Notice of Proposed Individual Exemption to Make Permanent as Modified Prohibited Transaction Exemption (PTE) 91-8 Involving Equitable Life Assurance Society of the United States and Its Affiliates (Equitable) and Its Wholly-Owned Subsidiary, Equitable Real Estate Management, Inc. (ERE), Located in New York, New York

Federal RegisterSep 6, 1996

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DEPARTMENT OF LABOR

[Application No. D-10011]

Notice of Proposed Individual Exemption to Make Permanent as

Modified Prohibited Transaction Exemption (PTE) 91-8 Involving

Equitable Life Assurance Society of the United States and Its

Affiliates (Equitable) and Its Wholly-Owned Subsidiary, Equitable Real

Estate Management, Inc. (ERE), Located in New York, New York

AGENCY: Pension and Welfare Benefits Administration, Department of

Labor.

ACTION: Notice of proposed individual exemption to make permanent as

modified PTE 91-8, which involves Equitable and ERE.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor of a proposed individual exemption to make

permanent as modified the temporary relief provided by PTE 91-8 (56 FR

1411/1419, January 14, 1991). PTE 91-8 is a temporary exemption which

expired January 13, 1996. This proposed exemption, if granted, will

make permanent as modified PTE 91-8 and will provide relief for the

provision of property management and/or leasing services by ERE 1,

Equitable's wholly-owned subsidiary to an Account (as defined in

Section IV below), provided that the conditions set forth in Section II

are met.

\1\ In this regard, ERE represents that during the course of PTE

91-8 ERE changed its acronym from EREIM. This was solely a matter of

preference and does not reflect a change in ownership or management

of ERE. The description of Equitable Real Estate Investment

Management, Inc., as set forth in the original notice of proposed

exemption published on February 28, 1990 at 55 FR 7057/7069 and in

the exemption application for permanent exemption and modification

of PTE 91-8, dated April 24, 1995, continues to accurately reflect

the ownership and management of ERE.

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EFFECTIVE DATE: The Department has determined to extend the temporary

exemptive relief provided under PTE 91-8 effective January 13, 1996,

until the date the final grant for this proposed exemption is published

in the Federal Register.

Also, if granted, this proposed exemption to make permanent PTE 91-

8 will be effective on the date the final grant is published in the

Federal Register. However, the modification in the annual reporting

requirement whereby Equitable will furnish the annual report to each

authorizing plan fiduciary and the Independent Fiduciary no later than

90 days following the end of the period to which the annual report

relates, as set forth in Section II(4)(a) in this proposed exemption,

will be effective, as of January 13, 1996.

DATES: Written comments and requests for a public hearing must be

received by the Department of Labor by no later than October 21, 1996.

ADDRESSES: All written comments and requests for a hearing (at least

three copies) should be sent to the Office of Exemption Determinations,

Pension and Welfare Benefits Administration, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210,

Attention: Application No. D-10011. The application for exemption

[[Page 47206]]

and the comments received will be available for public inspection in

the Public Disclosure Room of Pension and Welfare Benefits

Administration, U.S. Department of Labor, Room N-5638, 200 Constitution

Avenue NW., Washington DC 20210.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, Office of

Exemption Determinations, U.S. Department of Labor, telephone (202)

219-8883. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency

before the Department of a proposed exemption to make permanent as

modified PTE 91-8. PTE 91-8 provides an exemption from the restrictions

of section 406(a), 406(b)(1) and 406(b)(2) of the Employee Retirement

Income Security Act of 1974 (the Act) and from the sanctions resulting

from the application of section 4975 of the Internal Revenue Code of

1986 (the Code), by reason of section 4975(c)(1) (A) through (E) of the

Code.

The notice of proposed exemption to make permanent PTE 91-8 was

requested in an exemption application by Equitable and ERE pursuant to

section 408(a) of the Act and section 4975(c)(2) of the Code, and in

accordance with the procedures set forth in 29 CFR Part 2570, Subpart B

(55 FR 32836, 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.

Accordingly, the proposed exemption to make permanent PTE 91-8 is being

issued solely by the Department.

PTE 91-8

PTE 91-8 is a temporary individual exemption which expired on

January 13, 1996. A summary of the facts and representations pertaining

to PTE 91-8 was contained in a notice of pendency of proposed exemption

that was published in the Federal Register on February 28, 1990 at 55

FR 7057/7069. The grant of PTE 91-8 was published in the Federal

provision of certain real estate property management and, in some

instances, leasing services by EREIM, an indirect wholly owned

subsidiary of Equitable and the predecessor of ERE, affiliates of EREIM

and Tishman Speyer Properties (TSP), a partnership in which Equitable

has a 50 percent ownership interest, to various real estate separate

accounts (the Accounts) in which employee benefit plans participate.

