Rules and Regulations. Notice of Proposed Exemptions

Agency: Pension and Welfare Benefits Administration, Labor
Action: Notice of Proposed Exemptions
Citation: FR Doc. 01-7044 · Application No. D-10942, et al.

Summary

This document contains notices of pendency before the Department of Labor (the Department) of proposed exemptions from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (the Act) and/or the Internal Revenue Code of 1986 (the Code). Written Comments and Hearing Requests All interested persons are invited to submit written comments or request for a hearing on the pending exemptions, unless otherwise stated in the Notice of Proposed Exemption, within 45 days from the date of publication of this Federal Register Notice. Comments and requests for a hearing should state: (1) The name, address, and telephone number of the person making the comment or request, and (2) the nature of the person's interest in the exemption and the manner in which the person would be adversely affected by the exemption. A request for a hearing must also state the issues to be addressed and include a general description of the evidence to be presented at the hearing.

Supplementary Information

The proposed exemptions were requested in applications filed pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the Code, and in accordance with procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). Effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the Secretary of the Treasury to issue exemptions of the type requested to the Secretary of Labor. Therefore, these notices of proposed exemption are issued solely by the Department. The applications contain representations with regard to the proposed exemptions which are summarized below. Interested persons are referred to the applications on file with the Department for a complete statement of the facts and representations. Bank of America (BofA), Located in Bethesda, Maryland [Application No. D-10942] Proposed Exemption The Department is considering granting an exemption under the authority of section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance with the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32,836, 32,847, August 10, 1990). If the exemption is granted, the restrictions of section 406(a) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall not apply to (1) the proposed granting to BofA by the Westbrook Real Estate Fund IV, L.P. (LP), a Delaware Limited Partnership, of a first, exclusive, and prior security interest in the capital commitments (Capital Commitments), reserve amounts (Reserve Amounts) and capital contributions (Capital Contributions), whether now owned or after-acquired, of certain employee benefit plans (Plans) investing in the LP; (2) the proposed collateral assignment and pledge by the LP to BofA of its security interest in each Plan's limited partnership interest, whether now owned or after-acquired; (3) the proposed granting by the LP of a first, exclusive, and prior security interest in a borrower collateral account to which all Capital Contributions will be deposited when paid (Borrower Collateral Account); (4) the proposed granting to BofA by Westbrook Real Estate Partners Management IV, L.L.C., a Delaware limited liability company and the general partner of the LP (the General Partner), of its right to make calls for cash contributions (Drawdowns) under the Amended and Restated Agreement of Limited Partnership of Westbrook Real Estate Fund IV, L.P., dated as of September 15, 2000 (Agreement), where BofA is the representative of certain lenders (the Lenders) that will fund a so-called “credit facility” (Credit Facility) providing credit to the LP, and the Lenders are parties in interest with respect to the Plans; and (5) the execution of a partner agreement and estoppel (Estoppel) under which the Plans agree to honor the Drawdowns; provided that (i) the proposed grants, assignments, and Estoppels are on terms no less favorable to the Plans than those which the Plans could obtain in arm's-length transactions with unrelated parties; (ii) the decisions on behalf of each Plan to invest in the LP and to execute such Estoppels in favor of BofA, for the benefit of each Lender, are made by a fiduciary which is not included among, and is independent of and unaffiliated with, the Lenders and BofA; (iii) with respect to Plans that may invest in the LP in the future, such Plans will have assets of not less than $100 million 1 and not more than 5% of the assets of such Plan will be invested in the LP; and (iv) the General Partner is unrelated to any Plan and any Lender. 1 In the case of multiple plans maintained by a single employer or a single group of employers treated as a single employer under Sections 414(b), 414(c), 414(m), and 414(o) of the Code, the assets of which are invested on a commingled basis (e.g., through a master trust), this $100 million threshold will be applied to the aggregate assets of all such plans. Summary of Facts and Representations 1. The LP was formed by the General Partner (as sponsor and sole general partner) with the intent of seeking capital commitments from a limited number of prospective investors who would become partners (Limited Partner) of the LP. There are thirteen current and prospective Limited Partners having, in the aggregate, irrevocable, unconditional capital commitments of approximately $600 million. 