Grant of Individual Exemption; Plumbers and Pipe Fitters National Pension Fund (the Fund), Located in Alexandria, VA

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 99-46; Exemption Application No. D-

10514]

Grant of Individual Exemption; Plumbers and Pipe Fitters National

Pension Fund (the Fund), Located in Alexandria, VA

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemption.

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SUMMARY: This document contains an exemption issued by the Department

of Labor (the Department) from certain of the prohibited transaction

restrictions of the Employee Retirement Income Security Act of 1974

(the Act) and/or the Internal Revenue Code of 1986 (the Code).

Notice was published in the Federal Register of the pendency before

the Department of a proposal to grant such exemption. The notice set

forth a summary of facts and representations contained in the

application for exemption and referred interested persons to the

respective application for a complete statement of the facts and

representations. The application has been available for public

inspection at the Department in Washington, D.C. The notice also

invited interested persons to submit comments on the requested

exemption to the Department. In addition the notice stated that any

interested person might submit a written request that a public hearing

be held (where appropriate). The applicant has represented that it has

complied with the requirements of the notification to interested

persons.

The notice of proposed exemption was issued and the exemption is

being granted solely by the Department because, effective December 31,

1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,

October 17, 1978) transferred the authority of the Secretary of the

Treasury to issue exemptions of the type proposed to the Secretary of

Labor.

Statutory Findings

In accordance with section 408(a) of the Act and/or section

4975(c)(2) of the Code and the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon

the entire record, the Department finds that the exemption is:

(a) Administratively feasible;

(b) In the interests of the plan and its participants and

beneficiaries; and

(c) Protective of the rights of the participants and beneficiaries

of the plan.

Plumbers and Pipe Fitters National Pension Fund (the Fund), Located

in Alexandria, VA

[Prohibited Transaction Exemption 99-46 Application No. D-10514]

Exemption

The restrictions of sections 406(a)(1)(A), 406(a)(1)(B),

406(a)(1)(D), 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, effective October 9, 1997, to the transfer to the Fund from

the United Association of Journeymen and Apprentices of the Plumbing

and Pipe Fitting Industry of the United States and Canada, AFL-CIO (the

Union), a party in interest with respect to the Fund, of the Union's

limited partnership interests in Diplomat Properties, Limited

Partnership (the Partnership), the sole asset of which is the Diplomat

Resort

[[Page 61945]]

and Country Club (the Property); and to the transfer to the Fund of the

Union's holding of stock in Diplomat Properties, Inc., the corporate

general partner of such Partnership, in consideration for a capital

contribution by the Fund to the Partnership in the amount of $40

million dollars, plus reasonable costs incurred by the Union in

purchasing the Property, and in consideration for the release of a

certain loan obligation of the Partnership which was guaranteed by the

Union and collateralized by Union assets; provided that:

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\*\ For purposes of this exemption, references to specific

provisions of Title I of the Act, unless otherwise specified, refer

also to the corresponding provisions of the Code.

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(1) The transaction was a one-time transaction;

(2) An independent fiduciary (the I/F) which has the following

qualifications acted on behalf of the Fund:

(a) The I/F is an individual, group of individuals, or a business

entity which has substantial experience and expertise in the commercial

real estate field;

(b) Neither the I/F nor any of its affiliates have any ownership or

other interest in the Union or its affiliates, nor does the Union or

any of its affiliates have any ownership interest in the I/F or its

affiliates; and

(c) Neither the I/F nor its affiliates engages in any business

transactions with the Union or its affiliates.

(3) Prior to the Fund entering the transaction, the I/F reviewed

and approved the terms of the transaction, determined that the

transaction was an appropriate investment for the Fund, that the amount

paid by the Fund to acquire ownership of the Property through the

Partnership was appropriate and fair, that the total costs incurred

were necessary for the acquisition of the Property and were reasonable,

and that the transaction was in the best interest of the Fund and its

participants and beneficiaries;

(4) The fair market value of the Property held by the Partnership

was determined by an independent, qualified appraiser, as of the date

of the transaction;

(5) The Fund paid no fees or commissions as a result of the

transaction; and

(6) The terms of the transaction were no less favorable to the Fund

than those it would have received under similar circumstances when

negotiated at arm's length with unrelated third parties.

