[Federal Register Volume 60, Number 19 (Monday, January 30, 1995)]
[Notices]
[Pages 5700-5731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2081]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09469, et al.]
Proposed Exemptions; Financial Institutions Retirement Fund, et
al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (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
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request 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 request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue NW., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue NW., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions 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 exemptions were requested in
applications 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 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Financial Institutions Retirement Fund (the Fund) and Financial
Institutions Thrift Plan (the Thrift Plan) Located in White Plains, New
York
[Application No. D-09469]
Proposed Exemption
Section I. Covered Transactions
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). If the exemption
is granted the restrictions of sections 406(a) and 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) through
(E) of the Code, shall not apply to the provision of certain services,
and the receipt of compensation for such services, by Pentegra
Services, Inc. (Pentegra), a wholly-owned, for-profit subsidiary
corporation of the Fund, to employee benefit plans (the Plans) and to
their sponsoring employers (the Employers) that participate in the Fund
and the Thrift Plan; provided that the following conditions are met:
[[Page 5701]]
(a) A qualified, independent fiduciary of the Fund determines that
the services provided by Pentegra are in the best interests of the Fund
and are protective of the rights of the participants and beneficiaries
of the Fund;
(b) At the time the transactions are entered into, the terms of the
transactions are not less favorable to Pentegra than the terms
generally available in comparable arm's-length transactions between
unrelated parties;
(c) Pentegra receives reasonable compensation for the provision of
its services, as determined by the independent fiduciary;
(d) Prior to the offering of services, the independent fiduciary
will initially review the services to be provided by Pentegra and will
determine that such services are reasonable and appropriate for
Pentegra, taking into account such factors as: whether Pentegra has the
capability to perform such services, whether the fees to be charged
reflect arm's length terms, whether Pentegra personnel have the
qualifications to provide such services, and whether such arrangements
are reasonable based upon a comparison with similarly qualified firms
in the same or similar locales in which Pentegra proposes to operate;
(e) No services will be provided by Pentegra without the prior
review and approval of the independent fiduciary;
(f) Not less frequently than quarterly, the independent fiduciary
will perform periodic reviews to ensure that the services offered by
Pentegra remain appropriate for Pentegra and that the fees charged by
Pentegra represent reasonable compensation for such services;
(g) Not less frequently than annually, Pentegra will provide a
written report to the board of directors of the Fund describing in
detail the services it provided to employee benefit plans and/or their
sponsoring employers that participated in the Fund and the Thrift Plan,
a detailed accounting of the fees received for such services, and an
estimate of the fees Pentegra anticipates it will receive during the
following year from such plans and their sponsoring employers;
(h) Not less frequently than annually, the independent fiduciary
will conduct a detailed review of approximately 10 percent of all
completed transactions, which will include a reasonable cross-section
of all services performed; such transactions will be reviewed for
compliance with the terms and conditions of this exemption;
(i) Pentegra's financial statements will be audited each year by an
independent certified public accountant, and such audited statements
will be reviewed by the independent fiduciary;
(j) The independent fiduciary shall have the authority to prohibit
Pentegra from performing services that such fiduciary deems
inappropriate and not in the best interests of Pentegra and the Fund;
and
(k) Each Pentegra contract with a Fund or Thrift Plan employer, or
a plan of such employer, will be subject to termination without penalty
by Pentegra for any reason upon not more than 90 days written notice to
such employer or plan.
Section II. Recordkeeping
(1). The independent fiduciary and the Fund will maintain, or cause
to be maintained, for a period of 6 years, the records necessary to
enable the persons described in paragraph (2) of this Section II to
determine whether the conditions of this exemption have been met,
except that (a) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the independent
fiduciary and the Fund or their agents, the records are lost or
destroyed before the end of the six year period, and (b) no party in
interest other than the independent fiduciary and the Board of
Directors of the Fund shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by
section 4975 (a) and (b) of the Code, if the records are not
maintained, or are not available for examination as required by
paragraph (2) below.
(2)(a). Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (1) of this
Section II shall be unconditionally available at their customary
location during normal business hours by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(2) Any employer participating in the Fund or any duly authorized
employee or representative of such employer; and
(3) Any participant or beneficiary of the Fund or any duly
authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (a)(2) and
(a)(3) of this paragraph (2) shall be authorized to examine trade
secrets of the independent fiduciary, the Fund, or their affiliates, or
commercial or financial information which is privileged or
confidential.
(3) For purposes of this Section II, references to the Fund shall
also include Pentegra.
Summary of Facts and Representations
1. The Fund is a multiple employer, defined benefit pension plan
which is intended to meet the requirements for qualification under
section 401(a) of the Code and as an employee pension benefit plan
within the meaning of section 3(2) of the Act. The applicant further
represents that because all of the assets of the Fund are available to
pay all benefits accrued under its retirement program, the Fund is
considered to be a single plan under the Code and regulations
thereunder.
The Fund was established in 1943 to provide a means by which the
Federal Home Loan Banks and various financial institutions could
cooperate in providing retirement benefits for their employees. The
applicant represents that the Fund is currently the largest provider of
pension benefits in the thrift industry with 12 Federal Home Loan
Banks, hundreds of individual thrift institutions, and various other
companies which directly service the thrift industry that have chosen
to participate in the Fund. As of March 31, 1994, the Fund had total
assets of approximately $1.36 billion, 355 participating employers, and
36,714 individual plan participants. As of July 1, 1993, the applicant
represents that the fair market value of the assets of the Fund exceed
its liabilities for projected accrued benefits by approximately $420
million.
The named fiduciaries of the Fund and the Thrift Plan are their
respective boards of directors. The President of both the Fund and
Thrift Plan is also, for both the Fund and Thrift Plan, the chief
administrative officer, a member ex officio of the board of directors,
and pursuant to the Act, the ``plan administrator''. The Fund has
another 13 individuals that are members of its board of directors, most
of whom are presidents of various employers that participate in the
Fund, and one individual who is the Regional Director for the Northeast
Region of the Office of Thrift Supervision.
The Thrift Plan is a multiple employer, defined contribution plan
that was established in 1970. As of March 31, 1994, the Thrift Plan had
total assets of $315,845,510, 196 participating employers, and 16,897
individual plan participants. It was created to encourage employers
participating in the Fund to continue their participation by providing
them with the convenience of a defined contribution plan which is
administered [[Page 5702]] by the same personnel at the same facilities
as the Fund. The Thrift Plan has a board of directors which, in
addition to the President of the Thrift Plan, consists of 6 individuals
who are presidents of various employers that participate in the Thrift
Plan.
2. The Fund proposes to create a wholly-owned, for-profit
subsidiary corporation designated as Pentegra Services, Inc.
(Pentegra), a Delaware corporation, in order to externalize the
services the Fund performs for employee benefit plans (the Plans) and
their sponsoring employers (the Employers) in a way that will enhance
the value of the assets of the Fund. The applicant represents that
research indicates that, if the Fund does not expand its employee
benefit services to gain new clients, it is facing the problem of
increased costs of plan administration on a per participant basis
because of the consolidation and contraction of many companies which
occurred in recent years in the thrift industry. The intention of the
Fund is to have Pentegra, on a cost effective basis, expand its current
services and activities by providing various ministerial or fiduciary
services to Plans and their Employers, which may or may not participate
in the Fund or in the Thrift Plan. The applicant represents that the
creation of Pentegra will enable the Fund to develop new products and
services for employers outside of the banking industry that not only
will enhance revenues but will increase significantly the experience
and resources of the Fund and enable the Fund to attract and retain a
highly qualified staff of employees.
The applicant represents that Pentegra will report not less
frequently than annually to the board of directors of the Fund, a
detailed description of the services it provided to employee benefit
plans and/or to their sponsoring employers that participate in the Fund
and the Thrift Plan. Also, the report by Pentegra will give a detailed
account of the fees received for such services and will estimate the
amount of fees it anticipates receiving in the following year from the
plans and/or their sponsoring employers. Further, Pentegra's financial
statements will be audited annually by an independent certified public
accountant and such audited statements will be reviewed by Pentegra's
independent fiduciary (see below).
The services that Pentegra is proposing to provide to tax-qualified
defined benefit and defined contribution plans and to their sponsoring
employers include:
(a) Preparation of plan documents and summary plan descriptions.
(b) Procurement of favorable determination letters with respect to
the tax qualification of the plans from the Internal Revenue Service.
(c) Maintenance of books of account for plans and each participant,
disclosing, among other things, accrued benefits and account balances.
(d) Performance of plan administration functions involving
preparation of employee statements, calculation and payment of
benefits, preparation of investment performance data, top-heavy
testing, and administration of plan participant loans and hardship
withdrawals.
(e) Performance of functions necessary for maintaining compliance
with applicable provisions of the Code; such as, the special
nondiscrimination testing, testing for compliance with the annual
limitations on contributions and benefits, and testing for compliance
with minimum coverage and participation requirements.
(f) Assist in the preparation of annual reports and participant
benefit statements as required by the Act and Code.
(g) Provide consulting services to its clients, including employers
participating in the Fund or Thrift Plan, with respect to tax-qualified
retirement plans.
Pentegra is represented by the applicant to have intentions of
offering similar services with regard to nonqualified compensation
plans or arrangements as will be offered with regard to tax-qualified
retirement plans. The nonqualified plans will be excess benefit plans,
supplemental executive retirement plans, salary continuation plans,
elective deferred compensation plans, and various types of equity-based
compensation arrangements, such as stock options, stock appreciation
rights, and phantom stock.
Accordingly, with respect to such nonqualified plans and
arrangements, Pentegra intends to perform for its clients, including
employers participating in the Fund or the Thrift Plan, the following
enumerated services:
(a) Preparation of appropriate plan documents and, as applicable,
summary plan descriptions.
(b) Assist employers in obtaining various rulings from governmental
authorities; e.g., IRS private letter rulings.
(c) Maintenance of books of account for plans and for each
participant in the plan.
(d) Performance of various administration functions, such as
benefit calculations, testing for compliance with tax withholding
requirements, and making determinations of eligibility for benefits and
payment options.
(e) Assist in preparation of annual reports of plans and
participant benefit statements.
(f) Provide consulting services to clients, including Fund and
Thrift Plan sponsoring employers, with respect to nonqualified plans.
3. The Fund is contracting with Ernst & Young, a New York
partnership, to employ its division of Actuarial, Benefits, and
Compensation Consulting Services (ABC) to be the independent fiduciary
with respect to the services Pentegra will render to Employers that
participate in the Fund or the Thrift Plan and to the Plans sponsored
by the Employers.
Ernst & Young represents that it is an international professional
services firm performing as independent auditors and business advisers
to a broad range of companies engaged in various business activities,
including companies engaged in regulated industries, such as banking,
insurance, and utilities. Its clientele includes companies required to
comply with the Act. In addition, Ernst & Young states that as
auditors, it has numerous policies, practices, and systems in place to
ensure that it remains independent from its clients.1 Ernst &
Young has 600 locations worldwide with 20,000 employees that generated
domestic revenues for fiscal 1993 of $2.3 billion and global revenues
that exceeded $5 billion. They further represent that including its
undertaking as independent fiduciary for the Fund, it will not receive
revenues from the Fund and the Thrift Plan that exceed one percent of
its gross receipts from all sources for any fiscal year.
\1\Since Ernst & Young is serving as independent fiduciary for
Pentegra, Ernst & Young will not be engaged as Pentegra's
independent certified public accountant.
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The practice of ABC provides a variety of services related to
qualified and nonqualified retirement programs, including defined
benefit and defined contribution arrangements, and welfare benefit and
executive compensation programs. It also deals with benefits, tax, and
regulatory issues, actuarial matters, and employee communications. ABC
has more than 350 professionals located nationwide, comprised of
attorneys, accountants, actuaries, plan administrators, and
consultants. ABC is familiar with the types of services that Pentegra
proposes to provide to both qualified and nonqualified plans because of
its having performed all of those services for its own clients. ABC
[[Page 5703]] has also performed surveys that are regularly used to
advise employers and their employee benefit plans on implementing and
improving their recordkeeping procedures, benefit valuations, and
compliance systems. Ernst & Young concludes that the past experience of
ABC will enable it to discern which services that may be performed by
Pentegra are appropriate and in the best interests of the Fund and
whether or not the fees for the services constitute reasonable
compensation.
Following the initial review of the services to be provided by
Pentegra, ABC will perform periodic reviews (at fixed intervals, at
least quarterly as well as spot checks) to ensure that the services
offered remain appropriate for the Fund. ABC not only will determine
whether the services are beneficial for the Fund, but will also
determine whether the fees charged by Pentegra represent reasonable
compensation. ABC will use its own service and pricing structure
experience as well as comparisons to similarly qualified firms in
similar locales to determine if fees charged by Pentegra are those that
would be charged in arm's-length transactions. Pentegra will establish
written schedules for fees for different services it will provide that
will be subject to review and approval or disapproval by ABC. An annual
detailed review of approximately 10 percent of all completed service
transactions undertaken by Pentegra will be made by ABC, selecting a
reasonable cross-section of all the different services performed.
Ernst & Young represents that ABC will take an active role in
determining whether the services performed by Pentegra are economically
pragmatic for the Fund and whether the services are in the best
interests of the Fund and its participants and beneficiaries. ABC also
will determine whether the services performed by Pentegra will enhance
the services and product availability as well as afford economies of
scale for the Fund and its respective programs.
An initial review by ABC of the services to be performed by
Pentegra and the fees to be charged will involve an in-depth analysis
of each service proposed by Pentegra and the fees to be charged to
determine whether such services are reasonable and appropriate for
Pentegra to perform and whether the fees represent reasonable
compensation. ABC will review the qualifications of the personnel who
will perform the services, interview selected individuals, review
documentation and processes to assess administrative practices,
systems, and controls employed by Pentegra as well as evaluate the
overall capabilities of Pentegra to deliver the proposed services. ABC
will also assess the proposed pricing structure of Pentegra for
reasonableness in relation to the market. No services will be rendered
by Pentegra without prior review and approval by ABC.
As part of the initial review, ABC will explore with Pentegra the
standardization of certain services by Pentegra to determine whether
the services could have uniform pricing and marketing. If such
standardization of services and fees by Pentegra are reasonable and
competitive, then ABC would not need to approve every transaction
involving such previously approved standardized service.
ABC will maintain for a period of 6 years records that document its
determinations as to the services to be rendered and fees charged by
Pentegra, and records of the process and rationale used by ABC to make
its determinations. Such records will include the initial
determinations as well as ABC's periodic and annual reviews and
decisions for approving and disapproving the services and fees of
Pentegra.
Ernst & Young further represents that ABC will take action to
prohibit Pentegra from performing services that ABC deems inappropriate
and not in the best interests of the Fund and its participants and
beneficiaries. When ABC undertakes to prohibit Pentegra from offering a
service, it will inform the President and Senior Vice President--Legal
& Secretary of the Fund by facsimile and overnight mail to cease
providing the service. Should such service continue, overnight letters
containing ABC's findings and orders will be sent to each member of
Pentegra's and the Fund's board of directors.
4. The applicant represents that the proposed transactions will
permit Pentegra to operate in a for-profit environment and to develop
new products and services which will inevitably inure to the benefit of
Fund and its Employers by way of enhanced services and the attainment
of greater expertise by the staff. Also, the applicant foresees that
the proposed provision of services by Pentegra will expand the economic
value of the Fund's plan administration services and create significant
increased returns for such services. The applicant further represents
that the potential returns to be derived from the use of the
administration services provided by Pentegra will serve to maintain the
present positive economies of scale available under the Fund, and thus
facilitate both significant Employer participation in the Fund and its
continuing viability as a retirement benefit program, and thereby
provide substantial benefits to individual participants and their
beneficiaries.
Under the proposed transactions, the applicant represents that the
rights of the participants and beneficiaries of the Fund will be
protected. The staff of the Fund, in conjunction with a market research
firm, has made a study of the current and projected market in which the
Fund operates, and the staff performed an analysis of its services and
the feasibility of offering its services to third-party employers. A
special committee of the board of directors of the Fund reviewed in
detail the findings of the staff of the Fund and an independent
financial advisor (the Deloitte & Touche Valuation Group) provided an
opinion as to the fairness of the proposed transactions from a
financial perspective.
With respect to the setting of compensation for Fund and Pentegra
employees, the applicant represents that on an annual basis the
President and the human resources officer of the Fund draft a proposed
salary budget for the Fund (including Pentegra), taking into account
input from various management levels, and also, making an analysis of
each described position, determining the relative worth and fair market
value of each position, and reviewing the performance of each employee.
The proposed annual salary budget is then presented by the
President of the Fund to the personnel committee of the board of
directors of the Fund, which reports directly to the board of directors
of the Fund on major personnel policies, including compensation
matters. The personnel committee typically enters into executive
session (without the President of the Fund in attendance) when it
deliberates over the proposed salary budget and presents its
recommendations to the board of directors of the Fund. The board of
directors then makes the final decision regarding salary levels.
The personnel committee consists of 5 presidents of different
financial institutions that participate in the Fund. No employees or
officers of the Fund, Pentegra, or the Thrift Plan are members of the
personnel committee. The applicant represents that, as a result of the
make-up of the committee and the board of directors, there is assurance
that compensation levels are appropriate and in accordance with the
board of directors duty as fiduciaries of the Fund to act in the best
interests of the participants and beneficiaries of the Fund.
[[Page 5704]]
In addition, the applicant represents that if an employer
participating in the Fund and/or the Thrift Plan is considering
retaining Pentegra to provide services and an officer of such employer
is also a member of either the board of directors of the Fund, the
Thrift Plan, or Pentegra, such individual shall refrain from any
discussions or considerations by such board of directors with respect
to the provision of services by Pentegra.
The applicant represents that in the event a situation arises which
could lead to a conclusion that there may be a conflict of interest or
the appearance of a conflict of interest in the context described above
involving a person who is a member of the Board of the Fund, the Thrift
Plan, or Pentegra, the following procedures will be followed:
(a) The person shall disclose the facts of the situation to the
Chairperson of the Board of which the person is a member;
(b) The person shall not participate in any formal or informal
discussion of, or participate in any decision, or vote on the specific
contract, relationship, person, or organization with respect to which
the conflict or appearance of conflict may arise. However, such person
may be counted to establish a quorum for meetings;
(c) The person will leave the meeting to allow the remaining
members to engage in a free and frank discussion regarding the
contract, relationship, individual, or organization with respect to
which the conflict or appearance of conflict may arise and not return
to the meeting until called by the Chairperson of the Board; and
(d) The minutes of the affected Board shall record the absence of
the person from the discussions, deliberations, and decisions of the
Board with respect to the contract, relationship, individual, or
organization in question. If a vote is taken, the person affected will
not vote, and the minutes of the meeting will record that fact.
The applicant represents that the terms of any transactions between
Pentegra and employers who participate in the Fund or Thrift Plan will
be at least as favorable to Pentegra as the terms available in arm's-
length transactions between Pentegra and employers who do not
participate in the Fund or the Thrift Plan. It is represented by the
applicant that all arrangements between Pentegra and a Fund or Thrift
Plan employer, or its plan, for the provision of services, will be in
writing and will be terminable by Pentegra without penalty to Pentegra
upon not more than 90 days written notice to such an employer or its
plan. Further, such plans and employers may terminate their contracts
with Pentegra without penalty upon not more than 90 days written notice
to Pentegra.
