[Federal Register Volume 62, Number 32 (Tuesday, February 18, 1997)]
[Notices]
[Pages 7268-7275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3837]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Nos. D-10192, L-10193 through L-10196, et al.]
Proposed Exemptions ILGWU National Retirement Fund, et al.
(Collectively the Plans)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction 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
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request 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. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
[[Page 7269]]
ILGWU National Retirement Fund, et al. (collectively, the Plans),
Located in New York, New York
[Application Nos. D-10192, L-10193 through L-10196]
Proposed Exemption
Section I--Transactions
The restrictions of sections 406(a), 406 (b)(1) and (b)(2) of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1) (A) through (E) of the Code,
shall not apply, effective July 1, 1995, to--
(A) The provision of banking services (Banking Services, as defined
in section IV(C)) by the Amalgamated Bank of New York (the Bank) to
certain employee benefit plans (the Plans, as defined in section
IV(E)), which are maintained on behalf of members of the International
Ladies Garment Workers Union;
(B) The purchase by the Plans of certificates of deposit (CDs)
issued by the Bank; and
(C) The deposit of Plans' assets in money market or other deposit
accounts established by the Bank; provided that the applicable
conditions of Section II and Section III are met:
Section II--Conditions
(A) The terms under which the Banking Services are provided by the
Bank to the Plans, and those under which the Plans purchase CDs from
the Bank or maintain deposit accounts with the Bank, are at least as
favorable to the Plans as those which the Plans could obtain in arm's-
length transactions with unrelated parties.
(B) The interests of each of the Plans with respect to the Bank's
provision of Banking Services to the Plans, the purchase of CDs from
the Bank by any of the Plans, and the deposit of Plan assets in deposit
accounts established by the Bank, are represented by an Independent
Fiduciary (as defined in section IV(D)).
(C) With respect to each Plan, the representation of the Plan's
interests by the Independent Fiduciary is authorized, and confirmed at
least annually, by the Authorizing Plan Fiduciary (as defined below in
section IV(A));
(D) With respect to the purchase by any of the Plans of
certificates of deposit (CDs) issued by the Bank or the deposit of Plan
assets in a money market account or other deposit account established
at the Bank: (1) Such transaction complies with the conditions of
section 408(b)(4) of the Act; (2) Any CD offered to the Plans by the
Bank is also offered by the Bank in the ordinary course of its business
with unrelated customers; and (3) Each CD purchased from the Bank by a
Plan pays the maximum rate of interest for CDs of the same size and
maturity being offered by the Bank to unrelated customers at the time
of the transaction;
(E) The compensation received by the Bank for the provision of
Banking Services to the Plan is not in excess of reasonable
compensation within the meaning of section 408(b)(2) of the Act.
(F) Following the merger of the International Ladies Garment
Workers Union with UNITE, the Independent Fiduciary made an initial
written determination that (1) the Bank's provision of Banking Services
to the Plans, (2) the deposit of Plan assets in depository accounts
maintained by the Bank, and (3) the purchase by the Plans of CDs from
the Bank, are in the best interests and protective of the participants
and beneficiaries of each of the Plans.
(G) On a periodic basis, not less frequently than quarterly, the
Bank provides the Independent Fiduciary with a written report (the
Periodic Report) which includes the following items with respect to the
period since the previous Periodic Report: (1) A listing of Banking
Services provided to, all outstanding CDs purchased by, and deposit
accounts maintained for each Plan; (2) a listing of all fees paid by
the Plans to the Bank for the Banking Services, (3) the performance of
the Bank with respect to all investment management services, (4) a
description of any changes in the Banking Services, (5) an explanation
of any problems experienced by the Bank in providing the Banking
Services, (6) a description of any material adverse events affecting
the Bank, and (7) any additional information requested by the
Independent Fiduciary in the discharge of its obligations under this
exemption.
(H) On a periodic basis, not less frequently than annually, the
Independent Fiduciary reviews the Banking Services provided to each
Plan by the Bank, the compensation received by the Bank for such
services, any purchases by the Plan of CDs from the Bank, and any
deposits of assets in deposit accounts maintained by the Bank, and
makes the following written determinations:
(1) The services, CDs and depository accounts are necessary or
appropriate for the establishment or operation of the Plan;
(2) The Bank is a solvent financial institution and has the
capability to perform the services;
(3) The fees charged by the Bank are reasonable and appropriate;
(4) The services, the depository accounts, and the CDs are offered
to the Plan on the same terms under which the Bank offers the services
to unrelated Bank customers in the ordinary course of business;
(5) Where the Banking Services include an investment management
service, that the rate of return is not less favorable to the Plan than
the rates on comparable investments involving unrelated parties; and
(6) The continuation of the Bank's provision of Banking Services to
the Plan for compensation is in the best interests and protective of
the participants and beneficiaries of the Plan.
