[Federal Register Volume 76, Number 33 (Thursday, February 17, 2011)]
[Notices]
[Pages 9366-9373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3590]
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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-11528, Wachovia Corporation and Its
Current and Future Affiliates or Successors (collectively, Wachovia or
the Applicant; and D-11635, The Parvin Nahvi, M.D., Inc. 401(k) Profit
Sharing Trust (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.
[[Page 9367]]
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 rrepresentations.
Wachovia Corporation and Its Current and Future Affiliates or
Successors (Collectively, Wachovia or the Applicant)
Located in San Francisco, California
[Application No. D-11528]
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).\1\
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\1\ For purposes of this proposed exemption, references to
section 406 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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Section I. Sales of Auction Rate Securities From Plans to Wachovia:
Unrelated to a Settlement Agreement
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) and (D) and section 406(b)(1) and (2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A), (D), and (E) of the Code, shall not
apply, effective February 1, 2008, to the sale by a Plan (as defined in
Section V(e)) of an Auction Rate Security (as defined in Section V(c))
to Wachovia, where such sale (an Unrelated Sale) is unrelated to, and
not made in connection with, a Settlement Agreement (as defined in
Section V(f)), provided that the conditions set forth in Section II
have been met.
Section II. Conditions Applicable to Transactions Described in Section
I
(a) The Plan acquired the Auction Rate Security in connection with
brokerage or advisory services provided by Wachovia to the Plan;
(b) The last auction for the Auction Rate Security was
unsuccessful;
(c) Except in the case of a Plan sponsored by Wachovia for its own
employees (a Wachovia Plan), the Unrelated Sale is made pursuant to a
written offer by Wachovia (the Offer) containing all of the material
terms of the Unrelated Sale, including, but not limited to: (1) The
identity and par value of the Auction Rate Security; (2) the interest
or dividend amounts that are due and unpaid with respect to the Auction
Rate Security; and (3) the most recent rate information for the Auction
Rate Security (if reliable information is available). Notwithstanding
the foregoing, in the case of a pooled fund maintained or advised by
Wachovia, this condition shall be deemed met to the extent each Plan
invested in the pooled fund (other than a Wachovia Plan) receives
advance written notice regarding the Unrelated Sale, where such notice
contains all of the material terms of the Unrelated Sale, including,
but not limited to, the material terms described in the preceding
sentence;
(d) The Unrelated Sale is for no consideration other than cash
payment against prompt delivery of the Auction Rate Security;
(e) The sales price for the Auction Rate Security is equal to the
par value of the Auction Rate Security, plus any accrued but unpaid
interest or dividends;
(f) The Plan does not waive any rights or claims in connection with
the Unrelated Sale;
(g) The decision to accept the Offer or retain the Auction Rate
Security is made by a Plan fiduciary or Plan participant or an
individual retirement account (an IRA (as defined in Section V(e))
owner who is independent (as defined in Section V(d)) of Wachovia.
Notwithstanding the foregoing: (1) In the case of an IRA which is
beneficially owned by an employee, officer, director or partner of
Wachovia, the decision to accept the Offer or retain the Auction Rate
Security may be made by such employee, officer, director or partner; or
(2) in the case of a Wachovia Plan or a pooled fund maintained or
advised by Wachovia, the decision to accept the Offer may be made by
Wachovia after Wachovia has determined that such purchase is in the
best interest of the Wachovia Plan or pooled fund; \2\
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\2\ The Department notes that the Act's general standards of
fiduciary conduct also would apply to the transactions described
herein. In this regard, section 404 of the Act requires, among other
things, that a fiduciary discharge his duties respecting a plan
solely in the interest of the plan's participants and beneficiaries
and in a prudent manner. Accordingly, a plan fiduciary must act
prudently with respect to, among other things, the decision to sell
the Auction Rate Security to Wachovia for the par value of the
Auction Rate Security, plus unpaid interest and dividends. The
Department further emphasizes that it expects Plan fiduciaries,
prior to entering into any of the proposed transactions, to fully
understand the risks associated with this type of transaction
following disclosure by Wachovia of all relevant information.
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(h) Except in the case of a Wachovia Plan or a pooled fund
maintained or advised by Wachovia, neither Wachovia nor any affiliate
exercises investment discretion or renders investment advice within the
meaning of 29 CFR 2510.3-21(c) with respect to the decision to accept
the Offer or retain the Auction Rate Security;
(i) The Plan does not pay any commissions or transaction costs with
respect to the Unrelated Sale;
(j) The Unrelated Sale is not part of an arrangement, agreement or
understanding designed to benefit a party in interest to the Plan;
(k) Wachovia and its affiliates, as applicable, maintain, or cause
to be maintained, for a period of six (6) years from the date of the
Unrelated Sale, such records as are necessary to enable the persons
described below in paragraph (l)(1), to determine whether the
conditions of this exemption, if granted, have been met, except that:
(1) No party in interest with respect to a Plan which engages in an
Unrelated Sale, other than Wachovia and its affiliates, as applicable,
shall be subject to a civil penalty under section 502(i) of the Act or
the taxes imposed by section 4975(a) and (b) of the Code, if such
records are not maintained, or not available for examination, as
required, below, by paragraph (l)(1); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of Wachovia or its affiliates, as applicable, such records are lost or
destroyed prior to the end of the six-year period;
(l)(1) Except as provided below in paragraph (l)(2), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to above in paragraph (k) are
unconditionally available at their customary location for examination
during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the U.S. Securities and
Exchange Commission;
(B) Any fiduciary of any Plan, including any IRA owner, that
engages in a Sale, or any duly authorized employee or representative of
such fiduciary; or
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a Plan that engages in the
Unrelated Sale, or any authorized employee or representative of these
entities;
(2) None of the persons described above in paragraphs (l)(1)(B)-(C)
shall be authorized to examine trade secrets of Wachovia, or commercial
or financial information which is privileged or confidential; and
(3) Should Wachovia refuse to disclose information on the basis
that
[[Page 9368]]
such information is exempt from disclosure, Wachovia shall, by the
close of the thirtieth (30th) day following the request, provide a
written notice advising that person of the reasons for the refusal and
that the Department may request such information.
