[Federal Register Volume 61, Number 220 (Wednesday, November 13, 1996)]
[Notices]
[Pages 58224-58231]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29036]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09988]
Proposed Class Exemption for Bank Collective Investment Fund
Conversion Transactions
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of Proposed Class Exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed class exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974 (the Act or ERISA) and from certain taxes
imposed by the Internal Revenue Code of 1986 (the Code). If granted,
the proposed exemption would permit an employee benefit plan (the
Client Plan) to purchase shares of a registered investment company (the
Fund), the investment adviser for which is a bank (the Bank) that
serves as a fiduciary of the Client Plan, in exchange for plan assets
transferred in-kind to the Fund from a collective investment fund (the
CIF) maintained by the Bank. The proposed exemption, if granted, would
affect participants and beneficiaries of the Client Plans that are
involved in such transactions as well as the Bank and the Fund.
ADDRESSES: All written comments and requests for a public hearing
(preferably 3 copies) should be sent to: Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, 200 Constitution Avenue N.W., Washington, DC 20210, (Attention:
``CIF Conversion Class Exemption''). The application for exemption
(Application No. D-09988) and all additional comments received from
interested persons will be available for public inspection in the
Public Documents Room, Pension and Welfare Benefits Administration,
U.S. Department of Labor, Room N-5638, 200 Constitution Avenue N.W.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady or Mr. E.F.
Williams, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, U.S. Department of Labor, Washington, DC 20210
at (202) 219-8881 or (202) 219-8194, respectively, or Ms. Susan E.
Rees, Plan Benefits Security Division, Office of the Solicitor, U.S.
Department of Labor, Washington, DC 20210 at (202) 219-4600, ext. 105.
(These are not toll-free numbers.)
SUPPLEMENTARY INFORMATION: This document contains a notice of pendency
before the Department of a proposed class exemption from the
restrictions of sections 406(a) and 406 (b)(1) and (b)(2) of the Act
and from the taxes imposed by section 4975 (a) and (b) of the Code by
reason of section 4975(c)(1) (A) through (E) of the Code. The proposed
exemption was requested in an application dated March 28, 1995
submitted on behalf of Federated Investors (Federated) pursuant to
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).1
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\1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 USC App.
1 (1996) generally transferred the authority of the Secretary of the
Treasury to issue exemptions under section 4975(c)(2) of the Code to
the Secretary of Labor.
In the discussion of the exemption, references to specific
provisions of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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I. Paperwork Reduction Act Analysis
The Department of Labor, as part of its continuing effort to reduce
paperwork and respondent burden, provides the general public and
Federal agencies with an opportunity to comment on proposed and/or
continuing collections of information in accordance with the Paperwork
Reduction Act of 1995 (PRA 95) (44 U.S.C. 3506(c)(2)(A). This program
helps to ensure that requested data can be provided in the desired
format, reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the impact of
collection requirements on respondents can be properly assessed.
Currently, the Pension and Welfare Benefits Administration is
soliciting comments concerning the proposed new collection of
information under the Proposed Class Exemption for Bank Collective
Investment Fund Conversion Transactions.
DATES: Written comments must be submitted on or before January 13, 1996
to Mr. Gerald B. Lindrew, Department of Labor, Pension and Welfare
Benefits Administration, 200 Constitution Avenue, NW, Washington, D.C.
20210. The Department of Labor is particularly interested in comments
which:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarify the information
to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other
[[Page 58225]]
technological collection techniques or other forms of information
technology, e.g., permitting electronic submissions of responses.
Title: Class Exemption for Bank Collective Investment Fund
Conversion Transactions.
Summary: The proposed exemption would permit employee benefit plans
to purchase shares of a registered investment company in exchange for
plan assets transferred in-kind from a bank maintained collective
investment fund, where the bank that serves as a fiduciary of the plan
is also the investment adviser for the investment company. The proposal
is conditioned upon an independent fiduciary receiving advance notice
concerning the transfer of assets and written confirmation after the
completion of each transaction.
Needs and Uses: ERISA requires that the Department make a finding
that the proposed exemption meets the statutory requirements of section
408(a) before granting the exemption. The Department therefore finds it
necessary that certain information be provided to an independent
fiduciary of each plan in advance of, and subsequent to, the proposed
transaction, and that the independent fiduciary approve the proposed
transaction.
Respondents and Proposed Frequency of Response: The Department
staff estimates that approximately 50 parties will seek to take
advantage of the class exemption in any given year. The respondents
will be banks and trust companies acting as fiduciaries of plans
investing in collective investment funds maintained by such entities.
Estimated Annual Burden: The Department staff estimates the annual
burden for preparing the materials required under the proposed class
exemption to be 892 hours. The total annual burden cost (operating/
maintenance) is estimated to be $113,772.00. There are estimated to be
no capital/start-up burden costs. Comments submitted in response to
this notice will be summarized and/or included in the request for
Office of Management and Budget approval of the information collection
request; they will also become a matter of public record.
