[Federal Register Volume 62, Number 172 (Friday, September 5, 1997)]
[Notices]
[Pages 47056-47060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23640]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10393]
AEW Capital Management, L.P. (AEW); Located in Boston,
Massachusetts
AGENCY: Pension and Welfare Benefits Administration.
ACTION: Notice of proposed exemption, U.S. Department of Labor to
replace Prohibited Transaction Exemption (PTE) 93-40 Involving Aldrich,
Eastman & Waltch, L.P. and Aldrich, Eastman & Waltch, Inc.
(collectively, Old AEW).
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed individual exemption
which, if granted, would replace PTE 93-40 (58 FR 34821, June 29,
1993). PTE 93-40 permitted the payment to Old AEW of certain investment
fees and disposition fees relating to real estate investments by
employee benefit plans for which Old AEW provided investment management
services, as well as the investment by such plans in a multiple client
commingled account managed by Old AEW, subject to certain conditions.
These transactions were described in a notice of pendency that was
published in the Federal Register on April 27, 1993 at 58 FR 25662. PTE
93-40, which was effective as of April 27, 1993, expired by operation
of law, as discussed below. The proposed exemption would provide
conditional relief identical to that provided by PTE 93-40 for a newly-
merged entity known as ``AEW Capital Management, L.P.''
DATES: Written comments and/or requests for a public hearing should be
received by the Department within 45 days of the date of publication of
this notice of proposed exemption in the Federal Register. The proposed
exemption, if granted, will be effective December 10, 1996.
ADDRESSES: All written comments and/or requests for a public hearing
(preferably, three copies) should be sent to the Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW,
Washington, DC 20210, Attention: Application No. D-10393. The
application pertaining to the proposed exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed exemption that would replace PTE
93-40. PTE 93-40 provided an exemption from certain prohibited
transaction restrictions of section 406 of the Employee Retirement
Income Security Act of 1974 (the Act) and from the sanctions resulting
from the application of section 4975 of the Internal Revenue Code of
1986 (the Code), as amended, by reason of section 4975(c)(1) of the
Code. The proposed exemption was requested in an application filed by
AEW pursuant to section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures (the Procedures) set forth
in 29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990).
Effective December 31, 1978,
[[Page 47057]]
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.
Accordingly, this proposed replacement exemption is being issued solely
by the Department.
Specifically, PTE 93-40 provided exemptive relief from section
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)(E) of the Code, with respect to the payment by the plans of
certain initial investment fees and disposition fees to Old AEW. In
addition, PTE 93-40 provided exemptive relief from the restrictions of
section 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, with respect to the
investment by the plans in a multiple client commingled account managed
by Old AEW.
Subsequent to the granting of PTE 93-40, AEW informed the
Department that, effective as of December 10, 1996, all the assets of
Old AEW and certain of their affiliates had been transferred to the new
AEW Capital Management, L.P. (denoted herein as AEW). All of the
partnership interests of AEW are owned, directly or indirectly, by New
England Investment Companies, a publicly held limited partnership,
which in turn is approximately 53 percent owned by The Metropolitan
Life Insurance Company. Because AEW is a newly created legal entity,
the Department determined that PTE 93-40 was no longer effective as of
December 10, 1996. Thus, the Department is of the view that PTE 93-40
would be unavailable for use by AEW with respect to the subject
transactions.
AEW represents that, in all material respects, notwithstanding its
changes in structure and ownership, AEW has otherwise continued to
operate in the same manner, and with the same senior management
personnel. AEW is an investment adviser registered under the Investment
Advisers Act of 1940 whose client accounts continue to consist of
either separate accounts for individual clients or commingled accounts
for multiple clients. Accordingly, the Department has decided to
publish a new exemption for AEW which, if granted, would replace PTE
93-40 and would have an effective date of December 10, 1996 for
transactions described in PTE 93-40.
Notice to Interested Persons
In accordance with the requirements of the Investment Advisers Act
of 1940, Old AEW provided notice and obtained the consent of the
independent fiduciary of each of its client plans with respect to its
anticipated changes in structure and ownership. AEW will further
provide written notice of the proposed exemption to same within 15 days
of the date of publication of this notice of pendency in the Federal
Register. Such notice will include a copy of this notice of pendency as
published in the Federal Register and an explanation of the rights of
interested persons to comment on and/or request a hearing with respect
thereto. Written comments and hearing requests are due within 45 days
of the date of publication of this notice in the Federal Register.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, a fiduciary to
discharge his or her 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 requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries
(2) Before an exemption can be granted under section 408(a) of the
Act and 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 such plan; and
(3) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and the Code,
including statutory or administrative exemptions. 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.
