Notice2022-25378
Exemption From Certain Prohibited Transaction Restrictions Involving the Children's Hospital of Philadelphia Pension Plan for Union-Represented Employees Located in Philadelphia, PA
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 22, 2022
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains a notice of exemption issued by the Department of Labor (the Department) 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). This exemption permits the sale (the Sale) of certain illiquid private fund interests (the Interests) by the Children's Hospital of Philadelphia Pension Plan for Union-Represented Employees (the Plan or the Applicant) to the Children's Hospital of Philadelphia Foundation (the Foundation).
Full Text
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<title>Federal Register, Volume 87 Issue 224 (Tuesday, November 22, 2022)</title>
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[Federal Register Volume 87, Number 224 (Tuesday, November 22, 2022)]
[Notices]
[Pages 71358-71361]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-25378]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2022-04; Exemption Application No. D-
12048]
Exemption From Certain Prohibited Transaction Restrictions
Involving the Children's Hospital of Philadelphia Pension Plan for
Union-Represented Employees Located in Philadelphia, PA
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of exemption.
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SUMMARY: This document contains a notice of exemption issued by the
Department of Labor (the Department) 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). This exemption permits the sale (the Sale) of certain
illiquid private fund interests (the Interests) by the Children's
Hospital of Philadelphia Pension Plan for Union-Represented Employees
(the Plan or the Applicant) to the Children's Hospital of Philadelphia
Foundation (the Foundation).
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department
at (202) 693-8456. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: The Applicant requested an individual
exemption pursuant to ERISA section 408(a) in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011).
On March 9, 2022, the Department published a notice of proposed
exemption in the Federal Register that would permit the Sale of the
Interests by the Plan to the Foundation, provided certain conditions
are met.\1\
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\1\ 87 FR 13324, March 9, 2022.
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After considering the entire record developed in connection with
the Applicant's exemption application, including two comment letters
discussed below, the Department has determined to grant the exemption
subject to the new definitions section and the conditions described
below. The exemption only provides the relief specified in the
exemption text and does not provide relief from violations of any law
other than the prohibited transaction provisions of ERISA expressly
stated herein.
The Department makes the requisite findings under ERISA section
408(a) that the exemption is: (1) administratively feasible, (2) in the
interest of the plan and its participants and beneficiaries, and (3)
protective of the rights of the Plan's participants and beneficiaries,
if all of the exemption conditions are met. Accordingly, affected
parties should be aware that the conditions incorporated in this
exemption are, individually and taken as a whole, necessary for the
Department to grant the relief requested by the Applicant. Absent these
or similar conditions, the Department would not have granted this
exemption.
Background
As discussed in further detail in the proposed exemption, the Plan
owns 23 private fund limited partnership interests and one illiquid
``side pocket'' portion of an original hedge fund investment (the
Interests). The Interests include investments in private equity funds,
real estate funds, and natural resource funds. The Applicant represents
that the Plan originally invested in the Interests because each
Interest provided significant risk adjusted rate of return potential
and appropriate investment diversification. As of October 1, 2021, the
Interests represented approximately 8.5% of the Plan's assets, with
fair market values ranging from $0 to $990,321.
The Plan intends to improve Plan liquidity and diversification by
selling the Interests. As confirmed by Newport Trust Company (Newport),
the independent fiduciary engaged to represent the Plan, sales of the
Interests to an unrelated third party on the open market would likely
be for less than book value. According to Newport, such sales for the
Interests' fair market value would require approval from the respective
general partner of each Interest and would likely result in the plan
receiving approximately 15 percent less than the cash equivalent of
book value. Rather than sell the Interests for less than book value,
the Applicant requested an exemption to permit the Plan to sell the
Interests at full book value to the Foundation, a party in interest
with respect to the Plan.\2\ An exemption is necessary because the Sale
is prohibited under ERISA and the Code.
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\2\ The Foundation's relationship to the Plan Sponsor is that
the Foundation supports the operations and funding of the Plan
Sponsor, but the two entities do not have any ownership interests in
each other.
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On March 9, 2022, the Department proposed an exemption that would
permit the Plan to sell the Interests to the Foundation. The exemption
requires a prudently appointed and qualified independent fiduciary,
Newport, to protect and promote the interests of Plan participants and
beneficiaries in the transaction. The exemption also contains
protective conditions, including a requirement that Newport represent
the Plan's interests for all purposes with respect to the Sale, and a
requirement that the Plan not pay any commissions, fees, or other
expenses associated with the Sale.
The Department finds that the favorable terms of the Sale together
with the protective conditions included herein are appropriately
protective of, and in the interest of the Plan and its participants and
beneficiaries.
Written Comments Received
In the proposed exemption, the Department invited all interested
persons to submit written comments and/or requests for a public hearing
with respect to the notice of proposed exemption.
