[Federal Register Volume 61, Number 243 (Tuesday, December 17, 1996)]
[Notices]
[Pages 66314-66333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31993]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10227 and 10232, et al.]
Proposed Exemptions; Real Estate Equity Trust No. 1 (the Trust)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Real Estate Equity Trust No. 1 (the Trust), et al. Located in
Cincinnati, OH
[Exemption Application Nos. D-10227 and D-10232]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the purchase of units in the Trust by
certain multiemployer pension plans (the Plans) that will enable State
Street Global Advisors, Inc. (SSGA), the independent fiduciary for the
Plans investing in the Trust, to make initial and subsequent equity
investments on behalf of the Trust, in the Cincinnati Development Group
Limited Partnership (the Partnership), which may result in a benefit
inuring to Fifth Third Bank (Fifth Third), the trustee of the Trust and
a party in interest with respect to the Plans.
This proposed exemption is subject to the following conditions:
(a) Each Plan investing in the Trust has total assets that are in
excess of $50 million.
(b) No Plan that purchases units in the Trust that will permit the
Partnership investment has, immediately following the acquisition of
such units, more than 5 percent of its assets invested therein.
(c) The decision to purchase units in the Trust that will allow
SSGA to make the initial and any subsequent equity contributions to the
Partnership is made by a Plan fiduciary (the Second Fiduciary) which is
independent of Fifth Third and its affiliates and which is not SSGA.
(d) As independent fiduciary for the Trust, SSGA determines
whether--
(1) It is in the best interests of the Trust and the Plans
participating therein to make the initial and subsequent investments in
the Partnership;
(2) It is appropriate for the Trust to assign, transfer, pledge or
otherwise encumber its interest in the Partnership provided the Trust
obtains written consent from Cincinnati Development Group, LLC (CDG);
(3) It is appropriate for the Trust to withdraw as a limited
partner from the Partnership or to withdraw its capital from such
Partnership provided the Trust obtains the written consent of CDG;
(4) It is appropriate for the Trust to consent to the sale by CDG
of substantially all of the assets of the Partnership or the transfer
by CDG of its interest in the Partnership to a third party;
(5) It is appropriate for the Trust to contribute to the
Partnership the amount necessary to complete construction of the
Fountain Square West Project and to require that CDG release control of
the Partnership to an entity designated by the Trust, if CDG fails to
provide for construction cost overruns;
(6) It is appropriate for the Trust to elect to continue the
Partnership by appointing a successor general partner.
(7) An entity designated by the Trust to serve as general partner
is appropriate upon the occurrence of (d)(5) or (d)(6).
(e) At the time the Partnership investment is made, the terms of
the transaction are at least as favorable to each Plan participating in
the Trust as
[[Page 66315]]
those obtainable in an arm's length transaction with an unrelated
party.
(f) Prior to investing in the Partnership, Fifth Third provides
SSGA and the Second Fiduciary of each Plan participating in the Trust
with offering materials disclosing all material facts concerning the
purpose, structure and operation of the Partnership.
(g) Subsequent to investing in the Partnership, the Trust and SSGA
receive the following ongoing information from CDG:
(1) Within 120 days after the end of the Partnership's fiscal year,
an unaudited annual report containing--
(A) A balance sheet and statements of income, Partners' equity,
changes in financial position and cash flow for the year then ended;
(B) A report of the activities of the Partnership during the period
covered by the report; and
(C) An itemization of any fees or payments made to CDG or any
related party or affiliate.
(2) Within 60 days of the end of each year, an appraisal report,
prepared by a qualified, independent appraiser, of each property held
in the Partnership.
(3) Periodically (but not less frequently than quarterly),
operating and development budgets of the Partnership as well as
unaudited operations and financial reports. (Information with respect
to the Partnership is disseminated by Fifth Third to the Second
Fiduciaries of Plans investing in the Trust through annual audited
financial statements of the Trust, prepared by independent, certified
public accountants and in quarterly communications setting forth
Partnership financial data. SSGA will also be given copies of this
information.)
(h) As to each Plan participating in the Trust, the total fees paid
to Fifth Third will constitute no more than ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
(i) Fifth Third maintains, for a period of six years, the records
necessary to enable the persons described in paragraph (j) 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 Fifth Third
and/or its affiliates, the records are lost or destroyed prior to the
end of the six year period; and
(2) No party in interest other than Fifth Third 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 below by paragraph (j).
(j)(1) Except as provided in section (i)(2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (i) are
unconditionally available at their customary location during normal
business hours by:
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(j)(2) None of the persons described above in paragraphs (j)(1)(B)-
(j)(1)(D) of this paragraph (j) are authorized to examine the trade
secrets of Fifth Third or commercial or financial information which is
privileged or confidential.
Summary of Facts and Representations
1. The Trust was originally established on December 1, 1987 by a
trust agreement between Fifth Third, as trustee, and the International
Brotherhood of Electrical Workers Local 212 Pension Fund (the IBEW
Pension Plan), as beneficiary. The purpose of the Trust is to make
equity investments in real estate development projects that are located
within a 100 mile radius of Greater Cincinnati. As a condition
precedent to any investment by the Trust, all project work must be
performed by union labor.1
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1 This proposed exemption provides no relief with respect to
any violations of section 404 of the Act.
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The Trust is a group trust, exempt from taxation under section
501(a) of the Code pursuant to the principles of Revenue Ruling 81-100,
1981-1 C.B. 326. Under the terms of the Trust, the initial investment
by a Plan must be at least $500,000.\2\
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\2\ It is represented that the purchase or redemption of units
in the Trust by the investing Plans would be statutorily exempt
under section 408(b)(8) of the Act. In this regard, the Department
expresses no opinion herein on whether such transactions would
satisfy the terms and conditions of section 408(b)(8) of the Act.
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Thereafter, a Plan may make additional contributions in increments
of $100,000. Although there are no minimum or maximum limits imposed by
the Trust on the portion of the total assets of any Plan that may be
invested therein, such investment must be approved initially by a
Second Fiduciary.
The Trust has been established for an indefinite duration. However,
it may be terminated upon (a) the resignation or termination of Fifth
Third, (b) the adoption by the Board of Directors (or the Executive
Committee) of Fifth Third of a resolution directing the termination and
liquidation of the Trust or (c) a vote of 75 percent of the beneficial
interests in the Trust to remove Fifth Third.
2. Fifth Third, the trustee of the Trust, is a regional bank
headquartered in Cincinnati, Ohio. As of August 3, 1995, Fifth Third
had over $14 billion in assets and its trust department had over $7
billion in assets under management. Fifth Third has legal title and
sole investment discretion over all of the assets of the Trust and is
permitted under the terms of the Trust Agreement to acquire new equity
real estate investments, distribute income received to investing Plans
and to maintain Trust records. Fifth Third represents that before
investing Trust assets in a specific equity investment, it must
determine whether the investment is expected to have a rate of return
at least equal to or greater than comparable investments which do not
use union labor.
For services rendered to the Trust, Fifth Third will receive the
following annual compensation: $15 per $1,000 on the first $5 million
invested; $10 per $1,000 on the next $10 million invested; $5 per
$1,000 on the next $15 million invested; and $3 per million on the next
$25 million invested. According to the applicant, as to each Plan
investing in the Trust, the total fees paid to Fifth Third will
constitute no more than reasonable compensation within the meaning of
section 408(b)(2) of the Act.3
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3 The Department expresses no opinion herein on whether such
fees will satisfy the terms and conditions of section 408(b)(2) of
the Act.
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3. There are currently five Plans participating in the Trust, none
of which are sponsored by Fifth Third or any of its affiliates. These
Plans are the IBEW Pension Plan, the Pipefitters and Mechanical
Equipment Service Union Local 392 Pension Fund (the Pipefitters Pension
Plan), the Ironworkers District Council for Southern Ohio and Vicinity
Pension Fund (the Ironworkers Pension Plan), the Southwest Ohio
District Council of Carpenters' Pension Fund (the Carpenters Pension
Plan) and the Laborers International Union of North America Local 265
Pension Fund (the Laborers Pension Plan).
As the following table shows, each Plan investing in the Trust has
total assets that are in excess of $50 million.
[[Page 66316]]
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Plan Total assets Valuation date
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IBEW Pension Plan.............. $115,500,000 Mar. 31, 1996.
Pipefitters Pension Plan....... 172,654,000 Mar. 31, 1996.
Ironworkers Pension Plan....... 395,000,000 Jan. 31, 1996.
Carpenters Pension Plan........ 132,696,000 Mar. 31, 1996.
Laborers Pension Plan.......... 64,496,000 Mar. 31, 1996.
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In addition, as of March 31, 1996, each Plan's investment in the
Trust was reported as follows:
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Value of trust Percentage of Percentage of
Plan investments trust assets plan assets
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IBEW Pension Plan............................................... $3,588,796 28 3.1
Pipefitters Pension Plan........................................ 3,097,902 24 2.0
Ironworkers Pension Plan........................................ 2,686,711 21 0.7
Carpenters Pension Plan......................................... 2,441,064 19 1.8
Laborers Pension Plan........................................... 908,672 8 1.4
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Total Assetts............................................. 12,723,145 .............. ..............
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4. The Plans are not parties in interest with respect to each other
within the meaning of section 3(14) of the Act nor do they share common
participants. Investment decisions for the Plans are made by separate
boards of trustees. The geographic jurisdictions for the Plans cover
various counties that are primarily located in the States of Ohio,
Indiana and Kentucky. Participants in the Plans are engaged in diverse
trades ranging from electrical work to general construction labor. As
of December 5, 1996, there were approximately 14,349 participants in
all of the Plans investing in the Trust with the participant level
ranging from 1,500 participants for the IBEW Pension Plan to 6,243
participants for the Ironworkers Pension Plan.
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Number of
Plan participants
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IBEW Pension Plan......................................... 1,500
Pipefitters Pension Plan.................................. 1,400
Ironworkers Pension Plan.................................. 6,243
Carpenters Pension Plan................................... 3,655
Laborers Pension Plan..................................... 1,551
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Total............................................... 14,349
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5. CDG is a limited liability company maintaining its principal
offices in Cincinnati, Ohio. CDG's members are Belvedere Corp., The
Madison Realty Partnership, Towne/Center City LLC and Duke Realty
Limited Partnership. These entities are commercial real estate
developers from the Greater Cincinnati area. CDG was formed on March
24, 1995 for the purpose of developing a 210,000 square foot retail
complex in downtown Cincinnati known as ``Fountain Square West.'' Once
developed, the Fountain Square West Project will include a three-story
anchor retail store (the Lazarus Department Store), a two-story
specialty retail center, an office tower and an underground parking
garage. As discussed below, the Lazarus Department Store, the retail
stores and the parking garage will be held by the Partnership. A
portion of the ground comprising the Fountain Square West site, the
related air rights, a building pad for the future development of an
office building (including the office building) and the exclusive
rights to 20 spaces in the underground parking garage will be held by
Fifth Third.
6. The Partnership will be a limited partnership organized under
the laws of the State of Ohio and it will maintain its principal office
at 500 Carew Tower, Cincinnati, Ohio. The primary purposes of the
Partnership are to develop, improve, own, manage and lease real estate.
It is intended that the Partnership will constitute a real estate
operating company.4 CDG will serve as the general partner of the
Partnership and the Trust will serve as the sole limited partner.
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4 According to the Partnership Agreement, the Partnership
will function as a ``real estate operating company'' within the
meaning of regulation section 29 CFR 2510.3-101(e). Accordingly, it
is represented that transactions involving assets of the Partnership
will not be deemed to involve plan assets and will not be subject to
the prohibited transaction provisions of the Act. The Department
expresses no opinion in this proposed exemption on whether the
Partnership will qualify as a real estate operating company.
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To raise equity capital for the Partnership, CDG will make a
capital contribution of approximately $1.5 million. As for the Trust,
Second Fiduciaries of the IBEW Pension Plan, the Pipefitters Pension
Plan, the Carpenters Pension Plan and the Laborers Pension Plan have
agreed to make an aggregate capital contribution to the Partnership of
up to $7 million by purchasing additional units in the Trust.5 The
Plans will contribute to the Partnership as follows:
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5 It is represented that the Trust currently has
approximately $500,000 in liquid assets which is available for
investment in the Partnership. As a result, if less than $6.5
million in units are subscribed for by the Plans, the Trust will
combine those proceeds with its existing liquid assets to make the
$7 million investment in the Partnership.
[[Page 66317]]
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Allocation Amount Percentage of
Plan percentages invested plan assets
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IBEW Pension Plan............................................... 30.8 $2,156,000 1.8
Pipefitters Pension Plan........................................ 30.8 2,156,000 1.2
Carpenters Pension Plan......................................... 30.8 2,156,000 1.6
Laborers Pension Plan........................................... 07.6 532,000 0.8
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Total..................................................... .............. 7,000,000 ..............
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Although the Second Fiduciaries of the Ironworkers Pension Plan
have declined to purchase additional units in the Trust at this time,
it is represented that this Plan will have a pro rata interest in the
Trust that will include a portion of the Partnership interest.6
After the units are acquired, no Plan, including the Ironworkers
Pension Plan, will have more than 5 percent of its assets invested in
the Trust. In addition, the Trust will not be required to pay any
unrelated business income tax in connection with the Partnership
investment.
