[Federal Register Volume 60, Number 48 (Monday, March 13, 1995)]
[Notices]
[Pages 13457-13475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6118]
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DEPARTMENT OF LABOR
[Application No. D-09595, et al.]
Proposed Exemptions; Norwest Bank Minnesota, N.A., et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Norwest Bank Minnesota, N.A. Located in Minneapolis, MN
[Application No. D-09595]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).1
\1\For purposes of this exemption, reference to provisions of
Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
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Section I. Exemption for the In-Kind Transfer of Assets
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c) of the Code,
shall not apply, as of September 30, 1994, to the in-kind transfer of
assets of plans for which Norwest Bank Minnesota, N.A. or any of its
affiliates (collectively, the Bank) serves as a fiduciary (the Client
Plans), including plans established or maintained by the Bank (the Bank
Plans; collectively, the Plans), that are held in certain collective
investment funds (the CIFs) maintained by the Bank, in exchange for
shares of the Norwest Funds (the Funds), an open-end investment company
registered under the Investment Company Act of 1940 (the '40 Act), as
amended, for which the Bank acts as investment adviser, custodian, and
shareholder servicing agent, in connection with the termination of such
CIFs provided that the following conditions are met:
(a) No sales commissions or other fees are paid by a Bank Plan or a
Client Plan in connection with the purchase of shares of the Funds
through the in-kind transfer of CIF assets and no redemption fees are
paid in connection with the sale of such shares of the Funds.
(b) All of the assets of a Bank Plan or a Client Plan that are held
in the CIFs are transferred in-kind to the Funds in exchange for shares
of such Funds. A Plan not electing to participate in the Funds receives
a cash payment representing a pro rata portion of the assets of the
terminating CIF before the final liquidation takes place.
(c) Each Bank Plan and each Client Plan receives shares of the
Funds which have a total net asset value that is equal to the value of
such 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 the procedures set forth in Rule 17a-7(b) (Rule 17a-7) under the
Investment Company Act of 1940 (the '40 Act), as
[[Page 13458]] amended, and the procedures established by the Funds
pursuant to Rule 17a-7 for the valuation of such assets. Such
procedures must require that all securities for which a current market
price cannot be obtained by reference to the last sale price for
transactions reported on a recognized securities exchange or NASDAQ be
valued based on an average of the highest current independent bid and
lowest current independent offer, as of the close of business on the
Friday preceding the weekend of the CIF transfers, determined on the
basis of reasonable inquiry from at least three sources that are
broker-dealers or pricing services independent of the Bank.
(d) A second fiduciary who is independent of and unrelated to the
Bank (the Second Fiduciary) receives advance written notice of the in-
kind transfer of assets of the CIFs and full written disclosure, which
includes but is not limited to, the following information concerning
the Funds:
(1) A current prospectus for each portfolio of the Funds in which a
Bank Plan or a Client Plan is considering investing;
(2) A statement describing (i) the fees for investment advisory or
similar services that are to be credited back to a Client Plan, (ii)
the fees retained by the Bank for Secondary Services, as defined in
paragraph (g) of Section III below, and (iii) all other fees to be
charged to or paid by the Bank Plan or the Client Plan and by such
Funds to the Bank or to unrelated third parties. Such statement also
includes the nature and extent of any differential between the rates of
the fees;
(3) The reasons why the Bank considers such investment to be
appropriate for the Bank Plan or the Client Plan;
(4) A statement describing whether there are any limitations
applicable to the Bank with respect to which assets of a Bank Plan or a
Client Plan may be invested in the relevant 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, if granted.
(e) On the basis of the foregoing information, the Second Fiduciary
authorizes in writing the in-kind transfer of the Bank Plan's or the
Client Plan's CIF assets to a Fund in exchange for shares of the Funds,
the investment of such assets in corresponding portfolios of the Funds,
the fees received by the Bank in connection with its services to the
Funds and, in the case of a Client Plan only, the purchase by such
Client Plan of additional shares of the corresponding Funds with the
fees credited back to the Client Plan by the Bank. Such authorization
by the Second Fiduciary will be consistent with the responsibilities,
obligations and duties imposed on fiduciaries under Part 4 of Title I
of the Act.
(f) For all subsequent transfers of CIF assets to a Fund following
the publication of the proposed exemption in the Federal Register, the
Bank sends by regular mail to each affected Bank Plan and Client Plan a
written confirmation, not later than 30 days after the 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) of the '40 Act;
(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.
(g) For all subsequent transfers of CIF assets to a Fund following
the publication of the proposed exemption in the Federal Register, the
Bank 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;
(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.
(h) The conditions set forth in paragraphs (c), (d), (e), (o) and
(p) of Section II below as they would relate to all Plans are
satisfied.
Section II. Exemption for the Receipt of Fees
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c) of the Code,
shall not apply, as of November 11, 1994, to (1) the receipt of fees by
the Bank from the Funds for acting as an investment adviser to the
Funds; and (2) the receipt and proposed retention of fees by the Bank
from the Funds for acting as custodian or shareholder servicing agent
to the Funds, as well as for any other services provided to the Funds
which are not investment advisory services (i.e., the Secondary
Services), in connection with the investment in shares of the Funds by
the Client Plans, other than the Bank Plans, for which the Bank serves
as fiduciary.
The aforementioned transactions are subject to the following
conditions:
(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 the Client Plans for shares in
the Funds is the net asset value per share, as defined in paragraph (d)
of Section III, 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 the Bank nor an affiliate, including any officer or
director, purchases from or sells to any of the Client Plans shares of
any of the Funds.
(d) The combined total of all fees received by the Bank for the
provision of services to the Client Plans, and in connection with the
provision of services to any of the Funds in which the Client Plans
invest, are not in excess of ``reasonable compensation'' within the
meaning of section 408(b)(2) of the Act.
(e) The Bank does not receive any fees payable, pursuant to Rule
12b-1 of the '40 Act (the 12b-1 Fees) in connection with the
transactions involving the Funds.
(f) 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 the Bank, including any
investment advisory fees paid by the Bank to third party sub-advisers,
within not more than one business day after the receipt of such fees by
the Bank.
(g) The Second Fiduciary receives, in advance of investment by a
Client Plan in the Funds, full and detailed written disclosure of
information concerning the relevant Funds as set forth above in Section
I(d).
(h) On the basis of the information described in paragraph (d) of
Section I, the Second Fiduciary authorizes in writing:
(1) The ongoing investment of assets of the Client Plans in shares
of the Funds, in connection with the transactions set forth in Section
II;
(2) The investment portfolios of the Funds in which the assets of
the Client Plans may be invested; and
(3) The fees to be paid by the Funds in which Client Plans invest
to the Bank [[Page 13459]] and the purchase of additional shares of the
Funds by the Client Plan with the fees credited to the Client Plan by
the Bank.
(i) The authorization referred to in paragraph (h) is terminable at
will by the Client Plan, without penalty to the Client Plan. Such
termination will be effected by the Bank selling the shares of the
Funds held by the affected Client Plan within the period of time
specified by the Client Plan but not more than one business day
following receipt by the Bank from the Second Fiduciary, of the
termination form (the Termination Form), as defined in paragraph (h) of
Section III below, or any other written notice of termination; provided
that, if due to circumstances beyond the control of the Bank, the sale
cannot be executed within one business day, the Bank shall have one
additional business day to complete such sale.
(j) In the event of an increase in the contractual rate of any fees
paid by the Funds to the Bank regarding investment advisory services or
fees for similar services that had been authorized by the Second
Fiduciary in accordance with paragraph (h) of this Section II, the Bank
provides written notice to the Second Fiduciary in a prospectus for the
Funds or otherwise, of any increases in the contractual rate of fees
charged by the Bank to the Funds for investment advisory services even
though such fees will be credited to the Client Plans as required by
paragraph (f) of Section II.
(k) In the event of an additional Secondary Service, as defined in
paragraph (g) of Section III below, provided by the Bank to the Funds
for which a fee is charged or an increase in the contractual rate of
any fee due from the Funds to the Bank for any Secondary Service, as
defined in paragraph (g) of Section III below, that results from an
increase in the rate of such fee or from the decrease in the number or
kind of services performed by the Bank 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 paragraph (h) of this
Section II, the Bank will, at least 30 days in advance of the
implementation of such additional service for which a fee is charged or
fee increased, provide written notice to the Second Fiduciary
explaining the nature and amount of the additional service for which a
fee is charged or the nature and amount of the increase in fees of the
affected Fund. Such notice will be accompanied by the Termination Form,
as defined in paragraph (h) of Section III below.
(l) The Second Fiduciary is supplied with a Termination Form at the
times specified in paragraphs (k) and (m) of this Section II, which
expressly provides an election to terminate the authorization,
described above in paragraph (h) of this Section II, with instructions
regarding the use of such Termination Form including statements that:
(1) The authorization is terminable at will by any of the Client
Plans, without penalty to such Plans. The termination will be effected
by the Bank selling the shares of the Funds held by the Client Plans
requesting termination within the period of time specified by the
Client Plan, but not later than one business day following receipt by
the Bank from the Second Fiduciary of the Termination Form or any
written notice of termination; provided that if, due to circumstances
beyond the control of the Bank, the sale of shares of such Client Plans
cannot be executed within one business day, the Bank shall have one
additional business day to complete such sale; and
(2) Failure by the Second Fiduciary to return the form on behalf of
the 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
and will result in the continuation of the authorization, as described
in paragraph (h) of this Section II, of the Bank to engage in the
transactions on behalf of the Client Plan.
(m) The Second Fiduciary is supplied with a Termination Form, at
least once in each calendar year, beginning with the calendar year that
begins after the date of 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 paragraph (m) of this Section II,
sooner than six months after such Termination Form is supplied pursuant
to paragraph (k) of this Section II, except to the extent required by
said paragraph (k) of this Section II to disclose an increase in fees.
(n) On an annual basis, the Bank will provide 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
which contains a description of all fees paid by the Funds to the Bank.
(2) A copy of the annual financial disclosure report prepared by
the Bank which contains information about the portfolios of the Funds
and includes audit findings of an independent auditor (the Auditor)
within 60 days of the preparation of the report.
In addition, the Bank will respond to oral or written responses to
inquiries of the Second Fiduciary as they arise.
(o) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Client Plans than dealings between the
Funds and other shareholders holding the same class of shares as the
Client Plans.
(p) The Bank maintains for a period of six years the records
necessary to enable the persons described below in paragraph (q) to
determine whether the conditions of this exemption have been met,
except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Bank, the
records are lost or destroyed prior to the end of the six year period,
and
(2) No party in interest 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 (q) of Section II below; and
(q)(1) Except as provided in paragraph (p)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (p) are unconditionally available at their
customary location for examination during normal business hours by--
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC);
(ii) Any fiduciary of a Client Plan who has authority to acquire or
dispose of shares of the Funds owned by the Client Plan, or any duly
authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of a Client Plan or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraphs (q)(1) (ii) and
(iii) shall be authorized to examine trade secrets of the Bank, or
commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Bank'' means Norwest Bank Minnesota, N.A. and any
affiliate of the Bank, as defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of the Bank includes--
(1) Any person directly or indirectly through one or more
intermediaries, [[Page 13460]] controlling, controlled by, or under
common control with the Bank. (For purposes of this paragraph, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual.)
(2) Any officer, director, employee, relative or partner in such
person, and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(c) The term ``Fund'' or ``Funds'' refers to the Norwest Funds or
to any diversified open-end investment company or companies registered
under the '40 Act for which the Bank serves as an investment adviser
and may also serve as a custodian, shareholder servicing agent,
transfer agent or provide some other ``Secondary Service'' (as defined
below in paragraph (g) of this Section IV) which as been approved by
such Funds.
(d) 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 chargeable to
each portfolio, by the number of outstanding shares.
(e) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or 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.
(f) The term ``Second Fiduciary'' means a fiduciary of a plan who
is independent of and unrelated to the Bank. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to the Bank if:
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by, or is under common control with the Bank;
(2) Such Second Fiduciary, or any officer, director, partner,
affiliate, employee, or relative of such Second Fiduciary is an
officer, director, partner or employee of the Bank 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 Bank Plans, the
Second Fiduciary may receive compensation from the Bank 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 such transactions.
With the exception of the Bank Plans, if an officer, director,
partner, affiliate or employee of the Bank (or 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
adviser, (ii) the approval of any such purchase or sale between the
Client Plan and the Funds, and (iii) the approval of any change of fees
charged to or paid by the Client Plan, any of the transactions
described in Sections I and II above, then paragraph (f)(2) of this
Section IV, shall not apply.