II. Background
The application contains facts and representations with regard to
the requested exemption which are summarized below. Interested persons
are referred to the application on file with the Department for the
complete representations of the applicant. The applicant, Federated,
requests retroactive and prospective exemptive relief for the in-kind
transfer of assets from a CIF in which Client Plans invest to a Fund in
exchange for shares of the Fund. The exemption is being requested in
light of the Department's position that Prohibited Transaction
Exemption (PTE) 77-4 (42 FR 18732, April 8, 1977) is unavailable for
the purchase of shares in Funds other than for cash. In pertinent part,
PTE 77-4 permits the purchase or sale by an employee benefit plan of
shares of a Fund when a fiduciary with respect to the plan is also the
investment adviser of the Fund.
Federated represents that it advises, administers and distributes
its own Funds and also administers, distributes and provides related
services to Funds that are advised by other financial institutions,
including many Banks. In total, Federated provides such services with
respect to over $70 billion in assets.
Since April 1989, Federated has assisted a number of Banks in
establishing ``proprietary'' mutual funds, (i.e., mutual funds advised
by the Bank and for which the Bank may provide other services, such as
custody or shareholder recordkeeping). These Funds are often
established through the complete or partial conversion of the Bank's
CIFs into the Funds. Such conversions have been motivated by changes in
the investment industry and the increasing trend toward the
establishment of participant-directed plans under section 401(k) of the
Code. Federated assists these Banks in the conversion process and may
serve as administrator, as well as in other capacities (such as
transfer agent and portfolio recordkeeper) with respect to such Funds.
Federated explains that these in-kind transfers have been completed
in compliance with the banking rules governing CIFs and the
requirements of the Investment Company Act of 1940 (the '40 Act). To
avoid engaging in a prohibited transaction, the Banks have sought in
good faith to comply with PTE 77-4 and have relied on the availability
of that class exemption. Federated states that the conditions of PTE
77-4 (as they were interpreted by the banking industry at that time)
were met, including the provision of disclosures regarding the Fund to
an independent plan fiduciary (the Independent Fiduciary) and prior
approval by that fiduciary. However, Federated notes that the
Department's position that PTE 77-4 does not apply to in-kind exchanges
of assets, such as occur in a CIF-to-Fund conversion, has created
uncertainty as to what Banks should do with regard to past and future
transactions. Therefore, Federated believes that class exemptive relief
is warranted because of the large number of Banks that have entered
into, or propose to enter into, such transactions. In Federated's view,
the exemptive relief requested would reduce the burden that has been
placed on Banks and would create certainty as to how such transactions
may be structured to comply with provisions of the Act.
III. Discussion of the Application
The applicant represents that, as part of the conversion process,
assets representing the Client Plans' interests in the CIFs are being
transferred to the Funds in exchange for which the Client Plans receive
shares of the Funds. The in-kind transfers are subject to the prior
approval of Independent Fiduciaries and a number of additional
safeguards that are discussed below.
The Banks that would be covered by the requested exemption include
banks or trust companies that are regulated by federal or state law.
The Banks may serve as trustees, investment managers or custodians for
Client Plans that are subject to the Act. If a Bank has investment
discretion over the assets of a Client Plan, it commonly manages such
assets through CIFs. Where a Bank serves as a nondiscretionary trustee
or a custodian, it has made CIFs available as investment options for
participant-directed plans at the election of the plan sponsor. CIF
investments have allowed Client Plans to pool their assets thereby
permitting greater diversification and lower management fees than
individually-managed portfolios.
Federated represents that over the past 15 years mutual funds have
become increasingly popular investments for plan investors. Among the
advantages of Funds over CIFs are daily pricing and redemption,
published prices available in newspapers of general circulation and
greater portability. Daily pricing and redemption permits: (a)
immediate investment of plan contributions in various types of
investments; (b) greater flexibility in transferring assets from one
type of investment to another; and (c) faster distributions. CIFs, by
contrast, generally have been valued quarterly and have not permitted
daily withdrawals or transfers. Because of the advantages offered by
Funds, many Banks have been converting their CIFs into Funds by
transferring the assets out of the CIFs and into the Banks' proprietary
Funds. In some cases, the Banks have terminated their CIFs. In other
cases, the CIFs have been partially converted and not terminated
because one or more clients has preferred to remain invested in the
CIFs.
[[Page 58226]]
The applicant represents that the conversion transaction that is
the subject of this exemption request is structured as an in-kind
transfer of plan assets held by the CIF to the corresponding Funds, in
exchange for shares of the Funds. This approach, according to the
applicant, avoids incurring transaction costs in connection with
liquidating the CIF investments and making the same investments for the
Funds.
