[Federal Register Volume 63, Number 193 (Tuesday, October 6, 1998)]
[Notices]
[Pages 53722-53730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26622]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 98-46; Exemption Application No. D-
10503, et al.]
Grant of Individual Exemptions; Sanwa Bank California, et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, DC. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, 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 proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
Sanwa Bank California (Sanwa Bank), Located in Los Angeles, CA
[Prohibited Transaction Exemption 98-46; Exemption Application No. D-
10503]
Exemption
Section I. Exemption for the In-Kind Transfers of Assets
The restrictions of section 406(a) and section 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) shall not apply,
effective October 31, 1997, to the purchase, by an employee benefit
plan established and maintained by parties other than Sanwa Bank (the
Client Plan) or by Sanwa Bank (the Bank Plan) 1 of shares of
one or more open-end management investment companies (the Fund or
Funds), registered under the Investment Company Act of 1940, as amended
(the 1940 Act), in exchange for assets of the Plan transferred in-kind
to the Fund by a collective investment fund (the CIF) maintained by
Sanwa Bank, where Sanwa Bank is the investment adviser and may provide
other services to the Fund (the Secondary Services), as defined in
Section III(i), and where Sanwa Bank is also a fiduciary of the Plan.
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\1\ Unless otherwise noted, the Client Plans and the Bank Plans
are collectively referred to as the Plans.
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This exemption is subject to the following conditions:
(a) A fiduciary (the Second Fiduciary), as defined in Section
III(h), which is acting on behalf of each affected Plan and which is
independent of and unrelated to Sanwa Bank, receives advance written
notice of the in-kind transfer of assets of the CIFs in exchange for
shares of the Funds and full written disclosures of information
concerning the Funds which includes the following:
(1) A current prospectus for each Fund in which the Client Plan may
invest;
[[Page 53723]]
(2) A statement describing the fees for investment advisory or
other similar services, any fees for Secondary Services, as defined in
Section III(i), and all other fees to be charged to or paid by the
Client Plan and by such Funds to Sanwa Bank, including the nature and
extent of any differential between the rates of such fees;
(3) A statement of the reasons why Sanwa Bank may consider such
investment to be appropriate for the Client Plan;
(4) A statement of whether there are any limitations applicable to
Sanwa Bank with respect to which assets of a Client Plan may be
invested in Fund shares, and, if so, the nature of such limitations;
and
(5) A copy of the proposed exemption and/or a copy of the final
exemption upon the request of the Second Fiduciary.
(b) On the basis of the foregoing information, the Second Fiduciary
gives prior approval in writing for each purchase of Fund shares in
exchange for the Plan's assets transferred from the CIF, consistent
with the responsibilities, obligations and duties imposed on
fiduciaries by Part 4 of Title I of the Act. In addition, the Second
Fiduciary gives prior approval in writing of the receipt of
confirmation statements described in Section I(g) by facsimile or
electronic mail if the Second Fiduciary elects to receive such
statements in that form.
(c) No sales commissions or other fees are paid by the Plan in
connection with the purchase of Fund shares.
(d) All transferred assets are securities for which market
quotations are readily available, or cash.
(e) The transferred assets constitute a pro rata portion of all
assets of a Plan held in the CIF immediately prior to the transfer.
Notwithstanding the foregoing, the allocation of fixed-income
securities held by a CIF among Plans on the basis of each Plan's pro
rata share of the aggregate value of such securities will not fail to
meet the requirements of this subsection if:
(1) The aggregate value of such securities does not exceed one (1)
percent of the total value of the assets held by the CIF immediately
prior to the transfer; and
(2) Such securities have the same coupon rate and maturity, and at
the time of the transfer, the same credit ratings from nationally
recognized statistical rating agencies.
(f) Each Plan receives Fund shares that have a total net asset
value equal to the value of the Plan's transferred assets on the date
of the transfer, as determined with respect to securities in a single
valuation performed in the same manner and at the close of business on
the same day in accordance with Securities and Exchange Commission
(SEC) Rule 17a-7 under the 1940 Act, as amended (Rule 17a-7), (using
sources independent of Sanwa Bank and the Fund) and the procedures
established by the Funds pursuant to Rule 17a-7.
(g) Sanwa Bank sends by regular mail or, if applicable, by
facsimile or electronic mail, to the Second Fiduciary of each affected
Plan that purchases Fund shares in connection with the in-kind
transfer, the following information:
(1) No later than 30 days after the completion of the purchase, a
written confirmation which contains--
(A) The identity of each transferred security that was valued for
purposes of the transaction in accordance with Rule 17a-7(b)(4);
(B) The current market price, as of the date of the in-kind
transfer, of each such security involved in the transaction; and
(C) The identity of each pricing service or market-maker consulted
in determining the current market price of such securities.
(2) No later than 105 days after the completion of each purchase, a
written confirmation which contains--
(A) The number of CIF units held by each affected Plan immediately
before the in-kind transfer, the related per unit value, and the total
dollar amount of such CIF units; and
(B) The number of shares in the Funds that are held by each
affected Plan immediately following the in-kind transfer, the related
per share net asset value and the total dollar amount of such shares.
(h) The conditions set forth in Sections II(d), (e), (n)(1), (o),
(p) and (q) are satisfied.