The Accounts are managed by Equitable, EREIM or subsidiaries thereof.

PTE 91-8 also permits the provision, by the law department of Equitable

(the Law Department), of certain legal services to the Accounts

required in connection with individual properties held by the Accounts.

Equitable is a mutual life insurance company organized under the

laws of the State of New York. Among the variety of products and

services, Equitable offers asset management and other services to

numerous employee benefit plans, including investments in the Accounts.

The Accounts hold investments in income-producing real estate such as

office buildings, hotels, shopping centers and industrial and

commercial properties. As the investment manager with respect to the

Accounts, Equitable has investment discretion to acquire and dispose of

properties on behalf of the Accounts, and the responsibility to manage

Account properties. Equitable represented that its direct or indirect

subsidiaries may act as the investment manager with respect to existing

or new Accounts.

Furthermore, Equitable represented that the provision of property

management and leasing services to the Accounts by ERE and certain of

its other affiliates is of central importance in maximizing returns

available to its investors, including employee benefit plans. In this

regard, large real estate investment managers typically manage

properties themselves or through property management firms they have

acquired. This strategy enables them to use unified leasing strategy

and other efficient management strategies, and is a superior

alternative to retaining independent managers for property management.

Equitable stated that often the best arrangements for the provision of

property services to the Accounts, and the highest quality of services

can be provided through the use of its in-house personnel or through

firms in which Equitable has an interest. Such firms possess special

expertise in the type of properties held by the Accounts and knowledge

of the Accounts and their properties.

The services provided to the Accounts by ERE and certain other

affiliates of Equitable included day to day property management and

leasing responsibilities associated with the operation of income-

producing properties. Specifically, these responsibilities included:

(a) using best efforts to lease the property to desirable tenants and

negotiating the terms and renewals of such leases; (b) receiving and

collecting rents; (c) arranging for all necessary repairs and

replacement and installation of equipment; (d) handling tenant

complaints; (e) preparing and submitting to the owner proposed

operating and capital budgets; and (f) performing marketing and

promotional supervisory services.

To ensure that the transactions in PTE 91-8 operated in the

interests of the Accounts and the participating plans therein, the

exemption contained certain specified safeguards. These safeguards

included: (1) the requirement that the arrangement under which the

transactions were performed be subject to the prior authorization of an

independent plan fiduciary for each plan invested in an Account; \2\

(2) the requirement that not less than 45 days prior to the

implementation of either the policy for property management and leasing

services or the policy for legal services, Equitable or EREIM, as

investment manager, furnish the authorizing plan fiduciary with

reasonably available information; (3) a mechanism enabling the plans to

terminate their investment in the Account; (4) an annual reporting

requirement whereby Equitable furnished the annual report to each

authorizing plan fiduciary and the Independent Fiduciary no later than

45 days following the end of the period to which the annual report

related; (5) confirmation by the plans of the multiple services

arrangement; (6) approval by the Independent Fiduciary of each

transaction under the exemption, and a mechanism for the Independent

Fiduciary's negotiation and approval of contracts for the provision of

services by EREIM, TSP or the Law Department to the Accounts; (7) the

requirement that the terms of a service provision arrangement must be

reviewed by the Independent Fiduciary prior to implementation; (8) the

requirement that Equitable and EREIM had to furnish certain information

regarding transactions to the Independent Fiduciary for its periodic

review of performance of EREIM, TSP, or the Law Department under the

contracts; (9) a plan investor sophistication requirement; (10)

percentage limitations on plan investment in the Accounts, including

Equitable's in-house plans; (11) the requirement that the terms of the

transactions must be as favorable to the Accounts as arm's length

terms; and, (12) that the compensation paid to

[[Page 47207]]

EREIM, TSP or the Law Department shall not exceed reasonable

compensation within the meaning of section 408(b)(2) of the Act and the

regulations thereunder. In addition to these conditions, PTE 91-8 and

the notice relating to PTE 91-8 contained other protective conditions

that had to be met by Equitable and its affiliates with respect to the

Accounts and the transactions which were the subject of PTE 91-8. Also,

representations contained in Paragraph IV of the notice of proposed

exemption relating to PTE 91-8 placed certain limitations on the fees

that EREIM or TSP were permitted to receive for property management and

leasing services rendered to the Accounts pursuant to PTE 91-8.

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\2\ In this regard, under this proposed exemption to make

permanent as modified PTE 91-8, Equitable represents that for plans

which have previously authorized their participation in the Accounts

under PTE 91-8, no reauthorization will be required.

