Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices 15597

1CIEBA is a committee of the Financial

Executives Institute, an organization whose

membership is made up of senior financial

executives in corporations engaged in, among other

things, banking, manufacturing, and insurance.

2Section 102 of Reorganization Plan No. 4 of 1978

(43 FR 47713, October 17, 1978), effective December

31, 1978 (44 FR 1065, January 3, 1979), generally

transferred the authority of the Secretary of the

Treasury to issue exemptions under section

4975(c)(2) of the Code to the Secretary of Labor. In

the discussion of the exemption, references to

sections 406 and 408 of the Act should be read to

refer as well to the corresponding provisions of

section 4975 of the Code.

equipment or material to which this

recognition is tied, or that its

recognition is limited to certain

products;

CSA shall inform OSHA as soon as

possible, in writing, of any change of

ownership or key personnel, including

details;

CSA will continue to meet the

requirements for recognition in all areas

where it has been recognized; and

CSA will always cooperate with

OSHA to assure compliance with the

letter as well as the spirit of its

recognition and 29 CFR 1910.7.

Effective Date

This recognition will become effective

on March 24, 1995, and will be valid

until December 24, 1997, (a period of

five years from the date of the original

recognition, December 24, 1992), unless

terminated prior to that date, in

accordance with 29 CFR 1910.7.

Signed at Washington, DC this 20th day of

March, 1995.

Joseph A. Dear,

Assistant Secretary.

[FR Doc. 95–7366 Filed 3–23–95; 8:45 am]

BILLING CODE 4510–26–M

Pension and Welfare Benefits

Administration

[Application No. D–09602]

Proposed Class Exemption for Plan

Asset Transactions Determined by InHouse Asset Managers

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Notice of proposed class

exemption.

SUMMARY: This document contains a

notice of pendency before the

Department of Labor (the Department) of

a proposed class exemption from certain

prohibited transaction restrictions of the

Employee Retirement Income Security

Act (ERISA or the Act) and from certain

taxes imposed by the Internal Revenue

Code of 1986 (the Code). If granted, the

proposed exemption would exempt

various transactions involving employee

benefit plans whose assets are managed

by in-house managers (INHAMS),

provided that the conditions of the

proposal are met. The proposed

exemption, if granted, would affect

participants and beneficiaries of

employee benefit plans, the sponsoring

employers of such plans, INHAMS, and

other persons engaging in the described

transactions.

DATES: Written comments and requests

for a hearing must be received by the

Department on or before May 8, 1995.

ADDRESSES: All written comments and

requests for a public hearing (preferably

3 copies) should be sent to: Pension and

Welfare Benefits Administration, Office

of Exemption Determinations, Room N–

5649, 200 Constitution Avenue, NW,

Washington, DC 20210, Attention:

CIEBA Class Exemption Proposal. The

application for exemption (Application

Number D–9602), as well as all

comments received from interested

persons, will be available for public

inspection in the Public Documents

Room, Pension and Welfare Benefits

Administration, U.S. Department of

Labor, Room N–5638, 200 Constitution

Avenue, NW, Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT:

Virginia J. Miller, Office of Exemption

Determinations, Pension and Welfare

Benefits Administration, U.S.

Department of Labor, Washington, DC

20210 (202) 219–8971 (not a toll-free

number); or Paul D. Mannina, Plan

Benefits Security Division, Office of the

Solicitor, U.S. Department of Labor,

Washington, DC 20210 (202) 219–9141

(not a toll free number.)

SUPPLEMENTARY INFORMATION: This

document contains a notice of pendency

before the Department of a proposed

class exemption from certain of the

restrictions of sections 406 and 407(a) of

ERISA and from certain taxes imposed

by section 4975(a) and (b) of the Code,

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

Code. The proposed exemption was

requested in an application dated

December 16, 1993, submitted by the

Committee on Investment of Employee

Benefits Assets (CIEBA) 1 pursuant to

section 408(a) of ERISA and section

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

accordance with the procedures set

forth in 29 CFR section 2570 subpart B

(55 FR 32836, August 10, 1990).2

I. Background

On March 13, 1984, the Department

granted Prohibited Transaction

Exemption 84–14 (PTE 84–14) (49 FR

9494), a class exemption which permits

various parties who are related to

employee benefit plans to engage in

transactions involving plan assets if,

among other conditions, the assets are

managed by a ‘‘qualified professional

asset manager’’ (QPAM), which is

independent of the parties in interest

and which meets specified financial

standards. Additional exemptive relief

is provided for employers to furnish

limited amounts of goods and services

in the ordinary course of business.

Limited relief is also provided for leases

of office or commercial space between

managed funds and QPAMs or

contributing employers.

The QPAM exemption was proposed

by the Department on its own motion in

an effort to give institutional managers

greater flexibility to engage in a variety

of beneficial transactions which would

otherwise have been prohibited by

ERISA, without sacrificing the interests

of plan participants and beneficiaries. In

its proposal for the QPAM exemption,

the Department noted its belief that, as

a general matter, transactions entered

into on behalf of plans with parties in

interest are most likely to conform to

ERISA’s general fiduciary standards

where the decision to enter into the

transaction is made by an independent

fiduciary. Thus, the relief contained in

the QPAM exemption was predicated

upon the existence of a professional

asset manager who is solely responsible

for the discretionary management of

plan assets that are transferred to its

control.

The QPAM exemption did not

provide relief for transactions involving

the assets of plans managed by in-house

asset managers. Nonetheless, in granting

the QPAM exemption, the Department

noted that the grant of the QPAM

exemption did not foreclose future

consideration of additional exemptive

relief for transactions involving plan

assets that are not managed by

‘‘QPAMs’’ or for transactions which do

not meet all of the conditions of PTE

84–14. The Department further stated

that it would consider pursuing

additional exemptive relief for

transactions involving assets of plans

managed by in-house managers if the

requisite findings under section 408(a)

could be made.