It is represented that the process used by Banks assisted by
Federated has been designed to comply with the '40 Act and PTE 77-4, as
applicable. In this regard, Federated represents that the Bank obtains
the approval of an Independent Fiduciary prior to investing a Client
Plan's assets in a Fund. The Independent Fiduciary is generally the
Client Plan's named fiduciary or plan sponsor. In requesting the
Independent Fiduciary's approval, the Bank provides such fiduciary with
a description of the transaction, information about each Fund into
which assets would be transferred and a current prospectus. It is
represented that all disclosures and the form of approval are designed
to meet the requirements of PTE 77-4.2
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\2\ In pertinent part, PTE 77-4 requires that a fiduciary of a
plan who is independent of and unrelated to the fiduciary/investment
adviser, or any affiliate thereof, receive a prospectus issued by
the investment company and full written disclosure of the investment
advisory and other fees charged to, or paid by, the plan and the
investment company. Such information should include: (a) the nature
and extent of any differential between the rates of such fees; (b)
the reasons why the fiduciary/investment adviser may consider such
purchases of shares in the investment company to be appropriate for
the plan; (c) 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, (d) the nature of
such limitations.
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To the extent that the Independent Fiduciary of a Client Plan
approves the investment in the Funds, the purchase of Fund shares by
the Client Plan is accomplished in accordance with Securities and
Exchange Commission Rule 17a-7 (Rule 17a-7 or the Rule) under the '40
Act (17 CFR 270.17a-7). Rule 17a-7 is an exemption from the prohibited
transaction provisions of section 17(a) of the '40 Act (15 USC 80a-
17(a)), which prohibit, among other things, transactions between an
investment company and its investment adviser or affiliates of its
investment adviser. Thus, Rule 17a-7 permits transactions between the
Funds and other accounts that use the same or affiliated investment
advisers, subject to certain conditions that are designed to assure
fair valuation of the assets involved in the transaction and fair
treatment of both parties to the transaction. Among the conditions of
Rule 17a-7 is the requirement that the transaction be effected at the
``independent current market price'' for the security involved.3
In this regard, the ``independent current market price'' for specific
types of CIF securities involved in the transactions is determined as
follows:
\3\ Rule 17a-7 also includes the following requirements: (a) the
transaction must be consistent with the investment objectives and
policies of the Fund, as described in its registration statement;
(b) the security that is the subject of the transaction must be one
for which market quotations are readily available; (c) no brokerage
commissions or other remuneration may be paid in connection with the
transaction; and (d) the Fund's board of directors (i.e., those
directors who are independent of the Fund's investment adviser) must
adopt procedures to ensure that the requirements of Rule 17a-7 are
followed, and determine no less frequently than quarterly that the
transactions during the preceding quarter were in compliance with
such procedures.
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(a) If the security is a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934
(the '34 Act) (17 CFR 240.11Aa3-1), the last sale price with respect
to such security reported in the consolidated transaction reporting
system (the Consolidated System); or, if there are no reported
transactions in the Consolidated System that day, the average of the
highest current independent bid and the lowest current independent
offer for such security (reported pursuant to Rule 11Ac1-1 under the
'34 Act) (17 CFR 240.11Ac1-1), as of the close of business on the
CIF valuation date.
(b) If the security is not a reported security, and the
principal market for such security is an exchange, then the last
sale on such exchange or, if there are no reported transactions on
such exchange that day, the average of the highest current
independent bid and lowest current independent offer on the exchange
as of the close of business on the CIF valuation date.
(c) If the security is not a reported security and is quoted in
the NASDAQ system, then the average of the highest current
independent bid and lowest current independent offer reported on
Level 1 of NASDAQ as of the close of business on the CIF valuation
date.4
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\4\ It is represented that Level 1 of NASDAQ provides the best
bid and ask quotations for each NASDAQ security that has a minimum
of two registered market-makers providing quotations. Level 2
provides the current bid and ask prices for each market-maker in any
available NASDAQ securities, not just the best prices. Level 3
allows for market-makers instantaneously to insert new quotations
into the system and is generally only used by market-makers and
traders.
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(d) For all other securities, the average of the highest current
independent bid and lowest current independent offer determined on
the basis of reasonable inquiry from at least three independent
sources as of the close of business on the CIF valuation date.
Federated represents that these valuation conditions are objective and
require documentation to permit review by independent parties.
Federated represents that, in a conversion transaction, a portion
of the plan assets in each CIF, representing the interests in the CIF
of the Client Plans that approve the asset transfer, are transferred to
the corresponding Funds using the then-current market value of the
plans' assets in exchange for shares in the Fund. Simultaneously, each
Client Plan's investment in the CIF is liquidated and Fund shares of
equal value to the Client Plan's interest in the CIF are distributed to
the Client Plan.
Prior to the transfers, the applicant states that the CIF assets
must be reviewed to determine whether they are appropriate investments
for the corresponding Fund, consistent with the Fund's investment
objectives and policies and applicable requirements under the '40 Act
and the Code. In addition, Federated notes that Rule 17a-7 permits
transfers only of securities for which market quotations are readily
available and does not include restricted securities (such as those
described by SEC Rule 144) or other securities for which market
quotations are not readily available.5 If the class exemption were
not available, the transferring plans would request cash distributions,
causing the CIF to incur higher transaction costs in liquidating a
larger proportion of its securities holdings.
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5 The Department notes that the Bank retains ongoing
responsibilities under ERISA's general standards of fiduciary
conduct with respect to plans electing to remain as investors in the
CIF and with respect to other aspects of the transfers.