(I) Copies of the Bank's periodic reports to the Independent
Fiduciary are furnished to the Authorizing Plan Fiduciaries on a
periodic basis, not less frequently than annually and not later than 90
days after the period to which they apply.
(J) The Independent Fiduciary is authorized to continue, amend, or
terminate, without any penalty to any Plan (other than the payment of
penalties required under federal or state banking regulations upon
premature redemption of a CD), any arrangement involving: (1) The
provision of Banking Services by the Bank to any of the Plans, (2) the
deposit of Plan assets in a deposit account maintained by the Bank, or
(3) any purchases by a Plan of CDs from the Bank;
(K) The Authorizing Plan Fiduciary may terminate, without penalty
to the Plan (other than the payment of penalties required under federal
or state banking regulations upon premature redemption of a CD), the
Plan's participation in any arrangement involving: (1) The
representation of the Plan's interests by the Independent Fiduciary,
(2) the provision of Banking Services by the Bank to the Plan, (3) the
deposit of Plan assets in a deposit account maintained by the Bank, or
(4) the purchase by the Plan of CDs from the Bank.
Section III--Recordkeeping
(A) For a period of six years, the Bank and the Independent
Fiduciary will maintain or cause to be maintained all written reports
and other memoranda evidencing analyses and determinations made in
satisfaction of conditions of this exemption, except that: (a) A
prohibited transaction will not be considered to have occurred if, due
to circumstances beyond the control of the Independent Fiduciary and
the Bank the records are lost or destroyed before the end of the six-
year period; and (b) no party in interest other than the Bank and
[[Page 7270]]
the Independent Fiduciary 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 (2) below;
(B)(1) Except as provided in section (2) of this paragraph (B) and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (A) of this
section III shall be unconditionally available at their customary
location during normal business hours for inspection by: (a) Any duly
authorized employee or representative of the U.S. Department of Labor
or the Internal Revenue Service, (b) any employer participating in the
Plans or any duly authorized employee or representative of such
employer, and (c) any participant or beneficiary of the Plans or any
duly authorized representative of such participant or beneficiary.
(2) None of the persons described in subsections (b) and (c) of
subsection (1) above shall be authorized to examine trade secrets of
the Independent Fiduciary or the Bank, or any of their affiliates, or
any commercial, financial, or other information that is privileged or
confidential.
Section IV--Definitions
(A) ``Authorizing Plan Fiduciary'' means, with respect to each
Plan, the board of trustees of the Plan or other appropriate plan
fiduciary with discretionary authority to make decisions with respect
to the investment of Plan assets;
(B) ``Bank'' means the Amalgamated Bank of New York;
(C) ``Banking Services'' means custodial, safekeeping, checking
account, trustee services, and investment management services involving
fixed income securities (either directly or through a collective
investment fund maintained by the Bank).
(D) ``Independent Fiduciary'' means a person, within the meaning of
section 3(9) of the Act, who (1) Is not an affiliate of the Union of
Needletrades, Industrial & Textile Employees (UNITE) and any successor
organization thereto by merger, consolidation or otherwise, (2) is not
an officer, director, employee or partner of UNITE, (3) is not an
entity in which UNITE has an ownership interest, (4) has no
relationship with the Bank other than as Independent Fiduciary under
this exemption, and (5) has acknowledged in writing that it is acting
as a fiduciary under the Act. No person may serve as an Independent
Fiduciary for the Plans for any fiscal year in which the gross income
(other than fixed, non-discretionary retirement income) received by
such person (or any partnership or corporation of which such person is
an officer, director, or ten percent or more partner or shareholder)
from UNITE and the Plans for that fiscal year exceed five percent of
such person's annual gross income from all sources for the prior fiscal
year. An affiliate of a person is any person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or
under common control with the person. The term ``control'' means the
power to exercise a controlling influence over the management or
policies of a person other than an individual. Initially, the
Independent Fiduciary is U.S. Trust Company of California, N.A.