CIEBA, in its application, has

requested exemptive relief for in-house

managers similar to that available to

outside managers under the QPAM

exemption. CIEBA represents that inhouse managers encounter technical

problems under the prohibited

transaction rules of ERISA in the course

of considering arm’s-length transactions

that would be in the interests of their

plans. The applicant believes that the

narrowly focused relief requested,

combined with the conditions and

restrictions built into the exemption,
15598 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices

3 40 FR 50845 (October 31, 1975)

4The Department is expressing no opinion as to

whether the above-described transaction would

come within the scope of relief provided by PTE

84–14.

should resolve the most common

problems faced by CIEBA members

while being protective of the interests of

plan participants and beneficiaries.

II. Discussion of the Application

A. Summary of Facts and

Representations

The application contains facts and

representations with regard to the

requested exemption which are

summarized below. Interested persons

are referred to the application on file

with the Department for the complete

representations of the applicant.

The applicant represents that many

transactions that have little if any

potential for abuse of the plan constitute

technical prohibited transactions as a

result of the breadth of the rules under

section 406(a) and the definition of

party in interest. The applicant states

that the problem results largely from the

inclusion of all persons providing

services to a plan in the definition of a

party in interest, under section 3(14)(B)

of ERISA, as well as persons owning a

10% or more interest in such service

providers, under section 3(14)(H) or (I).

For example, a broker-dealer who has an

ongoing relationship with a plan

through its securities brokerage business

may be prohibited from selling debt

securities issued by itself or its parent

organization to the plan, or otherwise

from selling property to the plan (other

than securities, which meet the

requirements of PTE 75–1).3 Similarly,

CIEBA represents that a bank which

provides trustee or custodial services to

a plan may not be able to engage in any

sale or credit transactions with that

plan.

CIEBA states that INHAMs have

become an established part of many

large companies which manage some or

all of their plan assets in-house.

According to the applicant, many of the

large corporations that make up its

membership maintain one or more

employee benefit plans holding in the

aggregate assets in excess of $250

million. These large corporations have

determined that they can reduce costs

and maintain high quality management

by developing an in-house asset

management capability rather than

relying exclusively on outside managers

or consultants. It is represented that, in

addition to providing reduced costs for

comparable or better quality

management, in-house managers are

attractive to employers because they

devote their time solely to the plan’s

asset management activities, while

outside managers have other clients and

responsibilities. The applicant also

asserts that the named plan fiduciaries

benefit from having access to in-house

expertise and advice to assist them in

carrying out their fiduciary

responsibilities.

The applicant represents that the inhouse management of plan assets can

take several forms. The in-house

manager may be a direct or indirect

subsidiary of an employer with respect

to a plan. Alternatively, the

management of the assets may be

performed by a division or group within

the employer’s corporate structure that

reports to the employer’s treasurer or

senior financial officer. In some

instances, the in-house manager is

established as a separate membership

non-profit corporation, with the

majority of the members being officers

or directors of the employer. According

to the applicant, the in-house manager

has direct management responsibility

over at least part of the assets, and

usually also advises a higher-level

investment committee of the employer

or other named fiduciary of the plan

with respect to asset allocation and the

selection and monitoring of outside

managers.

The applicant states that the in-house

manager’s operations are monitored by

a plan fiduciary, which may be a senior

management employee, a committee

made up of, or appointed by, the plan

sponsor’s board of directors, or a person

otherwise appointed by the board or the

named fiduciary of the plan. The

fiduciary monitors the in-house

manager’s performance and sets

investment guidelines and objectives for

the sponsor’s plans. The investment

guidelines promulgated by the fiduciary

generally describe the overall

investment strategy and objectives for

the plan, any criteria for investment in

certain asset classes, and what level of

approvals, if any, are required for

particular investments.

CIEBA represents that, unless the

Department provides broad exemptive

relief for in-house asset managers, plans

will be disadvantaged because of the

restrictions on the types of transactions

an in-house manager can engage in on

behalf of a plan. The applicant explains

that, with very large plans, there may be

thousands of parties in interest, so that

many transactions may be prohibited.

The task of determining whether a

particular transaction is prohibited can

present a considerable burden for plan

fiduciaries. According to the applicant,

if the in-house manager wishes to enter

into a transaction which he or she

believes would be beneficial to the plan

but which also involves a party in

interest, that manager must either (1)

seek an individual prohibited

transaction exemption; (2) retain a

QPAM for the transaction; or (3) forgo

the transaction. The applicant argues

that seeking an individual exemption

involves time and legal expenses. In

addition, the applicant notes that the

use of a QPAM entails additional

expenses for the plan despite the fact

that the in-house manager has already

done most of the work required for the

transaction, including performing the

necessary due diligence as to, for

example, the creditworthiness of the

other parties to the transaction.4 Finally,

the applicant argues that forgoing the

transaction may cause the plan to miss

out on a beneficial investment

opportunity. Thus, CIEBA argues that an

INHAM class exemption is necessary

because the existing limitations on a

plan’s investment choices can raise a

plan’s investment costs in the short run

by limiting the parties with whom it

may deal, and adversely affect

investment performance in the long run.

Accordingly, CIEBA requests relief for

three general categories of transactions

which are more fully described below.

B. Description of the Requested

Exemption

1. The INHAM Concept

Under the requested exemption, an

INHAM would be defined as either (1)

a direct or indirect wholly-owned

subsidiary of an employer with respect

to a plan, or a direct or indirect whollyowned subsidiary of a parent

organization of the employer, or (2) a

membership nonprofit corporation, a

majority of whose members are officers

or directors of the employer or a parent

organization. In addition, the INHAM

would have to be registered as an

investment adviser under the

Investment Advisers Act of 1940. Under

the applicant’s proposed definition, the

employer with which the INHAM is

affiliated must be a plan sponsor (or

group of related plan sponsors) whose

plan or plans hold in the aggregate

assets of at least $250 million of which

at least $50 million of such assets must

be under the direct management and

responsibility of the INHAM.

2. Transactions With Service Providers

The applicant requests broad relief for

transactions between a plan managed by

an INHAM and a person who is a party

in interest with respect to the plan

solely by reason of providing services to

the plan or solely by reason of a
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices 15599

5 In this regard, see section I(b) of PTE 84–14,

which contains the identical requirement.

