Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35281

for a system for grading proficiency

testing performance to determine

whether a laboratory is performing

acceptably.

The topics to be discussed at this

meeting include: a review of minutes

from the February 19, 1998, meeting;

introduction of newly appointed Board

members, discussion of comments on

the DRAFT Quality Assurance

Standards for Convicted Offender DNA

Databasing Laboratories; discussion of

certification; and a discussion of topics

for the next DNA Advisory Board

meeting.

The meeting is open to the public on

a first-come, first seated basis. Anyone

wishing to address the DAB must notify

the Designated Federal Employee (DFE)

in writing at least twenty-four hours

before the DAB meets. The notification

must include the requestor’s name,

organizational affiliation, a short

statement describing the topic to be

addressed, and the amount of time

requested. Oral statements to the DAB

will be limited to five minutes and

limited to subject matter directly related

to the DAB’s agenda, unless otherwise

permitted by the Chairman.

Any member of the public may file a

written statement for the record

concerning the DAB and its work before

or after the meeting. Written statements

for the record will be furnished to each

DAB member for their consideration

and will be included in the official

minutes of a DAB meeting. Written

statements must be type-written on 81⁄2′′

X 11′′ xerographic weight paper, one

side only, and bound only by a paper

clip (not stapled). All pages must be

numbered. Statements should include

the Name, Organizational Affiliation,

Address, and Telephone number of the

author(s). Written statements for the

record will be included in minutes of

the meeting immediately following the

receipt of the written statement, unless

the statement is received within three

weeks of the meeting. Under this

circumstance, the written statement will

be included with the minutes of the

following meeting. Written statements

for the record should be submitted to

the DFE.

Inquiries may be addressed to the

DFE, Dr. Dwight E. Adams, Chief,

Scientific Analysis Section, Laboratory

Division—Room 3266, Federal Bureau

of Investigation, 935 Pennsylvania

Avenue, NW, Washington, DC 20535–

0001, (202) 324–4416, FAX (202) 324–

1462

Dated: June 22, 1998.

Dwight E. Adams,

Chief, Scientific Analysis Section, Federal

Bureau of Investigation.

[FR Doc. 98–17136 Filed 6–26–98; 8:45 am]

BILLING CODE 4410–02–P

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

[Application No. D–10483, et al.]

Proposed Exemptions; Van Ness

Plastic Molding Co., Inc.

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 restrictions 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

requests for a hearing should state: (1)

The name, address, and telephone

number of the person making the

comment or request, and (2) the nature

of the person’s interest in the exemption

and the manner in which the person

would be adversely affected by the

exemption. A request for a hearing must

also state the issues to be addressed and

include a general description of the

evidence to be presented at the hearing.

ADDRESSES: All written comments and

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, NW.,

Washington, DC 20210. Attention:

Application No. llll, 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, NW.,

Washington, DC 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.

Van Ness Plastic Molding Co., Inc.

Employees’ Money Purchase Pension

Plan (the Plan) Located in Belleville, NJ

[Application No. D–10483]

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act

and section 4975(c)(2) the Code and in

accordance with the procedures set

forth in 29 CFR part 2570, subpart B (55

FR 32836, 32847, August 10, 1990). If

the exemption is granted, the

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

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

resulting from the application of section

4975 of the Code, by reason of section

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

shall not apply to (1) the making to the

Plan of a restoration payment (the

Restoration Payment) with respect to

certain defaulted third-party notes (Note

1, Note 2 and Note 3; collectively, the

Notes) by the Van Ness Plastic Molding

Co., Inc. (the Employer), a party in

interest with respect to the Plan; and (2)

the potential future receipt by the

Employer of recapture payments (the
35282 Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices

1According to the applicant, the question of

whether the Notes were also secured by a master

insurance policy issued by Generali Underwriters,

Inc., an unrelated party, which guaranteed the

income stream from the leases, continues to be the

subject of litigation.

2The Department expresses no opinion herein on

whether the acquisition and holding of the Notes

by the Plan violated any of the provisions of Part

4 of Title I of the Act.

Recapture Payments) made to the Plan

pursuant to bankruptcy proceedings

involving the issuer/assignor of the

Notes.

This proposed exemption is subject to

the following conditions:

(a) Mr. William Van Ness, the Plan

trustee (the Trustee), agrees to have

excluded from his individual account in

the Plan (the Account) any benefit

attributable to the Restoration Payment,

such that the total Restoration Payment

is allocated to the Accounts of the other

Plan participants and does not include

any portion related to the interest of Mr.

Van Ness’s Account in the Notes.

(b) The Restoration Payment, which is

calculated based upon the Account

balances in the Plan of participants

other than Mr. Van Ness, covers—

(1) The aggregate unrecovered

principal of the Notes plus accrued, but

unpaid, interest on the Notes as of the

dates of default, calculated through

December 31, 1997;

(2) An additional amount representing

interest on the unrecovered principal of

Notes 2 and 3, originally scheduled for

maturity in 1999, from January 1998

until the date the Restoration Payment

is made; and

(3) Lost opportunity costs associated

with Note 1, which was originally

scheduled for maturity in 1997, from

January 1998 until the date the

Restoration Payment is made.

(c) Any Recapture Payments are

restricted solely to the amounts, if any,

recovered by the Plan with respect to

the Notes in litigation or otherwise.

(d) The Restoration Payment is made

to resolve potential claims for breach of

fiduciary duty relating to the

management of the Plan.

(e) The Employer receives a favorable

ruling from the Internal Revenue

Service (the Service) that the

Restoration Payment does not constitute

a ‘‘contribution’’ or other payment that

will disqualify the Plan.

Summary of Facts and Representations

1. The Plan is a nonstandardized

prototype money purchase pension plan

having 96 participants and total assets

of $1,831,873.27 as of December 31,

1997. The Plan is sponsored by the

Employer, a New Jersey corporation that

is engaged in the manufacture of plastic

molding. Mr. William Van Ness, the

Trustee, also serves as the sole

shareholder and president of the

Employer. As Trustee, Mr. Van Ness has

full investment discretion and authority

with regard to Plan investments except

with respect to those that are under the

control of an investment manager.

2. Among the assets of the Plan are

three notes that were issued or assigned

by The Bennett Funding Group, Inc.

(Bennett), an unrelated party. The

Notes, which were acquired by the Plan

between 1993 and 1995 at the direction

of Mr. Van Ness, are in the face amounts

of $250,000 (Note 1), $17,688.48 (Note

2), and $13,842.22 (Note 3). In order to

purchase the Notes, the Plan paid

Bennett an aggregate cash purchase

price of $281,530.70. Following

acquisition, the Plan did not incur any

servicing fees or costs in connection

with the administration of the Notes.

The Notes are further described as

follows:

(a) Note 1 represented a contractual or

an insurable interest in a pooled

investment vehicle that was established

and sold by Bennett and its subsidiary,

Resort Funding, Inc., on a non-recourse

basis to accredited investors. The

investment pool consisted of consumer

sales agreements, leases and rental

agreements, installment sales contracts

or consumer sales agreements generated

by third party business equipment

dealers and others. The amount of the

issue was $60 million. Each unit or

interest had a minimum purchase price

of $10,000. The term of each investment

contract or ‘‘note’’ ranged from 11

months to 60 months and carried

interest at the rate of approximately 6

percent to 9 percent per annum.

On March 15, 1993, the Plan acquired

Note 1 from Bennett for the cash

purchase price of $250,000. Note 1,

which carried interest at the rate of 9

percent per annum, was scheduled to

mature on December 15, 1997. Interest

under Note 1 was payable to the Plan in

monthly installments of $1,875, with

payments commencing on April 15,

1993.

(b) Note 2 was acquired by the Plan

from Bennett on August 1, 1995 for a

total purchase price of $17,688.48. Note

2 had a term commencing on September

30, 1995 and ending on August 30,

1999. It carried interest at the

annualized rate of 9.5 percent. Principal

and interest were payable to the Plan in

monthly installments of $444.39.

(c) Note 3 was acquired by the Plan

from Bennett on November 16, 1995 for

a total purchase price of $13,842.22.

Note 3 had a term commencing from

January 15, 1996 until December 15,

1999. It carried interest at the

annualized rate of 9.5 percent. Principal

and interest were payable to the Plan in

monthly installments of $337.76.

Each Note was secured by (a)

equipment owned by Bennett which

Bennett was leasing to unrelated parties;

and (b) an assignment of the income

stream generated by such leases.1 The

Employer and the Trustee believed that

the Notes were relatively low-risk and

safe investments.