(E) ``Plans'' means any of the following employee benefit plans,
and their successors by reason of merger, spin-off or otherwise:
International Ladies Garment Workers Union Nation Retirement Fund;
International Ladies Garment Workers Union Death Benefit Fund;
Health Fund of New York Coat, Suit, Dress, Rainwear & Allied Workers
Union, ILGWU;
Health & Vacation Fund, Amalgamated Ladies Garment Cutters Union, Local
10;
ILGWU Eastern States Health & Welfare Fund;
ILGWU Office, Clerical & Misc. Employee Retirement Fund;
ILGWU Retirement Fund, Local 102;
Union Health Center Staff Retirement Fund;
Unity House 134 HREBIU Plan Fund;
Puerto Rican Health & Welfare Fund;
Health & Welfare Fund of Local 99, ILGWU;
Local 99 Exquisite Form Industries, Inc. Severance Fund;
Local 99 K-Mart Severance Fund;
Local 99 Kenwin Severance Fund;
Local 99 Lechters Severance Fund;
Local 99 Eleanor Shops Severance Fund;
Local 99 Monette Severance Fund;
Local 99 Moray, Inc. Severance Fund;
Local 99 Petri Stores, Inc. Severance Fund;
Local 99 Netco, Inc. Severance Fund;
Local 99 Misty Valley, Inc. Severance Fund; and
Local 99 Norstan Apparel Shops, Inc. Severance Fund
(F) ``UNITE'' means the Union of Needletrades, Industrial & Textile
Employees and any successor organization thereto by merger,
consolidation or otherwise.
EFFECTIVE DATE: This exemption, if granted, shall be effective as of
July 1, 1995.
Summary of Facts and Representations
1. The Plans are pension and welfare benefit plans established
pursuant to collective bargaining agreements to provide benefits to
active members, retired members and staff of the International Ladies
Garment Workers Union (ILGWU) and its local unions. At various times
prior to July 1, 1995, each of the Plans had retained and commenced to
utilize the banking services of the Amalgamated Bank of New York (the
Bank), a New York state-chartered commercial bank located in New York,
New York. The services for which the Plans contracted with the Bank
have included custodial, safekeeping, checking account, trustee, and
fixed-income investment management services. The Plans have also
purchased certificates of deposit issued by the Bank and utilized the
Bank's money market and other deposit accounts. The Plans have used
varying combinations of the services offered by the Bank. For example,
as of July 1, 1995, six of the Plans were using the Banks's investment
management services of a fixed-income nature; six Plans were using the
Bank's custodial services, some in conjunction with the investment
management services; seven Plans were using the Bank's safekeeping
services; and one Plan held certificates of deposit issued by the Bank.
When these service-provision relationships between the Bank and the
Plans were established, prior to July 1, 1995, all of the common stock
of the Bank was held by or on behalf of the General Office of the
Amalgamated Clothing and Textile Workers Union (ACTWU), local unions
and joint boards of ACTWU, and individuals related to ACTWU. Prior to
July 1, 1995, ACTWU and ILGWU were not related. Thus, the Bank
represents that prior to July 1, 1995, the Bank was a party in interest
with respect to the Plans solely by reason of the provision of services
to the Plans and not by reason of any ownership of interests in the
Bank by ILGWU or the Plans.
2. Effective July 1, 1995 (the Consolidation Date), ACTWU and the
ILGWU merged and formed a consolidated organization, the Union of
Needletrades, Industrial and Textile Employees (UNITE). Under the
agreement governing the merger (the Agreement), UNITE is deemed to be a
consolidation and continuation of ILGWU and ACTWU and their respective
affiliates. Neither ACTWU nor ILGWU is deemed to have been
[[Page 7271]]
dissolved or terminated by the consolidation, and each is treated under
the Agreement as a ``constituent member'' of UNITE. As part of the
consolidation, new Bank stock was issued to UNITE and Bank stock
previously held in the name of ACTWU was transferred to and registered
in the name of UNITE. Pursuant to the Agreement, the president of UNITE
appointed ten new members of the Bank's board of directors to reflect
the participation of ILGWU in the ownership of the Bank, and all of the
newly-appointed Bank directors are trustees of one or more of the
Plans. The Bank represents that as a result of the consolidation
pursuant to the Agreement, the Bank became more than fifty percent
(50%) owned by an employee organization whose members are covered by
the Plans, and therefore the Bank became a party in interest with
respect to the Plans by reason of the ownership of the Bank by UNITE.
3. The Bank is requesting an exemption to permit the continuation,
after the Consolidation Date, of the Bank's provision to the Plans of
the banking services which had been provided to the Plans prior to the
Consolidation Date, under the terms and conditions described herein.
The services which the Bank will be authorized to continue to provide
to the Plans are defined in the exemption as (1) services identified in
the exemption as Banking Services, consisting of custodial,
safekeeping, checking account, trustee services, and investment
management services involving fixed income securities (either directly
or through a collective investment fund maintained by the Bank); (2)
the purchase by the Plans of certificates of deposit (CDs) issued by
the Bank; and (3) the deposit of Plans' assets in money market or other
deposit accounts established by the Plan. Hereafter, references to
Banking Services will include all three types of services provided to
the Plans by the Bank.
