Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41431

Volume VI

None.

Volume VII

California

CA970049 (Feb. 14, 1997)

CA970050 (Feb. 14, 1997)

CA970052 (Feb. 14, 1997)

CA970054 (Feb. 14, 1997)

CA970056 (Feb. 14, 1997)

CA970065 (Feb. 14, 1997)

CA970071 (Feb. 14, 1997)

CA970072 (Feb. 14, 1997)

CA970074 (Feb. 14, 1997)

CA970075 (Feb. 14, 1997)

CA970077 (Feb. 14, 1997)

CA970079 (Feb. 14, 1997)

General Wage Determination

Publication

General wage determinations issued

under the Davis-Bacon and related Acts,

including those noted above, may be

found in the Government Printing Office

(GPO) document entitled ‘‘General Wage

Determinations Issued Under The DavisBacon and Related Acts’’. This

publication is available at each of the 50

Regional Government Depository

Libraries and many of the 1,400

Government Depository Libraries across

the country.

The general wage determinations

issued under the Davis-Bacon and

related Acts are available electronically

by subscription to the FedWorld

Bulletin Board System of the National

Technical Information Service (NTIS) of

the U.S. Department of Commerce at

(703) 487–4630.

Hard-copy subscriptions may be

purchased from: Superintendent of

Documents, U.S. Government Printing

Office, Washington, DC 20402, (202)

512–1800.

When ordering hard-copy

subscription(s), be sure to specify the

State(s) of interest, since subscriptions

may be ordered for any or all of the

seven separate volumes, arranged by

State. Subscriptions include an annual

edition (issued in January or February)

which includes all current general wage

determinations for the States covered by

each volume. Throughout the remainder

of the year, regular weekly updates are

distributed to subscribers.

Signed at Washington, DC this 25th day of

July, 1997.

Carl J. Poleskey,

Chief, Branch of Construction Wage

Determinations.

[FR Doc. 97–20028 Filed 7–31–97; 8:45 am]

BILLING CODE 4510–27–M

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

[Application No. D–10261, et al.]

Proposed Exemptions; McCrosky,

Feldman, Cochrane & Brock, P.C.

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Notice of proposed exemptions.

SUMMARY: This document contains

notices of pendency before the

Department of Labor (the Department) of

proposed exemptions from certain of the

prohibited transaction restriction of the

Employee Retirement Income Security

Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing

Requests

All interested persons are invited to

submit written comments or request for

a hearing on the pending exemptions,

unless otherwise stated in the Notice of

Proposed Exemption, within 45 days

from the date of publication of this

Federal Register Notice. Comments and

request for a hearing should state: (1)

The name, address, and telephone

number of the person making the

comment or request, and (2) the nature

of the person’s interest in the exemption

and the manner in which the person

would be adversely affected by the

exemption. A request for a hearing must

also state the issues to be addressed and

include a general description of the

evidence to be presented at the hearing.

ADDRESSES: All written comments and

request for a hearing (at least three

copies) should be sent to the Pension

and Welfare Benefits Administration,

Office of Exemption Determinations,

Room N–5649, U.S. Department of

Labor, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210. Attention:

Application No. stated in each Notice of

Proposed Exemption. The applications

for exemption and the comments

received will be available for public

inspection in the Public Documents

Room of Pension and Welfare Benefits

Administration, U.S. Department of

Labor, Room N–5507, 200 Constitution

Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions

will be provided to all interested

persons in the manner agreed upon by

the applicant and the Department

within 15 days of the date of publication

in the Federal Register. Such notice

shall include a copy of the notice of

proposed exemption as published in the

Federal Register and shall inform

interested persons of their right to

comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The

proposed exemptions were requested in

applications filed pursuant to section

408(a) of the Act and/or section

4975(c)(2) of the Code, and in

accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR

32836, 32847, August 10, 1990).

Effective December 31, 1978, section

102 of Reorganization Plan No. 4 of

1978 (43 FR 47713, October 17, 1978)

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.

McCroskey, Feldman, Cochrane &

Brock, P.C. Profit Sharing Plan and

Trust (the Plan), Located in Muskegon,

Michigan

[Application No. D–10261].

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) and 406

(b)(1) and (b)(2) of the Act and the

sanctions resulting from the application

of section 4975 of the Code, by reason

of sections 4975(c)(1) (A) through (E) of

the Code, shall not apply to the

proposed cash sale (the Sale) by the

Plan of certain improved real property

located at 1440 and 1442 Peck Street in

Muskegon, Michigan (the Muskegon

Property) to the McCroskey

Development Partnership (the

Partnership), a party in interest with

respect to the Plan; provided that the

following conditions are satisfied:

(A) All terms and conditions of the

Sale are no less favorable to the Plan

than those which the Plan could obtain

in an arm’s-length transaction with an

unrelated party;

(B) The Sale is a one-time transaction

for cash in which the Plan incurs no

expenses;
41432 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

1The Department expresses no opinion as to

whether the Plan’s purchase of the Original

Property satisfied the conditions of section 408(e)

of the Act.

2The Department expresses no opinion as to

whether the Original Lease satisfied the conditions

of section 408(e) of the Act.

(C) The Plan receives a purchase price

for the Muskegon Property which is no

less than the greater of (1) the fair

market value of the Muskegon Property

established at the time of the sale by an

independent qualified appraiser, or (2)

$350,000;

(D) Within sixty days of the

publication in the Federal Register of a

notice granting this proposed

exemption, if granted, McCroskey,

Feldman, Cochrane & Brock, P.C. (the

Employer) files Form 5330 with the

Internal Revenue Service and pays the

applicable excise taxes which are due

with respect to the continuation of a

lease of the Muskegon Property by the

Plan to the Employer after September

27, 1989; and

(E) Within sixty days of the

publication in the Federal Register of a

notice granting this proposed

exemption, if granted, the Employer’s

payment of rent to the Plan for the

Muskegon Property from September 27,

1989 through the date of the

Partnership’s purchase of the Property

from the Plan is reviewed by an

independent fiduciary to determine

whether such rent was at all times no

less than the fair market rental value of

the Muskegon Property, and, to the

extent such rent is determined to have

been less than the fair market rental

value, the Employer pays the Plan the

amount of such deficiency together with

interest thereon at a rate determined by

the independent fiduciary to be

appropriate to compensate the Plan for

lost income on such deficiency amount.

Summary of Facts and Representations

1. The Plan is a defined contribution

profit sharing plan with individual

accounts for each of its participants. The

Plan is sponsored by McCroskey,

Feldman, Cochrane & Brock, P.C. (the

Employer), a Michigan professional

corporation operating a law firm located

in Muskegon, Michigan. The Plan had

approximately 38 participants and

beneficiaries and total assets of

approximately $6,209,646 as of

December 31, 1996. The trustees of the

Plan are J. Walter Brock and Gary T.

Neal (the Trustees), each of whom is an

employee and an 11.11 percent

shareholder of the Employer.

2. On September 23, 1975, the Plan

purchased three lots of real property

(the Original Property) from a

partnership called the Advocates, whose

partners were the shareholders of the

Employer. Two lots of the Original

Property are adjacent lots located in

Muskegon County, Michigan (the

Muskegon Property) at 1440 Peck Street

and 1442 Peck Street in Muskegon, MI.

The Plan paid a purchase price of

$250,000 for the lot at 1440 Peck Street

and a purchase price of $25,000 for the

adjacent lot at 1442 Peck Street. The

remainder of the Original Property was

a third lot, located in Calhoun County

(the Calhoun Property) at 5906 Morgan

Road in Battle Creek, Michigan, and the

purchase price for this lot was $42,500.

The Employer represents that the Plan’s

purchase of the Original Property from

the Advocates met the requirements of

section 408(e) of the Act, pertaining to

the purchase of qualifying employer real

property, and was therefore exempt

from the prohibited transactions

provisions of section 406 of the Act.1

3. Upon acquisition of the Original

Property by the Plan, the Employer

commenced to lease all three lots of the

Original Property from the Plan for use

as office locations for the Employer’s

law practice. The Employer represents

that the Plan’s leases of the Original

Property to the Employer (the Original

Leases) constituted leases of qualifying

employer real property in satisfaction of

the requirements of section 408(e) of the

Act and were therefore exempt from the

prohibitions of section 406 of the Act.2

The initial Original Lease was for a

ten-year term and provided for rent at

appraised rental values. Rent was set at

$3,600 per month, as determined by the

August 1975 appraisal, for a total of

$43,228 per year. The lease was triple

net, and also specified that rent was to

be a fixed sum for the first five years,

and that for the second five years,

annual rent would be determined by

appraisal, and would reflect any change

in the rental value of the property. The

Employer represents that its continued

lease of the Original Property from the

Plan subsequent to the second term of

the Original Lease was pursuant to

extensions of the Original Lease and

that rentals of no less than the subject

property’s fair market rental value were

paid to the Plan in accordance with

appraisals conducted in 1988, 1993 and

1995.

On September 27, 1989, the Plan sold

the Calhoun Property to an unrelated

party, the United Association of

Plumbers and Pipefitters Union Local

335 (the Union). The Employer

represents that it was relocating its

business to the Muskegon Property and

was forced to abandon the Calhoun

Property. The Employer represents that

the Union is independent of and

unrelated to the Employer and the Plan.

Since the Plan sold the Calhoun

Property to the Union, the Employer has

continued to occupy the Muskegon

Property and lease it from the Plan

pursuant to extensions of the Original

Lease. The Employer states that the two

lots constituting the Muskegon Property

are treated as one parcel for address and

appraisal purposes, referred to as 1440

Peck Street, because the structural

improvements on each lot are

components of a single commercial

structure which lies on parts of both

lots. Hereinafter, references to the

Muskegon Property are intended to

include both 1440 and 1442 Peck Street.

4. In anticipation of upcoming

increased Plan liquidity needs, and in

recognition that the continuation of the

Employer’s use and lease of the

Muskegon Property since the Plan’s sale

of the Calhoun Property has constituted

a prohibited transaction under section

406 of the Act, the Trustees have

determined to terminate the Plan’s lease

of the Muskegon Property to the

Employer by causing the Plan to sell the

Muskegon Property. A partnership

comprised of shareholders of the

Employer, the McCroskey Development

Partnership (the Partnership), has

expressed to the Trustees a willingness

to purchase the Muskegon Property at

its full fair market value, and the

Trustees are now proposing to cause the

Plan to sell the Muskegon Property to

the Partnership for cash. The Trustees

and the Employer are requesting an

exemption to enable this sale

transaction under the terms and

conditions described herein.

5. If the exemption is granted, the

Partnership will pay the Plan a cash

purchase price for the Muskegon

Property of no less than the fair market

value of the Muskegon Property as of

the date of the sale and in no event less

than $350,000. The Muskegon Property

was appraised as of April 11, 1995 by

Stephen P. Nedeau, MAI, SRA (Nedeau),

who determined that as of that date the

Muskegon Property had a fair market

value of $350,000. Commensurate with

the sale transaction, the Trustees will

cause the appraisal by Nedeau to be

updated as of the sale date, and the

purchase price will be cash in the

amount of (a) the Muskegon Property’s

fair market value according to such

updated appraisal, or (b) $350,000,

whichever is greater. The Plan will pay

no expenses related to the transaction.

6. The Department is not proposing

exemptive relief for the continuation of

the lease by the Employer of the

Muskegon Property from the Plan (the

Continued Lease) after September 27,

1989, the date on which the Plan sold

the Calhoun Property. The Employer
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41433

3For purposes of this proposed exemption,

reference to provisions of Title I of the Act, unless

otherwise specified, refer also to the corresponding

provisions of the Code.

4 In the case of a Plan sponsored by TCW, such

fiduciary need not be independent of TCW.

recognizes that the Continued Lease has

constituted a prohibited transaction

under the Act and the Code for which

no exemptive relief is proposed herein.

Accordingly, the Employer represents

that it will pay the excise taxes which

are applicable under section 4975(a) of

the Code by reason of such Continued

Lease within sixty (60) days of the

publication in the Federal Register of a

notice granting the exemption proposed

herein.

7. The Employer represents that the

rentals paid to the Plan during the

Continued Lease have provided the Plan

with appropriate amounts of rent in

accordance with updated appraisals of

the Muskegon Property. However,

because the amount of annual rent has

remained constant under the Continued

Lease, as an additional condition of this

exemption, if granted, the Employer will

cause a review of the rentals paid to the

Plan and the Muskegon Property’s fair

market rental values during the

Continued Lease by an independent

Plan fiduciary in order to determine

whether the Plan received rentals of no

less than the fair market rental values of

the Muskegon Property during the

Continued Lease. The Employer

represents that the independent

fiduciary for this purpose will be either

Nedeau, who performed the most recent

appraisal of the Muskegon Property, or

the trust department of FMB

Lumberman’s Bank in Muskegon,

Michigan, which represents itself to be

independent of the Employer. In the

event such independent fiduciary

determines that rent payments received

by the Plan were less than the

Muskegon Property’s fair market rental

value for any period during the

Continued Lease, the Employer will pay

the Plan the amount of any such

deficiency with interest on such amount

at a rate determined by the independent

fiduciary to compensate the Plan

appropriately for lost income.

8. In summary, the applicant

represents that the transaction satisfies

the statutory criteria of section 408(a) of

the Act and section 4975(c)(2) of the

Code because: (1) The proposed sale

will be a one-time cash transaction; (2)

The Plan will experience no losses nor

incur any expenses from the transaction;

(3) The Plan will receive cash for the

Muskegon Property in the amount of no

less than the Muskegon Property’s

updated fair market value as of the sale

date and in no event less than $350,000;

and (4) The transaction will enable the

termination of the ongoing Continued

Lease of the Muskegon Property by the

Plan to the Employer, which constitutes

a prohibited transaction.

FOR FURTHER INFORMATION CONTACT: Mr.

Ronald Willett of the Department,

telephone (202) 219–8881. (This is not

a toll-free number.)

TCW Group, Inc., Trust Company of the

West, TCW Funds Management, Inc.,

TCW Galileo Funds, Inc. (collectively;

TCW), Located in Los Angeles,

California

[Application No. D–10319]

Proposed Exemption

Section I. Covered Transactions

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).3 If

the exemption is granted, the

restrictions of section 406(a) of the Act

and the sanctions resulting from the

application of section 4975 of the Code,

by reason of section 4975(c)(l) (A)

through (D) of the Code, shall not apply

to the acquisition or redemption of units

(the Units) in the TCW Life Cycle Trusts

(the Trusts, as defined in Section III)

established in connection with such

Plans’ participation in the TCW

Portfolio Solutions Program (the

Program) by individual account plans

described in section 3(34) of the Act (the

Plans), including Plans sponsored by

TCW, and the acquisition or redemption

of shares (the Shares) in the TCW

Galileo Funds (the Funds, as defined in

Section III) by the Trusts.

In addition, the restrictions of section

406(b) of the Act and the sanctions

resulting from the application of section

4975 of the Code, by reason of section

4975(c)(1) (E) and (F) of the Code, shall

not apply to the provision of advice, and

to the receipt of fees as a result thereof,

in connection with the investment by

the Plans in the Trusts under the

Program.

This proposed exemption is subject to

the following conditions set forth below

in Section II.

Section II. General Conditions

A. The terms of each purchase or

redemption of the Units in the Trusts

are at least as favorable to an investing

Plan as those obtainable in an arm’s

length transaction with an unrelated

party.

B. The participation of a Plan in the

Program will be expressly authorized in

writing by a fiduciary of the Plan who

is independent of TCW.4 With respect to

the Plans sponsored by TCW, this

condition will be deemed satisfied for

purposes of the purchase or redemption

of Units in the Trusts, if the purchase

and redemption of Shares in the Funds

by the Trusts meets the conditions of

Prohibited Transaction Exemption (PTE)

77–3 (42 FR 18743, April 8, 1977).

C. Participation in the Program will be

limited to Plans which have a minimum

of $5,000,000 in plan assets as of the

most recent year.

D. No Plan will pay a fee or

commission by reason of the acquisition

or redemption of Units in the Trusts or

Shares in the Funds.

E. The price paid or received by the

Plans for the Units in the Trusts is the

‘‘net asset value’’ per Unit, at the time

of the transaction. The Trusts will buy

and sell shares in the Funds on the same

basis as other shareholders.

F. The total fees paid to TCW and its

affiliates by each Plan for the provision

of services in connection with its

investment in the Units of the Trusts

under the Program does not exceed

‘‘reasonable compensation’’ within the

meaning of section 408(b)(2) of the Act.

In this regard, the total amount paid by

a Trust to TCW or unaffiliated third

persons for services necessary to operate

the Trusts, and for TCW to provide what

may be considered investment advice,

will not exceed 1% per annum of the

average daily ‘‘net asset value’’ of the

shares of the Funds and cash held by

such Trust.

G. TCW will not receive any fees from

the Plans whose participants (the

Participants) receive recommendations

concerning investment in a Trust, nor

from the Trusts in which the Plans

invest. Notwithstanding the foregoing,

TCW will not be precluded from

receiving: (i) fees from the Funds which

are paid by other investors in the Funds,

and which are permissible under the

Investment Company Act of 1940, as

amended (the 1940 Act); (ii)

reimbursement for ‘‘direct expenses’’

within the meaning of 29 CFR

2550.408c–2 in connection with the

operation of the Program; or (iii)

reimbursement for direct expenses

which TCW pays to unaffiliated third

persons for goods and services provided

to the Trusts and/or Plans under the

Program.