4. On or about March 29, 1996,

Bennett filed for Chapter 11 bankruptcy

protection in the United States

Bankruptcy Court for the Northern

District of New York (Case Nos. 96–

61376 et seq.). Richard C. Breeden,

formerly the Chairman of the Securities

and Exchange Commission (the SEC),

was appointed Bankruptcy Trustee for

the Bennett debtors on April 18, 1996.

Subsequent to the March 29, 1996 filing,

five additional affiliates of Bennett filed

for Chapter 11 protection and Mr.

Breeden was again appointed as

Bankruptcy Trustee for these entities.

5. The Declaration of Bankruptcy by

the Bennett debtors stemmed from a

lawsuit by the SEC regarding alleged

widespread fraudulent practices

involving the Bennett debtors. In this

regard, (a) over $55 million of fictitious

leases were sold to investors and the

funds derived from investors were used

to service these leases; (b) assignments

made of government leases were

typically illegal and ineffective; and (c)

through certain ‘‘sham’’ transactions

Bennett appeared to be profitable while

it was actually losing money.

6. The Plan filed a Proof of Claim (the

Claim) in the amount of $326,355.73 for

the ‘‘money loaned and purchase of

lease/assignments’’ in the Bennett

bankruptcy.2 The Plan’s Claim was

classified as an unsecured nonpriority

claim, since Mr. Breeden noted that

there was no collateral or lien on the

property of the debtor securing the

Claim. The Claim includes both

principal and interest payments on the

Notes’ outstanding balances from the

date of the last payment received in

1996 through December 15, 1997. In this

regard, the Plan received aggregate

payments from Bennett with respect to

the Notes of $70,396.67. Such payments

can be broken down as follows:

(a) For Note 1, the Plan received a

final interest payment from Bennett in

March 1996 in the amount of $1,875 or

total interest payments of $67,500.

(b) For Note 2, the Plan received

monthly interest payments from Bennett

until February 1996 in the amount of

$444.39 or a total payment of both

principal and interest of $2,221.95.
Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35283

3The average rate of return earned by the Plan for

1995 through 1997 is 12.54 percent. This figure

does not include the Plan’s investment in the Notes.

In a letter dated September 11, 1997, Mark

Shemtob, A.S.A of Abar Pension Services, Inc., an

independent actuarial and pension consulting firm,

located in Livingston, New Jersey, represented that

the Plan had net investment earnings of $198,126

in 1995 and an average account balance of

$1,198,876, which would result in a 16.53 percent

rate of return for 1995. In 1996, Mr. Shemtob noted

that the Plan had net investment earnings of

$131,397 and an average account balance of

$1,032,459, which would result in a 12.73 percent

rate of return for that year.

By letter dated April 29, 1998, the applicant

noted that the Plan’s rate of return for the year 1997

was 8.41 percent based upon a telephone

communication with Mr. Shemtob. Accordingly,

the average rate of return for the Plan for the period

1995 through 1997 is 12.54 percent.

4Section 401(a)(4) of the Code provides that

contributions made by an employer to or under a

Continued

(c) For Note 3, the Plan received

monthly interest payments until

February 1996 of $337.36 or a total

payment of both principal and interest

of $674.72.

At the time of the Bennett bankruptcy

proceedings, the amount of unrecovered

principal for Notes 1, 2 and 3 were

$250,000, $15,825.81 and $13,363.98,

respectively.

7. Because of the complexity

surrounding the Bennett debtors’

bankruptcy, it is unclear whether any

recovery of the Notes will occur. Also,

due to uncertainty about whether the

Notes have actually been insured, the

applicant believes it unlikely that any

insurance company would pay

investors’ claims (including individual

investors and retirement plans) relating

to the individual leases inasmuch as the

insured is listed as Bennett. The

applicant further represents that

whatever amount, if any, that the Plan

is able to recover with respect to the

Notes through the bankruptcy

proceedings, or otherwise, it is likely to

suffer significant losses.

8. As stated in Representation 1, as of

December 31, 1997, the assets of the

Plan totaled $1,831,873.27. This figure

reflects the fair market value of the

Plan’s assets and assumes that the Notes

(plus accrued interest) are valued at $0.

According to the applicant, the exact

fair market value of the Notes is not

ascertainable at this time as litigation is

ongoing with respect to this matter.

9. At present, the amount of

unrecovered principal of the Notes is

$279,189.79. In addition, the accrued

interest associated with the Notes

through the dates of default, calculated

through December 31, 1997 is

$44,458.89. In order to avoid potential

fiduciary claims by Plan participants

and others relating to the Plan’s

investment in the Notes, the Employer

proposes to restore the losses to the Plan

by making a ‘‘Restoration Payment.’’

Therefore, an administrative exemption

is requested from the Department.

10. The Restoration Payment will

consist, in part, of the aggregate amount

of the principal loss on the Notes (i.e.,

$279,189.79) plus accrued, but unpaid,

interest (i.e., $44,458.89), calculated

from the time of default through

December 31, 1997, and multiplied by

58.38 percent, which percentage reflects

the interests in the Plan of participants

other than Mr. Van Ness, who has a

41.62 percent interest in the Plan. In

other words, 58.38 percent of the

unrecovered principal and interest (or

$188,946.09) will be paid to the

Accounts of the remaining Plan

participants. The Restoration Payment

will also include an additional amount

representing accrued interest on the

unpaid principal of Notes 2 and 3, for

the period January 1998 until the date

the Restoration Payment is made, again

attributable to the Accounts of

participants in the Plan other than the

Account of Mr. Van Ness. Finally, the

Restoration Payment will include the

lost opportunity costs with respect to

the unrecovered principal of Note 1

from the period of its scheduled

maturity in December 1997 and ending

with the date immediately preceding the

date the Restoration Payment is made,

again attributable to the Accounts of

participants in the Plan other than the

Account of Mr. Van Ness. Such

opportunity costs will be based on the

average rate of return for the Plan,

excluding the Notes, for the years 1995

through 1997.3

Assuming the Restoration Payment is

made to the Plan on June 30, 1998, the

applicant represents that the

opportunity costs associated with Note

1 is $18,302.13 and would be calculated

as follows:

$250,000 (Unrecovered Principal of

Note 1) × 58.38% (Plan’s Interest in

Note 1) × 12.54% (Plan’s Average Rate

of Return for 1995–1997) = $18,302.13.

Again assuming the Restoration

Payment is made to the Plan on June 30,

1998, the applicant represents that the

total payment would be approximately

$208,321.87. Of this amount,

(a) $188,946.09 would denote the

Restoration Payment as of December 31,

1997, which would be calculated as

follows:

$250,000.00 Note 1 Unrecovered Principal

15,825.81 Note 2 Unrecovered Principal

13,363.98 Note 3 Unrecovered Principal

$279,189.79 Total Unrecovered Principal

$44,458.89 Accrued interest on Notes

from Default through

12/31/97

$323,648.68 Total Unrecovered Principal

and Accrued Interest

through 12/31/97

$323,648.68 × 58.38% (Plan’s Interest in

Notes 1, 2 and 3 plus Accrued Interest) =

$188,946.09;

(b) $18,302.13 would be attributed to

the opportunity costs associated with

Note 1 from January 1998 through June

30, 1998, as already calculated above;

(c) $438.86 would be attributed to

actual interest accruing on Note 2 from

January 1998 through June 30, 1998,

calculated as follows: $15,825.81 (Note

2 Unrecovered Principal) × 58.38%

(Plan’s Interest in Note 2) × 4.75%

(1⁄2 year interest) = $438.86; and

(d) $634.79 would represent the

additional interest accruing on Note 3

from January 1998 until June 30, 1998,

calculated as follows: $13,363.98 (Note

3 Unrecovered Principal) × 58.38%

(Plan’s Interest in Note 3) × 4.75%

(1⁄2 year interest) = $634.79.

11. Because Mr. Van Ness has agreed

to have excluded from his Account any

benefit which may be attributable to the

Restoration Payment, each affected Plan

participant will have allocated to his or

her Account in the Plan the applicable

portion of the Restoration Payment as

determined by the third-party Plan

administrator. However, in no event

will a restored Account have assets

exceeding the amount that would have

been in the Account of the affected Plan

participant but for the loss due to the

Bennett bankruptcy.

