[Federal Register Volume 75, Number 67 (Thursday, April 8, 2010)]
[Notices]
[Pages 17966-17970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-7892]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Application No. and Proposed Exemption involving D-11565,
Citizens Bank Wealth Management, N.A.
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed exemption from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or 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
requests for a hearing on the pending exemption, 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.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``[email protected]'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The application for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Warning: If you submit written comments or hearing requests, do not
include any personally-identifiable or confidential business
information that you do not want to be publicly-disclosed. All comments
and hearing requests are posted on the Internet exactly as they are
received, and they can be retrieved by most Internet search engines.
The Department will make no deletions, modifications or redactions to
the comments or hearing requests received, as they are public records.
Notice to Interested Persons
Notice of the proposed exemption 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 exemption was requested in an
application 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, this notice of proposed exemption is
issued solely by the Department.
The application contains representations with regard to the
proposed exemption which is summarized below. Interested persons are
referred to the application on file with the Department for a complete
statement of the facts and representations.
Citizens Bank Wealth Management, N.A., Located in Flint, Michigan
[Application No. D-11565]
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).
Section I. Transaction
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A)
[[Page 17967]]
and (D) and 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)(A), (D), and (E) of the Code, shall not apply,
effective December 16, 2008, to the past sale of certain Auction Rate
Securities (ARS) by the Four-Way Tool & Die, Inc. Profit Sharing Plan
and Trust (the Plan) to Citizens Republic Bancorp (Citizens Republic),
a party in interest with respect to the Plan, provided that the
following conditions were satisfied: \1\
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\1\ For purposes of this proposed exemption, references to
section 406 of the Act should be read to refer also to the
corresponding provisions of section 4975 of the Code.
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(A) The subject ARS were acquired for the Plan by Citizens Bank
Wealth Management, N.A. (the Trustee), acting in its capacity as
trustee of the Plan, from an independent broker;
(B) The last auction for each of the ARS was unsuccessful;
(C) The sale of the ARS was directly between the Plan and Citizens
Republic for solely cash consideration against prompt delivery of the
ARS;
(D) The sale price for each of the ARS was equal to the par value,
plus any accrued but unpaid interest;
(E) The Plan did not waive any rights or claims in connection with
the sale;
(F) The decision to sell the ARS to the Trustee was made by a Plan
fiduciary independent of the Trustee;
(G) The Plan did not pay any commissions or transaction costs in
connection with the sale;
(H) The sale was not part of an arrangement, agreement, or
understanding designed to benefit a party in interest to the Plan;
(I) Upon termination of the Plan, the Plan participants received
100 percent of their account balances, and as a result of the pre-
termination sale of the ARS to Citizens Republic at face value, plus
any accrued but unpaid interest, no participant was adversely affected
by the absence of an auction market for the ARS or the resulting
decline in their market value;
(J) The Trustee and its affiliate, as applicable, maintain, or
cause to be maintained, for a period of at least six (6) years from the
date of the sale, such records as are necessary to enable the persons
described in paragraph (K), below, to determine whether the conditions
of this exemption, if granted, have been met, except that--
(i) No party in interest with respect to the Plan that engaged in
the sale, other than the Trustee and its affiliate, as applicable,
shall be subject to a civil penalty under section 502(i) of the Act or
the taxes imposed by section 4975(a) and (b) of the Code, if such
records are not maintained, or are not available for examination, as
required, below, by paragraph (K); and
(ii) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of the Trustee or its affiliate, as applicable, such records are lost
or destroyed prior to the end of the six-year period; and
(K)(i) Except as provided in subparagraph (ii), below, and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (J), above, are
unconditionally available at their customary location for examination
during normal business hours by--
(a) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the U.S. Securities and
Exchange Commission;
(b) Any fiduciary of the Plan, or any duly authorized employee or
representative of such fiduciary; or
(c) The employer of participants of the Plan, and any employee
organization whose members are covered by the Plan, or any authorized
employee or representative of these entities;
(ii) None of the persons described above in (b) or (c) of
subparagraph (K) shall be authorized to examine trade secrets of the
Trustee, or commercial or financial information which is privileged or
confidential; and
(iii) If the Trustee refuses to disclose information on the basis
that such information is exempt from disclosure, the Trustee shall, by
the close of the thirtieth (30th) day following the request, provide a
written notice advising that person of the reasons for the refusal and
that the Department may request such information.