Section III. Sales of Auction Rate Securities From Plans to Wachovia:
Related to a Settlement Agreement
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) and (D) and section 406(b)(1) and (2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A), (D), and (E) of the Code, shall not
apply, effective February 1, 2008, to the sale by a Plan of an Auction
Rate Security to Wachovia, where such sale (a Settlement Sale) is
related to, and made in connection with, a Settlement Agreement,
provided that the conditions set forth in Section IV have been met.
Section IV. Conditions Applicable to Transactions Described in Section
III
(a) The terms and delivery of the Offer are consistent with the
requirements set forth in the Settlement Agreement and acceptance of
the Offer does not constitute a waiver of any claim of the tendering
Plan;
(b) The Offer or other documents available to the Plan specifically
describe, among other things:
(1) The securities available for purchase under the Offer;
(2) The background of the Offer;
(3) The methods and timing by which Plans may accept the Offer;
(4) The purchase dates, or the manner of determining the purchase
dates, for Auction Rate Securities tendered pursuant to the Offer, if
the Offer had any limitation on such dates;
(5) The timing for acceptance by Wachovia of tendered Auction Rate
Securities, if there were any limitations on such timing;
(6) The timing of payment for Auction Rate Securities accepted by
Wachovia for payment, if payment was materially delayed beyond the
acceptance of the Offer;
(7) The expiration date of the Offer; and
(8) How to obtain additional information concerning the Offer;
(c) The terms of the Settlement Sale are consistent with the
requirements set forth in the Settlement Agreement; and
(d) All of the conditions in Section II have been met.
Section V. Definitions
For purposes of this proposed exemption:
(a) The term ``affiliate'' means any person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or
under common control with such other person;
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual;
(c) The term ``Auction Rate Security'' or ``ARS'' means a security:
(1) That is either a debt instrument (generally with a long-term
nominal maturity) or preferred stock; and (2) with an interest rate or
dividend that is reset at specific intervals through a Dutch auction
process;
(d) A person is ``independent'' of Wachovia if the person is: (1)
Not Wachovia or an affiliate; and (2) not a relative (as defined in
section 3(15) of the Act) of the party engaging in the transaction;
(e) The term ``Plan'' means an individual retirement account or
similar account described in section 4975(e)(1)(B) through (F) of the
Code (an IRA); an employee benefit plan as defined in section 3(3) of
the Act; or an entity holding plan assets within the meaning of 29 CFR
2510.3-101, as modified by section 3(42) of the Act; and
(f) The term ``Settlement Agreement'' means a legal settlement
involving Wachovia and a U.S. state or federal authority that provides
for the purchase of an ARS by Wachovia from a Plan.
DATES: Effective Date: If granted, this proposed exemption will be
effective as of February 1, 2008.
Summary of Facts and Representations
1. The Applicant, Wachovia, is a global financial services firm
headquartered in North Carolina. Among other things, Wachovia includes
banks, registered investment advisers subject to the Investment
Advisers Act of 1940 and broker-dealers registered with the U.S.
Securities and Exchange Commission. In this last regard, Wachovia acts
as a broker and dealer with respect to the purchase and sale of
securities, including Auction Rate Securities. Wachovia is one of the
largest diversified financial services companies in the United States.
Wachovia provides a broad range of retail banking and brokerage, asset
and wealth management, and corporate and investment banking products
and services to customers through 3,330 retail financial centers in 21
states from Connecticut to Florida and west to Texas and California,
and nationwide retail brokerage, mortgage lending and auto finance
businesses. On December 31, 2008, Wachovia was acquired by Wells Fargo
& Company (WF). WF is a nationwide, diversified community-based
financial services company with total assets of $1.2 trillion and
market capitalization of $140 billion as of December 31, 2009.
2. The Applicant describes Auction Rate Securities and the
arrangement by which ARS are bought and sold as follows. Auction Rate
Securities are securities (issued as debt or preferred stock) with an
interest rate or dividend that is reset at periodic intervals pursuant
to a process called a Dutch Auction. Investors submit orders to buy,
hold, or sell a specific ARS to a broker-dealer selected by the entity
that issued the ARS. The broker-dealers, in turn, submit all of these
orders to an auction agent. The auction agent's functions include
collecting orders from all participating broker-dealers by the auction
deadline, determining the amount of securities available for sale, and
organizing the bids to determine the winning bid. If there are any buy
orders placed into the auction at a specific rate, the auction agent
accepts bids with the lowest rate above any applicable minimum rate and
then successively higher rates up to the maximum applicable rate, until
all sell orders and orders that are treated as sell orders are filled.