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Federated explains that if the CIF will be terminated, the Client
Plans not transferring assets to a Fund will receive a distribution,
prior to the transfer date, of their pro rata portions of each CIF
asset. The remaining CIF assets are then transferred to the Funds on
behalf of the Client Plans that approve the transaction. If the CIF
will not be terminated, the assets of the CIF are divided, prior to the
transfer, so that each Client Plan that chooses to remain invested in
the CIF retains its pro rata share of the CIF assets.
Although the Bank will generally divide the assets held in a CIF
among the Client Plans on a pro rata basis, Federated explains that in
some instances, the CIF may hold ``small investments'' in fixed-income
securities that are not divisible, or that can be divided only at
substantial cost. Federated states that these investments will
typically be issued in units of $1,000 or more. For example, a CIF may
have 5 bonds in $1,000 denominations, for an aggregate principal value
of $5,000, and 50 percent of the Client Plans participating in the CIF
may elect to transfer their investments to a Fund.
[[Page 58227]]
A strict pro rata allocation to each Client Plan would require that
$2,500 of the principal value of these bonds be transferred to the
Fund. However, a $1,000 bond cannot be divided into two segments of
$500 each. Federated states that securities, such as the bond in this
example, that are incapable of division could be liquidated for cash
prior to the transfer but, if there are many such securities, the
transaction costs may become significant.
In these situations, solely for purposes of the prospective relief
requested herein 6, Federated represents that the Banks will treat
equivalent, ``small investment'' fixed-income securities as fungible
for allocation purposes if such securities have the same coupon rates,
maturities and credit ratings at the time of the transaction. For
example, notes with variable interest rates will be treated as fungible
only if they have the identical interest rate formulas. This
requirement will ensure that all Client Plans receive securities that
have equivalent terms and features. The Banks will allocate such fixed-
income securities among the Client Plans in a manner such that each
receives its pro rata share of the value of such securities.7
Federated represents that providing Banks with the ability to allocate
fixed-income securities other than on a strictly pro rata basis would
permit the CIF, and, therefore, the Client Plans, to avoid the
transaction costs involved in liquidating these small positions prior
to maturity.
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\6\ In this regard, the Department wishes to emphasize that the
proposed class exemption would provide no retroactive relief for any
past in-kind transfer of CIF assets to a Fund unless all or a pro
rata portion of the assets of the CIF were transferred to the Fund
in exchange for shares of such Fund. (See Section I(c) below.)
\7\ The applicant represents that the valuation of fixed income
securities will be performed in accordance with Rule 17a-7.
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In order to establish what constitutes ``small investments,''
Federated proposes that this exception from the general pro rata
division rule be available only for investment positions in fixed-
income securities which, in the aggregate, constitute no more than one
(1) percent of the CIF's assets. This one (1) percent limit will ensure
that the ``small investment'' positions in fixed-income securities will
represent a de minimis portion of the overall assets held by the CIF at
the time of the transactions.
In implementing the asset transfers, Federated represents that the
current market value of the assets of the CIFs have been and will be
determined in accordance with Rule 17a-7 and the procedures adopted by
the board of directors of the Fund pursuant to such Rule. The assets
are valued by the CIF and the Fund in the same manner using the
``independent current market price'' of the securities as defined in
Rule 17a-7 as of the close of business on the same business day. In
addition, no brokerage commissions or other remuneration is charged to
the Client Plans in connection with the asset transfer and any such
costs or expenses are paid by the Bank.
Federated states that the same values are used for the securities
both in determining the amount transferred from the CIF and the amount
received by the Fund. Thus, the total net asset value of the Fund
shares received by the Client Plan is equal in value to the Client
Plan's share of the assets of the CIF exchanged for shares of the Fund
on the date of transfer.
The valuations are based on prices, bids and offers as of the close
of business on the date of the asset transfer. Federated states that,
in the transactions in which it has been involved, the asset transfers
have primarily been scheduled to occur over a weekend to allow
sufficient time for processing. As applicable, securities have been
valued based on their closing prices, or the average of bid and ask
quotations (or prices obtained from pricing services) obtained from at
least three independent sources, as of the close of business on the
Friday preceding the weekend of the asset transfers. The transfer of
the securities has been completed by the following Monday, at which
time the Client Plans whose assets were formerly invested in a CIF hold
shares in the corresponding Fund of equal value to their units in the
CIF as of the close of business the previous Friday.
Subsequent to the transaction, Federated explains that compliance
with Rule 17a-7 procedures of the Fund is reviewed by independent
members of the Fund's board of directors and by independent auditors.
In this regard, records pertaining to Rule 17a-7 transactions are
reviewed by SEC staff during their periodic inspections of the Funds.
Thus, in Federated's view, the asset transfer transactions are
ministerial in nature because they are performed in accordance with
procedures that are prescribed by Rule 17a-7 and approved by the Fund's
board of directors. Further, Federated states that the pricing of all
securities transferred to a Fund is accomplished by reference to
independent sources. In each case, the affected Client Plans receive
shares of the Funds that are of equal value to the previously-held CIF
units.
