type D1 Account;
(y) The term RPT Stable Value Agreements means: The BANA RPT Global
Wrap Agreement and the BANA RPT Buy and Hold Wrap Agreement;
(z) The term Separately Managed Accounts means: The Hertz
Separately Managed Account and the Wal-Mart Separately Managed Account;
(aa) The term Separately Managed Account Wrap Agreements means: The
BANA Wal-Mart Separately Managed Wrap Agreement and the BANA Hertz
Separately Managed Wrap Agreement;
(bb) The term Type D1 Account means: The book account maintained
within RPT for purposes of identifying Downgraded Securities, including
unamortized losses with respect to Downgraded Securities that have been
sold, and Permitted Securities covered by the RPT Special Purpose Wrap
Agreement;
(cc) The term Tier 3 Wrap Provider means: A financial institution
that has entered into a wrap agreement with respect to assets held in
the Wal-Mart Separately Managed Account that will not be accessed for
purposes of making benefit payments until after two tiers of buffer
assets are accessed;
(dd) The term Trustee means: Bank of America, N.A.;
(ee) The term Wal-Mart Plan means: The Wal-Mart Profit Sharing and
401(k) Plan and the Wal-Mart Puerto Rico Profit Sharing and 401(k)
Plan;
(ff) The term Wal-Mart Separately Managed Account means: The
separately managed stable value account advised by BlackRock Advisors
on behalf of the Wal-Mart Plan;
(gg) The term Merrill means: Merrill Lynch & Co., Inc. and its
Affiliates;
(hh) The term RPT Wrap-Related Transaction means: (1) The
determination, calculation of and adjustments to the Crediting Rate,
and any changes to the Crediting Rate formula; (2) valuations of
securities covered by the BANA RPT Stable Value Agreements; (3) payment
of wrap fees and any changes to wrap fees; (4) the purchase and sale of
any security covered by the RPT Stable Value Agreements; (5) BANA's or
the Trustee's exercise of its right to immunize or terminate the RPT
Stable Value Agreements; (6) amendments to the RPT Stable Value
Agreements; and (7) any other exercise by BANA, the Trustee, or
BlackRock Advisors of their rights, or any performance by BANA, the
Trustee, or BlackRock of their obligations, under the Stable Value
Agreements;
(ii) The term Special Purpose Wrap-Related Transaction means: (1)
The transfer of Below Investment Grade Securities to the Type D1
Account; (2) the sale or transfer of Downgraded Securities out of the
Type D1 Account; (3) the purchase and sale of certain other securities
permitted to be held in the Type D1 Account; (4) transactions relating
to maintenance of a minimum ratio of Permitted Securities and
Downgraded Securities; (5) the determination, calculation of and
adjustments to the Type D1 Account Crediting Rate and any changes to
the Type D1 Account Crediting Rate formula; (6) valuations of
securities covered by the RPT Special Purpose Wrap Agreement; (7)
payment of and any changes to wrap fees; (8) BANA's or the Trustee's
exercise of its right to immunize or terminate the RPT Special Purpose
Wrap Agreement; (9) the entering into and amendment of the RPT Special
Purpose Wrap Agreement; and (10) any exercise by BANA, the Trustee, or
BlackRock Advisors of their rights, or any performance by BANA, the
Trustee, or BlackRock of their obligations, under the RPT Special
Purpose Wrap Agreement;
(jj) The term Separately Managed Account Wrap-Related Transaction
means: (1) The determination, calculation of and adjustments to the
Crediting Rate, and any changes to the Crediting Rate formula; (2)
valuations of securities covered by the Separately Managed Account Wrap
Agreements; (3) payment of wrap fees and any changes to wrap fees; (4)
the purchase and sale of any security covered by the Separately Managed
Account Wrap Agreements; (5) BANA's or the Trustee's exercise of its
right to terminate the Separately Managed Wrap Agreements; (6)
amendments to the Separately Managed Wrap Agreements; and (7) any other
exercise by BANA, the Trustee, or BlackRock Advisors of their rights,
or any performance by BANA, the Trustee, or BlackRock of their
obligations, under the Separately Managed Wrap Agreements.
Summary of Facts and Representations
1. Applicants
A. Bank of America, NA (BANA). BANA is a wholly-owned indirect
subsidiary of Bank of America Corporation (BAC). BANA is engaged in a
general consumer banking, commercial banking and trust business,
offering a wide range of commercial, corporate, international,
financial market, retail and fiduciary banking services.
B. Merrill Lynch & Co., Inc. (Merrill). Merrill is a holding
company that, through its affiliates, provides broker-dealer,
investment banking, financing, advisory, wealth management, insurance,
lending and related products and services. Merrill's subsidiaries
included Merrill Lynch Bank & Trust Co., FSB (MLTC). MLTC merged into
BANA during the fourth quarter of 2009.
[[Page 61938]]
C. BlackRock, Inc. (BlackRock). BlackRock is an investment
management firm that, as of December 31, 2008, had approximately $1.307
trillion in assets under management.
D. Merrill/BAC Merger. On September 15, 2008, BAC and Merrill
entered into an agreement and plan of merger pursuant to which,
effective as of the closing of the transactions contemplated thereby, a
new, wholly-owned subsidiary of BAC merged with and into Merrill (the
Merrill/BAC Merger). The Merrill/BAC Merger closed on January 1, 2009,
at which time Merrill became a wholly-owned subsidiary of BAC and an
affiliate of BANA.
E. Merrill/BlackRock Transaction. On September 29, 2006, Merrill
contributed Merrill Lynch Investment Managers, LLC and various other
assets and subsidiaries that comprised its investment management
business to BlackRock. As a result of that transaction (the Merrill/
BlackRock Transaction), from September 29, 2006, though December 26,
2008, Merrill held an approximate 49% ownership interest in BlackRock
and held 45% of the outstanding voting securities of BlackRock.
Pursuant to an exchange agreement between Merrill and BlackRock, dated
as of December 26, 2008, Merrill reduced its voting interest in
BlackRock to 4.9%. However, Merrill retained an approximate 49.5%
equity interest in BlackRock.
F. BlackRock/Barclays Acquisition. On December 1, 2009, BlackRock
acquired Barclays Global Investors. As part of this transaction,
Merrill Lynch's economic ownership of BlackRock was reduced to 34.2%.
Merrill Lynch currently has a 3.4% voting interest in BlackRock.
2. The Application
The application submitted by the Applicants includes the following:
An overview of stable value funds; a description of the Retirement
Preservation Trust (RPT) stable value fund; a request for retroactive
and prospective exemptive relief for the operation of, and certain
transactions under, two stable value wrap agreements entered into
between MLTC and BANA with respect to certain assets of the RPT; a
request for retroactive and prospective exemptive relief for the
execution and operation of, and certain transactions under, a ``special
purpose'' wrap agreement entered into between MLTC and BANA with
respect to certain assets of RPT; a request for retroactive and
prospective exemptive relief for the operation of and transactions
under two stable value wrap agreements entered into by BANA with
respect to single plan separately managed accounts advised by BlackRock
Advisers, a BlackRock affiliate, on behalf of the Hertz Plan and the
Wal-Mart Plan; and numerous representations by Fiduciary Counselors
Inc., who is currently the independent fiduciary (the Independent
Fiduciary) responsible for representing the interests of the Hertz
Plan, the Wal-Mart Plan, and employee benefit plans (Plans) investing
in RPT for purposes of the transactions described in this proposed
exemption, if granted.
Paragraphs 3-9. Applicants' Overview of Stable Value Funds
3. Stable value funds are intended as conservative investment
options that provide preservation of principal, liquidity and current
income at levels that are typically higher than those provided by money
market funds. To achieve this objective, stable value funds invest in
traditional and synthetic guaranteed investment contracts (GICs). A
traditional GIC is an investment contract that guarantees payments on
deposits at a specified rate and is typically purchased through an
insurance company. In a synthetic GIC structure, the plan or plan asset
fund retains title to an underlying portfolio of fixed income assets
and purchases a ``wrap agreement'' from a bank, insurance company or
other financial institution. Synthetic GICs permit diversification away
from the credit risk of an insurance company and provide an opportunity
to achieve higher returns through an actively managed portfolio.
4. Under the terms of standard wrap agreements, the wrap provider
agrees that payments to participants upon retirement, death,
disability, employment termination, hardship or transfer to a non-
competing investment alternative (generally referred to as ``benefit
responsive payments'') will be made based on ``book value,'' regardless
of fluctuations in the market value of the underlying portfolio of
assets. Book value generally represents the value of deposits (i.e.,
the principal amount invested) plus interest (accumulated at a
``credited rate'') minus withdrawals and minus adjustments for assets
that become impaired.\2\ This provision of book value accounting at the
participant level is the core feature of a stable value fund. However,
not all payments to participants are made at book value. For example,
withdrawals arising from a plan's decision to transfer to a competing
investment alternative, or certain actions initiated by a plan sponsor,
may be paid at market value, which could be less than book value
depending on the performance of the underlying investment portfolio.
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\2\ The Applicants describe an impaired security as including a
security with respect to which the issuer or guarantor has failed to
make one or more payments of principal or interest.
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5. A wrap agreement does not guarantee that the book value of the
wrapped assets will increase by a specified rate of return. Rather,
interest is credited to the underlying portfolio based on a formula
that is designed to equal the actual total rate of return on the
underlying portfolio over time, while smoothing the gains and losses.
To achieve this smoothing, the difference between the market value of
the underlying portfolio and the book value of the underlying portfolio
is amortized through periodic adjustments to the rate at which interest
is credited to the book value of the underlying portfolio. The rate at
which interest is credited is determined by means of a formula (the
crediting rate formula) which takes into account the yield to maturity
and the duration of the underlying portfolio as well as the ratio of
the market value of the underlying portfolio to the book value.
6. Stable value funds generally include: (1) a liquidity fund that
may or may not be covered by a wrap agreement; and (2) multiple
portfolios of assets, each covered by a different wrap agreement. The
wrap agreements include rules establishing the priority for obtaining
cash for withdrawals from the assets included in the stable value fund.
Generally, these rules require that withdrawals be first met from new
cash and then from the liquidity fund. Once these sources are
exhausted, withdrawals are funded by selling securities in wrapped
portfolios. Thus, for example, in the event there are significant
participant withdrawals during a bond-market downturn (an environment
in which there could be a significant difference between the wrap
contract book value and the market value of the wrapped assets) the
stable value fund would first access liquid assets in the fund in an
attempt to make book value payments. Once those are exhausted, wrapped
assets would be sold in a pre-specified order to provide liquidity
needed to make book value payments. If all of the assets covered by a
particular wrap contract were sold, and if the proceeds were
insufficient to meet the book value payment, the wrap provider would
pay the difference between the sale proceeds and the book value under
the wrap contract before securities in the next lower tier would be
sold to fund withdrawals.
7. Wrap agreements can generally be terminated by either party
(i.e., the
[[Page 61939]]
trustee of the stable value fund or the wrap provider) at market value.
However, most wrap agreements have immunization provisions whereby if
the wrap agreement is terminated: (1) More conservative investment
guidelines (i.e., more conservative than the guidelines in effect
before the immunization) will apply to the underlying portfolio; and
(2) the wrap provider will continue to provide book value coverage
until a date that is generally determined by reference to the
underlying portfolio. If wrap contracts were terminable by the wrap
provider on short notice at a time when the market value of the wrapped
assets was below the wrapped contract book value, and another wrap
provider could not be found as a substitute, the unwrapped assets would
be immediately revalued down to their fair market value. Immunization
is a ``middle ground,'' and provides a means of winding down and
terminating a contract that otherwise would be ``evergreen.''
Immunization effectively permits an open-ended contract to be converted
to a contract with a deferred termination date. During the immunization
period, the wrapped contract continues to be ``benefit responsive'' and
investors continue to receive payments at book value.
8. Fees for wrap agreements are generally based on a percentage of
the book value of assets covered by a wrap agreement. The fee is
frequently paid from the assets of the Plan or Plan asset fund. The
amount of the fee will vary depending upon the risk taken and the
market conditions when the wrap agreement is negotiated. Since book
value payments generally could occur when investments are moved to
another non-competing investment option, when retirees or other
inactive participants withdraw money from a plan and when participants
take in-service withdrawals, book value payments are neither
predictable nor controllable by the wrap provider. Notwithstanding that
wrap contracts are structured in a manner that is intended to mitigate
the risk of higher than expected or untimely participant withdrawals,
the risk remains greater than zero. Fees for wrap agreements would be
significantly higher if the wrap provider guaranteed the actual
performance of the assets wrapped in circumstances beyond those
described above.
9. In the current distressed economic climate, the number of
financial institutions that are willing to enter into wrap agreements
has declined. To the extent wrap coverage can be obtained, the fees for
providing such coverage have significantly increased from the fees
generally available during the past ten years.
Paragraphs 10-22. Applicants' Description of RPT
10. RPT is a ``stable value'' fund with approximately $11.7 billion
book value of assets as of December 31, 2008. Payments to participants
(or beneficiaries) upon retirement, death, disability, employment
termination, hardship or transfer to a non-competing investment
alternative are generally based on book value, such that a participant
in RPT will receive his invested principal and interest at a crediting
rate, as described in further detail below, even if the actual market
value of the underlying assets is less.
11. Bank of America, N.A. (hereinafter, either BANA or the Trustee)
is the trustee of RPT. BlackRock Advisers, a wholly-owned subsidiary of
BlackRock, is an investment adviser to RPT. The assets of RPT are
divided into several portfolios, which include an actively managed
portfolio with approximately $2.8 billion book value of assets (the
Actively Managed Account) and a buy and hold portfolio with
approximately $1.6 billion book value of assets (the Global Buy and
Hold Account).
12. In connection with the operation of RPT, the Trustee has
entered into stable value wrap agreements with banks and other
financial institutions to provide benefit responsive facilities with
respect to certain assets of RPT. BANA is one of several financial
institutions that have entered into stable value wrap agreements with
the Trustee under RPT. In this regard, prior to the Merrill/BAC Merger,
BANA had entered into two separate wrap agreements with the Trustee
under RPT. One agreement, dated May 1, 2004, provides a benefit
responsive facility with respect to the Actively Managed Account (the
BANA RPT Global Wrap Agreement). The other agreement, dated October 16,
1996 (assigned by Barclays Bank PLC to BANA effective April 1, 1998,
and amended effective as of December 31, 2008), provides a benefit
responsive facility with respect to the Global Buy and Hold Account
(the BANA RPT Buy and Hold Wrap Agreement).
13. The BANA RPT Global Wrap Agreement is one of four wrap
agreements covering assets in a global wrap account (the Global Wrap
Account). The Global Wrap Account represents approximately 24% of the
total book value of the assets of RPT. The assets in the Global Wrap
Account are actively managed. Under this wrap agreement, which RPT and
BANA entered into prior to the Merrill/BAC Merger, BANA provide benefit
responsive coverage for approximately 27% of the book value of the
assets credited to the Global Wrap Account. Banks and financial
institutions unaffiliated with BANA have entered into wrap agreements
with the Trustee providing coverage for approximately 73% of the book
value of the assets in the Global Wrap Account. The assets in the
Global Wrap Account covered by the BANA RPT Global Wrap Agreement are
not segregated from the assets in the Global Wrap Account covered by
the other wrap agreements. Each wrap agreement covers a specified
percentage of the book value of the assets in the Global Wrap Account
as a whole. In this regard, the BANA RPT Global Wrap Agreement provides
a benefit responsive wrap with respect to approximately 5.5% of the
total book value of the assets of RPT.