(g) The term ``Secondary Service'' means a service, other than
investment advisory or similar services which is provided by the Bank
to the Funds, including, but not limited to, custodial or shareholder
services. However, the term ``Secondary Service'' does not include any
brokerage services provided by the Bank to the Funds.
(h) The term ``Termination Form'' means the form supplied to the
Second Fiduciary at the times specified in paragraphs (i), (k), (l),
and (m) of Section II which expressly provides an election to the
Second Fiduciary to terminate on behalf of a Plan the authorization
described in paragraph (h) of Section II. Such Termination Form is to
be used at will by the Second Fiduciary to terminate such authorization
without penalty to the Plan and to notify the Bank in writing to effect
such termination by selling the shares of the Fund held by the Plan
requesting termination not later than one business day following
receipt by the Bank of written notice of such request for termination;
provided that if, due to circumstances beyond the control of the Bank,
the shares of such Client Plans cannot be executed within one business
day, the Bank shall have one additional business day to complete such
sale.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of September 30, 1994 with respect to the transactions described in
Section I and as of November 11, 1994 with respect to the transactions
described in Section II.
Summary of Facts and Representations
1. The parties or entities involved in the subject transactions are
described as follows:
a. The Bank and its affiliates are direct or indirect wholly owned
subsidiaries of Norwest Corporation, a bank holding company. The Bank
is a national bank that is principally located in Minneapolis,
Minnesota. It serves as trustee, directed trustee, investment manager
or custodian to approximately 7,500 employee benefit plans. As
custodian or directed trustee of a plan, the Bank has custody of a
Client Plan's assets but it has no duty to review investments or make
investment recommendations with respect to such assets. Instead, it
must act only as directed by an authorized third party. When the Bank
serves as a discretionary trustee or investment manager of a Client
Plan, it generally invests, with the sponsor's approval, the assets of
a Client Plan account in a series of CIFs it manages. The Bank may also
provide investment advice to other fiduciaries who have investment
discretion over a Client Plan's assets or manage an individual
investment portfolio for a Client Plan.
As of December 31, 1992, the Bank had discretionary and
nondiscretionary pension and welfare plan assets under management
totaling $16.25 billion. Of this total, $3.2 billion of pension and
welfare plan assets were held in 30 CIFs maintained by the Bank. Also
as of December 31, 1992, the Bank had total discretionary assets under
management for all trust clients, CIFs and investment advisory clients
of approximately $22.35 billion and total trust assets (both
discretionary and nondiscretionary) of approximately $90.75 billion.
With respect to the CIFs discussed herein, the Bank receives a
single, Plan-level management fee negotiated with each Client Plan. The
typical annualized fee range for the management fee is from .25 percent
to 1.50 percent of invested Client Plan assets. The management fee is
dependent upon such factors as asset class and negotiation. The Bank
charges a minimum fee of $500 to $1,000 for small accounts but it
charges no fee for Secondary Services (e.g., shareholder and custodial
services) provided to a Client Plan.
b. The Funds individually constitute a separate investment
portfolio or a series of portfolios having a separate prospectus and
representing a distinct investment vehicle. In the aggregate, the Funds
comprise a Delaware business trust currently registered as an open-end
investment company under the '40 Act. The Funds include seventeen new
portfolios ranging from money market funds to bond funds. In some
situations, the shares of a Fund will be divided into different classes
and charge different levels of expenses. Except for these differences,
the shares of each Fund will [[Page 13461]] represent the same
proportionate interest in the assets of that Fund.
c. The Board of Trustees (the Trustees) manages the Funds,
negotiates the investment advisory contracts and contracts for
Secondary Services described below. A majority of the Trustees are
independent of the Bank. The Trustees are elected by the shareholders
of the Funds, except that in certain cases following a vacancy on the
Board of Trustees, the Trustees can appoint a new Trustee without
advance shareholder approval.
The Bank serves as the investment adviser to each Fund and receives
investment advisory fees from the Funds. The Bank also serves as
custodian, shareholder servicing agent and transfer agent to the Funds
and is compensated by the Funds for the Secondary Services it renders
to such Funds in these capacities.
d. Forum Financial Services (FFS), a Delaware corporation which is
wholly independent of the Bank, serves as distributor of the shares of
the Funds and provides administrative and accounting services to the
Funds. FFS is compensated and reimbursed by the Funds for certain
expenses it incurs in performing these functions.
e. The Bank Plans consist of the Norwest Corporation Master Savings
Trust (the Savings Trust) and the Norwest Corporation Master Pension
Trust (the Pension Trust). As of June 30, 1994, the Savings Trust had
total assets of $747,976,484 and two participating Bank Plans, the
Norwest Corporation Savings-Investment Plan (the Norwest Savings Plan)
and the Ford Bank Group, Inc. Savings Plan (the Ford Savings Plan).
Also, as of June 30, 1994, the Norwest Savings Plan and the Ford
Savings Plan had 32,259 participants and 616 participants,
respectively.
The Pension Trust holds the assets of the Norwest Corporation
Pension Plan (the Norwest Plan), the First Minnesota Employee's Pension
Plan (the First Minnesota Plan) and the United Bank of Colorado, Inc.
Retirement Income Plan (the United Bank Plan). As of June 30, 1994, the
Pension Trust had total assets of $625,781,748. As of January 1, 1994,
the Norwest Pension Plan had 27,725 participants, the First Minnesota
Plan had 868 participants and the United Bank Plan had 3,437
participants.
f. The Client Plans include various pension, profit sharing, and
stock bonus plans as well as voluntary employees' beneficiary
associations, supplemental unemployment benefit plans, simplified
employee benefit plans, Keogh Plans and IRAs for which the Bank
presently serves (or will serve in the future) as a fiduciary
(including those plans whose assets are currently invested in the
Bank's CIFs).
g. Wilmington Trust Company (WTC) of Wilmington, Delaware, has been
retained by the Bank to serve as the Second Fiduciary for the Bank
Plans proposing to invest in the Funds. WTC, the primary subsidiary of
Wilmington Trust Corporation, was established in 1903. WTC is wholly
independent of the Bank and its affiliates.
As of December 31, 1993, WTC exercised discretionary investment
authority over approximately $25.7 billion of fiduciary assets,
including approximately $14.5 billion of assets of plans covered by the
Act and non-qualified employee benefit plans. As of December 31, 1993,
WTC also served as directed trustee, agent or custodian with respect to
more than $2.5 billion of assets of plans covered by the Act and non-
qualified employee benefit plans.
Description of the Transactions
2. The Bank maintains CIFs in which both Bank Plans and Client
Plans have invested. To better serve the interests of these Plans, the
Bank has decided, subject to approval of such Plans, to terminate
twelve of its CIFs and transfer the assets currently invested in the
CIFs to the corresponding Funds. The Bank notes that mutual funds are
subject to supervision by the SEC, place greater emphasis on
participant disclosure than do bank CIFs and provide an effective
mechanism for disclosure. Moreover, the Bank represents that Plan
sponsors and participants will be able to monitor more easily the
performance of their investments in the Funds on a daily basis since
information concerning investment performance of the Funds will be
available in daily newspapers of general circulation.
Accordingly, the Bank requests retroactive exemptive relief with
respect to the transfer of a Bank Plan's or a Client Plan's assets from
certain terminating CIFs to the Funds. In addition, the Bank requests
prospective exemptive relief for the receipt of fees from the Funds in
connection with the investment of assets of Client Plans for which the
Bank acts as a trustee, directed trustee, investment manager, or
custodian, in shares of the Funds in instances where the Bank is an
investment adviser, custodian, and shareholder servicing agent for the
Funds.\2\ The exemptive relief provided for the receipt of fees would
cover Client Plans only, specifically those Plans for which the Bank
exercises investment discretion as well as Client Plans where
investment decisions are participant-directed by a Second Fiduciary.
\2\The Bank is not requesting an exemption for investments in
the Funds by the Bank Plans. The Bank represents that Bank Plans may
acquire or sell shares of the Funds pursuant to Prohibited
Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977). PTE
77-3 permits the acquisition or sale of shares of a registered,
open-end investment company by an employee benefit plan covering
only employees of such investment company, employees of the
investment adviser or principal underwriter for such investment
company, or employees of any affiliated person (as defined therein)
of such investment adviser or principal underwriter, provided
certain conditions are met. The Department expresses no opinion on
whether any transactions with the Funds by the Bank Plans would be
covered by PTE 77-3.
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In-Kind Transfers to the Funds by Bank Plans and Client Plans
3. During the weekends of September 30, 1994-October 2, 1994 and
November 11-13, 1994, the Bank began transferring the assets of 12
terminated CIFs to the Funds. Specifically, during the weekend
beginning September 30, 1994, the Bank transferred the assets of two
CIFs, namely, ``Stock Fund S'' and ``Bond Fund R'' to the ``Contrarian
Stock Fund'' and the ``Total Return Bond Fund.'' Then, during the
weekend of November 11-13, 1994, the Bank terminated the assets of the
ten remaining CIFs. Once terminated, the assets from these CIFs were
transferred to fifteen ``Advantage Funds'' portfolios which also
comprise the Funds. Following the transfers, the Bank commenced
offering shares in the Funds to the Bank Plans and the Client Plans.\3\
\3\At present, the Bank does not intend to terminate or convert
two other CIFs, the ``Short Term Investment Fund'' and the ``Stable
Return Fund.'' Nevertheless, if at some future date the Bank were to
decide to terminate and convert these two CIFs as well, the Bank
represents that it will comply with the conditions of the final
exemption and it will value the assets of both the CIFs and the
transferee Funds in accordance with Rule 17a-7 of the '40 Act, as
amended, and the procedures established by the Funds pursuant to
Rule 17a-7 for the valuation of such assets. (See Representation 3.)
Although the Bank does not currently anticipate that either of
these CIFs will invest in the Funds, if such an investment were to
be made, the fee arrangements will be structured to comply with
Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732, April 8,
1977). In pertinent part, PTE 77-4 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 of the investment company.
The Bank also represents that it will continue to comply with
PTE 77-4 in connection with the crediting of fees paid to it or its
affiliates by the Total Return Bond Fund and the Contrarian Stock
Fund.
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To the extent legally permissible, all transfers were effected in-
kind. However, because certain CIFs had already invested in other
mutual funds and transfers of those mutual fund investments to the
Funds would violate federal securities laws applicable to the
[[Page 13462]] mutual funds, the Bank decided to liquidate those
investments on the date of the transfer. The Funds then purchased
substantially the same securities held by the mutual funds in whose
shares the CIFs had previously been invested.
The Bank represents that the transfers of assets were conducted in
accordance with Rule 17a-7 of the '40 Act and the procedures
established by the Funds pursuant to Rule 17a-7 for the valuation of
such assets so as to make the transactions ministerial and as
nondiscretionary in nature as possible.\4\ In this regard, the asset
transfers to the funds occurred over one or more weekends selected by
the Trustees using market values as of the close of business on the
preceding Friday. Thus, the transfers of the securities were completed
on Friday prior to the opening of business on Monday, the next business
day. As of that day, a Bank Plan or a Client Plan whose assets were
transferred from a CIF would hold shares in the corresponding Fund. The
value of the Plan's assets in the Fund would be at the same aggregate
value as the units held in the CIF as of the close of trading on the
preceding Friday. The value of a CIF's portfolio was determined by FFS
in coordination with the Bank. In this regard, it is represented that
the current market price for specific types of CIF securities involved
in the in-kind transfers was determined as follows:
\4\In pertinent part, Rule 17a-7 mandates that such transactions
be effected at the ``independent current market price'' for such
security, involve no brokerage commissions or other remuneration,
and comply with valuation procedures adopted by the board of
directors of the investment company to ensure that all requirements
of the Rule are satisfied.
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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); or if there were no reported transactions in
the Consolidated System that day, the average of the highest
independent bid and the lowest independent offer for such security
(reported pursuant to Rule 11Ac1-1 under the '34 Act), as of the
close of business; or
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; or if there were no reported transactions on
such exchange that day, the average of the highest independent bid
and lowest independent offer on such exchange as of the close of
business; or
c. If the security was not a reported security and was quoted in
the NASDAQ system, then the average of the highest independent bid
and lowest independent offer reported on Level 1 of NASDAQ as of the
close of business; or
d. For all other securities (i.e., securities not listed on an
exchange and for which no bid and ask quotations are readily
available), valuation determined by (1) averaging prices obtained
from at least three independent matrix pricing services\5\ or (2)
averaging bid and ask quotations as of the close of trading on the
Friday preceding the in-kind transfers from three independent
brokers.