H. Any investment advice given to the

Participants by TCW under the Program

will be based on the responses provided

by the Participants to worksheet

questions which are developed and

designed by an independent financial
41434 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

5TCW will not receive any fees or other

compensation with respect to recommendations

regarding investments in an unrelated Money

Market Fund, GIC or similar investment vehicle.

6TCW anticipates that most Plans which

participate in the Program will comply with section

404(c) of the Act. Section 404(c) of the Act requires,

in part, that specific disclosures be provided by the

Plans to the participants and beneficiaries. See 29

CFR 2550.404c–1 (b)(2)(i)(A) and (b)(2)(i)(B)(2) (iv)

and (v).

expert (the Financial Expert, as defined

in Section III (F)) and the independent

behavioral expert (the Behavioral Expert

as defined in Section III (G),

collectively; the Experts).

I. Any investment advice given to the

Participant will be implemented only at

the express direction of the Participant.

J. Under the Program, TCW will give

investment advice to the Participants

that is limited to the Trusts, a Money

Market Fund, a Guaranteed Investment

Contact (GIC) or a similar investment

vehicle that may or may not be affiliated

with TCW.5

K. The compensation of neither

Expert is affected by the decisions made

by the participants and beneficiaries

regarding investment of the assets of

their accounts among the Trusts.

L. To the extent any assistance is

provided by TCW, or unaffiliated third

persons, to the Participants in

completing the worksheets and

questions designed by the Experts, such

assistance is provided by individuals

whose compensation is not affected by

the investment by the participants and

beneficiaries of the assets of their

accounts among the Trusts.

M. With respect to its participation in

the Program, an independent Plan

fiduciary must receive, prior to the

Plan’s investment in any of the Trusts,

complete and detailed written

information regarding the Trusts and the

Funds which will include, but may not

be limited to:

(1) A description of the Program;

(2) The allocation of the Funds in

each Trust specified by the Financial

Expert, and the basis upon which the

Funds in each Trust will be rebalanced

so that the Funds’ proportionate value

in each Trust equals that specified by

the Financial Expert;

(3) Upon request by the Plan

Fiduciary, the current basis upon which

the asset allocation of the Trusts was

derived;

(4) Full disclosure of all the expenses

charged to the Trusts, and how such

expenses are allocated;

(5) Full disclosure of all the fees

charged by the Funds, which may be

accomplished by providing the current

prospectus for each of the Funds

comprising a Trust; and

(6) A copy of the proposed exemption

and, if granted, the final exemption, as

published in the Federal Register.

N. (1) Prior to investing in a Trust,

each Participant will receive full

disclosures which will include, but may

not be limited to:

(a) Disclosure regarding composition

of the Trusts, and a description of the

underlying Funds;

(b) Upon request, a Participant will

also receive a copy of the Funds’

prospectus;6 and

(c) The Participant can meet with a

facilitator familiar with the Program, or

contact such a facilitator using a tollfree number.

(2) Subsequent to his participation in

the Program, each Participant will

receive the following disclosures which

will include, but may not be limited to:

(a) Written confirmations of purchase

and redemption transactions for each

Participant within 10 days of each such

transaction;

(b) Telephone access to the quotations

of the Participant’s account balance; and

(c) A periodic newsletter describing

the Trusts’ performance during the

preceding period, market conditions

and economic outlook and, if

applicable, prospective changes in the

asset allocation model and the reasons

for the change.

O. Each Plan Fiduciary will receive

the following written disclosures with

respect to its ongoing participation in

the Program which will include, but

may not be limited to:

(1) A quantitative annual report

which will include—

(a) Performance Summary for each

Fund;

(b) Schedule of Investments for each

Fund;

(c) Statements of Assets and

Liabilities for each Fund;

(d) Statements of Operations for each

Fund;

(e) Statements of Changes in Net

Assets for each Fund;

(f) Notes to Financial Statements,

which include but are not limited to,

primary investment objective of each

Fund;

(g) The performance and rate of return

achieved for each Trust and the Funds

in which the Trust is invested; and

(h) A breakdown of all expenses and

fees at the Fund and Trust levels.

P. (1) Except as provided in Section

II(P)(2) below, the independent Plan

Fiduciary will receive, at least 30 days

advance notice of any material change

in the information described in Section

II(M) (2) or (3) regarding the

composition of the Trusts or the basis

on which the Trusts’ assets are

rebalanced, and will receive at least 30

days advance notice of any material

increase in expenses at the Trust level

described in Section II(M)(4);

(2) The Financial Expert will have the

sole responsibility for determining the

materiality of any changes in the

information in Section II(M) (2) or (3).

TCW will determine the materiality of

any changes described in Section

II(M)(4) regarding the expenses charged

to the Trusts. For any changes in the

information in Section II(M) (2) or (3)

which are not material, the independent

Plan Fiduciaries will be notified within

10 days of such change. For any changes

in the information in Section II(M)(4)

which are not material the independent

Plan Fiduciary will be notified at least

quarterly. Independent Plan Fiduciaries

will be afforded, at all times, a

reasonable opportunity to terminate

their Plans’ participation in the Program

as described in Section II(Q)(2) below;

and

(3) Under extraordinary

circumstances outside the control of

TCW, the independent Plan Fiduciary

may not be provided advance notice by

TCW of material changes in the

information listed in Section II(M) (2) or

(3) regarding the composition of the

Trusts or the basis on which the Trusts’

assets are rebalanced. Under such

circumstances, the Plan Fiduciaries will

be notified within 10 days of any such

change. The Financial Expert will

determine whether the circumstance is

extraordinary and if the change in the

composition of the Trusts or in the basis

for rebalancing is material.

Q. (1) The Units in the Trusts will be

redeemed by TCW, at no charge.

Redemption requests received in proper

form prior to the close of trading on the

New York Stock Exchange (NYSE) will

be affected at the net asset value per

Unit determined on that day.

Redemption requests received after the

close of regular trading on the NYSE

will be effected at the net asset value at

the close of business of the next day,

except on weekends or holidays when

the NYSE is closed; and

(2) The Plans can redeem their Units

in the Trusts on five business days (or

less) notice.

R. The Trusts permit participants and

beneficiaries to purchase or redeem an

interest in the Trust on any day that the

shares of the Funds contained within

the Trust can be purchased or

redeemed. This paragraph (R) does not

preclude any Plan from restricting such

purchases and redemptions to a less

frequent basis.

S. All transactions involving

securities owned by the Funds will be

executed through brokers in which TCW

has no interest and who are unrelated to
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41435

TCW. TCW will not receive any

consideration from such brokers in

connection with their selection, or for

effecting or executing such transactions

other than research which will benefit

the shareholders of the Funds, including

the Trusts. TCW brokerage practices

will reasonably comply with the

requirements of section 28(e) of the

Securities and Exchange Act of 1934.

T. (1) The independent Fiduciaries of

Plans participating in the Program will

receive full written disclosure, in a

statement separate from a Fund

prospectus, of any proposed increases in

the rates of advisory or other fees

charged by TCW to the Funds for

services (or of any material increase in

expenses charged by TCW to the Funds

or fees charged by TCW for internal

accounting services for the Funds) at

least 30 days prior to the effective date

of such increase, accompanied by a

termination form (the Termination

Form, as described in (2) below) and

shall receive full written disclosure in a

Fund prospectus, or otherwise, of any

such increases in the rate of fees

charged by TCW to the Funds; and

(2) The Termination Form shall

provide an election to terminate

participation in the Program and shall

contain instructions on the use of the

form that includes the following

information: (a) the authorization to

participate in the Program is terminable

at will by the Plan, without penalty to

the Plan, upon receipt by TCW of

written notice from the Plan; and (b)

failure to return the Termination Form

will result in the continued

authorization of the Plan’s participation

in the Program, including investment in

the Trusts.

U. TCW maintains, for a period of six

years, the records necessary to enable

the persons described in paragraph (V)

of this Section II to determine whether

the conditions of this exemption have

been met, including a record of each

recommendation made to the

participants and beneficiaries, and their

subsequent investment choices, except

that—

(1) A prohibited transaction will not

be considered to have occurred if, due

to the circumstances beyond the control

of TCW and/or its affiliates, the records

are lost or destroyed prior to the end of

the six-year period; and

(2) No party in interest, other than

TCW, shall be subject to the civil

penalty that may be assessed under

section 502(i) of the Act, or to the taxes

imposed by section 4975(a) and (b) of

the Code if the records are not

maintained or not available for

examination as required by paragraph

(V)(1) of this Section II below.

V. (1) Except as provided in

subparagraph (2) of this paragraph (V)

and notwithstanding any provisions of

subsections (a)(2) and (b) of section 504

of the Act, the records referred to in

paragraph (U) of this Section II are

unconditionally available at their

customary location for examination

during normal business hours by—

(a) Any duly authorized employee or

representative of the Department, the

Internal Revenue Service, or the

Securities and Exchange Commission,

(b) Any fiduciary of a participating

Plan or any duly authorized

representative of such fiduciary,

(c) Any contributing employer to any

participating Plan, or any duly

authorized employee or representative

of such employer, and

(d) Any participant or beneficiary of

any participating Plan, or any duly

authorized representative of such

participant or beneficiary.

(2) None of the persons described in

paragraphs (1) (b)–(d) of this paragraph

(v) shall be authorized to examine trade

secrets of TCW, or commercial or

financial information which is

privileged or confidential.

Section III. Definitions

A. The term Trust or Trusts means a

commingled trust or trusts which satisfy

the requirements of IRS Revenue Ruling

81–100, 1981–1 C.B. 326 which invest

exclusively in one or more of the

portfolios of TCW Galileo Funds, Inc.,

cash or cash equivalents.

B. The term Fund or Funds means one

or more of the portfolios of TCW Galileo

Funds, Inc., an open-end investment

company registered under the

Investment Company Act of 1940, as

amended (the 1940 Act).

C. The term TCW means the TCW

Group, Inc., and any affiliates thereof as

defined below in paragraph (D) of this

Section III.

D. The term affiliate of a person

includes:

(1) Any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with the person;

(2) Any officer, director, employee,

relative, or partner in any such person;

and

(3) Any corporation or partnership of

which such person is an officer,

director, partner, or employee.

E. The term control means the power

to exercise a controlling influence over

the management or policies of a person

other than an individual.

F. The term Financial Expert means

Professor Jeffrey F. Jaffe, Ph.D., or a

successor Financial Expert. Less than 5

percent (5%) of Professor Jaffe’s gross

income, for federal income tax

purposes, in his prior tax year, will be

paid by TCW in the immediately

subsequent tax year. If the Financial

Expert has any income which is not

included in the gross income (e.g.,

interest income which is exempt from

federal income taxes), such income may

be added to his gross income for his

purpose. In the event TCW determines

to replace Professor Jaffee or any of his

successors, TCW will send a letter to the

Department 60 days prior to such

replacement. The letter will specify that

the successor Financial Expert has

responsibilities, experience and

independence similar to those of

Professor Jaffee. If the Department does

not object to the successor, the new

appointment will become effective on

the 60th day after the Department

receives such letter.

G. The term Behavioral Expert means

Professor Shlomo Benartzi, or a

successor Behavioral Expert. In the

event TCW determines to replace

Professor Benartzi or any of his

successors, TCW will send a letter to the

Department 60 days prior to such

replacement. The letter will specify that

the successor has responsibilities,

experience and independence similar to

that of Professor Benartzi. If the

Department does not object to the

successor, the new appointment will

become effective on the 60th day after

the Department receives such letter.

H. The term net asset value of a Trust

is defined to mean the fair market value

of shares in the Funds and cash, minus

the accrued expenses of a Trust.

EFFECTIVE DATES: If granted, this

exemption will be effective as of the

date this notice of proposed exemption

is published in the Federal Register.

Summary of the Facts and

Representations

1. The TCW Group, Inc., is the

holding company for a group of whollyowned subsidiaries that provide a broad

range of investment management

services. Trust Company of the West is

a trust company chartered by the State

of California, and is one of the largest

trust companies in the United States.

TCW Funds Management, Inc., TCW

Asset Management Company, and

Continental Asset Management Corp.,

are investment advisors registered with

the Securities and Exchange

Commission under the Investment

Advisors Act of 1940. TCW Group Inc.

also contains other registered

investment advisor entities. As of

September 30, 1996, TCW Group, Inc.

was owned 90% by employees and 10%

by directors.
41436 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

7For purposes of this proposed exemption, the

term Participants includes participants and

beneficiaries who have the power to direct the

investments of their account balances.

8See Footnote 3, supra.

9Upon the request of a very large plan, TCW may

construct an individual arrangement utilizing

separate Trusts complying with the safeguards

discussed herein.

10The applicant represents that Galileo is strictly

regulated and its fees have to be approved by an

independent Board of Directors. Specifically,

section 15 of the 1940 Act contains certain

procedures for the adoption and renewal of

investment advisory contracts. This section 15

requires, among other things, that the terms of

investment advisory agreements must be approved

by a majority of directors, including a majority of

the independent directors, cast in person at a

meeting called for purpose of voting on such

approval. Section 15(c) of the 1940 Act imposes a

duty on the directors to request and evaluate, and

the investment advisor to furnish, whatever

information is necessary to evaluate the investment

advisory agreement.

The standards regarding the approval of an

investment advisory agreement are governed by

section 36(b) of the 1940 Act, which provides that

an investment advisor to a registered investment

company has a fiduciary duty with respect to its

receipt of compensation for services and other

payments.

11 It is the sole responsibility of the Financial

Expert to determine whether to include an

additional Fund as an investment under one or

more of the Trusts.

TCW is primarily in the business of

providing investment management

services. TCW manages pools of taxexempt capital for pension and profit

sharing funds, jointly trusteed

retirement, health and welfare funds,

public employee retirement funds,

endowments and foundations. TCW also

manages a number of mutual funds for

retail investors, and manages assets for

insurance companies, foreign investors,

and high net worth individuals.

As of September 30, 1996, TCW had

more than $50 billion in assets under

management, representing over 1,200

institutional and private clients. As of

the same date, TCW had a staff of more

than 500 individuals, including over

200 investment and administrative

professionals. This investment staff

includes more than 50 portfolio

managers/analysts, approximately 60

research personnel and 14 traders. TCW

also employs more than 40 client

relations professionals and more than 60

administrative professionals.

2. TCW intends to offer the Program

entitled ‘‘TCW Portfolio Solutions’’

under which TCW will render

investment advice to the Participants 7

in the Plans. Participation by Plans in

the Program will be approved by Plan

Fiduciaries who are independent of

TCW. It is represented that virtually all

of the Plans participating in the Program

will be designed to comply with the

provisions of section 404(c) of the Act.

The Plans will be individual account

plans described in section 3(34) of the

Act. Once the Program is approved by

the Plan Fiduciary, TCW will provide

each Participant, who wants to receive

a recommendation regarding

investments, with a worksheet

(Worksheet), in writing or

electronically, as described below. The

Worksheets consist of a series of

questions, designed to assess the

Participants’ retirement needs and

levels of risk tolerance. Upon

completion of the Worksheets, a

Participant’s responses will be analyzed

and each Participant will receive a

written recommendation by TCW of an

appropriate Life Cycle Trust (i.e. Trust)

for investment. Initially, the Program

will offer four separate commingled

Trusts (more may be added in the

future), and, if not otherwise available

under a Plan, a separate Money Market

Fund and a Guaranteed Investment

Contract (GIC). At the request of the

Plan, the Money Market Fund, the GIC,

or a similar investment vehicle may or

may not be affiliated with TCW.8

Each Trust is a group trust established

pursuant to IRS Revenue Ruling 81–100,

1981–1 C.B. 326. Application will be

made to the Internal Revenue Service

(IRS) for a favorable determination as to

the tax-exempt status of each Trust.

TCW is the trustee of each Trust. Each

Trust will invest exclusively, but in

varying proportions, in the Funds which

are the thirteen mutual funds (more

funds may be added in the future)

offered by TCW Galileo Funds, Inc., an

open-end investment company.9

3. An independent Financial Expert

will develop a methodology for

assessing the Participants’ retirement

funding needs. An independent

Behavioral Expert will develop a

methodology for assessing the

Participants’ levels of loss aversion. A

computer program will be designed by

programmers unaffiliated with TCW

which will incorporate the

methodologies designed by the two

Experts. Information from the

Participant’s Worksheet will be input

into the computer program and will

produce an investment recommendation

presented by TCW to the Participant.

This recommendation will result solely

from the output of the computer

program, and neither TCW nor any of its

affiliates will be able to change or affect

the output. The recommendation will

reflect the methodology developed by

the Financial Expert, except that the

methodology developed by the

Behavioral Expert may result in a more

conservative recommendation for a

Participant whose Worksheet responses

reflect a high risk aversion level. The

more conservative recommendation may

result from the Participant’s risk profile,

which is developed through the

responses to questions on the Worksheet

regarding risk tolerance and will only be

used to recommend the same or a more

conservative Trust than would have

been recommended if only questions

regarding the financial requirements of

the Participant were contained in the

Worksheets. Under the Program, the

Participant retains discretion and may

disregard the recommendation of TCW

and invest in another Trust or in the

separate Money Market Fund or GIC

offered under the Program.

