[Federal Register Volume 60, Number 53 (Monday, March 20, 1995)]
[Notices]
[Pages 14780-14795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6728]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09358, et al.]
Proposed Exemptions; NCNB Real Estate Fund, 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, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits [[Page 14781]] Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
NCNB Real Estate Fund (the Fund), NationsBank Pension Plan, NationsBank
Retirement Savings Plan
Located in Charlotte, North Carolina
[Exemption App. Nos. D-09358, D-09359 and D-09360, respectively]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department and the Service are considering granting
the following requested exemptions under the authority of section
408(a) of the Act and section 4975(c)(2) of the Code and in accordance
with the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR
32836, August 10, 1990) and Revenue Procedure 75-26, 1975-1 C.B. 722.
Section I: Covered Transactions
1. 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 (the Sale) of units in the Fund (Units) by plans participating in
the Fund (the Plans) pursuant to an Option election made available by
NationsBank of North Carolina, N.A. (the Bank), to a standby trust (the
Standby Trust) established and maintained by NationsBank, Corporation
(the Holding Company), a party in interest with respect to the Plans.
This proposed exemption is subject to the conditions set forth in
Section II.
2. If the exemption is granted, the restrictions of sections
406(a)(1)(D), 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) (D) and (E) of the Code shall not apply to any
decision by the Bank to sell a property held by the Fund to a third
party, and jointly owned by the Plans and the Holding Company, provided
that: each Plan receives no less than fair market value for its
interest in the property; and the Independent Fiduciary approves the
reasonableness and propriety of the sale of the property.
Section II: Conditions
(a) The properties held by the Fund (the Properties) shall be
appraised by an independent and qualified appraiser within twelve
months and updated within fifteen days before the Settlement Valuation
Date.
(b) The Plans selling Units pursuant to the Options will receive a
price equal to the value of each Unit sold based on the value of the
Fund as of the Settlement Valuation Date (the Unit Purchase Price) plus
the Interest Amount which will be calculated by the Bank and reviewed
and approved by the Independent Fiduciary who has been retained to
represent the interests of the Plans with respect to the Sale and the
subsequent activities of the Fund related to the Fund's liquidation.
(c) Plans selling Units pursuant to Options 1 or 2 will receive the
Unit Purchase Price plus the Interest Amount for each Unit sold on the
settlement date (Settlement Date) which will be no more than 120 days
after the Settlement Valuation Date.
(d) If Options 2 or 4 are elected, the Plans involved will receive
the final payment, if any, within sixty days after, the two year
anniversary of the Settlement Valuation date for Option 2, or the date
of complete liquidation of the Fund for Option 4.
(e) Prior to the Settlement Valuation Date, the Bank will provide
each Plan with written information regarding the terms of the Sale.
Such information includes, but is not limited to:
(i) notice that each Plan will be entitled to elect one or more
Options which will permit the Plan to sell all or part of its Units to
the Stand-by Trust, or to continue to hold all or part of its Units in
the Fund until the Fund's liquidation is complete, provided that if
multiple Options are elected they must be uniform with respect to the
grant, or failure to grant, a Release to the Bank,
(ii) a description of each Option,
(iii) the date by which a Plan must elect an Option (Option
Election Date), and
(iv) forms for electing the Options.
(f) Except for Plans with respect to which the Bank or any of its
Affiliates is an employer, the decision whether to authorize the
Independent Fiduciary to make an Option election on behalf of the Plan
will be made by a fiduciary independent of the Bank and its Affiliates
and the Independent Fiduciary.
(g) The Bank and any Affiliate which is an employer with respect to
a Plan will authorize the Independent Fiduciary to choose among all of
the Options.
(h) A Plan's Option election will be made by a Plan fiduciary who
is independent of the Bank and its Affiliates or by the Independent
Fiduciary.
(i) The Independent Fiduciary's duties and responsibilities
include, but are not limited to:
(1) Reviewing and determining whether to approve the appraisals of
the Properties;
(2) Ordering a new appraisal in cases in which it has determined
not to approve an existing appraisal;
(3) Reviewing and approving all of the disclosures, written
explanations, and forms furnished to the Plans by the Bank;
(4) Furnishing information to an independent Plan fiduciary, in
advance of any date by which the independent Plan fiduciary is required
to respond in order to authorize the Independent Fiduciary to make a
decision on behalf of the Plan. Such information includes, but is not
limited to:
(i) the Unit Purchase Price;
(ii) a description and explanation of the Options;
(iii) dates by which the Plans must act in order to make Option
elections and authorize the Independent Fiduciary to make Option
elections on behalf of the Plan;
(iv) information summarizing: the effect of failing to authorize
the Independent Fiduciary to make Option elections on behalf of the
Plan, the effect [[Page 14782]] of failing to make an Option election
after informing the Independent Fiduciary that the independent Plan
fiduciary would make the decision to select an Option election, and the
availability and effect of the different Option election authorizations
which the Plan may provide to the Independent Fiduciary, in language
calculated to be reasonably understood by the average independent Plan
fiduciary responsible for making decisions on behalf of a Plan with
regard to Units of the Fund held by the Plan;
(4) making Option elections on behalf of any Plan if: (a) The Bank
or any of its Affiliates is an employer with respect to the Plan; (b)
the independent Plan fiduciary authorizes the Independent Fiduciary to
make an Option elections on behalf of that Plan; or (c) the independent
Plan fiduciary does not reserve the right to make an Option election
and fails to make an Option election prior to the Option Election Date;
(5) providing guidance regarding the four Options, to those
independent Plan fiduciaries who wish to make their own Option
elections;
(6) reviewing and determining whether to approve the Unit Purchase
Price as of the Settlement Valuation Date, and the value of a Unit in
the Fund as of two years from the Sale of the Units by the Plans to the
Standby Trust (for purposes of determining the amount which is due to
those Plans electing Option 2);
(7) reviewing and determining whether to approve the Interest
Amount payable to any Plan which elected either Option 1 or 2;
(8) exercising its veto authority with regard to the proposed Unit
Purchase Price, Interest Amount, or value of Fund Units pursuant to
Option 2, which it has determined not to approve;
(9) monitoring the Bank's efforts to dispose of the Properties
during the liquidation of the Fund;
(10) approving the reasonableness and propriety of sales of the
Properties during the period in which the Standby Trust owns units in
the Fund.
(j) The Independent Fiduciary may be removed by a majority vote of
the Plans ``for cause.''
(i) The term ``for cause'' shall mean that there must be sufficient
and reasonable grounds for removal and the grounds must be related to
the ability and fitness of the Independent Fiduciary to perform his
required duties.
(ii) Each Plan's vote for or against removal will be proportionate
to it's ownership interest in the Fund exclusive of Units owned by the
Standby Trust.
(k) The Bank and the Holding Company will be bound by the decisions
and determinations made by the Independent Fiduciary.
(l) The Bank will continue its efforts, with due diligence to
liquidate the Fund.
(m) Any distributions made by the Fund will be made pro rata, in
cash.
(n) Any payment made pursuant to any of the Options will be made in
cash.
(o) The Independent Fiduciary is responsible for monitoring
compliance with the terms and conditions of the exemption at all times.
Section II. Definitions
For purposes of this exemption:
(a) Affiliate of the Bank includes:
(1) Any person directly or indirectly through one or more
intermediaries controlling, controlled by, or under common control with
the Bank;
(2) Any officer, director or employee of the Bank, or of a person
described in paragraph (a)(1) of Section II; and
(3) Any partnership in which the Bank is a partner;
(b) Control means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
(c) Affiliate of the Independent Fiduciary includes:
(1) Any person directly or indirectly through one or more
intermediaries controlling, controlled by, or under common control with
the Independent Fiduciary;
(2) Any officer or director of the Independent Fiduciary;
(3) Any partner in the Independent Fiduciary, or any other related
individual, with the authority to make, or who actually makes,
fiduciary decisions which are within the scope of the Independent
Fiduciary's duties and responsibilities under this exemption, or who
holds a five percent (5%) or greater interest in the Independent
Fiduciary;
(d) Independent Fiduciary means a person who:
(1) Is not an Affiliate of the Bank as defined in section II(a);
(2) does not have an ownership interest in the Bank or its
Affiliates;
(3) is not a corporation or partnership in which the Bank or any of
its Affiliates has an ownership interest;
(4) is not a fiduciary with respect to any of the Plans other than
in connection with the transactions described in this exemption;
(5) has acknowledged in writing acceptance of fiduciary
responsibility;
(6) is either:
(i) A business organization which has at least (5) years of
experience with respect to commercial real estate investments or other
relevant experience;
(ii) a committee comprised of three to five individuals who each
have at least five (5) years of experience with respect to commercial
real estate investments or other relevant experience; or
(iii) a committee comprised both of a business organization or
organizations and individuals having the qualifications described in
paragraphs (d)(1) through (6)(ii) above.
(7) An individual acting in a fiduciary capacity with respect to
the Fund on behalf of, and at the direction of, an Independent
Fiduciary meeting the conditions of paragraphs (d)(1) through (6)(iii)
above shall be considered an Independent Fiduciary.
For purposes of this definition, no organization or individual may
serve as an Independent Fiduciary for the Fund for any fiscal year, if
the gross income received by such organization or individual (or by any
partnership or corporation of which such organization or individual is
an officer, director, or ten percent (10%) or more partner or
shareholder) from the Bank, or any Affiliate, for that fiscal year
exceeds five percent (5%) of its or his annual gross income from all
sources for the prior fiscal year. If such organization or individual
has no income for the prior fiscal year, the 5% limitation shall be
applied with reference to the fiscal year in which such organization or
individual serves as an independent fiduciary. The income limitation
will include income received for services rendered to the Plans and the
Fund as Independent Fiduciary, as described in this exemption.
