[Prohibited Transaction Exemption 2005-11; Exemption Application No. D-
11185, et al.
[08/12/2005]
Volume 70, Number 155, Page 47236-47246
[[Page 47236]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2005-11; Exemption Application No. D-
11185, et al.
Grant of Individual Exemptions; The UNITE National Retirement
Fund
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions 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).
A 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
application for a complete statement of the facts and representations.
The application has been available for public inspection at the
Department in Washington, DC. 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. No requests
for a hearing were received by the Department. Public comments were
received by the Department as described in the granted exemption.
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, 5 U.S.C. App. 1
(1996), 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 makes the following findings:
(a) The exemption is administratively feasible;
(b) The exemption is in the interests of the plan and its
participants and beneficiaries; and
(c) The exemption is protective of the rights of the participants
and beneficiaries of the plan.
The UNITE National Retirement Fund Located in New York, New York
[Prohibited Transaction Exemption 2005-11; Exemption Application No. D-
11185]
Exemption
I. Covered Transactions
The restrictions of sections 406(a)(1)(A) through (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,\1\ shall not apply to the
purchase(s) by UNITE-HERE \2\ and certain regional entities affiliated
with and chartered by UNITE-HERE (the UNITE-HERE Affiliates) from the
UNITE National Retirement Fund (the Pension Fund) of shares of
perpetual cumulative convertible preferred stock (the Preferred Stock)
representing fifteen percent (15%) of the outstanding equity interests
in the ALICO Services Corporation (ASC), a wholly-owned entity of the
Pension Fund; provided the conditions set forth in section II, below,
are satisfied.
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\1\ 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.
\2\ The applicant represents that the union's official name has
been changed from the Union of Needletrades, Industrial, and Textile
Employees to UNITE. In addition, the applicant has informed the
Department that, effective July 12, 2004, UNITE merged with the
Hotel Employees and Restaurant Employees International Union (HERE)
to form UNITE-HERE.
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II. Conditions \3\
(a) Prior to entering into the transactions,
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\3\ In order to provide more clarity, the Department notes that
the numbering of the subparagraphs in section II, in the final
exemption has been changed from the system used to number the
subparagraphs of section II, as set forth in the Notice.
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(1) An independent, qualified fiduciary (the Independent
Fiduciary), as defined in section III (a), below, determines, on behalf
of the Pension Fund, whether the Preferred Stock should be sold to
UNITE-HERE and to the UNITE-HERE Affiliates;
(2) The Independent Fiduciary approves of the terms underlying the
Preferred Stock to be issued by ASC;
(3) The Independent Fiduciary negotiates and approves of the terms
of the sales of the Preferred Stock to UNITE-HERE and to the UNITE-HERE
Affiliates; and
(4) The Independent Fiduciary determines that the terms of the
sales of the Preferred Stock are no less favorable to ASC than terms
that would be offered to an unrelated third party under similar
circumstances;
(b) The Independent Fiduciary determines that the purchase price
for the Preferred Stock paid by UNITE-HERE and by the UNITE-HERE
Affiliates is no less than the fair market value of such Preferred
Stock, as of the date each of the transactions is entered;
(c) The Independent Fiduciary determines the fair market value of
the Preferred Stock, as of the date each of the transactions is
entered; and
(d) In determining the fair market value of the Preferred Stock,
the Independent Fiduciary obtains an appraisal from an independent,
qualified appraiser selected by the Independent Fiduciary and ensures
that the appraisal and the Independent Fiduciary's analysis of the
appraisal are consistent with sound principles of valuation and the
elements described in paragraph 8 in the Summary of Facts and
Representations in the Notice of Proposed Exemption (the Notice);
(e) The Independent Fiduciary monitors the terms of the
transactions and ensures that ASC, UNITE-HERE, and the UNITE-HERE
Affiliates comply with the approved terms of the sales of the Preferred
Stock; and
(f) The Pension Fund incurs no fees, commissions, or other charges
or expenses as a result of its participation in the transactions other
than the fees incurred in requesting this exemption and the fee payable
to the Independent Fiduciary.
III. Definitions
For purposes of this exemption:
(a) The term, ``Independent Fiduciary,'' means an individual or
firm which is independent of and unrelated to ASC, UNITE-HERE, the
UNITE-HERE Affiliates, and any other party to the subject transactions
(the Parties), and which has acknowledged and agreed that it is a
fiduciary appointed to act on behalf of the Pension Fund for all
purposes related to the subject transactions. For purposes of this
exemption:
(1) A fiduciary will not be deemed to be independent of and
unrelated to the Parties, if:
(i) Such fiduciary directly or indirectly controls, is controlled
by or is under common control with such Parties;
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration from such Parties in connection
with the transactions
[[Page 47237]]
described in this exemption; except that an Independent Fiduciary may
receive compensation for acting as an Independent Fiduciary in
connection with the transactions contemplated herein, if the amount or
payment of such compensation is not contingent upon or in any way
affected by the Independent Fiduciary's ultimate decisions with regard
to the subject transactions;
(2) No individual or firm shall serve as an Independent Fiduciary
during any year in which annual gross revenues received from business
with the Parties for that year exceeds five (5) percent of such
individual's or firm's annual gross revenues from all sources for the
prior tax year; and
(3) The individual or firm selected as an Independent Fiduciary
must be qualified to serve as fiduciary and to carry out the duties and
responsibilities, as set forth herein.
Written Comments
In the Notice, the Department of Labor (the Department) invited all
interested persons to submit written comments and requests for a
hearing on the proposed exemption within forty-five (45) days of the
date of the publication of the Notice in the Federal Register on March
24, 2004. Because the forty-five (45 day) comment period concluded on a
weekend, all comments and requests for a hearing were due by Monday,
May 10, 2004.
During the comment period, the Department received comment letters,
facsimiles, and/or e-mails from 132 commentators. At the close of the
comment period, the Department forwarded a copy of each of these
comment letters, facsimiles, and e-mails to the applicant and requested
that the applicant and the Independent Fiduciary respond in writing to
the issues raised by the commentators. The concerns expressed by the
commentators and the applicant's and the Independent Fiduciary's
responses thereto are summarized in the paragraphs below.
Generally, the comments from commentators have been classified into
the following categories: (1) Comments from individuals asking about
benefits under the Pension Fund, including but not limited to, benefit
entitlement, the level of benefit payments, and missed benefit
payments; (2) comments from individuals requesting an explanation of
the subject transactions or requesting confirmation that the subject
transactions will not affect benefits under the Pension Fund; (3)
comments from Cintas Corporation (Cintas) supporting its request that
the exemption be denied; (4) comments from Cintas requesting that if
the exemption were granted, additional safeguards be incorporated into
the conditions of the exemption; (5) substantive comments from other
interested persons; and (6) requests for hearing from interested
persons.
I. Comments Concerning Benefits
With regard to the first category of comments, the applicant
represents that all e-mails, facsimiles, and comment letters concerning
benefits were forwarded to UNITE Fund Administrators (UFA), the plan
administrator for the Pension Fund. It is further represented that UFA
has responded in writing either by mail or by e-mail to each of the
commentators who expressed concern about benefits under the Pension
Fund. In addition, the applicant represents that UFA provided
interested persons with a telephone number to call with questions
regarding benefits and made available to English, Chinese, and Spanish
speaking individuals to answer such calls. In this regard, it is
represented that UFA received and responded to more than 4,000
telephone inquiries.