Section II. Exemption for the Receipt of Fees from the Funds
The restrictions of section 406(a) and section 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, effective October 31, 1997, to (1) the receipt of fees by
Sanwa Bank from the Funds for investment advisory services provided to
the Funds; and (2) the receipt or retention of fees by Sanwa Bank from
the Funds for acting as a custodian or shareholder serving agent to the
Funds, as well as for providing any other services to the Funds which
are not investment advisory services (i.e., the Secondary Services), as
defined in Section III(i), in connection with the investment of shares
in the Funds by the Client Plans for which Sanwa Bank acts as a
fiduciary, provided that the following conditions are met:
(a) No sales commissions are paid by the Client Plans in connection
with purchases or redemptions of shares of the Funds and no redemption
fees are paid in connection with the sale of such shares by the Client
Plans to the Funds.
(b) The price paid or received by the Client Plans for shares in
the Funds is the net asset value per share, as defined in Section
III(e), at the time of the transaction and is the same price which
would have been paid or received for the shares of the same class by
any other investor at that time.
(c) Sanwa Bank, any of its affiliates or their officers or
directors do not purchase from or sell to any of the Client Plans
shares of any of the Funds.
(d) For each Client Plan, the combined total of all fees received
by Sanwa Bank for the provision of services to such Plan, and in
connection with the provision of services to any of the Funds in which
the Client Plans may invest, is not in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(e) Sanwa Bank does not receive any fees payable, pursuant to Rule
12b-1 (the 12b-1 Fees) under the 1940 Act in connection with the
transactions involving the Funds.
(f) A Second Fiduciary with respect to a Client Plan receives in
advance of the investment by the Client Plan in any of the Funds, a
full and detailed written disclosure of information concerning such
Fund including, but not limited to the disclosures described above in
Section I(a).
(g) On the basis of the foregoing information, the Second Fiduciary
authorizes in writing--
(1) The investment of assets of the Client Plan in shares of the
Fund;
(2) The Funds in which the assets of the Client Plan may be
invested; and
(3) The fees received by Sanwa Bank in connection with investment
advisory services and Secondary Services provided to the Funds, such
authorization by the Second Fiduciary to be consistent with the
responsibilities, obligations, and duties imposed on fiduciaries by
Part 4 of Title I of the Act.
(h) The authorization, described in Section II(g) is terminable at
will by the Second Fiduciary of a Client Plan, without penalty to such
Client Plan. Such termination will be effected by Sanwa Bank redeeming
the shares of the Funds held by the affected Client Plan within one
business day following receipt by Sanwa Bank, either by mail, hand
delivery, facsimile, or other available means at the option of the
[[Page 53724]]
Second Fiduciary, of written notice of termination (the Termination
Form), as defined in Section III(j); provided that if, due to
circumstances beyond the control of Sanwa Bank, the redemption cannot
be executed within one business day, Sanwa Bank shall have one
additional business day to complete such redemption.
(i) The Client Plans do not pay any Plan-level investment advisory
fees to Sanwa Bank with respect to any of the assets of such Client
Plans which are invested in shares of the Funds. This condition does
not preclude the payment of investment advisory fees by the Funds to
Sanwa Bank under the terms of an investment advisory agreement adopted
in accordance with section 15 of the 1940 Act or other agreement
between Sanwa Bank and the Funds or the retention by Sanwa Bank of fees
for Secondary Services paid to Sanwa Bank by the Funds.
(j) In the event of an increase in the rate of any fees paid by the
Funds to Sanwa Bank regarding investment advisory services that Sanwa
Bank provides to the Funds over an existing rate for such services that
had been authorized by a Second Fiduciary of a Client Plan, in
accordance with Section II(g), Sanwa Bank will, at least 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 Second Fiduciary of each Client Plan invested in a Fund which is
increasing such fees. Such notice shall be accompanied by the
Termination Form, as defined in Section III(j).
(k) In the event of an (1) addition of a Secondary Service, as
defined in Section III(i), provided by Sanwa Bank to the Funds for
which a fee is charged or (2) an increase in the rate of any fee paid
by the Funds to Sanwa Bank for any Secondary Service that results
either from an increase in the rate of such fee or from the decrease in
the number or kind of services performed by Sanwa Bank for such fee
over an existing rate for such Secondary Service which had been
authorized by the Secondary Fiduciary in accordance with Section II(g),
Sanwa Bank will, at least 30 days in advance of the implementation of
such Secondary Service or fee 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 Funds and
which explains the nature and amount of the additional Secondary
Service for which a fee is charged or the nature and amount of the
increase in fees) to the Second Fiduciary of each of the Client Plans
invested in a Fund which is adding a service or increasing fees. Such
notice shall be accompanied by the Termination Form, as defined in
Section III(j).