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Procedure for Requesting Permanent Relief for Transactions in PTE

91-8

This proposed exemption was requested by Equitable and ERE pursuant

to Paragraphs IX and X of the notice of proposed exemption relating to

PTE 91-8. As mentioned, PTE 91-8 is a temporary exemption which expired

on January 13, 1996. Pursuant to Paragraphs IX and X, prior to the

expiration of PTE 91-8, Equitable and ERE could apply for a permanent

exemption provided that, among other things, the application for a

permanent exemption describes whether and how compliance with PTE 91-8

has been achieved. In particular, the application for a permanent

exemption should describe:

(a) the number of transactions engaged in under PTE 91-8;

(b) the decisions made by the independent fiduciaries for various

services; and

TSP for the property services and legal services that have been

rendered under PTE 91-8.

Further, pursuant to Paragraphs IX and X of the notice of proposed

exemption relating to PTE 91-8, the application for a permanent

exemption should include a report from the Independent Fiduciary

expressing such fiduciary views and rationales with respect to the

extension of PTE 91-8 and whether the Independent Fiduciary believes

that cost savings have been achieved for the Accounts. In paragraph X

of the notice of proposed exemption relating to PTE 91-8, Equitable

identified certain standards which may be applied by the Department in

reviewing the fees charged by Equitable to determine whether cost

savings have been achieved, and whether making PTE 91-8 permanent would

be appropriate. Among other things, Equitable represented in Paragraph

X, that property management and leasing fees charged by unaffiliated

property management firms generally range from 4 to 5 percent of gross

receipts (depending upon such factors as property type, geographic

location and project complexity) and average approximately 4.5 percent

of gross receipts. Therefore, Equitable proposed in Paragraph X, that

the standard of review adopted by the Department in evaluating the

operation of property related services, should require Equitable to

demonstrate that the aggregate annual property management and leasing

fees charged to each Account (including the allocable cost of the

services of the independent fiduciary under the exemption) were less

than 4.5 percent of the gross receipts earned by the Account during

each year that ERE or TSP has provided property management and leasing

services pursuant to the exemption.

Cost Savings Report of the Independent Fiduciary

Jackson Cross Company (Jackson Cross), as the independent fiduciary

(the Independent Fiduciary) for property management and leasing

services under PTE 91-8, prepared a report regarding cost savings

achieved by the Accounts (the Report). In the Report, Charles F.

Seymor, CRE, MAI, and chairman of Jackson Cross, made the following

representations. Mr. Seymor stated that the provision by Compass

Management and Leasing and Compass Retail (collectively, Compass), two

wholly-owned subsidiaries of ERE 3, of property management and

leasing services to the Accounts resulted in substantial savings to the

Accounts. Mr. Seymor represented that in negotiating the final terms of

the management or management and leasing contracts for each of the

Accounts' properties, Jackson Cross reviewed market fee ranges in each

market area and also the fees paid to the previous managers. In this

regard, Jackson Cross required that a measurable economic benefit be

evident before they approved a transaction and also quantified that

benefit in their separate initial reports on each approved property. In

the annual reports to ERE for the year 1994, Jackson Cross applied

management fees and leasing fees 4 to actual 1994 gross

collections and to the leases negotiated for the Accounts, and compared

the results to what would have been charged if these fees were at the

low end of the market range or the contractual fee for the previous

managers.5 In 1994, Jackson Cross visited over 40% of the

Accounts' properties. Jackson Cross estimated that in 1994 alone, a

savings of $1,650,000 was obtained to the benefit of the Accounts.

Furthermore, 95 transactions were completed through December 31, 1994,

and on an annual basis, the fees earned by Compass were less than 4.5

percent of the gross receipts earned by the properties in each Account

managed by Compass. Accordingly, Jackson Cross concluded that the

property management and leasing services rendered by Compass to the

Accounts resulted in substantial savings for their benefit. In

preparing the annual reports, Jackson Cross also reviewed several

additional measures of quality management and leasing services to

ensure that the services provided to the Accounts are the best

available as compared to the services provided by other first rate

property managers in the locality of a property. In this regard,

Jackson Cross considered the following criteria: how each property

performed against budget; how the value of each property has been

affected during the year; whether the management and leasing

professionals engaged in continuing education and training during the

year, and what professional designations they have achieved; and

whether these professionals have adopted an appropriate long-range view

as stewards of these properties, with a goal of maximizing the

Accounts' investments.

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\3\ The applicant represents that these two subsidiaries of ERE,

which were formerly separate divisions of ERE are subject to the

management and control of ERE, and their status as separate

corporate entities rather than divisions of ERE was implemented

solely for organizational reasons. ERE may in the future recognize

one or both of the Compass entities as divisions within ERE.

\4\ It is represented that most management fees and leasing

commissions are typically calculated as a percentage of gross

receipts during a given year and a percentage of new lease

transactions, respectively.

\5\ In this regard, Jackson Cross compared fee schedules charged

by Compass to the fee schedules charged by previous unaffiliated

property managers during the year preceding ERE's performance of

such services under the exemption. Furthermore, Jackson Cross as the

Independent Fiduciary is obligated to monitor property management

fees currently charged by the unaffiliated managers and to assure

that the fees charged by Equitable or ERE do not exceed these fees.