IV. Description of the Proposed Exemption
The proposed class exemption consists of four sections. Section I
would provide conditional exemptive relief for transactions occurring
from October 1, 1988 until the date the notice granting the final
exemption is published in the Federal Register. Section II would
provide prospective relief for transactions which must meet certain
additional conditions which are described below. Section III provides
that a transaction that meets the applicable conditions of the proposed
exemption will be deemed a purchase by the Client Plan of shares of an
open-end investment company registered under the Investment Company Act
of 1940 for purposes of PTE 77-4. Accordingly, if the exemption is
granted, a Bank that complies with the terms of this exemption and with
the terms of PTE 77-4 would be able to receive investment management
and investment advisory fees from the Fund and the Client Plan with
respect to the plan's assets invested in shares of the Fund to the
extent permitted under PTE 77-4. Section III also provides that
compliance with the proposed exemption will constitute compliance with
paragraphs (a), (d) and (e) of section II of PTE 77-4. Finally, Section
IV contains definitions for certain terms used in the proposed
exemption.
Specifically, the proposed class exemption set forth in Section I
would provide retroactive relief from the restrictions of sections
406(a) and 406(b)(1) and (b)(2) of the Act for the purchase of Fund
shares by an employee benefit plan, where a Bank that serves as
investment adviser to the Fund is also a fiduciary with respect to the
plan, in exchange for plan assets transferred in-kind to the Fund from
a CIF maintained by the Bank. The exemption is generally similar to a
number of individual exemptions that have been granted by the
Department for such transactions, but the operative language of this
proposal differs from that of the individual exemptions.8 The
principal purpose of the language in the proposal is to make clear that
the class exemption would not provide relief for any prohibited
transactions that may arise in connection with terminating a CIF,
permitting certain plans to
[[Page 58228]]
withdraw from a CIF that is not terminating, or liquidating or
transferring any plan assets held by the CIF. The class exemption would
provide relief only for the purchase of Fund shares by a Client Plan in
exchange for assets that are transferred from a CIF. Although the
Department interprets the individual exemptions as being similarly
limited in their scope, the language of the proposed class exemption is
intended to clarify this limitation. The Department believes that the
scope of the proposed class exemption is consistent with the
applicant's request for relief based on the applicant's mistaken
reliance on PTE 77-4. The Department, however, specifically solicits
comments on whether the scope of the proposed exemption should be
modified to include other aspects of in-kind transfers of CIF assets.
The Department also notes that the proposal defines the term ``Client
Plan'' in section IV so as to exclude exemptive relief for purchases of
Fund shares by plans sponsored by the Bank for its own employees.
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\8\ See, for example, PTE 94-82 involving Marshall & Ilsley
Trust Company (59 FR 62422, December 5, 1994); PTE 94-86 involving
The Bank of California, N.A. (59 FR 65403, December 19, 1994); PTE
95-33 involving Bank South, N.A. (60 FR 20773, April 27, 1995); PTE
95-48 involving Mellon Bank, N.A. (60 FR 32995, June 26, 1995); and
PTE 95-49 involving Norwest Bank (60 FR 33000, June 26, 1995).
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The conditions applicable to the retroactive exemption set forth in
Section I of the proposal are described below.
Under section I(a) of the proposal, no sales commissions or other
fees are paid by Client Plan in connection with the transaction.
Section I(b) and (c) of the proposed exemption requires that the
transferred assets be securities for which market quotations are
readily available and consist of the Client Plan's pro rata portion of
all the transferable assets held by the CIFs immediately prior to the
transfer. Under section I(d), the Client Plan must receive shares of a
Fund to which the CIF assets have been transferred that have a total
net asset value that is equal to the value of the Client Plan's pro
rata portion of the transferred assets on the date of the transfer,
based on the current market value of such assets, as determined in a
single valuation for each asset, with all valuations performed in the
same manner at the close of the same business day, in accordance with
Rule 17a-7 of the '40 Act (using sources independent of the Bank) and
the procedures established by the Funds pursuant to Rule 17a-7 for the
valuation of such assets. The same valuation must be used for each
asset in determining the amount transferred from the CIF and the amount
received by the Fund.
Section I(e) provides that an Independent Fiduciary must receive
advance written notice of the transaction, as well as the following
written information concerning the Funds: (a) a current prospectus for
each Fund in which a Client Plan is considering investing; (b) full and
detailed written disclosure of the investment advisory and other fees
charged to, or paid by, the Client Plan (and by such Fund) to the Bank
or any unrelated third party, including the nature and extent of any
differential between the rates of the fees; (c) the reasons why the
Bank may consider an exchange of the Client Plan's CIF assets for
investments in the Fund to be appropriate for the Client Plan; and (d)
a statement describing whether there are any limitations applicable to
the Bank with respect to which assets of the Client Plan may be
invested in the Fund, and, if so, the nature of such limitations.