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6 The Department notes that section 404(a)(1) of the Act
requires, among other things, that a fiduciary of a plan must act
prudently, solely in the interest of the plan's participants and
beneficiaries, and for the exclusive purpose of providing benefits
to participants and beneficiaries. In order to act prudently in
making investment decisions, a plan fiduciary must consider, among
other factors, the availability, riskiness and potential return of
alternative investments for the plan. Investing the Trust's assets
in the Partnership would not satisfy section 404(a)(1) of the Act if
such investment provided the Trust with less return in comparison to
risk than comparable investments available to the Trust, or if
investment in the Partnership involved a greater risk to the
security of the Trust's assets than other investments offering a
similar return.
The Department has construed the requirements that a fiduciary
act solely in the interest of, and for the exclusive purpose of
providing benefits to, participants and beneficiaries as prohibiting
a fiduciary from subordinating the interests of participants and
beneficiaries in their retirement income to unrelated objectives.
Thus, in deciding whether and to what extent to invest in the
Partnership, SSGA must consider only factors relating to the
interests of the Trust. A decision to invest in the Partnership may
not be influenced by a desire to stimulate the real estate industry
and generate employment by union labor unless the investment, when
judged solely on the basis of its economic value to the Trust would
be equal or superior to alternative investments available to the
Trust.
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7. Aside from the capital contributions made by CDG and the Trust
to the Partnership, the city of Cincinnati (the City) will grant
financial incentives to the development of the Fountain Square West
Project of up to $22 million. These financial incentives consist of--
(a) The City's Purchase of the Downtown Lazarus Department Store.
On October 19, 1995, the City agreed to purchase the downtown Lazarus
Store location from Federated Department Stores, Inc. (Federated) for
$11,775,000. (The property was eventually transferred to the City on
January 4, 1996.) This acquisition provided funding which enabled
Federated to enter into another lease agreement (the Anchor Tenant
Lease) with CDG that would make a new Lazarus Department Store the
anchor tenant for the Fountain Square West Project. Under the terms of
the Anchor Tenant Lease, Federated must pay CDG $9,675,000 for tenant
improvements to the portion of the Fountain Square West Project leased
by Federated. In addition, Federated must pay CDG an initial rental
payment of $2,100,000. Following CDG's assignment of the Anchor Tenant
Lease to the Partnership, Federated will make the aforementioned rental
payments to the Partnership.
(b) The City's Issuance of Bonds (the City Bonds). On May 15, 1996,
the City issued bonds in the face amount of $10,225,000. The proceeds
of the City Bond issue were transferred by the City to CDG on May 16,
1996. Such proceeds will be given by CDG to the Partnership after CDG
assigns its long-term ground lease with the City (the City Lease)
7 to the Partnership. The City Bonds will be used as a funding
source for the Fountain Square West Project and they must be repaid to
the City with interest over a period of twenty years. To repay the
City, CDG has negotiated a property tax abatement on the Fountain
Square West Project during the period that the City Bonds are
outstanding. It is intended that the abatement will reduce the
Partnership's cash outflows that would be required to pay the property
taxes.
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7 On October 19, 1995, the City and CDG entered into a
written lease of the property comprising the Fountain Square West
Project, including the air rights, for a basic term minimum total
rental amount of $10,225,000 plus certain ``percentage rent.'' The
City Lease provides that while the City Bonds are outstanding, the
annual base rent will be equal to the City's annual repayment
obligation obligation on the City Bonds. That amount is $827,567
(interest only) through 1998 and approximately $1,115,000 per year
until the City Bonds are repaid. All interest and principal due on
the City Bonds are to be paid off in 2016, which is 20 years from
the date of their issuance. After the City Bonds are repaid, the
base rent under the City Lease will be $1 per year.
In addition, during the period before the City Bonds are fully
repaid (i.e., before 2016) the City Lease provides for additional
annual rent of 3 percent of the gross rents received during the year
by the Partnership in excess of $3 million. Although no gross rents
are projected during the initial 10 years of the Fountain Square
West Project, after the City Bonds are fully paid, the City Lease
will provide for annual rent of 3 percent of gross rents received by
the Parnership during the year.
The term of the City Lease has not yet commenced but it is
contingent upon whether an office building, to be located on the
Fountain Square West site, is ever constructed. If there is no
office building constructed within 45 years, the City Lease will
expire, provided, however, that CDG will have two additional 10 year
options to extend such lease, thereby making the maximum term of the
City Lease 65 years. Assuming the office building is constructed
within 45 years, the City Lease will expire after a term of 65
years, provided, however, that CDG has three, additional 10 year
options to extend the lease, thereby making the maximum term of the
City Lease 95 years. Aside from paying rent, CDG is required under
the City Lease to pay all utilities and real estate taxes with
respect to the property.
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8. Thus, based upon the foregoing, the Plans and CDG will make a
total investment in the Partnership of $8.5 million. As additional
sources of capital, the Partnership will receive the $10,225,000 in
proceeds from the City Bonds that have been issued by the City and the
$5.5 million in proceeds from the Partnership's air rights lease (the
Air Rights Lease) 8 with Fifth Third (see also Representation 13).
As a result, the total amount available to the Partnership for
construction will be $24,225,000. It is represented that these
construction funds will be greater than the budgeted construction costs
of $24,045,000, which include a ``contingency cushion'' of $3.5
million.
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8 The Air Rights Lease was entered into by and between CDG
and Fifth Third on September 7, 1995. It permits CDG to sublease a
portion of the ground comprising the Fountain Square West site,
related air rights and exclusive rights to 20 underground parking
spaces to Fifth Third for a lump sum rental of $3.5 million.
Although the initial term of the Air Rights Lease is 45 years, the
lease has not yet commenced, it will coincide with the term of the
City Lease and is similarly contingent on whether Fifth Third ever
has an office building constructed on the subject property. Assuming
the office building is constructed, the initial term of the Air
Rights Lease will be automatically extended to 65 years. Afterwards,
the Air Rights Lease may be extended by the parties for three
successive 10 year periods, thereby making the maximum lease term 95
years.
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9. If, however, construction costs exceed the budgeted funds
available to CDG for the construction of the Fountain Square West
Project, it is represented that there are several safeguards in place
which may obviate
[[Page 66318]]
the Trust's responsibility for any cost overruns. In this regard, CDG
has posted a letter of credit with the City in the amount of $500,000
to assure the City that CDG will perform its obligations under the City
Lease including the Partnership's obligation to construct the Fountain
Square West Project. In addition, Warm Brothers Construction Company
(Warm) and Duke Realty Investments, Inc. (Duke) have provided the City
with guarantees with respect to the completion of the Fountain Square
West Project.9 Further, the Partnership Agreement requires CDG to
provide additional capital in excess of $24,045,000. CDG may exercise
this option by contributing additional capital or by selling
subordinate equity in the Partnership to a third party. Such equity
will not affect the Trust's preferred return or percentage of cash flow
distributions made to the Trust described in Representation 10. Only if
the foregoing safeguards fail to provide sufficient financing, will the
Trust ever be confronted with the decision on whether to make
additional contributions to the Partnership or to remove CDG as the
general partner.
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9 Although financial information for Warm is not
available, it is represented that as of November 1996, Duke had
gross revenues of over $150 million, net operating income of over
$110 million, net income of over $42 million, free and clear cash
flow in excess of $10 million, a stock capitalization of over $1
billion and a total market value in excess of $1.4 billion.
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After construction of the Fountain Square West Project is
completed, if CDG determines that additional capital is needed for its
operations, both it and the Trust may make additional contributions in
accordance with their respective cash flow allocations as set forth
below in Representation 10. If the Trust declines to make its share of
the contribution, CDG may lend the amount requested to the Partnership.
10. The Partnership Agreement states that cash flow participation
10 will be as follows and will be paid to the extent available in
the following order of priority:
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10 The Partnership Agreement defines cash flow for any
fiscal year as all revenues relating to such fiscal year received by
the Partnership from the operation of the Fountain Square West
Project less all Partnership cash expenditures of any kind with
respect to such fiscal year.
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o First Tier: Payment of interest and principal on any loan from
CDG.
o Second Tier: Payment of a 9 percent preferred return to the
Trust.
o Third Tier: Payment of a 9 percent preferred return to the
CDG.\11\
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\11\ The Partnership Agreement states that the 9 percent
preferred return for both the Trust and CDG is calculated on the
basis of capital contributions, less extraordinary cash flow
distributions and liquidating distributions.
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o Fourth Tier: Any remaining cash flow is distributed 42.5 percent
to the Trust and 57.5 percent to CDG.\12\
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\12\ Remaining cash flow will be calculated twice a year as of
June 30 and September 30 and will be distributed no later than 90
days after such dates.
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The applicant represents that the cash flow participations by the
Trust and CDG were determined on the basis of arm's length negotiations
between the parties over a period of several months. The applicant also
represents that the percentages reflect many factors, including (a) the
efforts by CDG to negotiate the City Lease (along with financial
incentives from the City), (b) the efforts of CDG to negotiate the
Anchor Tenant Lease and the assignment of that lease to the
Partnership, (c) the efforts by CDG to negotiate the Air Rights Lease
with Fifth Third and the assignment of that lease to the Partnership,
(d) the responsibility of CDG for cost overruns during construction and
for any losses of the Partnership, (e) the capital contribution of CDG,
and (f) the preferred return provided to the Trust.
11. With respect to investments in the Partnership, it is
represented that the Trust and SSGA will receive the following
information from CDG:
(a) Within 120 days after the end of the Partnership's fiscal year,
an unaudited annual report containing (1) a balance sheet and
statements of income, Partners' equity, changes in financial position
and cash flow for the year then ended; (2) a report of the activities
of the Partnership during the period covered by the report; and (3) an
itemization of any payments or fees made to CDG or any related party or
affiliate.
(b) Within 60 days of the end of each year, an appraisal report
prepared by a qualified, independent appraiser, of each property held
by the Partnership.
(c) Periodically (but not less frequently than quarterly),
operating and development budgets of the Partnership as well as
unaudited operations and financial reports.
In addition, Fifth Third will furnish information with respect to
the Partnership to the Second Fiduciaries of Plans investing in the
Trust through annual audited financial statements of the Trust,
prepared by independent, certified public accountants and in quarterly
communications setting forth Partnership financial data. SSGA will also
receive copies of this information.
12. The Partnership may be dissolved upon the earlier of any of the
following events: (a) The disposition of all or substantially all of
the assets of the Partnership, as determined by CDG in its sole
discretion, and the receipt of the final payment of the purchase price
for the retail improvements comprising the Fountain Square West Project
that are owned by the Partnership; (b) the unanimous agreement of CDG
and the Trust to terminate and dissolve the Partnership; (c) the
withdrawal, expulsion, adjudication of bankruptcy, insolvency,
dissolution or other cessation of CDG to exist as a legal entity unless
a substitute general partner and limited partner elect to continue the
business of the Partnership; or (d) December 31, 2095 which is the
expiration of the Partnership.
Upon liquidation, the Partnership Agreement provides for the making
of distributions as follows:
o First: An amount necessary to satisfy any reserve for contingent
liabilities.
o Second: Payment of interest and principal on any loan from CDG.
o Third: Payment to the Trust for any unpaid cumulative preferred
return.
o Fourth: Payment to CDG for any unpaid cumulative paid return.
o Fifth: Payment to the Trust and CDG in the ratio of their
respective capital contributions up to the amount of their respective
capital contributions.
o Sixth: Balance to be distributed 42.5 percent to the Trust and
57.5 percent to CDG.
The procedure for making the liquidating distributions is reflected
in a report of the Fountain Square West Project that was prepared by
Carey Leggett Realty Advisors (CLRA) of Columbus, Ohio on January 15,
1996. At the time of liquidation, CLRA assumes that that the sales
price for the Fountain Square West Project will be $16,989,000 in the
year 2008. Of that amount, the Trust will receive $10,607,825 (or 62
percent of the sale proceeds). This amount consists of $7 million of
returned capital stemming from the Trust's initial investment and 42.5
percent of the balance after CDG receives its return of capital.
13. As stated above, under the proposed development plan for the
Fountain Square West Project, CDG will assign the Anchor Tenant Lease,
the City Lease and the Air Rights Lease to the Partnership. The
Partnership will construct and own the improvements on that portion of
the property that will house the Lazarus Department Store, the
specialty retail center and the underground parking garage. After
construction, the Partnership will manage the retail portion of the
Fountain Square West Project.
The proposed development plan will permit Fifth Third to build and
then own the office tower that is
[[Page 66319]]
contemplated for construction on the Fountain Square West site. As
stated previously, in accordance with the provisions of the Air Rights
Lease, Fifth Third will make a lump sum payment to the Partnership of
$3.5 million to sublease a portion of the ground and related air rights
which will be leased by the Partnership from the City as well as for
exclusive rights to 20 parking spaces at Fountain Square West. In
addition, Fifth Third will pay the Partnership $2 million in order that
the Partnership may hire a construction company (possibly, an affiliate
of CDG) for the design and construction of the building pad to support
the office tower. The total $5.5 million cost for the air rights,
building pad and parking spaces will be paid from Fifth Third's
corporate assets and none of the cost or the future cost of
constructing the office tower will come from the Trust.13
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\13\ Under the Partnership Agreement, the $3.5 million received
pursuant to the Air Rights Lease is to be treated as extraordinary
cash flow and allocated between CDG and the Trust in accordance with
their respective cash flow allocations. However, to the extent that
the proceeds are needed for construction purposes, such funds will
not be distributed as extraordinary cash flow. As for the $2 million
payment for the building pad, it is represented that such amount was
specifically earmarked and used for construction purposes and that
there is no provision in the Partnership Agreement that would permit
the distribution of any portion of that payment to the Trust and
CDG.
