Proposed Exemptions; State Street Bank and Trust
Federal RegisterOct 2, 1997
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10159, et al.]
Proposed Exemptions; State Street Bank and Trust
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone
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number of the person making the comment or request, and (2) the nature
of the person's interest in the exemption and the manner in which the
person would be adversely affected by the exemption. A request for a
hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ________________, stated in each
Notice of Proposed Exemption. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
State Street Bank and Trust Company Located in Boston,
Massachusetts
[Application No. D-10159]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a)(1) (A) through (D) and
406 (b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (E) of the Code,1 shall not apply to
the lending of securities to State Street Bank and Trust Company (State
Street), acting through its Financial Markets Group (FMG) (formerly the
Money Market Division of the Capital Markets Area) or acting through
any other division or U.S. affiliate of State Street that is a
successor to the activities of FMG; and shall not apply to the lending
of securities to any U.S. registered broker-dealers affiliated with
State Street (the Affiliated Broker Dealers) 2 by employee
benefit plans (the Client Plans or the Client Plan), including
commingled investment funds holding plan assets for which State Street,
through its Master Trust Services Division (the Trust Division) acts as
directed trustee or custodian, and for which State Street, through its
Global Securities Lending Division or any other similar division of
State Street or U.S. affiliate of State Street or of its parent
(collectively, GSL) acts as securities lending agent (or sub-agent);
and shall not apply to the receipt of compensation by GSL in connection
with the proposed transactions, provided that the following conditions
are met:
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\1\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
\2\ FMG, any division or U.S. affiliate of State Street that
becomes a successor to the activities of FMG, and the Affiliated
Broker Dealers are collectively referred to, herein, as the SSB
Group.
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a. Neither State Street, the SSB Group, GSL, nor any other division
or affiliate of State Street has or exercises discretionary authority
or control with respect to the investment of the assets of Client Plans
involved in the transaction (other than with respect to the investment
of cash collateral after securities have been loaned and collateral
received) or renders investment advice (within the meaning of 29 CFR
2510.3-21(c)) with respect to such assets, including decisions
concerning a Client Plan's acquisition or disposition of securities
available for loan;
b. Before a Client Plan participates in a securities lending
program and before any loan of securities to the SSB Group is effected,
the fiduciary of such plan who is independent of State Street, GSL, the
SSB Group, and any other division or affiliate of State Street must
have:
(1) Authorized and approved the securities lending authorization
agreement with GSL (the Agency Agreement), where GSL is acting as the
direct securities lending agent; or
(2) Authorized and approved the primary securities lending
authorization agreement (the Primary Lending Agreement) with the
primary lending agent, where GSL is lending securities under a sub-
agency arrangement with the primary lending agent 3; and
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\3\ The Department, herein, is not providing relief for
securities lending transactions engaged in by primary lending
agents, other the GSL, beyond that provided, pursuant to Prohibited
Transaction Class Exemption 81-6 (PTCE 81-6) and Prohibited
Transaction Class Exemption 82-63 (PTCE 82-63). PTCE 81-6 was
granted 46 FR 7527, January 23, 1981, as amended at 52 FR 18754, May
19, 1987. The Notice of Proposed Exemption for application numbers
D-5598 and D-5776 was published at 46 FR 10570, February 3, 1981.
PTCE 82-63 was granted 47 FR 14804, April 6, 1982. The Notice of
Proposed Class Exemption was published at 46 FR 7518, January 23,
1981, as amended at 46 FR 10570, February 3, 1981.
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(3) Approved the general terms of the securities loan agreement
(the Loan Agreement) between such Client Plan and the borrower, the SSB
Group, the specific terms of which are negotiated and entered into by
GSL;
c. A Client Plan may terminate the Agency Agreement or the Primary
Lending Agreement at any time, without penalty to such plan, on five
(5) business days notice;
d. The Client Plan will receive from the SSB Group (either by
physical delivery or by book entry in a securities depository, wire
transfer or similar means) by the close of business on or before the
day the loaned securities are delivered to the SSB Group, collateral
consisting of cash, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, or irrevocable bank
letters of credit issued by a person other than State Street or an
affiliate thereof, or any combination thereof, or other collateral
permitted under PTCE 81-6 (as amended from time to time or,
alternatively, any additional or superseding class exemption that may
be issued to cover securities lending by employee benefit plans);
e. The market value of the collateral must, as of the close of
business on the
[[Page 51686]]
preceding business day, initially equal at least 102 percent (102%) of
the market value of the loaned securities. If the market value of the
collateral falls below 100 percent (100%) (or such greater percentage
agreed to by the parties) of the loaned securities, GSL will require
the SSB Group to deliver additional collateral by the close of business
on the following day such that the market value of the collateral will
again equal at least 102 percent (102%). The Loan Agreement will give
the Client Plans a continuing security interest in, title to, or the
rights of a secured creditor with respect to the collateral and a lien
on the collateral. GSL will monitor the level of the collateral daily;
f. All GSL's procedures regarding the securities lending activities
will at a minimum conform to the applicable provisions of PTCE 81-6 and
PTCE 82-63;
g. State Street will agree to indemnify and hold harmless each
lending Client Plan (including the sponsor and fiduciaries of such
Client Plan) against any and all damages, losses, liabilities, costs,
and expenses (including attorneys' fees) which the Client Plan may
incur or suffer directly arising out of the lending of the securities
of such Client Plan to the SSB Group;
h. The Client Plan will receive the equivalent of all distributions
made to holders of the borrowed securities during the term of any loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions;
i. Prior to any Client Plan's approval of the lending of its
securities to the SSB Group, a copy of this Notice of Proposed
Exemption and a copy of the final exemption, if granted, will be
provided to the Client Plan;
j. Only Client Plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
the SSB Group;
k. The terms of each loan of securities by the Client Plans to the
SSB Group will be at least as favorable to such plans as those of a
comparable arm's-length transaction between unrelated parties;
l. Each Client Plan will receive monthly reports on the
transactions, including but not limited to the information described in
paragraph 26 below, so that an independent fiduciary of such plan may
monitor the securities lending transactions with the SSB Group;
m. Before entering into the Loan Agreement and before a Client Plan
lends any securities to the SSB Group, an independent fiduciary of such
Client Plan will receive sufficient information, concerning the
financial condition of State Street, including but not limited to
audited and unaudited financial statements of State Street's parent
corporation; and
n. The SSB Group will provide to a Client Plan prompt notice at the
time of each loan by such plan of any material adverse changes in State
Street's financial condition, since the date of the most recently
furnished financial statements.
Summary of Facts and Representations
1. State Street is a wholly-owned subsidiary of State Street Boston
Corporation, a bank holding company organized in 1970 under the laws of
the Commonwealth of Massachusetts. As a Massachusetts trust company and
a member bank of the Federal Reserve System, State Street is a
``bank,'' as defined in both section 202(a)(2) of the Investment
Advisers Act of 1940 and section 581 of the Code. As of December 31,
1994, State Street's total assets were $21.7 billion, of which $16
billion (or 74%) were investment securities and money market assets and
$3.2 billion (or 15%) were loans.
2. State Street, through its Trust Division, provides custodial
services, trustee, and related fiduciary services to its customers. In
this regard, the Trust Division has more than $1.6 trillion of assets
under custody and, as custodian, services $664 billion of pension and
other assets for U.S. pension plans, government plans, and other tax
exempt investors in North American. In addition, with $675 billion of
mutual fund assets under custody, it is represented that the Trust
Division services 36 percent (36%) of registered funds. It is
represented that at year-end 1994, the Trust Division also had $210
billion of bonds under trusteeship and $160 billion of assets under
management.
3. State Street, acting through GSL, also provides securities
lending services to many of State Street's institutional clients. GSL,
on behalf of State Street's securities lending clients, negotiates the
terms of loans with borrowers, pursuant to a client-approved form of
loan agreement the terms of which may be modified from time to time
with the approval of the client, and otherwise acts as a liaison
between the lender and the borrower to facilitate the lending
transaction. As securities lending agent, GSL also has responsibility
for monitoring receipt of all required collateral and for marking such
collateral to market daily, so that adequate levels of collateral are
maintained. To the extent agreed upon with the client, GSL is also
responsible for investing the cash collateral after securities have
been loaned and collateral received. GSL also monitors and evaluates on
a continuing basis the performance and creditworthiness of the
borrowers of securities.
GSL also may be retained from time to time by primary securities
lending agents to provide securities lending services in a sub-agency
capacity with respect to portfolio securities of the clients of such
primary lending agents. As securities lending sub-agent, GSL's role in
the lending transaction (i.e., negotiating the terms of loans with
borrowers, pursuant to a client-approved form of loan agreement the
terms of which may be modified from time to time with the approval of
the client, monitoring receipt of collateral, marking to market
required collateral, and investing cash collateral) parallels the role
under lending transactions in which GSL acts as primary lending agent
on behalf of its clients.
The borrowers with whom GSL usually transacts as agent for the
lender are typically broker-dealers who use borrowed securities to
satisfy their trading requirements or to ``re-lend'' securities to
other broker-dealers, and others who need a particular security for
various periods of time. All such borrowing by broker-dealers is
required to conform to the Federal Reserve Board's Regulation T.