(4) The proposed exemption, if granted, will be applicable to the
transactions previously described in PTE 93-40 only if the conditions
specified herein are satisfied.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the proposed replacement exemption to the
address above, within the time period set forth above. All comments
will be made a part of the record. Comments and requests for a hearing
should state the reasons for the writer's interest in the proposed
exemption. Comments received will be available for public inspection
with the referenced application at the address set forth above.
Proposed 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, the Department proposes to replace PTE
93-40 as follows:
Part I. Exemption for Payment of Certain Fees to AEW
The restrictions of section 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)(E) of the Code, shall not apply to the
payment of certain initial investment fees (the Investment Fee) and
disposition fees (the Disposition Fee) to AEW by employee benefit plans
for which AEW provides investment management services (the Client
Plans), pursuant to an investment management agreement (the Agreement)
entered into between AEW and the Client Plans either individually,
through the establishment of a single client separate account (Single
Client Account), or collectively, as participants in a multiple client
commingled account (Multiple Client Account), provided that the
conditions set forth below in Part III are satisfied. (Single Client
Accounts and Multiple Client Accounts are collectively referred to
herein as Accounts).
Part II. Exemption for Investments in a Multiple Client Account
The restrictions of section 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 any investment by a Client Plan in a Multiple Client
Account managed by AEW, provided that the conditions set forth below in
Part III are satisfied.
[[Page 47058]]
Part III. General Conditions
(a) The investment of plan assets in a Single or Multiple Client
Account, including the terms and payment of any Investment Fee and
Disposition Fee, shall be approved in writing by a fiduciary of a
Client Plan which is independent of AEW and its affiliates and, in the
case of a Multiple Client Account for which ultimate investment
discretion is exercised by a bank trustee, a fiduciary which is
independent of the bank trustee and AEW and its affiliates (the
Independent Fiduciary). Notwithstanding the foregoing, AEW may
authorize the transfer of cash from a Single Client Account to a
Multiple Client Account, provided that: (1) The Multiple Client Account
has similar investment objectives and the identical fee structure as
the Single Client Account; (2) the Agreement governing the Single
Client Account authorizes AEW to invest in a Multiple Client Account;
(3) AEW receives no additional fees from the Single Client Account for
cash invested in the Multiple Client Account and no additional
Investment Fee is paid with respect to cash transferred to the Multiple
Client Account; (4) a binding commitment to make the transfer to the
Multiple Client Account is made by AEW within six months of the
Independent Fiduciary's decision to allocate assets to the Single
Client Account or, in the event that AEW's binding commitment to make
the transfer occurs more than six months after such Fiduciary's
decision, AEW obtains an additional authorization from the Independent
Fiduciary; and (5) each transfer of assets from the Single Client
Account to the Multiple Client Account occurs within 60 days of the
actual transfer of such assets to the Single Client Account.
(b) The terms of any investment in an Account and of any Investment
Fee or Disposition Fee shall be at least as favorable to the Client
Plans as those obtainable in arm's length transactions between
unrelated parties.
(c) At the time any Account is established and at the time of any
subsequent investment of assets (including the reinvestment of assets)
in such Account:
(1) Each Client Plan shall have total net assets with a value in
excess of $50 million; and
(2) No Client Plan shall invest, in the aggregate, more than five
percent of its total assets in any Account or more than 10 percent of
its total assets in all Accounts established by AEW.
(d) Prior to making an investment in any Account, the Independent
Fiduciary of each Client Plan investing in an Account shall receive
offering materials from AEW which disclose all material facts
concerning the purpose, structure, and operation of the Account,
including any fee arrangements.
(e) With respect to its ongoing participation in an Account, each
Client Plan shall receive the following written information from AEW:
(1) Audited financial statements of the Account prepared by
independent public accountants selected by AEW no later than 90 days
after the end of the fiscal year of the Account;
(2) Quarterly and annual reports prepared by AEW relating to the
overall financial position and operating results of the Account and, in
the case of a Multiple Client Account, the value of each Client Plan's
interest in the Account. Each such report shall include a statement
regarding the amount of fees paid to AEW during the period covered by
such report;
(3) Annual appraisals indicating the fair market value of the
Account's assets as established by an M.A.I. licensed real estate
appraiser independent of AEW and its affiliates which has been approved
by the Client Plan prior to investing in the Account, provided that if
a new appraiser for a property is chosen by AEW, the appraiser shall be
approved by the Independent Fiduciary of the Client Plan or the
responsible independent fiduciaries of Client Plans and other
authorized persons acting for investors in a Multiple Client Account
(the Responsible Independent Fiduciaries, as defined in Part IV(e)
below), prior to any valuation of such property; and
(4) In the case of any Multiple Client Account, a list of all other
investors in the Account.