14. Under the BANA RPT Buy and Hold Wrap Agreement, prior to
December 31, 2008, BANA provided a benefit responsive facility with
respect to a segregated ``buy and hold'' portfolio of assets of RPT,
with no other wrap provider providing a benefit responsive facility
with respect to this portfolio. Effective as of December 31, 2008, the
Applicants amended the BANA RPT Buy and Hold Wrap Agreement in a manner
that: (a) Combined the ``buy and hold'' portfolio covered by the BANA
RPT Buy and Hold Wrap Agreement with a portfolio of assets of RPT
covered by a ``buy and hold'' benefit responsive wrap agreement between
the Trustee and another unaffiliated wrap provider (Global Buy and Hold
Wrap Provider 2) to form the Global Buy and Hold Account; and (b)
provides that BANA will provide coverage for 50% of the book value of
the assets held in the Global Buy and Hold Account. Global Buy and Hold
Wrap Provider 2's wrap agreement with the Trustee was amended similarly
to provide that it will provide coverage for 50% of the book value of
the assets held in the Global Buy and Hold Account. As is the case with
the BANA RPT Global Wrap Agreement, the assets in the Global Buy and
Hold Account covered by the BANA RPT Buy and Hold Wrap Agreement are
not segregated from the assets in the Global Buy and Hold Account
covered by the other wrap agreement. Each wrap agreement covers a
specified percentage of the book value of the assets in the Global Buy
and Hold Account as a whole. The Global Buy and Hold Account as a whole
represents approximately 13.6% of the book value of the assets of RPT,
and the BANA RPT Buy and Hold Wrap Agreement
[[Page 61940]]
provides a benefit responsive wrap with respect to approximately 6.8%
of the total book value of the assets of RPT.\3\
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\3\ The Applicants represent that the conversion of the BANA RPT
Buy and Hold Wrap Agreement into a ``global'' arrangement will not
affect the Crediting Rate (referenced above and described in further
detail below) applicable to a participant's account in RPT. In this
regard, the Applicants state that the conversion involved a purely
internal adjustment, based upon an objective mathematical formula,
among BANA and the other wrap provider to reflect the different
market to book ratios of assets wrapped by BANA and Global Buy and
Hold Wrap Provider 2 at the time of conversion into the Global Buy
and Hold Account. The Applicants represent that this adjustment is
relevant only if the wrap contracts must be accessed to make benefit
responsive payments and will have no effect on the participants.
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15. The BANA RPT Global Wrap Agreement and the BANA RPT Buy and
Hold Wrap Agreement (the RPT Stable Value Agreements) provide for
``buffer'' assets that would be liquidated to fund withdrawals from RPT
before the assets held under the Global Wrap Account or the Global Buy
and Hold Account are used to fund withdrawals. Under the RPT Stable
Value Agreements, liquidity requirements for withdrawals would be
satisfied in the following order:
(1) Netting withdrawals from deposits whenever possible;
(2) Simple interest payments and maturing proceeds;
(3) Type ``A'' assets which include money market and other
short-term investments as well as any short-term benefit responsive
floaters;
(4) Type ``B'' buffer contracts, which will generally be
accessed on a pro rata basis;
(5) Level ``C'' contracts on a pro rata basis; and
(6) Level ``D'' contracts.
The RPT Stable Value Agreements cover Level C assets which, subject to
a limited temporary exception for certain Plan level withdrawals from
RPT, will not be accessed until assets in a higher category have all
been accessed.\4\ A minimum of 8% of RPT's assets must be held as Type
A and Type B combined. As of June 10, 2009, Type A and Type B assets
accounted for approximately 13% of the assets of RPT. These ``buffer''
assets significantly reduce the likelihood that payments will be
triggered for any of the wrap providers that wrap assets in the Global
Wrap Account or the Global Buy and Hold Account.
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\4\ The Applicants represent that, to address liquidity concerns
under RPT, the wrap providers covering assets in RPT have agreed to
permit the Trustee and BlackRock Advisers to sell a vertical slice
of securities held in RPT, other than securities covered by the
Special Purpose Wrap Agreement (discussed below), to fund certain
Plan-level withdrawals. In this regard, BAC will provide direct
capital contributions to fund the difference between the market
value and the book value of the assets attributable to the
withdrawing Plans in an amount of up to $175 million. BAC's
commitment to provide liquidity will be in effect for a maximum
period of two years.
---------------------------------------------------------------------------
16. The BANA RPT Stable Value Agreements effectively function to
protect Plans that invest in RPT if there are significant withdrawals
during negative market conditions. RPT has been structured with the
expectation that RPT liquidity requirements can be satisfied without
resort to the assets covered by the wrap contracts. Since RPT was
established in 1989, the Trustee has never been required to access the
wrap contracts. Eligible investments made by RPT are generally
conservative and the buffer assets reduce the likelihood that a payment
would need to be made under a wrap contract.\5\ Each of the RPT Stable
Value Agreements also has strict investment guidelines regarding the
investments that can be held under those contracts. Only in the event
that there are substantial withdrawals from RPT at a time when the
assets of RPT are significantly underperforming would there be any risk
that the assets covered by the wrap contracts would need to be
liquidated to satisfy withdrawals and a payment from a wrap provider
would be required. Moreover, in the current distressed economic
environment, participants in employee benefit plans have generally
moved assets into conservative investments, such as stable value funds.
RPT had a net inflow (i.e., contributions in excess of withdrawals) of
approximately $300 million during the fourth quarter of 2008.
---------------------------------------------------------------------------
\5\ The Department has not considered the issue, and is
expressing no opinion herein, regarding whether RPT assets have been
invested on a conservative basis or in a manner consistent with RPT
guidelines.
---------------------------------------------------------------------------
17. The crediting rate under a wrap agreement is the rate of
interest that is used for purposes of determining the accrued interest
to be added to the book value of the assets covered by the agreement.
Under either RPT Stable Value Agreement, such crediting rate (the
Crediting Rate) was set at the inception of the wrap agreement by
agreement between BANA and the Trustee and has been, and will continue
to be, reset periodically based on an objective formula. The Crediting
Rate formula is designed to amortize the difference between the market
value and the book value of assets covered by the wrap agreement over
the approximate duration of the covered assets. The Crediting Rate
formula used in the BANA RPT Global Wrap Agreement and the BANA RPT Buy
and Hold Wrap Agreement, effective as of March 1, 2009, is:
Crediting Rate = [(PMV/PBV)1/(F*DUR) * (1 + AYTM)] - 1
Where:
PMV is the market value of the covered assets;
PBV is the book value of the covered assets;
ATYM is the dollar duration weighted annualized yield to maturity of
the covered assets;
DUR is the modified duration (Macaulay duration of the asset or
assets * 1/1 + dollar duration weighted annualized yield to maturity
of the covered assets); and
F is the factor, if any, agreed upon by the Trustee or its designee,
BANA and the other wrap providers covering assets in the Global Wrap
Account or the Global Buy and Hold Account, and approved by the
Independent Fiduciary for purposes of modifying the duration
component of the Crediting Rate.\6\
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\6\ According to the Applicants, prior to March 2009, a slightly
different Crediting Rate (to the one above) was set forth in the RPT
Stable Value Agreements and the Separately Managed Account Wrap
Agreements (described below), and a simplified version of that
formula was used to calculate the Crediting Rate. The Applicants
note further that, in at least one instance, the Crediting Rate was
increased in the middle of a month. The Applicants do not believe
these modifications, which are described in further detail below,
adversely affected Plan participants and beneficiaries.
18. In the current economic environment, it has become standard
stable value industry practice to vary the duration component of the
Crediting Rate formula to more quickly amortize the difference between
the book value and the market value of assets covered by a wrap
agreement. BlackRock Advisors and the Trustee believe that having
flexibility to vary the duration component of the Crediting Rate
formula applicable to the BANA RPT Stable Value Agreements is in the
best interests of participants and beneficiaries because it will
greatly enhance BlackRock Advisors' ability to react to low market to
book ratios, the risk that securities will be downgraded, low Crediting
Rates and volatile cash flows.\7\
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\7\ The Department notes that the Trustee's ability to shorten
the duration component of the Crediting Rate formula may also
benefit BANA by reducing the likelihood that BANA will have to make
a payment to RPT during the immunization period (as described
below).
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19. The assets in RPT are valued by BlackRock on a daily basis
using a BlackRock-approved process that applies to all client
securities held by BlackRock. Valuations are performed without regard
to whether the security is held in RPT or another account or commingled
vehicle advised by BlackRock. When valuing securities in RPT, in all
cases, BlackRock looks first to external third-party pricing sources,
[[Page 61941]]
including index providers, broker-dealers and independent pricing
services. BlackRock has a hierarchy for prioritizing third-party
pricing sources, based on availability and reliability of the price
obtained. The pricing source may vary by asset class or type, but not
for a particular security. Over time, the hierarchy used for a
particular asset class may change due to a decrease in accuracy or
consistency or a drop in coverage for a particular security. Currently,
BlackRock's third-party pricing hierarchy generally works in the
following order: (i) Index providers; (ii) broker-dealers (structured
products); \8\ and (iii) third-party pricing services (currently FT
Interactive and Reuters Pricing Services).
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\8\ The Applicants state that, as a practical matter, in many
instances broker-dealers will be the first pricing source for
securities, including non-agency mortgage backed securities, in
stable value products, because no index provider is available.
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20. BlackRock Solutions (BRS), a financial modeling group, would
generate its own valuation only when it exhausts the third-party
sources for a valuation. This could occur when there are no market
quotations available for a security, or if a security were to break a
control, which means that it is identified by the computer system
because the price provided by a third-party source does not fall within
certain statistical norms.\9\ Historically, BRS has been able to rely
exclusively on third-party sources to price securities of the type held
in RPT and, to date, has never generated its own price for such
securities. However, as a result of the current market instability, BRS
has enhanced and formalized its process for valuing securities when
third-party sources are not available. With respect to assets covered
by the RPT Stable Value Wrap Agreements, any valuation generated by BRS
will be subject to the limitations described below.
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\9\ The Applicants state that a security breaking a control does
not necessarily mean that BRS will independently value the security.
When a security breaks a control, BRS first contacts the external
third-party pricing source that generated the value, provides that
third-party source with additional information regarding the issue
and asks the third-party source to review its price. The independent
pricing source will verify or change its price based on the
information provided. BRS will use the third party's valuation of a
particular security, unless a determination has been made that the
price is unreliable. If the price is deemed unreliable, it will be
valued in accordance with this paragraph 20, subject to Independent
Fiduciary oversight, as described below.
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21. BANA and the Trustee each have the right to terminate the BANA
RPT Global Wrap Agreement through an ``immunization'' process set forth
in the BANA RPT Global Wrap Agreement.\10\ If an immunization period
occurs, the wrapped assets will be managed in accordance with
investment guidelines that are more conservative than the investment
guidelines applicable under the wrap contract before the immunization
period, with the intent of closing any gap between the market value of
the wrapped assets and the wrap contract book value. The BANA RPT
Global Wrap Agreement has what is referred to as a ``pull to par''
provision, so that the agreement will not terminate (absent the
application of another termination provision, such as an event of
default) until the gap between the market value of the wrapped assets
and the wrap contract book value is closed, however long that takes.
This ``pull to par'' provision has become a market standard provision
and was included in the BANA RPT Global Wrap agreement prior to
December 31, 2008. During the immunization period, if all wrapped
assets were liquidated to fund book value payments, and market value
had not converged with contract book value, BANA would be obligated to
pay the remainder of the book value of the contract.
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\10\ The Applicants state that, because the BANA RPT Buy and
Hold Wrap Agreement covers a ``buy and hold'' portfolio, instead of
an actively managed portfolio as covered by the BANA RPT Global Wrap
Agreement, immunization is not a feature of the BANA RPT Buy and
Hold Wrap Agreement. In this regard, the Trustee may elect to
terminate the BANA RPT Buy and Hold Wrap Agreement by giving BANA
seven business day's notice of such election. Absent a default by
the Trustee, if BANA wants to terminate the BANA RPT Buy and Hold
Wrap Agreement, BANA would not agree to future additions to, or
substitution of assets in, the ``buy and hold'' portfolio covered by
the agreement. In that event, the BANA RPT Buy and Hold Wrap
Agreement generally would terminate on the maturity date of the
latest maturing asset covered by the agreement.
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22. According to the Applicants, immunization of a wrap contract is
more protective of Plan participants and beneficiaries than immediate
termination, if a substitute wrap provider is not available. In this
regard, the Applicants state that if a substitute wrap provider is not
available, immediate termination of the BANA RPT Global Wrap Agreement
or any other wrap contract covering assets in the Global Wrap Account
at a time when the book value exceeded the market value would likely
result in RPT ``breaking the buck'' (i.e., the value of participants'
accounts would reflect the market value, rather than the book value, of
assets that are no longer covered by the BANA RPT Global Wrap
Agreement). If all or a portion of the Global Wrap Account is
immunized, the returns would be reduced over time, but participants
would still receive the book value of their account. In any event,
because immunization could result in participants or Plan sponsors
changing investment alternatives and loss of assets under management,
BlackRock Advisors would work to find a substitute wrap provider as
quickly as reasonably possible.
Paragraphs 23-29. Applicants' Representations and Request for Relief
Regarding the Execution and Operation of the RPT Stable Value Wrap
Agreements
23. The Applicants seek exemptive relief for: The operation of the
RPT Stable Value Wrap Agreements, pursuant to the terms of; and for
transactions under the RPT Stable Value Wrap Agreements. The Applicants
describe the operation of the RPT Stable Value Agreements as including,
among other things, the following transactions (the RPT Wrap-Related
Transactions): (1) The determination, calculation of, and adjustments
to, the Crediting Rate and any changes to the Crediting Rate formula;
(2) valuations of securities covered by the RPT Stable Value
Agreements; (3) payment of wrap fees and any changes to wrap fees; (4)
the purchase and sale of any security covered by the RPT Stable Value
Agreements; (5) BANA's or the Trustee's exercise of its right to
immunize or terminate the RPT Stable Value Agreements; and (6)
amendments to the RPT Stable Value Agreements.
24. According to the Applicants, the provision of wrap coverage by
BANA to RPT could be considered an extension of credit under section
406(a) of ERISA. The Applicants state also that, because BANA and
Merrill are under common control by BAC, and Merrill has an approximate
34% equity ownership interest in BlackRock, the maintenance of and
transactions under the BANA RPT Stable Value Agreements could give rise
to self-dealing concerns under section 406(b) of ERISA. In particular,
BlackRock Advisor's role as investment adviser raises a concern that it
could make investment decisions that are designed to benefit BANA, to
the detriment of Plan participants and beneficiaries.
25. The Applicants request that the exemptive relief sought herein
be retroactive to January 1, 2009 (the date of the Merrill/BAC Merger).
The Applicants state that retroactive relief is appropriate because
terminating the BANA RPT Global Wrap Agreement prior to the Merger
could have caused significant disruption to Plans and participants and
beneficiaries investing in RPT. In this regard, if a substitute wrap
provider was not available to replace BANA, immediate termination of
the BANA RPT Global Wrap
[[Page 61942]]
Agreement or any other wrap agreement covering assets in the Global
Wrap Account could have resulted in RPT ``breaking the buck'' (i.e.,
the value of the participants' accounts would have reflected the market
value (rather than the higher book value) of assets no longer covered
by the BANA RPT Global Wrap Agreement).
26. The Applicants propose a number of conditions with respect to
covered transactions involving the RPT Stable Value Agreements. In this
regard, effective June 1, 2009, BlackRock Advisors may only change the
formula for calculating the Crediting Rate after obtaining prior
approval of BANA, the other financial institutions that have entered
into wrap agreements covering the same assets in the Global Wrap
Account or the Global Buy and Hold Account, as the case may be, and the
Independent Fiduciary. BlackRock Advisors shall provide the Independent
Fiduciary with any information it may reasonably request in determining
whether to approve any proposed change in the Crediting Rate formula.
Additionally, the Crediting Rate with respect to a RPT Stable Value
Wrap Agreement may not be reset more frequently than on a monthly
basis, unless: (1) Prior to such resetting, the crediting rate with
respect to a non-BANA wrap agreement covering assets in the same Global
Account as such RPT Stable Value Wrap Agreement is reset more
frequently than on a monthly basis; and (2) the Crediting Rate is reset
at the same time, and in the same manner, as such other crediting rate.