Section II. Definitions
For purposes of this exemption:
(A) The term ``affiliate'' means any person, directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such other person (with respect to the
Trustee, ``affiliate'' includes, but is not limited to, its parent
corporation, Citizens Republic Bancorp;
(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 ``Auction Rate Securities'' or ``ARS'' means
securities that are debt instruments (generally with a long-term
nominal maturity) with an interest rate that is reset at specific
intervals through a Dutch Auction process;
(D) A person is ``independent'' of the Trustee if the person is (1)
not the Trustee or an affiliate, and (2) not a ``relative'' (as defined
in section 3(15) of the Act) of the party engaging in the transaction;
and
(E) The term ``Plan'' means the Four-Way Tool & Die, Inc. Profit
Sharing Plan and Trust, which is an employee benefit plan as defined in
section 3(3) of the Act, and its related trust, which is an entity
holding plan assets within the meaning of 29 CFR 2510.3-101, as
modified by section 3(42) of the Act.
Summary of Facts and Representations
1. Four-Way Tool & Die, Inc. (the Employer), located in Troy,
Michigan, is engaged in the production of tooling, primarily for the
automotive industry. The Four-Way Tool & Die, Inc. Profit Sharing Plan
and Trust (the Plan), a defined contribution plan qualified under
section 401(a) of the Code, was adopted by the Employer, effective
October 1, 1969; was most recently amended and restated, effective
October 1, 2007; and was terminated, effective January 31, 2009, and
all assets were liquidated and distributed to the Plan participants. As
of December 16, 2008, the Plan had 16 active participants (and no
beneficiaries receiving benefits) and total assets of approximately
$4,166,240. The Plan maintained individual accounts for each
participant, but participants were not permitted to direct the
investment of his or her account.
2. The applicant Citizens Bank Wealth Management, N.A. (also
referred to herein as the Trustee) was the trustee of the Plan,
beginning in October 1, 2007, having full investment discretion under a
trust agreement with the Employer to invest Plan assets within the
guidelines set by a written investment policy. The Trustee is a
national banking association headquartered in Flint, Michigan and a
wholly owned subsidiary of Citizens Republic Bancorp (Citizens
Republic), a bank holding company. Among other things, the Trustee acts
as an institutional trustee for employee benefit plans and is a
registered investment advisor subject to the Investment Advisers Act of
1940.
3. It is represented that, on various dates from November 2, 2007
to December 24, 2007, the Trustee acquired certain Auction Rate
Securities (ARS) as an investment for the Plan through UBS Financial
Services, an independent international broker.\2\ The
[[Page 17968]]
value of the ARS was allocated among all participants' accounts (in the
same manner as all other Plan investments) in accordance with the terms
of the Plan.
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\2\ The Department expresses no opinion herein as to whether the
acquisition and holding of the ARS by the Plan met the requirements
of Part 4 in Title I of the Act.
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The Trustee describes the ARS and the arrangement by which they are
purchased and sold as follows. The ARS are securities (in each case
herein issued as debt) with an interest rate that is not fixed but is
reset at periodic intervals pursuant to a process called a ``Dutch
Auction.'' Investors submit orders to buy, hold, or sell a specific ARS
to a broker-dealer selected by the entity that issued the ARS. The
broker-dealers, in turn, submit all of these orders to an auction
agent. The auction agent's functions include collecting orders from all
participating broker-dealers by the auction deadline, determining the
amount of securities available for sale, and organizing the bids to
determine the winning bid. If there are any buy orders placed into the
auction at a specific rate, the auction agent accepts bids with the
lowest rate above any applicable minimum rate and then successively
higher rates up to the maximum applicable rate, until all sell orders
and orders that are treated as sell orders are filled. Bids below any
applicable minimum rate or above the applicable maximum rate are
rejected. After determining the ``clearing rate'' for all of the
securities at auction, the auction agent allocates the ARS available
for sale to the participating broker-dealers based on the orders that
they submitted. If there are multiple bids at the clearing rate, the
auction agent will allocate securities among the bidders at such rate
on a pro rata basis. In the event of a failed auction, existing ARS
holders receive the maximum rate set in the official statements under
which the ARS were issued (i.e., the ``default rate'') until such time
as sufficient bids are received to set a new clearing rate at the next
auction.
