Notice of Proposed Exemption for Certain Transactions Involving the Massachusetts Mutual Life Insurance Company (MM), Located in Springfield, MA

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10396]

Notice of Proposed Exemption for Certain Transactions Involving

the Massachusetts Mutual Life Insurance Company (MM), Located in

Springfield, MA

AGENCY: Pension and Welfare Benefits Administration, Labor

ACTION: Notice of proposed exemption.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed exemption from

certain of the prohibited transaction restrictions of the Employee

Retirement Income Security Act of 1974 (the Act) and the Internal

Revenue Code of 1986 (the Code). The proposed exemption would exempt

certain transactions that may occur as a result of the sharing of real

estate investments among various Accounts maintained by MM, including

the MM general account and the general accounts of MM's affiliates

which are licensed to do business in at least one state (collectively,

the General Account), and the ERISA-Covered Accounts with respect to

which MM is a fiduciary. As an acknowledged investment manager and

fiduciary, MM is primarily responsible for the acquisition, management

and disposition of the assets allocated to the ERISA-Covered Accounts.

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

received by the Department on or before April 7, 1998.

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

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

Pension and

[[Page 6218]]

Welfare Benefits Administration, Room N-5649, U.S. Department of Labor,

200 Constitution Avenue, N.W., Washington, D.C. 20210, Attention:

Application No. D-10396. The application for exemption and the comments

received will be available for public inspection in the Public

Documents Room of the Pension and Welfare Benefits Administration, U.S.

Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210.

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency

before the Department of an application for exemption from the

restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of the Act and

from 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.

The proposed exemption was requested in an application filed by MM

pursuant to section 408(a) of the Act and section 4975(c)(2) of the

Code, and in accordance with the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Summary of Facts and Representations

1. MM is a mutual life insurance company organized under the laws

of the Commonwealth of Massachusetts and subject to supervision and

examination by the Insurance Commissioner of the Commonwealth of

Massachusetts. MM operates in all 50 states, as well as the District of

Columbia and Puerto Rico, and presently has approximately 3 million

individual and group policyholders and $242 billion of life insurance

in force. MM, either directly or through its affiliates, offers a

complete portfolio of life insurance, health insurance, asset

accumulation products, health and pension employee benefits, plan

administration and investment management services.1 It also

provides health and pension benefits to its employees, including former

employees of Connecticut Mutual Life Insurance Company (Connecticut

Mutual).2 The assets of MM as of December 31, 1996 are

estimated to be $55.7 billion and its assets under management as of

that date are approximately $130.8 billion.

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\1\ On March 31, 1996, MM sold its group life and health

subsidiary, and will no longer offer group life and health insurance

after the completion of a transition period under the purchase and

sale agreement.

\2\ On February 29, 1996, Connecticut Mutual, a mutual life

insurance company organized under the laws of the State of

Connecticut, was merged with and into MM. As a result of the merger,

MM succeeded to all rights, benefits, obligations and liabilities of

Connecticut Mutual. In addition, certain of the retirement plans of

Connecticut Mutual and its affiliates were merged with and into the

retirement plans of MM and its affiliates (collectively, the

Affiliate Plans) as of January 1, 1997.

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MM maintains several pooled separate accounts in which pension,

profit-sharing and thrift plans participate, and also manages all or a

portion of the assets of a number of large plans pursuant to various

single customer separate accounts and advisory accounts (the ERISA-

Covered Accounts). A number of ERISA-Covered Accounts invest in equity

interests in real estate or in mortgage loans. The ERISA-Covered

Accounts, MM's general account (which includes all of MM's assets

invested on behalf of its policyholders not participating in separate

accounts), the general accounts of one or more of MM's affiliates which

are insurance companies licensed to do business in at least one of the

fifty states, accounts maintained by MM for foreign pension plans and

other ``non-ERISA'' investors, and accounts which MM may establish in

the future (collectively, the Accounts) may participate in the

transactions which are the subject of this proposed exemption.

2. The applicant represents that in recent years real estate has

gained increasing popularity among plan sponsors. Various high quality

commercial real estate investments from time to time become available

which offer the potential for a higher rate of return than do other

real estate investments. Because there are relatively few potential

investors for large scale investments such as office buildings,

shopping centers, and industrial parks, the owner or developer of such

real estate investments must offer a higher return in order to attract

investors. In many cases, MM's real estate accounts would be precluded

from acquiring these investments on an individual basis because such

investments would require the commitment of a disproportionately large

percentage of account assets to one or a few investments. The sharing

of large or uniquely desirable real estate investments would permit the

ERISA-Covered Accounts to participate in more attractive and profitable

real estate investments while maintaining portfolio diversification.

3. The real estate investments which MM proposes to share may

either take the form of a direct investment in real property or an

interest in a joint venture partnership which holds title to, manages,

and/or develops real property. MM's investments in joint venture

partnerships may include an equity interest in the joint venture and a

debt interest in mortgages to which the joint venture property is

subject. Development joint venture arrangements could be ``leveraged'';

that is, acquisition and development costs are met by the equity

contribution of the joint venture partners and by loans to the

partnership which are secured by the joint venture's interest in its

real property. MM, on behalf of its Accounts, could own 50 percent of

the joint venture partnership and provide 100 percent of the debt

financing.

4. MM anticipates that real estate investments will be allocated to

each Account maintained by MM in the same proportions of debt and

equity. No ERISA-Covered Account will participate in an investment for

the purpose of enabling another Account to make an investment.

5. General investment criteria for each ERISA-Covered Account are

set forth in the separate account contract between MM and the plan

contractholder. MM's allocation procedures provide for the allocation

of each real estate investment opportunity to one or more Accounts for

which the opportunity is suitable, taking into consideration each

Account's investment criteria and strategy, as well as each Account's

acquisition budget for the year. These procedures are periodically

reviewed by MM to ensure that each Account receives equitable

treatment.

6. During the course of MM's holding of a real estate investment,

certain situations may arise which require a decision to be made with

regard to the management or disposition of the investment. For example,

there may be a need for additional contributions of operating capital,

or there may be an offer to purchase the investment by a third party or

a joint venture partner. When MM shares these investments among more

than one Account, a potential for conflict may arise since the same

decision may not be in the best interest of each Account. Therefore,

the applicant has submitted a request for exemption, with certain

proposed safeguards designed to protect the interests of any

participating ERISA-Covered Account in the resolution of potential or

actual conflicts.

7. Each plan contractholder currently participating in an ERISA-

Covered Account that proposes to share real estate investments which

are structured as shared investments under this proposed exemption must

be furnished with a written description of the transactions that may

occur involving such investments which might raise questions under the

conflict of interest prohibitions of the Act with respect to MM's

involvement in such transactions and which are the subject of this

proposed exemption. This description

[[Page 6219]]

must discuss the reasons why such conflicts of interest may be present

(i.e., because the General Account participates in the investment and

may benefit from the transaction or because the interests of the

various Accounts participating in the investment may be adverse with

respect to the transaction). The description must also disclose the

principles and procedures to be used to resolve any anticipated

impasses, as will be outlined below. In addition, each current

contractholder in an ERISA-Covered Account that proposes to share

investments must receive a copy of this notice of pendency within

thirty days of its publication, and a copy of the exemption when

granted before the Account begins to participate in the sharing of

investments.

8. With respect to new contractholders in an ERISA-Covered Account

that participates in the sharing of investments, each prospective

contractholder must be provided with the above mentioned written

description, a copy of the notice of pendency and a copy of the

exemption as granted before the contractholder begins to participate in

the Account. A plan contractholder may withdraw from a single customer

or open-end pooled ERISA-Covered Account by providing written notice to

MM. Where a plan contractholder is in a closed-end pooled ERISA-Covered

Account, it may not have a right to have its interest redeemed prior to

the predetermined termination date, but it may sell its interest to a

third party.

9. An independent fiduciary or independent fiduciary committee must

be appointed on behalf of each ERISA-Covered Account participating in

the sharing of investments. The independent fiduciary, acting on behalf

of the ERISA-Covered Account, shall have the responsibility and

authority to approve or reject recommendations made by MM or its

affiliates regarding the allocation of shared real estate investments

to the ERISA-Covered Account and recommendations concerning those

transactions occurring subsequent to the allocations which are the

subject of this proposed exemption. The independent fiduciary is

informed of the procedures set forth in the proposed exemption for the

resolution of anticipated impasses prior to his or its acceptance of

the appointments. MM and its affiliates shall provide the independent

fiduciary with the information and materials necessary for the

independent fiduciary to make an informed decision on behalf of the

ERISA-Covered Account. No allocation or transaction which is the

subject of the proposed exemption will be undertaken prior to the

rendering of such informed decision by the independent fiduciary.