4. Under the exemption, with respect to the proposed continuation
of the Bank's provision of Banking Services to the Plan, the interests
of the Plans and their participants and beneficiaries must be
represented by a fiduciary which is independent of and unrelated to the
Bank (the Independent Fiduciary). The exemption defines the Independent
Fiduciary as a person (within the meaning of section 3(9) of the Act)
who has acknowledged in writing its fiduciary capacity under the Act
and who is unrelated to the Bank and UNITE other than as Independent
Fiduciary under this exemption. Under the terms of the exemption, the
Independent Fiduciary is required to conduct an initial evaluation of
the Banking Services to determine whether their continued provision to
the Plans after the Consolidation Date is in the best interests and
protective of the participants and beneficiaries of the Plans, and
thereafter to monitor and oversee the relationships between the Plans
and the Bank, representing the Plans' interests therein and conducting
ongoing periodic evaluations and determinations as to whether the
Bank's provision of Banking Services to the Plans continues to be in
the best interests and protective of the Plans. The Independent
Fiduciary's authority includes the ability to continue, amend or
terminate, without penalty to a Plan (other than a penalty required for
early redemption of a CD) any arrangement under which the Bank provides
the Banking Services to any of the Plans. On a periodic basis no less
frequent than annually, the Independent Fiduciary is required to review
the Banking Services provided to each Plan by the Bank, the
compensation received by the Bank for such services, any purchases by
the Plan of certificates of deposit (CDs) from the Bank, and any
deposits of assets in deposit accounts maintained by the Bank, and to
make a number of written determinations, more fully described in
section II(H) of the proposed exemption, constituting an analysis of
whether the Bank's provision of Banking Services to the Plans continues
to be in the best interests and protective of the participants and
beneficiaries of the Plans. To enable the Independent Fiduciary to
fulfill its obligations under the exemption, the Bank is required to
provide information (listed in section II(G) of the proposed exemption)
in writing to the Independent Fiduciary no less frequently than
quarterly, relating to identification and description of the Banking
Services and the circumstances under which they are rendered. The
exemption requires that the compensation received by the Bank for the
provision of services to the Plans is not in excess of reasonable
compensation within the meaning of section 408(b)(2) of the Act.
5. With respect to each Plan, the exemption requires that the
representation of the Plan's interests by the Independent Fiduciary
regarding the Bank's provision of Banking Services to the Plan is
authorized and confirmed at least annually by the Plan's board of
trustees or other appropriate Plan fiduciary with authority to make
decisions with respect to the investment of Plan assets (the
Authorizing Plan Fiduciary). The Authorizing Plan Fiduciary of each
Plan must be furnished copies of the Bank reports to the Independent
Fiduciary no less frequently than annually and no later than 90 days
after the period to which they apply. The exemption provides that the
Authorizing Plan Fiduciary may terminate, without penalty to the Plan
(other than a penalty required for early redemption of a CD), the
Plan's participation in any arrangement involving the representation of
the Plan's interests by the Independent Fiduciary or the provision of
Banking Services by the Bank.
6. The exemption requires the Bank and the Independent Fiduciary to
maintain all written reports and other memoranda evidencing analyses
and determinations made in satisfaction of the conditions of the
exemption. The Plans which are covered by the exemption are identified
in section IV(E) of the exemption. The effective date of the exemption
will be July 1, 1995, the Consolidation Date.
7. The U.S. Trust Company of California, N.A. (U.S. Trust) was
appointed by the Plans (the Appointment) effective July 28, 1995 to
serve in the capacity of Independent Fiduciary on behalf of the Plans
with respect to the Bank's provision of the Banking Services to the
Plans in accordance with the exemption, pursuant to an agreement signed
and formalized on September 21, 1995 between the Plans, the Bank and
U.S. Trust. With assets under management totalling approximately $53
billion, U.S. Trust represents that it has extensive trust and
management capabilities, including discretionary asset management,
asset allocation and diversification, investment advice, securities
trading and independent fiduciary assignments under the Act. U.S. Trust
represents that immediately upon the Appointment, it undertook a review
and assessment of the Banking Services and made a preliminary
determination that the Banking Services were appropriate and adequate
to satisfy the Plans' banking needs, until a more thorough review and
assessment could be completed. U.S. Trust represents that it has
completed this thorough review and assessment with the professional
assistance of the consulting firm of Towers Perrin (Towers Perrin).
