Union pension fund loan to an apprenticeship fund

P/OPINION 77-47
                                                             3(14)
                                                             406(b)

                     June 13, 1977


Dear          :

This letter will clarify our letter of April 12, 1977.

On October 22, 1976, you filed on behalf of the (named)
(Local Union # ) Pension Fund (the Pension Fund) an
application for exemption from the prohibitions of section
406 of the Employee Retirement Income Security Act of 1974
(the Act) and from the taxes imposed by section 4975(a)
and (b) of the Internal Revenue Code of 1954 (the Code) by
reason of section 4975(c)(1) of the Code for a transaction
involving the loan of money from the Pension Fund to the
(named) Local Union #   Journeymen – Apprentice Training
Fund (the Training Fund). You submitted additional
information in a letter dated April 1, 1977.

The application states that the Training Fund purchased
improved property for $275,000 for use as a training
facility and executed a mortgage on the property in the
amount of $200,000 to the (named) Savings and Loan
Association (the Association) to secure a first mortgage
loan. The Training Fund proposes to renovate existing
buildings and construct a new classroom and meeting room
building on this property at an estimated cost, including
architect's fees, of $868,000. The Pension Fund proposes
to loan to the Training Fund $1,000,000 secured by a
construction mortgage on the property, for a period of 25
years at an interest rate of 8.5 percent. The trustees of
the Pension Fund will disburse the loan to the Training
Fund in installments upon completion of various stages of
the construction. The application file states that the
trustees of the Pension Fund have tentatively approved the
loan. The application file contains a commitment letter
from the Association which states that upon completion of
construction the land and buildings will be worth
approximately 1 million dollars. The Association proposed
to loan the Training Fund 75 percent of this appraised
value for a term of 10, 15 or 20 years, at an interest
rate of 9 percent.

                          - 2-

P/OPINION 77-47


Your letter of April 1, 1977 states that at the present
time neither fund provides services to the other, and that
Mr. (x), who serves as business manager of the Local
Union, Chairman of the Board of trustees of the Pension
Fund and trustee of the Training Fund, will abstain from
future votes regarding the loan with respect to both
funds. Mr. (x) is the only individual who serves as a
trustee of both funds.

The application file states that the Pension Fund has
assets in excess of 11 million dollars. The Training Fund
has an annual income in excess of $220,000 from employer
contributions pursuant to a 3-year collective bargaining
agreement. Principal and interest on the contemplated
construction loan will amount to $8,052.30 a month, or
$96,627.60 annually. The Training Fund's anticipated cost
of taxes, maintenance, repairs, and salaries for the
operation of the training facility is approximately
$90,000 annually. It is not clear whether this figure
includes payments owed to the Association, the holder of
the first mortgage on the real estate. These payments
amount to approximately $30,000 annually.

     (Confidential, Non-substantive Portion Deleted)
 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 406(a) of the Act provides, in relevant part, that
a fiduciary with respect to a plan shall not cause the
plan to engage in a transaction if he knows or should know
that the transaction constitutes the direct or indirect
lending of money or extension of credit between the plan
and a party in interest or the direct or indirect use of
plan assets by or for the benefit of a party in interest
with respect to the plan. The term "party in interest" is
defined in section 3(14) of the Act. Section 406(b)(2) of
the Act provides that a fiduciary with respect to a plan
shall not in his individual or in any other capacity act
in any transaction involving the plan on behalf of a party
(or represent a party) whose interests are adverse to the
interests of the plan or the interests of its participants
or beneficiaries.

                          - 3-


P/OPINION   77-47

Based on the facts and representations contained in the
application file, it does not appear that the Training
Fund is a party in interest with respect to the Pension
Fund. Accordingly, the loan of money from the Pension
Fund to the Training Fund would not be a prohibited
transaction under section 406(a) of the Act.

However, the proposed transaction may violate section
406(b)(2) of the Act. Whether a violation of section
406(b)(2) occurs depends upon the facts and circumstances.
A violation of section 406(b)(2) will not necessarily
occur solely because an individual who is a fiduciary with
respect to the plan is also a representative of a party
which wishes to encourage in a transaction involving the
plan.

If, throughout the negotiation and duration of the
proposed transaction, neither Mr. (x) nor any of the other
trustees of the Pension Fund or the Training Fund
represent interests adverse to those of the respective
plans and their respective participants and beneficiaries,
then the proposed loan would not be a prohibited
transaction under section 406(b)(2) of the Act, and no
administrative exemption under section 408(a) of the Act
would be necessary. The determination as to whether the
proposed transaction violates section 406(b)(2) must be
made by plan fiduciaries in light of all the relevant
facts and circumstances. Mr. (x)'s decision to abstain
from further voting with respect to the proposed loan is
merely one factor which should be considered in
determining whether the proposed transaction violates
section 406(b)(2). Whether Mr. (x) was involved in the
deliberations leading up to the decision to approve the
loan would be another. If plan fiduciaries determine that
the proposed loan would not be a prohibited transaction,
they may withdraw their request for an exemption. If the
request for an exemption is not withdrawn, the Department
will continue to consider the application under section
408(a) of the Act.

                          - 4-


P/OPINION 77-47

You should note that our response relates only to the
application of section 406 of the Act to the proposed
transaction. It does not deal with the application of any
other provision of the Act, or the provisions of any other
statute, to the proposed transaction.

Specifically, our response does not deal with the
application of the fiduciary duties set forth in section
404(a)(l) of the Act.

Sincerely,