Bids below any applicable minimum rate or above the applicable maximum
rate are rejected. After determining the clearing rate for all of the
securities at auction, the auction agent allocates the ARS available
for sale to the participating broker-dealers based on the orders they
submitted. If there are multiple bids at the clearing rate, the auction
agent will allocate securities among the bidders at such rate on a pro-
rata basis.
3. The Applicant states that, under a typical Dutch Auction
process, Wachovia is permitted, but not obligated, to submit orders in
auctions for its own account either as a bidder or a seller and
routinely does so in the auction rate securities market in its sole
discretion. Wachovia may place one or more bids in an auction for its
own account to acquire ARS for its inventory, to prevent: (a) A failed
auction (i.e., an event where there are insufficient clearing bids
which would result in the auction rate being set at a specified rate,
resulting in no ARS being sold through the auction process); or (b) an
auction from clearing at a rate that Wachovia believes does not reflect
the market for the particular ARS being auctioned.
4. The Applicant states that for many ARS, Wachovia has been
appointed by the issuer of the securities to serve as a
[[Page 9369]]
dealer in the auction and is paid by the issuer for its services.
Wachovia is typically appointed to serve as a dealer in the auctions
pursuant to an agreement between the issuer and Wachovia. That
agreement provides that Wachovia will receive from the issuer auction
dealer fees based on the principal amount of the securities placed
through Wachovia.
5. The Applicant states further that Wachovia may share a portion
of the auction rate dealer fees it receives from the issuer with other
broker-dealers that submit orders through Wachovia, for those orders
that Wachovia successfully places in the auctions. Similarly, with
respect to ARS for which broker-dealers other than Wachovia act as
dealer, such other broker-dealers may share auction dealer fees with
Wachovia for orders submitted by Wachovia.
6. According to the Applicant, since February 2008, only a minority
of auctions have cleared, particularly involving municipalities. As a
result, Plans holding ARS may not have sufficient liquidity to make
benefit payments, mandatory payments and withdrawals and expense
payments when due.\3\
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\3\ The Department notes that Prohibited Transaction Exemption
80-26 (45 FR 28545 (April 29, 1980), as amended at 71 FR 17917
(April 7, 2006)) permits interest-free loans or other extensions of
credit from a party in interest to a plan if, among other things,
the proceeds of the loan or extension of credit are used only: (1)
For the payment of ordinary operating expenses of the plan,
including the payment of benefits in accordance with the terms of
the plan and periodic premiums under an insurance or annuity
contract, or (2) for a purpose incidental to the ordinary operation
of the plan.
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7. The Applicant represents that, in certain instances, Wachovia
may have previously advised or otherwise caused a Plan to acquire and
hold an Auction Rate Security.\4\ In connection with Wachovia's role in
the acquisition and holding of ARS by various Wachovia clients,
including the Plans, Wachovia entered into Settlement Agreements with
certain U.S. states and federal authorities. Pursuant to these
Settlement Agreements, among other things, Wachovia was required to
send a written offer to certain Plans that held ARS in connection with
the advice and/or brokerage services provided by Wachovia. As described
in further detail below, eligible Plans that accepted the Offer were
permitted to sell the ARS to Wachovia for cash equal to the par value
of such securities, plus any accrued but unpaid interest and/or
dividends. The Applicant states that, prospectively, additional shares
of ARS may be tendered by Plans to Wachovia pursuant to a Settlement
Agreement. Accordingly, the Applicant is requesting retroactive and
prospective relief for the Settlement Sales. The Applicant is also
requesting retroactive relief (and prospective relief) for Unrelated
Sales in the event that a sale of Auction Rate Securities by a Plan to
Wachovia has occurred outside the Settlement process. If granted, this
proposed exemption will be effective as of February 1, 2008.
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\4\ The relief contained in this proposed exemption does not
extend to the fiduciary provisions of section 404 of the Act.
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8. Specifically, the Applicant is requesting exemptive relief for
the sale of Auction Rate Securities under two different circumstances:
(a) Where Wachovia initiates the sale by sending to a Plan a written
Offer to acquire the ARS (i.e., an Unrelated Sale), notwithstanding
that such Offer is not required under a Settlement Agreement; and (b)
where Wachovia is required under a Settlement Agreement to send to
Plans a written Offer to acquire the ARS (i.e., a Settlement Sale). The
Applicant states that the Unrelated Sales and Settlement Sales (also
referred to as a Covered Sale) are in the interests of Plans. In this
regard, the Applicant states that the Covered Sales would permit Plans
to normalize Plan investments. The Applicant represents that each
Covered Sale will be for no consideration other than cash payment
against prompt delivery of the ARS, and such cash will equal the par
value of the ARS, plus any accrued but unpaid interest or dividends.
The Applicant represents further that Plans will not pay any
commissions or transaction costs with respect to any Covered Sale.