With regard to the first category of comments, the Independent
Fiduciary is of the opinion that since the sale of the Preferred Stock
does not impact individual benefit determinations these comments are
outside the scope of its assignment as independent fiduciary.
II. Comments Requesting an Explanation
With respect to the second category of comments, it is represented
that the applicant either posted or mailed copies of (1) the Notice,
(2) the supplemental statement required pursuant to the Department's
Regulation section 29 CFR 2570.43, and (3) a cover memorandum which
explained the subject transactions in summary form and informed
interested persons that the proposed transactions would not affect such
persons' entitlement to benefits under the Pension Fund. It is
represented that the applicant also posted at the union hall and in
other locations customarily used for employee benefits matters Spanish
versions of the supplemental statement and the cover memorandum. Based
on the foregoing, the applicant maintains that it has provided a clear
explanation and adequate notice regarding the subject transactions and
should not be required to respond further to comment letters,
facsimiles, and e-mails from commentators requesting clarification.
With respect to the second category of comments, the Independent
Fiduciary represents that it does not believe that the subject
transactions will threaten the security of the plan participants. In
this regard, the Independent Fiduciary represents that it believes the
terms of the sale of the Preferred Stock are no less favorable to the
Pension Fund than terms negotiated at arm's-length with an unrelated
third party under similar circumstances. In fact, the Independent
Fiduciary negotiated the terms of the sales, and the Independent
Fiduciary's approval of the sales is required under the subject
exemption. In this regard, the Independent Fiduciary represents that it
will not permit ASC to consummate the transactions, unless the
Independent Fiduciary believes ASC is receiving consideration that is
no less than fair market value and on terms no less favorable than the
terms that would be offered to an unrelated third party under similar
circumstances.
III. Cintas' Comments Supporting Denial of the Exemption
The most extensive comment letter, which included many of the
issues raised by other commentators, was filed by Cintas, a
contributing employer to the Pension Fund and to other related
multiemployer plans. Cintas requests denial of the exemption or, in the
alternative, additional safeguards for the protection of the Pension
Fund and its participants and beneficiaries.
As a general response, the applicant maintains that Cintas'
comments were made within the context of an ongoing labor dispute, and
were intended to serve as an indirect attack on UNITE-HERE, rather than
to provide meaningful comments regarding the subject transactions.
The specific comments requesting denial of the exemption which were
raised by Cintas, and the applicant's and the Independent Fiduciary's
responses thereto, are set forth in the numbered paragraphs below.
(1) In its comment, Cintas expresses concern about the proposed
sale of the Preferred Stock to UNITE-HERE and about other transactions
among UNITE-HERE and its affiliates, the Pension Fund (including ASC
and its subsidiaries), and other multiemployer plans that have UNITE-
HERE trustees. Cintas believes that the interrelationships among UNITE-
HERE and the related plans may raise prohibited transactions issues
under sections 406(a) and (b) of the Act. Most of these relate to on-
going service relationships among the parties that may be impacted by
the proposed ownership of ASC by UNITE-HERE.
Further, Cintas believes that the subject transactions may have
[[Page 47238]]
ramifications beyond those present in a sale between a plan and a party
in interest. In this regard, Cintas believes it is inappropriate to
consider any one of the particular transactions between UNITE-HERE and
the related plans by itself without considering the implications raised
by other interrelationships.
Cintas maintains that in order to fully evaluate the proposed
transactions, it is critical that the Department have an understanding
of the many interrelationships among UNITE-HERE and its affiliates, the
Pension Fund (including ASC and its subsidiaries), and other
multiemployer funds that have UNITE-HERE trustees, some of which Cintas
claims it does not know and some of which Cintas notes were not
mentioned in the proposed exemption. In Cintas' view, a full review of
all of these activities may well be warranted through an audit of these
plans.
In response to Cintas' comment, the applicant maintains that it has
heretofore disclosed all relevant relationships to the Department in
its April 8, 2003, application letter with respect to the proposed
transactions and in a prior application for Prohibited Transaction
Exemption 2001-13 (PTE 2001-13) \4\ for which relief was granted.
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\4\ 66 FR 7810 (Jan. 25, 2001).
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In response to the questions raised by Cintas concerning the sale
of the Preferred Stock and the relationships between the Pension Fund,
UNITE-HERE and its affiliates, and other clients of ASC that are plans
whose participants are represented by one or more of such affiliates,
the Independent Fiduciary states that it is because of these
relationships that it was appointed. In this regard, the Independent
Fiduciary represents that it has no relationship with UNITE-HERE and
its affiliates. Further, the Independent Fiduciary points out that its
only responsibilities have been to the Pension Fund and its
participants, and then only with respect to the original acquisition of
ASC by the Pension Fund in 2001, pursuant to PTE 2001-13, and to the
purchases of the Preferred Stock that are the subject of this
exemption.
(2) Cintas expresses concern about the services rendered by
affiliates of UNITE-HERE and/or by ASC and its subsidiaries and focuses
on the fees charged for such services to various funds sponsored by
UNITE-HERE, including the Pension Fund. In this regard, Cintas
maintains that the fees paid by such funds are high. In support of its
position, Cintas points out the amount of fees paid to UFA by an
underfunded predecessor to the Pension Fund, notwithstanding the fact
that UFA is represented to be a tax-exempt, not-for-profit subsidiary
of ASC.
In response, the applicant maintains that Cintas' claims are
unsubstantiated, reflect a lack of understanding regarding the
operation of multiemployer plans and are misleading. In the opinion of
the applicant, Cintas fails to provide any support for its assertion
concerning the amount of fees charged by UFA. It is the applicant's
position that the fees charged are reasonable, particularly considering
the complex nature of these multiemployer plans and the level of
services provided. In addition, the applicant represents that UFA
administers the complicated benefit structures resulting from the
numerous fund mergers that have occurred. Further, it is represented
that UFA provides services, which are time-intensive and labor-
intensive, in an efficient and cost-effective manner.
(3) Cintas is concerned that the amount of fees paid by an
underfunded predecessor to the Pension Fund were twice the level of the
contributions received by such fund.
In response, the applicant maintains that an evaluation of
administrative efficiency or reasonableness of fees using a comparison
of fund expenses to employer contributions is misleading. According to
the applicant, the amount of contributions to a multiemployer pension
fund are, in many cases, driven by factors that are not closely
connected with the effort involved in administering the fund. The
applicant represents that contribution rates are established through
collective bargaining and are not necessarily correlated to costs. It
is represented that many related funds have had little or no
contribution requirements and that in the past the contribution rate
for a significant portion of contributing employers to a predecessor of
the Pension Fund was set at a de minimis rate that bore no relation to
the administrative services required by such fund. It is further
represented that these employers now contribute at a higher rate and
that contributions currently exceed UFA fees.
(4) Cintas is concerned that a related fund paid UFA in excess of
$5 million in administrative and investment management fees,
notwithstanding the fact that such fund was subject to an agreement
with the Pension Benefit Guaranty Corporation and was in poor financial
condition.
In response, the applicant represents that the fund in question was
terminated on December 31, 2003, and that a significant portion of the
fees involved legal issues arising from the termination, the collection
of delinquent contributions, and employer withdrawal liability, all of
which are cost-intensive undertakings. It is represented that the
Pension Benefit Guaranty Corporation is fully aware of the arrangement
pursuant to which UFA handles the administration of the fund and has
never raised any concerns regarding UFA, its administration of the
fund, or the amount of fees charged.