Each financial institution entering into a wrap agreement covering
assets included in a Global Account will obtain information from
BlackRock Advisors on a monthly basis regarding the investments that
are included in those accounts sufficient to enable the financial
institution to independently verify that the Crediting Rate was
calculated properly. In addition, the dollar amount of Global Wrap
Account assets covered by the BANA RPT Global Wrap Agreement shall not
exceed 50% of the total assets held in such Account, and the terms
associated with the BANA RPT Global Wrap Agreement at the time such
Agreement was entered into, amended, modified or renewed shall be no
less favorable to RPT than the terms associated with comparable
agreements with unrelated parties. Similarly, the dollar amount of
Global Buy and Hold Account assets covered by the BANA RPT Buy and Hold
Wrap Agreement shall not exceed 60% of the total assets held in such
Account, and the terms associated with the BANA RPT Buy and Hold Wrap
Agreement at the time such Agreement was entered into, amended,
modified or renewed shall be no less favorable to RPT than the terms
associated with comparable agreements with unrelated parties. Further,
any RPT Wrap-Related Transaction that involves: (1) The exercise by
BANA, the Trustee, or BlackRock Advisors of their rights under the RPT
Stable Value Agreements; or (2) the performance by BANA, the Trustee,
or BlackRock of their obligations under the RPT Stable Value
Agreements, shall be subject to prior review and approval by the
Independent Fiduciary if such exercise or performance affects the
Crediting Rate or would otherwise have an adverse impact on the book
value of a participant's or beneficiary's investment in RPT.
Additionally, the Independent Fiduciary must receive a copy of any
amendment contemplated for the RPT Stable Value Agreements (other than
amendments that are purely ministerial in nature), and must thereafter
review and approve the amendment prior to its implementation.
27. The Applicants represent that the fee BANA will receive under
the BANA RPT Global Wrap Agreement or the BANA RPT Buy and Hold Wrap
Agreement will be reasonable relative to market conditions and risks,
as determined and approved annually by the Independent Fiduciary.
Notwithstanding this, in no event shall the fee exceed the maximum
percentage fee paid to any other financial institution that has entered
into a wrap agreement covering the same assets in the Global Wrap
Account or the Global Buy and Hold Account, as the case may be.
Additionally, the Trustee will not trigger immunization with respect to
the BANA RPT Global Wrap Agreement unless: (i) The Trustee triggers
immunization with respect to another wrap agreement (i.e., not provided
by BANA) covering the same assets in the Global Wrap Account,
immediately prior to, or at the same time as, immunization is triggered
with respect to the BANA RPT Global Wrap Agreement; (ii) another
financial institution that has entered into a wrap agreement with
respect to assets in the Global Wrap Account triggers immunization
immediately prior to, or at the same time as, immunization is triggered
with respect to the BANA RPT Global Wrap Agreement; or (iii) the
Trustee determines that BANA is no longer financially responsible and
the Independent Fiduciary determines that the immunization is in the
interests of investing Plans.
28. The Applicants represent that assets held in RPT will be valued
at their current fair market value on a daily basis. Valuations will be
based on the price that may be obtained in a current arm's-length sale
to a third party. In this regard, BlackRock will first obtain prices
for securities from independent third-party sources, including index
providers, broker-dealers and independent pricing services. To do this,
BlackRock will maintain a hierarchy that prioritizes pricing sources by
asset class or type and will value securities based on the price
generated by the highest priority source. If no third-party sources are
available to value a security (or the price generated by the third-
party falls outside specified statistical norms, and, after review,
BlackRock determines that such price is not reliable), BlackRock will
value the security using an analytic methodology. The Independent
Fiduciary will thereafter review that methodology and valuation, and
obtain its own valuation if it deems appropriate. Each financial
institution that has entered into a wrap agreement covering assets in
the Global Wrap Account and the Global Buy and Hold Account, including
BANA, has the right to object to the valuation of a particular
security, regardless of the source of the valuation. If such an
objection is made, wrap providers that are not affiliated with BANA may
thereafter determine a new valuation for the security, and BANA will be
bound by this new valuation notwithstanding that BANA did not
participate in the determination of such valuation, provided that BANA
is provided with reasonably satisfactory documentation supporting the
valuation.
29. Prior to a Plan sponsor's decision to include RPT as an
investment option for participants in the Plans it sponsors, the
Trustee will provide the Plan sponsor with the following: The RPT
Declaration of Trust (as amended and restated as of April 23, 2009, and
as may be further amended from time to time); a purchase agreement to
be entered into by the Plan fiduciary and the Trustee; upon request, a
copy of the Annual Report for RPT and a fact sheet describing RPT's
investment objective and strategy and a performance analysis; and a
copy of the proposed exemption or the final exemption, if granted.
Additionally, on an ongoing basis, Plan fiduciaries will receive the
Annual Report for RPT and the Plan's Investment Summary and Accounting.
Plan participants will also receive information describing the
investment objectives and performance of RPT; and a statement,
delivered at least quarterly, that sets forth the value of the
participant's account contributions,
[[Page 61943]]
withdrawals, distributions, loans and change in value since the prior
statement.
Paragraphs 30-40. Applicants' Representations and Request for Relief
Regarding the Execution and Operation of the RPT Special Purpose Wrap
Agreement
30. The Applicants represent that, in the current market
environment, there is a significantly increased risk that the credit
rating of securities of the type included in RPT will be downgraded,
including downgrades to below Baa3, BBB- or BBB- by Moody's Investors
Services, Inc., Standard & Poor's Rating Group, or Fitch Ratings,
respectively (Below Investment Grade Securities). However, several wrap
agreements in RPT do not ``cover'' Below Investment Grade
Securities.\11\ If a security held by RPT is no longer covered by a
wrap agreement, participant accounts (with respect to Plans that invest
in RPT) will reflect the lower market value, rather than the book
value, with respect to the portion of their account attributable to the
unwrapped security. This could cause RPT to effectively ``break the
buck.''
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\11\ In other words, these wrap agreements either do not permit
a cure period (i.e., a period of time during which a downgraded
security may be sold), or have a cure period that is of a limited
duration.
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31. To reduce the risk that Below Investment Grade Securities would
cause RPT to ``break the buck,'' MLTC and BANA entered into the RPT
Special Purpose Wrap Agreement on April 23, 2009. The RPT Special
Purpose Wrap Agreement is designed to cover securities which cease to
be covered by a RPT wrap solely as a result of a downgrade in the
security's credit rating to below ``investment grade.'' Under the RPT
Special Purpose Wrap Agreement, BlackRock Advisors will automatically
transfer each Below Investment Grade Security to a new portfolio (the
Type D1 Account), and that security will be covered by the RPT Special
Purpose Wrap Agreement (hereafter, a Below Grade Investment Security
held in the Type D1 Account and covered by the RPT Special Purpose Wrap
Agreement shall be referred to as a Downgraded Security). As described
in paragraph 34 below, the RPT Special Purpose Wrap Agreement is
designed to rapidly amortize the difference between the amortized cost
of a Downgraded Security and the market value of the Downgraded
Security.\12\
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\12\ The Applicants state that securities that are ``impaired''
will not be transferred to the RPT Special Purpose Wrap Agreement.
The Applicants generally describe an ``impaired'' security as: (a) A
security with respect to which the issuer or guarantor has failed to
make one or more payments of principal or interest; (b) a security
with respect to which the principal or interest has become due and
payable before it otherwise would have been due or payable; (c) a
security where the rate of interest thereon has been reset; or (d) a
security with respect to which the issuer becomes insolvent or
institutes or has instituted against it a proceeding seeking a
judgment of insolvency or bankruptcy. The Applicant states that an
``impaired security'' would remain in RPT and the Trustee would
decide whether to hold or sell such security.
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32. The proposed exemption, if granted, would permit certain
transactions in connection with the operation of the RPT Special
Purpose Wrap Agreement. These transactions (the Special Purpose Wrap-
Related Transactions) include: (1) The transfer of Below Investment
Grade Securities to the Type D1 Account; (2) the sale or transfer of
Downgraded Securities out of the Type D1 Account; (3) the purchase and
sale of certain other securities permitted to be held in the Type D1
Account (the Permitted Securities, as described below); (4)
transactions relating to maintenance of a minimum ratio of Permitted
Securities and Downgraded Securities (the Minimum Ratio, as described
below); (5) the determination, calculation of and adjustments to the
Type D1 Account Crediting Rate (described below) and any changes to the
Type D1 Account Crediting Rate formula; (6) valuations of securities
covered by the RPT Special Purpose Wrap Agreement; (7) payment of and
any changes to wrap fees; (8) BANA's or the Trustee's exercise of its
right to immunize or terminate the RPT Special Purpose Wrap Agreement;
and (9) the entering into and amendment of the RPT Special Purpose Wrap
Agreement.
33. Certain limits apply to the amount of Below Investment Grade
Securities that may be transferred to the Type D1 Account.
Specifically, the Type D1 Account may consist of up to a maximum of
$200 million in: (1) Book value of Downgraded Securities that have not
been sold; and/or (2) aggregate unamortized realized losses with
respect to Downgraded Securities. BlackRock Advisors expects to sell
Downgraded Securities as market conditions permit. Any remaining
unamortized losses associated with the sale of the Downgraded
Securities will continue to be amortized under the RPT Special Purpose
Wrap Agreement.
34. In addition to Downgraded Securities, the Type D1 Account will
be funded with Permitted Securities. Permitted Securities are U.S.
Treasury debentures, Government National Mortgage Association (GNMA)
securities and securities guaranteed by the Federal Deposit Insurance
Corporation (FDIC). The Applicants state that these purchases have been
made, and the Type D1 Account currently holds approximately $500
million in Permitted Securities. The maximum modified duration of a
Permitted Security will be 3.5 years at the time of purchase. The RPT
Special Purpose Wrap Agreement requires a minimum ratio of 2.5 to 1.0
of market value of Permitted Securities to the total unamortized
unrealized and realized losses with respect to the Downgraded
Securities (the Minimum Ratio).\13\ This Minimum Ratio is designed to
ensure that the Type D1 Account receives sizeable investment gains,
which, in turn, would enable a more rapid amortization of the losses
included in the RPT Special Purpose Wrap Agreement. The Minimum Ratio
will be monitored on a daily basis, and if it drops below 2.5 to 1.0,
BlackRock Advisors will correct the ratio within 10 business days
either by moving additional Permitted Securities into the Type D1
Account or by selling Downgraded Securities and using the proceeds of
those sales to reinvest in Permitted Securities. Notwithstanding the
above, if the ratio is not corrected within 10 business days of a
breach of the Minimum Ratio, BANA reserves the right to terminate the
RPT Special Purpose Wrap Agreement immediately without payment
obligation.
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\13\ The Applicants state that the RPT Special Purpose Wrap
Agreement permits the Trustee to reduce the amount of Permitted
Securities (provided the Minimum Ratio is maintained) if the ratio
of the market value of Permitted Securities to the total unamortized
unrealized and realized losses with respect to Downgraded Securities
is greater than 2.5 to 1.0.
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35. The total book value of the assets included in the D1 Account
and covered by the RPT Special Purpose Wrap will not exceed $700
million without the prior written consent of the Trustee, BANA, and the
Independent Fiduciary. Additionally, the Type D1 Account Crediting Rate
will be 0.00% as of the next following reset date at any time when the
book value under the wrap agreement includes any unamortized losses
(realized or unrealized) on Downgraded Securities. The reason for using
a 0.00% Crediting Rate is to amortize losses as quickly as possible and
to maintain as much capacity as possible to move additional Below
Investment Grade Securities into the Type D1 Account to be covered by
the RPT Special Purpose Wrap Agreement. If the book value under the RPT
Special Purpose Wrap Agreement does not include any unamortized losses
on Downgraded Securities, the Type D1 Account Crediting Rate will be
[[Page 61944]]
determined on a monthly basis using the following formula:
Crediting Rate = [(PMV/PBV)I/(F*DUR) * (1 + AYTM)] - 1
Where:
AYTM = dollar duration weighted annualized yield to maturity.
PMV = fair market value of assets in the Type D1 Account (as reduced
by accrued but unpaid fees).
PBV = book value of the Type D1 Account.
DUR = modified duration (Macaulay duration of the asset or assets *
1/(1 + the dollar weighted annualized yield to maturity of the
asset)).
F = factor, if any, agreed upon by BlackRock Advisors and BANA and
approved by the Independent Fiduciary.
36. The Applicants state that the Type D1 Account Crediting Rate
formula would likely generate a higher return for Participants on the
assets applied to purchase the Permitted Securities than the
approximately 40 basis point return currently received if these assets
continued to be held in Type A cash-equivalent investments. Effective
June 1, 2009, BlackRock Advisors will not change the Type D1 Account
Crediting Rate formula unless BANA and the Independent Fiduciary agree
to the adjustment before it is made. BlackRock Advisors must first
provide the Independent Fiduciary with any information it may
reasonably request in determining whether to approve a proposed change
in the formula. Additionally, the Type D1 Account Crediting Rate itself
will not be reset more frequently than monthly.
37. Downgraded Securities and Permitted Securities will be valued
using the same process applicable to assets in the Global Wrap Account
and the Global Buy and Hold Account, as described in paragraph 19
above, except that the Independent Fiduciary will review valuations of
Downgraded Securities and Permitted Securities where BlackRock is
unable to obtain a reliable valuation from third party sources and, if
it deems appropriate, the Independent Fiduciary will obtain an
independent valuation, which will be binding upon BANA. Further, if
BANA objects to a valuation provided by BlackRock, the Independent
Fiduciary will review the valuation and, if it deems appropriate, the
Independent Fiduciary will thereafter obtain an independent valuation.
In that situation, BANA will be bound by the valuation determined by
the Independent Fiduciary.
38. The fee paid by RPT to BANA under the RPT Special Purpose Wrap
Agreement was initially set at 15 basis points per annum, payable
quarterly.\14\ The fee must be reviewed annually for reasonableness
relative to market conditions and risks, and approved by the
Independent Fiduciary in the manner described in paragraph 47 below.
Notwithstanding this, in no event shall the fee exceed 15 basis points.
The fee will be based on the total book value of assets included in the
Type D1 Account, including both the Downgraded Securities and the
Permitted Securities.
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\14\ As described in further detail in paragraph 51 below, the
Independent Fiduciary has submitted a written report (the Report) to
the Department regarding the Special Purpose Wrap Agreement
arrangement. In the Report, the Independent Fiduciary opined that a
fee level of 15 basis points is reasonable and within the range of
fees paid by RPT to other, unrelated wrap providers.
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39. The RPT Special Purpose Wrap Agreement will not have a
specified term, but will be an ``evergreen'' contract. However, unless
otherwise agreed by BANA, the Trustee, and the Independent Fiduciary,
no Below Investment Grade Securities will be added to the RPT Special
Purpose Wrap Agreement after April 23, 2011. The Trustee has the right
to immunize the portfolio of securities included in the Type D1 Account
only if BANA elects to terminate the RPT Special Purpose Wrap
Agreement, or if BANA defaults under the RPT Special Purpose Wrap
Agreement. If an immunization election becomes effective (the RPT
Special Purpose Immunization Date), the RPT Special Purpose Wrap
Agreement would terminate on the later of: (1) The date that is the
number of years after the RPT Special Purpose Immunization Date which
does not extend beyond the modified duration (as defined in the RPT
Special Purpose Wrap Agreement) of the underlying assets on the RPT
Special Purpose Immunization Date; or (2) the first date on which the
market value of the underlying assets equals or exceeds the book value
under the wrap agreement. From the RPT Special Purpose Immunization
Date to the termination date, the underlying assets would be managed by
BlackRock Advisors in accordance with immunization guidelines set forth
in the RPT Special Purpose Wrap Agreement. This Agreement has a ``pull
to par'' provision, as described above, and may be terminated by the
Trustee at market value at any time, but the Trustee would only do so
if alternative wrap coverage was available. According to the
Applicants, the Trustee generally would not take this action unless the
market value of the assets in the Type D1 Account exceeded the book
value of those assets and another wrap provider agreed to provide a
benefit responsive facility with respect to those assets.