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14. The applicant has requested an administrative exemption from
the Department because it believes the use of the assets of the Trust
in a manner which benefits Fifth Third constitutes a violation of the
Act. Specifically, the applicant represents that the investment by the
Trust in the Partnership will not only enable the Partnership to
develop the retail portion of the Fountain Square West Project, but it
will also allow Fifth Third to cause the office tower portion of the
Project to be constructed, thereby enhancing the value of that portion
of the Project.
15. Fifth Third has appointed SSGA of Boston, Massachusetts to
serve as the independent fiduciary for the Trust with respect to the
initial, and possibly, future equity investments made by the Trust to
the Partnership. In this regard, SSGA will monitor and protect the
rights of the Trust and the Plans investing therein to the extent that
any actions of Fifth Third may impact adversely on the Partnership.
Specifically, SSGA will determine whether it is in the best interest of
the Trust and the Plans participating therein to make the initial and
subsequent investments in the Partnership. Also included among its
duties, SSGA will determine whether it is appropriate for the Trust (a)
to assign, transfer, pledge or otherwise encumber its interest in the
Partnership provided the Trust obtains written consent from CDG; (b) to
withdraw as a limited partner from the Partnership or to withdraw its
capital from such Partnership provided the Trust obtains the written
consent of CDG; (c) to consent to the sale by CDG of substantially all
of the assets of the Partnership or the transfer by CDG of its interest
in the Partnership; (d) to contribute to the Partnership the amount
necessary to complete construction of the Fountain Square West Project
and to require that CDG release control of the Partnership to an entity
designated by the Trust, if CDG fails to provide for construction cost
overruns; (e) to elect to continue the Partnership by appointing a
successor general partner; and whether (f) the entity designated by the
Trust to serve as general partner is appropriate upon the occurrence of
(d) or (e).
16. Mr. H. Peter Norstrand, Vice President of SSGA, has agreed to
undertake the duties of the independent fiduciary. Mr. Norstrand
represents that he has over 25 years of experience in commercial real
estate as well as considerable experience as a fiduciary under the Act.
Both SSGA and Mr. Norstrand represent that they understand their
fiduciary obligations and acknowledge that they are acting as a
fiduciary with respect to the Trust. Further, neither Mr. Norstrand nor
SSGA are related in any way to Fifth Third, CDG or any of their
principals. Although SSGA is compensated by Fifth Third, it has derived
approximately 0.00005 percent of its gross revenues from Fifth Third
for services rendered to date. It is anticipated that for any year that
SSGA is retained as the independent fiduciary for the Trust its
compensation for these services will be substantially below one percent
of its gross revenues.
17. SSGA represents that it has--
(a) Reviewed all relevant documents concerning the Fountain Square
West Project, including but not limited to, the lease and sublease
agreements, service agreements, guaranties, the Partnership Agreement
and the exemption application.
(b) Obtained and reviewed independent economic and market reports
on the Cincinnati economy and real estate markets. Among its findings,
SSGA observes that forecasts for the City are uniformly consistent and
call for slow but steady growth.
(c) Performed a financial analysis of the Fountain Square West
Project by reviewing the January 1996 investment summary prepared for
Fifth Third by CLRA. SSGA states that it has independently replicated
CLRA's spreadsheets and tested the performance of the investment under
various alternative assumptions as well as returns for the City Lease.
SSGA has concluded that the assumptions used by CLRA are reasonable and
in some cases, conservative.
(d) Reviewed the most recent quarterly and annual reports for
Federated whose Lazarus Department Store is expected to anchor the
Fountain Square West Project, as well as investment commentary on
Federated as published by Bloomberg. SSGA notes that Federated has a
headquarters operation in the City and states that the annual rental
obligation on the Lazarus Department Store will represent a small
fraction of Federated's annual gross income.
(e) Conducted, through Mr. Norstrand, personal interviews with
representatives of Fifth Third, CLRA and the principals of CDG and
toured the development site and environs. SSGA has concluded that CDG
is well-suited to develop and manage the Fountain Square West Project.
18. In addition, SSGA has analyzed the risk of the Fountain Square
West Project in the context of ``macro'' and ``micro'' levels. On the
``macro'' level, SSGA has examined the development team who will
construct, lease and manage the Fountain Square West Project. Further,
SSGA has examined the site on which the Fountain Square West Project
will be located and states that the property is perfectly suited for
its intended use. Finally, SSGA has considered pricing. In this regard,
SSGA has examined ``internal rates of return'' 14 and has
forecasted returns ranging between 11 percent and 14 percent for the
Trust's proposed investment. These projected returns reflect the
present value of future streams of income which have been based upon
such factors as actual market rents negotiated and assumptions of what
future market rents will be. In contrast, SSGA notes that the returns
forecasted for the Trust by CLRA range from 9 percent to 14
percent.15
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\14\ The internal rate of return is the rate of return on
invested capital that is generated or capable of being generated
within an investment during the period of ownership. The internal
rate of return is the rate of profit (or loss) or a measure of
performance. It is calculated by finding the discount rate that
equates the present value of future cash flows to the cost of the
investment. The calculation of the internal rate of return takes
into account the amount of the initial investment, cash flows during
the life of the investment and the proceeds from the disposition of
the investment.
\15\ More specifically, SSGA states that it used a three-step
process to analyze the potential return on investment. First, SSGA
replicated the ten year cash flow forecasts prepared by CLRA.
Second, SSGA tested the returns under various alternative
assumptions (e.g., an assumption of lower market rents or higher
tenant improvement costs). Third, SSGA calculated the internal rate
of return for the Trust based on the Partnership distribution
protocol during the entire term of the investment. This calculation,
according to SSGA, includes an assumption of a sale of the Fountain
Square West Project within ten years based on an ``exit valuation.''
The exit valuation is determined by applying a capitalization rate
to the eleventh year forecasted net operating income (less assumed
selling costs).
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[[Page 66320]]
Overall, SSGA believes that the range of expected returns for the
investment are comparable to the range of returns that other investors
might expect for a similar transaction. Moreover, because much of the
risk has been taken out of the proposed Trust investment (e.g., the
City has made a $22 million financial commitment to the Project and the
Anchor Tenant Lease has been closed), SSGA believes that any investor
would find these returns appropriate regardless of the collateral
benefits (e.g., the creation of jobs).16
---------------------------------------------------------------------------
\16\ Since a major portion of the income derived by the Limited
Partner is generated by the Anchor Tenant Lease, SSGA states that
the rate of return is dependent on such factors as the division of
partnership cash flow, the timing of the initial investment, market
rent, lease-up assumptions regarding the balance of the retail space
and exit capitalization assumptions. Thus, in SSGA's view, the
generation of employment stemming from the Fountain Square West
Project will not impact on the Trust's internal rate of return.
---------------------------------------------------------------------------
SSGA does not view the disproportionate allocation of cash flow
between CDG and the Trust as problematic. SSGA states that because CDG
is not only committing to contribute capital and to bear the
responsibility for cost overruns, it has also mitigated much of the
risks of the investment by negotiating the Anchor Tenant Lease as well
as entering into arrangements with the City. These actions, SSGA
believes, would seem to justify the allocation of the cash flow.
On the micro-level, SSGA states that the major risk factors it has
examined include (a) the creditworthiness of Federated and (b) the
ability of the Partnership to lease certain ``speculative'' space. On
the issue of creditworthiness, SSGA believes that Federated will
perform under its lease in accordance with its terms. According to
SSGA, the Fountain Square West Project will be highly visible involving
substantial community involvement. With a headquarters operation within
sight of the Fountain Square West Project, SSGA represents that
Federated will have the necessary resources to ensure the success of
its operation. SSGA also notes that since Federated has emerged from
its reorganization as a dominant retailer, its rental obligations at
Fountain Square West will represent a small fraction of Federated's
gross revenues.
19. With respect to the ability of the Partnership to lease 45,000
square feet of speculative space, SSGA represents that several factors
suggest that Fountain Square West will be leased substantially as
forecast. In this regard, SSGA states that the speculative space will
represent less than 3 percent of the downtown inventory and that
forecasted rents will be comparable to rents currently being achieved
in the market. In addition, SSGA asserts that the space will afford a
retailer the opportunity to be in a new facility that is in close
proximity to a popular anchor store having the latest features in
storefront design. Further, SSGA notes that the possibility of an
existing store presently on the complex moving to an adjacent parcel
and the likelihood that Fifth Third will develop and occupy the office
tower will strengthen the site as a retail core and provide an
additional inducement to a prospective retailer.
20. SSGA has evaluated how the terms of the proposed transaction
will compare with the terms of similar transactions between unrelated
parties. SSGA notes that the Fountain Square West Project is extremely
unique in the following respects: (a) In terms of City commitment, SSGA
explains that the City will be making a major financial commitment to
the downtown retail core at a time when most American municipalities
are cutting back; (b) in terms of location, SSGA observes that few
American cities have such an appropriate site available for
development; (c) in terms of risk, SSGA believes that the rate of
return to the Trust relative to investment risk is appropriate; and (d)
in terms of the development team, SSGA represents that the team is of
high caliber. In conclusion, SSGA states that the terms of the Fountain
Square West Project are comparable to the terms that other investors
would accept if they were unrelated parties.
21. In summary, it is represented that the proposed transaction
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) Each Plan investing in the Trust will have total assets that
are in excess of $50 million.
(b) No Plan that purchases units in the Trust for purposes of
allowing the Trust to invest in the Partnership will have, immediately
after the purchase of such units, more than 5 percent of its assets
invested in the Trust.
(c) The decision to purchase additional units in the Trust that
will allow SSGA to make the initial and any subsequent equity
contributions to the Partnership, will be made by a Second Fiduciary
which is independent of Fifth Third and its affiliates and which is not
SSGA.
(d) As independent fiduciary for the Trust, SSGA will approve and
monitor the Trust's investment in the Partnership.
(e) At the time the Partnership investment is made, the terms of
the transaction will be at least as favorable to each Plan
participating in the Trust as those obtainable in an arm's length
transaction with an unrelated party.
(f) SSGA and the Second Fiduciary of each Plan participating in the
Trust will receive initial and ongoing disclosures concerning the
Partnership.
(g) As to each Plan participating in the Trust, the total fees paid
to Fifth Third will constitute no more than ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
Notice to Interested Persons
Notice of the proposed exemption will be given to the SSGA as well
as the Second Fiduciaries of Plans investing in the Trust within 10
days of the publication of the notice of proposed exemption in the
Federal Register. Notice will be provided to SSGA and each Second
Fiduciary by first class mail. Notice will be provided to active
participants in the Plans by posting at local union halls at the
locations designated for member notifications. The notice will include
a copy of the notice of proposed exemption as published in the Federal
Register as well as a supplemental statement, as required, pursuant to
29 CFR 2570.43(b)(2), which shall inform interested persons of their
right to comment on and/or to request a hearing. Retirees in the Plans
will be mailed a statement which will include a toll-free telephone
number such participants may call if they wish to obtain a copy of the
proposed exemption. Comments and requests for a public hearing are due
within 40 days of the publication of the notice of proposed exemption
in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
United States Trust Company of New York and Certain of Its Affiliates
Located in New York, NY
[Application Nos. D-10234 and D-10235]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act
[[Page 66321]]
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--Proposed Exemption for In-Kind Transfers of Assets
If the exemption is granted, the restrictions of section 406(a) and
406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(F) of the Code, shall not apply, effective as of May 31, 1996, to the
in-kind transfer to any diversified open-end investment company (the
Fund or Funds) registered under the Investment Company Act of 1940 (the
ICA) to which the United States Trust Company of New York or any of its
affiliates (collectively, US Trust) serves as investment adviser and
may provide other services (i.e. ``Secondary Services'' as defined in
Section III(h) below), of the assets of various employee benefit plans
(the Plan or Plans) that are either held in certain collective
investment funds (the CIF or CIFs) maintained by US Trust or otherwise
held by US Trust as trustee, investment manager, or in any other
capacity as fiduciary on behalf of the Plans, in exchange for shares of
such Funds; provided that the following conditions are met:
(a) A fiduciary (the Second Fiduciary) who is acting on behalf of
each affected Plan and who is independent of and unrelated to US Trust,
as defined in Section III(g) below, receives advance written notice of
the in-kind transfer of assets of the Plans or the CIFs in exchange for
shares of the Fund and the disclosures described in Section II(f)
below.
(b) On the basis of the information described in Section II(f)
below, the Second Fiduciary authorizes in writing the in-kind transfer
of CIF or Plan assets in exchange for shares of the Funds, the
investment of such assets in corresponding portfolios of the Funds, and
the fees received by US Trust in connection with its services to the
Fund. Such authorization by the Second Fiduciary is to be consistent
with the responsibilities, obligations, and duties imposed on
fiduciaries by Part 4 of Title I of the Act.
(c) No sales commissions are paid by the Plans in connection with
the in-kind transfers of CIF or Plan assets in exchange for shares of
the Funds.
(d) All or a pro rata portion of the assets of the Plans held in
the CIFs or all or a pro rata portion of the assets of the Plans held
by US Trust in any capacities as fiduciary on behalf of such Plans are
transferred in-kind to the Funds in exchange for shares of such Funds.
Notwithstanding the foregoing, solely for purposes of this paragraph
(d), assets of the 401(k) Plan and ESOP of United States Trust Company
of New York and Affiliated Companies (the UST DC Plan) held by US Trust
as trustee and allocated to the U.S. Government Short/Intermediate Term
Investment Fund shall be treated as assets held in a CIF.