The Department received one comment letter from Newport and another
from the Applicant. The Department did not receive any requests for a
public hearing. Presented below is a discussion of both comment
letters.
Comments From Newport
Section II (c) of the proposed exemption states that: ``The Sale
price for each Interest will be the fair market value of the Interest
as of the date of the Sale, as determined by the Independent Fiduciary,
based upon an updated Independent Appraisal Report prepared by the
Independent Appraiser that values the Interest as of the date of the
Sale.''
In its comment letter, Newport states that it evaluated the Sale of
the Interests by the Plan to the Foundation based upon the assumption
that the Plan would receive the greater of: (1) the fair market value
of each Interest as of the date of the Sale, as determined by Newport,
based upon a qualified independent appraisal by SB Advisors LLC (SB
Advisors); or (2) the book value of each Interest, as determined by the
general partner of each Interest (less any distributions and plus any
contributions made between the valuation date and the Sale). Newport
states that the book value of the Interests exceeded their fair market
value by $2,114,073 based on the valuation report prepared by SB
Advisors dated May 24, 2021. Newport represents that it referred to
this favorable pricing, among other factors, when it concluded that the
terms and conditions of the Sale were favorable to the Plan and its
participants.
Newport recommends that the Department add an exemption condition
[[Page 71359]]
that would require CHOP to make a voluntary cash contribution to the
Plan in the amount equal to the difference (if any) between: (1) the
book value of each of the Interests as determined by the general
partner of each Interest as reflected on the most recent valuation
statement of the Interest immediately before the Sale (less any
distributions and plus any contributions made between the valuation
date and the sale), and (2) the fair market value of each Interest as
of the date of the Sale as determined by Newport based upon a qualified
independent appraisal by SB Advisors.
Department's Response: The Department agrees with Newport's
recommendation that the Plan receives the greater of fair market value
or full book value for the Interests. However, the Department has
determined that the Sale of the Interests must be for the greater of
book value or fair market value rather than fair market value plus a
subsequent cash contribution. Therefore, the Department has amended
section II(c) to state, ``The Sale price for each Interest will equal
the greater of: (1) the fair market value of each Interest as of the
date of the Sale, as determined by Newport, based upon a qualified
independent appraisal by SB Advisors LLC (SB Advisors); or (2) the book
value of each Interest, as determined by the general partner of each
Interest as reflected on the most recent valuation statement of the
Interest immediately before the Sale (less any distributions made from
the Interest to the Plan and plus any contributions made by the Plan to
the Interests between the valuation date and the Sale).''
Comments From the Applicant
In its comment letter, the Applicant requests the Department to
incorporate the following factual corrections into the exemption: (1)
the full name of the Committee is ``The Pension Fiduciary Committee of
the Children's Hospital of Philadelphia;'' (2) as of April 29, 2022,
the duration of the Plan's investment in the Interests is 11-17 years,
rather than 7-18 years as stated in the proposed exemption; and (3) the
Foundation's relationship to the Plan Sponsor is that the Foundation
supports the operations and funding of the Plan Sponsor, but the two
entities are not connected on the basis of ownership (and more
specifically, the Foundation does not own the Plan Sponsor).
Department's Response: The Department acknowledges and accepts the
Applicant's factual corrections to the proposed exemption.
The complete application file (D-12048) for this exemption is
available for public inspection in the Public Disclosure Room of the
Employee Benefits Security Administration, Room N-1515, U.S. Department
of Labor, 200 Constitution Avenue NW, Washington, DC 20210. For a more
complete statement of the facts and representations supporting the
Department's decision to grant this exemption, please refer to the
notice of proposed exemption published on March 9, 2022, at 87 FR
13324.
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 ERISA section 408(a) does not relieve a fiduciary or other party
in interest from certain requirements of other ERISA provisions,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
ERISA section 404, which, among other things, require a fiduciary to
discharge their duties respecting the plan prudently and solely in the
interest of the plan's participants and beneficiaries.
(2) As required by ERISA section 408(a), the Department hereby
finds that the exemption is: (a) administratively feasible; (b) in the
interests of the affected plan and its participants and beneficiaries;
and (c) protective of the rights of the plan's participants and
beneficiaries.
(3) This exemption is supplemental to, and not in derogation of,
any other ERISA provisions, 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 determining whether the transaction is in fact a
prohibited transaction.
(4) The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application accurately describe all material terms of the transactions
that are the subject of the exemption.
Accordingly, the Department grants the following exemption under
the authority of ERISA section 408(a) and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011):
Exemption
Section I. Definitions
(a) ``CHOP'' means The Children's Hospital of Philadelphia, the
Plan sponsor of the Children's Hospital of Philadelphia Pension Plan
for Union-Represented Employees.