9. The Applicant represents that the proposed exemption is
protective of the Plans. The Applicant states that, with the exception
of sales of ARS involving Wachovia Plans and pooled funds maintained or
advised by Wachovia: (a) Each Covered Sale will be made pursuant to a
written Offer; and (b) the decision to accept the Offer or retain the
ARS will be made by a Plan fiduciary or Plan participant or IRA owner
who is independent of Wachovia.\5\ Additionally, each Offer will be
delivered in a manner designed to alert a Plan fiduciary that Wachovia
intends to purchase ARS from the Plan. Offers made in connection with
an Unrelated Sale will contain all of the material terms of the
Unrelated Sale, including: (a) The identity and par value of the
Auction Rate Security; (b) the interest or dividend amounts that are
due with respect to the Auction Rate Security; and (c) the most recent
rate information for the Auction Rate Security (if reliable information
is available). Offers made in connection with a Settlement Agreement
will specifically include, among other things: (a) The background of
the Offer; (b) the method and timing by which a Plan may accept the
Offer; (c) the expiration date of the Offer; (d) a description of
certain risk factors relating to the Offer; (e) how to obtain
additional information concerning the Offer; and (f) the manner in
which information concerning material amendments or changes to the
Offer will be communicated. The Applicant states that, with very
narrowly tailored exceptions (involving Wachovia Plans and pooled funds
maintained or advised by Wachovia), neither Wachovia nor any affiliate
will exercise investment discretion or render investment advice with
respect to a Plan's decision to accept the Offer or retain the ARS.\6\
In the case of a Wachovia Plan or a pooled fund maintained or advised
by Wachovia, the decision to engage in a Covered Sale may be made by
Wachovia after Wachovia has determined that such purchase is in the
best interest of the Wachovia Plan or pooled fund. The Applicant
represents further that Plans will not waive any rights or claims in
connection with any Covered Sale.
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\5\ However, in the case of an IRA beneficially owned by an
employee, officer, director or partner of Wachovia, the decision to
accept the Offer or retain the ARS may be made by such employee,
officer, director or partner of Wachovia.
\6\ The Applicant states that while there may be communication
between a Plan and Wachovia subsequent to an Offer, such
communication will not involve advice regarding whether the Plan
should accept the Offer.
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10. The Applicant represents that the proposed exemption, if
granted, would be administratively feasible. In this regard, the
Applicant notes that each Covered Sale will occur at the par value of
the affected ARS (plus accrued but unpaid interest and dividends, to
the extent applicable), and such value is readily ascertainable. The
Applicant represents further that Wachovia will maintain the records
necessary to enable the Department and Plan fiduciaries, among others,
to determine whether the conditions of this exemption, if granted, have
been met.
11. In summary, the Applicant represents that the transactions
described herein satisfy the statutory criteria of section 408(a) of
the Act because, among other things:
(a) With only very narrow exceptions (involving Wachovia Plans and
pooled funds maintained or advised by Wachovia), each Covered Sale
shall be made pursuant to a written Offer;
(b) Each Covered Sale shall be for no consideration other than cash
payment against prompt delivery of the ARS;
(c) The amount of each Covered Sale shall equal the par value of
the ARS,
[[Page 9370]]
plus any accrued but unpaid interest or dividends;
(d) Plans will not waive any rights or claims in connection with
any Covered Sale;
(e) With only very narrow exceptions (involving Wachovia Plans and
pooled funds maintained or advised by Wachovia): (1) The decision to
accept an Offer or retain the ARS shall be made by a Plan fiduciary or
Plan participant or IRA owner who is independent of Wachovia (unless
the IRA owner is an employee, officer, director or partner of
Wachovia); and (2) neither Wachovia nor any affiliate shall exercise
investment discretion or render investment advice within the meaning of
29 CFR 2510.3-21(c) with respect to the decision to accept the Offer or
retain the ARS;
(f) Plans shall not pay any commissions or transaction costs with
respect to any Covered Sale;
(g) A Covered Sale shall not be part of an arrangement, agreement
or understanding designed to benefit a party in interest to the
affected Plan;
(h) With respect to any Settlement Sale, the terms and delivery of
the Offer, and the terms of Settlement Sale, shall be consistent with
the requirements set forth in the Settlement Agreement;
(i) Wachovia shall make available in connection with an Unrelated
Sale the material terms of the Unrelated Sale, including: (1) The
identity and par value of the Auction Rate Security; (2) the interest
or dividend amounts that are due but unpaid with respect to the Auction
Rate Security; and (3) the most recent rate information for the Auction
Rate Security (if reliable information is available); and
(j) Each Offer made in connection with a Settlement Agreement shall
describe the material terms of the Settlement Sale, including the
following (and shall not constitute a waiver of any claim of the
tendering Plan): (1) The background of the Offer; (2) the methods and
timing by which the Plan may accept the Offer; (3) the purchase dates,
or the manner of determining the purchase dates, for ARS pursuant to
the Offer and the timing for acceptance by Wachovia of tendered ARS for
payment; (4) the expiration date of the Offer; and (5) how to obtain
additional information concerning the Offer.
Notice to Interested Persons
The Applicant represents that the potentially interested
participants and beneficiaries cannot all be identified, and,
therefore, the only practical means of notifying such participants and
beneficiaries of this proposed exemption is by the publication of this
notice in the Federal Register. Comments and requests for a hearing
must be received by the Department not later than 30 days from the date
of publication of this notice of proposed exemption in the Federal
Register.