The Plan will be required to refund

the Restoration Payment to the

Employer only to the extent of any

amount or amounts that the Plan is able

to recover from Bennett (the Recapture

Payment). The Employer will bear all

expenses of prosecuting the Plan’s

claims with respect to the Notes,

including those relating to the Bennett

bankruptcy proceedings, as well as the

costs of the exemption application.

12. Coincident with its filing of the

exemption application, the Employer

requested a Private Letter Ruling from

the Service on the issues of whether the

Restoration Payment (a) would

constitute a ‘‘contribution’’ or other

payment to the Plan subject to the

provisions of either sections 404 or 4972

of the Code; (b) would adversely affect

the qualified status of the Plan pursuant

to either Code sections 401(a)(4) or 415;

(c) would result in taxable income to

affected Plan participants and

beneficiaries; and (d) would be

deductible in full by the Employer

pursuant to section 162 of the Code.4 In
35284 Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices

stock bonus, pension, profit sharing or annuity plan

shall be deductible under section 404 subject to

certain limitations contained therein.

Section 415 of the Code provides, in relevant

part, that a trust which is part of a pension, profit

sharing or stock bonus plan shall not constitute a

qualified trust under section 401(a)—

(A) in the case of a defined benefit plan, the plan

provides for the payment of benefits with respect

to a participant which exceeds the limitations of

subsection (b), or

(B) in the case of a defined contribution plan,

contributions and other additions under the plan

with respect to any participant for any taxable year

exceed the limitations of subsection (c).

Section 415(e) of the Code provides limitations

on employer contributions and benefits where an

individual is a participant in both a defined benefit

and a defined contribution plan maintained by the

same employer.

Section 1.415–6(b)(2) of the Income Tax

Regulations provides that the term ‘‘annual

additions’’ includes employer contributions which

are made under the plan. Section 1.415–6(b)(2)

further provides that the Commissioner of the

Service may treat transactions between the plan and

the employer or certain allocations to participants’

accounts as giving rise to annual additions.

Section 4972 of the Code imposes on an employer

an excise tax on nondeductible contributions to a

qualified plan.

Finally, section 402(a) of the Code generally

provides that amounts held in a trust that is exempt

from tax under Code section 501(a) and that is part

of a plan that meets the qualification requirements

of Code section 401(a) will not be taxable to

participants until such time as such amounts are

actually distributed to distributees under the plan.

5See 29 CFR 2510.3–101 for the Department’s

definition of ‘‘plan assets’’ relating to plan

investments.

its ruling letter of March 2, 1998, the

Service stated that neither the Code nor

the Income Tax Regulations provide

guidance on whether the Employer’s

proposed Restoration Payment would

constitute a contribution under the

Code. However, in the instant case, the

Service noted that the Restoration

Payment would ensure that the affected

participants would recover their

Account balances and place such

participants in the position in which

they would have been in the absence of

the Trustee’s decision to invest a

portion of the Plan’s assets in the Notes.

The Service explained that it was

reasonable to characterize the

Restoration Payment as a ‘‘replacement

payment.’’ In this regard, the

replacement payment would be made by

the Employer in response to potential

claims against the Employer and those

individuals who were responsible for

investing the Plan’s assets in the Notes.

In addition, the replacement payment

would be allocated to the Accounts of

participants in the Plan who had

incurred a principal loss as a result of

the Note investment. Thus, the Service

concluded that the proposed Restoration

Payment (a) would not constitute a

contribution or other payment subject to

the provisions of Code sections 404 or

4972; (b) would not adversely affect the

qualified status of the Plan pursuant to

either Code section 401(a)(4) or Code

section 415; and (c) would not, when

made, result in taxable income to

affected Plan participants and

beneficiaries.

Finally, the ruling letter is

conditioned on two requirements.

Firstly, the Restoration Payment must be

made to resolve potential claims for

breach of fiduciary duty relating to the

management of the Plan. Secondly, the

ruling letter is based on the

representation that no part of the

Restoration Payment will be added to

the Account of the Trustee.

13. In summary, it is represented that

the proposed transactions will satisfy

the statutory criteria for an exemption

under section 408(a) of the Act because:

(a) The Restoration Payment will enable

the Plan to recover immediately the

unpaid principal of the Notes, accrued

interest and lost opportunity costs; (b)

any Recapture Payments will be

restricted solely to the amounts, if any,

recovered by the Plan with respect to

the Notes in litigation or otherwise; (c)

the Employer has received a favorable

ruling from the Service that the

Restoration Payment does not constitute

a ‘‘contribution’’ or other payment that

will disqualify the Plan; (d) Mr. Van

Ness’s Account will not share in the

Restoration Payment such that the total

Restoration Payment will be made to the

Accounts of Plan participants other than

Mr. Van Ness; and (e) the Restoration

Payment will be made to resolve

potential claims for breach of fiduciary

duty relating to the management of the

Plan.

For Further Information Contact: Ms.

Jan D. Broady of the Department,

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

a toll-free number.)

John Hancock Mutual Life Insurance

Company (JHMLIC) Located in Boston,

Massachusetts

[Application No. D–10484]

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 section 406(b)(2) of the

Act shall not apply to:

(1) The proposed purchases and sales

of timber properties between various

separate accounts (the Accounts), such

as the ForesTree Separate Account, that

are maintained by JHMLIC and managed

by Hancock Natural Resource Group,

Inc. (HNRG), John Hancock Timber

Resource Corporation (JHTRC), or

another Affiliate of JHMLIC; and

(2) The proposed purchases and sales

of timber properties between the

Accounts where HNRG or another

Affiliate of JHMLIC serves as the

investment manager and various

partnerships (the Partnerships) in which

JHTRC or another Affiliate of JHMLIC is

the general partner.

Conditions and Definitions

This proposed exemption is subject to

the following conditions:

1. ERISA-Covered Plans may

participate in the proposed transactions

only if they have total assets in excess

of $100 million.

2. At least 30 days prior to the

proposed transaction, each affected

Customer invested in the Accounts or

Partnerships participating in the

transaction will be provided with

information regarding the timber

properties involved and the terms of the

transaction, including the purchase

price and how the transaction would

meet the goals and investment policies

of the Customer. Notice of any change

in the purchase price will be provided

to the Customer at least 30 days prior to

the consummation of the transaction.

3. An Independent Fiduciary will be

appointed by JHMLIC or an Affiliate to

represent the interests of the ERISACovered Plans as follows:

(a) Where the proposed transaction

involves an ERISA-Covered Plan

(including a Pooled Separate Account or

Partnership holding ‘‘plan assets’’

subject to the Act) 5 and a Non-ERISA

Plan or other Non-ERISA Customer, an

Independent Fiduciary will be

appointed to represent the ERISACovered Plan (or Pooled Separate

Account or Partnership), whether that

Account or Partnership is the buyer or

the seller of a timber property in the

proposed transaction;

(b) Where the proposed transaction

involves two ERISA-Covered Plans (or

Pooled Separate Accounts or

Partnerships holding ‘‘plan assets’’

subject to the Act) and the decision to

liquidate the timber property is the

result of one or more ‘‘triggering events’’

described below, an Independent

Fiduciary will be appointed by JHMLIC

or an Affiliate to represent the

purchasing plan (or Pooled Separate

Account or Partnership)—i.e. the

Buying Account or Buying Partnership.

A ‘‘triggering event’’ will exist

whenever:

(i) JHMLIC or an Affiliate receives a

direction from the Customer to liquidate
Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35285

all of the Customer’s Account or interest

in a Partnership;

(ii) JHMLIC or an Affiliate receives a

request by the Customer to liquidate a

specified timber property; or

(iii) A liquidation of all of the assets

held in the Selling Account or Selling

Partnership, or a particular property

held by such Account or Partnership, is

required under the terms of the

investment contract, insurance contract

or investment guidelines governing the

Account or Partnership, and the

decision to select any particular timber

property to be sold is outside of the

control of JHMLIC and its Affiliates; and

(c) Where the proposed transaction

involves two ERISA-Covered Plans (or

Pooled Separate Accounts or

Partnerships holding ‘‘plan assets’’

subject to the Act) and there is no

‘‘triggering event’’ as described above in

Condition 3(b), an Independent

Fiduciary will be appointed by JHMLIC

or an Affiliate for each Account or

Partnership involved in the transaction.

4. With respect to each transaction

requiring the participation of an

Independent Fiduciary (as described in

Condition 3 above), the purchase and

sale of a timber property shall not be

consummated unless the Independent

Fiduciary determines that the

transaction, including the price to be

paid or received for the property, would

be in the best interest of the particular

Account or Partnership involved based

on the investment policies and

objectives of such Account or

Partnership.