(b) ``The Foundation'' means the Children's Hospital of
Philadelphia Foundation.
(c) The term ``Independent Appraiser'' means an individual or
entity meeting the definition of a ``Qualified Independent Appraiser''
under Department Regulation 29 CFR 2570.31(i) retained to determine, on
behalf of the Plan, the fair market value of the Interests as of the
date of the Sale and who:
(1) Is not CHOP or the Foundation or an affiliate of CHOP or the
Foundation and does not hold an ownership interest in CHOP, the
Foundation or affiliates of CHOP or the Foundation;
(2) Is independent of and is not related to any party to the
exemption transaction, including CHOP, the Foundation, and the
Independent Fiduciary, as defined below;
(3) Has acknowledged in writing that it has appropriate technical
training or experience to perform the services contemplated by the
exemption;
(4) Has not entered into any agreement or instrument that violates
the prohibitions on exculpatory provisions in ERISA section 410 or the
Department's regulation relating to indemnification of fiduciaries at
29 CFR 2509.75-4;
(5) For purposes of this definition, no organization or individual
may serve as Independent Appraiser for any fiscal year if the gross
income received by such organization or individual from CHOP, the
Foundation, and affiliates of CHOP and the Foundation for that fiscal
year exceeds two percent of such organization's or individual's gross
income from all sources for the prior fiscal year. This provision also
applies to a partnership or corporation of which such organization or
individual is an officer, director, or 10 percent or more partner or
shareholder and includes as gross income amounts received as
compensation for services provided as an independent fiduciary under
any prohibited transaction exemption granted by the Department;
(6) No organization or individual that is an Independent Appraiser
and no partnership or corporation of which such organization or
individual is an officer, director, or ten percent or more partner or
shareholder may acquire any property from, sell any property to, or
borrow any funds from CHOP, the Foundation, or affiliates of CHOP or
the Foundation while the individual serves as an Independent Appraiser.
This prohibition would continue for a period of six months after the
party ceases to be an Independent Appraiser; and
[[Page 71360]]
(7) In the event a successor Independent Appraiser is appointed to
represent the interests of the Plan with respect to the subject
transactions, no time should elapse between the resignation or
termination of the former Independent Appraiser and the appointment of
the successor Independent Appraiser;
(d) The term ``Independent Fiduciary'' means a person who:
(1) Is not CHOP or the Foundation or an affiliate of CHOP or the
Foundation and does not hold an ownership interest in CHOP, the
Foundation or affiliates of CHOP or the Foundation;
(2) Was not a fiduciary with respect to the Plan before its
appointment to serve as the Independent Fiduciary;
(3) Has acknowledged in writing that:
(i) It is a fiduciary and has agreed not to participate in any
decision with respect to any transaction in which it has an interest
that might affect its best judgment as a fiduciary; and
(ii) Has appropriate technical training or experience to perform
the services contemplated by the exemption;
(4) Has not entered into any agreement or instrument that violates
the prohibitions on exculpatory provisions in ERISA section 410 or the
Department's regulation relating to indemnification of fiduciaries at
29 CFR 2509.75-4;
(5) For purposes of this definition, no organization or individual
may serve as Independent Fiduciary for any fiscal year if the gross
income received by such organization or individual from CHOP, the
Foundation, and affiliates of CHOP and the Foundation for that fiscal
year exceeds two percent of such organization's or individual's gross
income from all sources for the prior fiscal year. This provision also
applies to a partnership or corporation of which such organization or
individual is an officer, director, or 10 percent or more partner or
shareholder and includes as gross income amounts received as
compensation for services provided as an independent fiduciary under
any prohibited transaction exemption granted by the Department;
(6) No organization or individual that is an Independent Fiduciary
and no partnership or corporation of which such organization or
individual is an officer, director or ten percent or more partner or
shareholder may acquire or commit to acquire any property from, sell or
commit to sell any property to, borrow or commit to borrow any funds
from, or lend or commit to lend any assets to CHOP, the Foundation, or
affiliates of CHOP or the Foundation while the individual serves as an
Independent Fiduciary. This prohibition would continue for a period of
six months after either: (i) the party ceases to be an Independent
Fiduciary, or (ii) the Independent Fiduciary negotiates on behalf of
the Plan during the period that such organization or the individual
serves as an Independent Fiduciary; and
(7) In the event a successor Independent Fiduciary is appointed to
represent the interests of the Plan with respect to the subject
transactions, no time should elapse between the resignation or
termination of the former Independent Fiduciary and the appointment of
the successor Independent Fiduciary;
(e) The term ``Interests'' means certain private fund limited
partnership interests and one illiquid side pocket portion of an
original hedge fund investment to be sold by the Children's Hospital of
Philadelphia Pension Plan for Union-Represented Employees to the
Foundation. The Interests consist of 18 funds that are spread among 14
managers and have varying durations. The Plan's investment duration in
the Interests ranges from 11-17 years.