Towers Perrin, an international firm of consultants and consulting
actuaries, represents that it is a registered investment advisor under
the Investment Advisors Act of 1940, providing a broad range of
services for investment management evaluation and performance
measurement. U.S. Trust
[[Page 7272]]
represents that in its review and assessment of the Bank and the
Banking Services provided to the Plans, U.S. Trust gathered information
from various sources, including various operations of the Bank, the
Bank's legal counsel, the Plans, and Towers Perrin. U.S. Trust
represents that its representatives and those of Towers Perrin met with
various officers of the Bank including the Bank's Chief Executive
Officer and Chief Investment Officer. U.S. Trust represents that it
also utilized a written report by Towers Perrin, prepared at the
request of U.S. Trust, specifically analyzing the investment management
services which the Bank has provided the Plans.
8. U.S. Trust has made various findings and determinations with
respect to the Bank and the provision of Banking Services to the Plans
which are summarized as follows:
Financial condition of the Bank: U.S. Trust represents that it
examined the Bank as a whole, from a financial point view. U.S. Trust
states that it found the Bank's assets to be liquid and secure, with 82
percent of assets invested in AAA-rated securities and only 7.4 percent
invested in loans. U.S. Trust represents that the duration positioning
of the Bank's assets and liabilities is managed such that, when
considered in conjunction with the liquidity of the Bank's assets,
interest rate changes will have a minimal effect on the Bank's income.
U.S. Trust concludes that the Bank is operated very conservatively and
is very well capitalized and solvent.
Custodial and safekeeping services: U.S. Trust represents that it
determined that the Bank possesses adequate capability to perform all
custodial and safekeeping services needed by the Plans, utilizing both
the Bank's own personnel and facilities as well as the contract
services of qualified third parties for certain data processing and
sub-custodial services. U.S. Trust determined that these services as
provided to the Plans are offered by the Bank to the public in the
ordinary course of business. U.S. Trust states that the fee schedules
of the Bank for these services are reasonable, based on industry
standards, and that the actual fees charged the Plans for custodial
services are lower than the scheduled fees. U.S. Trust concludes that
the Bank's provision of custodial and safekeeping services to the Plan
is reasonable and appropriate.
Certificates of deposit (CDs), money market accounts and checking
accounts: U.S. Trust determined that the Bank has the capability to
offer CDs and money market and other deposit account services as needed
by any of the Plans, and that the Bank offers these same services to
the general public in the ordinary course of its business. U.S. Trust
states that the fees are reasonable, because no fees are charged with
respect to CDs and money market accounts and the Bank customarily does
not charge the Plans fees for checking accounts. U.S. Trust represents
that at the time of its review, the rates of return on CDs, as
published in the Wall Street Journal, were lower than the rates paid by
the Bank on CDs with the same or shorter maturities. U.S. Trust states
that the rate paid by the Bank on its money market account also appears
to be reasonable, based on U.S. Trust's experience and investigation,
although there are no indices or published rates to use in comparison.
Considering all the information obtained, U.S. Trust concludes that the
Plans' utilization of the Bank for CDs and money market and other
deposit account services is reasonable and appropriate.
Investment Management Services: U.S. Trust represents that it
reviewed and evaluated the fixed-income investment products offered by
the Bank to the Plans, which are of three categories:
(1) A short-term bond fund (the Short-Term Product) with an average
duration of 1.7 years in 1995, investing primarily in U.S. Treasury and
government agency securities, in which four Plans have invested a total
of $111.6 million;
(2) A bond fund with an average duration of 3.4 years in 1995 (the
Intermediate-Duration Product) investing primarily in U.S. Treasury and
government agency securities and corporate bonds, in which one Plan has
invested a total of $2.5 million; and
(3) A bond fund designed for longer term investors (the Core
Duration Product) with an average duration of 4.6 years in 1995,
investing primarily in U.S. Treasury and government securities,
corporate bonds, and mortgage-backed securities, in which one Plan has
invested a total of $24.1 million.
U.S. Trust represents that in its review and evaluation of these
investment products, it utilized an extensive report prepared by Towers
Perrin regarding the products, and attended due diligence meetings with
various officers of the Bank. U.S. Trust states that it analyzed the
Bank's investment process, personnel, performance results, fees,
product and personnel growth, representative clients, historical
portfolio characteristics and a current portfolio contents summary.
U.S. Trust represents that in the course of its review it determined
that the Bank maintains the capability to provide these investment
management services competently, that the services are offered by the
Bank to the public in the ordinary course of business, and that the
fees for the services are reasonable based on industry norms taking
into account the experience and reputation of the Bank. U.S. Trust
states that it determined that additional costs to the Plans,
approximating $80,000, would likely result from a decision to replace
the Bank as the provider of these investment management services. With
respect to each of these three categories of investment products, U.S.