\5\According to the applicant, the SEC has permitted securities
not listed on an exchange and for which no bid and ask quotations
are readily available to be valued by a matrix pricing methodology.
The applicant explains that matrix pricing methodology is intended
to approximate what the actual market values of securities would be
if an active secondary market for those securities exists and takes
into account a variety of factors such as the most recent market
activity with respect to a subject security, liquidity, yield,
rating, type of industry, coupon rate, maturity and economic
conditions. If a matrix pricing service is used, the applicant
explains that the pricing entity will not be affiliated with the
Bank or the Funds.
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In essence, the Bank represents that the transfer transactions were
ministerial, performed in accordance with procedures prescribed by Rule
17a-7 and previously approved by the disinterested members of the
Fund's Board of Trustees. The Bank also represents that the pricing of
the securities was accomplished by reference to independent sources
such that the transaction would result in an affected Bank Plan or
Client Plan holding mutual fund shares of equal aggregate value to the
previously-held CIF units. No sales commissions or redemption fees were
or would be paid by a Bank Plan or a Client Plan in connection with
investments of shares in the Funds. In addition, no fees for
distribution expenses pursuant to Rule 12b-1 under the '40 Act were or
would be paid to FFS or the Bank by a Bank Plan or a Client Plan with
respect to transactions involving the Funds. Any fees charged by the
independent brokers for bid and ask prices were the responsibility of
the Bank. Further, the Bank represents that neither it nor its
affiliates, including any officer or director of the Bank, had
purchased or would purchase from or sell to any Bank Plan or Client
Plan shares of any of the Funds.\6\
\6\The Department notes that this representation is not intended
to limit the ability of Client Plans to deal with the Bank's account
representatives on matters involving the funds and is not meant to
prohibit purchases or sales of shares of the Funds that are placed
through personnel of the Bank when such personnel are acting as
agents for the Client Plans.
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4. As stated above, prior to investing a Plan's assets in the
Funds, the Bank was required to obtain the affirmative written approval
of an independent Second Fiduciary who is typically, in the case of a
Client Plan, the named fiduciary, trustee or sponsoring employer. In
the case of a Bank Plan, the Bank retained the services of WTC to
approve the in-kind transfer of assets of such Plan to the Funds.
The Bank provided advance written notice of the in-kind transfer of
assets of the CIFs and full written disclosure of information
concerning the Funds to the Second Fiduciary of a Bank or Client Plan.
In this regard, the Bank provided the Second Fiduciary with a current
prospectus for each portfolio of the Funds in which a Bank or Client
Plan is investing. The disclosure statement described the fees for
investment advisory or similar services to be credited back to the
Client Plan, including any fees for Secondary Services and all other
fees to be charged to or paid by a Bank Plan, a Client Plan or by the
Funds to the Bank. Such disclosure included the nature and extent of
any differential between the rates of fees. The disclosure statement
also explained why the Bank believed that the investment in the Funds
by a Bank Plan or a Client Plan was appropriate. As applicable, the
disclosure statement further described any limitations on the Bank
regarding which Plan assets may be invested in shares of the Funds and,
if so, the nature of such limitations.\7\ Upon request of the Second
Fiduciary, the Bank is required to provide a copy of the proposed
exemption and/or a copy of the final exemption, if granted.
\7\Section II(d) of PTE 77-4 requires, among other things, that
an independent plan fiduciary receive a current prospectus issued by
the investment company and a full and detailed written disclosure of
the investment advisory and other fees charged to or paid by the
plan and the investment company, including a discussion of whether
there are any limitations on the fiduciary/investment adviser with
respect to which plan assets may be invested in shares of the
investment company and, if so, the nature of such limitations.
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On the basis of information noted above, the Second Fiduciary could
authorize, in writing, that the Bank transfer a Bank Plan's or a Client
Plan's CIF assets to a Fund in exchange for shares of the Funds and
invest the Plan's assets in corresponding portfolios of the Funds. For
Client Plans, the written authorization also allowed the Bank to
receive fees from the Funds and to purchase additional shares of the
Funds with the fees credited back to the Client Plan by the Bank.
5. The Bank anticipated that the transfer of assets from the CIFs
to the Funds would be accomplished in stages as sufficient numbers of
approvals were received from Second Fiduciaries.\8\ If
[[Page 13463]] the Second Fiduciary had not provided the Bank with
approval of investment in the Funds by the time the last transfer of
assets from a terminating CIF to a Fund was to occur, a pro rata
portion of the assets of the terminating CIF was distributed in cash to
the trust account of a Bank Plan or a Client Plan before the final
liquidation of the CIF took place.
\8\According to the applicant, the conversion of the CIFs into
the Funds could be accomplished in stages for reasons of efficiency
and economy. Given the large number of Plans that had interests in
the CIFs, the applicant anticipated that it would take an extended
period of time to gather all of the necessary consents from Second
Fiduciaries. If consent was given promptly, the applicant saw no
reason to delay a Plan's investing in the Funds since a Second
Fiduciary would desire the timely investment of the Plan's assets.
Further, the applicant did not believe a staggered conversion
would operate to the detriment of a Plan. This was because all asset
transfers would be effected at fair market value and proratably
among the Plans. Therefore, Plans would have the same asset value
immediately before and after the conversion.
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6. Following each in-kind transfer, the Bank provided each affected
Plan with a written confirmation statement. This statement set forth
the number of CIF units held by the Plan immediately before the
conversion, the related per unit value and the total dollar amount of
the CIF units. The confirmation statement also included the number of
shares in the Funds that were held by the Bank Plan or the Client Plan
following the conversion, the related per share net asset value and the
total dollar amount of the shares. The confirmation statement further
disclosed (a) the identity of each security that was valued for
purposes of the transaction in accordance with Rule 17a-7(b)(4); (b)
the price of each such security for purposes of the transaction; and
(c) the identity of each pricing service or market maker consulted in
determining the value of such securities.
For all subsequent transfers of CIF assets to a Fund following the
publication of the proposed exemption in the Federal Register, the Bank
will send by regular mail to each affected Bank Plan and Client Plan a
written confirmation, not later than 30 days after the completion of
the transaction, containing the following information: (a) The identity
of each security that was valued for purposes of the transaction in
accordance with Rule 17a-7(b)(4) of the '40 Act; (b) the price of each
such security involved in the transaction; and (c) the identity of each
pricing service or market maker consulted in determining the value of
such securities. In addition, for all subsequent transfers of CIF
assets to a Fund following the publication of the proposed exemption in
the Federal Register, the Bank will send by regular mail, no later than
90 days after completion of each transfer, a written confirmation that
contains the following information: (a) 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 (b) 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.
Representations of the Second Fiduciary for the Bank Plans Regarding
the In-Kind Transfers
7. As stated above, the Bank retained WTC as the Second Fiduciary
to oversee the in-kind transfers of CIF assets to the Funds as such
transactions affect the Bank Plans. In such capacity, WTC represented
that it understood and would accept the duties, responsibilities and
liabilities in acting as a fiduciary for the Bank Plans, including
those imposed on fiduciaries under the Act.
WTC stated that it considered the effect of the in-kind transfer
transactions on the Bank Plans and noted that this investment
opportunity was being offered to Client Plans on the same terms and
conditions as the Bank Plans. Based on the foregoing, WTC believed that
the terms of the in-kind transfers were fair to participants of the
Bank Plans and comparable to and no less favorable than the terms that
would have been reached among unrelated third parties. Accordingly, WTC
represented that the in-kind transfer transactions were in the best
interest 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 was de minimus because the Funds 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., broader distribution permitted of the
Funds to different types of plans impacting positively on asset size of
the Funds and resulting in cost savings to shareholders) would more
than offset the impact of minimum additional expenses that may be borne
by the Bank Plans.
In opining on the appropriateness of the in-kind transfers, WTC
represented that it conducted an overall review of the Bank Plans,
including the Bank Plan documents. WTC stated that it also examined the
total investment portfolios of the Bank Plans to ascertain whether or
not the Bank Plans were in compliance with their investment objectives
and policies. Further, WTC 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, WTC stated
that it reviewed the diversification provided by the investment
portfolios of the Bank Plans. Based on its review and analysis of the
foregoing, WTC 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 flows, liquidity or diversification requirements
of the Bank Plans.
As Second Fiduciary, WTC represented that it was provided by the
Bank with the confirmation statements described in Representation 6. In
addition, WTC stated that it supplemented its findings following review
of the post-transfer account information to confirm whether or not the
in-kind transfer transaction 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. WTC 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 a Client Plan to Invest in the Funds
8. Besides the one-time, in-kind transfer of assets from the CIFs
to a comparable Fund, a Client Plan's assets may be invested in the
Funds in three other ways. First, a Client Plan may purchase shares in
the Funds directly through the Bank. Second, the Bank may transfer a
Client Plan's assets from one Fund to another Fund. Third, the Bank may
effect a daily automated sweep of uninvested cash of a Client Plan into
one or more Funds designated by the Bank.9 However, all
investments [[Page 13464]] for Client Plans in the Funds must be made
pursuant to the Second Fiduciary's written authorization.
\9\The Bank represents that shares of the Funds may also be
purchased through CIFs that are not being terminated particularly if
the relevant CIF seeks to invest in cash equivalents such as those
being held in money market funds. The Bank explains that CIFs that
are not being terminated may invest in shares of mutual funds with
similar objectives or in money market funds. The Bank further
explains that the authorizations of Second Fiduciaries will be
contained in adoption agreements for these CIFs and purchases of
shares of the Funds for the CIFs will be effected in accordance with
PTE 77-4. The Department, however, offers no opinion on whether PTE
77-4 would apply to investments in the Funds by the non-terminating
CIFs.
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With respect to sweep services, where the Bank has investment
discretion over a Client Plan, it will not charge separately for the
provision of sweep services for uninvested cash balances. Instead, the
Bank will charge 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 the Bank does not have
investment discretion with respect to a Client Plan's assets invested
in the Funds, it may charge a separate fee for sweep services.10
\10\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 Bank
9. To avoid charging its existing Client Plans any additional Fund-
level fees in connection with investment in the Funds and to
accommodate the specific needs of certain new Client Plans, the Bank is
implementing a fee structure under which, depending on each Client
Plan's provisions and the fee arrangements negotiated with the Second
Fiduciary, the Plan will not be required to bear any part of the
investment advisory fees charged to the Funds by the Bank.11 This
fee structure is an alternative to the crediting mechanisms provided
under PTE 77-4, which is also available if (a) negotiated by the Second
Fiduciary (provided the conditions contained in PTE 77-4 are met) or
(b) investments in the Total Return Bond Fund and Contrarian Stock Fund
are involved.12
\11\The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
fiduciaries of the Client Plans from the general fiduciary
responsibility provisions of section 404 of the Act. Thus, the
Department cautions the fiduciaries of Client Plans investing in the
Funds that they have an ongoing duty under section 404 of the Act to
monitor the services provided to the Client Plans to assure that the
fees paid by the Client Plans for such services are reasonable in
relation to the value of the services provided. Such
responsibilities would include determinations that the services
provided are not duplicative and that the fees are reasonable in
light of the level of services provided.
\12\PTE 77-4 conditions exemptive relief on a plan not paying an
investment management, investment advisory or similar fee with
respect to the plan assets invested in such shares for the entire
period of such investment. Section II(c) of PTE 77-4 states that
this condition does not preclude the payment of investment advisory
fees by the investment company under the terms of an investment
advisory agreement adopted in accordance with section 15 of the '40
Act. Section II(c) states further that this condition does not
preclude the payment of an investment advisory fee by the plan based
on total plan assets from which a credit has been subtracted
representing the plan's pro rata share of investment advisory fees
paid by the investment company.
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For providing custody and shareholder services to the Funds, the
Bank is retaining fees for Secondary Services.13 With respect to
fees for Secondary Services, the Funds are paying the Bank monthly
transfer agency fees ranging from .10 percent to .30 percent of the
daily net asset value of the Funds.14 In some instances, fees for
Secondary Services may be determined on a per item or a per account
basis subject to a cap based on the Funds' daily net asset value.
\13\As stated above, the term ``Secondary Service'' does not
include brokerage services. In this regard, the applicant
anticipates that neither it nor its affiliates will provide
brokerage services to the Funds.
\14\The Bank represents that it will continue its practice of
waiving secondary fees for the Contrarian Stock Fund and the Total
Return Bond Fund. As mentioned previously, the Bank states that PTE
77-4 will apply to transactions involving these Funds.