(l) The Second Fiduciary is supplied with a Termination Form at the
times specified in Sections II(j),(k) and (m), which expressly provides
an election to terminate the authorization, described above Section
II(g), with instructions regarding the use of such Termination Form
including statements that--
(1) The authorization is terminable at will by any of the Client
Plans, without penalty to such Plans. The termination will be effected
by Sanwa Bank redeeming shares of the Funds held by the Client Plans
requesting termination on the date established by the Client Plan on
the Termination Form or, if the Client Plan does not specify a date,
not later than one business day following receipt by Sanwa Bank from
the Second Fiduciary of the Termination Form or any written notice of
termination; provided that if, due to circumstances beyond the control
of Sanwa Bank, the redemption of shares of such Client Plan cannot be
executed on the date specified by the Client Plan or within one
business day when the Client Plan does not specify a date, Sanwa Bank
shall have one additional business day to complete such redemption; and
(2) Failure by the Second Fiduciary to return the Termination Form
on behalf of the Client Plan will be deemed to be an approval of the
additional Secondary Service for which a fee is charged or an increase
in the rate of any fees and will result in the continuation of the
authorization, as described in Section II(g), of Sanwa Bank to engage
in the transactions on behalf of the Client Plan;
(m) The Second Fiduciary is supplied with a Termination Form at
least once in each calendar year, beginning with the calendar year that
begins after the grant of this exemption is published in the Federal
Register and continuing for each calendar year thereafter, provided
that the Termination Form need not be supplied to the Second Fiduciary,
pursuant to this paragraph, sooner than six months after such
Termination Form is supplied pursuant to Sections II(j) and (k), except
to the extent required by Sections II(j) and (k) to disclose an
additional Secondary Service for which a fee is charged or an increase
in fees.
(n)(1) With respect to each of the Funds in which a Client Plan
invests, Sanwa Bank will provide the Second Fiduciary of such Plan the
following information:
(A) At least annually, a copy of an updated prospectus of such
Fund; and
(B) Upon the request of the Second Fiduciary, a report or statement
(which may take the form of the most recent financial report, the
current statement of additional information, or some other written
statement) which contains a description of all fees paid by the Fund to
Sanwa Bank.
(2) With respect to each of the Funds in which a Client Plan
invests, in the event such Fund places brokerage transactions with
Sanwa Bank, Sanwa Bank will provide the Second Fiduciary of such Client
Plan at least annually with a statement specifying--
(A) The total, expressed in dollars, brokerage commissions of each
Fund that are paid to Sanwa Bank by such Fund;
(B) The total, expressed in dollars, brokerage commissions of each
Fund that are paid by such Fund to brokerage firms unrelated to Sanwa
Bank;
(C) The average brokerage commissions per share, expressed as cents
per share, paid to Sanwa Bank by each Fund; and
(D) The average brokerage commissions per share, expressed as cents
per share, paid by each Fund to brokerage firms unrelated to Sanwa
Bank.
(o) All dealings between the Client Plans and any of the Funds are
on a basis no less favorable to such Client Plans than dealings between
the Funds and other non-Plan shareholders holding the same class of
shares as the Client Plans.
(p) Sanwa Bank maintains for a period of 6 years, in a manner that
is accessible for audit and examination, the records necessary to
enable the persons, described in Section II(q), 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 Sanwa Bank, the
records are lost or destroyed prior to the end of the 6 year period;
and
(2) No party in interest, other than Sanwa 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 Section II(q).
(q)(1) Except as provided in paragraph (q)(2) of this Section II
and notwithstanding any provisions of subsection (a)(2) and (b) of
section 504 of the Act, the records referred to in
[[Page 53725]]
Section II(p) are unconditionally available at their customary location
for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service (the Service) or the SEC;
(B) Any fiduciary of each of the Client Plans who has authority to
acquire or dispose of shares of any of the Funds owned by such Client
Plan, or any duly authorized employee or representative of such
fiduciary; and
(C) Any participant or beneficiary of the Plans or duly authorized
employee or representative of such participant or beneficiary.
(2) None of the persons described in paragraph (q)(1)(B) and
(q)(1)(C) of Section II shall be authorized to examine trade secrets of
Sanwa Bank, or commercial or financial information which is privileged
or confidential.
Section III. Definitions
For purposes of this exemption,
(a) The term ``Sanwa Bank'' means Sanwa Bank California and any
affiliate of Sanwa Bank, as defined in Section III(b).
(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 terms ``Fund'' or ``Funds'' mean any open-end management
investment company or companies registered under the 1940 Act for which
Sanwa Bank serves as investment adviser and may also provide custodial
or other services, such as Secondary Services, as approved by such
Funds.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and redemptions calculated by dividing the value
of all securities, determined by a method as set forth in a Fund's
prospectus and statement of additional information, and other assets
belonging to each of the portfolios in such Fund, less the liabilities
charged to each portfolio, by the number of outstanding shares.
(f) The term ``Plan'' means a welfare plan described in 29 CFR
2510.3-1, as amended; a pension plan described in 29 CFR 2510.3-2, as
amended; a plan described in section 4975(e)(1) of the Code; and a
retirement plan qualified under section 401(a) of the Code with respect
to which Sanwa Bank serves or will serve as trustee, investment manager
or custodian, and which constitutes an ``employee benefit plan'' under
section 3(3) of the Act. The term ``Client Plan'' includes a Plan
maintained by an entity other than Sanwa Bank. The term ``Bank Plan''
includes a Plan maintained by Sanwa Bank, including, but not limited
to, the Sanwa Bank California Retirement Plan and the Sanwa Bank
California Premiere Savings Plan.
(g) 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.
(h) The term ``Second Fiduciary'' means a fiduciary of a plan who
is independent of and unrelated to Sanwa Bank. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to Sanwa Bank if--
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by or is under common control with Sanwa Bank;
(2) Such Second Fiduciary, or any officer, director, partner,
employee or relative of such Second Fiduciary is an officer, director,
partner or employee of Sanwa Bank (or is a relative of such persons);
and
(3) Such Second Fiduciary directly or indirectly receives any
compensation or other consideration in connection with any transaction
described in this exemption; provided, however, that, with respect to
the Bank Plans, the Second Fiduciary may receive compensation from
Sanwa Bank in connection with the transactions contemplated herein, but
the amount or payment of such compensation may not be contingent upon
or in any way affected by the Second Fiduciary's ultimate decision
regarding whether the Bank Plans participate in the transactions and
may not exceed 5 percent of such Second Fiduciary's gross annual
revenues.