The mix of the Funds in the Trusts

will accommodate different investment

strategies and risk tolerances. Each

Trust will be designed to provide an

asset allocation model (Asset Allocation

Model) for four different profiles of

Participants. The four profiles will be

based on the Participants’ financial

objectives, time horizon, other savings

(including amounts held in other plans),

and risk tolerance. The independent

Financial Expert will periodically adjust

the Asset Allocation Models based on

investment goals and risk tolerances

assigned to each Asset Allocation

Model, as well as any changes in the

economy and market conditions. The

Trusts range from aggressive (portfolios

invest in equities) to conservative

(portfolios invest in fixed income

instruments). The Trusts may comprise

some or all of the Plan’s investment

alternatives. As described in paragraph

19 below, TCW will incur expenses for

operating the Program at the Trust level,

such as, for example, expenses paid to

third parties. TCW will receive only

reimbursement of direct expenses for

operating the Program. The structure of

the Program is described in more detail

below.

4. TCW Galileo Funds, Inc. (Galileo)

is an open-end management investment

company registered under the

Investment Company Act of 1940, as

amended (the 1940 Act).10 Galileo

currently offers shares in thirteen

Funds. Galileo may create additional

Funds, and such additional Funds may

be considered for investment by the

Trusts under the rebalancing of the

Trusts to be performed periodically by

the Financial Expert.11 The Funds have

a Registration Statement under the

Securities Act of 1933, as amended (the

1933 Act) and the 1940 Act. The

Registration Statement has been

declared effective by the Securities and

Exchange Commission (SEC) and is

updated at least annually to assure
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41437

12For the Convertible Securities Fund and Money

Market Funds offered inside the Trusts, the Adviser

has agreed to reduce its investment management

fee. Alternatively, the Adviser will pay these Funds’

operating expenses, so as to limit each respective

Fund’s total expenses to 0.95% and 0.40%, of its

average net asset value until December 31, 1997.

compliance with the securities laws.

The Funds are no-load mutual funds

which trade at their respective net asset

value. The Trusts trade at the net asset

value of the amalgam of the Funds in

which they are invested, plus any cash

they hold. The Funds are available to

institutional investors and individuals

with a high net worth, and require a

minimum initial investment of $250,000

and a minimum of $25,000 for

additional investments.

5. Galileo has entered into a contract

with TCW Funds Management, Inc. (the

Adviser), pursuant to which Galileo has

employed the Adviser to: manage the

investment of its assets; administer its

day-to-day operations; place purchase

and sale orders of the Funds’ securities;

and manage Galileo’s business affairs

(subject to control by the Board of

Directors of Galileo). Under the advisory

agreement (the Advisory Agreement),

the Funds pay the Adviser certain fees

for the services rendered, facilities

furnished, and the Funds’ expenses paid

by the Adviser. (See Table I). The Funds

are entirely no-load, and do not charge

fees to purchase or exchange shares.

Also, the Funds do not charge any

ongoing marketing expenses (i.e. fees

pursuant to Rule 12b–1 under the 1940

Act).

6. The following Table I illustrates the

expenses and fees incurred by the

Funds’ shareholders for the fiscal year

ending October 31, 1996. The applicant

represents that these fees and expenses

are subject to change. Expenses are

expressed as a percentage of each

Fund’s average net asset value.12

TABLE I.—SHAREHOLDER TRANSACTION EXPENSES FOR ALL PORTFOLIOS

Sales Load Imposed on Purchases .. None.

Sales Load Imposed on Reinvested

Dividends.

None.

Contingent Deferred Sales Load ....... None.

Redemption Fees .............................. None.

Exchange Fees ................................. None.

FUND NAME

Annual fund operating expenses Money

market

High

yield

Core

fixed

income

Long

term

mortgage

backed

Mortgage

backed

Mid-cap

growth

Convertible securities

Core

equity

Small

cap

Earnings

momentum

Asia

Pacific

Emerging

markets

Latin

America

Management fees ........................ .21% .75% .40% .50% .50% .93% .62% .75% 1.00% 1.00% 1.00% 1.00% 1.00%

Rule 12b–1 fees ........................... (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)

Other expenses ............................ .19% .15% .36% .18% .19% .27% .33% .07% .14% .43% .44% .41% .44%

Total fund operating expenses .... .40% .90% .76% .68% .69% 1.20% .95% .82% 1.14% 1.43% 1.44% 1.41% 1.44%

None.

The independent Fiduciaries of Plans

participating in the Program will receive

full written disclosure, in a statement

separate from a Fund prospectus, of any

proposed increases in the rates of

advisory or other fees charged by TCW

to the Funds for services (or of any

material increase in expenses charged

by TCW to the Funds or fees charged by

TCW for internal accounting services for

the Funds) at least 30 days prior to the

effective date of such increase,

accompanied by a termination form (the

Termination Form, as described below)

and shall receive full written disclosure

in a Fund prospectus, or otherwise, of

any such increases in the rate of fees

charged by TCW to the Funds.

The Termination Form shall provide

an election to terminate participation in

the Program and shall contain

instructions on the use of the form that

includes the following information: (a)

The authorization to participate in the

Program is terminable at will by the

Plan, without penalty to the Plan, upon

receipt by TCW of written notice from

the Plan; and (b) failure to return the

Termination Form will result in the

continued authorization of the Plan’s

participation in the Program, including

investment in the Trusts.

7. TCW will engage the Financial

Expert to construct Asset Allocation

Models for the Trusts, using generally

accepted principles of modern portfolio

theory. The Program also permits the

creation of individualized Trusts whose

asset class composition may be

modified by the Plan’s Independent

Fiduciary. However, the Financial

Expert has to approve such modification

as being appropriate for that particular

Trust. TCW represents that investment

in such individualized Trusts will be

limited to the Plan for which such a

Trust was created.

Initially, the Financial Expert will be

Professor Jeffrey Jaffe, Ph.D., who is

currently on the faculty of the Wharton

School. Mr. Jaffe received a Ph.D. in

finance in 1973 from the University of

Chicago’s Graduate School of Business.

He has been a frequent contributor to

the Quarterly Economic Journal, the

Journal of Finance, the Journal of

Financial and Quantitative Analysis,

and the Financial Analysts Journal. Mr.

Jaffe is the Academic Director of several

Wharton Executive Education Programs,

which he also teaches. In the event that

TCW determines to replace Professor

Jaffe or any of his successors, TCW will

send a letter to the Department 60 days

prior to such replacement. The letter

will specify that the successor Financial

Expert has the responsibilities,

experience and independence similar to

those of Professor Jaffe. If the

Department does not object to the

Successor Financial Expert, the new

appointment will become effective on

the 60th day after the Department

receives such letter.

Mr. Jaffe, as the Financial Expert, has

no pre-existing relationship with TCW

and its affiliates. Mr. Jaffe is

independent from and is not under the

control of TCW and its affiliates. The

investment decisions made by the

Participants will not affect the fees paid

to the Financial Expert. Mr. Jaffe will

receive compensation from TCW for

serving as the Financial Expert. Less

than 5% of Professor Jaffe’s gross

income, for federal income tax

purposes, in his prior tax year, will be

paid by TCW in the immediately

subsequent tax year. If Professor Jaffe, as

the Financial Expert, has any income

which is not included in the gross

income (e.g., interest income which is

exempt from federal income taxes), such

income may be added to his gross

income for this purpose.

8. As stated above, the Asset

Allocation Models will be developed

and maintained by the Financial Expert

and will be assigned specific investment

goals and risk tolerances. Under each

Asset Allocation Model, the Trusts will

invest in specific Funds and will hold

certain amounts of these Funds so as to

be in compliance with the prescribed

Asset Allocation Model. TCW may

assist the Financial Expert by providing

certain background information for the
41438 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

13 In this regard, the general standards of

fiduciary conduct promulgated under the Act apply

to the Plan Fiduciaries participation in the Program.

Section 404 of the Act requires, among other things,

that a fiduciary discharge his or her duties solely

in the interest of the participants and beneficiaries

and in a prudent fashion. Accordingly, the Plan

Fiduciary must act prudently when deciding to

enter the Program, and in considering the fees to be

paid to TCW or third parties thereunder. The

Department expects the Plan Fiduciary, prior to

entering into the Program, to fully understand the

operation of the Program and the compensation

paid thereunder, following disclosure by TCW of all

relevant information pertaining to the Program.

development of the Asset Allocation

Models. In this regard, TCW may supply

the Financial Expert with algorithms,

studies, analytics, research, models,

papers and any other relevant materials.

The Financial Expert may also seek the

assistance of other entities in

formulating the Asset Allocation

Models. In all cases, however, the

Financial Expert retains the sole control

and discretion for the development and

maintenance of the Asset Allocation

Models.

The Trusts’ holdings of the Funds will

be periodically rebalanced by TCW to

maintain compliance with specific

Asset Allocation Models. However, the

rebalancing procedures will not involve

any discretion on the part of TCW or its

affiliates. In this connection, the

Financial Expert will develop a

mechanical formula to rebalance the

relative value of the Funds in each Trust

on a pre-determined basis. The

Financial Expert also will determine the

timing of the rebalancing and may also

periodically adjust the Asset Allocation

Model.

9. TCW will also retain a behavioral

expert (the Behavioral Expert) to

formulate a risk profile for each

Participant based on each Participant’s

risk tolerance. As described below, the

Behavioral Expert is Schlomo Benartzi,

a professor at UCLA’s Anderson School

of Management. Professor Benartzi

received his Ph.D. in Behavioral

Finance and Mental Accounting from

Cornell University’s Johnson School of

Management. The Behavioral Expert is

independent of and is not under

common control of TCW and its

affiliates. The fees paid to the

Behavioral Expert by TCW for serving as

the Behavioral Expert will not be

affected by the investment decisions

made by the Participants.

10. The Program will be made

available to Plans which have a

minimum of $5 million in assets. The

Plan Fiduciaries will determine whether

the Program is appropriate for their

Plans. To assist the Plan Fiduciaries in

making this determination, TCW will

provide: a brochure describing the

Program; a contract containing the terms

and conditions of the Program which

must be executed by the Plan Fiduciary

before the Program is offered to the

relevant Plan Participants; full

disclosure concerning the composition

of the Trusts and, upon request, the

basis by which the Asset Allocation

Model for each Trust was derived (TCW

may require Plan Fiduciaries to keep

such basis confidential, except as

required by law); a reference guide/

disclosure document providing detailed

information as to how the Program

works; the fees charged to the Funds;

the expenses charged at the Trust level;

and related information.

TCW will also provide the Plan

Fiduciaries with a quantitative annual

report, based on raw data supplied by

the Plans. The annual report will enable

the Plan Fiduciaries to determine

whether the Program has increased or

maintained Plan participation, or has

achieved more appropriate asset

allocation for the investment of the Plan

Participants’ accounts. Such report will

disclose the extent to which the Plan

Participants followed TCW’s

recommendations. The annual report

will also include the performance and

rate of return achieved for each Trust

and the Funds in which it is invested,

and will contain a breakdown of all

expenses and fees at the Fund and Trust

levels.

11. The applicants represent that the

Program will assist Plan Fiduciaries in

achieving increased Plan participation,

and assisting Participants in attaining

appropriate asset allocation for their

individual accounts. In accordance with

their responsibilities under Title I of the

Act, the Plan Fiduciaries will review the

Program before offering it under their

Plans.13

12. Under the Program, TCW will

provide each Plan Participant, in

writing or otherwise, with Worksheets

to elicit from the Participants their

retirement funding needs and level of

loss aversion. The Worksheets will

consider each Participant’s savings,

liquidity needs, present and future

marginal income tax brackets, other

financial assets (e.g., amounts in other

plans), personal assets, other funding

sources (e.g., inheritance), and

investment time horizon. The

Worksheets will be developed by the

Behavioral Expert and the Financial

Expert. The risk profile, developed

through the use of the Worksheets, will

be used by TCW only to recommend to

the Participants the same or a less

aggressive Trust than it would have

recommended if the risk profile had not

been developed and was not considered.

TCW will disclose to the Participants

the reason for, and the effects of, the risk

profile.

The Worksheets will be provided in

different formats to accommodate all

Participants. It is anticipated that the

Worksheets will be provided in hardcopy with written instructions at

employee meetings and general

information meetings, through the

Intranet (a secured access subset of the

Internet), on computer terminals at the

office of the Plan Fiduciary, on the Plan

Fiduciary’s page on the world-wide

web, etc. If a computer-proficient

Participant does not understand a

question, he will be able to receive a

detailed answer via the computer. The

Participant can also meet with a

facilitator familiar with the Program, or

contact the facilitator by telephone

using an 800 toll-free number. The

facilitator may, if the Participant

chooses, complete the Worksheets based

on information furnished by or on

behalf of the Participant. The

compensation of such personnel will

not be affected by particular Trust

recommendations or the allocation of

investments in the Trusts and/or Money

Market Fund, Guaranteed Investment

Contract or similar vehicle. However,

such personnel may receive enhanced

compensation based on the amount

invested in the entire Program by all

Participants, or by the Participants

which they or their teams assist.

13. All the recommendations made by

TCW to the Participants regarding

specific Trusts, will be based solely

from inputting the Participant

information into the computer program

which is designed using parameters

provided by the Financial Expert and

the Behavioral Expert. Any computer

programmers who are retained to

formulate such programs will have no

affiliation with TCW. Neither TCW nor

any of its affiliates will have any

discretion regarding the output of the

Program. Under the Program, the

Participant retains discretion and may

disregard the recommendation of TCW

and invest in another Trust. Further, if

the Participant does not complete the

Worksheet, the Participant may elect

which Trust to invest in. The Program

imposes no limit on the frequency with

which a Participant may change his

investment election. However, Plan

sponsors may impose other limits

concerning frequency. The Program is

designed to recommend a single Trust to

the Plan Participants. However, if a Plan

wishes to permit its Participants to

invest in more than one Trust, TCW will

modify the Program to permit such

investments. However, only one Trust

will be recommended by TCW.
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41439

14An updated DALBAR study for the period

September 1993 through June 1996, reached the

same conclusion.

15The Department recently issued Interpretive

Bulletin 96–1, 29 CFR 2509.96–1 (the IB), which

encourages and facilitates the provision of

investment education to participants and

beneficiaries. The IB describes information which

will not constitute investment advice. Therefore, a

person will not become a fiduciary by providing

such information. However, the applicants

represent that their assistance to Plan Participants

pursuant to the Program may be considered to be

investment advice. 16See Footnote 4, supra.

14. The applicant believes that shortterm market volatility has influenced

investors to ‘‘buy high and sell low’’. In

this regard, DALBAR Financial Services,

Inc., (DALBAR) prepared a study titled

Quantitative Analysis of Investor

Behavior which tracked investor cash

flows in and out of mutual funds during

the period January 1984 through

September 1993. 14 The study concluded

that the investors’ tendency to bail out

of equity and bond funds during dips in

the market, and buy back during

recoveries, hurt overall performance.

Over the 10 year period studied,

investors in equity funds which were

advised by sales force personnel

outperformed direct market investors by

more than 20%.

The applicants represent that the

Plans’ Participants also fall prey to

market volatility because they, as a

group, are less sophisticated than

individuals who invest on their own in

mutual funds.

15. The Program is designed to correct

this tendency of ‘‘buying high, selling

low’’. First, Worksheets will analyze

investor behavior of each Participant

and determine the appropriate Trust for

investment. Since each Trust is a

portfolio containing varying percentages

of different asset classes represented by

its investments in the Funds, this design

accounts for the fact that investment

performance of different asset classes is

imperfectly correlated, and should

buffer short-term fluctuations in the

portfolio’s overall value.

16. The applicants request exemptive

relief for the provision of investment

advice to the Plans’ Participants which

may result in an investment by a

Participant in a particular Trust.15 In

this regard, TCW generally receives

higher net fees (and, potentially, higher

net profits) if a Participant invests in the

more aggressive Trusts. It is represented

that the Program offers the following

safeguards for the Plans and their

Participants to address this potential

conflict of interest. (a) An independent

Financial Expert will construct,

maintain and modify Asset Allocation

Models of the Trusts. (b) A separate

trust (Separate Trust) may be

constructed by the Plan Fiduciary based

on different weightings of the Funds. A

Separate Trust may be utilized if the

Financial Expert approves such

modification. (c) The Financial Expert

will develop, maintain, and if necessary,

modify a basis for rebalancing each

Trust. The rebalancing will maintain the

prescribed asset allocation for each

Trust also developed by the Financial

Expert. Rebalancing will not involve

any investment discretion by TCW or its

affiliates. (d) The Funds are

independently viable in the institutional

market where the minimum investment

is generally $250,000. (e) TCW will not

receive any fees other than those

charged by the Funds. However, TCW

may receive reimbursement for direct

expenses associated with operating the

Program, including expenses it pays to

third parties. (f) The Program only will

be available to Plans which have a

minimum of $5 million in plan assets.