40. The Trustee has engaged the Independent Fiduciary to monitor
the performance of BlackRock Advisors and the Trustee with respect to
the Type D1 Account and the RPT Special Purpose Wrap Agreement. Under
the terms of this engagement, and as described in part above, the
Independent Fiduciary must, among other things: (1) Determine whether
the RPT Special Purpose Wrap Agreement and the Type D1 Account
arrangement are prudent and in the best interest of participants and
beneficiaries of the Plans that have invested in RPT; (2) make an
initial and, thereafter, annual determination regarding whether the fee
paid by RPT to BANA under the Special Purpose Wrap Agreement is
reasonable relative to the specific attributes of the RPT Special
Purpose Wrap Agreement; (3) make an annual determination regarding
whether the continued maintenance of the RPT Special Purpose Wrap
Agreement is appropriate and in the interest of Plans; and (4) make a
monthly determination regarding whether the appropriate Type D1 Account
Crediting Rate formula is being used and a monthly determination
regarding whether such appropriate formula is being applied in proper
manner. Further, the Independent Fiduciary must receive a copy of any
amendment contemplated for the RPT Special Purpose Wrap Agreement
(other than amendments that are purely ministerial in nature), and must
thereafter review and approve the amendment prior to its
implementation. Finally, the Independent Fiduciary must review and give
prior approval for any RPT Special Purpose Wrap-Related Transaction
that involves: (1) The exercise by BANA, the Trustee, or BlackRock
Advisors of their rights under the RPT Special Purpose Wrap Agreement;
or (2) the performance by BANA, the Trustee, or BlackRock of their
obligations under the RPT Special Purpose Wrap Agreement, if such
exercise or performance affects the Type D1 Crediting Rate or otherwise
would have an adverse impact on the book value of a participant's or
beneficiary's investment in RPT.
Paragraphs 41-49. Applicants' Request for Relief Involving the
Separately Managed Account Wrap Agreements
41. The Applicants also seek exemptive relief for the provision and
operation of certain wrap agreements applicable to two separately
managed accounts. In this regard, BlackRock Advisors manages two
separately managed accounts, one on behalf of the Hertz Plan (the Hertz
Separately
[[Page 61945]]
Managed Account) and the other on behalf of the Wal-Mart Plan (the Wal-
Mart Separately Managed Account). These two separately managed accounts
(the Separately Managed Accounts) operate in a manner that is
substantially similar to RPT while being set up for individual employee
benefit plans, rather than contained as part of a collective trust.
MLTC is the directed trustee for the Wal-Mart Separately Managed
Account. MLTC entered into an agreement with BANA, dated August 19,
2003, and amended effective as of December 31, 2008, pursuant to which
BANA provides a book value benefit responsive facility with respect to
a portion of the assets held in the Wal-Mart Separately Managed Account
(BANA Wal-Mart Separately Managed Wrap Agreement). The Bank of New York
Mellon, as successor by operation of law to Mellon Bank N.A. (Mellon)
is the trustee for the Hertz Separately Managed Account, and Mellon
entered into an agreement with BANA and BlackRock Advisors, as
investment manager, dated July 27, 2007, and amended effective as of
December 31, 2008, pursuant to which BANA provides a book value benefit
responsive facility with respect to a portion of the assets held in the
Hertz Separately Managed Account (the BANA Hertz Separately Managed
Wrap Agreement).
42. The Applicants request that the exemptive relief sought with
respect to the BANA Wal-Mart Separately Managed Wrap Agreement and the
BANA Hertz Separately Managed Wrap Agreement (collectively, the
Separately Managed Account Wrap Agreements) be retroactive to January
1, 2009 (i.e., the date of the Merrill/BAC Merger). The Applicants
state that retroactive relief is appropriate since terminating the
Separately Managed Account Wrap Agreements prior to the Merrill/BAC
Merger would have caused significant disruption to the Plans and
participants and beneficiaries invested in the Separately Managed
Accounts. In this regard, the Applicants represent that in the current
distressed economic environment it is unlikely that a substitute wrap
provider could have been found for BANA. If a substitute wrap provider
was not available, immediate termination of the Separately Managed
Account Wrap Agreements could have resulted in the Separately Managed
Accounts ``breaking the buck'' (i.e., the value of the participants'
accounts would have reflected the market value (rather than the higher
book value) of assets no longer covered by the Separately Managed
Account Wrap Agreements.
43. According to the Applicants, the provision of wrap coverage by
BANA to the Separately Managed Accounts could be considered an
extension of credit under section 406(a) of ERISA. The Applicants state
also that, because BANA and Merrill are under common control by BAC,
and Merrill has an approximate 34% equity ownership interest in
BlackRock, the operation of the Separately Managed Account Agreements,
and certain transactions engaged in under such Agreements, could give
rise to self-dealing concerns under section 406(b) of ERISA. In
particular, BlackRock Advisor's role as investment adviser raises a
concern that it could make investment decisions that are designed to
benefit BANA, to the detriment of participants in the Hertz Plan and/or
the Wal-Mart Plan.
44. The Applicants describe the provision and maintenance of the
Separately Managed Account Wrap Agreements as including the following
transactions (the Separately Managed Wrap-Related Transactions): (1)
The determination, calculation of and adjustments to the Crediting Rate
and any changes to the Crediting Rate formula; (2) valuations of
securities covered by the Separately Managed Account Wrap Agreements;
(3) payment of wrap fees and any changes to wrap fees; (4) the purchase
and sale of any security covered by the Separately Managed Account Wrap
Agreements; (5) BANA's or the Trustee's exercise of its right to
terminate the Separately Managed Wrap Agreements; and (6) amendments to
the Separately Managed Wrap Agreements.
45. The Separately Managed Account Wrap Agreements are ``buy and
hold'' arrangements and do not cover actively-managed portfolios. The
BANA Wal-Mart Separately Managed Wrap Agreement provides two levels of
``buffers'' which would be accessed before any assets covered by BANA
would be used to provide benefit responsive payments. More than 64.3%
of the assets in the Wal-Mart Separately Managed Account consist of
investments held in these buffers, referred to as Tier 1 and Tier 2.
The assets covered by the BANA Wal-Mart Separately Managed Wrap
Agreement are included in the last tier to be accessed (Tier 3) and,
when accessed, are only accessed on a pro-rata basis with the assets
covered by the seven other Tier 3 Wrap Providers.\15\ The BANA Hertz
Separately Managed Wrap Agreement has one buffer which is accessed
before any assets covered by the BANA Hertz Separately Managed Wrap
Agreement would be accessed to provide benefit responsive payments.
Sixty-three and a third percent of the assets in the Hertz Separately
Managed Account are held in this buffer. After the initial buffer is
depleted for benefit responsive payments, assets are sold using the
last-in-first-out principle. Because the assets covered by the BANA
Hertz Separately Managed Wrap Agreement are the assets in the Hertz
Separately Managed Account that became subject to a benefit responsive
facility most recently prior to the date of the Application, these
assets will be the first assets sold to satisfy benefit responsive
payments after the buffer is depleted.
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\15\ The Applicants describe a Tier 3 Wrap Provider as a
financial institution that has entered into a wrap agreement with
respect to assets held in the Wal-Mart Separately Managed Account
that will not be accessed for purposes of making benefit payments
until two tiers of buffer assets are accessed.
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46. The Applicants propose several conditions with respect to
covered transactions involving the Separately Managed Wrap Agreements.
In this regard, under each Agreement, the Crediting Rate was set at the
inception of the wrap agreement by BANA and the counterparty and has
been, and will continue to be, reset periodically based on a formula
designed to amortize the difference between the market value and the
book value of the assets covered by the wrap agreement over the
approximate duration of the covered assets. The Crediting Rate formula
used in the BANA Hertz Separately Managed Wrap Agreement, effective
March 1, 2009, is: Crediting Rate = [(PMV/PBV)I/(F*DUR)*(1 +
AYTM)]-1.
The Crediting Rate formula in the Wal-Mart Separately Managed Wrap
Agreement, effective March 1, 2009,\16\ is:
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\16\ See footnote 6.
Net Crediting Rate = [((PMV/PBV)I/(F*DUR) * (1 + AYTM))-1]-
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WF
Where:
PMV = market value of the covered assets.
PBV = book value of the covered assets.
AYTM = dollar duration weighted annualized yield to maturity of the
covered assets.
DUR = modified duration {Macaulay duration of the asset or assets *
1/(1+ dollar weighted annualized yield to maturity of the asset or
asset)).
F = factor, if any, agreed upon by BlackRock Advisors and BANA and
approved by the Independent Fiduciary for purposes of modifying the
duration component of the Crediting Rate.
WF = wrap fee rate.
[[Page 61946]]
Effective June 1, 2009, BlackRock Advisors may only change the formula
for calculating the Crediting Rate after obtaining prior approval of
BANA and the Independent Fiduciary.
47. BANA will not receive a fee under the either the BANA Wal-Mart
Separately Managed Wrap Agreement or the BANA Hertz Separately Managed
Wrap Agreement in excess of the maximum percentage fee received by any
other Tier 3 Wrap Provider in the Wal-Mart Separately Managed Account
or the BANA Hertz Separately Managed Wrap Agreement, as the case may
be. Additionally, assets covered by the BANA Hertz Separately Managed
Wrap Agreement and the BANA Wal-Mart Separately Managed Wrap Agreement
will be valued in a similar fashion as assets covered by the BANA RPT
Stable Value Agreements, except that, if BANA objects to the valuation
of any asset, the Independent Fiduciary will make a binding
determination of the value of the asset.
48. Pursuant to the investment management agreements relating to
the Separately Managed Accounts, BlackRock Advisors provides the named
fiduciaries of the Hertz Plan and the Wal-Mart Plan with information
regarding investment performance and the assets held in the Separately
Managed Accounts, including type of asset, crediting rate, duration and
credit quality. In contrast with the BANA RPT Stable Value Agreements,
the Separately Managed Account Wrap Agreements are not global
arrangements. Each agreement provides coverage for 100% of the book
value of the specified assets. Because the Separately Managed Account
Wrap Agreements are not global arrangements, no wrap provider (other
than BANA) is involved in these arrangements that, as an independent
third party, could protect against potential conflicts of interests
between BANA and BlackRock Advisors. For this reason, BlackRock
Advisors and a named fiduciary of the Hertz Plan, and BlackRock
Advisors and a named fiduciary of the WalMart Plan, have engaged the
Independent Fiduciary to perform the following tasks (which are in
addition to the duties described above): (1) Conduct a monthly review
of the Crediting Rate; (2) analyze the purchase or sale of any
security, including any change to the market to book ratio, duration or
Crediting Rate; (3) review and approve any proposed amendment to the
BANA Hertz Separately Managed Wrap Agreement or the BANA Wal-Mart
Separately Managed Wrap Agreement; (4) review any exercise of contract
provisions by any of BANA, BlackRock Advisors or, in the case of the
BANA Wal-Mart Separately Managed Wrap Agreement, the Trustee, and
analyze its potential impact on investors; (5) provide quarterly
reports to BlackRock Advisors and to the named fiduciaries of the Wal-
Mart Plan and the Hertz Plan stating, among other things, whether
BlackRock Advisors has complied with all requirements of its contract.
The Independent Fiduciary will also inform the named fiduciaries of a
Plan if it believes that BANA or BlackRock Advisors has taken any
actions that are not in the best interests of the participants and
beneficiaries in the Wal-Mart Plan or the Hertz Plan, as relevant.
Consistent with this, the Independent Fiduciary will review and must
give prior approval for any Separately Managed Account Wrap-Related
Transaction that involves: (1) The exercise by BANA, the Trustee, or
BlackRock Advisors of their rights under the Separately Managed Account
Wrap Agreements; or (2) the performance by BANA, the Trustee, or
BlackRock of their obligations under the Separately Managed Account
Wrap Agreements, if such exercise or performance affects the Crediting
Rate or otherwise would have an adverse impact on the book value of a
participant's or beneficiary's investment in the Separately Managed
Accounts.
49. Each of the Separately Managed Account Wrap Agreements
effectively may be terminated by terminating the appointment of
BlackRock Advisors as investment manager. Under the Hertz Separately
Managed Account, the named fiduciaries (or their authorized
representatives) of the Hertz Plan may terminate BlackRock Advisors, as
the investment manager, on 30 days' notice. Under the Wal-Mart
Separately Managed Account, the named fiduciaries (or their authorized
representatives) of the Wal-Mart Plan may terminate BlackRock Advisors,
as the investment manager, on 90 days' notice. Because each of the
Separately Managed Account Wrap Agreements covers a ``buy and hold''
portfolio, immunization is not a feature of either agreement. BlackRock
Advisors may elect to terminate the Separately Managed Account Wrap
Agreements by giving BANA seven business days' notice of such election.
Absent a default by the counterparty, BANA may terminate the Separately
Managed Account Wrap Agreements by failing to agree to future additions
to, or substitution of assets in, the ``buy and hold'' portfolio
covered by the agreement and then the agreement generally would
terminate on the maturity date of the latest maturing asset covered by
the agreement.
Paragraphs 50-51. The Independent Fiduciary
50. The Independent Fiduciary is Fiduciary Counselors Inc., located
in Washington, DC. The Independent Fiduciary is experienced and
knowledgeable in the transactions and arrangements described herein.
The Independent Fiduciary is independent of and unrelated to BANA,
Merrill, BlackRock and their Affiliates. In this regard, the
Independent Fiduciary represents that, during any year of its
engagement, its annual gross revenue from BANA, Merrill, and BlackRock
has not, and will not, exceed five percent (5%) of the Independent
Fiduciary's annual gross revenue from all sources (for federal income
tax purposes) for its prior tax year.
51. In a written report dated April 2, 2009, submitted to the
Department (the Report), the Independent Fiduciary made a number of
representations regarding the RPT Special Purpose Wrap Agreement. In
the Report, the Independent Fiduciary stated that, among other things:
the RPT Special Purpose Wrap Agreement is an innovative solution to the
``breaking the buck'' problem with a laudable objective that clearly is
in the best interests of Plan participants; and it is likely that the
15 basis point annual wrap fee associated with the RPT Special Purpose
Wrap Agreement will soon be industry average, if not lower than
average. Regarding the Type D1 Account Crediting Rate, the Independent
Fiduciary stated that such crediting rate arrangement is reasonable
given that BANA has a limited capacity to absorb Below Investment Grade
Securities, and that additional capacity is not available from anyone
else. In the Report, the Independent Fiduciary states further that the
investment management flexibility (regarding the sale of Below
Investment Grade Securities) allowed by the Special Purpose Wrap
Agreement benefits Plan participants because it will enable sales to
occur when market conditions warrant, without the imposition of
constraints from the wrapper contract. Additionally, the Independent
Fiduciary stated in the Report that other provisions in the Special
Purpose Wrap Agreement are within the norms for wrap contracts between
unrelated parties.
52. In summary, the Applicants represent that the transactions
described herein satisfy the statutory criteria set forth in section
408(a) of the Act and section 4975(c)(2) of the Code because, among
other things: in the current
[[Page 61947]]
distressed economic environment it is unlikely that a substitute wrap
provider could be found for BANA; the interests of affected Plans have
been, and will be, protected by the Independent Fiduciary; and the fee
received by BANA pursuant to the arrangements described herein will be
reasonable relative to market conditions and risks, as determined by
the Independent Fiduciary.
Notice to Interested Persons
Written notice will be provided to a representative of each Plan
invested in RPT, and the named fiduciaries of the Hertz Plan and the
Wal-Mart Plan. The notice shall contain a copy of the proposed
exemption as published in the Federal Register and an explanation of
the rights of interested parties to comment regarding the proposed
exemption. Such notice will be provided by personal or express
delivery, or electronically if correspondence between the relevant
parties is typically carried out electronically, within 15 days of the
issuance of the proposed exemption. Any written comments must be
received by the Department from interested persons within 45 days of
the publication of this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Chris Motta of the Department,
telephone (202) 693-8544. (This is not a toll-free number.)