With respect to the Client Plans, if an officer, director, partner,
or employee of Sanwa Bank (or a relative of such persons), is a
director of such Second Fiduciary, and if he or she abstains from
participation in the choice of the Plan's investment manager/adviser,
the approval of any purchase or redemption by the Plan of shares of the
Funds, and the approval of any increase of fees, in connection with any
of the transactions described in Sections I and II, then Section
III(h)(2) shall not apply.
(i) The term ``Secondary Service'' means a service, other than an
investment advisory or similar service, which is provided by Sanwa Bank
to the Funds, including but not limited to, accounting, administrative,
brokerage or custodial services.
(j) The term ``Termination Form'' means the form supplied to the
Second Fiduciary of a Client Plan, at the times specified in Section
II(j), (k), and (m), which expressly provides an election to the Second
Fiduciary to terminate on behalf of the Plans the authorization,
described in Section II(g). Such Termination Form may be used at will
by the Second Fiduciary to terminate such authorization without penalty
to the Client Plan and to notify Sanwa Bank in writing to effect such
termination by redeeming shares of the Fund held by the Plans
requesting termination on the date established by the Client Plan on
the Termination Form or, if the Client Plan does not specify a date,
not later than one business day following receipt by Sanwa Bank of
written notice, either by mail, hand delivery, facsimile or other
available means at the option of the Second Fiduciary, of such request
for termination; provided that if, due to circumstances beyond the
control of Sanwa Bank, the redemption cannot be executed on the date
specified by the Client Plan or within one business day when the Client
Plan does not specify a date, Sanwa Bank shall have one additional
business day to complete such redemption.
(k) The term ``fixed-income security'' means any interest-bearing
or discounted government or corporate security with a face amount of
$1,000 or more that obligates the issuer to pay the holder a specified
sum of money, at specific intervals, and to repay the principal amount
of the loan at maturity.
(l) The term ``security'' shall have the same meaning as defined in
section 2(36) of the 1940 Act, as amended, 15 USC 80a-2(36) (1996).
(m) The term ``business day'' means a banking day as defined by
federal or state banking regulations.
EFFECTIVE DATE: This exemption is effective as of October 31, 1997.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption (the Notice) published on May 29, 1998
at 63 FR 29443.
[[Page 53726]]
Written Comments
The Department received two written comments with respect to the
Notice and no requests for a public hearing. The first comment was
submitted by an educational association (the Association) whose
retirement plan (the Association Plan) is administered by Sanwa Bank as
directed trustee. The comment raised numerous concerns, many of which
did not relate to the investment in the Funds by the Association Plan
and recommended that the exemption be denied. The second comment, which
was submitted by Sanwa Bank, suggested modifications to the Notice and
the Summary of Facts and Representations (the Summary) in several
areas.
Following is a discussion of the comments received, including Sanwa
Bank's responses to the Association's comment as well as the
Department's responses to the modifications to the proposed exemption
suggested by Sanwa Bank.
The Association's Comment
In its comment, the Association requests that the exemption be
denied primarily because the notice of proposed exemption provided by
Sanwa Bank to its clients ``did not consist of a complete disclosure of
the nature of the relationship between Sanwa Bank and the Eureka
Funds,'' specifically with respect to the fees. The Association states
that documents provided to the Association Plan were ``automatically
completed'' by Sanwa Bank to show the conversion of the Funds. As a
result, the Association represents that it did not give its informed
consent to Sanwa Bank.
In addition, the Association states that it is not clear whether
there has been a reduction in both the trust and custodial
administrative charges resulting from ``duplicative'' management fees.
If there has been a fee offset, the Association believes that it has
been in Sanwa Bank's favor as the Plan-level trust fund fee is 6 basis
points and the Fund-level fee is in the neighborhood of 100 basis
points.
Further, the Association finds the ``negative consent'' procedure
described in the Notice problematic because it is not clear whether the
fees would be offset fairly and equally. The Association represents
that there may also be pressure by a Plan to consent to the negative
consent procedure. If a Plan refused to use the Funds, the Association
believes that Sanwa Bank may decline to act as trustee or custodian of
other client funds.
In response to the Association's comment, Sanwa Bank notes at the
outset that it did not receive any objections from any other Plans
participating in the conversion transactions and that the comment is
the first indication it has received about the Association concerns,
despite the fact that investments by the Association Plan in the Funds
have been reported in periodic statements provided to the Association
by Sanwa Bank since the conversion transactions. In Sanwa Bank's view,
the Association's comment reflects misunderstandings regarding the
procedures that were followed in connection with the conversion
transactions as well as the purposes and scope of the proposed
exemption.