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Permanent Exemption for Transactions Under PTE 91-8

Equitable and ERE request that the exemptive relief for

transactions which were the subject of PTE 91-8 be made permanent

because as explained in the Jackson Cross report above, PTE 91-8

benefitted the employee benefit plans that participate in the Accounts.

Furthermore, Equitable and ERE

[[Page 47208]]

propose the following procedures to assure continued cost savings to

the Accounts under a permanent exemption (the Cost Saving Procedures).

The Cost Saving Procedures will be carried out as follows:

(a) After the fifth anniversary of the grant of this exemption, and

after the beginning of each subsequent five-year period, ERE will

prepare a survey of property management and leasing fees for the

properties that have similar geographic location and property types to

those held by the Accounts. The survey will include data regarding the

fees that have been charged to the Accounts by several property

management firms that are unaffiliated with Equitable or ERE for

services that are contemplated by the exemption during the one year

period prior to the beginning of the new five-year period. Also, the

survey will include data as to the fees paid by Equitable or ERE for

such services performed for the properties not held by the Accounts

during the same period and other market data regarding the cost of

property management and leasing services by geographic location and

property types.

(b) The Independent Fiduciary will review ERE's internal survey

referred to in (a) above, and will verify the accuracy of the data by

independently reviewing a sampling of the properties to which such fees

apply. Based upon its review of the survey and its own professional

resources and expertise, the Independent Fiduciary will determine a

typical range of annual fees for property management and leasing

services for the Accounts. The average of the range, as determined from

such survey, will serve as the basis of comparison for determining for

the next five-year period whether continuation of the property

management and leasing services policy (the Property Services Policy)

has provided a cost savings to the Accounts.

at the end of the applicable five-year period that the aggregate

property management and leasing fees charged to each Account pursuant

to the Property Services Policy plus the cost of the services of the

Independent Fiduciary under the exemption that are allocated to the

Accounts, are less than the fees that would have been charged using the

benchmark rate established at the beginning of the five year period.

(d) The Independent Fiduciary will review the data supplied by ERE

and, to the extent considered necessary by the Independent Fiduciary,

data collected from the Independent Fiduciary's own surveys, and will

document its findings and analysis of such cost savings in a report to

be delivered to each of the plans participating in the Accounts within

90 days after the end of the five-year period and each subsequent five-

year period and prior to the implementation of the annual confirmation

procedure described in paragraph (5) of Section II with respect to such

period. In the event the Independent Fiduciary finds that cost savings

have not been achieved for the Accounts, it will not approve any

additional services arrangements pursuant to the Property Services

Policy until Equitable and ERE have demonstrated to the satisfaction of

the Independent Fiduciary that policies intended to assure cost savings

to the Accounts have been implemented by Equitable and ERE. The survey,

the Independent Fiduciary's report reviewing the survey, and the final

report of the Independent Fiduciary analyzing whether cost savings had

been achieved during the five-year period to which the survey relates,

will be maintained by Equitable or ERE in accordance with the

recordkeeping requirements of Section III of this exemption.

Accordingly, the Department proposes to modify PTE 91-8 by adopting

the language of the Cost Saving Procedures as stated in (a)-(d) above

into a new paragraph (12) in Section II of this proposed exemption.

Requested Modifications and Changes in Circumstances to PTE 91-8.

A. Tishman Speyer Properties

Equitable represents that Tishman Speyer Properties (TSP), an

affiliate of Equitable at the time PTE 91-8 was issued, is no longer

affiliated with Equitable and, thus, requests that this exemption, if

granted, be inapplicable to TSP. The Department proposes to modify PTE

91-8 by eliminating any references to TSP in this proposed exemption.

B. Legal Services

Equitable represents that the exemption under PTE 91-8 for the

provision of legal services to the Accounts by Equitable in-house Law

Department was never implemented. Accordingly, Equitable requests that

this exemption eliminate reference to the relief for the provision of

such legal services by the Law Department to the Accounts. The

Department proposes to modify PTE 91-8 by eliminating relief for the

provision of legal services by the Law Department to the Accounts.

C. Modification of Acronym for EREIM

Equitable requests that for purposes of this proposed exemption, if

granted, EREIM should be referred to as ERE. Equitable represents that

the change in acronym from EREIM to ERE is a matter of preference and

does not reflect a change in ownership or management of EREIM. The

description of EREIM, as set forth in the original notice of proposed

exemption and in this exemption application, continues to accurately

reflect the ownership and management of EREIM. Accordingly, the

Department proposes to modify PTE 91-8 by substituting the acronym

``ERE'' for the acronym ``EREIM'' in this proposed exemption.