Trust made specific determinations regarding the rates of return
provided and arrived at specific conclusions as to whether the
investment products were appropriate for the Plans, summarized as
follows:
(1) The Short-Duration Product has consistently outperformed its
benchmark index, the Merrill Lynch 1-3 Year Treasury Index, earning 8.4
percent per year over the past seven years on an annualized basis,
while being conservatively managed and maintaining a high quality of
investment assets. U.S. Trust notes that the Bank has represented that
the investment strategy of this product will remain unchanged. U.S.
Trust has determined that the investment of assets of the Plans in the
Short-Duration Product is reasonable and appropriate.
(2) The Intermediate-Duration Product's cumulative performance over
the past seven years is very close to its benchmark, the Lehman
Intermediate Government/Corporate Index, and U.S. Trust determined that
this product is capable of generating returns above its benchmark. U.S.
Trust notes that the investment parameters of this product have
recently changed to include investments in corporate bonds and that it
has since demonstrated an ability to enhance returns. Because this
product has been managed under its current guidelines for a relatively
short period of time, U.S. Trust has concluded that the selection of
this product by certain of the Plans is reasonable and appropriate for
one more year, after which time another year's investment results will
be available for consideration and U.S. Trust will undertake a
reassessment of whether this product remains reasonable and appropriate
for investments by the Plans.
(3) U.S. Trust found that the Core Duration Product outperformed
its benchmark, the Lehman Aggregate Index, for 1995 and that its
investment parameters were recently changed to expand duration and
maturity restrictions and include corporate bonds
[[Page 7273]]
and asset-backed securities among its investment assets. U.S. Trust
concludes that the selection of this product by certain of the Plans is
reasonable and appropriate for one more year, after which time another
year's investment results will be available for consideration and U.S.
Trust will undertake a reassessment of whether this product remains
reasonable and appropriate for investments by the Plans.
Conclusion: As a conclusion to its review and analysis, U.S. Trust
states that in view of the information discussed above and U.S. Trust's
judgment with respect thereto, subject to the limitations discussed
regarding the Intermediate and Core Duration Products, U.S. Trust
believes it is in the best interests of the Plans to use the investment
management and other banking services provided by the Bank.
9. In summary, the applicant represents that the proposed exemption
satisfies the criteria of section 408(a) of the Act for the following
reasons: (a) The interests of the Plans with respect to the Bank and
its provision of services to the Plans are represented by an
Independent Fiduciary, U.S. Trust; (b) The representation of each
Plan's interests by the Independent Fiduciary with respect to the Bank
and its provision of services is authorized annually by the Plan's
Authorizing Plan Fiduciary; (c) U.S. Trust has reviewed and evaluated
the entire range of services provided by the Bank to the Plans and has
determined that it is in the best interests of the Plans to utilize
such services; (d) The Independent Fiduciary will oversee and monitor
the Bank's provision of services to the Plans and will make written
determinations at least annually regarding the continuation of such
provision of services; (e) At least quarterly, the Bank is required to
submit a Periodic Report to the Independent Fiduciary which relates
relevant details of the services provided by the Bank to any of the
Plans; (f) The Authorizing Plan Fiduciary will be provided copies of
the Bank's Periodic Reports to the Independent Fiduciary; (g) With
respect to each Plan, the Authorizing Plan Fiduciary is authorized to
terminate the representation of the Plan's interests by the Independent
Fiduciary or the provision of any services to the Plan by the Bank; and
(h) With respect to each Plan, the Independent Fiduciary is authorized
to continue, amend or terminate the Bank's provision of any services to
the Plan by the Bank.
FOR FURTHER INFORMATION CONTACT: Ron Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Hawaiian Airlines, Inc. Pilots' 401(k) Plan (the Pilots' Plan),
Hawaiian Airlines, Inc. 401(k) Plan for Flight Attendants (the
Attendants' Plan), and Hawaiian Airlines, Inc. 401(k) Savings Plan (the
Savings Plan; collectively the Plans) Located in Honolulu, Hawaii
[Application Nos. D-10380, D-10381, and D-10382]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2),
and 407(a) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (E) of the Code, shall not apply to (1) the past acquisition by
the Plans of certain transferable stock rights (the Rights) pursuant to
a stock rights offering (the Offering) to the Plans by Hawaiian
Airlines, Inc. (the Employer), the sponsor of the Plans; (2) the past
holding of the Rights by the Plans during the subscription period of
the Offering; and (3) the disposition or exercise of the Rights by the
Plans provided the following conditions are satisfied:
(A) The acquisitions and holding of the Rights by the Plans
occurred in connection with the Offering made available to all
shareholders of the common stock of the Employer; (B) The acquisition
and holding of Rights by the Plans resulted from an independent act of
the Employer as a corporate entity and all holders of the common stock
of the Employer, including the Plans, were treated in the same manner
with respect to the Offering; and (C) All decisions regarding the
holding and disposition of the Rights by the Plans were made in
accordance with provisions of the Plans for individually-directed
investment of participant accounts by the individual participants of
the Plans whose accounts in the Plans received Rights in connection
with the Offering, including all determinations regarding the exercise
or sale of the Rights received through the Offering, and if no timely
instructions concerning the Rights were given by participants of the
Plans, the Rights were sold.