(g) TCW will provide a Plan Fiduciary

with full written disclosure regarding

the composition of the Trusts. Upon

request, TCW will also provide the basis

from which the asset allocations for

each Trust were derived. The basis on

which the Trusts’ assets are rebalanced

is developed, maintained, and if

necessary, modified by the Financial

Expert. TCW will fully disclose all

amounts charged at the Fund levels by

providing the Plan Fiduciaries with a

copy of the Funds’ prospectus. (h) TCW

will also disclose to the Plan Fiduciary

all the expenses charged to the Trusts

prior to the Plan’s investment in any of

the Trusts. Such disclosures may be

provided in a brochure, a contract

executed by the Plan Fiduciary, or

otherwise. (i) TCW will provide the Plan

Fiduciary with a quantitative annual

report which will enable the Plan

Fiduciary to determine if the Program

has attained its objectives. (j)

Recommendation to a Participant will

be based solely on that Participant’s

response in the Worksheets. TCW has

no discretion to vary the

recommendations which were based on

the Participant’s funding needs and

behavioral profile as it relates to loss

aversion. However, Participants may

elect not to follow the recommendations

rendered by TCW. (k) TCW will hire an

independent Behavioral Expert to

develop and formulate the risk profile.

Such a risk profile will gauge whether

a Participant will maintain the optimal

Trust position if a large loss occurs. If

the Participant is not likely to maintain

the optimal position in the event of such

a loss, a more conservative Trust will be

recommended.

Prior to investing in a Trust, each

Participant will receive full disclosure

concerning the composition of the

Trusts, and a description of the

underlying Funds. Upon request, a

Participant will also receive a copy of

the Funds’ prospectus.16

Subsequent to their participation in

the Program, the Participants will be

provided with written confirmations of

the Participant’s purchase and

redemption transactions within 10 days

of each such transaction. Also,

quotations of the Participants’ account

balances will be available by telephone.

Both the Participants and Plan

Fiduciaries will receive a periodic

newsletter describing the Trusts’

performance during the preceding

period, market conditions and economic

outlook and, if applicable, prospective

changes in the Asset Allocation Model

and the reasons for change.

17. Furthermore, the Program

provides the following safeguards with

respect to the purchase and sale of Units

in the Trusts. (a) The Plan Fiduciaries

have the discretion to select and retain

the Program for their Plans. (b) The

Plans pay no more or receive no less for

a Unit in the Trusts than the Plans

would have paid or received in an

arm’s-length transaction with an

unrelated party. (c) The Plans can

redeem their Units in the Trusts on five

business days (or less) notice.

Redemption requests received in proper

form prior to the close of trading on the

NYSE will be affected at the net asset

value per Unit determined on that day.

Redemption requests received after the

close of regular trading on the NYSE

will be effected at the net asset value at

the close of business of the next day,

except on weekends or holidays when

the NYSE is closed. (d) Except as

provided below, the independent Plan

Fiduciary will receive, at least 30 days

advance notice of any material change

in the information regarding the

composition of the Trusts or the basis

on which the Trusts’ assets are

rebalanced, and will receive at least 30

days advance notice of any material

increase in expenses at the Trust level.

The Financial Expert will have the sole

responsibility for determining the

materiality of any changes in the

information regarding the composition

of the Trusts or the basis on which the

Trusts’ assets are rebalanced. TCW will

determine the materiality of any

changes in expenses charged to the

Trusts. For any immaterial changes in

the information regarding the

composition of the Trusts or the basis

on which the Trusts’ assets are
41440 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

17Best execution takes into account such factors

as price (including the applicable dealer spread or

commission, if any), size of the order, difficulty of

execution and operating facilities of the firm

involved. The applicants state that research, which

will benefit all the shareholders in the Funds,

including the Plans, may be provided by the Third

Party Brokers.

18Pursuant to this condition, the applicants

cannot pay or receive any sales fee or commission.

However, this does not prevent third parties from

paying or receiving fees or commissions.

19PTE 77–3 provides relief for the acquisition or

sale of shares of a registered open-end investment

company by an ‘‘in-house’’ employee benefit plan,

that is, a plan covering only employees of the

mutual fund, the fund’s investment adviser, or

principal underwriter or an affiliate of such

persons.

The plan may not pay any investment

management, investment advisory or similar fee to

the fund adviser, underwriter or affiliate, except in

the form of investment advisory fees paid by the

fund under an investment advisory agreement. The

plan also may not pay a sales commission in

acquiring or selling the fund shares, and may only

be charged a redemption fee under certain

conditions. Any other dealings with the plan, must

be on a basis no less favorable to the plan than such

dealings with other fund shareholders. The

Department expresses no opinion herein as to

whether the conditions of PTE 77–3 will be met

under the proposed transactions.

20The Department expresses no opinion as to

whether the requirements of 29 CFR sections

2550.408b–2 and 2550.408c–2 would be met with

respect to the reimbursement of TCW for the

provision of the above-described services. The

Department notes, however, that an expense would

not be properly reimbursable to the extent it was

incurred in connection with a service that was not

otherwise exempt under sections 408(b)(2) and

408(c) of the Act and corresponding regulations.

Thus, TCW must review each service to be provided

to the Trust to determine whether such service is

a ‘‘necessary service’’ for which reimbursement is

lawful. See Department of Labor Advisory Opinion

No. 93–06A, March 11, 1993.

21PTE 80–26 permits a party in interest to make

interest free loans to a plan. The proceeds of the

loan may be used only for (1) 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) a three day

period, for a purpose incidental to the ordinary

operation of the plan. In addition, the loan must be

unsecured and not made by an employee benefit

plan. The Department expresses no opinion as to

the applicability of PTE 80–26 or whether the

conditions of that exemption would be satisfied by

the proposed transactions.

rebalanced, the independent Plan

Fiduciary will be notified within 10

days of such change. For any immaterial

changes in the expenses charged to the

Trusts, the independent Plan Fiduciary

will be notified at least quarterly.

Independent Plan Fiduciaries will be

afforded, at all times, a reasonable

opportunity to terminate their Plans’

participation in the Program, as

described in item (c) above. Under

extraordinary circumstances outside the

control of TCW, the independent Plan

Fiduciary may not be provided advance

notice by TCW of material changes

regarding the composition of the Trusts

or the basis on which the Trusts’ assets

are rebalanced. Under such

circumstances, the Plan Fiduciaries will

be notified within 10 days of any such

change. The Financial Expert will

determine whether the circumstance is

extraordinary and if the change in the

composition of the Trusts or in the basis

for rebalancing is material. (e) The

broker-dealers who effectuate and

execute trades for the Funds, are

engaged on a ‘‘best execution’’ 17 basis

and are independent of TCW and its

affiliates (Third Party Brokers). (f) The

Plan pays no fee or commission by

reason of the acquisition or redemption

of Units in the Trusts.18

18. TCW will also offer the Program

to Participants in the Plans sponsored

by TCW. In this regard, TCW represents

that the Plans sponsored by TCW will

purchase or redeem Units in the Trusts

which acquire Shares in the Funds.

The applicants represent that the

purchase or redemption of Units in the

Trusts may be prohibited. Therefore, the

applicants request relief for the

purchase or redemption of Units in the

Trusts by Plans sponsored by TCW.

Such request for relief, however, does

not extend to the selection, acquisition

or sale of shares in the Funds by the

Trusts since the applicant represents

that such transactions are afforded relief

by Prohibited Transaction Class

Exemption 77–3, 42 FR 18734 (April 8,

1977) (PTE 77–3).19

In this connection, neither the

applicants nor any person in which they

have an interest will provide services to

the Trusts other than for reimbursement

of ‘‘direct expenses’’ within the meaning

of 29 CFR 2550.408c–2.

19. The applicants represent that the

combined total amounts received by

TCW and its affiliates for services

performed for the Trusts under the

Program will constitute no more than

reasonable compensation within the

meaning of 29 CFR 2550.408b–2(d) and

2250.408c–2. The only fees, other than

direct expenses, that TCW will receive

for such services are the fees charged by

the Funds to all investors. There will be

no separate fee at the Trust level for

asset allocation services.

The Plans’ Fiduciaries will receive

full disclosure of the services that will

be provided by or for the Trusts, and of

the Trusts’ expenses. These expenses

will include, but will not be limited to,

expenses for the Financial and

Behavioral Experts and the development

of the analytical and risk tolerance

components of the Worksheets,

expenses for printing and mailing

reports, expenses for publishing a

quarterly newsletter, expenses for

computer programmers, and any other

expense incurred by each Trust in the

ordinary course of business. 20

TCW represents that the combined

total amount payable by a Trust for

services necessary to operate the

Program and for TCW to provide what

may be considered investment advice,

will not exceed 1% of the Trusts’ net

asset value per annum, calculated on

the average daily value of a Plan’s

investment in the Trust. Additional

services, which are not necessary for the

operation of the Program (e.g.,

recordkeeping of amounts or units in

the participants’ individual accounts,

preparation of account statements for

participants, review of whether a Plan

complies with section 404(c) of the Act)

may be provided. However, these

expenses will not be considered in

determining whether the 1% limit is

exceeded. Except for these additional

services, all services provided will be

necessary to operate the Program (i.e.,

the Program Services). All the Trusts

will share the cost of the Program

Services on a pro-rata basis, based on

the amount of assets in each Trust. For

example, a Trust with $10 million in

assets will pay twice as much for

Program Services as a Trust with $5

million in assets. Fees at the Fund level

are separately determined and are not

affected by the fees paid at the Trust

level.

20. TCW will generally pay for direct

expenses for services performed for the

Trusts and seek reimbursement from the

Plans. The applicants state that this

could be a prohibited extension of credit

between a plan and a party-in-interest

pursuant to sections 406(a)(1)(B),

406(a)(1)(D) and 406(b)(2) of the Act.

However, the applicants represent that

these transactions are covered under

Prohibited Transaction Class Exemption

80–26, 45 FR 28545 (April 29, 1980)

(PTE 80–26) 21. The applicants also

represent that they will fully comply

with the applicable conditions of PTE

80–26 when they pay such expenses on

behalf of the Plans.

21. In summary, the applicant

represents that the transactions satisfy

the statutory criteria for an exemption

under section 408(a) of the Act because:

A. The decision to participate in the

Program will be made by a Plan

Fiduciary of a Plan which has a

minimum of $5,000,000 in plan assets;

B. Prior to making the decision to

participate in the Program, the Plan

Fiduciary will receive offering materials

and disclosures concerning the

Program’s purpose, fees, structure,

operation, and risks;
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41441

C. The Plan Fiduciary will receive an

annual report which will enable him to

monitor the Program’s effectiveness;

D. The Asset Allocation Models of the

Trusts and the rebalancing formula will

be constructed by an independent

Financial Expert;

E. A risk profile for each Participant

will be formulated by an independent

Behavioral Expert;

F. Investment recommendations made

by TCW to the Participants will be

based solely on their responses to the

Worksheets (and data which may be

supplied by the Plan or the Plan

Fiduciary), and the independent Experts

are responsible for formulating the

questions for the Worksheets;

G. TCW will maintain a record of the

recommendations made to the

Participants, including the investment

decisions made by the Participants;

H. Except for reimbursement of

expenses for services provided to the

Trusts, TCW will not receive any fees

from the operation of the Program other

than those attributable to the Funds;

I. (1) Prior to investing in a Trust,

each Participant will receive full

disclosures which will include, but will

not be limited to:

(a) Disclosure regarding composition

of the Trusts, and a description of the

underlying Funds;

(b) Upon request, a Participant will

also receive a copy of the Funds’

prospectus;

(c) The Participant can meet with a

facilitator familiar with the Program, or

contact such a facilitator using a tollfree number.

(2) Subsequent to his participation in

the Program, each Participant will

receive the following disclosures which

will include, but will not be limited to:

(a) Written confirmations of purchase

and redemption transactions for each

Participant within 10 days of each such

transaction;

(b) Telephone access to the quotations

of the Participant’s account balance; and

(c) A periodic newsletter describing

the Trusts’ performance during the

preceding period, market conditions

and economic outlook and, if

applicable, prospective changes in the

asset allocation model and the reasons

for the change; and

J. The Plans can redeem their Units in

the Trusts on five business days (or less)

notice.

Notice to Interested Persons

The applicant represents that because

potentially interested participants and

beneficiaries cannot be identified at this

time, the only practical means of

notifying such participants and

beneficiaries of this proposed

exemption is by publication in the

Federal Register. Therefore, 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.

However, because the applicants have

requested an effective date of the

publication of the notice of proposed

exemption in the Federal Register, the

applicants represent that if a Plan

invests in the Program within thirty (30)

days of the publication of the proposed

exemption in the Federal Register, the

Plan Fiduciary of that Plan will be given

a copy of the notice of proposed

exemption as published in the Federal

Register and a statement advising

interested persons of their right to

comment and request a hearing on the

proposed exemption. Accordingly, that

Plan Fiduciary and all interested

persons will be entitled to comment or

request a hearing on the proposed

exemption within thirty (30) days of the

Plan Fiduciary’s receipt of the above

materials.

FOR FURTHER INFORMATION CONTACT:

Ekaterina A. Uzlyan, U.S. Department of

Labor, telephone (202) 219–8883. (This

is not a toll-free number.)

Pension and Welfare Benefits

Administration, Notice of Proposed

Exemption for Certain Transactions

Involving the UNUM Life Insurance

Company of America (UNUM), Located

in Portland, Maine

[Application No. D–10437]

AGENCY: Department of Labor.

ACTION: Notice of proposed exemption.

SUMMARY: This document contains a

notice of pendency before the

Department of Labor (the Department) of

a proposed exemption from certain of

the prohibited transaction restrictions of

the Employee Retirement Income

Security Act of 1974 (the Act) and the

Internal Revenue Code of 1986 (the

Code). The proposed exemption would

exempt certain transactions that may

occur as a result of the sharing of real

estate investments among various

Accounts maintained by UNUM,

including the UNUM general account

and the general accounts of UNUM’s

affiliates which are licensed to do

business in at least one state

(collectively, the General Account), and

one or more separate accounts or

investment advisory accounts in which

one or more employee benefit plans

sponsored by UNUM or its affiliates

participate, or any combination thereof

(the ERISA-Covered Accounts) with

respect to which UNUM is a fiduciary.

As an acknowledged investment

manager and fiduciary, UNUM is

primarily responsible for the

acquisition, management and

disposition of the assets allocated to the

ERISA-Covered Accounts.

DATES: Written comments and requests

for a public hearing must be received by

the Department on or before September

30, 1997.

ADDRESSES: All written comments and

requests for a hearing (at least three

copies) should be sent of the Office of

Exemption Determinations, Pension and

Welfare Benefits Administration, Room

N–5649, U.S. Department of Labor, 200

Constitution Avenue, NW., Washington,

DC 20210, Attention: Application No.

D–10437. The application for exemption

and the comments received will be

available for public inspection in the

Public Documents Room of the Pension

and Welfare Benefits Administration,

U.S. Department of Labor, Room N–

5638, 200 Constitution Avenue, NW.,

Washington, DC 20210.

SUPPLEMENTARY INFORMATION: Notice is

hereby given of the pendency before the

Department of an application for

exemption from the restrictions of

sections 406(a), 406(b)(1) and 406(b)(2)

of the Act and from the sanctions

resulting from the application of section

4975 of the Code, by reason of section

4975(c)(1) (A) through (E) of the Code.

The proposed exemption was requested

in an application filed by UNUM

pursuant to 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).

Summary of Facts and Representations

1. UNUM is a stock life insurance

company organized under the laws of

the State of Maine and subject to

supervision and examination by the

Insurance Commissioner of Maine.

Among the variety of insurance

products and services it offers, UNUM

has long provided funding, deposit

administration, asset management and

other services for pension and profit

sharing plans subject to the provisions

of Title I of the Act. UNUM has

substantial experience in managing real

estate investments. Of the

approximately $11.8 billion in total

assets held by UNUM and its affiliates

at the close of 1995, General Account

assets included more than $261 million

in equity interests in real property and

more than $1.2 billion in mortgage

loans.

UNUM is owned by a parent holding

company, UNUM Corporation, a

Delaware corporation, which is publicly
41442 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

22The Trustees comprise senior actuarial,

financial, human resources and operating officers of

UNUM, its parent holding company and its

affiliates.

held and files reports with the

Securities and Exchange Commission

under the Securities Exchange Act of

1934.

UNUM Corporation maintains the

UNUM Employees Lifecycle Plan (the

UNUM Plan), which is a defined benefit

pension plan on behalf of its employees

and those of certain of its subsidiaries.

The UNUM Plan presently has 7,507

participants and holds more than $218

million in assets. Those assets are

managed by UNUM under an

Investment Management Agreement.

The UNUM Plan comprises an ERISACovered Account which may share real

estate investments under the exemption

proposed herein. The applicant

represents that currently the UNUM

Plan would be the only employee

benefit plan participating in an ERISACovered Account, but UNUM would

like to have the flexibility to share real

estate investments with additional

separate accounts or investment

advisory accounts in which other

employee benefit plans maintained by

UNUM or its affiliates participate.