The applicant represents that Pentegra will report not less than
annually to the board of directors of the Fund a detailed description
of the services it provided to employee benefit plans and/or to their
sponsoring employers that participate in the Fund and the Thrift Plan.
Also, the report by Pentegra will give a detailed account of the fees
received for such services and will estimate the amount of fees it
anticipates receiving in the following year from the such plans and/or
their sponsoring employers.
5. In summary, the applicant represent that the proposed
transactions will satisfy the criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because (a) the terms for the proposed
services between Pentegra and employers that participate in the Fund or
the Thrift Plan will be as favorable to Pentegra as are the terms
available in arm's-length transactions between Pentegra and employers
which do not participate in the Fund or the Thrift Plan; (b) Pentegra
will be able to terminate without penalty its services to plans
sponsored by employers which participate in the Fund or the Thrift Plan
on reasonably short notice under the particular circumstances; (c) an
independent fiduciary will determine that Pentegra receives reasonable
compensation for the provision of its services; and (d) the independent
fiduciary has the authority to prohibit Pentegra from performing
services that such fiduciary deems inappropriate and not in the best
interests of the Fund.
FOR FURTHER INFORMATION CONTACT: Mr. C. E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Mellon Bank, N.A., Located in Pittsburgh, Pennsylvania
[Application No. D-09523]
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, August 10, 1990).
Section I--Exemption for In-Kind Transfer of CIF Assets
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (F) of the Code, shall not apply, as of November 5, 1993, to
the in-kind transfer of assets of plans for which Mellon Bank, N.A. or
any of its affiliates (Mellon) acts as a fiduciary (the Client Plans),
other than plans established or maintained by Mellon, that are held in
certain collective investment funds maintained by Mellon (CIFs), in
exchange for shares of the Laurel Funds [a/k/a Dreyfus or Premier
Funds] (the Funds),\2\ open-end investment companies registered under
the Investment Company Act of 1940 (the 1940 Act), in situations where
Mellon acts as investment advisor for the Fund as well as custodian,
dividend disbursing agent, shareholder servicing agent, transfer agent,
and/or Fund accountant, or provides some other ``secondary service'' to
the Funds as defined in Section V(h), in connection with the
termination or partial termination of such CIFs, provided that the
following conditions and the general conditions of Section IV are met:
\2\The applicant represents that effective October 1994, the
Laurel Funds changed their name to either ``Dreyfus'' or ``Premier''
as a result of Mellon's acquisition of the Dreyfus Corporation, the
sponsor of the Dreyfus Funds.
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(a) No sales commissions or other fees are paid by the Client Plans
in connection with the purchase of Fund shares through the in-kind
transfer of CIF assets and no redemption fees are paid in connection
with the sale of such shares by the Client Plans to the Funds.
(b) Each Client Plan receives shares of a Fund which have a total
net asset value that is equal to the value of the Client Plan's pro
rata share of the assets of the CIF on the date of the in-kind
transfer, based on the current market value of the CIF's assets as
determined in a single valuation performed in the same manner at the
close of the same business day using independent sources in accordance
with Rule 17a-7 of the Securities and Exchange Commission under the
1940 Act (see 17 CFR 270.17a-7) and the procedures established by the
Funds pursuant to Rule 17a-7 for the valuation of such assets. Such
procedures must require that all securities for which a current market
price cannot be obtained by reference to the last sale price for
transactions reported on a recognized securities exchange or NASDAQ be
valued based on an average of the highest current independent bid and
lowest current independent offer, as of the close of business on the
Friday preceding the weekend of the CIF transfers (or, in the case of
any weekday CIF transfers, the day of the transfer), determined on the
basis of reasonable inquiry from at least three sources that are
broker-dealers or pricing services independent of Mellon.
[[Page 5705]]
(c) All or a pro rata portion of the assets of a Client Plan held
in a CIF are transferred in-kind to the Funds in exchange for shares of
such Funds.
(d) A second fiduciary which is independent of and unrelated to
Mellon (the Second Fiduciary) receives advance written notice of the
in-kind transfer of assets of the CIFs and full written disclosure of
information concerning the Funds (including a current prospectus for
each of the Funds and a statement describing the fee structure) and, on
the basis of such information, authorizes in writing the in-kind
transfer of the Client Plan's assets to a corresponding Fund in
exchange for shares of the Fund.
(e) For all transfers of CIF assets to a Fund following the
publication of this proposed exemption in the Federal Register, Mellon
sends by regular mail to each affected Client Plan the following
information:
(1) Within 30 days after completion of the transaction, a written
confirmation containing:
(i) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(ii) The price of each such security involved in the transaction;
(iii) The identity of each pricing service or market maker
consulted in determining the value of such securities; and
(2) Within 90 days after completion of each transfer, a written
confirmation that contains:
(i) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(ii) The number of shares in the Funds that are held by the Client
Plan immediately following the transfer, the related per share net
asset value, and the total dollar amount of such shares.
(f) The conditions set forth in paragraphs (e), (f) and (n) of
Section II below are satisfied.
Section II--Exemption for Receipt of Fees
If the exemption is granted, the restrictions of section 406(a) and
406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1) (A) through
(F) of the Code, shall not apply, as of November 5, 1993, to the
receipt of fees by Mellon from the Funds for acting as an investment
advisor for the Funds as well as for providing other services to the
Funds which are ``secondary services'' as defined in Section V(h), in
connection with the investment by the Client Plans in shares of the
Funds, provided that the following conditions and the general
conditions of Section IV are met:
(a) Each Client Plan receives a cash credit of such Plan's
proportionate share of all fees charged to the Funds by Mellon for
investment advisory services and ``secondary services'', including any
investment advisory fees paid by Mellon to third party sub-advisers, no
later than the same day as the receipt of such fees by Mellon. The
crediting of all such fees to the Client Plans by Mellon is audited by
an independent accounting firm on at least an annual basis to verify
the proper crediting of the fees to each Client Plan.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section V(e), and is the same price which would have been
paid or received for the shares by any other investor at that time.
(c) Neither Mellon nor an affiliate, including any officer or
director of Mellon, purchases or sells shares of the Funds from or to
any Client Plan.
(d) No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds and no redemption fees
are paid in connection with the sale of shares by the Client Plans to
the Funds.
(e) The combined total of all fees received by Mellon for the
provision of services to a Client Plan, and in connection with the
provision of services to the Funds in which the Client Plan may invest,
are not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.
(f) Mellon does not receive any fees payable pursuant to Rule 12b-1
under the 1940 Act in connection with the transactions.
(g) The Client Plans are not employee benefit plans sponsored or
maintained by Mellon.
(h) The Second Fiduciary receives full and detailed written
disclosure of information concerning the Funds (including a current
prospectus for each of the Funds and a statement describing the fee
structure) in advance of any investment by the Client Plan in a Fund.
(i) On the basis of the information described above in paragraph
(h), the Second Fiduciary authorizes in writing the investment of
assets of the Client Plan in each particular Fund and the fees to be
paid by such Funds to Mellon.
(j) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to Mellon are subject to an
annual reauthorization wherein any such prior authorization referred to
in paragraph (i) shall be terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by Mellon of written
notice of termination. A form expressly providing an election to
terminate the authorization described in paragraph (i) above (the
Termination Form) with instructions on the use of the form must be
supplied to the Second Fiduciary no less than annually. The
instructions for the Termination Form must include the following
information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by Mellon of written
notice from the Second Fiduciary; and
(2) Failure to return the Termination Form will result in continued
authorization of Mellon to engage in the transactions described in
paragraph (i) on behalf of the Client Plan.
(k) The Second Fiduciary of each Client Plan invested in a
particular Fund receives full written disclosure in a Fund prospectus
or otherwise of any increases in the rates of fees charged by Mellon to
the Funds for investment advisory services or other services (i.e.
``secondary services'') even though such fees will be credited to the
Client Plan as required by paragraph (a) above.
(l) On an annual basis, Mellon provides the Second Fiduciary of a
Client Plan investing in the Funds with:
(1) A copy of the current prospectus for the Funds and, upon such
fiduciary's request, a copy of the Statement of Additional Information
for such Funds which contains a description of all fees paid by the
Funds to Mellon;
(2) A copy of the annual financial disclosure report prepared by
Mellon which includes information about the Fund portfolios as well as
audit findings of an independent auditor within 60 days of the
preparation of the report; and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
(m) With respect to each of the Funds in which a Client Plan
invests, in the event such Fund places brokerage transactions with
Mellon or an affiliate, Mellon will provide the Second Fiduciary of
such Client Plan at least annually with a statement specifying:
(1) The total, expressed in dollars, brokerage commissions of each
Fund's portfolio that are paid to Mellon or an affiliate by such Fund;
(2) The total, expressed in dollars, of brokerage commissions of
each Fund's portfolio that are paid by such Fund to brokerage firms
unrelated to Mellon; [[Page 5706]]
(3) The average brokerage commissions per share, expressed as cents
per share, paid to Mellon or an affiliate by each Fund portfolio; and
(4) The average brokerage commissions per share, expressed as cents
per share, paid by each Fund portfolio to brokerage firms unrelated to
Mellon.
(n) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Client Plans than dealings with other
shareholders of the Funds.
Section III--Exemption for Transfers of Client Plan Securities from
Individual Portfolios
The restrictions of sections 406(a) and 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1) (A) through (F) of the Code, shall not
apply to an exchange (the Exchange) by a Client Plan of securities for
shares of the Funds (other than an exchange covered by Section I
above), and to the receipt of fees by Mellon from the Funds for acting
as investment adviser for the Funds as well as providing other services
to the Funds which are ``secondary services'' as defined in Section
V(h), in connection with such an investment by a Client Plan in the
Funds, provided that the following conditions and the general
conditions in Section IV are met:
(a) The terms of the transaction are at least as favorable to the
Client Plan as those obtainable in an arm's-length transaction between
unrelated parties.
(b) Each Exchange is a one-time transaction between a Client Plan
and the Fund.
(c) All or a pro rata portion of the assets of a Client Plan held
by Mellon in an investment account or portfolio that is selected by the
Second Fiduciary of such Client Plan for an Exchange are transferred
in-kind to the Funds in exchange for shares of such Funds.
(d) No sales commission or dealer mark-up is paid by the Client
Plan in connection with the transaction.
(e) The Exchange meets the requirements of the particular Fund for
an in-kind purchase of shares of the Fund.
(f) One of the following conditions is met:
(1) The Client Plan receives a cash credit of such Plan's
proportionate share of all fees (including all investment advisory fees
and all secondary service fees) charged to the Funds by Mellon, less
any fees paid by Mellon to parties unrelated to Mellon for services
other than investment advisory services provided to the Funds, no later
than the same day as the receipt of such fees by Mellon;
(2) The assets of the Client Plan invested in the Funds are
excluded from the assets on which the investment management fees paid
by the Client Plan to Mellon are determined; or
(3) The Client Plan pays an investment management fee to Mellon
based on total Plan assets from which a credit is subtracted
representing only the Client Plan's pro rata share of the investment
advisory fees paid by the Funds to Mellon.
(g) For purposes of the Exchange, the price of securities is
established as of the close of business on the date for the Exchange
specified in the written authorization by the Second Fiduciary, as
follows:
(1) If the security is described in subparagraphs (b) (1) through
(3) of Rule 17a-7 under the 1940 Act (see 17 CFR 270. 17a-7(b) (1)-
(3)), in accordance with the valuation procedures described in those
paragraphs; or
(2) If the security is not described in paragraph (g)(1) above, by
the recognized, independent pricing service or services disclosed to
the Second Fiduciary described in paragraph (j) below prior to its
written authorization of the Exchange. If no price is available from a
recognized, independent pricing service for such date, or from a
sufficient number of pricing services if more than one is to be used,
Mellon will determine the price by averaging the mean of the closing
bid and asked quotation for each of two or more recognized, independent
market markers and/or pricing services for such securities on that
date.
(h) For purposes of the Exchange, the price paid or received by a
Client Plan for Fund shares is the net asset value per share at the
time of the transaction, as defined in Section V(e), and Mellon
determines the value of the securities exchanged and the net asset
value of the Funds as of the close of business on the same day.
(i) Within 30 days after the authorization of the Exchange, the
Second Fiduciary receives a written confirmation that reflects the
price of each of the securities involved in the Exchange. For those
securities described in paragraph (g)(2) above, the confirmation will
include a written disclosure of the identity of the pricing service or
market markers consulted in determining the value of the securities.
(j) The Second Fiduciary acting for the Client Plan--
(1) Receives advance written disclosure of information concerning
the Funds (including current prospectuses for the Funds and a statement
describing the fee structure to be used to comply with paragraph (f)
above) and, prior to the Exchange, receives in writing (A) the reasons
why Mellon may consider such Exchanges to be appropriate for the Client
Plan and a list of the securities held by the Client Plan that would be
accepted by one or more Funds with respect to the Exchange, (B) the
date the Exchange is to occur, and (C) an explanation of the procedures
that would be followed for valuing the securities for purposes of the
Exchange, including the identity of the recognized, independent pricing
service or services that will value any of the securities described in
paragraph (g)(2) above; and
(2) On the basis of such information, authorizes in writing the
investment of assets of the Client Plan in the Funds through the
Exchange and the fees to be paid by the Funds to Mellon.
(k) The authorization referred to in paragraph (j) is terminable at
will by the Client Plan, without penalty to the Client Plan, upon
receipt by Mellon of written notice of termination. A Termination Form
expressly providing an election to terminate the authorization
described in paragraph (j) with instructions on the use of the form
must be supplied to the Second Fiduciary no less than annually. The
instructions for the Termination Form must include the following
information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by Mellon of written
notice from the Second Fiduciary; and
(2) Failure to return the form will result in continued
authorization of the investment by the Client Plan in the Funds and the
payment of fees by the Funds to Mellon.
(l) If the fee structure described in paragraph (f)(2) or (f)(3)
above is followed, the Second Fiduciary is notified of any change in
any of the rates of the fees payable to Mellon for investment advisory
services or secondary services, that had been disclosed to the Second
Fiduciary as described in paragraph (j) above, at least 30 days prior
to the effective date of such change, and approves in writing the
continued holding of any Fund shares acquired by the Client Plan prior
to such change which are still held by the Plan. Such approval may be
limited solely to the investment advisory and other fees paid by the
Funds in relation to the fees paid by the Client Plan and need not
relate to any other aspect of such investment.
(m) The conditions set forth in paragraphs (c), (e), (f), (g), (l),
(m), and (n) of Section II above are satisfied. [[Page 5707]]
Section IV--General Conditions
(a) Mellon maintains for a period of six years the records
necessary to enable the persons described below in paragraph (b) to
determine whether the conditions of this exemption have been met,
except that (1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Mellon, the
records are lost or destroyed prior to the end of the six-year period,
and (2) no party in interest other than Mellon shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act or
to the taxes imposed by section 4975 (a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b) (1) Except as provided below in paragraph (b)(2) and
notwithstanding any provisions of section 504(a)(2) of the Act, the
records referred to in paragraph (a) are unconditionally available at
their customary location for examination during normal business hours
by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1) (ii) and
(iii) shall be authorized to examine trade secrets of Mellon, or
commercial or financial information which is privileged or
confidential.
Section V--Definitions
For purposes of this proposed exemption:
(a) The term ``Mellon'' means the Mellon Bank, N.A. and any
affiliate thereof as defined below in paragraph (b) of this section.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' shall include the Laurel Funds,
Inc. [a/k/a the Dreyfus Funds or the Premier Funds], or any other
diversified open-end investment company or companies registered under
the 1940 Act for which Mellon serves as an investment adviser and may
also serve as a custodian, dividend disbursing agent, shareholder
servicing agent, transfer agent, Fund accountant, or provide some other
``secondary service'' (as defined below in paragraph (h) of this
Section) which has been approved by such Funds.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund or portfolio of the Fund, less the liabilities
charged to each such portfolio or Fund, by the number of outstanding
shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who is independent of and unrelated to Mellon. For purposes of
this exemption, the Second Fiduciary will not be deemed to be
independent of and unrelated to Mellon if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with Mellon;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner or employee
of Mellon (or is a relative of such persons);
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption.
If an officer, director, partner or employee of Mellon (or relative
of such persons), is a director of such Second Fiduciary, and if her or
she abstains from participation in (i) the choice of the Client Plan's
investment adviser, (ii) the approval of any such purchase or sale
between the Client Plan and the Funds, and (iii) the approval of any
change in fees charged to or paid by the Client Plan in connection with
any of the transactions described in Sections I and II above, then
paragraph (g)(2) of this section shall not apply.
(h) The term ``secondary service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by Mellon to the Funds. However, for purposes of this
exemption, the term ``secondary service'' will not include any
brokerage services provided to the Funds by Mellon for the execution of
securities transactions engaged in by the Funds.
(i) The term ``Termination Form'' means the form supplied to the
Second Fiduciary which expressly provides an election to the Second
Fiduciary to terminate on behalf of a Client Plan the authorization
described in paragraph (j) of Section II. Such Termination Form may be
used at will by the Second Fiduciary to terminate an authorization
without penalty to the Client Plan and to notify Mellon in writing to
effect a termination by selling the shares of the Funds held by the
Client Plan requesting such termination within one business day
following receipt by Mellon of the form; provided that if, due to
circumstances beyond the control of Mellon, the sale cannot be executed
within one business day, Mellon shall have one additional business day
to complete such sale.
Effective Date: If the proposed exemption is granted, the exemption
will be effective November 5, 1993, for those transactions described in
Sections I and II above.
Summary of Facts and Representations
1. Mellon Bank, N.A. (Mellon Bank) is a national banking
association with its principal offices located in Pittsburgh,
Pennsylvania, and is a subsidiary of Mellon Bank Corporation (referred
to herein together with its affiliates as ``Mellon''). As of December
31, 1992, Mellon Bank provided trust services for approximately 3,642
employee benefit plans, and had total assets under management of
approximately $41 billion. As of that same date, Mellon Bank had, in
combination with other subsidiaries of Mellon Bank Corporation, total
assets of approximately $31.6 billion.
Mellon acts as a trustee, directed trustee, investment manager,
and/or custodian for the Client Plans. The Client Plans include various
pension, profit sharing, and stock bonus plans as well as voluntary
employees' beneficiary associations, supplemental unemployment benefit
plans, simplified employee benefit plans, retirement plans for self-
employed individuals (i.e. Keogh Plans) and individual retirement
accounts (IRAs). Mellon's status as a [[Page 5708]] fiduciary with
investment discretion for a Client Plan arises out of its relationship
as a trustee or investment manager, but not from the rendering of any
investment advice to a third party that has investment discretion under
the Plan. Mellon, in its capacity as a fiduciary of the Client Plans,
may exercise investment discretion for all or a portion of the assets
of such Client Plans. As a custodian or directed trustee of a Client
Plan, Mellon has custody of Plan assets, collects all income, performs
bookkeeping and accounting services, generates periodic statements of
account activity and other reports, and makes payments or distributions
from the account as directed. However, Mellon has no duty as a
custodian or directed trustee to review investments or make
recommendations, acting only as directed by an authorized Second
Fiduciary.