5. Each Account or Partnership which

buys or sells a particular timber

property pays no more than or receives

no less than the fair market value of the

timber property at the time of the

transaction, as determined by a

qualified independent real estate

appraiser experienced with the

valuation of timber properties similar to

the type involved in the transaction.

6. Each purchase or sale of a timber

property between the Accounts or

Partnerships is a one-time transaction

for cash.

7. Each Account or Partnership

involved in the purchase or sale of a

timber property pays no real estate

commissions or brokerage fees relating

to the transaction.

8. JHMLIC or an Affiliate acts as a

discretionary investment manager for

the assets of the Accounts or

Partnerships involved in each

transaction.

9. No purchase or sale transaction is

designed to benefit the interests of one

particular Account or Partnership over

another.

10. For purposes of this proposed

exemption:

(a) ‘‘Account’’ means a Separate

Account as defined below, including a

‘‘Non-Pooled Separate Account’’ or a

‘‘Pooled Separate Account’’;

(b) ‘‘Partnership’’ means a limited

partnership with assets, that may or may

not be considered ‘‘plan assets’’ subject

to the Act, for which JHTRC or another

Affiliate of JHMLIC is the general

partner and HNRG or another Affiliate

of JHMLIC serves as investment

manager;

(c) ‘‘ERISA-Covered Plan’’ is an

employee benefit plan as defined under

section 3(3) of the Act;

(d) ‘‘Non-ERISA Plan’’ or ‘‘Non-ERISA

Customer’’ means an entity or investor

not covered by the provisions of Title I

of the Act, such as a governmental plan,

a university endowment fund, a

charitable foundation fund or other

institutional investor, whose assets are

managed in an Account or Partnership

for which JHMLIC or an Affiliate acts as

investment manager;

(e) ‘‘Affiliate’’ means any person

directly or indirectly through one or

more intermediaries, controlling,

controlled by, or under common control

with JHMLIC;

(f) ‘‘Buying Account’’ or ‘‘Buying

Partnership’’ means the Account or

Partnership which seeks to purchase

timber properties from another Account

or Partnership;

(g) ‘‘Selling Account’’ or ‘‘Selling

Partnership’’ means the Account or

Partnership which seeks to sell timber

properties to another Account or

Partnership;

(h) ‘‘Independent Fiduciary’’ means a

person or entity with authority to both

review the appropriateness of the

proposed transaction for an Account or

Partnership, that is considered to hold

‘‘plan assets’’ subject to the fiduciary

responsibility provisions of the Act,

based on the investment policy

established for that Account or

Partnership, and to negotiate the terms

of the transaction, including the price to

be paid for the timber property. An

individual or firm selected to serve as

an Independent Fiduciary shall meet the

following criteria:

(1) The individual or firm may have

no current employment relationship

with John Hancock or an Affiliate,

although a prior employment

relationship would not disqualify the

individual or firm;

(2) The individual or firm must not

have received more than five (5) percent

of its annual gross receipts during the

preceding calendar year from business

with John Hancock and its Affiliates;

(3) The individual or individuals in

the firm must have an undergraduate or

graduate academic degree in forestry;

(4) The individual or individuals in

the firm must have a minimum of five

(5) years experience and a demonstrated

proficiency in timberland appraisal

work;

(5) The individual or individuals in

the firm must have a current

certification as a Member of the

Appraisal Institute, a Senior Real Estate

Analyst under the Society of Real Estate

Appraisers, or a similar nationally

recognized certification;

(6) The individual or firm must have

the ability to access appropriate

timberland sales comparison data and

make appropriate adjustments to the

subject property; and

(7) The individual or firm must not

have a criminal record involving fraud,

fiduciary standards, or securities laws

violations;

(i) ‘‘Separate Account’’ means a

segregated asset Account which receives

premiums or contributions from

customers, including employee benefit

plans subject to the Act, in connection

with group annuity contracts and

funding agreements, with investments

held in the name of JHMLIC, but where

the value of the contract or agreement to

the Customer (contractholder) fluctuates

with the value of the investment

associated with such Account;

(j) ‘‘Non-Pooled Separate Account’’ or

‘‘Non-Pooled Account’’ means a

Separate Account established to back a

single contract issued to one Customer,

which may be an employee benefit plan

subject to the Act;

(k) ‘‘Pooled Separate Account’’ or

‘‘Pooled Account’’ means a Separate

Account established to back a group of

substantially identical contracts issued

to a number of unrelated Customers,

including employee benefits plans

subject to the Act; and

(l) ‘‘Customer’’ means a person or

entity that acts as the authorized

representative for an Account or

Partnership involved in a proposed

purchase or sale of timber properties,

that is independent of JHMLIC and its

Affiliates.

Summary of Facts and Representations

1. The Applicants. The applicant for

the exemption is John Hancock Mutual

Life Insurance Company of

Massachusetts (JHMLIC or ‘‘John

Hancock’’) on behalf of itself and on

behalf of its indirect wholly-owned

subsidiaries, Hancock Natural Resource

Group, Inc. (HNRG) and John Hancock

Timber Resource Corporation (JHTRC),

both Delaware corporations.
35286 Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices

John Hancock ranks as one of the

largest insurance companies in the

United States and is a registered

investment advisor. John Hancock and

its subsidiaries had total assets of

approximately $58.6 billion as of

December 31, 1996, and assets under

management of approximately $107

billion as of that date.

John Hancock offers group annuity

contracts and funding agreements to

Customers, including employee benefit

plans subject to the Act. Certain of these

contracts and agreements provide that,

in accordance with contractholder

direction, the premiums or

contributions received from the

contractholder will be allocated

internally on the books of John Hancock

to segregated asset accounts or

‘‘Separate Accounts.’’ The Separate

Account investments are held in John

Hancock’s name, but the value of the

contract or agreement to the

contractholder fluctuates with the value

of the investments associated with the

Separate Account. The direct expenses

of managing the investments and John

Hancock’s fees are charged against the

value of the Separate Account.

Separate Accounts may be established

to back a single contract issued to one

customer (a ‘‘Non-Pooled Separate

Account’’). In addition, a Separate

Account may be established to back a

group of substantially identical

contracts issued to a number of

unrelated customers (a ‘‘Pooled Separate

Account’’).

2. John Hancock currently maintains

a number of Separate Accounts that

invest almost exclusively in timberland.

These Pooled and Non-Pooled Separate

Accounts are known as the ForesTree

Separate Accounts. The contractholders

of both the pooled and non-pooled

ForesTree Separate Accounts include

both ERISA-covered plans and nonERISA governmental plans. As of July

1997, John Hancock had established a

total of 14 such pooled and non-pooled

ForesTree Separate Accounts in which

32 contractholders participate.

Currently, over two million acres of

timberland are allocated to the

ForesTree Separate Accounts, and these

properties have a fair market value in

excess of $2.3 billion.

Under the applicable contract or

agreement, John Hancock has the right

to control, manage and administer each

Separate Account, including the sole

discretion to select and dispose of

investments in accordance with the

investment policy established for the

Account.

3. John Hancock’s management

responsibilities under the ForesTree

Separate Accounts are performed mostly

by its wholly-owned subsidiary, HNRG,

which was established in 1995. Prior to

its incorporation in 1995, HNRG

functioned as a division within John

Hancock. HNRG currently manages 2.5

million acres of timberland valued at

approximately $2.87 billion. HNRG’s

managed assets include assets held in

the ForesTree Separate Accounts as well

as assets managed through other

arrangements. HNRG is responsible for

all decisions regarding the acquisition

and disposition of timberland properties

held in the ForesTree Separate

Accounts, although such decisions must

be reviewed and approved by John

Hancock’s internal investment

committees. HNRG also has sole

responsibility for the management of

John Hancock’s timberland properties,

including site preparation and

reforestation, road building and

construction, maintenance, acquisition

of insurance and payment of taxes. Onsite work is performed by independent

forest managers under contract to

HNRG.