However, the independent fiduciary need only have the authority to make

decisions regarding allocations among, or any other subject transaction

involving an ERISA-Covered Account and any other Account that occur

after the plan(s) invest(s) in the ERISA-Covered Account. In the case

of transactions involving the possible transfer of an interest in a

real estate investment between the General Account and an ERISA-Covered

Account, the independent fiduciary will not be limited to approving or

rejecting the recommendations of MM, but will have full authority to

negotiate the terms of the transfer (in accordance with the independent

appraisal procedure described below) on behalf of the ERISA-Covered

Account. The independent fiduciary shall also review on an as-needed

basis, but not less than twice annually, the shared real estate

investments in the ERISA-Covered Account's portfolio to determine

whether the shared real estate investments are held in the best

interest of the ERISA-Covered Account.

10. The independent fiduciary must be unrelated to MM or its

affiliates. The independent fiduciary may not be, or consist of, any

officer, director or employee of MM, or be affiliated in any way with

MM or any of its affiliates. (See definition of ``affiliate'' in

Section V(a), below.) The independent fiduciary must be either (1) A

business organization which has (or whose principals have) at least

five years of experience with respect to commercial real estate

investments, (2) a committee comprised of three to five individuals who

each have at least five years of experience with respect to commercial

real estate investments, or (3) the plan sponsor (or its designee) of a

plan or plans that is the sole participant in an ERISA-Covered Account.

An organization or individual may not serve as an independent fiduciary

for an ERISA-Covered Account for any fiscal year if the gross income

(excluding retirement income) received by such organization or

individual (or any partnership or corporation of which such

organization or individual is an officer, director, or ten percent or

more partner or shareholder) from MM and its affiliates for that fiscal

year exceeds five percent of its or his annual gross income from all

sources for the prior fiscal year. If such organization or individual

had no income for the prior fiscal year, the five percent limitation

shall be applied with reference to the fiscal year in which such

organization or individual serves as an independent fiduciary. The

income limitation will exclude compensation for services of an

independent fiduciary who is initially selected by a plan sponsor for a

single customer ERISA-Covered Account, because this situation would not

give rise to the possibility of divided loyalty on the part of the

independent fiduciary. The income limitation will include services

rendered to the Accounts under any prohibited transaction exemptions

granted by the Department. In addition, no organization or individual

who is an independent fiduciary, and no partnership or corporation of

which such organization or individual is an officer, director or ten

percent or more partner or shareholder, may (i) Acquire any property

from, sell any property to, or borrow any funds from, MM or its

affiliates, during the period that such organization or individual

serves as an independent fiduciary and a period of six months after

such organization or individual ceases to be an independent fiduciary,

or (ii) negotiate any such transaction during the period that such

organization or individual serves as independent fiduciary. The

independent fiduciary of a pooled ERISA-Covered Account may be a

committee of three to five investors or investor representatives

approved by the plans participating in the pooled ERISA-Covered

Account.3 A business organization or committee member may

not serve as an independent fiduciary of more than one ERISA-Covered

Account.

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\3\ The Department notes that where the independent fiduciary

consists of such a committee, the committee members would each need

to have the requisite minimum of five years' experience with respect

to commercial real estate investments.

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11. In the case of a single customer ERISA-Covered Account, if the

plan sponsor or its designee decides not to act as the independent

fiduciary, the independent fiduciary or independent fiduciary committee

will be selected initially by MM. In that event, the independent

fiduciary must be approved by the plan sponsor or another plan

fiduciary prior to the commencement of its fiduciary responsibilities

on behalf of the ERISA-Covered Account. The applicant represents that

because pooled ERISA-Covered Accounts often include several hundred

plan contractholders, the independent fiduciary will be selected

initially by MM. Prior to the commencement of the independent

fiduciary's responsibilities on behalf of an Account, the selection of

the independent fiduciary, however, must be approved by a majority of

the

[[Page 6220]]

contractholders in such an Account by vote proportionate to their

interests in the Account.

12. For both single customer and pooled ERISA-Covered Accounts,

prior to the making of any decision to approve the selection of an

independent fiduciary, plan contractholders must be furnished

appropriate biographical information pertaining to the independent

fiduciary or members of the independent fiduciary committee. This

biography must set forth the background and qualifications of the

fiduciary (or fiduciaries) to serve in that capacity. The information

must also disclose the total amount of compensation received by the

fiduciary (or each member of a fiduciary committee) from MM or an MM

affiliate during the preceding year, including compensation for any

business services performed by the fiduciary or any affiliate for MM or

its affiliates. The disclosure relating to compensation must be updated

annually thereafter. Subsequent disclosures must also include the

amount of fees and expenses paid for independent fiduciary services.

The plans will be able to use this information to determine whether to

approve MM's initial selection of the fiduciary or fiduciary committee

and whether to continue such approval each year thereafter.4

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\4\ MM represents that the contractholders in its single

customer and pooled closed-end real estate Accounts are

knowledgeable and sophisticated investors who fully understand the

operation of the ERISA-Covered Accounts.

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13. Once an independent fiduciary committee or organization is

appointed, the members of the committee or the organization will

continue to serve subject to an annual vote by each of the plans

participating in the ERISA-Covered Account. An independent fiduciary or

committee member may be removed by a majority vote of the Account's

contractholders or, in the case of a committee member, ``for cause'' by

a majority vote of the other members of the committee. The term ``for

cause'' means that there must be sufficient and reasonable grounds for

removal and the reasons for removal must be related to the ability and

fitness of an individual to perform his or her required duties. MM will

not have the authority to remove an independent fiduciary or a member

of an independent fiduciary committee. If a vacancy occurs by virtue of

the death, resignation or removal of a member of an independent

fiduciary committee, replacement members of the committee will be

appointed by a majority vote of remaining members of the committee.

Possible replacements may be suggested by members of the committee, MM

or plan contractholders. If an organization acting as independent

fiduciary is removed by majority vote of the Account's contractholders,

the procedure described above for the initial selection of an

independent fiduciary will apply to the replacement.

14. The independent fiduciary will be compensated by the ERISA-

Covered Account. MM may indemnify any independent fiduciary or members

of an independent fiduciary committee with respect to any action or

threatened action to which such person is made a party by reason of his

or her service as an independent fiduciary. Indemnification will be

provided as permitted under the laws of the Commonwealth of

Massachusetts and subject to the requirement that such person acted in

good faith and in a manner he or she reasonably believed to be solely

in the interests of the participants and beneficiaries of the plans

participating in the Account.

15. Written minutes must be taken and maintained in connection with

all meetings involving independent fiduciary committees of ERISA-

Covered Accounts. Such minutes must include a rationale as to why

decisions were made. Where the independent fiduciary is a committee,

decisions will be made on the basis of a majority vote. Any dissenting

committee member will provide a written rationale for his dissent.

Where the independent fiduciary is a single entity (e.g., a business

organization) for which no minutes of meetings would be maintained, all

decisions of such independent fiduciary and rationale thereof must be

set forth in writing and maintained by MM pursuant to the recordkeeping

requirements outlined in the General Conditions below.

16. In connection with the management of real estate shared

investments, it is possible that MM, on behalf of the General or Non-

ERISA Accounts, or the independent fiduciaries for ERISA-Covered

Accounts participating in a shared investment, may develop different

approaches as to whether or how long an investment should be held by an

Account. Certain situations may also arise during the course of MM's

holding of a shared real estate investment in which decisions will need

to be made where it is not possible to obtain the agreement of MM and

all of the independent fiduciaries involved. These situations may arise

as a result of an action taken by a third party, or they may arise in

connection with an action proposed by MM or the independent fiduciary

for an ERISA-Covered Account. In such cases, MM will make

recommendations to the independent fiduciaries regarding a proposed

transaction. If a course of action cannot be found that is acceptable

to each independent fiduciary, a stalemate procedure will be followed

to ensure that a decision can be made. The applicant represents that

the stalemate procedure is similar to procedures typically used to

resolve disputes between co-venturers under real estate joint venture

agreements and is therefore familiar to most real estate investors.

17. With respect to stalemates between two or more ERISA-Covered

Accounts which share an investment, the stalemate procedure is designed

to provide a result that is similar to what would occur in comparable

situations where unrelated parties to a transaction were dealing at

arm's length. This means that the action which will be taken in such

cases is the one that does not require an Account: 1) to invest new

money; 2) to change the terms of an existing agreement; or 3) to change

the existing relationship between the Accounts.

18. However, one additional option will be provided in the event of

such stalemates. Where investments are shared by two or more Accounts

(other than the General Account), MM will make recommendations to the

independent fiduciaries of each participating ERISA-Covered Account

regarding investment management decisions that must be made for a real

estate shared investment. For example, if the independent fiduciaries

cannot agree on a MM recommendation, MM may offer alternate

recommendations (possibly including partition and sale of undivided

interests) in an attempt to facilitate agreement. If the independent

fiduciaries still cannot agree, each ERISA-Covered Account will be

offered the opportunity to buy out the other ERISA-Covered Account's

interest on the basis of a specified price. The specified price may be

based on the price offered by a third party, or, if no third party

offer is received (or if the third party offer is unacceptable to

either ERISA-Covered Account), the specified price will be the price

established under the independent appraisal procedure described below.