Citigroup Inc. and its affiliates (Citigroup), the Citigroup
401(k) Plan, the Citibuilder 401(k) Plan for Puerto Rico (the
Citibuilder Plan and collectively with the Citigroup 401(k) Plan,
the Participant Directed Plans), the Citigroup Pension Plan (and
collectively with the Participant Directed Plans, the Plans) (the
Applicants), located in Greenwich, CT. [Application No. D-11591]
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Employee Retirement Income
Security Act of 1974, as amended (the Act) and section 4975(c)(2) of
the Internal Revenue Code of 1986 (the U.S. 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
If the proposed exemption is granted:
(a) The restrictions of sections 406(a), 406(b)(1), 406(b)(2), and
407(a) of the Act \17\ shall not apply, effective June 22, 2009 (the
Record Date), to:
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\17\ For purposes of this exemption, references to provisions of
Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
(1) The acquisition of stock rights (the Rights) by certain
plans, described below in Section I(a)(1)(A) through (C) of this
exemption, in connection with holding shares of common stock of
Citigroup Inc. (Citigroup Stock) on the Record Date established
pursuant to an offering of such Rights (the Offering) in accordance
with the Tax Benefits Preservation Plan (the Rights Plan) by
Citigroup Inc. (Citigroup), a party in interest with respect to the
following plans, and/or the acquisition of Citigroup Stock and the
attached Rights by the plans in the future pursuant to the Offering:
(A) The Citigroup 401(k) Plan (the Citigroup 401(k) Plan);
(B) The Citibuilder 401(k) Plan for Puerto Rico (the Citibuilder
Plan and collectively with the Citigroup 401(k) Plan, the
Participant Directed Plans); and
(C) The Citigroup Pension Plan (the Citigroup Pension Plan and
collectively with the Participant Directed Plans, the Plans);
(2) The holding of the Rights by the Plans until the date the
Plans exercise or otherwise dispose of the Rights or the expiration
of such Rights in accordance with the terms and conditions of the
Rights Plan, whichever is earlier; and
(3) The exercise or other disposition of the Rights by the
Plans;
provided that the conditions in Section II of this proposed
exemption, as set forth below, are satisfied.\18\
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\18\ The Department's determination to propose relief for these
transactions should not be viewed as an endorsement of the Rights
Plan, nor is it offering any views as to whether such transactions
satisfy any other requirements of ERISA, the Code or other relevant
statutory provisions. Rather, this proposed exemption is designed to
place the Plans and their participants and beneficiaries in the same
position as other holders of Citigroup Stock with respect to the
acquisition of the Rights and to prevent the possible dilution of
the Plans' investment in the Citigroup Stock.
(b) The sanctions resulting from the application of section 4975 of
the Internal Revenue Code of 1986 (the Code), by reason of section
4975(c)(1)(A) through (E) shall not apply, effective June 22, 2009, to
the acquisition of the Rights by the Plans, described above in Section
I(a)(1)(A), and Section I(a)(1)(C) of this proposed exemption; \19\
provided that the conditions in Section II of this proposed exemption,
as set forth below, are satisfied.
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\19\ The Applicants represent that, because the fiduciaries for
the Citibuilder 401(k) Plan for Puerto Rico have not made an
election under section 1022(i)(2) of the Act, whereby such plan
would be treated as a trust created and organized in the United
States for purposes of tax qualification under section 401(a) of the
U.S. Code, jurisdiction under Title II of the Act does not apply.
Accordingly, the Applicant is not seeking any relief for the
prohibitions, as set forth in Title II of the Act, for the
acquisition of the Rights by the Citibuilder Plan.
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Section II: Conditions
The relief provided in this proposed exemption is conditioned upon
adherence to the material facts and representations described herein
and as set forth in the application file and upon compliance with the
conditions, as set forth in this proposed exemption.
(a) The acquisition by each of the Plans of the Rights occurred or
will occur in connection with the June 22, 2009 Offering made available
by Citigroup on the same terms to all shareholders of the common stock
of Citigroup (the Citigroup Stock), including the acquisition of the
Rights at no cost to the Plans;
(b) The acquisition of the Rights by the Participant Directed Plans
on the Record Date resulted from an independent act of Citigroup as a
corporate entity. The acquisition of the Rights by the Plans in the
future will occur either at the direction of individual participants
(in the case of the Participant Directed Plans), at the direction of an
Independent Fiduciary (in the case of the Citigroup Pension Plan), or
in connection with in-kind contributions to a Plan by Citigroup of
Citigroup Stock and attached Rights (a Stock/Right Contribution), in
each case incidental to, and as a direct consequence of, the purchase
or other acquisition of Citigroup Stock. All holders of Citigroup
Stock, which include the Rights (other than an Acquiring Person, as
defined in the Rights Plan), including the Plans, were, and will
continue to be, treated in the same manner with respect to the
acquisition of the Rights;
(c) All shareholders of Citigroup Stock, including the Plans
acquired, or will acquire, the same proportionate number of Rights
based on the number of shares of Citigroup Stock held by such
shareholders, including the Plans;
(d) Except with respect to a Stock/Right Contribution where the
determination to make the contribution will be made by Citigroup as a
corporate entity, the acquisition of the Rights by the Participant
Directed Plans was made, or will be made, pursuant to provisions of
each such plan for individually-directed investment of participant
accounts;
(e) All decisions regarding the Rights that will be made by the
Participant Directed Plans will be made in accordance with the
provisions of such Participant Directed Plans for individually-directed
investment of participant accounts by the individual participants whose
accounts in each such Participant Directed Plan acquired the Rights in
connection with the Offering, and if no instructions are received, the
Rights will expire in accordance with the terms and conditions of the
Rights Plan;
[[Page 61948]]
(f) All decisions regarding the Rights (except in the case of an
acquisition as a result of a Stock/Right Contribution, where the
determination to make the contribution will be made by Citigroup as a
corporate entity) will be made on behalf of the Citigroup Pension Plan
by an Independent Fiduciary acting as an investment manager.
(g) To the extent the Citigroup board of directors exercises its
rights under the Offering to redeem the Rights at the redemption price
set forth in the Offering, all shareholders of Citigroup Stock will be
treated the same, including the Plans; and
(h) The acquisition of the Rights as a result of a Stock/Right
Contribution by Citigroup to the Plans shall result from a
determination by Citigroup as a corporate entity.
(i) Neither the Participant Directed Plan participants nor the
Citigroup Pension Plan will pay any fees or commissions in connection
with the exercise of the Rights other than the aggregate Purchase Price
with respect to the Rights then being exercised and an amount equal to
any applicable transfer tax or other governmental charge.
Section III: Definition
The term ``Independent Fiduciary'' means an investment manager, as
described in section 3(38) of the Act, that is:
(a) Independent of, and unrelated to, Citigroup Inc. and its
affiliates (Citigroup), and
(b) appointed to act on behalf of the Citigroup Pension Plan for
the purposes described in Section II.(f) above.
For purposes of this proposed exemption, a fiduciary will not be
deemed to be independent of, and unrelated to, Citigroup if: (i) Such
fiduciary directly or indirectly controls, is controlled by, or is
under common control with Citigroup; (ii) such fiduciary directly or
indirectly receives any compensation or other consideration in
connection with any transaction described in this proposed exemption,
except that it may receive compensation for acting as an independent
fiduciary from Citigroup in connection with the transactions described
herein, if the amount or payment of such compensation is not contingent
upon, or in any way affected by such fiduciary's decision; and (iii)
more than 5 percent of such fiduciary's annual gross revenue in its
prior tax year will be paid by Citigroup in the fiduciary's current tax
year.
Effective Date: If granted, this proposed exemption will be
effective as of June 22, 2009, the date of the announcement of the
Offering and will expire on June 10, 2012.
Summary of Facts and Representations
1. The Applicants are Citigroup Inc. and its affiliates
(Citigroup), the Citigroup 401(k) Plan, the Citibuilder 401(k) Plan for
Puerto Rico (the Citibuilder Plan and collectively with the Citigroup
401(k) Plan, the Participant Directed Plans), the Citigroup Pension
Plan (and collectively with the Participant Directed Plans, the Plans).
The Applicants requested this relief in an application dated December
2, 2009 and a revised application dated July 23, 2010 (the
Application).
Citigroup Inc. is a global diversified financial services holding
company whose businesses provide consumers, corporations, governments
and institutions with a broad range of financial products and services.
Citigroup has approximately 200 million customer accounts and does
business in more than 140 countries. Citigroup currently operates, for
management reporting purposes, via two primary business segments:
Citicorp, generally consisting of its regional consumer banking
businesses and institutional clients group; and Citi Holdings,
generally consisting of its brokerage and asset management and local
consumer lending businesses, and a special asset pool. Citigroup's
consumer and corporate banking business is a global franchise
encompassing, among other things, branch and electronic banking,
consumer lending services, investment services, and credit and debit
card services. Citibank, N.A. (Citibank) is a principal subsidiary of
Citigroup. As of September 30, 2009, Citigroup and its subsidiaries had
total consolidated assets of approximately $1.89 trillion.
2. Citigroup sponsors the Citigroup 401(k) Plan and the Citigroup
Pension Plan, while Citibank sponsors the Citibuilder 401(k) Plan for
Puerto Rico. These Plans are involved in the transactions for which an
exemption has been requested. These Plans are described, as follows:
(a) Citigroup 401(k) Plan: The Citigroup 401(k) Plan is a stock
bonus plan, a portion of which is designated as an employee stock
ownership plan, and contains within it a cash or deferred arrangement
under section 401(k) of the Code and a qualified Roth contribution
program under section 402A of the Code. The Citigroup 401(k) Plan is
intended to qualify under the provisions of section 401(a) of the Code,
and its related trust is intended to be tax-exempt pursuant to section
501(a) of the Code.
The Applicants represent that the Citigroup 401(k) Plan allows
participants to direct investments of their own contributions and a
portion of the employer contributions into several investment
alternatives, including Citigroup Stock. In the event that Citigroup,
as a corporate entity, decides to make an in-kind contribution of
Citigroup Stock and attached Rights (a Stock/Right Contribution) to the
Citigroup 401(k) Plan, the participants receiving a Stock/Right
Contribution can sell the Citigroup Stock (including the attached
Rights) and invest the proceeds in any other fund offered in the
Citigroup 401(k) Plan immediately upon such Citigroup Stock (and
attached Rights) being credited to the participants' accounts.\20\
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\20\ In this regard, Section 408(e) of ERISA provides a
statutory exemption for the acquisition or sale by a plan of
qualifying employer securities (as defined in section 407(d)(5)) if
certain conditions are met. The Department assumes that the
Citigroup 401(k) Plan is intended to satisfy the requirements of
section 404(c) of ERISA.
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The Citigroup 401(k) Plan is funded through a trust of which State
Street Bank and Trust Company is the trustee. Reliance Trust Company is
the sub-trustee for the Citigroup Stock fund offered as an investment
option in the participant directed plans. The Plans Administration
Committee of Citigroup Inc., a committee appointed by Citigroup, is the
Plan Administrator of the Citigroup 401(k) Plan. The Applicants state
that the 401(k) Plan Investment Committee is responsible for making all
investment decisions related to the Citigroup 401(k) Plan, other than
those investment decisions made by the participants and the decision to
offer Citigroup stock as an investment in the Plan. Citigroup, as plan
sponsor, is responsible for making all decisions regarding offering the
Citigroup Stock fund as an investment option under the Citigroup 401(k)
Plan.
As of June 22, 2009 (the Record Date), the Citigroup 401(k) Plan
had approximately 180,935 participants and total assets of
$6,990,680,850. The shares of Citigroup Stock held by the Citigroup
401(k) Plan were valued at approximately $393,394,961 as of the Record
Date, and comprised approximately six percent (6%) of the total assets
in the Citigroup 401(k) Plan. These shares represented approximately
seven percent (7%) of the total shares of Citigroup Stock outstanding
as of that date.
(b) The Citibuilder 401(k) Plan for Puerto Rico: The Citibuilder
Plan is a defined contribution profit sharing plan which includes a
qualified cash or deferred arrangement intended to meet
[[Page 61949]]
the requirements of section 1165(e) of the Puerto Rico Internal Revenue
Code of 1994, as amended (the PR Code). The Citibuilder Plan was
established for the exclusive benefit of the eligible employees and
beneficiaries of Puerto Rican subsidiaries of affiliates of Citibank.
The Applicants assert that the Citibuilder Plan is not intended to
meet, and has never in practice met, the requirements of section 401(a)
of the Code. The Citibuilder Plan is subject to Title I of the Act.
The Applicants represent that the Citibuilder Plan allows
participants to direct investments of their own contributions and
employer contributions into several investment alternatives, including
Citigroup Stock. In the event that Citigroup, as a corporate entity,
decides to make a Stock/Right Contribution to the Citibuilder Plan, the
participants receiving a Stock/Right Contribution can sell the
Citigroup Stock (including the attached Rights) and invest the proceeds
in any other fund offered in the Citibuilder Plan immediately upon such
Citigroup Stock (and attached Rights) being credited to the
participants' accounts. The Applicants assert that the Citibuilder Plan
is intended to satisfy the requirements of section 404(c) of ERISA.
The Citibuilder Plan is funded through a trust. The trustee of the
Citibuilder Plan is Banco Popular de Puerto Rico. The Plans
Administration Committee of Citigroup Inc. is the Plan Administrator of
the Citibuilder Plan. The Applicants state that the 401(k) Plan
Investment Committee is responsible for making all investment decisions
related to the Citibuilder Plan, other than those investment decisions
made by the participants and the decision to offer Citigroup Stock as
an investment in the Plan. Citigroup, as plan sponsor, is responsible
for making all decisions regarding offering the Citigroup Stock fund as
an investment option under the Citibuilder Plan.
As of the Record Date, the Citibuilder Plan had approximately 1,739
participants and total assets of $18,318,896. As of the Record Date,
the shares of Citigroup Stock held by the Citibuilder Plan were valued
at approximately $1,297,870 and comprised approximately seven percent
(7%) of the total assets of the Citibuilder Plan. These shares
represented approximately less than one percent (0.02%) of the total
shares of Citigroup Stock outstanding as of the Record Date.
(c) The Citigroup Pension Plan: The Citigroup Pension Plan is a
frozen defined benefit pension plan that generally provided benefits to
eligible participants under a cash balance formula. Certain
participants who have a protected benefit that was accrued under a plan
that was merged into the Citigroup Pension Plan may be eligible to have
a portion of their benefit calculated using a final average pay formula
(Grandfathered Participants). Effective January 1, 2007, the Citigroup
Pension Plan was closed to new participants. Effective January 1, 2008,
participants' hypothetical cash balance accounts ceased benefit
accruals, although these hypothetical accounts will continue to accrue
interest credits. Grandfathered Participants are not subject to the
benefit accrual freeze and continue to accrue benefits. The Applicants
assert that the Citigroup Pension Plan is intended to qualify under the
provisions of section 401(a) of the Code, and its related trust is
intended to be tax-exempt pursuant to section 501(a) of the Code.
The Citigroup Pension Plan is funded through a trust of which The
Bank of New York Mellon is the trustee. The Plans Administration
Committee is the Plan Administrator of the Citigroup Pension Plan. The
Applicants state that the Pension Plan Investment Committee has
oversight over all investment decisions related to the Citigroup
Pension Plan.
As of December 31, 2008, the Citigroup Pension Plan had
approximately 260,890 participants and total assets of approximately
$11,285,250,916. The Applicants note that the Citigroup Pension Plan
did not hold any Citigroup Stock as of the Record Date.
3. The Applicants provide that Citigroup has accumulated a
substantial amount of recognized net deferred tax assets, such as net
operating loss carryforwards and tax credits (the Tax Benefits), which
is included in its tangible common equity. As of December 31, 2009,
Citigroup had recognized net deferred tax assets of approximately $46.1
billion. Citigroup expects to utilize the Tax Benefits to offset future
taxable income. The Applicants assert that Citigroup's utilization of
the Tax Benefits is in the interests of all Citigroup Stockholders,
including the Plans, the participants and beneficiaries.
The Applicants note that Citigroup's ability to utilize these
deferred tax assets to offset future taxable income may be
significantly limited in the event that Citigroup experiences an
``ownership change'' as defined in section 382 of the Code.\21\
Specifically, section 382 provides that a ``loss corporation'' (i.e., a
corporation with net operating loss carryforwards and certain other tax
attributes) that experiences an ownership change will generally be
subject to an annual limitation after the ownership change on the use
of such attributes. The Applicants assert that in Citigroup's case,
this means that, should an ownership change occur, Citigroup could
experience a limitation on its ability to utilize a portion of its tax
deferred assets. Since tax losses and tax credits have finite carryover
periods, the limitation could negatively affect Citigroup's ability to
use the tax losses and tax credits before they expire. The precise
amount of the limitation that would arise from an ownership change
under section 382 on Citigroup's ability to utilize its deferred tax
assets would depend on the value of Citigroup's stock and prevailing
interest rates at the time of the ownership change.
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\21\ The Applicants note that generally, an ownership change
occurs if the ``five percent shareholders'' (as defined in section
382 of the Code) of a loss corporation increase their percentage
ownership interest in the loss corporation by more than 50
percentage points during a rolling three year testing period.