Accordingly, UNUM has requested that

the exemption proposed herein extend

to such other potential ERISA-Covered

Accounts as well. The proposed

exemption would apply to real estate

investments shared by two or more

ERISA-Covered Accounts, and would

also apply to real estate investments

shared by one or more ERISA-Covered

Accounts and the General Account. The

only employee benefit plans which will

participate in the ERISA-Covered

Accounts are plans maintained by

UNUM and its affiliates.

2. The applicant represents that

because there are relatively few

potential investors for large scale

investments such as office buildings,

shopping centers, and industrial parks,

the owner or developer of such real

estate investments must offer a higher

return in order to attract investors. In

many cases, UNUM’s real estate

accounts would be precluded from

acquiring these investments on an

individual basis because such

investments would require the

commitment of a disproportionately

large percentage of account assets to one

or a few investments. The sharing of

large or uniquely desirable real estate

investments would permit the ERISACovered Accounts to participate in more

attractive and profitable real estate

investments while maintaining portfolio

diversification.

3. The real estate investments which

UNUM proposes to share may either

take the form of a direct investment in

real property or an interest in a joint

venture partnership which holds title to,

manages, and/or develops real property.

No ERISA-Covered Account will

participate in an investment for the

purpose of enabling another Account to

make an investment.

4. Real estate equity investment

opportunities for the Accounts are

originated by the Real Estate Equity

Group (REEG), a department within

UNUM’s Investment Department (the

Investment Division). Real estate equity

investments are originated in

accordance with general investment

criteria developed by REEG and the

senior management of the Investment

Division. The specific investment

criteria for each account must be

approved by the board of directors of

each affiliated insurance company

participating in real estate investments

and updated no less frequently than

annually. With respect to the UNUM

Plan (or any other ERISA–Covered

Account), the investment strategy would

be developed and reviewed periodically

in consultation with the Plan trustees

and the independent fiduciary (see

below).

5. The strategy approved to date by

the trustees of the UNUM Plan (the

Trustees) 22 would limit its aggregate

participations in real estate investments

to 10% of Plan assets, with no more

than 1.5% of Plan assets in any one

property. The average amount invested

in each property by the Plan is expected

to be approximately $2.5 million. No

leverage would be employed, i.e., no

property would be debt financed. There

would eventually be ten or twelve

properties in the Plan’s real estate

portfolio, diversified among at least five

cities or regions which are

geographically dispersed. No more than

30% of the Plan’s portfolio would be

invested in any one city or region.

5. Allocations of investment

opportunities among Accounts are

based upon, among other things, the

extent to which each Account’s

projected acquisition needs and

investment objectives, established no

less frequently than annually as part of

the criteria for investment of the

Account, have not been satisfied by

other allocations. Under the exemption

proposed herein, real estate investments

meeting an Account’s investment

criteria could be shared by that Account

and one or more other Accounts for

which a share in the investment meets

the criteria of such other Account(s)

necessary to achieve economic,

geographical and property class

diversification within the limits on

investment amounts imposed by the

overall size and other holdings of the

Account.

6. During the course of UNUM’s

holding of a real estate investment,

certain situations may arise which

require a decision to be made with

regard to the management or disposition

of the investment. For example, there

may be a need for additional

contributions of operating capital, or

there may be an offer to purchase the

investment by a third party or a joint

venture partner. When UNUM shares

these investments among more than one

Account, a potential for conflict arises

since the same decision may not be in

the best interest of each Account.

Therefore, the applicant has submitted a

request for exemption, with certain

proposed safeguards designed to protect

the interests of any participating ERISACovered Account in the resolution of

potential or actual conflicts. Among the

safeguards will be the appointment for

each participating ERISA-Covered

Account of a fiduciary independent of

UNUM and its affiliates.

7. The independent fiduciary of any

ERISA-Covered Account that proposes

to share real estate investments will be

furnished with a written description of

the transactions that may occur

involving such investments which

might raise questions under the conflict

of interest prohibitions of the Act with

respect to UNUM’s involvement in such

transactions and which are the subject

of this proposed exemption. This

description must discuss the reasons

why such conflicts of interest may be

present (i.e., because the General

Account participates in the investment

and may benefit from the transaction or

because the interests of the various

Accounts participating in the

investment may be adverse with respect

to each other). The description must

also disclose the principles and

procedures to be used to resolve any

anticipated impasses, as will be

outlined below. In addition, the

independent fiduciary of any new

ERISA-Covered Account that proposes

to share investments following the

issuance of a final exemption will be

provided with the above-described

written description and a copy of the

exemption as granted, before beginning

to participate in any shared

investments.

8. The Trustees can request a change

in the investment Policies and

Objectives governing investment of its

assets under the Investment

Management Agreement which would

preclude further shared real estate

investments, and which could call for
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41443

divestiture of existing participations in

such investments on its behalf. Any

other plan would be able to withdraw

from an ERISA-Covered Account by

providing notice to UNUM in

accordance with the relevant

contractual provisions.

9. The UNUM Plan, and any other

ERISA-Covered Account, will only

participate in the shared real estate

equity investments with the approval of

a fiduciary which is entirely

independent of UNUM and its affiliates.

The independent fiduciary will be

chosen by the Trustees, who will have

reviewed information about the

nominee’s qualifications, and had an

opportunity to meet with and question

the nominee or its representatives prior

to confirming the appointment. The

nominee may be a firm, or a committee

of individuals, possessing the necessary

qualifications as outlined below.

10. UNUM will not have the authority

to remove an independent fiduciary or

a member of an independent fiduciary

committee, except for cause. The term

‘‘for cause’’ means that there must be

sufficient and reasonable grounds for

removal and the reasons for removal

must be related to the ability and fitness

of an individual to perform his or her

required duties under the proposed

exemption. The definition of the term

‘‘for cause’’ must be clearly stated in

specific terms in the contract by which

the independent fiduciary is retained. If

the organization acting as independent

fiduciary is removed for cause by the

Trustees, the procedure described above

for the initial selection of an

independent fiduciary shall apply to the

replacement.

In the case of an individual member

of a committee serving as an

independent fiduciary, the committee

member may also be removed for cause

at any time upon the majority vote of

the remaining members of the

committee. If a vacancy occurs by virtue

of the death, resignation or removal of

a member of an independent fiduciary

committee, replacement members of the

committee will be appointed by a

majority vote of remaining members of

the committee. Possible replacements

may be suggested by members of the

committee, UNUM, the Trustees, or the

appropriate fiduciary of any other

participating plan. If an independent

fiduciary is to be replaced, written

records regarding the reason for such

replacement as well as a description of

the replacement independent fiduciary

must be maintained by UNUM or its

affiliate, and such records must be made

available to the Department upon

request. If the independent fiduciary is

removed for cause, UNUM will explain

the circumstances in writing to the

Department.

11. Prior to the decision to approve

the selection of an independent

fiduciary initially selected by UNUM,

the Trustees or other appropriate

fiduciary on behalf of any other plan

participating in shared real estate

investments will be furnished with

appropriate biographical information

pertaining to the organization or

committee members. This biography

will set forth the background and

qualifications of the organization or

committee member to serve in the

capacity of independent fiduciary. The

information provided to the Trustees or

other plan fiduciaries will include the

total amount of compensation received

by the organization (or committee

member) from UNUM and its affiliates

during the preceding year. This

financial disclosure will be updated

annually, and will include the amount

of fees and expenses paid for

independent fiduciary services.

12. To ensure that the organizations or

committee members so selected are

knowledgeable and qualified to serve as

independent fiduciaries and are, in fact

independent of UNUM, the following

qualifications and restrictions will be

met. The independent fiduciary must be

unrelated to UNUM and its affiliates.

The independent fiduciary may not be,

or consist of, any officer, director or

employee of UNUM, or be affiliated in

any way with UNUM or any of its

affiliates. (See definition of ‘‘affiliate’’ in

Section V(a), below.) The independent

fiduciary must be either (1) a business

organization which has (or whose

principals have) at least five years of

experience with respect to commercial

real estate investments, or (2) a

committee composed of three to five

individuals who each have at least five

years of experience with respect to

commercial real estate investments. The

contract with the independent fiduciary

must provide for a minimum initial

term of not less than five (5) years.

No organization or committee member

will be eligible to serve as an

independent fiduciary for an ERISACovered Account for any taxable year if

the gross income (excluding retirement

income) received by such organization

or individual (or any partnership or

corporation of which such organization

or individual is an officer, director, or

ten percent or more partner or

shareholder) from UNUM and its

affiliates for that taxable year exceeds

five percent of its or his annual gross

income from all sources for the prior

fiscal year. If such organization or

individual had no income for the prior

fiscal year, the five percent limitation

shall be applied with reference to the

fiscal year in which such organization

or individual serves as an independent

fiduciary. In addition, no organization

or individual who is an independent

fiduciary, and no partnership or

corporation of which such organization

or individual is an officer, director or

ten percent or more partner or

shareholder, may (i) acquire any

property from, sell any property to, or

borrow any funds from, UNUM or its

affiliates, during the period that such

organization or individual serves as an

independent fiduciary and a period of

six months after such organization or

individual ceases to be an independent

fiduciary, or (ii) negotiate any such

transaction during the period that such

organization or individual serves as

independent fiduciary.

A business organization or committee

member may not serve as an

independent fiduciary of more than one

ERISA-Covered Account.

13. The independent fiduciary will be

compensated by the UNUM Plan or any

other ERISA-Covered Account for which

it acts as independent fiduciary. UNUM

may indemnify any independent

fiduciary or members of an independent

fiduciary committee with respect to any

action or threatened action to which

such person is made a party by reason

of his or her service as an independent

fiduciary. Indemnification will be

provided as permitted under the laws of

the State of Maine and subject to the

requirement that such person acted in

good faith and in a manner he or she

reasonably believed to be solely in the

interests of the participants and

beneficiaries of the plans participating

in the Account.

14. The independent fiduciary of each

ERISA-Covered Account will have the

responsibility and authority to approve

or reject recommendations made by

UNUM for any transaction described in

this notice of proposed exemption. The

committee members and/or organization

acting as independent fiduciary will be

informed of the procedures set forth in

the requested exemption for the

resolution of anticipated impasses prior

to his or its acceptance of the

appointment. UNUM will involve the

independent fiduciary in the

consideration of contemplated

transactions prior to the making of any

decisions, and will provide the

independent fiduciary with whatever

information may be necessary in making

its determinations. No transaction

which is the subject of this proposed

exemption will be undertaken prior to

the rendering of an informed decision

by the independent fiduciary. In

addition, the independent fiduciary will
41444 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

approve the initial allocation of a shared

investment to an ERISA-Covered

Account. In the case of transactions that

involve the possible transfer of an

interest in a real estate investment

between the General Account and an

ERISA-Covered Account, the

independent fiduciary will not be

limited to approving or rejecting the

recommendations of UNUM, but will

have full authority to negotiate the

terms of the transfer (in accordance with

the independent appraisal procedure

described below) on behalf of the

ERISA-Covered Account. The

independent fiduciary of each ERISACovered Account will also review on an

as-needed basis, but not less than twice

annually, the entire portfolio of shared

real estate investments in the ERISACovered Account to determine whether

it is in the best interests of the ERISACovered Account to retain or sell such

investments.

15. The independent fiduciary will

prepare written records of its decisions

and the reasons underlying those

decisions, which may take the form of

committee meeting minutes or letters to

UNUM. UNUM will maintain these and

all other written records required to be

maintained by the Department and will

make them available for inspection by

authorized employees of the Department

and the Internal Revenue Service, as

well as the fiduciaries, contributing

employers, and participants and

beneficiaries of the plans participating

in the proposed transactions.

16. In connection with the

management of real estate shared

investments, it is possible that UNUM,

on behalf of the General Account, or the

independent fiduciaries for ERISACovered Accounts participating in a

shared investment, may develop

different approaches as to whether or

how long an investment should be held

by an Account. Certain situations may

also arise during the course of UNUM’s

holding of a shared real estate

investment in which decisions will

need to be made where it is not possible

to obtain the agreement of UNUM and

all of the independent fiduciaries

involved. These situations may arise as

a result of an action taken by a third

party, or they may arise in connection

with an action proposed by UNUM or

the independent fiduciary for an ERISACovered Account. In such cases, UNUM

will make recommendations to the

independent fiduciaries regarding a

proposed transaction. If a course of

action cannot be found that is

acceptable to each independent

fiduciary, a stalemate procedure will be

followed to ensure that a decision can

be made. The applicant represents that

the stalemate procedure is similar to

procedures typically used to resolve

disputes between co-venturers under

real estate joint venture agreements and

is therefore familiar to most real estate

investors.

17. With respect to stalemates

between two or more Accounts which

share an investment, the stalemate

procedure is designed to provide a

result that is similar to what would

occur in comparable situations where

unrelated parties to a transaction were

dealing at arm’s length. This means that

the action which will be taken in such

cases is the one that does not require an

Account: (1) to invest new money; (2) to

change the terms of an existing

agreement; or (3) to change the existing

relationship between the Accounts.

Joint venture agreements typically

provide the opportunity for a coventurer to buy out the interest of

another co-venturer if they reach an

impasse. If, for example, a third party

wishes to buy out a joint venturer’s

interest in a property and the coventurers disagree on whether to accept

or reject the buy-out offer, the real estate

joint venture agreement will typically

allow one co-venturer to buy out the

other at a specified price.

18. Where investments are shared by

two or more ERISA-Covered Accounts,

UNUM will make recommendations to

the independent fiduciaries of each

participating ERISA-Covered Account

regarding investment management

decisions that must be made for a real

estate shared investment. For example,

if the independent fiduciaries cannot

agree on a UNUM recommendation,

UNUM may offer alternate

recommendations (possibly including

partition and sale of undivided

interests) in an attempt to facilitate

agreement. If the independent

fiduciaries still cannot agree, each

ERISA-Covered Account will be offered

the opportunity to buy out the other

ERISA-Covered Account’s interest on

the basis of a specified price. The

specified price may be based on the

price offered by a third party, or, if no

third party offer is received (or if the

third party offer is unacceptable to

either ERISA-Covered Account), the

specified price will be the price

established under the independent

appraisal procedure described below.

As in a buy-sell provision in a typical

joint venture, the ERISA-Covered

Account to which the offer is made will

have the option to sell to the offering

ERISA-Covered Account at the specified

price, or to buy out the offering ERISACovered Account’s interest at that price.

19. If the independent fiduciary for

the ERISA-Covered Account which

disagrees with UNUM’s

recommendation does not wish to make

a buy-sell offer to the other ERISACovered Account, the other ERISACovered Account(s) may do so. If no

ERISA-Covered Account chooses to

exercise the buy-sell option, UNUM will

take the action designed to preserve the

status quo, i.e., the action designed to

avoid expenditure of additional funds

by the Accounts and avoid any change

in existing arrangements or contractual

relationships.

20. Where a real estate investment is

shared by the General Account and one

or more ERISA-Covered Accounts and a

stalemate occurs between the General

Account and an ERISA-Covered

Account, UNUM may offer alternate

recommendations to facilitate an

agreement. If the Accounts still cannot

reach agreement, each Account will be

offered the opportunity to buy out the

other Account’s interest on the basis of

a specified price, which will be

established in accordance with the

independent appraisal procedure

described below, or will be the price

offered by a third party. If none of the

Accounts elects to make a buy-sell offer

to the other Account, UNUM would be

required to take the action selected by

the independent fiduciary of the ERISACovered Account. Where the General

Account wishes, e.g., to hold its interest

and the independent fiduciary for the

ERISA-Covered Account determines to

sell its interest, the General Account

will buy out the interest of the ERISACovered Account at the price offered by

the third party, or, at the ERISA-Covered

Account’s option, at an independently

determined price. Conversely, where the

independent fiduciary for the ERISACovered Account determines to retain

its interest while the General Account

wants to sell its interest, the ERISACovered Account has the option of

buying out the General Account, or, if

the independent fiduciary chooses not

to, the status quo will be maintained.

Specific Transactions

I. Direct Real Estate Investments

(a) Transfers Between Accounts

21. Following the initial sharing of

investments, it may be in the best

interests of the Accounts participating

in the investment for one Account to

sell its interest to the other(s). Such a

situation may arise, for example, when

one Account experiences a need for

liquidity in order to satisfy the cash

needs of the plans participating in the

Account, while for the other Account(s)

the investment remains appropriate.

One possible means of reconciling this

situation is for the ‘‘selling’’ Account to
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41445

sell its interest in the shared investment

to the remaining participating

Account(s) or to another Account(s) at

current fair market value. Such sales

may not, however, be appropriate in all

circumstances. An inter-Account

transfer will only be permitted when it

is determined to be in the best interests

of each Account that would be involved

in the transaction. The transfer would

also be subject to the approval of the

Insurance Departments of a number of

states where UNUM is domiciled,

including Maine, South Carolina and

New York. Because UNUM would be

acting on behalf of both the ‘‘buying’’

and ‘‘selling’’ Accounts (but not the

General Account) in such an interAccount transfer, the transfer might be

deemed to constitute a prohibited

transaction under section 406(b)(2) of

the Act. Accordingly, exemptive relief is

requested herein for the sale or transfer

of an interest in a shared real estate

investment by one ERISA-Covered

Account to another Account of which

UNUM is a fiduciary. Such transfers

would have to be at fair market value

and approved by the independent

fiduciary for each ERISA-Covered

Account involved in the transfer.