As in a buy-sell provision in a typical joint venture, the ERISA-

Covered Account to which the offer is made will have the option to sell

to the offering ERISA-Covered Account at the specified price, or to buy

out the offering ERISA-Covered Account's interest at that price.

19. If the independent fiduciary for the ERISA-Covered Account

which disagrees with MM's recommendation

[[Page 6221]]

does not wish to make a buy-sell offer to the other ERISA-Covered

Account, the other Account(s) (except for the General Account) may do

so. If no ERISA-Covered Account chooses to exercise the buy-sell

option, MM will take the action designed to preserve the status quo,

i.e., the action designed to avoid expenditure of additional funds by

the Accounts and avoid any change in existing arrangements or

contractual relationships.

20. Where a real estate investment is shared by the General Account

and one or more ERISA-Covered Accounts and a stalemate occurs between

the General Account and an ERISA-Covered Account, MM may offer

alternate recommendations to facilitate an agreement. If the Accounts

still cannot reach agreement, each Account will be offered the

opportunity to buy out the other Account's interest on the basis of a

specified price, which will be established in accordance with the

independent appraisal procedure described below, or will be the price

offered by a third party. If none of the Accounts elects to make a buy-

sell offer to the other Account, MM would be required to take the

action selected by the independent fiduciary of the ERISA-Covered

Account. Where the General Account wishes, e.g., to hold its interest

and the independent fiduciary for the ERISA-Covered Account determines

to sell its interest, the General Account will buy out the interest of

the ERISA-Covered Account at the price offered by the third party, or,

at the ERISA-Covered Account's option, at an independently determined

price. Conversely, where the independent fiduciary for the ERISA-

Covered Account determines to retain its interest while the General

Account wants to sell its interest, the ERISA-Covered Account has the

option of buying out the General Account, or, if the independent

fiduciary chooses not to, the status quo will be maintained.

Specific Transactions

I. Direct Real Estate Investments

(a) Transfers Between Accounts

21. Following the initial sharing of investments, it may be in the

best interests of the Accounts participating in the investment for one

Account to sell its interest to the other(s). Such a situation may

arise, for example, when one Account experiences a need for liquidity

in order to satisfy the cash needs of the plans participating in the

Account, while for the other Account(s) the investment remains

appropriate. One possible means of reconciling this situation is for

the ``selling'' Account to sell its interest in the shared investment

to the remaining participating Account(s) or to another Account(s) at

current fair market value. Such sales may not, however, be appropriate

in all circumstances. An inter-Account transfer will only be permitted

when it is determined to be in the best interests of each Account that

would be involved in the transaction. The transfer may also be subject

to the approval of the Insurance Departments of a number of states,

including Massachusetts and/or New York. Because MM would be acting on

behalf of both the ``buying'' and ``selling'' Accounts (but not the

General Account) in such an inter-Account transfer, the transfer might

be deemed to constitute a prohibited transaction under section

406(b)(2) of the Act. Accordingly, exemptive relief is requested herein

for the sale or transfer of an interest in a shared real estate

investment by one ERISA-Covered Account to another Account of which MM

is a fiduciary. Such transfers would have to be at fair market value

and approved by the independent fiduciary for each ERISA-Covered

Account involved in the transfer.

Ordinarily, no transfer of an interest in a shared investment will

be permitted between the General Account and an ERISA-Covered Account.

The transfer of an interest in a shared investment between the General

Account and an ERISA-Covered Account may be deemed to constitute a

violation of sections 406(a)(1) (A) and (D) as well as sections 406(b)

(1) and (2) of ERISA. As noted above, however, where a stalemate arises

between the General Account and an ERISA-Covered Account, the transfer

of such an interest would be permitted to resolve the conflict.

Specific stalemate procedures have been developed for these situations.

If, for example, a third party makes an offer to purchase the entire

investment held by MM on behalf of the General Account and an ERISA-

Covered Account, it is possible that the General Account would like to

accept the offer and the independent fiduciary on behalf of the ERISA-

Covered Account would like to reject the offer. In that event, MM may

offer alternative recommendations to the independent fiduciary. If

there is still no agreement, the independent fiduciary (as the party

wishing to reject the offer) would be given the opportunity to buy-out

the General Account's interest at a specified price. This price may be

a proportionate share of the third party offer; or, if such price is

unacceptable to the ERISA-Covered Account, a proportionate share of the

price determined through the independent appraisal procedure described

below. This procedure would give the ERISA-Covered Account an

opportunity to retain its interest in the shared investment. If the

ERISA-Covered Account does not choose to buy-out the General Account's

interest, the General Account would be required to accede to the

direction of the ERISA-Covered Account and would, therefore, reject the

third party offer.

If, in the event of a third party purchase offer, the General

Account wants to reject the offer but the independent fiduciary on

behalf of the ERISA-Covered Account wants to accept the offer, the

procedures described above would apply, except that the General Account

(as the party wishing to reject the offer) would have the opportunity

to buy-out the ERISA-Covered Account's interest at a proportionate

share of the third party purchase offer, or, at the option of the

independent fiduciary for the ERISA-Covered Account, at an

independently determined price. This will permit the ERISA-Covered

Account to sell its interest in a real estate investment, if it chooses

to do so, at no less than the same price it would have received from a

third party.

Even in the absence of a third party offer, MM may recommend the

sale of a shared investment. If the independent fiduciary approves the

recommendation, MM will arrange for the sale. If the independent

fiduciary does not approve MM's recommendation, MM may offer

alternative recommendations, possibly including partition and sale of

divided interests. If, however, no agreement is reached, the

independent fiduciary (as the party wishing to reject the

recommendation) would be given the opportunity to buy-out the General

Account's interest in accordance with the independent appraisal

procedure described below. If there is no buy-out, MM would take the

course of action consistent with the ERISA-Covered Account's

determination and would, therefore, not sell the investment.

The independent fiduciary may also determine independently that a

shared investment in an ERISA-Covered Account should be sold. If MM

agrees with this recommendation, MM will arrange the sale. If MM, on

behalf of the General Account, disagrees with the recommendation, MM

will first attempt to sell the ERISA-Covered Account's interest to

another Account other than the General Account. In this case, the sale

price and other terms would have to be approved by the independent

fiduciary for each ERISA-Covered Account. If the ERISA-Covered

Account's interest cannot be sold to another Account, MM may offer

[[Page 6222]]

alternative recommendations, possibly including partition and sale of

the ERISA-Covered Account's interest to a third party. If no agreement

is reached with respect to these options, the General Account (as the

party opposed to the sale) would have the opportunity of buying out the

ERISA-Covered Account's interest at a price established under

independent appraisal procedures described below. If there is no buy-

out and no agreement, MM will be required to take the course of action

consistent with the ERISA-Covered Account's determination and will sell

the entire investment.

Where an independent price for the transfer of an interest in a

shared investment between the General Account and an ERISA-Covered

Account is not established by an offer from an unrelated third party

(or where the third party price is unacceptable to the ERISA-Covered

Account), the stalemate procedure provides for the appointment of an

independent appraiser. Under this procedure, MM and the independent

fiduciary will each appoint an independent appraiser. These two

appraisers will then choose a third appraiser. The panel of appraisers

will each evaluate the entire investment, and the average of the three

appraisals will be used to determine the proportional value of each

shared investment interest. However, the General Account and the ERISA-

Covered Account may agree that, if one valuation is more than a

specified percentage outside the range of the other two valuations,

that valuation may be disregarded and the transfer price will be the

average of the remaining two valuations. The applicant represents that

this procedure, which is of the variety typically used in real estate

joint venture agreements, provides adequate protection for the ERISA-

Covered Account because the independent fiduciary is an equal

participant in the appraisal process. See Section I(a).

(b) Joint Sales of Property

22. In situations involving shared real estate investments, an

opportunity may arise to sell the entire investment to a third party,

and it may be determined for all of the participating Accounts that the

sale is desirable. When the General Account is participating in the

investment, and the sale is therefore determined to be in the best

interests of the General Account (in addition to being in the interests

of the other Account(s)), the sale might be deemed to constitute a

prohibited transaction under section 406 of the Act and section 4975 of

the Code.5 Similarly, MM may be acting on behalf of two

ERISA-Covered Accounts or an ERISA-Covered Account and a non-ERISA-

Covered Account other than the General Account. Accordingly, exemptive

relief is requested for these joint sales. The sales would have to be

approved by the independent fiduciary for each ERISA-Covered Account

involved in the sale. In accordance with MM's stalemate procedures, if

the independent fiduciary for one ERISA-Covered Account wishes to sell

its interest in a shared investment and the independent fiduciary for

another ERISA-Covered Account does not want to sell, MM will attempt to

negotiate a compromise, including the transfer of interests from one

Account to the other. If no agreement can be reached, the status quo

will be maintained and no sale will be made. See Section I(b).