(f) The term ``Plan'' means the Children's Hospital of Philadelphia
Pension Plan for Union-Represented Employees.
Section II. Covered Transactions
The restrictions of ERISA sections 406(a)(1)(A) and (D), and
406(b)(1) and (b)(2), and the sanctions resulting from the application
of Code section 4975, by reason of Code sections 4975(c)(1)(A), (D) and
(E) shall not apply to the sale (the Sale) of certain illiquid private
fund interests (the Interest(s)) by the Children's Hospital of
Philadelphia Pension Plan for Union-Represented Employees (the Plan or
the Applicant) to the Children's Hospital of Philadelphia Foundation
(the Foundation) where the Sale price for each Interest is the greater
of: (1) the fair market value of each Interest as of the date of the
Sale, as determined by Newport Trust Company (Newport), based upon a
qualified independent appraisal by SB Advisors LLC (SB Advisors); or
(2) the book value of each Interest, as determined by the general
partner of each Interest as reflected on the most recent valuation
statement of the Interest immediately before the Sale (less any
distributions made from the Interest to the Plan and plus any
contributions made by the Plan to the Interest between the valuation
date and the Sale). In order to receive such relief, the Conditions in
Section III must be met in conformance with the Definitions set forth
in Section I.
Section III. Conditions
(a) The Sale of each Interest is a one-time transaction for cash;
(b) The terms and conditions of the Sale are at least as favorable
to the Plan as those the Plan could obtain in an arm's-length
transaction with an unrelated third party;
(c) The Sale price for each Interest will equal the greater of: (1)
the fair market value of each Interest as of the date of the Sale, as
determined by Newport, based upon a qualified independent appraisal by
SB Advisors; or (2) the book value of each Interest, as determined by
the general partner of each Interest as reflected on the most recent
valuation statement of the Interest immediately before the Sale (less
any distributions made from the Interest to the Plan and plus any
contributions made by the Plan to the Interest between the valuation
date and the Sale).
(d) The Foundation assumes any remaining capital commitments in
connection with the Interests;
(e) The Plan pays no commissions, fees, or other expenses in
connection with the Sale;
(f) The Independent Fiduciary:
(1) Represents the Plan's interests for all purposes with respect
to the Sale;
(2) Determines that the Sale is in the interests of, and protective
of, the Plan and its participants and beneficiaries;
(3) Determines that the Sale price for the Interests is protective
of and in the interests of the Plan;
(4) Reviews and approves the terms and conditions of the Sale;
(5) Independently and prudently engages the Independent Appraiser
for the Sale;
(6) Reviews the Independent Appraisal Report, confirms that the
underlying methodology is reasonable and accurate and that the
Independent Appraiser has reasonably determined the fair market
valuation of the Interests in accordance with professional standards;
(7) Ensures that the Independent Appraiser renders an updated fair
market valuation of the Interests as of the date of the Sale that
includes a separate assessment regarding the likelihood that any
Interest reported as having no value in the appraisal report may
receive trailing distributions. The Independent Appraiser must consider
this likelihood when valuing any Interest and address the extent to
which this likelihood affects the Interest's value in its report;
(8) Determines whether it is prudent for the Plan to proceed with
the Sale;
[[Page 71361]]
(9) Has not and will not enter into any agreement or instrument
that violates ERISA Section 410; \3\
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\3\ ERISA section 410 generally provides that any provision in
an agreement or instrument that purports to relieve a fiduciary for
responsibility or liability for any responsibility, obligation, or
duty under Part I of Title I of ERISA is void against public policy.
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(10) Confirms that each condition of the exemption has been met;
and
(11) Submits a written report to the Department not later than 90
days after the Sale has been completed demonstrating that each
exemption condition has been met. The written report must include the
Independent Fiduciary's determinations regarding whether any Interest
is likely to receive trailing distributions and the extent to which any
anticipated trailing distributions increased the Interest's value.
(g) The Plan does not bear the costs of: (1) the exemption
application; (2) obtaining the exemption; nor (3) the Independent
Fiduciary or Independent Appraiser's fees;
(h) The Foundation receives written consent from each Fund manager
to purchase the Interests from the Plan before engaging in the Sale of
the respective Interests;
(i) The Sale is not part of an agreement, arrangement, or
understanding designed to benefit CHOP or the Foundation; and
(j) All the material facts and representations set forth in the
Summary of Facts and Representations are true and accurate at all
times.
Effective Date: This exemption will become effective on the date
that this grant notice is published in the Federal Register.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2022-25378 Filed 11-21-22; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on November 22, 2022.
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