(e) The Plans or the CIFs receive shares of the Funds that have a
total net asset value equal in value to the assets of the Plans or the
CIFs exchanged for such shares on the date of transfer.
(f) With respect to any in-kind transfer of CIF assets to a Fund,
each Plan receives shares of a Fund which have a total net asset value
that is equal to the value of the Plan's pro rata share of the assets
of the corresponding CIF on the date of the transfer, based on the
current market value of the CIF's assets, as determined in a single
valuation performed in the same manner as of the close of the same
business day with respect to all such Plans participating in the
transaction on such day, using independent sources in accordance with
the procedures set forth in Rule 17a-7(b) under the ICA (Rule 17a-7)
for the valuation of such assets. Such procedures must require that all
securities for which a current market price cannot be obtained by
reference to the last sale price for transactions reported on a
recognized securities exchange or NASDAQ be valued based on an average
of the highest current independent bid and lowest current independent
offer, as of the close of business on the last business day prior to
the in-kind transfers, determined on the basis of reasonable inquiry
from at least three sources that are broker-dealers or pricing services
independent of US Trust.
(g) (1) Not later than thirty (30) days after completion of each
in-kind transfer of CIF or Plan assets in exchange for shares of the
Funds (except for certain transactions described in paragraph (g)(2)
below), US Trust sends by regular mail to the Second Fiduciary, a
written confirmation containing:
(i) the identity of each of the assets that was valued for purposes
of the transaction in accordance with Rule 17a-7(b)(4) under the ICA;
(ii) the price of each of the assets involved in the transaction;
and
(iii) the identity of each pricing service or market maker
consulted in determining the value of such assets;
(2) For the in-kind transfer of CIF assets to the Funds which
occurred on June 28 and July 31, 1996, the written confirmations
described above in paragraph (g)(1) were made by US Trust to all Second
Fiduciaries of the appropriate Plans by October 15, 1996.
(h) For all in-kind transfers of CIF assets, US Trust sends by
regular mail to the Second Fiduciary, no later than ninety (90) days
after completion of the asset transfer made in exchange for shares of
the Funds, a written confirmation containing:
(1) the number of CIF units held by each affected Plan immediately
before the in-kind transfer, the related per unit value, and the
aggregate dollar value of the units transferred; and
(2) the number of shares in the Funds that are held by each
affected Plan following the in-kind transfer, the related per share net
asset value, and the aggregate dollar value of the shares received.
(i) The conditions set forth in paragraphs (d), (e), (f), (o), (p),
and (q) of Section II below are satisfied.
Section II--Proposed Exemption for Receipt of Fees From Funds
If the exemption is granted, 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 as of
June 30, 1996, to the receipt of fees by US Trust from the Funds for
acting as the investment adviser for the Funds as well as for acting as
the custodian, transfer agent, sub-administrator or for providing other
``Secondary Services'' (as defined in Section III(h) below) to the
Funds in connection with the investment in the Funds by Plans for which
US Trust acts as a fiduciary (Client Plans), other than Plans
established and maintained by US Trust for the benefit of its employees
and their beneficiaries (Bank Plans), provided that the following
conditions are met:
(a) No sales commissions are paid by the Client Plans in connection
with purchases or sales of shares of the Funds and no redemption fees
are paid in connection with the sale of such shares by the 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 by any other investor
at that time.
(c) Neither US Trust nor any affiliate (including officers,
directors and other persons, as defined in Section III(b) below)
purchases from or sells to the Client Plans any shares of the Funds.
[[Page 66322]]
(d) For each Client Plan, the combined total of all fees received
by US Trust for the provision of services to the Client Plan, and in
connection with the provision of services to any of the Funds in which
the Plan may invest, are not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
(e) US Trust or an affiliate does not receive any fees payable,
pursuant to Rule 12b-1 under the ICA (the 12b-1 Fees) in connection
with the transactions.
(f) The Second Fiduciary who is acting on behalf of a Client Plan
receives in advance of the investment by a Plan in any of the Funds a
full and detailed written disclosure of information concerning such
Fund including, but not limited to:
(1) a current prospectus for each portfolio of each of the Funds in
which such Client Plan is considering investing;
(2) a statement describing the fees for investment management,
investment advisory, or other similar services, any fees for Secondary
Services, as defined in Section III(h) below, and all other fees to be
charged to or paid by the Client Plan and by such Funds to US Trust,
including the nature and extent of any differential between the rates
of such fees;
(3) the reasons why US Trust may consider such investment to be
appropriate for the Client Plan;
(4) a statement describing whether there are any limitations
applicable to US Trust with respect to which assets of a Client Plan
may be invested in the Funds, and, if so, the nature of such
limitations; and
(5) upon request of the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption.
(g) On the basis of the information described in Section II(f)
above, the Second Fiduciary authorizes in writing the investment of
assets of the Client Plan in shares of the Fund and the fees to be paid
to US Trust in connection with its services to the Funds. The
authorization made by the Second Fiduciary must be consistent with the
duties, responsibilities and obligations imposed on fiduciaries by Part
4 of Title I of the Act.
(h) The authorization described above in Section II(g) is
terminable at will by the Second Fiduciary of a Client Plan, without
penalty to such Plan, upon receipt by US Trust of written notice of
termination. Such termination will be effected by US Trust selling the
shares of the Fund held by the affected Client Plan within one business
day following receipt by US Trust of the termination form (the
Termination Form), as defined in Section III(i) below, or any other
written notice of termination; provided that if, due to circumstances
beyond the control of US Trust, the sale cannot be executed within one
business day, US Trust shall have one additional business day to
complete such sale.
(i) Each Client Plan receives a credit, either through cash or, if
applicable, the purchase of additional shares of the Funds, pursuant to
an annual election, which may be revoked at any time, made by the
Client Plan, of such Plan's proportionate share of all investment
advisory fees charged to the Funds by US Trust, including any
investment advisory fees paid by US Trust to third party sub-advisers,
within not more than one business day after the receipt of such fees by
US Trust. The crediting of all such fees to the Client Plans by US
Trust is audited by an independent accounting firm on at least an
annual basis to verify the proper crediting of the fees to each Client
Plan.
(j) In the event of an increase in the rate of any fees paid by the
Funds to US Trust regarding any investment management services,
investment advisory services, or fees for similar services that US
Trust provides to the Funds over an existing rate for such services
that had been authorized by a Second Fiduciary, in accordance with
Section II(g), US Trust will, at least thirty (30) days in advance of
the implementation of such increase, provide a written notice (separate
from the Fund prospectus) to the Second Fiduciary of each of the Client
Plans invested in a Fund which is increasing such fees.
(k) In the event of an addition of a Secondary Service, as defined
in Section III(h) below, provided by US Trust to the Fund for which a
fee is charged or an increase in the rate of any fee paid by the Funds
to US Trust 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 US Trust for such fee over an existing
rate for such Secondary Service which had been authorized by the Second
Fiduciary of a Client Plan, in accordance with Section II(g), US Trust
will at least thirty (30) days in advance of the implementation of such
additional service for which a fee is charged or fee increase, provide
a written notice (separate from the Fund prospectus) 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(i) below.
(l) The Second Fiduciary is supplied with a Termination Form at the
times specified in paragraphs (k), (l), and (m) of this Section II,
which expressly provides an election to terminate the authorization,
described above in 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. Such termination will be effected
by US Trust selling the shares of the Fund held by the Client Plans
requesting termination within one business day following receipt by US
Trust, either by mail, hand delivery, facsimile, or other available
means at the option of the Second Fiduciary, of the Termination Form or
any other written notice of termination; provided that if, due to
circumstances beyond the control of US Trust, the sale of shares of
such Client Plans cannot be executed within one business day, US Trust
shall have one additional business day to complete such sale; and
(2) Failure by the Second Fiduciary to return the Termination Form
on behalf of a Client Plan will be deemed to be an approval of the
additional Secondary Service for which a fee is charged or increase in
the rate of any fees, if such Termination Form is supplied pursuant to
paragraphs (k) and (l) of this section II, and will result in the
continuation of the authorization, as described in Section II(g), of US
Trust to engage in the transactions on behalf of such Client Plan.
(m) The Second Fiduciary is supplied with a Termination Form,
annually during the first quarter of each calendar year, beginning with
the first quarter of the calendar year that begins after the date the
grant of this proposed 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 (m), sooner than six months after a Termination Form
is supplied pursuant to Section II(k) and (l), except to the extent
required by such paragraphs 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, US Trust will provide the Second Fiduciary of such Plan:
(A) at least annually with a copy of an updated prospectus of such
Fund;
(B) upon the request of such Second Fiduciary, with a report or
statement
[[Page 66323]]
(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
US Trust; and
(2) With respect to each of the Funds in which a Client Plan
invests, in the event such Fund places brokerage transactions with US
Trust, US Trust will provide the Second Fiduciary of such Plan at least
annually with a statement specifying:
(A) the total, expressed in dollars, brokerage commissions of each
Fund's investment portfolio that are paid to US Trust by such Fund;
(B) the total, expressed in dollars, of brokerage commissions of
each Fund's investment portfolio that are paid by such Fund to
brokerage firms unrelated to US Trust;
(C) the average brokerage commissions per share, expressed as cents
per share, paid to US Trust by each portfolio of a Fund; and
(D) the average brokerage commissions per share, expressed as cents
per share, paid by each portfolio of a Fund to brokerage firms
unrelated to US Trust.
(o) All dealings between the Client Plans and any of the Funds are
on a basis no less favorable to such Plans than dealings between the
Funds and other shareholders holding the same class of shares as the
Plans.
(p) US Trust maintains for a period of six (6) years the records
necessary to enable the persons, as described in Section II(q) below,
to determine whether the conditions of the 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 US Trust, the
records are lost or destroyed prior to the end of the six (6) year
period, and
(2) no party in interest, other than US Trust, 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) below.
(q)(1) Except as provided in Section II(q)(2) and notwithstanding
any provisions of Section 504(a)(2) and (b) of the Act, the records
referred to in Section II(p) above are unconditionally available at
their customary location for examination during normal business hours
by----
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of each of the Plans who has authority to
acquire or dispose of shares of any of the Funds owned by such a Plan,
or any duly authorized employee or representative of such fiduciary;
and
(iii) 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)(ii) and
(q)(1)(iii) of Section II shall be authorized to examine trade secrets
of US Trust, or commercial or financial information which is privileged
or confidential.
Section III--Definitions
For purposes of this proposed exemption,
(a) The term ``US Trust'' means the United States Trust Company of
New York and an affiliate, as defined in Section III(b)(1).
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund or Funds'' means any diversified open-end
investment company or companies registered under the ICA for which US
Trust serves as investment adviser, and may also provide custodial or
other services as approved by such Funds.
(e) The term, ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in 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, ``relative,'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term, ``Second Fiduciary,'' means a fiduciary of a plan who
is independent of and unrelated to US Trust. For purposes of this
proposed exemption, the Second Fiduciary will not be deemed to be
independent of and unrelated to US Trust if:
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by, or is under common control with US Trust;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary is an officer, director,
partner, or employee of US Trust (or is a relative of such persons);
(3) Such Second 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; provided, however, that with respect to the Bank Plans, the
Second Fiduciary may receive compensation from US Trust in connection
with the transactions contemplated herein, but the amount or payment of
such compensation may not be contingent upon or be in any way affected
by the Second Fiduciary's ultimate decision regarding whether the Bank
Plans participate in the transactions.
With the exception of the Bank Plans, if an officer, director,
partner, or employee of US Trust (or a relative of such persons), is a
director of such Second Fiduciary, and if he or she abstains from
participation in (i) the choice of the Plan's investment manager/
advisor, (ii) the approval of any purchase or sale by the Plan of
shares of the Funds, and (iii) the approval of any change of fees
charged to or paid by the Plan, in connection with any of the
transactions described in sections I and II above, then Section
III(g)(2) above shall not apply.
(h) The term, ``Secondary Service,'' means a service, other than an
investment management, investment advisory, or similar service, which
is provided by US Trust to the Funds, including but not limited to
custodial, accounting, administrative, or any other service. However,
for purposes of Section II(k), the term ``Secondary Service'' does not
include any brokerage services provided by US Trust to the Funds.
(i) The term ``Termination Form,'' means the form supplied to the
Second Fiduciary, at the times specified in paragraphs (k), (l), and
(m) of Section II above, 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 Plans and to notify US Trust in writing to effect such
[[Page 66324]]
termination by selling the shares of the Fund held by the Plans
requesting termination within one business day following receipt by US
Trust, either by mail, hand delivery, facsimile, or other available
means at the option of the Second Fiduciary, of written notice of such
request for termination; provided that if, due to circumstances beyond
the control of US Trust, the sale cannot be executed within one
business day, US Trust shall have one additional business day to
complete such sale.
(j) The term ``UST DB Plan'' means the Employees' Retirement Plan
of United States Trust Company of New York and Affiliated Companies.
(k) The term ``UST DC Plan'' means the 401(k) Plan and ESOP of
United States Trust Company of New York and Affiliated Companies.
(l) The term ``Bank Plan'' means the UST DB Plan and the UST DC
Plan.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of May 31, 1996, for transactions described in Section I, and June
30, 1996, for transactions described in Section II.
Summary of Facts and Representations
1. US Trust. UST New York, a wholly-owned subsidiary of U.S. Trust
Corporation, is a New York-chartered bank and trust company. UST New
York provides trust and banking services to individuals, corporation,
and institutions both nationally and internationally. UST New York
serves as trustee, investment manager, and/or custodian to the Plans
described below and as investment adviser to certain of the Funds. As
of December 31, 1995, UST New York had total assets under management of
approximately $40 billion.