Moreover, under section I(f), the Independent Fiduciary gives prior
approval in writing of each in-kind transfer of the Client Plan's CIF
assets to a Fund in exchange for shares of the Fund, on the basis of
the information disclosed to the Independent Fiduciary. In addition,
section I(g) requires that the Independent Fiduciary receive written
confirmation of the transaction no later than 105 days after the
transaction. This written confirmation must disclose the number of CIF
units held by the Client Plan immediately before the transaction and
the number of Fund shares held by the Client Plan immediately following
the transaction, the related per unit and per share values, and the
dollar amounts of the CIF units and the Fund shares involved in the
transaction.
Section I(h) requires that, for each Client Plan, the combined
total of all fees received by the Bank for the provision of services to
the Client Plan, and in connection with the provision of services to a
Fund in which a Client Plan invests, must not exceed ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
Finally, section I(i) provides that all dealings between a Client Plan
and a Fund are on a basis no less favorable to the Client Plan than
such dealings are with other shareholders of the Fund.
On a prospective basis, Section II requires that the transactions
meet certain conditions in addition to those described in Section I of
the proposal. These additional conditions are described below.
Section II(c) provides an exception to the general requirement that
the assets transferred to a Fund consist of the Client Plan's pro rata
portion of each of the assets of the CIF. This exception applies to
certain investments in fixed-income securities. The fixed-income
securities which are allocated between the CIF and the Fund must have
the same coupon rates, maturities and credit ratings at the time of the
transaction and cannot exceed one (1) percent of the aggregate assets
held by the CIF as of each transfer. In this regard, section IV(j)
defines the term ``fixed-income security'' as 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, usually at specific intervals, and to repay the principal
amount of the loan at maturity.
Under section II(f) of the proposal, the Independent Fiduciary must
give prior approval in writing of each in-kind transfer of the Client
Plan's CIF assets to a Fund in exchange for shares of the Fund. The
advance notice required by section II(e) will include the identity of
securities that will be valued in accordance with Rule 17a-7(b)(4) of
the '40 Act and allocated under section II(c), and the identity of any
fixed-income securities allocated under section II(c).9
---------------------------------------------------------------------------
\9\ Rule 17a-7(b)(4) describes the method for determining the
current market price of securities that are not reported securities
under Rule 11Aa3-1 (17 CFR 240.11Aa3-1), are not traded principally
on an exchange and are not quoted in the NASDAQ system. 17 CFR
270.17a-7(b)(4). Because the proper valuation of such securities may
require more extensive inquiry than in the valuation of securities
described in Rule 17a-7(b)(1)-(b)(3), the Department believes that
the Independent Fiduciary should receive advance notice that the
transfer will entail such valuations.
---------------------------------------------------------------------------
Section II(g)(1) requires a Bank to send the Independent Fiduciary
of a Client Plan an additional written confirmation, not later than 30
days after the completion of the transaction, for securities that were
valued in accordance with Rule 17a-7(b)(4). The additional confirmation
must contain the following information: (a) the identity of each such
security; (b) the current market price as of the date of the
transaction of each such security involved in the transaction; and (c)
the identity of each pricing service or market-maker consulted in
determining the value of such securities.
In addition, section II(h) requires the Bank to provide certain
ongoing disclosures to the Independent Fiduciary of a Client Plan. Such
written disclosures must include: (a) a copy of an updated prospectus
for each Fund in which such plan has invested, which is to be provided
at least on an annual basis; and (b) upon the request of the
Independent 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) containing a
description of
[[Page 58229]]
all fees paid by the Fund to the Bank. The purpose of this additional
disclosure is to ensure that the Independent Fiduciary will continue to
have the information necessary to effectively monitor the Fund
investments made by the Client Plan.
The Department wishes to note that the requirement under sections I
and II of the proposal that all valuations of all plan assets
transferred from a CIF to a Fund be determined in accordance with Rule
17a-7 under the '40 Act is 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 could take
advantage of the amended Rule without having to request an amendment to
the class exemption. However, the Department cautions that the
exemption would not be available for transactions involving assets that
are not valued by reference to sources independent of the Bank.
Unlike the individual exemptions cited above, this proposed class
exemption does not grant relief for fees that the Bank may receive from
the Fund as a result of the Client Plans' purchase of Fund shares.
However, section III of this proposal provides that a purchase of Fund
shares that complies with sections I and II will be deemed a purchase
of shares of an open-end investment company for purposes of PTE 77-4,
and in compliance with paragraphs (a), (d) and (e) of section II of
that exemption. Compliance with all of the conditions of PTE 77-4 would
permit the Bank to receive investment advisory and similar fees from
the Fund with respect to shares acquired by a Client Plan in accordance
with the proposal.
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 section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and 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 require, among other things, that a fiduciary
discharge his duties with respect to the plan solely in the interests
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 section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plans and their participants and beneficiaries and protective of the
rights of participants and beneficiaries of such plans;
(3) If granted, the proposed exemption will be applicable to a
transaction only if the conditions specified in the class exemption are
met; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Code and the Act,
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.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a public hearing on the proposed exemption to the address
and within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the proposed exemption.