6 29 CFR § 2550.408b-2(a) of the Department’s

regulations provides that section 408(b)(2) does not

contain an exemption for an act described in

section 406(b) even if such act occurs in connection

with a provision of services which is exempt under

section 408(b)(2). However, regulation section 29

CFR 2550.408(b)-2(e)(3) provides that if a fiduciary

furnishes services to a plan without the receipt of

compensation or other consideration (other than

reimbursement of direct expenses properly and

actually incurred in the performance of such

services within the meaning of § 2550.408c-2(b)(3)),

the provision of such services does not, in and of

itself, constitute an act described in section 406(b)

of the Act.

7The definition of ‘‘qualifying employer real

property’’ under ERISA section 407(d)(4) requires,

in part, that a substantial number of leased parcels

be geographically dispersed.

8CIEBA also suggests that this exemption be

subject to the requirement that the real property

Continued

relationship to such service provider.

The applicant notes that the broad relief

requested is similar to the general

exemption in PTE 84–14, but is more

restrictive in that it is only available for

transactions with service providers.

Among the conditions suggested by the

applicant is a requirement that the party

in interest not be the INHAM or a

person related to the INHAM. A party in

interest and an INHAM would be

considered related under the requested

exemption if either entity owns a 5% or

more interest, directly or indirectly, in

the other entity.

In addition, the terms of the

transaction would have to be negotiated

by the INHAM on behalf of the plan,

and the INHAM would have to make the

decision to enter into the transaction.

Notwithstanding the foregoing, the

applicant requests that the proposed

exemption permit the plan sponsor to

retain approval or veto power over large

transactions since these types of

transactions are customarily subject to

increased scrutiny by the plan sponsor.

The applicant explains that the higher

levels of review are generally conducted

by an investment committee or other

named fiduciary. The applicant further

represents that the requirement that the

INHAM negotiate and decide upon the

transaction is not affected by any such

higher levels of review.

The applicant also proposes that the

exemption not provide relief for

transactions described in three class

exemptions previously granted by the

Department: PTE 81–6 (46 FR 7527, 1/

23/81) (relating to securities lending

arrangements); PTE 83–1 (48 FR 895, 1/

7/83) (relating to acquisitions by plans

of interests in mortgage pools); or PTE

88–59 (53 FR 24811, 6/30/88) (relating

to certain mortgage financing

arrangements).5 Lastly, CIEBA has

suggested, as an additional condition,

the requirement that the INHAM

undergo an annual fiduciary audit to

determine whether the written

procedures adopted by the INHAM are

adequate to assure compliance with the

terms and conditions of the exemption.

The applicant represents that, by

requiring a party independent of the

employer to be involved in overseeing

compliance with the exemption, the

fiduciary audit would serve as a

meaningful additional independent

safeguard while not unduly interfering

with the INHAM’s investment

decisions.

The applicant asserts that plans

would be adequately protected under

the proposal because the INHAMs

would be independent of and unrelated

to the service providers with whom they

are dealing. In addition, the proposed

definition of INHAM is designed to

assure that the INHAM is in the

business of investment management

and, thus, in a position to develop

experience and sophistication in dealing

with investment issues. The registration

of the INHAM as an investment adviser

assures that the INHAM is subject to

regulation under the Investment

Advisers Act of 1940 and oversight by

the Securities and Exchange

Commission. The applicant represents

that the standards proposed for the

INHAM limit relief to only those

employers whose managers have

sufficient resources to assure knowledge

and sophistication in financial and

business matters.

3. Specific Exemptions for Employers

CIEBA represents that, where a plan

is sponsored by a company that is a

producer of goods such as appliances or

equipment, the plan may not be able to

purchase the appliances or equipment

for its own use, even at cost, because the

purchase could be a prohibited

transaction. Similarly, the plan sponsor

may provide services in the ordinary

course of its business to consumers,

such as utility services or maintenance

and support services for goods or

equipment sold. The applicant notes

that, while section 408(b)(2) provides a

statutory exemption for the provision of

services to a plan by a party in interest,

including an employer, that statutory

exemption appears to limit the

sponsor’s compensation for the

provision of services to its ‘‘direct

costs’’.6 CIEBA argues that, for many

types of services, it may be difficult as

a practical matter to determine what the

‘‘direct costs’’ of these services would

be, or the particular division or

subsidiary of the sponsor may not be

willing to provide the services at direct

cost because it would not be economical

to do so. In addition, with services such

as utilities, the company providing the

service may not necessarily know

whether the transaction involves a plan

asset.

Thus, CIEBA requests an exemption

which would permit the sale, leasing or

servicing of goods, or the furnishing of

services, to a plan by an employer or its

affiliate. All covered transactions would

be subject to a number of conditions,

including the requirement that the

transactions must take place in the

ordinary course of a business engaged in

by the employer or its affiliate with the

general public on terms no less

favorable than those available to the

general public. As a further limitation,

transactions engaged in under this

exemption could not exceed 1% of the

employer’s or affiliate’s annual gross

receipts received from all sources for its

prior taxable year.

CIEBA also requests relief for the

leasing of office or commercial space to

employers. The applicant represents

that the statutory exemption under

section 408(e) of ERISA, for the

acquisition and leasing of ‘‘qualifying

employer real property’’, may not

exempt the lease of a single parcel of

property to an employer or affiliate by

a plan.7 This lack of exemptive relief

has resulted in inadvertent prohibited

transactions where a plan not holding

any other employer real property

unexpectedly acquires property in

which an employer or an affiliate is a

tenant, such as upon foreclosure. The

applicant explains that the foreclosure

may be necessary to avoid the complete

loss of the plan’s investment, and the

plan fiduciaries are unlikely to be aware

of the identities of the tenants until after

the foreclosure occurs. CIEBA states that

the Congressional concerns underlying

the requirement that a substantial

number of parcels be dispersed

geographically are not present where

only a small portion of a single parcel

is leased by a plan to its employer.