4. According to the applicant, the subject ARS acquired for the
Plan were backed by student loans and were primarily selected based
upon the credit rating of the issuer. Soon after the Plan's acquisition
of the ARS, however, the unanticipated crisis in the national credit
markets resulted in over ten months of failed auctions.\3\
Consequently, the Plan was unable to dispose of its ARS, thereby
jeopardizing liquidity to make benefit payments, mandatory payments and
withdrawals, and expense payments when due. The Employer's business was
also impacted by the general economic downturn and the dramatic decline
in automobile sales. In late 2008, the Trustee was notified of a
proposed sale of the Employer and of its intention to terminate the
Plan by year's end and distribute all assets to participants as soon as
administratively possible. With the Employer likely to be sold and
uncertainty about a new owner, Plan participants were anxious to
receive their vested account balances.\4\
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\3\ The applicant represents that all auctions for the ARS
subsequent to the subject sale also failed.
\4\ According to the applicant, the anticipated sale of the
Employer ultimately was not consummated at the last minute, due to
the rapid decline in capital available to the prospective buyer in
late 2008, but the Plan has been terminated.
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To relieve the situation, it is represented that the Trustee
offered to have its parent corporation, Citizens Republic Bancorp,
purchase the ARS directly from the Plan at their par value, plus
accrued but unpaid interest. Larry Erickson, the owner and president of
the Employer and a fiduciary of the Plan, orally consented after
reviewing all the material terms of the sale,\5\ including the identity
and par value of each of the ARS, the interest amounts that were due
with respect to each of the ARS, and the most recent rate information
for each of the ARS (to the extent that reliable information was
available).\6\ The percentage of Plan assets involved in the sale on
December 16, 2008 was approximately 61.56%.\7\
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\5\ According to the applicant, Mr. Erickson is a member of the
Citizens Bank Southeast Michigan Advisory Board, an entity that has
no management responsibility or authority and cannot bind Citizens
Republic nor any of its affiliates; thus, the board had no role in
the subject sale of ARS by the Plan to Citizens Republic. The
board's primary function is in the area of public relations--
ensuring community involvement in determining important goals and
strategies for the bank to benefit the community, identifying area
charitable organizations in need of support, and suggesting ways in
which the bank can effectively support the local economy. The board
is comprised of various community leaders and bank customers, such
as Mr. Erickson. Each member of the board receives a stipend of $550
per meeting attended; there are six or fewer meetings per year.
\6\ The Department notes that the general standards of fiduciary
conduct set forth in the Act also apply to the subject transaction
described herein. In this regard, section 404 duties respecting a
plan solely in the interest of the plan's participants and
beneficiaries and in a prudent manner. Accordingly, the Plan
fiduciary must act prudently with respect to, among other things:
(1) the decision to sell an ARS, following disclosure by the Trustee
of all of the relevant information; and (2) the negotiation of the
terms of such sale, including the pricing. The Department further
emphasizes that the prudence rule described in section 404 requires
that fiduciaries conduct an objective and thorough decision making
process that considers all of the relevant information prior to
entering into financial transactions involving employee benefit plan
assets to ensure that all risks associated with such transactions
are understood.
\7\ The Department expresses no opinion herein as to whether the
percentage of Plan assets invested in the subject ARS met the
diversification requirement of Part 4 in Title I of the Act.
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The following chart provides information on each of the subject ARS
sold to Citizens Republic. The last column of the chart shows the
``default rate'' of interest for each of the ARS paid by Citizens
Republic for accrued but unpaid interest from the date of the last
interest payment until the date of sale. It is represented that none of
the ARS was in default in payment of interest as of the sale date on
December 16, 2008.\8\
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\8\ With respect to the ARS issued by the New Hampshire Higher
Education Loan Corp, the applicant represents that the 0.000% coupon
rate indicated in the chart was the result of earlier interest
coupon overpayments by the issuer that had been made in error. In
total, the Plan had already received a greater amount of interest
than the issuer was responsible to pay under the terms of the
security's official statement.
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Secondary Rate at sale
Issuer name Face value CUSIP Nature of issuer Rating insurance date (%)
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Iowa Student Loan Liquidity Corp. $300,000 462590GK0........... Private Entity...... Aa3/AA.............. AMBAC Assurance.... 3.135
Access to Loans for Learning 300,000 00432MAR0........... Private Entity...... Aaa/AAA............. None............... 3.135
Student Loan Corporation.