Borrowing purposes which are permitted, pursuant to Regulation T,
include the delivery of securities in the case of short sales, the
failure of a broker to receive securities it is required to deliver, or
other similar situations.
4. State Street itself, however, acting through the SSB Group, is
also a borrower of securities, and indeed acts in this capacity, after
full disclosure and consent, with respect to many of GSL's
institutional clients, such as public pension plans which are not
covered by the Act. The SSB Group, as borrower, uses borrowed
securities to meet its obligations to deliver securities in connection
with its short sales, trade fails, or other similar situations, and to
engage in repurchase transactions with third parties.4
Acting as principal, the SSB
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\4\ It is represented that Regulation T of the Federal Reserve
Board does not apply to the borrowing of securities by the SSB
Group, because the SSB Group is part of a bank.
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Group actively engages in the borrowing and lending of securities,
with a daily outstanding loan volume averaging $2 billion.
5. It is represented that GSL currently does not lend to the SSB
Group the
[[Page 51687]]
securities of any of State Street's trust or custody clients covered by
the Act, although as noted above, after full disclosure and consent,
GSL does lend U.S. government securities to the SSB Group for certain
of its clients who are not covered by the Act. It is represented that
the SSB Group and GSL have each developed an accounting system and
safeguards to service the needs of its respective client base. It is
represented that whenever trades are effected between GSL, acting as
securities lending agent, and the SSB Group, as borrower, such trades
are accomplished in the same manner as between completely independent
third parties. In this regard, such trades take place pursuant to an
established protocol, primarily over the telephone and through computer
trading screens used by all participants in the industry.
6. State Street proposes to offer to Client Plans, for which the
Trust Division of State Street serves as directed trustee or custodian,
and GSL serves as securities lending agent (or sub-agent), the
opportunity to lend securities to the SSB Group.5 In
addition, State Street proposes that GSL and the SSB Group receive
compensation in connection with such securities lending transactions.
It is represented that State Street is a party in interest and a
fiduciary with respect to the Client Plans, pursuant to section
3(14)(A) of the Act, and a service provider to such plans, pursuant to
section 3(14)(B) of the Act. Because the Trust Division, GSL, and the
SSB Group are all part of the same legal entity, State Street, the
lending of securities to the SSB Group by Client Plans for which the
Trust Division serves as directed trustee or custodian and for which
GSL serves as securities lending agent (or sub-agent) could be deemed
to be a prohibited transaction under section 406(a)(1) (A) through (D)
of the Act for which exemptive relief would be necessary. In addition,
because State Street, through GSL, would be acting as securities
lending agent (or sub-agent) and, through the SSB Group, would be the
borrower of securities from the Client Plans, the proposed transactions
could be deemed to be prohibited under section 406 (b)(1) and (b)(2) of
the Act, as well.
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\5\ For the sake of simplicity, future references to GSL's
performance of services as securities lending agent should be deemed
to include its parallel performance as securities lending sub-agent
and references to Client Plans should be deemed to refer to plans
for which GSL is acting as sub-agent with respect to securities
lending activities, unless otherwise indicated specifically or by
the context of the reference.
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7. With respect to various prohibited transactions which arise in
certain situations involving securities lending, there are two relevant
class exemptions, PTCE 81-6 and PTCE 82-63. PTCE 81-6 provides an
exemption under certain conditions from section 406(a)(1) (A) through
(D) of the Act and the corresponding provisions of section 4975(c) of
the Code for the lending of securities that are assets of an employee
benefit plan to certain broker-dealers or banks which are parties in
interest. In this regard, condition number one of PTCE 81-6 requires,
in part, that neither the borrower nor an affiliate of the borrower has
discretionary authority or control with respect to the investment of
the plan assets involved in the transaction. PTCE 82-63 provides an
exemption under specified conditions from section 406(b)(1) of the Act
and section 4975(c)(1)(E) of the Code for the payment of compensation
to a plan fiduciary for services rendered in connection with loans of
plan assets that are securities. In this regard, PTCE 82-63 permits the
payment of compensation to a plan fiduciary for the provision of
securities lending services, only if the loan of securities itself is
not prohibited under section 406(a) of the Act (i.e. a loan of
securities to a non-party in interest).
Under the proposed arrangement, because GSL would have discretion
to lend securities of the Client Plans to the SSB Group, and because
both GSL and the SSB Group are divisions of State Street, the lending
of securities to the SSB Group by the Client Plans for which GSL serves
as securities lending agent (or sub-agent) may be outside the scope of
relief provided by PTCE 81-6 and by PTCE 82-63. Accordingly, State
Street has requested the Department to grant relief from section
406(a)(1) (A) through (D), (b)(1), and (b)(2) of the Act and the
corresponding provisions of the Code which would permit the SSB Group
to borrow securities from those Client Plans for which State Street,
through its Trust Division will be acting as directed trustee or
custodian, and through GSL will be acting as securities lending agent
(or sub-agent).
In addition, State Street has requested relief from section
406(a)(1) (A) through (D), (b)(1), and (b)(2) and the corresponding
provisions of the Code which would permit GSL and the SSB Group to
receive compensation from a Client Plan in connection with the proposed
securities lending transactions. In this regard, it is represented that
the SSB Group will be compensated as any other independent borrower of
Client Plan securities would be (e.g., by receiving an agreed rebate
payment). In no event, will rates paid to the SSB Group be less
favorable to the Client Plan than a loan of such securities made at the
same time and under the same circumstances to an unaffiliated borrower.
8. If the requested exemption is granted, GSL represents that it
intends to employ the same procedures currently used in the case of
securities loans to unrelated third party borrowers and which GSL has
already incorporated into similar arrangements with institutional
clients not covered by the Act. Specifically, it is represented that
State Street will adopt and implement procedural safeguards that all
trades affected will take place at the same ``arms'' length'' prices
that would have been negotiated with similarly-situated third party
borrowers. In this regard, it is represented that the SSB Group, as
borrower, will receive a rebate fee comparable to the fee received by
independent borrowers, and GSL, as lender's agent for Client Plans,
will receive a fee specified in the agreement with such plans for
securities lending services. In this regard, it is represented that
such securities lending services will include monitoring the collateral
and acting appropriately to protect the interest of the lender in the
event of default by the borrower. It is further represented that with
respect to each Client Plan to which the proposed exemption would
apply, neither State Street, the SSB Group, GSL, nor any other division
or affiliate of State Street has or exercises discretionary authority
or control with respect to the investment of the assets of the plan
involved in the transaction (other than with respect to the investment
of cash collateral after securities have been loaned and collateral
received), or renders investment advice (within the meaning of 29 CFR
2510.3-21(c) with respect to those assets, including decisions
concerning a Client Plan's acquisition or disposition of securities
available for loan. Accordingly, it is represented that GSL will not be
in a position to influence the portfolio holdings of its Client Plans
in a manner that might increase or decrease the securities available
for lending to the SSB Group (or any other borrower). In addition,
State Street represents that the proposed lending program incorporates
the relevant conditions contained in class exemptions PTCE 81-6 and
PTCE 82-63.
9. Several safeguards, described more fully below, are incorporated
into this exemption in order to ensure the protection of the assets of
the Client Plans involved in the proposed transactions. In this regard,
where GSL
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is the direct securities lending agent, a fiduciary of a Client Plan
who is independent of State Street, GSL, the SSB Group, and any other
division or affiliate of State Street will sign the Agency Agreement
before such Client Plan participates in a securities lending program.
The Agency Agreement will, among other things, describe the operation
of the lending program, prescribe the form of the Loan Agreement to be
entered into on behalf of the Client Plan with borrowers, specify the
securities which are available to be loaned, and prescribe that a
borrower (including the SSB Group) is required to deliver collateral
having a value in excess of the value of the loaned securities (i.e.
not less than 102% or, in some cases, a higher agreed-upon percentage).
In addition, the Agency Agreement will provide that the securities will
be marked-to-market daily and provide a list of permissible borrowers,
including the SSB Group.
The Agency Agreement will also set forth the basis and the method
for GSL's compensation from a Client Plan for the performance of
securities lending services. As set forth more fully below, the basis
for GSL's compensation will be its fixed percentage share of the
return, if any, on cash collateral or the applicable interest due on a
non-cash collateral loan. The actual rate of return that will be
divided between the Client Plan and GSL in such pre-agreed percentage
will vary each day (and indeed during the day from time to time)
according to the investment performance from each loan of securities.
It is represented that GSL's share with respect to each Client Plan
will be negotiated with such Client Plan and thereafter set forth in
the Agency Agreement on the date such agreement is executed.
10. The Agency Agreement will contain provisions to the effect that
if the SSB Group is designated by a Client Plan as an approved
borrower, (i) such Client Plan will acknowledge that the SSB Group,
GSL, and the Trust Division are, or may be deemed to be, the same legal
entity, and (ii) GSL will represent to such Client Plan that each and
every loan made to the SSB Group on behalf of such plan will be at
market rates and will in no event be less favorable to such Client Plan
than a loan of such securities, made at the same time and under the
same circumstances, to an unaffiliated borrower.
