[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29834]
[[Page Unknown]]
[Federal Register: December 5, 1994]
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DEPARTMENT OF LABOR
[Prohibited Transaction Exemption 94-82; Exemption Application No. D-
9257, et al.]
Grant of Individual Exemptions; Marshall & Ilsley Trust Company
et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, D.C. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978) transferred the authority of the Secretary of
the Treasury to issue exemptions of the type proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
Marshall & Ilsley Trust Company Located in Milwaukee, Wisconsin
[Prohibited Transaction Exemption 94-82; Application No. D-9257]
Section I--Exemption for In-Kind Transfer of CIF Assets
The restrictions of section 406(a) and 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1) (A) through (F) of the Code, shall not
apply, as of November 20, 1992, to the in-kind transfer of assets of
plans for which Marshall & Ilsley Trust Company or an affiliate
(collectively, M&I) serves as a fiduciary (the Client Plans), other
than plans established and maintained by M&I, that are held in certain
collective investment funds maintained by M&I (the CIFs), in exchange
for shares of the Marshall Funds, Inc. (the Funds), an open-end
investment company registered under the Investment Company Act of 1940
(the 1940 Act), for which M&I acts as investment adviser, custodian,
and/or shareholder servicing agent, in connection with the termination
of such CIFs, provided that the following conditions and the general
conditions of Section III below are met:
(a) No sales commissions or other fees are paid by the Client Plans
in connection with the purchase of Fund shares through the in-kind
transfer of CIF assets and no redemption fees are paid in connection
with the sale of such shares by the Client Plans to the Funds.
(b) Each Client Plan receives shares of a Fund which have a total
net asset value that is equal to the value of the Client Plan's pro
rata share of the assets of the CIF on the date of the transfer, based
on the current market value of the CIF's assets, as determined in a
single valuation performed in the same manner at the close of the same
business day, using independent sources in accordance with Rule 17a-
7(b) of the Securities and Exchange Commission under the 1940 Act and
the procedures established by the Funds pursuant to Rule 17a-7 for the
valuation of such assets. Such procedures must require that all
securities for which a current market price cannot be obtained by
reference to the last sale price for transactions reported on a
recognized securities exchange or NASDAQ be valued based on an average
of the highest current independent bid and lowest current independent
offer, as of the close of business on the Friday preceding the weekend
of the CIF transfers, determined on the basis of reasonable inquiry
from at least three sources that are broker-dealers or pricing services
independent of M&I.
(c) A second fiduciary who is independent of and unrelated to M&I
(the Second Fiduciary) receives advance written notice of the in-kind
transfer of assets of the CIFs and full written disclosure of
information concerning the Funds (including a current prospectus for
each of the Funds and a statement describing the fee structure) and, on
the basis of such information, authorizes in writing the in-kind
transfer of the Client Plan's CIF assets to a corresponding Fund in
exchange for shares of the Fund.
(d) For all subsequent transfers of CIF assets to a Fund following
the publication of the proposed exemption in the Federal Register, M&I
sends by regular mail to each affected Client Plan a written
confirmation, not later than 30 days after completion of the
transaction, containing the following information:
(1) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(2) The price of each such security involved in the transaction;
and
(3) The identity of each pricing service or market maker consulted
in determining the value of such securities.
(e) For all subsequent transfers of CIF assets to a Fund following
the publication of the proposed exemption in the Federal Register, M&I
sends by regular mail to the Second Fiduciary no later than 90 days
after completion of each transfer a written confirmation that contains
the following information:
(1) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(2) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
(f) The conditions set forth in paragraphs (e), (f) and (l) of
Section II below are satisfied.
Section II--Exemption for Receipt of Fees
The restrictions of sections 406(a) and 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (F) of the Code, shall not
apply as of November 20, 1992, to: (1) the receipt of fees by M&I from
the Funds for acting as an investment adviser to the Funds in
connection with the investment by the Client Plans in shares of the
Funds; and (2) the receipt and proposed retention of fees by M&I from
the Funds for acting as custodian and shareholder servicing agent to
the Funds as well as for any other services to the Funds which are not
investment advisory services (i.e. ``secondary services'') in
connection with the investment by the Client Plans in shares of the
Funds, provided that the following conditions and the general
conditions of Section III are met:
(a) No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds and no redemption fees
are paid in connection with the sale of shares by the Client Plans to
the Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section IV(e), and is the same price which would have
been paid or received for the shares by any other investor at that
time.