As directed trustee of the Association Plan, Sanwa Bank represents
that it has been subject to investment directions of an independent
investment manager appointed by the Association. However, prior to the
conversion transactions, Sanwa Bank explains that the investment
manager authorized and directed the investment of the cash balances of
the Association Plan in one of its CIFs, the ITS Money Market
Investment Fund (the Money Market CIF). In August-September 1997, the
Sanwa Bank states that it provided the investment manager written
notices (a) announcing the termination and conversion of the Money
Market CIF and Sanwa Bank's other CIFs, (b) explaining that the Money
Market CIF would be converted to the Eureka Prime Money Market Fund
(the Prime Fund), (c) describing the nature and extent of Sanwa Bank's
relationship with the Prime Fund and other Funds (and containing
disclosures required by the proposed exemption), and (d) asking the
investment manager to choose a new cash management vehicle for the
Association Plan from among four separate alternatives which included,
in addition to the Prime Fund, the Eureka U.S. Treasury Obligations
Fund, a money market mutual fund advised by a party unrelated to Sanwa
Bank and an insured deposit at Sanwa Bank. By letter dated October 14,
1997, Sanwa Bank explains that the investment manager gave it standing
authorization to invest cash balances of the Association Plan in the
Prime Fund. Sanwa Bank states that it has informed the investment
manager that if the use of the Prime Fund is not satisfactory to either
the Association or the investment manager, it is prepared to carry out
authorized directions regarding an alternative disposition of cash
balances of the Association Plan.
In response to the Association's assertion that notices provided by
Sanwa Bank regarding the conversion transactions did not ``consist of a
complete disclosure of the nature of the relationship between Sanwa
Bank and the Funds,'' Sanwa Bank states that it provided written notice
to the investment manager prior to the conversion transactions
disclosing that Sanwa Bank was to serve as investment adviser to the
Funds as well as the rate of compensation it was to receive from each
of the Funds for its services as investment adviser.
In response to the Association's comment suggesting that trust and
custodial administration charges be reduced or offset, Sanwa Bank
explains that these fees are, in no way, duplicative of the fees it
receives from the Funds for performing investment advisory services.
This is reflected in the proposed exemption which requires that no
investment management or similar fees be charged to a Client Plan with
respect to Plan assets invested in the Funds. Further, Sanwa Bank
points out that the proposed exemption does not require, and was never
intended to require, the reduction or offsetting of trust or custodial
administration fees that Sanwa Bank receives from Client Plans for
trust and custodial administrative services.2
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\2\ Sanwa Bank notes that the Association was in error in
stating that Fund-level fees paid to Sanwa Bank were in the
neighborhood of 100 basis points. Sanwa Bank explains that the Prime
Fund prospectus indicates that the total expenses of that Fund,
including Sanwa Bank's compensation (after voluntary waivers) and
expenses and fees paid to third parties unrelated to Sanwa Bank,
only amount to 55 basis points per annum.
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In regard to the Association's concern that the ``negative
consent'' procedure places implicit pressure on a Plan to agree to the
procedure or face the consequence that Sanwa Bank might decline to act
as trustee or custodian, Sanwa Bank states that consistent with other
individual exemptions granted by the Department, the proposed exemption
allows the Second Fiduciary to decide whether or not to accept a fee
increase. In this regard, Sanwa Bank explains that the Second Fiduciary
is free to accept a fee increase by failing to object to such increase
or may object to the increase and request the redemption of Fund shares
held by the Plan. Therefore, Sanwa Bank represents that it sees no
reason to alter the basic principle established in several other
exemptions that the negative consent procedure is appropriate and is
protective of the rights of affected plans.
In conclusion, Sanwa Bank does not believe the Association's
comment justifies denying the exemption or otherwise changing it.
Further, Sanwa Bank notes that a Plan is free to terminate its
relationship with a Fund at any time without penalty. Therefore,
[[Page 53727]]
Sanwa Bank requests that the Department grant the exemption.
Sanwa Bank's Comment
1. Section I of the Notice
Sanwa Bank states that language at the end of the introductory
paragraph of Section I of the Notice provides that the exemption will
apply to transactions that occur ``in connection with the termination
of the CIFs'' and that similar language appears in Section I(e)(1) of
the Notice. Sanwa Bank represents that the although the CIFs involved
in the conversion transactions that occurred on October 31, 1997 did,
in fact, terminate, it specifically requested that the exemption extend
not only to conversion transactions in which the affected CIFs
terminate but to conversion transactions where the CIFs do not
terminate. Sanwa Bank explains that this is the rationale for including
the procedures set forth in Section I(e). For example, assets
transferred in-kind from a non-terminating CIF to a Fund would consist
of the pro rata share of the CIF's assets attributable to those Plans
electing to participate in the conversion transaction if not all of the
Plans elected to participate. Sanwa Bank notes that such transfers from
non-terminating CIFs are permitted in prior individual exemptions and
in Prohibited Transaction Exemption (PTE) 97-41, the Department's class
exemption for Collective Investment Fund Conversion Transactions (62 FR
42830, August 8, 1997). Therefore, Sanwa Bank requests that the clause
``in connection with the termination of such CIFs'' be deleted entirely
from the introductory paragraph of Section I and Section I(e)(1) of the
Notice.
In addition, Sanwa Bank requests that the first sentence of Section
I(e) of the Notice be amended to read as follows:
The transferred assets constitute all or a pro rata portion of
all assets of a Plan held in the CIF immediately prior to the
transfer.
The Department does not concur with the requested clarification and
has not made the change suggested by Sanwa Bank. The Department notes
that when a Plan elects to transfer assets from a non-terminating CIF
to a Fund, the Plan's proportionate share of all of its assets in the
CIF must be transferred to the Fund such that none of the Plan's assets
must remain in the CIF. Therefore, the Department has left the
condition, as originally proposed, intact.