United States Trust Company of the Pacific Northwest (UST Pacific)
is a limited purpose non-depository trust company chartered in Oregon
and is also a subsidiary of U.S. Trust Corporation. UST Pacific serves
as investment adviser to certain of the Funds.
Other Affiliates of UST New York that may offer shares of the Funds
to their fiduciary customers, but which did not have customer assets
invested in the converting CIFs, are included herein solely with
respect to the fee rebate and ``negative consent'' procedure described
below for future fee changes. These entities include certain national
banks, such as U.S. Trust Company of California, N.A., and U.S. Trust
Company of Texas, N.A., as well as certain state-chartered banks, such
as U.S. Trust Company of Connecticut, U.S. Trust Company of Florida
Savings Bank, and U.S. Trust Company of New Jersey.
2. The Plans. The Plans (i.e. the Client Plans and the Bank Plans)
presently consist of retirement plans qualified under section 401(a) of
the Code for which US Trust serves as a trustee or investment
fiduciary. These Plans are considered ``pension plans'' under section
3(2) of the Act. However, US Trust requests that the proposed exemption
apply to any ``employee benefit plan'', within the meaning of section
3(3) of the Act, and to any ``plan'' within the meaning of section
4975(e)(1) of the Code (including IRAs), and not solely to qualified
plans under Code section 401(a). Currently, UST New York serves as
trustee, investment manager, and/or custodian of approximately 250
Plans. As of September 30, 1995, UST New York had approximately $800
million in Plan assets under management, of which approximately $675
million represented assets invested in the CIFs.
The Plans include two qualified retirement plans sponsored by US
Trust (collectively, the Bank Plans), which are:
(i) The Employees' Retirement Plan of United States Trust
Company of New York and Affiliated Companies (the UST DB Plan); and
(ii) The 401(k) Plan and ESOP of United States Trust Company of
New York and Affiliated Companies (the UST DC Plan).
Assets of the Bank Plans represent approximately half of the assets
of the CIFs described herein.
The applicant states that Actuarial Sciences Associates, Inc., a
fiduciary that is independent of US Trust, was appointed to act as the
Second Fiduciary for the Bank Plans in connection with the
determination made by such Plans to participate in the conversion of
the CIFs to the Funds (as discussed below).
In addition, the applicant states that the Client Plans
participated in the conversion of the CIFs to the Funds based solely
upon decisions made in each case by a Plan fiduciary independent of US
Trust (collectively, the Second Fiduciaries). The applicant represents
that, following the initial CIF conversions, decisions to participate
in any future CIF conversions will also be made on behalf of each
Client Plan by a Second Fiduciary (as discussed more fully below),
although the specific Client Plans that may be involved have not been
identified at the present time.
3. The CIFs. The CIFs comprised the individual portfolios of the
United States Trust Company of New York Pooled Pension and Profit
Sharing Trust. However, for purposes of the proposed exemption, the
CIFs are deemed to have included a short-term investment fund
(identified below as ``the Government Fund'') that was not structured
as a commingled fund but as a separate fund that formed a part of, and
was offered as an investment option under, the UST DC Plan.
Specifically, the CIFs were as follows: (i) the Equity Portfolio;
(ii) the Fixed Income Portfolio; (iii) the International Portfolio;
(iv) the Short-term Fixed Income Portfolio; and (v) the U.S. Government
Short/Intermediate Term Fund (i.e. the Government Fund).
As a result of the conversions, each of these CIFs now correspond
to one of the Funds described below. However, prior to the initial CIF
conversions on May 31, 1996, UST New York determined that approximately
50 percent of the UST DB Plan's assets allocated to the Equity
Portfolio CIF would be reallocated to three different domestic equity
Funds with certain narrower investment objectives. These Funds, and the
percentage of the UST DB Plan's assets that were allocated to each
Fund, were: (i) The Early Life Cycle (or ``Small Cap'') Portfolio (10
percent); (ii) the Optimum Growth Portfolio (20 percent); and (iii) the
Equity Value Portfolio (20 percent).
In order to accomplish this result, the applicant states that prior
to the conversions US Trust created three new domestic equity CIFs with
investment objectives corresponding directly to the objectives of the
three proposed Equity Funds. US Trust then transferred to the new CIFs
the relevant percentage of the UST DB Plan's assets that were formerly
invested in the Equity Portfolio CIF. The new CIFs were: (i) the Early
Life Cycle CIF; (ii) the Optimum Growth CIF; and (iii) the Equity Value
CIF (collectively, the New CIFs). The applicant states that a pro rata
share of each of the underlying securities held by the Equity Portfolio
CIF were reallocated to the New CIFs by UST New York in accord with its
authority as trustee of the CIFs. No assets were reallocated
selectively or disproportionately. The creation of the New CIFs allowed
US Trust to accomplish the conversions by a direct, one-to-one exchange
of assets between each CIF and a Fund with corresponding investment
objectives.
4. The Funds. The Funds are certain portfolios of the following
three similarly named but separately registered investment companies:
(i) The Excelsior Institutional Trust; (ii) the Excelsior Funds, Inc.;
and (iii) the Excelsior Funds. All of the Funds are described further
below. However, US Trust requests that the exemption apply
prospectively to any similar Fund in
[[Page 66325]]
which a Plan invests where US Trust provides investment advisory
services and certain Secondary Services. In this regard, US Trust
states that all future Funds to which US Trust serves as an investment
adviser will assume similar structures and that Plan investments
therein will meet all of the terms and conditions of the exemption.
The Excelsior Institutional Trust (the Institutional Funds) is an
open-end, diversified management investment company registered under
the ICA. Currently, the Institutional Funds comprise the following
portfolios: (i) The Equity Fund; (ii) the Income Fund; (iii) the Total
Return Bond Fund; (iv) the Bond Index Fund; (v) the Balanced Fund; (vi)
the Equity Growth Fund; and (vii) the International Equity Fund.
UST New York serves as investment adviser to the first three of the
foregoing Institutional Funds and as sub-adviser to the fourth. UST
Pacific serves as investment adviser to the remaining three
Institutional Funds. Various parties unrelated to US Trust also provide
custodial, transfer agent, recordkeeping, and other non-advisory
services (i.e. Secondary Services) to the Institutional Funds. US Trust
also performs certain Secondary Services for the Institutional Funds,
including co-administration and shareholder services, for which it
receives fees.
The Excelsior Funds, Inc. (formerly known as the UST Master Funds,
Inc.; hereafter, the UST Funds) is an open-end, diversified management
investment company registered under the ICA. Currently, the UST Funds
comprise the following portfolios: (i) The Equity Fund; (ii) the Income
and Growth Fund; (iii) the Long-Term Supply of Energy Fund; (iv) the
Productivity Enhancers Fund; (v) the Environmentally-Related Products
and Services Fund; (vi) the Aging of America Fund; (vii) the
Communication and Entertainment Fund; (viii) the Business and
Industrial Restructuring Fund; (ix) the Global Competitors Fund; (x)
the Early Life Cycle Fund; (xi) the International Fund; (xii) the
Emerging Americas Fund; (xiii) the Pacific/Asia Fund; (xiv) the Pan
European Fund; (xv) the Short-Term Government Securities Fund; (xvi)
the Intermediate-Term Managed Income Fund; (xvii) the Managed Income
Fund; (xviii) the Money Fund; (xix) the Government Money Fund; and (xx)
the Treasury Money Fund.
UST New York serves as investment adviser to each of the UST Funds.
Various parties unrelated to US Trust provide custodial, transfer
agent, recordkeeping, and other Secondary Services to the UST Funds. US
Trust also performs certain Secondary Services for the UST Funds,
including transfer agent and shareholder services, for which it
receives fees.
The Excelsior Funds is a separate open-end, diversified management
investment company registered under the ICA, the only currently
relevant portfolio of which is the Institutional Money Fund (the Money
Fund Option).
UST New York serves as supplemental investment manager to the Money
Fund Option pursuant to an investment advisory agreement. Various
parties unrelated to US Trust provide investment advisory services to
the Excelsior Funds, as well as recordkeeping and other Secondary
Services. US Trust also performs certain Secondary Services for the
Excelsior Funds, including co-administration, custodial, and transfer
agent services, for which it receives fees.
5. Actuarial Sciences Associates, Inc. (ASA). ASA is an employee
benefits consulting firm established in July 1985 which is located in
Somerset, New Jersey. ASA was retained by US Trust to serve as the
Second Fiduciary for the UST DB Plan and the UST DC Plan (i.e. the Bank
Plans) in connection with the investments made in the Funds. ASA is an
affiliate of AT&T Investment Management Corporation (ATTIMCO). ATTIMCO
is a wholly-owned subsidiary of AT&T and is a registered investment
adviser under the ICA. As of December 31, 1995, ATTIMCO exercised
discretionary investment authority over approximately $75 billion of
fiduciary assets. ASA, ATTIMCO and their affiliates are independent of,
and unrelated to, US Trust.
Description of the Transactions
6. US Trust represents that the CIFs in which the Plans invested
were maintained in accordance with the requirements under New York law
that apply to collective investment trusts. US Trust decided to
terminate the CIFs and offer to the Plans participating therein
appropriate interests in corresponding Funds as alternative
investments. Because interests in a CIF generally must be liquidated or
withdrawn to effect distributions, US Trust believed that the interests
of the Plans invested in the CIFs would be better served by investment
in shares of the Funds which could be distributed in-kind. US Trust
also believed that the Funds offered the Plans advantages over the CIFs
as pooled investment vehicles. For instance, as shareholders of the
Funds, the Plans have opportunities to exercise voting and other
shareholder rights.
The Plans, as Fund shareholders, periodically receive certain
disclosures concerning the Funds. Such information includes: (i) A copy
of the Fund prospectus, which is updated at least annually; (ii) an
annual report containing audited financial statements of the Funds and
information regarding such Funds' investment performance; and (iii) a
semi-annual report containing unaudited financial statements. With
respect to the Plans, US Trust reports all transactions in shares of
the Funds in periodic account statements provided to each of the Plans.
Further, US Trust maintains that the net asset value of the portfolios
of the Funds can be monitored daily from information available in
newspapers of general circulation.
7. With respect to the requested exemption, US Trust proposes that
when from time-to-time a CIF is terminated its assets would be
transferred in-kind to a corresponding Fund in exchange for shares of
such Fund in order to avoid the potentially large brokerage expenses
that would otherwise be incurred in having the CIF sell such assets and
having the Fund acquire such assets. In addition, US Trust also
proposes that from time-to-time it may be appropriate for an individual
Plan for which US Trust serves as fiduciary to transfer all or a pro
rata share of its assets in-kind to any of the Funds in exchange for
shares of such Funds. For example, in the case of an in-kind exchange
between an individual Plan whose portfolio consists of common stock,
money market securities, and real estate, and a Fund that (under its
investment policy) invests only in common stock and money market
securities, the exchange would involve all or a pro rata share of the
common stock and money market securities held by the Plan, if such
stock and securities are eligible for purchase by the Fund, and would
not involve the transfer or exchange of the real estate holdings of
such Plan. In this regard, a particular Fund's eligible investments
will be set forth in its prospectus. No brokerage commissions, fees or
expenses (other than customary transfer charges paid to parties other
than US Trust) will be charged to the Plans or the CIFs in connection
with the in-kind transfers of assets to the Funds for shares of the
Funds.
Thus, in addition to the retroactive exemptive relief requested
herein for the initial in-kind transfer of CIF assets to the Funds in
exchange for Fund shares (as discussed in Item 8 below), US Trust also
requests prospective relief for transactions involving: (i) The future
in-kind transfer by other CIFs of all or a pro rata portion of the
assets of any of the Plans held in such CIFs to the Funds
[[Page 66326]]
in exchange for shares of the Funds; or (ii) the in-kind transfer of
all or a pro rata portion of the assets of any of the Plans held by US
Trust, in any capacity as fiduciary on behalf of such Plans, to the
Funds in exchange for shares of such Funds.
US Trust states that the transfers in-kind of assets in exchange
for Fund shares are ministerial transactions performed in accordance
with pre-established objective procedures which are approved by the
Board of Trustees of each Fund. Such procedures require that assets
transferred to a Fund: (i) Are consistent with the investment
objectives, policies, and restrictions of the Fund; (ii) satisfy the
applicable requirements of the ICA and the Code; and (iii) have a
readily ascertainable market value. In addition, any assets that are
transferred will be marketable and will not be subject to restrictions
on resale. Assets which do not meet these requirements will be sold in
the open market through an unaffiliated brokerage firm prior to any
transfer in-kind. Further, prior to entering into an in-kind transfer,
a Second Fiduciary of each affected Plan will receive certain
disclosures from US Trust and approve the transaction in writing.
8. The Conversion Transactions. US Trust specifically requests a
retroactive exemption for the in-kind transfers of CIF assets to
certain corresponding Funds which have already occurred. The initial
in-kind transfers of CIF assets to the Funds occurred on May 31, 1996,
and was a partial conversion of various CIFs involving assets of the
Bank Plans. Another in-kind transfer of CIF assets occurred on June 30,
1996, and was a partial conversion of such CIFs involving assets of
Client Plans that elected to participate in the CIF conversions.