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4. The Applicants state that given the possibility of such negative
consequences, on June 9, 2009, the board of directors of Citigroup
adopted the Tax Benefits Preservation Plan (the Rights Plan) in order
to preserve its ability to use the tax benefits. It is represented that
the Rights Plan uses mechanics and structures very similar to
traditional shareholder rights plans (commonly known as ``poison pill''
plans) in that it creates disincentives for those who engage in certain
activities. Unlike traditional shareholder rights plans which are
designed to deter unsolicited takeover bids, section 382-focused rights
plans are designed to protect tax assets by deterring actions that
could increase the likelihood of a loss of tax assets.\22\ As is the
case with the Rights Plan, this is generally accomplished by seeking to
deter any shareholder from accumulating positions that would qualify
such shareholder as a ``five percent shareholder'' under applicable tax
laws.
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\22\ The Applicants state that Citigroup's Rights Plan also
differs from the traditional shareholder rights plan in that the
Rights Plan does not apply to acquisitions of a majority of
Citigroup Stock made in connection with an offer to acquire 100% of
Citigroup Stock, and lasts for only 36 months. Traditional
shareholder rights plans generally last for 10 years.
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The Applicants note that, as with the many companies that have
adopted section 382-focused rights plans in the past, the Rights Plan
has the effect of significantly diluting the value of the shares of the
shareholder whose acquisitions of Citigroup Stock caused
[[Page 61950]]
the Rights Plan to become exercisable (the Acquiring Person) by
allowing all other shareholders to purchase, for each Right, preferred
stock equivalent to one share of Citigroup Stock but at half the price
of a share of Citigroup Stock at the time of the purchase.
Specifically, the mechanisms by which the Rights Plan works are as
follows:
(a) In connection with the adoption of the Rights Plan, on June 9,
2009, Citigroup's board of directors declared a dividend of one
preferred stock purchase right (a Right) for each outstanding share of
Citigroup Stock. The dividend was payable to holders of record of
Citigroup Stock on the Record Date, as well as shares of Citigroup
Stock issued after such date and before the Final Expiration Date (June
10, 2012). Unless and until the Rights become exercisable (as described
below), the Rights are not severable from Citigroup Stock, have no
independent voting or dividend rights associated with them and can be
transferred only in connection with the transfer of the underlying
shares of Citigroup Stock.
(b) Each Right will initially represent the right to purchase, for
$20.00 (the Purchase Price), one one-millionth of a share of Series R
Participating Cumulative Preferred Stock, $1.00 par value per share
(the Series R Preferred Stock).
(c) The Rights are not exercisable until the earlier of (i) the
close of business on the 10th business day after the date (the Stock
Acquisition Date) of the announcement that a person has become an
Acquiring Person (as defined in the Rights Plan) and (ii) the close of
business on the 10th business day (or such later day as may be
designated by Citigroup's board of directors before any person has
become an Acquiring Person) after the date of the commencement of a
tender or exchange offer by any person which could, if consummated,
result in such person becoming an Acquiring Person. The ``Distribution
Date'' is referred to as the date that the Rights become exercisable.
(d) The Applicants state that it is important to note that the
Rights may never become exercisable because Citigroup retained the
ability to unilaterally (i) amend the Rights Plan in any manner prior
to the occurrence of a Distribution Date, including by modifying the
definition of ``Final Expiration Date'' and effectively terminating the
Rights Plan immediately or (ii) redeem the Rights for $0.00001 per
Right at any time prior to a Distribution Date.
(e) After any person has become an Acquiring Person, each Right
(other than Rights treated as beneficially owned under certain U.S. tax
rules by the Acquiring Person) can be exercised by the holder to
purchase for the Purchase Price a number of shares of Series R
Preferred Stock having a market value of twice the Purchase Price.
Basically, all holders of these Rights (other than the Acquiring
Person) will have the right to acquire one one-millionth of a share of
Series R Preferred Stock, which will be the economic equivalent (e.g.,
the same voting rights, dividend rights, trading price and market
value) of one share of Citigroup Stock, for one-half (\1/2\;) of the
price of a share of Citigroup Stock as of the Distribution Date. Any
time after any person has become an Acquiring Person (but before any
person becomes the beneficial owner of 50% or more of the Citigroup
Stock), the board of directors of Citigroup may elect to implement such
dilution remedy against an Acquiring Person by exchanging any Rights
(other than the Rights beneficially owned by the Acquiring Person) for
one one-millionth of a share of Series R Preferred Stock per Right
(instead of having holders exercise Rights and pay the Purchase Price).
(f) In the event that an Acquiring Person causes an ownership
change, such Acquiring Person would almost certainly suffer extreme
dilution due to the triggering of the Distribution Date (and
exercisability of the Rights under the Rights Plan). This creates a
significant disincentive for any investor to acquire a sufficient
position, or to increase its position in Citigroup Stock, to cause such
person to be treated as a ``five percent shareholder'' for section 382
purposes. In addition, while exercise of the Rights by non-Acquiring
Person shareholders is not automatic, any such shareholder who does not
decide to exercise the Rights would almost certainly also experience
significant dilution.
(g) Citigroup's board of directors may redeem all of the Rights at
a price of $0.00001 per Right at any time before a Distribution Date.
(h) Prior to the Distribution Date, the Rights will be inseparable
from the corresponding Citigroup Stock and not evidenced by a separate
certificate and, as a result, the Rights will not be transferrable
separately from the corresponding Citigroup Stock. Instead, the Rights
will be evidenced by the certificates for (or current ownership
statements issued with respect to uncertificated shares in lieu of
certificates for) and will be transferred with Citigroup Stock, and the
registered holders of Citigroup Stock will be deemed to be the
registered holders of the Rights.
(i) After the Distribution Date, the rights agent will mail
separate certificates evidencing the Rights to each record holder of
Citigroup Stock as of the close of business on the Distribution Date,
and thereafter the Rights will be transferable separately from
Citigroup Stock. The Rights will expire on June 10, 2012 (the Final
Expiration Date), with no value, unless the Rights are earlier
exchanged or redeemed or the Plan is amended by the board of directors
of Citigroup.
(j) At any time prior to the Distribution Date, the Rights Plan may
be amended in any respect. At any time after the occurrence of a
Distribution Date, the Rights Plan may be amended in any respect that
does not adversely affect Rights holders (other than any Acquiring
Person).
(k) A Rights holder has no rights as a stockholder of Citigroup as
a result of holding the Rights, including the right to vote and to
receive dividends. The Rights Plan includes antidilution provisions
designed to maintain the effectiveness of the Rights.
5. Citigroup issued a press release regarding the adoption of the
Rights Plan on June 10, 2009. In addition, shareholders of Citigroup
Stock as of the Record Date, including participants in the Participant
Directed Plans who were invested in the Citigroup Stock fund, were
notified of the adoption of the Rights Plan by letter, dated June 22,
2009 (the Record Date). The notice was sent to active employees by
electronic mail (with the relevant link) and to all others by first
class mail. Shareholders did not have to pay any amount to acquire the
Rights. As of the Record Date, Citigroup had approximately 196,000
registered Citigroup Stock shareholders of record. As of the Record
Date, there were 5,671,743,807 shares of Citigroup Stock issued and
outstanding.
On March 2, 2010, the Applicants informed the Department that
Citigroup filed a February 26, 2010 preliminary proxy statement,
Schedule 14A, pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (1934 Act), with the Securities Exchange Commission (SEC)
providing the contents of the proxy statement that was mailed to
Citigroup stockholders, for the Citigroup annual stockholders' meeting
held on April 20, 2010. Proposal 6 of the proxy statement asks that the
stockholders at the meeting ratify the June 9, 2009 board of directors'
adoption of the Rights Plan. The proxy statement noted that because the
Rights Plan protects the value of the deferred tax assets for the
benefit of all
[[Page 61951]]
stockholders, the board of directors recommends that the stockholders
vote for ratification of the Rights Plan. On April 26, 2010, the
Applicants informed the Department that Form 8-K, filed by Citigroup on
April 23, 2010 with the SEC pursuant to Section 13 or 15(d) of the 1934
Act, reported that the proposal to ratify the adoption of the Rights
Plan was approved by the stockholders at the annual meeting held on
April 20, 2010. On April 23, 2010, Citigroup shareholders ratified and
approved the adoption of the Rights Plan.
6. The authorized capital stock of Citigroup consists of 15 billion
shares of Citigroup Stock, with a par value $0.01 per share, and 30
million shares of preferred stock, without a par value per share. The
Citigroup Stock is traded on the NYSE under the symbol of C. It is
represented that the closing price of the Citigroup Stock on June 19,
2009, before the Offering was $3.17 per share. On June 22, 2009, the
closing price of the Citigroup Stock was $3.00 per share. It is
represented that sufficient shares of the Series R Preferred Stock will
be available to satisfy fully all exercise elections made in connection
with the Rights.
7. The Applicants note that the acquisition by each of the Plans of
the Rights occurred or that will occur, in connection with the holding
or acquisition of Citigroup Stock as a result of the Offering made
available by Citigroup, on the same terms to all shareholders of the
Citigroup Stock, including the acquisition of the Rights at no cost.
The Applicants assert that neither the Participant Directed Plan
participants nor the Citigroup Pension Plan will pay any fees or
commissions in connection with the exercise of the Rights other than
the aggregate Purchase Price with respect to the Rights then being
exercised and an amount equal to any applicable transfer tax or other
governmental charge.
8. Citigroup and its affiliates, as employers any of whose
employees are covered by one or more of the Plans, subject to Title I
of the Act, and as fiduciaries of one or more of the Plans, are parties
in interest with respect to each such plan, pursuant to section
3(14)(A) and section 3(14)(C) of the Act, respectively. In addition,
Citigroup and its affiliates, as employers any of whose employees are
covered by one or more of the Plans, which are subject to Title II of
the Act, and as fiduciaries with respect to one or more of such Plans
are disqualified persons with respect to each such Plan, pursuant to
section 4975(e)(2)(A) and section 4975(e)(2)(C) of the Code,
respectively.
9. It is represented that the Citigroup Stock, the Rights, and the
Series R Preferred Stock satisfy the definition of ``employer
securities,'' as set forth under section 407(d)(1) of the Act \23\ and
that the Citigroup Stock and Series R Preferred Stock satisfy the
definition of a ``qualifying employer security,'' as set forth in
section 407(d)(5) of the Act. However, the Rights do not satisfy the
definition of ``qualifying employer securities,'' as defined under
section 407(d)(5) \24\ of the Act because the Rights, if considered
separately from Citigroup Stock as a security under section 3(20) of
the Act \25\, is not stock, a marketable obligation or an interest in a
publicly-traded partnership. Under section 407(a)(1) of the Act, a plan
may not acquire or hold any ``employer security'' which is not a
``qualifying employer security.'' Further, section 406(a)(1)(E) of the
Act prohibits the acquisition, on behalf of a plan, of any ``employer
security'' in violation of section 407(a) of the Act. Section 406(a)(2)
of the Act prohibits a fiduciary who has authority or discretion to
control or manage the assets of a plan to permit the plan to hold any
``employer security'' that violates section 407(a) of the Act.
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\23\ Section 407(d)(1) of the Act defines the term, ``employer
security,'' as ``a security issued by an employer of employees
covered by the plan, or by an affiliate of such employer.''
\24\ Section 407(d)(5) of the Act defines the term ``qualifying
employer security,'' as an employer security which is stock, a
marketable obligation (as defined in subsection (e)), or an interest
in a publicly traded partnership * * *''
\25\ Section 3(20) of ERISA states that ``security'' has the
same meaning as such term under section 2(1) of the Securities Act
of 1933, as amended (the ``Securities Act''). Section 2(1) of the
Securities Act defines the term ``security'' as ``any note, stock,
treasury stock, security future, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate,
preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas,
or other mineral rights, any put, call, straddle, option, or
privilege on any security, certificate of deposit, or group or index
of securities (including any interest therein or based on the value
thereof), or any put, call, straddle, option, or privilege entered
into on a national securities exchange relating to foreign currency,
or, in general, any interest or instrument commonly known as a
``security'', or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or
warrant or right to subscribe to or purchase, any of the
foregoing.''
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The Applicants have requested retroactive relief, effective as of
June 22, 2009, the Record Date of the Offering, from the prohibitions,
as set forth in Title I of the Act, for the acquisition and holding of
the Rights by the Plans. The Applicants have also requested the same
retroactive relief from the prohibitions, as set forth in section
4975(c)(1)(A) through (E) of the Code, for the acquisition of the
Rights by the Citigroup 401(k) Plan and the Citigroup Pension Plan.
10. The Applicants state that the Rights will only be exercisable
in the event Citigroup experiences an ownership change under section
382 of the Code. The Rights will remain outstanding until the Final
Expiration Date (or June 10, 2012), unless the Rights are earlier
exchanged or redeemed pursuant to the terms and conditions of the
Rights Plan or the Rights Plan is amended. The Applicants assert that
the Rights issued by Citigroup are transferable only in connection with
the transfer of the underlying shares of Citigroup Stock and cannot be
separated from the Citigroup Stock unless and until such Rights are
exercisable. This means that the Plans cannot simply refuse to accept
the Rights. Since the Rights are inseparable from Citigroup Stock, it
would be impossible for the Plans to hold Citigroup Stock (a qualifying
employer security) and not engage in a prohibited transaction. Absent
an exemption, the Plans would have to divest themselves of all
Citigroup Stock in order to not hold the Rights and thereby avoid a
prohibited transaction.
11. With regard to the Rights acquired by the Participant Directed
Plans and potentially to be acquired in the future, it is represented
by plan design that the participants of the Participant Directed Plans
control the assets in their accounts in such Plans and that no plan
fiduciary had the authority to exercise any control over such assets.
Therefore, on the Record Date, a Right attached to each Citigroup Stock
beneficially owned by a participant's account on that date and, thus,
the Rights were allocated to the accounts of the participants in such
Plans in proportion to the Citigroup Stock beneficially owned by each
such account. In the event that the Participant Directed Plans acquire
Citigroup Stock in the future, a Right will attach to each Citigroup
Stock beneficially acquired by each participant's account and, thus,
the Rights will be allocated to the accounts of the participants in
such Plans in proportion to the Citigroup Stock beneficially acquired
by each such account. In addition, it is represented that each
participant in the Participant Directed Plans will be given the
opportunity to exercise the Rights upon the Distribution Date in
accordance with the terms and conditions of the Rights Plan.
Accordingly, each participant will be able to make an independent
decision whether to acquire Citigroup
[[Page 61952]]
Stock (except in the case of a Stock/Right Contribution as discussed
below) and the attached Rights in the future and whether to exercise
the Rights following the Distribution Date and receive shares of Series
R Preferred Stock with a value equal to twice the Purchase Price.
12. With respect to the Citigroup Pension Plan, it is represented
that the Citigroup Pension Plan did not hold any Citigroup Stock as of
the Record Date. However, under the terms of the Citigroup Pension
Plan, the Pension Plan Investment Committee of Citigroup Inc., as the
named fiduciary of such Plan, has the authority to appoint a third
party manager unaffiliated with Citigroup and its affiliates to serve
as a ``fiduciary'' (within the meaning of section 3(21)(A) of the Act)
and an ``investment manager'' (within the meaning of section 3(38) of
the Act) (an Independent Fiduciary) over all or a portion of the assets
of the Citigroup Pension Plan. Under investment guidelines applicable
to the assets under the supervision and management of certain
Independent Fiduciaries, such Independent Fiduciaries may be able to
cause the Citigroup Pension Plan to invest in Citigroup Stock in
accordance with sections 408(e) and 407 of the Act. In the event that
the Citigroup Pension Plan acquires Citigroup Stock before the Final
Expiration Date, it is represented that all decisions regarding the
acquisition (except in the case of a Stock/Right Contribution as
discussed below), holding and exercise or other disposition of
Citigroup Stock and, therefore, the Rights by the Citigroup Pension
Plan will be exercised by an Independent Fiduciary. In addition,
Citigroup Inc. may in the future contemplate making employer
contributions to one or more of the Plans in shares of Citigroup Stock
and the Rights attached to such shares (a Stock/Rights Contribution).
The determination to make such Stock/Right Contribution will be made by
Citigroup as a corporate entity.