2. Mellon is in the process of making a series of mutual fund
portfolios within the Laurel Funds, Inc. [a/k/a Dreyfus Funds or
Premier Funds] (i.e. the Funds) available to some of the Client Plans
as alternatives to or in place of some of its collective funds (i.e.
the CIFs). Mellon requests an exemption for investments in a Fund which
occur through an in-kind transfer of a Client Plan's pro rata share of
assets from either a terminating or partially terminating CIF to a
corresponding Fund in exchange for shares of such Fund. Mellon also
requests an exemption for the receipt of fees from the Funds in
connection with the investment of assets of a Client Plan (including
any assets of a Client Plan which were held in a terminating or
partially terminating CIF) for which it acts as a trustee, directed
trustee, investment manager, or custodian, in shares of the Funds in
instances where Mellon is an investment adviser for the Funds as well
as a custodian, dividend disbursing agent, shareholder servicing agent,
transfer agent, and/or Fund accountant, or provides some other
secondary service to the Funds. Finally, Mellon seeks exemptive relief
to be able to transfer securities in-kind, rather than in cash, from a
Client Plan's individual investment portfolio (which is not a CIF) to a
Fund in exchange for shares of the Fund to avoid the additional
transaction costs involved in disposing of and re-acquiring the
securities on the open market.
To avoid charging existing Client Plans any additional fees in
connection with investments in the Funds, primarily as a result of the
in-kind transfers of CIF assets, Mellon has implemented a fee structure
under which the Client Plans do not bear any part of the fees charged
by Mellon to the Funds (as discussed further below). Under this
arrangement, Mellon charges its negotiated fees to the Client Plans and
also charges the Funds for investment advisory services as well as
secondary services. Mellon then credits as cash to each Client Plan its
proportionate share of all fees paid by the Funds to Mellon, no later
than the same day as the payment of the fees to Mellon. Therefore,
Mellon retains only the Plan-level fees for services to the Client
Plans. However, as noted in Paragraph 11 below, a Client Plan may have
an alternative fee structure for investments made into a Fund through
an in-kind transfer of securities from an individual portfolio. Under
these arrangements, Mellon would retain fees received from the Fund for
secondary services and would either credit to each Client Plan the fees
received from the Funds for investment advisory services or would not
charge the Client Plan a Plan-level investment management fee for those
assets invested in the Fund. In such instances, the Second Fiduciary's
choice of whether to obtain either a full or partial credit of Fund
fees paid by the Funds to Mellon shall be made in writing prior to any
in-kind transfer of securities into a Fund following full disclosure of
all relevant information concerning the various fee structures.
3. The Funds are a Maryland corporation organized as open-end
investment companies registered under the 1940 Act. The Funds consist
of a series of investment portfolios (each a ``Fund'') representing
distinct investment vehicles, which have their own prospectuses or
joint prospectuses with one or more other Funds. The shares of each
Fund represent a proportionate interest in the assets of that Fund.
The Funds involved in the initial transfer transactions were: (i)
The Laurel Intermediate Income Portfolio; (ii) The Laurel Stock
Portfolio; (iii) The Laurel Prime Money Market I Portfolio; and (iv)
The Laurel Short-Term Bond Portfolio. Additional Funds that were
available for investment in connection with the transactions described
herein following the initial transfer transactions included: (i) The
Laurel Midcap Stock Portfolio; (ii) The Laurel Bond Market Index
Portfolio; and (iii) The Laurel S&P 500 Index Portfolio.
The applicant states that Mellon subsequently acquired The Dreyfus
Corporation (Dreyfus), the sponsor of the Dreyfus family of mutual
funds, in August 1994. Thus, Dreyfus is now an affiliate of Mellon. As
a result of this acquisition, changes have been made to the names of
the Laurel Funds and the parties providing services to the Funds.
Effective October 1994, the Laurel Funds have changed their names to
include ``Dreyfus'' or ``Premier'' (another name used by Dreyfus). Some
of the Funds retain ``Laurel'' as part of their names so as not to
confuse them with existing Dreyfus Funds.
Shares of all Funds are offered to trust account customers of
Mellon, including the Client Plans, as a means of acquiring an interest
in a diversified portfolio of investments. Mellon states that each
series of Fund shares are offered to the Client Plans under terms and
conditions which are at least as favorable to the Plans as the terms
and conditions available to other shareholders of the Fund. Mellon
states further that additional Funds may be created in the future that
will receive assets from CIFs or otherwise be used for investment by
Client Plans.
4. Mellon served as the investment adviser to each Fund until the
acquisition of Dreyfus. Dreyfus, as Mellon's affiliate, is now the
investment adviser to the Funds and receives investment advisory fees
from each Fund that may vary between 0.20% and 1.50% of the Fund's
average net assets on an annual basis, depending on the particular
Fund. As noted above, Mellon also previously served as the custodian,
dividend disbursing agent, shareholder servicing agent, transfer agent,
and fund accountant, for which it was entitled to receive fees from the
Funds.3 Mellon continues to provide such ``secondary services'' to
the Funds. However, since the acquisition of Dreyfus, the new transfer
agent is The Shareholder Services Group, Inc., an independent party.
\3\ The Funds may use broker-dealers that are affiliates of
Mellon to provide brokerage services to the Funds. The applicant
states that such brokerage services would be provided in accordance
with section 17(e) of the 1940 Act, as amended, and Rule 17e-1
thereunder. Rule 17e-1 requires, among other things, that the
commissions, fees or other remuneration for any brokerage services
provided by an affiliate of an investment company's investment
advisor must be reasonable and fair compared to what other brokers
receive for comparable transactions involving similar securities.
---------------------------------------------------------------------------
Until Mellon's acquisition of Dreyfus, the Funds' administrator and
distributor were Frank Russell Investment Management Company and
Russell Fund Distributors, Inc. (collectively, the Russell Companies).
The applicant states that the Russell Companies were independent of and
unaffiliated with Mellon. The new administrator and distributor is
Premier Mutual Fund Services, Inc. (Premier Services). Mellon
represents that Premier Services is also independent of Mellon and its
affiliates. [[Page 5709]]
The Fund administrator receives annual fees of $500,000 plus an
asset-based component, which is 0.01% of the aggregate assets of the
Funds up to $10 billion and 0.005% of assets over $10 billion. The
asset-based fee is payable monthly, charged pro rata to each Fund on
its average daily net assets for the month. The administrator is also
entitled to receive reimbursement from the Funds for the start-up costs
of certain new Funds. Under the current arrangement, the Fund
distributor is reimbursed for certain of its Fund distribution fees and
expenses by Mellon. The Client Plans are not charged sales commissions,
redemption fees, or distribution expenses on their transactions or
investments in Fund shares.4
\4\ Mellon represents that all Funds have adopted a Distribution
and Service Plan pursuant to Rule 12b-1 under the 1940 Act. Prior to
July 28, 1992, the Funds paid the fees and expenses payable to the
distributor under such plan. However, since that date, the
distributor has waived its rights to these fees and expenses in
exchange for Mellon paying them, as described in the prospectus for
each Fund. Mellon states that these fees may be charged to the Funds
again in the future, but will not be charged to a class of Fund
shares in which the Client Plans have invested. In addition, Mellon
does not and will not receive fees payable pursuant to Rule 12b-1 in
connection with transactions involving any shares of the Funds.
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In-Kind Transfers of CIF Assets
5. Mellon is offering the Funds as alternatives or replacements for
a number of the CIFs currently used by Client Plans. In connection with
making these Funds available to a Client Plan, Mellon is transferring
in-kind the Plan's assets currently invested in a particular CIF to a
corresponding Fund with substantially similar investment objectives, if
a Second Fiduciary for the Client Plan provides prior written
authorization for the transfer following receipt of full and detailed
written disclosures regarding the particular Fund and related fees.
Mellon represents that a principal reason for offering Client Plans
the opportunity to transfer their CIF investments to the Funds is that
in many cases the interests of such Plans would be better served by the
use of mutual funds and Mellon's customers have expressed an interest
in having mutual funds available as investment vehicles. In this
regard, mutual funds are valued on a daily basis, whereas most of the
CIFs are valued weekly or monthly. The daily valuation permits (i)
immediate investment of Plan contributions in varied types of
investments; (ii) greater flexibility in transferring assets from one
type of investment to another; and (iii) daily redemption of
investments for purposes of making distributions. In addition,
information concerning the investment performance of mutual funds will
be available on a daily basis in newspapers of general circulation,
which will allow Client Plan sponsors and participants to monitor the
performance of their investments on a daily basis. Furthermore, unlike
CIF units, mutual fund shares can be given to participants in plan
distributions, thus avoiding the expense and delay of liquidating plan
investments and facilitating roll-overs into IRAs.
6. Prior to investing any Client Plan's assets in a Fund, Mellon
obtains written approval from the Second Fiduciary for the Client Plan,
who generally is either the Client Plan's named fiduciary, trustee (if
other than Mellon), or the sponsoring employer. Mellon provides the
Second Fiduciary with a current prospectus for that Fund and a written
statement giving full disclosure of the structure under which Mellon's
investment advisory and other fees will be credited back to the Client
Plan. The disclosure statement describes why Mellon believes the
investment of assets of the Client Plan in the Funds may be
appropriate. The disclosure statement also describes any limitations on
Mellon regarding which plan assets may be invested in shares of the
Funds and the nature of such limitations.
On the basis of such information, the Second Fiduciary authorizes
Mellon to invest the Client Plan's assets in the Fund(s) and to receive
fees from the Fund(s). In connection with the asset transfers from the
CIFs, if the Second Fiduciary has not provided Mellon with its approval
of investment in a corresponding Fund by the deadline established for
approvals of transfers from a CIF, the Client Plan continues to be
invested in that CIF. However, if the CIF is terminated, the Client
Plan receives a distribution from the CIF which is then invested in an
appropriate investment vehicle other than the Funds, in accordance with
the terms of the Client Plan.
Any authorization for investment by a Client Plan in shares of a
Fund and the fees paid to Mellon is terminable at will by the Second
Fiduciary, without penalty to the Client Plan, upon receipt by Mellon
of written notice of termination. A Termination Form expressly
providing an election to terminate the authorization with instructions
on the use of the form is supplied to the Second Fiduciary no less than
annually. The Termination Form instructs the Second Fiduciary that the
authorization is terminable at will by the Client Plan, without penalty
to the Client Plan, upon receipt by Mellon of written notice from the
Second Fiduciary (through the return of such form), and that failure to
return the Termination Form results in continued authorization of
Mellon to engage in the subject transactions on behalf of the Client
Plan.
Mellon states that the Termination Form may be used to notify
Mellon in writing to effect a termination by selling the shares of the
Funds held by the Client Plan requesting such termination within one
business day following receipt by Mellon of the form; provided that if,
due to circumstances beyond the control of Mellon, the sale cannot be
executed within one business day, Mellon shall have one additional
business day to complete such sale.
The Second Fiduciary will receive notice of any increases in the
rates of fees charged by Mellon to the Funds for investment advisory
services as well as for secondary services, through an updated
prospectus or otherwise. However, such notice will not be accompanied
by an additional Termination Form since all increases in investment
advisory fees and secondary fees will be credited by Mellon to the
Client Plans and will be subject to an annual reauthorization as
described above.
Mellon states that the Second Fiduciary receives an updated
prospectus for each Fund at least annually and either annual or semi-
annual reports for each Fund. Mellon also provides monthly or quarterly
reports to the Second Fiduciary of all transactions engaged in by the
Client Plans, including purchases and sales of the Fund shares.
The Funds may use broker-dealers that are affiliates of Mellon to
provide brokerage services to the Funds. As noted in Footnote 2 above,
such brokerage services would be provided in accordance with section
17(e) of the 1940 Act and Rule 17e-1 thereunder. Mellon represents that
it will provide at least annually to the Second Fiduciary of any Client
Plan that invests in the Funds written disclosures indicating the
following: (i) The total, expressed in dollars, brokerage commissions
of each Fund's portfolio that are paid to Mellon or an affiliate by
such Fund; (ii) the total, expressed in dollars, of brokerage
commissions of each Fund's portfolio that are paid by such Fund to
brokerage firms unrelated to Mellon; (iii) the average brokerage
commissions per share, expressed as cents per share, paid to Mellon or
an affiliate by each Fund portfolio; and (iv) the average brokerage
commissions per share, expressed as cents per share, paid by each Fund
[[Page 5710]] portfolio to brokerage firms unrelated to Mellon.
7. Prior to November 5, 1993, Mellon generally invested assets of
Client Plans for which it acted as a trustee with investment discretion
in a series of CIFs. In addition, certain Client Plans where investment
decisions were directed by a Second Fiduciary generally used a CIF as
an investment option for individual accounts in the Client Plans.
However, on Friday, November 5, 1993, Mellon terminated several of its
CIFs (as noted below) and transferred in-kind the assets that were in
these CIFs to various corresponding Funds. Mellon represents that the
initial acquisition of shares in the Funds by Client Plans invested in
the CIFs was accomplished by distributing the CIF assets to the Client
Plans, and then transferring these assets from the Client Plans to the
corresponding Funds.
Mellon anticipates that there will be additional in-kind transfers
of CIF assets to the Funds in the future. Such transfers will normally
take place over a weekend. The steps involved in transferring the
assets of a CIF attributable to a Client Plan's investment to a
corresponding Fund are as follows:
(a) Prior to the transfer, the assets of the CIF are reviewed to
determine whether they are appropriate investments for the
corresponding Fund, consistent with the Fund's investment objectives
and policies as well as the applicable requirements under the 1940 Act
and the Code. Mellon determines whether the assets are capable of being
divided between the CIF and the Fund (or among the Client Plans
receiving distributions, if the CIF is terminating). Assets that are
not appropriate investments for the corresponding Fund or are not
capable of being divided are liquidated prior to the transfer date.\5\
\5\Mellon states that such assets are sold in the open market
and are not sold through any brokerage firm affiliated with Mellon.
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(b) For purposes of the transfer, the values of the CIF assets are
determined based on market value as of the close of business on the
Friday preceding the transfer. Values are determined in a single
valuation in accordance with the valuation procedures described in Rule
17a-7(b) under the 1940 Act, 17 CFR 270.17a-7(b).\6\ As noted below in
paragraph (e), the valuation of the securities is performed in the same
manner for both the CIF's assets and the corresponding Fund's assets at
the close of the same business day using independent market sources.
\6\Rule 17a-7 permits transactions between investment funds that
use the same investment adviser, subject to certain conditions. Rule
17a-7 requires, among other things, that such transactions be
effected at the ``independent current market price'' for each
security, involve only securities for which market quotations are
readily available, involve no brokerage commissions or other
remuneration, and comply with valuation procedures adopted by the
board of directors of the investment company to ensure that all
requirements of the Rule are satisfied.
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(c) Having established the value of the CIF assets, the CIF
accounting unit determines the value of each Client Plan's investment
in the CIF. If the Client Plan is transferring its investment, or if
the CIF is terminating, the Plan's pro rata share of each investment is
distributed to the Client Plan, either in kind if all the CIF assets
are securities, or partly in kind and partly in cash if part of the CIF
assets consist of cash. Thus, each Client Plan receives a pro rata
share of each security and any cash. The CIF, if not terminating,
retains the securities and cash representing the pro rata shares of the
Client Plans that are not transferring their investments to the
Funds.\7\
\7\Such distributions are made in compliance with 12 CFR
9.18(b)(6), which requires that distributions in kind from CIFs must
be made ``ratably''. The Client Plans withdrawing from the CIF and
the Client Plans remaining invested in the CIF each receive their
pro rata portions of each CIF asset and the CIF cash, so that both
groups of Plans retain the same asset quality and liquidity
following the transfers.
---------------------------------------------------------------------------
(d) If the Second Fiduciary provides written approval of the
transfer of its CIF investments to the Fund by the deadline set for
such approval, the assets and cash received by the Client Plan from the
CIF are contributed to the corresponding Fund to purchase shares of
that Fund through an exchange of securities or investment of cash.
Exchanges are conducted in accordance with the procedures described in
the Fund prospectus, which provide that the securities being exchanged
need to meet the receiving Fund's investment objectives, policies and
limitations, have a readily ascertainable market value, be liquid, and
not be subject to resale restrictions.
(e) The securities received by the Fund are valued by the Fund for
purposes of the in-kind transfer transaction in the same manner as of
the same business day as the assets were valued by the corresponding
CIF and the per-share value of the Fund shares issued are based on the
Fund's then-current net asset value as of such date. Therefore, the
value of a Client Plan's investment in a Fund as of the start of
business the following Monday, based on the Client Plan's pro rata
share of the underlying market value of the securities transferred to
the Funds, is the same as the value of its investment in the
corresponding CIF as of the close of business the previous Friday.
The CIFs involved in the initial series of transfers and their
corresponding Funds are as follows:
------------------------------------------------------------------------
Mellon CIF Laurel fund
------------------------------------------------------------------------
Portfolio8
EB Intermediate Bond............... Intermediate Income
EB Stock........................... Stock
EB Special Stock................... Midcap Stock
EB Composite Bond Index............ Bond Market Index
EB Composite Bond.................. Bond Market Index
EB Stock Index..................... S&P 500 Stock Index
EB Equity Market................... S&P 500 Stock Index
EB Savings......................... Prime Money Market I
EB Enhanced Temporary Investment... Short-Term Bond
------------------------------------------------------------------------
8As of October 1994, these Funds were renamed as follows: (i) Premier
Limited Term Income; (ii) Dreyfus Disciplined Stock; (iii) Dreyfus
Disciplined Midcap Stock; (iv) Dreyfus Bond Market Index; (v) Dreyfus
S&P 500 Stock Index; (vi) Dreyfus/Laurel Prime Money Market; and (vii)
Dreyfus/Laurel Short-Term Bond.
Mellon states that because of the relatively small number of Client
Plans approving the transfer of assets from the EB Intermediate Bond
Fund, the EB Composite Bond Index Fund and the EB Composite Bond Fund,
and because of the nature of the assets in these CIFs, the transfers
from these CIFs were made totally in cash rather than in kind. The
Client Plans investing in these CIFs that had approved the transfer
received a distribution of the cash value of their CIF units, and that
cash was then used to acquire shares of the corresponding Funds.
Therefore, no exemptive relief is requested for the in-kind transfer of
assets from these three CIFs.
Each Client Plan that approved the CIF asset transfers to the Funds
received account statements describing the asset transfers either in
mid-December 1993, if such Plans were on a monthly account statement
schedule, or mid-January 1994, if such Plans were on a quarterly
account statement schedule. The statements showed the disposition of
the CIF units from the Client Plan account and the acquisition by the
account of Fund shares, both posted as of Monday, November 23,
1992.9 This [[Page 5711]] information provided the affected Client
Plans with written confirmation of the number of CIF units held by the
Client Plan immediately before the transfer, the related per unit value
and the total dollar amount of such CIF units as well as the number of
shares of the Funds held by the Client Plan following the transfer, the
related per share net asset value, and the total dollar amount of such
shares.
\9\The following example illustrates the contents of such a
statement: Assume a Client Plan held 12,506 units of the Mellon
Employee Benefit Stock Fund prior to the asset transfers. The
account statement showed a disposition of 12,506 units of Mellon
Employee Benefit Stock Fund, at a value of $72.08 per unit, on
November 23, 1992, with total proceeds of $901,432.18. The statement
also showed a purchase on that same date of 90,143.218 shares of the
Laurel Stock Fund, the Fund corresponding to the Mellon Employee
Benefit Stock Fund, at $10 per share, at a total cost of
$901,432.18, the same amount as the proceeds of the disposition from
the Mellon Employee Benefit Stock Fund.