(c) Neither M&I nor an affiliate, including any officer or director
of M&I, purchases or sells shares of the Funds from or to any Client
Plan.
(d) Each Client Plan receives a credit, either through cash or the
purchase of additional shares of the Funds pursuant to an annual
election made by the Client Plan, of such Plan's proportionate share of
all fees charged to the Funds by M&I for investment advisory services,
including any investment advisory fees paid by M&I to third party sub-
advisers, within no more than one business day of the receipt of such
fees by M&I.
(e) The combined total of all fees received by M&I for the
provision of services to a Client Plan, and in connection with the
provision of services to the Funds in which the Client Plan may invest,
are not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.
(f) M&I does not receive any fees payable pursuant to Rule 12b-1
under the 1940 Act in connection with the transactions.
(g) The Client Plans are not employee benefit plans sponsored or
maintained by M&I.
(h) The Second Fiduciary receives full and detailed written
disclosure of information concerning the Funds (including a current
prospectus for each of the Funds and statement describing the fee
structure) in advance of any investment by the Client Plan in a Fund.
(i) On the basis of the information described above in paragraph
(h), the Second Fiduciary authorizes in writing the investment of
assets of the Client Plan in each particular Fund, the fees to be paid
by such Funds to M&I, and, if applicable, the purchase of additional
shares of a Fund by the Client Plan with the fees credited to the
Client Plan by M&I.
(j) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to M&I are subject to an annual
reauthorization wherein any such prior authorization referred to in
paragraph (i) shall be terminable at will by the Client Plan, without
penalty to the Client Plan, upon receipt by M&I of written notice of
termination. A form expressly providing an election to terminate the
authorization described in paragraph (i) above (the Termination Form)
with instructions on the use of the form must be supplied to the Second
Fiduciary no less than annually. The instructions for the Termination
Form must include the following information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by M&I of written
notice from the Second Fiduciary; and
(2) Failure to return the Termination Form will result in continued
authorization of M&I to engage in the transactions described in
paragraph (i) on behalf of the Client Plan.
(k) The Second Fiduciary of each Client Plan invested in a
particular Fund receives full written disclosure, in a statement
separate from the Fund prospectus, of any proposed increases in the
rates of fees charged by M&I to the Funds for secondary services (as
defined in Section IV(h) below) at least 30 days prior to the effective
date of such increase, accompanied by a copy of the Termination Form,
and receives full written disclosure in a Fund prospectus or otherwise
of any increases in the rates of fees charged by M&I to the Funds for
investment advisory services even though such fees will be credited as
required by paragraph (d) above.
(l) In the event that M&I provides an additional secondary service
to a Fund for which a fee is charged or there is an increase in the
amount of fees paid by the Funds to M&I for any secondary services
resulting from a decrease in the number or kind of services performed
by M&I for such fees in connection with a previously authorized
secondary service, M&I will, at least thirty days in advance of the
implementation of such additional service or fee increase, provide
written notice to the Second Fiduciary explaining the nature and the
amount of the additional service for which a fee will be charged or the
nature and amount of the increase in fees of the affected Fund. Such
notice shall be accompanied by the Termination Form, as defined in
Section IV(i) below.
(m) On an annual basis, M&I provides the Second Fiduciary of a
Client Plan investing in the Funds with:
(1) A copy of the current prospectus for the Funds and, upon such
fiduciary's request, a copy of the Statement of Additional Information
for such Funds which contains a description of all fees paid by the
Funds to M&I;
(2) A copy of the annual financial disclosure report prepared by
M&I which includes information about the Fund portfolios as well as
audit findings of an independent auditor within 60 days of the
preparation of the report; and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
(n) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Client Plans than dealings with other
shareholders of the Funds.
Section III--General Conditions
(a) M&I maintains for a period of six years the records necessary
to enable the persons described below in paragraph (b) to determine
whether the conditions of this exemption have been met, except that (1)
a prohibited transaction will not be considered to have occurred if,
due to circumstances beyond the control of M&I, the records are lost or
destroyed prior to the end of the six-year period, and (2) no party in
interest other than M&I shall be subject to the civil penalty that may
be assessed under section 502(i) of the Act or to the taxes imposed by
section 4975(a) and (b) of the Code if the records are not maintained
or are not available for examination as required by paragraph (b)
below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) are unconditionally available at their
customary location for examination during normal business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1) (ii) and
(iii) shall be authorized to examine trade secrets of M&I, or
commercial or financial information which is privileged or
confidential.