For Further Information Contact: Gary Lefkowitz of the Department,
telephone (202) 693-8546. (This is not a toll-free number.)
The Parvin Nahvi, M.D., Inc. 401(k) Profit Sharing Trust (the Plan),
Located in Templeton, CA
Application No. D-11635
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). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975, by reason of section 4975(c)(1)(A) through (E) of the Code, shall
not apply, in connection with the cash sale by the Plan (the Sale) of a
parcel of improved real property (the Property), to Dr. Parvin Nahvi
and Dr. Javad Sani (the Applicants), the 100% owners of the Plan
sponsor, Parvin Nahvi, M.D., Inc. (the Employer), and parties in
interest with respect to the Plan; provided that:
(a) All terms and conditions of the Sale are at least as favorable
to the Plan as those that the Plan could obtain in an arm's length
transaction with an unrelated party;
(b) The Plan's obligations with respect to the remaining principal
balance of a loan (the Loan) on the Property that is secured by a first
deed of trust (the Deed of Trust) with Santa Lucia Bank, an unrelated
lender, are:
(1) Satisfied in full out of the proceeds of the Sale, or
(2) assumed in full by the Applicants, who indemnify and hold the
Plan harmless for any further payment on, or any claims arising in
connection with, the Loan;
(c) The Plan receives an amount in cash, equal to the greater of:
(1) The original purchase price paid by the Plan for the Property,
plus additional contributions or expenses paid by the Plan relating to
the holding of the Property, less any income generated by the Property
and paid to the Plan, less the Loan principal assumed by the Applicants
pursuant to Section (b)(2), or
(2) The Property's appraised value of $1,825,000, which represents
the fair market value of the Property, less the Loan principal assumed
by the Applicants pursuant to Section (b)(2);
(d) The fair market value of the Property has been determined by a
qualified independent appraiser (the Appraiser) and is updated by such
appraiser on the date the Sale is consummated;
(e) The Sale is a one-time transaction for cash;
(f) The Plan incurs no real estate fees, or commissions, in
connection with the Sale; and
(g) The Plan fiduciaries (1) determine whether it is in the
interest of the Plan to proceed with the Sale, (2) review and approve
the methodology used in the appraisal that is being relied upon, and
(3) ensure that such methodology is applied by the Appraiser in
determining the fair market value of the Property on the date of the
Sale.
Summary of Facts and Representations
Background
1. The Employer, a California professional medical corporation, is
the sponsor of the Plan. The Applicants are participants in the Plan
and the sole shareholders of the Employer. The Applicants are related
through marriage and are both fiduciaries and trustees (the Trustees)
of the Plan. The remaining employees covered under the Plan are the
Applicants' three children. The Employer is located in Templeton,
California.
2. The Plan is a profit sharing plan qualified under section 401(a)
of the Code and an individual account plan as described in section
3(34) of the Act, having an original effective date of January 1, 2002.
Under the Plan, each Plan participant may direct the Trustees to invest
any portion of his or her individual account in any asset which is
administratively feasible for the Plan to hold, provided the
acquisition of which would not result in disqualification of the Plan
under the Code. The Plan provides separate individual accounting so
that each participant bears the sole risk of loss attributable to his
or her investment decision.
3. According to the Plan's 2009 Annual Return/Report of Employee
Benefit Plan (the 2009 Annual Report), as of December 31, 2009, the
Plan had five participants holding combined net assets of
$1,459,184.\7\ According to the Applicants, as of December 31, 2009,
the Plan's five participants, together with their percentage holdings
of total Plan's assets, consist of Dr. Javad N. Sani, owning 57.69%,
Dr. Parvin Nahvi,
[[Page 9371]]
owning 32.28%, and the Applicants' children, Farhad Sani, Roya Sani,
and Sara Sani, owning 4.13%, 3.28%, and 2.62%, respectively.
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\7\ This figure takes into account the Plan's Loan liability of
$500,946 as of December 31, 2009.
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4. As Trustees, the Applicants caused the Plan, on August 5, 2004,
to purchase, on behalf of the participants, the Garden Street Inn, a
13-room bed and breakfast located at 1212 Garden Street, San Luis
Obispo, California, from Dan and Kathy Smith, unrelated third parties.
The Property, originally constructed in 1898, is a rectangular shaped,
two-story building containing approximately 5,998 square feet on the
first and second level combined and an additional 754 square foot
finished basement that is currently used as a manager's unit. The
Applicants represent that the purpose of the investment was to obtain
an income producing piece of real estate.
5. The total purchase price for the Property, inclusive of any
closing costs and $85,890 allocated to furniture and fixtures, was
$2,213,348.\8\ Of the total purchase price, the Plan paid $1,463,348 in
cash and financed the remainder through a first deed of trust with
Santa Lucia Bank, of Atascadero, California, an unrelated party, in the
original principal amount of $750,000. According to the Applicants,
there are no other deeds of trust or encumbrances on the Property. The
Applicants state that the Loan underlying the Deed of Trust has a
maturity date of August 4, 2014 and it carries a 6.5% fixed interest
rate for 5 years, after which it is subject to an adjustable rate of
interest. Subject to any payment changes, the Loan is payable in 119
monthly installments. According to the Plan's 2009 Annual Report, the
outstanding balance of the Loan as of December 31, 2009 was $500,946.