Under the requested exemption for

the leasing of office or commercial space

to an employer or affiliate, all the

conditions otherwise applicable under

ERISA section 408(e) would have to be

met, including the requirements that the

lease be for adequate consideration, that

no commission be charged, and that the

investment comply with the 10%

limitation contained in section 407(a)

with respect to the lease or acquisition

of qualifying employer real property by

plans other than eligible individual

account plans.8 As a further limitation,
15600 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices

leased to the employer be suitable or adaptable,

without excessive cost, for more than one use. In

this regard, see section 407(d)(4), which contains a

similar requirement.

9See PTE 84–14, 49 FR 9494 (March 13, 1984)

and PTE 91–38, 56 FR 31966 (July 12, 1991).

10The applicant notes that, with the constantly

changing nature of the financial markets, managers

seek to invest in new areas to (a) increase

investment return, (b) diversify investment

portfolios, and (c) better manage investment risk. In

this regard, the Department wishes to note that

ERISA’s general standards of fiduciary conduct

would apply to new areas of investment permitted

by this proposed exemption, and that satisfaction of

the conditions of this proposal should not be

viewed as an endorsement of any particular

investment by the Department. Section 404 of

ERISA requires, among other things, that a fiduciary

discharge his duties with respect to a plan solely

in the interest of the plan’s participants and

beneficiaries and in a prudent fashion. Accordingly,

the manager or other plan fiduciary must act

prudently with respect to the decision to enter into

an investment transaction, as well as to the

negotiation of the specific terms under which the

plan will engage in such transaction. The

Department further emphasizes that it expects a

manager or other plan fiduciary to fully understand

the benefits and risks associated with engaging in

a specific transaction, following disclosure to such

fiduciary of all relevant information. In addition,

such manager or plan fiduciary must be capable of

periodically monitoring the investment, including

any changes in the value of the investment and the

creditworthiness of the issuer or other party to the

transaction. Thus, in considering whether to enter

into a transaction, a fiduciary should take into

account its ability to provide adequate oversight of

the particular investment.

the amount of space covered by the

lease could not exceed 15% of the

rentable space of the property.

The applicant also requests relief for

the leasing of residential space owned

by a plan to an employee of an employer

any of whose employees are covered by

such plan, or to an employee of a 50%

or more parent or subsidiary of the

employer, provided that the amount of

space covered by the lease does not

exceed 10 percent of the rentable space

of the residential property and the

employee does not have or exercise any

authority with respect to the lease

transaction. The applicant represents

that this type of relief is necessary

because the property manager who

manages the property for the plan is

unlikely to be aware of any relationship

between the tenants and the plan

sponsor and the employees are unlikely

to be aware that the property is owned

by the plan.

The applicant further notes that a

plan could inadvertently engage in

prohibited transactions with employees

of the employer through investments in

portfolios of consumer receivables. For

example, a plan may purchase an

interest in a pool of credit card

receivables or mortgages, where the

receivables or mortgages may include

obligations of officers, directors or

employees who are parties in interest

under ERISA section 3(14)(H). The

applicant represents that the plan

fiduciary is unlikely to be aware of the

identities of the individual obligors who

have some interest in the pool, and even

if the fiduciary is aware of the identities,

it is unlikely to be aware of the

relationship, if any, that these obligors

have to the investing plan. In addition,

the applicant explains that obligations

of parties in interest may be added to

the portfolio subsequent to the plan’s

investment, an event over which the

plan would not have any control.

Accordingly, the applicant requests a

limited exemption for the acquisition,

holding or disposition by the plan of an

interest in a consumer receivables

portfolio, where a borrower whose

obligation is part of the portfolio is a

party in interest solely by reason of

being an employee, officer, director, or

10% or more shareholder, partner or

joint venturer with respect to either the

employer, an employee organization

whose members are covered by the plan,

or a 50% or more parent or subsidiary

of the employer.

4. Places of Public Accommodation

The applicant represents that, if a

plan owns a hotel that is part of the

property managed by an INHAM, a

prohibited transaction may occur if a

party in interest stays at that hotel. This

would be the case even though the hotel

is likely to be operated by persons who

are unaware of the party in interest

relationship. CIEBA notes that there is

little likelihood of abuse in these types

of transactions since the persons

managing the hotels and motels are

generally management companies that

would not be aware of the party in

interest relationship. In addition, the

applicant notes that the Department has

granted similar relief in several class

and individual exemptions.9

Accordingly, CIEBA requests relief for

the furnishing of services, facilities and

incidental goods to a party in interest by

a place of public accommodation, such

as a hotel or motel owned by a plan

managed by an INHAM if the services,

facilities and incidental goods are

furnished on a comparable basis to the

general public.

III. The Proposed Exemption

The proposed exemption consists of

four separate parts. Part I sets forth the

general exemption and enumerates

certain conditions applicable to the

transactions described therein. Parts II

and III of the proposal set forth specific

exemptions. Part IV contains definitions

for certain terms used in the proposed

exemption.

A. The INHAM Concept

As proposed, the class exemption

would be available for various party in

interest transactions that involve those

assets of a plan that are managed by an

INHAM. The Department has

determined to adopt the definition of

INHAM proposed by the applicant.

Accordingly, an INHAM is defined as

either (1) a wholly-owned subsidiary of

an employer with respect to a plan, or

a wholly- owned subsidiary of a parent

organization of the employer, or (2) a

membership nonprofit corporation, a

majority of whose members are officers

or directors of the employer or parent

organization. The definition also

requires the INHAM to be registered as

an investment adviser under the

Investment Advisers Act of 1940.

Finally, the employer with which the

INHAM is affiliated must be a plan

sponsor (or group of related plan

sponsors) whose plan or plans hold in

the aggregate assets of at least $250

million, $50 million of which is under

the direct management and control of

the INHAM. The Department believes

that these standards will help to ensure

that the INHAM is an entity that has

developed an appropriate level of

expertise in financial and business

matters.

B. General Exemption

The general exemption, set forth in

Part I, would allow that portion of a

plan which is managed by an INHAM to

engage in all transactions described in

section 406(a)(1)(A) through (D) with

virtually all party in interest service

providers except the INHAM or a person

related to the INHAM.10 As proposed,

this exemption does not extend to

transactions which would give rise to

violations of section 406(b) of ERISA.