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\5\ The Department notes that all future references to the

provisions of the Act shall be deemed to include the parallel

provisions of the Code.

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(c) Additional Capital Contributions

23. On occasion, commercial real estate investments require

infusions of additional capital in order to fulfill the investment

expectations of the property. For example, developmental real estate

investments sometimes require additional capital in order to complete

the construction of the property. In addition, the cash flow needed to

improve or operate completed buildings may also result in the need for

additional capital. Such additional capital is frequently provided by

the owners of the property. In the case of a property that is owned

entirely by MM on behalf of the Accounts, it is contemplated that

needed additional capital will ordinarily be contributed in connection

with the investment in the form of an equity capital contribution made

by each participating Account in an amount equal to such Account's

existing percentage equity interest in the shared investment;

6 that is, in the first instance, each Account would be

afforded the opportunity to contribute additional capital on a fully

proportionate basis. In the case of ERISA-Covered Accounts, all

decisions regarding the making of additional capital contributions must

be approved by the independent fiduciary for the Account. The making of

an additional capital contribution could be deemed to involve a

prohibited transaction under section 406 of the Act. If one or more

participating Accounts in a shared investment is unable to provide its

share of the needed additional capital, various alternatives may be

appropriate, including having the other Account(s) make a

disproportionate contribution. For example, where the General Account

and an ERISA-Covered Account participate in a shared investment and the

need for additional capital arises, it might be determined for

liquidity reasons or other factors involving the ERISA-Covered Account

that the additional contribution should not be made by that Account. As

a result, the additional equity capital may be provided entirely by the

General Account with the further consequence that the General Account

would thereafter have a larger interest in the investment and,

therefore, a larger share in the appreciation and income to be derived

from the property.7 Such an adjustment in ownership

interests might be deemed to constitute a prohibited (indirect sales)

transaction under section 406 of the Act. In addition, these situations

could also occur where two ERISA-Covered Accounts are involved or an

ERISA-Covered Account and a non-ERISA-Covered Account are involved.

Accordingly, the applicant is requesting exemptive relief that would

permit the contribution of additional equity capital for a shared

investment by Accounts participating in the investment (including the

General Account). Any decision made or action taken by an ERISA-Covered

Account (i.e., the contribution of either no additional capital, the

Account's pro rata share of additional capital, less than or more than

the Account's pro rata share, etc.) must be approved by such

independent fiduciary. See Section I(c).

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\6\ In any case where the General Account participates in a

shared investment with one or more ERISA-Covered Accounts and a call

for additional capital is made, the General Account will always make

a capital contribution that is at least equivalent proportionately

to the highest capital contribution made by an ERISA-Covered

Account.

\7\ In the case of shared real estate investments owned entirely

by MM accounts, if an Account contributes capital equaling less than

its pro rata interest in the investment (or makes no contribution at

all), that Account's equity interest will be re-adjusted and reduced

based on the change in the fair market value of the property caused

by the infusion of new capital.

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(d) Lending of Funds To Meet Additional Capital Requirements

24. If the General Account and an ERISA-Covered Account participate

in a shared investment that experiences the need for additional

capital, and it is determined that the ERISA-Covered Account does not

have sufficient funds available to meet the call for additional

capital, the General Account might be willing and able to loan the

required funds to the ERISA-Covered Account. Prior to any loan being

made, it must be

[[Page 6223]]

approved by the independent fiduciary for the ERISA-Covered Account.

Such loan will be unsecured and non-recourse, will bear interest at a

rate that will not exceed the higher of the prime rate plus two

percentage points or the prevailing interest rate on 90-day Treasury

Bills, will not be callable at any time by the General Account, and

will be prepayable at any time without penalty at the discretion of the

independent fiduciary of the ERISA-Covered Account. See Section I(d).

(e) Shared Debt Investments

25. MM occasionally makes real estate investments consisting of

interim construction loans or medium or long-term loans on a property.

In some instances, MM may have the opportunity to obtain an equity

ownership interest in the underlying real property upon maturity of the

debt or at the election of MM. It is possible that shared real estate

debt investments might raise questions under section 406 of the Act in

essentially two situations: (1) a material modification in the terms of

a loan agreement, or (2) a default on a loan. From time to time, the

terms of outstanding real estate loans need to be modified to take into

account new developments. Such modifications may commonly include

extensions of the term of the loan, revised interest rates, revised

repayment schedules, changes in covenants or warranties to permit, for

example, additional financing to be provided. These situations require

a decision on behalf of the lender whether it would be in its own

interest to make the modifications in question. Similarly, when a

borrower commits an act of default under a loan agreement, the lender

must determine, in its own interest, what action, if any, it wishes to

take. Such action might involve foreclosure on the loan, a

restructuring of the loan arrangement, or, in some cases as

appropriate, no action at all. When a debt investment is shared among

Accounts, a decision must be made on behalf of each Account with

respect to the action to be taken when a loan modification or loan

default situation occurs. These situations may also occur where two or

more Accounts hold interests in debt investments in respect of the same

property, and one interest is subordinate to the other in the event of

insolvency. In some cases, moreover, it is conceivable that different

actions might be desired by different Accounts. Normally, however, only

one unified course of action is possible in the situation. Since MM

maintains each of these Accounts, the action it decides to take for the

participating Accounts may raise questions under section 406 of the

Act. Accordingly, exemptive relief is being requested that will permit

MM on behalf of the Accounts to take appropriate action with respect to

the modification of the material terms of a loan or with respect to a

default situation when the loan is a shared investment involving one or

more ERISA-Covered Accounts. Each such action would require approval of

the independent fiduciary for each ERISA-Covered Account. If there is

an agreement among the independent fiduciaries as to the course of

action to follow with regard to a proposed loan modification, or an

adjustment in the rights upon default, such modification or adjustment

will be implemented. If, upon full discussion of the matter, no course

of action can be agreed upon by the independent fiduciaries, no

modification of the terms of the loan or adjustment in the rights upon

default would be made. The terms of the loan agreement as originally

stated would be carried out. See Section I(e).

II. Joint Venture Investments

26. Many real estate investments are structured as joint venture

arrangements (rather than 100 percent ownership interest in property)

in which MM and another party, such as a real estate developer or

manager, participate as joint venturer partners (or co-venturers).

Either MM or MM's co-venturer may act as managing partner of the joint

venture. Joint venture investments typically involve several particular

features by virtue of the terms and conditions of the joint venture

agreements that may, when MM's joint venture interest is shared, result

in possible violations of section 406 of the Act.

(a) Additional Capital Contributions to Joint Ventures

27. As in the case of investments made entirely by MM, joint

venture real estate investments sometimes require additional operating

capital. Typically, a joint venture agreement will provide for a

capital call by the general partner of the joint venture to be made to

each joint venturer and that each venturer provide the needed capital

on a pro rata basis either in the form of an equity contribution or a

loan to the joint venture. If one joint venturer refuses to contribute

its pro rata equity share of the capital call, the other joint

venturer(s) may contribute additional capital to cover the short-fall

and thereby ``squeeze down'' the interest in the venture of the non-

contributing joint venturer.8 Alternatively, if sufficient

additional capital is not provided by the joint venturers, other

financing may be sought, or the joint venture may be liquidated. In the

case of a capital call where MM's joint venture interest is shared by

two or more Accounts, a determination must be made on behalf of each

Account participating in the shared investment with respect to whether

it is appropriate for the Account to provide its proportionate share of

additional capital requested by the joint venture. The general rule

that MM will follow is that each Account will be given the opportunity

to provide its pro rata share of the capital call, but for some

Accounts it may be determined to be appropriate to provide less than a

full share or no additional capital at all. In such cases, the interest

of the Account would be reduced proportionately on a fair market basis.

In the case of ERISA-Covered Accounts, all decisions regarding the

making of additional capital contributions must be approved by the

independent fiduciary for the Account. In addition to situations where

some Accounts participating in the ownership of MM's joint venture

interest may not be in a position to provide their share of a capital

call, other situations may arise where the co-venturer is unable to

make its additional capital contributions. Both of these situations may

result in prohibited transactions under section 406 of the Act.

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\8\ In the case of a call for additional capital involving a

typical joint venture arrangement entered into between parties

dealing at arm's length, the joint venture agreement may commonly

provide that the equity interest of any non-contributing venturer be

re-adjusted, or ``squeezed down'', on a capital interest basis. This

involves re-adjusting the equity interests of the venturers solely

on the basis of the percentage of total capital contributed without

taking into account any appreciation on the underlying property.

This ``capital interest'' adjustment can substantially diminish the

equity interest of the non-contributing venturer in the actual

current market value of the underlying property. Thus, this type of

re-adjustment is intended to provide an incentive to all venturers

to make their proportionate capital contributions so that

improvements can be made and the operation of a property continued

without burdening the other venturers.