In addition, the Applicants state that, as of August 31, 2010, the
outstanding principal balance of the Loan had been paid down to
$479,876.43.\9\
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\8\ The Department expresses no opinion herein as to whether the
acquisition and holding of the Property by the Plan violated any of
the provisions of Part 4 of Title I of the Act.
\9\ The Applicants state that, as trustees of the Plan, they
have applied the income derived from the Property's operation since
its purchase to paying down the principal balance of the Loan.
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6. The Applicants note that the Plan does not own any property
aside from the subject Property. In addition, the Applicants represent
that no parties in interest with respect to the Plan own or lease any
property adjacent to the Property. The Applicants further represent
that the Property has not been leased to, or used by, any party in
interest with respect to the Plan since the date of acquisition.
7. According to the Applicants, aside from the Property's
acquisition price (including real estate taxes), the aggregate cost of
holding the Property by the Plan has been paid out of the income
generated by the Property. According to the Applicants, in respect of
the years 2004 through 2008, the Property yielded net income to the
Plan in the amounts of: $9,175, $30,433, $30,492, $64,639, and $14,125,
respectively. However, the Applicants state that, in 2009, the Property
suffered a loss of $21,035.\10\
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\10\ According to data provided by the Applicants, this loss was
mainly attributable to a $76,829 drop in revenue received from room
rents compared with the previous year and a corresponding drop in
expenses of only $41,000.
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8. Furthermore, during the five month period ending on May 31,
2010, the Property suffered an additional loss of approximately $3,017,
for a total loss of $24,052. The Applicants explain that, prior to June
1, 2010, the Property was managed by an unrelated third party, the
Hotel Management Group (HMG), which had been charging the Plan $3,000
per month in maintenance fees. Due to the inability of the Plan to
continue paying such fees, the management contract with HMG was
terminated as of June 1, 2010, and since then, the Applicants have
managed the Property themselves without receiving any compensation for
their services. As a result, from June 1, 2010 through August 31, 2010,
the Plan received approximately $16,836 in net income from the
Property.
Financial data provided by the Applicants, summarized below,
reveals that for the period beginning in 2004 and continuing through
August 31, 2010, the Plan received total income of $2,503,275 and
incurred total expenses of $2,361,627, related to its holding of the
Property, yielding aggregate net income of $141,648. As a result,
through August 31, 2010, the Plan's aggregate net acquisition and
holding costs with respect to the Property were $2,071,700 (the
original purchase price of $2,213,348, less aggregate net income of
$141,648).
------------------------------------------------------------------------
2004--8/31/2010
Item of Income/Expense ($)
------------------------------------------------------------------------
Revenue:
Rooms Department \11\.............................. 2,490,046.00
Other Income....................................... 13,229.00
------------------
Total Income..................................... 2,503,275.00
Departmental Expenses:
Rooms Department................................... 955,938.00
Cost of Other Income............................... 4,312.00
Fixed Expenses:
Real Estate Taxes.................................. 69,467.00
Insurance.......................................... 40,084.00
Mortgage Interest Expense.......................... 256,813.00
UBIT on Property................................... 0.00
Other.............................................. 10,327.00
Undistributed Expenses:
Operating Expenses................................. 96,152.00
Marketing Expenses................................. 77,765.00
Energy Costs....................................... 97,138.00
Administrative & General........................... \12\ 753,631.00
------------------
Total Expenses................................... 2,361,627.00
Net Income........................................... 141,648.00
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The Appraisal Report
9. The Property was originally appraised on June 9, 2009, by Keith
Spierling, of Spierling Appraisal and Consulting Services, Arroyo
Grande, California. Based on the appraisal report dated June 9, 2009
(the Appraisal Report), the Appraiser is an Associate Member of the
Appraisal Institute and has been actively engaged in the appraisal
profession for over 25 years, 20 of which with respect to the appraisal
of commercial properties. The Appraiser is also certified by the State
of California as a State Certified General Appraiser. The Appraiser
affirms that he is independent of the Applicants, the Employer, and any
other parties in interest. In addition, the Appraiser states that he
derives less than 1% of his income from these parties.
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\11\ Typically, the ``rooms department'' may include
reservations, the front office, housekeeping, telephone,
maintenance, and engineering. A ``department'' is a management
convention used in the hotel and lodging industry to ensure
efficient coordination and control of activities undertaken to
effectively manage a facility. In a very small lodging business,
such as a bed-and-breakfast, the owner can supervise each
department.
\12\ Includes approximately $184,400 paid to Sterling Hotels
Corporation and HMG, unrelated property management companies.