(5) Cintas is concerned that funds affiliated with UNITE-HERE pay
fees for services provided by ASC or its affiliates where directors or
executives of such subsidiaries are related to UNITE-HERE or its
affiliates. For example, Cintas cites to certain funds that receive
services or purchase insurance products from a subsidiary of ASC, the
Amalgamated Life Insurance Company (ALICO), where Cintas asserts that
Mr. Bruce Raynor, the President of UNITE-HERE is the chairman of ALICO,
and his son either is or was on the Board of Directors.
In response, the applicant points out that Mr. Bruce Raynor and his
brother, Harris Raynor, are members of the Board of Directors of ALICO
and ASC, but Mr. Raynor's son has not been and is not on the Board of
ALICO.
With regard to the provision of insurance services and products to
the related funds by ALICO and the participation of the Raynor brothers
on the Board of ALICO, the applicant states that it understands Cintas'
concern about the potential conflicts. The applicant believes, however,
that if the conflicted trustees recuse themselves from the decision-
making process regarding the retention of ALICO, and the services are
provided in accordance with section 408(b)(2) of the Act, there should
be no prohibited transaction under the Act.\5\
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\5\ In support of its view, the applicant relies on: (a)
Advisory Opinion 99-09A issued on May 21, 1999, in a letter to
Patricia A. Shlonsky (the Shlonsky Letter); (b) Advisory Opinion 79-
72A issued on October 19, 1979, in a letter to William D. Watters,
Esq. (the Watters Letter); and (c) Section 408(b)(2) of the Act.
The Shlonsky Letter cites to the Watters Letter for support for
the proposition that a fiduciary may avoid engaging in a transaction
described in section 406(b)(1) and 406(b)(2) of the Act ``by
removing himself or herself from all consideration by the plan of
whether or not to engage in such transaction, and by not otherwise
exercising, with respect to such transaction, any of the authority,
control or responsibility which makes him or her a fiduciary, absent
any arrangement, agreement, or understanding with respect to who
will ultimately provide the services in question. * * *''
Section 408(b)(2) of the Act provides a statutory exemption for
``contracting or making reasonable arrangements with a party in
interest for office space, or legal, accounting, or other services
necessary for the establishment or operation of the plan, if no more
than reasonable compensation is paid therefor.''
The Department is offering no view, herein, as to the
applicant's reliance on the Shlonsky Letter, the Watters Letter,
and/or the statutory exemption, as set forth in section 408(b)(2) of
the Act and 29 CFR 2550.408(b)(2) of the Department's regulations.
Further, the Department is providing no relief, herein, for any
prohibited transaction that may arise after the sale of the
Preferred Stock, including but not limited to, any that may arise in
connection with the participation by members of the Board of
Directors of ASC and/or members of the Board of Trustees of the
Pension Fund in the decision making process regarding the retention
of affiliates of UNITE-HERE and/or ASC and its subsidiaries to
provide services to the Pension Fund, or related funds. In this
regard the Department notes that these transactions are outside the
scope of relief offered by this exemption.
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[[Page 47239]]
(6) Cintas is concerned about the fact that the Amalgamated Bank,
an entity owned by UNITE-HERE and certain of its affiliates, provides
services to, and receives significant fees from, various funds
affiliated with UNITE-HERE, including the Pension Fund. Cintas points
out that certain funds, sponsored by the International Ladies Garment
Workers Union (ILGWU) prior to the merger of Amalgamated Clothing and
Textile Workers Union (ACTWU) and the ILGWU, obtained an exemption for
services provided by Amalgamated Bank, but Cintas is unaware of any
similar exemption for funds sponsored by ACTWU prior to its merger with
ILGWU. Further, Cintas points out that Schedule C of Form 5500 of a
predecessor to the Pension Fund and certain other related funds fail to
note that UFA and Amalgamated Bank are parties in interest.
In response, the applicant states that Amalgamated Bank is a
commercial bank chartered by the State of New York in 1923. Amalgamated
Bank is subject to the supervision and examination authority of the New
York State Banking Department. It is also subject to supervision and
examination by the Federal Deposit Insurance Corporation. As of May 31,
2004, Amalgamated Bank had total assets under custody of approximately
$16.7 billion and total assets under management of approximately $7.7
billion. It provides certain services to the Pension Fund and to
various related funds. Amalgamated Bank also provides investment
management and custodial services to more than 150 Taft-Hartley and
other labor union-related funds unrelated to or unaffiliated with
UNITE-HERE.
With regard to Cintas' concerns, the applicant maintains that the
Department was made aware of the relationship between Amalgamated Bank
and related funds and the Pension Fund in communications with
representatives from the Department.\6\
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\6\ On January 17, 2003, attorneys for UNITE met with
representatives of the Department in connection with the submission
on August 11, 2003, of a request for an opinion letter concerning
the continued utilization by plans sponsored by UNITE of the
services provided by Amalgamated Bank (formerly, Amalgamated Bank of
New York).
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Further, in connection with the recusal discussion in paragraph 8,
below, the applicant maintains that the relationship between
Amalgamated Bank and several other funds related to a predecessor of
UNITE, have been governed by the terms of a letter issued in 1981 by
the Department.\7\ Among these terms, a ``banking committee'' composed
of conflict-free employer and union trustees was required to make all
policy decisions with respect to Amalgamated Bank and to manage the
relationship between Amalgamated Bank and such funds.
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\7\ Letter from Ian Lanoff, Administrator of Pension Welfare
Benefit Programs at the Department, to Harry Huge, Esq., on behalf
of the Amalgamated Clothing and Textile Workers of America (January
15, 1981).
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(7) Cintas also expresses a concern that the ``potential for future
abuse'' will increase as a result of the merger between UNITE and HERE.
In this regard, Cintas believes that funds sponsored by HERE may enter
into service relationships with UFA, ALICO, and Amalgamated Bank as a
result of such merger.
In response, the applicant states that both ALICO and Amalgamated
Bank already maintain relationships with certain funds sponsored by
HERE. Second, the applicant believes that if the trustees of any fund
sponsored by UNITE-HERE exercise their fiduciary duties in accordance
with the Act and in a manner that does not violate the prohibited
transaction provisions of the Act, the applicant can see no reason why
such funds should be prohibited from engaging UFA, ALICO, or
Amalgamated Bank whenever such engagement would be to the benefit of
the funds and their participants and beneficiaries.
(8) Cintas notes that recusal by union trustees of the Pension Fund
who serve on the Board of Directors of ASC is inadequate. Accordingly,
in the opinion of Cintas, the union members serving on the boards of
trustees of various related funds should also be required to recuse
themselves before entering into service arrangements with ASC or its
subsidiaries.