11. When GSL is lending securities under a sub-agency arrangement,
the primary lending agent will enter into a Primary Lending Agreement
with a fiduciary of a Client Plan, before such plan participates in the
securities lending program. It is represented that it is the
responsibility of the primary lending agent to obtain the approval of
the fiduciary of the Client Plan to such Primary Lending Agreement. It
is represented that the primary lending agent will be independent of
GSL and the SSB Group. As State Street will not be a party to the
Primary Lending Agreement, it is represented that the sub-agency
arrangement between GSL and the primary lending agent will obligate the
primary lending agent to provide assurance that the primary lending
agent was independent of the fiduciary of the Client Plan.
The Primary Lending Agreement will contain substantive provisions
akin to those in the Agency Agreement relating to the description of
the operation of the lending program, use of an approved form of Loan
Agreement, specification of securities which are available to be
loaned, prescription that a borrower is required to deliver collateral
having a specified value in excess of the value of the loaned
securities, and a list of approved borrowers (including the SSB Group).
The Primary Lending Agreement will specifically authorize the primary
lending agent to appoint sub-agents, including GSL, to facilitate its
performance of securities lending agency functions. Where GSL is
appointed to act as such a sub-agent, GSL would require that the
primary lending agent represent to GSL that the primary lending agent
has received prior approval of or has the authority to make the
decision to hire GSL.
The Primary Lending Agreement will also set forth the basis and the
method for the primary lending agent's compensation from the Client
Plan for the performance of securities lending services and will
authorize the primary lending agent to pay a portion of its fee, as the
primary lending agent determines in its sole discretion, to any sub-
agent(s) it retains pursuant to the authority granted under such
agreement.
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(the Sub-Agency Agreement) with GSL under which the primary lending
agent will retain and authorize GSL, as sub-agent, to lend the
securities of the primary lending agent's Client Plans, in a manner
consistent with the terms and conditions as specified in the Primary
Lending Agreement. It is represented that the Primary Lending Agreement
and the Sub-Agency Agreement will not necessarily have identical terms,
because the procedures that State Street uses in operating its lending
program will be spelled out in its form agreement, and these may not be
identical to how the primary lending agent operates its own program.
For example, State Street may require that its Sub-Agency Agreement
contain certain specific provisions which the primary lending agent may
not have requested from the Client Plan. One such requirement is that
collateral initially equal 102 percent (102%) of the value of the
loaned securities, whereas the primary lending agent may have been
authorized to make loans of securities at less than 102 percent (102%)
collateral. State Street may also require recordkeeping in addition to
that specified in the Primary Lending Agreement and may require
different notice provisions.
GSL represents that the Sub-Agency Agreement will contain
provisions which are in substance comparable to those described in
paragraphs 9 and 10 above, which would appear in an Agency Agreement in
situations where GSL is the primary lending agent. In this regard, GSL
will make representations in the Sub-Agency Agreement, as described in
paragraph 10 above, with respect to arm's-length dealing with the SSB
Group. The Sub-Agency Agreement will also set forth the basis and
method for GSL's compensation to be paid by the primary lending agent.
12. In all cases, GSL will maintain records sufficient to assure
compliance with its representation that all loans to the SSB Group are
effectively at arm's-length terms. Such records will be provided to the
appropriate independent fiduciary of a Client Plan in the manner and
format agreed to with such fiduciary and without charge to such Client
Plan. A Client Plan may terminate the Agency Agreement at any time,
without penalty to such plan, on five (5) business days notice. It is
further represented that the Primary Lending Agreement may be subject
to a similar termination provision, if the primary lending agent is
relying on PTCE 81-6.
13. GSL, on behalf of the Client Plans, will enter into a Loan
Agreement with the SSB Group that is in substantially similar form to
the one used from time to time, with all other borrowers. It is
represented that the Loan Agreement cannot be identical to that used
with an unrelated party, in part because, special disclosures must be
made to Client Plans, regarding the relationship between GSL, the SSB
Group, and the Trust Division, as operations divisions of State Street.
However, it is represented that the economic terms and procedures
required by the Loan Agreement will be identical to those negotiated
with unrelated borrowers.
[[Page 51689]]
Although GSL will negotiate with the SSB Group the terms of any
specific loan, the general terms of the Loan Agreement, pursuant to
which any loan is effected will be approved by a fiduciary of the
Client Plan who is independent of State Street. The Loan Agreement will
specify, among other things, the right of the Client Plan, acting
through GSL, to terminate a loan at any time and such plan's rights in
the event of any default by the SSB Group. The Loan Agreement will
explain the basis for compensation to the Client Plan for lending
securities to the SSB Group under each category of collateral. The Loan
Agreement also will contain a requirement that the SSB Group must pay
all transfer fees and transfer taxes related to the loans of
securities.
14. Before entering into the Loan Agreement, State Street will
furnish its most recent available audited and unaudited financial
statements of its parent, State Street Boston Corporation, to GSL, and
in turn such statements will be made available to each Client Plan
before such plan is asked to approve the terms of the Loan Agreement.
The Loan Agreement will contain a requirement that the SSB Group must
provide to the Client Plan prompt notice at the time of a loan by such
plan of any material adverse changes in State Street's financial
condition, since the date of the most recently furnished financial
statements. If any such changes have taken place, GSL will not make any
further loans to the SSB Group, unless an independent fiduciary of such
Client Plan has approved the loan in view of the changed financial
condition.
15. As noted in paragraph 9 and 10, the agreement by GSL to provide
securities lending services, as agent, to a Client Plan will be
embodied in the Agency Agreement. The Client Plan and GSL will, prior
to the commencement of any lending activity, agree to the fee
arrangement, as described in paragraph 9 above, under which GSL will be
compensated for its services as lending agent. Such agreed upon fee
arrangement will be set forth in the Agency Agreement and thereby will
be subject to the prior written approval of a fiduciary of such Client
Plan who is independent of the SSB Group and GSL.
Similarly, with respect to such arrangements under which GSL is
acting as securities lending sub-agent, the agreed upon fee arrangement
of the primary lending agent will be set forth in the Primary Lending
Agreement, and such agreement will specifically authorize the primary
lending agent to pay a portion of the fee, as the primary lending agent
determines in its sole discretion, to any sub-agent, including GSL,
which is to provide securities lending services to the Client
Plans.6 A Client Plan will be provided with any reasonably
available information which is necessary for the independent fiduciary
of such plan to make a determination whether to enter into or continue
to participate under the Agency Agreement (or the Primary Lending
Agreement) and any other reasonably available information which such
fiduciary may reasonably request.
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\6\ The foregoing provisions describe arrangements comparable to
conditions (c) and (d) of PTCE 82-63 which require that the payment
of compensation to a ``lending fiduciary'' is made under a written
instrument and is subject to prior written authorization of an
independent ``authorizing fiduciary.'' In the event that a
commingled investment fund participates in the securities lending
program, the special rule applicable to such funds concerning the
authorization of the compensation arrangement, as set forth in
paragraph (f) of PTCE 82-63, must be satisfied.
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16. Each time a Client Plan loans securities to the SSB Group,
pursuant to the Loan Agreement, GSL will reflect in its records the
material terms of the loan, including the securities to be loaned, the
required level of collateral, and the fee or rebate payable. When a
loan is collateralized with cash, the cash will be invested for the
benefit of and at the risk of the Client Plan, and resulting earnings
(net of a rebate rate to the borrower and the fee to the lending agent)
comprise the compensation to such plan with respect to the loan. Where
the collateral consists of obligations other than cash, the borrower
will pay a fee (loan premium) directly to the Client Plan. The terms of
each loan will be at least as favorable to the Client Plan as those of
a comparable arm's-length transaction between unrelated parties.
17. The Client Plan will receive the equivalent of all
distributions made to holders of the borrowed securities during the
term of any loan, including, but not limited to, cash dividends,
interest payments, shares of stock as a result of stock splits and
rights to purchase additional securities, or other distributions. The
Loan Agreement will provide that the Client Plan may terminate any loan
at any time. Upon a termination, the SSB Group will be contractually
obligated to return the loaned securities to the Client Plan within
five (5) business days of notification (or such longer period of time
permitted pursuant to PTCE 81-6, as amended or superseded). If the SSB
Group fails to return the securities within the designated time, the
Client Plan will have the right under the Loan Agreement to purchase
securities identical to the borrowed securities and apply the
collateral to payment of the purchase price and any other expenses of
such plan associated with the sale and/or purchase.
18. GSL will establish each day separate written schedules of
lending fees and rebate rates to assure uniformity of treatment among
borrowing brokers and to limit the discretion that GSL would have in
negotiating securities loans to the SSB Group. Loans to all borrowers
of a given security on that day will be made at rates or lending fees
on the relevant daily schedules or at rates or lending fees which may
be more advantageous to the Client Plans. It is represented that in no
case will loans be made to the SSB Group at rates or lending fees less
advantageous to the Client Plans than those on the schedule. The daily
schedule of rebate rates will be based on the current value of the
clients' reinvestment vehicles and on market conditions, as reflected
by demand for securities by borrowers other than the SSB Group. As with
rebate rates, the daily schedule of lending fees will also be based on
market conditions, as reflected by demand for securities by borrowers
other than the SSB Group, and will generally track the rebate rates
with respect to the same security or class of security.