Effective Date: The exemption is effective October 9, 1997.

Written Comments

In the Notice of Proposed Exemption (the Notice), the Department

invited all interested persons to submit written comments and requests

for a hearing on the proposed exemption within 45 days of the date of

the publication of the Notice in the Federal Register on May 29, 1998.

All comments and requests for hearing were due by August 3, 1998.

During the comment period, the Department received four (4)

requests for a hearing. The Department has considered the concerns

expressed by the individuals who have requested a hearing. After due

deliberation, the Department does not believe that any issues have been

raised by the commentators which would require the convening of a

hearing.

The Department received letters from 65 interested persons

commenting on the proposed transaction. At the close of the comment

period, the Department forwarded copies of these letters to the

applicant for response. The applicant responded in writing to the

various concerns raised by the commentators. A description of the

comments and the applicant's responses thereto are summarized below.

1. Many commentators questioned whether the acquisition, holding,

and redevelopment of the Property by the Fund was an appropriate

investment. In this regard, some commentators opined that real estate

is a poor investment and that either hotels, in general, and/or the

Property, in particular, which is the subject of the exemption, are

poor real estate investments. Further, some commentators were concerned

about the prudence and/or risks associated with the acquisition of the

Property by the Fund in what commentators perceived to be a declining

hotel market. Other commentators expressed concerns about the

rehabilitation costs of the Property and questioned whether the Fund

could make a profit where previous owners of the Property had failed.

In this regard, a number of commentators noted that the cost to the

Fund to repair and redevelop the Property would likely exceed the $40

million expended by the Fund in acquiring the Partnership which holds

title to the Property. Finally, a commentator was concerned about the

loss to the Fund that might result from damage to the Property because

of hurricanes.

Other commentators were concerned about conflicts of interest

arising in connection with the use of the Property or the operations of

the Partnership. In this regard, it was alleged by several commentators

that the purchase of the Property was an effort to divert plan assets

to benefit private individuals. Another commentator alleged that the

Property was acquired for the personal use of union officials. One

commentator noted that ``there would be too great of a chance of graft

and unwise decisions to enter in this venture.'' Another commentator

questioned whether ``outside investors'' could become involved in the

Partnership.

In response to these concerns raised by the commentators, the

trustees of the Fund (the Trustees) have agreed to a number of

additional requirements, including the retention by the Fund of an

independent named fiduciary to oversee the Fund's investment in the

Property. A term sheet dated October 13, 1999, attached as part of the

representations made to the Department in a letter dated October 29,

1999 on behalf of the Trustees, details these additional requirements

and the retention of the independent named fiduciary. In this regard,

the Trustees will undertake such actions as are required, including

amendment of the Trust Agreement, and entering into a services

contract, to appoint Actuarial Sciences Associates (ASA) as named

fiduciary of the Fund account which holds the Partnership, Diplomat

Properties, Inc. (the general partner of the Partnership) (the GP), and

other assets of the Fund either invested in or awaiting investment in

the Property (collectively, the Diplomat Account).

ASA's services contract shall be subject to approval by the

Secretary of Labor (the Secretary). The performance of ASA's services

and responsibilities shall commence on the date when this exemption is

executed by the Secretary or her delegate. Upon the effective date of

the services contract, ASA or its designees will be substituted for the

current board and officers of the GP. The parties agree to provide to

the Secretary such information related to the Diplomat project as may

be requested in order to perform her duties under the Act.

Pursuant to the terms of such services contract, ASA shall have

full and complete authority, control, and discretion with respect to

the construction, use and/or sale of the Property and all of its

components, including, but not limited to, authority to cease or modify

any construction, sell or lease any component of the project or the

entire project, terminate or modify any or all existing contractual

relationships, enter into new contracts and perform whatever other

tasks might be necessary to maximize the financial return to the Fund

of its investment in the Partnership. ASA shall (and shall have the

authority to) retain on its own behalf or on behalf of the Fund or the

Partnership, or continue the retention of, such individuals and

entities as ASA determines are necessary and appropriate for ASA to

carry out its responsibilities under the services contract consistent

with its fiduciary

[[Page 61946]]

duties under the Act with respect to the Fund.