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28. MM Shortfall. The General Account and an ERISA-Covered Account

may experience a capital call from the general partner of the joint

venture for either an additional equity or debt contribution. If it is

determined that the ERISA-Covered Account does not have sufficient

funds available to meet its contribution requirement, 9 the

[[Page 6224]]

General Account may make a loan to the ERISA-Covered Account to enable

the ERISA-Covered Account to make its required pro rata capital

contribution. Accordingly, subject to the conditions of the proposed

exemption, Section II(a)(2) would provide relief for loans of this

type. Prior to any loan being made, it would have to be approved by the

independent fiduciary for the ERISA-Covered Account. Such loan will be

unsecured and non-recourse, will bear interest at a rate that will not

exceed the greater of the prime rate plus two percentage points or the

prevailing interest rate on 90-day Treasury Bills, will not be callable

at any time by the General Account, and will be prepayable at any time

without penalty at the discretion of the independent fiduciary of the

ERISA-Covered Account. In addition, the General Account may make an

additional equity contribution to the joint venture to cover the ERISA-

Covered Account's shortfall. In that event, the equity interest of the

ERISA-Covered Account will be ``squeezed down'' (relative to the equity

interest of the General Account) on a fair market value basis. This

option would avoid the capital basis squeeze-down of the ERISA-Covered

Account's interest by the co-venturer. Such contribution would be made

by the General Account only after the independent fiduciary for the

ERISA-Covered Account is given an opportunity to make an additional

contribution. See Section II(a)(3).

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\9\ In any case where the General Account and one or more ERISA-

Covered Accounts share MM's interest in a joint venture, the General

Account will always make a capital contribution that is at least

equivalent proportionately to the highest capital contribution made

by an ERISA-Covered Account, up to its pro rata share of the

additional capital call. Thus, the General Account will never be the

cause as between the Accounts of a capital contribution shortfall by

MM that would result in a capital basis squeeze down by a co-

venturer.

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A similar situation may arise where two ERISA-Covered Accounts, or

an ERISA-Covered and a non-ERISA-Covered Account, participate in a

joint venture investment. If one Account is unable or unwilling to

provide its proportionate share of a capital call, the other Account

may be interested in making up the shortfall. This might be

accomplished by means of an equity contribution with a resulting re-

adjustment on a current fair market value basis in the equity ownership

interests of the participating Accounts. Thus, any of these

disproportionate contribution situations between Accounts might result

in a violation of section 406 of the Act. Subject to the generally

applicable conditions of this proposed exemption, Section II(a)(3)

provides relief for these disproportionate contributions.

29. Co-Venturer Shortfall. In some cases, MM's co-venturer in a

joint venture investment may be unable to meet its additional capital

obligation, and MM may deem it advisable for some or all of the

participating Accounts to contribute capital in excess of the pro rata

share of MM's Accounts in the joint venture in order to finance the

operation of the property (and thereby squeeze down the equity interest

of the co-venturer).10 The applicant is requesting exemptive

relief that would permit additional capital contributions to be made by

participating Accounts (including the General Account) on a

disproportionate basis if the need arises. Any instance involving the

infusion of additional capital to a joint venture will be considered by

the independent fiduciary for each ERISA-Covered Account participating

in the investment and any action to be taken by the Account must be

approved by the independent fiduciary. These actions might include

contributing a pro rata share of additional equity capital (including a

capital contribution that squeezes down the interest of a co-venturer

on the basis provided in the joint venture agreement), contributing

more or less than a pro rata share, or contributing no additional

capital. See Section II(a)(4).

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\10\ In any case involving a shared joint venture interest held

by the General Account and an ERISA-Covered Account, if it is

determined that the ERISA-Covered Account will contribute its pro

rata share of extra capital, the General Account would also

contribute at least its pro rata share of such capital.

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(b) Third Party Purchases of Joint Venture Properties

30. Under the terms of typical joint venture agreements, if an

offer is received from a third party to purchase the assets of the

joint venture, and one joint venture partner (irrespective of the

percentage ownership interest of the joint venture partner) wishes to

accept the offer, the other joint venture partner must either (1) also

accept the offer, or (2) buy out the first partner's interest at the

portion of the offer price that is proportionate to the first partner's

share of the venture. For example, if MM on behalf of the Accounts and

a real estate developer are joint venture partners in a property and an

offer is received from another person to acquire the entire property

that the developer wants to accept, MM on behalf of the Accounts would

be obligated either to sell its interest also to the third party or to

buy out the interest of the developer at the portion of the price

offered by the third party proportionate to the developer's share of

the venture. When MM's interest in a real estate joint venture is

shared by two or more Accounts, it is likely that the same decision

will be appropriate for each Account in any third-party purchase

situation. See Sections I(b) and II(b)(1). It is also possible,

however, that it might be in the interests of some Accounts to reject

the offer and buy-out the developer, while other Accounts might not

have the funds to do so or, for some other reason, would elect to sell

to the third party. The joint venture agreements typically require,

however, that MM on behalf of the Accounts provide the co-venturer with

a unified buy or sell reply. Thus, in making a buy or sell decision in

any of these cases involving an ERISA-Covered Account, MM might be

deemed to be acting in violation of section 406 of the Act. Further, in

order to resolve situations where the same reply is not appropriate for

all participating Accounts, various alternatives may be adopted. For

example, the Account(s) that wishes to continue owning the property may

be willing and able to buy out not only the co-venturer, but also the

other participating Account(s) that wishes to accept the third party

offer to sell. Or, one Account may itself be willing and able to buy-

out the co-venturer while the other Account chooses to continue holding

its original interest in the property. Alternatively, all of the

Accounts may choose to participate in the buy-out, but on a basis that

is not in proportion to their existing ownership interests. Such

alternatives, when an ERISA-Covered Account is involved, while all

possibly desirable from case to case, may also raise questions under

section 406 of the Act, whether or not the General Account is a

participant in the investment. Accordingly, the applicant is requesting

exemptive relief that would permit MM to respond to third-party

purchase offers as appropriate under the circumstances. Such a response

might involve acceptance of the offer on behalf of all participating

Accounts, a buy-out of a co-venturer by some or all of the

participating Accounts on a pro rata or non-pro rata basis, or a buy-

out of the interest of one participating Account (and of the co-

venturer) by other participating Accounts. Any action by any ERISA-

Covered Account in these situations will be required to be approved by

the independent fiduciary for the Account in accordance with the

stalemate procedure, as described below (see rep. 31, below).

31. In a case involving the sharing of a joint venture interest

between two ERISA-Covered Accounts, if one ERISA-Covered Account wishes

to buy out the co-venturer and the other ERISA-Covered Account is

unable or unwilling to do so, the ERISA-Covered Account wishing to buy

out the co-venturer

[[Page 6225]]

would have the opportunity to do so if the other ERISA-Covered

Account's interests can also be accommodated. This could be

accomplished if, for example (1) the second ERISA-Covered Account

wishes to sell its interest to the first ERISA-Covered Account (at a

proportionate share of the price offered by the third party offeror)

and the first ERISA-Covered Account agrees; or (2) the second ERISA-

Covered Account wishes to continue holding its original interest. If,

however, the second ERISA-Covered Account wishes to sell its interest

and the first ERISA-Covered Account is unwilling or unable to buy it,

both Accounts would be required to sell to the third party offeror in

order to avoid the expenditure of additional funds by an unwilling

Account.

If the General Account participates in a joint venture interest

subject to a third party purchase offer, the stalemate procedure would

provide the same alternatives, except that if the General Account

wishes to accept the third party purchase offer and the ERISA-Covered

Account wishes to buy out the co-venturer (and is unwilling or unable

to buy out the General Account's interest), the General Account would

be required to buy out the co-venturer with the ERISA-Covered Account.

See Section II(b).