19. GSL will adopt maximum daily rebate rates for cash collateral
payable to the SSB Group on behalf of a lending Client Plan. Separate
maximum daily rebate rates will be established with respect to loans of
designated classes of securities such as U.S. government securities,
U.S. equities and corporate bonds, international fixed income
securities, and international equities. With respect to each designated
class of securities, the maximum rebate rate will be the lower of: (i)
The one month LIBOR rate, minus a stated percentage of such LIBOR rate
and, (ii) the client's actual reinvestment rate for the relevant cash
collateral, minus a stated percentage of such reinvestment rate, as
pre-approved by the independent fiduciary of the Client Plan. Thus,
when cash is used as collateral, the daily rebate rate will always be
lower than the rate of return to the Client Plans from authorized
investments for cash collateral by such stated percentage as shall be
pre-approved by the independent fiduciary. GSL will submit the formula
for determining the maximum daily rebate rates to an independent
fiduciary of the Client Plan for approval before lending any securities
to the SSB Group on behalf of such plan.
20. GSL will also adopt minimum daily lending fees for non-cash
collateral payable by the SSB Group to
[[Page 51690]]
GSL on behalf of the Plan. Separate minimum daily lending fees will be
established with respect to loans of designated classes of securities,
such as U.S. government securities, U.S. equities and corporate bonds,
international fixed income securities, and international equities. With
respect to each designated class of securities, the minimum lending fee
will be stated as a percentage of the principal value of the loaned
securities. GSL will submit such minimum daily lending fees to an
independent fiduciary of the Client Plan for approval before initially
lending any securities to the SSB Group on behalf of such plan.
21. For collateral other than cash, the lending fees charged the
previous day will be reviewed by GSL for competitiveness. Based on the
demand of the marketplace, this daily fee tends to remain constant and,
with respect to domestic securities and international debt securities,
is currently at least one twentieth of one percent of the principal
value of the loaned securities. With respect to international equity
securities, the daily fee is currently one fifth of one percent of the
principal value of the loaned securities. Because 50 percent (50%) or
more of securities loans by Client Plans will be to unrelated brokers
or dealers,7 the competitiveness of GSL's fee schedule will
be continuously tested in the marketplace. Accordingly, loans to the
SSB Group should result in a competitive rate of income to the lending
Client Plan.
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\7\ It is represented that this 50 percent (50%) requirement
applies regardless of the type of collateral used to secure the
loan.
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The method of determining the daily securities lending rates (fees
and rebates), the minimum lending fees payable by the SSB Group and the
maximum rebate payable to the SSB Group will be specified in an exhibit
attached to the Agency Agreement to be executed between the independent
fiduciary of the Client Plan and GSL in cases where GSL is the direct
securities lending agent.
22. Should GSL recognize prior to the end of a business day that,
with respect to new and/or existing loans, it must change the rebate
rate or lending fee formula in the best interest of Client Plans, it
may do so (i) with respect to borrowers other than the SSB Group, at
the end of such business day, and (ii) with respect to the SSB Group,
upon GSL's receipt of a written approval of the Client Plan's
independent fiduciary.8
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\8\ GSL represents that it will not initiate any modification in
such rates or fees which would be detrimental to the Client Plans.
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GSL may propose a change in the lending fee or rebate rate
determination, as applicable, with respect to an outstanding loan by
delivering written notice of the effective date and the new
determination pursuant to which a lending fee or rebate rate, as the
case may be, may be determined at least five (5) business days before
the date of the proposed change. In the event that the Client Plans
does not consent to such change by not providing GSL with
acknowledgment of its consent in writing by such means that will ensure
receipt by GSL prior to 10:00 A.M. New York time, on the effective date
of the change, then GSL will not make such change. The applicant
represents that allowing GSL to request a modification to the lending
fee or the rebate rate formula with respect to an existing loan to the
SSB Group when market conditions change will be beneficial to the
Client Plans. According to the applicants, in the absence of the
ability to make such modification, the SSB Group may be forced by
market conditions to terminate the loan and seek better terms
elsewhere. Such termination may then force the Client Plan to seek new
borrowers for its securities who, in light of the changed market
conditions, are likely to negotiate for the lending fee or rebate rate
which the SSB Group would have received or paid had GSL had the written
authority from the independent fiduciary of the Client Plan to decrease
the lending fee or increase the rebate rate.
23. While GSL will normally lend securities to requesting
borrowers, including, for these purposes, the SSB Group, on a ``first
come, first served'' basis, as a means of assuring uniformity of
treatment among borrowers, it should be recognized that in some cases
it may not be possible to adhere to a ``first come, first served''
allocation. This can occur, for instance, where (a) the credit limit
established for such borrower by GSL and/or the Client Plan has already
been satisfied; (b) the ``first in line'' borrower is not approved as a
borrower by the particular Client Plan whose securities are sought to
be borrowed; or (c) the ``first in line'' borrower cannot be
ascertained, as an operational matter, because several borrowers spoke
to different GSL representatives at or about the same time with respect
to the same security. In situations (a) and (b), loans would normally
be effected with the ``second in line.'' In situation (c), securities
would be allocated equitably among all eligible borrowers.
24. Under the Loan Agreement, State Street will agree to indemnify
and hold harmless each lending Client Plan (including the sponsor and
fiduciaries of such Client Plan) against any and all damages, losses,
liabilities, costs, and expenses (including attorneys' fees) which the
Client Plan may incur or suffer directly arising out of the lending of
the securities of such Client Plan to the SSB Group. Accordingly, State
Street will assure the Client Plan that the rate of return on each loan
will at a minimum equal the transactional cost to the plan of lending
securities to the SSB Group. The applicants contend that, as a result
of this indemnity, the rate of return earned by Client Plans from
lending to the SSB Group will, in total, exceed the return from lending
securities to other brokers.
25. The Client Plan will receive collateral from the SSB Group by
physical delivery, book entry in a securities depository, wire
transfer, or similar means by the close of business on or before the
day the loaned securities are delivered to the SSB Group. The
collateral will consist of cash, securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities or irrevocable
bank letters of credit (issued by a person other than State Street or
its affiliates) or any combination thereof, or such other types of
collateral which might be permitted by the Department under PTCE 81-6,
as amended or superseded, relating to securities lending activities.
The market value of the collateral on the close of business on the day
preceding the day of the loan will be at least 102 percent (102%) of
the market value of the loaned securities. The Loan Agreement will give
the Client Plan a continuing security interest in, title to, or the
rights of a secured creditor with respect to the collateral and a lien
on the collateral. GSL will monitor the level of the collateral daily.
If the market value of the collateral falls below 100 percent (100%)
(or such greater percentage agreed to by the parties) of that of the
loaned securities, GSL will require the SSB Group to deliver by the
close of business the next day sufficient additional collateral to
bring the level back to at least 102 percent (102%).
26. Each Client Plan participating in the lending program will be
sent a monthly transaction report which will provide a list of all
security loans outstanding and closed for a specified period. The
report will identify for each open loan position, the securities
involved, the value of the security for collateralization purposes, the
current value of the collateral, the rebate or loan premium (as the
case may be) at which the security is loaned, and the number of days
the security has been on loan.
[[Page 51691]]
In order to provide the means for monitoring lending activity,
rates on loans to the SSB Group compared with loans to other brokers,
and the level of collateral on the loans, it is represented that the
monthly report will show, on a daily basis, the market value of all
outstanding security loans to the SSB Group and to other borrowers as
compared to the total collateral held for both categories of loans.
Further, the monthly report will state the daily fees where collateral
other than cash is utilized and will specify the details used to
establish the daily rebate payable to all brokers where cash is used as
collateral. The monthly report also will state, on a daily basis, the
rates at which securities are loaned to the SSB Group compared with
those at which securities are loaned to other brokers. This statement
will give an independent fiduciary information which can be compared to
that contained in the daily rate schedule.
27. With respect to the proposed transactions, GSL will make and
retain for six (6) months tape recordings evidencing all securities
loan transactions with the SSB Group. Also, if requested by the lending
customer, GSL shall provide daily confirmations of securities lending
transactions; and GSL shall provide to lending customers monthly
account reports, or if requested by the customer, weekly, or daily
reports, setting forth for each transaction made or outstanding during
the relevant reporting period the loaned securities, the related
collateral, rebates and loan premiums, and such other information in
such format as shall be agreed to by the parties.
28. Only Client Plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
the SSB Group. This restriction is intended to assure that any lending
to the SSB Group will be monitored by an independent fiduciary of above
average experience and sophistication in matters of this kind.
29. State Street represents that the proposed transactions are in
the interest of the Client Plans in that the lending of securities is
an attractive investment opportunity. In this regard, a Client Plan
which participates in securities lending is able to earn a fee for
lending the securities to the borrower while continuing to receive the
economic benefits of receiving dividends, interest payments, and other
distributions made with respect to the loaned securities.