Section IV--Definitions
For purposes of this exemption:
(a) The term ``M&I'' means the Marshall & Ilsley Trust Company and
any affiliate thereof as defined below in paragraph (b) of this
section.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' shall include the Marshall
Funds, Inc., or any other diversified open-end investment company or
companies registered under the 1940 Act for which M&I serves as an
investment adviser and may also serve as a custodian, shareholder
servicing agent, transfer agent or provide some other ``secondary
service'' (as defined below in paragraph (h) of this Section) which has
been approved by such Funds.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund or portfolio of the Fund, less the liabilities
charged to each such portfolio or Fund, by the number of outstanding
shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who is independent of and unrelated to M&I. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to M&I if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with M&I;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner, employee,
or affiliate of M&I (or is a relative of such persons);
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption.
If an officer, director, partner, affiliate or employee of M&I (or
relative of such persons), is a director of such Second Fiduciary, and
if her or she abstains from participation in (i) the choice of the
Client Plan's investment adviser, (ii) the approval of any such
purchase or sale between the Client Plan and the Funds, and (iii) the
approval of any change in fees charged to or paid by the Client Plan in
connection with any of the transactions described in Sections I and II
above, then paragraph (g)(2) of this section shall not apply.
(h) The term ``secondary service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by M&I to the Funds. However, for purposes of this
exemption, the term ``secondary service'' will not include any
brokerage services provided to the Funds by M&I for the execution of
securities transactions engaged in by the Funds.
(i) The term ``Termination Form'' means the form supplied to the
Second Fiduciary which expressly provides an election to the Second
Fiduciary to terminate on behalf of a Client Plan the authorization
described in paragraph (j) of Section II. Such Termination Form may be
used at will by the Second Fiduciary to terminate an authorization
without penalty to the Client Plan and to notify M&I in writing to
effect a termination by selling the shares of the Funds held by the
Client Plan requesting such termination within one business day
following receipt by M&I of the form; provided that if, due to
circumstances beyond the control of M&I, the sale cannot be executed
within one business day, M&I shall have one additional business day to
complete such sale.
EFFECTIVE DATE: The exemption is effective as of November 20, 1992.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on August 17, 1994, at 59 FR
42300.
Notice to Interested Persons: The applicant represents that it was
unable to notify interested persons within the time period specified in
the Federal Register notice published on August 17, 1994. The applicant
states that interested persons were notified, in the manner agreed upon
between the applicant and the Department, by September 16, 1994.
Interested persons were advised that they had until October 17, 1994 to
comment on the proposed exemption.
Written Comments and Modifications: The applicant submitted the
following comments and requests for modifications regarding the notice
of proposed exemption (the Proposal).
In response to a question raised by the Department regarding the
reference in Section I(b) of the Proposal, describing the valuation
method to be used for the in-kind transfer of CIF assets, to ``* * *
procedures established by the Funds for the valuation of such assets'',
the applicant states that such ``procedures'' are adopted by the board
of directors of the Funds to provide for compliance with Securities and
Exchange Commission (SEC) Rule 17a-7 for transactions effected under
that Rule. The applicant represents that it does not intend for the
reference to these ``procedures'' to refer to any non-Rule 17a-7
valuation procedures for the Funds.
Therefore, in response to this comment, the Department has amended
Section I(b) of the Proposal by changing the clause to read as follows
(the new language being underlined):
``* * * and the procedures established by the Funds pursuant to
Rule 17a-7 for the valuation of such assets.''
The applicant states further that the valuation procedures used by
a mutual fund for determining the net asset value of its shares may
differ slightly from the valuation procedures used for Rule 17a-7
transactions. For example, the applicant notes that although the rules
and procedures for determining net asset value parallel the valuation
rules of Rule 17a-7(b) for securities for which market quotations are
readily available, the net asset value rules permit the amortized cost
method to be used for valuing certain types of securities, such as
short-term fixed-income securities, and permit the use of one, rather
than three, independent brokers or pricing services to value securities
which are not exchanged-traded.