2. Footnote 12 of the Summary
Sanwa Bank states that the last sentence of Footnote 12 of the
Summary should be revised to read as follows:
Specifically, the procedures relate to the methods of
communicating the confirmations described above by personal
delivery, facsimile or electronic mail (see Section I(b)and (g) of
this proposed exemption) and to pro rata allocations of CIF assets
where the CIF making an in-kind transfer does not terminate in
connection with the transaction (see section I(e) of this proposed
exemption).
In response to this comment, the Department has decided not to make
the requested revision for the reasons cited above in Item 1.
3. Section I(f) of the Notice
Sanwa Bank suggests that the initial reference to Rule 17a-7 in
Section I(f) be amended to read as follows: ``Securities and Exchange
Commission (SEC) Rule 17a-7 under the 1940 Act, as amended (Rule 17a-
7). In response, the Department concurs with this revision and has
amended the Notice, accordingly.
Sanwa Bank also states that Section I(f) of the Notice provides
that the assets transferred to a Fund are to be valued using sources
independent of Sanwa Bank in accordance with Rule 17a-7 and procedures
established by the Fund pursuant to Rule 17a-7. Specifically, Sanwa
Bank represents that the last sentence of Section I(f) states that
``such procedures must require'' that securities for which there is no
market price must be valued pursuant to certain specified procedures.
Sanwa Bank notes that although this language has appeared in prior
individual exemptions but not in PTE 97-41, it does not contemplate the
possibility of future amendments or modifications of the Rule. Sanwa
Bank further notes that in adopting PTE 97-41, the Department noted
that the requirement that valuations be determined in accordance with
Rule 17a-7 was ``designed to provide flexibility for future
transactions.'' Thus, for example, if Rule 17a-7 is subsequently
amended by the SEC to accommodate new pricing systems, banks or plan
advisers could take advantage of the amended Rule without having to
request an amendment to the class exemption. Therefore, Sanwa Bank
requests that the last sentence of Section I(f) be deleted.
In response, the Department concurs with this clarification and has
made the requested change.
4. Section II(b) of the Notice
Sanwa Bank states that the Funds' prospectus and prior
correspondence to the Department indicate that the Funds issue more
than one class of shares. The existence of separate share classes is
also reflected in Section II(o) of the Notice and in paragraph (d) of
Representation 24 of the Summary. Accordingly, Sanwa Bank requests that
Section II(b) of the Notice be modified to read as follows:
The price paid or received by the Client Plans for shares in the
Funds is the net asset value per share, as defined in Section
III(e), at the time of the transaction and is the same price which
would have been paid or received for shares of the same class by any
other investor at that time.
In addition, Sanwa Bank requests that paragraph (e) of
Representation 25 of the Summary be revised to read as follows:
The price that has been or will be paid or received by a Plan
for shares of the Funds is the net asset value per share at the time
of the transaction and is the same price for shares of the same
class which will be paid or received by any other investor at that
time.
The Department concurs with the revisions and has made the
requested changes.
5. Section II(l) of the Notice
Section II(l) of the Notice provides that, if a Second Fiduciary
terminates a prior authorization to invest in the Funds, Sanwa Bank
must redeem the Client Plan's shares ``within the period of time
specified by the Client Plan, but not later than one business day
following receipt by Sanwa Bank from the Second Fiduciary of the
Termination Form * * *.'' Sanwa Bank believes this provision is
intended to give Client Plans the flexibility to choose a redemption
that best suits the Plan's needs and circumstances and precludes a
Client Plan from specifying a redemption date beyond one business day
after receipt of the Termination Form.
To provide Client Plans who wish to have the flexibility to choose
another redemption date, Sanwa Bank suggests that the second sentence
of Section II(l) be amended to read as follows (bracketed word and
comma deleted; underlined words added):
The termination will be effected by Sanwa Bank redeeming shares
of the Funds held by the Client Plans requesting termination within
the period of time specified by the Client Plan [,but] or, if the
Client Plan does not specify a date, not later than one business day
following receipt by Sanwa Bank from the Second Fiduciary of the
Termination Form or any written notice of termination; provided that
if, due to circumstances beyond the control of Sanwa Bank, the
redemption of shares of such Client Plan cannot be executed within
one business day, Sanwa Bank shall have one additional business day
to complete such redemption; and
In connection with the foregoing change, Sanwa Bank also suggests
that the second sentence of Section III(j)
[[Page 53728]]
(definition of ``Termination Form'') be amended to read as follows
(underlined words added):
Such Termination Form may be used at will by the Second
Fiduciary to terminate such authorization without penalty to the
Client Plan and to notify Sanwa Bank in writing to effect such
termination by redeeming shares of the Fund held by the Plans
requesting termination within the time period specified by the
Client Plan or, if the Client Plan does not specify a date, not
later than one business day following receipt by Sanwa Bank of
written notice, either by mail, hand delivery, facsimile or other
available means at the option of the Second Fiduciary, of such
request for termination; provided that if, due to circumstances
beyond the control of Sanwa Bank, the redemption cannot be executed
within one business day, Sanwa Bank shall have one additional
business day to complete such redemption.