(f) The total fees paid to AEW shall constitute no more than
reasonable compensation.
(g) The Investment Fee shall be equal to a specified percentage of
the net value of the Client Plan assets allocated to the Account, which
shall be payable either:
(1) At the time assets are deposited (or deemed deposited in the
case of reinvestment of assets) in the Account; or
(2) In periodic installments, the amount (as a percentage of the
aggregate Investment Fee) and timing of which have been specified in
advance based on the percentage of the Client Plan's assets invested in
real property as of the payment date, provided that (i) the installment
period is no less than three months, and (ii) if the percentage of the
Client Plan assets which have actually been invested by a payment date
is less than the percentage required for the aggregate Investment Fee
to be paid in full through that date (both determined on a cumulative
basis), the Investment Fee paid on such date shall be reduced by the
amount necessary to cause the percentage of the aggregate Investment
Fee paid to equal only the percentage of the Client Plan assets
actually invested by that date. The unpaid portion of such Investment
Fee shall be deferred to and payable on a cumulative basis on the next
scheduled payment date (subject to the percentage limitation described
in the preceding sentence).
(h) The Disposition Fee shall be payable after the Client Plan has
received distributions from the Account in excess of an amount equal to
100 percent of its invested capital plus a pre-specified annual
compounded cumulative rate of return (the Threshold Amount), except
that in the case of AEW's removal or resignation, AEW shall be entitled
to receive a Disposition Fee payable either at the time of removal or,
in the event of AEW's resignation, upon sale of the assets to which the
fee is allocable or upon termination of the Account as the case may be,
subject to the requirements of paragraph (k) below, as determined by a
deemed distribution of the assets of the Account based on an assumed
sale of such assets at their fair market value (in accordance with
independent appraisals), only to the extent that the Client Plan would
receive distributions from the Account in excess of an amount equal to
the Threshold Amount at the time of AEW's removal or resignation. Both
the Threshold Amount and the amount of the Disposition Fee, expressed
as a percentage of the amount distributed (or deemed distributed) from
the Account in excess of the Threshold Amount, shall be established by
the Agreement and agreed to by the Independent Fiduciary of the Client
Plan.
(i) The Threshold Amount for any Disposition Fee shall include at
least a minimum rate of return to the Client Plan, as defined below in
Part IV(f).
(j) For any sale of property in an Account which shall give rise to
the payment of a Disposition Fee to AEW prior to the termination of the
Account, the sales price of the property shall be at least equal to a
target amount (the Target Amount), as defined in Part IV(g), in order
for AEW to sell the property and receive its Disposition Fee. If the
proposed sales price of the property is less than the Target Amount,
the proposed sale shall be disclosed to and approved by the Independent
Fiduciary for a Single Client Account or the Responsible Independent
Fiduciaries for
[[Page 47059]]
a Multiple Client Account, in which event AEW shall be entitled to sell
the property and receive its Disposition Fee. If the proposed sales
price is less than the Target Amount and the Independent Fiduciary's or
Responsible Independent Fiduciaries' approval is not obtained, AEW
shall still have the authority to sell the property, if the Agreement
provides AEW with complete investment discretion for the Account,
provided that the Disposition Fee which would have been payable to AEW
is paid only at the termination of the Account.
(k) In the event AEW resigns as investment manager for an Account,
the Disposition Fee shall be calculated at the time of resignation as
described above in paragraph (h) and allocated to each property based
upon the relationship that the appraised value of such property bears
to the total appraised value of the Account. Each amount arrived at
through this calculation shall be multiplied by a fraction, the
numerator of which shall be the actual sales price received by the
Account on disposition of the property (or in the case of a property
which has not been sold prior to the termination of the Account, the
appraised value of the property as of the termination date) and to the
denominator of which shall be the appraised value of the property which
was used in connection with determining the Disposition Fee at the time
of resignation, provided that this fraction shall never exceed 1.0. The
resulting amount for each property shall be the Disposition Fee payable
to AEW upon sale of such property or termination of the Account, as the
case may be.