Pennsylvania Higher Education 300,000 709163GR4........... Private Entity...... Aaa/AAA............. AMBAC Assurance.... 3.198
Assistance Agency.
Connecticut Student Loan 200,000 207784AG4........... Private Entity...... Aaa/AAA............. None............... 3.398
Foundation.
State Board of Regents of the 200,000 917546EM1........... Private Entity...... Aaa/AAA............. None............... 2.431
State of Utah.
Illinois Student Loan Assistance 350,000 452281HT8........... Private Entity...... Aaa/AAA............. None............... 3.325
Commission.
[[Page 17969]]
Pennsylvania Higher Education 300,000 709163DA4........... Private Entity...... Aaa/AAA............. None............... 3.547
Assistance Agency.
New Hampshire Higher Education 300,000 644616AV6........... Private Entity...... Aaa/AAA............. None............... 0.000
Loan Corp.
Illinois Student Loan Assistance 300,000 452281HS0........... Private Entity...... Aaa/AAA............. None............... 2.695
Commission.
Iowa Student Assistance 300,000 462590GF1........... Private Entity...... Aaa/AAA............. None............... 2.695
Commission.
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Total........................ 2,850,000
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5. The Trustee represents that the Plan was their only employee
benefit plan client holding ARS. However, numerous other individual and
corporate customers of the trust department held ARS in their accounts.
When the business decision was made for Citizens Republic to purchase
the illiquid ARS from the Trustee's customer accounts, it was
determined that all purchases should be made on the same basis and at
the same time, so as not to differentiate among different investors. It
is represented that, because the Trustee's intention was to complete
the purchases prior to the close of 2008, seeking a prospective
exemption for the one employee benefit plan customer would have either
delayed the repurchases for all customers or potentially disadvantaged
the Plan by not simultaneously participating in the repurchase program.
The Plan did not waive any rights or claims in connection with the sale
of ARS to Citizens Republic.
The applicant represents that the sale of the ARS by the Plan to
Citizens Republic was in the best interests of Plan because the sale
permitted the Plan to pay benefits and expenses of administration and
to proceed with termination, effective January 31, 2009, and the prompt
distribution of cash to all participants. Further, according to the
applicant, the extreme illiquidity in the credit markets at the time,
and over ten months of failed auctions, made it very apparent that all
the ARS held by the Plan had a fair market value below par and could
not be worth more than that amount in the near term, given the
historically low interest rate environment.\9\ The sale was for solely
cash consideration against prompt delivery of the ARS, and the Plan did
not pay any commissions or transaction costs in connection with the
sale. It is represented that, upon termination of the Plan, the Plan
participants received 100 percent of their account balances, and as a
result of the pre-termination sale of the ARS to Citizens Republic at
face value, plus any accrued but unpaid interest, no participant was
adversely affected by the absence of an auction market for the ARS or
the resulting decline in their market value.
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\9\ According to the applicant, due to the failure of the
primary market, a secondary market arose; information obtained from
secondary market activity, as well as third party valuations,
indicates that these particular ARS issues have traded at discounts
averaging between 72.0% and 84.5% of par.
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The Trustee is bearing the costs of the exemption application. The
Employer is bearing the costs of notifying interested persons.
6. In summary, the subject transaction satisfied the statutory
criteria for an exemption under section 408(a) of the Act for the
following reasons: (a) The sale of the ARS was directly between the
Plan and Citizens Republic for solely cash consideration against prompt
delivery of the ARS; (b) the sale price for each of the ARS was equal
to the par value, plus any accrued but unpaid interest; (c) the Plan
did not waive any rights or claims in connection with the sale; (d) the
decision to sell the ARS to the Trustee was made by the Employer, who
is independent of the Trustee, after receiving disclosure of all the
material terms of the sale; (e) the Plan did not pay any commissions or
transaction costs in connection with the sale; and (f) upon termination
of the Plan, the Plan participants received 100 percent of their
account balances, and as a result of the pre-termination sale of the
ARS to Citizens Republic at face value, plus any accrued but unpaid
interest, no participant was adversely affected by the absence of an
auction market for the ARS or the resulting decline in their market
value.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8557. (This is not a toll-free.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions 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 exemption, 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 exemption, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
[[Page 17970]]
Signed at Washington, DC, this 2nd day of April, 2010.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2010-7892 Filed 4-7-10; 8:45 am]
BILLING CODE 4510-29-P