2. The LP will target investments in a broad range of real-estate related assets, portfolios, and companies where the General Partner believes superior risk-adjusted returns are attainable. The LP generally will seek compounded annual returns on its investments in excess of 18%, a portion of which is expected to be comprised of current income. 3. Proceeds from investments may be reinvested to the extent they do not exceed the aggregate Capital Contributions with respect to such investment. To the extent they are not reinvested, net proceeds will be distributed to the Partners on at least a quarterly basis. Under the terms of the Agreement, the LP is expected to dissolve in the year 2008. 4. The Agreement requires each Limited Partner to execute a subscription agreement that obligates the Limited Partner to make contributions of capital up to a specified maximum. The Agreement requires Limited Partners to make Capital Contributions to fulfill this obligation upon receipt of notice from the General Partner. Under the Agreement, the General Partner may make Drawdowns up to the total amount of a Limited Partner's Capital Commitment upon 10 business days' notice. The Limited Partners' Capital Commitments are structured as unconditional, binding commitments to contribute equity when Drawdowns are made by the General Partner. In the event of a default by a Limited Partner, the LP may exercise any of a number of specific remedies. The Limited Partners constituting over 90% of the equity interest and their investments in the LP are: Name of partner Capital commitment Allstate Insurance Company $15,000,000 The BellSouth Corporation Health Care Trust—Retirees 5,000,000 The BellSouth Corporation Representable Employees' Health Care Trust—Retirees $10,000,000 The BellSouth Corporation RFA VEBA Trust $10,000,000 The BellSouth Corporation RFA VEBA Trust for Non-Representable Employees $3,000,000 BellSouth Master Pension Trust $92,000,000 IBM Personal Pension Plan Trust $50,000,000 NC/TREIT $100,000,000 New York State Common Retirement Fund $100,000,000 Teachers' Retirement System of Louisiana $100,000,000 State of Wisconsin Investment Board $100,000,000 Bankers Trust Company, as Trustee for the Walt Disney Company Retirement Plan Master Trust $10,000,000 Westbrook Real Estate Partners Management IV, L.L.C. $9,060,914 5. The applicant states that the LP will incur indebtedness in connection with many of its investments. In addition to mortgage indebtedness, the LP will incur short-term indebtedness for the acquisition of particular investments. This indebtedness will take the form of the Credit Facility secured by, among other things, a pledge and assignment of each Limited Partner's Capital Commitment. This type of facility will allow the LP to consummate investments quickly without having to finalize the debt/equity structure for an investment or having to arrange for interim or permanent financing prior to making an investment, and will have additional advantages to the Limited Partners and the LP. Under the Agreement, the General Partner may encumber each Limited Partner's Capital Commitments, Reserve Amounts, and Capital Contributions, including the right to make Drawdowns, to one or more financial institutions as security for the Credit Facility. Each of the Limited Partners has appointed the General Partner as its attorney-in-fact to execute all documents and instruments of transfer necessary to implement the provisions of the Agreement. In connection with this Credit Facility, each of the Limited Partners is required to execute documents customarily required in secured financings, including an agreement to honor Drawdowns unconditionally. 6. BofA will become agent for a group of Lenders providing a $450 million revolving Credit Facility to the LP. BofA will also be a participating Lender. Some of the Lenders may be parties in interest with respect to some of the Plans that invest in the LP by virtue of such Lenders' (or their affiliates') provisions of fiduciary services to such Plans for assets other than the Plans' interests in the LP. BofA is requesting an exemption to permit the Plans to enter into security agreements with BofA, as the representative of the Lenders, whereby such Plans' Capital Commitments, Reserve Amounts, and Capital Contributions to the LP, as well as the Plans' limited partnership interests, will be used as collateral for loans made by the Credit Facility to the LP, when such loans are funded by Lenders who are parties in interest to one or more of the Plans. The Credit Facility will be used to provide immediate funds for real estate acquisitions made by the LP, as well as for the payment of LP