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10. Under the fee structure, the Bank is charging its previously
agreed upon Plan-level fees to each Client Plan for services rendered
to such Plans as a trustee, directed trustee, investment manager or
custodian.\15\ All such fees are billed on a quarterly basis and may be
paid by the Client Plan sponsor rather than the Client Plan.
\15\The applicant represents that all fees paid by the Client
Plans directly to the Bank for services performed by the Bank are
exempt from the prohibited transaction provisions of the Act by
reason of section 408(b)(2) of the Act. The Department notes that to
the extent there are prohibited transactions under the Act as a
result of any services provided by the Bank directly to the Client
Plans which are not covered by section 408(b)(2) and the regulations
thereunder, no relief is being proposed herein for such
transactions.
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The Bank is entitled to receive Fund-level investment advisory fees
at a different rate for each Fund that is based on the average net
assets for the respective Fund. The investment advisory fees range from
.10 percent to .85 percent for the Advantage Funds. With respect to the
Ready Cash Investment Fund, the investment advisory fees are tiered.
For example, Client Plans investing in the Ready Cash Investment Fund
will pay the Bank .40 percent for the first $300 million of average
daily net assets of the Fund, .36 percent of the next $400 million and
.32 percent for any additional average daily net assets. (At present,
the Bank has agreed to waive any fees in excess of .30 percent of
average daily net assets until further notice.)
The investment advisory agreements and any changes in the fees will
be approved by a majority of the independent members of the Trust's
Board of Trustees. The investment advisory fees paid by each of the
Funds will be accrued on a daily basis and billed by the Bank to the
Funds at the beginning of the month following the month in which the
fees have accrued.
11. For most Client Plans,16 at the beginning of each month
and on the same business day as the receipt of such fees by the Bank,
the Bank will credit to each Plan such Plan's pro rata share of all
investment advisory fees charged by the Bank to the Funds17
(including investment advisory fees paid by the Bank to third party
subadvisers18) pursuant to a credit procedure (the Credit Method).
The Bank represents that the credited fees will be paid to the Client
Plan in cash, except that the credit may be effectuated through the
purchase of additional shares of the Funds if the Client Plan makes an
election. The purchase of additional shares will occur in lieu of the
cash credit on the same day that such credit would have been paid to
the Client [[Page 13465]] Plan. Again, all decisions regarding the use
of the Credit Method will be made by the Second Fiduciary at the time
such fiduciary provides its original written approval of the investment
of a Plan's assets in the Funds.
16As stated in Representation 9, a Second Fiduciary of a
Client Plan who is not interested in using the rebate mechanism
discussed in this proposed exemption will invest in the Funds
pursuant to PTE 77-4.
17As stated above, investments in the Total Return Bond
Fund and the Contrarian Stock Fund will be made in conformance with
PTE 77-4 and not in accordance with the rebate mechanism described
herein.
18The Bank notes that if the fee it credits to a Client
Plan already includes a third party sub-adviser's fee, no additional
credits will be required with respect to the portion of such fee
actually paid by the Bank to the sub-adviser.
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12. The Bank notes that Section II(c) of PTE 77-4 (id. at 18733)
prohibits the payment of double fees to the fiduciary/investment
adviser, by requiring that the plan not pay the investment adviser a
plan-level investment management or advisory-type fee with respect to
plan assets that are invested in mutual fund shares. The Bank also
explains that the condition against duplicate fees can be complied with
either by excluding the affected plan assets in determining the plan-
level investment management/advisory fee (the Offset Method) or by
subtracting a credit representing the plan's pro rata share of the
mutual fund- level advisory fee from the plan-level fee (the
Subtraction Method).
The Bank represents that the Credit Method satisfies the objective
of the double fee prohibition by netting out any additional fees
generated for the Bank by investment in the Funds. However, instead of
reducing the fees charged at the Plan-level, as is done by the Offset
and Subtraction Methods, the Bank states that the Credit Method
assesses full fees at both levels and then credits back the Fund-level
fees (with the exception of fees for Secondary Services) directly to
the Client Plan. Thus, on an ongoing basis, the Bank indicates that
Client Plans would pay only the fees previously agreed upon between the
Bank and the Second Fiduciary for investment management services
without regard to the conversions.
The Bank explains that the Subtraction Method would accomplish
essentially the same economic result as the Credit Method. However,
under the Subtraction Method, the Bank notes that its fees from the
Funds would be deducted from the amounts billed to the Client Plan by
the Bank for services, rather than being credited directly to the
Client Plan. The Bank states that the Credit Method will restore a
Client Plan's investment in the Funds (or overall investment position
if it receives the credit in cash) to the level it would have been if
the Client Plan had not been charged the Bank's Fund-level fees. The
Bank represents that the Credit Method will allow the Bank to maintain
its fiduciary fee schedules for its services to Client Plans which is
more efficient and less costly than a system employing credits against
fiduciary fees. Finally, the Bank explains that use of the Credit
Method will permit the Client Plans to retain their fiduciary fee
structures despite the change to a new investment vehicle.
Authorization Requirements for Client Plans
13. As stated in Representation 4, the transfer of a Bank Plan's or
a Client Plan's assets in exchange for shares of the Funds must be
preceded by the prior written authorization of the Second Fiduciary.
The Second Fiduciary must also approve the fees to be paid by the Funds
to the Bank and, in the case of a Client Plan, the purchase of
additional shares of such Funds by the Client Plan with fees credited
to the Client Plan by the Bank. In the case of the Bank Plans, the Bank
has represented that it intends to use PTE 77-3 with respect to the
purchase or sale of shares of the Funds by the Bank Plans and for the
receipt of compensation by the Bank.19 Accordingly, the following
authorization requirements would apply to Client Plans only.
19The Department is not expressing an opinion herein on
the applicability of PTE 77-3 with respect to ongoing investments by
the Bank Plans in shares of the Funds or to the receipt of fees from
the Funds by the Bank.
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For a Client Plan, the authorization is terminable at will by the
Second Fiduciary without penalty to the Client Plan upon receipt by the
Bank of written notice of termination. A Termination Form expressly
providing an election to terminate the authorization with instructions
on the use of the form will be supplied to the Second Fiduciary. In
general, the Termination Form will be furnished by the Bank to the
Second Fiduciary at least once every twelve months or whenever there
are increases in the contractual rates of fees due from the Funds to
the Bank, for Secondary Services. (See Representation 14.) Termination
will be effected by the Bank selling the shares of the Funds held by
the affected Client Plan within the period of time specified by the
Client Plan but not more than one business day following receipt by the
Bank from the Second Fiduciary, of the Termination Form or any other
written notice of termination; provided that, if due to circumstances
beyond the control of the Bank, the sale cannot be executed within one
business day, the Bank will have one additional business day to
complete such sale.
The Termination Form will instruct the Second Fiduciary of a Client
Plan that the authorization is terminable at will by the Plan, without
penalty to the Plan, upon receipt by the Bank of written notice from
the Second Fiduciary, and that failure to return the form will result
in the continued authorization of the Bank to engage in the subject
transactions on behalf of the Client Plan.
14. In the event of an increase in the contractual rate of any fees
paid by the Funds to the Bank regarding investment advisory services or
fees for similar services that had been authorized by the Second
Fiduciary, the Bank will provide written notice to the Second Fiduciary
in a prospectus for the Funds or otherwise, of any increases in the
rate of such fees even though these fees will be rebated by the Bank to
the Client Plans. Although the notice will explain the nature and
amount of the fee increase of the affected Fund or Funds, it will not
be accompanied by the Termination Form. This is because all increases
in investment advisory or similar fees will be subject to the annual
reauthorizations described in Representation 16.
15. In the event of an addition of a Secondary Service provided by
the Bank to the Funds for which a fee is charged or an increase in the
contractual rate of any fee due from the Funds to the Bank for any
Secondary Service that results from an increase in the rate of such fee
or from the decrease in the number or kind of services performed by the
Bank for such fee over an existing rate for such Secondary Service
which had been authorized by the Second Fiduciary of a Client Plan, the
Bank will provide, to the Second Fiduciary, at least 30 days in advance
of the implementation of such increase, written notice explaining the
nature and amount of the additional service for which a fee is charged
or fee increased for the affected Fund.20 Under these
circumstances, the notices will be accompanied by the Termination Form
with instructions on the use of such form. The instructions will
expressly provide an election to the Second Fiduciary to terminate at
will any prior authorizations without penalty to the Client Plan and
stipulate that failure to return the form will result in the
continuation of all authorizations [[Page 13466]] previously given to
the Second Fiduciary. Termination of the authorization by a Client Plan
to invest in the Funds will be effected by the Bank selling the shares
of the Funds held by the affected Client Plan within the period of time
specified by the Client Plan, but not later than one business day
following receipt by the Bank of the Termination Form or any other
written notice of termination. If, due to circumstances beyond the
control of the Bank the sale cannot be executed within one business
day, the Bank will have one additional day to complete such sale.
20An increase in the amount of a fee for an existing
Secondary Service (other than through an increase in the value of
the underlying assets in the Funds) or the imposition of a fee for a
newly-established Secondary Service shall be considered an increase
in the rate of such Secondary Fee. However, in the event a Secondary
Fee has already been described in writing to the Second Fiduciary
and the Second Fiduciary has provided authorization for the amount
of such Secondary Fee, and such fee was waived, no further action by
the Bank would be required in order for the Bank to receive such fee
at a later time. Thus, for example, no further disclosure would be
necessary if the Bank had received authorization for a fee for
custodial services from Client Plan investors and subsequently
determined to waive the fee for a period of time in order to attract
new investors but later charged the fee. However, reinstituting the
fee at an amount greater than previously disclosed would necessitate
the Bank providing notice of the fee increase and a Termination
Form.
---------------------------------------------------------------------------
16. The Second Fiduciary will be supplied with a Termination Form
at least once each year beginning with the calendar year that begins
after the date of the notice granting 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 the Bank or changes in other matters in connection with
the services rendered to the Funds. However, if the Termination Form
has been provided to the Second Fiduciary in the event of an addition
of a Secondary Service for which a fee is charged or an increase in any
fees for Secondary Services paid by the Funds to the Bank, then such
Termination Form need not be provided again to the Second Fiduciary
until at least six months have elapsed, unless such Termination Form is
required to be sent sooner as a result of an addition of a Secondary
Service for which a fee is charged or any increase in any fees for
Secondary Services.
Audit Requirements
17. The Bank is responsible for establishing and maintaining a
system of internal accounting controls for the crediting of the fees.
In this regard, the Bank has retained the services of KPMG Peat
Marwick, an independent accounting firm, to audit annually the
crediting of fees to Client Plans under this program. Such audits will
provide independent verification of the proper crediting to the Client
Plans. Information regarding fees may be used in the preparation of
required financial disclosure reports of the Funds for the benefit of
the Client Plans.
By letter dated November 11, 1993, the Auditor has described the
procedures that will be utilized in the annual audit of the Credit
Method program. Specifically, in performing its audit, the Auditor
will: (a) Review and test compliance with the specific operational
controls and procedures established by the Bank for making credits; (b)
verify, on a test basis, the daily credit factors transmitted to the
Bank (or its affiliates) by the Funds; (c) verify, on a test basis, the
proper assignment of credit identification fields to the Client Plans;
(d) verify, on a test basis, the credits paid in total to the sum of
all credits paid to each Client Plan; (e) recompute, on a test basis,
the amount of the credit determined for selected Client Plans and
verify that the proper credit was made to the proper Client Plan. The
Bank and FFS will be the sources of the factual information upon which
the Auditor will rely.
In the event that either the internal audit by the Bank or the
independent audit by the Auditor identifies an error made in the
crediting of fees to the Client Plans, the Bank will correct the error.
With respect to any shortfall in credited fees to a Client Plan
involving cash credits, the Bank 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 the Bank 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, the Bank 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 the Bank 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.
Ongoing Disclosures to Client Plans
18. On an annual basis, the Bank will provide the Second Fiduciary
of a Client 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 the Bank. In addition, the Bank will provide the Second
Fiduciary with a copy of a financial disclosure report prepared by the
Bank 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, the Bank will respond to oral or written responses
to inquiries of the Second Fiduciary as they may arise.
19. In summary, the Bank represents that the transactions described
herein will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The Funds will provide the Bank Plans and Client Plans with a
more effective investment vehicle than the CIFs maintained by the Bank
without any increase in investment advisory or similar fees paid to the
Bank.