13. The Applicants represent that all shareholders of Citigroup
Stock on or after the Record Date, including the participants in the
Participant Directed Plans and any Independent Fiduciary of the
Citigroup Pension Plan, have the ability to exercise the Rights
acquired with Citigroup Stock after the Distribution Date through the
close of business on the Final Expiration Date, unless earlier
exchanged or redeemed in accordance with the terms and conditions of
the Rights Plan. This deadline for exercising the Rights was
implemented by Citigroup as the issuer of the Rights. Neither the
shareholders (other than executive officers of Citigroup who are also
shareholders of Citigroup Stock), the participants in the Participant
Directed Plans nor any Independent Fiduciary had any voice in setting
the deadline with respect to the Rights.
14. The Applicants assert that the acquisition, holding, and
exercise or other disposition of the Rights by the Plans, pursuant to
the Offering, is in the interests of and beneficial to such Plans and
to the participants and beneficiaries of such Plans. The Applicants
note that the existence of the Rights Plan and issuance of Rights is
beneficial to the Plans to the extent they are shareholders of
Citigroup Stock because the Rights Plan is explicitly designed to
preserve Citigroup's ability to utilize its Tax Benefits (which in
total had a reported value of $46.1 billion as of December 31, 2009)
and to avoid limitations on the use of any portion of such amount.
Citigroup's ability to utilize its Tax Benefits has significant value
to Citigroup's shareholders, including the Plans that hold Citigroup
Stock.
It is represented that the Plans' ability to acquire, hold and
dispose of the Rights is in the interest of participants and
beneficiaries because it allows them to hold Citigroup Stock. If the
requested exemption were not granted, the Applicants represent that the
Plans would not be permitted to acquire, hold or dispose of the Rights.
Since the Rights are not severable from Citigroup Stock until they
become exercisable, the Plans would not be permitted to acquire, hold
or dispose of Citigroup Stock, even though the Citigroup Stock itself
is a qualifying employer security and such actions are contemplated by
the statutory scheme of ERISA.
The Applicants assert that the Plans' ability to exercise or
otherwise dispose of the Rights is beneficial to the Plans because, if
the Rights become exercisable, they will allow the Plans to acquire
additional equity in Citigroup at a discount on the same terms and
conditions as other holders of Citigroup Stock. If the Plans held
Citigroup Stock but were not able to exercise the Rights, the value of
their shares would be diluted significantly, resulting in harm to the
Plans. However, the Applicants state that it is important to note that
if the Rights Plan is successful, shareholders will be deterred from
becoming Acquiring Persons and the Rights will never become
exercisable.
15. It is represented that the acquisition, holding, and exercise
or other disposition of the Rights by the Plans will be protective of
such Plans and of the participants and beneficiaries of such Plans in
that all of the shareholders of Citigroup Stock, including the Plans,
will be treated in a similar manner with respect to the Rights. In
addition, all decisions regarding the future acquisition (except in the
case of an acquisition as a result of a Stock/Right Contribution, where
the determination to make the contribution will be made by Citigroup as
a corporate entity), holding and exercise or other disposition of the
Rights by the Participant Directed Plans will be made in accordance
with the provisions of such Plans for individually-directed investment
of participant accounts by the individual participants. All decisions
regarding the future acquisition (except in the case of an acquisition
as a result of a Stock/Right Contribution, where the determination to
make the contribution will be made by Citigroup as a corporate entity),
holding and exercise or other disposition of the Rights by the
Citigroup Pension Plan will be made by an Independent Fiduciary.
16. It is represented that the acquisition, holding, and exercise
or other disposition of the Rights by the Plans is feasible and all
shareholders of the Citigroup Stock (other than an Acquiring Person),
including the Plans, were, and will be, treated in the same manner with
respect to any past and future acquisition, holding, and exercise or
other disposition of the Rights. With regard to the fact that the past
acquisition and holding of the Rights were consummated prior to
obtaining an exemption due to the timing of the Offering, it is
represented that the fiduciaries were required to participate in the
Offering before requesting the proposed exemption and such fiduciaries
had no control over the timing of the transactions.
17. In summary, the Applicants represent that the proposed
transactions satisfy the statutory requirements for an exemption under
section 408(a) of the Act and section 4975(c)(2) of the Code because:
(a) The acquisition by each of the Plans of the Rights occurred or
will occur in the future in connection with the holding or acquisition
of Citigroup Stock as a result of the Offering made available by
Citigroup on the same terms to all shareholders of Citigroup Stock,
including the acquisition of the Rights at no cost;
(b) The past acquisition of the Rights by the Participant Directed
Plans resulted from an independent act of Citigroup as a corporate
entity. The acquisition of the Citigroup Stock with the attached Rights
by (i) the Participant Directed Plans in the future will occur at the
direction of individual
[[Page 61953]]
participants, (ii) the Citigroup Pension Plan at the direction of the
Independent Fiduciary, or (iii) as a result of a Stock/Right
Contribution where the determination to make the contribution will be
made by Citigroup as a corporate entity; in all cases, incidental to,
and as a consequence of, the purchase or other acquisition of Citigroup
Stock. All holders of the Rights holding Citigroup Stock (other than an
Acquiring Person), including the Plans, were, and will continue to be,
treated in the same manner with respect to the acquisition of the
Rights;
(c) All shareholders of Citigroup Stock, including the Plans
acquired, or will acquire, the same proportionate number of Rights
based on the number of shares of Citigroup Stock held by such
shareholder, including the Plans;
(d) Except with respect to a Stock/Right Contribution, the
acquisition of the Rights by the Participant Directed Plans was made,
or will be made, pursuant to provisions of each such plan for
individually-directed investment of participant accounts;
(e) All decisions regarding the holding and exercise or other
disposition of the Rights that will be made by the Participant Directed
Plans will be made in accordance with the provisions of such
Participant Directed Plans for individually-directed investment of
participant accounts by the individual participants whose accounts in
each such Participant Directed Plan acquired the Rights in connection
with the Offering, and if no instructions are received, the Rights will
expire in accordance with the terms and conditions of the Rights Plan;
and
(f) The authority for all decisions regarding the acquisition,
holding and exercise or other disposition of the Rights by the
Citigroup Pension Plan will be exercised by an Independent Fiduciary.
(g) Neither the Participant Directed Plan participants nor the
Citigroup Pension Plan will pay any fees or commissions in connection
with the exercise of the Rights other than the aggregate Purchase Price
with respect to the Rights then being exercised and an amount equal to
any applicable transfer tax or other governmental charge.
Notice to Interested Persons
The Applicants represent that within thirty (30) days of the date
of publication of the proposed exemption in the Federal Register, the
Applicants will provide notice of the proposed exemption (consisting of
a copy of the proposed exemption as published in the Federal Register
and the supplemental statement required by Department of Labor
Regulation Section 2570.43(a)(2), (collectively, the Notice to
Interested Persons)) to (i) all current participants (active and
inactive) in the Participant Directed Plans, and (ii) the current
Independent Fiduciaries (as defined in the proposed exemption) of the
Citigroup Pension Plan. With respect to the Participant Directed Plans,
the Applicants will provide all current participants with the Notice to
Interested Persons, as well as an explanatory cover letter, by first
class mail. The Notice to Interested Persons may be included in the
same package that includes the quarterly statements and other
participant notices if the timing of the mailing of the Notice to
Interested Persons coincides with the timing of the mailing of such
other statements and notices. With respect to the Citigroup Pension
Plan, the Applicants will provide the Independent Fiduciaries with the
Notice to Interested Persons by electronic mail, with a request for a
delivery receipt for the electronic mail.
The Department must receive all written comments and requests for a
hearing no later than thirty (30) days from the last date of the
mailing of the Notice to Interested Persons.
FOR FURTHER INFORMATION CONTACT: Wendy M. McColough of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)
The West Coast Bancorp 401(k) Plan (the Plan) Located in Lake
Oswego, Oregon
[Application No. D-11611]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\26\ If the
exemption is granted, the restrictions of sections 406(a)(1)(A) and
(E), 406(a)(2), 406(b)(1), 406(b)(2), and 407(a) and the sanctions
resulting from the application of section 4975(c)(1)(A) and (E) of the
Code, shall not apply, effective January 29, 2010, to: (1) the
acquisition of stock rights (the Rights) by the Plan issued by the West
Coast Bancorp, Inc. (Bancorp), the Plan sponsor and a party in interest
with respect to the Plan under the terms and conditions of a Rights
offering (the Offering); and (2) the holding of the Rights by the Plan
until their expiration, during the subscription period (the
Subscription Period) of the Offering, provided that the following
conditions were met:
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\26\ For purposes of this proposed exemption, references to the
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
(a) The receipt of the Rights by the Plan occurred in connection
with the Offering and was made available by Bancorp on the same terms
to all shareholders (the Shareholders) of the common stock of Bancorp
(Common Stock);
(b) The acquisition of the Rights by the Plan resulted from an
independent act of Bancorp as a corporate entity, and all holders of
the Rights, including the Plan, were treated in the same manner with
respect to such acquisition;
(c) All Shareholders of Common Stock, including the Plan, received
the same proportionate number of Rights based on the number of shares
of Common Stock held by such Shareholders;
(d) All decisions regarding the Rights held by the Plan were made
by the individual Plan participants whose accounts in the Plan received
the Rights, in accordance with the provisions under the Plan for
individually-directed investment of such account; and
(e) The Plan did not pay any fees or commissions in connection with
the acquisition and or holding of the Rights.
Effective Date: This proposed exemption, if granted, will be
effective as of January 29, 2010, the commencement date of the Offering
(the Commencement Date).
Summary of Facts and Representations
The Parties
1. Bancorp, which maintains its principal place of business in Lake
Oswego, Oregon, is the bank holding company for West Coast Bank (the
Bank), its primary subsidiary. The Bank maintains $2.7 billion in
assets and operates in 65 Oregon and Washington state locations. As of
the Commencement Date, there were 87,171,915 shares of Common Stock and
121,328 shares of Series B Preferred Stock (Series B Preferred Stock)
outstanding. As of March 9, 2010, Bancorp was authorized to issue 250
million additional shares of Common Stock in order to raise capital, as
discussed below.
2. Bancorp sponsors the Plan, a Code section 401(k) profit sharing
plan, for its subsidiaries. As of the Commencement Date, the Plan had
752 participants and assets totaling $22,717,737.22. Under the Plan,
participants may make pre-tax and after-tax 401(k) contributions.
Eligible employees may also make rollover contributions into the Plan
from other employers' qualified plans or from IRAs. Further, the Plan
allows
[[Page 61954]]
participants to self-direct the investment of their individual accounts
pursuant to section 404(c) of the Act. West Coast Trust Company, a
wholly-owned subsidiary of Bancorp serves as the Plan's directed
trustee (the Trustee).
3. The Plan provides participants with several investment options,
which include the Federated Government Obligations Money Market Fund
(the Money Market Fund) and the West Coast Bancorp Employer Stock Fund
(the Stock Fund). The Money Market Fund provides conservative investors
with current income and stable principal. Accordingly, the Money Market
Fund invests primarily in a portfolio of short-term U.S. Treasury and
government agency securities.
The Stock Fund allows participants to invest voluntarily in the
Common Stock. As of January 19, 2010, the Plan held 454,923.56 shares
of common stock or approximately 0.52% of the then outstanding shares
of Common Stock, with a value of $1,187,350 based on the $2.61 closing
price on the NASDAQ Global Select Market. The Common Stock trades under
ticker symbol ``WCBO.'' As of the Commencement Date, the Common Stock
represented approximately 5.23% of Plan assets as of the Commencement
Date.
Regulatory Involvement
4. From 2007 to early 2009, the value of the Common Stock decreased
by over 90 percent as a result of the stock market crash, the subprime
mortgage crisis and the recession. Bancorp represents that the Common
Stock's price reflected the trend for comparable bank stocks. Although
Bancorp had exposure to home mortgage loans that were eventually
written down, Bancorp represents that it was not a recipient of any
funds from the U.S. Treasury's Troubled Asset Relief Program.
5. On March 30, 2009, the Federal Deposit Insurance Corporation
(FDIC) and the Oregon Division of Finance and Corporate Securities
(DFCS) issued a joint Report of Examination (ROE) following a routine
examination of the Bank. The ROE, as summarized, stated that the Bank
had engaged in unsafe and unsound banking practices by: (a) Operating
with management whose policies and practices were detrimental to the
Bank; (b) operating with a board of directors which failed to provide
adequate supervision over and direction to the active management of the
Bank; (c) operating with inadequate capital in relation to the kind and
quality of assets held by the Bank; (d) operating with a large volume
of poor quality loans; (e) engaging in unsatisfactory lending and
collection practices; (f) operating in such a manner as to produce
operating losses; (g) operating with inadequate provisions for
liquidity; and (h) operating in violation of Part 323 of the FDIC Rules
and Regulations, 12 CFR Part 3234, concerning appraisals; and (i)
operating in violation of Part 353 of the FDIC Rules and Regulations,
12 CFR Part 353, concerning suspicious activity reporting.
6. On October 15, 2009, the FDIC, the DFCS and the Bank entered
into a Stipulation and Consent to the Issuance of an Order to Cease and
Desist (the Consent Agreement) (FDIC-09-4536). In the Consent
Agreement, the Bank, without admitting or denying alleged charges of
unsafe or unsound banking practices and violations of law and/or
regulations, agreed to the issuance of an Order to Cease and Desist
(the Consent Order). On October 22, 2009, the FDIC and the DFCS issued
the Consent Order which essentially required the Bank to take steps
outlined in the Consent Agreement. In this regard, The Bank was
required to increase its capital levels, reduce underperforming assets,
submit plans for a securities issuance to the FDIC, set capital and
leverage ratios, prevent fraudulent lending, and eliminate dividends
within certain time frames.\27\ The Bank represents in its Form 10-K
(Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934) filing for its fiscal year ending December 31,
2009 that it is in material compliance with all aspects of the Consent
Order. On July 15, 2010, the FDIC and DFCS issued a joint termination
of the Consent Order.
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\27\ Bancorp also entered a written agreement with the Federal
Reserve Bank of San Francisco (the Reserve Bank) and the DFCS on
December 15, 2009, agreeing not to take any dividends or other
payments representing a reduction in capital from the Bank without
the prior consent of the Reserve Bank and the DFCS.
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New Investment in the Bank
7. On October 23, 2009, Bancorp entered into investment agreements
with 52 outside investors as part of a private sale of $155 million of
newly-issued preferred stock and warrants issued by Bancorp (the
Capital Raise). Sandler O'Neill and Partners, L.P., Bancorp's financial
advisor with respect to the Capital Raise, represented Bancorp with the
outside investors, none of whom are parties in interest with respect to
the Plan.
During the Capital Raise, Bancorp received net proceeds of $139.2
million from the investors in exchange for 1,428,849 shares of
mandatorily convertible cumulative participating preferred stock (the
Series A Preferred Stock), 121,328 shares of mandatorily convertible
cumulative participating preferred stock (the Series B Preferred
Stock), and Class C warrants (the Class C Warrants), exercisable for a
total of 240,000 shares of Series B Preferred Stock (each at a price of
$100 per share together with certain other expired warrants).
As a result of shareholder approvals, on January 20, 2010, shares
of Series A Preferred Stock issued by Bancorp in the Capital Raise were
automatically converted into an aggregate of 71,442,450 shares of
Common Stock on January 27, 2010. Shares of Series B Preferred Stock
issued in the Capital Raise became automatically convertible into 12
million shares of Common Stock upon transfer of such preferred stock to
third parties in a ``widely dispersed'' offering.\28\ Finally, shares
of Series B Preferred Stock issuable upon the exercise of the Class C
Warrants became automatically convertible into 12 million shares of
Common Stock following exercise of the Class C Warrants and the
transfer of the Series B Preferred Stock issued by Bancorp to third
parties in a ``widely-dispersed'' offering.
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\28\ Bancorp's Form 10-K Report states, on page 35, that for the
fiscal year ending December 31, 2009, no conversion of Series B
Preferred Stock can occur until the condition of a ``widely-
dispersed'' offering of such stock has occurred, due to regulatory
reasons.
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Bancorp contributed the $139.2 million of proceeds from the Capital
Raise to the Bank, thereby improving the Bank's operating flexibility.