However, the applicant represents that the net asset value
determinations by the Funds are made on an objective and consistent
basis, in accordance with the applicable SEC rules and internal
procedures established by the board of directors of the Funds (the
Board). The applicant states that all the members of the Board are
independent of M&I, the investment adviser of the Funds. The procedures
established by the Board are described in the Statement of Additional
Information issued to Fund investors. These procedures include the time
of day at which net asset value will be determined and the specific
independent pricing services that will be used by the Funds.
Accordingly, the Department has determined that no further
modifications to Section I(b) of the Proposal are necessary.
In response to a question raised by the Department regarding the
utilization of sub-advisers, the applicant states that M&I currently
uses a third party sub-adviser for one of the Funds but otherwise is
the sole investment adviser to the Funds' existing portfolios and
presently contemplates no change with respect to such existing
portfolios. M&I states that in the event that other, particularly more
specialized, portfolios are started, third party sub-advisers may be
utilized to enhance the investment alternatives and the investment
advisory services available to the Funds for such portfolios. M&I
represents that each Client Plan's credit of all investment advisory
fees charged by M&I to the Funds will include any investment advisory
fees paid by M&I to third party sub-advisers.
In response to the applicant's comment, the Department has amended
Section II(d) of the Proposal as follows (new language being
underlined):
``* * * Each Client Plan receives a credit, either through cash
or the purchase of additional shares of the Funds pursuant to an
annual election made by the Client Plan, of such Plan's
proportionate share of all fees charged to the Funds by M&I for
investment advisory services, including any investment advisory fees
paid by M&I to third party sub-advisers, within no more than one
business day of the receipt of such fees by M&I.''
In response to a further question raised by the Department
regarding changes in fees received by M&I for secondary services, the
applicant has agreed to add a new condition to Section II of the
Proposal which requires prior disclosure of the addition of a secondary
service for which a fee is charged or an increase in fees as a result
of a decrease in the number or kind of services performed for an
existing secondary service fee. This condition, as discussed in
paragraph (l) of Section II, requires M&I to provide written notice to
the Second Fiduciary, at least thirty days in advance of the
implementation of such additional service or fee increase, explaining
the nature and the amount of the additional service for which a fee
will be charged or the nature and amount of the increase in fees of the
affected Fund. Such notice must be accompanied by a Termination Form.
With respect to purchases and sales of Fund shares, Section II(c)
of the Proposal states that neither M&I nor an affiliate, including any
officer or director of M&I, may purchase or sell shares of the Funds
from or to any Client Plan. The applicant states that while purchases
or redemptions of Fund shares by the Client Plans are made with the
Funds' distributor, which is independent of M&I, purchase and
redemption orders may be placed through the Client Plan's account
representative at M&I. The applicant requests that the Department
clarify that the language of Section II(c) of the Proposal does not
affect the ability of Client Plans to place orders through M&I
personnel.
In response to the applicant's comment, the Department notes that
Section II(c) was not intended to limit the ability of Client Plans to
deal with M&I account representatives on Fund matters and is not meant
to prohibit purchases or sales of Fund shares that are placed through
M&I personnel when such personnel are acting as agents for the Client
Plans.
With respect to 12b-1 fees, Section II(f) of the Proposal provides
that M&I may not receive any fees payable pursuant to Rule 12b-1 under
the 1940 Act. The applicant states that this condition is consistent
with the representations made by M&I. However, the applicant notes that
Paragraphs 3 and 4 of the Summary of Facts and Representations in the
Proposal (the Summary) overstate the representations made by M&I with
regard to 12b-1 fees and require minor clarification.
Paragraph 3 indicates that the Client Plans will invest only in
``Trust Shares'' of the Funds. The applicant states that at the current
time only the Marshall Money Market Fund has established a category of
``Trust Shares'', as distinguished from ``Investment Shares'' that are
charged with 12b-1 fees. The applicant notes that the remaining Funds,
while capable of establishing 12b-1 plans, have not done so, and
currently use only a single class of shares. The applicant represents
that if any of these Funds does establish a 12b-1 plan, it will create
a separate class of shares analogous to the Marshall Money Market
Funds' ``Trust Shares'' that will not be charged 12b-1 fees, and
investments by Client Plans will be limited to the class of shares not
subject to 12b-1 fees.
In Paragraph 4 of the Summary, the third sentence reads, ``* * * In
addition, M&I does not and will not receive fees payable pursuant to
Rule 12b-1 in connection with transactions involving any shares of the
Funds.'' The applicant states that this statement should be clarified
to limit it to transactions described under the exemption, because M&I
may receive 12b-1 fees in connection with transactions outside the
exemption involving separate classes of Fund shares. The Department
notes the applicant's clarification.