(b) With respect to the transfer of a Bank Plan's or a Client
Plan's CIF assets into a Fund in exchange for Fund shares, a Second
Fiduciary has or will authorize 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 has or will receive shares of the
Funds in connection with the transfer of assets of a terminating CIF
which have a total net asset value that is equal to the value of such
Plan's pro rata share of the CIF 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 '40 Act, as amended, and the procedures established by the Funds
pursuant to Rule 17a-7 for the valuation of such assets.
(d) For all subsequent transfers of CIF assets to a Fund following
the publication of the proposed exemption in the Federal Register, the
Bank will send by regular mail to each affected Bank Plan and Client
Plan a written confirmation, not later than 30 days after the
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) of the '40 Act; (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, the
Bank will 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.
[[Page 13467]]
(f) The price that has been or will be 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 have or will be paid by
a Bank Plan or a Client Plan in connection with the purchase of shares
of the Funds.
(h) The Bank has not and will 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 the Bank (including increases in the
contractual rates of fees for Secondary Services that are retained by
the Bank) will be terminable at will by the Client Plan, without
penalty to the Client Plan and will be effected within one business day
following receipt by the Bank, from the Second Fiduciary, of the
Termination Form or any other written notice of termination, unless
circumstances beyond the control of the Bank delay execution for no
more than one additional business day.
(j) The Second Fiduciary has received or will receive 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 the Bank
provides to the Funds.
(k) All dealings by or between the Client Plans, the Funds and the
Bank will be on a basis which is at least as favorable to the Client
Plans as such dealings are with other shareholders of the Funds.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested
persons who have investments in the terminating CIFs and from whom
approval is being sought for the transfer of Plan assets to the Funds.
In this regard, interested persons will include WTC, 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 particpants in the
Bank Plans by posting at major job sites. Such notice will be given to
interested persons within 14 days following the publication of the
notice of pendency in the Federal Register. The notice will include a
copy of the notice of proposed exemption as published in the Federal
Register and give interested persons the right to comment on and/or to
request a hearing with respect to the proposed exemption. Comments and
requests for a public hearing are due within 44 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.)
General Motors Hourly-Rate Employees Pension Plan; General Motors
Retirement Program for Salaried Employees; Saturn Individual Retirement
Plan for Represented Team Members; and Saturn Personal Choices
Retirement Plan for Non-Represented Team Members (Collectively, the
Plans) Located in New York, New York
[Application Nos. D-09694 thru D-09697]
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 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 section 406(b)(2) of the Act shall not apply to the
stock index ``exchange of futures for physicals'' (EFP) transaction
between the General Motors Retirement Program for Salaried Employees
(the Salaried Plan) and the General Motors Hourly-Rate Employees
Pension Plan, Saturn Individual Retirement Plan for Represented Team
Members, and Saturn Personal Choices Retirement Plan for Non-
Represented Team Members (together, the Hourly Plan) which occurred on
November 30, 1993 in the amount of approximately $730 million, provided
the following conditions were met:
(a) The terms of the EFP transaction were at least as favorable to
the Plans as the terms which would have been available in an arm's-
length EFP transaction involving unrelated parties;
(b) Each Plan received a price in the EFP transaction which was
equal to the midpoint between the highest independent bid and lowest
independent offer for buying and selling the futures involved on
November 30, 1993, based on EFP quotations obtained from at least six
independent broker-dealers capable of engaging in such an EFP at the
time of the transaction;
(c) Wells Fargo Institutional Trust Company, N.A. (WFITC), as an
independent fiduciary for the Salaried Plan, determined that the EFP
transaction was prudent and in the best interests of the Salaried Plan
and its participants and beneficiaries at the time of the transaction;
(d) WFITC monitored the EFP transaction on behalf of the Salaried
Plan and took whatever action was necessary to safeguard the interests
of the Salaried Plan at the time of the transaction;
(e) General Motors Investment Management Corporation (GMIMCo), as
the fiduciary for the Hourly Plan, determined that the EFP transaction
was prudent and in the best interests of the Hourly Plan and its
participants and beneficiaries at the time of the transaction; and
(f) GMIMCo monitored the EFP transaction on behalf of the Hourly
Plan and took whatever action was necessary to safeguard the interests
of the Hourly Plan at the time of the transaction.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective November 30, 1993.
Summary of Facts and Representations
1. The Plans were established by General Motors Corporation (GMC)
to provide retirement benefits for eligible hourly and salaried
employees of GMC and its affiliates. The aggregate fair market value of
the assets of the Plans was approximately $40.5 billion as of September
30, 1993. The Plans covered a total of approximately 831,532 active and
retired participants or their beneficiaries as of October 1, 1993.
The assets of the Plans involved in the transaction described
herein were held by: (i) Mellon Bank, N.A., acting as directed master
trustee and custodian; (ii) Bankers Trust Company, acting as directed
master trustee and custodian; (iii) WFITC, acting as custodian for
assets its manages; and (iv) Chemical Bank, acting as custodian for
certain assets managed by other investment managers.
2. The Pension Investment Committee of GMC (the PIC) is a committee
established by the Finance Committee of the Board of Directors of GMC
(the Finance Committee). The Finance Committee is the ``named
fiduciary'' for the Plans. Certain fiduciary responsibilities have been
delegated by the Finance Committee to the PIC, including the
responsibility for allocating funds among asset classes within broad
investment guidelines, recommending changes in broad investment
guidelines to the Finance Committee, and monitoring the investment
performance of the assets of the Plans. The PIC is comprised of
officers of GMC and its affiliates.
The PIC carries out its in-house investment oversight
responsibility through GMIMCo, a separately-
[[Page 13468]] incorporated, wholly-owned subsidiary of GMC. Certain
members of the PIC serve on the Board of Directors of GMIMCo. All
GMIMCo activities are subject to the general direction of the PIC.
The Finance Committee, as the ``named fiduciary'' for the Plans,
reviews the actions of the PIC to evaluate performance and to assure
that the Finance Committee's delegation of authority continues to be
prudent.
3. On November 30, 1993, the Plans entered into an EFP with each
other in the amount of approximately $730 million. An EFP is an
integrated transaction where one party buys the underlying (or
``physical'') commodity/security and simultaneously sells a related
futures contract while the other party sells the underlying commodity/
security and simultaneously buys a futures contract.21 However,
unlike an exchange-traded futures contract, an EFP is privately
negotiated and is not required to be competitively executed in an
exchange trading pit.22 The parties to an EFP typically negotiate
a private contract outside the trading pit covering the terms of the
exchange of the underlying commodity/security and the futures position.
The price, quantity and characteristics of the underlying commodity/
security that is bought or sold will affect the final price and
quantity of the futures position exchanged.
\21\A futures contract is an agreement in which one party agrees
to sell and another party agrees to buy a specific quantity of a
commodity at a future date. Upon entering into a futures contract,
the parties establish the price for the future sale or purchase. The
Commodity Futures Trading Commission (CFTC) is the federal agency
responsible for regulating futures trading in all tangible and
intangible ``commodities'' including securities. Unless exempted by
the CFTC, all futures contracts must be traded on CFTC-designated
exchanges called contract markets.
\22\See Section 4c(a) of the Commodity Exchange Act and CFTC
Rule 1.38 (17 CFR 1.38(a)) which require that all futures
transactions be executed openly and competitively except for
transactions which are executed noncompetitively in accordance with
written rules of the exchange which have been submitted to and
approved by the CFTC, specifically providing for the noncompetitive
execution of such transactions. The applicant states that this
exception applies to EFPs and that all futures exchanges have CFTC-
approved rules permitting EFPs to be consummated.
---------------------------------------------------------------------------
In a typical stock-index EFP, a customer (such as an employee
benefit plan) will sell a portfolio of common stocks which generally
replicates the Standard & Poors 500 Composite Stock Price Index (the
S&P 500 Index). In exchange for the stocks, the customer will receive
cash in an amount equal to the current value of the stock portfolio and
a corresponding long S&P 500 futures position.23 To effect the
transaction, the customer will contact its various broker-dealer/
futures commission merchants (``broker-dealers''), and will offer the
stocks in return for (1) a cash payment equal to the market price of
the stocks at the close of the New York equities market (e.g. the New
York Stock Exchange or American Stock Exchange) on that date and (2) a
corresponding long S&P 500 futures position established through that
broker-dealer and priced at a ``basis'' between the index and the
futures such that the cash plus futures is roughly equivalent in both
value and market exposure to the stocks.24
\23\The futures contract ``bought'' by the customer represents a
commitment to pay the cash value of the portfolio of S&P 500
securities at a specified time in the future.
\24\The applicant states that the market price of an S&P 500
futures contract will normally exceed the market price of the
underlying portfolio of stocks comprising the index (the ``cash
price'') by a certain amount (i.e. the ``basis'') primarily due to
the ``cost of carry.'' The ``cost of carry'' relates to the
difference between the U.S. Treasury Bill rate and the dividend
yield on the stock portfolio. In addition, the ``basis'' reflects
the deliverable supply of the underlying stocks and the expectations
of market participants.
---------------------------------------------------------------------------
However, the applicant states that two customers may negotiate such
an EFP transaction between themselves and use the broker-dealer merely
to facilitate the trade's execution by reporting and documenting the
stock and futures trades, as required by exchange rules.
4. On November 30, 1993, the Hourly Plan sold approximately $730
million of stock and simultaneously purchased approximately $730
million of S&P 500 futures contracts in an EFP transaction with the
Salaried Plan.25 Thus, the Salaried Plan purchased approximately
$730 million of stocks and sold approximately $730 million of S&P 500
futures in the transaction. WFITC acted as an independent fiduciary for
the Salaried Plan in the EFP transaction (as discussed further below).
\25\The applicant represents that GMIMCo consulted with the
Chicago Mercantile Exchange (CME) and the CFTC, both of which
advised that an EFP between the Plans would be consistent with their
applicable rules.
---------------------------------------------------------------------------
The Hourly Plan
5. With respect to the Hourly Plan, the applicant states that in
November 1993 the Plan needed to raise cash for upcoming benefit
payments to the participants and beneficiaries. In addition, the PIC
had modified the Hourly Plan's asset allocation strategy by increasing
the allocation for investments in asset classes other than the Canadian
and U.S. large capitalization equity securities.
GMIMCo was responsible for implementing the PIC's asset allocation
strategy in the most cost-effective manner. GMIMCo analyzed the Hourly
Plan's equity holdings, futures positions, overall asset mix,
allocation of assets among equity investment managers, and upcoming
liquidity needs. Based on this review, GMIMCo determined that
approximately $730 million of equity holdings, managed by twelve equity
managers, eleven of whom were external investment advisers, should be
liquidated to raise cash to meet benefit payments and to fund
investments in other asset classes to meet the PIC's asset allocation
guidelines.
GMIMCo also determined that, simultaneous with the sale of stocks,
the Hourly Plan should purchase approximately $730 million of S&P 500
futures contracts so that the designated funds would continue to be
exposed to the equity markets until the cash was either used to pay
benefits or placed with managers in other investment areas. The PIC had
previously authorized the use of futures to facilitate the Hourly
Plan's asset allocation objectives.
6. GMIMCo evaluated the following alternatives for selling stocks
and purchasing equity futures for the Hourly Plan:
(a) Direct each of the twelve investment managers to independently
liquidate securities in the open market and GMIMCo would independently
purchase futures;
(b) Direct each of the twelve investment managers to transfer
stocks to a central account and GMIMCo would sell the stocks via
portfolio trades in the open market with simultaneous futures
purchases;
(c) Engage in an EFP with a broker-dealer; or
(d) Engage in an EFP with the Salaried Plan.
7. GMIMCo states that separate open market trades through the
investment managers under alternative (a) would have involved the
greatest risks and potentially the highest costs. Under this
alternative, as each manager sold stocks, the manager would have
advised GMIMCo of its actions and GMIMCo would have then purchased
futures to maintain the overall equity exposure. Since each individual
stock could have moved in a different direction and by a different
amount relative to the broader equity index (i.e. ``tracking
error''),26 the Hourly Plan could have incurred significant costs.
Since the futures purchases would not have been simultaneous with the
stock sales, the [[Page 13469]] Hourly Plan would have also experienced
``timing mismatches'' which could have resulted in significant costs.
GMIMCo states that tracking error and timing mismatches could have
resulted in costs in excess of $4 million and concluded that there was
no incentive to undertake these risks when lower cost alternatives were
available.
\26\Tracking error is the mismatch of price movement on the
individual stock versus the index.