It is represented that failure to grant the requested exemption
will limit the number of companies to whom the Client Plans can lend
securities by excluding the SSB Group, an active securities borrower
that currently borrows securities in lending transactions or in
connection with reverse repurchase agreements worth in excess of $5
billion daily.
30. It is represented that the proposed exemption is
administratively feasible, in that it will not require any ongoing
involvement by the Department. In this regard, it is represented that
compliance with the requirements of the exemption can be readily
monitored by the independent fiduciaries of the Client Plans, as well
as by State Street's own internal audit and compliance personnel.
Further, it is represented that State Street will bear the cost of
filing the application for exemption and the costs associated with the
transfers of the loaned securities.
31. In summary, the applicants represent that the described
transactions will satisfy the statutory criteria of section 408(a) of
the Act because:
(a) Neither State Street, the SSB Group, GSL, nor any other
division or affiliate of State Street will have or exercise
discretionary authority or control with respect to the investment of
plan assets involved in the transaction (other than with respect to the
investment of cash collateral after securities have been loaned and
collateral received), or render investment advice (within the meaning
of 29 CFR 2510.3-21(c)) with respect to those assets, including
decisions concerning a Client Plan's acquisition or disposition of
securities available for loan;
(b) Before a Client Plan participates in a securities lending
program and before any loan of securities is effected, the fiduciary of
such plan who is independent of State Street, GSL, the SSB Group, and
any other division or affiliate of State Street will authorize and
approve the Agency Agreement or the Primary Lending Agreement, as
appropriate, and will approve the general terms of the Loan Agreement
between the Client Plan and the SSB Group;
(c) a Client Plan may terminate the Agency Agreement at any time,
without penalty to such plan, on five (5) business days notice;
(d) the Client Plans will receive from the SSB Group a continuing
security interest in, title to, or the rights of a secured creditor
with respect to the collateral and a lien on various forms of
collateral on each loan to the SSB Group which initially will be worth
at least 102 percent (102%) of the market value of the loaned
securities, and which will be monitored daily by GSL to insure that the
market value of the collateral never falls below 100 percent (100%) of
the market value of the loaned securities (or such greater percentage
agreed to by the parties);
(e) all the procedures under the proposed transactions will, at a
minimum, conform to the applicable provisions of PTCE 81-6 and PTCE 82-
63;
(f) State Street will indemnify and hold harmless each lending
Client Plan (including the sponsor and fiduciaries of such Client Plan)
against any and all damages, losses, liabilities, costs, and expenses
(including attorneys' fees) which the Client Plan may incur or suffer
directly arising out of the lending of the securities of such Client
Plan to the SSB Group;
(g) the lending arrangements will permit the Client Plans to lend
to the SSB Group, a major borrower of securities, and will enable such
plans to diversify the list of eligible borrowers and earn additional
income from the loaned securities on a secured basis, while continuing
to receive any dividends, interest payments and other distributions due
on those securities;
(h) prior to any Client Plan's approval of the lending of its
securities to the SSB Group, a copy of this Notice of Proposed
Exemption and a copy of the final exemption, if granted, will be
provided to the Client Plan;
(i) only Client Plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
the SSB Group;
(j) the terms of each loan of securities between the Client Plans
and the SSB Group will be at least as favorable to such plans as those
of a comparable arm's-length transaction between unrelated parties;
(k) the Client Plans will receive monthly reports, so that an
independent fiduciary of such plans may monitor the securities lending
transactions with the SSB Group;
(l) Before entering into the Loan Agreement and before a Client
Plan lends any securities to the SSB Group, an independent fiduciary of
such Client Plan will receive sufficient information, concerning the
financial condition of State Street, including but not limited to
audited and unaudited financial statements of State Street's parent
corporation; and
(m) The SSB Group will provide to a Client Plan prompt notice at
the time of each loan by such plan of any material adverse changes in
State Street's financial condition, since the date of the most recently
furnished financial statements.
[[Page 51692]]
Notice to Interested Persons
Included among those persons who may be interested in the pendency
of the proposed exemption are the investment committee(s) or trustee(s)
of any Client Plan(s) which are interested in lending securities to the
SSB Group. It is represented that the applicant will furnish at its
cost these various classes of interested persons with a copy of the
Notice of Proposed Exemption (the Notice), plus a copy of the
supplemental statement (Supplemental Statement), as required, pursuant
to 29 CFR 2570.43(b)(2) within fifteen (15) calendar days of
publication of the Notice in the Federal Register. Notification will be
provided to all the investment committee(s) or trustee(s) of any Client
Plan(s) which are interested in lending securities to the SSB Group
either by hand delivery or by mailing first class of a copy of the
Notice, plus a copy of the Supplemental Statement. It is represented
that the applicant will at its cost provide a copy of such Notice and a
copy of the final exemption, if granted, to Client Plans after the
final exemption has been issued and prior to any Client Plan's approval
of the lending of securities to the SSB Group.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
Franklin & Davis, P.C. Profit Sharing Plan (the Plan) Located in Troy,
Michigan
[Application No. D-10450]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (E) of the Code, shall not apply to
two proposed loans (the Loans) totaling $229,000 to Franklin & Davis,
P.C. (F&D), the Plan's sponsor and a disqualified person with respect
to the Plan, by the individual account (the Account) of Bruce W.
Franklin (Mr. Franklin), provided the following conditions are
satisfied: (a) The terms of the Loans are at least as favorable to the
Plan as those obtainable in arm's-length transactions with an unrelated
party; (b) the Loans do not exceed 25% of the assets of the Account;
(c) the first Loan (Loan 1) is secured by a second mortgage on certain
real property (the Property) which has been appraised by a qualified
independent appraiser to have a fair market value not less than 150% of
the amount of Loan 1 plus the balance of the first mortgage which it
secures; (d) the second Loan (Loan 2) is secured by certain securities
(the Securities) which have a fair market value not less than 200% of
Loan 2; and (e) the fair market value of the collateral remains at
least equal to the percentages described in conditions (c) and (d),
above, throughout the duration of the Loans.9
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\9\ Since Mr. Franklin is the sole owner of F&D and the only
participant in the Plan, there is no jurisdiction under Title I of
the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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Summary of Facts and Representations
1. F&D is a corporation located in Troy, Michigan, which is engaged
in the practice of law. The Plan is a defined contribution plan with
one participant, Mr. Franklin, who is also the Plan's trustee. As of
March 31, 1997, Mr. Franklin's Account balance was approximately
$916,000.
2. F&D wishes to borrow $229,000 from the Account, which represents
25% of the current fair market value of the Account. The money will be
loaned to F&D in two separate Loans. The Loans will each be amortized
over a 10 year period, with equal monthly payments of principal and
interest over the 10 year term. The interest rate for each Loan will be
9.5% per annum. The total monthly payments for the Loans will be
$2,963.20 per month. Ms. Linda Walden, Vice President of First Citizens
Bank (the Bank) of Newnan, Georgia, has represented in a letter dated
June 26, 1997 that the Bank would lend money to F&D at the same terms
as those of the Loans.
3. Loan 1 will be secured by the Property, which consists of Mr.
and Mrs. Franklin's residence, which is located at 3631 Brookside,
Bloomfield Township, Michigan. The Property has been appraised by Mr.
James Valiquett, an independent appraiser in Farmington, Michigan, to
have a fair market value of $720,000 as of October 8, 1996. The
Property has a first mortgage in the amount of $335,136. Loan 1 would
be secured by a second mortgage on the Property in the amount of
$144,864. Thus, the appraised fair market value of the Property would
represent 150% of the total outstanding principal amount of debt
secured by the Property. The applicant represents that the mortgage to
the Plan will be duly recorded.
4. Loan 2, which will be in the principal amount of $84,136, will
be secured by the Securities. The Securities are publicly traded stock
owned by Mr. and Mrs. Franklin, and consist of 257,084 shares of Royal
Silver Mines, Inc. which is traded on the NASDAQ stock exchange. The
Securities are currently valued at $192,813, which represents
approximately 230% of the principal amount of Loan 2. The applicant
represents that the Plan's security interest in the Securities will be
duly recorded.
5. In summary, the applicant represents that the proposed
transactions satisfy the criteria contained in section 4975(c)(2) of
the Code for the following reasons: (a) The Loans represent not more
than 25% of the assets of the Account; (b) the terms of the Loans will
be at least as favorable to the Plan as those obtainable in arm's-
length transactions with an unrelated party, as demonstrated by the
letter from the Bank; (c) Loan 1 will be secured by a second mortgage
on the Property, which has been determined by a qualified, independent
appraiser to have a fair market value of not less than 150% of the
total principal amount of the loans that it will secure; (d) Loan 2
will be secured by the Securities, which are publicly traded securities
with a current fair market value of approximately 230% of Loan 2; and
(e) Mr. Franklin is the only participant in the Plan to be affected by
the transactions, and he desires that the transactions be consummated.