With respect to the authorization of credits in the form of Fund
shares, the applicant states that the Second Fiduciary's authorization
of the fee credits may not necessarily include an authorization to
purchase additional shares with the credited fees. Therefore, Section
II(i) of the Proposal should include the phrase ``if applicable'' as
part of the clause ``* * * and the purchase of additional shares of a
Fund by the Client Plan with the fees credited to the Client Plan by
M&I''. The Department has amended Section II(i) to include this phrase.
In addition, Paragraph 8 of the Summary states, in the middle of the
first paragraph, that ``* * * Such authorization will include in the
future an election for the Second Fiduciary to purchase additional
shares of the Fund with the fees credited to the Client Plan by M&I.''
The applicant states that this should be clarified to provide that such
authorizations may, rather than will, be included in the future. The
Department also notes this additional clarification.
With respect to the use of broker quotations and pricing services
for valuing the securities transferred to a Fund, the applicant states
that the reference in Section I(b) of the Proposal to the use of ``* *
* at least three sources that are broker-dealers or pricing services
independent of M&I * * *'' for securities described under Rule 17a-
7(b)(4) is consistent with M&I's representations. However, the
applicant notes that the third paragraph of Paragraph 6 of the Summary
indicates that unlisted securities were valued based on quotations
obtained from three brokers independent of M&I, without referring to
the use of a fourth quotation in the event of an aberration in the
three quotations obtained or the use in some cases of independent
pricing services in place of brokers. The applicant requests that this
matter be clarified for the record. In this regard, the Department
notes the applicant's clarification regarding M&I's use of broker
quotations and pricing services for valuing unlisted securities
involved in the in-kind transfers to the Funds and also notes that such
procedures were consistent with Section I(b) of the Proposal.
With respect to the frequency of reports made to the Client Plans
on Fund transactions, the applicant states that Paragraph 8 of the
Summary should be clarified to state that such reports are provided to
Second Fiduciaries monthly or quarterly, rather than just monthly. The
Department also notes this clarification. In addition, the Department
has added as a condition of the exemption (see Section II(m) above) a
requirement that M&I provide the Second Fiduciaries of Client Plans
investing in the Funds the following:
(1) A copy of the current prospectus for the Funds and, upon such
fiduciary's request, a copy of the Statement of Additional Information
for such Funds which contains a description of all fees paid by the
Funds to M&I;
(2) A copy of the annual financial disclosure report prepared by
M&I which includes information about the Fund portfolios as well as
audit findings of an independent auditor within 60 days of the
preparation of the report; and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
Accordingly, after consideration of the entire record, the
Department has determined to grant the exemption as modified.
FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Xerox Corporation Profit Sharing and Savings Plan; Xerox Corporation
Retirement Income Guarantee Plan; Profit Sharing Plan of Xerox
Corporation and the Xerographic Division, A.C.T.W.U, AFL-CIO; and the
Retirement Income Guarantee Plan of Xerox Corporation and the
Xerographic Division, A.C.T.W.U, AFL-CIO (collectively, the Plans)
Located in Stamford, Connecticut; Exemption
[Prohibited Transaction Exemption 94-83; Exemption Application Nos. D-
9778 through D-9781]
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 guarantees (the Guarantees) by the Xerox
Corporation, the sponsor of the Plans, of amounts payable to the Plans
by the Aurora National Life Assurance Company with respect to five
group annuity contracts (the GACs) originally issued by Executive Life
Insurance Company of California (Executive Life); provided that the
following conditions are satisfied:
(A) All terms and conditions of such transactions are no less
favorable to the Plans than those which the Plans could obtain in
arm's-length transactions with unrelated parties;
(B) The Guarantees are made solely with respect to the amounts
which are due the Plans, but unpaid, with respect to the GACs; and
(C) The Settlement Agreement described within the Summary of Facts
and Representations, in the notice of proposed exemption, is approved
by the U.S. District Court, District of Connecticut.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on September 30, 1994 at 59
FR 50011.