---------------------------------------------------------------------------
In addition, under alternative (a), the market impact cost
associated with the stock transactions could have been approximately $7
million. GMIMCo calculated this cost by considering such factors as:
(i) The managers in the aggregate held over 1500 stocks, and over 600
were stocks common to more than one manager, which would have caused
the managers to compete with each other in selling the stocks; (ii) for
over 50% of the individual stocks in the portfolio, the amount of the
stock held represented more than 10% of the average daily trading
volume for such stock; (iii) for about 25% of the individual stocks in
the portfolio, the amount of the stock held exceeded 50% of the average
daily trading volume for such stock; and (iv) for over 10% of the
individual stocks in the portfolio, the amount of the stock held
represented more than one day's trading volume for such stock. The
market impact costs associated with the futures transactions, which
would have represented about 10% of the daily volume on the CME, were
estimated to be at least $1 million.
Under alternative (a), GMIMCo estimated that the commission costs
at approximately $.06/share on 21.1 million shares would have been
approximately $1.3 million. With twelve managers with over 1500 stock
names, GMIMCo estimated that the master trustee recordkeeping fees
would have been approximately $30,000.
In total, GMIMCo estimated that alternative (a) would have cost the
Hourly Plan approximately $13 million.
8. With respect to separate open market trades through GMIMCo under
alternative (b), GMIMCo states that such transactions would have
resulted in lower costs resulting from tracking error (approximately $2
million). In addition, the timing mismatches would have been eliminated
because GMIMCo could have simultaneously executed both the sale of the
stocks and the purchase of the futures. GMIMCo states that alternative
(b) would have resulted in lower market impact cost (approximately $3.5
million) since the time period for execution would have been more
effectively controlled and one manager would not be selling in
competition with another manager. However, the market impact cost for
the futures would still have been approximately $1 million.
GMIMCo states that the commission costs on equity portfolio trades
versus individual stock trades would have been lower (approximately $.5
million) under alternative (b), but master trustee fees would have been
higher at about $50,000.
In total, GMIMCo estimated that alternative (b) would have cost the
Hourly Plan approximately $7 million.
9. With respect to an EFP with a broker-dealer under alternative
(c), GMIMCo states that such a transaction would have eliminated the
timing mismatch risk and incorporated the market impact, tracking error
and commission costs into the pricing of the EFP quoted by the broker-
dealer. Therefore, on November 30, 1993, the date of the proposed EFP,
GMIMCo sought EFP bids and offers from eight broker-dealers--First
Boston, Goldman Sachs, J.P. Morgan, Lehman Bros., Merrill Lynch, Morgan
Stanley, Paine Webber, and Salomon Brothers. GMIMCo requested bid and
offer quotes from each broker-dealer on the proposed transaction.
GMIMCo provided the broker-dealers with the characteristics of the
portfolio, for example, how many stocks traded on exchanges such as the
NYSE and AMEX and on the NASDAQ. The broker-dealers were advised that
the portfolio was valued at approximately $730 million, based on the
prior day's closing value, and involved approximately 21,147,800
shares. The broker-dealers also were advised regarding the tracking
error of the portfolio versus the S&P 500 Index. The broker-dealers
were provided with the general liquidity characteristics of the
portfolio, including the fact that: (i) For over 50% of the individual
stocks in the portfolio, the amount of stock held represented more than
10% of the average daily trading volume for such stock, (ii) for about
25% of the individual stocks in the portfolio, the amount of the stock
held exceeded 50% of the average daily trading volume for such stock,
and (iii) for over 10% of the individual stocks in the portfolio, the
amount of the stock held represented more than one day's trading volume
for such stock.
Based on these characteristics, two broker-dealers declined to
participate. The remaining six broker-dealers provided the following
EFP quotations, with a bid to buy the futures and an offer to sell the
futures expressed as a discount or premium on the S&P 500 Index closing
price on the date of the transaction, as noted in the table below. In
each case, the broker-dealers agreed to buy or sell the stocks involved
at the S&P 500 Index closing price as of the date of the transaction.
------------------------------------------------------------------------
B-D's bid to B-D's offer to
Broker-dealer (B-D) buy futures EFP quotes sell futures
------------------------------------------------------------------------
A....................... -2.37 .............. 1.86
B....................... -2.39 .............. 3.29
C....................... -3.15 .............. 3.85
D....................... -3.95 .............. 4.55
E....................... -5.50 .............. 5.90
F....................... -5.37 .............. 6.07
Best Prices............. -2.37 .............. 1.86
Midpoint Between Best
Prices................. .............. -0.255
S&P 500 Index Close (11-
30-93)................. .............. 461.79
EFP Futures Price
(agreed to by parties
based on midpoint)..... .............. 461.535
------------------------------------------------------------------------
Of all of the broker-dealers providing quotes, Broker-Dealer A offered
the best price for the Hourly Plan to buy futures--i.e. 1.86, the
lowest premium above the S&P 500 Index closing price.
GMIMCo determined that an EFP with the Salaried Plan under
alternative (d) would be the least costly alternative. Under this
alternative, the Hourly Plan would engage in the EFP with the Salaried
Plan at the midpoint of the best EFP bid quoted by the broker-dealers
to sell stocks and buy futures (i.e. -2.37) versus the best EFP offer
quoted by the broker-dealers to buy stocks and sell futures (i.e.
1.86). Thus, alternative (d) provided the Hourly Plan with a better
price to buy the futures because the price of the futures based on the
-0.255 midpoint (i.e. 461.79 - 0.255 = 461.535) would be more favorable
to the [[Page 13470]] Hourly Plan than the price offered by Broker-
Dealer A based on the 1.86 premium above the closing price of the index
(i.e. 461.79 + 1.86 = 463.65).
GMIMCo states that alternative (d) saved the Hourly Plan
approximately $3.4 million, which otherwise would have been paid to
Broker-Dealer A. This cost savings resulted from the fact that the
difference between 463.65 (the best price at which the Hourly Plan
could have bought futures in an EFP with Broker-Dealer A) and 461.535
(the price at which the Hourly Plan bought futures in the EFP with the
Salaried Plan) was 2.115 index points or approximately 46 basis
points.27
\27\Note: 2.115/461.79 = .00458 = .458% or 45.8 basis points,
since .01% equals one basis point. Thus, the Hourly Plan would have
paid Broker-Dealer A approximately $3.4 million ($730 million x
.0046).
---------------------------------------------------------------------------
GMIMCo states that the transaction eliminated the tracking error,
timing mismatch risk and market impact costs. The Hourly Plan also
reduced costs under alternative (d) since the stock transfers were
directly between the respective investment managers via master trustee
bookkeeping entries, which reduced one layer of stock transfers and
resulted in savings of approximately $30,000.
GMIMCo determined that it was in the best interests of the Hourly
Plan and its participants and beneficiaries to sell the stocks and
purchase the futures through an EFP with the Salaried Plan.
Accordingly, on November 30, 1993, the Hourly Plan purchased from the
Salaried Plan 948 December S&P 500 futures contracts at a price of
461.50 and 2216 December S&P 500 futures contracts at a price of 461.55
or 3164 total contracts for an average price of 461.535.
The Salaried Plan
10. On November 19, 1993, GMIMCo appointed WFITC to act as an
independent fiduciary for the Salaried Plan for the proposed EFP with
the Hourly Plan. GMIMCo granted WFITC complete discretion to act on
behalf of the Salaried Plan for the proposed transaction and to take
any appropriate action necessary to safeguard the interests of the
Salaried Plan. WFITC was engaged as independent fiduciary prior to the
transaction with the understanding that it would determine whether it
was in the best interests of the Salaried Plan and its participants and
beneficiaries: (i) To purchase stocks and sell futures in the amount of
approximately $730 million; (ii) to engage in an EFP for the purchase
of stock and the sale of futures; and (iii) to engage in the EFP with
the Hourly Plan.
11. With respect to the determination for the Salaried Plan to
purchase stocks and sell futures, WFITC represents that the Salaried
Plan's holdings in equities and equity futures were approximately equal
to the PIC's designated asset allocation to the U.S. and Canadian
equity markets. The policy structure for the Salaried Plan established
by the PIC had allocated a specified percentage of the Plan's assets to
large capitalization U.S. and Canadian equity securities. This fact
coupled with the fact that the Plan held futures in an amount valued
well in excess of the value of the proposed transaction led WFITC to
conclude that the sale of long futures and their replacement by
purchasing U.S. and Canadian equity securities would be consistent with
the asset allocation policy of the PIC. In this regard, WFITC believed
that the PIC's asset allocation strategy for the Salaried Plan was
reasonable. Thus, WFITC concluded that the proposed sale of the futures
by the Salaried Plan would be appropriate for and in the best interest
of the Salaried Plan. This conclusion was based upon WFITC's view that
while financial futures are a legitimate method of achieving temporary
exposures to markets, there are differences in holding financial
futures as opposed to securities for the long term. These differences
include ``tracking error risk'' and ``basis risk.''
WFITC states that ``tracking error risk'' is defined in this
instance as the variance in performance of a given portfolio of
securities as compared to the index underlying a particular stock index
futures contract. In the case of the proposed transaction, WFITC
determined that such tracking error risk existed between the stock
index futures contracts held temporarily by the Salaried Plan and the
portfolio of cash securities that it had determined by policy to hold
for the long term. Therefore, WFITC concluded that the best interests
of the Salaried Plan would be served by replacing the stock index
futures contracts with stocks reflecting the strategies of the selected
investment managers.
WFITC states further that ``basis risk'' is defined in this
instance as the variance in value between an index and a fully
collateralized position in stock index futures contracts that is based
on the return of the same index. Such variance in value arises because,
while stock index futures are priced to equal the underlying index at
expiration, prior to expiration they are priced in an auction market
that is partially independent of the auction markets in which the
securities in the underlying index are priced. Therefore, WFITC
concluded that the interests of the Salaried Plan would be served by
eliminating the basis risk of the Salaried Plan by replacing the stock
index futures contracts with stocks in an amount up to $730 million
reflecting the strategies of the selected investment managers.
12. With respect to the determination for the Salaried Plan to
engage in an EFP, WFITC evaluated the various methods the Plan could
use in selling futures and purchasing equity securities. WFITC began
its analysis with the premise that the Salaried Plan should reduce or
eliminate transaction costs, including brokerage commissions, dealer
bid/offer spreads, market impact and opportunity costs. Based on
WFITC's experience in the futures and equity markets, WFITC believed
that EFP transactions are often the most cost effective method for
simultaneously selling index futures and buying equity securities.
WFITC states that because in an EFP both the sale of futures and the
purchase of securities is achieved in a single simultaneous transaction
with a single counterparty, all sources of transaction costs are
subsumed in a single negotiated price, reflected in the price at which
the futures in the EFP are traded.
WFITC represents that the negotiated price of an EFP can be readily
compared for cost-effectiveness against an ideal hypothetical
transaction with no transaction costs whatsoever. Such an ideal
transaction would consist of simultaneously (1) buying stocks at the
last reported sale price for each stock as of the moment of the
transaction, and (2) selling the stock index futures position such that
the futures are priced at or above a ``fair economic value'' with no
brokerage commissions, dealer bid/offer spread, market impact, or
opportunity cost.
WFITC determined the fair economic value of the futures by
calculating the difference between (1) the interest income foregone
through the expiration date of the futures by having to liquidate
positions in money-market instruments in order to provide cash required
to settle the stock purchases, and (2) the dividend income estimated to
be earned by holding stocks rather than futures contracts through the
expiration date of the futures. On November 30, 1993, the date of the
transaction, there were 20 days remaining until the expiration of the
futures contracts held by the Salaried Plan. WFITC states that the
prevailing money market interest rates at the time were 3.10%.
Therefore, the amount of interest that would have been earned for 20
days on the cash required to settle the stock purchases, expressed
[[Page 13471]] in S&P 500 Index points based on the closing price of
461.79, was equal to a premium of approximately 0.78 index
points.28 In addition, WFITC represents that the dividend income
that was expected to be earned on the stocks through the expiration
date of the futures, expressed in S&P 500 Index points based on the
closing price of 461.79, was equal to a premium of approximately 0.59
index points.29 Given these factors, WFITC calculated that the
fair economic value of the futures contracts to be equal to a premium
of 0.19 S&P 500 Index points above the quoted price of the
index.30 Thus, with the S&P 500 Index published at 461.79 at the
close of trading, the fair economic value of the futures contracts as
of November 30, 1993 was calculated by WFITC to be 461.98 (i.e. 461.79
+ 0.19 = 461.98). The applicant states that the actual closing price
for the December futures contracts on November 30, 1993 was 461.85, as
traded on the CME.