D. Annual Reconfirmation Requirement

Section II(4) of PTE 91-8 provides that the continued retention of

the Independent Fiduciary with respect to the property management and

leasing services arrangement for an Account is subject to the annual

reconfirmation by the holders of a majority of the units of beneficial

interests in that Account.6 An annual report regarding the

Account, which is furnished by Equitable and ERE to the authorizing

plan fiduciaries and the Independent Fiduciary (the Annual Report),

contains a ballot for the annual reconfirmation of the Independent

Fiduciary, which is to be returned to Equitable.

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\6\ The Independent Fiduciary may also be removed with or

without cause by the vote of the holders of a majority of the units

of beneficial interests in an Account voting in favor of such

removal.

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Equitable and ERE represent that while the plans that participate

in the Accounts support the continued service of the Independent

Fiduciary,7 it is often difficult to implement the Independent

Fiduciary reconfirmation requirement. In many cases, these ballots are

not returned by the plans for several months and then only after

repeated reminders. A plan's failure to respond to the reconfirmation

request by returning the ballot in a timely fashion creates uncertainty

as to whether the exemption will continue to be available for ERE and

its affiliates to continue providing property management and leasing

services to the Accounts.

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\7\ In this respect, Equitable notes that at least 99 percent of

the contractholders that have voted in the context of an annual

reconfirmation of the Independent Fiduciary have voted in favor of

such reconfirmation.

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Equitable requests that the procedure for annual client

reconfirmation of the Independent Fiduciary be modified to allow

Equitable to treat a plan's failure to return the ballot within 30 days

after

[[Page 47209]]

receipt of a request for reconfirmation as an indication of such plan's

vote in favor of continued retention of the Independent Fiduciary.

Equitable represents that this procedure will be implemented on an

annual basis. Equitable also states that this proposed modification

will increase efficiency in ensuring the continued service of a

qualified Independent Fiduciary without adversely affecting the

oversight conditions of the exemption.

The Department proposes to modify PTE 91-8 by adding the following

language to the new Section II(4)(a):

``The Annual Report will also contain a ballot regarding the

reconfirmation of the Independent Fiduciary, which is to be returned to

Equitable. In this respect, at the time of delivery of each Annual

Report, Equitable will specifically indicate to each plan that the

Independent Fiduciary may be terminated by a vote in favor of such

termination by the holders of a majority of the units of beneficial

interests in the Account and will request such plan to confirm the

Independent Fiduciary's appointment. Following a plan's receipt of the

Annual Report, Equitable may treat a plan's failure to return the

ballot within thirty (30) days after receipt of a request for

reconfirmation as a vote in favor of continued retention of the

Independent Fiduciary.''

In this regard, to ensure that the plans receive notification of

the annual client reconfirmation procedure, the Department proposes to

add the following language as a new paragraph (b) at the end of the new

Section II(4):

``Equitable or ERE receives confirmation that the notice and the

ballot sent to the authorizing plan fiduciary regarding the continued

retention of the Independent Fiduciary has been received by the

authorizing fiduciary and the Independent Fiduciary. The method used to

confirm notice to the authorizing fiduciaries and the Independent

Fiduciary must be sufficient to ensure that the authorizing fiduciaries

and the Independent Fiduciary actually receive the notice. In all

cases, return receipt for certified mail, printed confirmation of

facsimile transmissions and manifest or computer data entries of

independent courier services will be considered acceptable methods of

confirming receipt.''

The notice of proposed exemption relating to PTE 91-8 also

indicated that Equitable will promptly designate a replacement

Independent Fiduciary in the event of the removal or resignation of the

Independent Fiduciary, but such appointment is also subject to the

affirmative confirmation by the plans participating in the Accounts

vis-a-vis a ballot contained in the Annual Report. Equitable represents

that the need for such affirmative approval could cause delay in

replacing the Independent Fiduciary with a qualified new Independent

Fiduciary. The possibility of such delays requires that contingency

plans be made for using unaffiliated property management and/or leasing

firms (and whose services may not be as advantageous to the Accounts as

those that could be provided by an Equitable affiliate). Therefore,

Equitable represents that the appointment of the replacement

Independent Fiduciary will also be handled in accordance with the

procedure described in Section II(4)(a).

E. Annual Reporting Requirement

Section II(4) of PTE 91-8 requires Equitable or ERE to furnish each

authorizing plan fiduciary and the Independent Fiduciary with the

Annual Report identifying detailed information about the fees incurred

and services provided to the Account pursuant to PTE 91-8.8 The

Annual Report is required to be provided not later than 45 days

following the end of each reporting period. Equitable furnishes the

Annual Report within 45 days after the end of each calendar year.