Written Comments: The Department received 16 written comments and
no requests for a hearing. Two of the comments requested additional
information, which was provided by telephone by a representative of the
Department. Twelve of the comments did not address substantively the
transactions addressed by the proposed exemption. The remaining two
comments addressed substantive issues relating to the proposed
exemption:
1. One comment raised issues which are summarized as follows: (a)
The Plans continue to lose earning opportunities on the assets invested
in the GACs until 1999; (b) The Plans' participants have incurred
administrative and litigation expenses related to the proposed
transaction; (c) The Employer's profitability is affected by the
subject transactions; (d) The proposed transaction represents an
estimated loss of 15 percent of the Plans' principal investment in the
GACs; and (e) The Plans will have earned no income on their investments
in the GACs.
In a written response, the Xerox Corporation (the Applicant) notes
that the comment raises questions, and appears to constitute an
objection, with respect to the Applicant's entire two-part remedy
proposed for the problems resulting from the conservatorship of
Executive Life. This two-part remedy consists of (1) an up-front cash
payment, and (2) the proposed Guarantees pursuant to the Settlement
Agreement. The Applicant emphasizes that the proposed exemption relates
solely to the proposed Guarantees, and not to the entire two-part
remedy. Since the comment addresses the entire remedy as a whole, the
Applicant maintains that the comment is not relevant to the proposed
exemption, which involves only the Guarantees. The Applicant states
that prior to the Settlement Agreement's approval by the Federal
District Court for the District of Connecticut (the Court), affected
Plan participants were duly notified and afforded ample opportunity to
comment on the proposed Settlement Agreement. In response to
approximately 32,000 notices mailed to affected Plan participants
publicizing the settlement's terms, in addition to newspaper reports,
the Applicant states that only three objections were received. The
Applicant represents that in its hearing on September 8, 1994, the
Court determined that the Settlement Agreement was ``fair, reasonable
and adequate''. In conclusion, the Applicant states that the comment is
neither timely, nor relevant to the exemption request, nor in keeping
with the judgment of the Court which has considered this matter.
In specific response to the comment's point relating to litigation
expenses, the Applicant states that fees and administrative costs with
respect to the lawsuit resulting in the Settlement Agreement will be
paid out of funds transferred by the Applicant to an escrow account. In
specific response to the comment's point relating to loss of principal,
the Applicant states that the comment is wrong factually: The Applicant
represents that the proposed two-part remedy will protect 100 percent
of the face value of the GACs as of April 1, 1991, consisting of all
principal investments plus interest accrued at the rates guaranteed by
the GACs, less previous withdrawals.
2. The other comment objected to the proposed transaction because
of the commenter's opinion that it would wrongfully permit Xerox
Corporation to reinstate the principal investments in the GACs by 1999
while depriving the Plans' participants of any interest on such funds.
The commenter maintained that the proposed transaction rewards Xerox
Corporation for faulty investment strategy and violations of its
fiduciary duties.
In a written response to this comment, the Applicant notes that,
like the previous comment, it raises questions about the Applicant's
entire two-part remedy as a whole, rather than the proposed exemption,
which relates solely to the proposed Guarantees pursuant to the
Settlement Agreement. The Applicant maintains that since the comment
addresses the entire proposed remedy, the comment is not relevant to
the proposed exemption. As in response to the prior comment, the
Applicant states that before the Settlement Agreement was approved by
the Court, affected Plan participants were duly notified and afforded
ample opportunity to comment on the proposed Settlement Agreement. The
Applicant again notes that in its hearing on September 8, 1994, the
Court determined that the Settlement Agreement was ``fair, reasonable
and adequate''. The Applicant maintains in conclusion that the comment
is neither timely, nor relevant to the exemption request, nor in
keeping with the judgment of the Court which has considered this
matter.
3. The Department notes that, although all aspects of the
Settlement Agreement were disclosed in the Applicant's exemption
application, the exemption request was specifically limited to the
provision of the Guarantees by the Xerox Corporation. Accordingly, the
Department considered the request in the context of a settlement
agreement that had been agreed to by the parties to the litigation and
approved by the U.S. District Court. In this regard, the Department
noted in the proposal that it was not proposing any relief for any
violation of Part 4 which may have arisen as a result of the
acquisition and holding of the GACs.
Accordingly, after consideration of the entire record, including
the comments and the Applicant's responses, the Department has
determined to grant the exemption as proposed.
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 or disqualified
person from certain other provisions to which the exemptions does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional rules. Furthermore, the
fact that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Signed at Washington, D.C., this 30th day of November, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-29834 Filed 12-2-94; 8:45 am]
BILLING CODE 4510-29-P