Ordinarily, no transfer of an interest

in a shared investment will be permitted

between the General Account and an

ERISA-Covered Account. The transfer of

an interest in a shared investment

between the General Account and an

ERISA-Covered Account may be

deemed to constitute a violation of

sections 406(a)(1) (A) and (D) as well as

sections 406(b) (1) and (2) of ERISA. As

noted above, however, where a

stalemate arises between the General

Account and an ERISA-Covered

Account, the transfer of such an interest

would be permitted to resolve the

conflict. Specific stalemate procedures

have been developed for these

situations. If, for example, a third party

makes an offer to purchase the entire

investment held by UNUM on behalf of

the General Account and an ERISACovered Account, it is possible that the

General Account would like to accept

the offer and the independent fiduciary

on behalf of the ERISA-Covered

Account would like to reject the offer.

In that event, UNUM may offer

alternative recommendations to the

independent fiduciary. If there is still no

agreement, the independent fiduciary

(as the party wishing to reject the offer)

would be given the opportunity to buyout the General Account’s interest at a

specified price. This price may be a

proportionate share of the third party

offer; or, if such price is unacceptable to

the ERISA-Covered Account, a

proportionate share of the price

determined through the independent

appraisal procedure described below.

This procedure would give the ERISACovered Account an opportunity to

retain its interest in the shared

investment. If the ERISA-Covered

Account does not choose to buy-out the

General Account’s interest, the General

Account would be required to accede to

the direction of the ERISA-Covered

Account and would, therefore, reject the

third party offer.

If, in the event of a third party

purchase offer, the General Account

wants to reject the offer but the

independent fiduciary on behalf of the

ERISA-Covered Account wants to accept

the offer, the procedures described

above would apply, except that the

General Account (as the party wishing

to reject the offer) would have the

opportunity to buy-out the ERISACovered Account’s interest at a

proportionate share of the third party

purchase offer, or, at the option of the

independent fiduciary for the ERISACovered Account, at an independently

determined price. This will permit the

ERISA-Covered Account to sell its

interest in a real estate investment, if it

chooses to do so, at no less than the

same price it would have received from

a third party.

Even in the absence of a third party

offer, UNUM may recommend the sale

of a shared investment. If the

independent fiduciary approves the

recommendation, UNUM will arrange

for the sale. If the independent fiduciary

does not approve UNUM’s

recommendation, UNUM may offer

alternative recommendations, possibly

including partition and sale of divided

interests. If, however, no agreement is

reached, the independent fiduciary (as

the party wishing to reject the

recommendation) would be given the

opportunity to buy-out the General

Account’s interest in accordance with

the independent appraisal procedure

described below. If there is no buy-out,

UNUM would take the course of action

consistent with the ERISA-Covered

Account’s determination and would,

therefore, not sell the investment.

The independent fiduciary may also

determine independently that a shared

investment in an ERISA-Covered

Account should be sold. If UNUM

agrees with this recommendation,

UNUM will arrange the sale. If UNUM,

on behalf of the General Account,

disagrees with the recommendation,

UNUM will first attempt to sell the

ERISA-Covered Account’s interest to

another Account other than the General

Account. In this case, the sale price and

other terms would have to be approved

by the independent fiduciary for each

ERISA-Covered Account. If the ERISACovered Account’s interest cannot be

sold to another Account, UNUM may

offer alternative recommendations,

possibly including partition and sale of

the ERISA-Covered Account’s interest to

a third party. If no agreement is reached

with respect to these options, the

General Account (as the party opposed

to the sale) would have the opportunity

of buying out the ERISA-Covered

Account’s interest at a price established

under independent appraisal

procedures described below. If there is

no buy-out and no agreement, UNUM

will be required to take the course of

action consistent with the ERISACovered Account’s determination and

will sell the entire investment.

Where an independent price for the

transfer of an interest in a shared

investment between the General

Account and an ERISA-Covered

Account is not established by an offer

from an unrelated third party (or where

the third party price is unacceptable to

the ERISA-Covered Account), the

stalemate procedure provides for the

appointment of an independent

appraiser. Under this procedure, UNUM

and the independent fiduciary will each

appoint an independent appraiser.

These two appraisers will then choose

a third appraiser. The panel of

appraisers will each evaluate the entire

investment, and the average of the three

appraisals will be used to determine the

proportional value of each shared

investment interest. However, the

General Account and the ERISACovered Account may agree that if one

valuation is more than a specified

percentage outside the range of the other

two valuations, that valuation may be

disregarded and the transfer price will

be the average of the remaining two

valuations. The applicant represents

that this procedure, which is of the

variety typically used in real estate joint

venture agreements, provides adequate

protection for the ERISA-Covered

Account because the independent

fiduciary is an equal participant in the

appraisal process. See Section I(a).

(b) Joint Sales of Property

22. In situations involving shared real

estate investments, an opportunity may

arise to sell the entire investment to a

third party, and it may be determined

for all of the participating Accounts that

the sale is desirable. When the General

Account is participating in the

investment, and the sale is therefore

determined to be in the best interests of

the General Account (in addition to

being in the interests of the other

Account(s)), the sale might be deemed
41446 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

23The Department notes that all future references

to the provisions of the Act shall be deemed to

include the parallel provisions of the Code.

24 In any case where the General Account

participates in a shared investment with one or

more ERISA-Covered Accounts and a call for

additional capital is made, the General Account

will always make a capital contribution that is at

least equivalent proportionately to the highest

capital contribution made by an ERISA-Covered

Account.

25 In the case of shared real estate investments

owned entirely by UNUM accounts, if an Account

contributes capital equaling less than its pro rata

interest in the investment (or makes no contribution

at all), that Account’s equity interest will be readjusted and reduced based on the change in the

fair market value of the property caused by the

infusion of new capital.

26 In the case of a call for additional capital

involving a typical joint venture arrangement

entered into between parties dealing at arm’s

length, the joint venture agreement may commonly

provide that the equity interest of any noncontributing venturer be re-adjusted, or ‘‘squeezed

down’’, on a capital interest basis. This involves readjusting the equity interests of the venturers solely

on the basis of the percentage of total capital

contributed without taking into account any

appreciation on the underlying property. This

‘‘capital interest’’ adjustment can substantially

diminish the equity interest of the non-contributing

venturer in the actual current market value of the

underlying property. Thus, this type of readjustment is intended to provide an incentive to

to constitute a prohibited transaction

under section 406 of the Act and section

4975 of the Code.23

Similarly, UNUM may be acting on

behalf of two ERISA-Covered Accounts,

in which case a prohibited transaction

under section 406(b)(2) may be deemed

to occur. Accordingly, exemptive relief

is requested for these joint sales. The

sales would have to be approved by the

independent fiduciary for each ERISACovered Account involved in the sale.

In accordance with UNUM’s stalemate

procedures, if the independent fiduciary

for one ERISA-Covered Account wishes

to sell its interest in a shared investment

and the independent fiduciary for

another ERISA-Covered Account does

not want to sell, UNUM will attempt to

negotiate a compromise, including the

transfer of interests from one Account to

the other. If no agreement can be

reached, the status quo will be

maintained and no sale will be made.

See Section I(b).

(c) Additional Capital Contributions

23. On occasion, commercial real

estate investments require infusions of

additional capital in order to fulfill the

investment expectations of the property.

For example, developmental real estate

investments sometimes require

additional capital in order to complete

the construction of the property. In

addition, the cash flow needed to

improve or operate completed buildings

may also result in the need for

additional capital. Such additional

capital is frequently provided by the

owners of the property. In the case of a

property that is owned entirely by

UNUM on behalf of the Accounts, it is

contemplated that needed additional

capital will ordinarily be contributed in

connection with the investment in the

form of an equity capital contribution

made by each participating Account in

an amount equal to such Account’s

existing percentage equity interest in the

shared investment 24; that is, in the first

instance, each Account would be

afforded the opportunity to contribute

additional capital on a fully

proportionate basis. In the case of

ERISA-Covered Accounts, all decisions

regarding the making of additional

capital contributions must be approved

by the independent fiduciary for the

Account. The making of an additional

capital contribution could be deemed to

involve a prohibited transaction under

section 406 of the Act. If one or more

participating Accounts in a shared

investment is unable to provide its share

of the needed additional capital, various

alternatives may be appropriate,

including having the other Account(s)

make a disproportionate contribution.

For example, where the General

Account and an ERISA-Covered

Account participate in a shared

investment and the need for additional

capital arises, it might be determined for

liquidity reasons or other factors

involving the ERISA-Covered Account

that the additional contribution should

not be made by that Account. As a

result, the additional equity capital may

be provided entirely by the General

Account with the further consequence

that the General Account would

thereafter have a larger interest in the

investment and, therefore, a larger share

in the appreciation and income to be

derived from the property.25

Such an adjustment in ownership

interests might be deemed to constitute

a prohibited (indirect sales) transaction

under section 406 of the Act. In

addition, these situations could also

occur where two ERISA-Covered

Accounts are involved.

Accordingly, the applicant is

requesting exemptive relief that would

permit the contribution of additional

equity capital for a shared investment

by Accounts participating in the

investment (including the General

Account). Any decision made or action

taken by an ERISA-Covered Account

(i.e., the contribution of either no

additional capital, the Account’s pro

rata share of additional capital, less than

or more than the Account’s pro rata

share, etc.) must be approved by such

independent fiduciary. See Section I(c).

(d) Lending of Funds to Meet Additional

Capital Requirements

24. If the General Account and an

ERISA-Covered Account participate in a

shared investment that experiences the

need for additional capital, and it is

determined that the ERISA-Covered

Account does not have sufficient funds

available to meet the call for additional

capital, the General Account might be

willing and able to loan the required

funds to the ERISA-Covered Account.

Prior to any loan being made, it must

be approved by the independent

fiduciary for the ERISA-Covered

Account. Such loan will be unsecured

and non-recourse, will bear interest at a

rate that will not exceed the prevailing

interest rate on 90-day Treasury Bills,

will not be callable at any time by the

General Account, and will be

prepayable at any time without penalty

at the discretion of the independent

fiduciary of the ERISA-Covered

Account. Prior to any loan being made,

it would have to be approved by the

independent fiduciary for the ERISACovered Account. See Section I(d).

II. Joint Venture Investments

25. Many real estate investments are

structured as joint venture arrangements

(rather than 100 percent ownership

interest in property) in which UNUM

and another party, such as a real estate

developer or manager, participate as

joint venturer partners (or co-venturers).

Joint venture investments typically

involve several particular features by

virtue of the terms and conditions of the

joint venture agreements that may,

when UNUM’s joint venture interest is

shared, result in possible violations of

section 406 of the Act.

(a) Additional Capital Contributions

to Joint Ventures

26. As in the case of investments

made entirely by UNUM, joint venture

real estate investments sometimes

require additional operating capital.

Typically, a joint venture agreement

will provide for a capital call by the

general partner of the joint venture to be

made to each joint venturer under

which each venturer will be requested

to provide the needed capital. Capital

contributions are generally requested on

a pro rata basis either in the form of an

equity contribution or a loan to the joint

venture. If one joint venturer refuses to

contribute its pro rata equity share of

the capital call, the other joint

venturer(s) may contribute additional

capital to cover the short-fall and

thereby ‘‘squeeze down’’ the interest in

the venture of the non-contributing joint

venturer.26
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41447

all venturers to make their proportionate capital

contributions so that improvements can be made

and the operation of a property continued without

burdening the other venturers.

27 In any case where the General Account and one

or more ERISA-Covered Accounts share UNUM’s

interest in a joint venture, the General Account will

always make a capital contribution that is at least

equivalent proportionately to the highest capital

contribution made by an ERISA-Covered Account,

up to its pro rata share of the additional capital call.

Thus, the General Account will never be the cause

as between the Accounts of a capital contribution

shortfall by UNUM that would result in a capital

basis squeeze down by a co-venturer.

28 In any case involving a shared joint venture

interest held by the General Account and an ERISACovered Account, if it is determined that the

ERISA-Covered Account will contribute its pro rata

share of extra capital, the General Account would

also contribute at least its pro rata share of such

capital.

Alternatively, if sufficient additional

capital is not provided by the joint

venturers, other financing may be

sought, or the joint venture may be

liquidated. In the case of a capital call

where UNUM’s joint venture interest is

shared by two or more Accounts, a

determination must be made on behalf

of each Account participating in the

shared investment with respect to

whether it is appropriate for the

Account to provide its proportionate

share of additional capital requested by

the joint venture. The general rule that

UNUM will follow is that each Account

will be given the opportunity to provide

its pro rata share of the capital call, but

for some Accounts it may be determined

to be appropriate to provide less than a

full share or no additional capital at all.

In such cases, the interest of the

Account would be reduced

proportionately on a fair market basis.

In the case of ERISA-Covered Accounts,

all decisions regarding the making of

additional capital contributions must be

approved by the independent fiduciary

for the Account. In addition to

situations where some Accounts

participating in the ownership of

UNUM’s joint venture interest may not

be in a position to provide their share

of a capital call, other situations may

arise where the co-venturer is unable to

make its additional capital

contributions. Both of these situations

may result in prohibited transactions

under section 406 of the Act.

27. UNUM Shortfall. The General

Account and an ERISA-Covered

Account may experience a capital call

from the general partner of the joint

venture for either an additional equity

or debt contribution. If it is determined

that the ERISA-Covered Account does

not have sufficient funds available to

meet its contribution requirement, 27 the

General Account may make a loan to the

ERISA-Covered Account to enable the

ERISA-Covered Account to make its

required pro rata capital contribution.

Accordingly, subject to the conditions of

the proposed exemption, Section II(a)(2)

would provide relief for loans of this

type. Prior to any loan being made, it

would have to be approved by the

independent fiduciary for the ERISACovered Account. Such loan will be

unsecured and non-recourse, will bear

interest at a rate that will not exceed the

prevailing interest rate on 90-day

Treasury Bills, will not be callable at

any time by the General Account, and

will be prepayable at any time without

penalty at the discretion of the

independent fiduciary of the ERISACovered Account. In addition, the

General Account may make an

additional equity contribution to the

joint venture to cover the ERISACovered Account’s shortfall. In that

event, the equity interest of the ERISACovered Account will be ‘‘squeezed

down’’ (relative to the equity interest of

the General Account) on a fair market

value basis. This option would avoid

the capital basis squeeze-down of the

ERISA-Covered Account’s interest by

the co-venturer. Such contribution

would be made by the General Account

only after the independent fiduciary for

the ERISA-Covered Account is given an

opportunity to make an additional

contribution. See Section II(a)(3).

A similar situation may arise where

two ERISA-Covered Accounts

participate in a joint venture

investment. If one Account is unable or

unwilling to provide its proportionate

share of a capital call, the other Account

may be interested in making up the

shortfall. This might be accomplished

by means of an equity contribution with

a resulting re-adjustment on a current

fair market value basis in the equity

ownership interests of the participating

Accounts. Thus, any of these

disproportionate contribution situations

between Accounts might result in a

violation of section 406 of the Act.

Subject to the generally applicable

conditions of this proposed exemption,

Section II(a)(3) provides relief for these

disproportionate contributions.

28. Co-Venturer Shortfall. In some

cases, UNUM’s co-venturer in a joint

venture investment may be unable to

meet its additional capital obligation,

and UNUM may deem it advisable for

some or all of the participating

Accounts to contribute capital in excess

of the pro rata share of UNUM’s

Accounts in the joint venture in order

to finance the operation of the property

(and thereby squeeze down the equity

interest of the co-venturer).28 The

applicant is requesting exemptive relief

that would permit additional capital

contributions to be made by

participating Accounts (including the

General Account) on a disproportionate

basis if the need arises. Any instance

involving the infusion of additional

capital to a joint venture will be

considered by the independent

fiduciary for each ERISA-Covered

Account participating in the investment

and any action to be taken by the

Account must be approved by the

independent fiduciary. These actions

might include contributing a pro rata

share of additional equity capital

(including a capital contribution that

squeezes down the interest of a coventurer on the basis provided in the

joint venture agreement), contributing

more or less than a pro rata share, or

contributing no additional capital. See

Section II(a)(4).

(b) Third Party Purchases of Joint

Venture Properties

29. Under the terms of typical joint

venture agreements, if an offer is

received from a third party to purchase

the assets of the joint venture, and one

joint venture partner (irrespective of the

percentage ownership interest of the

joint venture partner) wishes to accept

the offer, the other joint venture partner

must either (1) also accept the offer, or

(2) buy out the first partner’s interest at

the portion of the offer price that is

proportionate to the first partner’s share

of the venture. For example, if UNUM

on behalf of the Accounts and a real

estate developer are joint venture

partners in a property and an offer is

received from another person to acquire

the entire property that the developer

wants to accept, UNUM on behalf of the

Accounts would be obligated either to

sell its interest also to the third-party or

to buy out the interest of the developer

at the portion of the price offered by the

third party proportionate to the

developer’s share of the venture. When

UNUM’s interest in a real estate joint

venture is shared by two or more

Accounts, it is likely that the same

decision will be appropriate for each

Account in any third-party purchase

situation. See sections I(b) and II(b)(1).