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10. Pursuant to a letter addressed to the Applicants dated May 14,
2010, the Appraiser stated that the Appraisal Report was completed for
Santa Lucia Bank, who was the primary client and the intended user of
the Report. He further represented that he was engaged by Santa Lucia
Bank so that the Applicants could obtain financing in order to purchase
the Property from the Plan as well as seek exemptive relief from the
Department for such purchase. Although the Appraisal Report was
completed for Santa Lucia Bank as its intended user, the Applicants
represent that the Appraisal Report was paid for by Dr. Sani. In this
regard, the Applicants state that, in anticipation of applying for the
exemption, they approached Santa Lucia Bank about assuming the Loan and
also the
[[Page 9372]]
possibility of taking out a second loan. Accordingly, the Applicants
explain, the bank required an appraisal of the Property in order to
determine whether or not the Applicants could assume the Loan and
qualify for the second loan. The Applicants explain further that the
policy of the bank is to initiate an appraisal with the client paying
the fee. Consequently, Santa Lucia Bank retained Mr. Spierling for an
appraisal of the Property and forwarded his bill for services to the
Applicants, who paid the amount due in turn.
11. The Appraiser acknowledged, in his letter of May 14, 2010, that
the Appraisal Report would be used for purposes of obtaining an
administrative exemption from the Department for the Sale. Furthermore,
the Appraiser stated that, barring any unforeseen circumstances, he
would be able to update the Appraisal Report as of the date of purchase
of the Property by the Applicants. According to the Appraiser, such an
update would be necessary due to the length of time elapsed between the
original Appraisal Report and the contemplated date of purchase of the
Property. The Applicants have stated that they would pay the costs
associated with updating the Appraisal Report.
12. In the Appraisal Report, the Appraiser valued the Property in
fee simple using the Sales Comparison Approach and Income Approach to
valuation. The Appraiser indicated that he considered using the Cost
Approach in addition to the Sales Comparison Approach and Income
Approach, but ultimately decided that the Cost Approach was not
appropriate, because the age of the building, the architectural details
of the structure, and the lack of similar land sales prevent the Cost
Approach from providing a meaningful indicator or adding any
credibility to the overall analysis.
The Appraisal Report indicates that the Sales Comparison Approach
and Income Approach yielded $1,875,000 and $1,850,000 for the Property,
respectively. According to the Appraiser, the Sales Comparison Approach
was considered the most pertinent to the analysis because of the recent
sales of similar properties that were available for a comparative
analysis, in spite of the fact that the available comparable sales of
properties in the area were somewhat dated. Consequently, the Appraiser
determined that the Sales Comparison Approach should be given
consideration in the final analysis. Additionally, the Appraiser
determined that the Income Approach was the most pertinent in the
analysis of income producing properties. In valuing the Property using
this approach, the Appraiser reviewed historical income and expense
data and compared such data to similar competitive properties. In
conclusion, the Appraiser accorded relatively equal consideration to
both approaches to value and determined that the fair market value of
the Property as of June 9, 2009 was $1,860,000, using an exposure of
three to sixteen months.
The Appraisal Update
13. Because the Appraisal Report was dated more than one year
before this proposed exemption was published, the Department required
an additional appraisal of the Property to take place, as an update to
the original appraisal. In this regard, on November 3, 2010, the
Appraiser provided an update to the Appraisal Report (the Appraisal
Update), which incorporates the Appraisal Report of June 9, 2009.\13\
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\13\ In the same manner that Santa Lucia Bank ordered the
Appraisal Report, at the Applicants' behest, Santa Lucia Bank also
retained Mr. Spierling to complete the Appraisal Update and
forwarded his bill for services to the Applicants, who paid the
amount due in turn.
---------------------------------------------------------------------------
14. In the Appraisal Update, the Appraiser valued the Property in
fee simple as of October 28, 2010 based upon the same methods of
valuation used in the Appraisal Report, the Income Approach and Sales
Comparison Approach. The Appraiser states that, upon his most recent
inspection, the interior and exterior of the Property revealed no
changes since the prior appraisal. However, the Appraisal Update notes
that, while there continues to be overall softness in the real estate
market in the past year since the date of the Appraisal Report, there
is insufficient data to develop any definitive trends in current market
price, as no additional sales of smaller, good quality hotels or bed
and breakfast facilities since June of 2009 have occurred.
15. The Appraisal Update indicates that the Sales Comparison
Approach and the Income Approach yielded $1,850,000 and $1,800,000,
respectively. Regarding the Sales Comparison Approach, while there were
no recent comparable sales data since June of 2009, as noted above,
there were several open listings which supported and correlated well
with the sales data in the Appraisal Report. In this regard, the
Appraisal Update states that the slight decline in the value of the
Property based on the Sales Comparison Approach was primarily due to
the persistent soft market conditions. Regarding the Income Approach,
an updated rental survey was completed which generally revealed that
room rates have remained relatively stable since the date of the
Appraisal Report. In addition, the Appraisal Update notes that no sales
data was revealed which would contradict the overall capitalization
rates used in the prior appraisal.
The Appraisal Update notes that the two approaches are considered
pertinent and should be considered in the final analysis. Thus, giving
equal weight to each valuation approach, the Appraisal Update states
that the fair market value of the Property as of October 28, 2010 was
$1,825,000 assuming an exposure period of 4 to 18 months. Accordingly,
the value of the Property constitutes approximately 93.11% of the
Plan's total asset value of $1,960,130.43.
Terms of the Sale
16. The Applicants have requested an exemption from the Department
to purchase the Property from the Plan. The Applicants represent that,
although they do not currently possess enough cash to purchase the
Property, they have the ability to sell for cash certain other
properties that they currently own in their individual capacities.