In addition, no organization or individual who is an Independent
Fiduciary or an Affiliate of such Independent Fiduciary, and no
partnership or corporation of which such Independent Fiduciary is an
officer, director, or ten percent (10%) or more partner or shareholder
with the authority to cause such corporation or partnership to engage
in the following transactions, or who exercises such authority in
conjunction with others, may:
(1) Acquire any property from, sell any property to, or borrow any
funds from, the Bank, its Affiliates, or any collective investment
vehicle or separate trust maintained or advised by the Bank or its
Affiliates, during the period that such organization or individual
serves as an Independent fiduciary and continuing for a period of six
(6) months after such organization or [[Page 14783]] individual ceases
to be an Independent Fiduciary; or
(2) Negotiate any such transaction, described above in paragraph
(1) above during the period that such organization or individual serves
as Independent Fiduciary.
No Plan fiduciary or sponsor of a Plan or a designee of such Plan
fiduciary, sponsor or Plan may serve as the Independent Fiduciary with
respect to the Fund.
(e) Option(s) means the following:
Option 1: A Plan will accelerate the liquidation of its investment
in the Fund by selling each of its Units subject to this Option to the
Standby Trust for an amount equal to the Unit Purchase Price plus the
Interest Amount. A Plan electing this Option will reserve all rights it
may have with respect to the Fund, the Bank and other appropriate
persons. However, with respect to a participant directed account Plan,
the Plan sponsor and an authorized independent Plan fiduciary will
provide a Release to the Fund, the Bank and other appropriate persons
without any affect on the rights of the participants or beneficiaries
regarding the matters covered by the Release.
Option 2: A Plan will accelerate the liquidation of its investment
in the Fund by selling each of its Units subject to this Option to the
Standby Trust for an amount equal to the Unit Purchase Price plus the
Interest Amount. In addition, the Bank will pay promptly following the
second anniversary of the Settlement Valuation Date, an amount equal to
the excess, if any, of (A) the sum of (1) the value that the Unit would
have had at the Valuation Date two years after the Settlement Valuation
Date if such Unit had not been sold, plus (2) the amount of any
distributions made with respect to such Unit during such two year
period, over (B) the Unit Purchase Price plus the Interest Amount. The
Bank will pay Litigation Expenses to the Plan, if any. Under this
Option, a Plan will release the Fund, the Bank and other appropriate
persons with respect to all matters relating to the investment in the
Fund occurring prior to the Sale.
Option 3: A Plan will continue its investment in the Fund through
the end of the liquidation process. Under this Option, a Plan reserves
all rights with respect to the Fund, the Bank and all other appropriate
persons. However, with respect to a participant directed account Plan,
the Plan sponsor and an authorized independent Plan fiduciary will
provide a Release to the Fund, the Bank and other appropriate persons
without any affect on the rights of the participants or beneficiaries
regarding the matters covered by the Release.
Option 4: A Plan will continue its investment in the Fund through
the end of the liquidation process. For a Plan electing this Option,
the Bank will agree to pay promptly following the completion of the
liquidation of the Fund, with respect to each Unit subject to this
Option, an amount equal to the excess, if any, of the (i) the value of
a Unit on September 28, 1990 over (ii) the value of all distributions
made to the Plan with respect to such Unit since September 29, 1990 and
during the liquidation of the Fund. The Bank will also pay Litigation
Expenses to the Plan, if any. Plans electing this Option will release
the Fund, the Bank and other appropriate persons with respect to all
matters related to the investment in the Fund occurring prior to the
Sale.
(f) Unit Purchase Price means the amount which is calculated by
dividing the value of all of the assets of the Fund, as reviewed and
approved by the Independent Fiduciary, by the total number of units in
the Fund.
(g) Interest Amount means the amount approved by the Independent
Fiduciary, equal to the net income earned on a Fund unit during the
period commencing on the Settlement Valuation Date and ending on the
day immediately preceding the Settlement Date, exclusive of realized or
unrealized appreciation or depreciation.
(h) Settlement Valuation Date means the date on which the value of
the Fund will be determined by the Bank in order to establish the Unit
Purchase Price in connection with the Sale. The Settlement Valuation
Date will be the last business day of the calendar month following the
calendar month in which final prospective approval will be granted by
the Office of the Comptroller of the Currency subsequent to a final
grant of this proposed exemption and approval of the transaction which
is the subject of this proposed exemption by the Federal Reserve Board.
(i) Litigation Expenses means the out-of-pocket expenses of
litigation instituted before November 24, 1992 by or on behalf of a
Plan against the Bank or the Fund with respect to the Plan's investment
in the Fund exclusive of any expense of litigation with respect to a
case which has proceeded to trial, or with respect to which there is a
judgment against the Bank or the Fund, prior to the Option Election
Date, plus interest. The total amount of Litigation Expenses, the rate
of interest and the period for which interest is paid must be agreed to
in writing between the Bank and the Plan prior to the Plan's election
of Options 2 or 4. However, in the event there has never been a written
settlement agreement specifying the amount of Litigation Expenses,
prior to the date on which the Plan elects Option 2 or 4, Litigation
Expenses will be the amounts requested by the Plan, unless such
expenses are unreasonable.
(j) Option Election Date means the date as communicated to the
Plans, at least Ninety (90) days subsequent to the Settlement Valuation
Date and at least sixty (60) days subsequent to the completion of the
mailing of the general post Settlement Valuation Date disclosure to all
of the Plans by the Independent Fiduciary, on or prior to which a Plan
must submit its Option election forms to the Bank.
(k) Settlement Date means the date, no more than 120 days after the
Settlement Valuation Date, on which the transfer of the Units to the
Standby Trust and delivery of Releases to the Bank will be effected
pursuant to the Options.
(l) Release means a release covering activities and transactions in
connection with the Fund prior to, and during, the Fund's liquidation,
but in no case shall be effective on or after the Settlement Date. In
this regard, the Release does not cover activities and transactions
necessary to comply with the exemption, the conditions of the
exemption, and the material representations made in connection
therewith, which form the basis for the Department's decision to
propose an exemption for the Sale and subsequent dispositions of
properties owned by the Fund.
Summary of Facts and Representatives
1. The applicants are the Bank and The Holding Company. The Holding
Company is a North Carolina corporation registered under the Bank
Holding Company Act of 1956, as amended. The Holding Company maintains
its principal office in Charlotte, North Carolina. The Holding Company
represents that it is the largest banking company in the south and
southwest and the fourth largest in the United States with banking
subsidiaries providing full-service banking centers in nine states:
Florida, Georgia, Kentucky, Maryland, North Carolina, South Carolina,
Tennessee, Texas, Virginia and the District of Columbia. As of December
31, 1992, total assets of the Holding Company and its subsidiaries were
approximately $118 billion.
2. The Bank is a wholly-owned subsidiary of the Holding Company
with its principal offices in Charlotte, North Carolina. As of
September 30, 1993 the Bank had total assets of approximately $20
billion. On February 28, 1974, the Bank established the Fund
[[Page 14784]] as a common trust fund exempt from federal income
taxation under section 584 of the Internal Revenue Code, and serves as
trustee of the Fund. The Fund is a vehicle for the collective
investment of tax-qualified retirement plans with respect to which the
Bank or its affiliates are trustees. The Fund is divided into units of
equal value (Units). The proportionate interest of each Plan is
represented by the number of Units owned by that Plan.
3. As of March 1992, approximately 589 defined benefit plans and
defined contribution plans held Units in the Fund. Some of these Plans
include participant directed accounts and may elect to meet the
requirements of section 404(c) of the Act (Section 404(c) Plans). In
relevant part, section 404(c) of the Act and the regulations
promulgated thereunder at 57 FR 46906 (October 13, 1992) provide that
where a participant or beneficiary of a Section 404(c) Plan in fact
exercises control over the assets in his or her account, then (1) the
participant or beneficiary shall not be deemed to be a fiduciary by
reason of his or her exercise of control; and (2) no person who is
otherwise a fiduciary shall be liable under the fiduciary
responsibility provisions of the Act for any loss, or by reason of any
breach which results from such participant's or beneficiary's exercise
of control.
Because section 404(c) of the Act applies only to the provisions of
Part 4 of Title I, there is no provision in the Code corresponding to
section 404(c). Thus, there is no statutory exemption from the excise
taxes imposed under section 4975 of the Code with respect to prohibited
transactions involving a Section 404(c) Plan. In this regard, the
Department notes that the authority to grant administrative exemptions
for section 404(c) transactions remains with the Treasury Department
pursuant to Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17,
1978). Accordingly, the Department has no authority to provide
exemptive relief with respect to a transaction that results from a
participant's or beneficiary's exercise of control within the meaning
of section 404(c) and applicable regulations. In this regard, the
Department has solicited the views of the Service with respect to the
transactions described herein as they relate to Section 404(c) Plans.
The Service has reviewed this notice of proposed exemption and concurs
with the exemptive relief provided. Accordingly, the Service has
determined that it will join the Department in publishing this pendency
notice in the Federal Register.1
\1\Neither the Department nor the Service is expressing an
opinion as to whether the investment decision made by a participant
of a Plan which holds an interest in the Fund would be subject to
relief provided by section 404(c) of the Act or applicable
regulations.
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4. The assets of the Fund have been primarily invested in real
estate and real estate related securities. According to the Bank, the
Fund experienced excellent returns through the second quarter of 1990.
However, due to market conditions and investor uncertainty, the Fund
experienced increased withdrawal requests and decreased new investment
commitments during the third quarter of 1990. As a result, the Bank
suspended admissions to and withdrawals from the Fund, and no Unit
transactions have been effected since June 30, 1990.
After considering several alternative courses of action, the Bank
determined in July of 1991 that it was in the best interests of the
Plans to terminate the Fund. Accordingly, the Fund is in the process of
liquidating pursuant to a Plan of liquidation which provides for the
orderly disposition of the assets of the Fund and periodic partial
liquidating distributions to Plans on a pro rata basis until the Fund
has been completely liquidated. As of December 31, 1993, the value of
the Fund was $172,907,000. As part of its plan of liquidation, during
the year ending on December 31, 1992, the Fund distributed assets worth
$222,000,000. The Bank anticipates that the liquidation will take
several more years.
6. Due to the inability to liquidate their investments in the Fund,
many Plans have experienced administrative difficulties. Certain Plans
have made claims and filed lawsuits against the Bank alleging breach of
fiduciary duty by the Bank in its management of the Fund.2
Consequently, some Plans have expressed a desire to accelerate the
liquidation of their investment in the Fund by selling all or part of
their Units for cash equal to the current value of the Plan's Units,
and in lieu of receiving proceeds during the liquidation process.