---------------------------------------------------------------------------
For all subsequent in-kind transfers of CIF assets to a Fund
following publication of this proposed exemption in the Federal
Register, Mellon will send by regular mail to each affected Client Plan
a written confirmation, not later than 30 days after completion of the
transaction, containing the following information:
(1) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(2) The price of each such security involved in the transaction;
and
(3) The identity of each pricing service or market maker consulted
in determining the value of such securities. Securities which are
valued in accordance with Rule 17a-7(b)(4) are securities for which the
current market price cannot be obtained by reference to the last sale
price for transactions reported on a recognized securities exchange or
the NASDAQ system. Mellon states that such securities are valued based
on an average of the highest current independent bid and lowest current
independent offer, as of the close of business on the Friday preceding
the weekend of the CIF transfers, determined on the basis of reasonable
inquiry from at least three sources that are broker-dealers or pricing
services independent of Mellon.
In addition, for all in-kind transfers of CIF assets to a Fund that
occur after the date this proposed exemption is published in the
Federal Register, Mellon will send by regular mail to the Second
Fiduciary no later than 90 days after completion of each transfer a
written confirmation that contains the following information:
(1) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(2) The number of shares in the Funds that are held by the Client
Plan immediately following the transfer, the related per share net
asset value, and the total dollar amount of such shares.
Mellon anticipates that additional CIFs will be converted or
``partially converted'' to the Funds so that the Client Plan investors
in those CIFs will be given the opportunity to transfer their
investments in-kind from the CIFs to corresponding Funds, or
alternatively to continue investing in the CIFs until such CIFs are
terminated. Mellon states that such transfers will follow the same
procedures as the initial transfers, including valuations in accordance
with Rule 17a-7(b), and will comply with the conditions of this
proposed exemption. In the case of partial CIF terminations, the
transfers will involve a smaller amount of assets and may occur on a
weekday rather than a weekend. In all cases, such transfers will use
the closing market prices for that particular day in valuing the Client
Plan assets to be transferred and the net asset value of the Fund.
8. Mellon or an affiliate (i.e. Dreyfus) charges investment
advisory fees to the Funds in accordance with the investment advisory
agreements between Mellon and the Funds. These agreements have been
approved by the independent members of the Board of Directors of the
Funds (the Directors), in accordance with the applicable provisions of
the 1940 Act. Any future changes in the fees paid to Mellon must be
approved by the Directors. These fees are payable monthly by the Funds.
Mellon uses a fee structure that is designed to preserve the
negotiated fee rates of the Client Plans that transfer investments from
the CIFs to the Funds, so as to minimize the impact of the change to
the Funds on a Client Plan's fees. At the beginning of each month, and
in no event later than the same day as the payment of the investment
advisory and other fees by the Funds to Mellon for the previous month,
Mellon credits to each Client Plan in cash its proportionate share of
all investment advisory fees charged by Mellon to the Funds for the
previous month.
To assure that Client Plans pay no additional fees as a result of
investing in the Funds rather than the CIFs, and to otherwise preserve
the negotiated fee rates of the Client Plans, Mellon also credits to
the Client Plans participating in the transfers their pro rata shares
of any fees paid by the Funds to Mellon for services other than
investment advisory services. However, Mellon does retain amounts
necessary to account for its direct expenses in providing such
secondary services. These credits are made at the same time and in the
same manner as the advisory fee credits.
In addition, Mellon has credited to the Client Plans participating
in the transfers from the CIFs to the Funds their pro rata shares of
fees paid by the Funds or Mellon to Fund service providers other than
Mellon, so that the Client Plans effectively receive a credit of all
charges assessed upon their investments in the Funds. Mellon retains
the flexibility to cease crediting these third-party fees and, in such
instances, provides further disclosure to and obtains express approval
from any Client Plan before terminating the credit of the third-party
fees for the Client Plan. However, Mellon states that all investment
advisory fees charged to the Funds by third party sub-advisers, or paid
by Mellon to such third party sub-advisers, will continue to be
credited to the Client Plans.
9. Mellon maintains a system of internal accounting controls for
the crediting of all fees to the Client Plans. In addition, Mellon
retains the services of KPMG Peat Marwick (the Auditor), an independent
accounting firm, to audit annually the crediting of fees to the Client
Plans under this program. Such audits provide independent verification
of the proper crediting to the Client Plans.
In its annual audit of the credit program, the Auditor will: (i)
Review and test compliance with the specific operational controls and
procedures established by Mellon for making the credits; (ii) verify on
a test basis the monthly credit factors transmitted to Mellon by the
Funds; (iii) verify on a test basis the proper assignment of
identification fields to the Client Plans; (iv) verify on a test basis
the credits paid in total to the sum of all credits paid to each Client
Plan; (v) recompute, on a test basis, the amount of the credit
determined for selected Client Plans and verify that the credit was
made to the proper Client Plan account.
In the event either the internal audit by Mellon or the independent
audit by the Auditor identifies an error made in the crediting of fees
to the Client Plans, Mellon will correct the error. With respect to any
shortfall in credited fees to a Client Plan, Mellon will make a cash
payment to the Client Plan equal to the amount of the error plus
interest paid at money market rates offered by Mellon for the period
involved. Any excess credits made to a Client Plan will be corrected by
an appropriate deduction from the Client Plan account or reallocation
of cash during the next payment period after discovery of the error to
reflect accurately the amount of total credits due to the Client Plan
for the period involved.
10. Mellon also uses the credit procedure described above (referred
to hereafter as ``the Alternative Credit Method'') for investments by
Client [[Page 5712]] Plans other than through the asset transfer
transactions. In addition, Mellon may use a fee offset method that
complies with Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732,
April 8, 1977).10 Mellon states that Client Plans that use the
Alternative Credit Method have the option to change to an offset method
that complies with PTE 77-4.
\10\PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that,
among other things, the plan does not pay an investment management,
investment advisory or similar fee with respect to the plan assets
invested in such shares for the entire period of such investment.
Section II(c) of PTE 77-4 states that this condition does not
preclude the payment of investment advisory fees by the investment
company under the terms of an investment advisory agreement adopted
in accordance with section 15 of the Investment Company Act of 1940.
Section II(c) states further that this condition does not preclude
payment of an investment advisory fee by the plan based on total
plan assets from which a credit has been subtracted representing the
plan's pro rata share of investment advisory fees paid by the
investment company.
---------------------------------------------------------------------------
However, Mellon represents that the Alternative Credit Method
offers several advantages to a Client Plan. These advantages include
the following:
(a) Plan Sponsor Paying Fees: With many Client Plans, the Plan
sponsor pays the Plan-level fees. In such instances, if the offset
method described in PTE 77-4 is used, the Client Plan pays all Fund-
level fees in connection with the investments in the Funds. By
contrast, under the Alternative Credit Method, the sponsor pays the
entire Plan-level fee and the Client Plan does not pay any Fund-level
fees. Thus, where the Plan sponsor pays the Client Plan's fees, the
Client Plan's rate of return on its investments in the Funds is higher
under the Alternative Credit Method.
(b) Timing of Credit: Plan-level trustee fees will generally be
paid to Mellon quarterly, whereas Fund-level investment advisory fees
are paid monthly. Consequently, the crediting may not occur for up to
three months under PTE 77-4 credit method, so that Mellon receives the
use of the amounts to be credited for the time period between the
payment dates. In contrast, there is no such time delay under the
Alternative Credit Method.
(c) Excess Credits: The amount of a Client Plan's pro rata share of
Fund advisory fees may exceed the amount of its Plan-level fees,
depending on the relative fee rates. Under the PTE 77-4 credit method,
it is not clear how an investment adviser should handle the amount of a
credit that exceeds the Plan-level fee. The problem of excess credits
does not arise under the Alternative Credit Method since the credit is
made directly to the Client Plan, rather than as an offset against the
Plan-level fees.
Mellon states that the Alternative Credit Method allows it to
maintain without modification its fiduciary fee schedules for its
services to the Client Plans, which is more efficient and less costly
than a system which employs credits against such fiduciary fees. In
addition, use of the Alternative Credit Method permits Mellon's
existing Client Plans to retain their negotiated fiduciary fee
structures despite the change to a new investment vehicle.
Mellon states further that where Client Plans are withdrawing
assets from the CIFs and investing in the corresponding Funds, the CIFs
and Funds would be forced to incur large transaction costs if the CIF
assets could not be transferred via the Client Plan accounts to the
Funds. The asset transfer transactions permit the CIFs and the Funds to
avoid incurring any such transaction costs in connection with
liquidating CIF investments and making investments for the Funds,
enhancing the investment return of the Client Plans.
In-Kind Transfers of Securities From Individual Portfolios
11. Mellon represents that certain Client Plans may desire in the
future to transfer securities from their individual portfolios to the
Funds in exchange for shares of the Funds (i.e. an Exchange), as
discussed in Section III above. The Exchange would involve assets as to
which Mellon is a fiduciary which are not distributed from a CIF. All
or a pro rata portion of the assets of a Client Plan held by Mellon in
an investment account or portfolio that is selected by the Second
Fiduciary of such Client Plan for an Exchange would be transferred in-
kind to the Funds in exchange for shares of such Funds. Such Exchanges
may occur when a Second Fiduciary of a Client Plan trusteed by Mellon
selects Mellon to manage the Client Plan's assets on a collective
rather than individual portfolio basis in order to achieve certain
economies of scale and diversification. Mellon states that in such
cases it may be less expensive for the Client Plan to exchange its
existing investments in securities directly for Fund shares rather than
liquidating the securities and investing the proceeds in the shares.
The Exchange would avoid transaction costs, such as commissions and
dealer mark-ups, as well as any adverse market impact from a sale of
the securities at the time of the transaction.
The Exchange would have to comply with the requirements for an
``in-kind'' exchange of securities as stated in the Fund prospectus.
Specifically, the securities to be exchanged must meet the investment
objectives, policies and limitations of the particular Fund portfolio,
must have a readily ascertainable market value, must be liquid and must
not be subject to resale restrictions. Securities accepted by a Fund
would be valued in the same manner as the Fund values its assets, and
the number of Fund shares issued would depend on the relative net asset
value of the shares purchased and securities exchanged.11 The
Fund's procedures will protect any existing Fund shareholders while
assuring that fair value is given to the Client Plan exchanging the
securities. The Second Fiduciary would receive disclosures regarding
the relevant Funds and their fees, including each Fund's prospectus and
additional information regarding the fee structures which may be used
to avoid duplicative investment advisory fees being paid to Mellon (see
Section III(f) above). In such instances, Mellon represents that one of
the following fee structures will be used: (i) The Client Plan will
receive a cash credit of such Plan's proportionate share of all fees
(including all investment advisory fees and all secondary service fees)
charged to the Funds by Mellon, less any fees paid by Mellon to parties
unrelated to Mellon for services other than investment advisory
services provided to the Funds, no later than the same day as the
receipt of such fees by Mellon; (ii) the assets of the Client Plan
invested in the Funds will be excluded from the assets on which the
investment management fees paid by the Client Plan to Mellon are
determined; or (iii) the Client Plan will pay an investment management
fee to Mellon based on total Plan assets from which a credit is
subtracted representing only the Client Plan's pro rata share of the
investment advisory fees paid by the Funds to Mellon.
\11\In this regard, the Department assumes that the securities
which are transferred to a Fund will have the same value at the time
the securities become part of the Fund's portfolio as the value that
was determined for the securities in the individual Client Plan
portfolios, in accordance with procedures described in Rule 17a-7
under the 1940 Act, for purposes of the Exchange.
---------------------------------------------------------------------------
Prior to the Exchange, the Second Fiduciary would receive in
writing (i) the reasons why Mellon may consider the Exchange to be
appropriate for the Client Plan and a list of the securities held by
the Client Plan that would be accepted by one or more Funds in the
Exchange, (ii) the date the Exchange is [[Page 5713]] to occur, and
(iii) an explanation of the procedures that would be followed for
valuing the securities for purposes of the Exchange, including the
identity of the independent pricing service or services that would be
used to value the securities. In addition, within 30 days after the
Exchange, the Second Fiduciary would receive written confirmation that
reflects the price of each security involved in the Exchange and, for
securities which are valued in accordance with Rule 17a-7(b)(4), a
written disclosure of the identity of the pricing services or broker-
dealers consulted in determining the value of the securities.
12. In summary, the subject transactions satisfy the statutory
criteria of section 408(a) of the Act and section 4975(c)(2) of the
Code for the following reasons:
(a) The Funds provide many of the Client Plans with a more
effective investment vehicle than the CIFs currently maintained by
Mellon, without any increase in fees paid by the Client Plans to
Mellon;
(b) Mellon requires annual audits by an independent accounting firm
to verify that the Client Plans receive proper credits for the fees
paid to Mellon by the Funds;
(c) Client Plan fiduciaries and participants have access to more
frequent reports of Fund performance than are available for plan assets
invested in the CIFs, which enables such fiduciaries or participants to
make more informed decisions regarding their investments;
(d) Client Plan investments in the Funds and the payment of any
fees by the Funds to Mellon in connection with such investments require
an advance authorization in writing by an independent fiduciary (i.e.
the Second Fiduciary) after full written disclosure, including current
prospectuses for the Funds and a statement describing the Alternative
Credit Method;
(e) Any authorization made by the Second Fiduciary is terminable at
will by that fiduciary, without penalty, upon receipt by Mellon of
written notice of termination from the Second Fiduciary on a form
expressly providing an election to terminate the authorization (i.e.
the Termination Form), which is supplied to the Second Fiduciary no
less than annually;
(f) No sales commissions or other fees are paid by the Client Plans
in connection with any acquisition of Fund shares (either by an in-kind
transfer of CIF assets, a cash purchase, or an in-kind transfer of
securities from a Client Plan's individual investment portfolio) and no
redemption fees are paid in connection with the sale of Fund shares;
(g) All dealings among the Client Plans, the Funds, and Mellon are
on a basis no less favorable to the Client Plans than such dealings
with the other shareholders of the Funds;
(h) The in-kind transfers of CIF assets into the Funds are done
with the prior written approval of independent fiduciaries (i.e. the
Second Fiduciary) following full and detailed written disclosure
concerning the Funds;
(i) Each Client Plan receives shares of a Fund which have a total
net asset value that is equal to the value of the Client Plan's pro
rata share of the assets of the CIF on the date of the in-kind
transfer, based on the current market value of the CIF's assets as
determined in a single valuation performed in the same manner at the
close of the same business day in accordance with independent sources
and the procedures established by the Funds for the valuation of such
assets; and
(j) With respect to any transfer of securities from an individual
portfolio of a Client Plan in exchange for Fund shares (i.e. an
Exchange), the Second Fiduciary receives written disclosures regarding
the relevant Funds and their fees (including the Fund prospectus,
additional information regarding the fee structure to be used to avoid
duplicative advisory fees, and the valuation procedures to be used for
the securities involved in the Exchange) as well as written
confirmations that reflect the price of each security involved in the
Exchange and, for securities valued in accordance with Rule 17a-
7(b)(4), the identity of the pricing service or broker-dealers
consulted in the valuation of such securities.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all Second
Fiduciaries of Client Plans described herein that had investments in a
terminating CIF and from whom approval was sought, or will be sought
prior to the granting of this proposed exemption, for a transfer of a
Client Plan's CIF assets to a Fund. In addition, interested persons
shall include the Second Fiduciaries of all Client Plans that are
currently invested in the Funds, as of the date the notice of the
proposed exemption is published in the Federal Register, where Mellon
provides services to the Funds and receives fees which would be covered
by the exemption, if granted. Notice to interested persons shall be
provided by first class mail within fifteen (15) days following the
publication of the proposed exemption in the Federal Register. Such
notice shall include a copy of the notice of proposed exemption as
published in the Federal Register and a supplemental statement (see 29
CFR 2570.43(b)(2)) which informs all interested persons of their right
to comment on and/or request a hearing with respect to the proposed
exemption. Comments and requests for a public hearing are due within
forty-five (45) days following the publication of the proposed
exemption in the Federal Register.
For Further Information Contact:
Mr. E.F. Williams of the Department, telephone (202) 219-8194. (This is
not a toll-free number.)
Bank South, N.A. (the Bank) Located in Atlanta, Georgia
[Application No. D-09626]
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--Exemption for In-Kind Transfer of Assets
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(F) of the Code, shall not apply as of February 11, 1994, to the in-
kind transfer of assets of plans for which the Bank serves as a
fiduciary (the Client Plans), other than plans established and
maintained by the Bank, that are held in certain collective investment
funds maintained by the Bank (the CIFs), in exchange for shares of the
Peachtree Funds (the Funds), an open-end investment company registered
under the Investment Company Act of 1940 (the 1940 Act) for which the
Bank acts as investment adviser, in connection with the termination of
such CIFs, provided that the following conditions and the general
conditions of Section III below are met:
(a) No sales commissions or other fees are paid by the Client Plans
in connection with the purchase of Fund shares through the in-kind
transfer of CIF assets and no redemption fees are paid in connection
with the sale of such shares by the Client Plans to the Funds.
(b) Each Client Plan receives shares of a Fund which have a total
net asset value that is equal to the value of the Client Plan's pro
rata share of the assets of the CIF on the date of the transfer, based
on the current market value of the CIF's assets, as determined in a
single [[Page 5714]] valuation performed in the same manner at the
close of the same business day using independent sources in accordance
with Rule 17a-7(b) of the Securities and Exchange Commission under the
1940 Act and the procedures established by the Funds pursuant to Rule
17a-7 for the valuation of such assets. Such procedures must require
that all securities for which a current market price cannot be obtained
by reference to the last sale price for transactions reported on a
recognized securities exchange or NASDAQ be valued based on an average
of the highest current independent bid and lowest current independent
offer, as of the close of business on the Friday preceding the weekend
of the CIF transfers, determined on the basis of reasonable inquiry
from at least three sources that are broker-dealers or pricing services
independent of the Bank.
(c) A second fiduciary who is independent of and unrelated to the
Bank (the Independent Fiduciary) receives advance written notice of the
in-kind transfer of assets of the CIFs and full written disclosure of
information concerning the Funds (including a current prospectus for
each of the Funds and a statement describing the fee structure) and, on
the basis of such information, authorizes in writing the in-kind
transfer of the Client Plan's CIF assets to a corresponding Fund in
exchange for shares of the Fund.
(d) For all transfers of CIF assets to a Fund following the
publication of this proposed exemption in the Federal Register, the
Bank sends by regular mail to each affected Client Plan the following
information:
(1) Within 30 days after completion of the transaction, a written
confirmation containing:
(i) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(ii) The price of each such security involved in the transaction;
(iii) The identity of each pricing service or market maker
consulted in determining the value of such securities; and
(2) Within 90 days after completion of each transfer, a written
confirmation that contains:
(i) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(ii) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
(e) The conditions set forth in paragraphs (e), (f) and (m) of
Section II below are satisfied.
Section II--Exemption for Receipt of Fees
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(F) of the Code, shall not apply as of February 11, 1994, to the
receipt of fees by the Bank from the Funds for acting as investment
adviser to the Funds in connection with the investment in the Funds by
Client Plans for which the Bank acts as a fiduciary, including any
Client Plan invested in a CIF which transfers its assets to a Fund,
provided that the following conditions and the general conditions of
Section III are met:
(a) No sales commissions, loads, charges or similar fees are paid
by the Client Plans for the purchase or sale of shares of the Funds and
no redemption fees are paid for the sale of shares by the Client Plans
to the Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section IV(e), and is the same price which would have
been paid or received for the shares by any other investor at that
time.