With respect to the in-kind transfers of CIF assets involving the
Bank Plans, US Trust states that a proportionate share of each CIF's
assets representing the interests of the Bank Plans therein was
transferred to the corresponding UST Fund, except for the UST DB Plan's
interests in the new Optimum Growth and Equity Value CIFs, which were
transferred to the corresponding new Institutional Funds. The following
table shows which CIF assets were transferred to particular Funds.
------------------------------------------------------------------------
CIF portfolio Corresponding fund portfolio
------------------------------------------------------------------------
Short-Term Fixed Income................... UST Funds/Money Fund.
Fixed Income.............................. UST Funds/Managed Income
Fund.
U.S. Government Short/Intermediate Term UST Funds/Short-Term
Fund. Government Securities Fund.
International............................. UST Funds/International
Fund.
Equity Portfolio.......................... UST Funds/Equity Fund.
Early Life Cycle.......................... UST Funds/Early Life Cycle
Fund.
Optimum Growth............................ Institutional Optimum Growth
Fund.
Equity Value.............................. Institutional Equity Value
Fund.
------------------------------------------------------------------------
As noted above, the Government Fund was a separate fund forming
part of the UST DC Plan, rather than a commingled CIF. However, for
purposes of the transactions for which US Trust requests an exemption,
this fund was treated in the same manner as a CIF in that all of its
assets were transferred to a corresponding Fund.
As of June 30, 1996, US Trust states that certain Client Plan
assets invested in the Short-Term Fixed Income CIF were transferred
either to the UST Funds/Money Fund or the Excelsior Funds/Money Fund
Option at the direction of the Second Fiduciary approving the
particular in-kind transfer. Otherwise, a proportionate share of each
CIF's assets representing the interests of the Client Plans (whose
Second Fiduciaries approved the transaction) were transferred on such
date to the corresponding Institutional Funds, as follows:
------------------------------------------------------------------------
CIF portfolio Corresponding fund portfolio
------------------------------------------------------------------------
Short-Term Fixed Income................... Excelsior Money Fund Option
or UST Funds/Money Fund
Fixed Income.............................. Institutional Total Return
Bond Fund.
International............................. Institutional International
Equity Fund.
Equity.................................... Institutional Equity Fund.
------------------------------------------------------------------------
Thus, for example, if at the time of the conversion the Bank Plans
held 45 percent of the interests in the Equity CIF, 45 percent of those
assets were transferred to the Equity Fund portfolio of the UST Funds
and the remaining 65 percent of the CIF's assets (representing the
interests of Client Plans) were transferred to the Equity Fund
portfolio of the Institutional Funds.
Each in-kind transfer of CIF assets was completed in a single
transaction on a single day. In each case, the in-kind transfer
transactions were accomplished by transferring from the converting CIF
a proportionate share of the Plans' assets then held by the CIF to the
corresponding Fund in exchange for an appropriate number of Fund
shares. Once all of a CIF's assets were transferred to a Fund, the CIF
was terminated and its assets, then consisting of Fund shares, were
distributed in-kind to the Plans participating in the CIFs based on
each Plan's pro rata share of the assets of the CIFs on the date of the
transaction.
Prior to each in-kind transfer transaction, the assets of a
transferring CIF were reviewed by US Trust to confirm that they were
appropriate investments for the receiving Fund. If any of the assets of
a CIF were not appropriate for its corresponding Fund, US Trust sold
such assets in the open market through an unaffiliated brokerage firm
prior to the in-kind transfer.
9. Advance Disclosure/Approval and Appointment of the Second
Fiduciary for the Bank Plans. US Trust provided to each affected Plan
disclosures that announced the termination of the particular CIF,
summarized the transaction, and otherwise complied with provisions of
Section I of this proposed exemption. Based on these disclosures, the
Second Fiduciary for each affected Plan approved in writing the Plan's
participation in the conversion transaction, including the fees that
were to be paid by the Funds to US Trust.
In the case of the initial in-kind transfer transactions involving
the Bank Plans which occurred on May 31, 1996, ASA was required to make
an independent determination in its fiduciary capacity that
participation in the conversion transaction on the terms proposed was
in the best interest of each Bank Plan. In this regard, as noted
earlier, US Trust appointed ASA to serve as the Second Fiduciary to
oversee the conversions of the CIFs to the Funds as they related to the
interests of the Bank Plans, including the decision whether to
participate therein. As part of its written report setting out the
conclusions discussed in Item 11 below, ASA was required to confirm
both its independence from US Trust and its qualifications to serve as
the Second Fiduciary for the Bank Plans.
10. Valuation Procedures. The assets transferred by a CIF to its
corresponding Fund consisted entirely of cash and marketable
securities. For purposes of a transfer in-kind, the value of the
securities in the CIF was determined based on market value as of the
close of business on the last business date prior to the transfer (the
CIF Valuation Date). The values on the CIF Valuation Date
[[Page 66327]]
were determined using the valuation procedures described in Rule 17a-7
under the ICA. In this regard, the ``current market price'' for
specific types of CIF securities involved in the transaction was
determined as follows:
a. If the security was a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the
'34 Act), the last sale price with respect to such security reported in
the consolidated transaction reporting system (the Consolidated System)
for the CIF Valuation Date; or, if there were 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), as of
the close of business on the CIF Valuation Date.
b. If the security was not a reported security, and the principal
market for such security was an exchange, then the last sale on such
exchange on the CIF Valuation Date or, if there were 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 was not a reported security and was quoted in
the NASDAQ system, then the average of the highest current independent
bid and lowest current independent offer reported on NASDAQ as of the
close of business on the CIF Valuation Date.
d. For all other securities, the average of the highest current
independent bid and lowest current independent offer, as of the close
of business on the CIF valuation date, determined on the basis of
reasonable inquiry. For securities in this category, US Trust obtained
quotations from at least three sources that were either broker-dealers
or pricing services independent of and unrelated to US Trust and, when
more than one valid quotation was available, used the average of the
quotations to value the securities, in conformance with interpretations
by the SEC and practices under Rule 17a-7.
The securities received by a transferee Fund portfolio were valued
by such portfolio for purposes of the transfer in the same manner and
as of the same day as such securities were valued by the corresponding
transferor CIF. The per share value of the shares of each Fund
portfolio issued to the CIFs was based on the corresponding portfolio's
then-current net asset value. US Trust states that the value of a
Plan's investment in shares of each Fund as of the opening of business
on the date of the conversion transaction was equal to the value of
such Plan's investment in the CIFs as of the close of business on the
last business day prior to the conversion transaction.
Not later than thirty (30) business days after completion of the
in-kind transfer transaction (except as otherwise noted),17 US
Trust sent by regular mail a written statement to each affected Plan
that included a confirmation of the transaction. Such confirmation
contained: (i) The identity of each security that was valued in
accordance with Rule 17a-7(b)(4), as described above; (ii) the price of
each such security for purposes of the transaction; and (iii) the
identity of each pricing service or market-maker consulted in
determining the value of such securities.
---------------------------------------------------------------------------
17 US Trust states that the written confirmations
regarding the identity and pricing of securities described under
Rule 17a-7(b)(4) that were involved in the in-kind transfers of CIF
assets which occurred on June 28 and July 31, 1996 were not made
within 30 days of the completion of the transactions due to clerical
errors made by certain US Trust personnel. US Trust represents that
upon discovery of this error, all of the confirmations were mailed
as soon as possible and were received by the Second Fiduciaries of
the appropriate Client Plans by October 15, 1996.
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Not later than ninety (90) days after completion of each in-kind
transfer of assets of the Plans or the CIFs in exchange for shares of
the Funds, US Trust mailed to the Plans a written confirmation of the
number of CIF units held by each affected Plan immediately before the
conversion (and the related per unit value or the aggregate dollar
value of the units transferred), and the number of shares in the Funds
that were held by each affected Plan following the conversion (and the
related per share net asset value or the aggregate dollar value of the
shares received).
In accordance with the conditions of Section I of this proposed
exemption, similar procedures will occur upon any future in-kind
exchanges between CIFs maintained by US Trust or Plans, and the Funds.
Representations of the Independent Fiduciary for the Bank Plans
Regarding the In-Kind Transfers
11. As stated above, US Trust retained ASA as the Second Fiduciary
to oversee the in-kind transfers of CIF assets to the Funds as such
transactions affected the Bank Plans. In such capacity, ASA represented
that it understood and would accept the duties, responsibilities and
liabilities in acting as a fiduciary under the Act for the Bank Plans.
In a written report dated May 30, 1996, ASA stated that it
considered the effect of the in-kind transfer transactions on the Bank
Plans and the implications of such transactions for Plans invested in
the CIFs. ASA noted that this investment opportunity was being offered
to the Client Plans on the same terms and conditions as was being
offered to the Bank Plans. Based on all available data, ASA concluded
that the terms of the in-kind transfers were fair to participants of
the Bank Plans. ASA states that such terms were comparable to, and no
less favorable than, the terms that would have been reached among
unrelated third parties.
Therefore, ASA specifically authorized the in-kind transfers of the
CIF assets on May 31, 1996 as the Second Fiduciary for the Bank Plans.
In this regard, ASA represented in its written report dated May 30,
1996, that the in-kind transfer transactions were in the best interests
of the Bank Plans and their participants and beneficiaries for the
following reasons:
(a) the impact of the in-kind transfers on the Bank Plans would be
de minimis because the Funds would substantially replicate the CIFs in
terms of the investment policies and objectives;
(b) the Funds would probably continue to experience relative
performance similar in nature to the CIFs given the continuity of
investment objectives and policies, management oversight and portfolio
management personnel;
(c) the in-kind transfers would not adversely affect the cash
flows, liquidity or investment diversification of the Bank Plans; and
(d) the benefits to be derived by the Bank Plans and their
participants by investing in the Funds (e.g., larger investor based
permitted by the Funds, cost savings to participants over time through
economies of scale, more choices for participants exercising investment
control, and ability to obtain investment information through readily
available sources) would more than offset the impact of minimum
additional expenses that may be borne by the Bank Plans.
In forming an opinion as to the appropriateness of the in-kind
transfers, ASA conducted an overall review of the Bank Plans, including
the Plan documents. ASA stated that it examined the total investment
portfolios of the Bank Plans to ascertain whether the Plans were in
compliance with their investment objectives and policies. Further, ASA
stated that it examined the liquidity requirements of the Bank Plans
and reviewed the concentration of the Bank Plans' assets invested in
the CIFs as well as the portion of the CIFs comprised of the assets of
the Bank Plans. Finally, ASA stated that it reviewed the
diversification provided
[[Page 66328]]
by the investment portfolios of the Bank Plans. Based on its review and
analysis of the foregoing, ASA represented that the in-kind transfer
transactions would not adversely affect the total investment portfolios
of the Bank Plans, compliance by such Plans with their stated
investment objectives and policies, or the cash flow, liquidity or
diversification requirements of the Plans.
As the Second Fiduciary for the Bank Plans, ASA represented that
following the in-kind transfer transactions, it was provided by US
Trust with the confirmation statements described herein. In addition,
ASA stated that it supplemented its findings following review of the
post-transfer account information to confirm whether the in-kind
transfers had resulted in the Bank Plans' receipt of shares in the
Funds equal in value to the Plans' pro rata share of assets of the CIFs
on the conversion date (i.e. May 31, 1996). ASA further represented
that it would take such action as it deemed necessary to safeguard the
interests of the Bank Plans in the event the confirmation statements
did not confirm the foregoing.
Other Opportunities Available for Plans To Invest in the Funds
12. Besides the in-kind transfer of assets from a CIF or a Plan to
a comparable Fund, in accordance with the conditions of this proposed
exemption, a Plan's assets may be invested in the Funds in three other
ways. First, a Plan may purchase shares in the Funds for cash directly
through US Trust. Second, US Trust may transfer a Plan's assets from
one Fund to another Fund. Third, US Trust may effect a daily automated
sweep of uninvested cash of a Plan into one or more Funds designated by
US Trust. However, all investments for Plans in the Funds must be made
pursuant to the Second Fiduciary's written authorization.
With respect to sweep services for the Client Plans where US Trust
has investment discretion for the Plan, US Trust does not charge
separately for the provision of sweep services for uninvested cash
balances. Instead, US Trust charges a single, Plan-level fee, which
covers both the sweep service and the management of assets in the sweep
vehicle (generally, a short-term investment fund). Such single fee is
determined as a percentage of the assets so invested. If US Trust does
not have investment discretion with respect to the Client Plan's assets
invested in the Funds, it may charge a separate fee for sweep
services.18
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\18\ The Department in a letter, dated August 1, 1986, to Robert
S. Plotkin, Assistant Director, Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System,
addressed the application of section 408(b)(2) of the Act to
arrangements involving ``sweep services.'' In that letter, the
Department set forth several examples to illustrate various
circumstances under which violations of section 406(b) of the Act
would arise with respect to such arrangements. Conversely, the
letter provided that, if a bank provides ``sweep'' services without
the receipt of additional compensation or other consideration (other
than reimbursement of direct expenses properly and actually incurred
in the performance of such services), then the provision of
``sweep'' services by the bank would not, in itself, constitute a
violation of section 406(b) of the Act. Moreover, including
``sweep'' services under a single fee arrangement for investment
management services which is calculated as a percentage of the
market value of the total assets under management would not, in
itself, constitute an act described in section 406(b)(1), because
the bank would not be exercising its fiduciary authority or control
to cause a plan to pay an additional fee.
In addition, the letter also discusses the applicability of the
statutory exemptions under section 408(b)(6) of the Act (fees for
``ancillary services'') and under section 408(b)(8) of the Act
(investments in collective trust funds maintained by such bank) to
such ``sweep'' service arrangements.