\2\On December 14, 1992, the Bank entered into an agreement
settling claims relating to the Fund with Teamsters Joint Council
No. 83 of Virginia Pension Fund. In addition, NationsBank of
Florida, N.A., an affiliate of the Bank and wholly owned subsidiary
of the Holding Company, entered into a settlement agreement with
Kenny Nachwalter Seymour & Crichlow, P.A. Employees' Trust and its
trustees. The terms of the settlement agreements contain the same
terms and conditions provided in this notice of proposed exemption,
and are contingent upon the granting of the exemption.
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7. In order to accommodate the Plans and to respond to those claims
against the Bank and the Holding Company, the Bank proposes the Sale
whereby the Holding Company would establish the Stand-by Trust and
contribute funds in a sufficient amount to enable the Stand-by Trust to
acquire the Units held by the Plans desiring to accelerate liquidation
of their Fund investment.3 The trustee of the Stand-by Trust will
be NationsBank of Tennessee, N.A., a national banking association
organized under the laws of the United States with its principal office
located in Nashville, Tennessee. NationsBank of Tennessee, N.A., as
trustee of the Standby Trust, is to execute Sale transactions pursuant
to the Option election forms timely filed. The Grantor of the trust is
the Holding Company which has agreed to provide assets sufficient for
the Stand-by Trust to meet its obligations.
\3\The Department notes that the exemptive relief being granted
herein extends only to those transactions described above. Also, the
Applicants represent that the Bank is a national bank which is
subject to the authority of the Office of the Comptroller of the
Currency (the OCC). The OCC has informed the Department that a
transaction that may be prohibited under the Act may also be a
violation of the National Bank Act or constitute an unsafe or
unsound banking practice. The proposed exemption does not address
the safety and soundness or the legality of the transaction under
the National Bank Act. Accordingly, the Bank should satisfy itself
that the transaction does not violate the National Bank Act or
constitute an unsafe or unsound banking practice.
In this regard, the applicants represent that they are currently
obtaining any and all regulatory approvals from applicable
governmental agencies, in order to effect the Sale, including
approval from the Office of the Comptroller of the Currency, the
Internal Revenue Service and the Federal Reserve Board.
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8. Following the establishment of the Stand-by Trust, each Plan
will be offered the opportunity to select from four Options which will
permit each Plan to elect to sell all or part of its Units in the Fund
to the Stand-by Trust, or to continue to hold all or part of its Units
in the Fund. Options 1 and 2 involve selling the Fund units to the
Standby Trust. Options 3 and 4 involve continuation of a Plan's
investment in the Fund.
Options 2 and 4 always involve the provision of a Release\4\
whereby the Plan sponsor, an authorized independent Plan fiduciary and
the [[Page 14785]] participants and beneficiaries release the Fund, the
Bank and other appropriate persons with respect to matters relating to
the Fund which occurred prior to the Settlement Date in exchange for
certain consideration provided by the Bank.\5\
\4\The Bank represents that there are only four litigants which
potentially will be eligible to receive Litigation Expenses. In this
regard, only four lawsuits were filed (on a consolidated basis)
before November 24, 1992. Three of the four lawsuits have been
settled conditioned on the opportunity to sell units to the Standby
Trust. Each settlement agreement provides that payment of Litigation
Expenses will be made with respect to the election of Option 2 or
Option 4 by, or on behalf of, the Plan within ten days after the
Bank and the Independent Fiduciary determine that all payments under
the relevant Option have been paid. In this regard, the Department
expects that a settlement of the fourth law suit would provide terms
at least as favorable to the Plan as the arrangement described in
this proposed exemption.
\5\The Department notes that the selection of the Options made
by the independent Plan fiduciaries or the Independent Fiduciary is
governed by the fiduciary responsibility provisions of Part 4,
Subtitle B, Title I of the Act. Section 404 of the Act requires, in
part, that a fiduciary of a plan act prudently, solely in the
interest of and for the exclusive purpose of providing benefits to
participants and beneficiaries. In this regard, the Department notes
that in order to act prudently, a fiduciary must consider, among
other factors, the risk and potential return of the alternative
Options for its Plan.
Further, the Department is expressing no opinion, herein, on the
decision by a fiduciary in electing an Option involving the Release.
In this regard, the Department notes that the election by a plan
fiduciary of an Option involving the Release does not preclude the
Department from taking any action with respect to past transactions
involving the Fund.
Finally, the Department notes that a determination by a Plan
fiduciary to settle litigation and enter into an agreement which
provides for the release of the Bank and the Fund is subject to the
fiduciary responsiblity requirements of section 404 of the Act.
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No release is involved in Options 1 or 3 except with respect to
participant directed account Plans. In this regard, in connection with
Options 1 and 3, the Plan sponsor and an authorized independent Plan
fiduciary will provide a Release to the Fund, the Bank and other
appropriate persons, without any affect on the rights of participants
or beneficiaries with respect to the matters covered by the Release.
A Plan may elect one Option with respect to its entire investment
in the Fund. Alternatively, a Plan may elect one Option with respect to
a portion of that Plan's investment in the Fund and another Option with
respect to the remainder. However, if a Plan elects multiple Options,
it must be a combination of either Options 1 and 3 or Options 2 and 4.
The Independent Fiduciary will provide each Plan with the
information necessary to evaluate the four Options. Plans which desire
to liquidate all or part of their investment in the Fund by selling
their Units to the Stand-by Trust may elect a combination of the four
Options by submitting an Option election form prior to the Option
Election Date. For those Plan sponsors of participant directed Plans
who wish to allow the participants and beneficiaries of their Plans to
make their own Option elections, the Plan sponsor will establish four
sub trusts each of which will accommodate the participants' and
beneficiaries' election of the different Options.\6\ Each participant's
election of an Option will then be represented by an interest in the
sub trust designated for that Option. If a Plan sponsor does not elect
to have participants and beneficiaries make Option elections, then the
Plan will be treated as any other Plan, and Option elections will be
made by the independent Plan fiduciary or the Independent Fiduciary.
\6\The Department expects that each participant or beneficiary
of a participant directed account Plan will be treated similarly
with respect to the availability of the opportunity to elect
Options, and those participants and beneficiaries who are
responsible for making Option elections will receive information
that is adequate to make an informed decision with regard to the
Options.
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The Bank will be directed with respect to each Plan's election of
one or more Options by an independent Plan fiduciary or by the
Independent Fiduciary who will represent the Plans interest for
purposes of the Sale.
9. In order to determine the value of the Units which will be sold
pursuant to the Option elections, the Unit Purchase Price, the assets
of the Fund will be appraised by independent and qualified appraisers
selected by the Bank. Such appraisals will be completed within twelve
months of and updated within fifteen days of the Sale. The Independent
Fiduciary will review and approve the professional qualifications of
the appraisers and their technical analyses and methodologies employed.
As part of this approval process, the Independent Fiduciary will
determine whether such appraisals are reasonable and adequate to
establish the fair market value of the Properties. Additionally, the
Independent Fiduciary will review and consider any capital improvement
programs, environmental issues, preemptive liens, debt obligations and
accrued expenses which may impact the value of the Properties. In the
event that the Independent Fiduciary finds that any appraisal is
deficient or unsuitable, the Independent Fiduciary has the authority to
request the revision of such appraisal or the commission of a new
appraisal. These appraisals will then be used by the Bank to calculate
the overall value of the Fund.
The Bank will calculate the Unit Purchase Price based on the value
of the Fund on the Settlement Valuation Date. The Unit Purchase Price
will be approved by the Independent Fiduciary. Such approval will be
accomplished by reviewing the appraisals of the assets of the Fund and
the procedures and methodologies to be employed by the Bank in
determining the Unit Purchase Price. Further, if the Independent
Fiduciary believes that the Unit Purchase Price proposed by the Bank is
not accurate, the Independent Fiduciary has the authority to order the
Bank to recalculate the Unit Purchase Price. In addition, the
Independent Fiduciary will review and approve the Bank's calculation of
the Interest Amount payable to those Plans which elected Options 1 or
2. The Independent Fiduciary will also participate in the quarterly
meetings held by the Bank in order to remain current on issues and
developments relating to the Fund.
10. Arthur Andersen, LLP (Arthur Andersen) has been retained to
serve as the Independent Fiduciary on behalf of the Plans with respect
to the Sale. Arthur Andersen represents that it has extensive
experience in the business of commercial real estate consulting,
appraisal and related activities. Arthur Andersen is an experienced
counselor to institutional owners of real estate and has negotiated
terms and conditions of various real estate transactions. Specifically,
Arthur Andersen has served as independent fiduciary on behalf of
numerous clients. In addition, Arthur Andersen acknowledges that in
acting as the Independent Fiduciary, it is a fiduciary within the
meaning of section 3(21) of the Act.
11. In its capacity as the Independent Fiduciary, Arthur Andersen
will review all disclosures made by the Bank to the Plans in connection
with the Sale. In addition, Arthur Andersen will distribute to all
Plans written disclosures providing general information regarding the
proposed transaction, the circumstances under which the Independent
Fiduciary will make an Option election for the Plan, and among which
Options the Independent Fiduciary may elect for the Plan under various
circumstances. Arthur Andersen will also provide general information to
all Plans regarding the various factors that each Plan may wish to
consider in deciding whether to authorize Arthur Andersen to select
from the four Options. This information will include the cost/benefit
considerations relating to pursuing an action against the Bank if the
independent Plan fiduciary does not release the Bank, and the relative
attractiveness of the additional features of Options 2 and 4. In
addition, Arthur Andersen will send a survey/profile to all Plans to
determine the type of Plan, degree of participant involvement in
investment elections, Plan liquidity needs and the preferences of the
independent Plan fiduciary. However, an independent Plan fiduciary that
decides to make its own decision and [[Page 14786]] declines to receive
the survey/profile will not receive it.
12. Arthur Andersen will make Option elections for (1) Any Plan
with respect to which the Bank or its Affiliates is an employer; (2)
Plans that have authorized Arthur Andersen to make an Option election
on their behalf; or (3) Any Plan which does not reserve the right to
make an Option election and fails to make an Option election prior to
the Option Election Date.