(c) Neither the Bank nor an affiliate, including any officer or
director of the Bank, purchases or sells shares of the Funds from or to
any Client Plan.
(d) The Client Plans do not pay any plan-level investment
management fees, investment advisory fees, or similar fees to the Bank
with respect to any of the assets of such Client Plans which are
invested in shares of any of the Funds. This condition does not
preclude the payment of investment advisory fees or similar fees by the
Funds to the Bank under the terms of an investment advisory agreement
adopted in accordance with section 15 of the 1940 Act or any other
agreement between the Bank and the Funds which is in compliance with
the 1940 Act.
(e) The combined total of all fees received by the Bank for the
provision of services to a Client Plan, and in connection with the
provision of services to the Funds in which the Client Plan may invest,
are not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.
(f) The Bank does not receive any fees payable pursuant to Rule
12b-1 under the 1940 Act in connection with the transactions.
(g) The Client Plans are not employee benefit plans sponsored or
maintained by the Bank.
(h) The Independent Fiduciary receives, in advance of any
investment by the Client Plan in a Fund, full and detailed written
disclosure of information concerning the Funds, including, but not
limited to:
(1) A current prospectus for each Fund in which a Client Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services, as well as all other fees to be charged to or paid by
the Client Plan and by the Funds, including the nature and extent of
any differential between the rates of such fees;
(3) The reasons why the Bank may consider such investment to be
appropriate for the Client Plan;
(4) A statement describing whether there are any limitations
applicable to the Bank with respect to which assets of a Client Plan
may be invested in the Funds, and if so, the nature of such
limitations; and
(5) Upon request of the Independent Fiduciary, a copy of the
proposed exemption and/or a copy of the final exemption, if granted,
once such documents become available.
(i) On the basis of the information described above in paragraph
(h) of this Section II, the Independent Fiduciary authorizes in writing
the investment of assets of the Client Plan in each Fund, and the fees
to be paid by such Funds to the Bank.
(j) All authorizations made by an Independent Fiduciary regarding
investments in a Fund and the fees paid to the Bank are subject to an
annual reauthorization wherein any such prior authorization referred to
in paragraph (i) of Section II shall be terminable at will by the
Client Plan, without penalty to the Client Plan, upon receipt by the
Bank of written notice of termination. A form expressly providing an
election to terminate the authorization described in paragraph (i) of
Section II above (the Termination Form) with instructions on the use of
the form must be supplied to the Independent Fiduciary no less than
annually. The instructions for the Termination Form must include the
following information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Plan, upon receipt by the Bank of written notice
from the Independent Fiduciary; and
(2) Failure to return the Termination Form will constitute
continued authorization of the Bank to engage in [[Page 5715]] the
transactions described in paragraph (i) of Section II on behalf of the
Client Plan.
(k) In the event of an increase in the rate of any fees paid by the
Funds to the Bank regarding any investment management services,
investment advisory services, or fees for similar services that the
Bank provides to the Funds over an existing rate for such services that
had been authorized by an Independent Fiduciary, in accordance with
paragraph (i) of this Section II, the Bank will, at least thirty (30)
days in advance of the implementation of such increase, provide a
written notice (which may take the form of a proxy statement, letter,
or similar communication that is separate from the prospectus of the
Fund and which explains the nature and amount of the increase in fees)
to the Independent Fiduciary of each of the Client Plans invested in a
Fund which is increasing such fees. Such notice shall be accompanied by
a Termination Form. However, if the Termination Form has been provided
to the Independent Fiduciary pursuant to this paragraph, then the
Termination Form need not be provided again for an annual
reauthorization pursuant to paragraph (j) above unless at least six
months has elapsed since the form was provided in connection with the
fee increase.
(l) On an annual basis, the Bank provides the Independent Fiduciary
of a Client Plan investing in the Funds with:
(1) A copy of the current prospectus for the Funds and, upon such
fiduciary's request, a copy of the Statement of Additional Information
for such Funds which contains a description of all fees paid by the
Funds to the Bank; and
(2) Upon the request of such Independent Fiduciary, a report or
statement (which may take the form of the most recent financial report,
the current Statement of Additional Information for the Fund, or some
other written statement) that contains a description of all fees paid
by the Fund to the Bank.
(m) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Client Plans than dealings with other
shareholders of the Funds.
Section III--General Conditions
(a) The Bank maintains for a period of six years the records
necessary to enable the persons described below in paragraph (b) of
Section III to determine whether the conditions of this exemption have
been met, except that (1) a prohibited transaction will not be
considered to have occurred if, due to circumstances beyond the control
of the Bank, the records are lost or destroyed prior to the end of the
six-year period, and (2) no party in interest other than the Bank shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act or to the taxes imposed by section 4975 (a) and (b)
of the Code if the records are not maintained or are not available for
examination as required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504 (a)(2) and (b) of the Act, the records
referred to in paragraph (a) of Section III are unconditionally
available at their customary location for examination during normal
business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1) (ii) and
(iii) shall be authorized to examine trade secrets of the Bank, or
commercial or financial information which is privileged or
confidential.
Section IV--Definitions
For purposes of this proposed exemption:
(a) The term ``Bank'' means the Bank South, N.A. and any affiliate
thereof as defined below in paragraph (b) of this Section IV.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' shall include the Peachtree
Funds, Inc., or any other diversified open-end investment company
registered under the 1940 Act for which the Bank serves as an
investment adviser.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund or portfolio of the Fund, less the liabilities
charged to each such portfolio or Fund, by the number of outstanding
shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term ``Independent Fiduciary'' means a fiduciary of a
Client Plan who is independent of and unrelated to the Bank. For
purposes of this exemption, the Independent Fiduciary will not be
deemed to be independent of and unrelated to the Bank if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Bank;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner, employee or
affiliate of the Bank (or is a relative of such persons);
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption.
If an officer, director, partner, affiliate or employee of the Bank
(or relative of such persons), is a director of such Independent
Fiduciary, and if he or she abstains from participation in (i) the
choice of the Client Plan's investment adviser, (ii) the approval of
any such purchase or sale between the Client Plan and the Funds, and
(iii) the approval of any change in fees charged to or paid by the
Client Plan in connection with any of the transactions described in
Sections I and II above, then paragraph (g)(2) of this Section IV shall
not apply.
(h) The term ``Termination Form'' means the form supplied to the
Independent Fiduciary which expressly provides an election to the
Independent Fiduciary to terminate on behalf of a Client Plan the
authorization described in paragraph (j) of Section II. The Termination
Form shall be used at will by the Independent Fiduciary to terminate an
authorization without penalty to the Client Plan and to notify the Bank
in writing to effect a termination by selling the shares of the Funds
held by the Client Plan requesting such termination within one business
day following receipt by the [[Page 5716]] Bank of the form; provided
that if, due to circumstances beyond the control of the Bank, the sale
cannot be executed within one business day, the Bank shall have one
additional business day to complete such sale.
Effective Date: If the proposed exemption is granted, the exemption
will be effective February 11, 1994.
Summary of Facts and Representations
1. The Bank is a Georgia corporation with its principal offices
located at 55 Marietta Street, N.W., Atlanta, Georgia, and is a wholly-
owned subsidiary of Bank South Corporation, a bank holding company. The
Bank provides trust services to approximately 128 employee benefit
plans with total assets of approximately $132 million, as of November
1, 1993. The Bank has total assets under management of approximately $1
billion.
The Bank serves as a discretionary trustee, investment manager,
directed trustee, or custodian for the Client Plans. The Client Plans
include various pension, profit sharing, and stock bonus plans as well
as voluntary employees' beneficiary associations, supplemental
unemployment benefit plans, simplified employee benefit plans,
retirement plans for self-employed individuals (i.e. Keogh plans), and
individual retirement accounts (IRAs).
The Bank represents that its status as a fiduciary with investment
discretion for a Client Plan arises out of its relationship as a
trustee or investment manager for such Plan. The Bank may exercise
investment discretion for all or a portion of the assets of a Client
Plan. As a custodian or directed trustee of a Client Plan, the Bank has
custody of Plan assets, collects all income, performs bookkeeping and
accounting services, generates periodic statements of account activity
and other reports, and makes payments or distributions from the account
as directed. However, the Bank has no duty as a custodian or directed
trustee to review investments or make recommendations, acting only as
directed by an authorized Independent Fiduciary.
2. The Bank requests an exemption for investments in a Fund which
occur through an in-kind transfer of a Client Plan's pro rata share of
assets of a terminating CIF to a corresponding Fund in exchange for
shares of such Fund.12 The Bank also requests an exemption for the
receipt of fees from the Funds in connection with the investment of
assets of a Client Plan (including any Client Plan invested in a CIF
which transfers its assets to a Fund), for which it acts as a trustee,
directed trustee, investment manager, or custodian in shares of the
Funds in situations where the Bank acts as an investment adviser to the
Funds. The exemption for the receipt of fees would include Client Plans
for which the Bank exercises investment discretion as well as Client
Plans where investment decisions are directed by an Independent
Fiduciary.13
\12\The Bank is not requesting an exemption for any investment
in the Funds by employee benefit plans sponsored and maintained by
the Bank (the Bank Plans). The Bank represents that the Bank Plans
may acquire or sell shares of the Funds pursuant to Prohibited
Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734, April 8, 1977).
PTE 77-3 permits the acquisition or sale of shares of a registered,
open-end investment company by an employee benefit plan covering
only employees of such investment company, employees of the
investment adviser or principal underwriter for such investment
company, or employees of any affiliated person (as defined therein)
of such investment adviser or principal underwriter, provided
certain conditions are met. The Department is expressing no opinion
in this proposed exemption regarding whether any transactions with
the Funds by the Bank Plans would be covered by PTE 77-3.
\13\The transactions with the Funds involving Client Plans for
which the Bank acts as a nondiscretionary trustee may be covered by
Prohibited Transaction Exemption 84-24 (PTE 84-24, 49 FR 13206,
April 3, 1984). PTE 84-24 provides, among other things, an exemption
for the purchase by a plan of securities issued by an investment
company from, or the sale of such securities to, an investment
company or an investment company principal underwriter, when the
investment company, principal underwriter, or investment company
investment adviser is a fiduciary or service provider to the plan
solely by reason of the sponsorship of a master or prototype plan or
the provision of nondiscretionary trust services to the plan, or
both, if the conditions discussed therein are met (see Section
III(f) and Section IV of PTE 84-24). However, the applicant states
that it is unclear whether PTE 84-24 would cover either: (i) The
``conversion'' transaction, pursuant to which Plan interests in the
CIFs are exchanged for equivalent interests in the Funds; (ii) the
``fee offset'' mechanism, pursuant to which the Bank ensures that
Plans are not charged investment advisory fees at both the Plan-
level and the Fund-level; and (iii) the ``negative consent''
mechanism, pursuant to which future Fund-level fee modifications are
deemed approved unless the Plan submits an ``investment termination
form'' after receiving notice of the fee modification, as discussed
herein. The Department expresses no opinion in this proposed
exemption regarding whether such transactions would be covered by
PTE 84-24.
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3. The Funds are a Massachusetts business trust organized as an
open-end investment company registered under the 1940 Act. The Funds
currently consist of five Funds or ``portfolios'', each having a
separate prospectus and representing a distinct investment vehicle. The
shares of each Fund represent a proportionate interest in the assets of
that Fund. The existing Funds include the Peachtree Government Money
Market Fund, the Peachtree Prime Money Market Fund, the Peachtree Bond
Fund, the Peachtree Equity Fund, and the Peachtree Georgia Tax-Free
Fund.14 The Bank states that additional Funds may be established
in the future. Shares of the Funds are offered and sold to eligible
investors, including the Client Plans and other trust clients of the
Bank, as a means of acquiring an interest in a diversified portfolio of
investments. The Bank states that the Fund shares are offered to the
Bank's trust customers, including the Client Plans, under terms and
conditions which are at least as favorable to such customers as the
terms and conditions offered to any other customers of the Bank.
\14\The Bank does not anticipate that the Client Plans will
invest in the Peachtree Georgia Tax-Free Fund, since the Plans are
not subject generally to Federal or State income taxes and would not
need to seek tax-free income.
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Investments of Client Plan assets in the Funds occur either through
a transfer of assets from a terminating CIF, the direct purchase of
shares of the Funds for a Client Plan by the Bank, the transfer by the
Bank of Client Plan assets from one Fund to another Fund, or a daily
automated sweep of uninvested cash of a Client Plan by the Bank into
one or more Funds previously designated by the Client Plan for sweeping
such cash. All such investments for the Client Plans are made pursuant
to the Independent Fiduciary's prior written authorization and annual
reauthorization to the Bank.
4. Federated Securities Corporation (FSC) is the principal
distributor for all shares of the Funds including shares which are sold
to the Client Plans. There are no fees for distribution expenses,
pursuant to Rule 12b-1 under the 1940 Act, paid by the Client Plans or
other trust clients of the Bank to FSC for any shares of the Funds. In
addition, the Bank does not and will not receive fees payable pursuant
to Rule 12b-1 in connection with transactions involving any shares of
the Funds. However, such shareholders are charged for certain
administrative expenses of the Funds. FSC is a subsidiary of Federated
Investors (Federated) which, through other subsidiaries, acts as the
transfer and dividend disbursing agent for the Funds and provides
certain personnel and administrative services for the Funds. Federated
and its subsidiaries are unrelated to the Bank. The Bank of New York is
the custodian for the securities and cash of the Funds.
5. The Bank serves as the investment adviser for the Funds pursuant
to investment advisory agreements with the Funds (the Agreements) which
allow the Bank to receive monthly investment advisory fees based on a
certain percentage (i.e., between .33% [[Page 5717]] and .75%) of the
average daily net assets of each of the Funds.15 The Bank is
currently the sole investment adviser to the Funds' existing portfolios
and presently contemplates no change for such portfolios. However, the
Bank states that it may utilize third party sub-advisers in the future
to enhance the investment alternatives and the investment advisory
services available to the Funds for certain new portfolios. The
Agreements and the fees received by the Bank are approved by the Board
of Directors of the Funds (the Funds' Directors), in accordance with
the applicable provisions of the 1940 Act. Any changes in the fees or
services for the Funds are approved by the Funds' Directors, a majority
of whom must be independent of the Bank.
\15\The Bank states that it will not perform any services for
the Funds other than investment advisory services. Thus, the Bank
will not act as the custodian, transfer agent, or shareholder
servicing agent for a Fund or provide any other secondary services
to the Funds. The Bank also will not provide portfolio execution
services for the Funds. Therefore, all securities transactions for a
Fund's portfolio will be executed by broker-dealers unrelated to the
Bank and will not generate commissions or other fees to the Bank.
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6. Prior to February 11, 1994, the Bank generally invested assets
of Client Plans for which it acted as a trustee with investment
discretion in a series of CIFs. In addition, certain Client Plans where
investment decisions are directed by an Independent Fiduciary generally
used a Bank CIF as an investment option for the Client Plans. However,
on Friday, February 11, 1994, the Bank terminated two of its CIFs--the
BankSouth Fixed Income CIF and the BankSouth Equity CIF. The assets in
these CIFs were transferred to the Peachtree Bond Fund and the
Peachtree Equity Fund, respectively. Each CIF transferred its assets to
the corresponding Fund in exchange for shares of that Fund at the then
current market value of the CIF assets, in accordance with Rule 17a-7
under the 1940 Act (as discussed below).16 The CIFs were then
liquidated and the Fund shares were distributed to the Client Plans,
subject to the prior written consent of the Independent Fiduciary for
the Client Plan. Any Client Plan that had not provided prior written
approval for the transfer of its CIF assets to the Funds by the
deadline set for such approvals received a cash distribution of its pro
rata share of the CIF assets no later than Friday, February 11, 1994,
preceding the transfers.
\16\Rule 17a-7 permits transactions between investment funds
that use the same investment adviser, subject to certain conditions.
Rule 17a-7 requires, among other things, that such transactions be
effected at the ``independent current market price'' for each
security, involve only securities for which market quotations are
readily available, involve no brokerage commissions or other
remuneration, and comply with valuation procedures adopted by the
board of directors of the investment company to ensure that all
requirements of the Rule are satisfied.
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The assets of the CIFs were reviewed by the Bank as investment
adviser to the Funds, in coordination with Federated Administrative
Services (FAS), the Funds' third party administrator, to determine that
the assets were appropriate investments for the corresponding Funds.
FAS created a portfolio accounting system to track the securities to be
acquired by the Funds. Prior to the transfer of CIF assets to the
Funds, the Funds did not hold any securities or other assets.
The transfer transactions occurred using market values as of the
close of business on Friday, February 11, 1994. The securities
transferred from the CIFs were the same as the securities received by
the Funds. The applicant states that the value of the securities was
determined in a single valuation by the Bank as investment adviser for
the Funds, in accordance with the requirement of Rule 17a-7(b) that
transactions be effected at the ``independent current market price'' of
the securities. The valuation of the securities was performed in the
same manner for both the CIF and the corresponding Fund at the close of
the same business day. Specifically, as required by the Rule,
securities listed on exchanges were valued at their closing prices on
Friday, February 11, and unlisted securities were valued based on the
average of bid and ask quotations at the close of the market on Friday,
February 11, obtained from three brokers independent of the Bank. Any
fees charged by the independent brokers for the bid and ask prices were
paid by the Bank.
Each Client Plan that approved the CIF asset transfers to the Funds
received account statements describing the asset transfers on or before
March 31, 1994. The statements showed the disposition of the CIF units
from the Client Plan account and the acquisition by the account of Fund
shares, both posted as of Monday, February 14, 1994.17 This
information provided the affected Client Plans with written
confirmation of the number of CIF units held by the Client Plan
immediately before the transfer, the related per unit value and the
total dollar amount of such CIF units as well as the number of shares
of the Funds held by the Client Plan following the transfer, the
related per share net asset value, and the total dollar amount of such
shares.
\17\The following example illustrates the information provided
by the statements: Assume a Client Plan held 12,506 units of the
BankSouth Equity CIF prior to the asset transfers. The account
statement showed a disposition of 12,506 units of the BankSouth
Equity CIF, at a value of $72.08 per unit, on February 14, 1994 with
total proceeds of $901,432.18. The statement also showed a purchase
on that same date of 90,143.218 shares of the Peachtree Equity Fund,
the Fund corresponding to the BankSouth Equity CIF, at $10 per
share, at a total cost of $901,432.18, the same amount as the
proceeds of the disposition from the BankSouth Equity CIF.
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Thus, the applicant represents that as of February 14, 1994, Client
Plans that were formerly invested in the terminated CIFs held shares of
the corresponding Funds which were of the same value, based on the
Client Plans' pro rata share of the underlying market value of the
securities transferred to the Funds, as their assets in the CIF as of
the close of business on Friday, February 11, 1994. The Bank represents
that the other CIFs may be terminated in the future and that all such
terminations and subsequent transfers of CIF assets for shares of the
Funds will comply with Rule 17a-7 as described above and the conditions
of this proposed exemption.