(c) Rights of First Refusal in Joint Venture Agreements

32. Under the terms of typical joint venture agreements, if a joint

venture partner wishes to sell its interest in the venture to a third

party, the other joint venture partner must be given the opportunity to

exercise a right of first refusal to purchase the first partner's

interest at the price offered by the third party. For example, if MM

and a real estate developer are joint venture partners and the

developer decided to sell its interest to a third party, MM would have

the right to purchase the developer's interest at the price offered by

the third party. In the case of shared real estate joint ventures, the

decision by MM on behalf of the Accounts with respect to whether or not

to exercise a right of first refusal might raise questions under

section 406 of the Act since each Account participating in the

investment might be affected differently by such decision. Because,

under the terms of the joint venture agreement, only one option

(exercise or not exercise) may be chosen by MM on behalf of the

Accounts, exemptive relief is being requested that would permit MM to

exercise or not exercise a right of first refusal as may be appropriate

under the circumstances. Any action taken on behalf of an ERISA-Covered

Account regarding the exercise of such a right would have to be

approved by the independent fiduciary. Further, under the requested

exemption, if the General Account and an ERISA-Covered Account share a

joint venture investment, even though MM may initially decide on behalf

of the General Account not to make a purchase under a right of first

refusal option, the General Account will be required to participate in

the purchase of the other joint venturer's interest if the independent

fiduciary determines that it is appropriate for the ERISA-Covered

Account to participate in the exercise of the right of first refusal on

at least a pro rata basis. If, however, two Accounts other than the

General Account participate in a joint venture and agreement cannot be

reached on behalf of the Accounts on whether to exercise a right of

first refusal, the right will not be exercised and the co-venturer will

be permitted to sell its interest to the third party, unless one

Account decides to buy-out the co-venturer alone. In this regard, it is

conceivable that some participating Accounts may elect to take

advantage of a right of first refusal opportunity and buy-out a co-

venturer without other participating Accounts taking part in the

transaction. For example, in the case of a shared joint venture

investment involving the General Account (or any other Account) and an

ERISA-Covered Account, if the co-venturer wishes to accept an offer to

sell its interest and the independent fiduciary of the ERISA-Covered

Account decides not to have the account participate in purchasing the

co-venturer's interest, the General Account (or other participating

Account) would be free to make the purchase on its own. The exercise of

a right of first refusal on such a disproportionate basis might also

raise questions under section 406 of the Act for which exemptive relief

may be needed. See Section II(c).

(d) Buy-Sell Provisions in Joint Venture Agreements

33. Joint venture agreements entered into by MM typically provide

that one joint venture partner may demand that the other partner either

sell its interest to the first partner at a price as determined by the

terms of the joint venture agreement or buy out the interest of the

first partner at such price. If the other joint venture partner refuses

to exercise either option within a specified period, it must sell its

interest to the first partner at the stated price. These ``buy-sell''

provisions are generally used to resolve serious difficulties or

impasses in the operation of a joint venture, but generally a joint

venture agreement permits the buy-sell provision to be exercised at any

time. As in the situations discussed above, the decision by MM on

behalf of the Accounts to make a buy-sell offer, or its reaction to

such an offer made by a co-venturer, may affect various participating

Accounts differently. Accordingly, any decision made by MM in these

cases involving ERISA-Covered Accounts might raise questions under

section 406 of the Act. The applicant is requesting exemptive relief

that would permit MM to make an appropriate decision under the

circumstances on behalf of all participating Accounts to make a buy-

sell offer to a co-venturer or to react to a buy-sell offer from a co-

venturer. Any such decision must be approved by the independent

fiduciary for each ERISA-Covered Account participating in the

investment.

34. In the event that MM recommends the initiation of the buy-sell

option against the co-venturer, MM will exercise the option if the

independent fiduciary on behalf of each participating ERISA-Covered

Account approves the recommendation. If, in the case of a General

Account/ERISA-Covered Account shared joint venture investment, the

independent fiduciary does not agree with MM's recommendation, the

independent fiduciary would be given the opportunity to buy out the

General Account's interest at a price to be determined in accordance

with the independent appraisal procedure described above. If the

independent fiduciary declines to buy out the General Account's

interest, the General Account would then have the opportunity to buy

out the ERISA-Covered Account's interest, (provided the independent

fiduciary for the ERISA-Covered Account approves of such sale), also in

accordance with the independent appraisal procedure. If neither the

General Account nor the ERISA-Covered Accounts buys out the other's

interest in the joint venture investment, MM would take the course of

action most consistent with the determination of the ERISA-Covered

Account, and would, therefore, not exercise the buy-sell option.

In the event that the co-venturer initiates the buy-sell option

with respect to a shared joint venture investment, MM must either sell

its entire interest to the co-venturer or reject the offer and buy-out

the co-venturer's interest at that price. If the participating Accounts

agree upon the course of action to be taken, MM will then take the

agreed action. If no agreement is reached, various alternatives may be

considered. For example, in the case of a General

[[Page 6226]]

Account/ERISA-Covered Account shared joint venture investment, if MM

recommends rejection of the offer (and consequent purchase of the co-

venturer's interest), but the independent fiduciary wants to accept the

offer, the General Account would have the option to purchase the co-

venturer's interest solely on behalf of the General Account. If the

General Account chooses this option, the ERISA-Covered Account (which

wished to accept the co-venturer's offer) would have the opportunity to

sell its interest to the General Account, at a proportionate share of

the price offered by the co-venturer, but would not be required to do

so. However, if the General Account declines to purchase the ERISA-

Covered Account's interest where the ERISA-Covered Account wishes to

accept the buy-sell offer, the entire joint venture interest would be

sold to the co-venturer. If the ERISA-Covered Account wishes to reject

the buy-sell offer (and purchase the co-venturer's interest) and the

General Account wishes to accept the offer, the General Account would

be required to purchase its proportionate share of the co-venturer's

interest, unless the independent fiduciary for the ERISA-Covered

Account elects to purchase more than its proportionate share (including

the entire co-venturer interest).

Where two or more ERISA-Covered Accounts share a joint venture

investment, the stalemate procedure is similar, except that no ERISA-

Covered Account would be required to purchase the interest of a co-

venturer (and thus expend additional funds) against its wishes. See

Section II(d).

(e) Transactions With Joint Venture Party in Interest

35. The applicant represents that when the General Account holds a

50 percent or more interest in a joint venture, the joint venture

itself may be deemed to be a party in interest under section 3(14)(G)

of the Act. Thus, any subsequent transaction involving the joint

venture and an ERISA-Covered Account that is also participating in the

venture (e.g., an additional contribution of capital) may be deemed to

be a transaction between the plans participating in an ERISA-Covered

Account and a party in interest (the joint venture itself) in violation

of section 406. Accordingly, the applicant is requesting exemptive

relief from the restrictions of section 406(a) of the Act, only, which

would permit: (1) any additional equity or debt capital contributions

to a joint venture by an ERISA-Covered Account which is participating

in an interest in the joint venture, where the joint venture is a party

in interest solely by reason of the ownership on behalf of the General

Account of a 50 percent or more interest in such joint venture; or (2)

any material modification in the terms of, or action taken upon default

with respect to, a loan to the joint venture in which the ERISA-Covered

Account has an interest as a lender. Either action would be conditioned

upon the approval of the independent fiduciary for the ERISA-Covered

Account. See Section III.

Initial Proportionate Allocations

The applicant, MM, has not requested exemptive relief for the

initial allocation of shared real estate investments by MM among two or

more Accounts, at least one of which is an ERISA-Covered Account, where

each of the Accounts participating in a real estate investment

participates in the debt and equity interests in the same relative

proportions as described in paragraph 3 above. It is the applicant's

position that the initial sharing of a real estate investment pursuant

to the described allocation by two or more Accounts maintained by MM

(which may include both its General Account and one or more ERISA-

Covered Accounts) does not involve a per se violation of sections

406(a)(1)(D) and 406(b)(1) and (b)(2) of the Act.

Regulations under section 408(b)(2) of the Act (29 CFR 2550.408b-

2(e)) provide that the prohibitions of section 406(b) are imposed on

fiduciaries to deter them from exercising the authority, control or

responsibility which makes them fiduciaries when they have interests

which may conflict with the interests of the plans for which they act.

In such cases, the regulation states that the fiduciaries have

interests in the transactions which may affect the exercise of their

best judgment as fiduciaries. It is the Department's view, however,

that a fiduciary does not violate section 406(b)(1) with respect to a

transaction involving the assets of a plan if he does not have an

interest in the transaction that may affect his best judgment as a

fiduciary.

Similarly, a fiduciary does not engage in a violation of section

406(b)(2) in a transaction involving the plan if he represents or acts

on behalf of a party whose interests are not adverse to those of the

plan. Nonetheless, if a fiduciary causes a plan to enter into a

transaction where, by the terms or nature of that transaction, a

conflict of interest between the plan and the fiduciary exists or will

arise in the future, that transaction would violate either section

406(b)(1) or (b)(2) of the Act. Moreover, if, during the course of a

transaction which, at its inception, did not involve a violation of

section 406(b)(1) or 406(b)(2), a divergence of interests develops

between the plan and the fiduciary, the fiduciary must take steps to

eliminate the conflict of interest in order to avoid engaging in a

prohibited transaction.

In the view of the Department, the mere investment of assets of a

plan on identical terms with a fiduciary's investment for its own

account and in the same relative proportions as the fiduciary's

investment would not, in itself, cause the fiduciary to have an

interest in the transaction that may affect its best judgment as a

fiduciary. Therefore, such an investment would not, in itself, violate

section 406(b)(1). In addition, such shared investment, or an

investment by a plan with another account maintained by a common

fiduciary, pursuant to reasonable procedures established by the

fiduciary would not cause the fiduciary to act on behalf of (or

represent) a party whose interests are adverse to those of the plan,

and therefore, would not, in itself, violate section

406(b)(2).11

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\11\ This analysis does not address any issues which may arise

under section 406(b)(2) where investments are shared solely by two

or more separate accounts maintained by a common fiduciary and the

participation of one account is relied upon to support the initial

investment of the other account.