Comments received will be available for public inspection with the
referenced application at the above address.
Proposed Exemption
The Department has under consideration the grant of the following
class 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. Retroactive Exemption for the Purchase of Fund Shares With
Assets Transferred In-Kind From A CIF
For the period from October 1, 1988, to [date of publication of
final class exemption], the restrictions of sections 406(a) and
406(b)(1) and (b)(2) of the Act and the taxes imposed by section 4975
of the Code, by reason of section 4975(c)(1)(A) through (E), shall not
apply to the purchase by an employee benefit plan (the Client Plan) of
shares of one or more diversified open-end management investment
companies (the Fund or Funds) registered under the Investment Company
Act of 1940, the investment adviser for which is a bank (the Bank) that
is also a fiduciary of the Client Plan, in exchange for assets of the
Client Plan transferred in-kind to the Fund from a collective
investment fund (the CIF) maintained by the Bank, if the following
conditions are met:
(a) No sales commissions or other fees are paid by the Client Plan
in connection with the purchase of Fund shares.
(b) All transferred assets are securities for which market
quotations are readily available.
(c) The transferred assets constitute the Client Plan's pro rata
portion of such assets that were held by the CIF immediately prior to
the transfer.
(d) The Client Plan receives Fund shares that have a total net
asset value equal to the value of the Client Plan's pro rata share of
transferred assets on the date of the transfer, as determined in a
single valuation for each asset, with all valuations performed in the
same manner, at the close of the same business day, in accordance with
Securities and Exchange Commission Rule 17a-7 (using sources
independent of the Bank and the Fund) and the procedures established by
the Funds pursuant to Rule 17a-7.
(e) With respect to each Client Plan owning assets held by the CIF,
an Independent Fiduciary with respect to such plan receives advance
written notice of the in-kind transfer and purchase and full written
disclosure of information concerning the Funds which includes the
following:
(1) A current prospectus for each Fund to which the CIF assets may
be transferred;
(2) A statement describing the fees to be charged to, or paid by, a
Client Plan and the Funds to the Bank or any unrelated third party,
including the nature and extent of any differential between the rates
of the fees;
(3) A statement of the reasons why the Bank may consider the
transfer and purchase to be appropriate for the Client Plan; and
(4) A statement of whether there are any limitations on the Bank
with respect to which plan assets may be invested in shares of the
Funds, and, if so, the nature of such limitations.
(f) On the basis of the foregoing information, the Independent
Fiduciary gives approval, in writing, for each purchase of Fund shares
in exchange for the Client Plan's transferred CIF assets, consistent
with the responsibilities, obligations and duties imposed on
fiduciaries by Part 4 of Title I of the Act.
(g) The Bank sends by regular mail to the Independent Fiduciary of
each
[[Page 58230]]
Client Plan that purchases shares in connection with the in-kind
transfer, no later than 105 days after completion of each purchase, a
written confirmation of the transaction containing--
(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.
(h) As to each Client Plan, the combined total of all fees received
by the Bank for the provision of services to the Client Plan, and in
connection with the provision of services to a Fund in which a Client
Plan holds shares purchased in connection with the in-kind transfer is
not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.
(i) All dealings in connection with the in-kind transfer and
purchase between the Client Plan and a Fund are on a basis no less
favorable to the Client Plan than dealings between the Fund and other
shareholders.
Section II. Prospective Exemption for the Purchase of Fund Shares With
Assets Transferred In-Kind From A CIF
Effective [date of publication of final class exemption], the
restrictions of sections 406(a) and 406 (b)(1) and (b)(2) of the Act
and the taxes imposed by section 4975 of the Code, by reason of section
4975(c)(1) (A) through (E) of the Code, shall not apply to the purchase
by an employee benefit plan (the Client Plan) of shares of one or more
diversified open-end management investment companies (the Fund)
registered under the Investment Company Act of 1940, the investment
adviser for which is a bank (the Bank) that is also a fiduciary of the
Client Plan, in exchange for assets of the Client Plan transferred in-
kind to the Fund from a collective investment fund (the CIF) maintained
by the Bank if the following conditions 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 transfer of
assets from the CIF.
(b) All transferred assets are securities for which market
quotations are readily available.
(c) The transferred assets constitute the Client Plan's pro rata
portion of such assets that were held by the CIF immediately prior to
the transfer. Notwithstanding the foregoing, the allocation of fixed-
income securities held by a CIF among Client Plans on the basis of each
Client Plan's pro rata share of the aggregate value of such securities
will not fail to meet the requirements of section II(b) 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.
(d) The Client Plan receives Fund shares that have a total net
asset value equal to the value of the Client Plan's pro rata share of
transferred assets on the date of the transfer, as determined in a
single valuation for each asset, with all valuations performed in the
same manner, at the close of the same business day, in accordance with
Securities and Exchange Commission Rule 17a-7 (using sources
independent of the Bank and the Fund) and the procedures established by
the Funds pursuant to Rule 17a-7.