ASA shall not be responsible for fiduciary breaches, if any, which

occurred prior to its appointment, but shall use its best efforts to

mitigate any losses arising from such breaches. ASA shall be

responsible for any losses caused by its own breaches of fiduciary

responsibility, and by the breaches of others as provided in the Act or

as set forth below.

ASA will be retained for a period of three (3) years from the date

of the issuance of the exemption unless removed by the Trustees with

the concurrence of the Department or pursuant to a court order for

cause. In this regard, ``cause'' shall mean a material breach by ASA of

its services contract with the Fund, a breach of fiduciary duty under

the Act by ASA with respect to the Fund, a change in control of ASA, or

the bankruptcy or insolvency of ASA. If ASA is removed during such

three-year period, the Trustees shall appoint a replacement named

fiduciary that is acceptable to the Department and shall designate such

acceptable replacement and arrange for its acceptance of responsibility

prior to the effective date of the removal. ASA may not resign during

such three-year period prior to the designation of a replacement

acceptable to the Department.

The Trustees will instruct the custodian of the Fund to transfer to

the Diplomat Account any additional amounts requested by ASA for the

operations or expenses of the Diplomat Account or the Partnership, so

long as the total amount of Fund assets at risk (i.e., the Fund's

investment in the Partnership plus any recourse debt in excess of the

value of the assets in the Partnership) does not exceed 13 percent of

the Fund assets at the time of the transfer.

ASA will be reimbursed for expenses to the extent permitted under

the Fund's guidelines for expense reimbursement (the Guidelines). The

auditor for the Fund will review annually ASA's expense reimbursement

for compliance with the Guidelines.

ASA will request and Department will expeditiously consider a

separate exemption that will permit ASA to act as a QPAM with respect

to the Diplomat Account, to be retroactively effective as of the date

that ASA's appointment is effective.

ASA will be permitted to retain, or continue the existing services

of, such third party service providers as it deems appropriate. To the

extent that ASA retains or continues to retain any such service

providers to carry out any functions currently contained in the

contracts of Saylor, Driscoll, and Structure Tone, Inc., with respect

to the Diplomat Account, the Partnership or the successor(s) thereof,

ASA shall indemnify the Fund for any losses or damages resulting from

the fiduciary breaches of such service providers which occur subsequent

to the appointment of ASA. ASA shall not be precluded from obtaining

indemnification from any such service providers or from exercising any

rights that the Fund has for indemnification under its existing

agreements with any service providers and collecting any damages owed

to the Fund. To the extent that the Fund, directly or indirectly,

maintains a controlling interest in the underlying assets of the

Partnership, or any successor(s) thereof, ASA will continue to exercise

control over the Partnership, its successor(s) and any general partner

thereof, including acting as or designating the board of directors and

officers of said Partnership, successor(s) or general partner. In the

event that the fiduciary responsibility provisions of the Act no longer

apply to the underlying assets of the Partnership or its successor(s),

and in the event that the Fund, directly or indirectly, maintains a

controlling interest in the Partnership or its successor(s), ASA or

such designees for whom ASA agrees to take full responsibility, shall

make, and shall retain full responsibility for: all decisions regarding

the purchase, sale, acquisition, exchange, lease, or encumbrance or

sale and leaseback of any real property owned by the Partnership and of

any personalty for which the transaction cost, or series of related

transaction costs, exceeds $1,000,000; all decisions regarding brand

affiliation for the hotel or any other piece of Partnership Property;

and all decisions to assign or lease general management responsibility

over the Partnership Property or any major component thereof.

2. One commentator asked why Chadwick, Saylor & Co. Inc. (CSC) had

rendered its September 1997 opinion ``without all of the information

that was available.'' In response, the applicant represents that

although the Partnership's consultants and advisors were in the process

of finalizing certain economic and financial models for the project,

CSC's opinion was rendered utilizing all ``available'' information.

Further, the applicant maintains that there was sufficient information

at the time for CSC to determine that the transaction was a prudent

investment for the Fund.