expenses. Repayments will be secured generally by the LP from the Limited Partners' Capital Contributions, Reserve Amounts, Drawdowns on the Limited Partners' Capital Commitments, and the Limited Partners' limited partnership interests. The stated maturity date of the Credit Facility is August 15, 2003. The LP can use its credit under the Credit Facility by direct or indirect borrowings or by requesting that letters of credit be issued. All Lenders will participate on a pro rata basis with respect to all cash loans and letters of credit up to the maximum of the Lenders' respective commitments. All such loans and letters of credit will be issued to or for the benefit of the LP or an entity in which the LP owns a direct or indirect interest (a Qualified Borrower), and not to any individual Limited Partner. All payments of principal and interest made by the LP or a Qualified Borrower will be allocated pro rata among all Lenders. 7. The Credit Facility will be a recourse obligation of the Partnership. To secure the Credit Facility, the LP will grant to BofA, for the benefit of each Lender, a first, exclusive, and prior: (1) security interest and lien in and to the Capital Commitments, Reserve Amounts, and Capital Contributions of the Limited Partners; (2) collateral assignment and pledge of the LP's security interest in each Limited Partner's limited partnership interest; and (3) security interest and lien in the Borrower Collateral Account. Additionally, to secure the Credit Facility, the General Partner shall: (1) Pledge, through a partner agreement and estoppel, its partnership interest to BofA for the benefit of each Lender; and (2) grant to BofA, for the benefit of each Lender, its right to make Drawdowns of the Capital Commitments and Reserve Amounts, and all other rights, titles, powers and privileges related to, appurtenant to or arising out of General Partner's right under the Agreement to require or demand that Limited Partners make Capital Contributions and fund Drawdowns. 8. It is contemplated each Limited Partner will execute an agreement pursuant to which it acknowledges that the LP and the General Partner have pledged and assigned to BofA, for the benefit of each Lender, all of their rights under the Agreement relating to Capital Commitments, Reserve Amounts, Drawdown notices, and Capital Contributions. Such agreement will include an acknowledgment and covenant by the Limited Partner that, if an event of default exists, such Limited Partner will, consistent with its obligations under the Partnership Agreement, honor any Drawdown made by BofA in accordance with the Agreement. Such an agreement and covenant by a Limited Partner effectively limits the assertion of any defense which the Partner might have against the LP or the General Partner with respect to the funding of any Drawdown made by BofA. 9. The applicant represents that at the present time the following Plans are Partners in the LP: (a) The BellSouth Master Pension Trust (BellSouth Pension Trust) holds the assets of two defined benefit plans (BellSouth Pension Plans) which own interests in the LP. The BellSouth Pension Trust has made a Capital Commitment of approximately $92 million to the LP. The applicant states that some of the Lenders may be parties in interest with respect to some of the BellSouth Pension Plans in the BellSouth Pension Trust by virtue of such Lenders' (or their affiliates') provisions of fiduciary services to such BellSouth Pension Plans with respect to BellSouth Pension Trust assets other than their limited partnership interests in the LP. Thus, BofA states that there is an immediate need for the BellSouth Pension Trust to enter into the Estoppel under the terms and conditions described herein. The total number of participants in the two BellSouth Pension Plans is approximately 137,703, and the approximate fair market value of the total assets of the BellSouth Pension Plans held in the BellSouth Pension Trust as of December 31, 1998 is $17.9 billion. The applicant represents that the fiduciary generally responsible for investment decisions in real estate matters on behalf of both BellSouth Pension Plans is the BellSouth Corporation Treasurer. The fiduciary responsible for reviewing and authorizing the investment in the LP is the BellSouth Corporation Treasurer. (b) The BellSouth Corporation Representable Employees Health Care Trust—Retirees (BellSouth Health Care Trust) holds the assets of two welfare benefit plans (BellSouth Health Care Plans) which own interests in the LP. The BellSouth Health Care Trust has made a Capital Commitment of approximately $10 million to the LP. The applicant states that some of the Lenders may be parties in interest with respect to some of the BellSouth Health Care Plans in the BellSouth Health Care Trust by virtue of such Lenders' (or their affiliates') provisions of fiduciary services to such BellSouth Health Care Plans with respect to BellSouth Health Care Trust assets other than their limited partnership interests in the LP. Thus, BofA states that