In response, the applicant believes that the Department should not
disregard established precedent that recusal by an interested party
works to eliminate self-dealing concerns under section 406(b) of the
Act. In this regard, the applicant notes that the Department has long
taken the position that a fiduciary may avoid engaging in an act
described in section 406(b)(1) of the Act, if such fiduciary does not
use the authority, control, or responsibility which makes such person a
fiduciary to cause the fund to pay a fee for a service furnished by a
person in which the fiduciary has an interest which may affect the
exercise of the fiduciary's best judgment as a fiduciary. The applicant
points out that the Department has on numerous occasions, considered
recusal an acceptable means to avoid triggering a breach of sections
406(b)(1) and (b)(2) of the Act, so long as such fiduciary (1) has
removed himself or herself from all consideration of whether to engage
in such activity and (2) does not otherwise exercise, with respect to
the proposed transaction, any of the authority, control, or
responsibility which makes him or her a fiduciary, provided there is no
arrangement, agreement, or understanding with respect to who will
ultimately provide the services in question. It is the applicant's view
that so long as the trustees of the Pension Fund and/or the trustees of
any related funds act in accordance with the foregoing mandates with
respect to the selection and retention of UFA or the selection and
retention of any other ASC subsidiary to provide services for such
funds, the applicant sees no reason why recusal would not work.
(9) Cintas maintains that, while the applicant asserts otherwise,
``it is hardly clear that the Labor Management Relations Act is not
violated by recusal of the union trustees.''
In response, the applicant states that it has provided supporting
authority for its position in the form of a United States Supreme Court
decision,\8\ while Cintas has failed to provide any support for its
statement.
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\8\ Local 144 Nursing Home Pension Fund v. Demisay et.al., 508
U.S. 581 (1993).
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(10) Cintas is concerned that, even if union trustees of the
Pension Fund recuse themselves, there will be enormous pressure on
management trustees of the Pension Fund to approve a transaction,
unless such transaction were completely unjustified, and to agree to
service arrangements and fees in order to avoid acrimony with the union
trustees and to avoid hostile collective bargaining negotiations with
UNITE-HERE.
It is the applicant's view that Cintas fails to understand that the
non-interested trustees remain subject to the fiduciary responsibility
provisions of the Act and are required, among other
[[Page 47240]]
things, to act for the benefit of the participants and beneficiaries
when making decisions that affect the Pension Fund. If the trustees
fail to act properly, they face liability under the Act for breaching
their fiduciary duties.
(11) Cintas is concerned that, if the exemption were granted and
UNITE-HERE were to have an interest in ASC, there would be a bias for
union trustees to increase fees charged for services provided by ASC or
its affiliates to funds sponsored by UNITE-HERE. Even if fees charged
by ASC were determined on a not-for-profit basis, Cintas believes that
such union trustees may take a more aggressive position in determining
what costs can be passed through to such funds.
In response, the applicant maintains that as UFA is a non-profit
organization, it is treated as having ``zero'' value when calculating
the enterprise value of ASC. In this regard, only the for-profit
businesses are assigned any value. Accordingly, the applicant maintains
that a fee increase caused by union trustees, acting as directors of
ASC, as set forth in Cintas' hypothetical, would not affect the
underlying value of the investment in ASC by UNITE-HERE.
(12) Cintas requested that its comment letter be distributed to the
other participating employers and possibly all parties in interest.
Although the applicant failed to respond to Cintas' request that
its comment letter be distributed to participating employers and
parties in interest, the Department notes that the complete application
file, including the comment letters, facsimiles, and e-mails from all
commentators and the applicant's and Independent Fiduciary's responses
thereto are available for public inspection in the Public Disclosure
Room of the Employee Benefits Security Administration, Room N-1513,
U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC
20210.
IV. Cintas Comments Requesting Additional Safeguards
In addition to the issues discussed above, Cintas also commented on
the terms of the proposed transactions, the structure of the
transactions, and requested modifications to the conditions of the
exemption.
Notwithstanding the fact that the applicant acknowledges that the
Independent Fiduciary is in the best position to address these issues,
the applicant responded to Cintas' comments. Both the applicant's
response and the response of the Independent Fiduciary are discussed in
the numbered paragraphs below:
(1)(a) In its comment, Cintas questions the need to structure the
transactions as sales of the Preferred Stock to related parties. In the
opinion of Cintas, such sales may well strip some of the value of ASC
from the Pension Fund and give it to UNITE-HERE and its affiliates by
virtue of the convertible nature of the Preferred Stock.
In response, the applicant states that, prior to approaching UNITE-
HERE and the UNITE-HERE Affiliates about purchasing an interest in the
company, ASC offered on two prior occasions to sell minority interests
to unrelated third-party purchasers. In this regard, it is represented
that every firm approached was offered the same terms as were offered
to UNITE-HERE and the UNITE-HERE Affiliates. It is represented that ASC
was unsuccessful in finding a buyer because the Pension Fund wanted to
maintain control of the operations of ASC. No purchaser was willing to
buy a small piece of an illiquid insurance company in which such
purchaser would have little or no control.
(b) Cintas acknowledges that the purported motivations for the
proposed transactions are the desire of ASC for an increase in working
capital, as well as the potential to increase profitability. Cintas
also acknowledges that the motivation of UNITE-HERE and its affiliates
generally is to invest in vehicles with a fixed rate of return.
However, Cintas suggests that there are ways other than the proposed
transactions to achieve these goals. In this regard, Cintas suggests
that: (i) ASC could have obtained a loan of capital from an unrelated
financial institution; (ii) UNITE-HERE or an affiliate could have made
a loan to ASC at a fixed rate of return; or (iii) the Pension Fund
could have made a direct capital infusion into ASC.
With regard to the purported motivations for the subject
transactions, the applicant maintains that Cintas ignores two important
reasons for the transactions proffered in the application. First, the
applicant wishes to sell a portion of ASC, so that ASC will no longer
constitute a plan asset look-through vehicle for purposes of the
Department's plan asset regulation. In this regard, the applicant is
concerned that other unrelated entities would be unwilling to engage in
joint ventures with ASC, if ASC is treated as a plan asset look-through
vehicle subject to the Act. Second, while the applicant has existing
relationships with over 125 benefit funds unaffiliated with UNITE-HERE,
it believes that the addition of UNITE-HERE and the UNITE-HERE
Affiliates as co-owners of ASC will enhance the standing of ASC with
existing trade union customers and will serve as an effective tool for
obtaining business from other trade unions or trade union sponsored
groups that do not currently maintain relationships with ASC or its
subsidiaries. In support of this assertion, the applicant points out
that Amalgamated Bank has benefited from its affiliation with UNITE-
HERE and has developed a significant amount of business from
organizations and employee benefit funds not affiliated with UNITE-
HERE.
With regard to Cintas' suggestion that ASC borrow the funds needed
for working capital from an unrelated financial institution or from
UNITE-HERE or its affiliates, the applicant maintains that the rating
agencies view debt financing negatively. In the opinion of the
applicant, debt financing would affect adversely the risk factors taken
into account by the rating agencies when ascertaining the ability of
ALICO, a subsidiary of ASC, to satisfy claims. The applicant believes
this could jeopardize ALICO's ``A'' rating. It is represented that
ALICO's ``A'' rating is extremely important for attracting and
retaining business.
The Independent Fiduciary confirms that ASC's primary business
unit, ALICO, currently has an ``A'' rating from A.M. Best, which gives
ALICO a competitive advantage. Further, the Independent Fiduciary
states that this rating is based, in part, on the fact that ASC has no
debt.
With regard to Cintas' suggestion that the Pension Fund provide
additional capital to fund the expansion of ASC, the applicant
represents that the trustees of the Pension Fund have determined that
because ASC already represents approximately 2.3 percent (2.3%) of the
assets of the Pension Fund, the trustees would prefer not to increase
the Pension Fund's investment in this valuable, but illiquid asset.