Generally, the relief for service

providers proposed herein is based

upon that requested by the applicant.

However, the Department has modified

CIEBA’s request in several respects, as

more fully described below.

In general, section I(a) of the proposal

requires that the INHAM function as the

decision maker for the plan in all

covered transactions. Specifically,

section I(a) requires that the terms of the

transaction be negotiated by, or under

the authority and general direction of,

the INHAM and that the INHAM make

the decision to enter into the

transaction. Under the proposal,

however, the exemption would not be

unavailable merely because the plan

sponsor retains the right to veto or

approve transactions involving amounts
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices 15601

in excess of $5 million, which have

been negotiated on behalf of the plan by

the INHAM. In this regard, the

Department notes that section I(a) of the

proposal would allow the retention of a

veto or approval power by the plan

sponsor under circumstances where the

INHAM negotiated an investment

transaction which obligates the plan to

make a number of payments which, in

the aggregate, exceed $5 million. Thus,

for example, section I(a) would be

deemed met, despite the retention of a

veto or approval power by the

sponsoring employer, if a plan is

required, as part of an investment in a

real estate limited partnership

negotiated by the INHAM, to make three

capital contributions to such

partnership totalling $6 million over a

pre-determined period. In this regard,

the Department cautions that Part I

would not be available for any

transaction that is negotiated by an

employer which sponsors a plan, and is

then subsequently presented to an

INHAM for approval.

Under section I(b) of the proposal, no

relief is provided for those transactions

described in Prohibited Transaction

Exemptions 81–6, 83–1 and 88–59.

Section I(c) of the proposed

exemption excludes from relief any

transaction which is part of an

agreement, arrangement or

understanding designed to benefit a

party in interest. Section I(d) requires

that the terms of each transaction must

be at least as favorable to the plan as the

terms generally available in arm’s length

transactions between unrelated parties.

Moreover, under section I(e), an INHAM

could not enter into transactions with a

party in interest who has discretionary

authority or control with respect to the

assets involved in the transaction or

otherwise renders investment advice

with respect to such assets. In addition,

section I(f) provides that the general

exemption would not be available if the

INHAM and the party in interest dealing

with the plan are related parties. Section

IV(d) generally provides that a party in

interest and an INHAM would be

‘‘related’’ if either entity owns a five

percent or more interest, directly or

indirectly, in the other entity.

PTE 84–14 was developed and

granted based on the premise that broad

relief from the prohibitions of section

406(a) of ERISA could be afforded to a

broad range of transactions if the

investment of plan assets and the

negotiations leading thereto are the sole

responsibility of an independent

manager. In addressing this lack of

independence of the INHAM under the

requested exemption, CIEBA has

suggested that any exemption proposed

by the Department be conditioned upon

a requirement that an independent

auditor conduct an annual fiduciary

audit to determine whether the written

procedures adopted by the INHAM are

designed to assure compliance with the

conditions of the exemption. The

Department has adopted CIEBA’s

suggestion under section I(g) of the

proposal. The term ‘‘fiduciary audit’’ is

defined in section IV(f) of the proposal

as including: (1) a determination by the

auditor as to whether or not the plan has

developed adequate internal policies

and procedures to assure compliance

with the terms of the exemption; (2) a

test of a representative sample of the

plan’s transactions to determine

operational compliance with such

policies and procedures; and (3) a

determination as to whether or not the

INHAM meets the definition of INHAM

set forth in the exemption.

The following examples illustrate the

types of transactions which would be

covered by Part I of the proposed

exemption:

(1) Corporation C designates INHAM

X to manage a portion of Plan P’s assets.

Assume that X meets the criteria for an

INHAM that are proposed. X uses Plan

P assets to purchase a building from Y,

a wholly-owned subsidiary of a brokerdealer that provides services to the Plan.

Absent this proposed exemption, the

purchase of the building from Y, a party

in interest described in ERISA section

3(14)(G), would violate the restrictions

contained in section 406(a)(1)(A), and

the transaction could not proceed until

exempted by the Department. The

general exemption set forth in Part I

would allow such transaction if the

conditions contained therein are met.

(2) INHAM X invests part of a pension

fund’s assets to acquire a parcel of

unimproved real property from the

president of the employer sponsoring

the Plan. Part I does not provide an

exemption for the purchase of the

property since relief is limited under

that Part to transactions with service

providers and their affiliates. In

addition, no relief would be provided

under the proposal for the act of selfdealing described in section 406(b)(1)

arising in connection with X’s use of the

fund’s assets in a transaction which

benefits a person in whom X has an

interest which may affect the exercise of

its best judgement as a fiduciary.

(3) Corporation C is the named

fiduciary of Plan P. C chooses INHAM

X to manage the portion of P’s assets

allocated for real estate investments. X,

using its discretionary authority, locates

and negotiates the purchase for $6

million of a commercial building in

New York that is being offered for sale

by Corporation Z. Z provides accounting

services to Plan P. Pursuant to its

arrangement with C, X is required to

seek the approval of C for all real estate

transactions involving amounts in

excess of $5 million. On the basis of X’s

recommendation, C approves the

transaction. Despite the retention of

approval power by C, Part I of the

proposal would be available for the

purchase of the building provided there

is no arrangement with C that requires

X to buy the building from Z and the

conditions of Part I are otherwise met.

(4) Corporation C allocates part of the

assets of its Plan P to a master trust

managed by INHAM X. X uses master

trust assets to purchase an office

building which is subsequently leased

to M. M provides administrative

services to Plan P. During the term of

the lease, M becomes a wholly-owned

subsidiary of Corporation C. Although

M is no longer a party in interest with

respect to Plan P solely by reason of

providing services to such Plan, Part I

will continue to be available for the

entire lease term since, at the time the

transaction was entered into (as defined

in section in IV(e)), M was not affiliated

with the plan sponsor and its

relationship to Plan P was solely that of

a service provider.

(5) INHAM X retains Broker-Dealer B

to provide brokerage services to Plan P.