If the Plan reserves the right to make its own Option election and
subsequently fails to make an Option election by the Option Election
Date, the Plan will be deemed to have elected Option 3. If the Plan
does not reserve the right to make its own Option election and the Plan
fails to make: a sufficiently broad authorization; any authorization at
all; or fails to complete the profile survey, Arthur Andersen will
elect only between Options 1 and 3 for the Plan. However, Arthur
Andersen will choose among all four Options if the independent Plan
fiduciary completes and returns timely all required parts of the
profile/survey and the related authorization form expressly authorizing
Arthur Andersen to choose among all four Options. The Bank represents
that it will authorize Arthur Andersen to choose among all four Options
for Plans with respect to which the Bank or any of its Affiliates is an
employer.
Arthur Andersen will review all surveys returned by the Plans for
completeness and contact Plan fiduciaries regarding any unclear or
incomplete information. In the event that the Plan fiduciaries do not
respond to the surveys, Arthur Andersen will make the Option election
based on the information available, and will notify each Plan of the
Option election which it has selected for the Plan and the basis for
such election in writing.
With respect to those independent Plan fiduciaries who notify
Arthur Andersen that they will be making their own Option elections,
Arthur Andersen is prepared to counsel any Plan fiduciary regarding the
election process.
Finally, as the Independent Fiduciary, Arthur Andersen's duties
will also include monitoring property sales and disposition activities
during the liquidation of the Fund.
13. The Bank represents that it will provide securities disclosure
forms and option elections forms, reviewed and approved by Arthur
Andersen, to the Plan within ten days after the date on which final
approval for the Sale will be granted by the Office of the Comptroller
of the Currency which will be subsequent to a final grant of this
proposed exemption and approval of the transactions covered by this
proposed exemption by the Federal Reserve Board (the Initiation Date).
The Bank represents that the Settlement Valuation Date will be the
last business day of the calendar month following the calendar month in
which the Initiation Date occurs.
The Bank states that the Independent Fiduciary will mail a notice
of right to make election, forms, supplemental disclosures and profile/
surveys within thirty (30) days subsequent to the Settlement Valuation
Date. The Plans will have at least thirty (30) days subsequent to the
mailing of the Option Election Information to return the profile/survey
to the Independent Fiduciary. The Plans will have at least sixty (60)
days after the date on which the Option Election Information is mailed
by the Independent Fiduciary in order to make their own Option
elections.
The Bank states that the date on which the Plans will receive in
cash the Unit Purchase Price plus the Interest Amount for their units
in the Fund will be no more than 120 days after the Settlement
Valuation Date.
14. The Standby Trustee will be obligated to acquire the Units in
accordance with the Option Election Forms, and sales will be effected
only pursuant to the Option Election Forms filed with the Bank on or
prior to the Option Election Date. A Plan may rescind an Option
election at any time prior to the Option Election Date.
15. The Bank agrees to be bound by the decisions and determinations
made by Arthur Andersen, as the Independent Fiduciary. In the event
that any action or inaction by the Bank or by the Holding Company with
respect to the liquidation of the Fund or the Stand-by Trust is
determined by the Independent Fiduciary to impede or conflict with any
action or inaction required of the Independent Fiduciary in order to
carry out and comply with the terms and provisions of this proposed
transaction, the Independent Fiduciary shall so notify the Bank and
demand that the Bank cease and desist from such action or take such
action as is requested by the Independent Fiduciary.
16. In summary, it is represented that the proposed transaction
will meet the statutory criteria for an exemption under section 408(a)
of the Act and section 4975(c)(2) of the Code because: (a) The
Properties will be appraised by an independent and qualified appraiser;
(b) The Plans selling Units pursuant to the Options will receive a
price at least equal to the Unit Purchase Price plus the Interest
Amount; (c) Prior to the Sale, the Plans will receive written
information regarding the terms of the Sale; (d) An Independent
Fiduciary has been retained to represent the Plans' interests with
respect to the Sale and ongoing disposition of the Properties in the
Fund; (e) The duties of the Independent Fiduciary shall include:
reviewing and approving the appraisals of the Properties; monitoring
the sales of, and disposition activities with respect to, the
Properties during the Fund's liquidation; making Option elections on
behalf of any Plan if the Bank or its affiliates have sole investment
discretion with respect to that Plan, the independent plan Fiduciary
authorizes the Independent Fiduciary to make an Option election on
behalf of that Plan, the independent Plan fiduciary does not indicate
whether the Independent Fiduciary is authorized to make an Option
election on behalf of the Plan, or the Bank or any Affiliate is an
employer with respect to the Plan; (f) The Bank and the Holding Company
will be bound by the decisions and determinations made by the
Independent Fiduciary; and (g) The Bank will continue its efforts to
liquidate the Fund.
FURTHER INFORMATION CONTACT: Eric Berger of the Department, telephone
(202) 219-8971. (This is not a toll-free number.)
The First National Bank of Boston and Its Affiliates (Collectively, the
Bank)
Located in Boston, Massachusetts
[App. No. D-09682]
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).
Section I--Exemption for 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)(1)(A) through
(F) of the Code, shall not apply as of April 1, 1994 to: (1) the
receipt by the Bank of fees from the 1784 Funds (the Funds), investment
companies registered under the Investment Company Act of 1940 (the 1940
Act), for acting as an investment adviser to the Funds in connection
with the investment by plans for which the Bank serves as a fiduciary
(the Client Plans) in shares of the Funds; and (2) the receipt and
retention of fees by the [[Page 14787]] Bank from the Funds for acting
as custodian and accountant to the Funds as well as for any other
services to the Funds which are not investment advisory services (i.e.
``secondary services'' as defined in Section III(h) below) in
connection with the investment by the Client Plans in shares of the
Funds, provided that the following conditions and the General
Conditions of Section II below are met:
(a) No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds and no redemption fees
are paid in connection with the sale of shares by the Client Plans to
the Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section III(e), and is the same price which would have
been paid or received for the shares by any other investor at that
time.
(c) Neither the Bank nor an affiliate, including any officer or
director of the Bank, purchases or sells shares of the Funds to any
Client Plan.
(d) Each Client Plan receives a credit, through a cash rebate, of
such Plan's proportionate share of all fees charged to the Funds by the
Bank for investment advisory services, including any investment
advisory fees paid by the Bank to third party sub-advisors, no later
than one business day after the receipt of such fees by the Bank. The
crediting of all investment advisory fees to the Client Plans by the
Bank is audited by an independent accounting firm on at least an annual
basis to verify the proper crediting of the fees to each Client Plan.
(e) The combined total of all fees received by the Bank for the
provision of services to a Client Plan, and in connection with the
provision of services to the Funds in which the Client Plan may invest,
are not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.7
7In addition, the Department notes that Section 404(a) of the
Act requires, among other things, that a fiduciary of a plan act
prudently, solely in the interest of the plan's participants and
beneficiaries, and for the exclusive purpose of providing benefits
to participants and beneficiaries when making investment decisions
on behalf of a plan. Thus, the Department believes that the Bank
should ensure, prior to any investments made by a Client Plan for
which it acts as a trustee or investment manager, that all fees paid
by the Funds, including fees paid to parties unrelated to the Bank
and its affiliates, are reasonable. In this regard, the Department
is providing no opinion as to whether the total fees to be paid by a
Client Plan to the Bank, its affiliates, and third parties under the
arrangements described herein would be either reasonable or in the
best interests of the participants and beneficiaries of the Client
Plans.
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(f) The Bank does not receive any fees payable pursuant to Rule
12b-1 under the 1940 Act in connection with the transactions.
(g) The Client Plans are not employee benefit plans sponsored or
maintained by the Bank.
(h) A second fiduciary acting for the Client Plan which is
independent of and unrelated to the Bank (the Second Fiduciary)
receives, in advance of any investment by the Client Plan in a Fund,
full and detailed written disclosure of information concerning the
Funds, including but not limited to:
(1) A current prospectus for each Fund in which a Client Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services, any secondary services as defined in Section III(h),
and all other fees to be charged to or paid by the Client Plan and by
the Funds, including the nature and extent of any differential between
the rates of such fees;
(3) The reasons why the Bank may consider such investment to be
appropriate for the Client Plan;
(4) A statement describing whether there are any limitations
applicable to the Bank with respect to which assets of a Client Plan
may be invested in the Funds, and if so, the nature of such
limitations; and
(5) Upon request of the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption, if granted, once such
documents are published in the Federal Register.
(i) On the basis of the information described above in paragraph
(h) of Section I, the Second Fiduciary authorizes in writing the
investment of assets of the Client Plan in each particular Fund, the
fees to be paid by such Fund to the Bank, and the cash rebate to the
Client Plan of fees received by the Bank from the Funds for investment
advisory services.
(j) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to the Bank are subject to an
annual reauthorization wherein any such prior authorization referred to
in paragraph (i) of Section I shall be terminable at will by the Client
Plan, without penalty to the Client Plan, upon receipt by the Bank of
written notice of termination. A form expressly providing an election
to terminate the authorization described in paragraph (i) above (the
Termination Form) with instructions on the use of the form must be
supplied to the Second Fiduciary no less than annually. The
instructions for the Termination Form must include the following
information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by the Bank of written
notice from the Second Fiduciary; and
(2) Failure to return the Termination Form will result in continued
authorization of the Bank to engage in the transactions described in
paragraph (i) of Section I on behalf of the Client Plan.
(k) The Second Fiduciary of each Client Plan invested in a
particular Fund receives full written disclosure, in a statement
separate from the Fund prospectus, of any proposed increases in the
rates of fees charged by the Bank to the Funds for secondary services
at least 30 days prior to the effective date of such increase,
accompanied by a copy of the Termination Form, and receives full
written disclosure in a Fund prospectus or otherwise of any increases
in the rates of fees charged by the Bank to the Funds for investment
advisory services even though such fees will be rebated as required by
paragraph (d) of Section I above.