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\8\ Specifically, under Section II(4) of PTE 91-8 the Annual

Report must include a description of the properties and the services

that have been performed by ERE or its affiliates for an Account and

an indication of the fees that were paid for the preceding reporting

period and which are anticipated to be paid to ERE or its affiliates

in the coming year for services provided by these entities in

connection with the properties held by an Account. The Annual Report

must also contain a description of the method for terminating the

multiple services arrangement and the reconfirmation and/or removal

of the Independent Fiduciary by the plans investing in the Account.

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Equitable represents that providing the Annual Report within the 45

day requirement makes it impossible to include actual year-end data for

the Accounts' properties because this data is not generally available

to Equitable early enough within that time period to allow for

necessary verification, submission to the Independent Fiduciary and

compilation and production of the Annual Reports. In addition,

Equitable must also substantially complete end-of-year financial

statements for the Accounts and other accounts managed by Equitable

during this period.

Equitable requests that the Annual Report requirement of PTE 91-8

be modified to allow Equitable to submit the Annual Report no later

than 90 days following the end of the period to which the Annual Report

relates, and that this modification be effective retroactively, as of

January 13, 1996, the date PTE 91-8 had expired.

In this regard, the Department proposes to modify PTE 91-8 by

substituting ``90 days'' for ``45 days'' in Section II(4)(a), such that

the new Section II(4)(a) should read, in relevant part:

* * * with the Annual Report containing the information

described in this paragraph, not less frequently than once a year

and not later than 90 days following the end of the period to which

the report relates.

This modification will be effective retroactively, as of January

13, 1996.

F. Modification of Investment Limitations of Section II(10)

1. 5 Percent Investment Limitation

Section II(10)(a) of PTE 91-8 limits the percentage of plan assets

that can be invested in an Account by any plans covering employees of

Equitable to 5 percent of the assets of the investing plan. Equitable

believes that the 5 percent limitation unduly restricts the investments

in the Accounts by Equitable's in-house plans and limits the investment

by the trustees of Equitable's pension plan in real estate separate

accounts, such as SA-8,9 which they believe to be prudent

investments that are appropriate for Equitable's plans. Fiduciaries of

Equitable's plans should not be forced to look to competitors for real

estate investment opportunities.

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\9\ Equitable represents that the primary means by which

Equitable's in-house plans invest in real estate is through SA-8.

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Therefore, Equitable is requesting that the percentage limitation

applicable to in-house plans be modified to permit any plan in which

employees of Equitable or an affiliate participate, to invest up to 10

percent of its assets in any Account covered by PTE 91-8. Equitable

represents that a 10 percent limitation would give trustees of the in-

house plans the flexibility necessary to deal with inadvertent

fluctuations in the levels of participation in an Account, and to

invest the assets of such Plans in what they determine are successful

diversified real estate funds.

Accordingly, the Department proposes to modify PTE 91-8 by

substituting ``10 percent'' for ``5 percent'' in Section II(10)(a),

such that the new Section II(10)(a) should read, in relevant part:

Not more than 10 percent of the assets of a plan covering

employees of Equitable will be invested in an Account.

Notwithstanding the foregoing, this percentage requirement will

continue to be satisfied by any plan that exceeds the 10 percent

limitation of this subsection provided that no portion of any excess

results from an increase in the assets transferred by such plan to

the Accounts.

[[Page 47210]]

2. 20 Percent Investment Limitation

Section II(10)(c) of PTE 91-8 imposes a limitation on the

percentage of total plan assets that can be invested in the Accounts by

plans other than those covering Equitable employees.

This limitation has been set at 20 percent of the assets of the

investing plan. PTE 91-8 states that this limitation will apply

prospectively only and on an ``acquisition'' basis, i.e., the 20

percent limitation is tested only when additional investments in an

Account are made by a plan. Equitable believes that it is unclear from

the language of PTE 91-8, which uses the plural ``Accounts'' rather

than ``Account'' to describe the limitation, whether the 20 percent

limitation is intended to be applied on a single Account basis or on

the basis of a plan's aggregate investment in all Accounts combined and

accordingly, Equitable requests that the Department clarify the scope

of this limitation.

The 20 percent limitation test of Section II(10)(c) of PTE 91-8 was

intended to apply to Equitable Accounts on an aggregate basis.

Accordingly, no modification of Section II(10)(c) is hereby necessary.

G. Modifications to Limitations on Fees

Paragraph IV (Fees for Property Services) of the notice of proposed

exemption relating to PTE 91-8 places certain limitations on the fees

that EREIM or TSP 10 are permitted to receive for property

management and leasing services rendered to the Accounts pursuant to

PTE 91-8.

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\10\ For purposes of this exemption, if granted, fee limitations

described in Paragraph IV of the notice of proposed exemption

relating to PTE 91-8 will apply to ERE and its affiliates.

