Exemption From Certain Prohibited Transaction Restrictions Involving the Children's Hospital of Philadelphia Pension Plan for Union-Represented Employees Located in Philadelphia, PA, 71358-71361 [2022-25378]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 87, Number 224 (Tuesday, November 22, 2022)]
[Notices]
[Pages 71358-71361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-25378]



[[Page 71358]]

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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

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    (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