The Independent Fiduciary acknowledges that the decision to invest
additional funds into ASC rests with the trustees of the Pension Fund,
not with the Independent Fiduciary. However, the Independent Fiduciary
notes that ASC already represents the largest single investment by the
Pension Fund in any single privately-held company. In this regard, the
Independent Fiduciary estimates that ASC represents approximately 2.7
percent (2.7%) of the Pension Fund's assets, rather than the 2.3
percent figure suggested by the applicant. Notwithstanding the
difference in the estimated percentage involved, the Independent
Fiduciary acknowledges that the percent of the Pension Fund's assets
committed to
[[Page 47241]]
ASC is within the limits imposed by the Pension Fund's investment
guidelines and is well within the limits on a single investment in the
investment guidelines of most large pension plans. Accordingly, the
Independent Fiduciary represents that it would endorse the decision by
the trustees of the Pension Fund not to increase the Pension Fund's
commitment to ASC.
(c) Cintas notes that one of the conditions of the exemption is
that an Independent Fiduciary determines whether the Preferred Stock
should be sold to UNITE-HERE. If the exemption were to be granted,
Cintas requests that this condition of the exemption be modified to
contain an express requirement that the Independent Fiduciary determine
that a $9 million dollar capital infusion is desirable. In this regard,
Cintas notes that the Pension Fund has $1.5 billion in assets and that
a capital infusion of $9 million would constitute less than 1 percent
(1%) of the Pension Fund's assets.
In response, the applicant maintains that the authority currently
possessed by the Independent Fiduciary is more than adequate to protect
the Pension Fund from abuse. The Independent Fiduciary has complete
authority to determine whether the Preferred Stock should be sold under
the terms of the proposed transactions. Further, assuming the
Independent Fiduciary determines that the Preferred Stock may be sold
to UNITE-HERE and the UNITE-HERE Affiliates, the Independent Fiduciary
may also accept or reject any or all terms applicable to such stock.
The purpose of the Independent Fiduciary is to protect the Pension Fund
and its participants and beneficiaries from abuse. In the opinion of
the applicant, the role of the Independent Fiduciary is not and should
not be to run ASC.
Furthermore, in a letter to the Department, dated, August 14, 2003,
the Independent Fiduciary represented that the subject transactions, as
currently structured, are prudent, in the interest of the participants
and beneficiaries of the Pension Fund and are protective of the rights
of the participants and beneficiaries of the Pension Fund.
(2) Cintas requests that the Department impose a condition of the
exemption that would require that ASC continue to operate as a plan
asset look-through vehicle, even after the sales of the Preferred Stock
to UNITE-HERE and its affiliates. In this way, Cintas believes that any
potential transactions between UNITE-HERE, and its affiliates, and the
Pension Fund \9\ will be subject to all applicable regulation under the
Act, including the fiduciary prudence requirements, as well as the
party in interest rules. The failure to include this condition in the
exemption, in Cintas' view, could lead to abuses in potential
transactions between UNITE-HERE and the Pension Fund. Further, Cintas
maintains that state corporate laws do not provide the same degree of
protection from potential abuse that the Act provides with regard to
future transactions between UNITE-HERE and the Pension Fund.
---------------------------------------------------------------------------
\9\ In making reference in this paragraph to potential
transactions between UNITE-HERE and the Pension Fund, the
Department, understands that Cintas meant to refer to potential
transactions between UNITE-HERE and ASC, as the Pension Fund owns
all of the common stock of ASC.
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In response, the applicant is concerned that unrelated entities
will be unwilling to engage in joint ventures with ASC, if ASC were to
be treated as a plan asset look-through vehicle subject to the Act. In
the view of the applicant, the unprecedented step of imposing this
condition on ASC would unnecessarily impede ASC's ability to engage in
potential advantageous business opportunities. Furthermore, the
applicant maintains that Cintas articulates no reason for imposing such
a condition other than an assertion that the condition would prevent
abuses in the case of transactions between UNITE-HERE and the Pension
Fund.
The Independent Fiduciary does not support Cintas' recommendation
that ASC's underlying assets should continue to be treated as plan
assets after the sales of the Preferred Stock to UNITE-HERE and its
affiliates. In this regard, the Independent Fiduciary points out that
the prohibited transactions rules under the Act were designed primarily
for passive investments, not operating companies. The Independent
Fiduciary believes that plan asset treatment would impede the ability
of ASC to grow; and therefore, would not be in the best interest of the
Pension Fund, as the principal owner of ASC. In the opinion of the
Independent Fiduciary, the Board of Directors of ASC will still be
subject to the fiduciary responsibilities to ASC's shareholders under
corporate law, and the trustees of the Pension Fund, in exercising
their rights and responsibilities as shareholders of ASC, will still be
subject to the fiduciary prudence requirements under the Act.
(3) While the applicant has represented that: (a) Each trustee of
the Pension Fund affiliated with UNITE-HERE and its affiliates will
recuse himself from any decision to vote the common stock of ASC when
the vote concerns the Preferred Stock and where participation by such
trustee would give rise to a conflict of interest, and (b) each
director of ASC affiliated with UNITE-HERE and its affiliates will
recuse himself from participating in any decision or action concerning
the Preferred Stock, Cintas questions whether such a representation
(rather than a condition of the exemption) offers adequate protection
for participants. In this regard, Cintas suggests that the Department
require, as a condition of the exemption, that an independent fiduciary
be appointed whenever trustees of the Pension Fund vote the common
stock of ASC, if the vote concerns the Preferred Stock, as well as, on
matters pertaining to the payment of dividends or the redemption of
Preferred Stock. Similarly, Cintas suggests that other funds that hire
ASC or its subsidiaries should be required to obtain an independent
fiduciary when determining whether to do so.
In response, the applicant believes that this proposed condition is
unnecessary, because the applicant already addressed this issue in
response to the Department's questions. In this regard, the applicant,
in a February 10, 2004, letter, stated that once the Preferred Stock
has been sold the trustees of the Pension Fund that serve on the ASC
Board of Directors will be acting as directors of an operating company.
As such, they will be subject to the mandates of New York State law
when making decisions, for example, to issue dividends with respect to
the Preferred Stock or to redeem the Preferred Stock. The applicant
takes the position that New York State corporate laws, with their
provisions addressing interested party transactions, provide adequate
protection to ASC and the Pension Fund as a shareholder in ASC.
Nevertheless, the applicant agrees that all conflicted ASC directors
will not participate in any vote regarding the issuance of Preferred
Stock dividends or the redemption of the Preferred Stock. For reasons
already expressed herein, the applicant does not believe that the
Department should ignore years of precedent that allows the use of
recusal.
Further, the applicant represents that the Board of Trustees of the
Pension Fund, and the Board of Directors of ASC have each issued
resolutions stating that each such board shall maintain, or cause to be
maintained within the United States for a period of six (6) years in a
manner that is convenient and accessible for audit and examination,
contemporaneous and comprehensive records of any portion of the
meetings of such boards, during which any
[[Page 47242]]
decision or action is taken with respect to ASC or any of its
subsidiaries involving the Preferred Stock to enable such records to be
available for inspection and review by any duly authorized employee or
representative of the Department of Labor, the Internal Revenue
Service, or any other applicable Federal or state regulatory agency.
Such records shall include but not be limited to documents
supporting any decision made or action voted upon, who was present at
the meeting in which such decision was made or action was voted on, who
voted on and who abstained from voting on such decision or action, the
result of any such vote, and a summary of any discussion surrounding a
decision made or action taken, setting forth an explanation of why a
particular decision was made or action was taken.