Effective Date: This exemption if granted, will be effective as of
August 7, 1996.
Summary of Facts and Representations
1. The Employer, a Hawaii corporation since 1929, is located in
Honolulu, Hawaii. It is primarily in the scheduled transportation of
passengers, cargo, and mail over a route system that services the six
major islands of Hawaii and Las Vegas and four cities on the west
coast: Los Angeles, San Francisco, Seattle, and Portland. In addition,
the Employer provides the only direct service from Hawaii to PagoPago,
American Samoa and Papeete, Tahiti. Also, the Employer provides charter
service from Honolulu to Las Vegas. The Employer operates a fleet of
thirteen DC-9 aircraft and eight DC-10 aircraft.
The common stock of the Employer is listed and traded on both the
American Stock Exchange and the Pacific Stock Exchange.
2. The Plans are defined contribution plans intended to satisfy the
requirements of section 401(a) of the Code. The Pilots' Plan and the
Attendants' Plan are collectively bargained profit sharing plans with
cash or deferred arrangements under section 401(k) of the Code.
Both the Air Line Pilots Association, International (the ALPA) and
the Association of Flight Attendants (the AFA) separately bargain with
the Employer for their own members over the terms of the Pilots' Plan
and the Attendants' Plan, respectively. The Employer appoints two
members to each Retirement Board for both the Pilots' Plan and the
Attendants' Plan, respectively, and the ALPA and the AFA each appoints
two members to the respective Plans of which their members are
participants. The four members of each of the Retirement Boards select
investment options for their respective participants, and resolves
disputes concerning the application, interpretation, or administration
of each of the Plans. As of August 2, 1996, the Pilots' Plan had total
assets of $8,960,644 and 333 participants and the Attendants' Plan had
total assets of $26,305,738 and 602 participants. The Savings Plan
covers mostly non-collectively and some collectively bargained
employees, represented by the International Association of Machinists,
and is a profit sharing plan with a cash or deferred arrangement under
section 401(k) of the Code. Since September 1, 1993, the Savings Plan
requires Employer contributions and provides that contributions from
participants are optional. The Employer solely appoints the three
members to the Retirement Board for the Savings Plan. The Retirement
Board for the Savings Plan selects investment options for
[[Page 7274]]
participants and resolves disputes concerning the application,
interpretation, or administration of the Savings Plan. As of August 2,
1996, the Savings Plan had total assets of $11,171,947 and 1,408
participants.
Pursuant to a trust agreement with the Employer, Vanguard Fiduciary
Trust Company (Vanguard), a Pennsylvania corporation located in
Malvern, Pennsylvania, is the trustee for the Plans. Vanguard acts for
the Plans upon investment instructions from participants of the Plans
and upon directions from the respective Retirement Boards of the Plans.
In addition, Vanguard provides the Plans with different investment
options or combinations thereof that have been selected by the
different Retirement Boards for the participants of the Plans to direct
investments for their respective accounts in the Plans. 1
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1 The Department expresses no opinion as to whether or not the
provisions of the Plans satisfy the requirements of section 404(c)
of the Act and regulations thereunder with respect to the various
investment options offered the participants of the Plans.
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3. On December 8, 1995, in order to increase its working capital,
the Employer, with approval of its shareholders, entered into an
investment agreement with Airline Investors Partnership, L.P. (AIP),
whereby the Employer during January 1996 issued and sold to AIP
18,181,818 shares of its common stock at $1.10 per share for a total
purchase price of $20 million. At the same time, the Employer also
issued and sold four shares of its Class B Special Preferred Stock to
AIP for a total purchase price of $4.40.
AIP, formed in November 1995 to invest in the Employer, is a
Delaware limited partnership whose general partner is AIP General
Partner, Inc., a Delaware corporation with its principal office in New
York City. By its investment in four shares of the Class B Special
Preferred Stock of the Employer, AIP has the right to nominate six of
the eleven individuals elected to the board of directors of the
Employer. Currently the president and a vice president of the general
partner of AIP and four other nominees of AIP have six of the seats on
the board of directors of the Employer.