there is an immediate need for the BellSouth Health Care Trust to enter into the Estoppel under the terms and conditions described herein. The total number of participants in the two BellSouth Health Care Plans is approximately 130,795. The approximate fair market value of the total assets of the BellSouth Health Care Plans held in the BellSouth Health Care Trust as of December 31, 1998 was $1.2 billion. The approximate fair market value of the assets in the BellSouth Health Care Plans was $1.8 billion. The applicant represents that the fiduciary generally responsible for investment decisions in real estate matters on behalf of both BellSouth Health Care Plans is the BellSouth Corporation Treasurer. The fiduciary responsible for reviewing and authorizing the investment in the LP is the BellSouth Corporation Treasurer. (c) The IBM Personal Pension Plan Trust (the IBM Trust) holds the assets of one defined benefit plan (the IBM Plan) which owns interests in the LP. The IBM Trust has made a Capital Commitment of $50 million to the LP. The applicant states that some of the Lenders may be parties in interest with respect to the IBM Plan by virtue of such Lenders' (or their affiliates') provisions of fiduciary services to the IBM Plan with respect to the IBM Trust assets other than its limited partnership interests in the LP. Thus, BofA states that there is an immediate need for the IBM Trust to enter into the Estoppel under the terms and conditions described herein. The total number of participants in the IBM Plan is approximately 333,295, and the approximate fair market value of the total assets of the IBM Plan as of December 31, 1999 was $45.6 billion. The applicant represents that the fiduciary generally responsible for investment decisions in real estate matters on behalf of the IBM Plan is the Retirement Plans Committee, IBM Corporation. The fiduciary responsible for reviewing and authorizing the investment in the LP is the Retirement Plan Committee, IBM Corporation. (d) The Walt Disney Company Retirement Plan Master Trust (Walt Disney Master Trust) holds the assets of five defined benefit plans (Walt Disney Pension Plans) which own interests in the LP. The Walt Disney Master Trust has made a Capital Commitment of $10 million to the LP. The applicant states that some of the Lenders may be parties in interest with respect to some of the Walt Disney Pension Plans in the Walt Disney Master Trust by virtue of such Lenders' (or their affiliates') provisions of fiduciary services to such Walt Disney Pension Plans with respect to Walt Disney Master Trust assets other than their limited partnership interests in the LP. Thus, BofA states that there is an immediate need for the Walt Disney Master Trust to enter into the Estoppel under the terms and conditions described herein. The total number of participants in the five Walt Disney Pension Plans is approximately 67,188 and the approximate fair market value of the total assets of the Walt Disney Pension Plans held in the Walt Disney Master Trust as of December 31, 1998 was $1.37 billion. The applicant represents that the fiduciary generally responsible for investment decisions in real estate matters on behalf of the Walt Disney Pension Plans is the Retirement Plans Committee, Walt Disney Company. The fiduciary responsible for reviewing and authorizing the investment in the LP is the Retirement Plans Committee, Walt Disney Company. 10. The applicant represents that the Plans in the trusts (the Trusts) listed in Rep. 9 are currently the only employee benefit plans subject to the Act that are Limited Partners of the LP and will be included in this exemption. However, the applicant states that it is possible that one or more other Plans will become Limited Partners of the LP in the future. Thus, the applicant requests relief for any such Plan under this proposed exemption, provided the Plan meets the standards and conditions set forth herein. In this regard, such Plan must be represented by an independent fiduciary and the General Partner must receive from the Plan one of the following: (1) a representation letter from the applicable fiduciary with respect to such Plan substantially identical to the representation letter submitted by the fiduciaries of the other Plans, in which case this proposed exemption, if granted, will apply to the investments made by such Plan if the conditions required herein are met; or (2) evidence that such Plan is eligible for a class exemption or has obtained an individual exemption from the Department covering the potential prohibited transactions which are the subject of this proposed exemption. 11. BofA represents that the LP will obtain an opinion of counsel that the LP constitutes an “operating company” under the Department's plan asset regulations (see 29 C.F.R. 2510.3—101(c)). 