(l) In the event that the Bank provides an additional secondary
service to a Fund for which a fee is charged or there is an increase in
the amount of fees paid by the Funds to the Bank for any secondary
services resulting from a decrease in the number or kind of services
performed by the Bank for such fees in connection with a previously
authorized secondary service, the Bank will, at least thirty days in
advance of the implementation of such additional service or fee
increase, provide written notice to the Second Fiduciary explaining the
nature and the amount of the additional service for which a fee will be
charged or the nature and amount of the increase in fees of the
affected Fund. Such notice shall be accompanied by the Termination
Form, as defined in Section III(i) below. However, if the Termination
Form has been provided to the Second Fiduciary pursuant to this
paragraph or paragraph (k) above, then the Termination Form need not be
provided again for an annual reauthorization pursuant to paragraph (j)
above unless at least six months has elapsed since the form was
provided in connection with the fee increase.
(m) On an annual basis, the Bank provides the Second Fiduciary of a
Client Plan investing in the Funds with:
(1) A copy of the current prospectus for the Funds and, upon such
fiduciary's request, a copy of the Statement of Additional Information
for such Funds which contains a description of all fees paid by the
Funds to the Bank; [[Page 14788]]
(2) A copy of the annual financial disclosure report prepared by
the Bank which includes information about the Fund portfolios as well
as audit findings of an independent auditor within 60 days of the
preparation of the report; and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
(n) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Client Plans than dealings with other
shareholders of the Funds.
Section II--General Conditions
(a) The Bank maintains for a period of six years the records
necessary to enable the persons described below in paragraph (b) of
Section II 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
the Bank, the records are lost or destroyed prior to the end of the
six-year period, and (2) no party in interest other than the Bank shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act or to the taxes imposed by section 4975(a) and (b) of
the Code if the records are not maintained or are not available for
examination as required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) of Section II are unconditionally
available at their customary location for examination during normal
business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1) (ii) and
(iii) shall be authorized to examine trade secrets of 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 the First National Bank of Boston and
any affiliate thereof as defined below in paragraph (b) of Section III.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' shall include the 1784 Funds,
Inc., or any other diversified open-end investment company registered
under the 1940 Act for which the Bank serves as an investment adviser
and may also serve as a custodian, Fund accountant, transfer agent or
provide some other ``secondary service'' (as defined below in paragraph
(h) of this Section) which has been approved by such Funds.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund or portfolio of the Fund, less the liabilities
charged to each such portfolio or Fund, by the number of outstanding
shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who is independent of and unrelated to 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 fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Bank;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner, employee or
affiliate of the Bank (or is a relative of such persons);
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption.
If an officer, director, partner, affiliate or employee of 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
Client Plan's investment adviser, (ii) the approval of any such
purchase or sale between the Client Plan and the Funds, and (iii) the
approval of any change in fees charged to or paid by the Client Plan in
connection with any of the transactions described in Sections I and II
above, then paragraph (g)(2) of Section III shall not apply.
(h) The term ``secondary service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by the Bank to the Funds. However, for purposes of this
exemption, the term ``secondary service'' will not include any
brokerage services provided to the Funds by the Bank for the execution
of securities transactions engaged in by the Funds.
(i) The term ``Termination Form'' means the form supplied to the
Second Fiduciary which expressly provides an election to the Second
Fiduciary to terminate on behalf of a Client Plan the authorization
described in paragraph (j) of Section II. The Termination Form shall be
used at will by the Second Fiduciary to terminate an authorization
without penalty to the Client Plan and to notify the Bank in writing to
effect a termination by selling the shares of the Funds held by the
Client Plan requesting such termination within one business day
following receipt by the Bank of the form; 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.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective April 1, 1994.
Summary of Facts and Representations
1. The Bank is a national banking association with its principal
offices located at 100 Federal Street, Boston, Massachusetts, and is a
subsidiary of Bank of Boston Corporation, a registered bank holding
company. The Bank and various affiliates (referred to herein as ``the
Bank''),8 serve as trustee, directed trustee, investment manager,
or custodian for approximately 800 [[Page 14789]] employee benefit
plans. As of April 1, 1994, the Bank had total assets under management
of approximately $1.3 billion.
\8\The Bank's current affiliates include: Rhode Island Hospital
Trust National Bank; Bank of Boston, Connecticut; Casco Northern
Bank, N.A.; Bank of Boston, Florida, N.A.; South Shore Bank;
Multibank West; and Mechanics Bank.
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The Bank represents that its status as a fiduciary with investment
discretion for a Client Plan arises out of its relationship as a
trustee or investment manager for such Plan, but does not result from
the rendering of any investment advice to a Plan fiduciary that has
investment discretion for the Client Plan. As a custodian or directed
trustee of a Client Plan, the Bank has custody of Plan assets, collects
all income, performs bookkeeping and accounting services, generates
periodic statements of account activity and other reports, and makes
payments or distributions from the account as directed. However, the
Bank has no duty as custodian or directed trustee to review investments
or make recommendations, acting only as directed by an authorized
Second Fiduciary.
The Client Plans include various pension, profit sharing, and stock
bonus plans as well as retirement plans for self-employed individuals
(i.e., Keogh plans), and individual retirement accounts (IRAs). The
Bank, in its capacity as a fiduciary of the Client Plans, may exercise
investment discretion for all or a portion of the assets of such Client
Plans.
2. The Bank invests assets of Client Plans for which it acts as a
fiduciary in shares of the Funds in instances where the Bank provides
investment advisory and other services to the Funds. The Client Plans'
pro rata share of fees paid by the Funds to the Bank for investment
advisory services are rebated to all Client Plans, subject to the
conditions of the proposed exemption, with respect to the assets of the
Client Plans involved in such Fund investments. All investments in the
Funds on behalf of the Client Plans are made by the Bank pursuant to an
initial written authorization, and an annual reauthorization (as
discussed below), of the investment by an independent Plan fiduciary
(i.e., the Second Fiduciary). The Bank invests assets of a Client Plan
in any of the Funds for which it has received prior written
authorization for such investment from the Second Fiduciary during the
period that such authorization is effective.
3. The Funds are a Massachusetts business trust organized on
February 5, 1993, as an open-end, diversified management investment
company registered under the 1940 Act. The Funds consist of twelve
separate series of funds or investment portfolios with combined assets
of approximately $897 million. Each share of each Fund represents an
undivided, proportionate interest in the assets of that Fund. The
current Funds are: (i) The 1784 Growth and Income Fund; (ii) The 1784
Asset Allocation Fund; (iii) The 1784 U.S. Government Medium-Term
Income Fund; (iv) The 1784 Tax-Exempt Medium-Term Income Fund; (v) The
1784 Massachusetts Tax-Exempt Income Fund; (vi) The 1784 U.S. Treasury
Money Market Fund; (vii) The 1784 Institutional U.S. Treasury Money
Market Fund; (viii) The 1784 Tax-Free Money Market Fund; (ix) The 1784
Short-Term Income Fund; (x) The 1784 Income Fund; (xi) The Connecticut
Tax-Exempt Income Fund; and (xii) The 1784 Rhode Island Tax-Exempt
Income Fund.9 The Bank states that shares of the Funds are offered
to the Bank's trust customers, including the Client Plans, under terms
and conditions which are at least as favorable to such customers as the
terms and conditions offered to other customers of the Bank.
9Since the Client Plans generally are not subject to
federal or state income taxes and do not need to seek tax-free
income, the Bank does not anticipate that the Client Plans will
invest in The 1784 Tax-Exempt Medium-Term Income Fund, The 1784
Massachusetts Tax-Exempt Income Fund, The 1784 Tax-Free Money Market
Fund, The Connecticut Tax-Exempt Income Fund, The 1784 Rhode Island
Tax- Exempt Income Fund or any other tax-exempt Fund.
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Additional Funds are in the process of registration and other
series of Funds may be established in the future. The Bank intends to
offer such Funds to the Client Plans, if deemed appropriate by the
Second Fiduciary, as a means of obtaining an interest in a diversified
portfolio of debt or equity investments consistent with the investment
policies and objectives of the Client Plans.
The Bank believes that there are material advantages to the Client
Plans from the use of the Funds. The Funds are valued on a daily basis,
in contrast to certain collective investment funds maintained by the
Bank which are valued monthly. The daily valuation permits (i)
immediate investment of Client Plan contributions in various types of
investments; (ii) greater flexibility in transferring assets from one
type of investment to another; and (iii) daily redemption of
investments for purposes of making distributions under the Client Plan.
In addition, information concerning the investment performance of the
Funds is available in newspapers of general circulation which allows
Client Plan fiduciaries to monitor the investment performance of such
assets on a daily basis rather than monthly.
All investments of Client Plan assets in the Funds will occur
either through the direct purchase of shares of the Funds for a Client
Plan by the Bank, the transfer by the Bank of Client Plan assets from
one Fund to another Fund, or a daily automated sweep of uninvested cash
of a Client Plan by the Bank into one or more Funds previously
designated by the Client Plan for sweeping such cash. Any such
investments for the Client Plans will be made pursuant to the Second
Fiduciary's prior written authorization and annual reauthorization to
the Bank.
4. No sales commissions or redemption fees are charged in
connection with the purchase or sale of shares of the Funds. However,
the Bank states that the Funds may pay a distribution fee to the Funds'
distributor, provided that such distributor is unrelated to the Bank
and the Client Plans. Thus, the Bank does not and will not receive fees
payable pursuant to Rule 12b-1 in connection with transactions
involving any shares of the Funds. The current distributor for the
Funds is SEI Financial Services Company (the Distributor), a wholly-
owned subsidiary of SEI Corporation (SEI). According to the
distribution plan adopted by the Funds pursuant to Rule 12b-1 under the
1940 Act, the Distributor receives a distribution fee equal to an
annual rate of 0.25% of each of the Funds' average daily net assets.
The distribution fee is calculated daily and paid monthly. For all of
the current Funds, the distribution fees have been waived by the
Distributor since the formation of the Funds.
SEI Financial Management Corporation, a wholly-owned subsidiary of
SEI, also serves as the administrator, dividend disbursing agent,
shareholder servicing agent, and transfer agent for the current Funds.