3. One commentator asked what would happen if the exemption were

not granted. Another commentator asked why the transaction did not

include a contingency clause relating to the requested prohibited

transaction exemption. In response, the applicant expressed its

understanding that in the event the exemption were denied, the Fund's

transaction with the Union must be rescinded, pursuant to the

Department's regulations and applicable law. Further, the applicant

stated that the terms of the Fund's acquisition of the Property did not

contain a contingency clause, because the applicant believed and

intended that the transaction would satisfy the Department's

requirements for an administrative exemption.

4. One commentator questioned whether the transaction was a way for

the Fund to finance alleged losses of the Union Labor Life Insurance

Company (ULLICO) in which the Fund had invested some of its assets. In

response, the applicant represents that the Fund acquired the Property

solely as an investment for the exclusive benefit of participants and

beneficiaries of the Fund. It is represented that the transfer of the

Property to ULLICO, then to the Union, and finally from the Union to

the Fund was in no way intended to finance ULLICO financial losses, if

any, nor were such transactions related to any investment that the Fund

has in several ULLICO separate accounts and other investment vehicles.

5. A number of commentators stated that their pensions and/or the

cost-of-living increases to their pensions were not large enough.

Several individuals requested increased ``medical'' benefits, even

though the Fund does not provide such benefits, or asked for a transfer

of pension plan assets to a medical fund. One commentator objected to

the denial by the Board of Trustees (the Trustees) of a pension

disability claim.

The Trustees believe that the Prohibited Transaction Exemption

Procedure is not the appropriate venue in which to address concerns

about the administration of the Fund, benefits levels, or individual

benefit claims. Accordingly, the Trustees have made no attempt to

address these comments.

6. One commentator expressed opposition to the acquisition of the

Property by the Fund on the basis that a pension fund sponsored by the

United Association Local 777, an affiliate of the Union, improperly

invested the assets of such pension fund. After researching the public

records, the applicant informed the Department that consent judgments

were entered on May 5, 1998, against a broker and the trustees of the

[[Page 61947]]

Connecticut Plumbers and Pipefitters Pension Fund (the Connecticut

Fund) for violations of the Act involving imprudent investment in risky

mortgage-backed securities. The applicant maintains that, as a legal

matter, the Connecticut Fund is a separate and distinct entity, and the

activities of its broker and trustees are unrelated to the Fund and the

Union and, therefore, should not affect the requested exemption.

Accordingly, based upon the representations made by the applicant,

the written comments received in response to the proposal and the

applicant's responses, including the agreement to undertake the actions

described in the term sheet, the Department has determined to grant the

exemption. In this regard, the Department notes that the additional

undertakings agreed to by the applicant, including the appointment of

ASA as an independent fiduciary, were material factors in the

Department's determination to grant a final exemption. Finally, the

Department notes that the representations and term sheet contained in

the applicant's letter dated October 29, 1999, supercede any of the

applicant's earlier responses to the comments received by the

Department to the extent inconsistent.

The comments submitted by the commentators to the Department and

the applicant's response thereto have been included as part of the

public record of the exemption application. The complete application

file, including all supplemental submissions received by the

Department, is available for public inspection in the Public Documents

Room of the Pension Welfare Benefits Administration, Room N-5638, U.S.

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

For a complete statement of the facts and representations

supporting the Department's decision to grant this exemption refer to

the Notice published on May 29, 1998, 63 FR 29453.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the

Department, telephone (202) 219-8883 (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

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

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest or disqualified

person from certain other provisions to which the exemptions 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) This exemption is supplemental to and not in derogation of, any

other provisions of the Act and/or the Code, including statutory or

administrative exemptions and transactional rules. Furthermore, the

fact that a transaction is subject to an administrative or statutory

exemption is not dispositive of whether the transaction is in fact a

prohibited transaction; and

(3) The availability of this exemption is subject to the express

condition that the material facts and representations contained in the

application accurately describes all material terms of the transaction

which is the subject of the exemption.

Signed at Washington, DC, this 8th day of November, 1999.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 99-29678 Filed 11-12-99; 8:45 am]

BILLING CODE 4510-29-P