In addition, the regulatory capital ratios of the Bank improved
significantly as a result of the Capital Raise.
The Offering
8. Following the Capital Raise, Bancorp embarked on an effort to
raise $10 million in additional capital through the Offering.\29\ The
Offering commenced on January 29, 2010 and it expired on March 1, 2010
at 5 p.m. PST (the Offering Expiration Date). The shares of Common
Stock issued in connection with the Offering were listed on the NASDAQ
Global Select Market.
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\29\ Bancorp apprised the FDIC and DFCS of the Offering pursuant
to the Consent Order.
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In the Offering, Bancorp distributed, at no charge, the Rights to
the Shareholders of record on January 19, 2010 (the Record Date). The
Rights entitled the Shareholders to purchase up to 5,000,000 shares of
Common Stock for a subscription price (the Subscription Price) of $2.00
per share. Each Shareholder received .31787 Rights for each share of
Common Stock they owned on the Record Date. The Rights were allocated
in whole numbers
[[Page 61955]]
only and were rounded down to the nearest whole number.
9. The Rights could not be sold, transferred or assigned, and they
were not listed for trading on the NASDAQ or any other exchange or
over-the-counter market. Bancorp represents that the Rights were
nontransferable to allow only legacy Shareholders the opportunity to
purchase additional shares of Common Stock to help offset the share
dilution such shareholders had incurred when the Preferred Stock was
acquired by the outside investors, as discussed above in Representation
7. Further, Bancorp states that the use of transferable Rights would
have allowed persons other than legacy Shareholders to acquire Common
Stock at the below market price; whereas, the Offering was intended to
benefit legacy Shareholders. Any Rights that were not exercised by the
Shareholders expired.
As noted above, each Right entitled a Shareholder an opportunity to
purchase one share of Common Stock at the Subscription Price of $2.00
per share. The Subscription Price, which was established by the
Bancorp's Board of Directors (the Board), was equal to the implied per
share value of the Common Stock that was negotiated by the new
investors, as discussed above in Representation 7. The Subscription
Price was not related to Bancorp's book value, results of operations,
cash flows, financial condition or the predicted future market value of
the Common Stock after the Offering. In addition, the Board did not
make any recommendations to the Shareholders regarding whether they
should exercise their Rights but urged the Shareholders to make
independent decisions based on their assessment of Bancorp's business
and the risk factors associated with a rights offering.
10. The Rights entitled the Shareholders to a basic subscription
privilege (the Basic Subscription Privilege) and an over-subscription
privilege (the Over-Subscription Privilege). The Basic Subscription
Privilege entitled the Shareholders to purchase one share of Common
Stock at the Subscription Price. The Over-Subscription Privilege
entitled Shareholders to purchase as many additional shares of Common
Stock available in the Offering as they wanted at the Subscription
Price. Shareholders were required to exercise their Basic Subscription
Privilege in full before they could exercise their Over-Subscription
Privilege. Additionally, Shareholders were required to exercise their
Over-Subscription Privilege at the same time they exercised their Basic
Subscription Privilege. However, Bancorp reserved the right to reject
in whole or in part any Over-Subscription requests, regardless of the
availability of shares of Common Stock.\30\ Bancorp represents that no
Shareholders who exercised their Basic Subscription Privileges,
including Plan Shareholders, had their Over-Subscription requests
rejected either in whole or in part.
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\30\ Bancorp had reserved the rejection right, which is
customary in a rights offering by a banking institution, to avoid
any shareholder from acquiring an ownership interest in Bancorp that
would either jeopardize Bancorp's ability to claim certain tax
advantages, such as net operating losses, or require Bancorp to
first obtain approval from federal or state banking authorities.
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If the Shareholders collectively exercised their Over-Subscription
Privileges in excess of the 5,000,000 shares authorized by Bancorp in
the Offering, Bancorp was required to fulfill first all Basic
Subscription Privileges. Then, any remaining shares of Common Stock
were to be sold pro rata among the Over-Subscription Shareholders based
on the number of shares for which the over-subscribing Shareholders had
subscribed under their Basic Subscription Privileges.
Request for Exemptive Relief and Rationale
11. Bancorp represents that the Rights satisfy the definition of an
``employer security,'' which under section 407(d)(1) of the Act is
defined as ``a security issued by an employer of employees covered by
the plan, or by an affiliate of such employer,'' However, Bancorp
states that the Rights do not satisfy the definition of a ``qualifying
employer security,'' as set forth in section 407(d)(5) of the Act,
which defines the term as an employer security which is stock, a
marketable obligation, or an interest in a publicly-traded partnership
(provided that such partnership is an existing partnership as defined
in the Code). Under section 407(a)(1) of the Act, a plan may not
acquire or hold any ``employer security'' which is not a ``qualifying
employer security.'' Moreover, section 406(a)(1)(E) of the Act
prohibits the acquisition, on behalf of a plan, of any ``employer
security in violation of section 407(a) of the Act. Finally, section
406(a)(2) of the Act prohibits a fiduciary who has authority or
discretion to control or manage the assets of a plan to permit the plan
to hold any ``employer security'' that violates section 407(a) of the
Act. Because the Plan's acquisition and holding of the Rights would
violate the Act,\31\ Bancorp requests an administrative exemption from
the Department. If granted, the exemption would be effective on the
Commencement Date.
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\31\ Other provisions of the Act that are implicated by the
transactions include section 406(a)(1)(A) of the Act and the
fiduciary self-dealing and conflict of interest provisions section
406(b)(1) and (b)(2) of the Act. In relevant part, section
406(a)(1)(A) of the Act provides that a fiduciary with respect to a
plan shall not cause the plan to engage in a transaction if the
fiduciary knows or should know that the transaction is a prohibited
sale or exchange of any property between a plan and a party in
interest. Section 406(b)(1) of the Act prohibits a fiduciary from
dealing with the assets of a plan in his own interest of or for his
own account. Section 406(b)(2) of the Act prohibits a fiduciary with
respect to a plan from acting in any transaction involving the plan
on behalf of a party, or represent a party, whose interests are
adverse to the interests of the plan or its participants and
beneficiaries.
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The Rights Disclosures
12. On February 3, 2010, Bancorp posted a ``Rights Offering
Notice'' on its intranet for its employees. On February 4, 2010,
Bancorp completed mailing a prospectus for the Offering. Plan
Shareholders also received special instructions entitled ``Special
Instructions for Participants in our 401(k) Plan--What You Need to Know
about the Bancorp Stock Rights Offering and Your 401(k) Account''
(Special Instructions). As discussed below, the Special Instructions
gave Plan Shareholders, as opposed to non-Plan Shareholders, different
timeframes and payment methods in which to exercise their Rights.
Exercise of Rights
13. Shareholders were permitted to exercise all, some or none of
their Rights. An election to exercise a Right was irrevocable once
made. Bancorp did not charge any fees or sales commissions to issue the
Rights or to issue shares of Common Stock to those who exercised their
Rights. However, if Shareholders exercised their Rights through a
broker or other holder of their shares, the Shareholders were
responsible for paying any fees that person may have charged. No fees
or expenses were paid by the Plan.
14. To exercise their Rights, including their Basic and Over-
Subscription Privileges, non-Plan Shareholders were required to
complete and submit a Subscription Rights Certificate to Wells Fargo,
N.A. which acted as the Subscription Agent for the Offering (the
Subscription Agent). The Subscription Agent collected these payments
and held them in a segregated bank account until the Offering was
completed. Once the Offering had been completed, the Subscription Agent
purchased the new shares of Common Stock in accordance with the terms
of the Offering. Generally, non-Plan Shareholders had until 5 p.m. PST
on the Offering Expiration Date (i.e., March 1, 2010) to
[[Page 61956]]
exercise their Rights, but those who held their shares in a brokerage
account had to comply with the earlier deadline set by their particular
broker.
15. To exercise their Rights, Plan Shareholders were required to
complete and submit a Subscription Rights Certificate and Election Form
to the Subscription Agent, which was not a party in interest with
respect to the Plan, by 5 p.m. CST (3 p.m. PST) on February 22, 2010
(the Participant Expiration Time), six business days before the
Offering Expiration Date.\32\ From the Commencement Date to the
Participant Expiration Time, the Subscription Agent was required to
provide the Trustee with daily reports of the participants who
submitted forms and the number of Rights they chose to exercise under
both their Basic and Over-Subscription Privileges.
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\32\ Bancorp represents that the extra business days were
required to provide the Trustee, the Subscription Agent for the
Offering, the Plan's recordkeeper, the custodian for the Stock Fund
and the clearing agency for the Offering sufficient time to process
Plan participants' elections to exercise their Rights, tabulate and
confirm the results, liquidate the participants' funds, confirm the
orders and the availability of the funds and remit payment to
purchase the shares.
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In order to exercise their Rights, Plan participants were not
required to remit any payments to the Subscription Agent. Instead,
participants were required to have enough money available in their
Money Market Fund accounts by the Participant Expiration Time to pay
for their Basic and Over-Subscription Privilege shares (their
Subscription Prices).\33\ Because participants were not likely to have
sufficient funds in their Money Market Fund accounts initially, the
Special Instructions provided detailed instructions about how
participants could transfer additional funds into the Money Market Fund
from other Plan investment funds and specified the timeframes in which
to do so. Participant directions to move funds in the Money Market Fund
from any other investment funds in the Plan except the Stock Fund had
to be received by February 17, 2010. Participant instructions to move
funds from the Stock Fund into the Money Market Fund had to be received
by February 19, 2010 in order to allow additional time to settle trades
on the Common Stock.
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\33\ Participants had to have sufficient funds to pay for their
Basic and Over-Subscription Privileges, but they could choose the
source of such funds from within their individual accounts in the
Plan. By liquidating only the participants' Money Market Fund
accounts rather than making a pro rata liquidation from each of the
Plan investment funds in which participants were invested, Bancorp
explains that the Plan allowed participants to choose which of their
Plan investment funds they wanted to liquidate to pay for their
shares of Common Stock. Thus, participants were not forced to use
money from other investment funds within the Plan which they wished
to keep invested at their then current levels.
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16. As soon as practicable after the Participant Expiration Time,
the Trustee froze the Money Market Fund accounts of the participants
exercising Rights\34\ and liquidated funds sufficient to cover their
Subscription Prices. If a participant did not have enough money, the
Trustee (as instructed by Bancorp) exercised that participant's Rights
to the maximum extent possible with the funds available. Once the
Trustee was finished liquidating funds, it lifted the freeze on the
Money Market Fund.
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\34\ Bancorp states that the reason behind freezing the
participant's Money Market Fund accounts was to prevent the
participants from moving money out of such fund after the
Participant Expiration Time lapsed but before the Trustee could
liquidate it.
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17. To provide the participants with a contemporaneous confirmation
of the number of shares they had purchased in the Offering while
working within the restrictions placed by the administration system of
the Plan's recordkeeper, the Stock Fund was credited with the number of
shares for which the participants had subscribed and paid, even though
at the time those shares had not yet been purchased.\35\ The Special
Instructions explicitly stated that the use of the term ``shares'' only
indicated a pending trade and that the actual shares they purchased
would not be officially credited to their accounts until after the
Offering had closed and the shares had been purchased. For these
reasons, the Stock Fund was frozen for those participants. The freeze
was in effect from the time the shares were credited as a pending trade
until the shares were actually purchased and credited to their
accounts. Bancorp informed participants that the freeze would last
until five to ten business days after the Offering Expiration Date.\36\
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\35\ According to Bancorp, the original intent was to create a
special temporary investment fund in the Plan designated as the
``Rights Offering Subscription,'' in order to show a
counterbalancing asset for the money that was liquidated from the
participants' Money Market Fund. However, the administrative system
of the Plan's recordkeeper was unable to create this special
account. Consequently, the only available option was to show the
subscription rights as actual shares within the Stock Fund, pending
the actual purchase of those shares.
\36\ Bancorp represents that the five to ten business days
allowed sufficient processing time for the Subscription Agent to
determine the number of shares acquired in the over-subscription,
for the shares to be issued, and for the crediting of the shares to
the participants' accounts.
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18. Because the Participant Expiration Time was set six business
days before the Offering Expiration Date, Bancorp explains that
participants would possibly have been at a slight disadvantage relative
to non-Plan Shareholders who had a few additional days to observe the
trading price of the Common Stock and determine whether they wanted to
participate in the Offering.\37\ Therefore, the Trustee was instructed
to note the public trading price of the Common Stock on Friday,
February 26, 2010 (one business day before the Offering Expiration
Date). If, on that date, the Common Stock last traded at above $2.00
per share, the Trustee was to exercise the participant's Rights
pursuant to the terms of the Offering as described above. If, however,
the Common Stock traded at $2.00 per share or lower, the Trustee was to
re-deposit all money into the appropriate participant's Money Market
Fund account and delete the pending trade from the participant's
account in the Stock Fund.
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\37\ According to Bancorp, most of the non-Plan Shareholders
held their shares in brokerage accounts. This meant that they had to
send their subscription elections to their brokers, who would then
patch those elections for their customers with the election cutoff
date set by their brokers, which was typically several business days
before the Offering Expiration Date.
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If a Plan Shareholder instructed the Trustee to exercise such
participant's Rights, the Trustee was required to remit the
participant's money to the designated clearing agency for the Offering,
Depository Trust & Clearing Corporation (DTC). DTC would then purchase
the Common Stock from Bancorp, and the Trustee would credit such
participant's account in the Stock Fund with the corresponding shares.
In the event participants over-subscribed to more shares than were
available under the Offering, the money liquidated from the
participant's Money Market Fund account to buy those shares was re-
deposited into the appropriate account.
19. As of the Commencement Date, 339 Plan participants were
eligible to exercise a minimum of one Right. However, only 70 or 20.1
percent of Plan Shareholders exercised their Rights. In addition, the
Common Stock never closed below $2.00 per share during the entire
Subscription Period.\38\ With respect to Plan Shareholders, the closing
price of the Common Stock on February 26, 2010 was $2.63 per share and
was $2.59 per share on the Expiration Closing Date. Accordingly, the
Trustee exercised the Rights for all such Plan Shareholders at the same
time.
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\38\ During this period, shares of Common Stock closed as low as
$2.47 per share on February 17, 2010 and as high as $2.80 per share
on February 3, 2010.
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[[Page 61957]]
20. Bancorp represents that the acquisition and holding of the
Rights by the Plan was administratively feasible, in that the Offering
was a one-time transaction, and all shareholders of Common Stock,
including the Plan shareholders, were treated in the same manner with
respect to the acquisition and holding of the Rights. With regard to
the fact that Plan shareholders had less time to decide whether to
exercise their Rights, Bancorp represents that the various service
providers involved in the Offering, rather than Bancorp, required the
additional time. Additionally, Bancorp explains that the Offering
included specific protections instructing the Trustee not to exercise
the Rights of Plan Shareholders if the Common Stock fell below the
Subscription Price. Further, Bancorp states that the proposed exemption
would be in the best interests of the Plan and its participants and
beneficiaries because Plan Shareholders that exercised their Rights
avoided the dilution of their interests in Bancorp and increased the
value of their individual accounts.
Summary
21. In summary, Bancorp represents that the transactions satisfied
the statutory requirements for an exemption under section 408(a) of the
Act because:
(a) The Plan's receipt of the Rights occurred in connection with
the Offering and was made available by Bancorp on the same terms to all
shareholders of the Common Stock;
(b) The acquisition of the Rights by the Plan resulted from an
independent act of Bancorp as a corporate entity, and all Shareholders
of the Rights, including the Plan, were treated in the same manner with
respect to such acquisition;
(c) All Shareholders of the Common Stock, including the Plan,
received the same proportionate number of Rights based on the number of
shares of the Common Stock held by such Shareholders;
(d) All decisions regarding the Rights held by the Plan were made
by the individual Plan participants whose accounts in the Plan received
the Rights, in accordance with the provisions under the Plan for
individually-directed investment of such accounts; and
(e) The Plan did not pay any fees or commissions in connection with
the acquisition or holding of the Rights.
FOR FURTHER INFORMATION CONTACT: Mr. Anh-Viet Ly of the Department at
(202) 693-8648. (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 30th day of September, 2010.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2010-24892 Filed 10-5-10; 8:45 am]
BILLING CODE 4510-29-P