28Note: 0.78/461.79 = .00168 = .168% or approximately 16.8
basis points. The interest income expected through expiration would
have been calculated in dollars as follows: $730 million x .00168
= 1,226,400.
29Note: 0.59/461.79 = .00127 = .127% or approximately 12.7
basis points. The dividend income expected through expiration would
have been calculated in dollars as follows: $730 million x .00127
= $927,100.
30Note: 0.19/461.79 = .00041 = .041% or approximately 4.1
basis points. The fair economic value of the futures contracts would
have been calculated in dollars as follows: $730 million x .00041
= $299,300.
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WFITC also represents that the negotiated price of an EFP can be
readily compared for cost-effectiveness against the estimated
transaction costs of selling the futures in the open futures market and
purchasing stock in the open stock market. For purposes of this
analysis, WFITC assumed that the transaction would be approximately
$730 million of stocks reflecting the then current value of the
securities held by the selected investment managers. WFITC estimated
commissions by assuming a rate of $.01 per share. At this rate, the
Salaried Plan would have paid brokerage commissions for purchasing
listed securities of approximately $186,286 or 2 basis points
(expressed as a percentage of the total value of the stocks).31
WFITC estimated the dealer bid/offer spread by measuring the difference
between the last reported sale for each security and its quoted offered
price. Using this technique, the Salaried Plan would have paid a total
dealer bid/offer spread of approximately $2,050,384 or 28 basis
points.32 WFITC states that it did not estimate any savings to the
Salaried Plan for brokerage commissions on the sale of the futures
contracts because such commissions would have been paid regardless of
whether the transaction was made in the open market or through an
EFP.33 WFITC states further that it made no estimate of market
impact or opportunity costs. Thus, WFITC estimated that the total costs
to execute the transactions in the open market would have been at least
$2,236,670 or approximately 30 basis points.
\31\Note: $186,286/$730 million = .0002 or .02%.
\32\Note: $2,050,384/$730 million = .0028 or .28%.
\33\With respect to the futures portion of the EFP, WFITC and
GMIMCo mutually agreed upon an independent CME clearing member
broker-dealer that presented the EFP to the CME, and conducted the
necessary reporting and documentation, ensuring that the EFP was
accepted by the CME and that the futures positions were properly
recorded. The broker-dealer received the customary commission for
such services from each Plan. Neither WFITC nor GMIMCo received any
of this compensation.
---------------------------------------------------------------------------
Using the pricing methodology described below, WFITC determined
that the total cost to the Salaried Plan of transacting the EFP with
the Hourly Plan would be approximately $701,225 or 9.6 basis points
(expressed as a percentage of the total value of the stocks). This cost
figure was calculated by comparing the price of the futures contracts
negotiated in the EFP based on the midpoint between the best EFP
quotations (461.535) to the fair economic value of the futures as
calculated by WFITC based on a premium of 0.19 S&P 500 Index points
above the closing price of the index (461.98), resulting in a
difference of 0.445 S&P 500 Index points (461.98 - 461.535 = 0.445).
The difference of 0.445 index points represented approximately 9.6
basis points based on the S&P 500 Index closing price of 461.79.34
\34\Note: 0.445/461.79 = .00096 or .096%, which is 9.6 basis
points.
---------------------------------------------------------------------------
WFITC compared the cost of 9.6 basis points to transact the EFP
with the Hourly Plan to the estimate of approximately 30 basis points
to execute the proposed transaction in the open market, and concluded
that there was an advantage of 20.4 basis points to transacting the EFP
with the Hourly Plan (or approximately $1,535,445). WFITC believed that
a projected savings of 20.4 basis points for the EFP transaction was a
conservative estimate of the advantages for the Salaried Plan because,
in establishing the cost estimates for the open market alternative,
WFITC had assumed a low commission rate of $.01 per share and had
assumed no market impact or opportunity costs for open market trading.
Thus, WFITC believed that 20.4 basis points would be the minimum
advantage to transacting the EFP with the Hourly Plan.
13. WFITC determined that it would permit the Salaried Plan to
engage in an EFP only if the price determination methodology was fair
to the Salaried Plan, was in the best interests of the Salaried Plan
and was consistent with general market standards. In this regard, WFITC
represents that it was involved in the EFP transaction, including the
pricing determinations that would be made, throughout the proceedings.
For example, prior to the consummation of the transaction, WFITC
determined along with GMIMCo the broker-dealers from which bids should
be solicited.
WFITC reviewed the information that was delivered to these brokers
as to the nature of the securities portfolios to be transacted as part
of the EFP. Additionally, WFITC performed an analysis of the portfolio,
using analytic software provided by BARRA, an independent investment
technology firm. This analysis provided WFITC with the correlation
between the securities in the portfolio and the S&P 500 futures
contracts.
WFITC and GMIMCo each determined independently that a single
broker--Broker-Dealer A--had quoted both the highest bid and the lowest
offer of any of the brokers who provided EFP quotations. Specifically,
Broker-Dealer A bid to sell the stocks at the closing price of the S&P
500 Index and buy the futures at a discount of 2.37 S&P 500 Index
points below the closing value of the S&P 500 Index. Since the other
brokers had bid larger discounts to buy the futures, Broker-Dealer A's
bid was the best price from the prospective of the Salaried Plan. As
noted above in the discussion involving GMIMCo, Broker-Dealer A had
also offered to buy the stocks at the S&P 500 Index closing price and
sell the futures at a premium of 1.86 S&P 500 Index points, or
approximately 40 basis points above the closing price of the S&P 500
Index. Since no other broker had offered to sell futures at a lower
premium relative to the index, Broker-Dealer A's offer price was also
best from the perspective of the Hourly Plan.
WFITC determined that the Salaried Plan's transacting the EFP with
the Hourly Plan at the midpoint between Broker-Dealer A's bid price and
offered price was better than trading in an EFP directly with Broker-
Dealer A at its bid price. Specifically, by trading with the Hourly
Plan, the Salaried Plan bought stocks at the closing price of the S&P
500 Index and sold futures at a discount of 0.255 S&P 500 Index points,
or approximately 5 basis points below the [[Page 13472]] closing price
of the S&P 500 Index.35 If the Salaried Plan had traded with
Broker-Dealer A directly, it would have bought stocks at the identical
price that was transacted via the EFP (i.e. the closing price of the
S&P 500 Index). However, the Salaried Plan would have sold futures to
Broker-Dealer A at a discount of 2.37 S&P 500 Index points, or
approximately 51 basis points below the value of the S&P 500
Index.36 Thus, the price for selling the futures would have been
46 basis points lower than the price the Salaried Plan received in the
EFP transaction with the Hourly Plan.
\35\Note: 0.255/461.79 = .0005 or .05%.
\36\Note: 2.37/461.79 = .0051 or .51%.
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WFITC determined that the price determination methodology was fair
to the Salaried Plan, was in the best interests of the Salaried Plan,
and was consistent with general market standards, because the
methodology included a thorough exploration of EFP prices in the
marketplace. WFITC states that the EFP price achieved for the Salaried
Plan was at least as favorable as any price the Plan could have
received from an independent broker-dealer capable of executing the
transaction on November 30, 1993.
14. In summary, the applicant represents that the transaction met
the statutory criteria contained in section 408(a) of the Act because:
(a) The terms of the EFP were at least as favorable to both the
Salaried Plan and the Hourly Plan as the terms which either Plan could
have received in an arm's-length transaction involving an unrelated
party; (b) each Plan received a price in the EFP transaction which was
equal to the midpoint between the highest independent bid and lowest
independent offer for buying and selling the futures involved, based on
EFP quotations obtained from independent broker-dealers capable of
engaging in such an EFP at the time of the transaction; (c) WFITC, as
an independent fiduciary for the Salaried Plan, determined that an EFP
with the Hourly Plan was in the best interests of the Salaried Plan and
its participants and beneficiaries; (d) WFITC monitored the EFP
transaction and took appropriate actions necessary to safeguard the
interests of the Salaried Plan; (e) GMIMCo, as fiduciary for the Hourly
Plan, determined that an EFP with the Salaried Plan was in the best
interests of the Hourly Plan and its participants and beneficiaries;
and (f) GMIMCo monitored the EFP transaction and took appropriate
actions necessary to safeguard the interests of the Hourly Plan.
Notice to Interested Persons
The applicant states that notice to interested persons shall be
made within twenty (20) business days following the publication of the
proposed exemption in the Federal Register. This notice shall include a
copy of the notice of proposed exemption (the Proposal) as published in
the Federal register and a supplemental statement (see 29 CFR
2570.43(b)(2)) which informs interested persons of their right to
comment on and/or request a hearing with respect to the proposed
exemption. The applicant will post a copy of the Proposal and the
supplemental statement in areas customarily used for notices to
employees regarding employee benefit and labor relations matters at GMC
locations where employees covered by the Plans are employed. The
applicant will send to each of the unions representing such employees a
copy of the Proposal and will request that each union post these
materials at local union halls within twenty (20) business days of the
publication of the Proposal in the Federal Register. Finally, the
applicant will send a copy of the Proposal and supplemental statement
to the presidents (or comparable officers) of the approximately 230 GMC
retiree organizations and clubs as a reasonable means of providing
notice to Plan participants who are retirees of GMC or an affiliate.
Comments or requests for a public hearing must be received by the
Department within sixty (60) days following the publication of the
Proposal in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department at
(202) 219-8194. (This is not a toll-free number.)
Law Offices of Bryson and Berman, P.A. Employees' Pension Plan and
Trust (Pension Plan) and Law Offices of Bryson and Berman, P. A.
Employees' Profit Sharing Plan and Trust (P/S Plan, Collectively; the
Plans) Located in Miami, Florida
[Application Nos. D-09884 and D-09885]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption
is granted, the 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 sale by the two individual
accounts in the Plans of Rodney W. Bryson of two adjacent parcels of
vacant land (Lots 3 and 4, collectively; the Lots) to Mr. Rodney Bryson
(Mr. Bryson), a trustee of the Plans and a party in interest with
respect to the Plans; provided that the following conditions are
satisfied:
(a) the proposed sale will be a one-time cash transaction;
(b) the Accounts in this transaction will receive the current fair
market value of the Lots established at the time of the sale by an
independent qualified appraiser; and
(c) the Accounts will pay no expenses associated with the sale.
Summary of Facts and Representations
1. The Plans were established in 1976 and have a total of three
participants, including Mr. Bryson and Mark S. Berman (Mr. Berman). Mr.
Bryson and Mr. Berman are the trustees of the Plans and are also the
sole stockholders of Law Offices of Bryson and Berman, P.A. (the
Employer). The Plans are a money purchase pension plan and a profit
sharing plan. The Plans provide for individually directed accounts. As
of June 30, 1994, the Pension Plan and the P/S Plan had $386,380 and
$487,419 in net assets, respectively. As of the same date, Mr. Bryson's
account in the Pension Plan (P/P Account) and the P/S Plan (P/S
Account, collectively; the Accounts) had $175,201 and $214,134 in net
assets, respectively. The Employer is a professional association
incorporated in the State of Florida, which specializes in trial law.
2. The Lots were originally acquired as follows. Pursuant to the
direction of Mr. Bryson, on December 14, 1989, the Accounts purchased
twenty acres of vacant land located in Broward County, Ft. Lauderdale,
Florida, from Suzanne F. Sinaiko, an unrelated third party for a total
consideration of $375,000. On the same day, the Accounts sold one half
of the twenty acres to Richard French and Mrs. Claudia French (the
Frenchs), unrelated third parties, for $187,500. As a result, at the
close of business on December 14, 1989, the Accounts owned ten acres of
vacant unimproved land (the Land) in Broward County, Ft. Lauderdale,
Florida. The applicant represents that at the time of acquisition, the
Lots represented 38% of the P/P Account and 38% of the P/S
Account.37
\ 37\The Department expresses no opinion as to whether the
Plans' acquisition and holding of the Lots in the Accounts violated
any provision of part 4 of title I of the Act. [[Page 13473]]
---------------------------------------------------------------------------
3. Consequently, the Accounts, in conjunction with the Frenchs,
made certain improvements to the Land. These improvements were made by
independent third party companies, and consisted of platting the Land,
constructing an access road, providing fill and landscaping. In this
regard, it is represented that the P/P Account paid $16,628 in capital
improvement costs, and the P/S Account paid $20,322 in capital
improvement costs. The Land was platted into two residential lots of
approximately 5 acres each (Lots 3 and 4). The Lots were allocated
among the Accounts as follows. The P/P Account owned 45% of Lot 3 and
Lot 4 (two 45% Interests), and the P/S Account owned 55% of Lot 3 and
Lot 4 (two 55% Interests, collectively; Four Interests).