The Department does not completely concur with the requested
modifications made by Sanwa Bank and believes that they could be more
accurately constructed. With respect to Section II(l) of the Notice,
the Department has decided to delete the phrase ``within the time frame
specified by the Client Plan'' and substitute the phrase ``on the date
established by the Client Plan on the Termination Form.'' For purposes
of consistency, the Department has also added the clause ``on the date
specified by the Client Plan or within one business day when the Client
Plan does not specify a date'' after the word ``executed.'' As revised,
Section II(l) would read as follows:
The termination will be effected by Sanwa Bank redeeming shares
of the Funds held by the Client Plans requesting termination on the
date established by the Client Plan on the Termination Form or, if
the Client Plan does not specify a date, not later than one business
day following receipt by Sanwa Bank from the Second Fiduciary of the
Termination Form or any written notice of termination; provided that
if, due to circumstances beyond the control of Sanwa Bank, the
redemption of shares of such Client Plan cannot be executed on the
date specified by the Client Plan or within one business day when
the Client Plan does not specify a date, Sanwa Bank shall have one
additional business day to complete such redemption; and
Similarly, the Department has revised Section III(j) of the Notice
to read as follows:
Such termination will be effected by Sanwa Bank redeeming the
shares of the Funds held by the affected Client Plan within one
business day following receipt by Sanwa Bank, either by mail, hand
delivery, facsimile, or other available means at the option of the
Second Fiduciary, of written notice of termination (the Termination
Form), as defined in Section III(j); provided that if, due to
circumstances beyond the control of Sanwa Bank, the redemption
cannot be executed on the date specified by the Client Plan or
within one business day when the Client Plan does not specify a
date, Sanwa Bank shall have one additional business day to complete
such redemption.
Finally, the Department has modified the first sentence in the
second paragraph of Representation 19 by deleting the word ``by'' and
adding the clause ``on the date established by the Client Plan on the
Termination Form, or if the Client Plan does not specify a date not
later than * * *'' after the word ``Plan.'' In addition, the Department
has revised the last sentence of Representation 19 to read as follows:
If, due to circumstances beyond the control of Sanwa Bank, the
redemption cannot be effected on the date specified by the Client
Plan or within one business day when the Client Plan does not
specify a date, Sanwa Bank will have one additional business day to
complete such redemption.
6. Section II(q)(1) of the Notice
Section II(q)(1) of the Notice provides that the records required
to be maintained in connection with the exemption must be available for
examination by duly authorized representatives of the SEC, as well as
the Department and the Service. Sanwa Bank notes that although the
requirement that records be available for SEC examination was included
in a few individual exemptions granted during 1996 it is not included
in individual exemptions granted prior to that time. Therefore, Sanwa
Bank requests that Section II(q)(1)(A) of the Notice be modified to
provide that the required records must be made available to authorized
representatives of the Department and the Service.
The Department is not persuaded by this comment and has not made
the requested change to the Notice. Because of the involvement of
mutual funds in the transactions described herein, the Department
believes that the records maintained in connection with the exemption
should be subject to SEC examination.
7. Other Modifications to the Notice
In addition to the changes noted above, Sanwa Bank has requested
(and the Department has agreed to make) several miscellaneous
modifications to the Notice. In this regard, the Department has
redesignated ``Section I(g)(2)(C)'' of the Notice as ``Section
I(g)(2)(B).'' Further, in Section III(d) of the Notice, the Department
has inserted quotation marks after the word ``Fund'' and before the
word ``Funds.''
8. Paragraph (b) of Representation 1 of the Summary
Sanwa Bank represents that the second paragraph of Representation 1
of the Summary should be revised to reflect the fact that as of August
28, 1997, the SBC Savings Plan had 3,000 participants instead of 3,500
participants.
In response, the Department has noted this change and has made the
requested modification.
9. Paragraph 3 of Representation 3 of the Summary
Sanwa Bank confirms that it has not received and will not receive
any 12b-1 fees in connection with the transactions covered by the
proposed exemption. However, Sanwa Bank wishes to point out that
because the Funds issue more than one class of shares, one class of
shares is subject to 12b-1 fees. Thus, although the class of Fund
shares purchased by Plans is not subject to 12b-1 fees, Sanwa Bank
emphasizes that it does receive 12b-1 fees with respect to the another
class of shares purchased by non-Plan investors. Accordingly, Sanwa
Bank notes that the last sentence of the third paragraph of
Representation 3 of the Summary should be clarified to read as follows:
``In addition, no Fund has paid or will pay any 12b-1 fees to Sanwa
Bank or its affiliates in connection with the transactions.''
In response, the Department has made the requested modification.
10. Representation 17 of the Summary
Sanwa Bank notes that the first two sentences of Representation 17
of the Summary, regarding certain Plan-level fees should be clarified
by substituting in their place the following language:
Through October 31, 1997, Sanwa Bank charged each Client Plan a
Plan-level fee for its services as trustee, investment manager or
custodian based on Sanwa Bank's standard fee schedules and the terms
of specific agreements negotiated between each Client Plan and Sanwa
Bank. Such Plan-level fees included asset-based charges that were
expressed as a percentage of Client Plan assets. Since October 31,
1997, however, Sanwa Bank no longer charges each Client Plan a Plan-
level investment management, investment advisory, or similar fee
with respect to assets of such Client Plan invested in shares of the
Fund.
In response, the Department has made the requested modification.