NOTICE TO INTERESTED PERSONS: Since Mr. Franklin is the only Plan
participant to be affected by the proposed transactions, the Department
has determined that there is no need to distribute the notice of
proposed exemption to interested persons. Comments and requests for a
hearing are due within 30 days from the date of publication of this
notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
The Sperry Rail, Inc. Retirement Plan (the Plan) Located in Danbury,
Connecticut
[Application No. D-10452]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55
[[Page 51693]]
FR 32836, 32847, August 10, 1990). If the exemption is granted, the
restrictions of sections 406(a), 406(b)(1) and (b)(2) of the Act and
the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (E) of the Code, shall
not apply to the proposed loan (the Loan) by the Plan of $965,000 to
Sperry Rail, Inc. (Sperry), the Plan sponsor and a party in interest
with respect to the Plan, provided the following conditions are
satisfied: (a) The Loan does not exceed 25% of the assets of the Plan;
(b) the Loan is at terms not less favorable to the Plan than those
obtainable in an arm's-length transaction with an unrelated party; (c)
the Loan is secured by personal property (the Property) that has been
appraised by an independent appraiser as having a fair market value not
less than 200% of the principal amount of the Loan; (d) an independent
fiduciary has reviewed the proposed Loan on behalf of the Plan and has
determined that the Loan is in the best interest of the Plan and its
participants and beneficiaries; and (e) the Plan's independent
fiduciary will monitor the Loan throughout its duration to ensure that
it remains in the best interest of the Plan and continues to meet the
conditions of the exemption proposed herein.
Summary of Facts and Representations
1. Sperry, the Plan sponsor, is in the railroad track inspection
business and maintains its executive offices in Danbury, Connecticut.
Sperry is a member of a controlled group of corporations. The other
members of the controlled group are Sperry's parent corporation,
Longview Holdings, Inc. (LHI), and Longview Inspection, Inc., another
subsidiary of LHI. The Plan is a defined benefit plan that has
approximately 192 participants and assets of $4,062,320 as of July 1,
1997.
2. Sperry has requested the exemption proposed herein to permit it
to borrow $965,000 from the Plan. The Loan is to be repaid over a
period of 15 years. The interest rate for the Loan is to be 1.5% plus
the yield on 30 year Treasury Bonds on the outstanding balance, which
is currently approximately 6.90% (which, when added to the 1.5% yields
approximately 8.40%). For the first three years of the Loan, Sperry
will make equal monthly payments of principal and interest in the
amount of $5,361.11. The interest rate (and monthly payment amount)
will be adjusted every 3 years to an amount equal to 1.5% above the
then-current yield on 30 year U.S. Treasury Bonds. The applicant
represents that when the interest rate is reset, it shall never be less
than the interest rate applicable at the start of the Loan. Mr. J.
Scott Bognar, Vice President of Putnam Trust (the Bank), a subsidiary
of Bank of New York, has reviewed the proposed terms of the Loan and
has determined that they constitute fair market value terms and are
commercially reasonable.
3. The Loan will be secured by the Property, which consists of a
Sperry Induction Detector Car bearing registration number: SRS 148, and
Sperry spare parts inventory, together with all accessions,
accessories, attachments, parts, equipment and repairs which may be
affixed to or used in connection with the Property. The applicant
represents that the Plan will have a first priority interest in the
Property, and Sperry will execute such financing statements as are
necessary to perfect the Plan's interest in the Property. The Property
has been appraised by R.L. Banks & Associates, Inc. (Banks),
Transportation Economists and Engineers, an independent expert with
offices in Washington, D.C. Banks has determined that as of December
27, 1996, the fair market value of Car Number 148 was $803,720, and the
value of the Sperry spare parts inventory was $1,500,000. Thus, Banks
has appraised the Property to have a total fair market value of
$2,303,720 as of December 27, 1996. This would represent approximately
2.4 times the principal amount of the Loan.
4. Mr. Paul Mishkin, a certified public accountant has been
retained by the Plan to be its independent fiduciary with respect to
the proposed Loan. Mr. Mishkin represents that he has more than 25
years' experience in both private industry and public accounting
working with large publicly-held corporations as well as significant
private companies. He has spent a substantial portion of that time
analyzing corporate structures and evaluating financial alternatives.
Mr. Mishkin represents that he has no financial interest in Sperry or
its related entities, nor does he provide any services to Sperry or its
affiliates. Mr. Mishkin has reviewed the terms of the proposed Loan and
has determined that they are equal or more favorable to the Plan than
those obtainable from an unrelated borrower. Mr. Mishkin represents
that the Loan is appropriate for the Plan and in the best interest of
the Plan's participants and beneficiaries and protective of their
rights.
5. Mr. Mishkin represents that he will monitor and enforce
compliance with the terms of the Loan. He will monitor monthly payments
made by Sperry. In the event payments are not made on a timely basis,
he will explore all avenues of recovery, including the right to sell
the Property. Additionally, Mr. Mishkin will periodically inspect the
condition of the Property, including obtaining current appraisals at
Sperry's expense, to insure that the collateral maintains a value of
200% of the outstanding Loan amount at all times. If the collateral
value falls below 200%, Mr. Mishkin has the authority to require Sperry
to add additional collateral to restore the Plan's secured interest to
200%. Alternatively, Mr. Mishkin has the authority to accelerate
repayments of principal consistent with any collateral shortfall.
6. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (a) The Loan represents not more than 25% of the assets of the
Plan; (b) the Loan is at terms not less favorable to the Plan than
those obtainable in an arm's-length transaction with an unrelated
party, as demonstrated by the representation from the Bank; (c) the
Loan is secured by the Property, which has been appraised by an
independent appraiser as having a fair market value approximately 240%
of the principal amount of the Loan; (d) Mr. Mishkin, the Plan's
independent fiduciary, has reviewed the proposed Loan on behalf of the
Plan and has determined that the Loan is in the best interest of the
Plan and its participants and beneficiaries; and (e) the Plan's
independent fiduciary will monitor the Loan throughout its duration to
ensure that it remains in the best interest of the Plan and continues
to meet the conditions of the exemption proposed herein.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Crown American Properties L.P. Retirement Savings Plan (the Plan)
Located in Johnstown, Pa.
[Application No. D-10454]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990). If the exemption is
granted, the restrictions of section 406(a), 406 (b)(1) and (b)(2), and
section 407(a) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (E) of the Code, shall not apply to the
purchase, holding or sale by participant-
[[Page 51694]]
directed accounts in the Plan of shares of Crown American Realty Trust
(the Crown REIT), an affiliate of Crown American Properties L.P. (Crown
American), the Plan's sponsor and, as such, a party in interest with
respect to the Plan, provided that the following conditions are met:
(A) Any purchase or sale of the Crown REIT shares by a participant
account (an Account) is made solely in accordance with the directions
of the participant whose account is making the purchase or sale;
(B) Immediately following any purchase of the Crown REIT shares by
an Account, the percentage of the total value of the Account invested
in the Crown REIT shares does not exceed 25 percent, as measured based
on the value of the assets held by such Account as of the close of the
prior business day;
(C) Compliance with the terms and conditions of this proposed
exemption, including the 25 percent limit described in Paragraph (B)
above, is monitored by PNC Bank, National Association, as the Plan's
trustee, which is independent of the Crown REIT and Crown American or
any affiliate thereof;
(D) With respect to any decisions made by a Plan participant for a
purchase or sale of Crown REIT shares by an Account, neither Crown
American, PNC, nor any of their affiliates has discretionary authority
or control with respect to the investment of the Plan assets involved
in the transaction, other than as required for PNC to monitor and
enforce compliance with the 25 percent limit described in Paragraph (C)
above, or renders any investment advice [within the meaning of 29 CFR
2510.3-21(c)] with respect to those assets;
(E) All purchases and sales of the Crown REIT shares by the Plan
are executed:
(1) for cash;
(2) on the national exchange on which the Crown REIT shares are
primarily traded (the Primary Exchange); and
(3) at the prevailing market price for the Crown REIT shares on the
Primary Exchange at the time of the transaction;
(F) Notwithstanding the provisions contained in (E) above,
purchases and sales of the Crown REIT shares may occur between the
Accounts within the Plan in order to avoid brokerage commissions and
other transaction costs, provided that the price received by each
Account is equal to the closing price for the Crown REIT shares on the
NYSE on the date of the transaction;
(G) Crown American maintains for a period of six years the records
necessary to enable the persons described below in paragraph (H) to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Crown American,
the records are lost or destroyed prior to the end of the six-year
period, and (2) no party in interest other than Crown American or an
affiliate shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act or to the taxes imposed by section 4975
(a) and (b) of the Code if the records are not maintained or are not
available for examination as required by paragraph (H) below; and
(H)(1) Except as provided below in paragraph (H)(2) and
notwithstanding any provisions of section 504(a)(2) of the Act, the
records referred to in paragraph (G) are unconditionally available at
their customary location for examination during normal business hours
by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Plan or any duly authorized employee or
representative of such fiduciary, and
(iii) Any participant or beneficiary of the Plan or duly authorized
employee or representative of such participant or beneficiary;
(2) None of the persons described in paragraph (H)(1) (ii) and
(iii) shall be authorized to examine trade secrets of Crown American,
or commercial or financial information which is privileged or
confidential.