For all transfers of CIF assets to a Fund following publication of
this proposed exemption in the Federal Register, the Bank sends by
regular mail to each affected Client Plan a written confirmation, not
later than 30 days after completion of the transaction, containing the
following information:
(1) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(2) The price of each such security involved in the transaction;
and
(3) The identity of each pricing service or market maker consulted
in determining the value of such securities. Securities which are
valued in accordance with Rule 17a-7(b)(4) are securities for which the
current market price cannot be obtained by reference to the last sale
price for transactions reported on a recognized securities exchange or
the NASDAQ system. The Bank states that such securities are valued
based on an average of the highest current independent bid and lowest
current independent offer, as of the close of business on the Friday
preceding the weekend of the CIF transfers, determined on the basis of
reasonable inquiry from at least three sources that are broker-dealers
or pricing services independent of the Bank.
In addition, for all in-kind transfers of CIF assets to a Fund that
occur after the date this proposed exemption is published in the
Federal Register, the Bank will send by regular mail to the Independent
Fiduciary no later than 90 [[Page 5718]] days after completion of each
transfer a written confirmation that contains the following
information:
(1) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(2) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
The Bank believes that the interests of the Client Plans are better
served by the collective investment of assets of the Client Plans in
the Funds rather than in the CIFs. The Funds are valued on a daily
basis, whereas the majority of the CIFs are valued monthly. The daily
valuation permits (i) immediate investment of Client Plan contributions
in various types of investments; (ii) greater flexibility in
transferring assets from one type of investment to another; and (iii)
daily redemption of investments for purposes of making distributions.
In addition, information concerning the investment performance of the
Funds will be available on a daily basis in newspapers of general
circulation which will allow Client Plan fiduciaries to monitor the
performance of investments on a daily basis and make more informed
investment decisions.
7. For investments in the Funds on behalf of Client Plans, the Bank
currently offsets its investment management or advisory fees for assets
invested in the Funds in accordance with one of the methods for
offsetting double investment advisory fees described in Prohibited
Transaction Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8,
1977).18 Consequently, the Bank represents that the fee structure
for these investments complies with the fee structure under PTE 77-4,
and that the other conditions of PTE 77-4 are met.19
\18\PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that,
among other things, the plan does not pay an investment management,
investment advisory or similar fee with respect to the plan assets
invested in such shares for the entire period of such investment.
Section II(c) of PTE 77-4 states that this condition does not
preclude the payment of investment advisory fees by the investment
company under the terms of an investment advisory agreement adopted
in accordance with section 15 of the 1940 Act. Section II(c) states
further that this condition does not preclude payment of an
investment advisory fee by the plan based on total plan assets from
which a credit has been subtracted representing the plan's pro rata
share of investment advisory fees paid by the investment company.
\19\The Department is expressing no opinion in this proposed
exemption regarding whether any transactions with the Funds under
the circumstances described herein would be covered by PTE 77-4.
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The Bank charges its standard fees to all the Client Plans for
serving as a trustee or investment manager for the Client Plans.20
All fees are billed on a quarterly basis. The annual charges for a
Client Plan account are based on fee schedules negotiated with the
Bank. The Bank provides services to the Client Plans for which it has
investment discretion, including sweep services for uninvested cash
balances in such Plans, under a single fee arrangement which is
calculated as a percentage of the market value of the Plan assets under
management. There are no separate charges for the provision of sweep
services to the Client Plans for which the Bank has investment
discretion. However, for Client Plans where investment decisions are
directed by an Independent Fiduciary, a separate charge is assessed for
sweep services where the Independent Fiduciary specifically agrees to
have the Bank provide such services to the Client Plan.21 The Bank
states that in many cases fees charged by the Bank to a Client Plan are
paid by the Client Plan sponsor rather than by the Client Plan.
\20\The applicant represents that all fees paid by Client Plans
directly to the Bank for services performed by the Bank are exempt
from the prohibited transaction provisions of the Act by reason of
section 408(b)(2) of the Act and the regulations thereunder (see 29
CFR 2550.408b-2). The Department notes that to the extent there are
prohibited transactions under the Act as a result of services
provided by the Bank directly to the Client Plans which are not
covered by section 408(b)(2), no relief is being proposed herein for
such transactions.
\21\See DOL Letter dated August 1, 1986 to Robert S. Plotkin,
Assistant Director, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, stating the
Department's views regarding the application of the prohibited
transaction provisions of the Act to sweep services provided to
plans by fiduciary banks and the potential applicability of certain
statutory exemptions as described therein.
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The Bank charges the Funds for its services to the Funds as
investment adviser, in accordance with the Agreements between the Bank
and the Funds. Under the Agreements, the Bank charges fees at a
different rate for each Fund, computed based on the average daily net
assets for the respective Fund. The fee differentials among the Funds
result from the particular level of services rendered by the Bank to
the Funds.
The investment advisory fees paid by each of the existing Funds are
accrued on a daily basis and billed by the Bank to the Funds at the
beginning of the month following the month in which the fees accrued.
The Bank states that any additional Funds will follow the same monthly
billing arrangement.
Under the fee structure which would be covered by the proposed
exemption, the Bank states that the Client Plans will not pay any plan-
level investment management fees, investment advisory fees, or similar
fees to the Bank with respect to any of the assets of such Client Plans
which are invested in shares of any of the Funds. However, this fee
structure does not preclude the payment of investment advisory fees or
similar fees by the Funds to the Bank under the terms of the
Agreements, provided that such Agreements are adopted in accordance
with section 15 of the 1940 Act.
The Bank states that the combined total of all fees received by the
Bank for the provision of services to a Client Plan, and in connection
with the provision of services to the Funds in which the Client Plan
may invest, are not in excess of ``reasonable compensation'' within the
meaning of section 408(b)(2) of the Act.
The Bank represents that the fee structure ensures that the Bank
does not receive any additional investment management, advisory or
similar fees from the Funds as a result of investments in the Funds by
the Client Plans. Thus, the Bank represents that the fee structure is
at least as advantageous to the Client Plans as an arrangement pursuant
to the conditions of PTE 77-4 whereby investment advisory fees paid by
the Funds to the Bank would be offset or credited against investment
management fees charged directly by the Bank to the Client Plans. In
this regard, the Bank states that the fee structure essentially has the
same effect in offsetting the Bank's investment advisory fees as an
arrangement under PTE 77-4, section II(c).
8. With respect to any transfer of a Client Plan's CIF assets to a
Fund, the Bank states that an Independent Fiduciary for the Client Plan
receives advance written notice of the in-kind transfer of assets of
the CIFs and full written disclosure of information concerning the
Fund. On the basis of such information, the Independent Fiduciary
authorizes in writing the in-kind transfer of the Client Plan's CIF
assets to a Fund in exchange for shares of the Fund. With respect to
the receipt of fees by the Bank from a Fund in connection with any
Client Plan's investment in the Fund, the Bank states that an
Independent Fiduciary receives full and detailed written disclosure of
information concerning the Fund in [[Page 5719]] advance of any
investment by the Client Plan in the Fund. On the basis of such
information, the Independent Fiduciary authorizes in writing the
investment of assets of the Client Plan in the Fund and the fees to be
paid by the Fund to the Bank. In addition, the Bank represents that the
Independent Fiduciary of each Client Plan invested in a particular Fund
will receive full written disclosure, in a statement separate from the
Fund prospectus, of any proposed increases in the rates of fees charged
by the Bank to the Funds for investment advisory services which is
above the rate reflected in the prospectus for the Fund, at least 30
days prior to the effective date of such increase.22
\22\ The Department notes that an increase in the amount of a
fee for an existing investment advisory service (other than through
an increase in the value of the underlying assets in the Funds) or
the imposition of a fee for a newly-established investment advisory
service shall be considered an increase in the rate of such
investment advisory fee. However, in the event an investment
advisory fee has already been described in writing to the
Independent Fiduciary and the Independent Fiduciary has provided
authorization for the investment advisory fee, and such fee is
waived, no further action by the Bank would be required in order for
the Bank to receive such fee at a later time. Thus, for example, no
further disclosure would be necessary if the Bank had received
authorization for a fee for investment advisory services from Client
Plan investors and subsequently determined to waive the fee for a
period of time in order to attract new investors but later charged
the fee.
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Any authorizations by the Independent Fiduciary regarding the
investment of a Client Plan's assets in a Fund and the fees to be paid
to the Bank, including any future increases in rates of such fees, are
or will be terminable at will by the Independent Fiduciary, without
penalty to the Client Plan, upon receipt by the Bank of written notice
of termination. A Termination Form expressly providing an election to
terminate the authorization with instructions on the use of the form is
supplied to the Independent Fiduciary no less than annually. The
instructions for the Termination Form include the following
information:
(a) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by the Bank of written
notice from the Independent Fiduciary; and
(b) Failure to return the Termination Form will result in continued
authorization of the Bank to engage in the subject transactions on
behalf of the Client Plan.
The Bank states that the Termination Form may be used to notify the
Bank in writing to effect a termination by selling the shares of the
Funds held by the Client Plan requesting such termination within one
business day following receipt by the Bank of the form. The Bank states
further that if, due to circumstances beyond the control of the Bank,
the sale cannot be executed within one business day, the Bank will
complete the sale within the next business day.
Any disclosure of information regarding a proposed increase in the
rate of fees for investment advisory services will be accompanied by a
Termination Form. However, if the Termination Form has been provided to
the Independent Fiduciary for the authorization of a fee increase, then
a Termination Form for an annual reauthorization will not be provided
by the Bank for that year unless at least six months has elapsed since
the Termination Form was provided for the fee increase.
Each Independent Fiduciary receives from the Bank a current
prospectus for the Funds and a written statement giving full disclosure
of the Fee Structure prior to any investment by the Client Plan in
shares of the Fund. The disclosure statement explains why the Bank
believes that the investment of assets of the Client Plan in the Funds
is appropriate. The disclosure statement also describes whether there
are any limitations on the Bank with respect to which Client Plan
assets may be invested in shares of the Funds and, if so, the nature of
such limitations.23 The Bank states that Client Plan fiduciaries
will also receive from Federated, the Funds' distributor, an updated
prospectus and periodic reports for each Fund. In addition to
information provided to Fund shareholders by Federated, the Bank will
provide each Independent Fiduciary with a quarterly performance review
for the Peachtree Equity and Bond Funds. This report will include
updated information regarding the particular Fund's investment
strategy, performance, and diversification of assets as well as a
description of the securities held by the Fund. The Bank states further
that Fund shareholders may also request a copy of the Statement of
Additional Information for any Fund free of charge, obtain other
information, or make inquiries about a Fund by writing or calling the
Bank.
\23\ See section II(d) of PTE 77-4 which requires, in pertinent
part, that an independent plan fiduciary receive a current
prospectus issued by the investment company and a full and detailed
written disclosure of the investment advisory and other fees charged
to or paid by the plan and the investment company, including a
discussion of whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested
in shares of the investment company and, if so, the nature of such
limitations.
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9. No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds. In addition, no
redemption fees are paid in connection with the sale of shares by the
Client Plans to the Funds. The applicant states that all other dealings
between the Client Plans, the Funds, and the Bank or any affiliate, are
on a basis no less favorable to the Client Plans than such dealings are
with the other shareholders of the Funds.
10. In summary, the Bank represents that the transactions described
herein satisfy the statutory criteria of section 408(a) of the Act
because: (a) The Funds provide the Client Plans with a more effective
investment vehicle than the CIFs maintained by the Bank without any
increase in investment management, advisory or similar fees paid to the
Bank; (b) with respect to the transfer of a Client Plan's CIF assets
into a Fund in exchange for Fund shares, an Independent Fiduciary
authorizes in writing such transfer prior to the transaction only after
full written disclosure of information concerning the Fund; (c) each
Client Plan receives shares of a Fund in connection with the transfer
of assets of a terminating CIF which have a net asset value that is
equal to the value of the Client Plan's pro rata share of the CIF
assets on the date of the transfer, based on the current market value
of such assets as determined in a single valuation at the close of the
same business day using independent sources in accordance with
procedures established by the Fund which comply with Rule 17a-7 of the
1940 Act; (d) with respect to any investments in a Fund by the Client
Plans and the payment of any fees by the Fund to the Bank, an
Independent Fiduciary receives full written disclosure of information
concerning the Fund, including a current prospectus and a statement
describing the fee structure, and authorizes in writing the investment
of the Client Plan's assets in the particular Fund and the fees paid by
such Fund to the Bank; (e) any authorizations made by a Client Plan
regarding investments in a Fund and fees paid to the Bank, or any
increases in the rates of fees for such services, are or will be
terminable at will by the Client Plan, without penalty to the Client
Plan, upon receipt by the Bank of written notice of termination from
the Independent Fiduciary; (f) no commissions or redemption fees are
paid by the Client Plan in connection with either the acquisition of
Fund shares, through either a direct purchase of the shares or a
transfer of CIF assets in exchange for the shares, or the sale of Fund
shares; and (g) all dealings between the Client Plans, the Funds and
[[Page 5720]] the Bank, are on a basis which is at least as favorable
to the Client Plans as such dealings are with other shareholders of the
Funds.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all Independent
Fiduciaries of Client Plans described herein that had investments in a
terminating CIF and from whom approval was sought, or will be sought
prior to the granting of this proposed exemption, for a transfer of a
Client Plan's CIF assets to a Fund. In addition, interested persons
shall include the Independent Fiduciaries of all Client Plans that are
currently invested in the Funds, as of the date the notice of the
proposed exemption is published in the Federal Register, where the Bank
provides services to the Funds and receives fees which would be covered
by the exemption, if granted. Notice to interested persons shall be
provided by first class mail within fifteen (15) days following the
publication of the proposed exemption in the Federal Register. Such
notice shall include a copy of the notice of proposed exemption as
published in the Federal Register and a supplemental statement (see 29
CFR 2570.43(b)(2)) which informs all interested persons of their right
to comment on and/or request a hearing with respect to the proposed
exemption. Comments and requests for a public hearing are due within
forty-five (45) days following the publication of the proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Dillon, Read & Co. Inc. (Dillon) Located in New York, New York
[Application No. D-09741]
Proposed Exemption
I. Transactions
A. The restrictions of sections 406(a) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A. (1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to the assets of that Excluded
Plan.24
\24\Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or assets
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.25 For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
\25\For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1) (i), (iii),
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. The restrictions of sections 406(a), 406(b) and 407(a) of the
Act, and the taxes imposed by section 4975 (a) and (b) of the Code by
reason of section 4975(c) of the Code, shall not apply to transactions
in connection with the servicing, management and operation of a trust;
provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust.26
\26\In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. The restrictions of sections 406(a) and 407(a) of the Act, and
the taxes imposed by sections 4975 (a) and (b) of the Code by reason of
sections 4975(c)(1) (A) through (D) of the Code, shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a [[Page 5721]] person is deemed to be a party in
interest or disqualified person (including a fiduciary) with respect to
a plan by virtue of providing services to the plan (or by virtue of
having a relationship to such service provider described in section
3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2) (F), (G),
(H) or (I) of the Code), solely because of the plan's ownership of
certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.
(D&P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. ``Certificate'' means:
(1) A certificate--
(a) That represents a beneficial ownership interest in the assets
of a trust; and
(b) That entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) A certificate denominated as a debt instrument--
(a) That represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) within the meaning of section 860D(a) of the
Internal Revenue Code of 1986; and
(b) That is issued by and is an obligation of a trust; with respect
to certificates defined in (1) and (2) for which Dillon or any of its
affiliates is either (i) the sole underwriter or the manager or co-
manager of the underwriting syndicate, or (ii) a selling or placement
agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) Either--
(a) Secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) Secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T);
(c) Obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property, (including obligations
secured by leasehold interests on commercial real property);
(d) Obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U);
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR section 2510.3-101(i)(2);
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);27
\27\The Department wishes to take the opportunity to clarify its
view that the definition of Trust contained in III.B.(1)(a) through
(e) includes a two-tier trust structure under which certificates
issued by the first trust, which contains a pool of receivables
described above, are transferred to a second trust which issues
certificates that are sold to plans. However, the Department is of
the further view that, since the exemption provides relief for the
direct or indirect acquisition or disposition of certificates that
are not subordinated, no relief would be available if the
certificates held by the second trust were subordinated to the
rights and interests evidenced by other certificates issued by the
first trust.
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(2) Property which had secured any of the obligations described in
subsection B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to made
to certificateholders; and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
arrangements with respect to any obligations described in subsection
B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) The investment pool consists only of
assets of the type which have been included in other investment pools,
(ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating
[[Page 5722]] categories by S&P's, Moody's, D&P, or Fitch for at least
one year prior to the plan's acquisition of certificates pursuant to
this exemption, and (iii) certificates evidencing interests in such
other investment pools have been purchased by investors other than
plans for at least one year prior to the plan's acquisition of
certificates pursuant to this exemption.
C. ``Underwriter'' means:
(1) Dillon;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
Dillon; or
(3) Any member of an underwriting syndicate or selling group of
which Dillon or a person described in (2) is a manager or co-manager
with respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services assets contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services assets contained in
the trust, including the master servicer and any subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust.
Notwithstanding the foregoing, a person is not an insurer solely
because it holds securities representing an interest in a trust which
are of a class subordinated to certificates representing an interest in
the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) Any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR section 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(a) Which is secured by equipment which is leased;
(b) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(c) With respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as the
trust would have if the equipment note were secured only by the
equipment and not the lease.
U. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(a) The trust holds a security interest in the lease;
(b) The trust holds a security interest in the leased motor
vehicle; and
(c) The trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as the trust would receive
under a motor vehicle installment loan contract.
V. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
Summary of Facts and Representations
1. Dillon, Read & Co. Inc. is an international investment banking
firm [[Page 5723]] which has its headquarters in New York, New York.
The firm has numerous offices in the United States as well as London,
Paris and Tokyo. Dillon and its affiliates28 engage in a variety
of activities that facilitate the flow of capital from investors in the
United States and abroad to corporations, governments and international
agencies. Dillon provides a broad range of merger and acquisition
services, engages in securities transactions as both principal and
agent and provides underwriting, research and financial services to
domestic and foreign financial institutions. The firm is actively
involved in the issuance and trading of equity securities, high-yield
corporate debt, investment grade fixed income securities, U.S.
Government securities and municipal securities.
\28\As described herein, the term ``Dillon'' refers to Dillon,
Read and Co. Inc. and its affiliates unless the context otherwise
requires.
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2. Dillon seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following
categories of trusts: (1) Single and multi-family residential or
commercial mortgage investment trusts;29 (2) motor vehicle
receivables pool investment trusts; (3) consumer or commercial
receivables investment trusts; and (4) guaranteed governmental mortgage
pool certificate investment trusts.30
\29\The Department notes that Prohibited Transaction Exemption
(PTE) 83-1 (48 FR 895, January 7, 1983) a class exemption for
mortgage pool investment trusts, would generally apply to trusts
containing single-family residential mortgages, provided that the
applicable conditions of PTE 83-l are met. Dillon requests relief
for single-family residential mortgages in this exemption because it
would prefer one exemption for all trusts of similar structure.
However, Dillon has stated that it may still avail itself of the
exemptive relief provided by PTE 83-1.