In a separate transaction, X uses Plan P

assets to purchase corporate bonds

directly from B. The bonds were

originally issued by Corporation Z, an

investment manager for a portion of the

Plan’s assets that are not controlled by

INHAM X. Since the Department

expects that, as part of its fiduciary

responsibilities, the INHAM would have

analyzed the terms of the bonds prior to

purchase, the relief provided by Part I

could extend to both the acquisition of

the bonds and the underlying extension

of credit. Thus, Part I could cover a

subsidiary transaction with a party in

interest if such transaction is itself

subject to relief under the proposal and

the applicable conditions are otherwise

met.

C. Specific Exemptions for Employers

Part II of the proposed exemption

provides limited relief under both

sections 406(a) and (b) of ERISA for

certain transactions involving

employers and their affiliates who

cannot qualify for the general exemption

provided by Part I.

In this regard, the Department has not

proposed the broad relief requested by

the applicant for transactions with

employers and their affiliates. The

Department does not believe that it has

sufficient information at this time to
15602 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices

make the broad findings necessary

under section 408(a) of ERISA to

propose exemptive relief with respect to

transactions that may inure to the direct

or indirect benefit of an employer.

Nonetheless, the Department believes

that it is appropriate to propose more

limited relief under circumstances

where the potential for the exercise of

undue influence that would benefit an

employer is more remote. However, the

Department wishes to take the

opportunity to note that its

determination not to propose the broad

relief requested does not foreclose

future consideration of additional

exemptive relief for transactions

involving plan assets that are managed

by INHAMS.

Part II is divided into two subparts.

Section II(a) provides limited relief for

the leasing of office or commercial space

by a plan to an employer if the plan

acquired the property subject to an

outstanding lease with an employer or

affiliate as a result of foreclosure on a

mortgage or deed of trust. As a

limitation, the exemption is effective

until the expiration of the lease term

and any renewal that does not require

the consent of the plan. Section II(a) of

the proposed exemption further requires

that the decision to foreclose on the

mortgage or deed of trust be made by the

INHAM as part of the exercise of its

discretionary authority, and that the

unit of space under the lease does not

exceed 15 percent of the rentable space

of the office building or commercial

center. The availability of relief is

further conditioned upon the

requirement that the transaction satisfy

the conditions of sections I(c) and I(g) of

the proposed exemption.

The application of section II(a) is

illustrated by the following example:

(6) INHAM X is responsible for

managing Plan P’s assets and uses a

portion of the assets to provide

financing for Developer D’s acquisition

of an office building. Plan P’s loan to D

is secured by a first mortgage on the

office building. Subsequently, D

defaults on the loan and Plan P

forecloses on its mortgage on the

property. Upon assuming ownership of

the office building, X discovers that a

tenant in the building is Corporation Z,

a wholly-owned subsidiary of the plan

sponsor. Although the relief afforded by

Part I of the proposed exemption would

not be available to Corporation Z

because it is ‘‘related’’ to the INHAM,

Part II(a) of the proposal is available for

the entire lease term if the conditions of

Part II(a) are otherwise met.

Section II(b) would permit a plan to

lease residential space to an employee

of an employer any of whose employees

are covered by such plan, or to any

employee of a 50% or more parent or

subsidiary of the employer. However, no

relief is available under this exemption

for officers, directors, and 10 percent or

more shareholders of the employer or an

affiliate of such employer, or for any

employees who have or exercise any

discretionary authority with respect to

the assets involved in the lease

transaction. As a further limitation, the

proposal requires that the unit of space

leased to an employee does not exceed

5% of the rentable space of the

residential property and that the total

amount of space leased to all employees

of the employer, or affiliates not exceed

10% of the rentable space of the

residential property. The Department

believes that requiring a significant

number of unrelated lessees will help to

ensure that the terms of the lease(s) are

no more favorable to the employee(s)

than the terms available to other

unrelated lessees of the residential

property owned by the plan.

The availability of relief under this

section is further conditioned on the

requirement that the transactions satisfy

the provisions of sections I(b), I(c), I(d)

and I(g) of the proposed exemption.

The application of section II(b) is

illustrated by the following example:

(7) Inham X is responsible for

managing Plan P’s assets and invests a

portion of the assets in a new garden

apartment complex comprised of 25 one

bedroom apartments. Three employees

of Corporation C, Plan P’s sponsor, each

rent 1 of the apartments from Plan P.

Assume that none of the employees is

an officer, director, or 10% or more

shareholder of Corporation C or an

affiliate, or has discretionary authority

or renders investment advice with

respect to the assets involved in the

lease transactions. The proposed

exemption under section II(b) would not

be available for these lease transactions

because, although each lease represents

less than 5% of the rentable space of the

residential property, the aggregate

amount of space leased to employees of

Corporation C exceeds 10% of the

rentable space of the property.

D. Places of Public Accommodation

The Department is proposing an

exemption, set forth in Part III, that

would provide relief from sections

406(a)(1)(A) through (D) and 406(b)(1)

and (b)(2) of ERISA for the furnishing of

services, facilities and any goods

incidental thereto by a place of

accommodation owned by a plan

managed by an INHAM to a party in

interest with respect to the plan, if the

services, facilities or incidental goods

are furnished on a comparable basis to

the general public.

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 section 4975(c)(2)

of the Code does not relieve a fiduciary

or other party in interest or disqualified

person from certain other provisions of

the Act and 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 require, among other things, that

a fiduciary discharge his duties

respecting the plan solely in the

interests 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 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 the

participants and beneficiaries;

(3) If granted, the proposed class

exemption will be applicable to a

particular transaction only if the

transaction satisfies the conditions

specified in the class exemption; and

(4) The proposed exemption, if

granted, will be supplemental to, and

not in derogation of, any other

provisions of the Code and Act,

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 proposed exemption to

the address and 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 proposed exemption. Comments

received will be available for public

inspection with the application for
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices 15603

exemption at the address set forth

above.

Proposed Exemption

The Department has under

consideration the grant of the following

class 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).