It is also possible, however, that it might

be in the interests of some Accounts to

reject the offer and buy-out the

developer, while other Accounts might

not have the funds to do so or, for some

other reason, would elect to sell to the

third party. The joint venture

agreements typically require, however,

that UNUM on behalf of the Accounts

provide the co-venturer with a unified

buy or sell reply. Thus, in making a buy

or sell decision in any of these cases

involving an ERISA-Covered Account,
41448 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

UNUM might be deemed to be acting in

violation of section 406 of the Act.

Further, in order to resolve situations

where the same reply is not appropriate

for all participating Accounts, various

alternatives may be adopted. For

example, the Account(s) that wishes to

continue owning the property may be

willing and able to buy out not only the

co-venturer, but also the other

participating Account(s) that wishes to

accept the third party offer to sell. Or,

one Account may be willing and able to

buy-out the co-venturer while the other

Account chooses to continue holding its

original interest in the property.

Alternatively, all of the Accounts may

choose to participate in the buy-out, but

on a basis that is not in proportion to

their existing ownership interests. Such

alternatives, when an ERISA-Covered

Account is involved, while all possibly

desirable from case to case, may also

raise questions under section 406 of the

Act, whether or not the General Account

is a participant in the investment.

Accordingly, the applicant is requesting

exemptive relief that would permit

UNUM to respond to third-party

purchase offers as appropriate under the

circumstances. Such a response might

involve acceptance of the offer on behalf

of all participating Accounts, a buy-out

of a co-venturer by some or all of the

participating Accounts on a pro rata or

non-pro rata basis, or a buy-out of the

interest of one participating Account

(and of the co-venturer) by other

participating Accounts. Any action by

any ERISA-Covered Account in these

situations will be required to be

approved by the independent fiduciary

for the Account in accordance with the

stalemate procedure, as described below

(see rep. 30, below).

30. In a case involving the sharing of

a joint venture interest between two

ERISA-Covered Accounts, if one ERISACovered Account wishes to buy out the

co-venturer and the other ERISACovered Account is unable or unwilling

to do so, the ERISA-Covered Account

wishing to buy out the co-venturer

would have the opportunity to do so if

the other ERISA-Covered Account’s

interests can also be accommodated.

This could be accomplished if, for

example (1) the second ERISA-Covered

Account wishes to sell its interest to the

first ERISA-Covered Account (at a

proportionate share of the price offered

by the third party offeror) and the first

ERISA-Covered Account agrees; or (2)

the second ERISA-Covered Account

wishes to continue holding its original

interest. If, however, the second ERISACovered Account wishes to sell its

interest and the first ERISA-Covered

Account is unwilling or unable to buy

it, both Accounts would be required to

sell to the third party offeror in order to

avoid the expenditure of additional

funds by an unwilling Account.

If the General Account participates in

a joint venture interest subject to a third

party purchase offer, the stalemate

procedure would provide the same

alternatives, except that if the General

Account wishes to accept the third party

purchase offer and the ERISA-Covered

Account wishes to buy out the coventurer (and is unwilling or unable to

buy out the General Account’s interest),

the General Account would be required

to buy out the co-venturer with the

ERISA-Covered Account. See Section

II(b).

(c) Rights of First Refusal in Joint

Venture Agreements

31. Under the terms of typical joint

venture agreements, if a joint venture

partner wishes to sell its interest in the

venture to a third party, the other joint

venture partner must be given the

opportunity to exercise a right of first

refusal to purchase the first partner’s

interest at the price offered by the third

party. For example, if UNUM and a real

estate developer are joint venture

partners and the developer decided to

sell its interest to a third party, UNUM

would have the right to purchase the

developer’s interest at the price offered

by the third party. In the case of shared

real estate joint ventures, the decision

by UNUM on behalf of the Accounts

with respect to whether or not to

exercise a right of first refusal might

raise questions under section 406 of the

Act since each Account participating in

the investment might be affected

differently by such decision. Because,

under the terms of the joint venture

agreement, only one option (exercise or

not exercise) may be chosen by UNUM

on behalf of the Accounts, exemptive

relief is being requested that would

permit UNUM to exercise or not

exercise a right of first refusal as may be

appropriate under the circumstances.

Any action taken on behalf of an ERISACovered Account regarding the exercise

of such a right would have to be

approved by the independent fiduciary.

Further, under the requested exemption,

if the General Account and an ERISACovered Account share a joint venture

investment, even though UNUM may

initially decide on behalf of the General

Account not to make a purchase under

a right of first refusal option, the

General Account will be required to

participate in the purchase of the other

joint venturer’s interest if the

independent fiduciary determines that it

is appropriate for the ERISA-Covered

Account to participate in the exercise of

the right of first refusal on at least a pro

rata basis. If, however, two Accounts

other than the General Account

participate in a joint venture and

agreement cannot be reached on behalf

of the Accounts on whether to exercise

a right of first refusal, the right will not

be exercised and the co-venturer will be

permitted to sell its interest to the third

party, unless one Account decides to

buy-out the co-venturer alone. In this

regard, it is conceivable that some

participating Accounts may elect to take

advantage of a right of first refusal

opportunity and buy-out a co-venturer

without other participating Accounts

taking part in the transaction. For

example, in the case of a shared joint

venture investment involving the

General Account (or any other Account)

and an ERISA-Covered Account, if the

co-venturer wishes to accept an offer to

sell its interest and the independent

fiduciary of the ERISA-Covered Account

decides not to have the account

participate in purchasing the coventurer’s interest, the General Account

(or other participating Account) would

be free to make the purchase on its own.

The exercise of a right of first refusal on

such a disproportionate basis might also

raise questions under section 406 of the

Act for which exemptive relief may be

needed. See Section II(c).

(d) Buy-Sell Provisions in Joint Venture

Agreements

32. Joint venture agreements entered

into by UNUM typically provide that

one joint venture partner may demand

that the other partner either sell its

interest to the first partner at a price

determined by the terms of the joint

venture agreement or buy out the

interest of the first partner at such price.

If the other joint venture partner refuses

to exercise either option within a

specified period, it must sell its interest

to the first partner at the stated price.

These ‘‘buy-sell’’ provisions are

generally used to resolve serious

difficulties or impasses in the operation

of a joint venture, but generally a joint

venture agreement permits the buy-sell

provision to be exercised at any time. As

in the situations discussed above, the

decision by UNUM on behalf of the

Accounts to make a buy-sell offer, or its

reaction to such an offer made by a coventurer, may affect various

participating Accounts differently.

Accordingly, any decision made by

UNUM in these cases involving ERISACovered Accounts might raise questions

under section 406 of the Act. The

applicant is requesting exemptive relief

that would permit UNUM to make an

appropriate decision under the
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41449

circumstances on behalf of all

participating Accounts to make a buysell offer to a co-venturer or to react to

a buy-sell offer from a co-venturer. Any

such decision must be approved by the

independent fiduciary for each ERISACovered Account participating in the

investment.

33. In the event that UNUM

recommends the initiation of the buysell option against the co-venturer,

UNUM will exercise the option if the

independent fiduciary on behalf of each

participating ERISA-Covered Account

approves the recommendation. If, in the

case of a General Account/ERISACovered Account shared joint venture

investment, the independent fiduciary

does not agree with UNUM’s

recommendation, the independent

fiduciary would be given the

opportunity to buy out the General

Account’s interest at a price to be

determined in accordance with the

independent appraisal procedure

described above. If the independent

fiduciary declines to buy out the

General Account’s interest, the General

Account would then have the

opportunity to buy out the ERISACovered Account’s interest, (provided

the independent fiduciary for the

ERISA-Covered Account approves of

such sale), also in accordance with the

independent appraisal procedure. If

neither the General Account nor the

ERISA-Covered Accounts buys out the

other’s interest in the joint venture

investment, UNUM would take the

course of action most consistent with

the determination of the ERISA-Covered

Account, and would, therefore, not

exercise the buy-sell option.

In the event that the co-venturer

initiates the buy-sell option with respect

to a shared joint venture investment,

UNUM must either sell its entire

interest to the co-venturer or reject the

offer and buy-out the co-venturer’s

interest at that price. If the participating

Accounts agree upon the course of

action to be taken, UNUM will then take

the agreed action. If no agreement is

reached, various alternatives may be

considered. For example, in the case of

a General Account/ERISA-Covered

Account shared joint venture

investment, if UNUM recommends

rejection of the offer (and consequent

purchase of the co-venturer’s interest),

but the independent fiduciary wants to

accept the offer, the General Account

would have the option to purchase the

co-venturer’s interest solely on behalf of

the General Account. If the General

Account chooses this option, the ERISACovered Account (which wished to

accept the co-venturer’s offer) would

have the opportunity to sell its interest

to the General Account, at a

proportionate share of the price offered

by the co-venturer, but would not be

required to do so. However, if the

General Account declines to purchase

the ERISA-Covered Account’s interest

where the ERISA-Covered Account

wishes to accept the buy-sell offer, the

entire joint venture interest would be

sold to the co-venturer. If the ERISACovered Account wishes to reject the

buy-sell offer (and purchase the coventurer’s interest) and the General

Account wishes to accept the offer, the

General Account would be required to

purchase its proportionate share of the

co-venturer’s interest, unless the

independent fiduciary for the ERISACovered Account elects to purchase

more than its proportionate share

(including the entire co-venturer

interest).

Where two or more ERISA-Covered

Accounts share a joint venture

investment, the stalemate procedure is

similar, except that no ERISA-Covered

Account would be required to purchase

the interest of a co-venturer (and thus

expend additional funds) against its

wishes. See Section II(d).

(e) Transactions With Joint Venture

Party in Interest

34. The applicant represents that

when the General Account holds a 50

percent or more interest in a joint

venture, the joint venture itself may be

deemed to be a party in interest under

section 3(14)(G) of the Act. Thus, any

subsequent transaction involving the

joint venture and an ERISA-Covered

Account that is also participating in the

venture (e.g., an additional contribution

of capital) may be deemed to be a

transaction between the plans

participating in an ERISA-Covered

Account and a party in interest (the

joint venture itself) in violation of

section 406. Accordingly, the applicant

is requesting exemptive relief from the

restrictions of section 406(a) of the Act,

only, which would permit any

additional equity capital contributions

to a joint venture by an ERISA-Covered

Account which is participating in an

interest in the joint venture, where the

joint venture is a party in interest solely

by reason of the ownership on behalf of

the General Account of a 50 percent or

more interest in such joint venture.

Such action would be conditioned upon

the approval of the independent

fiduciary for the ERISA-Covered

Account. See Section III.

Initial Allocations

The applicant, UNUM, has not

requested exemptive relief for the initial

allocation of shared equity real estate

investments by UNUM among two or

more Accounts, at least one of which is

an ERISA-Covered Account. UNUM

represents that neither the General

Account nor any ERISA-Covered

Account will incur any debt in

connection with the initial allocation of

the shared investment. In this regard, it

is the view of the Department that the

mere investment of assets of a plan on

identical terms with a fiduciary’s

investment for his or her own account

in the equity interests of a shared real

estate investment would not, in itself,

cause the fiduciary to have an interest

in the transaction that may affect his or

her best judgment as a fiduciary.

Therefore, such an investment would

not, in itself, violate section 406(b)(1)

which prohibits a fiduciary from dealing

with the assets of a plan in his or her

own interest or for his or her account.

In addition, such shared investment,

pursuant to reasonable procedures

established by the fiduciary, would not

cause the fiduciary to act (or represent)

a party whose interests are adverse to

those of the plan. Therefore, such an

investment would not, in itself, violate

section 406(b)(2) which states that a

fiduciary may not act in any capacity in

a transaction involving the plan on

behalf of a party whose interests are

adverse to those of the plan.

With respect to section 406(a)(1)(D) of

the Act which prohibits the transfer to,

or use by or for the benefit of a party in

interest (including a fiduciary) of the

assets of a plan, it is the opinion of the

Department that a party in interest does

not violate that section merely because

he or she derives some incidental

benefit from a transaction involving

plan assets. We are assuming, for

purposes of this analysis, that the

fiduciary does not rely upon and is not

otherwise dependent upon the

participation of plans in order to

undertake its share of the investment.

Thus, with respect to the investment

of plan assets in shared equity

investments which are made

simultaneously with investments by a

fiduciary for its own account on

identical terms, it is the view of the

Department that any benefit that the

fiduciary might derive from such

investment under these circumstances is

incidental and would not violate section

406(a)(1)(D) of the Act.

Notice to Interested Persons

Within 30 days of publication of this

proposed exemption in the Federal

Register, UNUM will provide the notice

required under 29 CFR section

2570.43(b) by posting a copy of all

materials to be required in that notice at

business locations maintained by
41450 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

UNUM and its affiliates at which

participants in the UNUM Plan work. In

addition, if any new ERISA-Covered

Account proposes to participate in

shared investments covered by the

exemption proposed herein, the

representatives of that Account will be

provided with a copy of this proposed

exemption and the final exemption

before beginning to participate in any

shared investments.

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 Code does not relieve a

fiduciary or other party in interest or

disqualified person from certain other

provisions of the Act and 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) The proposed exemption, if

granted, will not extend to transactions

prohibited under section 406(b)(3) of the

Act and section 4975(c)(1)(F) of the

Code;

(3) 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; and

(4) The proposed exemption, if

granted, will be supplemental to, and

not in derogation of, any other

provisions of the Act and 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.

Written Comments and Hearing

Requests

All interested persons are invited to

submit written comments or requests for

a hearing on the pending exemption to

the address above, within the time

period set forth above. All comments

will be made a part of the record.

Comments and requests for a hearing

should state the reasons for the writer’s

interest in the pending exemption.

Comments received will be available for

public inspection with the application

for exemption at the address set forth

above.

Proposed Exemption

Section I—Exemption for Certain

Transactions Involving the Management

of Investments Shared by Two or More

Accounts Maintained by UNUM

If the exemption is granted, as

indicated below, the restrictions of

certain sections of the Act and the

sanctions resulting from the application

of certain parts of section 4975 of the

Code shall not apply to the following

transactions if the conditions set forth in

Section IV are met:

(a) Transfers Between Accounts—(1)

The restrictions of section 406(b)(2) of

the Act shall not apply to the sale or

transfer of an interest in a shared

investment (including a shared joint

venture interest) between two or more

Accounts (except the General Account),

provided that each ERISA-Covered

Account pays no more, or receives no

less, than fair market value for its

interest in a shared investment.

(2) The restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and

the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975(c)(1) (A)

through (E) of the Code shall not apply

to the sale or transfer of an interest in

a shared investment (including a shared

joint venture interest) between ERISACovered Accounts and the General

Account, provided that such transfer is

made pursuant to stalemate procedures,

described in this notice of proposed

exemption, adopted by the independent

fiduciary for the ERISA-Covered

Account, and provided further that the

ERISA-Covered Account pays no more

or receives no less than fair market

value for its interest in a shared

investment.

(b) Joint Sales of Property—The

restrictions of sections 406(a), 406(b)(1)

and 406(b)(2) of the Act and the

sanctions resulting from the application

of section 4975 of the Code by reason of

section 4975(c)(1) (A) through (E) of the

Code shall not apply to the sale to a

third party of the entire interest in a

shared investment (including a shared

joint venture interest) by two or more

Accounts, provided that each ERISACovered Account receives no less than

fair market value for its interest in the

shared investment.

(c) Additional Capital Contributions—

The restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and

the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975(c)(1) (A)

through (E) of the Code shall not apply

either to the making of a pro rata equity

capital contribution by one or more of

the Accounts to a shared investment; or

to the making of a Disproportionate [as

defined in Section V(e)] equity capital

contribution by one or more of such

Accounts which results in an

adjustment in the equity ownership

interests of the Accounts in the shared

investment on the basis of the fair

market value of such interests

subsequent to such contribution,

provided that each ERISA-Covered

Account is given an opportunity to

make a pro rata contribution.

(d) Lending of Funds—The

restrictions of sections 406(a), 406(b)(1)

and 406(b)(2) of the Act and the

sanctions resulting from the application

of section 4975 of the Code by reason of

section 4975(c)(1) (A) through (E) of the

Code shall not apply to the lending of

funds from the General Account to an

ERISA-Covered Account to enable the

ERISA-Covered Account to make an

additional pro rata contribution,

provided that such loan—

(A) Is unsecured and non-recourse

with respect to participating plans,

(B) Bears interest at a rate not to

exceed the prevailing rate on 90-day

Treasury Bills,

(C) Is not callable at any time by the

General Account, and

(D) Is prepayable at any time without

penalty.