Summary of Facts and Representations
1. The Plan is a defined contribution plan sponsored by Crown
American. The Plan is a profit sharing plan that allows for elective
deferral contributions by Plan participants in accordance with section
401(k) of the Code. Elective deferrals may not exceed 15 percent of a
participant's compensation. In addition, Crown American may make
matching contributions and employer contributions.
As of June 30, 1997, the Plan had approximately $5.6 million in
assets and covered 449 participants and beneficiaries.
The trustee of the Plan is PNC, a banking corporation with its
principal place of business in Pittsburgh, Pennsylvania. PNC is
independent of Crown American and its affiliates.
Plan participants are responsible for determining how their
contributions and account balances are to be allocated among the
investment options available under the Plan. The eleven current
investment options are an investment contract fund, two fixed income
funds, two balanced funds, an S&P 500 Index Fund, two growth funds, a
small-capitalization equity fund, and two international funds.
2. Crown American is a Delaware limited partnership through which
the Crown REIT conducts its business operations. Crown American
currently has about 400 employees who are engaged in executive, asset
and property management, leasing, development, construction, financial,
legal and administrative operations relating to the shopping center
businesses owned by the Crown REIT.
The sole general partner of Crown American is the Crown REIT, which
also owned a 74.47 percent interest in Crown American as of August 31,
1996. The other 25.53 percent interests are limited partnership
interests owned by Crown Investment Trust, a Delaware business trust,
and Crown American Investment Company, a Delaware corporation, each
owned by the persons who developed the Crown REIT. The Crown REIT, as
sole general partner, controls the management of Crown American,
although Crown Investment Trust and Crown American Investment Company
have approval rights over certain decisions.
3. The Crown REIT is a Maryland real estate investment trust that
owns interests in a number of enclosed shopping mall properties. The
Crown REIT conducts its business activities through two partnerships,
one of which is Crown American.
The Crown REIT was created in 1993. The Crown REIT has one class of
equity interests, entitled ``Common Shares of Beneficial Interest''
(i.e. the Shares). There were 27,667,636 Shares outstanding as of April
15, 1997. The Shares are traded on the New York Stock Exchange (NYSE),
which is currently considered the Primary Exchange for purposes of the
proposed exemption (see Condition (E)(2) and (E)(3) above).
The average trading volume for the Shares is currently
approximately 300,000 Shares per week. The applicant states that the
average daily trading volume during 1996 was 96,100 Shares, and the
annual trading volume during that year was 18,696,300 Shares, or
approximately $148.6 million at the current stock price of $8 per
share, as of July 1997. The applicant states further that during the
period from July 1996 until June 1997, the price per share of the
Shares fluctuated from a low of $7.25 to a high of $8.75.10
---------------------------------------------------------------------------
\10\ The applicant states that based on current Plan assets of
$5.6 million, the maximum amount that could be transferred into the
Shares as an investment option for the Plan would be $1.4 million
(25 percent of $5.6 million). This amount would represent
approximately .8 percent of the annual trading volume. The maximum
annual projected new funds that could be invested in the Shares,
based on 25 percent of annual Plan contributions, could not exceed
$260,000 at current contribution rates, which would be just under .2
percent of the annual trading volume. Thus, the applicant does not
anticipate that trading by the Plan in the Shares will exceed one
(1) percent of annual trading volume during the first year, or .2
percent of annual trading volume during subsequent years. Since not
all participants will be investing up to 25 percent of their
Accounts in the Shares, and because trading will be spread out over
time with transactions being netted between Accounts when possible,
the applicant states that the actual percentages are likely to be
much lower. Therefore, the projected impact of the Plan's trading on
overall trading activity and the market value of the Shares is
expected to be negligible.
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[[Page 51695]]
4. Crown American, as the named fiduciary of the Plan, has
determined that it would be prudent and in the interests of the Plan's
participants and beneficiaries to make the Shares available as an
investment option under the Plan, to supplement the eleven current
investment options. Crown American states that the Shares are the
equivalent of ``employer securities' \11\ with respect to the Plan (see
discussion in Paragraph 5 below). Therefore, Crown American believes
that having the Shares available as an investment option would allow
the Plan participants to share in the growth of their employer's
business. Crown American represents that since the Shares are currently
traded daily on the NYSE, they should be considered a liquid investment
that can be easily valued on a daily basis.
---------------------------------------------------------------------------
\11\ Section 407(d)(1) of the Act states that an ``employer
security'' is a security issued by an employer of employees covered
by the plan, or by an affiliate of such employer.
---------------------------------------------------------------------------
If the proposed exemption is granted, Plan participants will
decide, as an additional investment option under the Plan, whether to
invest any of their account balances (i.e. Accounts) in the Shares.
Participants will be allowed to: (a) allocate a specified percentage of
their elective deferral contributions to an investment in the Shares,
and/or (b) transfer amounts from their investments in other Plan
investment options to the Shares. The Plan will require that a Plan
participant could not invest more than 25 percent of the assets in the
Account in the Shares, measured at the time of any proposed investment
in Shares using the Account values as of the previous business day.
Compliance with the 25 percent limitation will be monitored by PNC,
the Plan's trustee, as an independent plan fiduciary. If more than 25
percent of an Account is already invested in Shares, or if a directed
investment would cause the Account to exceed the 25 percent limit, PNC
will not permit any additional investment by that Account in the
Shares.
Purchases and sales of Shares by the Plan, which would result
solely from participant contributions or investment transfer decisions,
will be executed on the NYSE at the prevailing market price (subject to
applicable brokerage commissions) at the time of such transactions.
However, to avoid brokerage commissions and other transaction costs,
purchases and sales will be made between the Accounts to the extent
possible (i.e. ``netted'' transactions). Any such ``netted''
transactions will be valued at the closing market price for the Shares
on the NYSE on the date of the transaction and would be executed in a
non-discretionary, mechanical manner. \12\ All purchases and sales of
the Shares by the Plan will be for cash.
---------------------------------------------------------------------------
\12\ The applicant states that purchases and sales between the
Accounts would be considered intra-Plan transactions that would not
create separate prohibited transactions under section 406 of the
Act. In this regard, the Department is providing no opinion in this
proposed exemption as to whether cross-trades of employer securities
between participant accounts within a plan would violate any
provisions of Part 4 of Title I of the Act. However, the Department
notes that section 406(b)(2) of the Act prohibits a plan fiduciary
from acting, in his individual or in any other capacity, in any
transaction on behalf of a party (or represent a party) whose
interests are adverse to the interests of the plan or the interests
of its participants and beneficiaries. [emphasis added]
---------------------------------------------------------------------------
PNC will not be providing brokerage services to the Plan. PNC will
place all trades of the Shares for execution through an independent
broker-dealer.
Crown American states that it would not render any investment
advice, within the meaning of section 3(21)(A)(ii) of the Act, to any
participant regarding the investment of that participant's Account in
the Shares.
5. Crown American is the employer of the employees covered by the
Plan. Crown American represents that because the Crown REIT owns a 75.6
percent interest in Crown American, the Crown REIT would be considered
an ``affiliate'' of Crown American within the meaning of the Act.\13\
---------------------------------------------------------------------------
\13\ Section 407(d)(7) of the Act states that a person other
than a corporation is treated as an ``affiliate'' of another person
to the extent provided by regulation. The applicant states that the
Department has taken the position that in the absence of
regulations, a 50 percent ownership test, which is the threshold for
determining affiliation of corporations, should be used for
determining whether a corporation would be an ``affiliate'' of a
partnership or joint venture under section 407(d)(7). See DOL Info.
Ltr. To Gary Quintiere, WSB File No. DL0398 at 2 (Feb. 25, 1994);
see also ERISA Adv. Op. 80-55A (where a joint venture owning 65
percent of the interests in a corporation was considered an
affiliate of the corporation). Therefore, the applicant states that
the same 50 percent threshold should apply for purposes of
determining affiliation among non-corporate entities. In this
regard, the Department is providing no opinion herein as to whether
such non-corporate entities would be considered ``affiliates'' of
one another.
---------------------------------------------------------------------------
Crown American states that the Shares are ``securities'' within the
meaning of section 2(1) of the Securities Act of 1933, and as such are
``securities'' for purposes of Title I of the Act (see section 3(20) of
the Act defining the term ``security''). Crown American states further
that the Shares, as securities issued by the Crown REIT, would be
securities issued by an affiliate of an employer of employees covered
by the Plan, and thus ``employer securities'' with respect to the Plan
under section 407(d)(1) of the Act (as noted previously in Footnote 1).
However, under section 407(a)(1)(A), a Plan may acquire and hold only
those employer securities that are ``qualifying employer securities''.
In order to be a ``qualifying employer security'' (QES), section
407(d)(5) requires that an employer security must be either stock, a
marketable obligation, or an interest in certain types of publicly-
traded partnerships (as defined in section 7704(b) of the Code).