4. Assets invested in the ForesTree

Separate Accounts are managed by John

Hancock and HNRG in accordance with

the investment policies established for

the Accounts. The investment policy for

each Non-Pooled Account is established

jointly by John Hancock and the

contractholder. For each of the Pooled

Accounts, the investment policy is

established by John Hancock and

adopted by each contractholder when it

chooses to participate in a Pooled

Account. Under the investment policy

of most of the ForesTree Separate

Accounts, timberland properties are

purchased or sold opportunistically to

favor the return of the particular

portfolio. However, John Hancock states

that as a practical matter the properties

allocated to the ForesTree Separate

Accounts are fairly illiquid investments,

and are considered by its customers to

be long-term investments.

HNRG has established certain

guidelines that are followed as

investments are acquired and allocated

to timberland portfolios it manages,

including those portfolios for Accounts

holding ‘‘plan assets’’ subject to the Act

such as the ForesTree Separate

Accounts. The goal of these guidelines

is to enable HNRG to provide its clients

with access to a variety of timberland

acquisitions through a fair, consistent

and unbiased process. The central

element of the procedure is a

determination of the suitability of an

investment for a portfolio. In the event

that an investment is suitable for more

than one portfolio, priorities are set in

accordance with an investment queue

procedure.

HNRG states that the first step in

determining portfolio suitability is to

identify all potential funding sources for

a pending acquisition among its existing

clients. Each prospective participating

Account is evaluated independently.

The client’s investment policy, setting

forth specific objectives and constraints,

is the primary determinant of whether

or not a particular acquisition is suitable

for allocation to the Account. The

portfolio ‘‘fit’’ is based on financial

analysis that projects and measures

future portfolio performance, including

and excluding the pending acquisition,

against established performance targets.

Performance targets may include total

return, appreciation and income.

Different levels of investment in the

pending acquisition are reviewed.

Consideration is given to diversification

by geographic region, timber markets

and timber species. The proposed

investment is analyzed to determine if

it can be broken into appropriate parcels

to fit the client portfolio’s needs.

Portfolio investment recommendations

are intended to be consistent with the

standards defined by the Association for

Investment Management and Research

(AIMR), a professional association

which has adopted certain standards for

best practices by investment managers.

The amount of funding available for

any potential acquisition is determined

after the portfolio suitability analysis

has been completed. As a result, HNRG

states that when it comes to funding an

acquisition, one of the following three

situations will exist: (i) The acquisition

will be undersubscribed (i.e. there are

not enough funds available to acquire

the investment); (ii) the acquisition is

fully subscribed (i.e. there are ample

funds available to acquire the

investment), or (iii) the acquisition is

oversubscribed (i.e. client portfolio

funding availability exceeds the amount

needed to fund the acquisition).

The ‘‘investment queue’’ sets the

priorities for utilizing funds from

existing client Accounts in the event an

investment is suitable for more than one

client’s portfolio. The ‘‘investment

queue’’ is based on the source of

available client funds with the following

order of priority:

(a) Client funds committed to timber

property acquisitions, but unallocated;

(b) Timberland disposition proceeds

designated for reinvestment;

(c) Cash flow from operations; and

(d) Contingent funds.

Within each of the four categories of

available funds, the length of time that

the funds have been available for

investment will determine the level of

priority. For example, funds that have
Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35287

6The Applicants state that generally all of the

transaction expenses for the buyer and the seller

would be saved. However, to the extent that there

are any expenses that cannot be avoided, such

expenses would be negotiated between the

independent fiduciary and John Hancock, or a

second independent fiduciary, as the case may be.

been committed to an HNRG timberland

investment program, but are

unallocated, will receive priority

between clients in the chronological

order of when each commitment was

established.

5. Customers that want to use John

Hancock’s timber management expertise

typically invest in the ForesTree

Separate Accounts. These customers

include both ERISA-covered plans and

non-ERISA plans. Customers may also

invest directly in Partnerships that own

timber properties. In these cases, JHTRC

is usually appointed the general partner

of the Partnership holding the property

and HNRG serves as investment

manager of the Partnership. These

management responsibilities are

exercised in accordance with the

investment guidelines contained in the

partnership agreements, which contain

HNRG’s investment selection and

allocation policy procedures (as

described in Paragraph 4 above).

For purposes of this proposed

exemption, both ForesTree Separate

Account contractholders and John

Hancock’s investment management

clients who directly invest in

Partnerships holding timber properties,

including ERISA-Covered Plans, are

referred to as ‘‘Customers’.

The Transactions

6. The Applicants state that occasions

may arise when it is appropriate to

liquidate timber property held in an

Account or Partnership, even though the

property remains an attractive

investment. For example, a Customer’s

timber investments may have so

increased in value from its initial

investment that the timber-related

portion of the Customer’s aggregate

portfolio exceeds the Customer’s current

asset allocation guidelines for that

investment class. In addition, a

Customer may request that John

Hancock liquidate a portion of its timber

portfolio in order to recognize some of

the portfolio’s gains, even though the

particular timber parcel remains an

attractive investment. John Hancock

may also conclude that a particular

timber parcel, through individually an

attractive investment, is no longer

appropriate for the Customer’s Account,

in light of the composition of the

Account, its liquidity needs and other

available investment opportunities.

The Applicants state that in these and

other situations in which timber parcels

might be sold, the parcels chosen for

liquidation could be appropriate

investments for other Customers. Under

the proposed exemption, John Hancock

could satisfy the objectives of a Selling

Account or Selling Partnership and a

Buying Account or Buying Partnership

in a manner that provides advantages to

both sides of the transaction. Therefore,

John Hancock requests an exemption

that would permit it (and its Affiliates)

to transfer timber parcels between its

Customer Accounts and Partnerships

under certain conditions and

procedures described herein.

7. If John Hancock determines that it

should liquidate any timberland assets

held in a Customer’s Account or

Partnership, or if as the result of certain

‘‘triggering events’’ described below

such a liquidation must occur, and John

Hancock concludes that a particular

parcel of timberland to be sold is an

appropriate investment for the portfolio

of another Account or Partnership, John

Hancock will engage independent

fiduciaries (the I/Fs) to represent the

interests of any ERISA-Covered Plans

involved.

Under the procedures described by

the Applicants, an I/F will be appointed

by JHMLIC or an Affiliate to represent

the interests of the ERISA-Covered Plans

as follows:

(a) Where the proposed transaction

involves an ERISA-Covered Plan

(including a Pooled Separate Account or

Partnership holding ‘‘plan assets’’

subject to the Act) and a Non-ERISA

Plan or other Non-ERISA Customer, an

I/F will be appointed to represent the

ERISA-Covered Plan (or Pooled Separate

Account or Partnership), whether that

Account or Partnership is the buyer or

the seller of a timber property in the

proposed transaction.

(b) Where the proposed transaction

involves two ERISA-Covered Plans (or

Pooled Separate Accounts or

Partnerships holding ‘‘plan assets’’

subject to the Act) and the decision to

liquidate the timber property is the

result of one or more ‘‘triggering events’’

described below, an I/F will be

appointed by JHMLIC or an Affiliate to

represent the purchasing plan (or

Pooled Separate Account or

Partnership)—i.e. the Buying Account

or Buying Partnership. A ‘‘triggering

event’’ will exist whenever:

(i) JHMLIC or an Affiliate receives a

direction from the Customer to liquidate

all of the Customer’s Account or interest

in a Partnership;

(ii) JHMLIC or an Affiliate receives a

request by the Customer to liquidate a

specified timber property; or

(iii) A liquidation of all of the assets

held in the Selling Account or Selling

Partnership, or a particular timber

property held by such Account or

Partnership, is required under the terms

of the investment contract, insurance

contract or investment guidelines

governing the Account or Partnership,

and the decision to select any particular

property to be sold is outside the control

of JHMLIC and its Affiliates.

(c) Where the proposed transaction

involves two ERISA-Covered Plans (or

Pooled Separate Accounts or

Partnerships holding ‘‘plan assets’’

subject to the Act) and there is no

‘‘triggering event’’, an I/F will be

appointed by JHMLIC or an Affiliate for

each Account or Partnership involved in

the transaction.

With respect to each transaction

requiring the participation of an I/F, the

purchase and sale of a timber property

shall not be consummated unless the I/

F determines that the transaction,

including the price to be paid or

received for the property, would be in

the best interest of the particular

Account or Partnership involved based

on the investment policies and

objectives of such Account or

Partnership. The I/F will have the

authority both to review the

appropriateness of the proposed

purchase or sale in light of the

Customer’s investment policy and to

negotiate the terms of the transaction,

including the price to be paid for the

property and the allocation of the

transaction cost savings to the buyer and

seller.6 The I/F will always be provided

with a recent appraisal of the timber

property obtained by HNRG from a

qualified independent real estate

appraiser experienced with the

valuation of timber properties similar to

the type involved in the transaction.