The price AIP agreed to pay for its common stock investment in the
Employer in January 1996 was substantially discounted from the common
stock's closing market price of 2\11/16\ on December 8, 1995. In
recognition of the dilutive effect of the AIP acquisition, the
investment agreement with AIP contained a provision for an offering of
subscription rights to all shareholders of the Employer, including the
Plans but excluding AIP, to purchase an aggregate of up to 8,151,000
shares of common stock during the 30-day offering. The applicant
represents that the objective of the Offering was to permit non-AIP
shareholders an opportunity to purchase the stock of the Employer at a
discount price. Also, it was represented by the applicant that an
additional motivation for the Offering was to raise additional working
capital above the investment by AIP in order to meet the goal of the
Employer of improving its financial liquidity.2
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\2\ Rights were distributed in the Offering to two different
groups: (i) all shareholders as of August 7, 1996, including the
Plans but excluding AIP, and (ii) all employees of the Employer,
other than members of senior management, who were employed at any
time during 1995 and on the record date, August 7, 1996, without
regard to their indirect shareholder status as participants in the
Plans. Also, participants of the 1994 Stock Option Plan of the
Employer were granted options to purchase common stock from the
Employer for $3.25 per share. The Employer also entered into stock
purchase agreements with certain institutional investors, high net
worth individuals, and non-employee directors which the investors
agreed to purchase common stock from the Employer at $3.25 per
share. The applicant represents that a total of 12,085,000 shares of
common stock were issued during the Rights Offering to the above
persons.
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4. Pursuant to the terms of the Offering, each shareholder,
excluding AIP, received one Right for each share of common stock held
as of the record date at the close of business on August 7, 1996 (the
Record Date).3 As of the Record Date, the Plans held a total of
1,488,703 shares and received the same number of Rights pursuant to the
Offering. Each Right entitled a holder to purchase one share of the
common stock issued by the Employer for the exercise price of $3.25.
The exercise price was determined by the Employer after consultation
with its independent financial advisor prior to the Offering. The
Rights were traded on the American and Pacific Stock Exchanges until
the expiration date of the Offering. The Rights held by the Plans
required participants to communicate their directions to Vanguard, the
trustee for the Plans, by September 5, 1996, in order that the
directions from the participants of the Plans could be properly and
correctly processed by Vanguard. The applicant represents that prior to
the effective date of the Offering, the trustee, Vanguard, sent each
participant in the Plans written information regarding the Offering and
the Rights. During the effective period of the Offering Vanguard
provided each participant in the Plans the opportunity to independently
decide whether to exercise the Rights or to sell them. Also, the
participants were informed that if Vanguard did not receive timely
instructions, or received no instructions, Vanguard would sell the
Rights. The applicant represents that all Rights received by the Plans
were either exercised or sold.
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\3\ The Department notes that the Rights do not constitute
``qualifying employer securities'' within the meaning of section
407(d)(5) of the Act.
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Approximately 153,929 Rights issued to the Plans were exercised for
the total sum of $500,269, and the Plans netted approximately
$118,345.52 from the sale of the remaining Rights. As of the day
preceding the Record Date, the price of the common stock of the
Employer at the closing of the American Stock Exchange was $3.75.
5. The applicant represents that the terms of the offering can be
verified by the documents filed with the Securities and Exchange
Commission and with the American and Pacific Stock Exchanges. Also,
prices of the common stock and the Rights can be verified by examining
the trading activity as published in the various newspapers. In
addition, the applicant represents that participants and beneficiaries
of the Plans had the opportunity to exercise independent decision-
making authority with respect to the Rights in their accounts.
Furthermore, the applicant represents that the Plans were given the
Rights at no cost to the Plans, thus enabling the participants to
enhance their respective account balances that were holding Employer
common stock by either exercising the Rights at prices below the market
price or by selling the Rights.
The applicant represents that the Employer has borne all costs
associated with the Rights Offering to the Plans and the costs
associated with the exemption application.
6. In summary the applicants represent that the transactions
satisfied the statutory criteria of section 408(a) of the Act for the
following reasons: (a) the acquisition of the Rights by the Plans
resulted from an independent act by the Employer as a corporate entity
and all holders of the common stock of the Employer were treated in a
like manner, including the Plans; (b) all decisions with respect to the
rights were controlled by involved participants in accordance with
provisions of the Plans for individually-directed investments of such
accounts; (c) the Rights and the common stock of the Employer were both
traded on the American and Pacific Stock Exchanges with current price
information readily ascertainable as were the terms of the offering
from the public documents distributed to the holders of the common
stock and filed with the Securities and Exchange Commission and the
Exchanges; (d)
[[Page 7275]]
there were no expenses incurred by the Plans or its participants or
beneficiaries from the Offering and the resulting transactions; and (e)
if no instructions were received by the Plans trustee, the Rights were
sold.
FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 12th day of February, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-3837 Filed 2-14-97; 8:45 am]
BILLING CODE 4510-29-P