Section II—Exemption for Certain

Transactions Involving the Management

of Joint Venture Interests Shared by Two

or More Accounts Maintained by UNUM

If the exemption is granted, the

restrictions of certain sections of the Act

and the sanctions resulting from the

application of certain parts of section

4975 of the Code shall not apply to the

following transactions resulting from

the sharing of an investment in a real

estate joint venture between two or

more Accounts, if the conditions set

forth in Section IV are met:

(a) Additional Capital Contributions—

(1) The restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and

the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975(c)(1) (A)

through (E) of the Code shall not apply

to the making of additional pro rata

equity capital contributions by one or

more Accounts participating in the joint

venture.
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41451

(2) The restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and

the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975(c)(1) (A)

through (E) of the Code shall not apply

to the lending of funds from the General

Account to an ERISA-Covered Account

to enable the ERISA-Covered Account to

make an additional pro rata capital

contribution, provided that such loan—

(A) Is unsecured and non-recourse

with respect to the participating plans,

(B) Bears interest at a rate not to

exceed the prevailing rate on 90-day

Treasury Bills,

(C) Is not callable at any time by the

General Account, and

(D) Is prepayable at any time without

penalty.

(3) The restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and

the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975 (c)(1) (A)

through (E) of the Code shall not apply

to the making of Disproportionate [as

defined in section V(e)] additional

equity capital contributions (or the

failure to make such additional

contributions) in the joint venture by

one or more Accounts which result in

an adjustment in the equity ownership

interests of the Accounts in the joint

venture on the basis of the fair market

value of such joint venture interests

subsequent to such contributions,

provided that each ERISA-Covered

Account is given an opportunity to

provide its proportionate share of the

additional equity capital contributions;

and

(4) In the event a co-venturer fails to

provide all or any part of its pro rata

share of an additional equity capital

contribution, the restrictions of sections

406(a), 406(b)(1) and 406(b)(2) of the Act

and the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975(c)(1) (A)

through (E) of the Code shall not apply

to the making of Disproportionate

additional equity capital contributions

to the joint venture by the General

Account and an ERISA-Covered

Account up to the amount of such

contribution not provided by the coventurer which result in an adjustment

in the equity ownership interests of the

Accounts in the joint venture on the

basis provided in the joint venture

agreement, provided that such ERISACovered Account is given an

opportunity to participate in all

additional equity capital contributions

on a proportionate basis.

(b) Third Party Purchase Offers—(1)

In the case of an offer by a third party

to purchase any property owned by the

joint venture, the restrictions of sections

406(a), 406(b)(1) and 406(b)(2) of the Act

and the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975(c)(1) (A)

through (E) of the Code shall not apply

to the acquisition by the Accounts,

including one or more ERISA-Covered

Account[s], on either a proportionate or

Disproportionate basis of a co-venturer’s

interest in the joint venture in

connection with a decision on behalf of

such Accounts to reject such purchase

offer, provided that each ERISA-Covered

Account is first given an opportunity to

participate in the acquisition on a

proportionate basis; and

(2) The restrictions of section

406(b)(2) of the Act shall not apply to

any acceptance by UNUM on behalf of

two or more Accounts, including one or

more ERISA-Covered Account[s], of an

offer by a third party to purchase a

property owned by the joint venture

even though the independent fiduciary

for one (but not all) of such ERISACovered Account[s] has not approved

the acceptance of the offer, provided

that such declining ERISA-Covered

Account[s] are first afforded the

opportunity to buy out both the coventurer and ‘‘selling’’ Account’s

interests in the joint venture.

(c) Rights of First Refusal—(1) In the

case of the right to exercise a right of

first refusal described in a joint venture

agreement to purchase a co-venturer’s

interest in the joint venture at the price

offered for such interest by a third party,

the restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and

the sanctions resulting from the

application of section 4975 of the Code

by reason of section 4975(c)(1) (A)

through (E) of the Code shall not apply

to the acquisition by such Accounts,

including one or more ERISA-Covered

Account[s], on either a proportionate or

Disproportionate basis of a co-venturer’s

interest in the joint venture in

connection with the exercise of such a

right of first refusal, provided that each

ERISA-Covered Account is first given an

opportunity to participate on a

proportionate basis; and

(2) The restrictions of section

406(b)(2) of the Act shall not apply to

any decision by UNUM on behalf of the

Accounts not to exercise such a right of

first refusal even though the

independent fiduciary for one (but not

all) of such ERISA-Covered Accounts

has approved the exercise of the right of

first refusal, provided that none of the

ERISA-Covered Accounts that approved

the exercise of the right of first refusal

decides to buy-out the co-venturer on its

own.

(d) Buy-Sell Options—(1) In the case

of the exercise of a buy-sell option set

forth in the joint venture agreement, the

restrictions of sections 406(a), 406(b)(1)

and 406(b)(2) of the Act and the

sanctions resulting from the application

of section 4975 of the Code by reason of

section 4975(c)(1) (A) through (E) of the

Code shall not apply to the acquisition

by one or more of the Accounts on

either a proportionate or

Disproportionate basis of a co-venturer’s

interest in the joint venture in

connection with the exercise of such a

buy-sell option, provided that each

ERISA-Covered Account is first given

the opportunity to participate on a

proportionate basis; and

(2) The restrictions of section

406(b)(2) of the Act shall not apply to

any decision by UNUM on behalf of two

or more Accounts, including one or

more ERISA-Covered Account[s], to sell

the interest of such Accounts in the

joint venture to a co-venturer even

though the independent fiduciary for

one (but not all) of such ERISA-Covered

Account[s] has not approved such sale,

provided that such disapproving ERISACovered Account is first afforded the

opportunity to purchase the entire

interest of the co-venturer.

Section III—Exemption for Transactions

Involving a Joint Venture or Persons

Related to a Joint Venture

The restrictions of section 406(a) of

the Act and the sanctions resulting from

the application of section 4975 of the

Code by reason of section 4975(c)(1) (A)

through (D) of the Code shall not apply,

if the conditions in Section IV are met,

to any additional equity capital

contributions to a joint venture by an

ERISA-Covered Account that is

participating in an interest in the joint

venture, where the joint venture is a

party in interest solely by reason of the

ownership on behalf of the General

Account of a 50 percent or more interest

in such joint venture.

Section IV—General Conditions

(a) Each contractholder or prospective

contractholder in an ERISA-Covered

Account which shares or proposes to

share real estate investments is provided

with a written description of potential

conflicts of interest that may result from

the sharing, a copy of the notice of

pendency, and a copy of the exemption

if granted.

(b) An independent fiduciary must be

appointed on behalf of each ERISACovered Account participating in the

sharing of investments. The

independent fiduciary shall be either—

(1) A business organization which has

at least five years of experience with
41452 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices

respect to commercial real estate

investments, or

(2) A committee composed of three to

five individuals who each have at least

five years of experience with respect to

commercial real estate investments.

(c) The independent fiduciary or

independent fiduciary committee

member shall not be or consist of

UNUM or any of its affiliates.

(d) No organization or individual may

serve as an independent fiduciary for an

ERISA-Covered Account for any fiscal

year if the gross income (other than

fixed, non-discretionary retirement

income) received by such organization

or individual (or any partnership or

corporation of which such organization

or individual is an officer, director, or

ten percent or more partner or

shareholder) from UNUM, its affiliates

and the ERISA-Covered Accounts for

that fiscal year exceeds five percent of

its or his or her annual gross income

from all sources for the prior fiscal year.

If such organization or individual had

no income for the prior fiscal year, the

five percent limitation shall be applied

with reference to the fiscal year in

which such organization or individual

serves as an independent fiduciary.

The income limitation will include

income for services rendered to the

Accounts as independent fiduciary

under any prohibited transaction

exemption(s) granted by the

Department.

In addition, no organization or

individual who is an independent

fiduciary, and no partnership or

corporation of which such organization

or individual is an officer, director or

ten percent or more partner or

shareholder, may acquire any property

from, sell any property to, or borrow any

funds from, UNUM, its affiliates, or any

Account maintained by UNUM or its

affiliates, during the period that such

organization or individual serves as an

independent fiduciary and continuing

for a period of six months after such

organization or individual ceases to be

an independent fiduciary, or negotiate

any such transaction during the period

that such organization or individual

serves as independent fiduciary.

(e) The independent fiduciary will

approve the initial allocation of a shared

investment to an ERISA-Covered

Account. In addition, the independent

fiduciary acting on behalf of an ERISACovered Account shall have the

responsibility and authority to approve

or reject recommendations made by

UNUM or its affiliates for each of the

transactions in this proposed

exemption. In the case of a possible

transfer or exchange of any interest in a

shared investment between the General

Account and an ERISA-Covered

Account, the independent fiduciary

shall also have full authority to

negotiate the terms of the transfer.

UNUM shall involve the independent

fiduciary in the consideration of

contemplated transactions prior to the

making of any decisions, and shall

provide the independent fiduciary with

whatever information may be necessary

in making its determinations.

In addition, the independent fiduciary

shall review on an as-needed basis, but

not less than twice annually, the shared

real estate investments in the ERISACovered Account to determine whether

the shared real estate investments are

held in the best interest of the ERISACovered Account.

(f) UNUM maintains for a period of

six years from the date of the transaction

the records necessary to enable the

persons described in paragraph (g) of

this Section to determine whether the

conditions of this exemption have been

met, except that a prohibited transaction

will not be considered to have occurred

if, due to circumstances beyond the

control of UNUM or its affiliates, the

records are lost or destroyed prior to the

end of the six-year period.

(g)(1) Except as provided in paragraph

(2) of this subsection (g) and

notwithstanding any provisions of

subsection (a)(2) and (b) of section 504

of the Act, the records referred to in

subsection (f) of this Section are

unconditionally available at their

customary location for examination

during normal business hours by—

(A) Any duly authorized employee or

representative of the Department or the

Internal Revenue Service,

(B) Any fiduciary of a plan

participating in an ERISA-Covered

Account who has authority to acquire or

dispose of the interests of the plan, or

any duly authorized employee or

representative of such fiduciary,

(C) Any contributing employer to any

plan participating in an ERISA-Covered

Account or any duly authorized

employee or representative of such

employer, and

(D) Any participant or beneficiary of

any plan participating in an ERISACovered Account, or any duly

authorized employee or representative

of such participant or beneficiary.

(2) None of the persons described in

subparagraphs (B) through (D) of this

subsection (g) shall be authorized to

examine trade secrets of UNUM, any of

its affiliates, or commercial or financial

information which is privileged or

confidential.

Section V—Definitions

For the purposes of this exemption:

(a) An affiliate of UNUM includes—

(1) Any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with UNUM,

(2) Any officer, director or employee

of UNUM or person described in section

V(a)(1), and

(3) Any partnership in which UNUM

is a partner.

(b) An Account means the General

Account (including the general accounts

of UNUM affiliates), any separate

account of UNUM or its affiliate, or any

investment advisory account, trust,

limited partnership or other investment

account or fund managed by UNUM.

(c) The General Account means the

general asset account of UNUM and any

of its affiliates which are insurance

companies licensed to do business in at

least one State as defined in section

3(10) of the Act.

(d) An ERISA-Covered Account means

any Account (other than the General

Account) which consists solely of the

UNUM Plan or other plans maintained

by UNUM or its affiliates.

(e) Disproportionate means not in

proportion to an Account’s existing

equity ownership interest in an

investment, joint venture or joint

venture interest.

The proposed exemption, if granted,

will be subject to the express conditions

that the material facts and

representations contained in the

application are true and complete, and

that the application accurately describes

all material terms of the transactions to

be consummated pursuant to the

exemption.

FOR FURTHER INFORMATION CONTACT: Gary

H. Lefkowitz of the Department,

telephone (202) 219–8881. (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 of

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
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Notices 41453

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 25th day of

July, 1996.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

U.S. Department of Labor.

[FR Doc. 97–20243 Filed 7–31–97; 8:45 am]

BILLING CODE 4510–29–P

NATIONAL FOUNDATION ON THE

ARTS AND THE HUMANITIES

National Endowment for the Arts;

Combined Arts Panel

Pursuant to Section 10(a)(2) of the

Federal Advisory Committee Act (Public

Law 92–463), as amended, notice is

hereby given that a meeting of the

Combined Arts Advisory Panel,

Presenting Section (Heritage &

Preservation/Education & Access/

Planning & Stabliziation/Creation &

Presentation categories) to the National

Council on the Arts will be held on

August 20–22, 1997. The panel will

meet from 9:00 a.m. to 5:30 p.m. on

August 20, and from 9:00 a.m. to 5:00

p.m. on August 21–22 in Room 716 at

the Nancy Hanks Center, 1100

Pennsylvania Avenue, NW, Washington,

D.C., 20506. A portion of this meeting,

from 10:30 a.m. to 1:00 p.m. on August

22, will be open to the public for a

policy discussion on guidelines,

Leadership initiatives, Millennium,

planning, and field needs and trends.

The remaining portions of this

meeting, from 9:00 a.m. to 5:30 p.m. on

August 20, and from 9:00 a.m. to 10:30

a.m. and 1:00 p.m. to 5:00 p.m. on

August 22, are for the purpose of Panel

review, discussion, evaluation, and

recommendation on applications for

financial assistance under the National

Foundation on the Arts and the

Humanities Act of 1965, as amended,

including information given in

confidence to the agency by grant

applicants. In accordance with the

determination of the Chairman of March

31, 1997, these sessions will be closed

to the public pursuant to subsection

(c)(4), (6) and (9)(B) of section 552b of

Title 5, United States Code.

If you need special accomodations

due to a disability, please contact the

Office of AccessAbility, National

Endowment for the Arts, 1100

Pennsylvania Avenue, NW, Washington,

D.C. 20506, 202/682–5532, TYY/TDD

202/682–5496, at least seven (7) days

prior to the meeting.

Further information with reference to

this meeting can be obtained from Ms.

Kathy Plowitz-Worden, Committee

Management Officer, National

Endowment for the Arts, Washington,

D.C. 20506, or call (202) 682–5691.

Dated: July 28, 1997.

Kathy Plowitz-Worden,

Panel Coordinator, Office of Guidelines and

Panel Operations, National Endowment for

the Arts.

[FR Doc. 97–20297 Filed 7–31–97; 8:45 am]

BILLING CODE 7537–01–M

NATIONAL FOUNDATION ON THE

ARTS AND THE HUMANITIES

National Endowment for the Arts;

Combined Arts Panel

Pursuant to Section 10(a)(2) of the

Federal Advisory Committee Act (Public

Law 92–463), as amended, notice is

hereby given that a meeting of the

Combined Arts Advisory Panel, Arts

Education Section (Education & Access/

Planning & Stabilization/Creation &

Presentation and Heritage &

Preservation categories) to the National

Council on the Arts will be held on

August 11–15, 1997. The panel will

meet from 9:00 a.m. to 6:00 p.m. on

August 11, from 8:30 a.m. to 6:00 p.m.

on August 12–14 and from 8:30 a.m. to

5:00 p.m. on Friday, August 15 in Room

714 at the Nancy Hanks Center, 1100

Pennsylvania Avenue, NW, Washington,

D.C., 20506. A portion of this meeting,

from 2:00 p.m. to 4:00 p.m. on August

15, will be open to the public for a

policy discussion on guidelines,

Leadership Initiatives, Millennium,

planning, and field needs and trends.

The remaining portions of this

meeting, from 8:30 a.m. to 6:00 p.m. on

August 11–14, and from 8:30 a.m. to

2:00 p.m. and 4:00 p.m. to 5:00 p.m. on

August 15, are for the purpose of Panel

review, discussion, evaluation, and

recommendation on applications for

financial assistance under the National

Foundation on the Arts and the

Humanities Act of 1965, as amended,

including information given in

confidence to the agency by grant

applicants. In accordance with the

determination of the Chairman of March

31, 1997, these sessions will be closed

to the public pursuant to subsection

(c)(4), (6) and (9)(B) of section 552b of

Title 5, United States Code.

Any person may observe meetings, or

portions thereof, of advisory panels

which are open to the public, and may

be permitted to participate in the

panel’s discussions at the discretion of

the panel chairman and with the

approval of the full-time Federal

employee in attendance.

If you need special accommodations

due to a disability, please contact the

Office of AccessAbility, National

Endowment for the Arts, 1100

Pennsylvania Avenue, N.W.,

Washington, D.C. 20506, 202/682–5532,

TDY–TDD 202/682–5496, at least seven

(7) days prior to the meeting.

Further information with reference to

this meeting can be obtained from Ms.

Kathy Plowitz-Worden, Committee

Management Officer, National

Endowment for the Arts, Washington,

D.C., 20506, or call 202/682–5691.

Dated: July 28, 1997.

Kathy Plowitz-Worden,

Panel Coordinator, Panel Operations,

National Endowment for the Arts.

[FR Doc. 97–20298 Filed 7–31–97; 8:45 am]

BILLING CODE 7537–01–M

NUCLEAR REGULATORY

COMMISSION

Docket Nos. 50–295 and 50–304]

Commonwealth Edison Company; Zion

Nuclear Power Station; Notice of

Temporary Partial Closing of Local

Public Document Room

Notice is hereby given that the

Waukegan Public Library, Waukegan,

Illinois, which serves as the Nuclear

Regulatory Commission (NRC) local

public document room (LPDR) for the

Commonwealth Edison Company’s Zion

Generating Station, will undergo

extensive building renovation beginning