Under the conditions of this proposed

exemption, each Account or Partnership

which buys or sells a particular timber

property must pay no more than or

receive no less than the fair market

value of the timber property at the time

of the transaction, as determined by an

independent qualified real estate

appraiser.

8. An individual or firm selected to

serve as an I/F would be required to

meet the following criteria:

(a) The individual or firm may have

no current employment relationship

with John Hancock or an Affiliate,

although a prior employment

relationship would not disqualify the

individual or firm;

(b) The individual or firm must not

have received more than five (5) percent

of its annual gross receipts during the

preceding calendar year from business

with John Hancock and its Affiliates;
35288 Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices

7For example, in a transaction between Lyons

Falls Pulp & Paper, Inc., as seller, and a JHMLIC

Non-Pooled Separate Account, as buyer, which

involved 67,430 acres of timberland that was sold

to the Account for approximately $12.1 million on

February 14, 1996, the total transaction costs

involved more than 7.15 percent of the acquisition

price or over $865,150 ($12,100,000 × .0715). This

figure excludes the New York State Gains Tax of

over $1,000,000 that was incurred by the seller.

(c) The individual or individuals in

the firm must have an undergraduate or

graduate academic degree in forestry;

(d) The individual or individuals in

the firm must have a minimum of five

(5) years experience and a demonstrated

proficiency in timberland appraisal

work;

(e) The individual or individuals in

the firm must have a current

certification as a Member of the

Appraisal Institute, a Senior Real Estate

Analyst under the Society of Real Estate

Appraisers, or a similar nationally

recognized certification;

(f) The individual or firm must have

the ability to access appropriate

timberland sales comparison data and

make appropriate adjustments to the

subject property; and

(g) The individual or firm must not

have a criminal record involving fraud,

fiduciary standards, or securities laws

violations.

In addition to the appointment of an

I/F, the Applicants state that at least 30

days prior to any transaction, each

affected Customer involved with the

Accounts or Partnerships participating

in the transaction will be provided with

information regarding the timber

properties involved and the terms of the

transaction, including the purchase

price and how the transaction would

meet the goals and investment policies

of the Customer. John Hancock will

provide an additional notice to

Customers should the price of a timber

property change following the initial

notice. The transaction will not be

consummated until 30 days after the

second notice has been provided.

Any Customer that is an ERISACovered Plan will be responsible for

monitoring the performance of John

Hancock and its Affiliates as well as the

I/F, when an I/F is required, to ensure

that the conditions of this proposed

exemption are met. The Applicants state

that all ERISA-Covered Plans will be

large plans with sophisticated

fiduciaries capable of monitoring the

performance of the parties in the

proposed transaction. Under the

conditions of this proposed exemption,

ERISA-Covered Plans may participate in

the proposed transactions only if they

have total assets in excess of $100

million.

Justification for Transactions

9. The Applicants represent that the

transfer of timber properties from one

Account or Partnership to another will

have a number of advantages to both the

Buying Account or Partnership and the

Selling Account or Partnership.

First, when the transfer is between

two of John Hancock’s ForesTree

Separate Accounts, it will not require

the transfer of legal ownership of the

property. John Hancock has legal title to

all assets allocated to its Separate

Accounts and may reallocate these

assets among Separate Accounts

without a change in legal title. This

means that significant transaction costs

can be avoided, including real property

transfer taxes, title insurance policy

costs, closing and recording costs and,

where required, phase one

environmental audits.7 In addition, each

Account or Partnership involved in the

purchase or sale of a timber property

would not pay any real estate

commissions or brokerage fees for the

transaction. The allocation of any

remaining transaction costs would be

negotiated between the buyer and the

seller for each transaction. Under the

transactions that would be covered by

this proposed exemption, the I/Fs

would be responsible for negotiating the

allocation of any remaining transaction

costs for the Accounts or Partnerships

for which they are acting.

Second, a transfer of timber properties

between the Accounts or Partnerships

will often allow a Buying Account or

Partnership to invest its assets more

quickly and in properties that might not

otherwise be available to them. John

Hancock believes that investors commit

to establishing a timberland investment

portfolio because they have identified a

current need for such an asset category.

Therefore, John Hancock states that

once a Customer has committed to a

ForesTree Separate Account or to a

Partnership, it is important to the

Customer to invest its funds as rapidly

as is prudent. However, attractive

timber properties are relatively scarce,

and allowing a transfer of timber parcels

in accordance with this proposed

exemption would provide an

opportunity for the purchasing

Customers to invest funds more rapidly

than would be possible if the purchase

involved a seller having no relationship

to John Hancock.

Third, the Applicants represent that

because HNRG is the manager of the

Selling Account’s or Partnership’s

timber property, much more

information about the property would

be available to a Buying Account or

Partnership than would be if the

property were not managed by HNRG.

John Hancock states that this situation

reduces the risk to its purchasing

Customers. In addition, because HNRG

is already familiar with the timber

property, the Buying Account or

Partnership would avoid certain

expenses normally associated with the

purchase of a new property. These

‘‘start-up’’ expenses include the costs of

lot management plan development,

aerial photographs and geographical

information systems (GIS) mapping.

Finally, each purchase and sale of a

timber property between the Accounts

and/or Partnerships will be a one-time

transaction for cash. No purchase or sale

transaction will be designed to benefit

the interests one particular Account or

Partnership over another.

10. In summary, John Hancock

represents that the proposed

transactions will meet the statutory

criteria of section 408(a) of the Act

because: (a) Each purchase or sale of a

timber property between the Accounts

or Partnerships will be a one-time

transaction for cash; (b) each affected

Customer involved with the Accounts or

Partnerships participating in the

transaction will be provided with

information, at least 30 days prior to the

proposed transaction, regarding the

timber properties involved and the

terms of the transaction, including the

purchase price and how the transaction

would meet the goals and investment

policies of the Customer; (c) an I/F will

be appointed by JHMLIC or an Affiliate

to represent the interests of the ERISACovered Plans in the proposed

transaction, unless the decision to

liquidate a timber property from a

Selling Account or Selling Partnership

is the result of one or more ‘‘triggering

events’; (d) in a transaction where an I/

F is involved, the purchase or sale of the

timber property shall not be

consummated unless the I/F determines

that the transaction, including the price

to be paid or received for the property,

would be in the best interest of the

particular Account or Partnership

involved based on the investment

policies and objectives of such Account

or Partnership; (e) each Account or

Partnership which buys or sells a

particular timber property will pay no

more than or will receive no less than

the fair market value of the timber

property at the time of the transaction,

as determined by an independent

qualified real estate appraiser; (f) each

Account or Partnership involved in the

purchase or sale of a timber property

will pay no real estate commissions or

brokerage fees relating to the

transaction; (g) no purchase or sale

transaction will be designed to benefit

the interests one particular Account or
Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35289

8 In this regard, the Department notes that section

404(a) of the Act requires, among other things, that

a fiduciary discharge his duties with respect to a

plan solely in the interest of the participants and

beneficiaries and with the care, skill, prudence and

diligence under the circumstances then prevailing

that a prudent man acting in a like capacity and

familiar with such matters would use in the

conduct of an enterprise of a like character and with

like aims. With respect to the actions and omissions

of ABPA, the Department notes that no relief would

be provided under the proposed exemption for any

violation of the general fiduciary provisions of Part

4 of Title I of the Act.

Partnership over another; and (h)

ERISA-Covered Plans will be able to

participate in the proposed transactions

only if they have total assets in excess

of $100 million.

FOR FURTHER INFORMATION

CONTACT: Mr. E.F. Williams of the

Department, telephone (202) 219–8194.

(This is not a toll-free number.)

ACRA Local 725 Health & Welfare

Fund (the Welfare Plan) and ACRA

Local 725 Pension Fund (the Pension

Plan; together, the Plans) Located in

Macon, Georgia

[Application Nos. L–10536 and D–10537]

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act

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 section 406(b)(2) of the

Act shall not apply to the proposed

payment of interest by the Pension Plan

to the Welfare Plan on past mistaken

contributions (the Mistaken

Contributions) pursuant to an

indemnification agreement by the Board

of Trustees of the Pension Plan with

respect to the Mistaken Contributions,

provided the following conditions are

satisfied: (a) The Mistaken

Contributions occurred as a result of an

inadvertent clerical error committed by

the Plans’ independent third party

administrator; (b) the principal amount

of the Mistaken Contributions was

repaid as soon as the error was

discovered; and (c) the amount of

interest to be paid to the Welfare Plan

by the Pension Plan has been

determined by a third party bank to be

the fair market rate of interest.