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Specifically, Paragraph IV of the notice of proposed exemption

relating to PTE 91-8 provides, among other things, that the fee for

leases in which outside brokers are involved generally does not exceed

one percent (1%) of the lease amount. This fee is applicable to

circumstances where ERE as property manager is separately compensated

for leasing services where outside brokers are involved. In this

regard, Equitable requests that the 1% limitation be modified to 2.75

percent (2.75%) of the lease amount. Equitable and ERE have determined

that the 1% limitation is not consistent with the current practice of

establishing leasing commissions for transactions involving outside

brokers. Equitable and ERE represent that in most leasing markets such

``co-broker'' leasing fees for the project leasing broker are computed

at fifty percent (50%) of the normal new or renewal lease commission

fee, which is typically somewhere between four (4%) and seven (7%)

percent of the total lease payments. Such a fee structure reflects the

fact that the effort required of the exclusive project leasing broker

is, in most instances, not reduced by the addition of a tenant's

leasing broker, but can actually be more demanding. In this regard,

Equitable and ERE have obtained an opinion from Jackson Cross, the

independent fiduciary for property management and leasing, regarding

modification of this fee limitation. Mr. Seymor from Jackson Cross,

stated that based on their experience and studies, they found that

leasing fees vary with building size and with the competitive situation

in individual markets. In most markets, the project leasing broker

received 50% of the normal new or releasing commission. The outside

broker received the other 50%, but usually an ``override'' sufficient

to pay a full market commission. Because the normal full leasing

commission is typically in the range of 4% to 7% of the one year lease

amount, the project leasing broker usually received 2% to 3.5% of the

one year lease amount. In the opinion of Jackson Cross, restricting ERE

to a maximum of 1% does not provide adequate compensation to cover the

cost of appropriate professional leasing representation. In this

regard, Jackson Cross suggests that this ceiling be raised to 2.75%,

still subject to the market requirement that the Independent Fiduciary

must certify an economic benefit to the Account on a case by case

basis.

In this regard, the Department is proposing to modify PTE 91-8 by

increasing the fee limitation to ERE for leases involving outside

brokers to 2.75% of the lease amount. Additionally, the Department

proposes to further modify PTE 91-8 by incorporating this fee

limitation and other fee limitations as described in Paragraph IV of

the notice of proposed exemption relating to PTE 91-8 into Section II

as an additional condition. Accordingly, a new condition (13) is being

added to Section II as follows:

``(13)(a) The fees paid to ERE and/or its affiliates for property

management services provided in connection with a property held for an

Account shall not exceed for any one year period: (1) In the case of

property management services which include leasing services, 7 percent

of the overall gross receipts of the property; and (2) in the case of

property management services which do not include leasing services, 4

percent of the overall gross receipts of the property.

(b) Where a property manager is separately compensated for leasing

services: (1) the fee for new leases will not exceed 7 percent of the

lease amount; (2) the fee for renewal leases will not exceed 2 percent

of the lease amount; and (3) the fee for leases in which outside

brokers are involved will not exceed 2.75 percent of the lease

amount.''

The Department notes that this proposed exemption, if granted, is

subject to the express condition that the summary of facts and

representations set forth in the notice of proposed exemption relating

to PTE 91-8, as amended by this notice to make permanent PTE 91-8

accurately describe, where relevant, the material terms of the

transactions to be consummated pursuant to this exemption.

After considering Equitable and ERE's application, the Department

is proposing this exemption to make permanent PTE 91-8 pursuant to

section 408(a) of the Act and section 4975 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.)

Notice to Interested Persons

Those persons who may be interested in the pendency of the

requested exemption include fiduciaries and participants of plans which

have invested or may invest in an Account. Because of the large number

of plans which currently invest in the Accounts, the Department has

determined that the only practical form of providing notice to

interested persons is the distribution by Equitable, of a notice to the

fiduciaries of all plans currently invested in any Account. Such notice

will contain a copy of the notice of the proposed exemption published

in the Federal Register, and a statement advising interested persons of

their right to comment and to request a hearing on the proposed

exemption. Such distribution will occur within two (2) weeks of the

date of publication of the notice of the proposed exemption in the

Federal Register. Accordingly, comments and hearing requests on the

proposed exemption are due forty four (44) days after the date of

publication of this proposed exemption in the Federal Register.