2 2 The Department notes that the term “operating company” as used in the Department's plan asset regulation cited above includes an entity that is considered a “real estate operating company” as described therein (see 29 CFR 2510.3-101(e)). However, the Department expresses no opinion in this proposed exemption regarding whether the LP would be considered either an operating company or a real estate operating company under such regulations. In this regard, the Department notes that it is providing no relief for either internal transactions involving the operation of the LP or for transactions involving third parties other than the specific relief proposed herein. In addition, the Department encourages potential Plan investors and their independent fiduciaries to carefully examine all aspects of the LP's proposed real estate investment program in order to determine whether the requirements of the Department's regulations will be met. 12. BofA represents that the security and Estoppel constitutes a form of credit security which is customary among financing arrangements for real estate limited partnerships or limited liability companies, wherein the financing institutions do not obtain security interests in the real property assets of the partnership or limited liability companies. BofA also represents that the obligatory execution of the Estoppel by the Limited Partners for the benefit of the Lenders was fully disclosed in the LP's Private Placement Memorandum as a requisite condition of investment in the LP during the private placement of the limited partnership interests. BofA represents that the only direct relationship between any of the Limited Partners and any of the Lenders is the execution of the Estoppel. All other aspects of the transaction, including the negotiation of all terms of the Credit Facility, are exclusively between the Lenders and the LP. BofA represents that the proposed execution of the Estoppel will not affect the abilities of the Trusts to withdraw from investment and participation in the LP. The only Plan assets to be affected by the proposed transactions are any funds which must be contributed to the LP in accordance with requirements under the Agreement to make Drawdowns to honor a Limited Partner's Capital Commitments. 13. BofA represents that neither it nor any Lender acts or has acted in any fiduciary capacity with respect to the Plans' investment in the LP and that BofA is independent of and unrelated to the fiduciaries (the Trust Fiduciaries) responsible for authorizing and overseeing the Trusts' investments in the LP. The Trust Fiduciaries represent independently that their authorization of the Trusts' investments in the LP was free of any influence, authority or control by the Lenders. The Trust Fiduciaries represent that the Trusts' investments in and Capital Commitments to the LP were made with the knowledge that each Limited Partner would be required subsequently to grant a security interest in Drawdowns and Capital Commitments to the Lenders and to honor unconditionally Drawdowns made on behalf of the Lenders without recourse to any defenses against the General Partner. The Trust Fiduciaries individually represent that they are independent of and unrelated to BofA and the Lenders and that the investment by the Trusts for which the Trust Fiduciaries are responsible continues to constitute a favorable investment for the Plans participating in that Trust and that the execution of the Estoppel is in the best interests and protective of the participants and beneficiaries of such Plans. In the event another Plan proposes to become a Limited Partner, the applicant represents that it will require similar representations to be made by such Plan's independent fiduciary. Any Plan proposing to become a Limited Partner in the future and needing to avail itself of the exemption proposed herein will have assets of not less than $100 million, 3 and not more than 5% of the assets of such Plan will be invested in the LP. 3 See supra note 1. 14. In summary, the applicant represents that the proposed transactions satisfy the criteria of section 408(a) of the Act for the following reasons: (1) the Plans' investments in the LP were authorized and are overseen by the Trust Fiduciaries, which are independent of the Lenders, and other Plan investments in the LP from other employee benefit plans subject to the Act will be authorized and monitored by independent Plan fiduciaries; (2) none of the Lenders have any influence, authority or control with respect to the Trusts' investment in the LP or the Trusts' execution of the Estoppel; (3) the Trust Fiduciaries invested in the LP on behalf of the Plans with the knowledge that the Estoppel is required of all Limited Partners investing in the LP, and all other Plan fiduciaries that invest their Plan's assets in the LP will be treated the same as other Limited Partners are currently treated with regard to the Estoppel; (4) any Plan which may invest in the LP in the future, which needs to avail itself of the exemption proposed herein, will have assets of not less than $100 million, 4 and not more than 5% of the assets of any such Plan will be invested in the LP, and (5) the General Partner is unrelated to any Plan and any Lender. 4 Id.