The Bank states that SEI and its subsidiaries are unrelated to the Bank
and its affiliates.10
\10\With respect to any fees paid by the Funds to parties
unrelated to the Bank and its affiliates, the Department notes that
the Bank, as a trustee or investment manager for a Client Plan's
assets that are invested in the Funds, has a fiduciary duty to
ensure that the fees indirectly paid by a plan to third parties are
reasonable. The Department notes further that the Bank should ensure
that services performed by the Bank or an affiliate for a Fund are
not duplicative of any similar services performed by third parties.
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5. The Bank serves as the investment advisor for the Funds and
charges the Funds for this service in accordance with investment
advisory agreements (the Agreements) between the Bank and each Fund.
The Bank is currently the sole investment adviser to the Funds'
existing portfolios and presently contemplates no change for such
portfolios. However, the Bank states that it may utilize third party
sub-advisers in the future to enhance the investment
[[Page 14790]] alternatives and the investment advisory services
available to the Funds for certain new portfolios. The Agreements allow
the Bank to receive monthly investment advisory fees based on a
percentage of the average daily net assets of each of the Funds. The
Agreements and the fees received by the Bank are approved by the Board
of Directors of the Funds (the Funds' Directors), in accordance with
the applicable provisions of the 1940 Act. The Bank also serves as the
custodian and accountant for the Funds for which it is entitled to
receive additional fees. Any changes in the fees received by the Bank
from the Funds are approved by the Funds' Directors. All of the Funds'
Directors are independent of the Bank.
The Bank states that while it may be engaged by the Funds in the
future to perform additional secondary services, it will not provide
brokerage services to the Funds. Therefore, all securities transactions
for a Fund's portfolio will be executed by broker-dealers unrelated to
the Bank and will not generate commissions or other fees to the Bank.
6. The Bank represents that it has designed a fee structure (the
Fee Structure) which is at least as advantageous to the Client Plans as
an offset or credit arrangement, similar to that described in
Prohibited Transaction Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8,
1977), whereby investment advisory fees paid by the Funds to the Bank
would be offset against fees paid directly to the Bank by the Client
Plans.11
\11\PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that,
among other things, the plan does not pay 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 1940 Act. Section II(c) states
further that this condition does not preclude 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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Under the Fee Structure, the Bank charges its standard fees to the
Client Plans for serving as either a trustee, directed trustee,
investment manager, or custodian.12 All fees are billed on a
quarterly basis. The annual charges for a Client Plan account are
individually negotiated with the Bank based on the Bank's standard fee
schedules. The Bank provides services to the Client Plans for which it
acts as a trustee with investment discretion, including sweep services
for uninvested cash balances in such Plans, under a bundled or single
fee arrangement which is calculated as a percentage of the market value
of the Plan assets under management. Thus, in such instances, there are
no separate charges for the provision of particular services to the
Client Plans. However, for Client Plans where investment decisions are
directed by a Second Fiduciary, a separate charge is assessed for
particular services where the Second Fiduciary specifically agrees to
have the Bank provide such services to the Client Plan. With respect to
sweep services, the Bank represents that such services are generally
provided at no additional charge and, in any event, are provided only
if approved by a Second Fiduciary for the Client Plan after disclosure
of the services to be provided.13 The Bank states that in some
cases fees charged by the Bank to a Client Plan are paid by the Client
Plan sponsor rather than by the Client Plan.
\12\The applicant represents that all fees paid by 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 and the regulations thereunder (see 29
CFR 2550.408b-2). The Department notes that to the extent there are
prohibited transactions under the Act as a result of services
provided by the Bank directly to the Client Plans which are not
covered by section 408(b)(2), no relief is being proposed herein for
such transactions.
\13\See DOL 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, stating the
Department's views regarding the application of the prohibited
transaction provisions of the Act to sweep services provided to
plans by fiduciary banks and the potential applicability of certain
statutory exemptions as described therein.
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The Bank charges the Funds for its services to the Funds as
investment adviser, in accordance with the Agreements between the Bank
and the Funds. Under the Agreements, the Bank charges fees at a
different rate for each Fund, computed based on the average daily net
assets for the respective Fund. The fee differentials among the Funds
result from the particular level of services rendered by the Bank to
the Funds.
The investment advisory and other fees paid by each of the existing
Funds are 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
accrued. The applicant states that any additional Funds will follow the
same monthly billing arrangement.
At the beginning of each month (pursuant to the terms of the
applicable Agreements) and in no event more than one business day
following the receipt of such fees by the Bank, the Bank rebates to
each Client Plan directly with cash such Plan's pro rata share of all
investment advisory fees charged by the Bank to the Funds (the Rebate
Program). The Bank represents that each Client Plan's rebate of such
investment advisory fees will include any investment advisory fees paid
by the Bank to third party sub-advisers.
The Bank retains fees received from the Funds for custody and
shareholder services and will retain additional fees received in the
future for other secondary services. The Bank states that such
secondary services are distinct from the services provided by the Bank
as trustee to a Client Plan. Trustee services rendered at the Plan-
level include maintaining custody of the assets of the Client Plan
(including the Fund shares, but not the assets underlying the Fund
shares), processing benefit payments, maintaining participant accounts,
valuing plan assets, conducting non-discrimination testing, preparing
Forms 5500 and other required filings, and producing statements and
reports regarding overall plan and individual participant holdings.
These trustee services are necessary regardless of whether the Client
Plan's assets are invested in the Funds. Thus, the Bank represents that
its proposed receipt of fees for both secondary services at the Fund-
level and trustee services at the Plan-level would not involve the
receipt of ``double fees'' for duplicative services to the Client Plans
because a Fund is charged for custody and other services relative to
the individual securities owned by the Fund, while a Client Plan is
charged for the maintenance of Plan accounts reflecting ownership of
the Fund shares and other assets.14
\14\In this regard, the Department notes that the combined total
of all fees received by the Bank directly and indirectly from the
Client Plans for the provision of services to the Plans and/or to
the Funds should not be in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
In addition, the fact that certain transactions and fee
arrangements are the subject of an administrative exemption does not
relieve a Client Plan fiduciary from the general fiduciary
responsibility provisions of section 404 of the Act. Thus, the
Department cautions the fiduciaries of the 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.
Finally, the Department notes that the Bank, as a trustee and
investment manager for a Client Plan in connection with the decision
to invest Client Plan assets in the Funds, has a fiduciary duty to
monitor all fees paid by a Fund to the Bank, its affiliates, and
third parties for services provided to the Fund to ensure that the
totality of such fees is reasonable and would not involve the
payment of any ``double'' fees for duplicative services to the Fund
by such parties.
[[Page 14791]]
The Bank states that the Rebate Program ensures that the Bank does
not receive any investment advisory fees from the Funds as a result of
the investment in the Funds by the Client Plans. Thus, the Fee
Structure with the Rebate Program essentially has the same effect in
offsetting the Bank's investment advisory fees received from the Funds
as an arrangement allowing for a credit of such fees against investment
management fees charged directly to the Client Plans. The Bank prefers
the Fee Structure with the Rebate Program because it allows fees for
fiduciary services charged at the Plan-level to remain fixed without
any adjustments to such fees based on the investment advisory fees paid
by the Funds to the Bank. The Bank notes that the Fee Structure also
allows a Client Plan sponsor to pay the Client Plan's fees to the Bank
for fiduciary services and still allows the Client Plan to receive a
rebate of such Plan's pro rata share of the investment advisory fees
paid by the Funds to the Bank.15
\15\To the extent that the Department of the Treasury determines
that this arrangement should be deemed a contribution by an employer
to a Client Plan of the rebated fees, the transaction must be
examined under the applicable provisions of the Internal Revenue
Code, including sections 401(a)(4), 404 and 415.
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7. The Bank has established a system of internal accounting
controls for the Rebate Program. In addition, the Bank has retained the
services of Coopers & Lybrand of Boston, Massachusetts (the Auditor),
an independent accounting firm, to audit annually the rebating of fees
to the Client Plans under the Rebate Program. The Bank states that such
audits provide independent verification of the proper rebating to the
Client Plans of the investment advisory fees charged by the Bank to the
Funds. The Bank states further that information obtained from the
audits is used in the preparation of required financial disclosure
reports to the Client Plans' fiduciaries.
By letter dated March 29, 1994, the Auditor describes the
procedures that will be used in any annual audit of the Rebate Program.
The Auditor obtains: (i) A calculation of the daily actual balances for
all the Funds and for the total Client Plan shareholders of such Funds;
(ii) a detailed list of the expenses charged to the Funds' shareholders
by type of expense; and (iii) calculations of the total expenses
charged by the Bank to each Fund which are reimbursable to the Client
Plans. The Auditor states that every audit will include, but not
necessarily be limited to, an examination of: (i) The daily rebate
factors; (ii) the proper identification of Client Plan customers; (iii)
the calculation of the ratio used to determine the amount of expenses
to be rebated to each Client Plan; (iv) the total rebates paid and a
comparison of this amount to the sum of all rebates paid to each Client
Plan;16 and (v) the amount of rebated fees determined for selected
Client Plan customers of the Funds to ensure that the rebated amounts
were made to the proper Client Plan account.
\16\In this regard, the Auditor recomputes cash received in
connection with the rebate of each Client Plan's fees to ensure the
proper amount of cash was issued to the Client Plan under the Rebate
Program.
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In the event either the internal audit by the Bank or the
independent audit by the Auditor identifies that an error has been made
in the rebating of fees to the Client Plans, the Bank will correct the
error. With respect to any shortfall in rebated fees to a Client Plan,
the Bank will make a cash payment to the Plan equal to the amount of
the error with interest computed on the same yield as that paid by The
1784 Institutional U.S. Treasury Money Market Fund for the period
involved. Any excess rebates made to a Client Plan will be corrected,
to the extent possible, by an appropriate reduction of cash to the
Client Plan during the next payment period to accurately reflect the
proper amount of total rebates due to the Client Plan for the period
involved.