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Receipt of Fees by US Trust From the Funds
13. Under certain conditions, Prohibited Transaction Exemption
(PTE) 77-4, 42 FR 18732 (April 8, 1977) \19\ would permit US Trust to
receive fees from the Funds for any investments made by the Client
Plans under either of two circumstances: (i) where the Client Plan does
not pay any investment management, investment advisory, or similar fees
for the assets of such Plan invested in shares of a Fund for the entire
period of such investment; or (ii) where the Client Plan pays
investment management, investment advisory, or similar fees to US Trust
based on the total assets of such Plans from which a credit has been
subtracted representing such Plan's pro rata share of such investment
advisory fees paid to US Trust by the Fund. As such, with respect to
the Client Plans, there may be two levels of fees: (i) Those fees which
US Trust charges to the Client Plans for serving as trustee, investment
manager, or custodian for such Plans (the Plan-level Fees); and (ii)
those fees which US Trust charges to the Fund (the Fund-level Fees) for
serving as an investment adviser for the Fund as well as for being
custodian of the Fund or for providing other Secondary Services to the
Fund.
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\19\ PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that the
conditions of the exemption are met.
In addition, PTE 77-3, 42 FR 18734 (April 8, 1977) permits the
acquisition or sale of shares of a registered, open-end investment
company by an employee benefit plan covering only employees of such
investment company, employees of the investment adviser or principal
underwriter for such investment company, or employees of any
affiliated person (as defined therein) of such investment adviser or
principal underwriter, provided certain conditions are met.
In this regard, the Department is expressing no opinion in this
proposed exemption regarding whether any of the transactions with
the Funds by US Trust involving Plans discussed herein would be
covered by PTE 77-4.
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In its capacity as Plan fiduciary, except for the Bank Plans, US
Trust charges each Client Plan a fee for its investment management/
trustee services based upon its standard fee schedules and the terms of
the specific agreement negotiated between each Plan and US
Trust.20 Generally, its standard fees are expressed as a varying
percentage of plan assets invested with US Trust.
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\20\ The applicant represents that all fees paid by the Client
Plans directly to US Trust for services performed by US Trust are
exempt from the prohibited transaction provisions of the Act by
reason of section 408(b)(2) of the Act and the regulations
thereunder (see 29 CFR 2550.408b-2). In this regard, the Department
is providing no opinion in this proposed exemption as to whether the
conditions required for exemptive relief under section 408(b)(2) of
the Act, and the regulations thereunder (see 29 CFR 2550. 408b-2),
would be met for fees received by US Trust for the provision of
services to the Client Plans.
In addition, the Department notes that to the extent there are
prohibited transactions under the Act as a result of services
provided by US Trust directly to the Client Plans which are not
covered by section 408(b)(2), no relief is being proposed herein for
such transactions.
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For their investment advisory services to the Institutional Funds,
UST Pacific and UST New York are entitled to receive certain advisory
fees from the Institutional Funds, as set out in the prospectuses,
currently ranging from approximately 0.12 percent to 0.60 percent of
the Fund's daily average assets under management.
For its services as investment adviser to the UST Funds, UST New
York is entitled to receive certain advisory fees from the UST Funds,
as set out in the prospectuses, currently ranging from approximately
0.25 percent to 1.0 percent of the Funds' daily average assets under
management, prior to certain voluntary fee waivers. In addition, UST
New York may receive from the UST Funds fees for certain Secondary
Services. No such fees are paid to UST New York pursuant to a 12b-1
plan (i.e. distribution expenses payable under Rule 12b-1 of the ICA).
The Funds accrue daily as an expense payable to US Trust a ratable
portion of US Trust's investment advisory fees and fees for Secondary
Services based upon the average daily net asset value of the Funds.
Such fees are paid by the Funds
[[Page 66329]]
to US Trust monthly in arrears approximately two weeks after the end of
the month.
US Trust states that the Client Plans for which it serves as a
fiduciary generally should not bear any increased cost burdens as a
result of investing in the Funds. In this regard, US Trust credits or
``rebates'' to each Client Plan, generally by the fifth business day of
each month (and in no event later than the date it is paid by the
Funds), its proportionate share of all Fund-level investment advisory
fees for the prior month (the Credit Program).21 Under the
conditions of this proposed exemption, all ``rebates'' of such fees
must be made by US Trust to the appropriate Client Plan within not more
than one business day after the receipt of such fees by US Trust (see
Section II(i) above). US Trust charges each Client Plan, in accordance
with its pre-established fee schedules, its full investment management
fee for all assets under management, including those assets invested in
the Funds. US Trust states that the net effect of the Credit Program
will be that no Client Plan will pay, for any period, a ``double''
investment advisory fee for any assets invested in the Funds. Thus, US
Trust believes that this procedure effectively operates as a credit
against the full Plan-level investment management fee in compliance
with the terms of Part II(c) of PTE 77-4. US Trust represents that for
each Client Plan, the combined total of all fees received by US Trust
for the provision of services to the Client Plan, and in connection
with the provision of services to any of the Funds in which the Plan
may invest, will not be in excess of ``reasonable compensation'' within
the meaning of section 408(b)(2) of the Act.
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\21\ US Trust represents that initially the credit will take the
form of a rebate of fees to the extent of the Funds' investment
advisory fees and fees for Secondary Services paid to US Trust. The
credit will also involve an ``out-of-pocket'' payment by US Trust to
the extent that it also credits each Plan with the Plan's
proportionate share of fees paid by the Funds to service providers
unaffiliated with US Trust. Thus, for a period of time, US Trust
intends to ``rebate'' all Fund-level fees to the affected Plans.
However, in the future, US Trust will retain a portion of the fees
paid to it by the Funds for Secondary Services and will reduce or
eliminate the additional credits for fees paid by the Funds to
unaffiliated service providers. In this regard, US Trust will
continue to ``rebate'' all investment advisory fees charged to the
Funds by US Trust, including any investment advisory fees paid by US
Trust to third party sub-advisors.
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In the case of the Bank Plans, from which US Trust receives no
Plan-level fees, US Trust does not rebate or otherwise credit back to
the Plans any portion of the fees it receives from the Funds for
investment advisory/management services or Secondary Services,
consistent with the terms of PTE 77-3.22 ASA concluded, as the
Second Fiduciary for the Bank Plans in connection with the in-kind
transfer of CIF assets that was made into the Funds in exchange for
shares of the Funds on May 31, 1996, that the fees to be paid by the
Bank Plans as investors in the Funds would be reasonable and within
industry standards for mutual fund servicing fees.
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\22\ As noted previously, the Department is providing no opinion
in this proposed exemption as to whether the fee arrangements
discussed herein for the Bank Plans meet the conditions of PTE 77-3.
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14. Audit Requirements. US Trust is responsible for establishing
and maintaining a system of internal accounting controls for the
crediting of the investment advisory or other fees to the Client Plans
under the Credit Program. In this regard, US Trust has retained the
services of Coopers & Lybrand of New York, New York (the Auditor), an
independent accounting firm, to audit annually the rebating of fees to
the Client Plans under this program. Such audits will provide
independent verification of the proper crediting of fees to the Client
Plans. Information regarding fee credits will be used in the
preparation of required financial disclosure reports of the Funds for
the benefit of the Client Plans.
By letter dated September 25, 1996, the Auditor has described the
procedures that will be utilized in the annual audit of the Credit
Program. Specifically, in performing its audit, the Auditor will: (a)
Review and test compliance with the specific operational controls and
procedures established by US Trust for making expense rebates (i.e.
credits of fees under the Credit Program); (b) verify, on a test basis,
the monthly expense ratios by agreeing them to the respective Fund's
prospectus; (c) recalculate, on a test basis, the monthly average
balance invested in the Funds; (d) recalculate, on a test basis, the
amount of the rebate to be credited to each Client Plan; (e) recompute,
on a test basis, the amount of the rebate determined for selected
Client Plans and verify that the proper credit was made to the
particular Client Plan in a timely manner; and (f) verify, on a test
basis, the total amount of credits or ``rebates'' made to the
convenience account established for the Credit Program.
In the event that either the internal audit by US Trust or the
independent audit by the Auditor identifies an error made in the
crediting of fees to the Client Plans, US Trust will correct the error.
With respect to any shortfall in credit fees to a Client Plan involving
cash credits, US Trust will make a cash payment to the Client Plan
equal to the amount of the error plus interest paid at money market
rates offered by US Trust for the period involved. With respect to any
shortfall in credited fees involving a Client Plan where the Second
Fiduciary's prior election was to have credited fees invested in shares
of a particular Fund, US Trust will make a cash payment to the Client
Plan equal to the amount of the error plus interest based on the
greater of either (a) the money market rate offered by US Trust for the
period involved or (b) the total rate of return for shares of the
Funds, including dividends, that would have been acquired during such
period. Any excess credits made to a Client Plan will be corrected by
an appropriate deduction and reallocation of cash during the next
payment period to reflect accurately the amount of total credits due to
the Plan for the period involved.
15. Future Fee Changes. US Trust states that one of the
requirements of PTE 77-4 is that any change in any of the rates of fees
requires prior written approval by the Second Fiduciary of the Plans
participating in the Funds. US Trust notes that where many Plans
participate in a Fund, the addition of a service or any increase in
fees cannot be implemented until written approval of such change is
obtained from every Second Fiduciary. US Trust proposes to follow an
alternative ``negative consent'' procedure which it believes provides
the basic safeguards for the Plans and is more efficient, cost
effective, and administratively feasible than that required by PTE 77-
4.
Specifically, in the event of an increase in the rate of any
investment management fees, investment advisory fees, or similar fees,
the addition of a Secondary Service for which a fee is charged, or an
increase in the fees for Secondary Services paid by any Fund to US
Trust over an existing rate that had been authorized by the Second
Fiduciary, US Trust will provide, at least thirty (30) days in advance
of the implementation of such additional service or fee increase, to
the Client Plans invested in such Fund a written notice of such
additional service or fee increase. Such notice may take the form of a
proxy statement, letter, or similar communication that is separate from
the Fund prospectus and will explain the nature and amount of the
additional service or the increase in fees. In this regard, such
increase in fees for Secondary Services can result either from an
increase in the rate of such fee or from the decrease in the number or
kind of services performed by US Trust
[[Page 66330]]
for such fee over that which had been authorized by the Second
Fiduciary of a Client Plan. US Trust believes that notice provided in
this way will give the Second Fiduciary of each Plan adequate
opportunity to decide whether to continue the authorization of a Plan's
investment in any of the Funds in light of the increase in investment
management fees, investment advisory fees, or similar fees, the
additional Secondary Service for which a fee is charged, or the
increase in fees for any Secondary Services. In addition, such fee
increase will be disclosed to the Plan in an amendment of or supplement
to the Fund's prospectus, as well as in the Fund's Statement of
Additional Information, to the extent necessary to comply with
disclosure requirements of the U.S. Securities and Exchange Commission
(SEC).
The written notice of an additional secondary service for which a
fee is charged or a fee increase will be accompanied by a Termination
Form, as defined in Section III(i) of this proposed exemption, and by
instructions for the use of such form which will expressly provide an
election for the Second Fiduciaries of Plans to terminate at will any
prior authorizations without penalty to the Plans. Each Client Plan
will be supplied with a Termination Form annually during the first
quarter of each calendar year, beginning with the first quarter of the
calendar year that begins after the date the grant of this proposed
exemption is published in the Federal Register and continuing for each
calendar year thereafter, regardless of whether there have been any
changes in the fees payable to US Trust or changes in other matters in
connection with services rendered to the Funds. However, if the
Termination Form has been provided to the Plan in the event of an
addition of a Secondary Service for which a fee is charged, or an
increase in any existing fees for Secondary Services paid by the Fund
to US Trust, then such Termination Form need not be provided again to
the Plan until at least six months have elapsed, unless such
Termination Form is required to be sent sooner as a result of another
increase in any such fees or addition of such services.
The Termination Form will contain instructions regarding its use
which will state expressly that the authorization is terminable at will
by a Second Fiduciary, without penalty to the Plan, and that failure to
return the form will be deemed to be an approval of the additional
Secondary Service or the increase in the rate of any fees and will
result in the continuation of all authorizations previously given by
such Second Fiduciary. Termination by any Plan of authorization to
invest in the Funds will be effected by US Trust redeeming the shares
of the Fund held by the affected Plan by the close of business on the
day following the date of receipt by US Trust of the Termination Form
or any other written notice of termination. If, due to circumstances
beyond the control of US Trust, the redemption cannot be executed
within one business day, US Trust will have one additional business day
to complete such redemption.
16. No sales commissions are paid by the Client Plans in connection
with purchases or sales of shares of the Funds and no redemption fees
are paid in connection with the sale of such shares by the Plans to the
Funds. In addition, neither US Trust nor any affiliate (including
officers, directors and other persons, as defined in Section III(b)
above) purchases from or sells to the Client Plans any shares of the
Funds. US Trust does not receive any 12b-1 fees, payable pursuant Rule
12b-1 under the ICA, for transactions with the Funds involving the
Plans. In all cases, the price paid or received by a Plan for any Fund
shares is the net asset value per share, as defined in Section III(e)
above, at the time of the transaction and is the same price which would
be paid or received for the shares by any other investor at that time.
US Trust states that all dealings between the Plans and any of the
Funds are on a basis no less favorable to such Plans than dealings
between the Funds and other shareholders holding the same class of
shares as the Plans.