\30\Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
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3. Residential and commercial mortgage investment trusts may
include mortgages on ground leases of real property. Commercial
mortgages are frequently secured by ground leases on the underlying
property rather than by fee simple interests. The separation of the fee
simple interest and the ground lease interest is generally done for tax
reasons. Properly structured, the pledge of the ground lease to secure
a mortgage provides a lender with the same level of security as would
be provided by a pledge of the related fee simple interest. The terms
of the ground lease pledged to secure leasehold mortgages will in all
cases be at least ten years longer than the term of such
mortgage.31
\31\Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990) at 23150.
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement or equivalent agreement between a sponsor, a servicer and a
trustee. The sponsor or servicer of a trust selects assets to be
included in the trust. These assets are receivables or certificates
which may have been originated, in the ordinary course of business, by
a sponsor or servicer of the trust, an affiliate of the sponsor or
servicer, or by an unrelated lender and subsequently acquired by the
trust sponsor or servicer.
On or prior to the closing date, the sponsor acquires legal title
to all assets selected for the trust, establishes the trust and
designates an independent entity as trustee. On the closing date, the
sponsor conveys to the trust legal title to the assets, and the trustee
issues certificates representing fractional undivided interests in the
trust assets. Dillon, or one or more broker-dealers (which may include
Dillon), acts as underwriter or placement agent with respect to the
sale of the certificates. All of the public offerings of certificates
presently contemplated have been or are to be underwritten by Dillon on
a firm commitment basis. In addition, Dillon anticipates privately
placing certificates on both a firm commitment and an agency basis.
Dillon may also act as the lead underwriter for a syndicate of
securities underwriters.
Certificateholders will be entitled to receive periodic
installments of principal and/or interest, or other payments due on the
trust assets.
5. Some of the certificates will be multi-class certificates.
Dillon requests exemptive relief for two types of multi-class
certificates: ``strip'' certificates and ``fast-pay/slow-pay''
certificates. Strip certificates are a type of security in which the
stream of interest payments on receivables is split from the flow of
principal payments and separate classes of certificates are
established, each representing rights to disproportionate payments of
principal and interest.32
\32\It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. Interest and/or principal
payments received on the underlying trust assets are distributed first
to the class of certificates having the earliest stated maturity of
principal and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class pass-through arrangement is
the order in which distributions are made to certificateholders. In
each case, certificateholders will have a beneficial ownership interest
in the underlying trust assets. In neither case will the rights of a
plan purchasing certificates be subordinated to the rights of another
certificateholder in the event of default on any of the underlying
obligations. In particular, if the amount available for distribution to
certificateholders is less than the amount required to be so
distributed, all senior certificateholders will share in the amount
distributed on a pro rata basis.33
\33\If a trust issues subordinate certificates, holders of such
subordinate certificates may not share in the amount distributed on
a pro rata basis. The Department notes that the exemption does not
provide relief for plan investment in such subordinated
certificates.
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6. For tax reasons, the trust must be maintained as an essentially
passive entity. Therefore, both the sponsor's discretion and the
servicer's discretion with respect to assets included in a trust are
severely limited. Pooling and servicing agreements provide for the
substitution of trust assets by the sponsor only in the event of
defects in documentation discovered within a short time after the
issuance of trust certificates (within 120 days, except in the case of
obligations having an [[Page 5724]] original term of 30 years, in which
case the period will not exceed two years). Any receivable so
substituted is required to have characteristics substantially similar
to the replaced receivable and will be at least as creditworthy as the
replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
Parties to Transactions
7. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a homeowner or automobile
purchaser, or leases property to a lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their business,
including finance companies, financial institutions, and any kind of
manufacturer, merchant, or service enterprise for whom such origination
is an incidental part of its operations. Each trust may contain assets
of one or more originators. The originator of the receivables may also
function as the trust sponsor or servicer.
8. The sponsor of a trust will be one of three entities: (i) a
special-purpose corporation unaffiliated with the servicer, (ii) a
special-purpose or other corporation affiliated with the servicer, or
(iii) the servicer itself. Where the sponsor is not also the servicer,
the sponsor's role will generally be limited to acquiring the assets to
be included in the trust, establishing the trust, designating the
trustee, and assigning the assets to the trust.
9. The trustee of a trust is the legal owner of the obligations in
the trust. The trustee is also a party to or beneficiary of all the
documents and instruments deposited in the trust, and as such is
responsible for enforcing all the rights created thereby in favor of
certificateholders.
The trustee will be an independent entity, and therefore will be
unrelated to Dillon, the trust sponsor or the servicer. Dillon
represents that the trustee will be a substantial financial institution
or trust company experienced in trust activities. The trustee receives
a fee for its services, which will be paid from the assets of the trust
by the sponsor or servicer. The method of compensating the trustee will
be specified in the pooling and servicing agreement and disclosed in
the prospectus or private placement memorandum relating to the offering
of the certificates.
10. The servicer of a trust administers the trust assets on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, it is common for the
receivables to be ``subserviced'' by their respective originators and
for a single entity to ``master service'' the pool of receivables on
behalf of the owners of the related series of certificates. Where this
arrangement is adopted, a receivable continues to be serviced from the
perspective of the borrower by the local subservicer, while the
investor's perspective is that the entire pool of receivables is
serviced by a single, central master servicer who collects payments
from the local subservicers and passes them through to
certificateholders.
Receivables of the type suitable for inclusion in a trust
invariably are serviced with the assistance of a computer. After the
sale, the servicer keeps the sold receivables on the computer system in
order to continue monitoring the accounts. Although the records
relating to sold receivables are kept in the same master file as
receivables retained by the originator, the sold receivables are
flagged as having been sold. To protect the investors' interest, the
servicer ordinarily convenants that this ``sold flag'' will be included
in all records relating to the sold receivables, including the master
file, archives, tape extracts, and printouts.
The sold flags are invisible to the obligor, and do not affect the
manner in which the servicer performs the billing, posting and
collection procedures relating to the sold receivables. However, the
servicer uses the sold flag to identify the receivables for the purpose
of reporting all activity on those receivables after their sale to the
trust.
Depending on the type of receivable and the details of the
servicer's computer system, in some cases the servicer's internal
reports can be adapted for investor reporting with little or no
modification. In other cases, the servicer may have to perform special
calculations to fulfill the investor reporting responsiblities. These
calculations can be performed on the servicer's main computer, or on a
small computer with data supplied by the main system. In all cases, the
numbers produced for the investors are reconciled to the servicer's
books and reviewed by public accountants.
The underwriter will be a registered broker-dealer that acts as
underwriter or placement agent with respect to the sale of the
certificates. Public offerings of certificates are generally made on a
firm commitment basis. Private placements of certificates may be made
on a firm commitment or agency basis.
It is anticipated that the lead or co-managing underwriter will
make a market in certificates offered to the public.
In some cases, the originator and servicer of assets to be included
in a trust and the sponsor of the trust (though they themselves may be
related) will be unrelated to Dillon. However, affiliates of Dillon may
originate or service assets included in a trust, or may sponsor a
trust.
Certificate Price, Pass-Through Rate and Fees
11. In some cases, the sponsor will obtain the assets from various
originators pursuant to existing contracts with such originators under
which the sponsor continually buys receivables. In other cases, the
sponsor will purchase the receivables at fair market value from the
originator or a finance company pursuant to a purchase and sale
agreement related to the specific offering of certificates. In other
cases, the sponsor will originate the receivables itself.
As compensation for the assets transferred to the trust, the
sponsor receives cash, or certificates representing the entire
beneficial interest in the trust. The sponsor sells some or all of
these certificates for cash to investors or securities underwriters.
12. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and expectations as to the
likelihood of timely payment.
The pass-through rate for certificates is equal to the interest
rate on assets included in the trust minus a specified servicing
fee.34 This rate is generally [[Page 5725]] determined by the same
market forces that determine the price of a certificate.
\34\The pass-through rate on certificates representing interests
in trusts holding leases is determined by breaking down lease
payments into ``principal'' and ``interest'' components based on an
implicit interest rate.
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The price of a certificate and its pass-through, or coupon rate,
together determine the yield to investors. If an investor purchases a
certificate at less than par, that discount augments the stated pass-
through rate; conversely, a certificate purchased at a premium yields
less than the stated coupon.
13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor or an affiliate thereof, and
receive fees for acting as sponsor) will retain the difference between
payments received on the assets in the trust and payments payable to
certificateholders, except that in some cases a portion of the payments
on assets in the trust may be paid to a third party, such as a fee paid
to a provider of credit support. The servicer may receive additional
compensation by having the use of the amounts paid on the assets
between the time they are received by the servicer and the time they
are due to the trust (which time is set forth in the pooling and
servicing agreement). The servicer, typically, will be required to pay
the administrative expenses of servicing the trust, including in some
cases the trustee's fee, out of its servicing compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid in a lump sum
at the time the trust is established, or out of the payments received
on the assets in the trust.
14. The servicer may be entitled to retain certain administrative
fees paid by a third party, usually the obligor. These administrative
fees fall into three categories:
(a) Prepayment fees; (b) late payment and payment extension fees;
and (c) expenses, fees and charges associated with foreclosure or
repossession of assets in the trust, or other conversion of a secured
position into cash proceeds, upon default of an obligation.
Compensation payable to the servicer will be set forth or referred
to in the pooling and servicing agreement and described in reasonable
detail in the prospectus or private placement memorandum relating to
the certificates.
15. Payments on assets in the trust may be made by obligors to the
servicer at various times during the period preceding any date on which
pass-through payments to the trust are due. In some cases, the pooling
and servicing agreement may permit the servicer to place these payments
in non-interest bearing accounts in itself or to commingle such
payments with its own funds prior to the distribution dates. In these
cases, the servicer would be entitled to the benefit derived from the
use of the funds between the date of payment on an asset and the
certificate payment. Commingled payments may not be protected from the
creditors of the servicer in the event of the servicer's bankruptcy or
receivership. In those instances when payments on trust assets are held
in non-interest bearing accounts or are commingled with the servicer's
own funds, the servicer is required to deposit these payments by a date
specified in the pooling and servicing agreement into an account from
which the trustee makes payments to certificateholders.
16. The underwriter will receive a fee in connection with the
securities underwriting or private placement of certificates. In a firm
commitment underwriting, this fee would consist of the difference
between what the underwriter receives for the certificates that it
distributes and what it pays the sponsor for those certificates. In a
private placement, the fee normally takes the form of an agency
commission paid by the sponsor. In a best efforts underwriting in which
the underwriter would sell certificates in a public offering on an
agency basis, the underwriter would receive an agency commission rather
than a fee based on the difference between the price at which the
certificates are sold to the public and what it pays the sponsor. In
some private placements, the underwriter may buy certificates as
principal, in which case its compensation would be the difference
between what the underwriter receives for the certificates and what it
pays the sponsor for these certificates.
Purchase of Receivables by the Servicer
17. The applicant represents that as the principal amount of the
assets in a trust is reduced by payment, the cost of administering the
trust generally increases in proportion to the unpaid balance of the
assets in the trust, making the servicing of the trust prohibitively
expensive at some point.
Consequently, the pooling and servicing agreement generally
provides that the servicer may purchase the receivables included in the
trust when the aggregate unpaid balance payable on the receivables is
reduced to a specified percentage (usually between 5 and 10 percent) of
the initial balance.
The repurchase price for such an option is set at a level such that
the certificateholders will receive the full amount on all of the
receivables held by the trust plus the accrued interest at the pass-
through rate plus the full amount of property, if any, that has been
acquired by the trust through collections on or liquidations of the
receivables.
Certificate Ratings
18. The certificates will have received one of the three highest
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance
or other credit support (such as overcollateralization, surety bonds,
letters of credit or guarantees) will be obtained by the trust sponsor
to the extent necessary for the certificates to attain the desired
rating. The amount of this credit support is set by the rating agencies
at a level that is a multiple of the worst historical net credit loss
experience for the type of obligations included in the issuing trust.
Provision of Credit Support
19. In some cases, the servicer, or an affiliate of the servicer,
may provide credit support to the trust (i.e., act as an insurer). In
these cases, the servicer will first advance funds to the full extent
that it determines that such advances will be recoverable (a) out of
late payments by the obligors, (b) from the credit support provider
(which may be itself) or, (c) in the case of a trust that issues
subordinated certificates, from amounts otherwise distributable to
holders of subordinated certificates. In some transactions, the
servicer may not be obligated to advance funds, but instead would be
called upon to provide funds to cover defaulted payments to the full
extent of its obligations as insurer. Moreover, a servicer typically
can recover advances either from the provider of credit support or from
the future payment stream. When the servicer is the provider of the
credit support and provides its own funds to cover defaulted payments,
it will do so either on the initiative of the trustee, or on its own
initiative on behalf of the trustee, but in either event it will
provide such funds to cover payments to the full extent of its
obligations under the credit support mechanism.
If the servicer fails to advance funds, fails to call upon the
credit support mechanism to provide funds to cover defaulted payments,
or otherwise fails in its duties, the trustee would be required and
would be able to enforce the certificateholders' rights pursuant to the
pooling and servicing agreement.
Therefore, the trustee, who is independent of the servicer, will
have the ultimate right to enforce the credit support arrangement.
When a servicer advances funds, the amount so advanced is
recoverable by the servicer out of future payments on
[[Page 5726]] assets held by the trust to the extent not covered by
credit support. However, where the servicer provides credit support to
the trust, there are protections, including those described below, in
place to guard against a delay in calling upon the credit support to
take advantage of the fact that the credit support declines
proportionally with the decrease in the principal amount of the
obligations in the trust as payments on assets are passed through to
investors. These protective safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The servicer has servicing guidelines which include a general
policy as to the allowable delinquency period after which an obligation
ordinarily will be deemed uncollectible. The pooling and servicing
agreement will require the servicer to follow its normal servicing
guidelines and will set forth the servicer's general policy as to the
period of time after which delinquent obligations ordinarily will be
considered uncollectible;
(c) As frequently as payments are due on the assets included in the
trust (monthly, quarterly, or semi-annually as set forth in the pooling
and servicing agreement), the servicer is required to report to the
independent trustee the amount of all past-due payments and the amount
of all servicer advances, along with other current information as to
collections on the assets and draws upon the credit support. Further,
the servicer is required to deliver to the trustee annually a
certificate of an executive officer of the servicer stating that a
review of the servicing activities has been made under such officer's
supervision, and either stating that the servicer has fulfilled all of
its obligations under the pooling and servicing agreement or, if the
servicer has defaulted under any of its obligations, specifying any
such default. The servicer's reports are reviewed at least annually by
independent accountants to ensure that the servicer is following its
normal servicing standards and that the master servicer's reports
conform to the servicer's internal accounting records. The results of
the independent accountants' review are delivered to the trustee;
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount becomes a fixed dollar
amount, subject to reduction only for actual draws. From the time that
the floor amount is effective until the end of the life of the trust,
there are no proportionate reductions in the credit support amount
caused by reductions in the pool principal balance. Indeed, since the
floor is a fixed dollar amount, the amount of credit support ordinarily
increases as a percentage of the pool principal balance during the
period that the floor is in effect. The protection provided by a floor
dollar amount to the credit support applies particularly where the
servicer and the insurer are affiliated or are the same entity. (An
entity should not be considered an insurer solely because it holds
subordinated certificates.)
Disclosure
20. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the trust as a legal entity and a description
of how the trust was formed by the seller/servicer or other sponsor of
the transaction;
(c) Identification of the independent trustee for the trust;
(d) A description of the assets contained in the trust, including
the types of assets, the diversification of the assets, their principal
terms and their material legal aspects;
(e) A description of the sponsor and servicer;
(f) A description of the pooling and servicing agreement, including
a description of the seller's principal representations and warranties
as to the trust assets and the trustee's remedy for any breach thereof;
a description of the procedures for collection of payments on
receivables and for making distributions to investors, and a
description of the accounts into which such payments are deposited and
from which such distributions are made; identification of the servicing
compensation and any fees for credit enhancement that are deducted from
payments on receivables before distributions are made to investors; a
description of periodic statements provided to the trustee, and
provided to or made available to investors by the trustee; and a
description of the events that constitute events of default under the
pooling and servicing contract and a description of the trustee's and
the investors' remedies incident thereto;
(g) A description of the credit support;
(h) A general discussion of the principal federal income tax
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
(i) A description of the underwriters' plan for distributing the
pass-through certificates to investors; and
(j) Information about the scope and nature of the secondary market,
if any, for the certificates.
21. Reports indicating the amount of payments of principal and
interest are provided to certificateholders at least as frequently as
distributions are made to certificateholders. Certificateholders will
also be provided with periodic information statements setting forth
material information concerning the underlying assets, including, where
applicable, information as to the amount and number of delinquent and
defaulted assets.
22. In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
10-Q and Annual Reports on Form 10-K, many trusts obtain, by
application to the Securities and Exchange Commission, a complete
exemption from the requirement to file quarterly reports on Form 10-Q
and a modification of the disclosure requirements for annual reports on
Form 10-K. If such an exemption is obtained, these trusts normally
would continue to have the obligation to file current reports on Form
8-K to report material developments concerning the trust and the
certificates. While the Securities and Exchange Commission's
interpretation of the periodic reporting requirements is subject to
change, periodic reports concerning a trust will be filed to the extent
required under the Securities Exchange Act of 1934.
23. At or about the time distributions are made to
certificateholders, a report will be delivered to the trustee as to the
status of the trust and its assets, including underlying obligations.
Such report will typically contain information regarding the trust's
assets, payments received or collected by the servicer, the
[[Page 5727]] amount of prepayments, delinquencies, servicer advances,
defaults and foreclosures, the amount of any payments made pursuant to
any credit support, and the amount of compensation payable to the
servicer. Such report also will be delivered to or made available to
the rating agency or agencies that have rated the trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the trustee
summarizing information regarding the trust and its assets. Such
statement will typically contain information regarding payments and
prepayments, delinquencies, the remaining amount of the guaranty or
other credit support and a breakdown of payments between principal and
interest.
Forward Delivery Commitments
24. Dillon represents that, to date, it has not entered into any
forward delivery commitments in connection with the offering of pass-
through certificates. However, Dillon, represents that it may
contemplate entering into such commitments. Dillon notes that the
utility of forward delivery commitments has been recognized with
respect to the offering of similar certificates backed by pools of
residential mortgages. As such, Dillon states that it may find it
desirable in the future to enter into such commitments for the purchase
of certificates.
Secondary Market Transactions
25. It is Dillon's normal policy to attempt to make a market for
securities for which it is lead or co-managing underwriter. Dillon
anticipates that it will make a market in certificates.
Summary
26. In summary, the applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act due to the following:
(a) The trusts contain ``fixed pools'' of assets. There is little
discretion on the part of the trust sponsor to substitute assets
contained in the trust once the trust has been formed;
(b) Certificates in which plans invest will have been rated in one
of the three highest rating categories by S&P's, Moody's, D&P or Fitch.
Credit support will be obtained to the extent necessary to attain the
desired rating;
(c) All transactions for which Dillon seeks exemptive relief will
be governed by the pooling and servicing agreement, which is made
available to plan fiduciaries for their review prior to the plan's
investment in certificates;
(d) Exemptive relief from sections 406(b) and 407 for sales to
plans is substantially limited; and
(e) Dillon anticipates that it will make a secondary market in
certificates.
Discussion of Proposed Exemption
I. Differences between Proposed Exemption and Class Exemption PTE 83-1
The exemptive relief proposed herein is similar to that provided in
PTE 81-7 (46 FR 7520, January 23, 1981), Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts, amended and
restated as PTE 83-1 (48 FR 895, January 7, 1983).