Part I—Basic Exemption

Effective [date of publication of final

class exemption], the restrictions of

section 406(a)(1) (A) through (D) of the

Act and the taxes imposed by Code

section 4975 (a) and (b) of the Code, by

reason of 4975(c)(1) (A) through (D),

shall not apply to a transaction between

a party in interest with respect to a plan

and such plan, provided that an inhouse asset manager (INHAM) (as

defined in section IV(a)) has

discretionary authority or control with

respect to the plan assets involved in

the transaction and the following

conditions are satisfied:

(a) The terms of the transaction are

negotiated on behalf of the plan by, or

under the authority and general

direction of, the INHAM, and either the

INHAM, or (so long as the INHAM

retains full fiduciary responsibility with

respect to the transaction) a property

manager acting in accordance with

written guidelines established and

administered by the INHAM, makes the

decision on behalf of the plan to enter

into the transaction. Notwithstanding

the foregoing, a transaction involving an

amount in excess of $5,000,000, which

has been negotiated on behalf of the

plan by the INHAM will not fail to meet

the requirements of this section I(a)

solely because the plan sponsor or its

designee retains the right to veto or

approve such transaction;

(b) The transaction is not described

in—

(1) Prohibited Transaction Exemption

81–6 (46 FR 7527; January 23, 1981)

(relating to securities lending

arrangements),

(2) Prohibited Transaction Exemption

83–1 (48 FR 895; January 7, 1983)

(relating to acquisitions by plans of

interests in mortgage pools), or

(3) Prohibited Transaction Exemption

88–59 (53 FR 24811; June 30, 1988)

(relating to certain mortgage financing

arrangements);

(c) The transaction is not part of an

agreement, arrangement or

understanding designed to benefit a

party in interest;

(d) At the time the transaction is

entered into, and at the time of any

subsequent renewal or modification

thereof that requires the consent of the

INHAM, the terms of the transaction are

at least as favorable to the plan as the

terms generally available in arm’s length

transactions between unrelated parties;

(e) The party in interest dealing with

the plan: (1) is a party in interest with

respect to the plan (including a

fiduciary) solely by reason of providing

services to the plan, or solely by reason

of a relationship to a service provider

described in section 3(14)(F), (G), (H), or

(I) of ERISA; and (2) does not have

discretionary authority or control with

respect to the investment of the plan

assets involved in the transaction and

does not render investment advice

(within the meaning of 29 CFR 2510.3–

21(c)) with respect to those assets;

(f) The party in interest dealing with

the plan is neither the INHAM nor a

person related to the INHAM (within

the meaning of section IV(d)); and

(g) An independent auditor, who has

appropriate technical training and

proficiency with ERISA’s fiduciary

responsibility provisions and so

represents in writing, conducts a

fiduciary audit (as defined in section

IV(f)) on an annual basis to determine

whether the written procedures adopted

by the INHAM are designed to operate

in a manner which assures compliance

with the conditions of the exemption.

Following completion of the fiduciary

audit, the auditor shall issue a written

report to the plan presenting its specific

findings regarding the design of such

procedures and the level of compliance

with the procedures.

Part II—Specific Exemptions

Effective [date of publication of final

class exemption], the restrictions of

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

407(a) of the Act and the taxes imposed

by section 4975 (a) and (b) of the Code,

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

through (E), shall not apply to:

(a) The leasing of office or commercial

space owned by a plan managed by an

INHAM to an employer any of whose

employees are covered by the plan or an

affiliate of such an employer (as defined

in section 407(d)(7) of the Act), if—

(1) The plan acquires the office or

commercial space subject to an existing

lease with an employer, or its affiliate as

a result of foreclosure on a mortgage or

deed of trust;

(2) The INHAM makes the decision on

behalf of the plan to foreclose on the

mortgage or deed of trust as part of the

exercise of its discretionary authority;

(3) The exemption provided for

transactions engaged in with a plan

pursuant to section II(a) is effective until

the later of the expiration of the lease

term or any renewal thereof which does

not require the consent of the plan

lessor;

(4) The amount of space covered by

the lease does not exceed fifteen (15)

percent of the rentable space of the

office building or the commercial

center; and

(5) The requirements of sections I(c)

and I(g) are satisfied with respect to the

transaction.

(b) The leasing of residential space by

a plan to a party in interest if—

(1) The party in interest leasing space

from the plan is an employee of an

employer any of whose employees are

covered by the plan or an employee of

an affiliate of such employer (as defined

in section 407(d)(7) of the Act);

(2) The employee who is leasing space

does not have any discretionary

authority or control with respect to the

investment of the assets involved in the

lease transaction and does not render

investment advice (within the meaning

of 29 CFR 2510.3- 21(c)) with respect to

those assets;

(3) The employee who is leasing space

is not an officer, director, or a 10% or

more shareholder of the employer or an

affiliate of such employer;

(4) At the time the transaction is

entered into, and at the time of any

subsequent renewal or modification

thereof that requires the consent of the

INHAM, the terms of the transaction are

not less favorable to the plan than the

terms afforded by the plan to other,

unrelated lessees in comparable arm’s

length transactions;

(5) The amount of space covered by

the lease does not exceed five percent

(5%) of the rentable space of the

apartment building or multi-unit

residential subdivision [townhouses or

garden apartments], and the aggregate

amount of space leased to all employees

of the employer or an affiliate of such

employer does not exceed ten percent

(10%) of such rentable space; and

(6) The requirements of sections I(a),

I(c), I(d) and I(g) are satisfied with

respect to the transaction.

Part III—Places of Public

Accommodation

Effective [date of publication of final

class exemption], the restrictions of

section 406(a)(1)(A) through (D) and

406(b)(1) and (2) of ERISA and the taxes

imposed by Code section 4975(a) and

(b), by reason of Code section

4975(c)(1)(A) through (E), shall not

apply to the furnishing of services and

facilities (and goods incidental thereto)

by a place of public accommodation

owned by a plan and managed by an

INHAM to a party in interest with

respect to the plan, if the services and
15604 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Notices

facilities (and incidental goods) are

furnished on a comparable basis to the

general public.