8. With respect to the receipt of fees by the Bank from a Fund in
connection with any Client Plan's investment in the Fund, the Bank
states that a Second Fiduciary receives full and detailed written
disclosure of information concerning the Fund in advance of any
investment by the Client Plan in the Fund. On the basis of such
information, the Second Fiduciary authorizes in writing the investment
of assets of the Client Plan in the Fund and the fees to be paid by the
Fund to the Bank. In addition, the Bank represents that the Second
Fiduciary of each Client Plan invested in a particular Fund will
receive full written disclosure, in a statement separate from the Fund
prospectus, of any proposed increases in the rates of fees charged by
the Bank to the Funds for secondary services, which are above the rate
reflected in the prospectus for the Fund, at least 30 days prior to the
effective date of such increase. In the event that the Bank provides an
additional secondary service to a Fund for which a fee is charged or
there is an increase in the amount of fees paid by the Funds to the
Bank for any secondary services, resulting from a decrease in the
number or kind of services performed by the Bank for such fees in
connection with a previously authorized secondary service, the Bank
will, at least thirty days in advance of the implementation of such
additional service or fee increase, provide written notice to the
Second Fiduciary explaining the nature and the amount of the additional
service for which a fee will be charged or the nature and amount of the
increase in fees of the affected Fund.17 Such notice will be made
separate from the Fund prospectus and will be accompanied by a
Termination Form. The Second Fiduciary will also receive full written
disclosure in a Fund prospectus or otherwise of any increases in the
rate of fees charged by the Bank to the Funds for investment advisory
services even though such fees will be credited, as required by Section
I(d) above.
\17\With respect to increases in fees, the Department notes that
an 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 fees. However, in the event a secondary service fee has
already been described in writing to the Second Fiduciary and the
Second Fiduciary has provided authorization for the fee, and such
fee was temporarily 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 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.
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Any authorizations by a Second Fiduciary regarding the investment
of a Client Plan's assets in a Fund and the fees to be paid to the
Bank, including any future increases in rates of fees for secondary
services, are or will be terminable at will by the Second Fiduciary,
without penalty to the Client Plan, upon receipt by the Bank of written
notice of termination. The Bank states that a Termination Form
expressly providing an election to terminate the authorization with
instructions on the use of the form is supplied to the Second Fiduciary
no less than annually. The instructions for the Termination Form
include the following information:
(a) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by the Bank of written
notice from the Second Fiduciary; and
(b) Failure to return the form will result in continued
authorization of the [[Page 14792]] Bank to engage in the subject
transactions on behalf of the Client Plan.
The Termination Form may be used to notify the Bank in writing to
effect a termination by selling the shares of the Funds held by the
Client Plan requesting such termination within one business day
following receipt by the Bank of the form. The Bank states that if, due
to circumstances beyond the control of the Bank, the sale cannot be
executed within one business day, the Bank will complete the sale
within the next business day.
Any disclosure of information regarding a proposed increase in the
rate of any fees for secondary services will be accompanied by an
additional Termination Form with instructions on the use of the form as
described above. Therefore, the Second Fiduciary will have prior notice
of the proposed increase and an opportunity to withdraw from the Funds
in advance of the date the increase becomes effective. Although the
Second Fiduciary will also have notice of any increase in the rates of
fees charged by the Bank to the Funds for investment advisory services,
through an updated prospectus or otherwise, such notice will not be
accompanied by a Termination Form since all increases in investment
advisory fees will be rebated by the Bank to the Client Plans and will
be subject to an annual reauthorization as described above. However, if
the Termination Form has been provided to the Second Fiduciary for the
authorization of a fee increase, then a Termination Form for an annual
reauthorization will not be provided by the Bank for that year unless
at least six months has elapsed since the Termination Form was provided
for the fee increase.
The Bank states that the Second Fiduciary always receives a current
prospectus for each Fund and a written statement giving full disclosure
of the Fee Structure prior to any investment in the Funds. The
disclosure statement explains why the Bank believes that the investment
of assets of the Client Plan in the Funds is appropriate. The
disclosure statement also describes whether there are any limitations
on the Bank with respect to which Client Plan assets may be invested in
shares of the Funds and, if so, the nature of such limitations.18
18See section II(d) of PTE 77-4 which requires, in pertinent
part, 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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The Bank states further that the Second Fiduciary receives an
updated prospectus for each Fund at least annually and either annual or
semi-annual financial reports for each Fund, which include information
on the Auditor's findings as to the proper rebating of the investment
advisory fees by the Bank to the Client Plan. The Bank also provides
monthly reports to the Second Fiduciary of all transactions engaged in
by the Client Plan, including purchases and sales of Fund shares.
9. No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds. In addition, no
redemption fees are paid in connection with the sale of shares by the
Client Plans to the Funds. As noted above in Paragraph 4, the Bank does
not receive any fees payable pursuant to Rule 12b-1 under the 1940 Act
in connection with the transactions. The applicant states further that
all other dealings between the Client Plans and the Funds, the Bank or
any affiliate, are on a basis no less favorable to the Client Plans
than such dealings are with the other shareholders of the Funds.
10. In summary, the applicant represents that the transactions
described herein satisfy the statutory criteria of section 408(a) of
the Act and section 4975(c)(2) of the Code because: (a) The Funds
provide the Client Plans with a more effective investment vehicle than
collective investment funds maintained by the Bank without any increase
in investment management, advisory or similar fees paid to the Bank;
(b) the Bank requires annual audits by an independent accounting firm
to verify the proper rebating to the Client Plans of investment
advisory fees charged by the Bank to the Funds; (c) with respect to any
investments in a Fund by the Client Plans and the payment of any fees
by the Fund to the Bank, a Second Fiduciary receives full written
disclosure of information concerning the Fund, including a current
prospectus and a statement describing the Fee Structure, and authorizes
in writing the investment of the Client Plan's assets in the Fund and
the fees paid by the Fund to the Bank; (d) any authorizations made by a
Client Plan regarding investments in a Fund and fees paid to the Bank,
or any increases in the rates of fees for secondary services which are
retained by the Bank, are or will be terminable at will by the Client
Plan, without penalty to the Client Plan, upon receipt by the Bank of
written notice of termination from the Second Fiduciary; (e) no
commissions or redemption fees are paid by the Client Plan in
connection with either the acquisition of Fund shares or the sale of
Fund shares; (f) the Bank does not receive any fees payable pursuant to
Rule 12b-1 under the 1940 Act in connection with the transactions; and
(g) all dealings between the Client Plans, the Funds and the Bank, are
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 shall be given to all Second
Fiduciaries of Client Plans that are currently invested in the Funds,
as of the date the notice of the proposed exemption is published in the
Federal Register, where the Bank provides services to the Funds and
receives fees which would be covered by the exemption, if granted.
Notice to interested persons shall be provided by first class mail
within fifteen (15) days following the publication of the proposed
exemption in the Federal Register. Such notice shall include a copy of
the notice of proposed exemption as published in the Federal Register
and a supplemental statement (see 29 CFR 2570.43(b)(2)) which informs
all interested persons of their right to comment on and/or request a
hearing with respect to the proposed exemption. Comments and requests
for a public hearing are due within forty-five (45) days following the
publication of the proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Amended Profit Sharing Plan and Trust of Walker Products Co., Inc. (the
P/S Plan)
Located in Lincoln, Kansas
[App. No. D-09798]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 C.F.R. Part
2570, Subpart B (55 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 of certain farm land (the
Land) by the [[Page 14793]]
P/S Plan to Mr. Lloyd Walker, a 33\1/3\% shareholder of the P/S Plan
sponsor and a party in interest with respect to the P/S Plan, provided
that the following conditions are satisfied:
(1) The proposed sale will be a one-time cash transaction;
(2) The P/S Plan will receive the fair market value of the Land as
determined at the time of the sale by an independent, qualified
appraiser; and
(3) The P/S Plan will pay no expenses associated with the sale.
Summary of Facts and Representations
1. The Plan, established in May, 1974, is a profit sharing plan,
which currently has two participants. As of September 1, 1994, the P/S
Plan had $101,468 in total assets. The P/S Plan's trustees are Albert
Walker, Craig Walker and Joyce Walker (the P/S Plan Trustees). Craig
Walker is the president of Walker Products Company Inc. (the Employer).
Lloyd Walker is a 33\1/3\% shareholder of the Employer. However, Lloyd
Walker has retired from the Employer on December 31, 1982, and received
distributions from the P/S Plan on February 28, 1983. The Employer is a
Subchapter ``C'' Kansas corporation which is in the farming business.
The applicant represents that until approximately August, 1985, the
Employer maintained two plans (collectively; the Plans), the P/S Plan
and the Money Purchase Plan (M/P Plan). The M/P Plan was terminated in
August, 1985, and its assets were rolled over into the P/S Plan
approximately May, 1986.
2. On May 5, 1975, the M/P Plan purchased the 79.6 acre tract of
Land for $57,000 in cash from Edward Hamilton, the executor of the
Estate of Marie Jensen, neither of which had any relationship to the
Plans, Lloyd Walker, or the Employer. At the time that the Land was
purchased it represented 78.95% of the M/P Plan's assets. It is
represented that the original decision to purchase the Land was made by
the
M/P Plan Trustees who deemed it a safe investment which could produce
income from farming operations and a reasonable rate of return. The
Land was held by the M/P Plan from the date of original acquisition
until approximately May, 1986, when the M/P Plan's assets, including
the Land, were transferred into the P/S Plan.
3. The Land is currently encumbered with a first mortgage which was
entered into on August 31, 1994, in the principal amount of $30,000.
The applicant represents that the P/S Plan Trustees borrowed the money
(the Loan) in order to pay out distributions. The Loan was made by
Farmers National Bank, which is unrelated to the P/S Plan and the
Employer. The P/S Plan Trustees intend to pay off the Loan with the
proceeds from the proposed sale.
4. It is represented that since its original acquisition, the Land
has been rented or operated.19 Since April, 1985 and currently,
the Land has been rented on a crop share basis to Lowell Vonada (Mr.
Vonada), an unrelated third party. Under this arrangement, Mr. Vonada
as the tenant receives 60% of the crops and the P/S Plan receives 40%
of the crops. It is also represented that currently there are no crops
growing on the Land.
\19\With regard to the Land being operated, the applicant
represents that for a short period of time the employees of the
Employer (the Employees) were paid to provide farming services.
However, the applicant represents that the Employees were not
compensated for these farming services by either of the Plans. It is
further represented that no renter, at any time, has been a party in
interest with respect to the Plans.