17. On an annual basis, US Trust will provide the Second Fiduciary
of a Plan with a copy of the current prospectus for the Funds and, upon
such fiduciary's request, a copy of the Statement of Additional
Information which contains a description of all fees paid by the Funds
to US Trust. In addition, US Trust will provide the Second Fiduciary
with a copy of a financial disclosure report prepared by US Trust which
contains information about the portfolios of the Funds and includes the
Auditor's findings within 60 days of the preparation of the report.
Further, US Trust will respond to oral or written responses to
inquiries of the Second Fiduciary as they may arise.
In some cases, a US Trust affiliate may execute securities
transactions as a broker for the investment portfolios of certain
Funds, to the extent permitted by the ICA and the applicable rules of
the SEC. To the extent that US Trust does not currently execute
securities brokerage transactions for any Fund for which a fee is paid
to US Trust, but proposes to do so in the future, US Trust will at
least thirty (30) days in advance of the implementation of such
additional service provide a written notice to the Plan which explains
the nature of such additional service and the amount of the brokerage
fees involved. Further for any Fund that US Trust provides such
brokerages services, US Trust will provide at least annually to any
Plan that invests in such Funds a written disclosure indicating: (a)
The total, expressed in dollars, brokerage commissions of each Fund's
investment portfolio that are paid to US Trust by such Fund; (b) the
total, expressed in dollars, of brokerage commissions of each Fund's
investment portfolio that are paid by such Fund to brokerage firms
unrelated to US Trust; (c) the average brokerage commissions per share,
expressed as cents per share, paid to US Trust by each portfolio of a
Fund; and (d) the average brokerage commissions per share, expressed as
cents per share, paid by each portfolio of a Fund to brokerage firms
unrelated to US Trust.
18. In summary, US Trust represents that the transactions described
herein satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Funds provide the Client Plans and the Bank Plans with a
more effective investment vehicle than the CIFs maintained by US Trust
without any ``double'' investment advisory or similar fees paid to US
Trust.
(b) With respect to the transfer of a Plan's CIF assets into a Fund
in exchange for Fund shares, a Second Fiduciary authorizes in writing,
such transfer prior to the transaction only after full written
disclosure of information concerning the Fund.
(c) Each Bank Plan or Client Plan receives shares of the Funds, in
connection with the in-kind transfer of assets of a CIF or a Plan,
which have a total net asset value that is equal to the value of such
Plan's pro rata share of the CIF or Plan assets on the date of the
transfer as determined in a single valuation performed in the same
manner and at the close of the business day, using independent sources
in accordance with procedures established by the Funds which comply
with Rule 17a-7 of the ICA, as amended, and the procedures established
by the Funds pursuant to Rule 17a-7 for the valuation of such assets.
(d) For all in-kind transfers of CIF or Plan assets to a Fund, US
Trust sends by regular mail to each affected Plan a written
confirmation, not later than 30 days after the completion of the
transaction (except for certain
[[Page 66331]]
transactions described herein where such confirmations were sent at a
later date), containing the following information: (1) The identity of
each security that was valued for purposes of the transaction in
accordance with Rule 17a-7(b)(4) of the ICA; (2) the price of each such
security involved in the transaction; and (3) the identity of each
pricing service or market maker consulted in determining the value of
such securities.
(e) For all in-kind transfers of CIF assets to a Fund, US Trust
sends by regular mail, no later than 90 days after completion of each
transfer, a written confirmation that contains the following
information: (1) The number of CIF units held by the 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 Plan following the conversion, the related per
share net asset value and the total dollar amount of such shares.
(f) The price paid or received by a Bank Plan or a Client 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 the shares which was or would
have been paid or received by any other investor at that time.
(g) No sales commissions or redemption fees are paid by a Plan in
connection with the purchase of shares of the Funds.
(h) US Trust does not receive any 12b-1 fees in connection with the
transactions.
(i) Any authorizations made by a Client Plan regarding investments
in a Funds and fees paid to US Trust (including increases in the
contractual rates of fees for Secondary Services that are retained by
US Trust) are terminable at will by the Client Plan, without penalty to
the Client Plan, and are effected within one business day following
receipt by US Trust, from the Second Fiduciary, of the Termination Form
or any other written notice of termination, unless circumstances beyond
the control of US Trust delay execution for no more than one additional
business day.
(j) The Second Fiduciary receives written notice accompanied by the
Termination Form with instructions on the use of the form at least 30
days in advance of the implementation of any increase in the rate of
any fees for Secondary Services that US Trust provides to the Funds.
(k) All dealings by or between the Plans, the Funds and US Trust
are on a basis which is at least as favorable to the Plans as such
dealings are with other shareholders of the Funds.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested
persons who had investments in the terminating CIFs and from whom
approval was sought for the transfer of Plan assets to the Funds. In
this regard, interested persons will include ASA, the Second Fiduciary
of the Bank Plans; active participants in the Bank Plans; and Second
Fiduciaries of the Client Plans. Notice will be provided to each Second
Fiduciary by first class mail and to active participants in the Bank
Plans by posting at major job sites. Such notice will be given to
interested persons within 15 days following the publication of this
notice of pendency of the proposed exemption in the Federal Register.
The notice will include a copy of the notice of proposed exemption, as
published herein, and give interested persons the right to comment on
and/or to request a hearing on the proposed exemption. Comments and
requests for a public hearing are due within 45 days of the publication
of this notice of pendency of the proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Givens 401(k) Savings and Retirement Plan (the Plan) Located in
Chesapeake, VA
[Application No. D-10364]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 C.F.R. Part
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the
exemption is granted the restrictions of sections 406(a), 406(b)(1) and
(b)(2) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to the proposed purchase from the Plan
of the Plan's interest in a group annuity contract (the GAC Interest)
by Givens, Incorporated, a sponsor of the Plan; provided the following
conditions are satisfied:
(a) The sale is a one-time transaction for cash;
(b) The Plan suffers no loss nor incurs any expense in connection
with the sale; and
(c) The Plan receives a purchase price of no less than the fair
market value of the GAC Interest as of the date of the sale.
Summary of Facts and Representations
1. The Plan is a 401(k) defined contribution plan which provides
for individual participant accounts (the Accounts) and participant-
directed investment of the Accounts. The Plan is maintained by Givens
Trucking Company, Incorporated (GTC), a Virginia corporation, on behalf
of eligible employees of a controlled group of brother-sister
corporations which includes Givens, Incorporated (Givens), a Virginia
corporation engaged in the business of public warehousing in
Chesapeake, Virginia. GTC, Givens, and other employers in the
controlled group (the Sponsors) initially adopted the Plan effective
September 1, 1989 as a prototype 401(k) plan (the Predecessor Plan)
offered by the J. & W. Seligman Trust Company (Seligman). Seligman
served as trustee of the Predecessor Plan. Effective March 31, 1995,
the sponsors replaced Seligman as trustee and formed the Plan by
adopting a new plan and trust document which amended and entirely
restated the Predecessor Plan. At that time, Commerce Bank, located in
Virginia Beach, Virginia, was appointed as the new trustee to replace
Seligman. The Plan's current trustee, Branch Banking and Trust Company
of Virginia (the Trustee), is the successor to Commerce Bank as the
result of the Trustee's acquisition of Commerce Bank in 1995. As of
June 30, 1996, the Plan had 232 participants and total assets of
$2,154,700.
2. Among the investment options offered for Account investments
under Seligman's trusteeship was a fixed-income fund which invested
participant-directed Account funds in a group annuity contract, Mutual
Benefit Deferred Variable Annuity Contract No. 0888000033-S (the GAC).
The GAC, which was issued to Seligman on October 19, 1989 by Mutual
Benefit Life Insurance Company of New Jersey (Mutual Benefit), is a
pooled investment vehicle maintained by Seligman for various employee
benefit plans, each of which acquired pro-rata interests in the GAC in
proportion to amounts invested in the GAC. The terms of the GAC
provided that prior to the beginning of each calendar year, Mutual
Benefit would establish a guaranteed rate of interest (the Contract
Rates) payable on funds deposited pursuant to the GAC during that year.
3. On July 16, 1991, Mutual Benefit was placed into rehabilitation
proceedings by the New Jersey Commissioner of Insurance (the
[[Page 66332]]
Commissioner).23 As a result, the assets of the Plan invested in
the GAC were frozen, with the exception of certain hardship
withdrawals. The accumulated book value of the Plan's interest in the
GAC as of July 16, 1991 was $121,030.18, consisting of the Plan's
principal deposits plus interest at the Contract Rates less
withdrawals. In 1994, the terms of the GAC were redefined under a
rehabilitation plan (the Rehab Plan) approved by the Commissioner and
the court overseeing the rehabilitation proceedings, the Superior Court
of New Jersey--Mercer County. As a result of the Rehab Plan, all
liabilities and obligations of Mutual Benefit with respect to the GAC
have been assumed by the MBL Life Assurance Corporation (MBLLAC), a New
Jersey life insurance company located in Newark, New Jersey. Under the
Rehab Plan, contract holders such as Seligman were offered the ability
to ``opt in'' to the Rehab Plan by accepting restructured contracts or
to ``opt out'' by surrendering the contract for a reduced amount of
cash (generally, approximately 55 percent of the contract face value).
Seligman, as Plan trustee, elected to ``opt in'' to the Rehab Plan and
was issued a restructured contract designated as Mutual Benefit Life
Deferred Variable Annuity Contract No. IVA888000033 (the New GAC) in
replacement of the GAC, which was cancelled. Under the terms of the New
GAC, interest is earned on deposits not at the GAC's original Contract
Rates but at rates determined annually (the Rehab Rates) to reflect
MBLLAC's actual investment performance.24 The Rehab Rate for 1996
was established at 5.10 percent. The New GAC provides that Plan
participants are subject to a moratorium charge (the Penalty) for
withdrawal of any Account balances from the New GAC prior to December
31, 1999, for any reason other than death or financial hardship as
determined by MBLLAC. The Penalty is 21.7 percent of the amount
withdrawn through 1996, 16.3 percent through 1997, 10.9 percent through
1998 and 5.4 percent through 1999. The accumulated book value of the
Plan's interest in the New GAC was $129,178 as of June 30, 1996,
consisting of the accumulated book value of the Plan's interest in the
GAC as of July 16, 1991 plus interest at the Rehab Rates less
withdrawals.
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\23\ The Department notes that the decision to acquire and hold
interests in the GAC are governed by the fiduciary responsibility
requirements of Part 4, Subtitle B, Title I of the Act. In this
proposed exemption, the Department is not proposing relief for any
violations of Part 4 which may have arisen as a result of the
acquisition and holding of interests in the GAC.
\24\ For the period from July 16, 1991 through April 30, 1994,
the Plan earned interest at the Rehab Rates in the amount of
$20,395.82, while Plan withdrawals for this same period totalled
$10,040.52 and the Plan was assessed a contract expense charge of
$60.00. From May 1, 1994 through June 30, 1996, the Plan earned
interest at the Rehab Rates in the amount of $13,771.21 and Plan
withdrawals for this same period totalled $15,918.69. For 1996, the
Rehab Rate has been established at 5.10 percent.
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4. GTC and Givens (the Applicants) represent that allowing the Plan
assets to remain invested in the New GAC exposes Plan participants and
beneficiaries to some degree of risk, precludes transfers of Account
balances invested in the New GAC to other investment options available
in the Plan, precludes participant loans with respect to Account
balances invested in the New GAC, and prevents lump-sum distributions
to retiring participants who do not qualify for hardship distributions.
In order to enable restoration of full Plan operations with respect to
the amounts invested in the New GAC, and to protect the Plan
participants and beneficiaries from any further risk of investment loss
associated with the New GAC, the Applicants propose that Givens
purchase the Plan's entire interest in the New GAC (the GAC Interest)
from the Plan, and is requesting an exemption to enable such
transaction under the terms and conditions described herein.
5. Givens will purchase the GAC Interest from the Plan for a
purchase price equal to the Plan's pro-rata share of the accumulated
book value of the New GAC as of the purchase date under the
restructured terms, as determined by MBLLAC. As of June 30, 1996, the
value of the GAC Interest under the GAC's restructured terms, $129,178,
constituted approximately 6 percent of all Plan assets. The purchase
price will reflect interest earnings at the Rehab Rates through the
date of the sale transaction. The Plan will incur no expenses in
connection with the transaction. The Applicants state that the
transaction will enable the Plan participants to gain access to the
Account balances invested in the New GAC, for participant loans,
distributions and non-hardship withdrawals, without incurring the
Penalty for withdrawal, which they estimate would be at least $28,031.
The Applicants represent that in the proposed transaction the Plan will
experience no loss, since the transaction will enable the Accounts to
realize the same amount of cash they would realize from a withdrawal of
Account balances from the New GAC, with Rehab Rate interest through the
date of withdrawal, if withdrawals without the Penalty were permitted
under the terms of the Rehab Plan.
6. In summary, the Applicants represent that the proposed
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (a) The sale will be a one-time transaction for
cash; (b) The Plan will suffer no loss and will incur no expense with
respect to the transaction; (c) The transaction will protect the Plan
from any risk associated with continued holding of the New GAC, as well
as enabling participants to exercise all of their rights under the Plan
with respect to distributions, loans, transfers and withdrawals; and
(d) the purchase price will be the value of the GAC Interest as of the
sale date under the restructured terms of the New GAC, as determined by
MBLLAC.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of
[[Page 66333]]
whether the transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and 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, DC, this 12th day of December, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 96-31993 Filed 12-16-96; 8:45 am]
BILLING CODE 4510-29-P