Summary of Facts and Representations

1. The Welfare Plan is the ACRA

Local 725 Health & Welfare Fund of

Dade, Broward and Monroe Counties,

Florida, and the Pension Plan is the

ACRA Local 725 Pension Fund of Dade,

Broward and Monroe Counties, Florida.

Each Plan is maintained pursuant to

Collective Bargaining Agreements

between Air Conditioning Refrigeration

Associates, an employer association

representing various employers (the

Employers), and United Association

Local Union Number 725 (the Union),

an employee organization whose

members are covered by the Plan. The

Union represents individuals who

perform, as employees of the Employers,

construction and service work in the air

conditioning and pipe trades.

The Welfare Plan provides health and

welfare benefits to participant

employees and their families. It is

funded solely by Employer

contributions and earnings thereon. The

Welfare Plan has been in existence since

1961. As of April 30, 1997, the Welfare

Plan had 674 participants, and

approximately $4,275,000 in assets.

The Pension Plan provides retirement

and certain disability benefits to Plan

participants and survivor benefits to

spouses and/or other beneficiaries that

may be designated by the participant in

accordance with the Plan’s procedures.

The Pension Plan has been in existence

since 1962. As of April 30, 1997 the

Pension Plan had 1,633 participants and

assets of approximately $56,100,000.

2. The Board of Trustees of each Plan,

all of whom are individuals who serve

in that capacity for both Plans, had for

a period of several years retained the

services of Consolidated Benefit

Services, Inc. of Atlanta, Georgia

(Consolidated) to serve as

administrative manager (the

Administrator) for the Plans. Employer

contributions are made to the Pension

Plan and the Welfare Plan as well as

other trust funds and entities to which

contributions are required to be paid

pursuant to the Collective Bargaining

Agreement between the Employers and

the Union. These contributions are

collected and deposited in an escrow

account (the Escrow) under the

supervision of the Administrator. The

purpose of the Escrow is to receive and

deposit Employer contributions, allow

for clearance of checks and record each

Employer contribution to the Plans in a

timely fashion. Sums received by the

Escrow are then allocated to the

appropriate accounts. Thus, the

appropriate amount of contributions

due to the Welfare Plan are normally

allocated and paid to the Welfare Plan

accounts, and the appropriate amount of

contributions due to the Pension Plan

are normally allocated and paid to the

Pension Plan accounts.

3. In approximately September, 1996,

the Board of Trustees of each Plan was

advised that the parent corporation of

Consolidated, Harrington Benefit

Corporation (Harrington), which was

also the parent corporation of American

Benefit Plan Administrators, Inc.

(ABPA), had been acquired by Health

Services, Inc. (Health Services), a public

company. After the acquisition of

Harrington by Health Services, all

administrative record-keeping for the

Plans was transferred from the Atlanta

office of Consolidated to the Dallas

office of ABPA.

4. In August 1997, the independent

accountant for the Plans (the Auditor),

in the course of conducting a routine

annual audit, discovered that in

November 1996, ABPA, as the

Administrator for the Plans, withdrew

from the Escrow and transferred to the

accounts of the Pension Plan, sums

which were in excess of the proper

contributions allocated to the Pension

Plan by the Employers. This excess

payment created a shortfall in the

proper contributions to the Welfare

Plan. This process continued to occur in

subsequent months.8 For purposes of

this proposed exemption, all excess

amounts of money erroneously allocated

to the Pension Plan during this period

of time are described herein as ‘‘the

Mistaken Contributions’’. The applicant

represents that payments from the

Escrow to the Pension Plan were

utilized by ABPA to pay current

disbursements by the Pension Plan,

including such items as current pension

benefits and ongoing operational

expenses. Nonetheless, all financial

reports from ABPA to the Trustees of

each Plan erroneously reflected the

proper contributions being allocated to

the Pension Plan and the Welfare Plan.

These erroneous financial reports, rather

than documentation showing the actual

amounts transferred to the Pension Plan,

were delivered to the respective Boards

of Trustees. Accordingly, the Boards of

Trustees of the Plans were not aware of

the fact that sums of money were being

allocated erroneously to the Pension

Plan from the Escrow. The Trustees

were notified by the Auditor in late

August, 1997. At that time, immediate

instructions were made to correct the

Mistaken Contributions.

5. On October 29, 1997, all excess

sums paid erroneously to the Pension

Plan were repaid to the Welfare Plan.

The period of delay between the time of

discovery of the error (i.e., August,

1997) and its correction was the time

required by the Auditor to accurately

investigate and calculate the amount

necessary to correct the error. The total

amount of the Mistaken Contributions

was $796,983.29. This amount

represented approximately 18.6% of the

Welfare Plan’s assets and 1.4% of the

Pension Plan’s assets.
35290 Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices

9The Department expresses no opinion in this

proposed exemption as to whether the

contributions are subject to section 403(c)(2)(A)(ii)

of the Act.

10Since Mr. Hitchcock is the sole owner of the

Plan sponsor and the only participant in the Plan,

there is no jurisdiction under Title I of the Act

pursuant to 29 CFR 2510.3–3(b). However, there is

jurisdiction under Title II of the Act pursuant to

section 4975 of the Code.

11 In this proposed exemption, the Department is

expressing no opinion as to whether the Plan’s

acquisitions of the Stock constituted a prohibited

transaction under section 4975 of the Code, nor is

the Department herein proposing relief for any

prohibited transaction which may have occurred as

a result of such acquisitions of the Stock by the

Plan. However, the purchases and holding of the

Stock by the Plan raise questions under section

4975(c)(1)(D) and (E) of the Code. Section

4975(c)(1)(D) and (E) of the Code prohibits the use

by or for the benefit of a disqualified person of the

assets of a plan and prohibits a fiduciary from

dealing with the assets of a plan in his own interest

or for his own account. Mr. Hitchcock, as a director

of Thoratec, may have had an interest in the

acquisitions and holding of the Stock which may

have affected his best judgment as a fiduciary of the

Plan. In such circumstances, the transactions may

have violated section 4975(c)(1)(D) and (E) of the

Code. See Advisory Opinion 90–20A (June 15,

1990). Accordingly, to the extent there were

violations of section 4975(c)(1)(D) and (E) of the

Code with respect to the purchases and holding of

the Stock by the Plan, the Department is extending

no relief for these transactions herein.

12The Department notes that the Internal Revenue

Service has taken the view that if a plan is exposed

6. The applicants represent that since

the Mistaken Contributions were the

result of unintended erroneous

allocations by the Administrator of

contributions by the Employers, they

may be considered to come within

section 403(c)(2)(A)(ii) of the Act, which

would permit the return of the

contributions within 6 months after the

plan administrator discovered that the

contributions were made by a mistake of

fact or law.9 As a result, the applicants

are not seeking an exemption for the

Mistaken Contributions or the

repayment of their principal amount.

Rather, the applicants are requesting an

exemption merely for the proposed

payment of interest by the Pension Plan

to the Welfare Plan in connection with

the treatment of these transactions as

‘‘Mistaken Contributions’’ in order to

make the Welfare Plan ‘‘whole’’ for the

Pension Plan’s use of the money that

was erroneously allocated by ABPA

from the Escrow to the Pension Plan.

7. In addition to the Pension Plan’s

repayment of the principal amount of

the Mistaken Contributions to the

Welfare Plan, the Board of Trustees of

the Pension Plan now proposes to pay

interest to the Welfare Plan pursuant to

an indemnification agreement (the

Indemnification) with the Board of

Trustees of the Welfare Plan. The

Indemnification consists of an

agreement to pay a reasonable rate of

interest on the total amount of the

Mistaken Contributions to reimburse the

Welfare Plan for lost income. The

interest rate to be paid by the Pension

Plan will be established as a fair market

rate by an independent bank. The

Liberty Bank (the Bank) in Macon,

Georgia, was contacted for the purpose

of establishing such a market rate. The

Bank is an independent bank which has

no other relationship with the Plans.

The Bank represents that an appropriate

rate for such Mistaken Contributions

would be 8.25 to 8.5% per annum.

Accordingly, the Trustees of both Plans

have agreed to utilize the rate of 8.5%

per annum to reimburse the Welfare

Plan for losses relating to the period of

time it was denied access to the assets

(i.e., $796,983.29).