5. Lloyd Walker now desires to purchase the Land from the P/S Plan
in a one-time cash purchase. The Land was appraised (the Appraisal) on
October 18, 1994, by Frank L. Princ (Mr. Princ), an independent Kansas
State Certified General R.E. appraiser. Mr. Princ stated that the
purpose of the Appraisal is to estimate the market value of the Land on
an ``as is'' basis. The Land, located in Lincoln County, Kansas,
contains approximately 82 acres,20 of which 76.2 acres are in
cultivation, and the remaining acres are primarily woodland and waste.
In determining the fair market value of the Land, Mr. Princ utilized
the sales comparison approach and the income approach, but relied
mainly on the sales approach as the primary basis for the value
estimate of the Land. Accordingly, as of October 18, 1994, Mr. Princ
determined the fair market value of the Land to be $64,000.
\20\The applicant represents that 82 acres shown by Mr. Princ
probably come from the Lincoln County Appraiser's office. The
applicant also maintains that their reference to the Land as
containing 79.6 acres is based on the number of tillable acres on
the Land.
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6. The applicant maintains that the Land has yielded revenue for
the Plans. The applicant submitted a ``return on investment'' analysis
(the Analysis) on the Land, covering the period 1976 through 1994.
Return on investment value ratios were derived by the applicant by
dividing the estimated net income by the original acquisition price of
the Land for each year of ownership.21 An average of the ``return
on investment'' figures was determined to be 6.98%. Therefore,
according to the Analysis, the Plans received an average yield of 6.98%
for their investment in the Land.
\21\With respect to the Analysis, the applicant represents that
with respect to the period 1986 through 1994, the data was estimated
to reflect pro rata income and expenses for the Land, excluding any
unrealized gain due to the change in fair market value of the Land.
---------------------------------------------------------------------------
7. The applicant represents that the transaction is
administratively feasible, in the interest and protective of the
P/S Plan. Lloyd Walker will purchase the Land at its fair market value
in a one-time cash transaction. The transaction is protective and in
the best interest of the P/S Plan because as a result of this
transaction the P/S Plan will receive the fair market value of the Land
as determined at the time of the sale by an independent, qualified
appraiser. The transaction would also be in the interest of the P/S
Plan because it will enable the P/S Plan to sell an illiquid asset
which currently represents in excess of 50% of the P/S Plan's total
assets and which had little appreciation in value over time.22 The
sale will enable the P/S Plan Trustees to pay off the Loan and to
acquire investments with a higher yield. The applicant also represents
that the P/S Plan will incur no expenses as a result of the transaction
described herein.
22The Department expresses no opinion as to whether the
Plan's acquisition and holding of the Land, as well as the operation
of the Land by the Employees, violated any provision of part 4 of
Title I of the Act, and no relief is provided herein.
---------------------------------------------------------------------------
8. 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:
(1) The proposed sale will be a one-time cash transaction;
(2) The P/S Plan will receive the fair market value of the Land as
determined at the time of the sale by an independent, qualified
appraiser; and
(3) The P/S Plan will pay no expenses associated with the sale.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Delaware Trust Capital Management, Inc. (DTCM)
Located in Wilmington, Delaware
[App. No. D-09853]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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 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 certain rollover individual retirement accounts
(the [[Page 14794]] IRAs) of their interests in certain securities (the
Securities) to DTCM, a disqualified person with respect to the IRAs,
provided the following conditions are satisfied: (1) The sale is a one-
time transaction for cash; (2) no commissions or other expenses are
paid by the IRAs in connection with the sale; (3) the IRAs receive the
greater of: (a) the fair market value of the Securities as of June 30,
1994, plus accrued interest, less principal repayments received, or (b)
the fair market value of the Securities as of the time of the sale as
determined by a qualified, independent expert.23
23Pursuant to 29 CFR 2510.3-2(d), the IRAs are not within the
jurisdiction of Title I of the Act. However, there is jurisdiction
under Title II of the Act pursuant to section 4975 of the Code.
Summary of Facts and Representations
1. DTCM is a Delaware corporation which is engaged in the business
of providing trust and other fiduciary services to individuals,
businesses and non-profit entities, including employee pension plans
and individual retirement accounts.
2. DTCM was the trustee of the USA Training Academy, Inc. Profit
Sharing Plan (the Plan), and is the trustee of the IRAs, which are
rollover individual retirement accounts for five former participants
(the Affected Participants) in the Plan. DTCM (and its parent company,
Delaware Trust Company) have served as trustee of the Plan and the IRAs
from November 1, 1984 until the present. The applicant is a wholly
owned subsidiary of Delaware Trust Company, which in turn is a wholly
owned subsidiary of Meridian Bancorp, Inc.
3. In 1994, the Plan's Administrator advised the applicant, DTCM,
that the Plan's sponsor intended to terminate the Plan and, in that
connection, would be instructing DTCM to liquidate the Plan assets and
make distributions to the remaining Plan participants. In response,
DTCM informed the Plan Administrator that there was no readily
discernible market for the Securities. The Securities included the
following two obligations:
(a) SEARS ROEBUCK & CO MTG SEC PAR CTF (the Sears Securities),
which are mortgage-backed obligations issued by the Sears Mortgage
Securities Corp. These Securities pay 10.36% in interest and mature
July 25, 2018. The Plan acquired a participating certificate for
198,992 units of these obligations in July, 1988 for $196,200 (unit
cost=$0.99). The Plan has received all scheduled payments of principal
and interest.
(b) AMERICAN SVNGS & LOAN ASSN BRAZOR CNTY PART CTF (the American
Securities), which are mortgage-backed obligations issued by American
Savings and Loan Association of Brazoria County, Texas. Each loan is a
guaranteed FHA Title I loan. These Securities pay 9.5% in interest and
mature January 9, 2002. The Plan acquired 198,161.88 units in April,
1987 at a unit cost of $1 per unit. The Plan has received all scheduled
payments of principal and interest.
4. DTCM determined that as of June 30, 1994, the Sears Securities
had a fair market value of $24,163.78. This fair market value was
established by Sears' mortgage subsidiary, a brokerage house providing
master servicing for Sears' mortgage pass-through certificates which is
a sister subsidiary to Sears Mortgage Securities Corp., the issuer of
the Sears Securities. DTCM also determined that as of June 30, 1994,
the American Securities had a fair market value of $49,416.80. The
applicant represents that this fair market value was established by
A.W. Dougherty, an unrelated brokerage house specializing in fixed-
income securities.
5. DTCM, the Plan sponsor, the Plan and the Affected Participants
entered into an agreement (the Agreement) in 1994 that provided for the
orderly liquidation of the Plan without the delay that would have been
caused by attempting to convert the Securities to cash. Following the
execution of the Agreement on August 30, 1994, the applicant liquidated
the Plan assets (excluding the Securities). The Plan Administrator then
determined the value of each participant's account based upon the cash
proceeds of liquidation and the fair market value of the Securities as
of June 30, 1994 (see rep. 4, above).\24\ The Affected Participants
received pro rata shares of (i) the cash proceeds of the liquidation of
the Plan's assets and (ii) the Securities. The value of each Affected
Participant's account was distributed to the IRAs, individual
retirement rollover accounts established by DTCM on behalf of the
Affected Participants and for which DTCM serves as trustee. The IRAs
currently hold a total of 14,628.32 units of the Sears Securities and
41,501.40 units of the American Securities.
\24\The applicant represents that, based on the valuation
methods described in rep. 4, the fair market value of the Securities
on June 30, 1994, was at least as great as the fair market value of
the Securities on August 31, 1994, the date liquidation of the Plan
commenced.
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6. The applicant has requested an exemption to permit DTCM to
purchase the Securities from the IRAs. DTCM will pay the greater of (i)
the fair market value as of June 30, 1994, increased by any interest
payments in arrears as of the date of purchase by the applicant, and
reduced proportionately for any principal repayments received, or (ii)
the fair market value of the Securities as of the date of the sale as
determined by a qualified, independent expert. The IRAs will pay no
fees, commissions or other expenses in connection with the transaction.
The applicant represents that the Securities have been determined by
Ms. Janet Milanese, Vice President of Starboard Capital Markets, Inc.,
an independent expert in Philadelphia, Pa., as having a fair market
value as of January 31, 1995 which is less per unit than the June 30,
1994 figure determined as described in rep. 4, above. Accordingly, DTCM
proposes to pay to the IRAs the June 30, 1994 fair market value of the
Securities, plus any interest payments in arrears as of the date of the
transaction, less any principal repayments received.
7. The applicant represents that the Plan entered into the
Agreement because it allowed for the orderly liquidation of its assets
and distribution of benefits while at the same time protecting the
Affected Participants because they would receive at least as much as
they would have if the Plan had been able to sell the Securities in an
arm's-length transaction on the date of the Plan's liquidation. The
proposed transaction also benefits the IRAs since it allows the
Securities to be converted to cash prior to maturity at a price at
least as great as could be obtained in an arm's-length transaction.
8. In summary, the applicant represents that the proposed
transaction satisfies the criteria contained in section 4975 (c)(2) of
the Code because: (a) The sale is a one-time transaction for cash; (b)
no commissions or other expenses will be paid by the IRAs in connection
with the sale; (c) the IRAs will be receiving not less than the fair
market value of the Securities as determined by a qualified,
independent expert; and (d) each of the Affected Participants is the
only participant in his/her own IRA, and each has determined that the
proposed transaction is appropriate for and in the best interest of
his/her IRA and desires that the transaction be consummated.
NOTICE TO INTERESTED PERSONS: Because each of the Affected Participants
is the only participant in his/her own IRA, it has been determined that
there is no need to distribute the notice of proposed exemption to
interested persons. Comments and requests for a hearing are due 30 days
after publication of this notice in the Ferderal Register.
[[Page 14795]] FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of
the Department, telephone (202) 219-8881. (This is not a toll-free
number.)
General Information
The attention of interested persons is directed to the following:
(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 15th day of March, 1995.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare
BenefitsAdministration, U.S. Department of Labor.
[FR Doc. 95-6728 Filed 3-17-95; 8:45 am]
BILLING CODE 4510-29-P