4. Lot 3 was appraised on April 19, 1994 (the Appraisal), by Thomas
R. Wachtstetter A.S.A, I.F.A., an independent general appraiser
certified in the State of Florida (Mr. Wachtstetter). In the Appraisal,
Mr. Wachtstetter stated that Lot 3 contains 4.98 acres and is vacant
land. In establishing the fair market value of Lot 3, Mr. Wachtstetter
relied on the sales comparison approach to value and determined that
the fair market value of Lot 3 was $135,000. On October 26, 1994, Mr.
Wachtstetter submitted an addendum to the Appraisal (the Addendum),
which addressed the fair market value of Lot 4. In the Addendum he
stated that all information contained in the Appraisal of Lot 3 is also
applicable in estimating the value of Lot 4. Specifically, Mr.
Wachtstetter represented that Lot 3 and Lot 4 are adjacent, nearly the
same size, and neither Lot has any apparent easements, encroachments or
environmental concerns which would adversely affect the value of that
Lot. Mr. Wachtstetter concluded that the estimated value of each Lot is
$135,000 each, for an aggregate fair market value of $270,000. Mr.
Wachtstetter also addressed the assemblage value of Lots 3 and 4 as a
ten acre parcel, and concluded that the aggregate fair market value of
the Lots does not exceed the fair market value of five acre Lot 3 or
Lot 4, if purchased separately. The applicant represents that the Lots
are currently not encumbered by any debt, and that the Lots were never
used by any related persons, and are not adjacent to other real
property owned by Mr. Bryson or other parties in interest or related
persons. Since original acquisition, the Lots have remained vacant and
unutilized by any person, and have yielded no income to the Accounts.
5. Mr. Bryson now desires to purchase the Lots from the Accounts in
a one time cash transaction for their current aggregate fair market
value in order to build a personal residence. Once the transaction is
consummated, the P/S Account will receive fifty five percent (55%) of
the sale proceeds and the P/P Account will receive forty five percent
(45%) of the sale proceeds. It is represented that the proposed
transaction is in the best interest of the Accounts because the
transaction will enable the Accounts to divest of a non-income
producing asset which constitutes a relatively high percentage of the
Accounts' assets, and will provide the Accounts with liquidity. The
transaction is protective of the Accounts because as a result of the
sale the Accounts will receive the current fair market value of the
Lots, and the Accounts will incur no expenses as a result of the
proposed transaction. The applicant maintains that a real estate broker
has been attempting to sell the Lots since the summer of 1993, but the
Accounts received no reasonable offers.
6. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) The proposed sale will be a one-time cash transaction;
(b) The Accounts will receive the current fair market value of the
Lots established at the time of the sale by an independent qualified
appraiser;
(c) The Accounts will pay no expenses associated with the sale; and
(d) The sale will enable the Accounts to diversify its investment
portfolio and will provide the Accounts with liquidity.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Welborn Clinic Employees' Retirement Plan (the Plan) Located in
Evansville, Indiana
[Application No. D-09890]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the 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 sale by the Plan of certain
improved real property (the Property) located in Evansville, Indiana,
to WANC Leasing Company (WANC), a party in interest with respect to the
Plan; provided the following conditions are satisfied:
(A) All terms and conditions of the transaction are no less
favorable to the Plan than those which the Plan could obtain in an
arm's-length transaction with an unrelated party;
(B) The Plan receives a cash purchase price of no less than the
greater of (1) $8,555,000, or (2) the Property's fair market value as
of the sale date; and
(C) The Plan does not incur any expenses with respect to the
transaction.
Summary of Facts and Representations
Introduction: The Plan owns the Property, which is improved real
property leased to and occupied by the Plan sponsor, Welborn Clinic
(the Employer), as its principal place of business. The Employer
requires substantial improvements of the Property to accommodate
updated and modernized operations, but the Plan trustee has determined
that it is not in the best interests of the Plan to finance such
improvements. Instead, WANC (a partnership owned by principals of the
Employer) proposes to purchase the Property from the Plan, complete the
necessary improvements, and lease the Property to the Employer. The
exemption proposed herein would enable the Plan's sale of the Property
to WANC as described below.
1. The Plan is a defined contribution plan with 643 participants
and total net assets of $55,721,511 as of December 31, 1993. The
Employer is a multi-specialty group medical practice with its principal
place of business situated in the Property, located at 421 Chestnut
Street in the downtown sector of Evansville, Indiana. The Employer is
an Indiana business trust which is controlled by the physicians who
hold staff memberships with the Employer. The trustee of the Plan is
the Citizens National Bank of Evansville (the Trustee), which
represents itself to be independent of and unrelated to the Employer,
except as Plan Trustee. WANC is an Indiana general partnership in which
all of the 65 general partners are staff member physicians of the
Employer.
2. The Property is owned by the Plan and leased to the Employer
(the Employer Lease) pursuant to an individual administrative
exemption, PTE 89-4 (54 FR 2241, January 19, 1989). The rights of the
Plan with respect to the Property, including the Employer Lease and PTE
89-4, are represented for all purposes by the Trustee. The Property is
a 4.437 acre [[Page 13474]] parcel of land located in downtown
Evansville, Indiana, and is improved with a three-level, 99,500 square
foot medical office building (the Main Building) which constitutes the
main facility for the Employer's medical clinic (the Clinic). The
entire Clinic consists of three components: (1) the Main Building, (2)
a nearby medical facility building owned by WANC (the WANC Building)
and leased to the Employer, and (3) a two-story structure (the
Connector Building), owned by WANC and leased to the Employer,
connecting the Main Building with the WANC Building. Pursuant to an
additional administrative exemption, PTE 93-24 (58 FR 8991, February
18, 1993), the Employer Lease was modified in 1993 to enable an
exchange of land parcels between the Plan and WANC in connection with
WANC's construction of the Connector Building. As a result of the
property exchange covered by PTE 93-24, the Plan acquired a parking lot
(the New Parking Lot) adjacent to the Main Building, and WANC acquired
a parcel of property abutting both the Main Building and the WANC
Building, on which it constructed the Connector Building. The Connector
Building and the land underlying it are owned by WANC, leased to the
Employer, and utilized between the Main Building and the WANC Building
as the main entrance and reception area for the Clinic. Only the Main
Building is located on the Property owned by the Plan, which includes
the New Parking Lot.
The Trustee represents that the Employer has complied with, and
continues in compliance with, all terms and conditions of the Employer
Lease and the individual exemptions, PTE 89-4 and PTE 93-24.
3. The Employer represents that with the aid of consultants, it has
determined that the Main Clinic is in need of at least $3,000,000 of
expansion and renovation work in order to satisfy the Employer's needs.
As a result of WANC's 1993 construction of the Connector Building and a
recent renovation of the WANC Building, those two components of the
Clinic are new, updated medical facilities. However, the Employer
represents that the Main Building remains in need of substantial
refurbishing and refitting to provide updated, modernized workspace for
surgery, urology, oncology, hematology, dermatology, allergy, ear/nose/
throat, eyecare, the Employer's health maintenance organization, and
administrative/business offices. The Trustee is unwilling to commit
Plan assets to finance the necessary renovations of the Main Building
because the Trustee considers such expenses to be the obligation of the
Employer, and because the Trustee finds that the participants and
beneficiaries would receive very little short-term or intermediate-term
benefit from such additional investment of capital in the Clinic. The
Employer, as tenant and occupant of the Main Building, is unwilling to
bear the expense of the renovations because the improvements to the
Main Building would eventually increase the Employer's rent under the
Employer Lease, assuming such improvements would increase the
Property's fair market value. The Employer represents that even if it
were willing to finance renovations currently required, it is likely a
similar problem would arise again in the future, whereby the Main
Building would require renovations and the Trustee, on behalf of the
Plan, and the Employer would each be unwilling to finance the
improvements. The principals of WANC, however, have expressed a
willingness to finance the necessary renovations of the Main Building
pursuant to a proposed purchase of the Property from the Plan and its
lease to the Employer.
4. Accordingly, the Trustee, the Employer and WANC propose that the
Plan sell the Property to WANC, and are requesting an exemption for the
sale transaction. The proposed sale transaction will proceed in
accordance with a written agreement (the Agreement) executed between
the Trustee, on behalf of the Plan, and WANC after the exemption
proposed herein, if granted, is published in the Federal Register.
Under the Agreement, the Plan will sell the Property, consisting of
the Main Building, the underlying land, and the New Parking Lot, for a
cash purchase price of no less than $8,555,000 (the Minimum Purchase
Price). In an appraisal of the Property effective June 24, 1994, Brian
D. Shelton and William R Bartlett II, MAI, SRA (Shelton and Bartlett),
determined that the fair market value of the Property, inclusive of the
Employer Lease, was $8,250,000. Shelton and Bartlett are professional
real estate appraisers with Appraisal Company, Inc. in Evansville,
Indiana. In another appraisal of the Property, inclusive of the
Property, C. David Matthews (Matthews) determined that the Property had
a fair market value of $8,860,000 as of December 31, 1993. The Minimum
Purchase Price represents the mean of the two appraisals. Pursuant to
the Agreement, the Property will be reappraised by Matthews and
Bartlett (the Reappraisals) no earlier than the date of the Agreement
and no later than 30 days after the date of the Agreement. If the mean
of the Reappraisals is higher than $8,555,000, then the purchase price
of the Property shall be the mean of the Reappraisals. In no event will
the purchase price be lower than the Minimum Purchase Price.
5. The Trustee represents that the agreement to set the purchase
price for the Property at no less than the Minimum Purchase Price
resulted from arm's-length negotiations between the Trustee and WANC
over a two-month period. The Trustee initially proposed a sale of the
Property to WANC for a purchase price of $8,860,000, consistent with
Matthews' 1993 appraisal. The Trustee states that WANC considered this
price to be excessive, in light of the more recent appraisal by Shelton
and Bartlett, and WANC counter-proposed a purchase price of $8,250,000.
The Trustee represents that the two appraisals were reviewed and
analyzed by the Trustee's appraisal expert, Darrell Woehler (Woehler),
who noted differences in the approach of the two appraisers and
determined that substantial subjectivity could be expected among such
appraisals. Woehler noted that Matthews had considered the current rent
under the Employer Lease to be in excess of fair market rent, whereas
Shelton and Bartlett had found the current rent to be equivalent to
fair market rent. After Woehler's review, the Trustee continued
discussions with representatives of WANC, until both parties agreed on
the Minimum Purchase Price and the Reappraisals. The Trustee represents
that the Plan's depreciated net cost basis of the Property was
$3,751,070.42 as of December 31, 1993.
6. The Trustee represents that after careful consideration of all
facts and circumstances surrounding the proposed sale of the Property
to WANC, it has determined that it will be in the best interests and
protective of the participants and beneficiaries of the Plan. The
Trustee states that it has determined that the proposed purchase price
of at least $8,555,000 is not less than the fair market value of the
Property, and the Reappraisals ensure that the Plan will benefit from
any increase in fair market value as of the date of the sale. The
Trustee states that although the Plan has benefitted from favorable
returns on the Property, it is time for the Plan to dispose of the
Property and invest in other assets, in light of the pressing need for
renovations and modernization of the Property's improvements.
The Trustee notes that due to the nature of the Property as a
component [[Page 13475]] in a three-part medical facility, the other
two parts of which are owned by WANC, it would be very difficult to
find a buyer other than WANC willing to offer a purchase price as
favorable to the Plan as that offered by WANC.
7. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (1) The Plan will receive a cash purchase price of
no less than the Minimum Purchase Price, subject to possible upward
adjustment pursuant to the Reappraisals, which the Trustee has
determined to be no less than the fair market value of the Property;
(2) The Plan will incur no costs or expenses relating to the
transaction; (3) The Trustee has determined that retention of the
Property would not be in the best interests of the Plan due to the
necessity of renovation expenses; and (4) The Trustee has determined
that the Plan is unlikely to secure an unrelated buyer willing to pay a
purchase price for the Property as favorable to the Plan as the
proposed purchase price under the Agreement.
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 whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 8th day of March, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration Department of Labor.
[FR Doc. 95-6118 Filed 3-10-95; 8:45 am]
BILLING CODE 4510-29-P