11. Footnote 14 of the Summary
Sanwa Bank asserts that because Footnote 14 of the Summary might be
construed to imply that Sanwa Bank has waived all investment advisory
fees it
[[Page 53729]]
receives from the Funds through the end of the Funds' initial fiscal
year, it wishes to clarify that it has agreed to waive temporarily a
portion of such investment advisory fees.
The Department has noted this clarification.
For further information regarding the comments or other matters
discussed herein, interested persons are encouraged to obtain copies of
the exemption application file (Exemption Application No. D-10503) the
Department is maintaining in this case. The complete application file,
as well as all supplemental submissions received by the Department, are
made available for public inspection in the Public Documents Room of
the Pension and Welfare Benefits Administration, Room N-5638, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210.
Accordingly, after giving full consideration to the entire record,
including the written comments provided by the Association and Sanwa
Bank, the Department has made the aforementioned changes to the Notice
and Summary and has decided to grant the exemption subject to the
modifications or clarifications described above.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Bernard Chaus, Inc., Employee Savings Plan (the Plan), Located in
New York, New York
[Prohibited Transaction Exemption 98-47; Exemption Application No. D-
10606]
Exemption
The restrictions of sections 406(a), 406(b)(1) and (b)(2) and
407(a) 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, effective December 24, 1997, to: (1)
the past acquisition by the Plan of certain stock rights (the Rights)
pursuant to a stock rights offering (the Offering) by Bernard Chaus,
Inc. (the Employer), the sponsor of the Plan; (2) the past holding of
the Rights by the Plan during the subscription period of the Offering;
(3) the past disposition or exercise of the Rights by the Plan; and (4)
the proposed payment by the Employer to the Plan of an amount necessary
to credit Plan accounts of participants affected by an administrative
error relating to Rights which were not exercised or sold prior to the
expiration of the Rights; provided the following conditions are
satisfied:
(A) The Plan's acquisition and holding of the Rights occurred in
connection with the Offering made available to all shareholders of
common stock of the Employer;
(B) The acquisition and holding of the Rights by the Plan resulted
from an independent act of the Employer as a corporate entity and all
holders of the common stock of the Employer, including the Plan, were
treated in a substantially similar manner with respect to the Offering;
(C) All decisions regarding the holding and disposition of the
Rights by the Plan were made, in accordance with the Plan provisions
for individually-directed investment of participant accounts, by the
individual Plan participants whose accounts in the Plan received Rights
in connection with the Offering, including all determinations regarding
the exercise or sale of the Rights received through the Offering,
except for those participants who failed to file timely and valid
instructions concerning the Rights, in which case the Rights were sold;
and
(D) Within 30 days of the date of publication of this final
exemption in the Federal Register, with respect to the Plan accounts of
participants affected by an administrative error whereby 27 Rights (of
the 17,041 Rights received by the Plan) were not exercised or sold
prior to the expiration of the Rights, the Employer credits the
affected accounts with an amount equal to the value such accounts would
have received if the Rights had been sold on the last day of the
Offering, including interest thereon through the date of such crediting
at a rate equal to the average rate of earnings on all Plan assets
during that period.
EFFECTIVE DATE: This exemption is effective as of December 24, 1997.
For a more complete statement of the summary of facts and
representations supporting the Department's decision to grant this
exemption refer to the Notice of Proposed Exemption published on August
6, 1998 at 63 FR 42077.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
ACRA Local 725 Health & Welfare Fund (the Welfare Plan) and ACRA
Local 725 Pension Fund (the Pension Plan; together, the Plans),
Located in Dade, Broward and Monroe Counties, Florida
[Prohibited Transaction Exemption 98-48; Exemption Application Nos. L-
10536 and D-10537]
Exemption
The restrictions of section 406(b)(2) of the Act shall not apply to
the payment of interest by the Pension Plan to the Welfare Plan on past
mistaken contributions (the Mistaken Contributions) pursuant to an
indemnification agreement by the Board of Trustees of the Pension Plan
with respect to the Mistaken Contributions, provided the following
conditions are satisfied: (a) The Mistaken Contributions occurred as a
result of an inadvertent clerical error committed by the Plans'
independent third party administrator; (b) the principal amount of the
Mistaken Contributions was repaid as soon as the error was discovered;
and (c) the amount of interest to be paid to the Welfare Plan by the
Pension Plan has been determined by a third party bank to be the fair
market rate of interest.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the notice of proposed exemption published on June 29, 1998 at 63 FR
35289.
WRITTEN COMMENTS AND HEARING REQUESTS: The Department received no
hearing requests with respect to the proposed exemption. The only
comment received by the Department was submitted by the applicant to
correct an error that appeared in the proposed exemption. The proposed
exemption had indicated that the Plans were located in Macon, Georgia.
While the Plans' current third party administrative manager, Core
Management Resources, Inc., is located in Macon, the applicant
commented that the Plans' trustees and participants are essentially
located in Dade, Broward and Monroe Counties, Florida. The Department
has amended the exemption accordingly and otherwise granted the
exemption as proposed.
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:
[[Page 53730]]
(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 or disqualified
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application are true and complete and accurately describe all material
terms of the transaction which is the subject of the exemption. In the
case of continuing exemption transactions, if any of the material facts
or representations described in the application change after the
exemption is granted, the exemption will cease to apply as of the date
of such change. In the event of any such change, application for a new
exemption may be made to the Department.
Signed at Washington, D.C., this 30th day of September, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-26622 Filed 10-5-98; 8:45 am]
BILLING CODE 4510-29-P