(l) AEW or its affiliates shall maintain, for a period of six
years, the records necessary to enable the persons described in
paragraph (m) of this Part III to determine whether the conditions of
this exemption have been met, except that: (1) A prohibited transaction
will not be considered to have occurred if, due to circumstances beyond
the control of AEW or its affiliates, the records are lost or destroyed
prior to the end of the six year period; and (2) no party in interest,
other than AEW, 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 (m)
below.
(m)(1) Except as provided in paragraph (m)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (l) of this Part III shall be unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of a Client Plan or any duly authorized employee
or representative of such fiduciary;
(iii) Any contributing employer to a Client Plan or any duly
authorized employee or representative of such employer; and
(iv) Any participant or beneficiary of a Client Plan or any duly
authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described above in paragraph (m)(1) (ii)-
(iv) shall be authorized to examine the trade secrets of AEW and its
affiliates or any commercial or financial information which is
privileged or confidential.
Part IV. Definitions
For purposes of this exemption:
(a) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner of such
person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term ``management services'' means:
(1) Development of an investment strategy for the Account and
identification of suitable real estate-related investments;
(2) Directing the investments of the assets of the Account,
including the determination of the structure of each investment, the
negotiation of its terms and conditions and the performance of all
requisite due diligence;
(3) Timing and directing the disposition of any assets of the
Account and directing the liquidation of the Account;
(4) Administration of the overall operation of the investments of
the Account, including all applicable leasing, management, financing,
and capital improvement decisions;
(5) Establishing and maintaining accounting records of the Accounts
and distributing reports to Client Plans as described in Part III; and
(6) Selecting and directing all service providers of ancillary
services as defined in this Part IV.
(d) The term ``ancillary services'' means:
(1) Legal services;
(2) Services of architects, designers, engineers, hazardous
materials consultants, contractors, leasing agents, real estate
brokers, and others in connection with the acquisition, construction,
improvement, management and disposition of investments in real
property;
(3) Insurance brokerage and consultation services;
(4) Services of independent auditors and accountants in connection
with auditing the books and records of the Accounts and preparing tax
returns;
(5) Appraisal and mortgage brokerage services; and
(6) Services for the development of income-producing real property.
(e) The term ``Responsible Independent Fiduciaries'' means with
respect to a Multiple Client Account the Independent Fiduciary of each
Client Plan invested in the Account and other authorized persons acting
for investors in the Account which are not employee benefit plans as
defined under section 3(3) of the Act (such as governmental plans,
university endowment funds, etc.) that are independent of AEW and its
affiliates and are persons other than the bank trustee for the Account,
and that collectively hold at least 50% of the interests in the
Account.
(f) The term ``Threshold Amount'' means with respect to any
Disposition Fee an amount which equals all of a Client Plan's capital
invested in an Account plus a pre-specified annual compounded
cumulative rate of return that is at least a minimum rate of return
determined as follows:
(1) A non-fixed rate which is at least equal to the rate of change
in the consumer price index (CPI) during the period from the deposit of
the Client Plan's assets into the Account until distributions of the
Client Plan's assets from the Account equal or exceed the Threshold
Amount; or
(2) A fixed rate which is at least equal to the rate of change in
the CPI over some period of time specified in the Agreement, which
shall not exceed 10 years.
(g) The term ``Target Amount'' means a value assigned to each
property in the Account established by AEW either (1) at the time the
property is acquired, by mutual agreement between AEW and the
Independent Fiduciary for a Single Client Account or the Responsible
Independent Fiduciaries for a Multiple Client Account, or (2) pursuant
to an objective formula approved by such Fiduciaries at the time the
Account is established. However, in no event will such value be less
than the acquisition price of the property.
[[Page 47060]]
EFFECTIVE DATE: This exemption, if granted, is effective as of December
10, 1996.
The availability of this proposed exemption is subject to the
express condition that the material facts and representations contained
in the applications for exemption are true and complete and accurately
describe all material terms of the transactions.
For a more complete statement of the facts and representations
supporting the Department's decision to grant PTE 93-40, refer to the
proposed exemption and grant notice which are cited above.
Signed at Washington, DC, this 2nd day of September, 1997.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 97-23640 Filed 9-4-97; 8:45 am]
BILLING CODE 4510-29-P