The Department does not concur with Cintas' comment that an
independent fiduciary be appointed whenever trustees of the Pension
Fund vote the common stock of ASC in matters concerning the Preferred
Stock, or that an independent fiduciary be appointed by the Board of
Directors of ASC to make decisions on matters pertaining to the payment
of dividends or the redemption of Preferred Stock. Furthermore, the
Department does not concur with Cintas' suggestion that related funds
that hire ASC or its subsidiaries should be required to obtain an
independent fiduciary when determining whether to do so.
The Department notes that the relief provided by this exemption is
limited to the purchase by UNITE-HERE from the Pension Fund of the
Preferred Stock representing 15% of the outstanding equity interests in
ASC. Although commentators have raised a number of issues which are
unrelated to the exemption and other issues which have been addressed
by the applicant and/or by the Independent Fiduciary, the Department
wishes to emphasize that nothing in this exemption should be construed
as exempting any of the prohibited transactions described in section
406(a) or 406(b) of the Act other than the sale of the Preferred Stock.
Furthermore, the Department is not expressing any views as to whether
the administration of the Pension Fund, the operation of ASC and/or its
affiliates, or the operation of entities affiliated with or chartered
by UNITE-HERE raise issues under ERISA's fiduciary responsibility
provisions.
V. Substantive Comments From Other Interested Persons
In addition to the comment letter filed by Cintas, the Department
also received other comment letters expressing substantive concerns
regarding the subject transactions. Set forth below in summary form are
the issues raised by the commentators and the responses from the
applicant and the Independent Fiduciary to these concerns:
(1) Certain commentators expressed concerns regarding the funding
status of the Pension Fund and the impact of the subject transactions
on such funding.
In response, the applicant represents that the Pension Fund is 85%
funded for vested benefits, estimated as of January 1, 2004, and is
financially stable. Further, the applicant represents that the sale of
Preferred Stock by ASC will have no impact on the funding status of the
Pension Fund;
(2) Certain commentators raised concerns regarding self-dealing,
including a comment that the only purpose of the subject transactions
was to benefit UNITE-HERE.
In response, the applicant maintains that the self-dealing issue
has been addressed at length above in response to Cintas' comment
letter;
(3) One commentator expressed concerns regarding the loyalty of
Willamette Management Associates (WMA), because it was ``hired by
ASC.''
The applicant responds that WMA was retained by the Pension Fund
and is independent in that the average percentage of its annual income
derived from the Pension Fund over the previous six (6) years has been
less than one percent (1%). Further, both the Pension Fund and ASC
represent to the Department that compensation received by WMA is not
contingent upon the opinion expressed in its valuation reports.
The Independent Fiduciary, in response to this comment, represents
that WMA has been retained by the Pension Fund to perform the annual
valuations since the Pension Fund acquired ASC in 2001, and that WMA
receives less than one percent (1%) of its annual revenue from the
Pension Fund. It is represented that WMA is a nationally recognized
valuation firm with significant experience valuing closely-held
business. The Independent Fiduciary has determined that it is
appropriate to retain WMA to perform the valuation for purposes of
determining the price of the Preferred Stock. It is represented that
this valuation will be reviewed by an officer of the Independent
Fiduciary who is a Chartered Financial Analyst with significant
valuations experience, including valuing minority interests, closely-
held business, and special situations. In this regard, the Independent
Fiduciary represents that any valuation issues will be resolved to this
officer's satisfaction before the subject transactions are consummated.
In addition to its response to the commentator, the Independent
Fiduciary informed the Department of changes to the preliminary
valuation of ASC, effective as of May 31, 2003, but performed by WMA in
July 2003. In this regard, it is represented that WMA's preliminary
valuation was an estimate of one percent (1%) and fifteen percent
(15%), respectively, of the value of ASC on a pre-transaction basis. In
December 2003, after the Independent Fiduciary negotiated the terms of
the transaction, including the formula for the price of the Preferred
Stock based on the value of ASC, WMA provided an updated estimate of
the value of ASC on a post-transaction basis, as if the transactions
had been consummated on May 31, 2003. As a result of WMA's December
2003 valuation, the Independent Fiduciary represents that the figures,
as set forth in the Notice, 69 FR 13897, col. 3, lines 3-49, should
have read, as follows:
118 shares should have been 101 shares;
The value of a one percent (1%) ownership interest of
$536,000 and $624,000, respectively, should have been $541,000 and
$630,000;
The aggregate and per share values based on a $33 million
enterprise value and a 15 percent (15%) ownership interest of
$8,040,000 and $4,557 per share should have been $9,465,000 and $5,363
per share; and
The aggregate and per share values based on a $38.4
million enterprise value and 15 percent (15%) ownership interest of
$9,360,000 and $5,303 per share should have been $11,014,000 and $6,240
per share.
The Independent Fiduciary further represents that these figures
will not affect the price paid for the Preferred Stock, which will be
based on the final valuation of ASC at closing, as indicated in the
proposed exemption.
(4) Certain comment letters asked how the proceeds of the sale of
the Preferred Stock would be utilized.
In this regard, the applicant represents that the proceeds from the
sale of Preferred Stock shall be utilized ``to invest in the continued
growth of ASC and the development of new product lines and markets with
the goal of further increasing the value of ASC.''
(5) Certain individual commentators requested that the exemption be
denied,
[[Page 47243]]
because such individuals were denied benefits from the Pension Fund and
other funds affiliated with UNITE-HERE.
In response, the applicant maintains that such concerns have no
relevance to the subject transactions. Nevertheless, the applicant
represents that each commentator's concern was forwarded to UFA for
appropriate action.
(6) Two commentators expressed concerns regarding the cancellation
of their prescription drug benefits.
The applicant maintains that these comments are not relevant to the
subject transactions, because these comments involve the health
benefits of the individuals. The applicant represents that such
letters, however, were forwarded to UFA for appropriate action.
VI. Requests for Hearing
During the comment period, the Department received seven (7)
requests from commentators that the Department hold a hearing. These
comments were generally from individuals concerned as to how the
subject transactions would affect their benefits under the Pension
Fund. In this regard, the commentators requested that the Department
hold a hearing if, as a result of the requested exemption, pension
benefits were to be reduced or eliminated.
In response to the commentators' requests for a hearing, the
applicant maintains that because these individuals were notified that
the subject transactions would not affect adversely their benefits, and
because the parties requesting the hearings failed to demonstrate how
they would be adversely affected by the grant of the exemption, a
hearing is unwarranted.
The Department has carefully considered the concerns expressed by
the commentators who requested a hearing. After a review of these
concerns, and the applicant's response, the Department does not believe
that there are material factual issues relating to the exemption that
were raised by commentators during the comment period which would
require the convening of a hearing. Thus, the Department has determined
not to delay consideration of the final exemption by holding a hearing
on application D-11185. The comments submitted by the commentators to
the Department and the responses by the Independent Fiduciary and by
the applicant thereto have been included as part of the public
administrative 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
Disclosure Room of the Employee Benefits Security Administration, Room
N-1513, U.S. Department of Labor, 200 Constitution Avenue NW.,
Washington, DC 20210.
