Date: 1990-04-03
Speaker: JAMES S. RAY (democrat)
Chamber: H

Connerton. Ray & Simon. Washington. DC. DEAR MR. RAY: This Is in response to your request on behalf of the Union Labor Life Insurance Company (ULLICO) concerning ULLICOs Mortgage Separate Account J (the J Account). a pooled separate account which is designed to invest in mortgages which generally are secured by properties built or improved primarily with union labor. Specifically. your request concerns the application of the fiduciary responsibility provisions of section 404(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) to the operation of the J Account In accordance with the structure set forth in your request. and to an employee benefit plans investment of a portion of its assets in the J Account. You represent that ULLICO established the J Account in.1977 primarily as a means for plans to invest a portion of their assets in a diversified pool of high quality first mortgages on residential and incomeproducing properties. earning a return competitive with returns from comparable investments available in the marketplace. ULLICO also designed the J Account incidentally to help support the unionized sector of the building and construction industry. To achieve this incidental goal. ULLICO commits to make mortgages for the J Account which first satisfy rigorous. generally accepted financial standards. and. in addition. which will be secured by properties built or renovated primarily by union labor.. You further represent that the underwriting criteria used by ULLICO for both its general account and the J Account conform to those which are recognized as generally accepted by reasonably competent. profesYou note that not all mortgage loans from the J Account are secured by properties built by contractors employing only unino labor. The J Account has made (and currently carries) a substantial amount of loans secured by projects located in states with "righttowork" laws. where statutes prohibit enforceable agreements requiring the use of only union tradesmen. However. in such states. ULLICO requires the borrower to agree to use only contractors who are signatory to collective bargaining agreements with unions affiliated with the local AFLCIO Building Trades Council. Finally. some portions of the projects which the J Account has financed may have been undertaken by nonunion companies and workers. where. for example. union tradesmen are not available. sional mortgage lenders. ULLICO solicits and receives loan proposals from a variety of sources. including borrowers and developers. brokers. mortgage bankers. unions and designated correspondents.2 ULLICO receives such proposals from parties intending to utilize nonunion labor as well as parties intending to use only union labor. You have indicated. however. that most of those who apply to ULLICO for loans are aware of ULLICOs uniononly condition. and that ULLICO officials may mention this condition to applicants who might not otherwise be aware of it. Initially. the Mortgage Department of ULLICO originates possible investment opportunities. elicits written mortgage loan applications and submissions. performs the underwriting. negotiates acceptable loan terms and prepares a summary of the proposed mortgage and recommendation for presentation to ULLICOs Mortgage Subcommittee. Next. ULLICOs financial vice president typically reviews the proposal. with particular attention to certain financial factors. such as the financial statements and credit worthiness of the proposed borrower. In a third phase of the process. the Mortgage Subcommittee. a subcommittee of the Finance and Investment Committee of the Board of Directors of ULLICO. reviews the proposal and recommendation. and approves or rejects the loan. Finally. the full Executive Committee ratifies the approval of the Mortgage Subcommittee. ULLICO considers a broad range of physical. economic. financial and related factors with respect to all loans for its general account and the J Account. Those factors include: (1) Location of the property which will secure the loan. (2) Description of the security. (3) Valuation of the securityloans secured by incomeproducing property do not exceed a loan to value ratio of 75 percent. (4) Ability to repayULLICO considers a number of factors including the borrowers track record and income and expense projections with respect to the proposed project. (5) Terms of the loan. and (6) Diversificationby geography. size of loans. type of properties and type of tenants. Upon approval of a proposed loan by the Mortgage Subcommittee. ULLICO prepares and issues a commitment letter. setting forth the terms and conditions of the proposed loan.. the borrowers signifies acceptance by signing the commitment and paying the commitment fee. The union labor condition is included in the loan commitment. You represent that ULLICO will not commit to or fund a mortgage loan which does not meet its investment criteria. regardless of the requirement to use union labor. The promise of a borrower or developer to use union labor will not cause ULLICO to waive or compromise the requirements which all its investments must satisfy. Sections 403(c) and 404(a)(1) of ERISA require. among other things. that a fiduciary of a plan act prudently. solely in the interests of the plans participants and beneficiaries. and for the exclusive purpose of providing benefits to participants and beneficiaries. It is the position of the Department that. to act prudently. a plan fiduciary must con2You represent that any transactions between the J Account and a party in interest with respect to a plan investing in the J Acount would be exempted from the restrictions of section 406(a) of ERISA by Prohibited Transaction Exemption 7819 (43 FR 59915. December 22. 1978). sider. among other factors. the availability. riskiness. and potential return of alternative investments for his plan. Because the mortgage loans which the J Account makes causes it to forego other investment opportunities. such a loan would not be prudent if it provided the investing plans with less return. in comparison to risk. than comparable investments available to the plans. or if it involved a greater risk to the security of plan assets than other investments offering a similar return. The Department has construed the requirements that a fiduciary act solely in the interest of. and for the exclusive purpose of providing benefits to. participants and beneficiaries as prohibiting a fiduciary from subordinating the interest of participants and beneficiaries in their retirement income to unrelated objectives. Thus. in deciding whether and to what extent to invest in a particular investment. a fiduciary must ordinarily consider only factors relating to the interests of plan participants and beneficiaries in their retirement income. A decision to make an investment may not be influenced by a desire to stimulate the construction industry and generate employment. unless the investment. when judged solely on the basis of its economic value to the plan. would be equal or superior to alternative investments available to the plan. Thus. It would not be inconsistent with the requirements of sections 403(c) and 404 of ERISA for the J Account to make loans on properties which are constructed or improved with union labor. so long as the J Accounts investment process assures that loans made by the J Account will be at prevailing market terms. i.e.. that the terms for projects with the uniononly condition in fact reflect the terms prevailing in the overall mortgage market. In this regard. we wish to point out that if mortgage loans which satisfy both ERISAs fiduciary standards and the uniononly condition are unavailable for investment by the J Account. the prudence and exclusive purpose requirements of sections 403(c) and 404 of ERISA would require that the fiduciaries of the J Account select comparable investment opportunities which are available to the Account. We trust that this information will be helpful to you. Sincerely.