Part IV—Definitions

For the purposes of this exemption:

(a) The term ‘‘in-house asset manager’’

or ‘‘INHAM’’ means an organization

which is—

(1) either (A) a direct or indirect

wholly-owned subsidiary of an

employer, or a direct or indirect whollyowned subsidiary of a parent

organization of such an employer, or (B)

a membership nonprofit corporation a

majority of whose members are officers

or directors of such an employer or

parent organization; and

(2) an investment adviser registered

under the Investment Advisers Act of

1940 that, as of the last day of its most

recent fiscal year, has under its

management and control total assets

attributable to plans maintained by

affiliates of the INHAM (as defined in

section IV(b)) in excess of $50 million;

Provided that plans maintained by

such affiliates of the INHAM have, as of

the last day of each plan’s reporting

year, aggregate assets of at least $250

million.

(b) For purposes of section IV(a), an

‘‘affiliate’’ of an INHAM means a

member of either (1) a controlled group

of corporations (as defined in section

414(b) of the Code) of which the INHAM

is a member, or (2) a group of trades or

businesses under common control (as

defined in section 414(c) of the Code) of

which the INHAM is a member;

provided that ‘‘50 percent’’ shall be

substituted for ‘‘80 percent’’ wherever

‘‘80 percent’’ appears in section 414(b)

or 414(c) or the rules thereunder.

(c) The term ‘‘party in interest’’ means

a person described in Act section 3(14)

and includes a ‘‘disqualified person’’ as

defined in Code section 4975(e)(2).

(d) An INHAM is ‘‘related’’ to a party

in interest for purposes of section I(f) of

this exemption if the party in interest

(or a person controlling, or controlled

by, the party in interest) owns a five

percent or more interest in the INHAM

or if the INHAM (or a person

controlling, or controlled by, the

INHAM) owns a five percent or more

interest in the party in interest. For

purposes of this definition:

(1) The term ‘‘interest’’ means with

respect to ownership of an entity—

A) The combined voting power of all

classes of stock entitled to vote or the

total value of the shares of all classes of

stock of the entity if the entity is a

corporation.

(B) The capital interest or the profits

interest of the entity if the entity is a

partnership, or

(C) The beneficial interest of the

entity if the entity is a trust or

unincorporated enterprise; and

(2) A person is considered to own an

interest held in any capacity if the

person has or shares the authority—

(A) To exercise any voting rights or to

direct some other person to exercise the

voting rights relating to such interest, or

(B) To dispose or to direct the

disposition of such interest.

(e) For purposes of this exemption,

the time as of which any transaction

occurs is the date upon which the

transaction is entered into. In addition,

in the case of a transaction that is

continuing, the transaction shall be

deemed to occur until it is terminated.

If any transaction is entered into on or

after [date of publication of final class

exemption], or any renewal that requires

the consent of the INHAM occurs on or

after [date of publication of final class

exemption], and the requirements of

this exemption are satisfied at the time

the transaction is entered into or

renewed, respectively, the requirements

will continue to be satisfied thereafter

with respect to the transaction. Nothing

in this paragraph shall be construed as

exempting a transaction entered into by

a plan which becomes a transaction

described in section 406 of the Act or

section 4975 of the Code while the

transaction is continuing, unless the

conditions of the exemption were met

either at the time the transaction was

entered into or at the time the

transaction would have become

prohibited but for this exemption.

(f) Fiduciary Audit. A ‘‘fiduciary

audit’’ of a plan must include, among

other things, the following:

(1) A determination as to whether the

plan has developed adequate policies

and procedures designed to assure

compliance with the proposed

exemption;

(2) A test of a representative sample

of the plan’s transactions to determine

operational compliance with the written

policies and procedures;

(3) A determination as to whether the

INHAM has satisfied the definition of an

INHAM under the proposal; and

(4) A written report describing the

steps performed by the auditor during

the course of its review and the

auditor’s findings and

recommendations.

Signed at Washington, DC, this 20th day of

March, 1995.

Alan D. Lebowitz,

Deputy Assistant Secretary for Program

Operations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 95–7364 Filed 3–23–95; 8:45 am]

BILLING CODE 4510–29–P

Employment Standards Administration

Wage and Hour Division; Minimum

Wages for Federal and Federally

Assisted Construction; General Wage

Determination Decisions

General wage determination decisions

of the Secretary of Labor are issued in

accordance with applicable law and are

based on the information obtained by

the Department of Labor from its study

of local wage conditions and data made

available from other sources. They

specify the basic hourly wage rates and

fringe benefits which are determined to

be prevailing for the described classes of

laborers and mechanics employed on

construction projects of a similar

character and in the localities specified

therein.

The determinations in these decisions

of prevailing rates and fringe benefits

have been made in accordance with 29

CFR part 1, by authority of the Secretary

of Labor pursuant to the provisions of

the Davis-Bacon Act of March 3, 1931,

as amended (46 Stat. 1494, as amended,

40 U.S.C. 276a) and of other Federal

statutes referred to in 29 CFR part 1,

Appendix, as well as such additional

statutes as may from time to time be

enacted containing provisions for the

payment of wages determined to be

prevailing by the Secretary of Labor in

accordance with the Davis-Bacon Act.

The prevailing rates and fringe benefits

determined in these decisions shall, in

accordance with the provisions of the

foregoing statutes, constitute the

minimum wages payable on Federal and

federally assisted construction projects

to laborers and mechanics of the

specified classes engaged on contract

work of the character and in the

localities described therein.

Good cause is hereby found for not

utilizing notice and public comment

procedure thereon prior to the issuance

of these determinations as prescribed in

5 U.S.C. 553 and not providing for delay

in the effective date as prescribed in that

section, because the necessity to issue

current construction industry wage

determinations frequently and in large

volume causes procedures to be

impractical and contrary to the public

interest.

General wage determination

decisions, and modifications and

supersedeas decisions thereto, contain

no expiration dates and are effective

from their date of notice in the Federal

Register, or on the date written notice

is received by the agency, whichever is

earlier. These decisions are to be used

in accordance with the provisions of 29

CFR parts 1 and 5. Accordingly, the

applicable decision, together with any