Accordingly, after full consideration and review of the entire
administrative record, including the written comments from the
commentators and the responses thereto by the applicant and the
Independent Fiduciary, the Department has determined to grant the
exemption. For a more complete statement of the facts and
representations supporting the Department's decision to grant this
exemption refer to the Notice published on March 24, 2004, at 69 FR
13894.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
BNP Paribas S.A. (BNP Paribas) and Its French Affiliates (the French
Affiliates) Located in Paris, France
[Prohibited Transaction Exemption 2005-12; Exemption Application No. D-
11249]
Exemption
Section I. Covered Transactions
A. The restrictions of section 406(a)(1)(A) through (D) of the Act
\10\ 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 to any purchase or sale of a security between BNP
Paribas, a bank established under the laws of France and any French
Affiliate or branch of BNP Paribas which is a bank regulated by the
Commission Bancaire (CB) or a broker-dealer holding a securities
dealers license issued by the Comit[eacute] des Etablissements de
Cr[eacute]dit et des Enterprises d'Investissement or registered with
the Autorit[eacute] des Marches Financiers (AMF) (each, a BNP Entity),
and employee benefit plans (the Plans) with respect to which the BNP
Entity is a party in interest, including options written by a Plan or
the BNP Entity, provided that the following conditions and the General
Conditions of Section II, are satisfied:
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\10\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to corresponding provisions of the Code.
---------------------------------------------------------------------------
(1) The BNP Entity customarily purchases and sells securities for
its own account in the ordinary course of its business as a bank or
broker-dealer, as the case may be;
(2) The terms of any transaction are at least as favorable to the
Plan as those which the Plan could obtain in a comparable arm's length
transaction with an unrelated party; and
(3) Neither the BNP Entity nor any of its affiliates has
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets, and the BNP Entity is a party in interest or disqualified
person with respect to the Plan assets involved in the transaction
solely by reason of section 3(14)(B) of the Act or section
4975(e)(2)(B) of the Code, or by reason of a relationship to a person
described in such sections. For purposes of this paragraph, the BNP
Entity shall not be deemed to be a fiduciary with respect to Plan
assets solely by reason of providing securities custodial services for
a Plan.
B. The restrictions of sections 406(a)(1)(A) through (D) 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
(D) of the Code, shall not apply to any extension of credit to a Plan
by a BNP Entity to permit the settlement of securities transactions,
regardless of whether they are effected on an agency or a principal
basis, or in connection with the writing of options contracts, provided
that the following conditions and the General Conditions of Section II,
are satisfied:
(1) The BNP Entity is not a fiduciary with respect to the Plan
assets involved in the transaction, unless no interest or other
consideration is received by the BNP Entity or any of its affiliates in
connection with such extension of credit; and
(2) Any extension of credit would be lawful under the Securities
Exchange Act of 1934, as amended (the 1934 Act), and any rules or
regulations thereunder, if the 1934 Act, rules or regulations were
applicable and is lawful under applicable foreign law.
C. The restrictions of sections 406(a)(1)(A) through (D) 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 to the lending of securities that are assets of a Plan to a
BNP Entity, provided that the following conditions and the General
Conditions of Section II are satisfied:
(1) Neither the BNP Entity nor any of its affiliates has
discretionary authority or control with respect to the investment of
Plan assets involved in the transaction, or renders investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets;
[[Page 47244]]
(2) The Plan receives from the BNP Entity, either by physical
delivery or by book entry in a securities depository located in the
U.S., by the close of business on the day on which the securities lent
are delivered to the BNP Entity, collateral consisting of U.S.
currency, securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, or irrevocable U.S. bank letters of
credit issued by persons other than the BNP Entity (or any of its
affiliates), or any combination thereof having, as of the close of
business on the preceding business day, a market value (or, in the case
of letters of credit, a stated amount) equal to not less than 100
percent of the then market value of the securities lent. All collateral
shall be held in U.S. dollars, or dollar denominated securities or bank
letters of credit and shall be held in physical or book entry form in
the United States.
(3) The loan is made pursuant to a written loan agreement (the Loan
Agreement), which may be in the form of a master agreement covering a
series of securities lending transactions, and which contains terms at
least as favorable to the Plan as those the Plan could obtain in an
arm's length transaction with an unrelated party;
(4) In return for lending securities, the Plan either (a) receives
a reasonable fee which is related to the value of the borrowed
securities and the duration of the loan, or (b) has the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to the BNP
Entity, if such fee is not greater than the Plan would pay an unrelated
party in a comparable arm's length transaction with an unrelated party;
(5) The Plan receives at least the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities that the Plan would have received (net of tax
withholdings) had it remained the record owner of such securities.
Where dividends and other distributions on foreign securities payable
to a lending Plan are subject to foreign tax withholdings, the BNP
Entity will put the Plan back in at least as good a position as it
would have been in had it not lent the securities;
(6) If the market value of the collateral as of the close of
trading on a business day falls below 100% of the market value of the
borrowed securities as of the close of trading on that day, the BNP
Entity delivers additional collateral, by the close of business on the
following business day, to bring the level of the collateral back to at
least 100% of the market value of all the borrowed securities as of
such preceding day. Notwithstanding the foregoing, part of the
collateral may be returned to the BNP Entity if the market value of the
collateral exceeds 100% of the market value of the borrowed securities,
as long as the market value of the remaining collateral equals at least
100% of the market value of the borrowed securities;
(7) Prior to entering into a Loan Agreement, the BNP Entity
furnishes to the independent Plan fiduciary, who is making decisions on
behalf of the Plan with respect to the lending of securities: (a) The
most recent available audited statement of its financial condition, (b)
the most recent available unaudited statement of its financial
condition (if more recent than the audited statement), and (c) a
representation by the BNP Entity that, as of each time it borrows
securities, there has been no material adverse change in its financial
condition since the date of the most recently furnished financial
statement that has not been disclosed to the Plan fiduciary. Such
representation may be made by the BNP Entity's agreeing that each loan
of securities shall constitute a representation that there has been no
such material adverse change;
(8) The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the BNP Entity
delivers certificates for securities identical to the borrowed
securities (or the equivalent thereof in the event of reorganization,
recapitalization or merger of the issuer of the borrowed securities) to
the Plan within (a) the customary delivery period for such securities,
(b) five business days, or (c) the time negotiated for such delivery by
the Plan and the BNP Entity, whichever is lesser, or, alternatively,
such period as permitted by Prohibited Transaction Class Exemption 81-6
(PTCE 81-6, 46 FR 7527, January 23, 1981, as amended at 52 FR 18754,
May 19, 1987), as it may be amended or superseded;\11\
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\11\ PTCE 81-6 provides an exemption under certain conditions
from section 406(a)(1)(A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
a U.S. broker-dealer registered under the 1934 Act (or exempted from
registration under the 1934 Act as a dealer in exempt Government
securities, as defined therein).