The applicant states that the Shares are not marketable obligations
(as defined under section 407(e) of the Act) or interests in a
``publicly-traded partnership,'' as defined under the Code,\14\ which
would allow such Shares to meet the definition of QES under section
407(d)(5)(C) of the Act.\15\ In addition, the applicant represents that
it is not clear whether the Shares would be considered ``stock'' within
the meaning of section 407(d)(5) of the Act because, under Maryland
law, a ``share'' of a real estate investment trust is defined as a
transferable unit of beneficial interest in a real estate investment
trust, without any reference to the term ``stock''.\16\ The applicant
notes that the term ``stock'' is used under Maryland law solely in
[[Page 51696]]
connection with describing interests in a corporation, whereas a real
estate investment trust takes the form of an unincorporated trust.
---------------------------------------------------------------------------
\14\ The applicant notes that a real estate investment trust
such as the Crown REIT, takes the form of a corporation, trust or
association, each of which is distinguished in the Code from a
partnership (see section 856(a) of the Code).
\15\ The applicant also notes that to meet the requirements of
section 407(d)(5)(C) of the Act, a partnership must be an ``existing
partnership'' as defined in section 10211(c)(2)(A) of the Revenue
Act of 1987. This provision requires that the partnership have
existed or have applied for existence as a publicly-traded
partnership as of December 17, 1987. Because the Crown REIT was not
established until 1993, it cannot meet this definition.
\16\ See Md. Corp. & Assoc. Sec. 8-101(c).
---------------------------------------------------------------------------
The applicant states that if the Shares are not considered to be
QES, the Plan cannot rely on the statutory exemption under section
408(e) of the Act to obtain relief for the prohibitions of section 406
and 407 relating to transactions involving employer securities that are
QES.\17\ Therefore, the applicant requests an exemption under section
408(a) of the Act to enable the Accounts in the Plan to acquire, hold,
or dispose of the Shares, subject to the conditions discussed herein.
---------------------------------------------------------------------------
\17\ The Department is providing no opinion herein as to whether
the proposed transactions could meet the conditions necessary for
relief under section 408(e) of the Act and the regulations
thereunder.
---------------------------------------------------------------------------
6. PNC will be retained as an independent fiduciary for the Plan
for purposes of the proposed exemption. PNC represents that it is
independent of Crown American and its affiliates, including the Crown
REIT. PNC does have business relationships with Crown American and the
Crown REIT, including certain banking services and commercial loans.
However, PNC states that to the extent it has provided services to
Crown American or an affiliate in the past, its annual gross income for
such services was less than one-tenth of one (1) percent of its total
annual gross income. In addition, PNC has made, and may continue to
make, certain construction or permanent loans to the Crown REIT along
with other banks in connection with properties owned by the Crown REIT.
PNC states that such loans represent a de minimis percentage of PNC's
outstanding loan portfolio. PNC does not expect that any such loans
will affect its independence for purposes of its duties and
responsibilities as an independent fiduciary for the Plan in connection
with the proposed transactions involving the Shares.\18\ Moreover, as
discussed further in Paragraph 9, PNC is not providing any
recommendations or other investment advice as a fiduciary to the Plan
participants regarding whether to invest in the Shares.
---------------------------------------------------------------------------
\18\ The Department notes that section 404(a) of the Act
requires, among other things, that a plan fiduciary act prudently
and solely in the interests of the plan and its participants and
beneficiaries.
---------------------------------------------------------------------------
7. PNC represents that it is an experienced fiduciary which
currently serves as trustee of a number of participant-directed
employee pension plans subject to the Act, including plans that invest
in employer securities. In addition, PNC represents that it has had
experience with transactions involving publicly-traded shares of a real
estate investment trust.
PNC has submitted a statement, dated April 15, 1997, whereby it
acknowledges that it will be acting as a fiduciary to the Plan under
the Act for purposes of the proposed transactions involving the Shares,
and that it understands its duties, liabilities and responsibilities
under the Act.
8. The applicant has submitted a letter agreement between Crown
American and PNC (the I/F Agreement), which describes the duties of PNC
as the Plan's independent fiduciary in connection with the proposed
transactions. The I/F Agreement states that it shall be PNC's
responsibility to monitor compliance by the Accounts with all of the
conditions of this proposed exemption.
PNC will purchase and sell the Shares, as the Plan's trustee, in
accordance with participant instructions. PNC will execute all
transactions on the NYSE at the prevailing market price for the Shares,
except to the extent such transactions can be accomplished through
transfers between Accounts using the NYSE closing price to value the
Shares. PNC will value the Shares for the Accounts on a daily basis
using the NYSE prices.
PNC will ensure that following any purchase of Shares by an
Account, the percentage of the total value of the Account invested in
Shares does not exceed 25 percent, as measured based on the value of
the assets held by the Account as of the close of the prior business
day. In this regard, PNC's recordkeeping system will monitor whether an
initial investment allocation or contribution allocation would cause
the Account to exceed the 25 percent limit, and will not permit the
allocation if that would be the result. Any other participant-initiated
transaction involving the Shares, such as a reallocation among Plan
investments or reallocation of future contributions, will be requested
using a paper form. The completed form will be reviewed initially by
Crown and then by the responsible Client Service Officer at PNC to
ensure that the 25 percent limit will not be exceeded as a result of
the particular transaction. The Client Service Officer at PNC will
approve the transaction as complying with this requirement before it is
processed by PNC, as the Plan's trustee. However, the 25 percent
limitation under the proposed exemption will not be violated if an
Account's investment in Shares exceeds 25 percent of the value of the
Account solely by reason of an increase in value of the Shares or a
decrease in value of the other assets in the Account after such Shares
are acquired by the Account.
9. PNC represents that it would be appropriate for Crown to add the
Shares as an investment option for participants of the Plan for the
following reasons:
(a) Participants will be able to decide whether or not to invest
their Account balances in the Shares, and how much of their Account
balances to invest in or transfer from such Shares. They are familiar
with the issuer because they work for Crown, and they will receive
quarterly financial statements and annual reports of the issuer just as
any other shareholder;
(b) The Shares will be one of a series of diverse and varied
investment options available to Plan participants, and as a real estate
equity investment will help complement the other options as part of an
overall, well-diversified portfolio;
(c) The Shares are traded on the NYSE, so that (i) participants
will be able to follow any changes in the price of the Shares each
business day in newspapers of general circulation, and (ii) the Plan
will have a readily available avenue for purchasing or selling the
Shares as determined by participant investment decisions; and
(d) A participant's investment in the Shares could not exceed 25
percent of his or her total Account balance at time of purchase,
preventing the Account from becoming unduly concentrated in the Shares.
However, PNC states further that its statements regarding the
Shares do not constitute a recommendation or investment advice as to
whether any Plan participant should invest in the Shares as an
investment option under the Plan. Thus, PNC's role as the Plan's
independent fiduciary under the proposed exemption is limited to
enforcing the terms and conditions stated herein and does not extend to
the underlying investment decisions made by Plan participants as to
whether the Shares are an appropriate investment for particular
Accounts.
The applicant states that a communication statement will be sent by
Crown and PNC to each Plan participant regarding the addition of the
Shares as an investment option for the Plan and describing how this
investment option will operate. The communication statement will
describe, among other things, the information that Plan participants
will receive about their Share investments on an ongoing basis and the
relationships that exist between PNC and Crown or its affiliates.
10. In summary, the applicant represents that the proposed
transactions will meet the statutory
[[Page 51697]]
criteria of section 408(a) of the Act because: (a) Plan participants
will be able to invest in ``equity'' interests of the Crown REIT (i.e.
the Shares), which will allow them to share in the growth of their
employer's business; (b) no Plan participant will be able to invest
more than 25 percent of his or her Account in the Shares, so that an
Account's assets will not be unduly concentrated in Shares; (c)
compliance with the terms and conditions of the proposed exemption,
including the 25 percent limitation, will be monitored by an
independent Plan fiduciary (i.e. PNC); (d) the Shares will be acquired
and sold for cash by the Accounts; (e) the acquisition and disposition
of the Shares will occur on the NYSE, except to the extent that such
transactions can be ``netted'' between the Accounts to avoid brokerage
commissions and other transaction costs; (f) all transactions involving
the Shares will be either (i) executed on the open market at the then-
current NYSE prices, or (ii) ``netted'' between the Accounts using the
NYSE closing price for the Shares on the date of the transaction, as
determined by PNC, as the Plan's independent fiduciary; (g) Plan
participants will decide whether or not to invest their Account
balances in the Shares, and how much of their Account balances to
invest in or transfer from such Shares (subject to the 25 percent limit
required herein), and will receive quarterly financial statements and
annual reports of the issuer just as any other shareholder; and (h)
PNC, as the Plan's independent fiduciary, has determined that it would
be appropriate for Crown to add the Shares as an investment option for
the Plan's participants to complement other investment options as part
of an overall, well-diversified portfolio, but is not providing any
recommendations or investment advice to Plan participants in connection
with their proposed investments in the Shares.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 26th day of September, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-26072 Filed 10-1-97; 8:45 am]
BILLING CODE 4510-29-U
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.