8. The applicants represent that the

Trustees of the Plans have repeatedly

requested ABPA to provide a written

explanation of the manner in which the

Mistaken Contributions occurred, but

ABPA has failed to provide any

response. Due to dissatisfaction with

ABPA’s performance, the Trustees

terminated ABPA’s services effective

August 31, 1997, and appointed a new

administrative manager, Core

Management Resources, Inc., of Macon,

Georgia.

9. The applicants represent that no

participant in either Plan experienced

any reduction, deferment or delay in

receipt of any benefit due from either

Plan as a result of the errors. All benefits

and expenses of each Plan were paid in

a timely fashion by each respective Plan

in the ordinary course of its business.

10. In summary, the applicants

represent that the subject transactions

satisfy the criteria contained in section

408(a) of the Act because: (a) The

Mistaken Contributions were

inadvertent transfers that occurred

solely through the errors of the Plans’

independent third party administrator,

ABPA; (b) the Pension Plan repaid the

principal amount of the Mistaken

Contributions to the Welfare Plan as

soon as possible after the error was

discovered and properly calculated by

the Auditor; (c) the amount of interest

to be paid to the Welfare Plan on the

Mistaken Contributions has been

determined by an independent bank

(i.e., the Bank) as a fair market rate of

interest to reimburse the Welfare Plan

for losses relating to the period of time

it was denied access to the assets

erroneously allocated to the Pension

Plan; and (d) no participant in either the

Welfare Plan or the Pension Plan

experienced any reduction, deferment

or delay in receipt of any benefit due

from the Plan as a result of the

transactions.

FOR FURTHER INFORMATION

CONTACT: Gary H. Lefkowitz of the

Department, telephone (202) 219–8881.

(This is not a toll-free number.)

William M. Hitchcock SERP (DB) (the

Plan) Located in Houston, Texas

[Application No. D–10605]

Proposed Exemption

The Department is considering

granting an exemption under the

authority of 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 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 proposed sale by the Plan of

67,466 shares of stock (the Stock) in

Thoratec Laboratories, Inc. (Thoratec) to

William M. Hitchcock (Mr. Hitchcock),

a disqualified person with respect to the

Plan, provided the following conditions

are satisfied: (a) The sale is a one-time

transaction for cash; (b) the Plan pays no

sales commissions or other expenses in

connection with the transaction; (c) the

Plan receives the fair market value of

the Stock, as determined by reference to

its most current listed price on the

National Association of Securities

Dealers Automated Quotation National

Market System (NASDAQ) at the time of

the transaction; and (d) Mr. Hitchcock is

the only Plan participant to be affected

by the transaction, and he desires that

the transaction be consummated.10

Summary of Facts and Representations

1. The Plan is a defined benefit selfemployed retirement plan with one

participant, Mr. Hitchcock, who is the

sole owner of the Plan sponsor. The

Plan sponsor is a sole proprietorship

which is engaged in the business of

consulting. Mr. Hitchcock is also the

Plan’s trustee. As of March 18, 1998, the

Plan had $468,873 in total assets.

2. On February 14, 1994, the Plan

purchased 2,400 shares of the Stock at

a price of $2.03 per share (i.e., for a total

of $4,872). On April 5, 1995, the Plan

purchased 200,000 shares of the Stock at

a price of $1.30 per share (i.e., for a total

of $260,000). On June 10, 1996, the

Stock underwent a reverse stock split of

1/3 and, as a result, the Plan currently

holds 67,466 shares of the Stock. Mr.

Hitchcock is a director of Thoratec, and

together he and the Plan own 1.8% of

Thoratec.11 The Stock currently

constitutes approximately 93% of the

Plan’s assets.12 The Stock is publicly

traded on the NASDAQ.
Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35291

to the risk of large losses because of the lack of

diversification and the speculative nature of

investments made by the Plan, such an investment

strategy may raise questions in regard to the

exclusive benefit rule under section 401(a) of the

Code. For example, see Rev. Rul. 73–532, 1973–2

C.B. 128, which states, among other things, that the

safeguards and diversity that a prudent investor

would adhere to must be present in order for the

‘‘exclusive-benefit-of-employees’’ requirement to be

met. However, the Department is expressing no

opinion in this proposed exemption regarding

whether violations of section 401(a) of the Code

occurred as a result of the Plan’s acquisition of

investments that may be speculative in nature, such

as the purchase of the Stock.

3. Mr. Hitchcock now proposes to

purchase the Stock from the Plan for

cash. No commissions or other expenses

will be paid by the Plan in connection

with the sale. The Plan will receive the

fair market value of the Stock, as

determined by its most current listed

price on the NASDAQ at the time of the

sale. On March 12, 1998, the Stock was

trading at a price of $7.00 per share.

Therefore, based upon this per share

trading price, Mr. Hitchcock would have

paid the Plan $472,262 for the Stock

(67,466 shares times $7.00 per share).

4. Mr. Hitchcock represents that the

proposed sale would be advantageous to

the Plan because it would increase the

Plan’s liquidity and diversify the Plan’s

assets. In addition, 66,666 shares of the

Stock owned by the Plan are

unregistered and subject to certain sale

restrictions under Rule 144 of the

Securities and Exchange Commission

(SEC). The restricted Stock can be

disposed of only in a private placement

or in the public market over a period of

years under the timing and volume

restrictions of SEC Rule 144. As a result,

all of the Plan’s shares of the Stock may

not be sold on the open market at the

present time. These shares of the Stock

were purchased by the Plan in a private

placement. However, in any sale of the

Plan’s shares to a third party in a private

placement, the purchaser would

probably demand a significant discount

off the NASDAQ listed price in order to

acquire the shares. Therefore, by selling

all of the Stock to Mr. Hitchcock for the

most current listed price for each share

of the Stock on the NASDAQ, the Plan

will receive a premium for its shares at

the time of the transaction.

5. In summary, the applicant

represents that the proposed transaction

satisfies the criteria of section 4975(c)(2)

of the Code because: (a) The sale is a

one-time transaction for cash; (b) no

commissions or other expenses will be

paid by the Plan in connection with the

sale; (c) the Plan will receive the fair

market value of the Stock, as

determined by its most current listed

price on the NASDAQ at the time of the

sale; and (d) Mr. Hitchcock is the only

Plan participant to be affected by the

transaction, and he desires that the

transaction be consummated.

Tax Consequences of the Transaction

The Department of the Treasury has

determined that if a transaction between

a qualified employee benefit plan and

its sponsoring employer (or affiliate

thereof) results in the plan either paying

less than or receiving more than fair

market value, such excess may be

considered to be a contribution by the

sponsoring employer to the plan, and

therefore must be examined under the

applicable provisions of the Internal

Revenue Code, including sections

401(a)(4), 404 and 415.

Notice to Interested Persons: Since

Mr. Hitchcock is the only Plan

participant to be affected by the

proposed transaction, the Department

has determined that there is no need to

distribute the notice of proposed

exemption to interested persons.

Comments and requests for a hearing are

due within 30 days from the date of

publication of this notice of proposed

exemption in the Federal Register.

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

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 23rd day of

June 1998.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

Department of Labor.

[FR Doc. 98–17135 Filed 6–26–98; 8:45 am]

BILLING CODE 4510–29–P

NATIONAL ARCHIVES AND RECORDS

ADMINISTRATION

Agency Information Collection

Activities: Submission for OMB

Review; Comment Request

AGENCY: National Archives and Records

Administration (NARA).

ACTION: Notice.

SUMMARY: NARA is giving public notice

that the agency has submitted to OMB

for approval the information collection

described in this notice. The public is

invited to comment on the proposed

information collection pursuant to the

Paperwork Reduction Act of 1995.

DATES: Written comments must be

submitted to OMB at the address below

on or before July 29, 1998.

ADDRESSES: Comments should be sent

to: Office of Information and Regulatory

Affairs, Office of Management and

Budget, Attn: Ms. Maya Bernstein, Desk

Officer for NARA, Washington, DC

20503.

FOR FURTHER INFORMATION CONTACT:

Requests for additional information or

copies of the proposed information

collection and supporting statement

should be directed to Tamee Fechhelm

at telephone number 301–713–6730 or

fax number 301–713–6913.

SUPPLEMENTARY INFORMATION: Pursuant

to the Paperwork Reduction Act of 1995

(Public Law 104–13), NARA invites the

general public and other Federal