---------------------------------------------------------------------------
(9) In the event that the loan is terminated and the BNP Entity
fails to return the borrowed securities or the equivalent thereof
within the time described in paragraph (8) above, then the Plan may
purchase securities identical to the borrowed securities (or their
equivalent as described above) and may apply the collateral to the
payment of the purchase price, any other obligations of the BNP Entity
under the Loan Agreement, and any expenses associated with the sale
and/or purchase. The BNP Entity is obligated to pay to the Plan the
amount of any remaining obligations and expenses not covered by the
collateral (the value of which shall be determined as of the date the
borrowed securities should have been returned to the Plan), plus
interest at a reasonable rate, as determined in accordance with an
independent market source. If replacement securities are not available,
the BNP Entity will pay the Plan an amount equal to (a) the value of
the securities as of the date such securities should have been returned
to the Plan, plus (b) all the accrued financial benefits derived from
the beneficial ownership of such borrowed securities as of such date,
plus (c) interest at a reasonable rate determined in accordance with an
independent market source from such date to the date of payment. The
amounts paid shall be reduced by the amount or value of the collateral
determined as of the date the borrowed securities should have been
returned to the Plan. The BNP entity is obligated to pay, under the
terms of the Loan Agreement, and does pay, to the Plan, the amount of
any remaining obligations and expenses not covered by the collateral,
plus interest at a reasonable rate. Notwithstanding the foregoing, the
BNP Entity may, in the event it fails to return borrowed securities as
described above, replace non-cash collateral with an amount of cash not
less than the then current market value of the collateral, provided
that such replacement is approved by the independent Plan fiduciary;
and
(10) The independent Plan fiduciary maintains the situs of the Loan
Agreement in accordance with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-l. However, the BNP Entity shall not be subject to
the civil penalty, which may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if
the independent Plan fiduciary fails to comply with the requirements of
29 CFR 2550.404(b)-l.
If the BNP Entity fails to comply with any condition of this
exemption in the course of engaging in a securities lending
transaction, the Plan fiduciary which caused the Plan to engage in such
transaction shall not be deemed to have
[[Page 47245]]
caused the Plan to engage in a transaction prohibited by section
406(a)(1)(A) through (D) of the Act solely by reason of the failure on
the part of the BNP Entity to comply with the conditions of the
exemption.
Section II. General Conditions
A. The BNP Entity is a registered broker-dealer or bank subject to
regulation by a governmental agency, as described in Section III. B,
and is in compliance with all applicable rules and regulations thereof
in connection with any transactions covered by this exemption.
B. The BNP Entity, in connection with any transactions covered by
this exemption, is in compliance with all requirements of Rule 15a-6 of
the 1934 Act, and Securities and Exchange Commission (SEC)
interpretations thereof, providing foreign affiliates a limited
exemption from U.S. broker-dealers registration requirements (17 CFR
240.15a-6).
C. Prior to the transaction, the BNP Entity enters into a written
agreement with the Plan in which the BNP Entity consents to the
jurisdiction of the courts of the United States for any civil action or
proceeding brought in respect of the subject transactions.
D. Each BNP Entity located in the United States is fully
responsible for any judgment rendered by a United States court against
BNP Paribas, and the U.S. assets of BNP Paribas, including those of any
BNP Entities located in the U.S., are subject to the enforcement of any
such judgment.
E. The BNP Entity maintains, or causes to be maintained, within the
United States for a period of six years from the date of the covered
transactions, such records as are necessary to enable the persons
described in paragraph F. of this Section II to determine whether the
conditions of this exemption have been met, except that:
(1) If the records necessary to enable the persons described in
paragraph F. to determine whether the conditions of the exemption have
been met are lost or destroyed prior to the end of such year period,
due to circumstances beyond the control of the BNP Entity, then no
prohibited transaction will be considered to have occurred solely on
the basis of the unavailability of those records; and
(2) No party in interest, other than the BNP Entity and its
affiliates, shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act or to the taxes imposed by section
4975(a) and (b) of the Code if the records are not maintained or are
not available for examination as required by paragraph F. of this
Section II.
F. Notwithstanding the provisions of subsections (a)(2) and (b) of
section 504 of the Act, the BNP Entity makes the records referred to
above in paragraph E. of this Section II, unconditionally available for
examination during normal business hours at their customary location to
the following persons or an authorized representative thereof:
(1) The Department, the Internal Revenue Service or the SEC;
(2) Any fiduciary of a participating Plan;
(3) Any contributing employer to a Plan;
(4) Any employee organization any of whose members are covered by a
Plan; and
(5) Any participant or beneficiary of a Plan.
However, none of the persons described above in paragraphs (2)-(5)
of this paragraph F. shall be authorized to examine trade secrets of
the BNP Entity, or any commercial or financial information which is
privileged or confidential.
G. Prior to any Plan's approval of any transaction with a BNP
Entity, the Plan is provided with copies of the proposed and final
exemption with respect to the exemptive relief granted herein.
Section III. Definitions
For purpose of this exemption,
A. The term ``affiliate'' of another person shall include:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; and
(3) Any corporation, partnership or other entity of which such
other person is an officer, director or partner. (For purposes of this
definition, the term ``control'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.)
B. The term ``BNP Entity'' shall mean BNP Paribas or any branch or
affiliate thereof that is a broker-dealer or bank subject to regulation
by the (1) CB or (2) AMF.
C. The term ``security'' shall include equities, fixed income
securities, options on equity and on fixed income securities,
government obligations, and any other instrument that constitutes a
security under U.S. securities laws. The term ``security'' does not
include swap agreements or other notional principal contracts.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on May 13, 2005 at 70 FR
25601.
FOR FURTHER INFORMATION CONTACT: Ms. Silvia Quezada of the Department,
telephone (202) 693-8553. (This is not a toll-free number.)
Best Business Products Inc. Employee Stock Ownership Plan (the ESOP)
Located in Sioux Falls, SD
[Prohibited Transaction Exemption 2005-13 Application No. D-11305]
Exemption
The restrictions of sections 406(a)(1)(A) through (D), 406(b)(1),
and 406(b)(2) of the Employee Retirement Income Security Act (the Act)
and the sanctions resulting from the application of section 4975, by
reason of section 4975(c)(1)(A) through (E) of the Internal Revenue
Code of 1986 (the Code),\12\ shall not apply, effective July 7, 2004,
to: (1) The purchase from the ESOP by Best Business Products, Inc.
(BBP), a party in interest with respect to the ESOP, of shares of the
voting common stock of BBP (the Stock) which were allocated to the
accounts of the participants in the ESOP; and (2) the transfer to BBP
of shares of the Stock which were held by the ESOP in a suspense
account in exchange for the assumption by BBP of the ESOP's obligation
to pay the balance of a note (the Note) to Betty B. Best (Ms. Best), a
party in interest with respect to the ESOP; provided that prior to
entering into the subject transactions: (a) An independent fiduciary
(the Independent Fiduciary) was responsible for each of the
transactions, and in accordance with the fiduciary provisions of the
Act, reviewed, analyzed, and determined that the ESOP should enter into
each of the transactions; (b) the Independent Fiduciary reviewed,
negotiated, and approved the terms of each of the transactions, and
determined on behalf of the ESOP and solely in the interest of the
ESOP, its participants, and beneficiaries that the terms of each of the
transactions were fair and reasonable; (c) the Independent Fiduciary
monitored compliance with the terms of each of the transactions by the
parties; (d) an independent qualified appraiser determined the fair
market value of the Stock as of the date each of the transactions were
entered; and (e)
[[Page 47246]]
the ESOP incurred no fees, commissions, or other charges or expenses as
a result of its participation in each of the transactions.
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\12\ 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.
---------------------------------------------------------------------------
Effective Date: The exemption will be effective July 7, 2004.
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 13, 2005, 92 FR 25608.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8551 (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 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) 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 9th day of August, 2005.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 05-16046 Filed 8-11-05; 8:45 am]
BILLING CODE 4510-29-P
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