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With respect to section 406(a)(1)(D) of the Act which prohibits the

transfer to, or use by or for the benefit of a party in interest

(including a fiduciary) of the assets of a plan, it is the opinion of

the Department that a party in interest does not violate that section

merely because he derives some incidental benefit from a transaction

involving plan assets. We are assuming, for purposes of this analysis,

that the fiduciary does not rely upon and is not otherwise dependent

upon the participation of plans in order to undertake its share of the

investment.

Thus, with respect to the investment of plan assets in shared

investments which are made simultaneously with investments by a

fiduciary for its own account on identical terms and in the same

relative proportions, it is the view of the Department that any benefit

that the fiduciary might derive from such investment under these

circumstances is incidental and would not violate section 406(a)(1)(D)

of the Act.

Accordingly, since it appears that the method by which the

interests in the real estate investments are allocated to the Accounts

maintained by MM does not result in per se prohibited transactions

under the Act, the Department has not proposed exemptive

[[Page 6227]]

relief with respect to the initial sharing of these investments.

Notice to Interested Persons

Those persons who may be interested in the pendency of the

requested exemption include fiduciaries and participants of plans

investing in ERISA-Covered Accounts which will be engaging in

transactions described in the proposed exemption. Because of the number

of affected persons, the Department has determined that the only

practical form of providing notice to interested persons is the

distribution, by MM, of the notice of proposed exemption as published

in the Federal Register to the appropriate fiduciaries of each plan

described above. The distribution will occur within 30 days of the

publication of the notice of proposed exemption in the Federal

Register.

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Code does not relieve a fiduciary or other

party in interest or disqualified person from certain other provisions

of the Act and the Code, including any prohibited transaction

provisions to which the exemption does not apply and the general

fiduciary responsibility provisions of section 404 of the Act, which

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

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

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

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

Act and/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; and

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

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

including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction.

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a hearing on the pending exemption to the address above,

within the time period set forth above. All comments will be made a

part of the record. Comments and requests for a hearing should state

the reasons for the writer's interest in the pending exemption.

Comments received will be available for public inspection with the

application for exemption at the address set forth above.

Proposed Exemption

Section I--Exemption for Certain Transactions Involving the Management

of Investments Shared by Two or More Accounts Maintained by MM

If the exemption is granted, as indicated below, the restrictions

of certain sections of the Act and the sanctions resulting from the

application of certain parts of section 4975 of the Code shall not

apply to the following transactions if the conditions set forth in

Section IV are met:

(a) Transfers Between Accounts

(1) The restrictions of section 406(b)(2) of the Act shall not

apply to the sale or transfer of an interest in a shared investment

(including a shared joint venture interest) between two or more

Accounts (except the General Account), provided that each ERISA-Covered

Account pays no more, or receives no less, than fair market value for

its interest in a shared investment.

(2) The restrictions of sections 406(a), 406(b)(1) and 406(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 sale or transfer of an interest in a shared

investment (including a shared joint venture interest) between ERISA-

Covered Accounts and the General Account, provided that such transfer

is made pursuant to stalemate procedures, described in this notice of

proposed exemption, adopted by the independent fiduciary for the ERISA-

Covered Account, and provided further that the ERISA-Covered Account

pays no more or receives no less than fair market value for its

interest in a shared investment.

(b) Joint Sales of Property--The restrictions of sections 406(a),

406(b)(1) and 406(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 sale to a

third party of the entire interest in a shared investment (including a

shared joint venture interest) by two or more Accounts, provided that

each ERISA-Covered Account receives no less than fair market value for

its interest in the shared investment.

(c) Additional Capital Contributions--The restrictions of sections

406(a), 406(b)(1) and 406(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 either to the

making of a pro rata equity capital contribution by one or more of the

Accounts to a shared investment; or to the making of a Disproportionate

[as defined in Section V(e)] equity capital contribution by one or more

of such Accounts which results in an adjustment in the equity ownership

interests of the Accounts in the shared investment on the basis of the

fair market value of such interests subsequent to such contribution,

provided that each ERISA-Covered Account is given an opportunity to

make a pro rata contribution.

(d) Lending of Funds--The restrictions of sections 406(a),

406(b)(1) and 406(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 lending of

funds from the General Account to an ERISA-Covered Account to enable

the ERISA-Covered Account to make an additional pro rata contribution,

provided that such loan--

(A) is unsecured and non-recourse with respect to participating

plans,

(B) bears interest at a rate not to exceed the greater of the prime

rate plus two percentage points or the prevailing rate on 90-day

Treasury Bills,

(C) is not callable at any time by the General Account, and

(D) is prepayable at any time without penalty.

(e) Shared Debt Investments--In the case of a debt investment that

is shared between two or more Accounts, including one or more of the

ERISA-Covered Accounts, (1) the restrictions of sections 406(a) and

406(b)(1) and (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 any material

modification in the terms of the loan agreement resulting from a

request by the borrower, any

[[Page 6228]]

decision regarding the action to be taken, if any, on behalf of the

Accounts in the event of a loan default by the borrower, or any

exercise of a right under the loan agreement in the event of such

default, and (2) the restrictions of section 406(b)(2) of the Act shall

not apply to any decision by MM thereof on behalf of two or more ERISA-

Covered Accounts: (A) not to modify a loan agreement as requested by

the borrower; or (B) to exercise any rights provided in the loan

agreement in the event of a loan default by the borrower, even though

the independent fiduciary for one (but not all) of such Accounts has

approved such modification or has not approved the exercise of such

rights.

Section II--Exemption for Certain Transactions Involving the Management

of Joint Venture Interests Shared by Two or More Accounts Maintained by

MM

If the exemption is granted, the restrictions of certain sections

of the Act and the sanctions resulting from the application of certain

parts of section 4975 of the Code shall not apply to the following

transactions resulting from the sharing of an investment in a real

estate joint venture between two or more Accounts, if the conditions

set forth in Section IV are met:

(a) Additional Capital Contributions--(1) The restrictions of

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

making of additional pro rata equity capital contributions by one or

more Accounts participating in the joint venture.

(2) The restrictions of sections 406(a), 406(b)(1) and 406(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 lending of funds from the General Account

to an ERISA-Covered Account to enable the ERISA-Covered Account to make

an additional pro rata capital contribution, provided that such loan--

(A) Is unsecured and non-recourse with respect to the participating

plans,

(B) Bears interest at a rate not to exceed the greater of the prime

rate plus two percentage points or the prevailing rate on 90-day

Treasury Bills,

(C) Is not callable at any time by the General Account, and

(D) is prepayable at any time without penalty.

(3) The restrictions of sections 406(a), 406(b)(1) and 406(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 making of Disproportionate [as defined in

section V(e)] additional equity capital contributions (or the failure

to make such additional contributions) in the joint venture by one or

more Accounts which result in an adjustment in the equity ownership

interests of the Accounts in the joint venture on the basis of the fair

market value of such joint venture interests subsequent to such

contributions, provided that each ERISA-Covered Account is given an

opportunity to provide its proportionate share of the additional equity

capital contributions; and

(4) In the event a co-venturer fails to provide all or any part of

its pro rata share of an additional equity capital contribution, the

restrictions of sections 406(a), 406(b)(1) and 406(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 making of Disproportionate additional equity capital

contributions to the joint venture by the General Account and an ERISA-

Covered Account up to the amount of such contribution not provided by

the co-venturer which result in an adjustment in the equity ownership

interests of the Accounts in the joint venture on the basis provided in

the joint venture agreement, provided that such ERISA-Covered Account

is given an opportunity to participate in all additional equity capital

contributions on a proportionate basis.

(b) Third Party Purchase Offers--(1) In the case of an offer by a

third party to purchase any property owned by the joint venture, the

restrictions of sections 406(a), 406(b)(1) and 406(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 acquisition by the Accounts, including one or more

ERISA-Covered Account[s], on either a proportionate or Disproportionate

basis of a co-venturer's interest in the joint venture in connection

with a decision on behalf of such Accounts to reject such purchase

offer, provided that each ERISA-Covered Account is first given an

opportunity to participate in the acquisition on a proportionate basis;

and

(2) The restrictions of section 406(b)(2) of the Act shall not

apply to any acceptance by MM on behalf of two or more Accounts,

including one or more ERISA-Covered Account[s], of an offer by a third

party to purchase a property owned by the joint venture even though the

independent fiduciary for one (but not all) of such ERISA-Covered

Account[s] has not approved the acceptance of the offer, provided that

such declining ERISA-Covered Account[s] are first afforded the

opportunity to buy out both the co-venturer and ``selling'' Account's

interests in the joint venture.