PTE 83-1 applies to mortgage pool investment trusts consisting of
interest-bearing obligations secured by first or second mortgages or
deeds of trust on single-family residential property. The exemption
provides relief from sections 406(a) and 407 for the sale, exchange or
transfer in the initial issuance of mortgage pool certificates between
the trust sponsor and a plan, when the sponsor, trustee or insurer of
the trust is a party-in-interest with respect to the plan, and the
continued holding of such certificates, provided that the conditions
set forth in the exemption are met. PTE 83-1 also provides exemptive
relief from section 406(b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the
trust is a fiduciary with respect to the plan assets invested in such
certificates, provided that additional conditions set forth in the
exemption are met. In particular, section 406(b) relief is conditioned
upon the approval of the transaction by an independent fiduciary.
Moreover, the total value of certificates purchased by a plan must not
exceed 25 percent of the amount of the issue, and at least 50 percent
of the aggregate amount of the issue must be acquired by persons
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1
provides conditional exemptive relief from section 406(a) and (b) of
the Act for transactions in connection with the servicing and operation
of the mortgage trust.
Under PTE 83-1, exemptive relief for the above transactions is
conditioned upon the sponsor and the trustee of the mortgage trust
maintaining a system for insuring or otherwise protecting the pooled
mortgage loans and the property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to defaults in loan payments or property damage. This
system must provide such protection and indemnification up to an amount
not less than the greater of one percent of the aggregate principal
balance of all trust mortgages or the principal balance of the largest
mortgage.
The exemptive relief proposed herein differs from that provided by
PTE 83-1 in the following major respects: (1) The proposed exemption
provides individual exemptive relief rather than class relief; (2) The
proposed exemption covers transactions involving trusts containing a
broader range of assets than single-family residential mortgages; (3)
Instead of requiring a system for insuring the pooled assets, the
proposed exemption conditions relief upon the certificates having
received one of the three highest ratings available from S&P's,
Moody's, D&P or Fitch (insurance or other credit support would be
obtained only to the extent necessary for the certificates to attain
the desired rating); and (4) The proposed exemption provides more
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
After consideration of the representations of the applicant and
information provided by S&P's, Moody's, D&P and Fitch, the Department
has decided to condition exemptive relief upon the certificates having
attained a rating in one of the three highest generic rating categories
from S&P's, Moody's, D&P or Fitch. The Department believes that the
rating condition will permit the applicant flexibility in structuring
trusts containing a variety of mortgages and other receivables while
ensuring that the interests of plans investing in certificates are
protected. The Department also believes that the ratings are indicative
of the relative safety of investments in trusts containing secured
receivables. The Department is conditioning the proposed exemptive
relief upon each particular type of asset-backed security having been
rated in one of the three highest rating categories for at least one
year and having been sold to investors other than plans for at least
one year.35
\35\In referring to different ``types'' of asset-backed
securities, the Department means certificates representing interests
in trusts containing different ``types'' of receivables, such as
single family residential mortgages, multi-family residential
mortgages, commercial mortgages, home equity loans, auto loan
receivables, installment obligations for consumer durables secured
by purchase money security interests, etc. The Department intends
this condition to require that certificates in which a plan invests
are of the type that have been rated (in one of the three highest
generic rating categories by S&P's, D&P, Fitch or Moody's) and
purchased by investors other than plans for at least one year prior
to the plan's investment pursuant to the proposed exemption. In this
regard, the Department does not intend to require that the
particular assets contained in a trust must have been ``seasoned''
(e.g., originated at least one year prior to the plan's investment
in the trust). [[Page 5728]]
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III. Limited Section 406(b) and Section 407(a) Relief for Sales
Dillon represents that in some cases a trust sponsor, trustee,
servicer, insurer, and obligor with respect to assets contained in a
trust, or an underwriter of certificates may be a pre-existing party in
interest with respect to an investing plan.36 In these cases, a
direct or indirect sale or certificates by that party in interest to
the plan would be a prohibited sale or exchange of property under
section 406(a)(1)(A) of the Act.37 Likewise, issues are raised
under section 406(a)(1)(D) of the Act where a plan fiduciary causes a
plan to purchase certificates where trust funds will be used to benefit
a party in interest.
\36\In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which Dillon or
any of its affiliates is either (a) the sole underwriter or manager
or comanager of the underwriting syndicate, or (b) a selling or
placement agent.
\37\The applicant represents that where a trust sponsor is an
affiliate of Dillon, sales to plans by the sponsor may be exempt
under PTE 75-1, Part II (relating to purchases and sales of
securities by broker-dealers and their affiliates), if Dillon is not
a fiduciary with respect to plan assets to be invested in
certificates.
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Additionally, Dillon represents that a trust sponsor, servicer,
trustee, insurer, and obligor with respect to assets contained in a
trust, or an underwriter of certificates representing an interest in a
trust may be a fiduciary with respect to an investing plan. Dillon
represents that the exercise of fiduciary authority by any of these
parties to cause the plan to invest in certificates representing an
interest in the trust would violate section 406(b)(1), and in some
cases section 406(b)(2), of the Act.
Moreover, Dillon represents that to the extent there is a plan
asset ``look through'' to the underlying assets of a trust, the
investment in certificates by a plan covering employees of an obligor
under receivables contained in a trust may be prohibited by sections
406(a) and 407(a) of the Act.
For Further Information Contact: Virginia J. Miller of the
Department, telephone (202) 219-8971. (This is not a toll-free number.)
Treasure Valley Transplants, Inc. Money Purchase Pension Plan (the
Plan) Located in Boise, Idaho
[Application No. D-09874]
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). If the exemption
is granted, the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply to the proposed cash sale (the Sale) of certain
real property (the Property) by the Plan to Dr. George Holzer, D.V.M.
(Dr. Holzer), a disqualified person with respect to the Plan; provided
that (1) the Sale is a one-time transaction for cash; (2) the Plan does
not incur any expenses in connection with the proposed transaction; and
(3) the consideration paid for the Property is no less than the fair
market value of the Property as determined by an independent appraiser.
Summary of Facts and Representations
1. The Plan is a money purchase pension plan whose sole participant
is Dr. Holzer. The Plan, which was adopted by Treasure Valley
Transplants, Inc (the Employer) effective as of September 1, 1992, is a
successor plan to the George L. Holzer Rollover IRA (the IRA). As of
October 1, 1994, the Plan had assets of approximately $780,000.00.
The Employer is an Idaho corporation which specializes in bovine
embryo transfers. Dr. Holzer is the sole shareholder of the
Employer.\38\ Dr. Holzer and Kathleen J. Holzer serve as the Plan's co-
trustees.
\38\Since Dr. Holzer is the sole shareholder of the Employer,
and the only participant in the Plan, there is no jurisdiction under
Title I of the Act, pursuant to 29 CFR 2510.3-3(c)(1). There is,
however, jurisdiction under Title II of the Act pursuant to section
4975 of the Code.
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2. The Property is designated as Lot 16, Block 2, Warm Springs
Village 2nd Addition in Ketchum, Idaho, together with the improvements
thereon. The Property was appraised in September, 1994 by Monge
Appraisal & Investments (Monge), an independent appraisal firm located
in Sun Valley, Idaho. The appraisal was performed by Kyle T. Kunz and
Thomas R. Monge, MAI. The Property is described as a contemporary-style
dwelling completed in 1993, having 4,144 square feet of living space,
with 4 baths and a total of 10 rooms, including 4 bedrooms. The
Property is also described as being within walking distance of Warm
Spring Village and Sun Valley ski lift operations. The size of the lot
is 64 acres and is described as having good mountain views. Monge
determined, as of September 26, 1994, that the Property had a fair
market value of $775,000.00. The applicant represents that the Property
has never been used or occupied.
3. On September 3, 1991, the IRA loaned $230,000.00 to David and
Paula Barovetto to enable them to build a dwelling on the property. The
applicant represents that the Barovettos are not related to the Plan or
the IRA. The Barovettos defaulted on the loan on August 29, 1992, prior
to completion of the dwelling. The IRA subsequently commenced
foreclosure proceedings to acquire title to the Property. As a result
of those proceedings, on November 13, 1992, the IRA purchased the deed
on the Property for $265,756.00. The applicant represents that the
assets from the IRA were rolled into the Plan during the month of
November, 1992.\39\ In addition, the applicant represents that, in
order to protect its investment, the IRA and the Plan authorized work
on the partially completed dwelling and borrowed over $300,000 to
continue that work. It is represented that the Plan's total investment
in the Property as of October 26, 1994, including interest costs and
property taxes, was $830,717.30.
\39\The applicant represents that one of the reasons the Plan
was created was to allow the Property to be rolled into a vehicle to
which Dr. Holzer could make sufficient contributions to pay for the
costs of carrying the Property.
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4. The Plan proposes to sell the Property to Dr. Holzer for the
fair market value of the Property as determined by a qualified,
independent appraiser. The applicant represents that the Plan will
receive cash and will not incur any expenses in connection with the
proposed transaction. In addition, the applicant represents that the
Sale will provide the Plan with the opportunity to divest itself of a
non-income producing asset which has substantial carrying costs and to
replace it with liquid assets that can be placed in more diversified
investments. The applicant further represents that attempts to sell the
Property have been unsuccessful.
5. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because (1) the proposed Sale will be a one-
time transaction for cash; (2) the Plan will receive not less than the
fair market value of the Property as [[Page 5729]] determined by an
independent appraiser; (3) the Plan will not incur any expenses in
connection with the proposed transaction; and (4) the proposed
transaction will enable the Plan to diversify its assets in more liquid
investments.
Notice to Interested Persons
Since Dr. Holzer is the only person affected by the proposed
transaction, there is no need to distribute notice to interested
persons. Comments are due 30 days after publication of this notice in
the Federal Register.
For Further Information Contact: Virginia J. Miller of the
Department, telephone (202) 219-8971. (This is not a toll-free number.)
Terry Segal, P.C. Retirement Plans (the Plans) Located in Boston, MA
[Application No. D-09891]
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, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a), 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) through (E) shall
not apply to the proposed purchase by Terry and Harriet Segal (the
Segals) of an interest (the Interest) in a limited partnership (the
Limited Partnership) from Mr. Segal's individually-directed account
(the Account) in the Terry Segal, P.C. Pension Plan (the Pension Plan),
provided: (1) The purchase is a one-time transaction for cash; (2) the
Pension Plan Account is not required to pay any fees or commissions in
connection therewith; (3) the Interest is appraised by a qualified,
independent appraiser; and (4) the Pension Plan Account receives an
amount which reflects the fair market value of the Interest.
Summary of Facts and Representations
1. The Plans, which are defined contribution plans, consist of the
Pension Plan and the Terry Segal, P.C. Profit Sharing Plan (the Profit
Sharing Plan). At present, the Plans have two participants. They are
Terry Segal, a trial attorney who maintains his offices at 210
Commercial Street, Boston, Massachusetts, and his associate, Scott
Lopez. As of August 31, 1993, the Plans had total assets of $262,919.
Of this amount, the Pension Plan had assets of $169,858 and the Profit
Sharing Plan had assets of $93,061.
The Plans provide for participant-directed investments. Mr. Segal,
who serves as the trustee, had Account balances in the Pension Plan and
the Profit Sharing Plan of $167,504 and $90,744, respectively, as of
August 31, 1993.
2. Among the assets in Mr. Segal's Account in the Pension Plan is a
residual profits (and freely transferable) interest in a limited
partnership called ``Turbo Dynamix'' whose underlying assets consist of
machines for making frozen yogurt.40 The Interest was purchased by
Mr. Segal's Accounts in the Plans in April 1992 for the total cash
consideration of $50,000. The seller of the Interest was Turbo Dynamix
Corporation of Cambridge, Massachusetts. This entity is general partner
of the Limited Partnership and an unrelated party with respect to the
Accounts. Following acquisition, the Interest was allocated 65 percent
to Mr. Segal's Pension Plan Account and 35 percent to Mr. Segal's
Profit Sharing Plan Account. This allocation arrangement continued
until August 1, 1994. At that time, the allocable portion of the
Interest held by Mr. Segal's Account in the Profit Sharing Plan was
transferred to his Pension Plan Account. Thus, the Pension Plan Account
currently holds 100 percent of the Interest.41 Aside from the
Interest, Mr. Segal does not invest in the Limited Partnership on an
individual basis.
\40\For purposes of the exemptive relief requested herein, the
Accounts in the Plans that are held by Mr. Lopez will not be
affected by the proposed transaction.
\41\The Department is not proposing, nor is the applicant
requesting, exemptive relief with respect to the transfer of the
allocable portion of the Interest held by Mr. Segal's Account in the
Profit Sharing Plan to his Account in the Pension Plan.
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3. When initially purchased, the Pension Plan Account and the
Profit Sharing Plan Account collectively owned a 1.8249 percent profits
interest in the Limited Partnership. However, because additional
Limited Partnership interests were subsequently sold, by August 31,
1994 the Pension Plan Account's share of profits had decreased to
1.2452 percent. The Accounts never received any investment income for
the Interest nor did they ever incur any expenses other than the
$50,000 capital contribution.
4. Because the Interest has not generated any investment income and
due to the start-up nature of the Limited Partnership, Mr. and Mrs.
Segal request an administrative exemption from the Department in order
to purchase the Interest from the Pension Plan Account. The Segals
propose to pay the Pension Plan Account the fair market value of the
Interest on the date of the sale. The Pension Plan Account will not be
required to pay any fees or commissions in connection therewith.
6. The Interest has been appraised by Paul Kateman. Mr. Kateman is
the President of Turbo Dynamix Corporation, which is the general
partner of the Limited Partnership. Mr. Kateman is not an owner,
director, officer or director of the sponsor of the Plans nor is he a
participant or beneficiary of the Plans.
By letter dated September 6, 1994, Mr. Kateman represents that the
actual value of the Interest is speculative due to the start-up nature
of the Limited Partnership. In an addendum to his letter dated December
19, 1994, Mr. Kateman notes that the Limited Partnership has had no
earning capacity, no products currently in the market place and has
funded research and development and other business expenses by raising
capital. He explains that although the Limited Partnership has been
successful in raising capital since 1992 and has sold three interests
for $50,000, there is no ready market for buying and selling of such
interests. He represents that the book value of the Interest was
$45,541 as of December 19, 1994. Thus, the Segals propose to pay
$45,541 for such Interest.
7. In summary, it is represented that the proposed transaction will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because: (a) The purchase of the Interest will be a one-time
transaction for cash; (b) the Pension Plan Account will not be required
to pay any fees or commissions in connection therewith; (c) the
Interest has been appraised by Mr. Kateman who serves as president of
the general partner of the Limited Partnership; and (d) the Pension
Plan Account will receive an amount which reflects the fair market
value of the Interest.
Notice to Interested Persons
Because Mr. Segal is the only participant in the Pension Plan whose
Account therein will be affected by the proposed transaction, it has
been determined that there is no need to distribute the notice of
pendency to interested persons. Therefore, comments and requests for a
public hearing are due 30 days from the publication of this notice in
the Federal Register.
For Further Information Contact: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
[[Page 5730]]
Employee Benefit Capital Preservation Fund of Central Fidelity National
Bank (the Fund) Located in Richmond, Virginia
[Application No. D-09905]
Proposed Exemption
The Department of Labor 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 C.F.R.
Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the
exemption is granted, the restrictions of section 406(a), 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) through
(E) of the Code shall not apply to the past sale by the Fund of three
Guaranteed Income Contracts (the GICs) of Confederation Life Insurance
Company (CL) to Central Fidelity Bank, Inc. (CFB), a party in interest
with respect to the Fund, provided the following conditions are
satisfied: (1) The sale was a one-time transaction for cash; (2) the
Fund received no less than the fair market value of the GICs at the
time of the transaction; (3) the purchase price was not less than the
GICs' accumulated book values (defined as total deposits plus interest
accrued but unpaid at the GICs' stated rates of interest through the
date of sale, less withdrawals) as of the date of the sale.
Effective Date: If this proposed exemption is granted, it will be
effective on December 29, 1994.
Summary of Facts and Representations
1. The Fund is a group trust created on August 1, 1988, established
and maintained exclusively by Central Fidelity National Bank (the Bank)
for the collective investment of various participating trusts for the
assets of retirement, pension, profit sharing, stock bonus or other
plans exempt from taxation under the Code. Each participating trust is
deemed to have a proportionate undivided interest in the Fund, and each
shares ratably with the others in the income, profits, or losses
thereof. As of September 30, 1994, there were 266 participating trusts
in the Fund, and the Fund had assets with a total value of
approximately $48 million. All of the assets of the Fund are held by
the Bank as fiduciary. The Bank is a wholly-owned subsidiary of CFB,
which is a bank holding company located in Richmond, Virginia.
2. Among the Fund's investments are the three GICs, which can be
described as follows:
(a) GIC Contract Number 62340 is a single deposit contract acquired
from CL on November 16, 1990. Its maturity date is November 15, 1995.
The guaranteed rate of interest payable on the GIC is 8.9%, and the
deposit amount was $1 million.
(b) GIC Contract Number 62379 is also a single deposit contract
acquired from CL on January 11, 1991. Its maturity date is January 10,
1996. The guaranteed rate of interest payable on this GIC is 8.55%, and
the deposit amount was also $1 million.
(c) GIC Contract Number 62424 is also a single deposit contract
acquired from CL on March 8, 1991. Its maturity date is March 7, 1996.
The guaranteed rate of interest payable on this GIC is 8.6%, and the
deposit amount was also $1 million.
3. On August 11, 1994, Canadian regulatory authorities seized CL
due to serious liquidity problems facing CL, caused by failed real
estate investments. As a result, the assets of CL were frozen,
including the subject GICs. The Bank determined that, as a consequence
of CL's current financial condition, the likelihood that CL will timely
satisfy its obligations under the GICs is seriously compromised.
4. Due to the uncertainty of payments under the GICs, the Bank
sought to eliminate the financial risk to the Fund's participating
trusts and to protect the benefits of the participants and
beneficiaries in the participating trusts. The applicant represents
that this was accomplished by the cash sale of the GICs to CFB, the
Bank's parent company. The purchase price for each of the GICs was its
accumulated book value (defined as deposits plus accrued interest at
the guaranteed rate, less withdrawals). The total purchase price for
the three GICs amounted to $3,253,109.59. The Fund had received
scheduled interest payments from CL prior to August 12, 1994. Thus, the
purchase price for the GICs included interest at the guaranteed rates
for the periods from the last interest payments made by CL for the
respective contracts through the date of sale.
5. In summary, the applicant represents that the subject
transaction satisfied the criteria contained in section 408(a) of the
Act because: (a) The sale was a one time transaction for cash; (b) the
Fund received the accumulated book value (defined as deposits plus
unpaid interest to the date of the sale at the guaranteed rate, minus
withdrawals) of the GICs, which the applicant represents to be equal to
or in excess of the fair market value of the GICs; (c) the transaction
has enabled the Fund to avoid any risk associated with continued
holding of the GICs and to redirect assets to safer investments; and
(d) the Plan did not incur any expenses related to the transaction.
For further Information Contact: Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
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 of 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 exemptions, 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 exemptions, 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 5731]] Signed at Washington, DC, this 24th day of January
1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 95-2081 Filed 1-27-95; 8:45 am]
BILLING CODE 4510-29-P