Furthermore, the Applicants represent that there is a chance that they
may not be able to liquidate other real property holdings in order to
pay cash for the full purchase price of the Property. In such event,
they state that they will assume the remaining principal balance of the
Loan from the Plan and pay cash to the Plan for the remainder.\14\ In
either event, the Applicants state that the Plan's obligations with
respect to the Loan will be satisfied in full. Furthermore, the
Applicants state that the Plan will not pay any commissions, costs, or
other expenses in connection with the Sale, and the Appraisal Report
will again be updated by the Appraiser on the date of the Sale.\15\
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\14\ The Applicants represent that Santa Lucia Bank has
authorized the assumption of the existing Loan by the Applicants in
the event that the Sale takes place after approval by the Department
of the exemption.
\15\ For this purpose, the updated appraisal must take into
account any new data on recent sales of similar property in the
local real estate market, which may affect the valuation conclusion.
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17. Therefore, in exchange for the Property the Applicants will
make a one-time cash payment to the Plan equal to the greater of: (a)
The original purchase price paid by the Plan for the Property, plus any
expenses paid by the Plan relating to the holding of the Property, less
any income generated by the Property and paid to the Plan, and less the
Loan principal assumed by the Applicants, or (b) the appraised value of
[[Page 9373]]
$1,825,000, which represents the fair market value of the Property,
less the Loan principal assumed by the Applicants. In the event that
the Applicants assume the remainder of the Loan, they will indemnify
and hold the Plan harmless for any further payment on such Loan.
Rationale for the Sale
18. The Applicants represent that the proposed transaction is in
the interest of the Plan because it will divest the Plan of an asset
that has been difficult to manage within the Plan as a result of
adverse economic conditions. According to the Applicants, the
hospitality industry has undergone a downturn as a result of the recent
unfavorable economic conditions. As illustrated above, the net income
generated by the Property since 2007 has declined precipitously. The
Applicants point out that this lack of strong cash flow makes it
difficult for the Plan to pay expenses related to the management and
maintenance of the Property. In this regard, the Applicants represent
that the Property has had several maintenance and safety issues that
have gone unaddressed because the Plan cannot afford to make them.
19. Moreover, the Applicants suggest that the Sale is in the
interest of the Plan because the Applicants would pay more to the Plan
than unrelated third parties would pay to purchase the Property.
According to the Applicants, in a sale on the open market the Plan
would receive no more than its fair market value, whereas in the
proposed transaction, the Applicants would make the Plan whole for any
loss in the value of the Property since its acquisition, including any
expenses paid by the Plan in holding the Property (net of any income
paid to the Plan). As the Property's current fair market value is well
below its original acquisition cost, a sale on the open market would
cause the Plan to sustain a significant monetary loss. Furthermore, the
Applicants note that, in a sale on the open market, the Plan would be
forced to pay a real estate commission of approximately 7% on the sale
price of the Property. In the proposed transaction, the Plan will not
incur any expenses in connection with the Sale, including real estate
commissions.
20. Finally, the Applicants, in their capacities as Plan
fiduciaries, will (a) Determine whether it is in the interest of the
Plan to proceed with the Sale of the Property, (b) review and approve
the methodology used in the Appraisal Report that is being relied upon,
and (c) ensure that such methodology is applied by the Appraiser in
determining the fair market value of the Property on the date of the
Sale.
Summary
21. In summary, the Applicants represent that the proposed
transaction will satisfy the statutory criteria contained in section
408(a) of the Act and section 4975(c)(2) of the Code for the following
reasons:
(a) All terms and conditions of the Sale will be at least as
favorable to the Plan as those that the Plan could obtain in an arm's
length transaction with an unrelated party;
(b) The Plan's obligations with respect to the Loan will be:
(1) Satisfied in full out of the proceeds of the sale, or
(2) Assumed in full by the Applicants, who shall indemnify and hold
the Plan harmless for any further payment on, or any claims arising in
connection with, the Loan;
(c) The Plan will receive an amount in cash, equal to the greater
of:
(1) The original purchase price paid by the Plan for the Property,
plus expenses paid by the Plan relating to the holding of the Property,
less any income generated by the Property and paid to the Plan, less
the Loan principal assumed by the Applicants pursuant to Section
(b)(2), or
(2) The appraised value of $1,825,000, which represents the fair
market value of the Property, less the Loan principal assumed by the
Applicants pursuant to Section (b)(2);
(d) The fair market value of the Property has been determined by
the Appraiser, who will update the Appraisal Report on the date the
Sale is consummated;
(e) The Sale will be a one-time transaction for cash;
(f) The Plan will incur no real estate fees, or commissions, in
connection with the Sale; and
(g) The Plan fiduciaries will (1) determine whether it is in the
interest of the Plan to proceed with the Sale, (2) review and approve
the methodology used in the appraisal that is being relied upon, and
(3) ensure that such methodology is applied by the Appraiser in
determining the fair market value of the Property on the date of the
Sale.
For Further Information Contact: Warren Blinder of the Department,
telephone (202) 693-8553. (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, 14th day of February 2011.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2011-3590 Filed 2-16-11; 8:45 am]
BILLING CODE 4510-29-P