(e) With respect to each Client Plan owning assets held in the CIF,
an Independent Fiduciary for such Client Plan receives advance written
notice of the in-kind transfer and purchase of assets and full written
disclosure of information concerning the Funds which includes the
following:
(1) A current prospectus for each Fund to which the CIF assets may
be transferred;
(2) A statement describing the fees to be charged to or paid by the
Client Plan and the Funds to the Bank or any unrelated third party,
including the nature and extent of any differential between the rates
of such fees;
(3) A statement of the reasons why the Bank may consider the
transfer and purchase to be appropriate for the Client Plan;
(4) A statement of whether there are any limitations on the Bank
with respect to which plan assets may be invested in shares of the
Funds, and, if so, the nature of such limitations;
(5) The identity of securities that will be valued in accordance
with Rule 17a-7(b)(4) and allocated under section II(c); and
(6) The identity of any fixed-income securities allocated pursuant
to section II(c).
(f) On the basis of the foregoing information, the Independent
Fiduciary gives prior approval, in writing, for each purchase of Fund
shares in exchange for the Client 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.
(g) The Bank sends by regular mail to the Independent Fiduciary of
each Client Plan that purchases Fund shares in connection with the in-
kind transfer, the following information:
(1) Not later than 30 days after the completion of the purchase, a
written confirmation which contains--
(i) The identity of each security that was valued for purposes of
the purchase of Fund shares in accordance with Rule 17a-7(b)(4);
(ii) The current market price, as of the date of the in-kind
transfer, of each such security involved in the purchase of Fund
shares; and
(iii) The identity of each pricing service or market-maker
consulted in determining the current market price of such securities.
(2) Within 105 days after the completion of each purchase, a
written confirmation which contains--
(i) The number of CIF units held by the Client Plan immediately
before the in-kind 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 purchase, the related per share net
asset value and the total dollar amount of such shares.
(h) With respect to each of the Funds in which a Client Plan
continues to hold shares acquired in connection with the in-kind
transfer, the Bank provides the Independent Fiduciary of the Client
Plan with--
(1) A copy of an updated prospectus of such Fund, at least
annually; and
(2) Upon request of the Independent 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) containing a description of all fees paid by the Fund to the
Bank.
(i) As to each Client Plan, the combined total of all fees received
by the Bank for the provision of services to the Client Plan, and in
connection with the provision of services to a Fund in which a Client
Plan holds shares acquired in connection with the in-kind transfer, is
not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.
(j) All dealings in connection with the in-kind transfer and
purchase between the Client Plan and a Fund are on a basis no less
favorable to the Client Plan than dealings between the Fund and other
shareholders.
[[Page 58231]]
Section III. Availability of Prohibited Transaction Exemption (PTE) 77-
4
Any purchase of Fund shares that complies with the conditions of
either Section I or Section II of this class exemption shall be treated
as a ``purchase or sale'' of shares of an open-end investment company
for purposes of PTE 77-4 and shall be deemed to have satisfied
paragraphs (a), (d) and (e) of section II of that exemption. 42 FR
18732 (April 8, 1977).
Section IV. Definitions
For purposes of this proposed exemption:
(a) The term ``Bank'' means a bank or trust company, and any
affiliate thereof [as defined below in paragraph (b)(1)], which is
supervised by a state or federal agency.
(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 or relative of such person, 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 ``collective investment fund'' or ``CIF'' means a
common or collective trust fund or pooled investment fund maintained by
a ``Bank'' as defined in paragraph (a) of this Section IV.
(e) The term ``Fund'' or ``Funds'' means any diversified open-end
management investment company or companies registered under the '40 Act
for which the Bank serves as an investment adviser, and may also serve
as a custodian, shareholder servicing agent, transfer agent or provide
some other secondary service (as defined below in paragraph (i) of this
section).
(f) The term ``net asset value'' means the amount 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 chargeable to each portfolio, by the number of
outstanding shares.
(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 ``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 or any affiliate thereof;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of such fiduciary, is an officer, director, partner, employee
of the Bank (or is a relative of such persons) or any affiliate
thereof;
(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 proposed exemption.
If an officer, director, partner, employee of the Bank (or relative
of such persons) or any affiliate thereof, 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, and (ii) the
approval of any purchase or sale between the Client Plan and the Funds,
as well as any transaction described in Sections I and II above, then
paragraph (h)(2) of this Section IV shall not apply.
(i) The term ``secondary service'' means a service provided by a
Bank to a Fund other than investment management, investment advisory or
similar services.
(j) 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.
(k) The term ``Client Plan'' means a pension plan described in 29
CFR 2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, and
a plan described in section 4975(e)(1) of the Code, but does not
include an employee benefit plan established or maintained by the Bank
or by an affiliate thereof, for its own employees.
(l) The term ``security'' shall have the same meaning as defined in
section 2(36) of the '40 Act, as amended, 15 U.S.C. 80a-2(36) (1996).
Signed at Washington, D.C., this 5th day of November, 1996.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 96-29036 Filed 11-12-96; 8:45 am]
BILLING CODE 4510-29-P
