Advisory Opinion 1999-11A

Re: LaSalle Advisors Capital Management, Inc. (LACM), Identification Number C-09164

Dear Mr. Lawson:

This is in response to your letter requesting an advisory opinion concerning Prohibited Transaction Exemption 84-14 (PTE) (49 FR 9494, Mar. 13, 1984). Your letter concerns whether your client, LaSalle Advisors Limited Partnership (LaSalle Advisors), which previously satisfied the financial requirements of a "qualified professional asset manager" (QPAM) as set forth in section V(a)(4) of PTE 84-14, continues to satisfy those requirements after merging with and into a newly formed corporation.

You represent that in 1988, LaSalle Partners Limited Partnership (LPL) and LaSalle Partners Management Limited Partnership (LPML) (collectively the Partnerships), each a Delaware limited partnership, were formed to provide real estate services to clients including leasing, brokerage, construction and development management, real property asset management and real estate investment management advice. Both of the Partnerships had several subsidiary partnerships engaged in various businesses similar to that performed by LPL and LPML. LaSalle Advisors, a subsidiary of LPL, is a Delaware limited partnership which provides investment advice and asset management services to institutional investors, including pension plans covered by the Employee Retirement Income Security Act of 1974(ERISA). You represent that, from 1989 to 1997 LaSalle Advisors met the definition of a QPAM as defined in section V (a)(4) of PTE 84-14.

You state that in July 1997, LPL and LPML participated in a capital reorganization whereby the partners of LPL and LPML contributed all of their partnership interests therein to LaSalle Partners Incorporated (LPI), a newly formed Maryland corporation. This contribution resulted in LPI holding all of the Partnership's interests in LPL and LPML. Subsequently, LPI created several corporate subsidiaries and caused most of its partnership subsidiaries to assign their assets to or merge with and into newly formed, 100% owned corporate subsidiaries pursuant to Maryland Corporate Law. As a result of the reorganization, LaSalle Advisors was merged with and into its newly formed corporate counterpart, LACM. Prior to this merger, LACM conducted no business and thus had no prior fiscal year.

You state that after the merger, LACM succeeded to 100% of the business of LaSalle Advisors and intends to continue to provide the same investment management and investment advisory services as those provided by LaSalle Advisors.⁽¹⁾ You further indicate that pursuant to the merger, LaSalle Advisors transferred its rights, title and interests in all of its assets, obligations and liabilities (legal or otherwise) to LACM. You explain that the merger of LaSalle Advisors with and into LACM was accounted for in the same manner as a "pooling of interests" pursuant to Generally Accepted Accounting Principles (GAAP). You state that because the merger qualifies for pooling of interests accounting treatment, LACM will incorporate LaSalle Advisors' assets, liabilities, and net worth at the same book values represented on LaSalle Advisors' financial statements. Accordingly, you explain that for GAAP purposes, the financial statements of LACM will incorporate the historical financial statements of LaSalle Advisors, resulting in LACM having a fiscal year for accounting purposes that ended prior to its date of incorporation (i.e., the fiscal year ending December 31, 1996). Additionally, you note that, immediately following the merger, 100% of the employees of LaSalle Advisors became employees of LACM. Finally, you stress that, immediately prior to the merger, 99% of LaSalle Advisors was owned by LPI and was 1% owned by a director of LPI. Since the merger, 100% of the equity interest of LACM has been owned by LPI.

You ask whether LACM may use the prior year of LaSalle Advisors (i.e. the fiscal year ending December 31, 1996) for purposes of satisfying the financial requirements in section V(a)(4) of PTE 84-14. Specifically, you seek an opinion that LACM may reference the prior fiscal year of LaSalle Advisors, in order to meet the condition set forth in section V(a)(4) of PTE 84-14 which requires that an investment advisor meet the financial threshold in the class exemption "as of the last day of its most recent fiscal year."

PTE 84-14 generally provides an exemption from the prohibited transaction restrictions of § 406(a)(1)(A)-(D) of ERISA and from certain excise taxes imposed by section 4975 of the Internal Revenue Code for certain transactions between an employee benefit plan and a party in interest with respect to that plan provided that the plan's assets are managed by a QPAM as defined in the class exemption. Such a QPAM must be unrelated to the parties in interest and must satisfy certain enumerated financial standards. Subsection (a)(4) of Part V of PTE 84-14 provides that an investment advisor registered under the Investment Advisers Act of 1940 may qualify as a QPAM if it has, as of the last day of its most recent fiscal year, total assets under its management and control in excess of $50,000,000, and shareholders' or partners' equity in excess of $750,000.

The preamble to the proposed exemption states that "[t]he minimum capital and funds-under- management standards of the proposed exemption are intended to assure that the eligible fiduciaries managing the accounts or funds...are established institutions which are large enough to discourage the exercise of undue influence upon their decision-making processes by parties in interest." 47 FR 56945, 56947 (Dec. 21, 1982). The Department reiterated this position in the preamble to the final class exemption, where it explained that the premise of the assets-under- management and shareholders' or partners' equity requirements "was that basic financial standards must be required for every entity or person investing plan assets pursuant to the relief provided ... to assure some degree of financial accountability to plans in the event of breaches of fiduciary obligations and to discourage the exercise of undue influence upon the QPAM's decision-making processes." 49 FR 9494, 9502 (Mar. 13, 1984).

According to the documents you submitted, LaSalle Advisors had partners' equity exceeding $750,000 and total client assets in excess of $15.2 billion. As such, you represent that LaSalle Advisors had significant finances to assure accountability in the event of fiduciary breaches and had the assets under management necessary to discourage the exercise of undue influence upon its decision making processes. Because you state that LACM is merely a different business form of its predecessor partnership, LaSalle Advisors, you believe that LACM had the requisite financial strength to assure financial accountability to plans in the event of fiduciary breaches and to deter the exercise of undue influence upon its decision making processes by parties in interest.

The Department is of the view that LACM may use the prior financial year of its predecessor LaSalle Advisors for purposes of determining whether LACM meets the requirements set forth in subsection (a)(4) of Part V of PTE 84-14. This determination is based on your representations that: (1) LaSalle Advisors has met the definition of a QPAM since 1989; (2) LaSalle Advisors transferred its rights, title and interest in all of its assets to LACM, a newly formed corporation, pursuant to the merger; (3) LACM has succeeded to 100% of the business of LaSalle Advisors since the merger; (4) immediately following the merger the employees of LaSalle Advisors became the employees of LACM; and (5) the ownership group of LACM is 99% of that which owned LaSalle Advisors. The Department is not addressing any issues relating to whether LACM meets the other requirements or conditions in PTE 84-14.

This letter constitutes an Advisory Opinion under ERISA Procedure 76-1, and is issued subject to the provisions of the procedure, including section 10 thereof relating to the effect of Advisory Opinions. This opinion relates only to the specific issue addressed herein.