(c) Rights of First Refusal--(1) In the case of the right to

exercise a right of first refusal described in a joint venture

agreement to purchase a co-venturer's interest in the joint venture at

the price offered for such interest by a third party, the restrictions

of sections 406(a), 406(b)(1) and 406(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 acquisition by such Accounts, including one or more ERISA-

Covered Account[s], on either a proportionate or Disproportionate basis

of a co-venturer's interest in the joint venture in connection with the

exercise of such a right of first refusal, provided that each ERISA-

Covered Account is first given an opportunity to participate on a

proportionate basis; and

(2) The restrictions of section 406(b)(2) of the Act shall not

apply to any decision by MM on behalf of the Accounts not to exercise

such a right of first refusal even though the independent fiduciary for

one (but not all) of such ERISA-Covered Accounts has approved the

exercise of the right of first refusal, provided that none of the

ERISA-Covered Accounts that approved the exercise of the right of first

refusal decides to buy-out the co-venturer on its own.

(d) Buy-Sell Options--(1) In the case of the exercise of a buy-sell

option set forth in the joint venture agreement, the restrictions of

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

acquisition by one or more of the Accounts on either a proportionate or

Disproportionate basis of a co-venturer's interest in the joint venture

in connection with the exercise of such a buy-sell option, provided

that each ERISA-Covered Account is first given the opportunity to

participate on a proportionate basis; and

(2) The restrictions of section 406(b)(2) of the Act shall not

apply to any decision by MM on behalf of two or more Accounts,

including one or more ERISA-Covered Account[s], to sell the interest of

such Accounts in the joint venture to a co-venturer even though the

[[Page 6229]]

independent fiduciary for one (but not all) of such ERISA-Covered

Account[s] has not approved such sale, provided that such disapproving

ERISA-Covered Account is first afforded the opportunity to purchase the

entire interest of the co-venturer.

Section III--Exemption for Transactions Involving a Joint Venture or

Persons Related to a Joint Venture

The restrictions of section 406(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 (D) of the Code shall not apply, if the

conditions in Section IV are met, to any additional equity or debt

capital contributions to a joint venture by an ERISA-Covered Account

that is participating in an interest in the joint venture, or to any

material modification in the terms of, or action taken upon default

with respect to, a loan to the joint venture in which the ERISA-Covered

Account has an interest as a lender, where the joint venture is a party

in interest solely by reason of the ownership on behalf of the General

Account of a 50 percent or more interest in such joint venture.

Section IV--General Conditions

(a) The decision to participate in any ERISA-Covered Account that

shares real estate investments must be made by plan fiduciaries who are

totally unrelated to MM and its affiliates. This condition shall not

apply to plans covering employees of MM.

(b) Each contractholder or prospective contractholder in an ERISA-

Covered Account which shares or proposes to share real estate

investments that are structured as shared investments under this

exemption is provided with a written description of potential conflicts

of interest that may result from the sharing, a copy of the notice of

pendency, and a copy of the exemption if granted.

(c) An independent fiduciary must be appointed on behalf of each

ERISA-Covered Account participating in the sharing of investments. The

independent fiduciary shall be either

(1) A business organization which has at least five years of

experience with respect to commercial real estate investments,

(2) A committee composed of three to five individuals (who may be

investors or investor representatives approved by the plans

participating in the ERISA-Covered Account, and) who each have at least

five years of experience with respect to commercial real estate

investments, or

(3) The plan sponsor (or its designee) of a plan (or plans) that is

the sole participant in an ERISA-Covered Account.

(d) The independent fiduciary or independent fiduciary committee

member shall not be or consist of MM or any of its affiliates.

(e) No organization or individual may serve as an independent

fiduciary for an ERISA-Covered Account for any fiscal year if the gross

income (other than fixed, non-discretionary retirement income) received

by such organization or individual (or any partnership or corporation

of which such organization or individual is an officer, director, or

ten percent or more partner or shareholder) from MM, its affiliates and

the ERISA-Covered Accounts for that fiscal year exceeds five percent of

its or his or her annual gross income from all sources for the prior

fiscal year. If such organization or individual had no income for the

prior fiscal year, the five percent limitation shall be applied with

reference to the fiscal year in which such organization or individual

serves as an independent fiduciary. The income limitation shall not

include compensation for services rendered to a single-customer ERISA-

Covered Account by an independent fiduciary who is initially selected

by the Plan sponsor for that ERISA-Covered Account.

The income limitation will include income for services rendered to

the Accounts as independent fiduciary under any prohibited transaction

exemption(s) granted by the Department. Notwithstanding the foregoing,

such income limitation shall not include any income for services

rendered to a single customer ERISA-Covered Account by an independent

fiduciary selected by the Plan sponsor to the extent determined by the

Department in any subsequent prohibited transaction exemption

proceeding.

In addition, no organization or individual who is an independent

fiduciary, and no partnership or corporation of which such organization

or individual is an officer, director or ten percent or more partner or

shareholder, may acquire any property from, sell any property to, or

borrow any funds from, MM, its affiliates, or any Account maintained by

MM or its affiliates, during the period that such organization or

individual serves as an independent fiduciary and continuing for a

period of six months after such organization or individual ceases to be

an independent fiduciary, or negotiate any such transaction during the

period that such organization or individual serves as independent

fiduciary.

(f) The independent fiduciary acting on behalf of an ERISA-Covered

Account shall have the responsibility and authority to approve or

reject recommendations made by MM or its affiliates for each of the

transactions in this proposed exemption. In the case of a possible

transfer or exchange of any interest in a shared investment between the

General Account and an ERISA-Covered Account, the independent fiduciary

shall also have full authority to negotiate the terms of the transfer.

MM and its affiliates shall involve the independent fiduciary in the

consideration of contemplated transactions prior to the making of any

decisions, and shall provide the independent fiduciary with whatever

information may be necessary in making its determinations.

In addition, the independent fiduciary shall review on an as-needed

basis, but not less than twice annually, the shared real estate

investments in the ERISA-Covered Account to determine whether the

shared real estate investments are held in the best interest of the

ERISA-Covered Account.

(g) MM maintains for a period of six years from the date of the

transaction the records necessary to enable the persons described in

paragraph (h) of this Section to determine whether the conditions of

this exemption have been met, except that a prohibited transaction will

not be considered to have occurred if, due to circumstances beyond the

control of MM or its affiliates, the records are lost or destroyed

prior to the end of the six-year period.

(h)(1) Except as provided in paragraph (2) of this subsection (h)

and notwithstanding any provisions of subsection (a)(2) and (b) of

section 504 of the Act, the records referred to in subsection (g) of

this Section are unconditionally available at their customary location

for examination during normal business hours by--

(A) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

(B) Any fiduciary of a plan participating in an ERISA-Covered

Account engaging in transactions structured as shared investments under

this exemption who has authority to acquire or dispose of the interests

of the plan, or any duly authorized employee or representative of such

fiduciary,

(C) Any contributing employer to any plan participating in an

ERISA-Covered Account engaging in transactions structured as shared

investments under this exemption or any duly authorized

[[Page 6230]]

employee or representative of such employer, and

(D) Any participant or beneficiary of any plan participating in an

ERISA-Covered Account engaging in transactions structured as shared

investments under this exemption, or any duly authorized employee or

representative of such participant or beneficiary.

(2) None of the persons described in subparagraphs (B) through (D)

of this subsection (h) shall be authorized to examine trade secrets of

MM, any of its affiliates, or commercial or financial information which

is privileged or confidential.

Section V--Definitions

For the purposes of this exemption:

(a) An ``affiliate'' of MM includes --

(1) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with MM,

(2) Any officer, director or employee of MM or person described in

section V(a)(1), and

(3) Any partnership in which MM is a partner.

(b) An ``Account'' means the General Account (including the general

accounts of MM affiliates which are managed by MM), any separate

account managed by MM, or any investment advisory account, trust,

limited partnership or other investment account or fund managed by MM.

(c) The ``General Account'' means the general asset account of MM

and any of its affiliates which are insurance companies licensed to do

business in at least one State as defined in section 3(10) of the Act.

(d) An ``ERISA-Covered Account'' means any Account (other than the

General Account) in which employee benefit plans subject to Title I or

Title II of the Act participate.

(e) ``Disproportionate'' means not in proportion to an Account's

existing equity ownership interest in an investment, joint venture or

joint venture interest.

The proposed exemption, if granted, will be subject to the express

conditions that the material facts and representations contained in the

application are true and complete, and that the application accurately

describes all material terms of the transactions to be consummated

pursuant to the exemption.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,

telephone (202) 219-8881. (This is not a toll-free number.)

Signed at Washington, D.C., this 2nd day of February, 1998.

Ivan L. Strasfeld,

Director, Office of Exemption Determinations, Pension and Welfare

Benefits Administration, Department of Labor.

[FR Doc. 98-3050 Filed 2-5-98; 8:45 am]

BILLING CODE 4510-29-P