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

[[Page 47211]]

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 to

the extent jurisdiction exists under Title I of the Act, 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 requirements of

section 401(a) of the Code, e.g., the plan must operate for the

exclusive benefit of the employees of the employer maintaining the plan

and their beneficiaries;

(2) The proposed exemption, if granted, will not extend to

transactions prohibited under section 406(b)(3) of the Act and section

4975(c)(1)(F) of the Code;

(3) Before an exemption may be granted under section 408(a) of the

Act and section 4975(c)(2) of the Code, the Department must find that

the exemption is administratively feasible, in the interest of the plan

and of its participants and beneficiaries and protective of the rights

of participants and beneficiaries of the plan;

(4) This proposed exemption, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and the Code,

including statutory or administrative exemptions. 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

(5) This proposed exemption, if granted, is subject to the express

condition that the summary of facts and representations set forth in

the notice of proposed exemption relating to PTE 91-8, as amended by

this notice to make permanent as modified PTE 91-8 accurately describe,

where relevant, the material terms of the transactions to be

consummated pursuant to this exemption.

Written Comments and Hearing Requests

All interested persons are invited to submit written comments on

the pending exemption to the address above, within forty four (44) days

after the date of publication of this proposed exemption in the Federal

received will be available for public inspection with the application

for exemption at the address set forth above.

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting the requested

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, August 10, 1990).

Section I--Covered Transactions

The restrictions of section 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 the provision of property management and/or leasing

services by ERE, Equitable's wholly-owned subsidiary to an Account (as

defined in Section IV), provided that the conditions set forth in

Section II are met.

Section II--Conditions

(1) The arrangement under which the covered transactions is

performed is subject to the prior authorization of an independent plan

fiduciary with respect to each plan whose assets are invested in an

Account, following disclosure of information in the manner described in

paragraph (2) below. For plans which have previously authorized their

participation in the Accounts under PTE 91-8, no reauthorization will

be required.11 In the case of a plan whose assets are proposed to

be invested in an Account subsequent to implementation of the property

management and leasing services (the Property Services Policy), the

plan's investment in the Account is subject to the prior written

authorization of an independent plan fiduciary following disclosure of

the information described in paragraph (2). The requirement that the

authorizing fiduciary be independent of Equitable shall not apply in

the case of plans maintained by Equitable on behalf of its employees.

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\11\ However, during the notification of interested persons

period, Equitable will provide to all interested parties, including

the plans participating in the Accounts, a copy of the notice of

this proposed exemption. Accordingly, the plans will have the

opportunity to submit written comments on the pending exemption

during the comment period.

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(2) In the event Equitable proposes to implement the Property

Services Policy for any additional Account, not less than 45 days prior

to the implementation of the Property Services Policy, Equitable or

ERE, as investment manager, shall furnish the authorizing plan

fiduciary with any reasonably available information which Equitable or

ERE believes to be necessary to determine whether such approval should

be given, as well as such information which is reasonably requested by

the authorizing plan fiduciary. Such information will include: a

description of the services to be performed by ERE; identification of

properties for which services will be required; an estimate of the fees

that would be paid to ERE if it is selected to provide such services;

an explanation of the potential conflicts of interest involved in

selecting ERE; an explanation of the selection process; and a

description of the terms upon which a plan may withdraw from an

Account.

(3) In the event an authorizing plan fiduciary of any plan whose

assets are invested in an Account submits a notice in writing to

Equitable or ERE, as investment manager, at least 15 days prior to

implementation of the Property Services Policy, objecting to the

implementation of the Property Services Policy, the plan on whose

behalf the objection was tendered will be given the opportunity to

terminate its investment in the Account, without penalty. With the

exception of a plan which has invested in a closed-end Account under

which the rights of withdrawal from the Account may be limited as

provided in the plan's written agreement to invest in the Account, if

written objection to the Property Services Policy is submitted to

Equitable or ERE any time after 15 days prior to implementation of the

Property Services Policy (or after implementation), the plan must be

able to withdraw without penalty, within such time as may be necessary

to effect such withdrawal in an orderly manner that is equitable to all

withdrawing plans and to the non-withdrawing plans. However, Equitable

or ERE need not discontinue operating pursuant to the Property Services

Policy, once implemented, by reason of a plan electing to withdraw

after 15 days prior to the scheduled implementation date of the

Property Services Policy. Any plan which has a discretionary asset

management arrangement with Equitable may terminate such arrangement

and withdraw from an Account at any time.

(4)(a) Equitable or ERE shall furnish the authorizing plan

fiduciary and the Independent Fiduciary acting on behalf of the plans

participating in the Account with the Annual Report containing the

information described in this paragraph, not less frequently than once

a year and not later than 90 days following the end

[[Page 47212]]

of the period to which the report relates. Such Annual Report shall

disclose the total of all fees incurred by the Account during the

preceding year under contracts with ERE; include a description of the

properties and the services that have been performed by ERE for an

Account; and delineate the fees that are anticipated to be paid to ERE

in the coming year for services provided by these entities in

connection with properties held by an Account. The Annual Report will

contain a description of a method for the termination of the multiple

services arrangement (see Section II(5)), and for the confirmation and/

or removal of the Independent Fiduciary by investing plans in the

Accounts. The Annual Report will also contain a ballot regarding